[Federal Register Volume 74, Number 237 (Friday, December 11, 2009)]
[Proposed Rules]
[Pages 65852-65997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-28774]



[[Page 65851]]

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Part II





Department of Energy





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10 CFR Part 430



Energy Conservation Program: Energy Conservation Standards for 
Residential Water Heaters, Direct Heating Equipment, and Pool Heaters; 
Proposed Rule

  Federal Register / Vol. 74, No. 237 / Friday, December 11, 2009 / 
Proposed Rules  

[[Page 65852]]


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DEPARTMENT OF ENERGY

10 CFR Part 430

[Docket Number EE-2006-BT-STD-0129]
RIN 1904-AA90


Energy Conservation Program: Energy Conservation Standards for 
Residential Water Heaters, Direct Heating Equipment, and Pool Heaters

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

ACTION: Notice of proposed rulemaking and public meeting.

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

SUMMARY: The Energy Policy and Conservation Act (EPCA) prescribes 
energy conservation standards for various consumer products and 
commercial and industrial equipment, including residential water 
heaters, direct heating equipment (DHE), and pool heaters. EPCA also 
requires the U.S. Department of Energy (DOE) to determine whether more 
stringent, amended standards for these products would be 
technologically feasible and economically justified, and would save a 
significant amount of energy. In this notice, DOE is proposing amended 
energy conservation standards for residential water heaters (other than 
tabletop and electric instantaneous models), gas-fired DHE, and gas-
fired pool heaters. DOE also is announcing a public meeting to receive 
comment on these proposed standards and associated analyses and 
results.

DATES: DOE will hold a public meeting on Thursday, January 7, 2010, 
from 9 a.m. to 4 p.m., in Washington, DC. DOE must receive requests to 
speak at the public meeting before 4 p.m., Wednesday, December 23, 
2009. DOE must receive a signed original and an electronic copy of 
statements to be given at the public meeting before 4 p.m., Wednesday, 
December 30, 2009.
    DOE will accept comments, data, and information regarding this 
notice of proposed rulemaking (NOPR) before and after the public 
meeting, but no later than February 9, 2010. See section VII, ``Public 
Participation,'' of this NOPR for details.

ADDRESSES: The public meeting will be held at the U.S. Department of 
Energy, Forrestal Building, Room 1E-245, 1000 Independence Avenue, SW., 
Washington, DC 20585-0121. To attend the public meeting, please notify 
Ms. Brenda Edwards at (202) 586-2945. Please note that foreign 
nationals visiting DOE Headquarters are subject to advance security 
screening procedures. Any foreign national wishing to participate in 
the meeting should advise DOE as soon as possible by contacting Ms. 
Brenda Edwards to initiate the necessary procedures.
    Any comments submitted must identify the NOPR for Energy 
Conservation Standards for Heating Products, and provide the docket 
number EE-2006-BT-STD-0129 and/or regulatory information number (RIN) 
number 1904-AA90. Comments may be submitted using any of the following 
methods:
    1. Federal eRulemaking Portal: http://www.regulations.gov. Follow 
the instructions for submitting comments.
    2. E-mail: [email protected]. Include docket number 
EE-2006-BT-STD-0129 and/or RIN 1904-AA90 in the subject line of the 
message.
    3. Mail: Ms. Brenda Edwards, U.S. Department of Energy, Building 
Technologies Program, Mailstop EE-2J, 1000 Independence Avenue, SW., 
Washington, DC 20585-0121. Please submit one signed paper original.
    4. Hand Delivery/Courier: Ms. Brenda Edwards, U.S. Department of 
Energy, Building Technologies Program, 950 L'Enfant Plaza, SW., Suite 
600, Washington, DC 20024. Telephone: (202) 586-2945. Please submit one 
signed paper original.
    For detailed instructions on submitting comments and additional 
information on the rulemaking process, see section VII of this document 
(Public Participation).
    Docket: For access to the docket to read background documents or 
comments received, visit the U.S. Department of Energy, Resource Room 
of the Building Technologies Program, 950 L'Enfant Plaza, SW., Suite 
600, Washington, DC, (202) 586-2945, between 9 a.m. and 4 p.m., Monday 
through Friday, except Federal holidays. Please call Ms. Brenda Edwards 
at the above telephone number for additional information regarding 
visiting the Resource Room.

FOR FURTHER INFORMATION CONTACT: Mr. Mohammed Khan, U.S. Department of 
Energy, Office of Energy Efficiency and Renewable Energy, Building 
Technologies Program, EE-2J, 1000 Independence Avenue, SW., Washington, 
DC 20585-0121. Telephone: (202) 586-7892. E-mail: 
[email protected].
    Mr. Eric Stas or Mr. Michael Kido, U.S. Department of Energy, 
Office of the General Counsel, GC-72, 1000 Independence Avenue, SW., 
Washington, DC 20585-0121. Telephone: (202) 586-9507. E-mail: 
[email protected] or [email protected].
    For information on how to submit or review public comments and on 
how to participate in the public meeting, contact Ms. Brenda Edwards, 
U.S. Department of Energy, Office of Energy Efficiency and Renewable 
Energy, Building Technologies Program, EE-2J, 1000 Independence Avenue, 
SW., Washington, DC 20585-0121. Telephone: (202) 586-2945. E-mail: 
[email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of the Proposed Rule
II. Introduction
    A. Consumer Overview
    B. Authority
    C. Background
    1. Current Standards
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    2. History of Standards Rulemaking for Water Heaters, Direct 
Heating Equipment, and Pool Heaters
III. General Discussion
    A. Test Procedures
    1. Water Heaters
    2. Direct Heating Equipment
    3. Standby Mode and Off Mode Energy Consumption
    B. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    C. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    D. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Manufacturers and Consumers
    b. Life-Cycle Costs
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Any Lessening of Competition
    f. Need of the Nation to Conserve Energy
    g. Other Factors
    2. Rebuttable Presumption
IV. Methodology and Discussion
    A. Market and Technology Assessment
    1. Consideration of Products for Inclusion in This Rulemaking
    a. Determination of Coverage Under the Act
    b. Covered Products Not Included in This Rulemaking
    2. Definition of Gas Hearth Direct Heating Equipment
    3. Product Classes
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    B. Screening Analysis
    1. Comments on the Screening Analysis
    a. General Comments
    b. Water Heaters
    2. Technologies Considered
    3. Heat Pump Water Heaters Discussion
    a. Consumer Utility
    b. Production, Installation, and Servicing Issues

[[Page 65853]]

    c. General Comments
    C. Engineering Analysis
    1. Representative Products for Analysis
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    2. Ultra-Low NOX Gas-Fired Storage Water Heaters
    3. Efficiency Levels Analyzed
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    4. Cost Assessment Methodology
    a. Teardown Analysis
    b. Cost Model
    c. Manufacturing Production Cost
    d. Cost-Efficiency Curves
    e. Manufacturer Markup
    f. Shipping Costs
    g. Manufacturer Interviews
    5. Results
    6. Scaling to Additional Rated Storage Capacities for Water 
Heaters
    7. Energy Efficiency Equations
    D. Markups to Determine Product Price
    E. Life-Cycle Cost and Payback Period Analyses
    1. Product Cost
    2. Installation Cost
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    3. Annual Energy Consumption
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    d. Rebound Effect
    4. Energy Prices
    5. Repair and Maintenance Costs
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    6. Product Lifetime
    7. Discount Rates
    8. Compliance Date of the Amended Standards
    9. Product Energy Efficiency in the Base Case
    a. Water Heaters
    b. DHE
    c. Pool Heaters
    10. Inputs to Payback Period Analysis
    11. Rebuttable-Presumption Payback Period
    F. National Impact Analysis--National Energy Savings and Net 
Present Value Analysis
    1. Shipments
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    d. Impacts of Standards on Shipments
    2. Other Inputs
    a. Base-Case Forecasted Efficiencies
    b. Standards-Case Forecasted Efficiencies
    c. Annual Energy Consumption
    d. Site-to-Source Energy Conversion
    e. Total Installed Costs and Operating Costs
    f. Discount Rates
    3. Other Inputs
    a. Effects of Standards on Energy Prices
    G. Consumer Subgroup Analysis
    H. Manufacturer Impact Analysis
    1. Overview
    a. Phase 1: Industry Profile
    b. Phase 2: Industry Cash-Flow Analysis
    c. Phase 3: Subgroup Impact Analysis
    2. GRIM Analysis
    a. GRIM Key Inputs
    b. GRIM Scenarios
    3. Discussion of Comments
    a. Responses to General Comments
    b. Water Heater Comments
    4. Manufacturer Interviews
    a. Storage Water Heater Key Issues
    b. Gas-Fired Instantaneous Water Heater Key Issues
    c. Direct Heating Equipment Key Issues (Gas Wall Fan, Gas Wall 
Gravity, Gas Floor, and Gas Room Direct Heating Equipment)
    d. Direct Heating Equipment Key Issues (Gas Hearth Direct 
Heating Equipment)
    e. Pool Heater Key Issues
    I. Employment Impact Analysis
    J. Utility Impact Analysis
    K. Environmental Analysis
    1. Impacts of Standards on Emissions
    2. Valuation of CO2 Emissions Reductions
    3. Valuation of Other Emissions Reductions
V. Analytical Results
    A. Trial Standard Levels
    1. Water Heaters
    2. Direct Heating Equipment
    3. Gas-Fired Pool Heaters
    B. Economic Justification and Energy Savings
    1. Economic Impacts on Consumers
    a. Life-Cycle Cost and Payback Period
    b. Analysis of Consumer Subgroups
    c. Rebuttable Presumption Payback
    2. Economic Impacts on Manufacturers
    a. Water Heater Cash-Flow Analysis Results
    b. Direct Heating Equipment Cash-Flow Analysis Results
    c. Pool Heaters Cash-Flow Analysis Results
    d. Impacts on Employment
    e. Impacts on Manufacturing Capacity
    f. Cumulative Regulatory Burden
    g. Impacts on Small Businesses
    3. National Impact Analysis
    a. Significance of Energy Savings
    b. Net Present Value of Consumer Costs and Benefits
    c. Net Present Value of Benefits from Energy Price Impacts
    d. Impacts on Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation to Conserve Energy
    7. Other Factors
    C. Proposed Standards
    1. Water Heaters
    2. Direct Heating Equipment
    3. Pool Heaters
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Order 12866
    B. Review Under the Regulatory Flexibility Act
    1. Water Heater Industry
    2. Pool Heater Industry
    3. Direct Heating Equipment Industry Characteristics
    a. Description and Estimated Number of Small Entities Regulated
    b. Reasons for the Proposed Rule
    c. Objectives of, and Legal Basis for, the Proposed Rule
    d. Description and Estimate of Compliance Requirements
    e. Duplication, Overlap, and Conflict With Other Rules and 
Regulations
    f. Significant Alternatives to the Proposed Rule
    C. Review Under the Paperwork Reduction Act of 1995
    D. Review Under the National Environmental Policy Act of 1969
    E. Review Under Executive Order 13132
    F. Review Under Executive Order 12988
    G. Review Under the Unfunded Mandates Reform Act of 1995
    H. Review Under the Treasury and General Government 
Appropriations Act, 1999
    I. Review Under Executive Order 12630
    J. Review Under the Treasury and General Government 
Appropriations Act, 2001
    K. Review Under Executive Order 13211
    L. Review Under the Information Quality Bulletin for Peer Review
VII. Public Participation
    A. 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
VIII. Approval of the Office of the Secretary

I. Summary of the Proposed Rule

    The Energy Policy and Conservation Act (42 U.S.C. 6291 et seq.; 
EPCA or the Act), as amended, provides that any new or amended energy 
conservation standard DOE prescribes for certain consumer products, 
including residential water heaters, direct heating equipment (DHE), 
and pool heaters (collectively referred to in this document as the 
``three heating products''), shall be designed to ``achieve the maximum 
improvement in energy efficiency * * * which the Secretary determines 
is technologically feasible and economically justified.'' (42 U.S.C. 
6295(o)(2)(A)) Furthermore, the new or amended standard must ``result 
in significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B)) In 
accordance with these and other statutory provisions discussed in this 
notice, DOE proposes amended energy conservation standards for the 
three types of heating products listed above. Compliance with the 
proposed standards would be required for all residential water heaters 
listed in Table I.1 that are manufactured in or imported into the 
United States on or after five years after the date of publication of 
the final rule. The proposed standards would apply to all DHE and pool 
heaters listed in Table I.1 that are manufactured in or imported into 
the United States on or after three years after the date of publication 
of the final rule. Table I.1 sets forth the proposed standards for the 
products that are the subject of this rulemaking.

[[Page 65854]]



      Table I.1--Proposed Amended Energy Conservation Standards for
  Residential Water Heaters, Direct Heating Equipment, and Pool Heaters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
        Product class                   Proposed standard level
------------------------------------------------------------------------
                       Residential water heaters *
------------------------------------------------------------------------
Gas-fired Storage...........  For tanks with a      For tanks with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons: EF =      gallons: EF = 0.717
                               0.675 - (0.0012 x     - (0.0019 x Rated
                               Rated Storage         Storage Volume in
                               Volume in gallons).   gallons).
Electric Storage............  For tanks with a      For tanks with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 80
                               80 gallons: EF =      gallons: EF = 1.088
                               0.96 - (0.0003 x      - (0.0019 x Rated
                               Rated Storage         Storage Volume in
                               Volume in gallons).   gallons).
                             -------------------------------------------
Oil-fired Storage...........  EF = 0.68 - (0.0019 x Rated Storage Volume
                                              in gallons).
Gas-fired Instantaneous.....  EF = 0.82 - (0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------


 
          Product class                   Proposed standard level
------------------------------------------------------------------------
                       Direct heating equipment **
------------------------------------------------------------------------
Gas wall fan type up to 42,000     AFUE = 76%
 Btu/h.
Gas wall fan type over 42,000 Btu/ AFUE = 77%
 h.
Gas wall gravity type up to        AFUE = 70%
 27,000 Btu/h.
Gas wall gravity type over 27,000  AFUE = 71%
 Btu/h up to 46,000 Btu/h.
Gas wall gravity type over 46,000  AFUE = 72%
 Btu/h.
Gas floor up to 37,000 Btu/h.....  AFUE = 57%
Gas floor over 37,000 Btu/h......  AFUE = 58%
Gas room up to 20,000 Btu/h......  AFUE = 62%
Gas room over 20,000 Btu/h up to   AFUE = 67%
 27,000 Btu/h.
Gas room over 27,000 Btu/h up to   AFUE = 68%
 46,000 Btu/h.
Gas room over 46,000 Btu/h.......  AFUE = 69%
Gas hearth up to 20,000 Btu/h....  AFUE = 61%
Gas hearth over 20,000 Btu/h and   AFUE = 66%
 up to 27,000 Btu/h.
Gas hearth over 27,000 Btu/h and   AFUE = 67%
 up to 46,000 Btu/h.
Gas hearth over 46,000 Btu/h.....  AFUE = 68%
------------------------------------------------------------------------
                              Pool heaters
------------------------------------------------------------------------
Gas-fired........................  Thermal Efficiency = 84%
------------------------------------------------------------------------
* EF is the ``energy factor,'' and the ``Rated Storage Volume'' equals
  the water storage capacity of a water heater (in gallons), as
  specified by the manufacturer.
** Btu/h is ``British thermal units per hour'' and AFUE is ``Annual Fuel
  Utilization Efficiency.''

    DOE's analyses indicate that the proposed standards would save a 
significant amount of energy--an estimated 2.85 quads of cumulative 
energy over a 30-year period. This amount is equivalent to 61 days of 
U.S. gasoline use. Breaking these figures down by product type, the 
national energy savings of the proposed standards is estimated to be 
2.60 quads for residential water heaters, 0.22 quads for DHE, and 0.03 
quads for pool heaters.
    The cumulative national net present value (NPV) of total consumer 
costs and savings from the proposed standards (in 2008$) ranges from 
$5.73 billion (at 7-percent discount rate) to $18.1 billion (at 3-
percent discount rate). This is the estimated total value of future 
operating-cost savings minus the estimated increased product and 
installation costs, discounted to 2010.
    The NPV of the proposed standards for water heaters ranges from 
$4.79 billion (7-percent discount rate) to $15.6 billion (3-percent 
discount rate). DOE estimates the industry net present value (INPV) for 
water heaters to be approximately $1,455 million in 2008$. If DOE 
adopts the proposed standards, it estimates U.S. water heater 
manufacturers will lose between 0.2 percent and 5.6 percent of the 
INPV, which is approximately -$2.4 to -$81.0 million. However, the NPV 
for consumers (at the 7-percent discount rate) is 59 to 1996 times 
larger than the industry losses due to the proposed standards with the 
7-percent discount rate, and 193 to 6500 times larger than the industry 
losses due to the proposed standards with the 3-percent discount rate.
    For DHE, the NPV of the proposed standards ranges from $0.91 
billion (7-percent discount rate) to $2.22 billion (3-percent discount 
rate). DOE estimates the INPV for DHE to be approximately $104 million 
in 2008$. If DOE adopts the proposed standards, it estimates U.S. DHE 
manufacturers will lose between 1.9 percent and 5.9 percent of the 
INPV, which is approximately -$2.0 to -$6.2 million. However, the NPV 
for consumers (at the 7-percent discount rate) is 147 to 455 times 
larger than the industry losses due to the proposed standards with the 
7-percent discount rate, and 358 to 1,110 times larger than the 
industry losses due to the proposed standards with the 3-percent 
discount rate.
    For pool heaters, the NPV of the proposed standard ranges from 
$0.03 billion (7-percent discount rate) to $0.25 billion (3-percent 
discount rate). DOE estimates the INPV for pool heaters to be 
approximately $61.4 million in 2008$. If DOE adopts the proposed 
standards, it expects the impacts on U.S. pool heater manufacturers 
will be between a gain of 0.9 percent and a loss of 12.1 percent of the 
INPV, which is approximately -$0.5 million to -$7.5 million. However, 
the NPV for consumers (at the seven-percent discount rate) is 4 to 60 
times larger than the industry losses due to the proposed standards at 
the 7-percent discount rate, and 33 to 498 times larger than the 
industry losses due

[[Page 65855]]

to the proposed standards at the 3-percent discount rate.
    The economic impacts of the proposed standards on individual 
consumers (i.e., the average life-cycle cost (LCC) savings) are 
predominately positive. For water heaters, DOE projects that the 
average LCC impact is a gain of $68 for gas-fired storage water 
heaters, $39 for electric storage water heaters, and $395 for oil-fired 
storage water heaters, and no change for gas-fired instantaneous water 
heaters. For DHE, DOE projects that the average LCC impact for 
consumers is a gain of $104 for gas wall fan DHE, $192 for gas wall 
gravity DHE, $13 for gas floor DHE, $143 for gas room DHE, and $96 for 
gas hearth DHE. For pool heaters, DOE projects that the average LCC 
impact for consumers is a loss of $13 (which represents only 0.2 
percent of the average total LCC).
    In addition, the proposed standards would be expected to provide 
significant environmental benefits. The proposed standards would 
potentially result in cumulative greenhouse gas emission reductions of 
167 million tons (Mt) of carbon dioxide (CO2) from 2013 to 
2045. Specifically, the proposed standards for water heaters would 
reduce CO2 emissions by 154 Mt; the proposed standards for 
DHE would reduce CO2 emissions by 8.5 Mt; and the proposed 
standard for pool heaters would reduce CO2 emissions by 4.2 
Mt. For the three types of heating products together, DOE estimates 
that the range of the monetized value of CO2 emission 
reductions based on global estimates of the value of avoided 
CO2 is $0.399 billion to $4.386 billion at a 7-percent 
discount rate and $0.902 billion to $9.925 billion at a 3-percent 
discount rate.
    The proposed standards would also be expected to result in 
reduction in cumulative nitrogen oxides (NOX) emissions of 
129 kilotons (kt). Specifically, the proposed water heater standards 
would result in cumulative NOX emissions reductions of 118 
kt; the proposed standards for DHE would result in 7.7 kt of 
NOX emissions reductions; and the proposed standard for pool 
heaters would result in 3.7 kt of NOX emissions reductions.
    The proposed standards for heating products would also be expected 
to result in power plant mercury (Hg) emissions reductions. For water 
heaters, cumulative Hg emissions would be reduced by 0.20 tons (t). The 
proposed standards for DHE and pool heaters would be expected to have a 
negligible impact on mercury emissions.
    The benefits and costs of today's proposed rule can also be 
expressed in terms of annualized values. The annualized values refer to 
consumer operating cost savings, consumer incremental product and 
installation costs, the quantity of emissions reductions for 
CO2, NOX, and Hg, and the monetary value of 
emissions reductions. DOE calculated annualized values using discount 
rates of three percent and seven percent. Although DOE calculated 
annualized values, this does not imply that the time-series of cost and 
benefits from which the annualized values were determined are a steady 
stream of payments.
    Table I.2, Table I.3, and Table I.4 present the annualized values 
for the standards proposed for water heaters, DHE, and pool heaters, 
respectively. The tables also present the annualized net benefit that 
results from summing the two monetary benefits and subtracting the 
consumer incremental product and installation costs. Although summing 
the value of operating cost savings with the value of CO2 
reductions (and other emissions reductions) provides a valuable 
perspective, please note the following. The operating cost savings are 
domestic U.S. consumer monetary savings found in market transactions, 
but in contrast, the CO2 value is based on an estimate of 
imputed marginal social cost of carbon (SCC), which is meant to reflect 
the global benefits of CO2 reductions. In addition, the 
assessments of operating cost savings and CO2 savings are 
performed with different computer models, leading to different time 
frames for analysis. The operating cost savings are measured for the 
lifetime of appliances shipped in 2015-2045 or 2013-2043. The value of 
CO2, on the other hand is meant to reflect the present value 
of all future climate-related impacts, even those beyond 2065.

                                Table I.2--Annualized Benefits and Costs of Proposed Standards for Water Heaters (TSL 4)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Primary estimate (AEO  Low estimate (AEO low-    High estimate (AEO
                                                                                      reference case)          growth case)          high-growth case)
                   Category                                   Unit               -----------------------------------------------------------------------
                                                                                      7%          3%          7%          3%          7%          3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Operating Cost Savings..............  Million 2008$...................      1487.1      1842.4      1383.7      1708.4      1590.5      1976.2
Quantified Emissions Reductions...............  CO2 (Mt)........................        4.58        4.92        5.34        5.28        0.61        1.04
                                                NOX (kt)........................        3.54        3.79        4.17        4.11        0.58        0.92
                                                Hg (t)..........................       0.009       0.008     (0.003)     (0.011)       0.010       0.013
Monetized Avoided Emissions Reductions *        CO2 (at $20/t)..................       157.1       187.3       184.8       222.1        20.2        41.9
 (Million 2008$).
                                                NOX.............................         8.2         9.1         9.7        10.9         0.4         1.6
                                                Hg..............................         0.1         0.1       (0.1)       (0.1)         0.1         0.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Incremental Product and Installation  Million 2008$...................       945.5       917.3       894.4       861.7       997.0       973.4
 Costs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Net Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Value **............................  Million 2008$...................       698.8      1112.4       674.1      1068.9       613.7      1044.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For CO2, benefits reflect value of $20/t, which is in the middle of the values considered by DOE for valuing the potential global benefits resulting
  from reduced CO2 emissions. For NOX and Hg, the benefits reflect values of $2,491/t and $17 million/t, respectively. These values are the midpoint of
  the range considered by DOE.
** Monetized Value does not include monetized avoided emissions reductions for NOX and Hg.


[[Page 65856]]


                           Table I.3--Annualized Benefits and Costs of Proposed Standards for Direct Heating Equipment (TSL 3)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Primary estimate (AEO  Low estimate (AEO low-    High estimate (AEO
                                                                                      reference case)          growth case)          high-growth case)
                   Category                                   Unit               -----------------------------------------------------------------------
                                                                                      7%          3%          7%          3%          7%          3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Operating Cost Savings..............  Million 2008$...................       132.2       164.4       126.4       156.9       136.2       169.6
Quantified Emissions Reductions...............  CO2 (Mt)........................        0.24        0.27        0.43        0.46        0.13        0.14
                                                NOX (kt)........................        0.22        0.24        0.36        0.38        0.14        0.15
                                                Hg (t)..........................       0.000     (0.001)       0.000     (0.001)       0.000       0.000
Monetized Avoided CO2 Value (at $20/t) .*       Million 2008$...................         8.2         9.8         2.5         2.9        21.0        42.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Incremental Product and Installation  Million 2008$...................        41.8        40.6        41.8        40.6        41.8        40.6
 Costs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Net Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Value...............................  Million 2008$...................        98.5       133.5        87.1       119.2       115.4       171.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For CO2, benefits reflect value of $20/t, which is in the middle of the values considered by DOE for valuing the potential global benefits resulting
  from reduced CO2 emissions. For NOX and Hg, the annual benefits are very small and are thus not reported in the table.


                                 Table I.4--Annualized Benefits and Costs of Proposed Standards for Pool Heaters (TSL 4)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Primary estimate (AEO  Low estimate (AEO low-    High estimate (AEO
                                                                                      reference case)          growth case)          high-growth case)
                   Category                                   Unit               -----------------------------------------------------------------------
                                                                                      7%          3%          7%          3%          7%          3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Operating Cost Savings..............  Million 2008$...................       59.88       68.79       57.29       65.66       61.62       70.86
Quantified Emissions Reductions...............  CO2 (Mt)........................        0.13        0.13        0.16        0.17        0.09        0.10
                                                NOX (kt)........................       0.112       0.119       0.134       0.143       0.085       0.091
                                                Hg (t)..........................       0.000       0.000     (0.000)     (0.001)     (0.000)       0.000
Monetized Avoided CO2 Value (at $20/t).*        Million 2008$...................        4.20        4.84        5.24        6.08        3.01        3.47
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Incremental Product and Installation  2008$...........................       56.66       54.59       56.66       54.59       56.66       54.59
 Costs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Net Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized Value...............................  Million 2008$...................        7.41       19.04        5.88       17.15        7.97       19.74
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For CO2, benefits reflect value of $20/t, which is in the middle of the values considered by DOE for valuing the potential global benefits resulting
  from reduced CO2 emissions. For NOX and Hg, the annual benefits are very small and are thus not reported in the table.

    DOE has tentatively concluded that the proposed standards represent 
the maximum improvement in energy efficiency that is technologically 
feasible and economically justified, and would result in significant 
conservation of energy. Products achieving these standard levels are 
already commercially available. Based on the analyses culminating in 
this proposal, DOE found the benefits to the Nation of the proposed 
standards (energy savings, consumer LCC savings, national NPV increase, 
and emission reductions) outweigh the burdens (loss of INPV and LCC 
increases for some consumers). DOE considered higher efficiency levels 
as trial standard levels, and is still considering them in this 
rulemaking; however, DOE has tentatively concluded that the burdens of 
the higher efficiency levels would outweigh the benefits. With that 
said, based on consideration of public comments DOE receives in 
response to this notice and related information, DOE may adopt 
efficiency levels in the final rule that are either higher or lower 
than the proposed standards, or some level(s) in between the proposed 
standards and other efficiency levels presented.
    DOE is proposing TSL 4 for residential water heaters as the level 
which it has tentatively concluded meet the applicable statutory 
criteria (i.e., the highest level that is technologically feasible, 
economically justified, and would result in significant conservation of 
energy). Based upon public comments and any accompanying data 
submissions, DOE would strongly consider other TSLs (as presented in 
this NOPR or at some level in between), some of which might provide an 
even higher level of energy savings and promote a market for advanced 
water heating technologies, including heat pump and condensing water 
heaters. Accordingly, DOE is presenting a variety of issues throughout 
today's notice upon which it is seeking

[[Page 65857]]

comment which will bear upon its consideration of TSL 5 or TSL 6 for 
residential water heaters in the final rule.

II. Introduction

A. Consumer Overview

    EPCA currently prescribes energy conservation standards for the 
three heating products that are the subject of this rulemaking. DOE is 
proposing to raise the standards for the products shown in Table I.1. 
The proposed standards would apply to residential water heaters 
manufactured or imported on or after five years after the final rule 
publication date (i.e., approximately March 31, 2015). The proposed 
standards would apply to DHE and pool heaters manufactured or imported 
on or after three years after the final rule publication date (i.e., 
approximately March 31, 2013).
    DOE's analyses suggest that consumers would realize benefits from 
the proposed standards. Although DOE expects that the purchase price of 
the more-efficient heating products would be higher than the average 
prices of these products today, for most consumers, the energy 
efficiency gains would result in lower energy costs that would more 
than offset the higher purchase price. For water heaters, the median 
payback period is 2.7 years for gas-fired storage water heaters, 5.8 
years for electric storage water heaters, 0.5 years for oil-fired 
storage water heaters, and 23.5 years for gas-fired instantaneous water 
heaters. For DHE, the median payback period is 6.0 years for gas wall 
fan DHE, 8.3 years for gas wall gravity DHE, 14.7 years for gas floor 
DHE, 5.3 years for gas room DHE and 0.0 years for gas hearth DHE. (The 
reason that the median payback period for gas hearth DHE is zero is 
because for about two-thirds of the consumers, there is no incremental 
cost to get to the proposed standard level). For pool heaters, the 
median payback period is 13.0 years.
    When the overall net savings are summed over the lifetime of these 
products, water heater consumers will save, on average, $68 for gas-
fired storage water heaters, $30 for electric storage water heaters, 
$305 for oil-fired storage water heaters, and $0 for gas-fired 
instantaneous water heaters, compared to their life-cycle expenditures 
on base-case water heaters (i.e., the equipment expected to be 
purchased in the absence of revised energy conservation standards). 
(For gas-fired instantaneous water heaters, the average LCC for the 
proposed standard level is the same as the average LCC in the base 
case, so the savings are zero.) The average LCC impact for DHE 
consumers is a gain of $104 for gas wall fan DHE, $192 for gas wall 
gravity DHE, $13 for gas floor DHE, $143 for gas room DHE, and $96 for 
gas hearth DHE, compared to their life-cycle expenditures on base-case 
products. Pool heater consumers will see, on average, a slight increase 
in their life-cycle costs, compared to their expenditures on base-case 
products.

B. Authority

    Title III of EPCA sets forth a variety of provisions designed to 
improve energy efficiency. Part A \1\ of Title III (42 U.S.C. 6291-
6309) establishes the Energy Conservation Program for Consumer Products 
Other Than Automobiles. The program covers consumer products and 
certain commercial equipment (referred to hereafter as ``covered 
products''), including the three types of heating products that are 
subject to this rulemaking. (42 U.S.C. 6292(a)(4), (9) and (11)) EPCA 
prescribes energy conservation standards for the three heating 
products. (42 U.S.C. 6295(e)(1)-(3)) The statute further directs DOE to 
conduct two cycles of rulemakings to determine whether to amend these 
standards. (42 U.S.C. 6295(e)(4)) As explained in further detail in 
section II.C, ``Background,'' this rulemaking represents the second 
round of amendments to the water heater standards, and the first round 
of amendments to the DHE and pool heater standards.
---------------------------------------------------------------------------

    \1\ This part was originally titled Part B. It was redesignated 
Part A in the United States Code for editorial reasons.
---------------------------------------------------------------------------

    Under the Act, DOE's energy conservation program for covered 
products consists essentially of three parts: (1) Testing; (2) 
labeling; and (3) Federal energy conservation standards. The Federal 
Trade Commission (FTC) is responsible for the labeling provisions for 
consumer products, and DOE implements the remainder of the program. 
Section 323 of the Act authorizes DOE, subject to certain criteria and 
conditions, to develop test procedures to measure the energy 
efficiency, energy use, or estimated annual operating cost of each 
covered product. Manufacturers of covered products must use the DOE 
test procedure as the basis for certifying to DOE that their products 
comply with applicable energy conservation standards adopted under EPCA 
and for representing the efficiency of those products. Similarly, DOE 
must use these test procedures to determine whether the products comply 
with standards adopted under EPCA. (42 U.S.C. 6293) The test procedures 
for water heaters, unvented DHE, vented DHE, and pool heaters appear at 
Title 10 Code of Federal Regulations (CFR) part 430, subpart B, 
appendices E, G, O, and P, respectively.
    EPCA provides criteria for prescribing amended standards for 
covered products. As indicated above, any amended standard for a 
covered product must be designed to achieve the maximum improvement in 
energy efficiency that is technologically feasible and economically 
justified. (42 U.S.C. 6295(o)(2)(A)) Furthermore, EPCA precludes DOE 
from adopting any standard that would not result in significant 
conservation of energy. (42 U.S.C. 6295(o)(3)(B)) Moreover, DOE may not 
prescribe a standard for certain products (including the three heating 
products) if no test procedure has been established. (42 U.S.C. 
6295(o)(3)(A)) The Act also provides that, in deciding whether a 
standard is economically justified, DOE must determine whether the 
benefits of the standard exceed its burdens. (42 U.S.C. 
6295(o)(2)(B)(i)) DOE must do so after receiving comments on the 
proposed standard and by considering, to the greatest extent 
practicable, the following seven factors:
    1. The economic impact of the standard on manufacturers and 
consumers of the products subject to the standard;
    2. The savings in operating costs throughout the estimated average 
life of the covered products in the type (or class) compared to any 
increase in the price, initial charges, or maintenance expenses for the 
covered products that are likely to result from the imposition of the 
standard;
    3. The total projected amount of energy (or, as applicable, water) 
savings likely to result directly from the imposition of the standard;
    4. Any lessening of the utility or the performance of the covered 
products likely to result from the imposition of the standard;
    5. The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    6. The need for national energy and water conservation; and
    7. Other factors the Secretary considers relevant.

(42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))

    Furthermore, EPCA contains what is commonly known as an ``anti-
backsliding'' provision, which prohibits

[[Page 65858]]

the Secretary from prescribing any amended standard that either 
increases the maximum allowable energy use or decreases the minimum 
required energy efficiency of a covered product. (42 U.S.C. 6295(o)(1)) 
Also, the Secretary may not prescribe a new or amended standard if 
interested persons have established by a preponderance of the evidence 
that the standard is likely to result in the unavailability in the 
United States of any covered product type (or class) with performance 
characteristics (including reliability), features, sizes, capacities, 
and volumes that are substantially the same as those generally 
available in the United States. (42 U.S.C. 6295(o)(4))
    Under 42 U.S.C. 6295(o)(2)(B)(iii), EPCA establishes a rebuttable 
presumption that a standard is economically justified if the Secretary 
finds that ``the additional cost to the consumer of purchasing a 
product complying with an energy conservation standard level will be 
less than three times the value of the energy * * * savings during the 
first year that the consumer will receive as a result of the standard, 
as calculated under the applicable test procedure. * * *''
    Under 42 U.S.C. 6295(q)(1), EPCA specifies requirements for 
promulgation of a standard for a type or class of covered product that 
has two or more subcategories. DOE must specify a different standard 
level than that which applies generally to such type or class of 
products ``for any group of covered products which have the same 
function or intended use, if * * * products within such group--(A) 
consume a different kind of energy from that consumed by other covered 
products within such type (or class); or (B) have a capacity or other 
performance-related feature which other products within such type (or 
class) do not have and such feature justifies a higher or lower 
standard'' than applies or will apply to the other products. (42 U.S.C. 
6295(q)(1)) In determining whether a performance-related feature 
justifies a different standard for a group of products, DOE must 
``consider such factors as the utility to the consumer of such a 
feature'' and other factors DOE deems appropriate. Id. Any rule 
prescribing such a standard must include an explanation of the basis on 
which such higher or lower level was established. (42 U.S.C. 
6295(q)(2))
    Federal energy conservation requirements generally supersede State 
laws or regulations concerning energy conservation testing, labeling, 
and standards. (42 U.S.C. 6297(a)-(c)) However, DOE can grant waivers 
of Federal preemption for particular State laws or regulations in 
accordance with the procedures and other provisions of section 327(d) 
of the Act. (42 U.S.C. 6297(d))
    Finally, section 310(3) of the Energy Independence and Security Act 
of 2007 (EISA 2007; Pub. L. 110-140) amended EPCA to prospectively 
require that energy conservation standards address standby mode and off 
mode energy use. Specifically, when DOE adopts new or amended standards 
for a covered product after July 1, 2010, the final rule must, if 
justified by the criteria for adoption of standards in section 325(o) 
of EPCA, incorporate standby mode and off mode energy use into a single 
standard if feasible, or otherwise adopt a separate standard for such 
energy use for that product. (42 U.S.C. 6295(gg)(3)) Because the final 
rule in this rulemaking is scheduled for adoption by March 2010, this 
requirement does not apply in this rulemaking, and DOE has not 
attempted to address the standby mode or off mode energy use here. DOE 
is currently working on a test procedure rulemaking to address standby 
mode and off mode energy consumption for the three types of heating 
products that are the subject of this rulemaking.

C. Background

1. Current Standards
a. Water Heaters
    On January 17, 2001, DOE prescribed the current energy conservation 
standards for residential water heaters manufactured on or after 
January 20, 2004. 66 FR 4474. This final rule completed the first 
amended standards rulemaking for water heaters required under 42 U.S.C. 
6295(e)(4)(A). The standards consist of minimum energy factors (EF) 
that vary based on the storage volume of the water heater, the type of 
energy it uses (i.e., gas, oil, or electricity), and whether it is a 
storage, instantaneous, or tabletop model. 10 CFR 430.32(d). The water 
heater energy conservation standards are set forth in Table II.1 below.

      Table II.1--Current Federal Energy Conservation Standards for
                        Residential Water Heaters
------------------------------------------------------------------------
                                         Energy factor as of January 20,
             Product class                             2004
------------------------------------------------------------------------
1. Gas-Fired Storage Water Heater......  EF = 0.67 - (0.0019 x Rated
                                          Storage Volume in gallons).
2. Oil-Fired Storage Water Heater......  EF = 0.59 - (0.0019 x Rated
                                          Storage Volume in gallons).
3. Electric Storage Water Heater.......  EF = 0.97 - (0.00132 x Rated
                                          Storage Volume in gallons).
4. Tabletop Water Heater...............  EF = 0.93 - (0.00132 x Rated
                                          Storage Volume in gallons).
5. Gas-Fired Instantaneous Water Heater  EF = 0.62 - (0.0019 x Rated
                                          Storage Volume in gallons).
6. Instantaneous Electric Water Heater.  EF = 0.93 - (0.00132 x Rated
                                          Storage Volume in gallons).
------------------------------------------------------------------------

b. Direct Heating Equipment
    EPCA prescribes the energy conservation standards for DHE, which 
apply to gas-fired products manufactured on or after January 1, 1990. 
(42 U.S.C. 6295(e)(3)) These standards consist of several minimum 
annual fuel utilization efficiency (AFUE) levels, each of which applies 
to units of a particular type (i.e., wall fan, wall gravity, floor, 
room) and heating capacity range. Id. These statutory standards have 
been codified in DOE's regulations at 10 CFR 430.32(i). The DHE energy 
conservation standards are set forth in Table II.2 below. DOE notes 
that while electric DHE are available, standards for these products are 
outside the scope of today's rulemaking. See IV.A.1.b for a more 
detailed discussion of DHE coverage under EPCA.

[[Page 65859]]



  Table II.2--Current Federal Energy Conservation Standards for Direct
                            Heating Equipment
------------------------------------------------------------------------
                                                           Annual fuel
                                                           utilization
   Direct heating equipment       Product class Btu/h    efficiency, as
          design type                                   of  Jan. 1, 1990
                                                                %
------------------------------------------------------------------------
Gas Wall Fan..................  Up to 42,000..........                73
                                Over 42,000...........                74
Gas Wall Gravity..............  Up to 10,000..........                59
                                Over 10,000 and up to                 60
                                 12,000.
                                Over 12,000 and up to                 61
                                 15,000.
                                Over 15,000 and up to                 62
                                 19,000.
                                Over 19,000 and up to                 63
                                 27,000.
                                Over 27,000 and up to                 64
                                 46,000.
                                Over 46,000...........                65
Gas Floor.....................  Up to 37,000..........                56
                                Over 37,000...........                57
Gas Room......................  Up to 18,000..........                57
                                Over 18,000 and up to                 58
                                 20,000.
                                Over 20,000 and up to                 63
                                 27,000.
                                Over 27,000 and up to                 64
                                 46,000.
                                Over 46,000...........                65
------------------------------------------------------------------------

c. Pool Heaters
    EPCA requires pool heaters manufactured on or after January 1, 1990 
to have a thermal efficiency no less than 78 percent. The thermal 
efficiency for this product is measured by testing in accordance with 
the DOE test procedure for pool heaters codified in 10 CFR 430, subpart 
B, Appendix P. The statutory standard for pool heaters has been 
codified in DOE's regulations at 10 CFR 430.32(k).
2. History of Standards Rulemaking for Water Heaters, Direct Heating 
Equipment, and Pool Heaters
    Before being amended by the National Appliance Energy Conservation 
Act of 1987 (NAECA; Pub. L. 100-12), Title III of EPCA included water 
heaters and home heating equipment as covered products. NAECA's 
amendments to EPCA included replacing the term ``home heating 
equipment'' with ``direct heating equipment,'' adding pool heaters as a 
covered product, establishing energy conservation standards for these 
two products as well as residential water heaters, and requiring that 
DOE determine whether these standards should be amended. (42 U.S.C. 
6295(e)(1)-(4)) As indicated above, DOE amended the statutorily-
prescribed standards for water heaters in 2001 (66 FR 4474 (Jan. 17, 
2001)), but has not amended the statutory standards for DHE or pool 
heaters.
    DOE initiated this rulemaking on September 27, 2006, by publishing 
on its Web site its ``Rulemaking Framework for Residential Water 
Heaters, Direct Heating Equipment, and Pool Heaters.'' (A PDF of the 
framework document is available at http://www.eere.energy.gov/buildings/appliance_standards/residential/pdfs/heating_equipmentframework_092706.pdf.) DOE also published a notice announcing 
the availability of the framework document and a public meeting and 
requesting comments on the matters raised in the document. 71 FR 67825 
(Nov. 24, 2006). The framework document described the procedural and 
analytical approaches that DOE anticipated using to evaluate potential 
energy conservation standards for the three heating products and 
identified various issues to be resolved in conducting the rulemaking.
    DOE held the public meeting on January 16, 2007, where it: 
Presented the contents of the framework document; described the 
analyses it planned to conduct during the rulemaking; sought comments 
from interested parties on these subjects; and in general, sought to 
inform interested parties about, and facilitate their involvement in, 
the rulemaking. Interested parties that participated in the public 
meeting discussed the following issues: the scope of coverage for the 
rulemaking; product classes; efficiency levels analyzed in the 
engineering analysis; installation, repair, and maintenance costs; and 
product and fuel switching. At the meeting and during the public 
comment period, DOE received many comments that helped DOE identify and 
resolve the issues involved in this rulemaking to consider amended 
energy conservation standards for the three types of heating products.
    DOE then gathered additional information and performed preliminary 
analyses to help develop the potential energy conservation standards 
for the three heating products. This process culminated in DOE's 
announcement of another public meeting to discuss and receive comments 
on the following matters: The product classes DOE planned to analyze; 
the analytical framework, models, and tools that DOE has been using to 
evaluate standards; the results of the preliminary analyses DOE 
performed; and potential standard levels that DOE could consider. 74 FR 
1643 (Jan. 13, 2009) (the January 2009 notice). DOE also invited 
written comments on these subjects and announced the availability of a 
preliminary technical support document (preliminary TSD) to inform 
interested parties and enable them to provide comments. Id. (The 
preliminary TSD is available at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/water_pool_heaters_prelim_tsd.html.) DOE stated its interest in receiving comments on other 
relevant issues that participants believe DOE should address in this 
NOPR, which would affect energy conservation standards for the three 
heating products. Id. at 1646.
    The preliminary TSD provided an overview of the activities DOE 
undertook in developing potential standard levels for the three heating 
products and discussed the comments DOE received in response to the 
framework document. It also described the analytical framework that DOE 
used (and continues to use in this rulemaking), including a description 
of the methodology, the analytical tools, and the relationships among 
the various analyses that are part of the rulemaking. The preliminary 
TSD described in detail each analysis DOE performed up to that point, 
including inputs, sources,

[[Page 65860]]

methodologies, and results. DOE examined each of the three heating 
products in each of the following analyses:
     A market and technology assessment addressed the scope of 
this rulemaking (i.e., which types of heating products this rulemaking 
covers), identified the potential classes for each product, 
characterized the markets for these products, and reviewed techniques 
and approaches for improving product efficiency.
     A screening analysis reviewed technology options to 
improve the efficiency of each of the three heating products and 
weighed these options against DOE's four prescribed screening criteria 
(i.e., technological feasibility; practicability to manufacture, 
install, and service; adverse impacts on product utility or product 
availability; and adverse impacts on health or safety).
     An engineering analysis estimated the manufacturer selling 
prices (MSPs) associated with more efficient water heaters, DHE, and 
pool heaters.
     An energy use analysis estimated the annual energy use in 
the field of each of the three heating products.
     A markups analysis developed factors to convert estimated 
MSPs derived from the engineering analysis to consumer prices.
     A life-cycle cost analysis calculated, at the consumer 
level, the discounted savings in operating costs throughout the 
estimated average life of the product compared to any increase in 
installed costs likely to result directly from a given standard.
     A payback period (PBP) analysis estimated the amount of 
time it takes consumers to recover the higher purchase expense of more 
energy efficient products through lower operating costs.
     A shipments analysis estimated shipments of each of the 
three heating products over the time period examined in the analysis 
(i.e., 2015-2045 for water heaters and 2013-2043 for DHE and pool 
heaters) under both a base-case scenario (i.e., assuming no new 
standards) and a standards-case scenario (i.e., assuming new standards 
at the various levels under consideration). The shipments analysis 
provides key inputs to the national impact analysis (NIA).
     A national impact analysis assessed the aggregate impacts 
at the national level of potential energy conservation standards for 
each of the three heating products, as measured by the net present 
value of total consumer economic impacts and national energy savings.
     A preliminary manufacturer impact analysis took the 
initial steps in evaluating the effects on manufacturers of potential 
new efficiency standards.
    In the January 2009 notice, DOE summarized in detail the nature and 
function of the following analyses: (1) Engineering, (2) energy use 
characterization, (3) markups to determine installed prices, (4) LCC 
and PBP analyses, and (5) national impact analysis. 74 FR 1643, 1645-46 
(Jan. 13, 2009).
    The public meeting announced in the January 2009 notice took place 
on February 9, 2009. At this meeting, DOE presented the methodologies 
and results of the analyses set forth in the preliminary TSD. The major 
topics discussed at the February 2009 public meeting included the 
product classes for the rulemaking, the treatment of ultra-low 
NOX water heaters, heat pump water heaters screening 
considerations, installation costs and concerns for heat pump water 
heaters, the manufacturing costs for max-tech products, pool heater 
shipments, the energy-use adjustment for gas-fired instantaneous water 
heaters, and the compliance dates for amended standards. The comments 
received since publication of the January 2009 notice, including those 
received at the February 2009 public meeting, have contributed to DOE's 
proposed resolution of the issues in this rulemaking. This NOPR quotes 
and summarizes many of these comments, and responds to the issues they 
raised. (A parenthetical reference at the end of a quotation or 
paraphrase provides the location of the relevant source in the public 
record.)

III. General Discussion

A. Test Procedures

    As noted above, DOE's current test procedures for water heaters, 
vented DHE, and pool heaters appear at Title 10 Code of Federal 
Regulations (CFR) part 430, subpart B, appendices E, O, and P, 
respectively. DOE uses these test procedures to determine whether the 
products comply with standards adopted under EPCA. (42 U.S.C. 6293)
1. Water Heaters
    During the preliminary analysis, DOE received a number of comments 
on the test procedure for residential water heaters. Edison Electric 
Institute (EEI) stated that DOE should modify the values for hot water 
use and the number of daily draws in the water heater test procedure to 
more closely resemble field conditions (i.e., include more shorter 
draws, rather than fewer longer draws), and SEISCO INTERNATIONAL 
(SEISCO) recommended the adoption of a testing protocol for water 
heaters that can best simulate real world usage patterns. (EEI, No. 40 
at p.5; SEISCO, No. 41 at p. 3) \2\ Southern Company (Southern), Bock 
Water Heaters (Bock), and EEI all stated that DOE needs to revise the 
test procedure to account for the actual performance of gas-fired 
instantaneous water heaters. (Southern, No. 50 at p. 2; Bock, No. 53 at 
p. 3; EEI, No. 40 at p. 5)
---------------------------------------------------------------------------

    \2\ ``EEI, No. 40 at p. 5'' refers to: (1) To a statement that 
was submitted by the Edison Electric Institute. It was recorded in 
the Resource Room of the Building Technologies Program in the docket 
under ``Energy Conservation Program: Energy Conservation Standards 
for Residential Water Heaters, Direct Heating Equipment, and Pool 
Heaters,'' Docket Number EERE-2006-BT-STD-0129, as comment number 
40; and (2) a passage that appears on page 5 of that statement.
---------------------------------------------------------------------------

    DOE acknowledges that the actual hot water use and the number of 
daily draws seen in the field can vary greatly depending upon occupancy 
and consumer usage patterns for each type of water heater. DOE's test 
procedure attempts to normalize the usage across fuel types by 
specifying a typical draw pattern and total hot water usage. DOE 
accounts for the variability of these parameters on the energy 
consumption of the water heater using: (1) A hot water draw model that 
accounts for field conditions in a representative sample of U.S. homes; 
and (2) data from field studies of gas-fired instantaneous water 
heaters that incorporate a distribution of correction factors to 
account for actual field operation. These adjustments are used to 
estimate the impacts on consumers of amended standards in the LCC and 
PBP analysis.
    In the past, the issue of whether the efficiency levels examined by 
DOE in this NOPR are achievable using the current DOE test procedures 
for residential water heaters has received much attention from 
commenters. In particular, several manufacturers either through 
manufacturer interviews or docket submissions have expressed their 
concern that as efficiencies increase and approach the theoretical 
maximum efficiency for electric resistance water heating (i.e., 1.0 
EF), the ability to consistently and repeatedly achieve those 
efficiencies is significantly hindered by the variations and 
inaccuracies that are inherent in the current DOE test procedure. 
During engineering and manufacturer interviews, manufacturers have 
indicated that this becomes an increasingly important issue at 0.95 EF.
    Rheem Manufacturing Company (Rheem) commented that the nature of 
the DOE test procedure, including test set-up variations, 
instrumentation, and measurement inaccuracies, limits the attainable 
energy factor values. Rheem

[[Page 65861]]

stated that DOE should reevaluate the current test procedure to 
determine whether it can accurately measure the EF levels being 
proposed for standards, especially if a standard is set at or near the 
theoretically maximum-attainable EF. (Rheem, No. 49 at pp. 3-4)
    DOE agrees with Rheem's assertion that as the theoretical limit is 
reached for a covered product utilizing a given technology (e.g., 
electric resistance storage water heaters), the limitations imposed by 
the instrumentation, test set-up, and measurement accuracies become 
increasingly important. In response, DOE notes that there are currently 
several models in AHRI's Directory of certified residential water 
heaters that are listed with energy factors of 0.95 EF over a range of 
storage volumes. DOE believes this fact demonstrates that it is 
possible for manufacturers to make products that can repeatedly achieve 
an energy factor of 0.95 and can be certified at this efficiency level. 
In order to further verify the ability of manufacturers to achieve this 
efficiency level, DOE performed its own research, which consisted of 
independent third-party testing of several water heater models rated at 
0.95 EF with rated storage volumes spanning 30 to 80 gallons. Of the 
five models tested that were rated at 0.95 EF, four fell within the 
acceptable range of values to be rated and certified at 0.95 EF, while 
only one model failed to achieve an efficiency that would be acceptable 
for a 0.95 EF rating. This further demonstrates the ability of 
manufacturers to consistently achieve 0.95 EF, as the large majority of 
the sample of models tested did reach an acceptable value for 
certification at 0.95 EF.
    DOE has tentatively concluded that the TSLs being considering in 
the proposed rule provide ample room for manufacturers to innovatively 
design products which meet the standards using the existing test 
procedure. DOE's test results further provide evidence that electric 
storage water heaters exist at TSL 4 (0.95 EF at the representative 
rated storage capacity) across a range of storage volumes in the market 
today. In addition, DOE notes that once the product surpasses the 
theoretical maximum of a given technology by utilizing a different 
design these problems are mitigated. Consequently, DOE does not believe 
commenter's concerns regarding the repeatability and accuracy of the 
test procedure apply to TSL 6 and 7, where DOE is considering advance 
technology water heaters, including heat pump water heaters.
    The Natural Resources Defense Council (NRDC) stated that the water 
heater test procedure fails to capture all of the cost-effective 
efficiency measures; the American Council for an Energy-Efficient 
Economy (ACEEE) and NRDC both stated that due to test procedure flaws 
(e.g., giving no efficiency advantage for an insulated tank bottom), 
manufacturers are generally not willing to incorporate enhanced 
efficiency features because product costs are likely to rise without 
improving the rated energy efficiency. (NRDC, No. 48 at p. 3; ACEEE, 
No. 35 at p. 4) DOE acknowledges that the current test procedure may 
not reflect recent advances in technology. DOE believes, however, that 
the test procedure provides satisfactory methods for measuring 
performance of the efficiency levels considered in this rulemaking. 
Furthermore, the design paths that can be used to achieve the 
considered efficiency levels are given appropriate credit by the test 
procedure. DOE believes that the appropriate time to address the 
concerns raised is during the next revision of DOE's test procedure.
2. Direct Heating Equipment
    The energy conservation standards set by EPCA for DHE are 
consistent with the energy efficiency metric described in the vented 
home heating equipment test procedure. On May 12, 1997, DOE published a 
final test procedure rule (the May 1997 final rule) in the Federal 
Register that amended the test procedures for DHE, particularly for 
vented home heating equipment. 62 FR 26140. In this rulemaking, DOE 
proposes that this test procedure be applied to establish the 
efficiency of vented gas hearth DHE.
3. Standby Mode and Off Mode Energy Consumption
    EPCA, as amended by EISA 2007 requires DOE to amend the test 
procedures for the three types of heating products to include the 
standby mode and off mode energy consumption measurements. (42 U.S.C. 
6295(gg)(2)(B)(v)) Consistent with EISA 2007's statutory deadline for 
these changes, DOE intends to amend its test procedures to incorporate 
these measurements by March 31, 2010. DOE is handling standby mode and 
off mode energy use for the three heating products in a separate 
rulemaking.

B. Technological Feasibility

1. General
    In each energy conservation standards rulemaking, DOE conducts a 
screening analysis, which it bases on information it has gathered on 
all current technology options and prototype designs that could improve 
the efficiency of the products or equipment that are the subject of the 
rulemaking. As the first step in such analysis, DOE develops a list of 
design options for consideration in consultation with manufacturers, 
design engineers, and other interested parties. DOE then determines 
which of these means for improving efficiency are technologically 
feasible. DOE considers a design option to be technologically feasible 
if it is in use by the relevant industry or if research has progressed 
to the development of a working prototype. ``Technologies incorporated 
in commercial products or in working prototypes will be considered 
technologically feasible.'' 10 CFR 430, subpart C, appendix A, section 
4(a)(4)(i).
    Once DOE has determined that particular design options are 
technologically feasible, it evaluates each design option in light of 
the following additional screening criteria: (1) Practicability to 
manufacture, install, or service; (2) adverse impacts on product 
utility or availability; and (3) adverse impacts on health or safety. 
Section IV.B of this notice discusses the results of the screening 
analysis for the three types of heating products, particularly the 
designs DOE considered, those it screened out, and those that are the 
basis for the efficiency levels in this rulemaking. For further details 
on the screening analysis for this rulemaking, see chapter 4 of the 
NOPR TSD.
2. Maximum Technologically Feasible Levels
    When DOE proposes to adopt (or not adopt) an amended or new energy 
conservation standard for a type or class of covered product, it must 
``determine the maximum improvement in energy efficiency or maximum 
reduction in energy use that is technologically feasible'' for such 
product. (42 U.S.C. 6295(p)(1)) Accordingly, DOE determined the maximum 
technologically feasible (``max-tech'') efficiency levels for the three 
heating products in the engineering analysis using the most efficient 
design parameters that lead to the creation of the highest product 
efficiencies possible. (See chapter 5 of the NOPR TSD.)
    The max-tech efficiency levels are set forth in TSL 7 for 
residential water heaters, TSL 6 for DHE, and TSL 6 for pool heaters. 
For the representative rated storage volumes and input capacity ratings 
within a given product class, products with these efficiency levels 
were or are now being offered for sale, or there is a prototype that 
has

[[Page 65862]]

been tested and developed. No products at higher efficiency levels are 
currently available. Table III.1 lists the max-tech efficiency levels 
that DOE determined for this rulemaking.

             Table III.1--Max-Tech Efficiency Levels for the Residential Heating Products Rulemaking
----------------------------------------------------------------------------------------------------------------
             Product class                 Representative product             Max-tech efficiency level
----------------------------------------------------------------------------------------------------------------
                                            Residential water heaters
----------------------------------------------------------------------------------------------------------------
Gas-Fired Storage Water Heater.........  Rated Storage Volume = 40   EF = 0.80
                                          Gallons.
Electric Storage Water Heater..........  Rated Storage Volume = 50   EF = 2.2
                                          Gallons.
Oil-Fired Storage Water Heater.........  Rated Storage Volume = 32   EF = 0.68
                                          Gallons.
Gas-Fired Instantaneous Water Heater...  Rated Storage Volume = 0    EF = 0.95
                                          Gallons, Rated Input
                                          Capacity = 199,999 Btu/h.
----------------------------------------------------------------------------------------------------------------
                                            Direct heating equipment
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan Type......................  Rated Input Capacity =      AFUE = 80%
                                          Over 42,000 Btu/h.
Gas Wall Gravity Type..................  Rated Input Capacity =      AFUE = 72%
                                          Over 27,000 Btu/h and up
                                          to 46,000 Btu/h.
Gas Floor Type.........................  Rated Input Capacity =      AFUE = 58%
                                          Over 37,000 Btu/h.
Gas Room Type..........................  Rated Input Capacity =      AFUE = 83%
                                          Over 27,000 Btu/h and up
                                          to 46,000 Btu/h.
Gas Hearth Type........................  Rated Input Capacity =      AFUE = 93%
                                          Over 27,000 Btu/h and up
                                          to 46,000 Btu/h.
----------------------------------------------------------------------------------------------------------------
                                                  Pool heaters
----------------------------------------------------------------------------------------------------------------
Gas Fired..............................  Rated Input Capacity =      Thermal Efficiency = 95%
                                          250,000 Btu/h.
----------------------------------------------------------------------------------------------------------------

    See section IV.C.3 for additional details of the max-tech 
efficiency levels and discussion of related comments from interested 
parties on the preliminary analysis. In this NOPR, DOE again seeks 
public comment on the max-tech efficiency levels identified for its 
analyses. Specifically, DOE requests information about whether the 
efficiency levels identified by DOE would be achievable using the 
technologies screened-in during the screening analysis (see section 
IV.B), especially for gas-fired storage water heaters, and whether even 
higher efficiencies would be achievable using screened-in technologies. 
(See Issue 1 under ``Issues on Which DOE Seeks Comment'' in section 
VII.E of this NOPR.)

C. Energy Savings

1. Determination of Savings
    DOE used its NIA spreadsheet to estimate energy savings expected to 
result from amended energy conservation standards for products that 
would be covered under today's proposed rule. (Section IV.F of this 
notice and chapter 10 of the NOPR TSD describe the NIA spreadsheet 
model.) For each TSL, DOE forecasted energy savings over the period of 
analysis (beginning in 2013 (DHE, pool heaters) or 2015 (water 
heaters), the year that compliance with the amended standards would be 
required, and ending 30 years later) relative to the base case. (The 
base case represents the forecast of energy consumption in the absence 
of amended energy conservation standards.) Stated another way, DOE 
quantified the energy savings attributable to potential amended energy 
conservation standards as the difference in energy consumption between 
the standards case and the base case.
    The NIA spreadsheet model calculates the energy savings in site 
energy, which is the energy directly consumed on location by an 
individual product. DOE reports national energy savings on an annual 
basis in terms of the aggregated source (primary) energy savings, which 
are the energy savings used to generate and transmit the energy 
consumed at the site. To convert site energy to source energy, DOE 
derived conversion factors, which change with time, from the Energy 
Information Agency's (EIA) Annual Energy Outlook 2009 (AEO2009).
    For results of DOE's National Energy Savings (NES) analysis, see 
section V.B.3 of this notice or chapter 10 of the NOPR TSD.
2. Significance of Savings
    As noted above, under 42 U.S.C. 6295(o)(3)(B), DOE is prohibited 
from adopting a standard for a covered product if such standard would 
not result in ``significant'' energy savings. While the term 
``significant'' is not defined in the Act, the U.S. Court of Appeals 
for the District of Columbia Circuit, in Natural Resources Defense 
Council v. Herrington, 768 F.2d 1355, 1373 (D.C. Cir. 1985), indicated 
that Congress intended ``significant'' energy savings in this context 
to be savings that were not ``genuinely trivial.'' The energy savings 
for all of the TSLs considered in this rulemaking are nontrivial, and, 
therefore, DOE considers them ``significant'' within the meaning of 
section 325 of the EPCA.

D. Economic Justification

1. Specific Criteria
    As noted in section II.B., EPCA provides seven factors to be 
evaluated in determining whether a potential energy conservation 
standard is economically justified. (42 U.S.C. 6295(o)(2)(B)(i)) The 
following sections discuss how DOE has addressed each of those seven 
factors in this rulemaking.
a. Economic Impact on Manufacturers and Consumers
    EPCA requires DOE to consider the economic impact on manufacturers 
and consumers of products when determining the economic justification 
of a standard. (42 U.S.C. 6295(o)(2)(B)(i)(I)) In determining the 
impacts of an amended standard on manufacturers, DOE first determines 
the quantitative impacts using an annual cash-flow approach. This 
includes both a short-term assessment--based on the cost and capital 
requirements during the period between the announcement of a regulation 
and when the regulation comes into effect--and a long-term

[[Page 65863]]

assessment over the 30-year analysis period. The impacts analyzed 
include INPV (which values the industry on the basis of expected future 
cash flows), annual cash flows, changes in revenue and income, and 
other measures of impact, as appropriate. DOE analyzes and reports the 
impacts on different types of manufacturers, paying particular 
attention to impacts on small manufacturers. DOE also considers the 
impact of standards on domestic manufacturer employment and 
manufacturing capacity, as well as the potential for plant closures and 
loss of capital investment. Finally, DOE accounts for cumulative 
impacts of different DOE regulations and other regulatory requirements 
on manufacturers.
    For consumers, measures of economic impact include the changes in 
LCC and PBP for each TSL. The LCC, which is also separately specified 
as one of the seven factors to be considered in determining the 
economic justification for a new or amended standard (42 U.S.C. 
6295(o)(2)(B)(i)(II)), is discussed in the following section.
    For the results of DOE's analysis of the economic impacts of 
potential standards on manufacturers and consumers, see section V.B of 
this notice and chapters 8 and 12 of the NOPR TSD.
b. Life-Cycle Costs
    The LCC is the sum of the purchase price of a product (including 
associated installation costs) and the operating expense (including 
energy, maintenance, and repair expenditures) discounted over the 
lifetime of the product. In this rulemaking, DOE calculated both LCC 
and LCC savings for various efficiency levels for each product. The LCC 
analysis estimated the LCC for representative heating products in 
housing units that represent the segment of the U.S. housing stock that 
uses these appliances. Through the use of a housing stock sample, DOE 
determined for each household in the sample the energy consumption of 
the heating product and the appropriate energy prices. By using a 
representative sample of households, the analysis captured the wide 
variability in energy consumption and energy prices associated with 
heating product use. For each household, DOE sampled the values of 
several inputs to the LCC calculation from probability distributions. 
For purposes of the analysis, DOE assumes that the consumer purchases 
the product in the year the standard becomes effective.
    DOE presents the LCC savings as a distribution, with a mean value 
and a range across the sample for each product. This approach permits 
DOE to identify the percentage of consumers achieving LCC savings or 
attaining certain payback values due to an amended energy conservation 
standard, in addition to the average LCC savings or average payback for 
that standard.
    For the results of DOE's LCC and PBP analyses, see section V.B.1.a 
of this notice and chapter 8 of the NOPR TSD.
c. Energy Savings
    While significant conservation of energy is a separate statutory 
requirement for adopting an energy conservation standard, the Act 
requires DOE, in determining the economic justification of a standard, 
to consider the total projected energy savings that are expected to 
result directly from the standard. (42 U.S.C. 6295(o)(2)(B)(i)(III)) 
DOE used the NES spreadsheet results in its consideration of total 
projected savings.
    For the results of DOE's energy savings analyses, see section 
V.B.3.a of this notice and chapter 10 of the NOPR TSD.
d. Lessening of Utility or Performance of Products
    In establishing product classes and evaluating their potential for 
improved energy efficiency, DOE sought to develop potential standards 
for the three types of heating products that would not lessen the 
utility or performance of these products. During the screening 
analysis, DOE tentatively concluded that the efficiency levels being 
considered would not necessitate changes in product design that would 
reduce utility or performance of the three types of heating products 
that are the subject of this rulemaking. Therefore, none of the TSLs 
presented in today's NOPR would reduce the utility or performance of 
the products under consideration. (42 U.S.C. 6295(o)(2)(B)(i)(IV))
    For the results of DOE's analyses related to the impact of 
potential standards on product utility and performance, see section 
IV.B of this notice and chapter 4 of the NOPR TSD, the screening 
analysis.
e. Impact of Any Lessening of Competition
    EPCA directs DOE to consider any lessening of competition likely to 
result from standards. It directs the Attorney General to determine the 
impact, if any, of any lessening of competition likely to result from a 
proposed standard and to transmit such determination to the Secretary, 
not later than 60 days after the publication of a proposed rule, 
together with an analysis of the nature and extent of such impact. (42 
U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii)) DOE has transmitted a copy of 
today's proposed rule to the Attorney General and has requested that 
the U.S. Department of Justice (DOJ) provide its determination on this 
issue. DOE will publish and address the Attorney General's 
determination in the final rule.
f. Need of the Nation To Conserve Energy
    EPCA directs DOE to consider the need for national energy and water 
conservation as part of its standard-setting process. (42 U.S.C. 
6295(o)(2)(B)(i)(VI)) DOE has preliminarily determined that the non-
monetary benefits of the proposed standards would likely be reflected 
in improvements to the security and reliability of the Nation's energy 
system. Reductions in the demand for electricity may result in reduced 
costs for maintaining reliability of the Nation's electricity system. 
DOE conducts a utility impact analysis to estimate how standards may 
affect the Nation's power generation capacity requirements.
    Energy savings from the proposed standards would also be likely to 
result in environmental benefits in the form of reduced emissions of 
air pollutants and greenhouse gases associated with energy production, 
and through reduced use of fossil fuels at the homes where heating 
products are used. Although presented in summary form in section IV.K, 
DOE reports the environmental effects from the proposed standards and 
all of the considered TSLs in the environmental assessment contained in 
chapter 15 of the NOPR TSD. DOE also reports estimates of the economic 
value of emissions reductions resulting from the considered TSLs.
g. Other Factors
    The Act allows the Secretary of Energy, in determining whether a 
standard is economically justified, to consider any other factors that 
the Secretary deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) 
Under this provision, DOE considered LCC impacts on identifiable groups 
of consumers, such as seniors and residents of multi-family housing, 
who may be disproportionately affected by any national energy 
conservation standard level. In addition, DOE considered the 
uncertainties associated with the heat pump water heater market related 
to the ability of manufacturers to ramp up production of heat pump 
water heaters to serve the U.S. market, the ability of heat pump 
component manufacturers to increase production to serve the water

[[Page 65864]]

heater market, and the ability to retrain enough servicers and 
installers of water heaters to serve the market. See section V.C.1 for 
an additional discussion of the uncertainties in the heat pump water 
heater market.
    For the results of DOE's LCC subgroup analysis, see section IV.G of 
this notice and chapter 11 of the NOPR TSD. For a full discussion of 
the uncertainties related to heat pump water heaters, see sections 
V.C.1 and IV.B.3 of this notice.
2. Rebuttable Presumption
    As set forth in 42 U.S.C. 6295(o)(2)(B)(iii), EPCA provides for a 
rebuttable presumption that an energy conservation standard is 
economically justified if the additional cost to the consumer of a 
product that meets the standard level is less than three times the 
value of the first-year energy (and, as applicable, water) savings 
resulting from the standard, as calculated under the applicable DOE 
test procedure. The LCC and PBP analyses generate values that calculate 
the payback period for consumers of potential amended energy 
conservation standards. These analyses include, but are not limited to, 
the 3-year payback period contemplated under the rebuttable presumption 
test discussed above. However, DOE routinely conducts a full economic 
analysis that considers the full range of impacts, including those to 
the consumer, manufacturer, Nation, and environment, as required under 
42 U.S.C. 6295(o)(2)(B)(i). The results of this analysis serve as the 
basis for DOE to definitively evaluate the economic justification for a 
potential standard level (thereby supporting or rebutting the results 
of any preliminary determination of economic justification). The 
rebuttable presumption payback calculation is discussed in section IV.D 
of this NOPR and chapter 8 of the NOPR TSD.

IV. Methodology and Discussion

    In November 2006, DOE published a notice of public meeting and 
availability of the framework document. 71 FR 67825 (Nov. 24, 2006). 
DOE initially presented its proposed methodology for the analyses 
pertaining to the heating products rulemaking in the framework 
document. After receiving comments from interested parties on the 
approaches proposed in the framework document, DOE modified its 
methodology and assumptions, and performed a preliminary analysis for 
heating products. Subsequently, DOE published a notice of public 
meeting on January 13, 2009. 74 FR 1643. In the Executive Summary of 
that notice and preliminary TSD which accompanied it, DOE detailed its 
preliminary analysis conducted for the heating products rulemaking, 
including methodology, assumptions, and results. After receiving 
further comment from interested parties on the analytical approach and 
results of the preliminary analysis, DOE further refined its analyses 
for today's NOPR.
    DOE used two spreadsheet tools to estimate the impact of today's 
proposed standards. The first spreadsheet calculates LCCs and PBPs of 
potential new energy conservation standards. The second provides 
shipments forecasts and then calculates national energy savings and net 
present value impacts of potential new energy conservation standards. 
DOE also assessed manufacturer impacts, largely through use of the 
Government Regulatory Impact Model (GRIM). These spreadsheets are 
available online at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/waterheaters.html.
    Additionally, DOE estimated the impacts on utilities and the 
environment of potential energy efficiency standards for the three 
heating products. DOE used a version of EIA's National Energy Modeling 
System (NEMS) for the utility and environmental analyses. The NEMS 
model simulates the energy sector of the U.S. economy. EIA uses NEMS to 
prepare its AEO, a widely-known energy forecast for the United States. 
The EIA approves the use of the name NEMS to describe only an AEO 
version of the model without any modification to code or data. For more 
information on NEMS, refer to The National Energy Modeling System: An 
Overview 1998. DOE/EIA-0581 (98) (Feb. 1998) (available at: http://tonto.eia.doe.gov/FTPROOT/forecasting/058198.pdf).
    The version of NEMS used for appliance standards analysis is called 
NEMS-BT. Because the present analysis entails some minor code 
modifications and runs the model under various policy scenarios that 
deviate from AEO assumptions, the name ``NEMS-BT'' refers to the model 
as used here. (``BT'' stands for DOE's Building Technologies Program.) 
NEMS-BT offers a sophisticated picture of the effect of standards 
because it accounts for the interactions between the various energy 
supply and demand sectors and the economy as a whole.

A. Market and Technology Assessment

1. Consideration of Products for Inclusion in This Rulemaking
    In this subsection, DOE is presenting its determination of scope 
and coverage for the rulemaking. Specifically, this subsection 
addresses whether EPCA covers certain products and provides DOE with 
the authority to adopt standards for those products. Second, it 
addresses certain types of heating products that are covered under 
EPCA, but for which DOE is not proposing amended standards at this 
time, due to other relevant statutory provisions, technological 
limitations, or other considerations.
a. Determination of Coverage Under the Act
i. Solar-Powered Water Heaters and Pool Heaters
    As indicated above, EPCA directs DOE to determine whether to amend 
the energy conservation standards that the Act prescribes for 
residential water heaters and pool heaters. (42 U.S.C. 6295(e)(4)) 
Under EPCA, any standard for residential water heaters and pool heaters 
must establish either a maximum amount of energy use or a minimum level 
of efficiency that is based on energy use (42 U.S.C. 6291(5)-(6)). EPCA 
defines ``energy use,'' in part, as ``the quantity of energy'' that the 
product consumes. (42 U.S.C. 6291(4)) Further, EPCA covers these two 
products as consumer products. (42 U.S.C. 6291(2); 6292(a)(4), (9), and 
(11)) EPCA defines ``consumer product,'' in part, as an article that 
consumes or is designed to consume energy. (42 U.S.C. 6291(1)) EPCA 
defines ``energy'' as meaning ``electricity, or fossil fuels,'' or 
other fuels that DOE adds to the definition, by rule, upon determining 
``that such inclusion is necessary or appropriate to carry out the 
purposes'' of EPCA. (42 U.S.C. 6291(3)) DOE does not have statutory 
authority to add solar energy (or any other type of fuel) to EPCA's 
definition of ``energy.'' Thus, DOE presently lacks authority to 
prescribe standards for these products when they use the sun's energy 
instead of fossil fuels or electricity because EPCA currently covers 
only water heaters and pool heaters that use electricity or fossil 
fuels, and because any ``energy conservation standard'' currently 
adopted under EPCA for these two products must address or be based on 
the quantity of these fuels, but not solar power, that the product 
consumes. As to water heaters, DOE lacks authority to adopt standards 
for solar-powered products for an additional reason. ``Water heater'' 
under EPCA currently means ``a product which utilizes oil, gas, or 
electricity to heat potable water,'' thereby excluding solar water 
heaters from coverage. (42 U.S.C. 6291(27); 10 CFR 430.2)

[[Page 65865]]

ii. Add-On Heat Pump Water Heaters
    EPCA defines a residential ``water heater,'' in part, as a product 
that ``heat[s] potable water for use outside the heater upon demand, 
including * * * heat pump type units * * * which are products designed 
to transfer thermal energy from one temperature level to a higher 
temperature level for the purpose of heating water, including all 
ancillary equipment such as fans, storage tanks, pumps, or controls 
necessary for the device to perform its function.'' (42 U.S.C. 
6291(27); 10 CFR 430.2) Integral heat pump water heaters are fully 
functioning water heaters when shipped by the manufacturer. They heat 
water for use outside the appliance upon demand and include in a single 
packaged product all of the components required for operation as a 
water heater. Therefore, integral units meet EPCA's definition of a 
``water heater.''
    Another product sold for residential use is commonly known as an 
add-on heat pump water heater. This product typically is marketed and 
used as an add-on component to a separately manufactured, fully 
functioning storage water heater (usually a conventional electric 
storage-type unit). The add-on unit consists of a small pump and a heat 
pump system. The pump circulates the refrigerant from the water heater 
storage tank through the heat pump system and back into the tank. The 
add-on heat pump extracts heat from the surrounding air and transfers 
it to the water in a process that is much more efficient than 
traditional electric resistance designs. The unit can be mounted on top 
of the storage tank, or can be separately placed on the floor or 
mounted on a wall. Add-on units cannot by themselves provide hot water 
on demand, but rather heat water only after being added to a storage-
type water heater. Manufacturers do not ship the product as a fully-
functioning water heating unit or paired with a storage tank. The add-
on device, by itself, is not capable of heating water and lacks much of 
the equipment necessary to operate as a water heater. As such, it does 
not meet EPCA's definition of a ``water heater'' and currently is not a 
covered product. Consequently, DOE is not proposing in this rulemaking 
to adopt energy conservation standards for such add-on heat pump units.
iii. Gas-Fired Instantaneous Water Heaters With Inputs Above and Below 
the Levels Specified in Existing Definitions
    Another element of EPCA's definition of a residential ``water 
heater'' is that it includes ``instantaneous type units which heat 
water but contain no more than one gallon of water per 4,000 Btu 
[British thermal units (Btu)] per hour of input, including gas 
instantaneous water heaters with an input of 200,000 Btu per hour or 
less * * *.'' (42 U.S.C. 6291(27)(B); 10 CFR 430.2) DOE's test 
procedure for residential water heaters implements and elaborates on 
this definition: ``Gas Instantaneous Water Heater means a water heater 
that * * * has an input greater than 50,000 Btu/hr (53 MJ/h) but less 
than 200,000 Btu/h (210 MJ/h) * * *.'' 10 CFR part 430, subpart B, 
appendix E, section 1.7.2. During the preliminary analysis and as 
today's NOPR was developed, DOE considered whether to evaluate for 
standards gas-fired instantaneous water heaters with inputs greater 
than 200,000 Btu/h and less than 50,000 Btu/h.
    DOE's review of product literature from manufacturers of gas-fired 
instantaneous water heaters indicates that the majority of such 
products rated for residential, whole-house use has an input capacity 
of 199,000 Btu/h, and, thus, are covered by this rulemaking. Given the 
limitations set by Congress, residential gas-fired instantaneous water 
heaters with inputs greater than 200,000 Btu/h do not meet EPCA's 
definition of a ``water heater.'' Consequently, DOE is not proposing in 
this rulemaking to adopt energy conservation standards for such 
products.
    Regarding the lower end of the range, DOE reviewed Air-
Conditioning, Heating, and Refrigeration Institute's (AHRI) \3\ 
Consumers' Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment and manufacturer literature to determine the 
input capacities of products currently being offered for sale on the 
U.S. market. DOE found that the Directory contains only one gas-fired 
instantaneous water heater with an input capacity less than 50,000 Btu/
h. Moreover, DOE determined that this product has been discontinued and 
is being replaced by a comparable product that has an input capacity 
greater than 50,000 Btu/h. Therefore, DOE is not proposing standards 
for products with an input capacity below 50,000 Btu/h.
---------------------------------------------------------------------------

    \3\ The Air-Conditioning, Heating, and Refrigeration Institute 
(AHRI) is the trade association that represents manufacturers of 
heating products. It was formed on January 1, 2008, by the merger of 
the Gas Appliance Manufacturers Association (GAMA), which formerly 
represented these manufacturers, and the Air-Conditioning and 
Refrigeration Institute. AHRI maintains a Consumers' Directory of 
Certified Product Performance for water heaters, direct heating 
equipment, and pool heaters which can be found on AHRI's Web site at 
http://www.ahridirectory.org/ahridirectory/pages/home.aspx.
---------------------------------------------------------------------------

iv. Input Capacity for Residential Pool Heaters and Coverage of Spa 
Heaters
    Under EPCA, ``pool heater'' is defined as ``an appliance designed 
for heating nonpotable water contained at atmospheric pressure, 
including heating water in swimming pools, spas, hot tubs and similar 
applications.'' (42 U.S.C. 6291(25); 10 CFR 430.2) During a preliminary 
phase of this rulemaking, DOE considered excluding from consideration 
pool heaters with an input capacity greater than 1 million Btu/h, based 
on its understanding that manufacturers market such pool heaters as 
light industrial or commercial products. Subsequently, two 
manufacturers advised DOE that the industry defines residential pool 
heaters as having an input capacity of less than or equal to 400,000 
Btu/h. These comments suggested that DOE should use this capacity limit 
in its definition of residential pool heaters and for determining the 
scope of coverage of this product under EPCA.
    As indicated by its definition of ``pool heater,'' quoted above, 
EPCA places no capacity limit on the pool heaters it covers. (42 U.S.C. 
6291(25)) Furthermore, EPCA covers pool heaters as a ``consumer 
product,'' (42 U.S.C. 6291(2), 6292(a)(11)) and defines ``consumer 
product,'' in part, as an article that ``to any significant extent, is 
distributed in commerce for personal use or consumption by 
individuals.'' (42 U.S.C. 6291(1)) These provisions establish that 
EPCA, and standards adopted under it, apply to any pool heater 
distributed to any significant extent as a consumer product for 
residential use, regardless of input capacity; pool heaters marketed as 
commercial equipment, which contain additional design modifications 
related to safety requirements for installation in commercial 
buildings, are not covered by this standard. Therefore, DOE has 
tentatively concluded that an input capacity limit is neither necessary 
nor appropriate to determine the scope of coverage of this product 
under EPCA.
    Regarding whether spa heaters, which heat the water in spas, are 
covered products, DOE notes that EPCA defines a ``pool heater'' to 
include appliances ``designed for * * * heating water in * * * spas.'' 
(42 U.S.C. 6291(25); 10 CFR 430.2) As the definition encompasses spa 
heaters, they are covered by EPCA as well as by the current standards 
for pool heaters, and DOE has included them in this rulemaking. Because 
spa heaters and pool heaters perform similar functions, include similar 
features, and lack performance or operating features that

[[Page 65866]]

would cause them to have inherently different energy efficiencies, DOE 
has not created a separate product class for such units.
v. Vented Hearth Products
    As discussed in section II.C.2 above, before the enactment of 
NAECA, EPCA included ``home heating equipment'' in DOE's appliance 
standards program. EPCA did not define ``home heating equipment.'' 
NAECA's amendments to EPCA included replacing the term ``home heating 
equipment'' with ``direct heating equipment,'' and specified energy 
conservation standards for ``direct heating equipment.'' However, EPCA 
did not define this term, and subsequent legislation has not amended 
EPCA to provide a definition of ``direct heating equipment.''
    DOE defined ``home heating equipment'' and related terms in its 
regulations. These definitions inform the meaning of ``direct heating 
equipment.'' 10 CFR 430.2. Specifically, DOE defines ``home heating 
equipment'' as meaning ``vented home heating equipment and unvented 
home heating equipment,'' and defines each of these two terms. Id. The 
definition of ``vented home heating equipment,'' relevant here, is as 
follows:

* * * a class of home heating equipment, not including furnaces, 
designed to furnish warmed air to the living space of a residence, 
directly from the device, without duct connections (except that 
boots not to exceed 10 inches beyond the casing may be permitted) 
and includes: vented wall furnace, vented floor furnace, and vented 
room heater.'' Id.

DOE also defines the last three terms in this definition. Id. In order 
to provide additional clarity for interested parties, DOE is proposing 
to define the term ``direct heating equipment'' in today's rulemaking. 
Specifically, DOE is proposing to add the following definition in 10 
CFR 430.2:

    Direct heating equipment means vented home heating equipment and 
unvented home heating equipment.

Given that background, the following addresses the issue of vented 
hearth products.
    Vented hearth products include gas-fired products such as 
fireplaces, fireplace inserts, stoves, and log sets that typically 
include aesthetic features such as a yellow flame. Consumers typically 
purchase these products to add aesthetic qualities and ambiance to a 
room, and the products also provide space heating. They provide such 
heating by furnishing warmed air to the living space of a residence 
directly from the device without duct connections. There are two types 
of vented hearth product designs: (1) Recessed and (2) non-recessed. 
Recessed products are typically incorporated into or attached to a 
wall, whereas non-recessed products are typically free-standing and not 
attached to a wall. Both may include fireplace or hearth aesthetics, 
and the recessed product may include a surrounding mantle.
    Vented hearth products meet DOE's definition of ``vented home 
heating equipment,'' because they are designed to furnish warmed air to 
the living space of a residence without duct connections. Furthermore, 
recessed and non-recessed vented hearth products are similar in design 
to some of the direct heating products for which EPCA prescribes 
standards, namely gas wall fan and gravity-type furnaces in the case of 
recessed products, and room heaters in the case of non-recessed 
products.
    In sum, DOE has tentatively concluded that vented hearth products 
are covered products under EPCA, because they meet DOE's definition for 
``vented home heating equipment'' and, therefore, are classified as 
DHE. Thus, DOE proposes to establish standards for these products in 
this rulemaking and subject these products to the existing testing and 
certification provisions for DHE. See section IV.2 and IV.3, below, for 
additional discussion on DOE's proposal for establishing coverage of 
hearth products and the product classes for the rulemaking analyses. If 
DOE finalizes this rulemaking as proposed for hearth type DHE, 
manufacturers of these products would be subject to the provisions in 
10 CFR parts 430.23, 430.24, 430.27, 430.32, 430.33, 430.40 through 
430.49, 430.50 through 430.57, 430.60 through 430.65, and 430.70 
through 430.75, which currently apply to DHE. DOE seeks comment on the 
potential burdens to manufacturers of hearth-type DHE as a result of 
the testing, certification, reporting, and enforcement provisions in 
these sections. (See Issue 2 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.)
b. Covered Products Not Included in This Rulemaking
i. Unvented Direct Heating Equipment (Including Electric Equivalents to 
Gas-Fired Products)
    When EPCA included ``home heating equipment'' as a covered product, 
DOE construed this term as including unvented as well as vented 
products, and prescribed a separate test procedure for each one. 43 FR 
20128 (May 10, 1978); 43 FR 20147 (May 10, 1978). Each of these test 
procedures has since been amended, and they are codified in 10 CFR part 
430, subpart B, appendices G and O, respectively. The new energy 
conservation standards for this equipment in NAECA's amendments to EPCA 
in 1987 were only for gas products, however, and used the AFUE 
descriptor, which applies to vented but not unvented equipment. (42 
U.S.C. 6295(e)(3)) The AFUE descriptor is generally a measure of the 
amount of heat provided by the product compared to the amount of fuel 
supplied. Subsequent DOE actions concerning DHE--first in a NOPR 
proposing standards for eight separate products, 59 FR 10464 (March 4, 
1994), and then in a final rule adopting test procedure amendments for 
DHE, 62 FR 26140 (May 12, 1997)--have focused solely on vented 
products. This approach reflects DOE's understanding that because 
unvented heating products dissipate any heat losses directly into the 
conditioned space rather than elsewhere through a vent, the amount of 
energy losses from these products is minimal.
    The current test procedure for unvented equipment includes neither 
a method for measuring energy efficiency nor a descriptor for 
representing the efficiency of unvented home heating equipment. 
Instead, the current test procedure focuses on a method to measure and 
calculate the annual energy consumption of unvented equipment.10 CFR 
part 430, subpart B, appendix G. Nevertheless, it remains the case that 
the unvented products in question would dissipate any heat losses 
directly into the conditioned space, thereby resulting in minimal 
overall energy losses. Thus, DOE sees little benefit from setting a 
minimum efficiency level for these products and believes that it would 
be unnecessary to do so, given the extremely limited energy savings 
that could be achieved by such a standard. For these reasons, and 
consistent with previous rulemakings in which it has addressed DHE, DOE 
has not evaluated unvented products in this rulemaking and is not 
proposing standards for them at this time.
ii. Electric Pool Heaters
    EPCA's definition of ``pool heater,'' quoted above, is not limited 
to appliances that use a particular type or types of fuel. (42 U.S.C. 
6291(25); 10 CFR 430.2) Thus, EPCA covers both gas-fired pool heaters 
and electric pool heaters, including heat pump pool heaters. EPCA also 
specifies that the energy efficiency descriptor for residential pool 
heaters is thermal efficiency. (42 U.S.C. 6291(22)(E)). Lastly, EPCA 
defines the term ``thermal

[[Page 65867]]

efficiency of pool heaters'' as ``a measure of the heat in the water 
delivered at the heater outlet divided by the heat input of the pool 
heater as measured under test conditions specified in section 2.8.1 of 
the American National Standard for Gas Fired Pool Heaters, Z21.56-1986, 
or as may be prescribed by the Secretary.'' (42 U.S.C. 6291(26))
    Currently, DOE's test procedures specify only a method for testing 
gas-fired pool heaters (10 CFR part 430, subpart B, appendix P), and 
the current energy conservation standard for pool heaters is a minimum 
level of thermal efficiency that applies only to gas-fired products. In 
order for DOE to consider an energy conservation standard for electric 
pool heaters, DOE would first need to establish a test procedure for 
electric pool heaters using the thermal efficiency metric required by 
EPCA. DOE seeks comments from interested parties on how DOE could 
address EPCA's efficiency descriptor requirements in a future potential 
test procedure revision for electric pool heaters. For this reason, DOE 
is proposing amended standards for gas-fired pool heaters only and is 
not considering standards for electric pool heaters. This is identified 
as Issue 3 in Section VII.E, ``Issues on Which DOE Seeks Comment.''
iii. Tabletop and Electric Instantaneous Water Heaters
    Standards are currently applicable to tabletop and electric 
instantaneous water heaters. (10 CFR 430.32(d)) These products meet 
EPCA's definition of ``water heater'' (42 U.S.C. 6291(27); 10 CFR 
430.2) and are covered by the Act because they utilize electricity to 
heat potable water for use outside the heater upon demand. However, for 
the reasons explained below, DOE has not analyzed tabletop water 
heaters and electric instantaneous water heaters in this rulemaking, 
and is not proposing amended standards for them, because of the limited 
potential for energy savings from higher standards for these products.
    Tabletop products are primarily electric and are relatively small 
units because they are designed to be located underneath tabletops in 
highly specialized applications. The only means of which DOE is aware 
for manufacturers to increase the energy efficiency of tabletop units 
is to increase the thickness of their insulation, which would make them 
larger. Manufacturers already maximize the size of these water heaters 
in order to meet the currently required minimum energy factors, and 
size restrictions do not allow the units to be any larger. Thus, DOE is 
unaware of any means to make tabletop water heaters more energy 
efficient. Put another way, if DOE were to adopt a higher efficiency 
standard for this product, it would force this class of covered product 
off the market, in violation of 42 U.S.C. 6295(o)(4). For these 
reasons, DOE has not evaluated tabletop products in this rulemaking and 
is not proposing standards for them.
    Regarding electric instantaneous water heaters, DOE notes that the 
energy efficiency metric for electric instantaneous water heaters (and 
all other water heaters) is a combination of recovery efficiency and 
standby losses. All electric water heaters, including instantaneous 
products, have minor losses in recovery efficiency. Moreover, electric 
instantaneous water heaters have negligible standby losses because they 
store no more than two gallons of hot water. In addition, many of the 
electric instantaneous products currently on the market perform well 
above the existing applicable energy conservation standard and use 
available technologies to produce negligible standby losses. Therefore, 
DOE has not evaluated electric instantaneous water heaters in this 
rulemaking and is not proposing standards for them.
iv. Combination Water Heating/Space Heating Products
    EPCA authorizes DOE to set more than one standard for any product 
that performs more than one major function by setting one energy 
conservation standard for each major function. (42 U.S.C. 6295(o)(5)) 
Some products on the market provide both water heating and space 
heating. To the extent such combination products meet EPCA's criteria 
for coverage, DOE could set standards for them, including a separate 
standard for each of those functions. Id. However, because DOE's 
current test procedure cannot handle combination appliances and DOE has 
not yet adopted a test procedure to determine the energy efficiency of 
these combination appliances, DOE has not evaluated them in this 
rulemaking and is not proposing standards for them.

2. Definition of Gas Hearth Direct Heating Equipment
    In the preliminary analysis, DOE stated that vented hearth products 
can be used to provide residential space heating. When used to furnish 
heat to a living space, DOE reasoned that these products provide the 
same function and utility as vented heaters. DOE stated in the 
preliminary analysis that hearth heaters also provide the same utility 
and function as gas wall furnaces or gas room heaters, and do not use 
any unique technologies. See chapter 2 of the preliminary TSD. 
Additionally, AHRI's Consumers' Directory categorizes fireplace heaters 
as either room heaters or wall furnaces. DOE treated gas hearth DHE as 
either a room heater or a wall furnace for the purposes of the 
preliminary analysis and requested comment in the Executive Summary to 
the preliminary TSD on the need for a separate product definition and 
class for gas hearth DHE.
    AHRI stated that gas-fired hearth heaters need a unique definition 
but that they can be included within the room heater DHE product class. 
AHRI further stated that DOE should use the safety standard in the 
American National Standards Institute (ANSI) Standard Z.21-88, Vented 
Fireplace Heaters as a reference for developing a fireplace heater 
definition. (AHRI, Public Meeting Transcript, No. 34.4 at p. 36)
    DOE agrees with AHRI and has decided to establish a separate 
definition for ``hearth direct heating equipment'' to allow 
manufacturers to easily determine coverage under DOE's regulations. DOE 
has determined that hearth DHE should not be included with room heater 
DHE (the alternative suggested by AHRI) due to the unique constraints 
on hearth products that are not applicable to room heaters because of 
the former's aesthetic appeal to consumers (e.g., glass viewing panes, 
yellow flames, and ceramic log sets). DOE reviewed the ``vented gas 
fireplace heater'' definition in ANSI Standard Z.21-88, as suggested by 
AHRI. The ``vented gas fireplace heater'' definition in ANSI Standard 
Z.21-88 reads as follows:

    Vented gas fireplace heater is a vented appliance which 
simulates a solid fuel fireplace and furnishes warm air, with our 
without duct connections, to the space in which it is installed. A 
vented gas fireplace heater is such that it may be controlled by an 
automatic thermostat. The circulation of heating room air may be by 
gravity or mechanical means. A vented gas fireplace heater may be 
freestanding, recessed, zero clearance, or a gas fireplace insert.

    Part of the ``vented gas fireplace heater'' definition specified by 
ANSI Standard Z.21-88 would conflict with DOE's definition of ``home 
heating equipment.'' 10 CFR 430.2. Specifically, all types of home 
heating equipment under DOE's regulations must function without duct 
connections (although boots not to exceed 10 inches beyond the casing 
may be permitted). Therefore, DOE is modifying the definition of

[[Page 65868]]

``vented gas fireplace heater'' in ANSI Standard Z.21-88 to be 
consistent with the types of equipment covered under DOE's authority 
for home heating equipment. Consequently, in order to account for 
hearth DHE, DOE is proposing a definition of ``vented hearth heater'' 
in section 430.2 to read as follows:

    Vented hearth heater means a vented, freestanding, recessed, 
zero clearance fireplace heater, a gas fireplace insert or a gas-
stove, which simulates a solid fuel fireplace and is designed to 
furnish warm air, without ducts to the space in which it is 
installed.

DOE seeks comment on its definition for ``vented hearth heater.'' (See 
Issue 4 under ``Issues on Which DOE Seeks Comment'' in section VII.E of 
this NOPR.)
3. Product Classes
    In evaluating and establishing energy conservation standards, DOE 
generally divides covered products into classes by the type of energy 
used or by capacity or other performance-related feature that justifies 
a different standard for products having such feature. (See 42 U.S.C. 
6295(q)) In deciding whether a feature justifies a different standard, 
DOE must consider factors such as the utility of the feature to users. 
Id. DOE normally establishes different energy conservation standards 
for different product classes based on these criteria.
    Table IV.1 presents the product classes for the three types of 
heating products under consideration in this rulemaking. The 
subsections below provide additional details, discussion of comments 
relating to the product classes for the three heating products, as well 
as identified issues on which DOE is seeking comments.

   Table IV.1--Proposed Product Classes for the Three Heating Products
------------------------------------------------------------------------
     Residential water heater type               Characteristics
------------------------------------------------------------------------
Gas-Fired Storage Type.................  Nominal input of 75,000 Btu/h
                                          or less; rated storage volume
                                          from 20 to 100 gallons.
Oil-Fired Storage Type.................  Nominal input of 105,000 Btu/h
                                          or less; rated storage volume
                                          of 50 gallons or less.
Electric Storage Type..................  Nominal input of 12 kW (40,956
                                          Btu/h) or less; rated storage
                                          volume from 20 to 120 gallons.
Gas-Fired Instantaneous................  Nominal input of over 50,000
                                          Btu/h up to 200,000 Btu/h;
                                          rated storage volume of 2
                                          gallons or less.
------------------------------------------------------------------------
     Direct heating equipment type           Heating capacity (Btu/h)
------------------------------------------------------------------------
Gas Wall Fan Type......................  Up to 42,000.
                                         Over 42,000.
Gas Wall Gravity Type..................  Up to 27,000.
                                         Over 27,000 and up to 46,000.
                                         Over 46,000.
Gas Floor..............................  Up to 37,000
                                         Over 37,000.
Gas Room...............................  Up to 20,000.
                                         Over 20,000 and up to 27,000.
                                         Over 27,000 and up to 46,000.
                                         Over 46,000.
Gas Hearth.............................  Up to 20,000.
                                         Over 20,000 and up to 27,000.
                                         Over 27,000 and up to 46,000.
                                         Over 46,000.
------------------------------------------------------------------------
            Pool heater type             Characteristics
------------------------------------------------------------------------
Residential Pool Heaters...............  Gas-fired.
------------------------------------------------------------------------

a. Water Heaters
    Residential water heaters can be divided into various product 
classes categorized by physical characteristics that affect product 
efficiency. Key characteristics affecting the energy efficiency of the 
residential water heater are the type of energy used and the volume of 
the storage tank.
    The existing Federal energy conservation standards for residential 
water heaters correspond to the efficiency levels promulgated by the 
January 2001 final rule, as shown in 10 CFR 430.32(d). These product 
classes are differentiated by the type of energy used (i.e., electric, 
gas, or oil) and the type of storage for the water heater (i.e., 
storage, tabletop, or instantaneous). In this rulemaking, DOE has 
excluded tabletop water heaters and electric instantaneous water 
heaters from consideration for the reasons discussed above. Table IV.2 
shows the four product classes presented in the preliminary analysis 
for consideration in today's rulemaking.

 Table IV.2--Product Classes for Residential Water Heaters Described in
                       the Preliminary Analysis *
------------------------------------------------------------------------
     Residential water heater type               Characteristics
------------------------------------------------------------------------
Gas-Fired Storage Type.................  Nominal input of 75,000 Btu/h
                                          or less; rated storage volume
                                          from 20 to 100 gallons.
Oil-Fired Storage Type.................  Nominal input of 105,000 Btu/h
                                          or less; rated storage volume
                                          of 50 gallons or less.

[[Page 65869]]

 
Electric Storage Type..................  Nominal input of 12 kW (40,956
                                          Btu/h) or less; rated storage
                                          volume from 20 to 120 gallons.
Gas-Fired Instantaneous................  Nominal input of over 50,000
                                          Btu/h up to 200,000 Btu/h;
                                          rated storage volume of 2
                                          gallons or less.
------------------------------------------------------------------------
* Only the product classes covered by this rulemaking are shown. The
  table does not include tabletop and instantaneous electric water
  heaters.

    In response to the preliminary analysis, DOE received several 
comments from interested parties about DOE's potential product classes 
and their organization. These comments are summarized and addressed 
immediately below.
i. Gas-Fired and Electric Instantaneous Water Heaters
    EEI suggested that DOE should revisit the parameters for the input 
capacity range for gas-fired and electric instantaneous water heaters. 
Specifically, EEI stated that some gas-fired instantaneous water 
heaters on the market have an input capacity higher than 200,000 Btu/h, 
and some electric instantaneous water heaters have an input capacity 
much higher than 12 kW. (EEI, No. 40 at p. 2) Northwest Energy 
Efficiency Alliance (NEEA) and Northwest Power and Conservation Council 
(NPCC) recommended combining gas-fired storage and gas-fired 
instantaneous water heaters into one product class, because this would 
simplify the rulemaking, and the commenters do not believe 
manufacturers will reduce the efficiency of the products they offer now 
(most of which have EF ratings above 0.80) in response. (NEEA and NPCC, 
No. 42 at p. 4) SEISCO commented that DOE should establish a separate 
product class and definition for ``electric instantaneous water 
heaters''. SEISCO recommended creating a definition for ``whole house 
electric instantaneous water heaters'' and amending the current 12 
kilowatt (kW) maximum to a more reasonable 18 to 36 kW maximum to more 
accurately reflect the marketplace. (SEISCO, No. 41 at p. 1)
    In response, DOE notes that EPCA's definition of ``water heater,'' 
establishes the input capacity limits for residential instantaneous 
water heaters. Specifically, the term ``water heater'' means ``a 
product which utilizes oil, gas, or electricity to heat potable water 
for use outside the heater upon demand, including * * * (B) 
instantaneous type units which heat water but contain no more than one 
gallon of water per 4,000 Btu per hour of input, including gas 
instantaneous water heaters with an input of 200,000 Btu per hour or 
less, oil instantaneous water heaters with an input of 210,000 Btu per 
hour or less, and electric instantaneous water heaters with an input of 
12 kilowatts or less * * *'' (42 U.S.C. 6291(27)) As noted above, this 
statutory definition demonstrates that residential, gas-fired 
instantaneous water heaters with inputs greater than 200,000 Btu/h and 
residential, electric instantaneous water heaters with inputs greater 
than 12 kW do not meet the definitions of a ``water heater'' under 
EPCA. Accordingly, instantaneous water heaters outside the specified 
capacity range are not covered products under EPCA and are outside 
DOE's authority for standard setting pursuant to 42 U.S.C. 6295(e)(4). 
The input capacity ranges for gas-fired instantaneous water heaters and 
electric instantaneous water heaters are discussed further in sections 
IV.A.1.a and IV.A.1.b, respectively, of today's NOPR.
    Additionally, DOE disagrees with the suggestion from NEEA and NPCC 
that DOE should combine the gas-fired storage and gas-fired 
instantaneous water heater product classes for this rulemaking. As 
noted earlier in this section, storage capacity is a key characteristic 
affecting the energy efficiency of water heaters, and it is within 
DOE's authority to divide products into classes based on capacity. (42 
U.S.C. 6295(q)) Thus, DOE is maintaining separate product classes for 
gas-fired storage and gas-fired instantaneous water heaters for today's 
NOPR.
ii. Low-Boy Water Heaters
    AHRI recommended establishing a separate product class for low-boy 
heaters since they must fit under a 36-inch counter, be less than 34 
inches high, and have a jacket diameter of less than 26 inches. AHRI 
stated that low-boy heaters provide a specific utility to space-
constrained residences and that these products cannot be made any 
larger. Low-boy heaters account for approximately 18 percent of the 
residential market. (AHRI, No. 43 at p. 3)
    DOE does not agree that a separate product class needs to be 
established for low-boy water heaters. In evaluating and establishing 
energy conservation standards, DOE generally divides covered products 
into classes by the type of energy used, or by capacity or another 
performance-related feature that justifies a different standard. (See 
42 U.S.C. 6295(q)) DOE notes that low-boy water heaters use the same 
type of energy (i.e., gas or electricity) and are offered in a range of 
storage volumes. Thus, the type of energy used and the functionality of 
low-boy units are similar to other types of water heaters, and the size 
constraints of these units do not appear to impact energy efficiency, 
since many ``low-boy'' models have efficiencies that are comparable to 
standard-size water heaters currently available on the market.
    DOE seeks comment on its product classes for water heaters. In 
particular, DOE is seeking further comment about the need for a 
separate product class for low-boy water heaters. (See Issue 5 under 
``Issues on Which DOE Seeks Comment'' in section VII.E of this NOPR.)
iii. Ultra-Low NOX Water Heaters
    In the preliminary analysis, DOE did not distinguish ultra-low 
NOX gas-fired storage water heaters from traditional gas-
fired storage water heaters with standard burners. AHRI recommended 
establishing a separate product class. AHRI argued that these water 
heaters employ unique burners, designed to meet the ultra-low 
NOX requirements (imposed by local air quality management 
districts to limit NOX emissions of certain products), but 
which limit the manufacturer's options to increase efficiency. (AHRI, 
No. 43 at p. 2)
    Rheem commented that instantaneous gas-fired water heater ultra-low 
NOX requirements from local air quality management districts 
will commence in 2012 and that this product design

[[Page 65870]]

should be included in the analysis. (Rheem, No. 49 at p. 7)
    DOE does not agree that a separate product class needs to be 
established for ultra-low NOX gas-fired storage water 
heaters. As noted above, in evaluating and establishing energy 
conservation standards, DOE generally divides covered products into 
classes by the type of energy used, or by capacity or other 
performance-related feature that justifies a different standard for 
products having such feature. (See 42 U.S.C. 6295(q)) Ultra-low 
NOX gas-fired storage water heaters use the same type of 
energy (i.e., gas) and are offered in comparable storage volumes to 
traditional gas-fired storage water heaters using standard burners. In 
deciding whether the product incorporates a performance feature that 
justifies a different standard, DOE must consider factors such as the 
utility of the feature to users. Id. In terms of water heating, DOE 
believes ultra-low NOX water heaters provide the same 
utility to the consumer. However, DOE also notes that ultra-low 
NOX water heaters do incorporate a specific burner 
technology, allowing these units to meet the strict emissions 
requirements of local air quality management districts. Consequently, 
DOE developed an analysis on ultra-low NOX gas-fired storage 
water heaters. See section IV.C.2 for additional details. DOE requests 
comment from interested parties regarding the approach to the analysis 
for ultra-low NOX gas-fired storage water heaters. As 
indicated in section VII.E under Issue 6, DOE also seeks further 
comment about the need for a separate product class for ultra-low 
NOX water heaters.
iv. Gas-Fired and Electric Storage Water Heaters Product Class 
Divisions
    DOE received two comments about the product class divisions for 
gas-fired and electric storage water heaters. ACEEE stated that DOE 
should consider capacity-based product classes for gas-fired and 
electric storage water heaters. ACEEE stated that EPCA directs DOE to 
divide covered products into product classes by the type of energy used 
or by capacity or other performance-related features that affect 
efficiency. (42 U.S.C. 6295(q)) ACEEE also stated that DOE's energy 
efficiency equations demonstrate that capacity (i.e., rated storage 
volume) is one determinant of efficiency. Accordingly, ACEEE 
recommended separating gas-fired and electric storage water heaters 
into two product classes, including ``very large'' and ``other.'' 
(ACEEE, No. 35 at p. 2) ACEEE expressed its belief that DOE will not 
adequately reflect the potential of the product classes without 
considering larger and smaller products as separate product classes. 
(ACEEE, Public Meeting Transcript, No. 34.4 at pp. 66-67)
    ACEEE suggested that gas-fired storage water heaters with an input 
capacity greater than 65,000 Btu/h and electric storage water heaters 
with a rated storage volume greater than 75 gallons could be in the 
very large category. (ACEEE, No. 35 at p. 2) ACEEE commented that for 
heat pump water heaters, impacts such as air flow in small residences 
are much different for a 50-gallon model than a 30-gallon model. 
(ACEEE, Public Meeting Transcript, No. 34.4 at pp. 66-67)
    In light of the above, ACEEE recommended that DOE should propose 
energy conservation standards for electric storage water heater 
products in the very large category requiring a minimum EF of 1.7, 
which would move the largest electric water heaters to utilize heat 
pump water heater technologies. ACEEE recommended that DOE should 
propose standards for the very large product class of gas-fired storage 
water heaters requiring a minimum EF of 0.77, which corresponds to the 
least-efficient condensing product. (ACEEE, No. 35 at p. 1)
    Pacific Gas and Electric Company (PG&E), San Diego Gas and Electric 
(SDGE), and Southern California Gas Company (SoCal Gas) filed a joint 
comment and urged DOE to subdivide gas-fired storage water heaters and 
electric storage water heaters into subclasses based on rated storage 
volume. (PG&E, SDGE, and SoCal Gas, No. 38 at p. 3)
    DOE believes considering separate efficiency levels for different 
rated storage volumes could offer a way for DOE to capture additional 
potential energy savings. Instead of dividing gas-fired and electric 
storage water heaters into separate product classes by rated storage 
volume or input capacity as ACEEE suggested, however, DOE is using 
energy efficiency equations that vary with rated storage volume to 
describe the relationship between rated storage volume and energy 
factor. Historically, DOE has used the energy efficiency equations to 
account for the variability in performance resulting from tank size; 
these equations consider the increases in standby losses as tank volume 
increases. DOE is using the energy efficiency equations along with TSL 
pairings to consider different amended standards in the proposed rule. 
DOE further discusses the energy efficiency equations and the proposed 
modifications in section IV.C.7. DOE is requesting comment from 
interested parties on the energy efficiency equations developed for 
gas-fired and electric storage water heaters (See section IV.C.7 and 
Issue 7 under ``Issues on Which DOE Seeks Comment'' in section VII.E of 
this NOPR for more information.) In addition, DOE further discusses the 
trial standard levels, which are comprised of various efficiency level 
pairings across the full range of rated storage volumes, in section 
V.A.
v. Heat Pump Water Heaters
    In response to DOE's treatment of heat pump water heaters as a 
design option for electric storage water heaters in the preliminary 
analysis, DOE received several comments from interested parties. All of 
the commenters urged DOE to establish separate product classes for 
traditional electric resistance storage water heaters and heat pump 
water heaters. Their specific comments and DOE's response are presented 
below.
    A.O. Smith stated DOE should separate the electric storage water 
heater product class into two products classes--one for electric 
resistance heaters and one for heat pump water heaters. A.O. Smith 
noted that DOE separated the two classes in the ENERGY STAR criteria. 
A.O. Smith further stated that since heat pump water heaters may not 
even fit in 30 percent of the installations that currently have 
resistance electric heaters, they cannot be considered to be a truly 
interchangeable technology. (A.O. Smith, No. 37 at p. 9)
    AHRI agreed with some of the concerns DOE noted in the preliminary 
screening analysis for heat pump water heaters. Specifically, AHRI 
pointed to previous DOE studies, which found size-related installation 
issues with replacing an electric storage water heater with a heat pump 
water heater. To AHRI's knowledge, the heat pump water heater market 
has not changed significantly since DOE's 2001 water heater rulemaking, 
even with the recent initiation of the ENERGY STAR program and the 
enactment of legislation that provides a significant tax credit for the 
installation of these systems. With this in mind, AHRI recommended that 
DOE establish a separate product class for heat pump water heaters 
because its energy source is different than that of an electric water 
heater. While a heat pump water heater does use electricity to operate 
certain components, the actual energy source that heats the water is 
air. AHRI noted that an analogous situation exists for electric 
furnaces, which are

[[Page 65871]]

not subject to the same standards as heat pump systems. (AHRI, No. 43 
at p. 4)
    Rheem also maintains that heat pump water heaters require a 
separate product class. (Rheem, No. 49 at p. 5) Rheem commented that 
heat pump water heater designs require unique installations, air flow, 
space, condensate drain, service, and operational provisions that are 
considerably different from conventional electric storage water 
heaters. Rheem also stated that installation and air flow conditions 
will affect energy efficiency, and that heat pump water heaters cannot 
replace all electric storage type water heaters, as space and air flow 
constraints are quite common. Furthermore, Rheem commented that heat 
pump water heater technology depends largely on the operating 
environment; this represents a special performance-related 
consideration that warrants defining a separate product class for heat 
pump water heaters. (Rheem, No. 49 at p. 6) Rheem commented that the 
utility heat pump water heaters provide is not equivalent to other 
electric storage water heaters across the entire range of rated storage 
volumes. Rheem stated that the reduced delivery performance was 
recognized by ENERGY STAR, which requires a minimum first-hour rating 
of 50 gallons, instead of 67 gallons for common conventional 
technologies. The difference in utility will result in differing sizing 
guidelines to meet equivalent capacities. Rheem commented that while 
the primary fuel source for heat pump water heaters is assumed to be 
electricity, the technology attains an economic benefit by moving 
energy from one location to another. According to Rheem, it is 
conceivable that a heat pump water heater may operate and be designed 
with gas as a primary back-up fuel. Rheem noted that with energy 
factors exceeding 2.0, it can be argued that electricity is no longer 
the dominant fuel source. Rheem commented that these differences 
support the argument that heat pump water heaters are not simply an 
extension of conventional resistance-type electric storage water 
heaters. (Rheem, No. 49 at pp. 5-6)
    While DOE acknowledges some of the challenges associated with heat 
pump water heaters, DOE does not agree that they require a separate 
product class. Specifically, DOE does not believe heat pump water 
heaters provide a different utility from traditional electric 
resistance water heaters. Heat pump water heaters provide hot water to 
a residence just as a traditional electric storage water heater. In 
addition, both heat pump water heaters and traditional electric 
resistance storage water heaters use electricity as the primary fuel 
source. DOE believes heat pump water heaters can replace traditional 
electric resistance storage water heaters in most residences, although 
the installation requirements may be quite costly. DOE further 
addresses heat pump water heaters in the screening analysis at section 
IV.B.3 and the installation requirements in section IV.E.2.a.
    DOE seeks further comment on the need for a separate product class 
for heat pump water heaters. In particular, DOE is interested in 
receiving comments and data on whether a heat pump water heater can be 
used as a direct replacement for an electric resistance water heater, 
and the types and frequency of installations where a heat pump water 
heater cannot be used as a direct replacement for an electric 
resistance water heater. (See Issue 8 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.)
b. Direct Heating Equipment
    DHE can be divided into various product classes categorized by 
physical characteristics and rated input capacity, both of which affect 
product efficiency and function. Key characteristics affecting the 
energy efficiency of DHE are the physical construction (i.e., fan wall 
units contain circulation blowers), intended installation (i.e., floor 
furnaces are installed with the majority of the unit outside of the 
conditioned space), and input capacity.
    In the preliminary analysis, DOE examined the possibility of 
consolidating product classes for DHE. (See chapter 3 of the 
preliminary TSD.) NAECA originally established the Federal energy 
conservation standards, which are differentiated by input capacity 
range. Thus, to determine whether consolidation of existing product 
classes is appropriate, DOE examined the relationship between AFUE and 
input rating for DHE. The results of this inquiry are presented below.
i. Gas Wall Fan-Type Direct Heating Equipment
    For fan-type wall furnaces, DOE surveyed AHRI's Consumers' 
Directory and available product literature. DOE identified available 
products ranging from 8,000 to 65,000 Btu/h. The market data 
demonstrate two separate trends for fan-type wall furnaces based on the 
efficiency range of the products. For higher-efficiency products (i.e., 
78 percent AFUE and higher), DOE noticed that efficiency decreases as 
capacity increases. For lower-efficiency products (i.e., 73 to 77 
percent AFUE), DOE noticed that efficiency increases as capacity 
increases. Therefore, because of the differing trends between capacity 
and efficiency, DOE proposes that the two product classes for gas wall 
fan-type DHE should remain.
ii. Gas Wall Gravity-Type Direct Heating Equipment
    DOE examined the relationship between AFUE and input rating for 
gravity-type wall furnaces by reviewing AHRI's Consumers' Directory and 
available product literature. DOE identified products with input 
capacities ranging from 5,000 to 50,000 Btu/h. The Federal energy 
conservation standards for gas wall gravity-type furnaces divide these 
products into seven product classes based on input capacity ranges. The 
seven product classes are differentiated by one AFUE percentage point 
increase for each increase in input capacity range (i.e., the larger 
the input capacity, the higher the AFUE requirements). The market data 
for gas wall gravity-type furnaces indicate that manufacturers are not 
offering products over the entire input capacity range. Therefore, some 
product classes may be unnecessary. DOE proposes that five product 
classes (up to 10,000 Btu/h, over 10,000 and up to 12,000 Btu/h, over 
12,000 and up to 15,000 Btu/h, over 15,000 and up to 19,000 Btu/h, and 
over 19,000 and up to 27,000 Btu/h) be consolidated into a single 
product class labeled up to 27,000 Btu/h, leaving three product classes 
for gas wall gravity-type furnaces.
iii. Gas Floor-Type Direct Heating Equipment
    DOE surveyed the current market for gas floor furnaces by reviewing 
AHRI's Consumers' Directory and available product literature. The AHRI 
directory lists 23 products. The Federal energy conservation standard 
includes two product classes divided by input ratings, one above and 
one at or below 37,000 Btu/h. According to the AHRI directory, more 
than 75 percent of products are rated above 37,000 Btu/h. When 
comparing the models with the highest AFUE rating between the two 
product classes in the preliminary analysis, however, DOE found that 
the energy savings potential increases as the input capacity range 
increases. This fact suggests that input capacity affects the AFUE of 
gas floor-type furnaces. Therefore, DOE proposes that the two product 
classes for gas floor-type DHE should remain.

[[Page 65872]]

iv. Gas Room-Type Direct Heating Equipment
    DOE examined currently available room heaters by reviewing AHRI's 
Consumers' Directory and product literature. DOE found that room 
heaters have inputs ranging from 20,000 to 70,000 Btu/h. DOE also 
determined that the relationship between AFUE and input rating 
established by the Federal energy conservation standards is generally 
similar to the trend found among products listed in the AHRI directory. 
The market data show a general trend of increasing AFUE with input 
capacity range. DOE is proposing to consolidate the two lower input 
capacity ranges into a single product class (i.e., input ratings up to 
20,000 Btu/h), because there are no products in the AHRI directory 
under 20,000 Btu/h and all products at this input rating have the same 
efficiency. As a result, DOE is proposing only four product classes for 
gas room heaters.
    Overall, DOE only received one comment in response to its product 
class consolidation for the existing DHE product types in the 
preliminary analysis. AHRI agreed that the number of product classes 
(i.e., divisions by input capacity) for DHE product classes can be 
reduced. (AHRI, Public Meeting Transcript, No. 34.4 at p. 43)
    Therefore, for the NOPR, DOE is proposing to reduce the number of 
product classes as suggested in the preliminary analysis and described 
above. DOE is seeking comments on the proposed product classes. (See 
Issue 9 under ``Issues on Which DOE Seeks Comment'' in section VII.E of 
this NOPR.)
v. Gas Hearth Direct Heating Equipment
    DOE is proposing to add new product classes for gas hearth DHE, 
which are distinguished by input heating capacity. DOE modeled the 
product class divisions for gas hearth DHE after the proposed product 
class divisions for room heaters. DOE is seeking comments on the 
proposed product class divisions for gas hearth DHE. (See Issue 10 
under ``Issues on Which DOE Seeks Comment'' in section VII.E of this 
NOPR.)
    Table IV.3 presents the proposed product classes for DHE being 
considered for this rulemaking.

                        Table IV.3--Proposed Product Classes for Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
          Direct heating equipment type                            Input heating capacity  Btu/h
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan Type...............................  Up to 42,000.
                                                  Over 42,000.
Gas Wall Gravity Type...........................  Up to 27,000.
                                                  Over 27,000 and up to 46,000.
                                                  Over 46,000.
Gas Floor.......................................  Up to 37,000.
                                                  Over 37,000.
Gas Room........................................  Up to 20,000.
                                                  Over 20,000 and up to 27,000.
                                                  Over 27,000 and up to 46,000.
                                                  Over 46,000.
Gas Hearth......................................  Up to 20,000.
                                                  Over 20,000 and up to 27,000.
                                                  Over 27,000 and up to 46,000.
                                                  Over 46,000.
----------------------------------------------------------------------------------------------------------------

c. Pool Heaters
    As discussed above, the existing Federal energy conservation 
standards for pool heaters correspond to the efficiency levels 
specified by EPCA, as amended (42 U.S.C. 6295(e)(2)), and codified in 
10 CFR 430.32(k), classifying residential pool heaters with one product 
class. This product class is distinguished by fuel input type (i.e., 
gas-fired). DOE notes there are currently electric heat pump pool 
heaters on the market, which are not being considering in today's 
rulemaking, as discussed in section IV.A.1.b.

B. Screening Analysis

    DOE uses the following four screening criteria to determine which 
technology options are suitable for further consideration in an energy 
conservation standards rulemaking:
    1. Technological feasibility. DOE will consider technologies 
incorporated in commercial products or in working prototypes to be 
technologically feasible.
    2. Practicability to manufacture, install, and service. If mass 
production and reliable installation and servicing of a technology in 
commercial products could be achieved on the scale necessary to serve 
the relevant market at the time the standard comes into effect, then 
DOE will consider that technology practicable to manufacture, install, 
and service.
    3. Adverse impacts on product utility or product availability. If 
DOE determines a technology would have a significant adverse impact on 
the utility of the product to significant subgroups of consumers, or 
would result in the unavailability of any covered product type with 
performance characteristics (including reliability), features, sizes, 
capacities, and volumes that are substantially the same as products 
generally available in the United States at the time, it will not 
consider this technology further.
    4. Adverse impacts on health or safety. If DOE determines that a 
technology will have significant adverse impacts on health or safety, 
it will not consider this technology further.
    10 CFR part 430, subpart C, appendix A, 4(a)(4) and 5(b).
    In the preliminary analysis, DOE initially identified the 
technology options that could improve the efficiency of the three types 
of heating products that are the subject of this rulemaking. These 
technologies are listed in Table IV.4. See chapter 3 of the NOPR TSD 
for a detailed description of each technology option.

[[Page 65873]]



                          Table IV.4--Technologies DOE Considered for Heating Products
----------------------------------------------------------------------------------------------------------------
            Water heaters                   Direct heating equipment                    Pool heaters
----------------------------------------------------------------------------------------------------------------
Heat Traps                            Heat Exchanger Improvements           Electronic Ignition
Insulation Improvements               Electronic Ignition                   Improved Heat Exchanger Design
Power Vent (Gas-Fired and Oil-Fired   Thermal Vent Damper                   More Effective Insulation
 Only)                                                                       (Combustion Chamber)
Heat Exchanger Improvements           Electrical Vent Damper                Power Venting
Flue Damper (Electromechanical)       Power Burner                          Sealed Combustion
Side-Arm Heater                       Induced Draft                         Condensing Pulse Combustion
Electronic (or Interrupted) Ignition  Two Stage and Modulating Operation    Condensing
Heat Pump Water Heater (Electric      Improved Fan or Blower Motor
 Only)                                 Efficiency
CO2 Heat Pump Water Heater            Increased Insulation (Floor Furnaces
                                       Only)
Flue Damper (Buoyancy Operated)       Condensing
Directly-Fired                        Condensing Pulse Combustion
Condensing                            Air Circulation Fan
Condensing Pulse Combustion           Sealed Combustion
Thermophotovoltaic and
 Thermoelectric Generators
Reduced Burner Size (Slow Recovery)
Timer Control
Two-Phase Thermosiphon (tpts)
Modulating Controls
Intelligent Controls
Self-Cleaning
----------------------------------------------------------------------------------------------------------------

    In response to DOE's request for comments at the preliminary 
analysis stage of the rulemaking, DOE did not receive any comments 
suggesting additional technologies beyond those technology options 
presented in the preliminary analysis. Therefore, DOE considered the 
same technology options for the NOPR screening analysis.
1. Comments on the Screening Analysis
    In the preliminary analysis, DOE excluded several of the 
technologies listed in Table IV.4 from consideration in this rulemaking 
based on one or more of the screening criteria described above. The 
technology options that were screened out, along with the reasons for 
their exclusion, are shown below in Table IV.5. For greater detail 
regarding each technology option, please see Chapters 3 and 4 of the 
TSD accompanying today's notice.

                                                 Table IV.5--Summary of Screened-Out Technology Options
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Reasons for exclusion
                                                                             ---------------------------------------------------------------------------
                                                                                                 Practicability to
          Applicable product types              Excluded technology option      Technological       manufacture,     Adverse impacts    Adverse impacts
                                                                                 feasibility        install, and        on product        on health of
                                                                                                      service            utility             safety
--------------------------------------------------------------------------------------------------------------------------------------------------------
Water Heaters...............................  Side-Arm Heater...............                 X                  X   .................  .................
                                              Advanced Insulation...........                 X                  X   .................  .................
                                              Thermophotovoltaic and                         X                  X   .................  .................
                                               Thermoelectric Generators.
                                              U-Tube Flue Design............  .................                 X   .................  .................
                                              CO2 Heat Pump Water Heaters...  .................                 X   .................  .................
                                              Two-Phase Thermosiphons.......  .................                 X   .................  .................
                                              Reduced Burner Size (Slow       .................  .................                 X   .................
                                               Recovery).
                                              Directly Fired Water Heater...  .................  .................  .................                 X
                                              Flue Damper (Buoyancy           .................  .................  .................                 X
                                               Operated).
                                              Condensing Pulse Combustion...                 X                  X   .................  .................
Direct Heating Equipment....................  Increased Heat Transfer         .................                 X   .................  .................
                                               Coefficient.
                                              Power Burner..................  .................                 X   .................  .................
                                              Improved Fan Blower Motors....  .................                 X   .................  .................
                                              Condensing Pulse Combustion...                 X                  X   .................  .................
Pool Heaters................................  Condensing Pulse Combustion...                 X                  X   .................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In response to the screening analysis performed for the preliminary 
analysis, DOE received feedback from several interested parties.
a. General Comments
    NRDC commented generally that screening technologies because they 
have not penetrated the market for the covered product is a flawed 
approach. NDRC stated that determining if a product is practical to 
manufacture does not require someone to already be manufacturing it. 
Instead, NRDC stated that when determining whether a product is 
practical to manufacture, DOE should consider identified technology 
options even if they are not

[[Page 65874]]

currently used in covered products. NRDC stated that DOE should gather 
data to determine whether technologies used in other products would be 
useful in the products in question. (NRDC, No. 48 at p. 3)
    In response, as part of every rulemaking, DOE reviews the markets 
and technologies of the appliances under consideration using primary 
and secondary research. DOE considers prototype designs in the analysis 
that have not yet fully penetrated the market. In the case of a 
prototype design (or any design that has not penetrated the market at 
the time of the analysis) that is not being manufactured on a large 
scale, DOE examines the practicality of manufacturing, installing, and 
servicing the design, if it were required to be implemented on a larger 
scale by the anticipated compliance date of a standard, and accepts the 
product or screens it out of the analysis on that basis. DOE requires 
demonstration of a technology in at least a working prototype, because 
even though technologies may be proven for other applications, it may 
not translate to a different product type for a variety of reasons. 
NRDC did not point to specific examples of technologies DOE should 
consider, and hence, it is more difficult for DOE to specifically 
address the comment.
    AHRI commented that DOE should recognize that many DHE products do 
not require electricity. AHRI stated that such designs allow consumers 
to use these products for emergency heat during power outages, which 
provides a real utility that needs to be factored into DOE's analysis. 
(AHRI, Public Meeting Transcript, No. 34.4 at p. 21)
    DOE considers the impact of any lessening of utility from standards 
during the screening analysis. If DOE determines a technology would 
have significant adverse impact on the utility of the product to 
significant subgroups of consumers, or would result in the 
unavailability of any covered product type with performance 
characteristics (including reliability), features, sizes, capacities, 
and volumes that are substantially the same as products generally 
available in the United States at the time, it will not consider this 
technology further. DOE considered several technology options for DHE 
that require electricity for the NOPR analyses, including electronic 
ignition systems and blowers or fans. Blowers and fans are generally 
not necessary for the products to operate and, because the equipment 
can be operated without them, do not impact the utility of being able 
to use the equipment for emergency heat during a power outage. For 
models with electronic ignition systems, electricity is required to 
light the burner, and, thus, required for product operation. In the 
case of a power failure, however, many products employ battery backup 
systems that can provide the electrical power needed to light the 
burner (or the pilot in the case of intermittent pilot ignitions) 
during the power outage. Because of this, an electronic ignition system 
with battery backup would not cause any lessening of utility as 
compared to a traditional standing pilot system for DHE. Therefore, DOE 
did not screen out these technologies.
b. Water Heaters
    NEEA and NPCC stated that tank bottom insulation is an effective 
means of improving product efficiency. Accordingly, NEEA and NPCC urged 
DOE to consider this as a technology option for electric storage water 
heaters because field data from the Pacific Northwest suggest that tank 
bottom insulation decreases standby energy loss, especially when the 
tank is located on a concrete slab. (NEEA and NPCC, No. 42 at p. 4)
    DOE considered various improvements in insulation for storage water 
heaters during the screening analysis, including tank bottom 
insulation. (See chapter 3 of the NOPR TSD for a full description of 
the insulation improvements DOE considered.) DOE notes that tank bottom 
insulation was not screened out during the screening analysis, which is 
in contrast to advanced forms of insulation which were screened out as 
unproven (e.g., vacuum panels, aerogels). When listing the potential 
technology options at each efficiency level (see section IV.C.3), DOE 
shows only those technologies most commonly used in manufacturing, 
although specific implementation details vary by manufacturer. 
Manufacturers currently do not use increased tank bottom insulation as 
a primary means of increasing efficiency; therefore, it was not listed 
as one of the technologies used in achieving these efficiency levels 
for storage water heaters. Hence, DOE agrees with NEEA and NPCC that 
tank bottom insulation is an effective means of improving the energy 
factor of storage water heaters.
    NEEA and NPCC also urged DOE to include as technology options heat 
pump water heaters that use CO2 as the refrigerant. NEEA and 
NPCC commented that CO2 heat pump water heaters have been 
sold and serviced by hundreds of thousands of manufacturers in 
Southeast Asia and elsewhere over the last 5 to 10 years. (NEEA and 
NPCC, No. 42 at pp. 4-5)
    DOE is not considering CO2-based heat pump water heaters 
because DOE research suggests U.S. manufacturers do not have the 
necessary infrastructure to support manufacturing, installation, and 
service of CO2 heat pump water heaters on the scale 
necessary to serve the relevant market by the compliance date of an 
amended energy conservation standard. DOE also does not believe 
manufacturers would be able to develop the necessary infrastructure 
before the compliance date of an amended energy conservation standard 
because these products have not penetrated the U.S. market.
    ACEEE commented that DOE should revisit the preliminary conclusions 
presented in the screening analysis, including the tentative decision 
to not further consider thermophotovoltaic and thermoelectric 
generators. (ACEEE, No. 35 at pp. 3-4) The commenter stated that the 
inclusion of thermophotovoltaic and thermoelectric generators would 
make other technologies such as side-arm themosiphons more feasible. 
ACEEE asserted that in the case of thermophotovoltaic and 
thermoelectric generators, DOE assumes that line voltage or 24-volt 
power cannot be required for gas-fired storage water heaters. DOE 
research suggests that the amount of power that can be generated by 
thermophotovoltaic and thermoelectric generators in a residential 
storage water application is quite limited. Commercially-available 
thermoelectric elements for water heaters typically produce less than 
0.05 Watts of power, and so-called thermopiles can reach as high as 
0.75 Watts. While it is theoretically possible to power devices other 
than the customary gas valves with thermoelectric power sources, DOE is 
unaware of an external device that has an impact on energy efficiency 
whose power demands are low enough to allow it to be powered by such 
generators. DOE is also unaware of any thermophotovoltaic power 
generators that have been developed to the point where they could be 
incorporated by the compliance date of the rulemaking, nor of any role 
that such generators would play in increasing the energy efficiency of 
gas-fired storage water heaters.
    Rheem commented that DOE should recognize the special utility of 
self-powered water heaters. (Rheem, No. 49 at p. 4) DOE acknowledges 
that most gas-fired storage-water heaters on the market today do not 
require an electrical connection to operate (i.e., they are self-
powered). Typically, the gas valves on these units incorporate a 
thermoelectric

[[Page 65875]]

element that is impinged on by a standing pilot flame. The minute power 
generated by the thermoelectric element opens the gas supply in the 
valve assembly via a low-power solenoid. Thus, thermoelectric elements 
typically act as a safety device. They do not provide sufficient power 
to run fan blower motors and other high-powered devices. Therefore, DOE 
has tentatively decided to continue to exclude thermophotovoltaic and 
thermoelectric generators from its analysis, because they are not an 
effective means of improving the efficiency of water heaters.
    ACEEE also stated that DOE should revisit the preliminary 
conclusions presented in the screening analysis regarding flue dampers 
since electromechanical dampers were common on furnaces and boilers and 
appear to be available for residential boilers today. (ACEEE, No. 35 at 
pp. 3-4) DOE research suggests that there are no residential storage 
water heaters on the market today that incorporate such dampers.
    Although electromechanical dampers may be found on some furnaces, 
boilers, and commercial water heaters, their benefit in a residential 
water heater application is unknown because no manufacturer 
incorporates them in their products. All products that incorporate 
electromechanical dampers of which DOE is aware require line power to 
operate them. Thus, such dampers may not be practicable for all 
consumers. Additionally, DOE researched damper systems that do not 
require electrical power to operate. Typically, such systems are based 
on a bi-metal damper installed on top of the flue pipe outlet that 
opens when heated and closes as it cools. DOE research suggests that 
such non-electrically-actuated dampers pose potential health and safety 
problems. For example, such dampers can fail in the closed position, 
which could cause the exhaust gases to be stuck in the flue. 
Furthermore, they rely on hot air impingement to open. However, when 
the water heater begins its combustion cycle, the flue and its baffles 
are relatively cold, and flue gas temperatures may require some time 
until they reach the point where they will open a bi-metal damper 
quickly and completely. This is especially true for flammable vapor 
ignition resistant (FVIR) water heaters (which all residential water 
heaters are) whose natural draft is already restricted by FVIR 
components. With the flue shut or mostly shut on start-up, water heater 
combustion can be impacted in a number of ways, including nuisance 
lockouts, increased carbon monoxide production, and flue gases spilling 
into living spaces. For these reasons, non-electromechanical dampers 
were screened out.
    ACEEE commented that DOE should revisit the preliminary conclusions 
presented in the screening analysis regarding advanced forms of 
insulation, which resulted in DOE's tentative decision to screen out 
those technologies. (ACEEE, No. 35 at pp. 3-4) In response, DOE 
research suggests that emerging technologies such as vacuum-insulated-
panels (VIPs) may allow manufacturers to reduce heat loss, but such 
technologies have yet to find application in storage water heaters. DOE 
notes that ACEEE did not provide any new rationale or data to support 
why DOE should reconsider its original conclusion presented in the 
preliminary screening analysis that advanced forms of insulation have 
not been demonstrated as practical to manufacture and install. Hence, 
DOE screened out advanced forms of insulation from the NOPR analyses.
    ACEEE also stated that DOE should revisit its preliminary 
conclusions regarding sidearm heaters and two-phase thermosiphons 
(TPTS) which resulted in DOE's tentative decision to screen out those 
technologies. (ACEEE, No. 35 at pp. 3-4) Regarding two-phase 
thermosiphons, ACEEE did not provide any explanation in its comment as 
to why DOE should reconsider its initial conclusion that it is not 
practicable to manufacture, install, and service this technology on the 
scale necessary to serve the relevant market at the time compliance 
with the standard is required. TPTSs require a drastic redesign of the 
water heater and are typically not practical for indoor installation. 
Therefore, DOE has continued to screen out this technology.
    Regarding side-arm heaters, ACEEE commented that sidearm heaters 
are more feasible with access to 24-volt power, which would allow them 
to be located above or below the unit. This assertion does not address 
DOE's concerns about sidearm heaters presented in the preliminary 
analysis. DOE research did not reveal any working prototypes for gas-
fired or oil-fired storage water heaters, and manufacturers seem to no 
longer use this technology. Therefore, this technology is not feasible 
and not practical to manufacture, install, and service side-arm storage 
water heaters on the scale necessary to serve the relevant market at 
the time of the compliance date of the standard, and was not considered 
further in the analysis. See chapter 4 of the NOPR TSD, Screening 
Analysis, for more details about DOE's assessment of two-phase 
thermosiphons and sidearm heaters.
    For the reasons listed above, DOE still believes that 
thermophotovoltaic and thermoelectric generators, side-arm heaters, and 
advanced forms of insulation are not technologically feasible and are 
impractical to manufacture, repair, and install; that two-phase 
thermosiphons are impractical to manufacture, repair, and install; and 
that buoyancy operated flue dampers have an adverse impact on the 
safety of these products.
    Bradford White Corporation (BWC) stated that using multiple flues 
for gas-fired storage water heaters is difficult, costly, and 
impractical to produce on residential water heater tank production 
lines. (BWC, No. 46 at p. 2)
    In response, DOE research suggests that multi-flue storage water 
heaters can be produced at a higher production scale than is commonly 
done now. The current low shipment-volume techniques are commonly used 
in commercial gas-fired and oil-fired water heater designs. Solutions 
for higher-volume production of such heaters would require significant 
investments but are not technically infeasible. Thus, DOE believes 
multiple flue designs could be implemented on residential storage water 
heaters and are a viable technology for improving the efficiency of 
oil-fired storage water heaters.
    In summary, none of the comments DOE received on the screening 
analysis led DOE to reconsider its determination for any of the 
technologies that were excluded from the preliminary analysis. 
Therefore, DOE excluded the same technologies in the NOPR analysis. 
Chapter 4 of the NOPR TSD provides more details about the technologies 
that DOE screened out.
2. Technologies Considered
    Based upon the totality of the available information, DOE has 
tentatively concluded that: (1) All of the efficiency levels discussed 
in today's notice are technologically feasible; (2) products at these 
efficiency levels could be manufactured, installed, and serviced on a 
scale needed to serve the relevant markets; (3) these efficiency levels 
would not force manufacturers to use technologies that would adversely 
affect product utility or availability; and (4) these efficiency levels 
would not adversely affect consumer health or safety. Thus, the 
efficiency levels that DOE analyzed and is discussing in this notice 
are all achievable through technology options ``screened in'' during 
the screening analysis. The

[[Page 65876]]

technologies DOE considered are shown in Table IV.6 through Table IV.8.

                Table IV.6--Technologies DOE Considered for the Water Heater Engineering Analysis
----------------------------------------------------------------------------------------------------------------
                                                           Water heater type by Fuel Source
                                     ---------------------------------------------------------------------------
             Technology                                       Storage                            Instantaneous
                                     ---------------------------------------------------------------------------
                                          Gas-fired           Electric          Oil-fired          Gas-fired
----------------------------------------------------------------------------------------------------------------
Increased Jacket Insulation.........                 X                  X                  X   .................
Foam Insulation.....................  .................  .................                 X   .................
Improve/Increased Heat Exchanger                     X                  X                  X                  X
 Surface Area.......................
Enhanced Flue Baffle................                 X   .................                 X   .................
Direct-Vent (Concentric Venting)....  .................  .................  .................                 X
Power Vent..........................                 X   .................                 X                  X
Electronic (or Interrupted) Ignition                 X   .................                 X                  X
Heat Pump Water Heater..............  .................                 X   .................  .................
Condensing..........................                 X   .................                 X                  X
----------------------------------------------------------------------------------------------------------------


Table IV.7--Technologies DOE Considered for the Direct Heating Equipment
                          Engineering Analysis
------------------------------------------------------------------------
                               Technology
-------------------------------------------------------------------------
Increased Heat Exchanger Surface Area.
Direct-Vent (Concentric Venting).
Electronic Ignition.
Induced Draft.
Two Stage and Modulating Operation.
Condensing.
------------------------------------------------------------------------


 Table IV.8--Technologies DOE Considered for the Pool Heater Engineering
                                Analysis
------------------------------------------------------------------------
                               Technology
-------------------------------------------------------------------------
Increased Heat Exchanger Surface Area.
More Effective Insulation (Combustion Chamber).
Power Venting.
Sealed Combustion.
Condensing.
------------------------------------------------------------------------

3. Heat Pump Water Heaters Discussion
    For the preliminary analysis, DOE considered heat pump water 
heaters as a viable technology option for improving the efficiency of 
electric storage water heaters. DOE posted the preliminary TSD for 
residential heating products on its Web site on January 5, 2009 (for 
more information see http://www1.eere.energy.gov/buildings/appliance_standards/residential/water_pool_heaters_prelim_tsd.html). Pages 2-
21 to 2-29 of chapter 2 of the preliminary TSD contain an extensive 
discussion of heat pump water heaters and the significant issues 
pertaining to the consideration of heat pump water heaters in this 
rulemaking. In the executive summary to the preliminary TSD, DOE sought 
comments on the viability of heat pump water heaters as a technology 
for electric storage water heaters and whether these water heaters 
would be practicable to manufacture, service, and install on a scale 
necessary to serve the relevant market by the compliance date of any 
amended standard, which would be five years after publication of the 
final rule.
    In addition, DOE sought comment on several other issues regarding 
integral heat pump water heaters: (1) Whether manufacturers would be 
able to finance the investment costs necessary to convert their 
existing product lines to heat pump water heaters by the compliance 
date of an amended standard; (2) what percentage of manufacturers' 
product lines would be converted to heat pump water heaters by the 
compliance date of an amended standard (e.g., if standards did not 
reach the levels provided by heat pump water heaters); (3) how the 
market for heat pump water heaters has changed since the January 2001 
final rule, and the number of installations that would incur a 
significant increase in cost due to extensive modifications that will 
have to be made to a residence to accommodate a heat pump water heater; 
and (4) heat pump water heater programs that have been conducted since 
the January 2001 final rule.
    In response to the preliminary analysis, DOE received a multitude 
of comments from interested parties, both at the public meeting and in 
written responses during the preliminary analysis comment period. A 
summary of the comments received and DOE's responses are presented 
below.
a. Consumer Utility
    Southern stated that DOE needs to address issues regarding cold air 
produced by heat pump water heaters. According to Southern, simply 
increasing a residence's heat output is not an appropriate way to 
compensate for the cold air a heat pump water heater generates. 
Southern also asserted that constantly blowing cold air will create 
uneven temperatures within the dwelling space, leading to utility and 
comfort issues. (Southern, Public Meeting Transcript, No. 34.4 at p. 
22) Southern noted that a heat pump water heater could provide 
supplemental cooling during a home's cooling hours; however, 
concentrated cooling at a particular location would result in uneven 
temperatures in a home, thereby being incompatible with the home's 
temperature needs. Southern stated that this would reduce the utility 
and performance of a home's HVAC system, and that there is no practical 
solution. (Southern, No. 50 at p. 2) The commenter stated that an HVAC 
supply vent near the unit would not help mitigating cold air issues. 
Southern commented that although a vent may cancel the effect of the 
cool air supplied in the winter (by supplying heat), during the cooling 
season, the supply vent (now supplying cool air) would exacerbate the 
temperature imbalance in the area of the heat pump water heater. 
(Southern, No. 50 at p. 2)
    DOE agrees with Southern that cold air production of heat pump 
water heaters should be considered in the analysis. While DOE believes 
most consumers would choose to increase the use of their space heating 
system to deal with the increased heating load, DOE did account for the 
possibility that some consumers would choose to install ductwork to 
vent cold air away from the space surrounding the water heater to the 
outdoors to overcome uneven temperature problems. The increased 
installation costs of venting cold air away from a conditioned space, 
along with the increased cost of space heating for consumers who choose 
not to vent cold air away from the conditioned space, are accounted for 
in DOE's

[[Page 65877]]

analysis for certain percentages of consumers (see section IV.E.2).
    Southern also commented on noise issues. Southern stated that is 
difficult to comment on a hypothetical product where no specifications 
exist, but that existing electric storage water heaters are often 
located in utility closets close to bedrooms and living areas. The 
commenter asserted that even if the product generates decibel levels 
similar to a refrigerator, such noise is a matter of greater concern 
because a heat pump water heater would tend to be in closer proximity 
to a bedroom or other quiet living area, as compared to a refrigerator 
located in a kitchen. Noise dampening would not be practical because 
louvered doors would be required to allow adequate air flow for the 
heat pump water heater. Southern cited the EPCA criteria, stating that 
there would be a significant impact on the utility or performance of 
the appliance if excessive noise disturbs the consumer. (Southern, No. 
50 at p. 2)
    DOE does not agree that the additional noise from a compressor used 
for a heat pump water heater would affect consumer utility for two 
reasons. First, as Southern points out, noise from a heat pump water 
heater compressor may be comparable in decibel level to the noise 
created by a refrigerator compressor, which has not been found to 
adversely affect consumer utility. Second, while the actual impact of 
excess noise created by a compressor may vary greatly based on the 
location of the appliance installation, DOE does not have any reason to 
believe that water heaters are any more likely to be installed near a 
bedroom than a refrigerator. Water heaters are typically not installed 
in consumers' bedrooms or living spaces, but instead are usually 
installed in garages, closets, basements, attics, or other locations 
away from the living space. Thus, DOE believes that noise created by a 
compressor would not significantly impact consumer utility.
b. Production, Installation, and Servicing Issues
    DOE received numerous comments in response to the preliminary 
analysis on the practicality of manufacturing, installing, and 
servicing heat pump water heaters.
    Southern stated that it is difficult to determine whether heat pump 
water heaters would be practical to install and service and if they are 
reliable, because at the time Southern submitted this comment, there 
were no products on the market to compare against. (DOE notes several 
heat pump water heaters have recently become available on the market). 
Also, no product exists yet that could be mass produced and available 
in 2015 in response to a heat pump water heater energy efficiency 
standard. (Southern, Public Meeting Transcript, No. 34.4 at pp. 58-59) 
Further, Southern commented that installation of heat pump water 
heaters in new construction is still problematic for multifamily 
housing, although the issues are less severe than in replacement 
installations. In multifamily housing, interior locations are preferred 
for mechanical systems, and perimeter locations (e.g., windows and 
balconies) are preferred for exterior exposures. Southern stated that a 
heat pump water heater could be installed in an interior, but the 
addition of supply and return vents to the outdoors would be expensive. 
Southern also stated that placing the heat pump water heater at a 
perimeter location is possible, but would reduce the architectural 
options available for builders. (Southern, No. 50 at pp. 2-3) Finally, 
Southern commented that it is very concerned about the possible 
selection of an amended conservation standard at an efficiency level 
that would require heat pump water heaters. Southern strongly 
encourages the use of heat pump water heaters, but it argued that given 
operational differences, they are not suitable for some consumers due 
to the need for very expensive building modifications. (Southern, No. 
50 at p. 1)
    BWC noted that the owner or installer can return a water heater to 
the manufacturer if a defect is claimed. BWC stated that in these 
cases, units are tested and typically there is no actual defect. 
According to BWC, if heat pump water heaters are introduced on a larger 
scale, it is likely that more water heaters will be returned to the 
manufacturer without servicing because many traditional plumbers (who 
would install the heat pump water heaters) have no HVAC training and no 
refrigerant licenses. (BWC, No. 46 at p. 2) BWC stated that training 
and education costs associated with heat pump water heaters were 
overlooked in the previous rulemaking and have been overlooked in the 
current rulemaking as well. (BWC, No. 46 at p. 2)
    GE stated that it will be producing a heat pump water heater 
sometime in the near future, and asserted that it is practical to 
manufacturer, install, and service heat pump water heaters. Further, GE 
added that it has the facilities to both manufacture and service these 
products. It is GE's opinion that there will be a great deal of 
consumer interest in such products, and that this market will increase 
and be much larger than the current market. (GE, Public Meeting 
Transcript, No. 34.4 at p. 63)
    In its written submission, GE also commented on the practicality of 
installation and service. GE stated that its heat pump water heater 
occupies the exact footprint of a standard water heater and requires 
the same electrical and plumbing connections. (GE, No. 51 at p. 2) 
According to GE, the vast majority of installations would be simple and 
straightforward, and consumers would achieve significant energy savings 
and often may obtain collateral installation benefits such as 
dehumidified basements or cooler attics. (GE, No. 51 at p. 2) GE argued 
that heat pump water heaters installed in humid locations could 
eliminate the need for a separate dehumidifier, which could save 
consumers both capital and energy. (GE, No. 51 at p. 2) GE acknowledged 
that a heat pump water heater produces a small amount of condensate. 
However, GE commented that this would not require any building 
modifications, as condensate is easily drained to a floor drain that 
should accompany each water heater for leakage or overflow. (GE, No. 51 
at p. 2) Alternatively, GE commented that for heat pump water heaters 
that are not installed near a floor drain, a small condensate pump 
(similar to those used for HVAC installations) can be installed to pump 
condensate to a suitable drain. (GE, No. 51 at p. 2) GE did state that 
heat pump water heater installation in confined spaces with very small 
areas and no ventilation may present challenges. (GE, No. 51 at p. 2)
    Regarding the reliability issues surrounding heat pump water 
heaters, ACEEE stated that the historical record of failures for heat 
pump water heaters arises from the fact that initial models were 
brought to market by laboratory-based applied research and development 
companies and commercial niche companies, rather than the major 
consumer appliance companies that are currently announcing heat pump 
water heater products. ACEE stated that an analysis which ignores the 
nature of the manufacturer is bound to misrepresent the potential of 
the heat pump water heater. (ACEEE, Public Meeting Transcript, No. 34.4 
at pp. 65-66) NEEA and NPCC acknowledged the failure issues discussed 
in the preliminary analyses, but they argued that the failures have 
been attributable to the control boards, which other markets have 
experienced. NEEA and NPCC stated that the control board failures are 
not characteristic of the heat pump water heaters, but of the 
electronics industry itself, and replacement is a

[[Page 65878]]

simple and inexpensive remedy. (NEEA and NPCC, No. 42 at p. 5)
    In response to the comments provided by Southern, BWC, GE, ACEEE, 
NEEA, and NPCC, DOE believes that heat pump water heaters could 
potentially be installed and serviced on the scale necessary for the 
residential market before the potential compliance date of an amended 
energy conservation standard for water heaters. Although servicing heat 
pump water heaters will require significantly more training than 
servicing traditional electric storage water heater technologies, DOE 
notes that many domestic appliances are being installed and repaired 
today which feature compressors (i.e., refrigerators, room air 
conditioners, and similar appliances). DOE believes that, given the 5-
year delay between the issuance of the final rule and the compliance 
date and the fact that many manufacturers already have these products 
under development, it is unclear whether manufacturers would be able to 
retrain installers and service technicians to install and service heat 
pump water heater technology. DOE estimated the additional costs that 
would be incurred as a result of increased certification requirements 
to install and service heat pump water heaters in its analyses. See 
section IV.E.2 for details.
    A.O. Smith asserted that heat pump water heaters are a viable 
technology to serve a portion of the water heater market, but that they 
are only practical for a small, niche part of the market and should 
never be considered when setting the ``efficiency floor'' of the 
electric water heater market. A.O. Smith argued that manufacturers 
could make the investment needed for the small volumes of heat pump 
water heaters that manufacturers believe are practical, but the cost of 
changing every line completely over to heat pump water heaters would be 
prohibitive. In addition, A.O. Smith stated that the percentage of heat 
pump water heaters to penetrate the market will be small and will be 
driven by market incentives such as tax credits and rebates. (A.O. 
Smith, No. 37 at p. 8) BWC stated that it could likely convert some of 
its product lines to heat pump water heaters by the compliance date of 
the standard. BWC also commented that without knowing the cost to 
retrofit current production lines and the cost of heat pump water 
heaters, it cannot comment on what percentage could be converted by the 
compliance date. (BWC, No. 46 at p. 1) Edison Electric Institute stated 
that heat pump water heaters are different from standard electric 
storage water heaters and cannot be considered for direct replacements 
due to technology, size, and other issues. EEI also stated its concern 
that industry would not be able to increase production from under 
10,000 units per year to 4.5 million units per year by the compliance 
date of the standard. According to EEI, if DOE does not create a 
separate product class for heat pump water heaters, DOE should screen 
out this technology from this rulemaking. (EEI, No. 40 at p. 3)
    DOE acknowledges there could be issues with converting entire 
production lines to manufacture heat pump water heaters before the 
compliance date of this standard. However, DOE also notes that 
significant portions of heat pump water heaters are expected to remain 
very similar in design to current standard electric storage water 
heaters. Manufacturers could choose to produce the heat pump portion of 
the water heater in-house or purchase it from a supplier. GE has 
already announced that a heat pump water heater will be available 
sometime this year, and other major manufacturers are also developing 
heat pump water heaters. Given the 5-year delay in compliance date from 
the issuance of the final rule, and the fact that many manufacturers 
are already developing heat pump water heaters, DOE believes 
manufacturers may be able to convert their entire product lines before 
the compliance date of an amended energy conservation standard. 
However, DOE also recognizes there would likely be significant impacts 
on manufacturers. DOE considers those impacts in the MIA section of 
this NOPR (section IV.H).
    DOE is seeking comment on the manufacturability of heat pump water 
heaters and the capability of manufacturers to ramp up production. DOE 
is specifically seeking comment on how long it would take, and how much 
it would cost, for manufacturers to convert all product lines to heat 
pump water heaters if it were required by an amended energy 
conservation standard. Additionally, DOE is seeking comment about the 
capability of water heater installers and servicers to meet the unique 
demands created by heat pump water heaters. DOE is requesting comment 
about how long it would take to train installers and servicers to be 
able to serve the market created if heat pump water heaters were 
required by an amended energy conservation standard. DOE will consider 
all of these factors as it weighs the benefits and burdens of each TSL. 
(See Issue 11 under ``Issues on Which DOE Seeks Comment'' in section 
VII.E of this NOPR.)
c. General Comments
    DOE received several general comments about the current condition 
of heat pump water heater technology and the market for this product. 
These comments are discussed immediately below.
    Southern commented that, although not desirable, it would be less 
objectionable to require heat pump water heaters if the electric 
storage water heater class could be split at 40 gallons, with products 
larger than 40 gallons having a heat pump water heater efficiency level 
requirement, and products smaller than 40 gallons having a higher 
electric resistance efficiency level. (Southern, No. 50 at p. 4)
    EEI stated that there is a Federal tax credit for heat pump water 
heaters. (EEI, Public Meeting Transcript, No. 34.4 at p. 60) AHRI 
stated that the ENERGY STAR program has been established since the 
previous rulemaking, creating greater recognition by all interested 
parties about the need to save energy. AHRI commented that every 
manufacturer is probably investigating whether it can maintain a 
feasible business providing heat pump water heaters. However, AHRI also 
commented that DOE should not consider heat pump water heaters as an 
energy conservation standard for 2015. According to the commenter, the 
water heater industry and American consumers are experiencing difficult 
economic conditions, and consumers are not likely to purchase heat pump 
water heaters that are expensive. AHRI also stated that resistance-type 
electric storage water heaters are near their maximum efficiencies and 
need to evolve. AHRI commented that current conditions prohibit setting 
an efficiency minimum that would require a heat pump water heater. 
(AHRI, Public Meeting Transcript, No. 34.4 at pp. 60-62)
    AHRI stated that current market conditions and the introduction of 
heat pump water heater models by water heater manufacturers are 
allowing heat pump water heaters to take root in the market. Further, 
AHRI asserted that the heat pump water heater market needs to mature 
and that DOE should allow the market and consumers to respond to the 
availability of higher-technology electric storage water heaters that 
are reliable and meet consumer utility needs. (AHRI, Public Meeting 
Transcript, No. 34.4 at pp. 64-65)
    ACEEE stated that ENERGY STAR's water heater program demonstrates 
that heat pump water heaters are viable. The commenter stated that 
three major manufacturers have announced or told ACEEE about a 
qualifying heat pump

[[Page 65879]]

water heater to be marketed to consumers in 2009, which is more than 5 
years before energy conservation standard would take effect. (ACEEE, 
No. 35 at pp. 4-5) ACEEE asserted that cost-effectiveness should be 
examined because profits are likely to be greater for more expensive 
heat pump water heaters, even in a very competitive market, and that 
these higher cost products may benefit the industry in the current 
economic conditions. According to ACEEE, consumer preference can be 
very strong, and market studies show that consumers have a very 
sophisticated understanding of the benefits of very expensive heat pump 
water heaters. ACEEE noted that consumer preference has been seen for 
gas-condensing furnaces and other high-priced products in other markets 
that are considered commodity markets. (ACEEE, Public Meeting 
Transcript, No. 34.4 at p. 66)
    PG&E, SDGE, and SoCal Gas supported DOE's decision to include 
integral heat pump water heaters as a max-tech efficiency level for 
electric storage water heaters. PG&E, SDGE, and SoCal Gas believe the 
heat pump water heater technology has made important advances in recent 
years and pointed to the actions of General Electric as a major 
manufacturer speaking to the viability of this technology. (PG&E, No. 
38 at p. 2) NEEA and NPCC also agreed with the inclusion of heat pump 
water heaters in the rulemaking analyses, while acknowledging the 
failures issues discussed in the preliminary analyses. (NEEA and NPCC, 
No. 42 at p. 5) The American Gas Association (AGA) commented that there 
appear to be no significant barriers to including heat pump water 
heaters in the design options under consideration for electric storage 
water heaters. (AGA, No. 44 at p. 2)
    GE commented that heat pump water heaters have significant 
potential for increasing the energy efficiency of electric storage 
water heaters, but that shipments are currently very low (0.1 percent 
of all water heaters shipped). According to GE, heat pump water heaters 
should be encouraged through ENERGY STAR and other consumer incentives 
to allow time for heat pump water heaters to penetrate the market and 
prove themselves in terms of energy cost savings and reliability. GE 
stated that the heat pump water heater market is too new to consider 
establishing a minimum standard at a level that would require heat pump 
water heater technology at this time. (GE, No. 51 at pp. 1-2) Southern 
also commented that levels requiring heat pump water heater technology 
are not appropriate as an amended energy conservation standard level at 
this time. (Southern, No. 50 at p. 4)
    DOE believes that the ENERGY STAR program and Federal tax credit 
program, along with recent developments in heat pump water heater 
technology due to manufacturers' efforts, have made heat pump water 
heaters a much more viable technology for improving energy efficiency. 
As such, DOE is tentatively proposing to consider heat pump water 
heaters in this analysis as a design option for improving the 
efficiency of conventional electric storage water heaters. DOE 
considers the possibility of fuel switching resulting from heat pump 
water heater standards for electric storage water heaters in its 
shipments analysis (see section IV.F.1).
    The technologies evaluated in the screening analysis all have been 
used or are in use in commercially-available products, or exist in 
working prototypes. These technologies all incorporate materials and 
components that are commercially available in today's supply markets 
for the products covered by this NOPR. Therefore, DOE believes all of 
the efficiency levels evaluated in this notice are technologically 
feasible.

C. Engineering Analysis

    The engineering analysis develops cost-efficiency relationships to 
show the manufacturing costs of achieving increased efficiency. DOE has 
identified the following three methodologies to generate the 
manufacturing costs needed for the engineering analysis: (1) The 
design-option approach, which provides the incremental costs of adding 
to a baseline model design options that will improve its efficiency; 
(2) the efficiency-level approach, which provides the relative costs of 
achieving increases in energy efficiency levels, without regard to the 
particular design options used to achieve such increases; and (3) the 
cost-assessment (or reverse-engineering) approach, which provides 
``bottom-up'' manufacturing cost assessments for achieving various 
levels of increased efficiency, based on detailed data as to costs for 
parts and material, labor, shipping/packaging, and investment for 
models that operate at particular efficiency levels.
    For the preliminary analysis, DOE conducted the engineering 
analysis using both the efficiency level approach to identify 
incremental improvements in efficiency for each product and the cost-
assessment approach to develop a cost for each efficiency level. DOE 
identified the most common residential heating products on the market 
and determined their corresponding efficiency levels, the component 
specifications, and the distinguishing technology features associated 
with those levels. After identifying the most common products that 
represent a cross section of the market, DOE gathered additional 
information using reverse-engineering methodologies; product 
information from manufacturer catalogs; and discussions with 
manufacturers and other experts of water heaters, DHE, and pool 
heaters. This approach provided useful information, including 
identification of potential technology paths manufacturers use to 
increase energy efficiency.
    DOE generated a bill of materials (BOM) by disassembling multiple 
manufacturers' products that span a range of efficiency levels for each 
of the three product categories. The BOMs describe the product in 
detail, including all manufacturing steps required to make and/or 
assemble each part. Subsequently, DOE developed a cost model that 
converted the BOMs and efficiency levels into manufacturer production 
costs (MPCs). By applying derived manufacturer markups to the MPCs, DOE 
calculated the manufacturer selling prices and constructed industry 
cost-efficiency curves.
    DOE received several comments from interested parties on the 
approach to the engineering analysis. Rheem stated its support for 
DOE's product teardown plan and evaluation of insulations levels. 
(Rheem, No. 49 at p. 4) Southern agreed overall with the technical and 
engineering assumptions in the TSD. (Southern, No. 50 at p.1)
    Because DOE did not receive any comments from interested parties 
opposing its general approach to the engineering analysis, DOE 
continued to use the same approach for the NOPR phase of this 
rulemaking. However, DOE did receive specific comments from interested 
parties on certain aspects of the engineering analysis. A brief 
overview of the methodology, a discussion of the comments DOE received, 
DOE's response to those comments, and any adjustments DOE made to the 
engineering analysis methodology or assumptions as a result of those 
comments is presented in the sections below. See chapter 5 of the NOPR 
TSD for additional details about the engineering analysis.
1. Representative Products for Analysis
    For the engineering analysis, DOE reviewed all of the product 
classes of residential water heaters (storage-type and instantaneous), 
DHE, and pool heaters. Since the storage volume and input capacity 
affect the energy efficiency of residential heating

[[Page 65880]]

products, DOE examined each product type separately. Within each 
product type, DOE chose units for analysis that represent a cross 
section of the residential heating products market. The analysis of 
these representative products and product classes allowed DOE to 
identify specific characteristics that could be applied to all of the 
products across a range of storage and input capacities, as 
appropriate.
a. Water Heaters
    For residential, storage-type water heaters, the volume of the tank 
significantly affects the amount of energy consumed, because it takes 
more energy to heat a larger volume of water from a given temperature 
to a higher temperature than it does to do the same for a smaller 
volume of water. Also, an increase in the tank volume can create an 
increase in the tank surface area, leading to higher standby losses of 
two otherwise identical tanks (i.e., same insulation thickness, same 
materials). For the preliminary analysis, DOE examined specific storage 
volumes for gas-fired, oil-fired, and electric storage water heaters 
(referred to as representative storage volumes and shown in Table IV.9) 
because the energy efficiency equations for residential water heaters 
established by EPCA are a function of each product's storage volume. 
DOE reviewed the shipments data AHRI provided to determine the storage 
volume corresponding to the highest number of shipments for gas-fired 
water heaters, oil-fired water heaters, and electric water heaters. DOE 
conducted a similar review of shipment data for instantaneous gas-fired 
water heaters and determined the input rating corresponding to the 
highest number of shipments (i.e., 199,000 Btu/h, as shown in Table 
IV.9) since storage volume does not vary for this product class.
    DOE did not receive any comments in response to the preliminary 
analysis on the representative units for residential water heaters, and 
as such, used the same approach to determining representative units for 
the NOPR analysis. However, on review of the shipments for oil-fired 
storage water heaters for the NOPR analysis, DOE determined that oil-
fired storage water heaters with 32 gallons of storage volume have a 
higher number of shipments than those with 30 gallons, and adjusted the 
representative unit accordingly.

      Table IV.9--Representative Residential Water Heaters Analyzed
------------------------------------------------------------------------
                                           Representative storage volume
      Residential water heater class                 (gallons)
------------------------------------------------------------------------
Gas-Fired Storage Type...................                            40
Electric Storage Type....................                            50
Oil-fired Storage Type...................                            32
Instantaneous Gas Fired..................                             0
                                                   (199,000 Btu/h input
                                                              capacity)
------------------------------------------------------------------------

    Once DOE conducted the primary analysis on the representative rated 
storage volumes for each of the product classes, DOE extended the 
analysis to other rated storage volumes using the cost model and the 
energy efficiency equations. See section IV.C.7 for additional details. 
For gas-fired instantaneous water heaters, DOE used the analysis for 
the 199 kBtu/h input capacity and applied it to all products within the 
product class.
b. Direct Heating Equipment
    Current energy conservation standards for DHE are not determined by 
an equation, but by input capacity ranges. DOE examined one specific 
input capacity range for gas wall fan, gas wall gravity, gas floor, and 
gas room DHE in the preliminary analysis. In addition, DOE examined one 
specific input capacity range for gas hearth DHE in the NOPR analysis. 
The specific input ranges DOE analyzed are referred to as 
representative input rating ranges. DOE reviewed the DHE (including 
vented hearth products) shipment data AHRI and HPBA provided for this 
rulemaking and found the input rating range corresponding to the 
highest number of shipments for gas wall fan, gas wall gravity, gas 
floor, and gas room DHE. DOE did not receive any comments from 
interested parties in response to the preliminary analysis on the 
representative ranges for traditional DHE, and used the same approach 
to determine the ranges for the NOPR analysis. DOE did not receive 
shipments data categorized by capacity ranges for gas hearth DHE, and, 
therefore, determined the representative capacity range based on the 
number of models available on the market in each capacity range. DOE 
added a representative range for gas hearth DHE for the NOPR analysis. 
In addition, after reorganizing the DHE product classes, DOE reviewed 
gas room DHE shipments for the NOPR, and changed the representative 
input range for gas room DHE from over 46,000 Btu/h to between 27,000 
and 46,000 Btu/h. DOE found the input range between 27,000 and 46,000 
Btu/h contained the highest number of models for gas room DHE when the 
gas hearth DHE were removed from consideration. Table IV.10 presents 
the representative rated input rating ranges for residential DHE. For 
the remaining DHE product classes (i.e., wall fan, wall gravity, and 
floor), DOE did not receive any comments in response to the preliminary 
analysis on the representative units, and, therefore, used the same 
units for the NOPR analysis.

    Table IV.10--Representative Residential Direct Heating Equipment
      Products as Described by Input Capacity and Defined by Btu/h
------------------------------------------------------------------------
                                           Representative input rating
  Direct heating equipment design type            range (Btu/h)
------------------------------------------------------------------------
Gas Wall Fan...........................  Over 42,000.
Gas Wall Gravity.......................  Over 27,000 and up to 46,000.
Gas Floor..............................  Over 37,000.
Gas Room...............................  Over 27,000 and up to 46,000.
Gas Hearth.............................  Over 27,000 and up to 46,000.
------------------------------------------------------------------------


[[Page 65881]]

    After analyzing the representative product class (i.e., input 
rating range), DOE applied the analysis to the remaining product 
classes for each residential DHE type. Unlike storage water heaters, an 
equation is not applied to relate the range of input ratings. Instead, 
DOE proposes to maintain the AFUE difference between each input rating 
range as established by EPCA. That is, if the amended energy 
conservation standard is increased by two AFUE percentage points for 
the representative product class, for example, the amended energy 
conservation standards for the other product classes within this 
product type would all rise by two AFUE percentage points. The 
stringency resulting from an amended standard is constant across the 
range of inputs for a given product type. This approach appears to be 
consistent with the relationship between input capacity and efficiency 
exhibited by models currently available on the market based on DOE's 
review of the AHRI directory for DHE. In addition, DOE notes that the 
larger DHE units usually contain larger heat exchangers to get higher 
efficiencies. These larger heat exchangers have increased surface area, 
which also increases the convected losses to the surroundings. The 
increased losses result in lower AFUEs. Based on the market assessment 
and engineering principles, DOE believes the approach for maintaining 
the AFUE difference between each input rating range is reasonable.
c. Pool Heaters
    There is only one product class for residential gas-fired pool 
heaters, but this product class covers a wide range of input ratings. 
Although within the same product class, the variation in input rating 
is large enough to create variations in pool heater design (e.g., large 
variations in input will vary material usage and MPC). Therefore, for 
the preliminary analysis, DOE reviewed the shipment data from AHRI and 
found the input rating corresponding to the highest number of 
shipments, which was 250,000 Btu/h input rating. Because DOE did not 
receive any comments on the representative input rating in the 
preliminary analysis, DOE used the same approach for the NOPR analysis. 
Consequently, DOE used 250,000 Btu/h as the representative input rating 
for residential pool heaters in the NOPR analysis.
    The engineering analysis results for the representative product 
classes are used in the remaining DOE analyses, including the life-
cycle cost analysis and the national impact analysis.
2. Ultra-Low NOX Gas-Fired Storage Water Heaters
    In the preliminary analysis, DOE did not address ultra-low 
NOX gas-fired storage water heaters separately from gas-
fired storage water heaters with standard burners (i.e., non-ultra-low 
NOX burner). DOE developed a single cost-efficiency curve 
for all gas-fired storage water heaters. However, DOE received several 
comments in response to the preliminary analysis on the cost of ultra-
low NOX gas-fired storage water heaters. As discussed in 
section IV.A.3.a above, several local air quality management districts 
(mostly in California) limit the allowable NOX emissions 
from residential water heaters.
    BWC commented that there is a substantial cost increase to comply 
with the ultra-low NOX requirements. (BWC, No. 46 at p.1) 
Rheem commented that the MPC and MSP did not capture higher costs and 
prices associated with models that comply with ultra-low NOX 
requirements. (Rheem, No. 49 at pp. 4, 7) Rheem stated that although 
DOE included the costs associated with Flammable Vapor Ignition 
Resistant (FVIR) technology, DOE did not, but should have, included the 
costs associated with ultra-low NOX emissions requirements 
in its analysis. Further, Rheem stated that given the continued 
adoption of ultra-low NOX requirements in highly-populated 
regions such as California and Texas, DOE should revise its baseline 
cost estimates and include weighting for the population subject to 
ultra-low NOX regulations. (Rheem, No. 49 at p. 7)
    A.O. Smith stated that the types of burners currently used to 
comply with the ultra-low NOX requirements in an atmospheric 
water heater are much more restrictive (i.e., produce higher pressure 
drops) than conventional burners. According to the commenter, since 
gas-fired storage water heaters complying with the ultra-low 
NOX requirements also must comply with FVIR requirements, 
the units must also have flame arrestors on the air inlet, which 
further restricts the system. To boost the efficiency of ultra-low 
NOX gas-fired storage water heaters, manufacturers typically 
make the flue baffle more effective. In certain instances, given these 
additional restrictions, the only way for some of these units to 
continue to meet the energy conservation standards is to add a blower 
and/or power burner to the heater, which would greatly increase the 
manufacturing and installation costs. (A.O. Smith, No. 37 at p. 9) 
SoCal Gas agreed with the storage manufacturers, stating that ultra-low 
NOX requirements similar to those in the Southern California 
Air Quality Management District are being implemented in other regions. 
SoCal Gas stated that ultra-low NOX requirements necessitate 
a different type of product, which creates a cost issue because product 
costs and cost increases are dramatically higher. (SoCal Gas, Public 
Meeting Transcript, No. 34.4 at pp. 41-42)
    In response to the comments on the preliminary analysis, DOE 
developed a separate analysis for ultra-low NOX gas-fired 
storage water heaters. DOE developed cost-efficiency curves for ultra-
low NOX gas-fired storage water heaters by performing a 
teardown analysis (section IV.C.4.a) of several ultra-low 
NOX products from a variety of manufacturers at several 
efficiency levels. More specifically, DOE analyzed ultra-low 
NOX gas-fired storage water heaters at a 40-gallon 
representative storage volume, as was done for gas-fired storage water 
heaters with a standard burner. DOE then compared the ultra-low 
NOX gas-fired storage water heaters to the comparable gas-
fired storage water heaters that use standard burner technology (i.e., 
not ultra-low NOX compliant). DOE also considered the impact 
of ultra-low NOX regulations for the cumulative regulatory 
burden (see section V.B.2.f).
    DOE used the cost-efficiency curves for ultra-low NOX 
gas-fired storage water heaters in the downstream analysis, including 
the LCC. DOE distributed the costs based on those geographical areas 
with ultra-low NOX regulations. See chapter 5 of the NOPR 
TSD for the cost-efficiency curves for ultra-low NOX gas-
fired storage water heaters.
3. Efficiency Levels Analyzed
    For each of the representative products, DOE analyzed multiple 
efficiency levels and estimated manufacturer production costs at each 
efficiency level. The following subsections provide a description of 
the full efficiency level range DOE analyzed from the baseline 
efficiency level to the maximum technologically feasible (max-tech) 
efficiency level for each product class. In some cases, the highest 
efficiency level was identified through review of available product 
literature or prototypes for products not commercially available.
    For each product class, DOE selected baseline units as reference 
points, against which DOE measured changes resulting from potential 
amended energy conservation standards. Generally, the baseline unit in 
each product class: (1) Represents the basic

[[Page 65882]]

characteristics of equipment in that class; (2) just meets current 
Federal energy conservation standards; and (3) provides basic consumer 
utility.
    DOE conducted a survey of the residential heating products market 
to determine what types of products are available to consumers and to 
identify the efficiency levels corresponding to the highest number of 
models. Then, DOE established intermediate energy efficiency levels for 
each of the product classes that are representative of efficiencies 
that are typically available on the market or correspond to voluntary 
program targets such as ENERGY STAR. DOE reviewed AHRI's product 
certification directory, manufacturer catalogs, and other publicly-
available literature to determine which efficiency levels are the most 
prevalent for each representative product class.
    DOE determined the maximum improvement in energy efficiency that is 
technologically feasible (max-tech) for water heaters, DHE, and pool 
heaters, as required by section 325(o) of EPCA. (42 U.S.C. 6295(o)). 
For the representative product within a given product class, DOE could 
not identify any working products or prototypes at higher efficiency 
levels that were currently available beyond the identified max-tech 
level at the time the analysis was performed. DOE seeks comment on its 
max-tech efficiency levels.
    Rheem commented generally in response to the preliminary analysis 
about the water heater max-tech levels DOE identified. Rheem asserted 
that there is little to no presence of max-tech water heating products 
in the United States. Further, Rheem commented that it supports the 
growth of max-tech products through ENERGY STAR, which helps to 
distinguish top-performing products and to stimulate market 
transformation, but the commenter stated that max-tech should not be 
considered for a Federal minimum standard. (Rheem, No. 49 at p. 2)
    NRDC commented that max-tech levels face issues that are similar 
for all emerging technologies. It noted that: (1) Max-tech products are 
only produced and deployed on small scales, thereby limiting available 
data; (2) reliability is a concern, possibly due to small scale 
production; (3) costs are high but projected to decrease as production 
increases, although timing is unknown; (4) consumer reaction to new 
technologies and their amenities is unknown; and (5) units are more 
useful only in certain applications due to size, venting, or other 
inherent attributes. NRDC notes that DOE must consider all of these 
concerns when making a decision. (NRDC, No. 48 at pp. 1-2)
    As stated above, EPCA requires DOE to determine the maximum 
improvement in energy efficiency or maximum reduction in energy use 
that is technologically feasible for each class of covered products. 
(42 U.S.C. 6295(o)). Therefore, DOE must consider and include an 
analysis of max-tech levels for residential heating products in this 
rulemaking. However, DOE notes that consideration of the max-tech level 
does not necessarily mean that it will be adopted as the level in the 
energy conservation standard for that product, because DOE must 
consider, in turn, all of the other statutory factors under 42 U.S.C. 
6295(o).
    In addition to identifying efficiency levels for each product 
class, DOE identified a particular technology or combination of 
technologies associated with each efficiency level in order to make the 
engineering analysis more transparent to interested parties. For each 
efficiency level, DOE lists technology and design changes manufacturers 
could use to improve product energy efficiency to achieve the given 
efficiency level. These technologies provide methods to increase 
product energy and are representative of technologies found in a 
typical model at a given efficiency level. While DOE recognizes that 
manufacturers use many different technologies and approaches to 
increase the energy efficiency of residential heating products, the 
presented technologies and combinations of technologies and their 
ordering are simply possible paths manufacturers could use to reach 
higher efficiency levels.
a. Water Heaters
    The current Federal minimum energy conservation standards define 
the baseline efficiencies for residential water heaters as measured by 
the energy factor. These standards became effective on January 20, 
2004. (10 CFR Part 430.32(d)) For water heaters, DOE applied the 
representative storage capacity to the energy efficiency equations in 
10 CFR Part 430.32(d) to calculate the EFs of the baseline units.
i. Gas-Fired Storage Water Heaters
    As described in section IV.C.2, DOE performed a separate analysis 
for gas-fired water heaters with a standard burner and gas-fired water 
heaters with an ultra-low NOX burner for this NOPR. Table 
IV.11 and Table IV.12 show the efficiency levels DOE considered for 
gas-fired storage water heaters, along with the technologies that 
manufacturers could use to achieve the listed efficiencies. The 
technologies for standard burner gas-fired water heaters and ultra-low 
NOX gas-fired water heaters vary due to differences in the 
operating characteristics of the burners. Ultra-low NOX 
burners typically reduce the pressure in the flue, which can create 
problems if the pressures required to properly vent combustion products 
are not maintained. To mitigate these problems, manufacturers may 
reduce the amount of baffling or other airflow restrictions to ensure 
proper venting, which in turn may result in decreased efficiency. To 
overcome these issues, manufacturers must use power venting technology 
to achieve energy factors that are comparable to what they would 
achieve with a standard burner gas-fired storage water heater that can 
contain more baffling. Therefore, the technologies associated with 
ultra-low NOX gas-fired water heaters are implemented at 
lower efficiency levels and yield a lower energy factor than the same 
technologies associated with gas-fired storage water heaters that use a 
standard burner.

   Table IV.11--Forty-Gallon Gas-Fired Storage Water Heater, Standard
                                 Burner
------------------------------------------------------------------------
         Efficiency level (EF)                      Technology
------------------------------------------------------------------------
Baseline (EF = 0.59)...................  Standing Pilot and 1''
                                          Insulation.
Efficiency Level 1 (EF = 0.62).........  Standing Pilot and 1.5''
                                          Insulation.
Efficiency Level 2 (EF = 0.63).........  Standing Pilot and 2.0''
                                          Insulation.
Efficiency Level 3 (EF = 0.64).........  Electronic Ignition, Power Vent
                                          and 1'' Insulation.
Efficiency Level 4 (EF = 0.65).........  Electronic Ignition, Power Vent
                                          and 1.5'' Insulation.
Efficiency Level 5 (EF = 0.67).........  Electronic Ignition, Power Vent
                                          and 2'' Insulation.
Efficiency Level 6-Max-Tech (EF = 0.80)  Condensing, Power Vent, 2''
                                          Insulation.
------------------------------------------------------------------------


[[Page 65883]]


 Table IV.12--Forty-Gallon Gas-Fired Storage Water Heater, Ultra-low NOX
                                 Burner
------------------------------------------------------------------------
         Efficiency level (EF)                      Technology
------------------------------------------------------------------------
Baseline (EF = 0.59)...................  Standing Pilot and 1''
                                          Insulation.
Efficiency Level 1 (EF = 0.62).........  Standing Pilot and 2''
                                          Insulation.
Efficiency Level 2 (EF = 0.63).........  Electronic Ignition, Power
                                          Vent, and 1'' Insulation.
Efficiency Level 3 (EF = 0.64).........  Electronic Ignition, Power Vent
                                          and 1.5'' Insulation.
Efficiency Level 4 (EF = 0.65).........  Electronic Ignition, Power Vent
                                          and 2'' Insulation.
Efficiency Level 5 (EF = 0.67).........  Not Attainable (would go to
                                          condensing).
Efficiency Level 6-Max-Tech (EF = 0.80)  Condensing, Power Vent, 2''
                                          Insulation.
------------------------------------------------------------------------

    DOE found gas-fired storage water heaters capable of condensing 
operations at the highest efficiency level (i.e., max-tech). More 
energy can be extracted by condensing the combustion products in the 
flue gas, which extracts more heat in the form of latent energy, 
leading to an increase in the thermal efficiency of the gas-fired 
storage water heater. In the preliminary analysis, DOE identified the 
max-tech EF for condensing gas-fired storage water heaters as 0.77. DOE 
received several comments from interested parties (discussed below) 
which have caused DOE to revise its estimate upwards to 0.80 EF for 
condensing units.
    NRDC stated that condensing gas-fired water heaters are the future 
of gas-fired storage water heaters. (NRDC, No. 48 at p. 1) ACEEE 
commented that the max-tech efficiency level DOE considered for gas-
fired storage water heaters is lower than the ENERGY STAR level for the 
condensing storage water heater category, which is set at 0.80 EF. 
ACEEE stated that selecting 0.77 EF from a range of identified energy 
factors for condensing gas-fired storage water heaters ranging from 
0.77 to 0.82 EF will bias the results of the analysis and that the five 
percentage points of the energy factor correspond to less gas usage. 
ACEEE expressed concern with such a divergence between ENERGY STAR and 
the energy conservation standards rulemaking. (ACEEE, Public Meeting 
Transcript, No. 34.4 at p. 75-76) Further, ACEEE recommended that DOE 
analyze efficiency levels at 0.77 EF, 0.80 EF, and 0.82 EF for gas-
fired storage water heaters (ACEEE, No. 35 at p. 3) ASAP stated that 
DOE's analysis may be missing some efficiency levels. For gas-fired 
storage water heaters in particular, ASAP commented that condensing 
units may span a range of efficiencies, and a 0.77 EF may be an 
intermediate level that is not max-tech. (ASAP, Public Meeting 
Transcript, No. 34.4 at p. 92)
    A.O. Smith stated its support for the max-tech efficiency levels 
for water heaters as shown in the preliminary engineering analysis. 
Specifically, A.O. Smith supports a 0.77 EF for gas-fired condensing 
water heaters, which meets DOE's criteria of being technically 
feasible. (A.O. Smith, No. 37 at p. 3)
    In selecting the efficiency level for the max-tech condensing gas-
fired water heater for the NOPR analysis, DOE carefully considered all 
comments from interested parties regarding this issue. There are no 
products currently available on the residential gas-fired storage water 
heater market that can achieve the efficiencies that will be made 
possible by condensing technology, and, therefore, it is difficult to 
determine the highest possible EF that can be achieved using this 
technology. Although condensing gas-fired storage water heaters are not 
currently available on the market in residential sizes, they are 
available in commercial sizes that could be scaled down for residential 
use. Commercial condensing gas-fired storage water heaters have 
efficiencies of up to 96 percent thermal efficiency. There is no direct 
mathematical conversion that can be used to derive energy factor (the 
efficiency metric for residential water heaters) from thermal 
efficiency (the efficiency metric used for commercial water heaters). 
Therefore, in making the determination of a max-tech level for gas-
fired storage water heaters, DOE considered feedback from interested 
parties, information gathered during manufacturer interviews, available 
reports and literature, and its own technical expertise. As a result, 
DOE has revised the max-tech water heater efficiency to 0.80 EF for the 
NOPR analysis. This level is cited as the max-tech for condensing water 
heaters in several reports reviewed by DOE (described in more detail 
below), and DOE believes it is the maximum possible energy factor that 
can possibly be achieved by a gas-fired storage water heater at this 
time. DOE notes that A.O. Smith presentation given at the 2009 ACEEE 
Hot Water Forum identifies 0.80 EF as the maximum possible EF for 
residential condensing gas-fired water heaters. For more information 
visit http://www.aceee.org; the presentation is available at: http://www.aceee.org/conf/09whforum/PlenarySession1-AdamsPresentation.pdf.
    In addition, the Super Efficient Gas Water Heating Appliance 
Initiative (SEGWHAI) Final Project Report (April 2007) identified 
efficiency factors at 0.80 and above as achievable condensing 
efficiency levels for gas-fired storage water heaters, although these 
levels were based on theoretical modeling of gas-fired water heaters 
and have never been demonstrated in working prototypes. For more 
information, visit http://www.segwhai.org. A 0.80 EF level is also 
consistent with the max-tech level identified by ENERGY STAR in its 
determination of an appropriate efficiency level for gas-fired storage 
water heaters utilizing condensing technology. For more information, 
visit http://www.energystar.gov. As explained above, DOE seeks comment 
on the max-tech efficiency levels identified for the analyses, 
especially those for gas-fired water heaters. (See Issue 1 under 
``Issues on Which DOE Seeks Comment'' in section VII.E of this NOPR.)
    DOE received several comments about the other efficiency levels and 
technologies identified for the preliminary analysis.
    Southern commented on the technologies for efficiency level 3 for 
gas-fired storage water heaters, stating its belief that adding 
electronic ignition would not require manufacturers to use power vent 
systems. (Southern, Public Meeting Transcript, No. 34.4 at p. 87)
    DOE agrees with Southern's comment, because an assessment of the 
current market demonstrates that gas-fired storage water heaters using 
electronic ignition systems do not always include power vent 
technologies. However, DOE believes many manufacturers that use power 
vent technologies to reach efficiency level 3, 4, and 5 also use 
electronic ignition systems since the fan already requires electricity. 
Therefore, DOE paired electronic ignition and power venting 
technologies with one inch of insulation as a potential approach to 
achieving efficiency level 3. DOE believes that manufacturers implement 
designs that have both electronic ignition and power vent

[[Page 65884]]

technology at this efficiency level. At efficiency levels 1 and 2, DOE 
used standing pilot systems for gas-fired storage water heaters, which 
do not require line electricity. Even though efficiency level 3 and 
above for gas-fired storage water heaters would require consumers to 
have an external electrical connection, DOE has determined that 
consumers would continue to have other non-electrical alternatives such 
as other types of gas-fired water heaters (e.g., gas-fired 
instantaneous water heaters).
    ACEEE stated that DOE should include an efficiency level that 
considers flue and vent damper technologies instead of power vent 
technology. The commenter stated that this may not significantly affect 
the energy factor because the test procedure does not account for the 
value of entrained bypass air. ACEEE asserted that flue and vent 
dampers may have much lower costs than power vents and may have less 
entrained air. Further, ACEEE stated that flue and vent dampers do not 
require exhaust temperatures to be reduced to a level that can be 
handled by PVC plastics. (ACEEE, Public Meeting Transcript, No. 34.4 at 
p. 88)
    DOE focused its analysis on technologies that would impact 
efficiency, as measured by the DOE test procedure. DOE discussed its 
consideration of damper technologies as part of the screening analysis 
in section IV.B.1.a. For the engineering analysis, DOE examined the 
most common methods used by manufacturers to improve energy factor, as 
determined using DOE's test procedures specified in 10 CFR part 430, 
subpart B, appendix E. Through its reverse-engineering analysis, and 
review of manufacturer literature, DOE found that manufacturers most 
often use power vent technology to achieve higher efficiency for gas-
fired storage water heaters. Thus, DOE considered efficiency levels 
that are typically achieved using a power vent design in the NOPR 
analysis.
    Rheem commented that at the preliminary analysis efficiency level 5 
(i.e., 0.66 EF), gas-fired storage water heaters may require operation 
at and near condensing efficiency levels, which can be undesirable. 
(Rheem, No. 49 at p. 4)
    DOE notes that several manufacturers already manufacture water 
heaters at 0.66 EF, making gas-fired storage water heaters at 0.66 EF 
practical to manufacture, install, and service, and technologically 
feasible. DOE is unaware of any adverse impacts to either product 
utility or health and safety that would result from a water heater at 
0.66 EF. DOE reviewed the market for gas-fired water heaters at 0.66 EF 
and 0.67 EF. DOE did not find any products currently on the market, 
which incorporate features to accommodate condensing operation. 
Therefore, DOE sees no reason to eliminate that efficiency level from 
consideration. However, DOE did revise efficiency level 5 from 0.66 EF 
for the preliminary analysis to 0.67 EF for the NOPR analysis to 
maintain consistency with the ENERGY STAR Program. DOE notes there are 
also products currently offered with a 0.67 EF at the representative 
volume size.
    Rheem also stated that the technologies identified to increase 
energy efficiency for gas-fired storage water heaters are appropriate. 
However, Rheem asserted that the insulation thicknesses that would be 
required to achieve efficiency levels 1, 2, and 3 are understated. 
Rheem commented that efficiency level 1 requires 2 to 2.5 inches of 
insulation, for example. (Rheem, No. 49 at p. 4)
    DOE research suggests that the tank thicknesses listed at various 
efficiency levels are consistent with products available on the market. 
DOE reviewed manufacturer literature, which typically includes 
information on energy factor and insulation thicknesses. For the 
preliminary analysis, DOE reverse-engineered several gas-fired water 
heaters to verify the technologies used to improve energy efficiency, 
including insulation thicknesses. Since the preliminary analysis, DOE 
also hired an independent testing facility to determine the EF of a 
representative sample of water heaters across multiple efficiency 
levels for the NOPR. These water heaters were subsequently disassembled 
to verify the technologies used to increase energy efficiency. In the 
end, DOE came to the same conclusions as in the preliminary analysis 
regarding insulation thicknesses. Therefore, DOE believes the results 
of its assessment of insulation thicknesses at various efficiency 
levels are accurate.
    Rheem also commented that baseline technologies for 40-gallon gas-
fired storage water heaters do not apply uniformly for the entire range 
of rated storage volumes, and as such, DOE should account for the 
additional manufacturing, installation, and shipping costs for larger 
size water heaters. (Rheem, No. 49 at p. 4)
    For the NOPR engineering analysis, DOE performed teardowns of 
models at multiple nominal capacities and noted any differences 
(including minor differences) that occurred. DOE used the knowledge 
gained from these teardowns when it extended the cost analysis to the 
other capacity (gallon) sizes. As part of its analysis, DOE accounted 
for additional installation costs and shipping costs of larger units 
(see sections IV.E.2.a and IV.C.4.f, respectively).
ii. Electric Storage Water Heaters
    Table IV.13 shows the efficiency levels considered for electric 
storage water heaters, along with their corresponding potential 
technologies that could be used to achieve those levels.

         Table IV.13--Fifty-Gallon Electric Storage Water Heater
------------------------------------------------------------------------
         Efficiency level (EF)                      Technology
------------------------------------------------------------------------
Baseline (EF = 0.90)...................  1.5'' Foam Insulation.
Efficiency Level 1 (EF = 0.91).........  2'' Foam Insulation.
Efficiency Level 2 (EF = 0.92).........  2.25'' Foam Insulation.
Efficiency Level 3 (EF = 0.93).........  2.5'' Foam Insulation.
Efficiency Level 4 (EF = 0.94).........  3'' Foam Insulation.
Efficiency Level 5 (EF = 0.95).........  4'' Foam Insulation.
Efficiency Level 6 (EF = 2.0)..........  Heat Pump Water Heater.
Efficiency Level 7-Max-Tech (EF = 2.2).  Heat Pump Water Heater, More
                                          Efficient Compressor.
------------------------------------------------------------------------

    For electric storage water heaters, although no integrated heat 
pump water heaters were available on the market at the time the 
analysis was developed, such products had been developed and 
manufactured in the past, three models

[[Page 65885]]

have been certified under the ENERGY STAR program, and others are 
currently under development by other water heater manufacturers. DOE 
found electric heat pump water heaters capable of obtaining EFs of 2.2 
in the preliminary analysis and retained this level as the max-tech 
level in the NOPR analysis. DOE received several comments on the 
efficiency levels and technologies presented in the preliminary 
analysis.
    NRDC commented that heat pump water heaters are the future of 
electric storage water heater technology. (NRDC, No. 48 at p. 1) ASAP 
stated that DOE may be missing some efficiency levels in its analysis. 
ASAP commented that an efficiency level between efficiency level 5 and 
the max-tech for electric storage water heaters may merit analysis, 
particularly if ENERGY STAR has a heat pump water heater at 2.0 EF. 
(ASAP, Public Meeting Transcript, No. 34.4 at p. 92) Similarly, ACEEE 
recommended DOE analyze levels at 1.7 EF, 2.0 EF, and 2.2 EF. (ACEEE, 
No. 35 at p. 3) Additionally, ACEEE stated that prior analyses have 
been conducted for heat pump water heaters at 2.5 EF, although further 
specifics were not provided. (ACEEE, Public Meeting Transcript, No. 
34.4 at p. 94) BWC referred DOE to comments made during the previous 
residential water heater rulemaking on July 18, 1994. (BWC, No. 46 at 
p. 2) BWC asserted that the previous rulemaking stated a reasonable 
energy factor of 1.50, but that the current rulemaking does not. BWC 
stated its belief that 1.5 EF is still a reasonable EF for heat pump 
water heaters. (BWC, No. 46 at p. 2)
    In response to these comments, DOE revised the efficiency levels 
considered for electric storage water heaters to include an 
intermediate heat pump water heater efficiency level at 2.0 EF for the 
NOPR analysis. This is not the max-tech level, but it does represent a 
significant change in technology and increase in efficiency over the 
traditional electric storage heater technology. This technology would 
also be easier for manufacturers to achieve than the max-tech 2.2 EF. 
DOE notes this efficiency level also corresponds to the level set forth 
by the ENERGY STAR program. DOE did not find any heat pump water 
heaters currently available or in the research stage with a 1.7 EF. In 
addition, DOE believes it is unlikely that manufacturers will offer 
products below the ENERGY STAR level, which is at 2.0 EF. Currently, 
there are also Federal tax credits for heat pump water heaters with an 
energy factor greater than or equal to 2.0 EF. Additionally, DOE 
maintained 2.2 EF as the max-tech efficiency level. Although ACEEE 
commented that analysis has been performed on heat pump water heaters 
with EFs of up to 2.5, ACEEE did not indicate the source of this 
analysis, and DOE could not identify any heat pump water heaters at 2.5 
EF through its research efforts. The highest EF obtained in prototype 
designs currently being developed is 2.2 EF.
    In response to the technology options presented in the preliminary 
analysis, AHRI stated that increasing the insulation on an electric 
storage water heater from 3 to 4 inches would not increase the energy 
factor of such magnitude by 0.01 EF point. AHRI does not believe that 
an increase in the energy factor would be seen using DOE's test 
procedure when only the insulation thickness is increased and no other 
design changes are made to eliminate many of the thermal short circuits 
present in a water heater. (AHRI, Public Meeting Transcript, No. 34.4 
at pp. 90-91) Rheem also commented that DOE should recognize that there 
are diminishing returns for added foam insulation, adding that it is 
unclear how the efficiency levels for electric storage water heaters 
with 3 and 4 inches of insulation were evaluated to yield the proposed 
efficiency levels. (Rheem, No. 49 at p. 3)
    DOE research determined the technology options manufacturers 
typically use to improve product efficiency, and was based on multiple 
data sources including manufacturer literature, which usually includes 
information on energy factor and insulation thicknesses. DOE also 
conducted a teardown analysis of electric storage water heaters for the 
preliminary analysis. For the NOPR analysis, DOE tested the EF of water 
heaters and then performed a teardown analysis on those water heaters 
across various EF ratings to confirm the technologies used for 
increasing efficiency. Although insulation thickness is not the only 
design change, DOE believes it is the driving factor in increasing the 
EF for electric storage water heaters, and, therefore, is listed as a 
commonly used technology option. For these reasons, DOE did not revise 
the technology options for EL4 and EL 5 for electric storage water 
heaters for the NOPR analysis.
iii. Oil-Fired Storage Water Heaters
    Table IV.14 presents the efficiency levels DOE considered for oil-
fired storage water heaters, along with the technology options that 
manufacturers could use to achieve the listed efficiency.

   Table IV.14--Thirty-Two-Gallon Oil-Fired Storage Water Heater With
                             Burner Assembly
------------------------------------------------------------------------
         Efficiency level (EF)                      Technology
------------------------------------------------------------------------
Baseline (EF = 0.53)...................  1'' Fiberglass Insulation.
Efficiency Level 1 (EF = 0.54).........  1.5'' Fiberglass Insulation.
Efficiency Level 2 (EF = 0.56).........  2'' Fiberglass Insulation.
Efficiency Level 3 (EF = 0.58).........  2.5'' Fiberglass Insulation.
Efficiency Level 4 (EF = 0.60).........  2'' Foam Insulation.
Efficiency Level 5 (EF = 0.62).........  2.5'' Foam Insulation.
Efficiency Level 6 (EF = 0.66).........  1'' Fiberglass Insulation, and
                                          Multi Flue Design.
Efficiency Level 7-Max-Tech (EF = 0.68)  1'' Foam Insulation, and Multi
                                          Flue Design.
------------------------------------------------------------------------

    The most efficient residential oil-fired storage water heater on 
the market has an EF of 0.68 and includes electronic ignition, foam 
insulation, and enhanced flue baffles. DOE considered this efficiency 
level in the preliminary analysis and did not revise it for the NOPR 
analysis. However, DOE has determined that all oil-fired water heaters 
currently manufactured at the max-tech efficiency level incorporate a 
proprietary design. While DOE typically does not consider proprietary 
designs in its analysis due to impacts on competition likely to result 
from setting a minimum standard an efficiency level that is only 
achievable using a proprietary design, the agency has determined 
through discussions with manufacturers and its own technical expertise 
that the max-tech level for oil-fired storage water heaters is 
achievable using alternative approaches that are not proprietary. 
Therefore, DOE included

[[Page 65886]]

this efficiency level in the NOPR analysis. DOE believes manufacturers 
of oil-fired storage water heaters could achieve an EF of 0.68 by using 
a multiple flue design consisting of several flues to increase the heat 
transfer area, instead of a single, central flue that is standard on 
nearly all residential gas-fired and oil-fired storage water heaters. 
DOE revised its cost analysis for a 0.66 EF and 0.68 EF to represent a 
non-proprietary, multiple flue design.
    DOE did not receive any comments in response to the preliminary 
analysis on the max-tech efficiency level or the other efficiency 
levels DOE considered for oil-fired storage water heaters. See chapter 
5 of the NOPR TSD for more information about the efficiency levels DOE 
analyzed for oil-fired storage water heaters.
iv. Gas-Fired Instantaneous Water Heaters
    Table IV.15 presents the efficiency levels DOE considered for gas-
fired instantaneous water heaters, along with their corresponding 
potential technologies.

 Table IV.15--Zero-Gallon Gas-Fired Instantaneous Water Heater, 199,000
                          Btu/h Input Capacity
------------------------------------------------------------------------
         Efficiency level (EF)                      Technology
------------------------------------------------------------------------
Baseline (EF = 0.62)...................  Standing Pilot.
Efficiency Level 1 (EF = 0.69).........  Standing Pilot and Improved
                                          Heat Exchanger Area.
Efficiency Level 2 (EF = 0.78).........  Electronic Ignition and
                                          Improved Heat Exchanger.
Efficiency Level 3 (EF = 0.80).........  Electronic Ignition and Power
                                          Vent.
Efficiency Level 4 (EF = 0.82).........  Electronic Ignition, Power
                                          Vent, Improved Heat Exchanger
                                          Area.
Efficiency Level 5 (EF = 0.84).........  Electronic Ignition, Power
                                          Vent, and Improved Heat
                                          Exchanger Area.
Efficiency Level 6 (EF = 0.85).........  Electronic Ignition, Power
                                          Vent, Direct Vent, and
                                          Improved Heat Exchanger Area.
Efficiency Level 7 (EF = 0.92).........  Electronic Ignition, Power
                                          Vent, Direct Vent, Condensing.
Efficiency Level 8 - Max Tech (EF =      Electronic Ignition, Power
 0.95).                                   Vent, Direct Vent, Condensing
                                          (Max-Tech).
------------------------------------------------------------------------

    For the preliminary analysis, DOE identified a gas-fired 
instantaneous water heater capable of condensing with an EF of 0.92 as 
the max-tech level. DOE did not receive any comments on the max-tech 
gas-fired instantaneous water heaters. However, on reviewing the gas-
fired instantaneous water heater market, DOE identified a new max-tech 
level at 0.95 EF for instantaneous gas-fired water heaters that use 
condensing technology.
    DOE received several comments on the potential technologies 
incorporated at each efficiency level for gas-fired instantaneous water 
heaters that were presented in its preliminary engineering analysis. 
For the preliminary analysis, DOE considered the baseline to be the 
current Federal minimum standard (i.e., 0.62 EF). Also, DOE did not 
incorporate the need to handle condensate into the installed cost 
estimates until products reached the 0.92 efficiency level for the 
preliminary analysis.
    A.O. Smith suggested using a higher EF as the baseline efficiency 
level for gas-fired instantaneous water heaters. A.O. Smith noted that 
the vast majority of models available (per the AHRI Directory) are 
already well above the Federal minimum energy conservation standards of 
0.62 EF. Since the majority of shipments in the current market for 
tank-type water heaters are at the Federal minimum energy conservation 
standards, DOE should use the same logic in choosing the baseline 
efficiency levels. (A.O. Smith, No. 37 at p. 3)
    In response, DOE defines the baseline efficiency level as 
representative of the basic characteristics of equipment in that class. 
The characteristics of a gas-fired instantaneous water heater that just 
meets the 0.62 EF requirement would be representative of the most basic 
design that could be used for a gas-fired instantaneous water heater. 
Therefore, DOE did not change the baseline efficiency level for gas-
fired instantaneous water heaters in the NOPR analysis.
    At the public meeting for the preliminary analysis, DOE sought 
comment on safety concerns for gas-fired instantaneous water heaters at 
near-condensing efficiency levels. Operating at near-condensing levels 
may result in corrosive condensation formation, which may occur when 
the combustion products (which include water vapor) cool and condense. 
Manufacturers stated during engineering interviews that there is a 
safety margin needed to account for variations due to manufacturing 
tolerances, gas quality, differences in venting configurations, 
altitude, ambient conditions, and installer experience. DOE 
specifically requested information about how manufacturers would change 
current designs to mitigate corrosive condensate formation at near-
condensing EF levels that may be present in some installations. DOE 
also requested comment about how manufacturers would alter current 
designs of gas-fired instantaneous water heaters to achieve safe 
operation if a potential amended standard required all installations to 
operate at near-condensing EF levels.
    In response, Noritz stated that 0.83 EF is generally the borderline 
between condensing and non-condensing, the point at which units begin 
operating in condensing mode in at least some applications. (Noritz, 
Public Meeting Transcript, No. 34.4 at p. 113) Noritz also stated that 
condensation may occur in the near condensing range, which includes 
0.83, 0.84, and 0.85 EF, and that it would change the copper heat 
exchanger in its standard product to stainless steel or better to 
manage the acidic condensate. (Noritz, Public Meeting Transcript, No. 
34.4 at pp. 108-109) Noritz recommends that contractors install a 
condensate collector for instantaneous gas-fired water heaters with 
energy factors at 0.82 and 0.83, but acknowledged that the condensate 
collector is not included in a large percentage of installations. 
Therefore, Noritz stated that it would include a stainless steel heat 
exchanger with the condensate collector on higher efficiency products 
because of the increased safety issues associated with condensate 
management. (Noritz, Public Meeting Transcript, No. 34.4 at pp. 111-
112) Further, Noritz said it would use this stainless steel heat 
exchanger nationwide for cost considerations and to keep the product 
standard. (Noritz, Public Meeting Transcript, No. 34.4 at pp. 109-110) 
Noritz commented that it handles acidic condensation with a stainless 
steel heat exchanger for the condensing instantaneous gas-fired water 
heater that has an energy factor of 0.92 EF, and that the product uses 
a primary copper heat exchanger and a secondary stainless steel heat 
exchanger. Noritz commented that some companies may use titanium, but 
this may not be realistic for Noritz because of the cost. (Noritz, 
Public Meeting

[[Page 65887]]

Transcript, No. 34.4 at pp. 109-110) In written comments, Noritz 
suggested that DOE's cost-efficiency curve should be continuous from 
0.62 to 0.82, at which point there should be a kink in the curve, and 
the cost of producing a product with an EF of 0.83 or higher would see 
a steep increase. According to the commenter, the delineation between 
condensing and non-condensing product gas-fired instantaneous water 
heaters is at an EF of 0.83, which is borderline. Noritz asserted that 
manufacturers making products with an EF of 0.83 or above would need to 
design these products to deal with condensate, thereby requiring more 
expensive heat exchanger materials, condensate drains, and some method 
of treating (i.e., neutralizing) the condensate for safe disposal. 
(Noritz, No. 36 at pp. 1-2)
    Similar to Noritz's comments, AHRI noted that the costs of gas-
fired instantaneous water heaters at near-condensing efficiency levels 
(i.e., an EF of 0.84 and 0.85) need to include the measures 
manufacturers would use to minimize problems associated with excessive 
condensate in the appliance or its venting system. Specifically, AHRI 
noted that manufacturers must build safety factors into their designs 
to address the wide scope of installation conditions, such as colder 
incoming water temperatures or various venting systems. AHRI 
recommended that DOE model the heat exchanger using more corrosive-
resistant materials, specifying a venting system using stainless steel, 
and adding a means to collect and dispose of condensate. (AHRI, No. 43 
at p. 2) Regarding manufacturing products that operate near their 
condensing levels, AHRI stated that manufacturers want to build 
products that can be sold anywhere in the United States. However, there 
are parts of the United States where the incoming water is colder than 
the water specified by the test procedure, and this may cause pre-
condensing. AHRI asserted that efficiency levels at these levels create 
safety issues, and that manufacturers would have to rely on 
manufacturing and installation skills due to the small margin between 
condensing and non-condensing operation. (AHRI, Public Meeting 
Transcript, No. 34.4 at pp. 110-111)
    DOE acknowledges that for efficiency levels associated with near-
condensing operation, a portion of the flue products may condense, and 
this percentage may vary as a function of field conditions. 
Additionally, operation where a portion of the flue gases condense 
(i.e., near-condensing operation) creates the same safety issues 
associated with fully condensing operation because corrosive condensate 
is introduced into the heat exchanger and venting system during both 
types of operation. Therefore, DOE determined that for instantaneous 
gas-fired water heater efficiency levels 5 and 6 (energy factors 0.84 
and 0.85, respectively), the costs associated with condensing operation 
should be accounted for in the MPCs. DOE revised its costs for the NOPR 
phase of this analysis for gas-fired instantaneous water heaters to 
account for design changes necessary to handle condensate at these 
efficiency levels.
b. Direct Heating Equipment
    The baseline efficiencies for DHE are defined by the current 
Federal minimum energy conservation standards and the representative 
characteristics for products on the market that just meet Federal 
minimum energy conservation standards, as measured by the AFUE, and 
effective on January 1, 1990. (10 CFR part 430.32(i)) For DHE, the 
AFUEs corresponding to the representative input ratings in 10 CFR 
430.32(i) were assigned as the baseline unit AFUEs.
    Table IV.16 through Table IV.20 show the efficiency levels DOE 
analyzed for each product class of DHE, along with technologies that 
manufacturers could use to reach that efficiency level.
    In the preliminary analysis, DOE identified various efficiency 
levels for gas wall fan DHE, including max-tech levels that used 
electronic ignition and induced draft combustion systems. DOE did not 
receive any comments pertaining to its efficiency levels or 
technologies for the preliminary analysis. After reviewing the 
efficiency levels and technologies for the NOPR analysis, DOE 
determined that the same efficiency levels and technologies are still 
appropriate.

          Table IV.16--Gas Wall Fan-Type DHE, Over 42,000 Btu/h
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 74)...................  Standing Pilot.
Efficiency Level 1 (AFUE = 75).........  Intermittent Ignition and Two-
                                          Speed Blower.
Efficiency Level 2 (AFUE = 76).........  Intermittent Ignition and
                                          Improved Heat Exchanger.
Efficiency Level 3 (AFUE = 77).........  Intermittent Ignition, Two-
                                          Speed Blower, and Improved
                                          Heat Exchanger.
Efficiency Level 4-Max-Tech (AFUE = 80)  Induced Draft and Electronic
                                          Ignition.
------------------------------------------------------------------------

    In the preliminary analysis, DOE identified gas wall gravity 
efficiency levels and technology options, which included a 75-percent 
AFUE level as the max-tech that could be achieved using induced draft. 
DOE received several comments in response.
    AHRI cautioned that adding too many electrical devices to gas wall 
gravity-type DHE will at some point remove those products from that 
product class, because they will get converted into gas wall fan-type 
DHE. (AHRI, Public Meeting Transcript, No. 34.4 at pp. 69-70) AHRI also 
stated that an external electrical supply is required at some of the 
higher efficiency levels. AHRI asserted that when this occurs, that 
product can no longer be classified as a gravity-type product, but 
instead would be a fan-type product. Therefore, AHRI stated that the 
efficiency levels presented in the preliminary analysis are unrealistic 
for gas wall gravity-type DHE. (AHRI, Public Meeting Transcript, No. 
34.4 at pp. 114-115) Additionally, Bock commented that adding induced 
draft technology to a gas wall gravity-type unit would exclude it from 
this equipment class. (Bock, Public Meeting Transcript No. 34.4 at p. 
119)
    In response to these comments, DOE further reviewed the gravity-
type wall DHE market and the available products and technologies for 
the NOPR analyses. A ``vented wall furnace'' (i.e., gas wall fan-type 
or gravity-type DHE) is defined as a vented heater that furnishes heat 
air circulated either by gravity or by a fan. 10 CFR 430.2. Gravity-
type and fan-type wall DHE are differentiated only by the inclusion 
(fan-type) or exclusion (gravity-type) of a fan from the design. DOE 
agrees with Bock that the addition of an induced draft fan (which 
forces the combustion products through the heat exchanger to increase 
turbulence and, thus, heat transfer) would cause those products to be 
excluded from the wall gravity product class. Thus, for the NOPR 
analysis, DOE removed the

[[Page 65888]]

efficiency level at 75 AFUE that corresponded to induced draft 
technology. Instead, DOE identified 72 AFUE as the max-tech efficiency 
level, which can be attained using electronic ignition technology.

   Table IV.17--Gas Wall Gravity-Type DHE, Over 27,000 Btu/h and Up to
                              46,000 Btu/h
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 64)...................  Standing Pilot.
Efficiency Level 1 (AFUE = 66).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 2 (AFUE = 68).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 3 (AFUE = 71).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 4-Max Tech (AFUE = 72)  Electronic Ignition.
------------------------------------------------------------------------

    In the preliminary analysis, DOE analyzed several efficiency levels 
for gas floor DHE, ranging from 57 AFUE up to 75 AFUE. DOE chose these 
levels based on the product availability listings contained in 
manufacturer specification sheets and DOE's previous analysis for 
direct heating equipment. However, for the NOPR, DOE conducted another 
review of the current market and determined that the market no longer 
offers models above 58 percent AFUE. This assessment was based on a 
review of updated information from AHRI Directory of Certified Products 
and manufacturer specification sheets. In its review, DOE identified 
heat exchanger improvements as a potential design approach to achieve 
the max-tech level 58 AFUE. DOE could not find any prototypes being 
developed above 58 percent AFUE. Accordingly, DOE based the efficiency 
levels for the NOPR analyses on those levels known to be 
technologically feasible for this product class and DOE only analyzed 
the baseline and max-tech efficiency levels, because no products are 
available at any other efficiency levels (See Table IV.18.).

           Table IV.18--Gas Floor-Type DHE, Over 37,000 Btu/h
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 57)...................  Standing Pilot.
Efficiency Level 1-Max Tech (AFUE = 58)  Standing Pilot and Improved
                                          Heat Exchanger.
------------------------------------------------------------------------

    In the preliminary analysis, DOE included gas hearth DHE in the 
analysis for gas room DHE. For the NOPR analysis, DOE is establishing a 
separate product class for gas hearth DHE. Consequently, DOE revised 
the efficiency levels analyzed for gas room DHE to represent the market 
and technologies available for products, excluding those that are now 
gas hearth DHE, based upon the characteristics of the fireplace and 
DOE's proposed definition for ``gas hearth DHE.'' This resulted in the 
elimination of several efficiency levels that were considered in the 
preliminary analysis for gas room DHE. Also, the max-tech efficiency 
level has changed for the NOPR because of this restructuring of the DHE 
product classes. For room heaters, the use of electronic ignition and 
multiple heat exchangers has been identified as a possible approach to 
reach the max-tech efficiency level (AFUE = 83). These technologies are 
being used in room heaters that are currently on the market.

Table IV.19--Gas Room-Type DHE, Over 27,000 Btu/h and Up to 46,000 Btu/h
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 64)...................  Standing Pilot.
Efficiency Level 1 (AFUE = 65).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 2 (AFUE = 66).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 3 (AFUE = 67).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 4 (AFUE = 68).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 5-Max Tech (AFUE = 83)  Electronic Ignition and
                                          Multiple Heat Exchanger
                                          Design.
------------------------------------------------------------------------

    DOE did not analyze a gas hearth DHE product class separately in 
the preliminary analysis. Based upon public comment, for the NOPR 
analysis, DOE surveyed the residential gas hearth DHE market to 
identify technologies and efficiency levels common to gas hearth DHE. 
For gas hearth DHE, DOE identified products capable of condensing 
operations and rated at 93 AFUE as the max-tech level.

  Table IV.20--Gas Hearth DHE, Over 27,000 Btu/h and Up to 46,000 Btu/h
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 64)...................  Standing Pilot.
Efficiency Level 1 (AFUE = 67).........  Electronic Ignition.
Efficiency Level 2 (AFUE = 72).........  Fan Assisted.
Efficiency Level 3-Max Tech (AFUE =      Condensing.
 93)..
------------------------------------------------------------------------


[[Page 65889]]

c. Pool Heaters
    The baseline efficiencies for pool heaters were defined by the 
current Federal minimum energy conservation standards and the 
representative characteristics for products on the market that just 
meet Federal minimum energy conservation standards, as measured by 
thermal efficiency and effective on January 1, 1990. (10 CFR 430.32(k)) 
For pool heaters, the thermal efficiency corresponding to the baseline 
unit is 78 percent. Id.
    DOE analyzed efficiency levels for pool heaters with standing pilot 
ignitions and pool heaters with electronic ignitions for the 
preliminary analysis. DOE distinguished between the two ignition 
systems because of the energy use difference between electronic 
ignition and standing pilot systems. The DOE test procedure does not 
fully include the energy use by a standing pilot systems in the thermal 
efficiency metric, but DOE accounted for the energy use difference 
between electronic ignition and standing pilot systems in its consumer 
LCC analysis. DOE did not receive any comments in response to the 
preliminary analysis that opposed this approach, and, therefore, DOE 
continues to use it for the NOPR analysis. After surveying the pool 
heater market, DOE determined that electronic ignition is offered in 
products covering the whole range of efficiencies, while standing pilot 
ignition systems are only offered in products corresponding to the 
first three intermediate efficiency levels. Consequently, DOE developed 
two baseline products and two efficiency pathways for efficiency levels 
1 through 3.
    For the NOPR analysis, DOE examined the same efficiency levels as 
it did in the preliminary analysis (see Table IV.21).

            Table IV.21--Gas-Fired Pool Heater, 250,000 Btu/h
------------------------------------------------------------------------
 Efficiency level (thermal efficiency)              Technology
------------------------------------------------------------------------
Baseline (Thermal Efficiency = 78) *...  ...............................
Efficiency Level 1 (Thermal Efficiency   Improved Heat Exchanger Design.
 = 79) *.
Efficiency Level 2 (Thermal Efficiency   Improved Heat Exchanger Design.
 = 81) *.
Efficiency Level 3 (Thermal Efficiency   Improved Heat Exchanger Design,
 = 82) *.                                 More Effective Insulation
                                          (Combustion Chamber).
Efficiency Level 4 (Thermal Efficiency   Power Venting.
 = 83).
Efficiency Level 5 (Thermal Efficiency   Power Venting, Improved Heat
 = 84).                                   Exchanger Design.
Efficiency Level 6 (Thermal Efficiency   Sealed Combustion, Improved
 = 86).                                   Heat Exchanger Design.
Efficiency Level 7 (Thermal Efficiency   Sealed Combustion, Condensing.
 = 90).
Efficiency Level 8-Max Tech (Thermal     Sealed Combustion, Condensing,
 Efficiency = 95).                        Improved Heat Exchanger
                                          Design.
------------------------------------------------------------------------
* Technologies incorporating either a standing pilot or electronic
  ignition. Efficiency Levels above 3 include electronic ignition.

    In the executive summary to the preliminary TSD, DOE sought 
comments on design changes manufacturers might use to mitigate the 
formation of corrosive condensation at 86 percent thermal efficiency 
for gas-fired pool heaters. DOE also sought comments on the changes 
manufacturers would make to the product design and the effects on MPC 
that would result if the amended energy conservation standards were at 
86 percent thermal efficiency.
    Raypak commented that Efficiency Level 6 (i.e., 86 percent) 
requires sealed combustion, which will be a condensing system. (Raypak, 
Public Meeting Transcript, No. 34.4 at pp. 120-121) AHRI urged DOE to 
exclude near-condensing thermal efficiency levels from its analysis. 
AHRI pointed out that manufacturers would need to address a range of 
field installations and operating conditions if a minimum energy 
conservation standard level is set in the near-condensing range. (AHRI 
No. 43 at p. 5)
    In response, DOE is aware of a pool heater model on the market at 
Efficiency Level 6. According to product literature, these models do 
not appear to incorporate condensate management. Therefore, DOE did not 
change the technology options at Efficiency Level 6 to represent a 
condensing pool heater. However, DOE's technology option for Efficiency 
Level 6 does include sealed combustion, as Raypak suggested.
4. Cost Assessment Methodology
    At the start of the preliminary engineering analysis, DOE 
identified the energy efficiency levels associated with residential 
heating products on the market, as determined in the market assessment. 
DOE also identified the technologies and features that are typically 
incorporated into products at the baseline level and at the various 
energy efficiency levels above the baseline. Next, DOE selected 
products for the physical teardown analysis that corresponded to the 
representative rated storage volumes and input capacities. DOE gathered 
the information from the physical teardown analysis to create bills of 
materials using a reverse engineering methodology. After that, DOE used 
the physical teardown analysis to identify the design pathways 
manufacturers typically use to increase the EF of residential water 
heaters, the AFUE of residential DHE, or the thermal efficiency of 
residential pool heaters. DOE calculated the MPC for products spanning 
the full range of efficiencies from the baseline to the maximum 
technology available at various levels, and it also identified each 
technology or combination of technologies in each product that was 
responsible for improving the energy efficiency. DOE determined the 
cost-effectiveness of each technology by comparing the increase in MPC 
to the increase in energy efficiency. For the NOPR, DOE reexamined and 
revised several of the steps in its cost assessment methodology based 
on additional teardown analysis and in response to comments received on 
the preliminary analysis.
    During the preparation and refining of the cost-efficiency 
comparison and MPCs for the NOPR, DOE also held interviews with 
manufacturers to gain insight into each of the water heating, direct 
heating, and pool heating industries and requested comments on the 
engineering approach DOE used. DOE used the information gathered from 
these interviews, along with the information gathered through 
additional teardown analysis and public comments, to refine efficiency 
levels and assumptions in the cost model. Next, DOE converted the MPCs 
into MSPs using publicly-available water heating, direct heating, and 
pool heating industry financial data, in addition to manufacturers' 
feedback. Further information on comments received and the revisions to 
the analysis methodology is presented in subsections a through g of 
this section. For

[[Page 65890]]

additional detail, see chapter 5 of the NOPR TSD.
a. Teardown Analysis
    To assemble bill of materials (BOMs) and to calculate the 
manufacturing costs of the different components in residential heating 
products, DOE disassembled multiple residential heating products into 
their base components and estimated the materials, processes, and labor 
required for the manufacture of each individual component, a process 
referred to as a ``physical teardown.'' Using the data gathered from 
the physical teardowns, DOE characterized each component according to 
its weight, dimensions, material, quantity, and the manufacturing 
processes used to fabricate and assemble it. DOE also used a 
supplementary method, called a ``virtual teardown,'' which uses 
published manufacturer catalogs and supplementary component data to 
estimate the major physical differences between a product that was 
physically disassembled and a similar product that was not. For 
supplementary virtual teardowns, DOE gathered product data such as 
dimensions, weight, and design features from publicly-available 
information, such as manufacturer catalogs. DOE obtained information 
and data not typically found in catalogs and brochures, such as fan 
motor details, gas manifold specifications, or assembly details, from 
the physical teardowns of a similar product or through estimates based 
on industry knowledge. The teardown analysis for this engineering 
analysis included over 40 physical and virtual teardowns of water 
heaters, DHE, and pool heaters during the preliminary analysis and over 
20 additional teardowns performed for the NOPR analysis. The additional 
teardowns performed for the NOPR analysis allowed DOE to further refine 
the product components and assumptions used to develop the MPCs.
    The teardown analysis allowed DOE to identify the technologies that 
manufacturers typically incorporate into residential heating products, 
along with the efficiency levels associated with each technology or 
combination of technologies. DOE used the teardown analysis to create 
detailed BOMs for each product class. The BOMs from the teardown 
analysis were then placed into the cost model to calculate the MPC for 
the representative product in each product class. See chapter 5 of the 
NOPR TSD for more details on the teardown analysis.
b. Cost Model
    The end result of each teardown is a structured BOMs. DOE developed 
structured BOMs for each of the physical and virtual teardowns. The 
BOMs incorporate all materials, components, and fasteners classified as 
either raw materials or purchased parts and assemblies, and 
characterize the materials and components by weight, manufacturing 
processes used, dimensions, material, and quantity. The cost model is a 
Microsoft Excel spreadsheet that converts the materials and components 
in the BOMs into dollar values based on the price of materials, labor 
rates associated with manufacturing and assembling, and the cost of 
overhead and depreciation. To convert the information in the BOMs to 
dollar values for the preliminary analysis, DOE collected information 
on labor rates, tooling costs, raw material prices, and other factors. 
For purchased parts, the cost model estimates the purchase price based 
on volume-variable price quotations and detailed discussions with 
manufacturers and component suppliers. For fabricated parts, the prices 
of raw metal materials (e.g., tube, sheet metal) are estimated on the 
basis of 5-year averages. The cost of transforming the intermediate 
materials into finished parts is estimated based on current industry 
pricing. For the NOPR analysis, DOE updated all of the labor rates, 
tooling costs, raw material prices, the costs of resins, and the 
purchased parts costs. Chapter 5 of the NOPR TSD describes DOE's cost 
model and definitions, assumptions, and estimates.
    DOE received several comments on the material prices collected for 
use in the cost model, as discussed below.
    Bock commented that manufacturer production costs were calculated 
approximately 2 years before the public meeting for the preliminary 
analysis. Bock noted that the price of steel has increased tremendously 
and that DOE should recalculate these costs. (Bock, Public Meeting 
Transcript, No. 34.4 at p. 27) In written comments, Bock reiterated 
that because material prices, particularly for steel, have increased 
significantly since DOE completed its analysis, DOE's estimated 
manufacturer production costs and selling prices should be adjusted to 
reflect this trend. (Bock, No. 53 at p. 1)
    In contrast, ACEEE commented that DOE significantly overestimated 
the cost of compliance with amended standards to the consumer. ACEEE 
stated that this was due to the effects of changing material prices on 
products and suggested that it would be appropriate for DOE to review 
past rulemakings to determine the accuracy of DOE's analytical 
approaches. (ACEEE, Public Meeting Transcript, No. 34.4 at pp. 81-82) 
Southern Company disagreed with ACEEE regarding the cost to the 
consumer and referenced the most recent residential air conditioner 
rulemaking which was done when commodity prices were depressed. 
Southern stated that because of the depressed commodity prices, the 
actual costs were higher than DOE's projections. (Southern, Public 
Meeting Transcript, No. 34.4 at p. 82) Further, Southern commented that 
a 5-year rolling average of commodity prices would be appropriate for 
this rulemaking. (Southern, Public Meeting Transcript, No. 34.4 at p. 
83) Rheem agreed with Southern regarding commodity prices. Regarding 
the residential central air conditioner rulemaking, Rheem stated that 
the results were devastating to the industry and domestic 
manufacturers, and the company urged DOE to be very careful in 
estimating the cost to consumers because of the potential for a 
significantly adverse impact on domestic manufacturing jobs. (Rheem, 
Public Meeting Transcript, No. 34.4 at pp. 83-84) In its written 
comments, Rheem noted that manufacturer production costs were derived 
from material prices that were based on 5-year averages from 2003 to 
2007. Rheem urged DOE to revise material prices due to their drastic 
increases and volatility driven by global demand. (Rheem, No. 49 at pp. 
2-3) A.O. Smith agreed that using material prices from 2003 through 
2007 to determine a normalized average may be understating actual 
prices, which continued to fluctuate but generally increased in 2008. 
(A.O. Smith, No. 37 at p. 4)
    Because all interested parties agreed with DOE's approach to use 5-
year rolling average material prices in the engineering analysis, DOE 
used the same approach in the NOPR analysis. DOE acknowledges Bock's, 
Rheem's, and A.O. Smith's concerns about the timing of the production 
cost calculations because the majority of manufacturer production cost 
can typically be attributed to materials, which can fluctuate greatly 
from year to year. DOE uses a 5-year span to normalize the fluctuating 
prices experienced in the metal commodities markets to screen out 
temporary dips or spikes. DOE believes a 5-year span is the longest 
span that would still provide appropriate weighting to current prices 
experienced in the market. DOE updates the 5-year span for metal prices 
based on a review of updated commodity

[[Page 65891]]

pricing data, which point to continued increases. Considering the 
significant amount of steel and copper in the different heating 
products at issue in this rulemaking, incorporating commodity prices 
that reflect 5-year average prices as close to current conditions would 
best reflect overall market conditions. Consequently, DOE calculated a 
new 5-year average materials price using the U.S. Department of Labor's 
Bureau of Labor Statistics (BLS) Producer Price Indices (PPIs) for 
various raw metal materials from 2005 to 2009 to calculate new 
averages, which incorporate the changes within each material industry 
and inflation. DOE also used BLS PPI data to update current market 
pricing for other input materials such as plastic resins and purchased 
parts. Finally, DOE adjusted all averages to 2008$ using the gross 
domestic product implicit price deflator.
c. Manufacturing Production Cost
    Once the cost estimate for each teardown unit was finalized, DOE 
totaled the cost of materials, labor, and direct overhead used to 
manufacture a product in order to calculate the manufacturer production 
cost for the preliminary analysis. The total cost of the product was 
broken down into two main costs: (1) The full manufacturer production 
cost or MPC; and (2) the non-production cost, which includes selling, 
general, and administration (SG&A) costs, the cost of research and 
development, and interest. DOE estimates the MPC at each efficiency 
level considered for each product class, from the baseline through the 
max-tech. After DOE incorporates all of the assumptions into the cost 
model, DOE calculates the different percentages of each aspect of 
production cost (i.e. materials, labor, depreciation, and overhead) 
that make up the total production cost. The product cost percentages 
are used to validate the assumptions by comparing them to 
manufacturers' actual financial data published in annual reports, along 
with feedback from manufacturers during interviews. DOE uses these 
production cost percentages in the MIA (see section IV.H).
    For the NOPR analysis, DOE revised the assumptions in the cost 
model based on additional teardown analysis, updated pricing, and 
additional manufacturer feedback, which resulted in revised MPCs and 
production cost percentages. DOE calculated the average product cost 
percentages by product type (i.e., water heater, DHE, pool heater) as 
well as by product class (e.g., gas-fired storage water heater, 
electric storage water heater) due to the large variations in 
production volumes, fabrication and assembly costs, and other 
assumptions that affect the calculation of the unit's total MPC. 
Chapter 5 of the NOPR TSD shows DOE's estimate of the MPCs for the NOPR 
phase of this rulemaking, along with the different percentages for each 
aspect of the production costs that make up the total product MPC.
    DOE received various comments in response to the MPCs presented in 
its preliminary analysis, as discussed below.
    For pool heaters, Raypak stated that the cost difference between 
the ignition systems of gas-fired pool heaters should be more than $3, 
because the electronic ignition controls cost more than $3. Raypak also 
commented that the materials used for Efficiency Level 6 must be 
suitable for condensing applications, which means that DOE's estimate 
for MPC for Efficiency Level 6 is understated. (Raypak, Public Meeting 
Transcript, No. 34.4 at pp. 120-121)
    In response, DOE revised all of the MPCs for residential heating 
products for the NOPR analyses. In the case of pool heaters, DOE 
reexamined the component cost assumptions for electronic ignitions and 
revised the estimate of the cost to implement an electronic ignition 
design. The revised cost assumptions for an electronic ignition are 
documented in chapter 5 of the NOPR TSD. DOE also revised the costs for 
Efficiency Level 6, but did not consider the costs associated with 
condensate management at that efficiency level. Some residential pool 
heater designs currently on the market do not appear to accommodate 
condensing operations at 86 percent thermal efficiency, thereby 
suggesting that such costs need not be incurred to reach that 
efficiency level. Therefore, DOE did not account for condensate 
management in the cost of products at Efficiency Level 6.
    Regarding gas-fired storage water heaters, Rheem stated that the 
MPC and MSP for Efficiency Level 6 should be higher. (Rheem, No. 49 at 
p. 4) A.O. Smith asserted that the estimated manufacturer production 
costs in DOE's preliminary analysis are too low for max-tech water 
heaters (i.e., heat pump water heaters and condensing gas-fired water 
heaters). (A.O. Smith, No. 37 at p. 4) Additionally, A.O. Smith stated 
that the baseline MPCs are approximately 11 percent low for gas-fired 
storage water heaters and 13 percent low for electric storage water 
heaters. (A.O. Smith, No. 37 at p. 6)
    On this point, DOE has revised its cost estimates for storage water 
heaters at all levels, including the baseline and the max-tech 
efficiency levels based on manufacturer feedback obtained during 
interviews performed for the MIA (see section IV.H.4). The resulting 
cost estimates for the NOPR analysis are higher than in the preliminary 
analysis. Chapter 5 of the NOPR TSD discusses DOE's cost estimates for 
max-tech storage water heaters.
    BWC commented that the energy factor for condensing gas-fired 
storage water heaters (the max-tech level) was based on models on the 
market that are not classified as residential water heaters. BWC stated 
that it is unfair to use non-residential models to determine the cost 
of condensing water heaters, because non-residential models do not 
include components and the associated costs to make them compliant with 
other regulations, such as FVIR and ultra-low NOX 
requirements. (BWC, No. 46 at p. 2).
    For DOE's estimate of the manufacturing cost of condensing gas-
fired storage water heaters, DOE did include the additional cost of 
FVIR in both the preliminary and NOPR analyses, which is not found in 
commercial water heaters currently on the market. DOE also based its 
condensing water heater design on one that would be more typical of 
residential applications (i.e., 40-gallon storage volume and 40,000 
Btu/h input capacity). In addition, DOE developed separate manufacturer 
production costs for gas-fired storage water heaters with standard 
burners and for gas-fired storage water heaters with ultra-low 
NOX burners (section IV.C.2), including those gas-fired 
water heaters that would have been at the max-tech efficiency level.
d. Cost-Efficiency Curves
    The result of the engineering analysis is a set of cost-efficiency 
curves. DOE created 11 curves representing each product class examined 
for this NOPR. For storage water heaters, the cost-efficiency curves 
show the representative rated storage volumes in addition to the other 
storage volumes analyzed.
    Chapter 5 of the NOPR TSD contains the 11 cost-efficiency curves in 
the form of energy efficiency (i.e., EF, AFUE, or thermal efficiency) 
versus MPC. The results show that the cost-efficiency curves are 
nonlinear. As efficiency increases, manufacturing becomes more 
difficult and more costly. Large jumps are evident when efficiencies 
approach levels where electronic ignition, blower motors, power vent, 
and condensing operation are included in designs. Additionally, MPC 
increases greatly

[[Page 65892]]

when heat pump technology is used as an alternative to resistive 
heating for electric storage water heaters.
    The non-linear relationship is common across all product types. In 
addition, DHE and high-efficiency pool heaters see larger increases in 
MPC due to lower production volumes than water heaters.
    In response to the cost-efficiency curves developed for the 
preliminary analysis, ACEEE asserted that DOE's cost-efficiency 
relationship ignores the potential ``learning-by-doing'' effects that 
have driven down the costs of technologies for almost all regulated 
goods. The commenter argued that more stringent standards lead to 
product redesigns that almost inevitably result in lower consumer 
prices for more-efficient goods after the amended standards have become 
effective. ACEEE recommended that DOE balance the current cost-
efficiency development approach with the historical results of 
rulemakings on manufacturer production costs. (ACEEE, No. 35 at p. 5)
    Similarly, NRDC questioned DOE predictions that more-efficient 
products result in escalating costs and stated that DOE should re-
analyze these projections. NRDC also commented that this rulemaking 
addresses products previously covered and analyzed in other 
rulemakings, and asserted that DOE should evaluate previous analyses by 
reviewing its predictions versus the realized effects of standards so 
that costs are not overestimated for this rulemaking. NRDC stated that 
an overestimation of the cost to improve efficiency could cause DOE to 
set standards below the levels that would be justified if DOE were to 
determine costs by more accurate methods, a result which would fail to 
meet the requirements of the statute. (NRDC, No. 48 at p. 4)
    DOE does not agree with ACEEE or NRDC for the following reasons. 
DOE recognizes that every change in minimum energy conservation 
standards is an opportunity for manufacturers to make investments 
beyond what would be required to meet the new standards in order to 
minimize costs or to respond to other factors. However, DOE's 
manufacturing cost estimates seek to gauge the most likely industry 
response to meet the requirements of proposed energy conservation 
standards. DOE's analysis of manufacturing cost must be based on 
currently-available technology that would provide a nonproprietary 
pathway for compliance with a standard once it becomes effective, and, 
thus, DOE cannot speculate on future product and market innovation. In 
response to a change in energy conservation standards, manufacturers 
have made a number of changes to reduce costs in the past. For example, 
DOE understands manufacturers have re-engineered products to reduce 
cost, made changes to manufacturing process to reduce labor costs, and 
moved production to lower-cost areas to reduce labor costs. However, 
these are individual company decisions, and it is impossible for DOE to 
forecast such decisions. DOE does not know of any data that would allow 
it to determine the precise course a manufacturer may take. 
Furthermore, while manufacturers have been able to reduce the cost of 
products that meet previous energy conservation standards, there are no 
data to suggest that any further reductions in cost are possible. 
Therefore, it would not be appropriate to speculate about cost 
reduction based upon prior actions of manufacturers of either the same 
or other products. Setting energy conservation standards upon relevant 
data is particularly important given EPCA's anti-backsliding provision 
at 42 U.S.C. 6295(o)(1).
e. Manufacturer Markup
    DOE applies a non-production cost multiplier (the manufacturer 
markup) to the full MPC to account for corporate non-production costs 
and profit. The resulting manufacturer selling price is the price at 
which the manufacturer can recover all production and non-production 
costs and earn a profit. To meet new or amended energy conservation 
standards, manufacturers often introduce design changes to their 
product lines that result in increased manufacturer production costs. 
Depending on the competitive environment for these particular products, 
some or all of the increased production costs may be passed from 
manufacturers to retailers and eventually to customers in the form of 
higher purchase prices. As production costs increase, manufacturers 
typically incur additional overhead. The MSP should be high enough to 
recover the full cost of the product (i.e., full production and non-
production costs), and yield a profit. The manufacturer markup has an 
important bearing on profitability. A high markup under a standards 
scenario suggests manufacturers can pass through the increased variable 
costs and some of the capital and product conversion costs (the one-
time expenditures). A low markup suggests that manufacturers will not 
be able to recover as much of the necessary investment in plant and 
equipment.
    To calculate the manufacturer markups for the preliminary analysis, 
DOE used 10-K reports from publicly-owned residential heating products 
companies. (SEC 10-K reports can be found using the search database at: 
http://www.sec.gov/edgar/searchedgar/webusers.htm.) The financial 
figures necessary for calculating the manufacturer markup are net 
sales, costs of sales, and gross profit. For the preliminary analysis, 
DOE averaged the financial figures spanning 2000 to 2006 and then 
calculated the markups. For the NOPR analysis, DOE updated the 
financial figures using 10-K reports spanning 2003 to 2008. To 
calculate the time-average gross profit margin for each firm, DOE 
summed the gross profit for all the years and then divided the result 
by the sum of the net sales for those years. DOE presented the 
calculated markups to manufacturers during the interviews for the NOPR 
(see section IV.H.4). DOE considered the feedback from manufacturers in 
order to supplement the calculated markup, and refined the markup to 
better reflect the residential heating products market. DOE developed 
the manufacturer markup by weighting the feedback from manufacturers on 
a market share basis, since manufacturers with larger market shares 
more accurately represent a greater portion of the market. DOE used a 
constant markup to reflect the MSPs of the baseline products as well as 
more-efficient products. DOE took this approach because amended 
standards may make high-efficiency products, which currently are 
considered premium products, and make them the baselines. See chapter 5 
of the NOPR TSD for more details about the markup calculation.
    In response to the preliminary analysis, Bock commented on the MPC 
and MSP for oil-fired storage water heaters at Efficiency Level 6. Bock 
stated that the MPC is reasonable in terms of considering increased 
material costs, but that the MSP is much too low (implying that DOE's 
markup for oil-fired storage water heaters is too low). The commenter 
stated that the distribution chain is flawed for some manufacturers and 
that, unlike gas-fired and electric storage water heaters, oil-fired 
storage water heaters require an oil burner that adds approximately 
$400 to the MSP. Based upon the above reasoning, Bock stated that the 
MSP for Efficiency Level 6 is approximately $1,400. (Bock, No. 53 at p. 
1)
    The MSP, as defined by DOE, is the selling price from the 
manufacturer to the first step in its distribution chain (e.g., a 
wholesaler, a distributor, or a national retailer). The MSP does not

[[Page 65893]]

include any further markups for the rest of the distribution chain, but 
the MPC for oil-fired storage water heaters includes the price of the 
burner. Therefore, the MSP as defined by DOE can be significantly lower 
than the purchase price for an end-consumer, which is what DOE believes 
Bock is referring to. The purchase price would depend on the typical 
markups in each step of the distribution chain as well as the number of 
layers of distribution the product has to clear before reaching the 
end-consumer. Section IV.D of this notice describes the distribution 
chain markups in further detail.
f. Shipping Costs
    For the preliminary analysis, DOE accounted for the shipping costs 
for residential heating products as part of the non-production costs 
that comprise the manufacturer markup. This approach is typical of 
energy conservation standards rulemakings for residential products.
    Following the preliminary analysis, DOE received several comments 
about the impact of an amended energy conservation standard on shipping 
(i.e., freight) costs for storage water heaters. A.O. Smith commented 
that freight is not a manufacturing cost, but it is a substantial cost 
incurred for water heaters, especially tank-type models. Water heater 
manufacturers generally pay for shipping to most customers; therefore, 
this cost is added in the manufacturer's gross margin calculation. A.O. 
Smith noted that an increase in water heater size will add cost to the 
overall manufacture/purchase transition. (A.O. Smith, No. 37 at p. 4) 
Similarly, BWC commented that DOE underestimated the increase in 
freight costs as overall dimensions increase when larger cavity sizes 
are used. (BWC, No. 46 at p. 2).
    Although the non-production costs typically account for freight in 
the manufacturer markup, DOE responded to these comments by separating 
the shipping costs from the markup multiplier for storage water heaters 
for the NOPR analysis in order to make the MSP calculation more 
transparent. DOE calculated the MSP for storage water heaters by 
multiplying the MPC determined from the cost model by the manufacturer 
markup and adding shipping costs. More specifically, DOE calculated 
shipping costs based on a typical 53-foot straight frame trailer with a 
storage volume of 4,240 cubic feet. DOE examined the average sizes of 
representative water heaters and determined the number of units that 
would fit in each trailer, based on assumptions about the arrangement 
of water heaters in the trailer. Finally, DOE calculated the average 
cost for each unit shipped based on an average cost of $4,000 per 
trailer load. See chapter 5 of the NOPR TSD for more details about 
DOE's shipping cost assumptions and the shipping costs per unit for 
each storage water heater product class.
g. Manufacturer Interviews
    Throughout the rulemaking process, DOE seeks feedback and insight 
from interested parties to improve the information used in its 
analyses. DOE interviewed manufacturers as a part of the NOPR 
manufacturer impact analysis (see section IV.H.4). During the 
interviews, DOE sought feedback on all aspects of its analyses for 
residential heating products. For the engineering analysis, DOE 
discussed the analytical assumptions and estimates, cost model, and 
cost-efficiency curves with manufacturers of water heaters, DHE, and 
pool heaters. DOE considered all the information manufacturers provided 
when refining the cost model and assumptions. DOE incorporated 
equipment and manufacturing process figures into the analysis as 
averages to avoid disclosing sensitive information about individual 
manufacturers' products or manufacturing processes. More details about 
the manufacturer interviews are contained in chapter 12 of the NOPR 
TSD. The interview guides DOE distributed to manufacturers are 
contained in appendix 12-A of the NOPR TSD.
5. Results
    The results from the engineering analysis were used in the LCC 
analysis to determine consumer prices for residential heating products 
at the various potential standard levels. Using the manufacturer 
markup, DOE calculated the MSPs of the representative water heaters, 
DHE, and pool heater from the MPCs developed using the cost model. 
Chapter 5 of the NOPR TSD provides the full list of MPCs and MSPs at 
each efficiency level for each analyzed representative product.
6. Scaling to Additional Rated Storage Capacities for Water Heaters
    To account for the large variation in the rated storage volumes of 
residential storage water heaters and differences in both usage 
patterns and first cost to consumers of water heaters larger or smaller 
than the representative capacity, DOE scaled its MPCs and efficiency 
levels at the representative capacities to several discrete rated 
storage volumes at capacities higher and lower than the representative 
storage volume for each storage water heater product class. DOE 
developed the MPCs for water heaters at each of the rated storage 
volumes shown in Table IV.22. These storage volumes were determined to 
be the most prevalent storage volumes available on the market during 
the market analysis (see Chapter 3 of the TSD). The MPCs developed for 
this analysis were used in the downstream LCC analysis, where a 
distribution of MPCs was used based on the estimated market share of 
each rated storage volume (see Section IV.E).

      Table IV.22--Additional Water Heater Storage Volumes Analyzed
------------------------------------------------------------------------
                                      Storage volumes analyzed (gallons,
     Water heater product class                     U.S.)
------------------------------------------------------------------------
Gas-fired Storage..................  30, 50, 65, 75.
Electric Storage...................  30, 40, 66, 80, 119.
Oil-fired Storage..................  50.
------------------------------------------------------------------------

    To develop the MPCs for the analysis of additional storage volumes, 
DOE developed a cost model based on teardowns of representative units 
from a range of nominal capacities and multiple manufacturers. Whenever 
possible, DOE maintained the same product line that was used for the 
teardown at the representative storage volume to allow for a direct 
comparison between models at the representative storage volume and 
models at higher and lower storage volumes. The cost model accounts for 
changes in the size of water heater components that would scale with 
tank volume (e.g., tank dimensions, wrapper dimensions, wall 
thicknesses, insulation thickness, anode

[[Page 65894]]

rod(s), flue pipe(s)). Components that typically do not change based on 
tank volume (e.g., gas valves, thermostats, controls) were assumed to 
remain largely the same across the different storage volume sizes, 
while accounting for price differences due to changes in insulation 
thickness. DOE estimated the changes in material and labor costs that 
occur at volume sizes higher and lower than the representative capacity 
based on observations made during teardowns and professional 
experience. Performing teardowns of models outside of the 
representative capacity allowed DOE to accurately model certain 
characteristics (such as tank wall thickness and wrapper thickness) 
that are not identifiable in manufacturer literature.
    While DOE was able to receive feedback from manufacturers regarding 
the manufacturing costs of storage water heaters at representative 
storage capacities, DOE was unable to solicit manufacturing cost 
feedback from manufacturers regarding the additional water heaters 
shown above. However, DOE was able to finely tune the performance of 
the cost model to accurately predict the weights of non-representative 
units via the additional teardowns. For example, DOE observed that the 
tank wall thickness increases as a function of tank diameter. Based on 
the feedback received from manufacturers for representative units and 
the accuracy of the material predictions for non-representative units, 
DOE believes that its scaling is accurate. In addition to comparing 
model output to actual teardowns, model outputs were also compared to 
published catalog data.
    The results of DOE's analysis for the additional storage volumes 
are presented in chapter 5 of the NOPR TSD (engineering analysis). 
Chapter 5 of the NOPR TSD also contains additional details about the 
calculation of MPCs for storage volumes outside of the representative 
capacity. DOE is seeking comment its MPC estimates at the additional 
storage volumes outside of the representative storage volumes, as well 
as on its approach to developing these MPCs. (See issue number 12 under 
Section VII.E ``Issues on Which DOE Seeks Comment'').
7. Energy Efficiency Equations
    As part of the engineering analysis for residential water heaters, 
DOE reviewed the energy efficiency equations that define the existing 
Federal energy conservation standards for gas-fired and electric 
storage water heaters. The energy efficiency equations allow DOE to 
expand the analysis on the representative rated storage volume to the 
full range of storage volumes covered under the existing Federal energy 
conservation standards.
    DOE uses energy efficiency equations to characterize the 
relationship between rated storage volume and energy factor. The energy 
efficiency equations allow DOE to account for the increases in standby 
losses as tank volume increases. As the tank storage volume increases, 
the tank surface area increases. The larger surface area results in 
higher heat transfer rates that result in higher jacket losses. Other 
losses to consider are the feed-through losses and flue losses (for 
gas-fired water heaters). The current energy efficiency equations show 
that for each water heater class, the minimum energy factor decreases 
as the rated storage volume increases.
    After reviewing market data and product literature for gas-fired 
and electric storage water heaters, DOE presented two approaches for 
amending the existing energy efficiency equations for storage water 
heaters. One approach was to maintain the same slope used in the 
existing equations, but to incrementally increase the intercepts. This 
created energy efficiency equations with the same slope to define EF 
across the entire range of storage volumes for each efficiency level. 
The advantage of this approach would be to maintain the same slopes 
established in NAECA and used in the 2001 rulemaking, which have 
historically characterized the water heater market.
    A second approach was to adjust the slope of the energy efficiency 
equations based on the review of the storage water heater models 
currently on the market. The advantage of this approach is the 
acknowledge the changes in the product efficiencies offered over time 
and account for these changes. DOE examined the efficiencies of models 
with varying storage volumes, but with the same or similar design 
features. DOE varied the slope of the line to maximize the number of 
models in the series that meet the efficiency levels DOE is considering 
in the full range of rated storage volumes. DOE sought comments on 
approaches to develop the energy efficiency equations for all storage 
volumes and all efficiency levels of gas-fired and electric storage 
water heaters. Specifically, DOE sought comment on an alternative 
approach based on model series that incorporate current market data 
from AHRI's Consumers' Directory to generate revised equation slopes 
that minimize the number of models that would become obsolete. DOE 
received feedback from several interested parties, as discussed 
immediately below.
    ACEEE commented that the alternative energy efficiency equations 
appear to relax the energy factor requirements for smaller capacity 
water heaters while making the energy factor requirements more 
stringent for larger capacity water heaters. (ACEEE, Public Meeting 
Transcript, No. 34.4 at p. 100) AHRI stated that there are more options 
for saving energy at higher capacities. AHRI further stated that 
additional energy may be saved by using an alternative energy 
efficiency equation and that there may be two equations that define the 
energy conservation standard across the range of rated volumes. (AHRI, 
Public Meeting Transcript, No. 34.4 at pp. 101-102) Rheem argued that 
size constraints must be considered when determining alternative energy 
efficiency equations and efficiency levels for replacement water 
heaters. Rheem stated that there are certain doorways and attics where 
installations will not be possible due to size constraints. (Rheem, 
Public Meeting Transcript, No. 34.4 at p. 104)
    Rheem expressed concern that changes to the energy efficiency 
equations may result in the elimination of certain capacities. However, 
Rheem stated that the current slope is inappropriate as it would set 
unattainable levels for small and large capacity water heaters. Rheem 
commented that the proposed alternative equations disproportionately 
affect gas-fired storage water heaters, especially large-storage-volume 
products. In sum, Rheem recommended that DOE should revisit the current 
equations to determine whether energy factors across the full range of 
rated storage volumes are still appropriate. (Rheem, No. 49 at p. 6)
    EEI expressed support for DOE's decision to update the energy 
efficiency equations for storage-type water heaters. However, EEI 
cautioned DOE to avoid eliminating certain storage volumes from the 
market. Therefore, EEI suggested that DOE develop a two-slope approach 
for smaller and larger water heaters to ensure competition in the 
marketplace. (EEI, No. 40 at p. 4)
    In response, DOE agrees that the alternative slopes examined at 
each efficiency level for the preliminary analysis were not as 
stringent for the lower storage volume models and were more stringent 
for higher storage volume models when compared to the slope defining 
existing standards. DOE presented such slopes because many models at 
lower storage volumes have already reached close to the maximum 
possible efficiency with conventional technologies, while there is more 
potential for increased energy efficiency for models with larger 
storage volumes. However, DOE also notes that this

[[Page 65895]]

increased stringency may discourage manufacturers from continuing to 
develop larger storage volume models. To attempt to mitigate these 
issues, DOE is proposing ``two-slope'' energy efficiency equations to 
better define the relationship between storage volume and energy factor 
across the range of covered storage volumes.
    ACEEE stated its support for modifying the energy efficiency 
equations for electric and gas-fired storage water heaters if the 
effect would be to increase the EF for larger units (i.e., those units 
with a higher rated storage volume). For electric storage water 
heaters, ACEEE supported capping the EF requirement at 0.95, even for 
the smaller rated storage types. (ACEEE, No. 35 at p. 6) NEEA and NPCC 
agreed with DOE's intention to adjust the slopes of the energy 
efficiency equations for gas-fired and electric storage water heaters. 
Specifically, NEEA and NPCC stated their support for the recommended 
approach by fitting the energy efficiency equations to actual product 
lines on the market. NEEA and NPCC recommended a further lessening of 
the slope than the examples shown in the preliminary analysis to 
preserve at least one model offered on the current market over the 
range of storage volumes. (NEEA and NPCC, No. 42 at p. 6) BWC commented 
that the energy efficiency equations for water heaters should be 
changed, arguing that as amended standards increase energy efficiency, 
it becomes increasingly difficult for units with larger gallon 
capacities to comply. (BWC, No. 46 at p. 1)
    In contrast, A.O. Smith stated that the existing energy efficiency 
equations should not be changed. While A.O. Smith acknowledged some of 
the points DOE made in the preliminary analyses regarding the existing 
energy efficiency equations, A.O. Smith stated it would take a much 
more detailed investigation than DOE has used to validate the points 
raised. (A.O. Smith, No. 37 at p. 8)
    While DOE acknowledges that A.O. Smith does not support changing 
the energy-efficiency equations for gas-fired and electric storage 
water heaters, DOE believes that the slopes of the energy efficiency 
equations can be revised to more accurately characterize the 
relationship between storage volume and energy factor for the current 
storage water heater market.
    For this NOPR, DOE reviewed AHRI's March 2009 Consumers' Directory 
and developed a database of products that includes all gas-fired and 
electric storage water heater models subject to this rulemaking. DOE 
also reviewed manufacturers' catalogs to gather information on the 
design characteristics of each water heater model. The manufacturers' 
catalogs include information on efficiency ratings, product series 
descriptions, jacket insulation thicknesses, ignition types, and 
drafting methods (i.e., natural or power vented drafting). To further 
investigate the relationship between EF and rated storage volume, DOE 
conducted testing according to the water heater test procedure 
specified in 10 CFR 430, subpart B, appendix E (the same test procedure 
manufacturers use to certify products in AHRI's Consumers' Directory) 
to verify the EF values. DOE tested model series with similar design 
characteristics and volumetric designs to isolate how EF changes with 
rated storage volume. DOE performed this testing for a number of model 
series at various efficiencies and for a variety of manufacturers. DOE 
chose models to test by selecting product series from multiple major 
manufacturers that span the range of rated volumes within each product 
class and that span the range of efficiency levels. After completion of 
testing, DOE conducted a teardown analysis of the tested models and 
confirmed the specific technologies that affect energy efficiency and 
the volumetric characteristics of the tank. DOE used the results of 
this analysis to adjust the energy efficiency equations.
    Using the information gathered from product catalogs, independent 
testing results, and product teardowns, DOE developed an alternative 
approach for revising the energy efficiency equations based on three 
constraints. DOE applied the following constraining criteria to the 
development process:
     For gas-fired water heaters, each energy efficiency 
equation must include units with the specified efficiency level at 40-
gallon rated storage volume.
     For electric storage water heaters, each energy efficiency 
equation must include units with the specified efficiency level at 50-
gallon rated storage volume.
     The energy efficiency equations cannot result in a 
standard that falls below current standards over the entire rated 
volume range.
    DOE chose this approach because it takes into account the models 
currently on the market, considers the technologies incorporated into 
those models, and attempts to optimize the number of models across the 
entire rated volume range that would meet the efficiency levels DOE is 
considering. The approach also attempts to minimize the number of 
models that would be eliminated from the market by the efficiency 
levels DOE is considering across the entire range of storage volumes.
    In examining the market data to develop the energy efficiency 
equations, DOE noted a trend of greater decline in energy efficiency at 
higher rated storage volumes than at lower storage volumes. As a 
result, DOE developed energy efficiency equations with varying slopes 
at several of the efficiency levels analyzed for the NOPR analysis. 
These equations maintain one slope from the minimum covered rated 
storage volume up to a certain rated storage volume (i.e., 60 gallons 
for gas-fired storage water heaters and 80 gallons for electric storage 
water heaters), and then maintain a different slope over the remaining 
range of covered storage volumes. DOE selected 60-gallon and 80-gallon 
storage volumes as the point where the change in slope of the energy 
efficiency equations for gas-fired and electric storage water heaters, 
respectively, should occur, because the market data suggested a natural 
break in the available products at those points. Models with gallon 
sizes above 60 gallons for gas-fired units and 80 gallons for electric 
units typically experienced reduced efficiencies more rapidly as a 
function of increasing storage volume, as compared to units with lower 
volume sizes. The higher ends of the residential storage capacities 
also have a lower volume of shipments.
    Based upon the above approach, for gas-fired storage water heaters, 
DOE did not change the slope of the energy efficiency equation for 
storage volumes above 60 gallons across efficiency levels (i.e., DOE 
kept the same slope above 60 gallons at each efficiency level). Few 
gas-fired storage water heaters exist with storage volumes greater than 
60 gallons, and, therefore, the market data were very limited. Due to 
the lack of data for the efficiency at larger gas-fired water heater 
storage volumes, DOE used the slope defining the current standard for 
residential gas-fired storage water heaters, as listed in DOE's 
regulations at 10 CFR 430.32(d). In other words, DOE maintained the 
same slope for Efficiency Level 1 through Efficiency Level 5 for gas-
fired storage water heaters above 60 gallons.
    For the max-tech efficiency levels considered for gas-fired storage 
water heaters and electric storage water heaters, DOE also did not 
change the slope of the energy efficiency equations. Because there are 
no products currently available on the market meeting the max-tech 
efficiency levels, DOE could not perform an analysis or come to any 
definitive conclusion about the effect of storage volume on energy 
factor at these

[[Page 65896]]

efficiency levels. However, DOE does recognize that with any storage 
water heater, the standby losses will increase with storage volume due 
to increased tank surface area. Because there is no data that DOE can 
use to make a determination of an appropriate slope at these levels, 
DOE maintained the relationship between storage volume and energy 
factor developed previously for water heaters. Therefore, the energy 
efficiency equations for the max-tech levels exhibit the same slopes 
used for the gas-fired storage water heater and electric storage water 
heaters in the current energy conservation standards at 10 CFR 
430.32(d). Table IV.23 and Table IV.24 show the energy efficiency 
equations developed for the NOPR for gas-fired and electric storage 
water heaters, respectively.

                                       Table IV.23--NOPR Energy Efficiency Equations for Gas Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Efficiency level                                 20 to 60 gallons                                  Over 60 and up to 100 gallons
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Energy Efficiency Equation.....  EF = -0.00190(VR) + 0.670.............................  EF = -0.00190(VR) + 0.670.
EL 1 Energy Efficiency Equation.........  EF = -0.00150(VR) + 0.675.............................  EF = -0.00190(VR) + 0.699.
EL 2 Energy Efficiency Equation.........  EF = -0.00120(VR) + 0.675.............................  EF = -0.00190(VR) + 0.717.
EL 3 Energy Efficiency Equation.........  EF = -0.00100(VR) + 0.680.............................  EF = -0.00190(VR) + 0.734.
EL 4 Energy Efficiency Equation.........  EF = -0.00090(VR) + 0.690.............................  EF = -0.00190(VR) + 0.750.
EL 5 Energy Efficiency Equation.........  EF = -0.00078(VR) + 0.700.............................  EF = -0.00190(VR) + 0.767.
EL 6 Energy Efficiency Equation.........  EF = -0.00078(VR) + 0.8312............................  EF = -0.00078(VR) + 0.8312.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                    Table IV.24--NOPR Energy Efficiency Equations for Electric Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Efficiency level                                 20 to 80 gallons                                  Over 80 and up to 120 gallons
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Energy Efficiency Equation.....  EF = -0.00132(VR) + 0.97..............................  EF = -0.00132(VR) + 0.97.
EL 1 Energy Efficiency Equation.........  EF = -0.00113(VR) + 0.97..............................  EF = -0.00149(VR) + 0.999.
EL 2 Energy Efficiency Equation.........  EF = -0.00095(VR) + 0.967.............................  EF = -0.00153(VR) + 1.013.
EL 3 Energy Efficiency Equation.........  EF = -0.00080(VR) + 0.966.............................  EF = -0.00155(VR) + 1.026.
EL 4 Energy Efficiency Equation.........  EF = -0.00060(VR) + 0.965.............................  EF = -0.00168(VR) + 1.051.
EL 5 Energy Efficiency Equation.........  EF = -0.00030(VR) + 0.960.............................  EF = -0.00190(VR) + 1.088.
EL 6 Energy Efficiency Equation.........  EF = -0.00113(VR) + 2.057.............................  EF = -0.00113(VR) + 2.057.
EL 7 Energy Efficiency Equation.........  EF = -0.00113(VR) + 2.257.............................  EF = -0.00113(VR) + 2.257.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE seeks comment on the energy efficiency equations for gas-fired 
and electric storage water heaters developed for the NOPR. In 
particular, DOE seeks comment on its approach to developing the energy 
efficiency equations, the appropriate slope of energy efficiency 
equations at each efficiency level analyzed, and the appropriate 
storage volumes for changing the slope of the line. DOE is also 
interested in alternatives to the energy efficiency equations that DOE 
should consider for the final rule. (See Issue 7 under ``Issues on 
Which DOE Seeks Comment'' in section VII.E of this NOPR.)
    There are very few models of oil-fired storage water heaters on the 
market. The lack of data to correlate storage volume and energy factor 
for oil-fired water heaters makes it difficult for DOE to conclude that 
an alternative approach is needed for the energy efficiency equations. 
In the preliminary analysis, DOE presented energy efficiency equations 
for oil-fired storage water heaters that were developed by maintaining 
the same slope used in the existing Federal requirements found in 10 
CFR 430.32(d). DOE did not present any alternative method to 
establishing energy efficiency equations for oil-fired storage water 
heaters.
    In response, AHRI stated its support for using the current energy 
efficiency equations for oil-fired storage water heaters. (AHRI, No. 43 
at p. 5)
    Because DOE did not receive any comments in opposition to using the 
same slopes for oil-fired storage water heaters that currently define 
the existing Federal standards, DOE is continuing to use the same 
methodology for the NOPR.
    AHRI also recommended that DOE remove the volume adjustment term 
from the energy efficiency equations for gas-fired instantaneous water 
heaters and specify a minimum EF applicable to all sizes of residential 
instantaneous water heaters. (AHRI, No. 43 at p. 5) Additionally, A.O. 
Smith stated that because gas-fired instantaneous water heaters have no 
volume correction, an EF level for all sizes would be appropriate. 
(A.O. Smith, No. 37 at p. 7)
    DOE acknowledges that nearly all are rated at 0 gallons of storage 
volume. Because the volume adjustment term is multiplied by storage 
volume, this will by default eliminate the volume adjustment term from 
the energy efficiency equation used for gas-fired instantaneous water 
heaters with a rated storage volume of 0 gallons. However, by 
definition, gas-fired instantaneous water heaters may have a rated 
storage volume of up to 2 gallons. Therefore, DOE is proposing to 
maintain the volume adjustment factor for consistency with the other 
energy-efficiency equations.
    See chapter 5 of the NOPR TSD for additional information about the 
energy efficiency equations for residential water heaters.

D. Markups To Determine Product Price

    By applying markups to the manufacturer selling prices estimated in 
the engineering analysis, DOE estimated the amounts consumers would pay 
for baseline and more-efficient products. At each step in the 
distribution channel, companies mark up the price of the product to 
cover business costs and profit margin. The appropriate markups for 
determining the consumer product price depend, therefore, on the type 
of distribution channels through which products move from manufacturer 
to consumer.
    Bock stated that DOE needs to consider that manufacturers sell to 
their representatives, who sell water heaters to distributors. (Bock, 
No. 53 at p. 2) DOE's information indicates that manufacturer 
representatives work on commission to facilitate sales from 
manufacturers to both distributors and retailers, but they do not mark 
up the products. The commission is part of the manufacturers' costs.
    The distribution channel for water heaters differs for replacement 
versus new applications, resulting in different

[[Page 65897]]

markups. For replacement applications, manufacturers sell to either 
plumbing distributors or large retail outlets (typically large home-
supply stores). Products destined for replacement applications follow 
one of two paths: (1) A retail outlet sells a unit to the consumer, who 
either installs it or hires someone to install it; or (2) a plumbing 
distributor sells a unit to a contractor, who then sells it to a 
consumer and installs it. Bock suggested modifying the first 
distribution channel to include a contractor-installer. (Bock, Public 
Meeting Transcript, No. 34.4 at pp. 140-141) DOE agrees that a 
contractor-installer may be involved in the first path, but because the 
consumer purchases the product directly, the contractor does not mark 
up the cost of the unit. Thus, DOE did not include a contractor-
installer in the first distribution path.
    AHRI disagreed with the analytical results that indicate higher 
markups for new construction than for replacement applications. (AHRI, 
No. 33 at p. 1) DOE's markup for new construction is higher because it 
includes a markup for builders. Because builders incur the cost of a 
water heater or direct heating equipment installed in a new home, DOE 
finds it appropriate to include a markup for this cost. To estimate a 
builder markup, DOE calculated an average markup that applies to all 
costs builders incur (based on Census data).
    NEEA and NPCC stated that DOE should repeat the process used to 
determine markups for the 2001 water heater rulemaking so that costs 
including markups align with the marketplace. They also stated that 
DOE's method for validating calculated markups is insufficient, 
although further explanation was not provided. (NEEA and NPCC, No. 42 
at pp. 6-7)
    The 2001 water heater rulemaking used data on retail prices to 
estimate markups. DOE did not use the same markup process as in the 
current rulemaking, however, because commenters on the previous 
rulemaking stated that DOE provided no consistency checks to determine 
the method's validity, and it did not account for the differences in 
price associated with different technologies. In addition, DOE has 
adopted a different approach to estimate markups in all of its 
rulemakings conducted in recent years that DOE believes is appropriate 
because it provides consistent estimates based on publicly-available 
statistics. DOE collected retail price data for water heaters to 
provide a check on its estimated markups. DOE's average calculated 
retail price for water heaters is close to the average Internet retail 
price for typical electric and oil-fired storage water heaters, 7 
percent lower for gas-fired instantaneous water heaters, and 11 percent 
lower for gas-fired storage water heaters. Given the uncertainty 
regarding the representativeness of the retail price data that DOE 
collected, DOE considers that its markup method provides reasonably 
good agreement with prices in the market.

E. Life-Cycle Cost and Payback Period Analyses

    DOE conducted LCC and PBP analyses to evaluate the economic impacts 
on individual conducted LCC and PBP analyses to evaluate the economic 
impacts on individual consumers of potential amended energy 
conservation standards for the three types of residential heating 
products. The LCC represents total consumer expenses during the life of 
an appliance, including purchase and installation costs plus operating 
costs (expenses for energy use, maintenance, and repair). To compute 
LCCs for the three heating products, DOE discounted future operating 
costs to the time of purchase, then summed those costs over the life of 
the appliances. The PBP is calculated using the change in purchase cost 
(normally higher) that results from an amended efficiency standard, 
divided by the change in annual operating cost (normally lower) that 
results from the standard.
    DOE measures the changes in LCC and PBP associated with a given 
efficiency level relative to an estimate of base-case appliance 
efficiencies. The base-case estimate reflects the market in the absence 
of amended mandatory energy conservation standards, including the 
market for products that exceed the current standards.
    For each set of heating products, DOE calculated the LCC and PBP 
for a nationally representative set of housing units, which were 
selected from EIA's Residential Energy Consumption Survey (RECS). The 
preliminary analysis used the 2001 RECS. The analysis for today's 
proposed rule uses the 2005 RECS. (See http://www.eia.doe.gov/emeu/recs/.) For each sampled household, DOE determined the energy 
consumption and energy price for the heating product. By developing a 
representative sample of households, the analysis captured the 
variability in energy consumption and energy prices associated with the 
use of residential heating products. DOE determined the LCCs and PBPs 
for each sampled household using a heating product's unique energy 
consumption and the household's energy price, as well as other 
variables. DOE calculated the LCC associated with the baseline heating 
product in each household. To calculate the LCC savings and PBP 
associated with equipment that meets higher efficiency standards, DOE's 
analysis replaced the baseline unit with a range of more-efficient 
designs.
    EEI stated that not all residential water heaters are installed in 
homes, and thus DOE should modify its analysis to account for product 
usage and energy pricing in commercial establishments. (EEI, No. 40 at 
p. 5) DOE is unaware of data that show the percentage of residential 
water heater shipments that go to the commercial sector or how those 
products are used in the commercial sector, and the commenter did not 
provide such data. Therefore, DOE did not undertake a separate analysis 
for such installations.
    Inputs to the calculation of total installed cost include the cost 
of the product--which includes manufacturer costs, manufacturer 
markups, retailer or distributor markups, and sales taxes--and 
installation costs. Inputs to the calculation of operating expenses 
include annual energy consumption, energy prices and price projections, 
repair and maintenance costs, product lifetimes, discount rates, and 
the year that proposed standards take effect. DOE created distributions 
of values for some inputs to account for their uncertainty and 
variability. Probabilities are attached to each value. As described 
above, DOE used samples of households to characterize the variability 
in energy consumption and energy prices for heating products. For the 
inputs to installed cost, DOE used probability distributions to 
characterize sales taxes. DOE also used distributions to characterize 
the discount rate and product lifetime that are inputs to operating 
cost.
    The computer model DOE uses to calculate LCC and PBP, which 
incorporates Crystal Ball (a commercially available software program), 
relies on a Monte Carlo simulation to incorporate uncertainty and 
variability into the analysis. The Monte Carlo simulations randomly 
sampled input values from the probability distributions and household 
samples. The model calculated the LCC and PBP for products at each 
efficiency level for 10,000 housing units per simulation run.
    Table IV.25 summarizes the approach and data DOE used to derive 
inputs to the LCC and PBP calculations. The table provides the data and 
approach DOE used for the preliminary TSD, as well as the changes made 
for today's NOPR. The following subsections discuss the

[[Page 65898]]

initial inputs and the changes DOE made to them.

  Table IV.25--Summary of Inputs and Key Assumptions in the LCC and PBP
                                Analyses*
------------------------------------------------------------------------
                                                       Changes for the
           Inputs                Preliminary TSD        proposed rule
------------------------------------------------------------------------
                             Installed Costs
------------------------------------------------------------------------
Product Cost................  Derived by            No change.
                               multiplying
                               manufacturer cost
                               by manufacturer,
                               retailer and
                               distributor markups
                               and sales tax, as
                               appropriate.
Installation Cost...........  Water Heaters: Based  Applied additional
                               on data from RS       cost for space
                               Means and other       constraints and
                               sources.              other installation
                                                     situations.
                              DHE: Based on data    No change.
                               from RS Means and
                               DOE's furnace
                               installation model.
                              Pool Heaters: Based   No change.
                               on data from RS
                               Means.
------------------------------------------------------------------------
                             Operating Costs
------------------------------------------------------------------------
Annual Energy Use...........  Water Heaters: Used   No change in
                               hot water draw        approach; sample
                               model to calculate    and data updated
                               hot water use for     using RECS 2005.
                               each household in
                               the sample from
                               RECS 2001.
                               Calculated energy
                               use using the water
                               heater analysis
                               model (WHAM).
                              DHE: Based on sample  No change in
                               and data from RECS    approach; sample
                               2001.                 and data updated
                                                     using RECS 2005.
                              Pool Heaters: Based   No change in
                               on sample and data    approach; sample
                               from RECS 2001.       and data updated
                                                     using RECS 2005.
Energy Prices...............  Electricity: Based    Electricity: Updated
                               on EIA's 2006 Form    using data from
                               861 data.             EIA's 2007 Form 861
                                                     data and EIA's Form
                                                     826.
                              Natural Gas: Based    Natural Gas: Updated
                               on EIA's 2006         using EIA's 2007
                               Natural Gas           Natural Gas
                               Navigator.            Navigator.
                              Variability:          ....................
                               Regional energy      Variability: No
                               prices determined     change.
                               for 13 regions.
Energy Price Trends.........  Forecasted using      Forecasts updated
                               EIA's AEO2008.        using EIA's
                                                     AEO2009.
Repair and Maintenance Costs  Water Heaters: Based  Updated various
                               on RS Means and       repair costs.
                               other sources.
                              DHE: Based on RS      Updated various
                               Means and other       repair costs.
                               sources.
                              Pool Heaters: Based   Updated various
                               on RS Means and       repair costs.
                               other sources.
------------------------------------------------------------------------
                 Present Value of Operating Cost Savings
------------------------------------------------------------------------
Product Lifetime............  Water Heaters: Based  Revised average
                               on range of           lifetimes for gas-
                               lifetimes from        fired and electric
                               various sources.      storage water
                               Variability and       heaters.
                               uncertainty:         Set lifetime of oil-
                               characterized using   fired storage water
                               Weibull probability   heater equal to
                               distributions.        that of gas-fired
                                                     storage water
                                                     heater.
                              DHE: same as for      No change.
                               water heaters.
                              Pool Heaters: same    Average lifetime
                               as for water          increased from 6
                               heaters.              years to 8 years
Discount Rates..............  Approach based on     No change in
                               the cost to finance   approach; added
                               an appliance          data from 2007
                               purchase. Primary     SCF.**
                               data source was the
                               Federal Reserve
                               Board's SCF** for
                               1989, 1992, 1995,
                               1998, 2001, and
                               2004.
Compliance Date of New        Water heaters: 2015.  No change.
 Standard.                    DHE and Pool
                               Heaters: 2013.
------------------------------------------------------------------------
* References for the data sources mentioned in this table are provided
  in the sections following the table or in chapter 8 of the NOPR TSD.
** Survey of Consumer Finances.

1. Product Cost
    To calculate consumer product costs, DOE multiplied the 
manufacturer selling prices developed in the engineering analysis by 
the supply-chain markups described above (along with sales taxes). DOE 
used different markups for baseline products and higher-efficiency 
products, because the markups estimated for incremental costs differ 
from those estimated for baseline models.
2. Installation Cost
    The installation cost is the total cost to the consumer to install 
the equipment, excluding the marked-up consumer product price. 
Installation costs include labor, overhead, and any miscellaneous 
materials and parts.
a. Water Heaters
    In its preliminary analysis, DOE included several installation 
costs that reflect the space constraints on water heaters having 
thicker insulation. DOE assumed that major modifications for 
replacement installations would occur 40 percent of the time for water 
heaters with 3 inches or greater insulation. The analysis included 
costs for modifications such as removing door jams or incorporated 
strategies such as installing a smaller tank plus a tempering valve. To 
estimate the fraction of households that would require various 
modifications, DOE used the water heater location determined for

[[Page 65899]]

each sample household. DOE determined the location using information 
from the 2005 RECS, which reports whether the house has a basement, 
whether the basement is heated or unheated, and the presence or absence 
of a garage, crawlspace, or attic.
    DOE received several comments on the space constraints for water 
heaters with increased insulation thicknesses. AHRI stated that the 
analysis does not fully recognize the size constraints on water heaters 
that have increased insulation. (AHRI, No. 33 at p. 2) For example, 
AHRI questioned DOE's assumption that space constraints do not apply if 
the floor area of a house is more than 1,000 square feet. (AHRI, No. 43 
at p. 4) Rheem and AHRI stated that DOE should consider the space 
constraints of water heaters installed in attics. (Rheem, No. 49 at p. 
2; AHRI, No. 43 at p. 4) Rheem stated that space constraints render 
larger products economically and technically infeasible. (Rheem, No. 49 
at p. 1) EEI stated that DOE should consider the effect of adding 
insulation to electric storage water heaters and the issue of space 
constraints in replacement situations. (EEI, No. 40 at p. 4) PG&E, San 
Diego Gas and Electric (SDG&E), and SoCal Gas stated that if the 
diameter of a water heater is increased by 2 inches, installation 
becomes unworkable in highly constrained spaces. (PG&E, SDG&E, and 
SoCal Gas, No. 38 at p. 3)
    A.O. Smith stated that many closets and cabinets do not have 
adequate clearance to accommodate larger-diameter water heaters. It 
stated that many electric storage water heaters cannot accept larger-
diameter tanks without modifying the installation. A.O. Smith added 
that in the South, many water heater installations are in attics, and 
larger water heaters may not fit between the two ceiling joists in the 
pull-down staircase to the attic. A.O. Smith suggested that DOE's 
analysis should increase the number of installations that would require 
modification or the use of a small water heater with a tempering valve. 
(A.O. Smith, No. 37 at pp. 1-2)
    In response to the above comments, for the NOPR analysis, DOE 
further investigated the issue of space constraints for water heaters 
with insulation thickness of 2 inches and above. Based upon the results 
of this inquiry, DOE expanded the percentage of installations that may 
have space constraints, including houses having a floor area of more 
than 1,000 square feet. For approximately 20 percent of replacement 
installations, DOE applied major modifications (removal of door jamb at 
an average cost of $191) for water heater designs with 2-inch 
insulation. For another 20 percent of replacement installations, DOE 
assumed that the household would install a smaller water heater and use 
tempering and check valves (at an average cost of $142). DOE also added 
a cost for extra labor needed to install water heaters in attics, and 
for installing larger water heaters (66 gallon and larger).
    AHRI stated that the additional cost of $22 for tempering and check 
valves associated with installing an electric water heater is 
significantly understated. (AHRI, No. 43 at p. 4) In clarification, DOE 
incorporated an average cost of $142 for tempering and check valves for 
homes where they would be needed. The value of $22 is an average over 
all homes, including those where tempering and check valves are not 
necessary.
    AHRI stated that a survey conducted by the SEGWHAI project in 
California determined that the average installation cost for a standard 
gas-fired storage water heater approached $1,000, which is higher than 
DOE's estimated average. (AHRI, Public Meeting Transcript, No. 34.4 at 
pp. 84-85) DOE used RS Means and installation cost data to derive a 
nationally-representative range of installation costs, whereas the 
SEGWHAI data pertain only to California. Because of the need to set a 
national standard, DOE has continued to rely on RS Means as a 
recognized and commonly used source for estimating such costs.
    AHRI also stated that DOE underestimated the cost of condensing 
gas-fired storage water heaters. AHRI said that SEGWHAI estimated an 
installed cost of $4,000, compared to DOE's estimate of $1,782. The 
SEGWHAI estimate refers to a large-capacity commercial condensing unit 
having an EF of 0.84. For a condensing gas-fired storage water heater 
having an EF of 0.82 (a more appropriate comparison for the residential 
units at issue here), SEGWHAI proposes a $1,700 Tier 2 cost, which is 
comparable to the estimated installed cost of the 0.77 EF unit 
considered in DOE's analysis.
    NEEA and NPCC questioned why DOE included the cost of installing an 
electrical outlet in the cost of gas-fired storage water heaters. (NEEA 
and NPCC, No. 42 at p. 8) In response, DOE understands that the 
baseline gas-fired water heater requires no electricity. If such a 
model is replaced with a higher-efficiency unit, however, an electrical 
outlet installation may be required.
    The American Gas Association (AGA) stated that the installation 
costs for gas-fired storage water heaters having an EF greater than 
0.62 need to include the cost of stainless steel vent connectors. (AGA, 
No. 44 at p. 3) DOE agrees that some models having an EF greater than 
0.62 will require stainless steel vent connectors, but only if the 
recovery efficiency (RE) is 78 percent or higher. For the NOPR 
analysis, DOE added the cost of stainless steel vent connectors for all 
natural draft gas-fired water heaters that have an RE of 78 percent or 
higher.
    A.O. Smith stated that the installation costs for electric storage 
water heaters at all efficiency levels are overstated by a factor of 
two. (A.O. Smith, No. 37 at p. 6) In response, DOE acknowledges that 
the average installation costs for electric storage water heaters 
presented in the preliminary TSD were too high. Consequently, for the 
NOPR analysis, DOE updated the labor cost. Instead of using national-
average costs, DOE used region-specific costs, which yield a lower 
national-average cost for electric water heaters. DOE also reduced the 
labor time by one half hour. The result is that the average 
installation cost for electric storage water heaters is approximately 
half as much as the cost estimated in the preliminary analysis.
    AGA stated that DOE's cost estimate for providing electrical supply 
to water heaters that incorporate electronic ignition is too low. AGA 
stated that DOE should use the cost estimates in other rulemakings for 
installations where electrical service is needed. (AGA, No. 44 at pp. 
3-4) DOE's estimated cost for adding electrical supply for water 
heaters requiring electronic ignition, which is based on RS Means, is 
similar to the costs DOE used in the rulemaking for cooking products 
(74 FR 16040 (April 8, 2009)) and other rulemakings for installations 
that require electrical service.
    Rheem stated that the cost of installing gas-fired, electric 
storage, and low-boy electric water heaters in manufactured housing 
units, where water heaters are typically installed under a counter, 
would be affected at higher efficiency levels. (Rheem, No. 49 at p. 2) 
As discussed previously, DOE considered and accounted for the cost of 
accommodating space constraints that may arise in some replacement 
applications when higher-efficiency units with thicker insulation are 
installed. In the specific case of manufactured homes, for the NOPR DOE 
increased the fraction of installations assumed to have space 
constraints by two-fold.
    Table IV.26 shows the average installation costs used in the NOPR 
analysis for selected efficiency levels considered for gas-fired and 
electric

[[Page 65900]]

storage water heaters. (Installation costs for electric storage water 
heaters with heat pump design are further discussed below.) The costs 
vary with the location of the water heater. For electric resistance 
water heaters, the average installation costs at different efficiency 
levels are similar for basement and garage locations, but they are 
higher for water heaters of 0.95 EF for indoor and attic locations. For 
gas-fired water heaters, the average installation cost is much higher 
for 0.67 EF and 0.80 EF units because thereis a change from metal 
Category I vents to plastic Category IV vents.

                        Table IV.26--Average and Incremental Installation Costs for Electric and Gas-Fired Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                  Electric                                                                     Gas-fired
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Average       Incremental                                                    Average       Incremental
           EF                Description      installation     installation              EF               Description      installation    installation
                                             cost (2008$) *    cost (2008$)                                                cost (2008$)*   cost (2008$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.90...................  1.5 in (Baseline).            $222  ...............  0.59...................  Pilot, 1 in......            $576  ..............
0.91 and 0.92..........  2 and 2.25 in.....             241             $19   0.62...................  Pilot, 1.5 in....             595             $19
0.93 and 0.94..........  2.5 and 3 in......             259              36   0.63...................  Pilot, 2 in......             621              46
0.95...................  4 in..............             282              60   0.67...................  Power vent, 2 in.             808             233
                                                                              0.80...................  Condensing, 2 in.             828             252
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Average installation cost represents the weighted average cost for replacement and new construction applications.

    DOE received several comments on installation costs for heat pump 
water heaters. In its preliminary analysis, DOE applied a distribution 
of costs for heat pump water heater installations in enclosed spaces, 
including situations where modifications would be required. In its 
comments on the preliminary analysis, GE stated that in general, heat 
pump water heaters should be no more difficult or expensive to install 
than standard electric storage water heaters, because they will require 
the same electrical and plumbing connections. GE noted that its heat 
pump water heater occupies a footprint similar to that of a standard 
unit. GE stated, however, that it may be difficult to install a heat 
pump water heater in a confined space that lacks ventilation. (GE, No. 
51 at p. 2) A.O. Smith commented that the requirements for providing 
adequate air flow for a heat pump water heater may be higher than DOE 
estimated. (A.O. Smith, No. 37 at p. 1) NEEA and NPCC stated that DOE 
should use a distribution of costs to encompass heat pump water heater 
installations that require building modifications. (NEEA and NPCC, No. 
42 at p. 8)
    DOE agrees that installation of heat pump water heaters in enclosed 
spaces may require modifications to allow for adequate ventilation. 
Accordingly, for half of indoor replacement installations, DOE added a 
cost for installing a fully-louvered closet door to permit adequate air 
flow for the operation of the unit. It used a distribution of costs 
that averages $344. In addition, DOE assumed that the household facing 
space constraints would install a smaller water heater and use 
tempering and check valves in 20 percent of replacement installations.
    DOE's preliminary analysis considered the fact that heat pump water 
heaters draw heat from the space in which they are located and release 
cooled air. Thus, when such a water heater is located in a conditioned 
space, its use affects the load that the home's space heating and air 
conditioning equipment must meet. DOE accounted for the additional 
energy costs that affected households would incur.
    Southern commented that DOE had not adequately considered the 
issues Southern previously raised regarding installing heat pump water 
heaters to replace existing electric water heaters, which included the 
need to provide venting of cooled air released by such units. The 
commenter also stated that for new construction installations in 
multifamily housing units, interior locations are preferred for 
installing mechanical systems. Southern commented that a heat pump 
water heater could be installed indoors, but it would be costly to 
provide supply and return vents to the exterior. (Southern, No. 50 at 
pp. 2-3)
    In the NOPR analysis, DOE continued to assume that many households 
that would be affected by indoor operation of a heat pump water heater 
would not want to incur the cost of a venting system, and would instead 
operate their heating and cooling systems to compensate for the effects 
of the heat pump water heater. However, DOE agrees that some households 
would prefer to install a venting system. DOE estimated that those 
households that would experience significant indoor cooling due to 
operation of the heat pump water heater in the heating months (i.e., 
the heat pump cooling load is greater than 10 percent of the space 
heating load) would have a venting system installed to exhaust and 
supply air. Using calculations specific to each household in the 
subsample for electric water heaters, DOE estimated that 40 percent of 
replacement installations would incur this cost, which averages $460.
    Table IV.27 shows the average additional installation costs that 
DOE applied for heat pump water heaters (relative to the baseline 
electric storage water heater), along with the fraction of 
installations receiving each specific cost.

                     Table IV.27--Additional Installation Costs for Heat Pump Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                                     Share of
                                                                                   installations
       Installation cost description             Assignment to installations         impacted     Average cost *
                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Additional Labor...........................  All installations..................             100             $69
Closet Door Redesign due to Space            50 of indoor and heated basement                 16             344
 Constraints.                                 replacement installations.
Tempering Valve Addition due to Space        20 of all replacement installations              16             142
 Constraints.

[[Page 65901]]

 
Condensate Pump............................  25 of all replacement installations              20             154
Venting Adder **...........................  40 of replacement installations                  10             460
                                              with significant cooling load
                                              effects.
Larger Drain Pan...........................  All installations..................             100               2
----------------------------------------------------------------------------------------------------------------
* Labor cost hours from 2008 RS Means; material cost from 2008 RS Means; condensate pump from retailer web
  sites; drain pan from 2001 TSD.
** All households experiencing significant cooling load effects in the heating season are either assigned the
  venting adder or the extra cost for space heating is included in the energy use calculations.

    In summary, for the NOPR analysis, DOE used a distribution of 
installation costs for heat pump water heaters ranging from $213 to 
$1,918. The estimated average installation cost for a heat pump water 
heater (at 2.00 EF), weighted over replacement and new construction 
applications, is $446. This compares to average costs of $222 for a 
baseline (0.9 EF) electric storage water heater and $282 for a 0.95 EF 
electric storage water heater. For further details on DOE's derivation 
of installation costs for electric storage water heaters, please see 
chapter 8 of the NOPR TSD. DOE requests comments on its analysis of 
installation costs for water heaters; it is particularly interested in 
comments on its analysis of installation costs for heat pump water 
heaters. This is identified as issue 13 under ``Issues on Which DOE 
Seeks Comment'' in section VII.E of this NOPR.
    Regarding installation of gas-fired instantaneous water heaters, 
A.O. Smith questioned whether DOE considered the need for the pressure 
relief valve and drain pans that manufacturers and codes require. (A.O. 
Smith, No. 37 at p. 6) Noritz stated that gas-fired instantaneous water 
heaters that achieve an EF of 0.83 or higher require condensate drains 
and some method of treating the condensate so that it can be disposed 
of, further adding to the installation cost. (Noritz, No. 36 at pp. 1-
2) For the NOPR analysis, DOE included the cost and installation of a 
drain pan and pressure relief valve, as well as a filter for treating 
the condensate for units with an EF of 0.83 or higher.
    A.O. Smith questioned whether DOE included the cost to replace a 
gas line with a larger line when installing gas-fired instantaneous 
water heaters in replacement applications. (In some cases the existing 
gas line is not adequate to accommodate the higher gas input required 
by the instantaneous water heaters.) A.O. Smith also stated that the 
analysis should include the costs related to extreme installation 
situations for gas-fired instantaneous water heaters, as DOE did for 
the costs of adding tempering valves or modifying door jams for 
electric storage water heaters. (A.O. Smith, No. 37 at p. 6) In 
response, DOE did not include the costs of such measures for gas-fired 
instantaneous water heaters, because in those cases where these 
measures would be required, the extremely high cost would likely lead 
households to purchase a storage water heater instead.
    AHRI stated that DOE should reconcile its cost estimates for 
installing instantaneous water heaters with the SEGWHAI estimate, which 
is at least $200 to $300 more than DOE's estimate. (AHRI, Public 
Meeting Transcript, No. 34.4 at p. 168) As noted above, the SEGWHAI 
data pertain only to California, where labor costs are higher than the 
national average. For the NOPR, DOE used RS Means and installation cost 
data to derive region-specific installation costs.
b. Direct Heating Equipment
    DOE used the approach in the 1993 TSD to calculate installation 
costs for baseline direct heating equipment for its preliminary 
analysis, as it believes that the factors affecting DHE installation 
are largely unchanged, and more recent data are not available. For gas 
wall gravity, floor, and room direct heating equipment, DOE increased 
installation costs for designs that require electricity. DOE made this 
adjustment for the replacement market only, because wiring is 
considered part of the general electrical work in new construction. DOE 
did not receive comments on the installation costs for direct heating 
equipment, so it maintained the same approach for the NOPR analysis. 
For further details on DOE's derivation of installation costs for 
direct heating equipment, please see chapter 8 of the NOPR TSD.
c. Pool Heaters
    DOE developed installation cost data for the baseline pool heater 
in its preliminary analysis using RS Means and information in a 
consultant's report. DOE incorporated additional installation costs for 
designs involving electronic ignition and/or condensing. DOE did not 
receive comments on the installation costs for pool heaters, so it 
maintained this earlier approach for the NOPR analysis. For further 
details on DOE's derivation of installation costs for pool heaters, 
please see chapter 8 of the NOPR TSD.
3. Annual Energy Consumption
    DOE determined the annual energy use in the field for the three 
types of heating products based on data obtained from RECS. DOE 
supplemented this data as required for each heating product, as 
discussed below.
a. Water Heaters
    DOE calculated the annual energy consumption of water heaters in 
the sample households by considering the primary factors that determine 
energy use: (1) Hot water use per household; (2) energy efficiency of 
the water heater; and (3) operating conditions other than hot water 
draws. DOE used a hot water draw model to calculate hot water use for 
each household in the sample. The characteristics of each water 
heater's energy efficiency were obtained from the engineering analysis. 
DOE developed water heater operating conditions (other than hot water 
draws) from weather data and other relevant sources. DOE used a 
simplified energy equation, the water heater analysis model (WHAM), to 
calculate the energy use of water heaters. WHAM accounts for a range of 
operating conditions and energy efficiency characteristics. DOE's 
approach is explained in further detail in chapter 7 of the NOPR TSD.
    To estimate hot water use by each sample household, DOE used a hot 
water draw model that accounts for the key factors that determine such 
use, such as the number and ages of the people who live in the 
household, the way they consume hot water, the

[[Page 65902]]

presence of hot-water-using appliances, the tank size and thermostat 
set point of the water heater, and the climate in which the residence 
is situated. In general, households with higher hot water use have 
water heaters with larger storage volume.
    DOE received several comments on hot water use. ACEEE stated that 
the hot water draw model is insufficiently supported by field data. 
(ACEEE, Public Meeting Transcript, No. 34.4 at p. 178) NEEA and NPCC 
stated that DOE should provide more detail on the draw model and 
explain how it has been validated and calibrated. (NEEA and NPCC, No. 
42 at p. 7) DOE acknowledges that insufficient field data are currently 
available to fully validate the draw model. However, Electric Power 
Research Institute (EPRI) developed the draw model based on a 
nationally representative sample of households. It is DOE's 
understanding that this widely-used model, which has been updated 
several times to account for changes in household hot water use, is the 
most credible tool available for modeling daily hot water use. The draw 
model is described in detail in appendix 7-B of this NOPR's TSD, as 
well as in the reports referenced in chapter 7 of the TSD.
    NEEA and NPCC stated that current estimates of hot water use in the 
Pacific Northwest are about 20 percent higher than DOE's estimate of 
national-average daily use. (NEEA and NPCC, No. 42 at p. 7) Household 
hot water use differs among geographic regions for various reasons. 
DOE's analysis for Census Division 9 (which includes the Pacific 
Northwest) shows average hot water use by electric water heaters (47.9 
gal/day) as being higher than the average national value (41.9 gal/
day). Therefore, DOE believes that the estimates used in its analysis 
are reasonable.
    EEI stated that DOE should consider the effects on hot water use of 
smaller households and the lower hot water use of new dishwashers and 
clothes washers, which are installed in both new and existing homes. 
(EEI, No. 40 at p. 6) For the NOPR, DOE used the most recent data 
available regarding household characteristics (from the 2005 RECS). In 
addition, DOE modified the hot water draw model to account for the 
impact of the efficiency standards that recently became effective for 
dishwashers and clothes washers.
    BWC commented that hot water usage for gas-fired instantaneous 
water heaters may be different than for storage water heaters, although 
it has no evidence to support this idea. (BWC, No. 46 at p. 1) GE and 
Noritz stated that they are unaware of any data that support the 
assumption that consumers use more hot water with a gas-fired water 
heater. (GE, No. 51 at p. 3; Noritz, No. 36 at p. 2) Because DOE found 
no usable data showing greater or lesser hot water use for 
instantaneous water heaters than for storage water heaters, it 
estimated that households use the same volume of hot water with both 
types of water heaters.
    Commenting on the calculation of energy use, Bock stated that WHAM 
does not accurately estimate energy consumption. (Bock, No. 53 at p. 2) 
In response, DOE notes that the WHAM equation has been validated 
against field data and that the comparison shows that WHAM results 
correlate well.
    NEEA and NPCC stated that the estimated energy use results could be 
verified with sub-metered (i.e., measured) field data. (NEEA and NPCC, 
No. 42 at p. 7) DOE found that the sub-metered field data for water 
heaters are insufficient to represent the range of national water 
heater energy use patterns. Therefore, DOE did not undertake such 
verification of its energy use estimates.
    AHRI and Bock stated that the estimates of annual energy 
consumption for gas- and oil-fired water heaters are about 65 percent 
of test procedure usage specifications, whereas for electric water 
heaters it is 55 percent. AHRI questioned why the analysis appears to 
be using different field use assumptions for electric water heaters. 
(AHRI, No. 33 at p. 2; Bock, No. 53 at p. 2) In response, DOE's 
analysis used 2005 RECS data to estimate the energy consumption of 
water heaters in use by U.S. households. DOE's analysis thereby 
incorporates assumptions about operating conditions that are 
appropriate for each water heater type. For example, DOE determined 
that the average annual ambient temperature is higher for the stock of 
electric water heaters than for the stock of gas-fired water heaters. 
This difference contributes to the lower average energy use for 
electric water heaters.
    A.O. Smith stated that the analysis of ambient air temperature 
effects does not include water heaters installed in attics in the 
South, and that the temperature derivation formulas are not applicable 
to attic installations, where solar gain can bring temperatures to 
ambient plus 40 [deg]F in summer. (A.O. Smith, No. 37 at pp. 5-6) DOE's 
analysis included water heaters installed in attics and accounted for 
the range of temperatures found in such locations.
    The energy efficiency and consumption of heat pump water heaters 
depend on ambient temperature. The equation DOE used to determine the 
energy consumption of heat pump water heaters is similar to the WHAM 
equation, but it modulates the recovery efficiency by applying a 
performance adjustment factor that is a function of the average ambient 
temperature. GE stated that because lower ambient temperatures will 
affect the performance of both heat pump and storage water heaters, DOE 
should use universally applied conditions to compare products. (GE, No. 
51 at p. 2) DOE's energy calculations for heat pump and storage water 
heaters accounted for the effects of lower ambient temperatures. Heat 
pump water heaters are more affected by air temperature because the air 
provides the heat to warm the water.
    As stated previously, DOE assumed that many households that would 
be affected by indoor operation of a heat pump water heater would not 
want to incur the cost of a venting system, and would instead operate 
their space heating or cooling system to compensate for the effects of 
the heat pump water heater. For each such home, DOE estimated the 
impact on space heating only during heating months (i.e., when indoor 
temperature is at least 10 degrees greater than the average outdoor 
temperature), and the impact on air conditioning only during cooling 
months (i.e., when indoor temperature is at least 5 degrees less than 
the average outdoor temperature). For each affected household in the 
electric water heater sub-sample, DOE included such indirect energy use 
in its calculation of the energy consumption of a heat pump water 
heater.
    BWC stated that the assumed rated capacity (Pon) of 500 watts and 
cooling capacity of 3,500 Btu/h are not correct for all heat pump water 
heaters. (BWC, No. 46 at p. 2) For the preliminary analysis, DOE based 
those values on information available in AHRI's 2007 Consumers' 
Directory. For the NOPR, DOE created a distribution of values for Pon 
and cooling capacity that represent a range of heat pump water heater 
designs.
    To calculate the energy use of gas-fired instantaneous water 
heaters, DOE used the same approach as for storage water heaters, 
modified to account for the absence of a tank. For the preliminary 
analysis, DOE applied a performance adjustment factor to account for 
evidence that the rated energy efficiency of instantaneous water 
heaters overstates actual performance, as reported in a study of 
instantaneous water heater installations conducted for the California 
Energy Commission (CEC). See Davis Energy Group. Measure Information 
Template: Tankless Gas Water Heaters (May 18, 2006); http://

[[Page 65903]]

www.energy.ca.gov/title24/2008standards/prerulemaking/documents/2006-
05-18_workshop/2006-05-11_GAS_WATER.PDF. The adjustment factor 
effectively increases the calculated energy use of a gas-fired 
instantaneous water heater by 8.8 percent.
    A.O. Smith noted its strong support for incorporating results from 
the CEC study to account for performance drop-off at small draw 
volumes. Because it requires 5 to 20 seconds for a gas-fired 
instantaneous water heater to heat up, 1 gallon of cold water can be 
wasted at the beginning of every water draw. (A.O. Smith, No. 37 at pp. 
1, 5) ACEEE, PG&E, SDG&E, SoCal Gas, and AGA also support applying a 
performance adjustment. (ACEEE, No. 35 at p. 7; PG&E, SDG&E, and SoCal 
Gas, No. 38 at p. 4; AGA, No. 44 at p. 3) BWC expressed support for 
applying the 8.8-percent adjustment factor to gas-fired instantaneous 
water heaters, noting that its testing indicates that this number may 
be a little low. (BWC, No. 46 at p. 1) AHRI disagreed with applying an 
8.8-percent factor. AHRI stated that the CEC study obtained its field 
data from one two-person household, which does not support a 
technically sound analysis. (AHRI, No. 33 at p. 2) Bock, GE, Noritz, 
and Rheem agreed. (Bock, No. 53 at p. 2; GE, No. 51 at p. 3; Noritz, 
No. 36 at p. 2; Rheem, No. 49 at pp. 6-7)
    For the NOPR analysis, the performance adjustment factor DOE 
developed to capture the field energy use of gas-fired instantaneous 
water heaters is a probability distribution. The factor changes based 
on household hot water consumption, rather than on a fixed value that 
may represent only a fraction of households. The 8.8-percent adjustment 
factor DOE used for the preliminary analysis became the upper value in 
the distribution DOE used for the NOPR. The rest of the range was 
derived from a Gas Technology Institute (GTI) study that calculated an 
energy use reduction (adjustment) factor as a function of the volume of 
water gas-fired instantaneous water heaters use daily.
    Southern stated that the draws in the hot water draw model should 
ideally be shorter for instantaneous water heaters. (Southern, Public 
Meeting Transcript, No. 34.4 at p. 194) ACEEE stated that PG&E and 
Consumers Union have performed studies on alternative draw patterns for 
gas-fired instantaneous water heaters that are more reflective of daily 
use. (ACEEE, Public Meeting Transcript, No. 34.4 at pp. 195-196) In 
response, DOE's performance adjustment factor accounts for a range of 
draw patterns associated with gas-fired instantaneous water heaters. 
Accordingly, DOE maintains its existing approach.
b. Direct Heating Equipment
    For the preliminary analysis of LCC and PBP, DOE estimated energy 
consumption of direct heating equipment in functioning housing units. 
To represent actual households likely to purchase and use direct 
heating equipment, DOE developed a household sample from the 2001 RECS. 
DOE did not receive any comments on its approach for estimating energy 
consumption of direct heating equipment. Therefore, for the NOPR, DOE 
used the same approach, but it used a household sample drawn from the 
2005 RECS.
c. Pool Heaters
    For the preliminary analysis of LCC and PBP, DOE estimated energy 
consumption of pool heaters at functioning housing units. To represent 
actual households likely to purchase and use pool heaters, DOE used a 
household sample from the 2001 RECS. For the NOPR, DOE used a household 
sample drawn from the 2005 RECS.
    AHRI stated that DOE's estimate of the annual energy use of a 
typical residential pool heater is overestimated by a factor of two. It 
said that DOE's estimated annual energy use of 53.6 MBtu [one thousand 
British thermal units] based on an energy use of 250 kBtu/h at 78 
percent thermal efficiency (a baseline unit) represents 214 hours of 
operation annually. AHRI mentioned a CEC study that determined that gas 
pool heaters were used on average 104 hours per year, and it commented 
that the LCC should be recalculated based on that value. (AHRI, No. 43 
at p. 5)
    In response, DOE notes that the CEC study mentioned is based on a 
single study conducted in the early 1990s. For the NOPR, DOE did revise 
the range of operating hours used its analysis, although it relied on 
more recent data than the referenced CEC study. Instead, DOE calculated 
the pool heater operating hours using the estimated pool heater heating 
load for each sample household from the 2005 RECS. The average hours of 
operation in the NOPR analysis is 149 per year, which results in an 
annual energy use of 38 MBtu for a 250 kBtu/hr baseline unit operating 
at 78 percent thermal efficiency.
d. Rebound Effect
    A rebound effect refers to increased energy consumption resulting 
from actions that increase energy efficiency and reduce consumer costs. 
For its preliminary analysis, DOE searched the literature on the 
rebound effect related to the three types of heating products, and also 
considered how EIA's NEMS incorporates a rebound effect.
    For water heaters, DOE reviewed a summary of studies on the rebound 
effect, which concluded that ``technical improvements for residential 
hot water heating will be between 60 and 90 percent effective in 
reducing energy consumption for this service'' (implying a rebound 
effect of 10 to 40 percent). See L.A. Greening, D.L. Greene, C. 
Difiglio, Energy Efficiency and Consumption: The Rebound Effect, Energy 
Policy, 28(6-7): pp. 389-401. DOE found that NEMS does not incorporate 
a rebound factor, however. Balancing these findings from the literature 
with the zero rebound effect used in NEMS, DOE decided that a rebound 
effect of 10 percent was reasonable for water heaters.
    A.O. Smith supported the use of a 10-percent rebound effect for 
water heaters. (A.O. Smith, No. 37 at p. 2) It added that there is an 
additional rebound effect for gas-fired instantaneous water heaters 
because of the promotion of ``unlimited'' or ``endless'' hot water. 
(A.O. Smith, No. 37 at p. 7) NEEA and NPCC suggested that DOE ignore 
the rebound effect except in the case of the highest candidate standard 
levels, as adoption of the lower efficiency levels would not provide 
consumers with noticeable savings in energy bills. (NEEA and NPCC, No. 
42 at p. 8) ACEEE stated that it does not believe that the peer-
reviewed literature supports assertions of large rebound effects, and 
the more conservative approach is to ignore them for these products. 
(ACEEE, No. 35 at p. 7)
    As stated above, the literature does indicate the presence of a 
rebound effect of 10 to 40 percent for water heaters. Given that NEMS 
does not incorporate a rebound effect for water heating, and that the 
comments received on the preliminary analysis support a rebound effect 
of 10 percent or lower, DOE believes that using a value at the lower 
end of the range found in the literature (i.e., 10 percent) is 
reasonable and has incorporated such an effect in its analyses for this 
NOPR.
4. Energy Prices
    For the LCC and PBP, DOE derived average energy prices for 13 
geographic areas consisting of the nine U.S. Census divisions, with 
four large States (New York, Florida, Texas, and California) treated 
separately. For Census divisions containing one of these large States, 
DOE calculated the regional average excluding the data for the large 
State.

[[Page 65904]]

    DOE estimated residential electricity prices for each of the 13 
geographic areas based on data from EIA Form 861, ``Annual Electric 
Power Industry Database,'' and EIA Form 826, ``Monthly Electric Utility 
Sales and Revenue Data.'' DOE calculated an average annual regional 
residential electricity price by: (1) Estimating an average residential 
price for each utility (by dividing the residential revenues by 
residential sales); and (2) weighting each utility by the number of 
residential consumers served in that region (based on EIA Form 861). 
DOE calculated an average monthly regional electricity price by first 
calculating monthly prices for each State, and then calculating a 
regional price by weighting each State in a region by the number of 
consumers in that State using EIA Form 826. For the preliminary TSD, 
DOE used EIA data from 2006. The NOPR analysis used the data from 2007.
    DOE estimated average residential natural gas prices in each of the 
13 geographic areas based on data from EIA's Natural Gas Navigator. See 
Energy Information Administration, Natural Gas Navigator, 2009; http://tonto.eia.doe.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm. DOE calculated 
an average natural gas price by first calculating the price for each 
State, and then calculating a regional price by weighting each State in 
a region by the number of consumers in that State. This method differs 
from the method DOE used to calculate electricity prices, because EIA 
does not provide utility-level data on gas consumption and prices. For 
the preliminary TSD, DOE used EIA data from 2006. For today's proposed 
rule, DOE used the data from 2007.
    DOE estimated average residential prices for liquefied petroleum 
gas (LPG) in each of the 13 geographic areas based on data from EIA's 
State Energy Consumption, Price, and Expenditures Estimates. See Energy 
Information Administration, 2007 State Energy Consumption, Price, and 
Expenditure Estimates (SEDS); http://www.eia.doe.gov/emeu/states/_seds.html. For the preliminary TSD, DOE used data from 2005. For 
today's proposed rule, DOE used the data from 2006.
    DOE estimated average residential prices for oil in each of the 13 
geographic areas based on data from EIA's Petroleum Navigator. See 
Energy Information Administration, Petroleum Navigator, December, 2009; 
http://tonto.eia.doe.gov/dnav/pet/pet_cons_821dsta_a_EPD0_VAR_Mgal_a.htm. For the preliminary TSD, DOE used data from 2006. For 
today's proposed rule, DOE used the data from 2007.
    To estimate the trends in energy prices for the preliminary TSD, 
DOE used the price forecasts in AEO2008. To arrive at prices in future 
years, DOE multiplied current average regional prices by the forecast 
of annual average price changes in AEO2008. Because AEO2008 forecasts 
prices to 2030, DOE followed past guidelines that EIA provided to the 
Federal Emergency Management Program. DOE used the average rate of 
change from 2020 to 2030 to estimate the price trend for electricity 
after 2030, and the average rate of change from 2015 to 2030 to 
estimate the price trend after 2030 for natural gas, LPG, and oil. For 
today's proposed rule, DOE used the same approach, but updated its 
energy price forecasts using AEO2009. DOE intends to update its energy 
price forecasts for the final rule based on the latest available AEO. 
In addition, the spreadsheet tools that DOE used to conduct the LCC and 
PBP analyses allow users to select price forecasts from either AEO's 
high-growth scenario or low-growth scenario to estimate the sensitivity 
of the LCC and PBP to different energy price forecasts.
    Earthjustice stated that DOE must quantify the effect of a 
CO2 emissions cap on energy prices in the LCC analysis. 
(Earthjustice, No. 47 at p. 4) DOE believes that it would be 
inappropriate to speculate on the form of any Federal carbon control 
legislation, and the ensuing impacts on residential energy prices. 
Therefore, DOE does not incorporate such impacts into the energy price 
forecasts that DOE used for the NOPR analysis.
5. Repair and Maintenance Costs
    Repair costs are associated with repairing or replacing components 
that have failed in the appliance, whereas maintenance costs are 
associated with maintaining the operation of the equipment. Determining 
the repair cost involves determining the cost and the service life of 
the components that are likely to fail. Discussion of repair and 
maintenance costs for the three types of heating products is provided 
below, along with a summary of public comments on this topic. For more 
information on DOE's development of repair and maintenance cost 
estimates, see chapter 8 of the NOPR TSD.
a. Water Heaters
    The repair cost for a water heater reflects the cost for a service 
call when the product fails. There are four design options considered 
for the gas-fired water heater analysis that may encounter repair cost 
during the lifetime of the water heater: (1) Pilot ignition; (2) 
electronic ignition; (3) power vent; and (4) condensing design. The 
energy efficiency levels that include power vent or condensing design 
encounter both power vent as well as electronic ignition repair costs. 
For each of the above four design options, DOE estimated both an 
average cost and the year in which the repair would, on average, be 
most likely to occur.
    AHRI stated that DOE's analysis of gas-fired water heaters ignored 
the introduction of FVIR designs that require maintenance. (AHRI, No. 
43 at pp. 1-2) For the NOPR, DOE added a cost for maintaining the FVIR 
for all gas-fired storage water heaters.
    For the preliminary analysis, DOE determined that there is 
virtually no maintenance or repair associated with conventional 
electric resistance water heaters. For a heat pump water heater, 
maintenance includes annual cleaning of the air filter and a preventive 
maintenance cost to check the evaporator and refrigeration system. 
Although the literature suggests that no professional help is necessary 
for this maintenance, DOE believes there are instances in which such 
help is needed. For some locations where the heat pump water heater 
might be more exposed to the outdoor environment, such as garages and 
crawlspaces, DOE applied a 5-year preventative maintenance cost based 
on experience with heat pump water heater outdoor installations in 
Australia, which has roughly comparable conditions as much of the 
United States. See Rheem Manufacturing Company (Australia), Owners 
Guide and Installation Instruction: Air Sourced Heat Pump Water Heater, 
2006; http://www.rheem.com.au/images/pdf/owners_heatpump_126524B_0610.pdf. DOE estimated that 27 percent of these exposed installations 
would require this maintenance, based on a survey conducted for central 
air conditioners, which include heat exchangers that operate similarly 
as the evaporator heat exchanger in a heat pump water heater.
    ACEEE recommended that DOE use refrigerator maintenance costs for 
heat pump water heaters because of similarities in the components and 
operation. (ACEEE, No. 35 at p. 6) A.O. Smith stated that the cost for 
regular and routine maintenance on heat pump water heaters must be 
considered. It added that it is inaccurate to compare a heat pump water 
heater to a refrigerator due to the much longer duty cycle on a heat 
pump water heater, the slow recovery time, the need for frequent 
cleaning, and the scale build-up on the

[[Page 65905]]

water side, which is not an issue with refrigerators. (A.O. Smith, No. 
37 at p. 8) GE stated that DOE ascribed inappropriate maintenance costs 
to heat pump water heaters, which require no more attention than a 
standard room air conditioner. (GE, No. 51 at p. 2)
    In response, DOE notes that it based its maintenance costs for heat 
pump water heaters on experience in Australia, so it is not necessary 
to use another appliance as a proxy. DOE acknowledges that many heat 
pump water heaters may require little or no maintenance. However, DOE 
believes that because the field experience with heat pump water heaters 
is limited, it is reasonable to apply a maintenance cost for some 
installations. As described above, DOE applied a 5-year preventative 
maintenance cost for 27 percent of the installations in garages and 
crawlspaces.
    Regarding repair of conventional electric resistance water heaters, 
ACEEE stated that data may be available on the number of resistive 
elements that need to be replaced. (ACEEE, Public Meeting Transcript, 
No. 34.4 at p. 211) Based on this comment, for the NOPR, DOE added a 
cost for replacing resistive elements at least once during the lifetime 
for one-fourth of installations.
    For heat pump water heaters, DOE considered the cost of replacing 
the compressor and the evaporator fan and the year in which, on 
average, they would be expected to fail. DOE used a lifetime 
distribution for the compressor and evaporator fan with an average 
lifetime of 19 years. For the majority of households, the compressor 
and evaporator fan would likely not fail during the water heater's 
lifetime. However, because there is some overlap between the lifetime 
distribution used for the compressor and evaporator fan and the 
lifetime distribution used for electric water heaters (see below), DOE 
included a compressor and evaporator fan repair cost in the appropriate 
year for some households. DOE requests comments on its analysis of 
repair and maintenance costs for heat pump water heaters. This is 
identified as issue 14 under ``Issues on Which DOE Seeks Comment'' in 
section VII.E of this NOPR.
    Regarding repair costs of gas-fired instantaneous water heaters, 
AGA stated that DOE needs to account for incremental design options, 
particularly electronic ignition maintenance and replacement. (AGA, No. 
44 at p. 4) In its preliminary analysis, DOE already applied a 
distribution of costs for electronic ignition repair based on RS Means. 
It maintained the same approach for the NOPR analysis.
    For the preliminary analysis, DOE applied a maintenance cost for 
some gas-fired instantaneous water heaters to address the fouling of 
the heat exchanger from hard water, periodic sensor inspections, and 
filter changes. A.O. Smith stated that $85 per year is too low for 
annual maintenance (de-liming) for gas-fired instantaneous water 
heaters. (A.O. Smith, No. 37 at p. 7) In response, for the NOPR, DOE 
used a distribution of costs for maintenance of gas-fired instantaneous 
water heaters, not a single cost of $85, and also applied no cost for 
some installations.
    Noritz stated that the basis for including de-liming costs for gas-
fired instantaneous water heaters is clauses in the warranty, which is 
standard for all water heaters, so de-liming costs should not be 
included only for gas-fired instantaneous water heaters. (Noritz, No. 
36 at p. 2) Noritz stated that the necessity for de-liming varies, so 
it would be best not to include the cost for any class of water heater, 
but if it is included for gas-fired instantaneous water heaters, DOE 
should account for the fact that it is not necessary for every 
installation. (Noritz, No. 36 at pp. 2-3) DOE agrees that de-liming is 
not necessary for every installation, so in the NOPR analysis, it 
assigned zero cost to a fraction of households.
    For the preliminary analysis, DOE determined that maintenance for 
oil-fired water heaters is most frequently performed under annual 
maintenance contracts, which typically include repair of failed 
components. DOE estimated the average cost of separate maintenance/
repair contracts only for water heaters as $153 per year. This mean 
value comes from a collection of annual maintenance contract prices, 
which were gathered from web sites that represent oil-fired product 
suppliers in the eastern U.S. The same maintenance cost applies to all 
energy efficiency levels. DOE did not receive any comments on this 
topic, so it maintained the same approach for the NOPR analysis.
    Bock stated that DOE did not include the cost of annually flushing 
oil-fired storage water heaters. (Bock, No. 53 at p. 2) For the NOPR, 
DOE included a cost for flushing the tanks of all storage water 
heaters, including oil-fired storage water heaters.
b. Direct Heating Equipment
    For the preliminary analysis, DOE determined that maintenance cost 
data for gas-fired furnaces provide a reasonable approximation of 
maintenance costs for DHE because of the similarity in design and 
operation. DOE derived the costs from a field survey sponsored by 
several gas utilities that estimated the average total service charge 
(parts, labor, and other charges). See Jakob, F. E., et al., Assessment 
of Technology for Improving the Efficiency of Residential Gas Furnaces 
and Boilers, 1994. Gas Research Institute. Chicago, IL. Report No. GRI-
94/0175. DOE used a maintenance frequency of once every 5 years for all 
direct heating equipment.
    DOE determined the repair costs for DHE using an approach that 
reflects the cost and the service life of the components that are 
likely to fail. The non-condensing designs DOE considered that may 
encounter repair costs during the lifetime of the product include pilot 
ignition, electronic ignition, circulating blower, and induced draft. 
The repair cost of the condensing design includes electronic ignition, 
circulation blower, and induced draft components. DOE did not receive 
comments on maintenance and repair costs for DHE, so it continued to 
use the existing approach for its NOPR analysis.
c. Pool Heaters
    For the preliminary analysis, DOE determined that most pool owners 
do not perform any pool heater maintenance except when the heater does 
not come on. In such situations, the maintenance work includes checking 
controls, cleaning burners, cleaning the heat exchanger, starting the 
heater, and measuring water temperature rise. DOE used an average cost 
of $351. For units employing power vent and condensing design options, 
maintenance also includes measuring combustion differential pressure. 
For these units, DOE used an average cost of $491 and estimated that 
the maintenance occurs on average in the fifth year of the pool heater 
lifetime. Raypak stated that pool heaters need maintenance more than 
every 5 years due to outdoor installation. (Raypak, Public Meeting 
Transcript, No. 34.4 at p. 215) DOE applied a distribution ranging from 
3 to 6 years for pool heater maintenance. Thus, some applications would 
receive maintenance more than once every 5 years.
    Pool heater design options that may encounter repair cost during 
the lifetime of the pool heater include pilot ignition, electronic 
ignition, and power vents. For each of these, DOE estimated the average 
repair cost and when in the product lifetime such repair would be 
likely to occur. DOE continued to use the above approach for the NOPR 
analysis.

[[Page 65906]]

6. Product Lifetime
    For the preliminary analysis, DOE used a variety of sources to 
establish minimum, average, and maximum values for the lifetime of each 
of the three types of heating products. For each product class, DOE 
characterized the product lifetime using a Weibull probability 
distribution that ranged from minimum to maximum lifetime estimates. 
See chapter 8 of the NOPR TSD for further details on the sources DOE 
used to develop product lifetimes.
    For the preliminary TSD, DOE chose average lifetimes for gas-fired 
and electric storage water heaters based on the values in the middle of 
each range: 12 years for gas units and 14 years for electric units. In 
the NOPR analysis, DOE found that applying the above values to historic 
shipments resulted in estimates of the stock of gas-fired and electric 
storage water heaters that did not match the data on the stock reported 
in the Census Bureau's 2007 American Housing Survey (AHS), which covers 
all housing units in the United States. The estimated stock is too 
small for gas-fired water heaters and too large for electric water 
heaters. Using an average lifetime of 13 years for both gas-fired and 
electric storage water heaters produces stock estimates for 2007 that 
are close to the stock numbers from the AHS. Furthermore, several 
sources report a lifetime of 13 years. (See chapter 8 of the NOPR TSD.) 
Therefore, DOE used an average lifetime of 13 years for both gas-fired 
and electric storage water heaters in its NOPR analysis.
    DOE evaluated whether electric heat pump water heaters have a 
different lifetime from the baseline products. An accelerated 
durability test of heat pump water heaters conducted by Oak Ridge 
National Laboratory suggests that these units have similar lifetime as 
standard electric resistance storage water heaters. Therefore, DOE used 
the same lifetime for all efficiency levels considered for this product 
class.
    For gas-fired instantaneous water heaters, DOE used a distribution 
with 20 years as the average lifetime for these units in its 
preliminary analysis. A.O. Smith stated that a 20-year lifetime for 
gas-fired instantaneous water heaters is too long, and there is not 
adequate data to backup this claim. (A.O. Smith, No. 37 at p. 2) BWC 
stated that DOE's average lifetime for gas-fired instantaneous water 
heaters is derived from manufacturer literature and it suggested that 
DOE instead use an independent source for this information. (BWC, No. 
46 at p. 2) DOE is not aware of and the commenters did not provide any 
other source of data on the lifetime of gas-fired instantaneous water 
heaters, so it used the same distribution as in the preliminary 
analysis.
    For oil-fired storage water heaters, DOE used 9 years as the 
average lifetime. Bock stated that oil-fired storage water heaters 
should have the same lifetime as gas-fired storage water heaters 
because they are identical in material, construction, volume, and 
storage temperature. (Bock, No. 53 at p. 2) For the NOPR analysis, DOE 
used the same lifetime for oil-fired storage water heaters as for gas-
fired storage water heaters (i.e., 13 years).
    For direct heating equipment, DOE used the average, minimum, and 
maximum lifetime values from its 1993 TSD for direct heating equipment 
because it did not find more recent representative data. The average 
lifetime DOE used for each of the product classes was 15 years. DOE did 
not receive any comments on DHE lifetime, so it continued to use the 
above values for the NOPR.
    For pool heaters, DOE used 8 years as an average lifetime based on 
the available data. DOE did not receive any comments on pool heater 
lifetime, so it continued to use the above value for the NOPR.
7. Discount Rates
    To establish discount rates for the heating products in the 
preliminary analysis, DOE derived estimates of the finance cost of 
purchasing these appliances. Because the purchase of equipment for new 
homes entails different costs for consumers than the purchase of 
replacement equipment, DOE used different discount rates for new 
construction and replacement. See chapter 8 of this NOPR's TSD for 
further details on the development of discount rates for heating 
products.
    DOE estimated discount rates for appliance purchases in new housing 
using the effective real mortgage rate for homebuyers, which accounts 
for deducting mortgage interest for income tax purposes, and an 
adjustment for inflation. DOE developed a distribution of mortgage 
interest rates using data from the Federal Reserve Board's ``Survey of 
Consumer Finances'' (SCF) for 1989, 1992, 1995, 1998, 2001, and 2004. 
For today's NOPR, DOE added data from the 2007 SCF. Because the 
mortgage rates carried by households in these years were established 
over a range of time, DOE believes they are representative of rates 
that may apply when amended standards take effect. The effective real 
interest rates on mortgages across the six surveys averaged 3.0 
percent.
    DOE's approach for deriving discount rates for replacement 
purchases involved identifying all possible debt or asset classes that 
might be used to purchase replacement products, including household 
assets that might be affected indirectly. DOE used data from the 
surveys mentioned above to estimate the average percentages of the 
various debt and equity classes in the average U.S. household 
portfolios. DOE used SCF data and other sources to develop 
distributions of interest or return rates associated with each type of 
equity and debt. For today's NOPR, DOE added data from the 2007 SCF. 
The average rate across all types of household debt and equity, 
weighted by the shares of each class, is 4.8 percent.
8. Compliance Date of the Amended Standards
    In the context of EPCA, the compliance date is the future date when 
parties subject to the requirements of a new standard must begin to 
comply. As described in DOE's semi-annual implementation report for 
energy conservation standards activities submitted to Congress pursuant 
to section 141 of EPACT 2005, a final rule for the three types of 
heating products that are the subject of this rulemaking is scheduled 
to be completed by March 2010. Compliance with amended energy 
efficiency standards for direct heating equipment and pool heaters is 
required three years after the final rule is published in the Federal 
Register (in 2013); compliance with amended standards for water heaters 
is required five years after the final rule is published (in 2015). DOE 
calculated the LCC for the three types of heating products as if 
consumers would purchase new products in the year compliance with the 
standard is required.
    Earthjustice stated that DOE assumes a 5-year lead time to be 
consistent with the requirements in 42 U.S.C. 6295(e)(4)(B), which 
requires that DOE ``publish a final rule no later than January 1, 2000 
to determine whether standards in effect * * * should be amended,'' and 
that ``any such amendment shall apply to products manufactured on or 
after January 1, 2005.'' The commenter stated that this assumption is 
contrary to the structure and purpose of the statute. It also declared 
that there is no statutory language to deal with the current situation, 
which involves determining a compliance date for a standard that DOE 
was required to adopt nearly 10 years ago. Earthjustice stated that the 
required publication date and compliance dates have passed, and that it 
is unreasonable

[[Page 65907]]

to apply the 5-year lead time specified in 42 U.S.C. 6295(e)(4)(B). 
(Earthjustice, No. 47 at p. 5) ASAP stated that DOE's compliance date 
of 2015 is arbitrary because the law states that compliance with the 
standard is required by 2005. ASAP stated that DOE is obligated to use 
time as a variable and look at a range of implementation dates for all 
of the standard levels to determine the standard that would best meet 
the statutory criteria. ASAP suggested that DOE analyze a range of 
compliance dates from 18 months to 8 years after publication of the 
final rule. (ASAP, Public Meeting Transcript, No. 34.4 at pp. 57-58) 
AHRI stated that DOE is obligated to allow five years between the final 
rule and the compliance date for the requirements for water heater 
products. (AHRI, Public Meeting Transcript, No. 34.4 at pp. 60-61)
    In response, DOE notes that the language in 42 U.S.C. 6295(e)(4) 
specifically states that amended standards, if any, shall apply to 
products manufactured on or after the 36-month period beginning on the 
date such a final rule is published for the first iteration of 
rulemaking and on or after the 60-month period beginning on the date 
such a final rule is published for the second iteration of rulemaking. 
(42 U.S.C. 6295(e)(4)(A)-(B)) The language of 42 U.S.C. 6295(e)(4)(B) 
anticipates that a standard will be in place for covered water heaters 
that are manufactured precisely five years after publication of the 
final rule and prospectively thereafter. DOE believes that the time 
differential, as specified in EPCA, between the publication of the 
final rule and the compliance deadline reflects Congress's judgment as 
to what constitutes adequate lead time.
9. Product Energy Efficiency in the Base Case
    To accurately estimate the percentage of consumers who would be 
affected by a particular standard level, DOE's analysis considered the 
projected distribution of product efficiencies that consumers purchase 
under the base case (i.e., the case without new energy efficiency 
standards). DOE refers to this distribution as a base-case efficiency 
distribution. Using the projected distribution of product efficiencies 
for each heating product, DOE randomly assigned a specific product 
efficiency to each sample household. If a household was assigned a 
product efficiency greater than or equal to the efficiency of the 
standard level under consideration, the LCC calculation shows that this 
household is not affected by that standard level. Each of the three 
types of heating products is addressed below, including relevant public 
comments and DOE's response. For further information on DOE's 
estimation of base-case market shares, see chapter 8 of the NOPR TSD.
a. Water Heaters
    In its preliminary analysis, DOE estimated the base-case market 
shares of various energy efficiency levels for water heaters in the 
effective year. DOE began with data on shipments for 2002-2006 from 
AHRI, supplemented with data on the number of water heater models at 
different energy efficiency levels reported in AHRI directories and the 
Federal Trade Commission directory. (See chapter 8 of the NOPR TSD for 
citations for these data sources.) For gas-fired and electric storage 
water heaters, DOE then estimated the future market impact of the 
ENERGY STAR program. Effective in 2010, the minimum efficiency for the 
ENERGY STAR designation will be 0.67 EF for non-condensing gas-fired 
storage water heaters, 0.80 EF for condensing gas-fired storage water 
heaters, and 2.0 EF for heat pump water heaters. To estimate the base-
case market shares of these products, DOE considered the market 
penetration goals set by the ENERGY STAR program.
    For gas-fired instantaneous water heaters, DOE estimated that the 
base-case market shares in 2015 would be equivalent to current shares. 
In the case of this product, the majority of the market (approximately 
85 percent of shipments) is already at the ENERGY STAR level, so there 
is limited room for the shares of ENERGY STAR products to increase in 
the near future. For oil-fired storage water heaters, DOE also 
estimated that the market shares in 2015 would be equivalent to current 
shares, as there has been little change in the past decade.
    Southern and EEI stated that the 5-percent market share DOE 
projected for heat pump water heaters under the base case seems too 
high. (Southern, Public Meeting Transcript, No. 34.4 at p. 186; EEI, 
No. 40 at p. 5) GE stated that based on the expansion of the market for 
front-loading clothes washers, which was a new higher-efficiency 
product in the U.S. market with higher first cost but much lower 
operating costs, the predicted 5-percent market share for heat pump 
water heaters is not unreasonable. (GE, Public Meeting Transcript, No. 
34.4 at pp. 188-189) In response, DOE notes that, consistent with 
manufacturer predictions, heat pump water heaters entered the mass 
market in 2009. Given the high level of interest in promoting ENERGY 
STAR-qualified appliances, DOE believes that its projection was 
reasonable, and it used the same market share for the NOPR analysis.
    For oil-fired storage water heaters, Bock stated that the market 
shares for Efficiency Level 5 and 6 are much higher than indicated in 
the preliminary TSD. (Bock, No. 34.4 at pp. 187-188) For the NOPR, DOE 
updated its base-case efficiency distribution to reflect data from the 
March 2009 AHRI directory of certified products, which resulted in a 
higher market share at levels 5 and 6.
    DOE's projected base-case energy efficiency market shares are shown 
in Table IV.28. These market shares represent the products that 
households would purchase in 2015 in the absence of revised energy 
conservation standards.

                                          Table IV.28--Water Heaters: Base-Case Energy Efficiency Market Shares
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  Gas storage                             Electric storage                     Oil storage                  Gas-fired instantaneous
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Market                             Market                             Market                             Market
                EF                   share (%)            EF            share (%)            EF            share (%)            EF            share (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.59..............................         87.2  0.90................         36.2  0.53................         22.2  0.62................          0.3
0.62..............................          3.0  0.91................         25.6  0.54................          0.0  0.69................          1.8
0.63..............................          0.9  0.92................          8.7  0.56................          0.0  0.78................          1.0
0.64..............................          1.2  0.93................         19.5  0.58................          0.0  0.80................         12.2
0.65..............................          1.4  0.94................          2.5  0.60................         11.1  0.82................         62.9
0.67..............................          5.3  0.95................          2.5  0.62................         16.7  0.84................          2.8
0.80..............................          1.0  2.0.................          4.0  0.66................         40.0  0.85................          3.8
                                                 2.2.................          1.0  0.68................         10.0  0.92................          9.5

[[Page 65908]]

 
                                                                                                                       0.95................          5.7
                                   -------------                      -------------                      -------------                      ------------
                                            100                                100                                100                                100
--------------------------------------------------------------------------------------------------------------------------------------------------------

b. DHE
    Little is known about the efficiency distribution of direct heating 
equipment that consumers in the United States currently purchase. For 
the preliminary analysis, DOE estimated the market shares of different 
energy efficiency levels within each product class in the base case 
using data in the March 2007 GAMA directory. DOE did not receive any 
comments on its estimation of base-case market shares for DHE. It 
employed the same approach for its NOPR analysis, but used more recent 
GAMA data on the number of models at different energy efficiency 
levels. See Gas Appliance Manufacturers Association, Consumer's 
Directory of Certified Efficiency Ratings for Heating and Water Heating 
Equipment (March 2008); http://www.gamanet.org/gama/inforesources.nsf/vAllDocs/Product+Directories?OpenDocument.
c. Pool Heaters
    No shipments data are available on the distribution of gas-fired 
pool heaters by energy efficiency level. For the preliminary TSD, DOE 
estimated the market shares of different energy efficiency levels in 
the base-case by using data from the FTC on the number of gas-fired 
pool heater models at different energy efficiency levels as a proxy for 
shipments. DOE did not receive any comments on its estimation of base-
case market shares for pool heaters. It employed the same approach for 
the NOPR analysis, but used more recent FTC data on the numbers of 
models at various energy efficiency levels.
10. Inputs to Payback Period Analysis
    The payback period is the amount of time it takes the consumer to 
recover the additional installed cost of more-efficient products, 
compared to baseline products, through energy cost savings. The simple 
payback period does not account for changes in operating expense over 
time or the time value of money. Payback periods are expressed in 
years. Payback periods that exceed the life of the product mean that 
the increased total installed cost is not recovered in reduced 
operating expenses.
    The inputs to the PBP calculation are the total installed cost of 
the equipment to the customer for each efficiency level and the annual 
(first-year) operating expenditures for each efficiency level. The PBP 
calculation uses the same inputs as the LCC analysis, except that 
energy price trends and discount rates are not needed.
    NEEA and NPCC stated that that they are concerned about how the 
payback period was calculated for efficiency level 3 for gas-fired 
instantaneous water heaters (0.80 EF) because of the lengthy payback 
period. (NEEA & NPCC, No. 42 at p. 2) In response, DOE notes that 
almost the entire market is at CSL 3 or higher. Therefore, the PBP that 
DOE calculated applies only to the very few households that would be 
affected by a standard at this level. There is a significant cost 
differential in going from CSL 1 and 2 to CSL 3, which leads to very 
high PBPs for the affected households.
11. Rebuttable-Presumption Payback Period
    The PBP analysis helps to determine whether the 3-year rebuttable 
presumption of economic justification applies--that is, whether the 
purchaser will recover the higher installed cost of more-efficient 
equipment through lowered operating costs within 3 years. (42 U.S.C. 
6295(o)(2)(B)(iii)) For each efficiency level it considered, DOE 
determined the value of the first year's energy savings by calculating 
the quantity of those savings in accordance with DOE's test procedure, 
and multiplying that amount by the average energy price forecast for 
the year in which a new standard is expected to take effect. Section 
V.B.1.c of this notice and chapter 8 of the NOPR TSD present the 
rebuttable presumption PBP results.
    Earthjustice stated the DOE must justify any refusal to adopt 
standard levels at least as strong as those that satisfy the rebuttable 
presumption payback period. (Earthjustice, No. 47 at p. 3) The LCC and 
PBP analyses generate values that calculate the payback period for 
consumers of potential energy conservation standards; these include, 
but are not limited to, the 3-year payback period contemplated under 
the rebuttable presumption test discussed above. However, DOE routinely 
conducts an economic analysis that considers the full range of impacts, 
including those to the consumer, manufacturer, Nation, and environment, 
as required under 42 U.S.C. 6295(o)(2)(B)(i) and 42 U.S.C. 6316(e)(1)). 
The results of this analysis serve as the basis for DOE to definitively 
evaluate the economic justification for a potential standard level, 
thereby supporting or rebutting the results of any preliminary 
determination of economic justification.

F. National Impact Analysis--National Energy Savings and Net Present 
Value Analysis

    The national impact analysis assesses the national energy savings 
and the net present national impact analysis assesses the national 
energy savings and the net present value of total product costs and 
savings expected to result from standards at specific efficiency 
levels. DOE used the NIA spreadsheet to calculate energy savings and 
NPV, using the annual energy consumption and total installed cost data 
from the LCC analysis. DOE forecasted the energy savings, energy cost 
savings, product costs, and NPV for each product class from 2013 (or 
2015) through 2043 (or 2045). The forecasts provided annual and 
cumulative values for the above output parameters. In addition, DOE 
used its NIA spreadsheet to analyze scenarios that used inputs from the 
AEO2009 Low Economic Growth and High Economic Growth cases. These cases 
have higher and lower energy price trends compared to the Reference 
case, as well as higher and lower housing starts, which result in 
higher and lower appliance shipments to new homes.
    Earthjustice stated that DOE needs to consider the impact of 
increased employment and reduced emissions in its national impact 
analysis. (Earthjustice, No. 47 at p. 1) NRDC stated that DOE failed to 
include the benefits of avoided carbon emissions in

[[Page 65909]]

the NIA. (NRDC, No. 48 at p. 5) In response, DOE accounts for the 
impacts on employment in the employment impact analysis (section IV.I), 
and it quantifies avoided carbon emissions in the environmental 
assessment (section IV.K).The NIA primarily considers the national 
energy savings and the NPV from a national perspective of total 
appliance consumer costs and savings expected to result from standards, 
and it also evaluates the benefits to the economy of reduced energy 
prices due to standards. Even though employment and reduced emissions 
are separately addressed outside the NIA, DOE thoroughly considers 
these issues when conducting its analyses in the context of standard 
setting.
    Table IV.29 summarizes the approach and data DOE used to derive the 
inputs to the NES and NPV analyses for the preliminary analysis and the 
changes to the analyses for the proposed rule. A discussion of these 
inputs and changes follows. See chapter 10 of the NOPR TSD for further 
details.

   Table IV.29--Approach and Data Used for National Energy Savings and
                   Consumer Net Present Value Analyses
------------------------------------------------------------------------
                                                       Changes for the
           Inputs                Preliminary TSD        proposed rule
------------------------------------------------------------------------
Shipments...................  Annual shipments      See IV.F.1.a through
                               from shipments        IV.F.1.d.
                               model.
Compliance Date of Standard.  Water Heaters: 2015.  No change.
                               DHE and Pool
                               Heaters: 2013.
Base-Case Forecasted          Efficiency market     No change in
 Efficiencies.                 shares estimated      approach; updated
                               for compliance        efficiency market
                               year. SWEF *          shares estimated
                               remains constant      for compliance
                               except for gas and    year.
                               electric water
                               heaters, for which
                               SWEF increases
                               slightly over
                               forecast period.
Standards-Case Forecasted      ``Roll-up''          No change in
 Efficiencies.                 scenario used for     approach; updated
                               determining SWEF in   efficiency market
                               2013 (or 2015) for    shares estimated
                               each standards        for compliance
                               case. SWEF remains    year.
                               constant except for
                               gas and electric
                               water heaters, for
                               which SWEF
                               increases slightly
                               over forecast
                               period.
Annual Energy Consumption     Annual weighted-      No change.
 per Unit.                     average values as a
                               function of SWEF.
Rebound Effect..............  Water heaters: 10%.   No change.
                               DHE: 15%. Pool
                               Heaters: 10%.
Total Installed Cost per      Annual weighted-      No change.
 Unit.                         average values as a
                               function of SWEF.
Energy Cost per Unit........  Annual weighted-      No change.
                               average values as a
                               function of the
                               annual energy
                               consumption per
                               unit and energy
                               (and water) prices.
Repair Cost and Maintenance   Annual values are a   No change.
 Cost per Unit.                function of
                               efficiency level.
Escalation of Energy Prices.  AEO2008 forecasts     Updated using
                               (to 2030) and         AEO2009 forecasts.
                               extrapolation to
                               2043 (and 2045).
Energy Site-to-Source         Varies yearly and is  No change.
 Conversion Factor.            generated by DOE/
                               EIA's NEMS.
Discount Rate...............  Three and seven       No change.
                               percent real.
Present Year................  Future expenses are   Future expenses are
                               discounted to 2007.   discounted to 2010,
                                                     when the final rule
                                                     will be published.
------------------------------------------------------------------------
* Shipments-Weighted Energy Factor.

1. Shipments
    The shipments portion of the NIA spreadsheet is a model that uses 
historical data as a basis for projecting future shipments of the 
appliance products that are the subject of this rulemaking. In 
projecting shipments for water heaters and pool heaters, DOE accounted 
for two market segments: (1) New construction and (2) replacement of 
failed equipment. Data were unavailable to develop separate forecasts 
of direct heating equipment shipments for replacement and new home 
installations, so the forecast was based on the time series of 
historical total shipments developed for each product class.
    Table IV.30 summarizes the approach and data DOE used to derive the 
inputs to the shipments analysis for the preliminary analysis, and the 
changes DOE made for today's proposed rule. A discussion of these 
inputs and changes follows. For details on the shipments analysis, see 
chapter 9 of the NOPR TSD.

     Table IV.30--Approach and Data Used for the Shipments Analysis
------------------------------------------------------------------------
                                                       Changes for the
           Inputs             Preliminary analysis      proposed rule
------------------------------------------------------------------------
Historical Shipments........  Water Heaters: Data   Water Heaters: Used
                               provided by AHRI.     updated data from
                                                     AHRI.
                              DHE: Data provided    DHE: Used data from
                               by AHRI and DOE       manufacturers and
                               estimates.            HPBA * for hearth
                                                     products.
                              Pool Heaters: Data    Pool Heaters: Used
                               from 1993 TSD and     inputs from
                               DOE estimates.        manufacturers.
New Construction Shipments..  For water heaters     No change in
                               and pool heaters,     approach. New
                               determined by         housing forecast
                               multiplying housing   updated with
                               forecasts by          AEO2009
                               forecasted            projections.
                               saturation of
                               products in new
                               housing.

[[Page 65910]]

 
                              Housing forecasts     ....................
                               based on AEO2008
                               projections.
                              New housing product   ....................
                               saturations based
                               on AHS for water
                               heaters, consultant
                               data for pool
                               heaters.
Replacements................  For water heaters     No change for water
                               and pool heaters,     heaters. For pool
                               determined by         heaters, included
                               tracking total        estimated non-
                               product stock by      replacement of some
                               vintage and           pool heaters.
                               establishing the
                               failure of the
                               stock using
                               retirement
                               functions from the
                               LCC and PBP
                               analysis.
First-Time Owners...........  Included for pool     No change.
                               heaters.
------------------------------------------------------------------------
* Hearth, Patio & Barbecue Association.

    To determine new construction shipments, DOE used forecasts of 
housing starts coupled with estimates of product market saturation in 
new housing. For the preliminary analysis, DOE used actual data for 
2007 for new housing completions and mobile home placements and adopted 
the projections from AEO2008 for 2008 to 2030. DOE updated its new 
housing projections for today's proposed rule using AEO2009. DOE 
estimated replacements using historical shipments data and product 
retirement functions that it developed from product lifetimes.
    AHRI stated that shipments for all of the products dropped 
considerably in 2008, and this drop will change the forecast since 
today's new house installation is tomorrow's replacement installation. 
(AHRI, No. 33 at p. 2) In response, DOE's NOPR analysis used actual 
shipments data for 2008, so any such changes are captured in DOE's 
analysis.
a. Water Heaters
    For the preliminary analysis, DOE used information on choice of 
water heater products in recently-built housing to estimate shipments 
to the new construction market. DOE assumed the market shares of water 
heaters using a particular fuel follow the average pattern in new homes 
for 2000 to 2006 throughout the forecast period. The shipments model 
assumes that when a unit using a particular fuel is retired, it 
generally is replaced with a unit that uses the same fuel. Section 
IV.F.1.d discusses the potential effects of energy conservation 
standards on choice of water heater product in the new construction and 
replacement markets.
    For its shipments forecast for gas-fired storage water heaters and 
electric storage water heaters, DOE assumed that the current market 
shares of small-volume and large-volume products would remain the same 
throughout the forecast period.
    Within the category of gas-fired water heaters, DOE disaggregated 
the shares of gas storage water heaters and gas-fired instantaneous 
water heaters based on projections of total shipments of gas-fired 
instantaneous water heaters. Because there is much uncertainty about 
the future growth of gas-fired instantaneous water heaters, DOE modeled 
three scenarios for their market penetration. The scenarios are based 
on experience with gas-fired instantaneous water heaters in Australia, 
where the proportion of instantaneous water heaters in total gas-fired 
storage water heater shipments has grown considerably in the past 
decade. (See Syneca Consulting, Cost-Benefit Analysis: Proposal to 
Introduce a Minimum Energy Performance Standard for Gas Water Heaters, 
2007, Australian Greenhouse Office: Equipment Energy Efficiency Gas 
Committee.) Residential water heating services and technology in 
Australia are roughly comparable to those in the United States. Storage 
water heaters have somewhat lower volume capacities in Australia, but 
end-use hot water demand also may be lower. Prices of gas-fired 
instantaneous water heaters in Australia are roughly comparable to 
prices of gas-fired storage water heaters (excluding installation 
costs). In the United States, gas-fired instantaneous water heaters 
currently cost about twice as much as typical 40-gallon gas storage 
water heaters. Although the price differential in the United States 
likely will decrease, the specifics of the United States market 
probably will not duplicate the market in Australia. Nonetheless, DOE 
believes that the market evolution in Australia provides the most 
similar model for scenarios for the United States.
    AHRI stated that the Australian water heater market has significant 
differences from the U.S. market because in Australia: (1) Gas water 
heaters are not the prevalent residential option; (2) many gas water 
heaters are installed outside; and (3) prices of gas storage water 
heaters and gas-fired instantaneous water heaters are practically 
equal. (AHRI, No. 43 at p. 2) Rheem stated that in Australia, most 
water heaters are installed outdoors, which makes a difference in terms 
of the venting and total installation cost. (Rheem, Public Meeting 
Transcript, No. 34.4 at p. 241) A.O. Smith commented that the scenario 
for low market penetration of gas-fired instantaneous water heaters may 
be reasonable, but the other two scenarios over-predict the market 
penetration. (A.O. Smith, No. 37 at p. 7) Noritz stated that Australia 
is the only market it has identified that could provide any insight 
into the adoption of gas-fired instantaneous water heaters in the 
United States. (Noritz, No. 36 at p. 3)
    In response, DOE acknowledges the uncertainty associated with 
basing forecasted market penetration of gas-fired instantaneous water 
heaters on the Australian experience, but it agrees with Noritz (the 
largest manufacturer of these products) that there is no other market 
that could provide a model for forecasting U.S. market penetration. In 
making use of the Australian experience, DOE took into account some of 
the differences between the two markets that would tend to cause 
shipments growth to be lower in the U.S. For further details on the 
shipments forecast for gas-fired instantaneous water heaters, see 
chapter 9 of the NOPR TSD.
b. Direct Heating Equipment
    To estimate historical shipments of direct heating equipment for 
the preliminary analysis, DOE used two sets of data from AHRI and 
information from the 1993 TSD. Data were unavailable to develop 
separate forecasts of direct heating equipment shipments for 
replacement and new home installations, so DOE based the forecast on 
the time series of historical total shipments developed for each 
product class. To forecast shipments of gas room DHE, shipments of room 
heaters were held constant at the average level from

[[Page 65911]]

2002 to 2005, and gas fireplace shipments (referred to as hearth 
products DHE in this NOPR) assigned to gas room DHE were held constant 
at the average from 2002 to 2004. Forecasted floor furnaces shipments 
follow the downward trend from 2000 to 2007. Total combined shipments 
of gas wall gravity and gas wall fan DHE were held constant at the 
average volume from 2002 to 2006. The upward trend seen from 2002 to 
2006 was extrapolated into the future for gas wall fan DHE. DOE derived 
future shipments of gas wall gravity DHE based on the combined 
shipments of gas wall gravity and gas wall fan DHE and the forecast 
shipments for the latter. Shipments of gas fireplaces assigned to gas 
wall fan DHE were kept constant at the average from 2002 to 2004.
    Commenting on DOE's forecast, HPBA stated that gas fireplace 
shipments will likely decrease as opposed to staying level. (HPBA, 
Public Meeting Transcript, No. 34.4 at p. 258) Apart from a decrease 
due to the 2008-2009 economic recession, DOE is not aware of reasons 
why gas fireplace (hearth products) shipments would be expected to 
decrease, given that the number of U.S. households will continue to 
increase. However, based on its review of market information, DOE 
modified its forecast of gas hearth products shipments. The forecast 
used for the NOPR accounts for the sharp decline in shipments in 2007-
2008, but assumes that shipments in the future will approximately 
follow the trend seen in 1998-2007.
    In addition, DOE modified its forecast of gas wall gravity and gas 
wall fan DHE to better reflect current information. Instead of having 
different trends for each of these product classes, as in the 
preliminary analysis, DOE assumed that shipments of each class would 
stay constant at the 2008 level during the forecast period.
c. Pool Heaters
    To forecast pool heater shipments for new construction for the 
preliminary analysis, DOE multiplied the annual housing starts 
forecasted for single-family and multi-family housing by the estimated 
saturation of gas-fired pool heaters in recently built new housing. For 
replacement pool heaters, DOE used a survival function based on its 
distribution of product lifetimes to determine when a unit fails. DOE 
also introduced a market segment representing purchases by existing 
households that had not owned a pool heater. These first-time owners 
include existing households that have a pool and those that install 
one.
    In the preliminary analysis, DOE's projected that pool heater 
shipments would grow significantly from 0.28 million in 2006 to over 
0.7 million by 2040. Raypak stated that the slope of the shipments 
forecast for pool heaters should be consistent with the past 10 years 
of data, which show that the slope is either constant or decreasing due 
to economic reasons. It also stated that pool heater new construction 
shipments are declining because of lot size issues and other 
restrictions. (Raypak, No. 34.4 at p. 247) EEI stated that projected 
pool heater shipments are overstated and that DOE should obtain more 
recent numbers to develop more realistic projections for shipments. 
(EEI, No. 40 at pp. 5-6) In response, DOE revised the NOPR analysis to 
account for those households that are not likely to replace their pool 
heater when it fails due to cost. As a result, the shipments projection 
shows only modest growth over the analysis period.
d. Impacts of Standards on Shipments
    In some of its energy conservation standard rulemakings, DOE has 
used elasticities to estimate the response of appliance demand 
(shipments) to changes in the installed cost and operating costs 
associated with more-efficient appliances. Typically, higher installed 
costs of more-efficient appliances are projected to cause some 
consumers to forego purchase of a new product.
    In the case of water heaters, however, DOE believes that this 
approach would not be appropriate because the consumer (or home 
builder) decision is usually not whether to purchase the product or 
not, but rather what type of water heater to buy. A water heater is 
generally not a discretionary purchase. However, to the extent that 
energy conservation standards result in an increase in the price of a 
specific type of water heater compared to a competing product, some 
consumers (or home builders in the case of shipments for new 
construction) may purchase the competing product. The consumer or 
builder decision is not solely based on economic factors, as the 
availability of natural gas plays a key role. Evaluation of this 
decision requires an assessment of the specific factors that influence 
it in the context of the two main markets for water heaters, 
replacements and new homes.
    In the preliminary analysis, DOE determined that the greatest 
potential for product switching would exist in the case of a standard 
that effectively required an electric heat pump water heater. This type 
of product often has a substantially higher installed cost than a 
typical electric resistance storage water heater and is relatively new 
to consumers and builders. Because the product choice decision 
partially depends on the relative costs of competing products, DOE 
considered the following potential combinations of electric and gas-
fired storage water heaters that could result from standards: (1) 
Electric heat pump water heater and a gas-fired storage water heater 
using natural draft; (2) electric heat pump water heater and a gas-
fired storage water heater using a power vent; and (3) electric heat 
pump water heater and a gas-fired storage water heater using condensing 
technology. DOE used data from the 2001 RECS to estimate the percentage 
of households expected to purchase an electric water heater in the base 
case that could switch to a gas-fired water heater because they had the 
necessary infrastructure. To estimate how many households that could 
switch to gas-fired water heaters would do so, DOE considered the 
difference in installed cost between the gas-fired storage water heater 
and an electric heat pump water heater in each of the combinations 
listed above.
    DOE did not quantify the potential for switching to gas water 
heating in the case of a standard that requires 0.95 EF for electric 
water heaters, as the installed cost is only moderately higher than the 
baseline electric water heater (0.90 EF), and DOE judged that this 
would not be sufficient to prompt consumers to consider switching to 
gas water heating.
    ACEEE stated that because builders make the choices that lock in 
subsequent energy source decisions at the time of construction, 
converting to a different energy source for water heating is too 
costly. However, it added that a few consumers in existing houses would 
choose gas conversion over installing a heat pump water heater. (ACEEE, 
No. 35 at pp. 6-7) NEEA and NPCC commented that most water heater 
replacements are on an emergency basis and that there is no convincing 
argument to include fuel switching in the analysis. (NEEA and NPCC, No. 
42 at p. 9)
    DOE agrees with the comment from ACEEE but it also notes that not 
all water heater replacements are on an emergency basis. DOE believes 
that the cost differential estimated in its analysis suggests that a 
small fraction of consumers would be likely to switch. For the NOPR, 
DOE used a similar approach as for the preliminary analysis using data 
from the 2005 RECS.
    Southern stated that many consumers would switch to a gas-fired 
storage water heater instead of installing a heat

[[Page 65912]]

pump water heater even if the installed cost is more, especially if the 
heat pump water heater would need to be installed in an enclosed 
interior location. (Southern, No. 50 at p. 4) DOE's approach took 
detailed account of those situations in which consumers with a failed 
electric storage water heater would find it less expensive to switch to 
a gas-fired storage water heater instead of installing a heat pump 
water heater. In determining which households would switch to a gas-
fired storage water heater, the analysis considered the installed costs 
that consumers might incur if they replaced an electric storage water 
heater located indoors with a heat pump water heater. (Refer to the 
discussion of installation costs for heat pump water heaters in section 
IV.E.2.a.) Given that an interior location may not easily allow the 
venting required with installing a gas-fired storage water heater, DOE 
does not believe consumers would switch to a gas-fired storage water 
heater instead of installing a heat pump water heater if the installed 
cost of the gas-fired product is higher.
    In the NOPR analysis, the fraction of households using an electric 
storage water heater estimated to switch to a gas-fired storage water 
heater instead of installing a heat pump water heater ranges from zero 
with a standard level for gas-fired storage water heaters that requires 
condensing technology, to 9 percent with a standard level for gas-fired 
storage water heaters that requires power vent technology.
    In the preliminary analysis, DOE concluded that builders who 
planned to install an electric storage water heater would not switch to 
gas-fired storage water heaters in the event of a standard that 
effectively requires heat pump technology. A.O. Smith stated that 
builders would be unlikely to switch from a heat pump water heater to a 
gas-fired storage water heater due to the cost of adding gas to the 
house, and if gas were already supplied to the house, a heat pump water 
heater would not have been installed. (A.O. Smith, No. 37 at p. 8) DOE 
agrees that availability of natural gas is the key determining factor 
for builders. Accordingly, DOE's analysis for the NOPR shows negligible 
switching in new homes.
    EEI stated that there may be a switch from electric storage to 
electric instantaneous water heaters if DOE adopts a standard level 
that would require use of heat pump technology for electric storage 
water heaters. (EEI, No. 40 at p. 5) DOE acknowledges that some 
households facing extreme structural modifications to accommodate a 
heat pump water heater may purchase an electric instantaneous water 
heater instead. However, because such switching requires expensive 
electrical modification to the home's electrical circuits to 
accommodate the higher electrical demand of instantaneous water 
heaters, DOE believes it is an unlikely choice for most households with 
electric water heating.
    With respect to the new construction market, in the preliminary 
analysis, DOE concluded that builders who planned to install an 
electric storage water heater would not switch to gas-fired storage 
water heaters in the event of a standard that effectively requires heat 
pump technology. A.O. Smith commented that builders would be unlikely 
to switch from a heat pump water heater to a gas-fired storage water 
heater due to the cost of adding gas to the house, and if gas had been 
already supplied to the house, a heat pump water heater would not have 
been installed. (A.O. Smith, No. 37 at p. 8) DOE agrees that 
availability of natural gas is the key factor determining water heater 
choice for home builders. Accordingly, DOE's analysis for the NOPR 
shows negligible switching in new homes.
    Regarding potential switching from gas-fired water heaters to 
electric water heaters, DOE determined that the cost of replacing an 
existing gas-fired storage water heater with an electric one is 
substantial due to the complexity of the installation. Because it takes 
longer for an electric storage water heater to recover heated capacity, 
a larger electric tank may be necessary to replace a gas unit. In new 
construction, if natural gas is available, builders generally will 
install a gas-fired water heater. Given the above considerations, in 
both new construction and the replacement market, a large increase in 
the price of a gas storage water heater compared to an electric storage 
water heater likely would be necessary to motivate consumers to replace 
a gas water heater with an electric unit, or to motivate builders to 
install an electric water heater instead of a gas unit. Because DOE 
does not envision such a price differential resulting from this 
rulemaking, it concluded that amended standards would not induce 
switching from a gas storage water heater to an electric storage water 
heater.
    In its preliminary analysis, DOE did not quantify the potential for 
switching away from oil-fired water heaters. Bock and EEI stated that 
DOE should consider fuel and equipment switching impacts of standards 
on oil-fired equipment. (Bock, No. 53 at p. 1; EEI, No. 40 at pp. 4-5) 
In response, DOE believes that the price of the oil-fired storage water 
heater is a minor factor in the fuel choice decision for households 
with such a water heater. In most cases, a household with an oil-fired 
storage water heater needing replacement would switch to a gas-fired 
water heater if gas is available because of the greater convenience and 
lower cost of gas water heating. Therefore, DOE believes that the 
moderately higher equipment price that might result from the proposed 
standard level (5 percent) would have a negligible impact on fuel 
switching for oil-fired storage water heaters, and DOE did not include 
such switching in its NOPR analysis.
    In its preliminary analysis, DOE did not quantify the potential for 
switching away from gas-fired instantaneous water heaters due to lack 
of quantitative information about the factors that shape the purchase 
decision for this product. However, given that the vast majority of the 
market (85 percent) is already at the proposed standard level (0.82 
EF), there is little reason to expect any switching to storage water 
heaters as a result of the proposed standard.
    For DHE and pool heaters, DOE did not find any data it could use to 
estimate the extent of switching away from the gas-fired products 
subject to this rulemaking if energy conservation standards were to 
result in a significant increase in installed costs. DOE did not 
receive any comments on its approach for these products, and it 
maintained the same approach for the NOPR analysis.
    In summary, DOE projects that no fuel switching would occur for 
gas-fired storage, oil-fired storage, and gas-fired instantaneous water 
heaters. For electric storage water heaters, DOE estimated that a 
standard that effectively requires heat pump water heaters would result 
in a decline in shipments ranging from zero to 9 percent, depending on 
the standard level for gas-fired storage water heaters.
    DOE requests comments on its analysis of fuel switching that may 
result from the proposed standards on water heaters and the other 
heating products. In particular, DOE requests comments on (1) its 
general approach, which does not involve price elasticities; (2) its 
analysis of switching to gas-fired storage water heaters in the case of 
a standard that effectively requires an electric heat pump water 
heater; (3) its conclusion that the proposed standards would not induce 
switching from a gas storage water heater to an electric storage water 
heater; and (4) its conclusion that the proposed standards would not 
induce switching for gas-fired instantaneous water heaters, DHE, and 
pool heaters.

[[Page 65913]]

This is identified as issue 15 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.
2. Other Inputs
    The following is a discussion of the other inputs to the NIA and 
any revisions DOE made to those inputs for today's proposed rule.
a. Base-Case Forecasted Efficiencies
    A key input to DOE's estimates of NES and NPV is the energy 
efficiencies that DOE forecasts over time for the base case (without 
new standards) and each of the standards cases. The forecasted 
efficiencies represent the annual shipment-weighted energy efficiency 
of the products under consideration over the forecast period.
    For the preliminary analysis, DOE used the SWEFs for 2013 or 2015 
as a starting point to forecast the base-case energy efficiency 
distribution for each product class. To represent the distribution of 
product energy efficiencies in those years, DOE used the same market 
shares as in the base case for the LCC analysis. For gas storage water 
heaters and electric storage water heaters, DOE estimated the 
distribution of product energy efficiencies in 2015 by accounting for 
the estimated market impact of the newly established ENERGY STAR 
efficiency levels for water heaters (see section IV.9.a). The projected 
trend to 2015 represents an average annual increase in energy 
efficiency of 0.27 percent for gas-fired storage water heaters and 0.55 
percent for electric storage water heaters. DOE applied the above 
values to estimate the increase in average energy efficiency until the 
end of the forecast period.
    DOE found no quantifiable indications of change in energy 
efficiencies over time for oil-fired and gas-fired instantaneous water 
heaters, direct heating equipment, or pool heaters, and it did not 
receive any comments on this topic. Therefore, for these products, DOE 
estimated that energy efficiencies remain constant at the 2015 or 2013 
level until the end of the forecast period.
    For today's proposed rule, DOE maintained the approach described 
above.
b. Standards-Case Forecasted Efficiencies
    For its determination of standards-case forecasted efficiencies, 
DOE used a ``roll-up'' scenario in the preliminary analysis and the 
NOPR to establish the SWEF for the year that standards would become 
effective and subsequent years. In this approach, product energy 
efficiencies in the base case that do not meet the standards level 
under consideration would roll up to meet the new standard level. The 
market share of energy efficiencies that exceed the standard level 
under consideration would be the same in the standards case as in the 
base case. Changes over the forecast period match those in the base 
case. For today's proposed rule, DOE maintained this approach.
c. Annual Energy Consumption
    The inputs for determining NES are annual energy consumption per 
unit, shipments, equipment stock, national annual energy consumption, 
and site-to-source conversion factors. Because the annual energy 
consumption per unit depends directly on efficiency, DOE used the SWEFs 
associated with the base case and each standards case, in combination 
with the annual energy use data, to estimate the shipment-weighted 
average annual per-unit energy consumption under the base case and 
standards cases. The national energy consumption is the product of the 
annual energy consumption per unit and the number of units of each 
vintage. This calculation accounts for differences in unit energy 
consumption from year to year. For today's proposed rule, DOE 
maintained this approach.
d. Site-to-Source Energy Conversion
    To estimate the national energy savings expected from appliance 
standards, DOE uses a multiplicative factor to convert site energy 
consumption (at the home or commercial building) into primary or source 
energy consumption (the energy required to deliver the site energy). 
These conversion factors account for the energy used at power plants to 
generate electricity and losses in transmission and distribution, as 
well as for natural gas losses from pipeline leakage and energy used 
for pumping. For electricity, the conversion factors vary over time due 
to projected changes in generation sources (i.e., the power plant types 
projected to provide electricity to the country). The factors that DOE 
developed are marginal values, which represent the response of the 
system to an incremental decrease in consumption associated with 
appliance standards.
    In the preliminary analysis, DOE used annual site-to-source 
conversion factors based on the version of NEMS that corresponds to 
AEO2008. For today's NOPR, DOE updated its conversion factors based on 
AEO2009. The AEO does not provide energy forecasts beyond 2030; DOE 
used conversion factors that remain constant at the 2030 values 
throughout the remainder of the forecast period.
    In response to a request from the DOE's Office of Energy Efficiency 
and Renewable Energy (EERE), the National Research Council (NRC) 
appointed a committee on ``Point-of-Use and Full-Fuel-Cycle Measurement 
Approaches to Energy Efficiency Standards'' to conduct a study called 
for in section 1802 of EPACT 2005. The fundamental task before the 
committee was to evaluate the methodology used for setting energy 
efficiency standards and to comment on whether site (point-of-use) or 
source (full-fuel-cycle) measures of energy efficiency better support 
rulemaking to achieve energy conservation goals. The NRC committee 
defined site (point-of-use) energy consumption as reflecting the use of 
electricity, natural gas, propane, and/or fuel oil by an appliance at 
the site where the appliance is operated. Full-fuel-cycle energy 
consumption was defined as including, in addition to site energy use, 
the following: Energy consumed in the extraction, processing, and 
transport of primary fuels such as coal, oil, and natural gas; energy 
losses in thermal combustion in power generation plants; and energy 
losses in transmission and distribution to homes and commercial 
buildings. (See The National Academies, Board on Energy and 
Environmental Systems, Letter to Dr. John Mizroch, Acting Assistant 
Secretary, U.S. DOE, Office of EERE from James W. Dally, Chair, 
Committee on Point-of-Use and Full-Fuel-Cycle Measurement Approaches to 
Energy Efficiency Standards, May 15, 2009.)
    In evaluating the merits of using point-of-use and full-fuel-cycle 
measures, the NRC committee noted that DOE uses what the committee 
referred to as ``extended site'' energy consumption to assess the 
impact of energy use on the economy, energy security, and environmental 
quality. The extended site measure of energy consumption includes the 
generation, transmission, and distribution but, unlike the full-fuel-
cycle measure, does not include the energy consumed in extracting, 
processing, and transporting primary fuels. A majority of members on 
the NRC committee concluded that extended site energy consumption 
understates the total energy consumed to make an appliance operational 
at the site. As a result, the NRC committee's primary general 
recommendation is for DOE to consider moving over time to use of a 
full-fuel-cycle measure of energy consumption for assessment of 
national and environmental impacts, especially levels of greenhouse gas 
emissions, and to providing more comprehensive information to the

[[Page 65914]]

public through labels and other means, such as an enhanced Web site. 
For those appliances that use multiple fuels (e.g., water heaters), the 
NRC committee believes that measuring full-fuel-cycle energy 
consumption would provide a more complete picture of energy used, 
thereby allowing comparison across many different appliances as well as 
an improved assessment of impacts. The NRC committee also acknowledged 
the complexities inherent in developing a full-fuel-cycle measure of 
energy use and stated that a majority of the committee recommended a 
gradual transition to that expanded measure and eventual replacement of 
the currently used extended site measure.
    DOE acknowledges that its site-to-source conversion factors do not 
capture all of the energy consumed in extracting, processing, and 
transporting primary fuels. DOE also agrees with the NRC committee's 
conclusion that developing site-to-source conversion factors that 
capture the energy associated with the extraction, processing, and 
transportation of primary fuels is inherently complex and difficult. 
However, DOE has performed some preliminary evaluation of a full-fuel-
cycle measure of energy use.
    Based on two studies completed by the National Renewable Energy 
Laboratory (NREL) in 1999 and 2000, DOE estimated the ratio of the 
energy used upstream to the energy content of the coal or natural gas 
delivered to power plants. For coal, the NREL analysis considered 
typical mining practices and mine-to-plant transportation distances, 
and used data for the State of Illinois. Based on data in this report, 
the estimated multiplicative factor for coal is 1.08 (i.e., it takes 
approximately 1.08 units of coal energy equivalent to provide 1 unit of 
coal to a power plant). A similar analysis of the energy consumed in 
upstream processes needed to produce and deliver natural gas to a power 
plant yielded a multiplicative factor of 1.19. (For further information 
on the NREL studies, please see: Spath, Pamela L., Margaret K. Mann, 
and Dawn Kerr, Life Cycle Assessment of Coal-fired Power Production, 
NREL/TP-570-25119, June 1999; and Spath, Pamela L. and Margaret K. 
Mann, Life Cycle Assessment of a Natural Gas Combined-Cycle Power 
Generation System, NREL/TP-570-27715, September 2000.)
    While the above factors are indicative of the magnitude of the 
impacts of using full-fuel-cycle measures of energy use, there are two 
aspects of the problem that warrant further study. The first is the 
refinement of the estimates of the multiplicative factors, particularly 
to incorporate regional variation. The second is development of 
forecasts of the multiplicative factors over the time frames used in 
the rulemaking analyses, typically ten to fifty years. The second 
issue, of forecasting how the efficiency factors for various fuels may 
change over time, has the potential to be quite significant. The 
existing NEMS forecast of power plant electricity generation by fuel 
type can be used to estimate the impact of a changing mix of fuels. 
However, currently NEMS provides no information on potential changes to 
the relative ease with which the different fuels can be extracted and 
processed. DOE intends to further evaluate the viability of using full-
fuel-cycle measures of energy consumption for assessment of national 
and environmental impacts of appliance standards.
e. Total Installed Costs and Operating Costs
    The total annual installed cost increase is equal to the annual 
difference in the per-unit total installed cost between the base case 
and standards cases multiplied by the shipments forecasted in the 
standards case.
    The annual operating cost savings per unit reflect differences in 
energy, repair, and maintenance costs between the base case and the 
various standard levels DOE considered. DOE forecasted energy prices 
for the preliminary analysis are based on AEO2008. DOE updated the 
energy prices for today's proposed rule using forecasts from AEO2009.
f. Discount Rates
    DOE multiplies monetary values in future years by the discount 
factor to determine the present value. For the preliminary analysis and 
today's NOPR, DOE estimated the NPV of appliance consumer benefits 
using both a 3-percent and a 7-percent real discount rate. DOE uses 
these discount rates in accordance with guidance provided by the Office 
of Management and Budget (OMB) to Federal agencies on the development 
of regulatory analysis (OMB Circular A-4 (Sept. 17, 2003), section E, 
``Identifying and Measuring Benefits and Costs''). NRDC stated that a 
discount rate below 3 percent is warranted for societal benefits. 
(NRDC, No. 48 at p. 5) OMB Circular A-4 states that when regulation 
primarily and directly affects private consumption, a lower discount 
rate is appropriate. ``The alternative most often used is sometimes 
called the social rate of time preference * * * the rate at which 
`society' discounts future consumption flows to their present value.'' 
(p. 33) It suggests that the real rate of return on long-term 
government debt may provide a fair approximation of the social rate of 
time preference, and states that over the last 30 years, this rate has 
averaged around 3 percent in real terms on a pre-tax basis. It 
concludes that ``for regulatory analysis, [agencies] should provide 
estimates of net benefits using both 3 percent and 7 percent.'' (p. 34) 
DOE finds that the guidance from OMB is reasonable, so it is continuing 
to use a 3-percent and a 7-percent discount rate for estimating net 
benefits.
3. Other Inputs
a. Effects of Standards on Energy Prices
    In the preliminary analysis, DOE analyzed the potential impact on 
natural gas prices resulting from amended standards on water heaters 
and the associated benefits for all natural gas consumers in all 
sectors of the economy. (DOE did not include natural gas savings from 
amended standards on DHE and pool heaters in this analysis because they 
are not large enough to have a noticeable impact.) DOE used NEMS-BT to 
account for the natural gas savings associated with two scenarios of 
possible standards, including max-tech efficiency levels. Like other 
widely used energy-economic models, NEMS incorporates parameters to 
estimate the changes in energy prices that would result from an 
increase or decrease in energy demand. The response of price to a 
decrease in demand is termed the ``inverse price elasticity.'' The 
overall inverse price elasticity observed in NEMS changes over the 
forecast period based on the model's dynamics of natural gas supply and 
demand. DOE calculated the nominal savings in total natural gas 
expenditures in each year by multiplying the estimated annual change in 
the average end-user natural gas price by the annual total U.S. natural 
gas consumption associated with each scenario. DOE then calculated the 
NPV of the savings in natural gas expenditures for 2015 to 2045 using 
3- and 7-percent discount rates for each scenario.
    For the NOPR, DOE used the same approach to estimate the benefits 
of reduced natural gas prices as in the preliminary TSD. However, it 
analyzed the potential impact on natural gas prices, and the associated 
benefits for natural gas consumers, resulting from the proposed water 
heater standards (TSL 4), as well as the other TSLs considered.
    NRDC stated that DOE must consider the benefit of reduced natural 
gas and electricity prices and include it in the NIA. (NRDC, No. 48 at 
p. 5) ACEEE

[[Page 65915]]

stated that DOE must incorporate the impacts of gas and electricity 
consumption reductions resulting from the standards on energy prices in 
the primary economic analysis, rather than simply note side studies 
that DOE did not incorporate into the decision-making process. (ACEEE, 
No. 35 at p. 8)
    DOE reports the results of its analysis of the benefits of reduced 
natural gas prices associated with standards in chapter 10 of the NOPR 
TSD, National Impacts Analysis. As discussed therein, when gas prices 
drop in response to a lower output of existing natural gas production 
capacity, consumers benefit but producers suffer. In economic terms, 
the situation represents a benefits transfer to consumers (whose 
expenditures fall) from producers (whose revenue falls equally). When 
prices decrease because extraction costs decline, however, consumers 
and producers both benefit, and the change in natural gas prices 
represents a net gain to society. Consumers benefit from the lower 
prices, and producers, whose revenues and costs both fall, are no worse 
off. Because there is uncertainty about the extent to which the 
calculated impacts from reduced natural gas prices are a benefits 
transfer, DOE tentatively concluded that it should not give a heavy 
weight to this factor in its consideration of the economic 
justification of standards on heating products.
    DOE investigated the possibility of estimating the impact of 
specific standard levels on electricity prices in its rulemaking for 
general service fluorescent lamps and incandescent reflector lamps. 
(See U.S. Department of Energy--Office of Energy Efficiency and 
Renewable Energy: Energy Conservation Standards for General Service 
Fluorescent Lamps and Incandescent Reflector Lamps; Proposed Rule, 74 
FR 16920, 16978-979 (April 13, 2009).) It found that whereas natural 
gas markets exhibit a fairly simple chain of agents from producers to 
consumers, the electric power industry is a complex mix of fuel 
suppliers, producers, and distributors. While the distribution of 
electricity is regulated everywhere, its institutional structure 
varies, and upstream components are more complicated, because the cost 
of generation differs across the country. For these and other reasons, 
accurate modeling of the response of electricity prices to a decrease 
in residential-sector demand due to standards is problematic. Thus, DOE 
does not plan to estimate the value of potentially reduced electricity 
costs for all consumers associated with revised standards for heating 
products.

G. Consumer Subgroup Analysis

    In analyzing the potential impact of new or amended standards on 
individual and commercial consumers, DOE evaluates the impact on 
identifiable subgroups of consumers that may be disproportionately 
affected by a national standard level. DOE used RECS data to analyze 
the potential effect of energy conservation standards on the considered 
consumer subgroups for selected heating products, as explained below. 
For gas-fired and electric storage water heaters, and gas wall fan and 
gas wall gravity DHE, DOE estimated consumer subgroup impacts for low-
income households and senior-only households. In addition, for gas-
fired and electric storage water heaters, DOE estimated consumer 
subgroup impacts for households in multi-family housing and households 
in manufactured homes as well.
    DOE did not evaluate consumer subgroup impacts for gas-fired 
instantaneous water heaters and oil-fired storage water heaters. Gas-
fired instantaneous water heaters were excluded from the consumer 
subgroup analysis due to insufficient data, and oil-fired storage water 
heaters were excluded due to low product shipments. For direct heating 
equipment, gas floor DHE and gas room DHE were excluded due to the low 
and decreasing levels of product shipments. For gas hearth DHE, DOE 
examined the senior-only subgroup, but did not evaluate the low-income 
subgroup because the saturation of this product is very small among 
low-income households due to the high product cost. DOE did not 
evaluate consumer subgroup impacts for pool heaters because the sample 
size of the subgroups is too small for meaningful analysis. More 
details on the consumer subgroup analysis and results can be found in 
chapter 11 of the NOPR TSD.

H. Manufacturer Impact Analysis

1. Overview
    In determining whether an amended energy conservation standard for 
the three types of heating products subject to this rulemaking is 
economically justified, the Secretary is required to consider ``the 
economic impact of the standard on the manufacturers and on the 
consumers of the products subject to such standard.'' (42 U.S.C. 
6295(o)(2)(B)(i)(I)) The statute also calls for an assessment of the 
impact of any lessening of competition as determined by the Attorney 
General that is likely to result from the adoption of a standard. (42 
U.S.C. 6295(o)(2)(B)(i)(V)) DOE conducted the MIA to estimate the 
financial impact of amended energy conservation standards on 
manufacturers of residential water heaters, DHE, and pool heaters, and 
to assess the impacts of such standards on employment and manufacturing 
capacity.
    The MIA has both quantitative and qualitative aspects. The 
quantitative part of the MIA relies on the Government Regulatory Impact 
Model (GRIM), an industry cash-flow model customized for the three 
heating products covered in this rulemaking. The GRIM inputs 
characterize each industry's cost structure, shipments, and revenues. 
This includes information from many of the analyses described above, 
such as MPCs and MSPs from the engineering analysis and shipment 
forecasts from the NIA. The key GRIM output is the Industry Net Present 
Value (INPV), which estimates the value of each industry on the basis 
of cash flows, expenditures, and investment requirements as a function 
of TSLs. Different sets of assumptions (scenarios) will produce 
different results. The qualitative part of the MIA addresses factors 
such as product characteristics, characteristics of particular firms, 
and market trends. The qualitative discussion also includes an 
assessment of the impacts of standards on manufacturer subgroups. The 
complete MIA is discussed in chapter 12 of the NOPR TSD.
    DOE conducted the MIA for the three types of heating products in 
three phases. Phase 1 (Industry Profile) characterized each industry 
using data on market shares, sales volumes and trends, pricing, 
employment, and financial structure. Phase 2 (Industry Cash Flow) 
focused on each industry as a whole. In this phase, DOE used each GRIM 
to prepare an industry cash-flow analysis. Using publicly-available 
information developed in Phase 1, DOE adapted each GRIM's generic 
structure to perform an analysis of the impacts on residential water 
heater, directing heating equipment, and pool heater manufacturers due 
to amended energy conservation standards. In Phase 3 (Subgroup Impact 
Analysis), DOE conducted interviews with a representative cross-section 
of manufacturers that produce the majority of residential water heater, 
DHE, and pool heater sales. During these interviews, DOE discussed 
engineering, manufacturing, procurement, and financial topics specific 
to each company, and obtained each manufacturer's view of the industry 
as a whole. The interviews also provided valuable information that DOE 
used to evaluate the impacts of amended energy conservation standard on 
manufacturer

[[Page 65916]]

cash flows, manufacturing capacity, and employment levels. Each of 
these phases is discussed in further detail below.
a. Phase 1: Industry Profile
    In Phase 1 of the MIA, DOE prepared a profile of each of the three 
heating product industries based on the market and technology 
assessment prepared for this rulemaking. Before initiating the detailed 
impact studies, DOE collected information on the present and past 
structure and market characteristics of each industry. This information 
included market share data, product shipments, manufacturer markups, 
and the cost structure for various manufacturers. The industry profile 
includes: (1) Further detail on the overall market and product 
characteristics; (2) estimated manufacturer market shares; (3) 
financial parameters such as net plant, property, and equipment, SG&A 
expenses, cost of goods sold, etc.; and (4) trends in the number of 
firms, market, and product characteristics for the three heating 
product industries.
    The industry profile included a top-down cost analysis of 
residential water heater, DHE, and pool heater manufacturers that DOE 
used to derive preliminary financial inputs for the GRIMs (e.g., 
revenues, depreciation, SG&A, and research and development (R&D) 
expenses). DOE also used public sources of information to further 
calibrate its initial characterization of each industry, including 
Security and Exchange Commission 10-K filings (available at http://www.sec.gov), Standard & Poor's stock reports (available at http://www2.standardandpoors.com), and corporate annual reports. DOE 
supplemented this public information with data released by privately 
held companies.
b. Phase 2: Industry Cash-Flow Analysis
    Phase 2 focused on the financial impacts of potential amended 
energy conservation standards on industries as a whole. More-stringent 
energy conservation standards can affect manufacturer cash flow in 
three distinct ways: (1) Create a need for increased investment, (2) 
raise production costs per unit, and (3) alter revenue due to higher 
per-unit prices and possible changes in sales volumes. To quantify 
these impacts in Phase 2 of the MIA, DOE used the GRIMs to perform 
three cash-flow analyses: one for the residential water heater industry 
(separated into the impacts on gas-fired and electric storage, oil-
fired storage, and gas-fired instantaneous water heaters), one for DHE 
(separated into the impacts on traditional DHE and gas hearth DHE), and 
one for gas-fired pool heaters. In performing these analyses, DOE used 
the financial values derived during Phase 1 and the shipment scenarios 
used in the NIA.
c. Phase 3: Subgroup Impact Analysis
    Using average cost assumptions to develop an industry-cash-flow 
estimate does not adequately assess differential impacts of amended 
energy conservation standards among manufacturer subgroups. For 
example, small manufacturers, niche players, or manufacturers 
exhibiting a cost structure that largely differs from the industry 
average could be more negatively affected. DOE used the results of the 
industry characterization analysis in Phase 1 to group manufacturers 
that exhibit similar characteristics. The interviews provided valuable 
information on manufacturer subgroups. During the manufacturer 
interviews, DOE discussed financial topics specific to each 
manufacturer and obtained each manufacturer's view of the industry as a 
whole.
    As stated above, DOE reports the MIA impacts by grouping the 
impacts of certain product classes together. DOE presents the industry 
impacts by the major product types (gas-fired and electric storage 
water heaters, oil-fired storage water heaters, gas-fired instantaneous 
water heaters, traditional DHE, gas hearth DHE, and gas-fired pool 
heaters). These product groupings represent separate markets that are 
served by the same manufacturers and are typically produced in the same 
factories. Once segmented into major product types by industry, DOE was 
only able to identify one subgroup--small manufacturers.
    For its small business manufacturer subgroup analysis, DOE uses the 
small business size standards published by the Small Business 
Administration (SBA) to determine whether a company is a ``small 
business.'' 65 FR 30836, 30848 (May 15, 2000), as amended at 65 FR 
53533, 53544 (Sept. 5, 2000) and codified at 13 CFR Part 121). To be 
categorized as a ``small business,'' a residential water heater, DHE, 
or pool heater manufacturer and its affiliates may employ a maximum of 
500 employees. The 500-employee threshold includes all employees in a 
business's parent company and any other subsidiaries. Based upon this 
classification, DOE identified five residential water heater 
manufacturers, 12 DHE manufacturers, and one small gas-fired pool 
heater manufacturer that qualify as small businesses per the applicable 
SBA definition. The small business subgroup is discussed in chapter 12 
of the TSD and in section VI.B of today's notice.
2. GRIM Analysis
    DOE uses the GRIM to quantify the changes in cash flow that result 
in a higher or lower industry value. The GRIM analysis uses a standard, 
annual-cash-flow analysis that incorporates MPCs, MSPs, shipments, and 
industry financial information as inputs, and models changes in costs, 
distribution of shipments, product and capital conversion costs, and 
manufacturer markups that would result from amended energy conservation 
standards. The GRIM spreadsheet uses the inputs to arrive at a series 
of annual cash flows, beginning with the base year of the analysis, 
2010, and continuing over the analysis period. DOE used the same base 
year (2010) as the NIA, which is the same year as the announcement of 
the final rule. DOE used the same analysis period in the MIA as in the 
NIA. For all rulemakings, DOE considers a 30-year analysis period after 
the anticipated compliance date of the final rule, which under EPCA 
means the date after which regulated parties must comply with the 
requirements of the amended standard. The compliance date of the 
rulemaking is estimated to be March of 2013 for DHE and pool heaters 
and March of 2015 for residential water heaters. The analysis period 
runs from the beginning of 2013 to 2043 for DHE and pool heaters and 
from the beginning of 2015 to 2045 for residential water heaters.
    DOE uses the GRIM to calculate cash flows using standard accounting 
principles and to compare changes in INPV between the base case and 
various TSLs (the standards cases). The difference in INPV between the 
base case and the standards case represents the financial impact of the 
potential amended energy conservation standard on manufacturers. DOE 
collected this information from a number of sources, including 
publicly-available data and manufacturer interviews.
    DOE created a separate GRIM for each of the three types of heating 
products. For today's notice, DOE is structuring separate TSLs for the 
three heating products. DOE also treats certain product classes within 
the three heating products separately. For example, DOE created 
specialized interview guides for different groups of product classes. 
These interview guides included one for storage water heaters (gas-
fired storage, electric storage, and oil-fired storage water heaters), 
one for gas-fired instantaneous water heaters, one for

[[Page 65917]]

traditional DHE (gas wall fan, gas wall gravity, gas floor, and gas 
room DHE), one for gas hearth DHE, and one for gas-fired pool heaters. 
DOE grouped product classes made by the same manufacturers and in the 
same production facilities together. This allowed DOE to better 
understand the impacts on manufacturers of these product classes.
    For example, the TSLs DOE considered for residential water heater 
packages selected efficiency levels of gas-fired storage, electric 
storage, oil-fired storage, and gas-fired instantaneous water heaters. 
The TSLs DOE considered for DHE packages selected efficiency levels for 
gas wall fan, gas wall gravity, gas floor, gas room, and gas hearth 
units. Each of the TSLs DOE considered for pool heaters consist of a 
single efficiency level for gas-fired pool heaters. DOE describes the 
TSLs in section V.A of today's notice. Because the combinations of TSLs 
can make it more difficult to discuss the required efficiencies for 
each product class, DOE presents the MIA results in section V.B.2 of 
today's notice and chapter 12 of the NOPR TSD by groups of 
manufacturers that make the covered products. DOE presents the MIA 
results for gas-fired storage and electric storage water heaters 
together because manufacturers typically produce both types of water 
heaters in the same facilities. The MIA results for oil-fired storage 
and gas-fired instantaneous water heaters are presented separately. The 
MIA results for DHE are separated into traditional DHE (gas wall fan, 
gas wall gravity, gas floor, and gas room DHE) and gas hearth DHE. The 
MIA results for gas-fired pool heaters are also presented separately.
a. GRIM Key Inputs
i. Manufacturer Product Costs
    In the MIA, DOE used the MPCs for the three types of heating 
products at each efficiency level calculated in the engineering 
analysis, as described in section IV.C and further detailed in chapter 
5 of the NOPR TSD. Changes in MPCs can affect revenues and gross 
margins. For instance, manufacturing a higher-efficiency product is 
typically more expensive due to the use of more complex components and 
higher-cost raw materials. For gas-fired storage water heaters, DOE 
used a weighted average MPC using both standard burner and ultra-low-
NOX burner cost-efficiency curves from the engineering 
analysis to account for shipments of ultra-low-NOX water 
heaters.
ii. Base-Case Shipments Forecast
    The GRIM estimates manufacturer revenues based on total unit 
shipment forecasts and the distribution of these values by efficiency 
level. Changes in the efficiency mix at each standard level affect 
manufacturer finances. For this analysis, the GRIM uses the NIA 
shipments forecasts from 2008 and continuing until the end of the 
analysis period for each heating product (2045 for residential water 
heaters and 2043 for DHE and pool heaters). In the shipments analysis, 
DOE also estimated the distribution of efficiencies in the base case 
for all product classes. See section IV.F.1 for additional details.
iii. Product and Capital Conversion Costs
    Amended energy conservation standards will cause manufacturers to 
incur one-time conversion costs to bring their production facilities 
and product designs into compliance. For the MIA, DOE classified these 
one-time conversion costs into two major groups: (1) Product conversion 
costs and (2) capital conversion costs. Product conversion costs are 
one-time investments in research, development, testing, marketing, and 
other costs focused on making product designs comply with the amended 
energy conservation standard. Capital conversion costs are one-time 
investments in property, plant, and equipment to adapt or change 
existing production facilities so that new product designs can be 
fabricated and assembled.
    DOE assessed the product conversion costs manufacturers would be 
required to make at each TSL. For residential gas-fired storage water 
heaters, electric storage water heaters, and gas-fired pool heaters, 
DOE based most of its estimates of the product conversion costs on 
information obtained from manufacturer interviews. DOE estimated 
average industry product conversion costs by weighting the estimates 
from manufacturers by market share, then extrapolating the interviewed 
manufacturers' product conversion costs for each product class to 
account for the market share of companies that were not interviewed. 
DOE verified the accuracy of these product conversion costs by 
comparing them to its own estimate of the product development, testing, 
certification, and retraining effort required by each manufacturer at 
each TSL. DOE also compared the product conversion costs to the total 
cost of other recent product development efforts manufacturers have 
incurred (such as the cost to redesign burners to comply with ultra-
low-NOX requirements). For gas-fired and electric storage 
water heaters at TSL 5, DOE used the industry-wide product conversion 
costs for the standard-size volumes at TSL 4. DOE assumed the 
additional product conversion costs for the large gallon sizes at TSL 5 
scaled with the total industry-wide product conversion costs. At TSL 5 
for gas-fired and electric storage water heaters, DOE multiplied its 
estimate for the entire industry to exclusively offer heat pump 
products at TSL 6 and condensing products at TSL 7 by the percentage of 
total electric storage and gas-fired storage water heater models that 
exceed a 55 gallon rated volume (27 percent and 11 percent, 
respectively).
    For oil-fired storage water heaters, gas-fired instantaneous water 
heaters, and all DHE product classes, DOE did not receive sufficient 
manufacturer data to serve as the basis for its industry-wide product 
conversion estimates. For these products, DOE calculated its estimates 
by reviewing product literature and publically-available information 
about the efficiency of the existing product lines. DOE used this 
information to estimate the number of product lines that manufacturers 
would need to modify or develop at each TSL. DOE also estimated a per-
product-line development cost at each efficiency level and assumed 
these costs represented the product conversion costs for a manufacturer 
that has to upgrade product lines to meet that TSL. DOE also assumed 
that that the product development costs increase as the design changes 
become more complex and if manufacturers do not currently offer 
products that meet or exceed the required efficiency. DOE calculated 
the product conversion costs by multiplying its per-line product 
conversion cost estimate by the number of product lines that 
manufacturers would need to modify or develop at each TSL. For 
traditional DHE and gas-fired water heaters, DOE assumed that 
manufacturers would convert all existing product lines that did not 
meet the efficiencies required at that TSL. However, for gas hearth DHE 
DOE assumed that manufacturers would only convert up to 50-percent of 
their existing product lines that did not meet the required 
efficiencies. DOE's estimates of the product conversion costs for all 
of the heating products addressed in this rulemaking can be found in 
section V.B.2 of today's notice and in chapter 12 of the NOPR TSD.
    DOE also evaluated the level of capital conversion costs 
manufacturers would incur to comply with potential amended energy 
conservation

[[Page 65918]]

standards. During interviews, DOE asked manufacturers to estimate the 
required capital conversion costs to expand the production of higher-
efficiency products or quantify the required tooling and plant changes 
if product lines meeting the required efficiency level do not exist. 
For residential gas-fired storage water heaters, electric storage water 
heaters, and gas-fired pool heaters, DOE based its capital conversion 
costs for most TSLs on these interviews. DOE verified the accuracy of 
these capital conversion costs by comparing them to a separate bottoms-
up estimate of the number of sub-assembly and assembly lines for each 
manufacturer and the required tooling changes to each line at each TSL, 
considering the costs of recent line upgrades. As a final verification, 
DOE examined what level of capital investments would be required to 
maintain the historical value for net plant, property, and equipment as 
a ratio of total revenue. For gas-fired and electric storage water 
heaters at TSL 5, DOE used the industry-wide capital conversion costs 
for the standard-size volumes at TSL 4. At TSL 5 DOE also used a 
separate estimate to calculate the additional capital conversion costs 
that would be required to manufacture gas-fired condensing water 
heaters and electric heat pump water heaters for rated storage volumes 
above 55 gallons. For oil-fired storage water heaters, gas-fired 
instantaneous water heaters, and DHE, DOE used a bottoms-up approach to 
estimate the cost of additional production equipment and changes to 
existing production lines that the industry would require at each TSL. 
DOE used feedback from manufacturer interviews about the tooling 
requirements at each efficiency level and product catalogs to estimate 
the total capital conversion costs for each product category at each 
TSL.
    DOE did not consider the provisions in the American Recovery and 
Reinvestment Act of 2009, Public Law 111-5, in its estimates of the 
capital conversion costs for all products. The industrial development 
bonds and advanced energy project tax credit programs in that Act have 
not been fully distributed, and there is insufficient information 
available to do a thorough analysis of their potential impacts. It is 
also unclear if manufacturers of residential water heaters, DHE, or 
pool heaters would qualify for these provisions. DOE is not aware of 
any manufacturers of products covered by this rulemaking being awarded 
funds from these programs (see http://www.energy.gov/recovery/ for a 
list of awardees). Therefore, DOE did not include the bonds or tax 
credit in its analysis for this NOPR of potential impacts on the three 
heating product industries. DOE's estimates of the capital conversion 
costs for all three types of heating products can be found in section 
V.B.2 of today's notice and in chapter 12 of the NOPR TSD.
b. GRIM Scenarios
i. Residential Water Heater Standards-Case Shipments Forecasts
    The GRIM used several residential water heater shipments developed 
in the NIA. The NIA incorporated different scenarios that account for 
fuel switching, penetration rates of gas-fired instantaneous water 
heaters, growth rates of ENERGY STAR products, and economic growth 
rates. To account for the likely impacts on the water heater industry 
of amended energy conservation standards, DOE used the main NIA 
shipment scenario. The main NIA water heater scenario accounted for 
fuel switching. In this scenario, DOE considered the potential for 
current users of electric storage water heaters to instead purchase a 
gas-fired storage water heater replacement if amended energy 
conservation standard for electric storage water heaters were set at 
levels that would effectively require the use of heat pumps. The main 
NIA scenario used the Reference case gas-fired instantaneous water 
heater market share scenario. Finally, the main NIA scenario used the 
Reference case economic growth scenario and the moderate rate of 
efficiency growth scenarios. In all standards-case shipment scenarios, 
DOE considered that shipments at efficiencies below the projected 
minimum standard levels would roll up to those efficiency levels in 
response to amended energy conservation standards. See section IV.F.1 
of this NOPR and chapter 10 for more information on the residential 
water heater standards-case shipment scenarios.
ii. Direct Heating Equipment and Pool Heater Shipment Scenarios
    For the DHE and pool heater shipments, DOE used the NIA shipments 
in the base case and the standards case. DOE also considered that 
shipments at efficiencies below the projected minimum standard levels 
in the base case would roll up to those efficiency levels in response 
to amended energy conservation standards. See section IV.F.1 of this 
NOPR and chapter 10 of the NOPR TSD for additional details about the 
shipment scenarios.
iii. Markup Scenarios
    In the GRIM, DOE used the MSPs estimated in the engineering 
analysis for each product class and efficiency level. The MSPs include 
direct manufacturing production costs (i.e., labor, material, and 
overhead estimated in DOE's MPCs), all non-production costs (i.e., 
SG&A, R&D, shipping, and interest), along with profit.
    DOE used several standards-case markup scenarios to represent the 
uncertainty about the potential impacts on prices and profitability 
following the implementation of amended energy conservation standards. 
For the three types of heating products, DOE analyzed two markup 
scenarios: (1) a preservation of return on invested capital scenario, 
and (2) a preservation of operating profit scenario.
    Return on invested capital is defined as net operating profit after 
taxes divided by the total invested capital (fixed assets and working 
capital, or net plant, property, and equipment plus working capital). 
In the preservation of return on invested capital scenario, the 
manufacturer markups are set so that the return on invested capital the 
year after the compliance date of the amended energy conservation 
standards is the same as in the base case. This scenario models the 
situation in which manufacturers maintain a similar level of 
profitability from the investments required by amended energy 
conservation standards as they do from their current business 
operations. After standards, manufacturers have higher net operating 
profits but also greater working capital and investment requirements. 
Because manufacturers earn additional operating profit from the 
investments required by the amended energy conservation standards, this 
scenario represents the high bound to profitability following 
standards.
    During interviews, multiple manufacturers stated that the higher 
production costs could severely harm profitability. Because of the 
highly competitive market, several manufacturers suggested that the 
additional costs required at higher efficiencies could not be fully 
passed through to customers. In the preservation of operating profit 
markup scenario, manufacturer markups are lowered so that only the 
total operating profit in absolute dollars is maintained as before the 
amended energy conservation standard. DOE implemented this scenario in 
GRIM by lowering the manufacturer markups at each TSL to yield 
approximately the same earnings before interest and taxes in the 
standards case in the year after

[[Page 65919]]

the compliance date of the amended standards, as in the base case. This 
scenario represents the lower bound of industry profitability following 
amended energy conservation standards because higher production costs 
and the investments required to comply with the amended energy 
conservation standard do not yield additional operating profit.
3. Discussion of Comments
    During the February 2009 public meeting, interested parties 
commented on the assumptions and results of the preliminary analysis. 
In oral and written comments, interested parties discussed the effects 
of the current economic downturn on manufacturers, the high costs 
required to educate installers and service contractors, and potential 
employment impacts due to amended energy conservation standards. DOE 
addresses these comments below. DOE also received comments on the 
cumulative burden of ultra-low-NOX requirements, which are 
addressed in sections IV.C and V.B.2.f.
a. Responses to General Comments
    AHRI stated that DOE must take into account the impacts of the 
current economic conditions on the manufacturing industry in the 
manufacturer impact analysis. (AHRI, Public Meeting Transcript, No. 
34.4 at p. 19)
    In the MIA, DOE models the impacts of amended energy conservation 
standards on manufacturers of residential water heaters, DHE, and pool 
heaters from the base year to the end of the analysis period (i.e., 
2010-2045 for residential water heaters and 2010-2043 for DHE and pool 
heaters). DOE notes the compliance dates for all three heating products 
(i.e., 2015 for residential water heaters and 2013 for DHE and pool 
heaters). Using information that only reflects these three industries 
during the current economic downturn would not be representative of the 
three heating products over the entire analysis period. DOE used the 
most current information that is publicly available in many of its 
estimates and analyses, inputs that take the current economic downturn 
into consideration. For example, as described in section IV.C.4.b, DOE 
uses 5-year averages for metal material prices and up-to-date prices 
for other raw materials and purchased components in its engineering 
analysis cost models. For today's notice, DOE also updated many of its 
LCC and NIA assumptions to better reflect the most recent information 
(e.g., AEO2009) and in response to comments from interested parties 
(sections IV.E and IV.F). For the MIA, DOE uses financial parameters 
like standard R&D to model the cash-flow impacts on the water heater, 
DHE, and pool heater industries. To calculate the estimates of the 
financial parameters used in the GRIMs, DOE examined 6 years of SEC 10-
K data. While DOE updated some of these GRIM estimates based on 
interviews with manufacturers, these changes were made to better 
reflect the parameters that are representative of each industry over 
the long-term and are not specifically attributable to current economic 
conditions.
b. Water Heater Comments
    BWC and AHRI stated that the economic downturn has limited the 
funding available for R&D and the tooling necessary to develop and 
manufacture more-efficient products. (BWC, No. 46 at p. 3; AHRI, No. 33 
at p. 1) Noritz America Corporation also stated that the economy has 
greatly affected manufacturers' bottom line and ability to support R&D. 
(Noritz, No. 36 at p. 3)
    For today's notice, DOE includes the capital and product conversion 
costs that would be required to meet the entire industry demand at each 
TSL. While DOE agrees that the current economic downturn may affect the 
funding for R&D and capital expenditures in the near term, DOE notes 
that the compliance date for the residential water heater standard is 
2015. In the GRIM, DOE allocates its estimates of the product 
conversion and capital conversion costs in between the announcement of 
the final rule adopting energy conservation standard (estimated to be 
March 2010) and the compliance date requiring compliance with the 
energy conservation standards for water heaters. DOE also assumes that 
more of the capital conversion and product conversion costs will occur 
closer to the compliance date than the announcement date. Because most 
of the product conversion and capital conversion costs are allocated 
several years in the future, it is expected that the economic 
conditions at that time will be different than they are currently.
    BWC argued that as new technologies are developed, manufacturers 
must incur additional costs to educate installers and service 
contractors. (BWC, No. 46 at p. 3)
    DOE agrees with BWC that a higher energy conservation standard 
could require manufacturers to incur costs to educate installers and 
service contractors, especially if the products have to change 
dramatically to accommodate amended energy conservation standards. 
During interviews, manufacturers indicated that significant resources 
are required to educate installers and service contractors when a new 
product is introduced. The resources required are even greater when the 
new product involves a new technology or a new mode of operation. For 
example, an energy conservation standard that eliminates atmospheric 
gas-fired storage water heaters would have such an impact on 
manufacturers. Product conversion costs are one-time investments which 
encompass research, development, testing, and marketing, focused on 
making product designs comply with the amended energy conservation 
standard. Hence, DOE includes an estimate of the cost to manufacturers 
to educate installers and service contractors in the product conversion 
costs at each TSL.
    Bock asserted that the ENERGY STAR program will affect consumer 
purchasing patterns. Bock commented that ENERGY STAR, which ignored 
oil-fired storage water heaters, caused a loss of market share, a 
reduction in shipments, and a decrease in employment for oil-fired 
storage water heater manufacturers. (Bock, No. 53 at p. 3)
    DOE agrees that a reduction in oil-fired storage water heater 
shipments could affect employment at oil-fired manufacturers' plants. 
However, DOE does not believe that the proposed energy conservation 
standard will cause a reduction in oil-fired storage water heater 
shipments. For example, today's proposed energy conservation standards 
increase the installed price of electric storage water heaters, gas 
storage water heaters, and instantaneous gas-fired water heaters by 
roughly $132, $101, and $588, respectively over the current baseline 
products. The installed cost of an oil-fired storage water heater 
increases by only $61. DOE does not believe that these minimum price 
increases for consumers would distort the market such that consumers 
would elect to replace oil-fired storage water heaters with another 
type of water heater. DOE addresses the direct employment impacts due 
to standards in section V.B.2.d.
4. Manufacturer Interviews
    DOE interviewed manufacturers representing over 95 percent of 
residential storage water heater sales, about 50 percent of gas-fired 
instantaneous water heater sales, approximately 99 percent of 
traditional DHE sales (gas wall fan, gas wall gravity, gas floor, and 
gas room DHE), over 50 percent of gas hearth DHE sales, and

[[Page 65920]]

about 75 percent of pool heater sales. These interviews were beyond 
those DOE conducted as part of the engineering analysis. DOE used these 
interviews to tailor each GRIM to incorporate unique financial 
characteristics for each industry. DOE contacted companies from its 
database of manufacturers, which provided a representative sample of 
each industry. All interviews provided information that DOE used to 
evaluate the impacts of potential amended energy conservation standards 
on manufacturer cash flows, manufacturing capacities, and employment 
levels.
    Before each telephone interview or site visit, DOE provided company 
representatives with an interview guide that included the topics for 
which DOE sought input. The MIA interview topics included: (1) Key 
issues to this rulemaking; (2) a company overview and organizational 
characteristics; (3) manufacturer production costs and selling prices; 
(4) manufacturer markups and profitability; (5) shipment projections 
and market shares; (6) product mix; (7) financial parameters; (8) 
conversion costs; (9) cumulative regulatory burden; (10) direct 
employment impact assessment; (11) exports, foreign competition, and 
outsourcing; (12) consolidation; and (13) impacts on small business. 
The MIA interview guide for storage water heaters contained three 
additional sections: (1) Ultra-low-NOX water heaters; (2) 
unit shipping methods and associated costs; and (3) alternative energy 
efficiency equations. Appendix 12A of the NOPR TSD contains the five 
interview guides DOE used to conduct the MIA interviews.
    In the manufacturer interviews, DOE asked manufacturers to describe 
their major concerns about this rulemaking. The following sections 
describe the most significant key issues identified by manufacturers. 
DOE also includes additional concerns in chapter 12 of the TSD. DOE's 
responses are provided where relevant in today's notice.
a. Storage Water Heater Key Issues
i. Fuel Switching
    Gas-fired storage, electric storage, and oil-fired storage water 
heater manufacturers are concerned that this energy conservation 
standard rulemaking could cause fuel switching. While most storage 
water heater manufacturers also sell gas-fired instantaneous water 
heaters, storage manufacturers are concerned that a more aggressive 
standard on gas-fired and electric storage units could lower the first 
cost differential of gas-fired instantaneous water heaters and increase 
their market penetration. Increased penetration of gas-fired 
instantaneous water heaters would lower the shipments of storage water 
heaters, resulting in lower profitability and fewer shipments for 
manufacturers that focus on storage water heaters, especially if they 
lose market share to companies that exclusively manufacture 
instantaneous water heaters.
ii. Ultra-Low-NOX Requirements
    Manufacturers that make gas-fired storage water heaters are 
concerned about the large product development costs to meet the ultra-
low-NOX requirements in some regions of the Southwest. In 
particular, manufacturers are concerned that higher energy factors, 
lower NOX emissions, and compliance with existing safety 
regulations are often at odds. Manufacturers also stated that the 
higher cost of the ultra-low-NOX gas storage water heaters 
would hurt consumers in those regions and could cause them to switch to 
less expensive electric storage units.
iii. Profitability
    Manufacturers stated that amended energy conservations standards 
could affect profitability. At any TSL, manufacturers will be forced to 
discontinue a certain percentage of their existing products and make 
potentially significant product and plant modifications. If 
manufacturers earn a lower markup for more-efficient products after the 
amended energy conservation standard, their profit margin would 
decrease. Energy conservation standards could also harm profitability 
by eliminating up-sell opportunities to more-efficient units that earn 
a greater absolute profit. Finally, while manufacturers generally agree 
with DOE's estimate of manufacturer production costs, many noted that 
their actual product offerings are more segmented into multiple models 
made at various production locations. Multiple product offerings could 
make it more difficult to reach the price points DOE calculates. If 
production costs were higher, markups would be lower than the 
manufacturer markup DOE assumes and profitability would decrease.
iv. Appropriateness of Heat Pump Water Heaters
    Heat pump water heaters are effectively required for all rated 
storage volumes at TSL 6 and TSL 7 and for a portion of the market at 
TSL 5 for electric storage water heaters to meet the specified 
efficiency level. Most electric storage water heater manufacturers 
disagreed with DOE's decision to include heat pump water heaters in the 
electric storage water heater product class. In addition, all electric 
storage water heater manufacturers agreed that this technology is only 
appropriate for the ENERGY STAR level, not a minimum required 
efficiency. While many manufacturers intend to or currently are 
designing heat pump water heaters in response to the ENERGY STAR 
requirements, manufacturers believe that setting a minimum standard 
during the design phase is not appropriate and could cause many serious 
and negative consequences.
    Manufacturers listed many reasons why this technology is not ready 
to be applied across the millions of electric storage water heaters 
needed to satisfy demand. A significant problem is that heat pump water 
heaters could not be installed in a large portion of existing homes 
(e.g., 30 to 40 percent of homes), without incurring tremendous costs 
for affected consumers to modify their existing structures. The 
technology also has not been fully developed and has not yet been 
proven reliable for large-scale manufacturing. Some manufacturers are 
concerned that any problems that arise with applying the technology 
across millions of electric storage water heaters that could not be 
proven by the compliance date of the rule would cause significant harm 
to their industry due to the anti-backsliding provision in EPCA. 
Manufacturers stated that other problems could arise with the 
production of heat pump water heaters if the standard were set at TSL 6 
or TSL 7. For example, there is almost no existing capacity to 
manufacture these water heaters, especially on the scale that an energy 
conservation standard would require. Requiring over 4 million annual 
shipments in 2015 could lead to acquisition problems because component 
suppliers are not prepared for such a jump in demand. In particular, 
acquiring sufficient compressors, thermal expansion valves, and other 
purchased parts to meet market demand could be a challenge.
    Manufacturers also added that setting the energy conservation 
standard at a level effectively requiring the use of heat pump 
technology would cause many negative impacts in the industry, even if 
the technology were proven by the compliance date specified in the 
final rule. Because of the increased labor required, manufacturers 
would have to consider shifting a considerable portion of production 
overseas to obtain viable production costs, as was true for the 
residential air-conditioning industry. Domestic employment in the 
industry

[[Page 65921]]

would be affected because only part of the production would likely 
remain in the United States after the compliance date of the amended 
energy conservation standard.
    Manufacturers also stated that they would incur significant 
conversion costs if the standard level effectively mandates heat pump 
water heaters, for the reasons explained below. Every main assembly 
line and feeder line would need modifications to integrate the new 
assembly into existing production facilities. Finally, manufacturers 
would face a significant challenge to retrain their service technicians 
and installers for a completely new technology. Because the technology 
has not been fully developed, the skills needed to service and install 
heat pump water heaters are unknown. However, manufacturers indicated 
that a combination of plumbing and HVAC skills would be required that 
do not exist today.
v. Capital Conversion Costs for Oil-Fired Storage Water Heaters
    Oil-fired storage water heater manufacturers indicated that capital 
conversion costs for oil-fired storage water heaters at higher 
efficiency levels, while perhaps not appearing prohibitively large on a 
nominal basis, are extremely significant relative to the volume of oil-
fired water heater shipments. At any level above TSL 1, at least one 
manufacturer with substantial market share indicated that there is a 
real risk that these capital and product conversion costs could cause 
it to exit the market.
b. Gas-Fired Instantaneous Water Heater Key Issues
i. Potential Market Distortion
    Manufacturers stated that amended energy conservation standard 
could greatly affect the market penetration of gas-fired instantaneous 
water heaters. If the prices were greatly increased relative to storage 
water heaters, market penetration could be slowed. In addition, a 
drastic increase in the required efficiency (at TSL 7) could disrupt 
current arrangements with overseas suppliers or parent companies and 
limit product availability in the United States.
ii. Ultra-Low-NOX Requirements
    Manufacturers of gas-fired instantaneous water heaters expressed 
great concern about the conflicting requirements of higher energy 
factor requirements and pending ultra-low-NOX requirements. 
At most efficiency levels, manufacturers commented that there is a 
tradeoff in burner design between higher efficiency and lower 
NOX emissions. Manufacturers indicated that they have not 
found a solution and are very concerned about concurrently meeting the 
ultra-low-NOX requirements and amended energy conservation 
standards.
c. Direct Heating Equipment Key Issues (Gas Wall Fan, Gas Wall Gravity, 
Gas Floor, and Gas Room Direct Heating Equipment)
i. Consumer Impacts
    Manufacturers remarked that energy conservation standards could 
hurt consumers, arguing that many of existing installations cannot be 
replaced with more-efficient units because of space considerations. 
Customers that choose these units would either have to pay for 
structural modifications or switch to a different heat source. Some 
manufacturers also noted that improvements in efficiency for the most 
common type of traditional DHE (gas wall gravity DHE) have long 
paybacks at any TSL.
    All manufacturers stated that gas wall gravity and gas room DHE 
provide a unique utility by operating in the event of a power failure. 
Manufacturers stated that consumers would be hurt if these products 
required line power, because it would leave many without a backup 
source of heat.
ii. Significant Capital and Product Development Costs
    Manufacturers stated that any product conversion or capital 
conversion cost would be difficult to justify because of the very low 
shipment volumes of each product line. Manufacturers remarked that any 
required investments could force them to reduce their product offerings 
at best and permanently exit the market at worst. Due to the large 
number of product offerings that would need to be recertified and/or 
redesigned, some manufacturers argued that 3 years would not be enough 
lead time. Finally, because shipment volumes are so low, any investment 
would significantly add to the final cost of the product, assuming that 
manufacturers could pass part of the increased cost on to consumers.
    Manufacturers are also concerned that higher production costs could 
drive more consumers to purchase a central system rather than replace 
their failed direct heating system. If shipments declined at all, 
manufacturers stated they would be less able to justify the required 
investment to upgrade products and product lines, which would hurt 
their industry further. All manufacturers said that potential energy 
conservation standards are a real threat to their business and could 
cause them to exit the market completely.
d. Direct Heating Equipment Key Issues (Gas Hearth Direct Heating 
Equipment)
i. Loss of Aesthetic Appeal for Decorative Products
    According to manufacturers, all gas hearth products have an 
aesthetic function in addition to a heating function. In fact, 
manufacturers stated that the primary function of most gas hearth 
products covered by this rulemaking is the ambiance and aesthetic 
appeal provided by the flame. Gas hearth DHE are used mostly to zone 
heat when occupants are in close proximity or to supplement a central 
heating system, but are used as a primary heating source only in very 
rare cases.
    Because gas hearth DHE are mostly decorative items in residences, 
manufacturers believe that energy conservation standards could have a 
different impact on their industry than the water heater industry, for 
example. Gas hearth manufacturers stated that the utility of the other 
strictly heating products covered by today's rule has little to do with 
the appearance of the products and would not be impacted at any 
standard level. For example, the consumer utility from water heaters 
would not be impacted by amended energy conservation standards as long 
as hot water is still delivered. However, the relevant manufacturers 
were greatly concerned that potential energy conversation standards for 
gas hearth DHE could harm their industry and consumers in qualitative 
ways, in addition to the direct impacts on industry value. Their 
customers' needs are related to the size, shape, and appearance of the 
flame, and for these customers, efficiency is not usually a concern, 
given such products' low usage patterns. Manufacturers stated that they 
earn premiums for aesthetic features such as better-looking flames and 
more attractive masonry, rather than higher efficiency. Multiple 
manufacturers stated that the yellow flames that consumers look for in 
a log set depend on a rich gas-to-air mixture, which inherently limits 
the achievable energy efficiency. Hence, at higher efficiency levels, 
it becomes more difficult to improve efficiency and maintain a 
desirable flame color, an impact that is hard to measure and which 
could have a significant detrimental effect on the industry.

[[Page 65922]]

ii. Product Switching and Profitability
    Because the aesthetic appeal of the unit and the flame are critical 
features, manufacturers believed that overly-stringent energy 
conservation standards could cause customers to switch to non-covered 
hearth products, such as wood-burning stoves or strictly decorative 
units, if the energy conservation standards greatly raised prices. 
Finally, manufacturers stated that a significant portion of gas hearth 
products are purchased by builders. Because the appearance of the units 
and the flame are more critical features than efficiency, manufacturers 
believed that higher costs could cause more builders to purchase 
strictly decorative products that are not covered by this rulemaking.
    Besides higher prices potentially causing a switching to non-
covered products, manufacturers were also concerned that higher 
standards had the potential to lower overall demand for gas hearth 
products. At higher costs, manufacturers believe that customers would 
no longer purchase inserts for existing homes or that builders would 
make gas hearth products in new homes an option rather than a standard 
feature. Manufacturers also believe that a shrinking market would 
reduce profits.
e. Pool Heater Key Issues
i. Impacts on Consumers
    Manufacturers stated that an amended energy conservation standards 
set above an efficiency level achievable using atmospheric technology 
(TSL 3 through TSL 6) could hurt consumers. According to manufacturers, 
customers would not recoup the initial higher costs with lower utility 
bills at these TSLs. Because most residential pool heaters are a luxury 
item with low usage patterns, most customers do not purchase units at 
TSL 4 and above. Thus, manufacturers stated that more-efficient 
residential pool heaters are only appropriate in commercial settings 
(e.g., hotels, gyms) because the higher usage allows such customers to 
recoup the higher initial costs.
ii. Future Shipment Trends
    Manufacturers commented that pool heater shipments follow new 
housing starts. Because the new housing market is down, manufacturers 
have lowered their projections for future pool heater sales as well. 
Manufacturers also do not expect future shipments to return to 
historical levels, as recent new housing starts have increasingly been 
on smaller lots that do not have the room to accommodate swimming 
pools.
    Manufacturers are concerned that amended energy conservation 
standards could further decrease future sales. Because pool heaters are 
not a necessity, the higher initial cost could dissuade some consumers 
from replacing a failed unit or adding a heater to a new pool or spa. 
Manufacturers are also concerned that a higher price point for gas-
fired pool heaters could hurt future shipments by making alternatives 
like solar or heat pump pool heaters comparatively cheaper. 
Manufacturers stated that this trend is already a concern because a few 
States and utilities have offered subsidies for solar water heaters.
iii. Future NOX Emission Requirements
    According to manufacturers, residential gas-fired pool heaters are 
currently exempt from ultra-low NOX requirements in the 
Southwest air quality management districts. However, most manufacturers 
voiced a concern over potential future requirements. If air quality 
management districts set more restrictive NOX requirements 
in the future, some manufacturers may be required to incur a costly 
redesign of their burner systems.

I. Employment Impact Analysis

    Employment impacts consist of direct and indirect impacts. Direct 
employment impacts are any changes in the number of employees of 
manufacturers of the appliance products that are the subject of this 
rulemaking, their suppliers, and related service firms. Indirect 
employment impacts are changes in employment in the larger economy that 
occur due to the shift in expenditures and capital investment caused by 
the purchase and operation of more-efficient appliances. The MIA 
addresses the direct employment impacts that concern manufacturers of 
the three heating products.
    Indirect employment impacts from standards consist of the net jobs 
created or eliminated in the national economy, other than in the 
manufacturing sector being regulated, due to: (1) Reduced spending by 
end users on energy (electricity, gas--including liquefied petroleum 
gas--and oil); (2) reduced spending on new energy supply by the utility 
industry; (3) increased spending on new products to which the new 
standards apply; and (4) the effects of those three factors throughout 
the economy. DOE expects the net monetary savings from standards to be 
redirected to other forms of economic activity. DOE also expects these 
shifts in spending and economic activity to affect the demand for labor 
in the short term, as explained below.
    One method for assessing the possible effects on the demand for 
labor of such shifts in economic activity is to compare sectoral 
employment statistics developed by the Labor Department's Bureau of 
Labor Statistics (BLS). (Data on industry employment, hours, labor 
compensation, value of production, and the implicit price deflator for 
output for these industries are available upon request by calling the 
Division of Industry Productivity Studies (202-691-5618) or by sending 
a request by e-mail to [email protected]. See http://www.bls.gov/news.release/prin1.nr0.htm.) The BLS regularly publishes its estimates 
of the number of jobs per million dollars of economic activity in 
different sectors of the economy, as well as the jobs created elsewhere 
in the economy by this same economic activity. Data from BLS indicate 
that expenditures in the utility sector generally create fewer jobs 
(both directly and indirectly) than expenditures in other sectors of 
the economy. There are many reasons for these differences, including 
wage differences and the fact that the utility sector is more capital 
intensive and less labor intensive than other sectors. See Bureau of 
Economic Analysis, Regional Multipliers: A User Handbook for the 
Regional Input-Output Modeling System (RIMS II), U.S. Department of 
Commerce, 1992.
    Energy conservation standards have the effect of reducing consumer 
utility bills. Because reduced consumer expenditures for energy likely 
lead to increased expenditures in other sectors of the economy, the 
general effect of efficiency standards is to shift economic activity 
from a less labor-intensive sector (i.e., the utility sector) to more 
labor-intensive sectors (e.g., the retail and manufacturing sectors).
    In developing the preliminary analysis and today's NOPR, DOE 
estimated indirect national employment impacts using an input/output 
model of the U.S. economy called Impact of Sector Energy Technologies 
(ImSET). ImSET is a spreadsheet model of the U.S. economy that focuses 
on 188 sectors most relevant to industrial, commercial, and residential 
building energy use. (See J. M. Roop, M. J. Scott, and R. W. Schultz, 
ImSET: Impact of Sector Energy Technologies, PNNL-15273, Pacific 
Northwest National Laboratory, 2005). ImSET is a special-purpose 
version of the ``U.S. Benchmark National Input-Output'' (I-O) model 
designed to estimate the national employment and income effects of 
energy-saving technologies. The ImSET software includes a computer-
based I-O model with structural coefficients to characterize economic 
flows among the 188 sectors. ImSET's national economic

[[Page 65923]]

I-O structure is based on a 1997 U.S. benchmark table (See Lawson, Ann 
M., et al., ``Benchmark Input-Output Accounts of the U.S. Economy, 
1997,'' Survey of Current Business, Dec. 2002, pp. 19-117.) Chapter 13 
of the NOPR TSD presents further details on the employment impact 
analysis.

J. Utility Impact Analysis

    The utility impact analysis included an analysis of the potential 
effects of amended energy conservation standards for the three types of 
heating products on the electric and gas utility industries. For this 
analysis, DOE used NEMS-BT to generate forecasts of electricity and 
natural gas consumption, electricity generation by plant type, and 
electric generating capacity by plant type. DOE conducts the utility 
impact analysis as a scenario that departs from the latest AEO 
Reference case. In other words, the energy savings impacts from amended 
energy conservation standards are modeled using NEMS-BT to generate 
forecasts that deviate from the AEO Reference case. Chapter 13 of the 
NOPR TSD presents details on the utility impact analysis.
    NEEA and NPCC urged DOE to consider the impact of gas-fired 
instantaneous water heaters on local gas distribution companies' 
ability to meet hot water demand during peak periods, and the 
possibility that they may have to invest in shoring up system peak 
capacity, adding significant upward pressure on rates. (NEEA and NPCC, 
No. 42 at p. 9) DOE acknowledges that growing use of gas-fired 
instantaneous water heaters could contribute to peak demand problems, 
and that higher-efficiency gas-fired instantaneous water heaters could 
ameliorate the problem. However, DOE currently does not have adequate 
data to reliably quantify the potential impacts.

K. Environmental Analysis

    DOE has prepared a draft environmental assessment (EA) pursuant to 
the National Environmental Policy Act and the requirements of 42 U.S.C. 
6295(o)(2)(B)(i)(VI) and 6316(a) to determine the environmental impacts 
of the proposed standards. DOE estimated the impacts on power sector 
emissions of CO2, NOX, and Hg using the NEMS-BT 
model. Because the on-site operation of non-electric heating products 
requires use of fossil fuels and results in emissions of 
CO2, NOX and sulfur dioxide (SO2), DOE 
also accounted for the reduction in these emissions due to standards at 
the sites where these appliances are used.
1. Impacts of Standards on Emissions
    In the EA, NEMS-BT is run similarly to the AEO NEMS, except that 
heating product energy use is reduced by the amount of energy saved (by 
fuel type) due to each TSL. The inputs of national energy savings come 
from the NIA spreadsheet model; the output is the forecasted physical 
emissions at each TSL. The net benefit of the standard is the 
difference between emissions estimated by NEMS-BT at each TSL and the 
AEO Reference Case.
    NEMS-BT tracks CO2 emissions using a detailed module 
that provides results with broad coverage of all sectors and inclusion 
of interactive effects. For the preliminary TSD, DOE used AEO2008. For 
today's NOPR, DOE used the AEO2009 NEMS (stimulus version). For the 
final rule, DOE intends to revise the emissions analysis using the most 
current AEO.
    DOE has preliminarily determined that SO2 emissions from 
affected Electric Generating Units (EGUs) are subject to nationwide and 
regional emissions cap and trading programs that create uncertainty 
about the standards' impact on SO2 emissions. Title IV of 
the Clean Air Act sets an annual emissions cap on SO2 for 
all affected EGUs. SO2 emissions from 28 eastern States and 
the District of Columbia (D.C.) are also limited under the Clean Air 
Interstate Rule (CAIR, published in the Federal Register on May 12, 
2005. 70 FR 25162 (May 12, 2005), which creates an allowance-based 
trading program that will gradually replace the Title IV program in 
those States and DC. (The recent legal history surrounding CAIR is 
discussed below.) The attainment of the emissions caps is flexible 
among EGUs and is enforced through the use of emissions allowances and 
tradable permits. Energy conservation standards could lead EGUs to 
trade allowances and increase SO2 emissions that offset some 
or all SO2 emissions reductions attributable to the 
standard. DOE is not certain that there will be reduced overall 
SO2 emissions from the standards. The NEMS-BT modeling 
system that DOE used to forecast emissions reductions currently 
indicates that no physical reductions in power sector emissions would 
occur for SO2. The above considerations prevent DOE from 
estimating SO2 reductions from standards at this time.
    Even though DOE is not certain that there will be reduced overall 
emissions from the standard, there may be an economic benefit from 
reduced demand for SO2 emission allowances. Electricity 
savings decrease the generation of SO2 emissions from power 
production, which can lessen the need to purchase SO2 
emissions allowance credits, and thereby decrease the costs of 
complying with regulatory caps on emissions.
    Much like SO2, NOX emissions from 28 eastern 
States and the District of Columbia (DC) are limited under the CAIR. 
Although CAIR has been remanded to EPA by the D.C. Circuit, it will 
remain in effect until it is replaced by a rule consistent with the 
Court's July 11, 2008, opinion in North Carolina v. EPA. 531 F.3d 896 
(D.C. Cir. 2008); see also North Carolina v. EPA, 550 F.3d 1176 (D.C. 
Cir. 2008). Because all States covered by CAIR opted to reduce 
NOX emissions through participation in cap-and-trade 
programs for electric generating units, emissions from these sources 
are capped across the CAIR region.
    In the 28 eastern States and DC where CAIR is in effect, DOE's 
forecasts indicate that no NOX emissions reductions will 
occur because of the permanent cap. Energy conservation standards have 
the potential to produce environmentally-related economic impact in the 
form of lower prices for emissions allowance credits, if they were 
large enough. However, DOE has preliminarily concluded that the 
proposed standard would not have such an effect because the estimated 
reduction in NOX emissions or the corresponding allowance 
credits in States covered by the CAIR cap would be too small to affect 
allowance prices for NOX under the CAIR.
    The proposed standard would reduce NOX emissions in 
those 22 States not affected by the CAIR. As a result, DOE used the 
NEMS-BT to forecast emission reductions from the standards that are 
considered in today's NOPR.
    Similar to emissions of SO2 and NOX, future 
emissions of Hg would have been subject to emissions caps. The Clean 
Air Mercury Rule (CAMR) would have permanently capped emissions of 
mercury for new and existing coal-fired plants in all States beginning 
in 2010 (70 FR 28606). However, the CAMR was vacated by the D.C. 
Circuit in its decision in New Jersey v. Environmental Protection 
Agency. 517 F 3d 574 (D.C. Cir. 2008) Thus, DOE was able to use the 
NEMS-BT model to estimate the changes in Hg emissions resulting from 
the proposed rule.
    EEI stated that DOE's analysis of emissions from electric power 
generation should account for the rise in renewable portfolio standards 
and the possibility of an upcoming CO2 cap and trade 
program, both of which would reduce the amount of emissions produced 
per kWh electricity generated. (EEI, No. 40 at p. 6) DOE's projections

[[Page 65924]]

of CO2 emissions from electric power generation are based on 
the AEO2009 version of NEMS. The emissions projections reflect market 
factors and policies that affect utility choice of power plants for 
electricity generation, including existing renewable portfolio 
standards. Because of the speculative nature of forecasting future 
regulations, DOE does not include the impact of possible future 
regulations in its forecasts.
    EEI stated that if DOE examines changes in power plant emissions, 
then it should also examine changes in the emissions associated with 
oil extraction (domestic and overseas), crude oil transportation (sea 
and land-based), natural gas flaring, oil refining, refined oil 
delivery, natural gas production, natural gas delivery, natural gas 
delivery system methane leaks, propane production and delivery, and 
emissions associated with the extraction and importation of liquefied 
natural gas. (EEI, No. 40 at p. 6)
    Emissions occur at each stage of the extraction, conversion, and 
delivery of the energy supply chain. Nonetheless, emissions are 
dominated by power plant emissions in the case of electric appliances 
and in-house emissions in the case of natural gas and oil-fired 
appliances, so DOE focuses on those points.
    The operation of non-electric heating products requires use of 
fossil fuels and results in emissions of CO2, NOX 
and SO2 at the sites where these appliances are used. NEMS-
BT provides no means for estimating such emissions. DOE calculated the 
effect of the proposed standards on the above site emissions based on 
emissions factors derived from the literature.
2. Valuation of CO2 Emissions Reductions
    DOE received comments on the desirability of valuing the 
CO2 emissions reductions that result from standards. NRDC 
stated that DOE must account for the value of avoided carbon emissions. 
(NRDC, No. 48 at p. 4) NEEA and NPCC stated that it would be 
inappropriate to assign a value of zero to avoided carbon emissions. 
(NEEA and NPCC, No. 42 at p. 10) Earthjustice stated that DOE must 
consider well-established literature on the value of CO2 
emissions to consider reduced emissions in States that will remain 
outside CO2 reduction regimes. (Earthjustice, No. 47 at p. 
4)
    For today's NOPR, DOE is relying on a new set of values recently 
developed by an interagency process that conducted a thorough review of 
existing estimates of the social cost of carbon (SCC). The SCC is 
intended to be a monetary measure of the incremental damage resulting 
from greenhouse gas (GHG) emissions, including, but not limited to, net 
agricultural productivity loss, human health effects, property damages 
from sea level rise, and changes in ecosystem services. Any effort to 
quantify and to monetize the harms associated with climate change will 
raise serious questions of science, economics, and ethics. But with 
full regard for the limits of both quantification and monetization, the 
SCC can be used to provide estimates of the social benefits of 
reductions in GHG emissions.
    For at least three reasons, any single estimate of the SCC will be 
contestable. First, scientific and economic knowledge about the impacts 
of climate change continues to grow. With new and better information 
about relevant questions, including the cost, burdens, and possibility 
of adaptation, current estimates will inevitably change over time. 
Second, some of the likely and potential damages from climate change--
for example, the value society places on adverse impacts on endangered 
species--are not included in all of the existing economic analyses. 
These omissions may turn out to be significant in the sense that they 
may mean that the best current estimates are too low. Third, 
controversial ethical judgments, including those involving the 
treatment of future generations, play a role in judgments about the SCC 
(see in particular the discussion of the discount rate, below).
    To date, regulations have used a range of values for the SCC. For 
example, a regulation proposed by the U.S. Department of Transportation 
(DOT) in 2008 assumed a value of $7 per ton CO2 (2006$) for 
2011 emission reductions (with a range of $0-14 for sensitivity 
analysis). Regulation finalized by DOE used a range of $0-$20 (2007$). 
Both of these ranges were designed to reflect the value of damages to 
the United States resulting from carbon emissions, or the ``domestic'' 
SCC. In the final Model Year 2011 Corporate Average Fuel Economy rule, 
DOT used both a domestic SCC value of $2/t CO2 and a global 
SCC value of $33/t CO2 (with sensitivity analysis at $80/
tCO2), increasing at 2.4 percent per year thereafter.
    In recent months, a variety of agencies have worked to develop an 
objective methodology for selecting a range of interim SCC estimates to 
use in regulatory analyses until improved SCC estimates are developed. 
The following summary reflects the initial results of these efforts and 
proposes ranges and values for interim social costs of carbon used in 
this rule. It should be emphasized that the analysis described below is 
preliminary. These complex issues are of course undergoing a process of 
continuing review. Relevant agencies will be evaluating and seeking 
comment on all of the scientific, economic, and ethical issues before 
establishing final estimates for use in future rulemakings.
    The interim judgments resulting from the recent interagency review 
process can be summarized as follows: (a) DOE and other Federal 
agencies should consider the global benefits associated with the 
reductions of CO2 emissions resulting from efficiency 
standards and other similar rulemakings, rather continuing the previous 
focus on domestic benefits; (b) these global benefits should be based 
on SCC estimates (in 2007$) of $55, $33, $19, $10, and $5 per ton of 
CO2 equivalent emitted (or avoided) in 2007 (in calculating 
the benefits reported in this NOPR, DOE has escalated the 2007$ values 
to 2008$ for consistency with other dollar values presented in this 
notice, resulting in SCC estimates (in 2008$) of approximately $5, $10, 
$20, $34, and $56); (c) the SCC value of emissions that occur (or are 
avoided) in future years should be escalated using an annual growth 
rate of 3 percent from the current values); and (d) domestic benefits 
are estimated to be approximately 6 percent of the global values. These 
interim judgments are based on the following considerations.
    1. Global and domestic estimates of SCC. Because of the distinctive 
nature of the climate change problem, estimates of both global and 
domestic SCC values should be considered, but the global measure should 
be ``primary.'' This approach represents a departure from past 
practices, which relied, for the most part, on measures of only 
domestic impacts. As a matter of law, both global and domestic values 
are permissible; the relevant statutory provisions are ambiguous and 
allow the agency to choose either measure. (It is true that Federal 
statutes are presumed not to have extraterritorial effect, in part to 
ensure that the laws of the United States respect the interests of 
foreign sovereigns. But use of a global measure for the SCC does not 
give extraterritorial effect to Federal law and hence does not intrude 
on such interests.)
    It is true that under OMB guidance, analysis from the domestic 
perspective is required, while analysis from the international 
perspective is optional. The domestic decisions of one nation are not 
typically based on a judgment about the effects of those decisions on

[[Page 65925]]

other nations. But the climate change problem is highly unusual in the 
sense that it involves (a) a global public good in which (b) the 
emissions of one nation may inflict significant damages on other 
nations and (c) the United States is actively engaged in promoting an 
international agreement to reduce worldwide emissions.
    In these circumstances, the global measure is preferred. Use of a 
global measure reflects the reality of the problem and is expected to 
contribute to the continuing efforts of the United States to ensure 
that emission reductions occur in many nations.
    Domestic SCC values are also presented. The development of a 
domestic SCC is greatly complicated by the relatively few region- or 
country-specific estimates of the SCC in the literature. One potential 
estimate comes from the DICE (Dynamic Integrated Climate Economy, 
William Nordhaus) model. In an unpublished paper, Nordhaus (2007) 
produced disaggregated SCC estimates using a regional version of the 
DICE model. He reported a U.S. estimate of $1/tCO2 (2007 
value, 2007$), which is roughly 11 percent of the global value.
    An alternative source of estimates comes from a recent EPA modeling 
effort using the FUND (Climate Framework for Uncertainty, Negotiation 
and Distribution, Center for Integrated Study of the Human Dimensions 
of Global Change) model. The resulting estimates suggest that the ratio 
of domestic to global benefits varies with key parameter assumptions. 
With a 3 percent discount rate, for example, the US benefit is about 6 
percent of the global benefit for the ``central'' (mean) FUND results, 
while, for the corresponding ``high'' estimates associated with a 
higher climate sensitivity and lower global economic growth, the US 
benefit is less than 4 percent of the global benefit. With a 2 percent 
discount rate, the U.S. share is about 2 to 5 percent of the global 
estimate.
    Based on this available evidence, a domestic SCC value equal to 6 
percent of the global damages is used in this rulemaking. This figure 
is in the middle of the range of available estimates from the 
literature. It is recognized that the 6 percent figure is approximate 
and highly speculative and alternative approaches will be explored 
before establishing final values for future rulemakings.
    2. Filtering existing analyses. There are numerous SCC estimates in 
the existing literature, and it is legitimate to make use of those 
estimates to produce a figure for current use. A reasonable starting 
point is provided by the meta-analysis in Richard Tol, ``The Social 
Cost of Carbon: Trends, Outliers, and Catastrophes, Economics: The 
Open-Access, Open-Assessment E-Journal,'' Vol. 2, 2008-25. http://www.economics-ejournal.org/economics/journalarticles/2008-25 (2008). 
With that starting point, it is proposed to ``filter'' existing SCC 
estimates by using those that (1) are derived from peer-reviewed 
studies; (2) do not weight the monetized damages to one country more 
than those in other countries; (3) use a ``business as usual'' climate 
scenario; and (4) are based on the most recent published version of 
each of the three major integrated assessment models (IAMs): FUND, DICE 
and PAGE (Policy Analysis of the Greenhouse Effect).
    Proposal (1) is based on the view that those studies that have been 
subject to peer review are more likely to be reliable than those that 
have not been. Proposal (2) is based on a principle of neutrality and 
simplicity; it does not treat the citizens of one nation differently on 
the basis of speculative or controversial considerations. Proposal (3) 
stems from the judgment that as a general rule, the proper way to 
assess a policy decision is by comparing the implementation of the 
policy against a counterfactual state where the policy is not 
implemented. A departure from this approach would be to consider a more 
dynamic setting in which other countries might implement policies to 
reduce GHG emissions at an unknown future date, and the United States 
could choose to implement such a policy now or in the future.
    Proposal (4) is based on three complementary judgments. First, the 
FUND, PAGE, and DICE models now stand as the most comprehensive and 
reliable efforts to measure the damages from climate change. Second, 
the latest versions of the three IAMs are likely to reflect the most 
recent evidence and learning, and hence they are presumed to be 
superior to those that preceded them. It is acknowledged that earlier 
versions may contain information that is missing from the latest 
versions. Third, any effort to choose among them, or to reject one in 
favor of the others, would be difficult to defend at this time. In the 
absence of a clear reason to choose among them, it is reasonable to 
base the SCC on all of them.
    The agency is keenly aware that the current IAMs fail to include 
all relevant information about the likely impacts from greenhouse gas 
emissions. For example, ecosystem impacts, including species loss, do 
not appear to be included in at least two of the models. Some human 
health impacts, including increases in food-borne illnesses and in the 
quantity and toxicity of airborne allergens, also appear to be 
excluded. In addition, there has been considerable recent discussion of 
the risk of catastrophe and of how best to account for worst-case 
scenarios. It is not clear whether the three IAMs take adequate account 
of these potential effects.
    3. Use a model-weighted average of the estimates at each discount 
rate. At this time, there appears to be no scientifically valid reason 
to prefer any of the three major IAMs (FUND, PAGE, and DICE). 
Consequently, the estimates are based on an equal weighting of 
estimates from each of the models. Among estimates that remain after 
applying the filter, the average of all estimates within a model is 
derived. The estimated SCC is then calculated as the average of the 
three model-specific averages. This approach ensures that the interim 
estimate is not biased towards specific models or more prolific 
authors.
    4. Apply a 3 percent annual growth rate to the chosen SCC values. 
SCC is assumed to increase over time, because future emissions are 
expected to produce larger incremental damages as physical and economic 
systems become more stressed as the magnitude of climate change 
increases. Indeed, an implied growth rate in the SCC is produced by 
most studies that estimate economic damages caused by increased GHG 
emissions in future years. But neither the rate itself nor the 
information necessary to derive its implied value is commonly reported. 
In light of the limited amount of debate thus far about the appropriate 
growth rate of the SCC, applying a rate of 3 percent per year seems 
appropriate at this stage. This value is consistent with the range 
recommended by IPCC (2007) and close to the latest published estimate 
(Hope, 2008).
    For climate change, one of the most complex issues involves the 
appropriate discount rate. OMB's current guidance offers a detailed 
discussion of the relevant issues and calls for discount rates of 3 
percent and 7 percent. It also permits a sensitivity analysis with low 
rates for intergenerational problems. (``If your rule will have 
important intergenerational benefits or costs you might consider a 
further sensitivity analysis using a lower but positive discount rate 
in addition to calculating net benefits using discount rates of 3 and 7 
percent.'') The SCC is being developed within the general context of 
the current guidance.
    The choice of a discount rate, especially over long periods of 
time, raises highly contested and exceedingly difficult questions of 
science,

[[Page 65926]]

economics, philosophy, and law. See, e.g., William Nordhaus, ``The 
Challenge of Global Warming (2008); Nicholas Stern, The Economics of 
Climate Change'' (2007); ``Discounting and Intergenerational Equity'' 
(Paul Portney and John Weyant, eds., 1999). Under imaginable 
assumptions, decisions based on cost-benefit analysis with high 
discount rates might harm future generations--at least if investments 
are not made for the benefit of those generations. See Robert Lind, 
``Analysis for Intergenerational Discounting,'' id. at 173, 176-177. At 
the same time, use of low discount rates for particular projects might 
itself harm future generations, by ensuring that resources are not used 
in a way that would greatly benefit them. In the context of climate 
change, questions of intergenerational equity are especially important.
    Reasonable arguments support the use of a 3 percent discount rate. 
First, that rate is among the two figures suggested by OMB guidance, 
and hence it fits with existing National policy. Second, it is standard 
to base the discount rate on the compensation that people receive for 
delaying consumption, and the 3 percent rate is close to the risk-free 
rate of return, proxied by the return on long term inflation-adjusted 
U.S. Treasury Bonds. (In the context of climate change, it is possible 
to object to this standard method for deriving the discount rate.) 
Although these rates are currently closer to 2.5 percent, the use of 3 
percent provides an adjustment for the liquidity premium that is 
reflected in these bonds' returns.
    At the same time, other arguments support use of a 5 percent 
discount rate. First, that rate can also be justified by reference to 
the level of compensation for delaying consumption, because it fits 
with market behavior with respect to individuals' willingness to trade 
off consumption across periods as measured by the estimated post-tax 
average real returns to private investment (e.g., the S&P 500). In the 
climate setting, the 5 percent discount rate may be preferable to the 
riskless rate because it is based on risky investments and the return 
to projects to mitigate climate change is also risky. In contrast, the 
3 percent riskless rate may be a more appropriate discount rate for 
projects where the return is known with a high degree of confidence 
(e.g., highway guardrails).
    Second, 5 percent, and not 3 percent, is roughly consistent with 
estimates implied by reasonable inputs to the theoretically derived 
Ramsey equation, which specifies the optimal time path for consumption. 
That equation specifies the optimal discount rate as the sum of two 
components. The first reflects the fact that consumption in the future 
is likely to be higher than consumption today (even accounting for 
climate impacts), so diminishing marginal utility implies that the same 
monetary damage will cause a smaller reduction of utility in the 
future. Standard estimates of this term from the economics literature 
are in the range of 3 to 5 percent. The second component reflects the 
possibility that a lower weight should be placed on utility in the 
future, to account for social impatience or extinction risk, which is 
specified by a pure rate of time preference (PRTP). A conventional 
estimate of the PRTP is 2 percent. (Some observers believe that a 
principle of intergenerational equity suggests that the PRTP should be 
close to zero.) It follows that discount rate of 5 percent is within 
the range of values which are able to be derived from the Ramsey 
equation, albeit at the low end of the range of estimates usually 
associated with Ramsey discounting.
    It is recognized that the arguments above--for use of market 
behavior and the Ramsey equation--face objections in the context of 
climate change, and of course there are alternative approaches. In 
light of climate change, it is possible that consumption in the future 
will not be higher than consumption today, and if so, the Ramsey 
equation will suggest a lower figure. Some people have suggested that a 
very low discount rate, below 3 percent, is justified in light of the 
ethical considerations calling for a principle of intergenerational 
neutrality. See Nicholas Stern, ``The Economics of Climate Change'' 
(2007); for contrary views, see William Nordhaus, A Question of Balance 
(2008); Martin Weitzman, ``Review of the Stern Review on the Economics 
of Climate Change.'' Journal of Economic Literature, 45(3): 703-724 
(2007). Additionally, some analyses attempt to deal with uncertainty 
with respect to interest rates over time; a possible approach enabling 
the consideration of such uncertainties is discussed below. Richard 
Newell and William Pizer, ``Discounting the Distant Future: How Much Do 
Uncertain Rates Increase Valuations?'' J. Environ. Econ. Manage. 46 
(2003) 52-71.
    The application of the methodology outlined above yields estimates 
of the SCC that are reported in Table IV.31. These estimates are 
reported separately using 3 percent and 5 percent discount rates. The 
cells are empty in rows 10 and 11 because these studies did not report 
estimates of the SCC at a 3 percent discount rate. The model-weighted 
means are reported in the final or summary row; they are $33 per 
tCO2 at a 3% discount rate and $5 per tCO2 with a 
5% discount rate.

Table IV.31--Global Social Cost of Carbon Estimates ($/tCO2 in 2007 in 2007$), Based on 3% and 5% Discount Rates
                                                        *
----------------------------------------------------------------------------------------------------------------
                        Model                   Study             Climate scenario          3%            5%
----------------------------------------------------------------------------------------------------------------
1............  FUND..................  Anthoff et al. 2009...  FUND default..........          6              -1
2............  FUND..................  Anthoff et al. 2009...  SRES A1b..............          1              -1
3............  FUND..................  Anthoff et al. 2009...  SRES A2...............          9              -1
4............  FUND..................  Link and Tol 2004.....  No THC................         12               3
5............  FUND..................  Link and Tol 2004.....  THC continues.........         12               2
6............  FUND..................  Guo et al. 2006.......  Constant PRTP.........          5              -1
7............  FUND..................  Guo et al. 2006.......  Gollier discount 1....         14               0
8............  FUND..................  Guo et al. 2006.......  Gollier discount 2....          7              -1
                                                               FUND Mean.............          8.25            0
9............  PAGE..................  Wahba & Hope 2006.....  A2-scen...............         57               7
10...........  PAGE..................  Hope 2006.............  ......................  ............            7
11...........  DICE..................  Nordhaus 2008.........  ......................  ............            8
----------------------------------------------------------------------------------------------------------------

[[Page 65927]]

 
Summary......................................................  Model-weighted Mean...         33               5
----------------------------------------------------------------------------------------------------------------
* The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus (2008),
  Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND, PAGE, or
  DICE and use business-as-usual climate scenarios. All values are based on the best available information from
  the underlying studies about the base year and year dollars, rather than the Tol (2008) assumption that all
  estimates included in his review are 1995 values in 1995$. All values were updated to 2007 using a 3 percent
  annual growth rate in the SCC, and adjusted for inflation using GDP deflator.

    DOE used the model-weighted mean values of $33 and $5 per ton 
(2007$), as these represent the estimates associated with the 3 percent 
and 5 percent discount rates, respectively. The 3 percent and 5 percent 
estimates have independent appeal and at this time a clear preference 
for one over the other is not warranted. These values were then 
escalated to 2008$ and rounded to $34 and $5. Thus, DOE has also 
included--and centered its current attention on--the average of the 
estimates associated with these discount rates, which is approximately 
$20 (in 2008$). (Based on the $20 global value, the domestic value 
would be approximately $1 per ton of CO2 equivalent.)
    It is true that there is uncertainty about interest rates over long 
time horizons. Recognizing that point, Newell and Pizer have made a 
careful effort to adjust for that uncertainty. See Newell and Pizer, 
supra. This is a relatively recent contribution to the literature.
    There are several concerns with using this approach in this 
context. First, it would be a departure from current OMB guidance. 
Second, an approach that would average what emerges from discount rates 
of 3 percent and 5 percent reflects uncertainty about the discount 
rate, but based on a different model of uncertainty. The Newell-Pizer 
approach models discount rate uncertainty as something that evolves 
over time; in contrast, one alternative approach would assume that 
there is a single discount rate with equal probability of 3 percent and 
5 percent.
    Table IV.32 reports on the application of the Newell-Pizer 
adjustments. The precise numbers depend on the assumptions about the 
data generating process that governs interest rates. Columns (1a) and 
(1b) assume that ``random walk'' model best describes the data and uses 
3 percent and 5 percent discount rates, respectively. Columns (2a) and 
(2b) repeat this, except that it assumes a ``mean-reverting'' process. 
As Newell and Pizer report, there is stronger empirical support for the 
random walk model.

 Table IV.32--Global Social Cost of Carbon Estimates ($/tCO2 in 2007 in 2007$),* Using Newell & Pizer Adjustment
                                     for Future Discount Rate Uncertainty**
----------------------------------------------------------------------------------------------------------------
                                                                  Random-walk model       Mean-reverting model
                                                             ---------------------------------------------------
              Model             Study       Climate scenario       3%           5%           3%           5%
                                                             ---------------------------------------------------
                                                                  (1a)         (1b)         (2a)         (2b)
----------------------------------------------------------------------------------------------------------------
1......  FUND...........  Anthoff et al.    FUND default....           10            0            7           -1
                           2009.
2......  FUND...........  Anthoff et al.    SRES A1b........            2            0            1           -1
                           2009.
3......  FUND...........  Anthoff et al.    SRES A2.........           15            0           10           -1
                           2009.
4......  FUND...........  Link and Tol      No THC..........           20            6           13            4
                           2004.
5......  FUND...........  Link and Tol      THC continues...           20            4           13            2
                           2004.
6......  FUND...........  Guo et al. 2006.  Constant PRTP...            9            0            6           -1
7......  FUND...........  Guo et al. 2006.  Gollier discount           14            0           14            0
                                             1.
8......  FUND...........  Guo et al. 2006.  Gollier discount            7           -1            7           -1
                                             2.
                                            FUND Mean.......           12            1            9            0
9......  PAGE...........  Wahba & Hope      A2-scen.........           97           13           63            8
                           2006.
10.....  PAGE...........  Hope 2006.......  ................  ...........           13  ...........            8
11.....  DICE...........  Nordhaus 2008...  ................  ...........           15  ...........            9
----------------------------------------------------------------------------------------------------------------
Summary...................................  Model-weighted             55           10           36            6
                                             Mean.
----------------------------------------------------------------------------------------------------------------
* The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus (2008),
  Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND, PAGE, or
  DICE and use business-as-usual climate scenarios. All values are based on the best available information from
  the underlying studies about the base year and year dollars, rather than the Tol (2008) assumption that all
  estimates included in his review are 1995 values in 1995$. All values were updated to 2007 using a 3 percent
  annual growth rate in the SCC, and adjusted for inflation using GDP deflator.
** Assumes a starting discount rate of 3 percent. Newell and Pizer (2003) based adjustment factors are not
  applied to estimates from Guo et al. (2006) that use a different approach to account for discount rate
  uncertainty (rows 7-8).

    The resulting estimates of the social cost of carbon are 
necessarily greater. When the adjustments from the random walk model 
are applied, the estimates of the social cost of carbon are $10 and $55 
(2007$), with the 5 percent and 3 percent discount rates, respectively. 
The application of the mean-reverting adjustment yields estimates of $6 
and $36 (2007$). Since the random walk model has greater support from 
the data, DOE also used the SCC values of $10 and $55 (2007$). When 
escalated to 2008$, these values were approximately $10 and $56.
    In summary, in considering the potential global benefits resulting 
from reduced CO2 emissions, DOE used values based on a 
social cost of carbon of approximately $5, $10, $20, $34 and

[[Page 65928]]

$56 per metric ton avoided in 2007 (values expressed in 2008$). DOE 
also calculated the domestic benefits based on a value of approximately 
$1 per metric ton avoided in 2007. To monetize the CO2 
emissions reductions expected to result from amended standards for 
heating products in 2013-2045, DOE escalated the above values for 2007 
using a three-percent escalation rate. As indicated in the discussion 
above, estimates of SCC are assumed to increase over time since future 
emissions are expected to produce larger incremental damages as 
physical and economic systems become more stressed as the magnitude of 
climate change increases. Although most studies that estimate economic 
damages caused by increased GHG emissions in future years produce an 
implied growth rate in the SCC, neither the rate itself nor the 
information necessary to derive its implied value is commonly reported. 
However, applying a rate of 3 percent per year is consistent with the 
range recommended by IPCC (2007).
    DOE recognizes that scientific and economic knowledge about the 
contribution of CO2 and other GHG to changes in the future 
global climate and the potential resulting damages to the world economy 
continues to evolve rapidly. Thus, any value placed in this rulemaking 
on CO2 emissions reduction is subject to change. DOE, 
together with other Federal agencies, will continue to review various 
methodologies for estimating the monetary value of reductions in 
CO2 and other greenhouse gas emissions. This ongoing review 
will consider the comments on this subject that are part of the public 
record for this and other rulemakings, as well as other methodological 
assumptions and issues. However, consistent with DOE's legal 
obligations, and taking into account the uncertainty involved with this 
particular issue, DOE has included in this proposed rule the most 
recent values and analyses resulting from the ongoing interagency 
review process.
3. Valuation of Other Emissions Reductions
    DOE also investigated the potential monetary benefit of reduced 
NOX and Hg emissions from the TSLs it considered. As 
previously stated, DOE's analysis assumed the presence of nationwide 
emission caps on SO2 and caps on NOX emissions in 
the 28 States covered by the CAIR. In the presence of these caps, the 
NEMS-BT modeling system that DOE used to forecast emissions reduction 
indicated that no physical reductions in power sector emissions would 
occur for SO2, but that the standards could put slight 
downward pressure on the prices of emissions allowances in cap-and-
trade markets. Estimating this effect is very difficult because such 
factors as credit banking can change the trajectory of prices. From its 
modeling to date, DOE is unable to estimate a benefit from 
SO2 emissions reductions at this time. See the environmental 
assessment in the NOPR TSD for further details.
    As noted above, new or amended energy conservation standards would 
reduce NOX emissions in those 22 States that are not 
affected by the CAIR, in addition to the reduction in site 
NOX emissions nationwide. DOE estimated the monetized value 
of NOX emissions reductions resulting from each of the TSLs 
considered for today's NOPR based on environmental damage estimates 
from the literature. Available estimates suggest a very wide range of 
monetary values, ranging from $370 per ton to $3,800 per ton of 
NOX from stationary sources, measured in 2001$ (equivalent 
to a range of $442 to $4,540 per ton in 2008$). Refer to the OMB, 
Office of Information and Regulatory Affairs, ``2006 Report to Congress 
on the Costs and Benefits of Federal Regulations and Unfunded Mandates 
on State, Local, and Tribal Entities,'' Washington, DC, for additional 
information.
    For Hg emissions reductions, DOE estimated the monetized values 
resulting from the TSLs considered for today's NOPR based on 
environmental damage estimates from the literature. The impact of 
mercury emissions from power plants on humans is considered highly 
uncertain. However, DOE identified two estimates of the environmental 
damage of mercury based on estimates of the adverse impact of childhood 
exposure to methyl mercury on intelligence quotient (IQ) for American 
children, and subsequent loss of lifetime economic productivity 
resulting from these IQ losses. The high-end estimate is based on an 
estimate of the current aggregate cost of the loss of IQ in American 
children that results from exposure to mercury of U.S. power plant 
origin ($1.3 billion per year in 2000$), which works out to $33.3 
million per ton emitted per year (2008$). Refer to L. Trasande et al., 
``Applying Cost Analyses to Drive Policy that Protects Children,'' 1076 
Ann. N.Y. Acad. Sci. 911 (2006) for additional information. DOE's low-
end estimate is $0.66 million per ton emitted (in 2004$) or $0.745 
million per ton in 2008$. DOE derived this estimate from an evaluation 
of mercury control that used different methods and assumptions from the 
first study but was also based on the present value of the lifetime 
earnings of children exposed. See Ted Gayer and Robert Hahn, 
``Designing Environmental Policy: Lessons from the Regulation of 
Mercury Emissions,'' Regulatory Analysis 05-01, AEI-Brookings Joint 
Center for Regulatory Studies, Washington, DC (2004). A version of this 
paper was published in the Journal of Regulatory Economics in 2006.
    EEI stated that the costs of remediating emissions of 
CO2, SO2, NOX, and Hg are included in 
the rates customers pay, so monetizing their values would be double 
counting. (EEI, No. 40 at p. 6) DOE understands the comment as 
referring to actions power plant operators take to meet environmental 
regulations, the costs of which are reflected in electricity rates. 
With regulations currently in place, revised standards for heating 
products would result in a reduction in CO2, NOX, 
and Hg emissions by avoiding electricity generation. Because these 
emissions impose societal costs, their reduction has an economic value 
that can be estimated.
    Earthjustice stated that DOE must calculate and monetize the value 
of the reductions in emissions of particulate matter (PM) that will 
result from standards; even if DOE cannot consider secondary PM 
emissions, it must consider primary emissions. (Earthjustice, No. 47 at 
p. 5) DOE agrees that PM impacts are of concern due to human exposures 
that can impact health. But impacts of PM emissions reduction are much 
more difficult to estimate than other emissions reductions due to the 
complex interactions between PM, other power plant emissions, 
meteorology and atmospheric chemistry that impact human exposure to 
particulates. Human exposure to PM usually occurs at a significant 
distance from the power plants that are emitting particulates and 
particulate precursors. When power plant emissions travel this distance 
they undergo highly complex atmospheric chemical reactions. While the 
Environmental Protection Agency (EPA) does keep inventories of direct 
PM emissions of power plants, in its source attribution reviews the EPA 
does not separate direct PM emissions from power plants from the 
particulates indirectly produced through complex atmospheric chemical 
reactions. This is in part because SO2 emissions react with 
direct PM emissions particles to produce combined sulfate particulates. 
Thus it is not useful to examine how the standard impacts direct PM 
emissions independent of indirect PM production and atmospheric 
dynamics. DOE is not currently able to run a model that can

[[Page 65929]]

make these estimates reliably at the national level.
    Earthjustice stated that DOE must consider coming climate change 
legislation and a national cap on carbon emissions and must account for 
the effect of the standards in reducing allowance prices. 
(Earthjustice, No. 47 at p. 4) Because no climate change legislation 
has been enacted to date, the timing and shape of any national cap on 
carbon emissions is uncertain at this point. Therefore, DOE did not 
account for such a cap in its NOPR analysis.

V. Analytical Results

A. Trial Standard Levels

    DOE analyzed the benefits and burdens of a number of TSLs for each 
of the three types of heating products separately. For a given product 
consisting of several product classes, DOE developed some of the TSLs 
so that each TSL is comprised of energy efficiency levels from each 
product class that exhibit similar characteristics. For example, in the 
case of water heaters, one of the TSLs consists of the max-tech 
efficiency levels from each product class being considered for this 
rulemaking. DOE attempted to limit the number of TSLs considered for 
the NOPR by eliminating efficiency levels that do not exhibit 
significantly different economic and/or engineering characteristics 
from the efficiency levels already selected as a TSL. A description of 
each TSL DOE analyzed for each of the three types of heating products 
is provided below. While DOE only presents the results for those 
efficiency levels in TSL combinations in today's NOPR, DOE presents the 
results for all efficiency levels analyzed in the NOPR TSD. DOE 
requests comments on the results for all of the efficiency levels since 
DOE could consider any combination of efficiency levels for the final 
rule as a result of comments from interested parties.
1. Water Heaters
    Table V.1 shows the seven TSLs DOE analyzed for water heaters. 
Since amended water heater standards would apply to the full range of 
storage volumes, DOE is presenting the TSLs for water heaters in terms 
of the energy efficiency equations, rather than only showing the 
required efficiency level at the representative capacities. As 
discussed in section IV.C.7, DOE is using the alternative energy-
efficiency equations developed in the engineering analysis for the 
NOPR. DOE is grouping the energy efficiency equations for each of the 
four water heater product classes to show the benefits and burdens of 
amended energy conservation standards.
    For TSL 1, 2, 3, and 4, DOE is using the rated storage volume 
divisions and the energy efficiency equations as shown in section 
IV.C.7, which specify a two-slope approach. TSL 1 consists of the 
efficiency levels for each product class that are approximately equal 
to the current shipment-weighted average efficiency. TSL 2 and TSL 3 
consist of efficiency levels with slightly higher efficiencies compared 
to TSL 1 for most of the product classes. TSL 4 represents the maximum 
electric resistance water heater efficiency across the entire range of 
storage volumes that DOE analyzed for electric storage water heaters, 
and the maximum atmospherically vented efficiency across the entire 
range of storage volumes that DOE analyzed for gas-fired storage water 
heaters.
    For TSL 5, DOE further modified the two-slope approach developed in 
the engineering analysis. For this TSL, DOE considers a pairing of 
efficiency levels that would promote the penetration of advanced 
technologies into the electric and gas-fired storage water heater 
markets and potentially save additional energy by using a two-slope 
approach with different requirements for each subsection. Consequently, 
DOE pairs an efficiency level requiring heat pump technology for large-
volume electric storage water heaters with an efficiency level 
achievable using electric resistance technology for small-volume 
electric storage water heaters. In addition, DOE pairs an efficiency 
level requiring condensing technology for large-volume gas storage 
water heaters with an efficiency level that can be achieved in 
atmospherically vented gas-fired storage water heaters with increased 
insulation thickness for small storage volumes.
    In addition to pairing different technologies for small and large 
volume products for TSL 5, DOE also modified the division point between 
small-volume and large-volume gas-fired and electric storage water 
heaters. DOE used an analysis of market data to determine the initial 
division points (see section IV.C.7 for details), which were 60 gallons 
for gas-fired storage water heaters and 80 gallons for electric storage 
water heaters. These division points are used to modify the two-slope 
equations for TSLs 1, 2, 3, and 4 (as well as TSLs 6 and 7, described 
below). Because DOE pairs two different technologies for consideration 
as an amended standard in TSL 5, DOE is concerned that manufacturers 
may attempt to circumvent the increased standards for large-volume 
water heaters by producing water heaters at volumes just below the 
division points. As a result, DOE has chosen to modify the division 
points for TSL 5 to 55 gallons for gas-fired and electric storage water 
heaters to attempt to mitigate the potential loophole. TSL 5 includes 
efficiency levels that effectively require heat pump technology for 
electric storage water heater with rated storage volumes above 55 
gallons, and efficiency levels that effectively require condensing 
technology for gas-fired storage water heaters with rated storage 
volumes above 55 gallons. Using DOE's shipments model and market 
assessment, DOE estimated approximately 4 percent of gas-fired storage 
water heater shipments and 11 percent of models would be subject to the 
large-volume water heater requirements using the TSL 5 division. 
Similarly, DOE estimated approximately 9 percent of electric storage 
water heater shipments and 27 percent of models would be subject to the 
large volume water heater requirements using the TSL 5 division.
    DOE specifically seeks comment on the different approach taken in 
TSL 5, including the rated storage volume division of 55 gallons 
between small and large storage volumes for gas-fired and electric 
storage water heaters at TSL 5. In particular, DOE is interested in 
comments from interested parties regarding whether DOE should consider 
an alternative division in the final rule, including (but not limited 
to), 66 gallons or 75 gallons. In addition, DOE seeks comments 
regarding whether different divisions should be specified for gas-fired 
and electric storage water heaters such that a similar percentage of 
the market is impacted in terms of shipments and/or models.
    TSL 6 uses the same divisions as TSL 1, 2, 3, and 4 for gas-fired 
water heaters. TSL 6 is identical to TSL 4 except DOE is considering a 
heat pump water heater level for electric storage water heaters across 
the entire range of storage volumes, which is compatible with ENERGY 
STAR criteria for electric storage water heaters at the representative 
rated storage volume. DOE did use a division point for the max-tech 
energy efficiency equations as described in the engineering analysis. 
TSL 7 consists of the max-tech efficiency levels for each of the water 
heater product classes at the time the analysis was developed. TSL 6 
and 7 both require efficiency levels that can be met using heat pump 
technology for electric storage water heaters. TSL 7, however, requires 
a higher efficiency level than TSL 6, which corresponds to the max-tech 
efficiency level for the representative rated storage capacity (i.e., 
2.2 EF at 50 gallons). TSL 7 also

[[Page 65930]]

requires efficiency levels that can be met using condensing technology 
for gas-fired storage and instantaneous water heaters.
    Table V.1 demonstrates the energy efficiency equations and 
associated two slope divisions for TSLs 1 through 7.

 Table V.1--Trial Standard Levels for Residential Water Heaters (Energy
                                 Factor)
------------------------------------------------------------------------
            emsp;                     emsp;                 emsp;
------------------------------------------------------------------------
Trial standard level                  Energy efficiency equation
------------------------------------------------------------------------
TSL 1.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.675-(0.0015 x  EF = 0.699-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                              For ESWHs with a      For ESWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 80
                               80 gallons:           gallons:
                              EF = 0.967-(0.00095   EF = 1.013-(0.00153
                               x Rated Storage       x Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.64-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------
TSL 2.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.717-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                              For ESWHs with a      For ESWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 80
                               80 gallons:           gallons:
                              EF = 0.966-(0.0008 x  EF = 1.026-(0.00155
                               Rated Storage         x Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.66-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------
TSL 3.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.717-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                              For ESWHs with a      For ESWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 80
                               80 gallons:           gallons:
                              EF = 0.965-(0.0006 x  EF = 1.051-(0.00168
                               Rated Storage         x Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.66-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------
TSL 4.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.717-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                              For ESWHs with a      For ESWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.960-(0.0003 x  EF = 1.088-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.68-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------

[[Page 65931]]

 
TSL 5.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 55
                               55 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.831-(0.00078
                               Rated Storage         x Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                              For ESWHs with a      For ESWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 55
                               55 gallons:           gallons:
                              EF = 0.960-(0.0003 x  EF = 2.057-(0.00113
                               Rated Storage         x Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.68-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------
TSL 6.......................  For GSWHs with a      For GSWHs with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.717-(0.0019 x
                               Rated Storage         Rated Storage
                               Volume in gallons).   Volume in gallons).
                             -------------------------------------------
                               For ESWHs (over the Entire Rated Storage
                                             Volume range):
                              EF = 2.057-(0.00113 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.68-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.82-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------
TSL 7.......................   For GSWHs (over the Entire Rated Storage
                                             Volume range):
                              EF = 0.831-(0.00078 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For ESWHs (over the Entire Rated Storage
                                             Volume range):
                              EF = 2.057-(0.00113 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For OSWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.74-(0.0019 x Rated Storage Volume
                                              in gallons).
                             -------------------------------------------
                               For GIWHs (over the Entire Rated Storage
                                             Volume range):
                               EF = 0.95-(0.0019 x Rated Storage Volume
                                              in gallons).
------------------------------------------------------------------------

2. Direct Heating Equipment
    Table V.2 demonstrates the six TSLs DOE analyzed for DHE. TSL 1 
consists of the efficiency levels that are close to the current 
shipment-weighted average efficiency. TSL 2, TSL 3 and TSL 4 consist of 
efficiency levels that have gradually higher efficiency than TSL 1. TSL 
5 consists of the efficiency levels that include electronic ignition 
and fan assist (where applicable), and TSL 6 consists of the max-tech 
efficiency levels.

                      Table V.2--Trial Standard Levels for Direct Heating Equipment (AFUE)
----------------------------------------------------------------------------------------------------------------
                                             TSL 1       TSL 2       TSL 3       TSL 4       TSL 5       TSL 6
              Product class                (percent)   (percent)   (percent)   (percent)   (percent)   (percent)
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan (over 42,000 Btu/h)........          75          76          77          80          75          80
Gas Wall Gravity (over 27,000 and up to           66          68          71          71          72          72
 46,000 Btu/h)..........................
Gas Floor (over 37,000 Btu/h)...........          58          58          58          58          58          58
Gas Room (over 27,000 and up to 46,000            66          67          68          68          83          83
 Btu/h).................................
Gas Hearth (over 27,000 and up to 46,000          67          67          67          72          72          93
 Btu/h).................................
----------------------------------------------------------------------------------------------------------------

3. Gas-Fired Pool Heaters
    Table V.3 shows the six TSLs DOE analyzed for pool heaters. TSL 1 
consists of the efficiency level that is close to the current shipment-
weighted average efficiency. TSL2 and TSL 3 consist of the efficiency 
levels that have gradually higher efficiency than TSL 1. TSL 4 is the 
highest efficiency level with positive NPV. TSL 5 is the highest 
analyzed non-condensing efficiency level, and TSL 6 consists of the 
max-tech efficiency level.

[[Page 65932]]



                                Table V.3--Trial Standard Levels for Pool Heaters
                                              [Thermal efficiency]
----------------------------------------------------------------------------------------------------------------
                                             TSL 1       TSL 2       TSL 3       TSL 4       TSL 5       TSL 6
              Product class                (percent)   (percent)   (percent)   (percent)   (percent)   (percent)
----------------------------------------------------------------------------------------------------------------
Gas.....................................          81          82          83          84          86          95
----------------------------------------------------------------------------------------------------------------

B. Economic Justification and Energy Savings

1. Economic Impacts on Consumers
a. Life-Cycle Cost and Payback Period
    Consumers affected by new or amended standards usually experience 
higher purchase prices and lower operating costs. Generally, these 
impacts are best captured by changes in life-cycle costs and payback 
period. Therefore, DOE calculated the LCC and PBP for the potential 
standard levels considered in this rulemaking. DOE's LCC and PBP 
analyses provided key outputs for each TSL, which are reported by 
product in Table V.4 through Table V.13, below. In each table, the 
first two outputs are the average total LCC and the average LCC 
savings. The next three outputs show the percentage of households where 
the purchase of a product complying with each TSL would create a net 
life-cycle cost, no impact, or a net life-cycle savings for the 
purchaser. The last outputs are the median PBP and the average PBP for 
the consumer purchasing a design that complies with the TSL. The 
results for each TSL are relative to the efficiency distribution in the 
base case (no amended standards).
    DOE based its LCC and PBP analyses for heating products on energy 
consumption under conditions of actual use, whereas it based the 
rebuttable presumption PBP test on consumption under conditions 
prescribed by the DOE test procedure, as required by EPCA. (42 U.S.C. 
6295(o)(2)(B)(iii))

                                             Table V.4--Gas-Fired Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62        3,369           69            9           22           69          1.4          4.6
2, 3, 4.........................................         0.63        3,369           68           15           17           68          2.7         11.6
5...............................................       * 0.63        3,355           78           16           16           68          3.0         12.1
6...............................................         0.67        3,618         -150           67            6           27         20.9         24.6
7...............................................         0.80        3,522          -55           62            1           36         14.1         14.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5, the EF and the results represent shipments-weighted averages f the EFs and results that apply to small- and large-volume water heaters,
  respectively. For the other TSLs the EF and the results refer to the representative rated volume (40 gal).


                                             Table V.5--Electric Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92        3,372           16           10           32           59          2.8          7.8
2...............................................         0.93        3,361           23           11           29           60          3.0          8.0
3...............................................         0.94        3,351           32           20           14           66          4.5          8.6
4...............................................         0.95        3,342           39           25           10           65          5.8          8.8
5...............................................       * 1.04        3,306           96           25           10           65          5.9          9.1
6...............................................         2.00        3,145          224           45            5           50          8.3         25.9
7...............................................         2.20        3,095          273           45            1           54          8.2         21.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5, the EF and the results represent shipments-weighted averages of the EFs and results that apply to small- and large-volume water heaters,
  respectively. For the other TSLs the EF and the results refer to the representative rated volume (50 gal).


                                             Table V.6 Oil-Fired Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.58        8,616          171            0           69           31          0.7          0.8
2...............................................         0.60        8,377          288            0           52           48          0.4          0.3
3, 4, 5, 6......................................         0.62        8,190          395            0           45           55          0.5          0.7
7...............................................         0.68        7,863          655            0            7           93          1.4          1.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 65933]]


                                          Table V.7--Gas-Fired Instantaneous Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2, 3, 4, 5...................................         0.82        5,409            0           11           85            4         23.5         30.4
6...............................................         0.92        5,665         -181           70           15           15         34.1         50.2
7...............................................         0.95        5,798         -307           83            6           12         39.5         58.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Table V.8--Gas Wall Fan DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 5............................................           75        6,879           73            3           59           38          3.1          3.1
2...............................................           76        6,842           90            5           55           41          3.9          6.7
3...............................................           77        6,825          104           30           14           56          6.0         15.0
4, 6............................................           80        6,793          135           44            5           52          9.8         22.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                  Table V.9--Gas Wall Gravity DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           66        6,533           25           12           70           18          8.1         14.8
2...............................................           68        6,458           83           19           40           41          6.5         10.9
3, 4............................................           71        6,349          192           39            0           61          8.3         14.1
5, 6............................................           72        6,473           68           59            0           41         13.0         26.5
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                     Table V.10--Gas Floor DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2, 3, 4, 5, 6................................           58        7,404           13           25           57           18         14.7         20.4
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                      Table V.11--Gas Room DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           66        7,702           42           19           50           31          8.1         13.4
2...............................................           67        7,630           96           19           25           56          4.9          9.4
3, 4............................................           68        7,567          143           20           25           55          5.3         10.2
5, 6............................................           83        6,892          646           26           25           49          7.0         15.2
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 65934]]


                                                     Table V.12--Gas Hearth DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2, 3.........................................           67        5,195           96            9           51           40          0.0          7.9
4, 5............................................           72        5,388          -70           69           13           17         25.9         77.6
6...............................................           93        5,571         -253           81            0           19         37.5         78.2
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                 Table V.13--Gas-Fired Pool Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                    Thermal                                         Households with
                       TSL                         efficiency  Average LCC  Average LCC ---------------------------------------    Median      Average
                                                       %          2008$       savings                              Net benefit     years        years
                                                                               2008$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           81        6,383           24            6           64           30          2.5          3.5
2...............................................           82        6,395           18           31           46           22          7.4         10.1
3...............................................           83        6,395           39           52           24           24         10.6         18.7
4...............................................           84        6,461          -13         * 59           22           20         13.0         19.5
5...............................................           86        7,034         -555           90            6            5         28.6         42.4
6...............................................           95        7,809       -1,323           96            1            3         28.1         37.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 4, DOE determined that 14 percent of the consumers will experience a net cost smaller than 2 percent of their total LCC (see chapter 8 of the
  TSD).

b. Analysis of Consumer Subgroups
    For gas-fired and electric storage water heaters, and gas wall fan 
and gas wall gravity DHE, DOE estimated consumer subgroup impacts for 
low-income households and senior-only households. In addition, for gas-
fired and electric storage water heaters, DOE estimated consumer 
subgroup impacts for households in multi-family housing and households 
in manufactured homes as well. (As a reminder and as explained in 
section IV.6, not all products in this rulemaking were included in 
DOE's consumer subgroup analysis.)
    For gas-fired storage water heaters, the impacts of the proposed 
standard (0.63 EF) are roughly the same for the senior-only sample and 
the low-income sample as they are for the full household sample for 
this product class. For the multi-family sample and the manufactured 
home sample, the average LCC savings are somewhat lower than they are 
for the full household sample, and the fraction of households 
experiencing a cost (negative savings) is higher. In both cases, 
however, the average LCC savings is positive, and more than half of the 
households in the identified subgroups would experience an LCC benefit.
    For electric storage water heaters, the impacts of the proposed TSL 
4 standard (0.95 EF) are roughly the same for the senior-only sample as 
they are for the full household sample for this product class. The 
impacts are slightly more negative for the low-income sample, and they 
are moderately more negative for the multi-family sample and the 
manufactured home sample. The average LCC savings are -$2 for the 
latter two subgroups, but in both cases, more than half of the 
households in the identified subgroups would experience an LCC benefit.
    In the case of a standard for electric storage water heaters at TSL 
5, which would require 2.0 EF only for large-volume water heaters, the 
negative subgroup impacts seen in the case of TSL 6 are substantially 
less because only a small fraction of the households in the subgroups 
has large-volume water heaters for which the standard would effectively 
require a heat pump water heater.
    In the case of a standard for electric storage water heaters at TSL 
6, the average LCC savings are lower for all of the subgroups than for 
the full household sample for this product class. The multi-family 
subgroup would experience an average negative LCC savings of $359 
(i.e., the average LCC would increase), and three-fourths of the 
households in the subgroup would experience a net cost. For the other 
subgroups, the fraction of households that would experience a net cost 
is close to or just above 50 percent, which is slightly higher than for 
the full household sample. The impact on the multi-family subgroup is 
primarily due to the lower hot water use among these households.
    For gas wall fan and gas wall gravity DHE, DOE estimated that the 
impacts of the proposed standards are roughly the same for the senior-
only sample and the low-income sample as they are for the full 
household sample for these product classes.
    Chapter 11 of the NOPR TSD presents the detailed results of the 
consumer subgroup analysis.

                  Table V.14--Comparison of Subgroup Impacts for Electric Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                    Average LCC     Households
                            Subgroup                                  savings      with net cost  Median payback
                                                                      (2008$)           (%)       period (years)
----------------------------------------------------------------------------------------------------------------
                                             0.95 EF
----------------------------------------------------------------------------------------------------------------
Senior-only.....................................................              38              24             5.3
Low-income......................................................              17              29             6.3

[[Page 65935]]

 
Multi-family....................................................              -2              35             6.8
Mobile Home.....................................................              -2              34             7.0
All Households..................................................              39              25             5.8
----------------------------------------------------------------------------------------------------------------
                                             2.0 EF
----------------------------------------------------------------------------------------------------------------
Senior-only.....................................................              30              52             9.8
Low-income......................................................             143              49             9.3
Multi-family....................................................            -359              76            23.8
Mobile Home.....................................................              81              51             9.6
All Households..................................................             224              45             8.3
----------------------------------------------------------------------------------------------------------------

c. Rebuttable Presumption Payback
    As discussed above, EPCA provides a rebuttable presumption that an 
energy conservation standard is economically justified if the increased 
purchase cost for a product that meets the standard is less than three 
times the value of the first-year energy savings resulting from the 
standard (42 U.S.C. 6295(o)(2)(B)(iii)) DOE's LCC and PBP analyses 
generate values that calculate the payback period for consumers of 
potential energy conservation standards, which includes, but is not 
limited to, the three-year payback period contemplated under the 
rebuttable presumption test discussed above. However, DOE routinely 
conducts a full economic analysis that considers the full range of 
impacts, including those to the consumer, manufacturer, Nation, and 
environment, as required under 42 U.S.C. 6295(o)(2)(B)(i).
    In the present case, DOE calculated a rebuttable presumption 
payback period for each TSL. Rather than using distributions for input 
values, DOE used discrete values and, as required by EPCA, based the 
calculation on the assumptions in the DOE test procedures for the three 
types of heating products. As a result, DOE calculated a single 
rebuttable presumption payback value, and not a distribution of payback 
periods, for each standard level. Table V.15 through Table V.17 show 
the rebuttable presumption payback periods that are less than 3 years. 
For gas-fired and electric storage water heaters and gas wall gravity 
DHE and gas room DHE, there were no payback periods under 3 years.
    While DOE examined the rebuttable-presumption criterion, it 
considered whether the standard levels considered for today's rule are 
economically justified through a more detailed analysis of the economic 
impacts of these levels pursuant to 42 U.S.C. 6295(o)(2)(B)(i). The 
results of this analysis serve as the basis for DOE to definitively 
evaluate the economic justification for a potential standard level 
(thereby supporting or rebutting the results of any preliminary 
determination of economic justification).

          Table V.15--Water Heaters: Rebuttable Payback Periods
------------------------------------------------------------------------
                                                      Energy      PBP
                   Product class                      factor    (years)
------------------------------------------------------------------------
Oil-Fired Storage.................................       0.54        1.0
                                                         0.56        0.7
                                                         0.58        0.9
                                                         0.60        0.5
                                                         0.62        0.7
                                                         0.66        1.4
                                                         0.68        1.3
Gas-Fired Instantaneous...........................       0.69        0.9
------------------------------------------------------------------------


    Table V.16--Direct Heating Equipment: Rebuttable Payback Periods
------------------------------------------------------------------------
                                                                  PBP
                   Product class                      AFUE %    (years)
------------------------------------------------------------------------
Gas Wall Fan DHE..................................         75        2.9
                                                           76        2.9
Gas Hearth DHE....................................         67        2.0
------------------------------------------------------------------------


          Table V.17--Pool Heaters: Rebuttable Payback Periods
------------------------------------------------------------------------
                 Thermal efficiency %                       PBP years
------------------------------------------------------------------------
79....................................................               1.1
81....................................................               1.9
------------------------------------------------------------------------

2. Economic Impacts on Manufacturers
    DOE performed an MIA to estimate the impact of amended energy 
conservation standards on manufacturers of residential water heaters, 
DHE, and pool heaters. Chapter 12 of the NOPR TSD explains this 
analysis in further detail. The tables below depict the financial 
impacts on manufacturers (represented by changes in INPV) and the 
conversion costs DOE estimates manufacturers would incur at each TSL. 
DOE shows the results by grouping product classes made by the same 
manufacturer and uses the scenarios that show the likely changes in 
industry value following amended energy conservation standards. In the 
following discussion, the INPV results refer the difference in industry 
value between the base case and the standards case that result from the 
sum of discounted cash flows from the base year (2010) through the end 
of the analysis period. The results also discuss the difference in cash 
flow between the base case and the standards case in the year before 
the compliance date of amended energy conservation standards. This 
figure gives a representation of how large the required conversion 
costs are relative to the cash flow generated by the industry in the 
absence of amended energy conservation standards. In the engineering 
analysis, DOE presents its findings of the common technology options 
that achieve the efficiencies for each of the representative product 
classes. To refer to the description of technology options and the 
required efficiencies at each TSL, see section IV.C of today's notice.
a. Water Heater Cash-Flow Analysis Results
    DOE modeled two different markup scenarios to estimate the 
potential impacts of amended energy conservation standards on 
residential water heater manufacturers. To assess the lower end of the 
range of potential impacts on water heater manufacturers, DOE modeled 
the preservation of return on invested capital scenario. Besides the 
impact of the main NIA shipment scenario and the required capital and 
product conversion costs on INPV, this case models that manufacturers 
would

[[Page 65936]]

maintain the base-case return on invested capital in the standards 
case. This scenario represents the lower end of the range of potential 
impacts on manufacturers because manufacturers generate a historical 
rate of additional operating profit on the physical and financial 
investments required by energy conservation standards.
    To assess the higher end of the range of potential impacts on the 
residential water heater industry, DOE modeled the preservation of 
operating profit markup scenario in which higher energy conservation 
standards result in lower manufacturer markups. This scenario models 
manufacturers' concerns about the higher costs of more efficient 
technology harming profitability. The scenario represents the upper end 
of the range of potential impacts on manufacturers only because no 
additional operating profit is earned on the investments required the 
meet the amended energy conservation standards. The results of these 
scenarios for the residential water heater industry are presented in 
Table V.18 through Table V.23.
i. Cash-Flow Analysis Results for Gas-Fired and Electric Storage Water 
Heaters

  Table V.18--Manufacturer Impact Analysis for Gas-Fired and Electric Storage Water Heaters--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Trial standard level
                                                  Units           Base case ----------------------------------------------------------------------------
                                                                                 1          2          3          4          5          6          7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..................................  (2008$ millions)........      842.7      838.9      837.7      837.8      839.2      821.8      840.7      905.7
Change in INPV........................  (2008$ millions)........  .........      (3.8)      (5.1)      (4.9)      (3.5)     (20.9)      (2.0)       62.9
                                        (%).....................  .........     -0.45%     -0.60%     -0.59%     -0.41%     -2.48%     -0.24%      7.47%
Product Conversion Costs..............  (2008$ millions)........  .........       11.0       13.2       13.2       13.2       28.9       55.7       72.6
Capital Conversion Costs..............  (2008$ millions)........  .........        0.0        3.9        3.9       37.1       58.0       69.3      189.2
Total Investment Required.............  (2008$ millions)........  .........       11.0       17.0       17.0       50.3       86.9      125.0      261.8
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Table V.19--Manufacturer Impact Analysis for Gas-Fired and Electric Storage Water Heaters--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Trial standard level
                                                  Units           Base case ----------------------------------------------------------------------------
                                                                                 1          2          3          4          5          6          7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..................................  (2008$ millions)........      842.7      830.4      812.0      807.4     $763.9      712.8     $536.9     $305.1
Change in INPV........................  (2008$ millions)........  .........     (12.3)     (30.7)     (35.3)     (78.8)    (129.9)    (305.8)    (537.6)
                                        (%).....................  .........     -1.46%     -3.64%     -4.19%     -9.35%    -15.41%    -36.29%    -63.79%
Product Conversion Costs..............  (2008$ millions)........  .........       11.0       13.2       13.2       13.2       28.9       55.7       72.6
Capital Conversion Costs..............  (2008$ millions)........  .........        0.0        3.9        3.9       37.1       58.0       69.3      189.2
Total Investment Required.............  (2008$ millions)........  .........       11.0       17.0       17.0       50.3       86.9      125.0      261.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    TSL 1 represents an improvement in efficiency from the baseline 
level of 0.59 EF to 0.62 EF for gas-fired storage water heaters for the 
representative rated storage volume of 40 gallons. For electric storage 
water heaters TSL 1 represents an improvement in efficiency from the 
baseline level of 0.90 EF to 0.92 EF for the representative rated 
storage volume of 50 gallons. At TSL 1, DOE estimates the impacts on 
INPV to range from -$3.8 million to -$12.3 million, or a change in INPV 
of -0.45 percent to -1.46 percent. At this level, the industry cash 
flow is estimated to decrease by approximately 4.8 percent, to $58.1 
million, compared to the base-case value of $61.0 million in the year 
leading up to the standards. Currently, over 75 percent of the gas-
fired storage water heaters are sold at the baseline level. However, 
all manufacturers also offer a full line of gas-fired storage water 
heaters that meet the gas-fired efficiencies at TSL 1. Although the 
majority of the electric storage water heater shipments do not meet TSL 
1, every manufacturer also offers a full line of electric storage water 
heaters at or above this level. Because manufacturers have existing 
products and manufacturers could reach the required efficiencies with 
relatively minor changes to the foam insulation thickness at TSL 1, 
manufacturers of gas-fired and electric storage water heaters would 
have minimal conversion costs at TSL 1. Because the technology required 
at TSL 1 is similar to the baseline, the INPV impacts are similar for 
both markup scenarios. It is hence unlikely that TSL 1 would greatly 
reduce manufacturers' profitability.
    TSL 2 represents an improvement in efficiency from the baseline 
level of 0.59 EF to 0.63 EF for gas-fired storage water heaters for the 
representative rated storage volume of 40 gallons. For electric storage 
water heaters, TSL 2 represents an improvement in efficiency from the 
baseline level of 0.90 EF to 0.93 EF for the representative rated 
storage volume of 50 gallons. At TSL 2, DOE estimates the impacts on 
INPV to range from -$5.1 million to -$30.7 million, or a change in INPV 
of -0.60 percent to -3.64 percent. At this level, the industry cash 
flow is estimated to decrease by approximately 8.7 percent, to $55.7 
million, compared to the base-case value of $61.0 million in the year 
leading up to the standards. Currently, over 80 percent of the gas-
fired storage water heaters sold do not meet TSL 2. At TSL 2, 
manufacturers are expected to meet the gas-fired efficiency 
requirements by adding additional insulation to their existing 
products. The conversion costs at TSL 2 are

[[Page 65937]]

relatively minor for gas-fired storage water heaters because most 
manufacturers have a full line of products at the required efficiency 
for TSL 2 and only minor changes in the manufacturing process would be 
required. Although the majority of the electric storage water heater 
market is below the efficiency specified for electric storage water 
heaters at TSL 2, more than 28 percent of the market is at or above 
this level. Manufacturers would have increasing conversion costs for 
both capital and product conversion for electric storage water heaters 
to modify production facilities to accommodate the extra insulation 
required at TSL 2. Because the technology required at TSL 2 is similar 
to the baseline for gas-fired and electric storage water heaters, 
however, it is unlikely that TSL 2 would greatly impact manufacturers' 
profitability.
    Similar to TSL 2, TSL 3 represents an improvement in efficiency 
from the baseline level of 0.59 EF to 0.63 EF for gas-fired storage 
water heaters for the representative rated storage volume of 40 
gallons. Because the efficiency requirements for gas-fired storage 
water heaters are the same at TSL 3 as at TSL 2, the impacts on 
manufacturers are the same as at TSL 2 for the gas-fired storage 
efficiency requirements. There are small impacts on manufacturers to 
improve the efficiency of the majority of the gas-fired storage 
shipments from the baseline. However, because these changes are 
expected to be relatively minor increases to the insulation thickness, 
the impacts on the industry are not substantial because these changes 
do not greatly alter the current manufacturing process. TSL 3 
represents a further improvement in efficiency for electric storage 
water heaters from the baseline level of 0.90 EF to 0.94 EF for the 
representative rated storage volume of 50 gallons. To achieve the 
efficiency levels for TSL 3, electric storage manufacturers would be 
expected to further increase tank insulation thickness, with still 
relatively small conversion costs because many manufacturers already 
manufacture storage water heaters at TSL 3. DOE estimates the INPV 
impacts to range from -$4.9 million to -$35.3 million, or a change in 
INPV of -0.59 percent to -4.19 percent. At this level, the industry 
cash flow is estimated to decrease by approximately 8.7 percent to 
$55.7 million, compared to the base-case value of $61.0 million in the 
year leading up to the standards.
    Similar to TSL 2 and TSL 3, TSL 4 represents an improvement in 
efficiency from the baseline level of 0.59 EF to 0.63 EF for gas-fired 
storage water heaters for the representative rated storage volume of 40 
gallons. Because the efficiency requirements for gas-fired storage 
water heaters are the same at TSL 4 as at TSL 2 and TSL 3, the impacts 
on gas-fired manufacturers are the same. There are small impacts on 
manufacturers to improve the efficiency of the majority of the gas-
fired storage shipments from the baseline. However, because these 
changes are expected to be relatively minor increases to the insulation 
thickness, the impacts on the industry are not substantial because 
these changes do not greatly alter the current manufacturing process. 
TSL 4 represents a further improvement in efficiency from the baseline 
level of 0.90 EF to 0.95 EF for electric storage water heaters at the 
representative rated storage volume of 50 gallons. Based on a review of 
units on the market at these efficiency levels, DOE expects that 
manufacturers would likely further increase insulation levels. Because 
not all manufacturers have models at this efficiency currently 
available on the market, however, DOE expects that electric storage 
water heater manufacturers would incur higher conversion costs at TSL 4 
than at TSL 3. At TSL 4, DOE estimates the INPV impacts to range from -
$3.5 million to -$78.8 million, or a change in INPV of -0.41 percent to 
-9.35 percent. At this level, the industry cash flow is estimated to 
decrease by approximately 33.2 percent to $40.8 million, compared to 
the base-case value of $61.0 million in the year leading up to the 
standards. Only a small number of electric storage water heaters on the 
market meet the efficiency level for electric storage water heaters 
required by TSL 4. Electric storage manufacturers would have increasing 
conversion costs for both capital and product conversion to greatly 
increase the production of low volume products. The capital conversion 
costs for electric storage water heaters are more substantial than for 
gas-fired storage water heaters because each production line would 
require additional foaming stations to accommodate the greatly 
increased insulation thicknesses and, due to slower production speeds, 
adding additional production lines in existing facilities to maintain 
current shipment volumes. Manufacturers also noted that they were 
concerned about TSL 4 for electric storage water heaters because of 
problems with the test procedure that could make it difficult replicate 
the efficiencies required at this TSL.
    TSL 5 has the same efficiency requirements as TSL 4 for gas-fired 
and electric storage water heaters with rated storage volumes less than 
55 gallons. Because the efficiency requirements for gas-fired and 
electric storage water heaters with rated storage volumes less than 55 
gallons are equal to TSL 4, at TSL 5 manufacturers share the same 
concerns for these rated storage volumes as at TSL 4. However, the 
efficiency requirements for gas-fired storage water heaters with rated 
storage volumes greater than 55 gallons effectively require condensing 
technology, and the efficiency requirements for electric storage water 
heaters with rated storage volumes greater than 55 gallons effectively 
require heat pump technology. At TSL 5, DOE estimates the INPV impacts 
to range from -$20.9 million to -$129.9 million, or a change in INPV of 
-2.48 percent to -15.41 percent. At this level, the industry cash flow 
is estimated to decrease by approximately 55.6 percent to $27.1 
million, compared to the base-case value of $61.0 million in the year 
leading up to the standards. The higher, negative impacts on INPV are 
largely caused by the additional conversion costs required to 
substantially change the technology commonly used in large size gas-
fired and electric storage water heaters today. DOE estimates the 
approximately 4 percent of gas-fired storage water heater shipments 
with rated volumes greater than 55 gallons would require an additional 
$13 million in conversion costs to use condensing technology. DOE 
estimates the approximately 9 percent of gas-fired storage water heater 
shipments with rated volumes greater than 55 gallons would require an 
additional $24 million in conversion costs to use heat pump technology.
    Much of the additional capital conversion costs calculated for 
large volume sizes at TSL 5 involve creating an additional gas-fired 
and electric assembly line in a facility adjacent to a current 
production facility. Because high-volume manufacturing facilities are 
typically arranged for units with similar assembly processes, the more 
complex technology used for larger rated volumes at TSL 5 could not be 
accommodated on existing production lines. The estimated product 
conversion costs at TSL 5 would involve retraining existing service and 
installation personnel, who have little experience installing and 
servicing storage water heaters that use these advanced technologies. 
To minimize unit damage and warranty claims and improve market 
acceptance, manufacturers would likely have to expend significant 
additional resources to hire training staff to provide more technical 
support.

[[Page 65938]]

The other portion of the product conversion costs for large rated 
volumes are the product development effort to redesign existing 
products. Manufacturers could face constraints regarding the abilities 
of their engineering teams to develop multiple water heater families at 
TSL 5, as most engineering departments have limited experience with 
either technology. At a minimum, the efficiency requirements at TSL 5 
would require manufacturers to convert existing commercial condensing 
gas products for residential use. However, multiple manufacturers would 
also have to develop completely new platforms in order to remain cost-
competitive. Even if a manufacturer were to offer incur these high 
conversion costs, the high product development and capital conversion 
costs for a small segment of the overall market make it likely that 
consumers will have fewer product families to choose from after the 
compliance date of the final rule.
    Even if manufacturers offer gas condensing and electric heat pump 
water heaters for the large gallon sizes at TSL 5, there could be 
additional, negative impacts on consumers that could lead to a smaller 
market for these products. Consumers might no longer purchase water 
heaters with rated storage volumes above 55 gallons because of 
substantially higher increased first costs than most products currently 
on the market, the unfamiliar technologies, and size limitations. 
Because of these changes in the market, at TSL 5, manufacturers could 
decide that the demand for residential heat pump and condensing gas 
water heaters would drop to a point where the high product conversion 
and capital costs required for a small portion of total shipments are 
not justified. As a result, manufacturers would no longer manufacture 
residential storage water heaters at rated storage volumes above 55 
gallons. In addition, consumers could be impacted if fewer contractors 
were willing to install these more complex products, especially if 
field technicians did not obtain any additional licenses and test 
equipment that could be required to service heat pump water heaters. 
These additional requirements would also likely increase installation 
and service costs beyond current levels since consumers would have 
fewer servicers/installers to choose from.
    Similar to TSL 2 through TSL 4, TSL 6 represents an improvement in 
efficiency from the baseline level of 0.59 EF to 0.63 EF for gas-fired 
storage water heaters for the representative rated storage volume of 40 
gallons. Similarly, the impacts on manufacturers due to the gas-fired 
storage efficiencies are relatively minor because the required 
efficiencies for all volume sizes can likely be met with relatively 
minor changes to the insulation thickness. For electric storage water 
heaters, TSL 6 represents an improvement in efficiency from the 
baseline level of 0.90 EF to 2.0 EF for electric storage water heaters 
at the representative rated storage volume of 50 gallons. At TSL 6, DOE 
estimates the impacts on INPV to range from -$2.0 million to -$305.8 
million, or a change in INPV of -0.24 percent to -36.29 percent. At TSL 
6, the industry cash flow is estimated to decrease by approximately 
75.7 percent, to $14.8 million, compared to the base-case value of 
$61.0 million in the year leading up to the standards. To achieve 
efficiencies at or above TSL 6 would require the use of heat pumps for 
electric storage water heaters for all rated volumes, a technology 
option that has yet to see wide adoption in the U.S. market. The higher 
expected purchased part content and market pressures would be expected 
to reduce manufacturer profits margins substantially. Although most 
electric storage water heater manufacturers indicated that they are in 
the process of developing heat pump water heaters, all manufacturers 
believe that an efficiency level that requires heat pump water heater 
technology is not appropriate as an amended energy conservation 
standard. Manufacturers stated that they would face substantial costs 
to switch their entire electric storage water heater production over to 
heat pump electric storage water heaters. Several manufacturers expect 
that they will have to buy the heat pump modules from outside vendors 
since most water heater manufacturers have no experience manufacturing 
heat pumps and have limited space in their facilities to produce heat 
pump systems. Multiple manufacturers stated that even if they were to 
simply buy and integrate heat pump modules, there would be substantial 
product development and capital conversion costs because present 
facilities are not adequate to handle the heat pump modules. DOE 
estimates that manufacturers would incur almost $70 million in capital 
conversion costs to modify production facilities to exclusively 
manufacture heat pump electric storage water heaters. These capital 
conversion cost estimates do not include the cost of building 
manufacturing capacity to produce the heat pump modules because DOE 
believes manufacturers will likely purchase these as subassemblies.
    Furthermore, manufacturers stated that they would consider moving 
all or part of their existing production capacity abroad if the energy 
conservation standard is set at TSL 6 because many manufacturers expect 
that they would have to redesign their facilities completely to 
accommodate a minimum energy conservation standard at this TSL. 
According to these manufacturers, building a new facility entails less 
business disruption risk than attempting to completely redesign and 
upgrade existing facilities, and lower labor rates in Mexico and other 
countries abroad may entice manufacturers to move their production 
facilities outside of the U.S. In addition, manufacturers are very 
concerned about the significant number of customers who would face 
extremely costly installations for electric storage water heater 
replacements if a standard effectively requiring heat pump technology 
is mandated. According to manufacturers, a significant percentage of 
electric storage water heaters are installed in space-constrained 
environments which cannot accommodate the additional space required for 
the heat pump module. This is especially true for mobile homes and 
other consumer sub-groups that use smaller capacity tanks.
    Another concern of manufacturers at TSL 6 is the amount of 
additional training that would be necessary to upgrade the 
installation, distribution, and maintenance networks on the scale 
necessary to support an electric storage water heater market that used 
heat pump technology exclusively. Stated more simply, manufacturers are 
concerned that the typical installer or repair person would not have 
the requisite knowledge to troubleshoot or repair heat pump water 
heaters. Manufacturers also expressed concern about profitability if 
amendments to the minimum energy conservation standard for electric 
storage water heaters were to require the use of heat pump technology. 
An amended energy conservation standard that effectively mandated heat 
pump technology would completely change the nature of their business. 
The production costs for an integrated heat pump water heater at the 
50-gallon representative rated storage volume are approximately four 
times the baseline production costs. Specifically, manufacturers 
believe that because this technology results in much more expensive 
units than the majority of products on the market today, not all of the 
increased costs could be passed on to the customer. In addition, the 
significantly higher production costs

[[Page 65939]]

would require an additional $256 million in working capital to purchase 
significantly more expensive components, carry more costly inventory, 
and handle higher accounts receivable. DOE estimates that the working 
capital requirement and conversion costs would cause electric storage 
water heater manufacturers to incur a total one-time investment of at 
least $375 million in an electric storage market valued at 
approximately $311 million. Finally, manufacturers believe it is 
unlikely that they could earn the same return on these extremely large 
investments, so profitability would be expected to decrease after the 
compliance date of the amended energy conservation standards.
    TSL 7 represents an improvement in efficiency from the baseline 
level of 0.59 EF to 0.80 EF for gas-fired storage water heaters for the 
representative rated storage volume of 40 gallons. TSL 7 represents an 
improvement in efficiency from the baseline level of 0.90 EF to 2.2 EF 
for electric storage water heaters at the representative rated storage 
volume of 50 gallons. At TSL 7, DOE estimates the impacts on INPV to 
range from $62.9 million to -$537.6 million, or a change in INPV of 
7.47 percent to -63.79 percent. At TSL 7, the industry cash flow is 
estimated to decrease by approximately 171.6 percent, to -$43.7 
million, compared to the base-case value of $61.0 million in the year 
leading up to the standards. Because TSL 7 also requires improved heat 
pump technology (with additional efficiency-related improvements to 
both the heat pump module and the water heater tank), electric storage 
water heater manufacturers shared the same concerns at TSL 7 as they 
had at TSL 6. Because additional, more-costly improvements to heat pump 
technology are required, however, electric storage water heater 
manufacturers were more concerned about the potential for energy 
conservation standards to greatly disrupt the industry if the amended 
energy conservation standard were set at TSL 7.
    For gas-fired storage water heaters, TSL 7 requires manufacturers 
to produce fully-condensing gas-fired storage water heaters, which is 
significantly more complex than the insulation changes required at most 
lower TSLs. Currently, no manufacturer offers residential gas-fired 
storage water heaters with condensing technology. Manufacturers would 
need to redesign their products at the condensing level, which would 
force manufacturers to incur significant product and capital conversion 
costs. Some loss in product utility may also occur for units that are 
presently installed in space-constrained applications because 
condensing water heaters require greater installation space to 
accommodate bigger heat exchangers, fully-installed blowers, and other 
components that non-condensing models do not feature. At the condensing 
level, manufacturers would be required to purchase substantial tooling 
to fabricate new coil and tank designs and make changes to all 
subassembly and main assembly lines. DOE estimates that manufacturers 
would incur approximately $111 million in capital conversion costs to 
modify their production facilities. Some gas-fired storage water heater 
manufacturers stated during interviews that they would consider moving 
facilities offshore at TSL 7 to take advantage of lower labor costs. In 
addition, due to the complexity and large size of storage water heaters 
at this efficiency, manufacturers are concerned that installations will 
be far more difficult and could force many consumers to pay 
substantially higher installed costs if their replacement water heater 
does not fit into their existing space. Manufacturers are also 
concerned about profitability if standards were set at a level that 
would effectively require condensing technology. An amended energy 
conservation standard that effectively mandated condensing gas-fired 
storage water heaters would completely change the existing structure of 
the industry. Because this technology results in much more expensive 
units than the majority of products on the market today, manufacturers 
argued that not all of the increased costs could be passed on to the 
customer. In addition, the significantly higher production costs would 
require at least an additional $145 million in working capital to 
purchase significantly more expensive components, carry more costly 
inventory, and handle higher accounts receivable. DOE estimates that 
the working capital requirement and conversion costs would cause gas-
fired storage water heater manufacturers to incur a total one-time 
investment of at least $276 million in a gas-fired storage market 
valued at approximately $532 million. While there is a slightly 
positive impact if manufacturers get the same return on these 
investments as in the base case, manufacturers believe that they will 
not earn the same return from the substantially higher capital 
requirements at TSL 7.
ii. Cash-Flow Analysis Results for Oil-Fired Storage Water Heaters

        Table V.20--Manufacturer Impact Analysis for Oil-Fired Storage Water Heaters--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Trial standard level
                                                  Units           Base case ----------------------------------------------------------------------------
                                                                                 1          2          3          4          5          6          7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..................................  (2008$ millions)........        8.7        8.5        8.5        8.5        8.5        8.5        8.5        7.4
Change in INPV........................  (2008$ millions)........  .........      (0.2)      (0.2)      (0.2)      (0.2)      (0.2)      (0.2)      (1.3)
                                        (%).....................  .........     -1.93%     -1.78%     -1.96%     -1.96%     -1.96%     -1.96%    -14.84%
Product Conversion Costs..............  (2008$ millions)........  .........        0.3        0.3        0.3        0.3        0.3        0.3        1.0
Capital Conversion Costs..............  (2008$ millions)........  .........        0.2        0.2        0.2        0.2        0.2        0.2        3.6
Total Investment Required.............  (2008$ millions)........  .........        0.5        0.5        0.5        0.5        0.5        0.5        4.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 65940]]


             Table V.21--Manufacturer Impact Analysis for Oil-Fired Storage Water Heaters--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Trial standard level
                                                  Units           Base case ----------------------------------------------------------------------------
                                                                                 1          2          3          4          5          6          7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..................................  (2008$ millions)........        8.7        8.3        8.4        8.3        8.3        8.3        8.3        5.2
Change in INPV........................  (2008$ millions)........  .........      (0.3)      (0.3)      (0.4)      (0.4)      (0.4)      (0.4)      (3.5)
                                        (%).....................  .........     -3.89%     -3.58%     -4.31%     -4.31%     -4.31%     -4.31%    -39.86%
Product Conversion Costs..............  (2008$ millions)........  .........        0.3        0.3        0.3        0.3        0.3        0.3        1.0
Capital Conversion Costs..............  (2008$ millions)........  .........        0.2        0.2        0.2        0.2        0.2        0.2        3.6
Total Investment Required.............  (2008$ millions)........  .........        0.5        0.5        0.5        0.5        0.5        0.5        4.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    TSL 1 represents an improvement in efficiency for oil-fired storage 
water heaters from the baseline level of 0.53 EF to 0.58 EF for the 
representative rated storage volume of 32 gallons. At TSL 1, DOE 
estimates the impacts on INPV to range from -$0.2 to -$0.3 million, or 
a change in INPV of -1.93 percent to -3.89 percent. At this level, the 
industry cash flow would be expected to decrease by approximately 28.5 
percent, to $0.4 million, compared to the base-case value of $0.6 
million in the year leading up to the standards. At TSL 1, one of the 
two major manufacturers would have to incur relatively small product 
and capital conversion costs to slightly modify their existing product 
line. DOE research suggests that this TSL can be met with changes to 
the insulation thickness of baseline products. However, if more costly 
design changes were required it could have more of an impact on the 
industry.
    TSL 2 represents an improvement in efficiency from the baseline 
level of 0.53 EF to 0.60 EF for the representative rated storage volume 
of 32 gallons. At TSL 2, DOE estimates the impacts on INPV to range 
from -$0.2 million to -$0.3 million, or a change in INPV of -1.78 
percent to -3.58 percent. At this level, the industry cash flow is 
estimated to decrease by approximately 28.5 percent, to $0.4 million, 
compared to the base-case value of $0.6 million in the year leading up 
to the standards. Similar to TSL 1, at TSL 2 DOE has tentatively 
concluded, based on a review of existing products on the market, that 
TSL 2 could be met with changes to the type and thickness of the 
insulation. The impacts at TSL 1 are slightly worse than at TSL 2 
because the technology option for existing oil-fired storage water 
heaters on the market results in lower product costs at TSL 2. However, 
if TSL 2 is met with similar insulation changes, only one of two major 
manufacturers would still be required to slightly modify their current 
residential oil-fired storage product lines at TSL 2.
    TSLs 3 through TSL 6 represent an improvement in efficiency from 
the baseline level of 0.53 EF to 0.62 EF for the representative rated 
storage volume of 32 gallons. At these levels, DOE estimates the 
impacts on INPV to range from -$0.2 million to -$0.4 million, or a 
change in INPV of -1.96 percent to -4.31 percent. At this level, the 
industry cash flow decreases by approximately 28.5 percent, to $0.4 
million, compared to the base-case value of $0.6 million in the year 
leading up to the standards. At these TSLs, one major manufacturer 
would have to incur relatively minor product and capital conversion 
costs to modify their existing oil-fired residential storage water 
heater product line. DOE has tentatively concluded based on a review of 
existing products on the market that the efficiency requirements at TSL 
3 through TSL 6 could be met with changes to the type and thickness of 
the insulation. Due to the low volume of oil-fired storage water 
heaters, if any manufacturer had to make substantial product or capital 
conversion costs to reach the amended energy conservation standard 
using a more complex technology, these substantial costs could force 
them to consider exiting the residential oil-fired storage water heater 
market.
    TSL 7 (the max-tech level) represents an improvement in efficiency 
from the baseline level of 0.53 EF to 0.68 EF for the representative 
rated storage volume of 32 gallons. At TSL 7, DOE estimates the impacts 
on INPV to range from -$1.3 million to -$3.5 million, or a change in 
INPV of -14.84 percent to -39.86 percent. At this level, the industry 
cash flow is estimated to decrease by approximately 342.5 percent, to -
$1.3 million, compared to the base-case value of $0.6 million in the 
year leading up to the standards. At TSL 7, at least one major 
manufacturer would have to incur very substantial product and capital 
conversion to redesign the combustion and baffling system to include a 
multi flue design. Given the small size of the residential oil-fired 
storage water heater market, this manufacturer stated that these 
extremely large substantial product and capital conversion costs would 
be difficult to justify. At TSL 7, it is possible that this 
manufacturer would exit the residential oil-fired storage water heater 
market. Because there are only two main manufacturers that supply the 
vast majority of U.S. shipments of oil-fired storage water heaters, any 
manufacturer exiting the market could lead to a market disruption.
iii. Cash-Flow Analysis Results for Gas-Fired Instantaneous Water 
Heaters

     Table V.22--Manufacturer Impact Analysis for Gas-Fired Instantaneous Water Heaters--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Trial standard level
                                            Units          Base case -----------------------------------------------------------------------------------
                                                                           1           2           3           4           5           6           7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..............................  (2008$ millions)....       603.5       604.7       604.7       604.7       604.7       604.7       604.7       683.8
Change in INPV....................  (2008$ millions)....  ..........         1.2         1.2         1.2         1.2         1.2         1.2        80.3

[[Page 65941]]

 
                                    (%).................  ..........       0.20%       0.20%       0.20%       0.20%       0.20%       0.20%      13.31%
Product Conversion Costs..........  (2008$ millions)....  ..........         0.0         0.0         0.0         0.0         0.0         0.0         8.0
Capital Conversion Costs..........  (2008$ millions)....  ..........         0.0        0.00        0.00         0.0         0.0         0.0         9.6
Total Investment Required.........  (2008$ millions)....  ..........         0.0         0.0         0.0         0.0         0.0         0.0        17.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


      Table V.23--Manufacturer Impact Analysis for Gas-Fired Instantaneous Storage Water Heaters--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Trial standard level
                                            Units          Base case -----------------------------------------------------------------------------------
                                                                           1           2           3           4           5           6           7
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV..............................  (2008$ millions)....       603.5       601.7       601.7       601.7       601.7       601.7       601.7       537.6
Change in INPV....................  (2008$ millions)....  ..........       (1.8)       (1.8)       (1.8)       (1.8)       (1.8)       (1.8)      (65.9)
                                    (%).................  ..........      -0.30%      -0.30%      -0.30%      -0.30%      -0.30%      -0.30%     -10.91%
Product Conversion Costs..........  (2008$ millions)....  ..........         0.0         0.0         0.0         0.0         0.0         0.0         8.0
Capital Conversion Costs..........  (2008$ millions)....  ..........         0.0         0.0         0.0         0.0         0.0         0.0         9.6
Total Investment Required.........  (2008$ millions)....  ..........         0.0         0.0         0.0         0.0         0.0         0.0        17.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    TSL 1 through TSL 6 represent an improvement in efficiency from the 
baseline gas-fired instantaneous water heater efficiency level of 0.62 
EF to 0.82 EF for the representative input capacity of 199 kBtu/h. At 
TSL 1 through TSL 6, DOE estimates the INPV impacts to range from $1.2 
million to -$1.8 million, or a change in INPV of 0.20 percent to -0.30 
percent. At this level, the industry cash flow is estimated to remain 
at the base-case value of $75.0 million in the year leading up to the 
standards. DOE research suggests that over 80 percent of gas-fired 
instantaneous products sold today meet or exceed this efficiency, and 
nearly all manufacturers of gas-fired instantaneous water heaters 
currently make products that meet or exceed the efficiency required by 
TSL 1 through TSL 6. Hence, there appears to be little risk that TSL 1 
through TSL 6 would greatly harm manufacturers or reduce the number of 
manufacturers that sell these products.
    TSL 7 (the max-tech level) represents an improvement in efficiency 
from the baseline level of 0.62 EF to 0.95 EF for the representative 
input capacity of 199 kBtu/h. At TSL 7, DOE estimates the INPV impacts 
to range from $80.3 million to -$65.9 million, or a change in INPV of 
13.31 percent to -10.91 percent. At this level, the industry cash flows 
are estimated to decrease by approximately 5.9 percent to $70.5 
million, compared to the base-case value of $75.0 million in the year 
leading up to the standards. Only one manufacturer currently offers a 
gas-fired instantaneous water heater that meets the max-tech efficiency 
on the U.S. market. Most manufacturers would incur substantial product 
conversion and capital conversion costs to upgrade their existing 
products at TSL 7. To reach 0.95 EF, a more complex condensing model 
would need to be developed. Because only one manufacturer offers 
products that meet this efficiency, TSL 7 could greatly reduce the 
number of gas-fired instantaneous water heaters offered for sale in the 
United States.
b. Direct Heating Equipment Cash-Flow Analysis Results
    Traditional DHE manufacturers are extremely concerned about the 
potential for amended energy conservation standards to harm their 
business. The vast majority of the traditional DHE market is controlled 
by three manufacturers. The small shipment volume of products in the 
traditional market has greatly reduced the number of competitors in the 
past decade. The traditional DHE market is mostly a replacement market 
met by these three companies that have acquired product lines as 
competitors were bought and absorbed or exited the market. Most DHE 
manufacturers offer a wide scope of products manufactured at low 
production rates to ensure that they can maintain a viable portion of 
the replacement market in order to remain in business. Because the 
traditional DHE market consists of a large number of relatively low-
volume, mostly replacement models, manufacturers stated that they 
cannot justify large investments needed to redesign their existing 
product lines. Manufacturers are concerned that amended energy 
conservation standards could greatly impact the availability of 
replacement products for the majority of their customers due to the 
limited resources that would be available to update existing products 
and make changes to their existing facilities. In addition, 
manufacturers were concerned that energy conservation standards could 
lower profitability at higher TSLs because demand is expected to 
decline in response to increases in first cost that could cause 
consumers to switch to other types of heating appliances.
    Gas hearth manufacturers were also concerned about potentially 
detrimental impacts from amended energy conservation standards. While 
there are three major gas hearth DHE manufacturers, DOE identified an 
additional 12 manufacturers in the market and technology assessment 
(see chapter 3 of the TSD). Because consumers generally are more 
interested in the appearance of these products than

[[Page 65942]]

efficiency, every manufacturer typically offers a wide range of product 
lines and an even greater number of individual products. Manufacturers 
are concerned that higher energy conservation standards could harm 
their business because they do not have the resources to upgrade all 
these existing product lines and could be forced to offer fewer 
products after the compliance date for the amended energy conservation 
standards. Manufacturers were also concerned that higher price points 
could lead to lower profitability. Because of the large number of 
manufacturers and the recent decline in shipments, manufacturers were 
concerned that additional production costs could not be passed on to 
consumers or that markups would be lowered to avoid higher price points 
leading to lower sales.
    To assess the lower end of the range of potential impacts of 
amended standards on DHE manufacturers, DOE modeled the industry 
assuming the preservation of return on invested capital scenario. 
Besides the impact of shipments and the required capital and product 
conversion costs on INPV, this scenario assumes that manufacturers are 
able to maintain their base-case return, even on additional invested 
capital. In this scenario, operating profit increases after the 
compliance date of the amended energy conservation standards because 
manufacturers continue to earn a historical rate of return on the 
investments required by the amended energy conservation standards.
    To assess the higher end of the range of potential impacts of 
amended standards on the DHE industry, DOE modeled the preservation of 
operating profit markup scenario. In this scenario, higher energy 
conservation standards result in lower manufacturer percentage markups. 
The preservation of operating profit markup scenario models 
manufacturers' concerns about the low volume of shipments and declining 
profitability if higher energy conservation standards were implemented. 
The preservation of operating profit scenario also models gas hearth 
manufacturer concerns that amended energy conservation standards would 
impact profitability due to the need to lower their markups to keep 
customers from switching to non-covered hearth products if the energy 
conservation standards significantly raised the installed prices of 
covered products. In the preservation of operating profit scenario, 
manufacturer markups decline and operating profit remains the same 
after the compliance date of the amended energy conservation standards 
as in the base case. Industry value is harmed because manufacturers do 
not earn additional return on the investments required by the amended 
standards.
i. Cash-Flow Analysis Results for Traditional Direct Heating Equipment 
(Gas Wall Fan, Gas Wall Gravity, Gas Floor, and Gas Room Direct Heating 
Equipment)

      Table V.24--Manufacturer Impact Analysis for Traditional Direct Heating Equipment--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        17.9        17.5        17.3        16.9        16.7        16.2        15.7
Change in INPV..........................  (2008$ millions)..........  ..........       (0.4)       (0.6)       (1.1)       (1.3)       (1.8)       (2.2)
                                          (%).......................  ..........      -2.27%      -3.42%      -5.91%      -7.16%      -9.99%     -12.28%
Product Conversion Costs................  (2008$ millions)..........  ..........         0.6         1.0         1.9         2.4         3.5         4.3
Capital Conversion Costs................  (2008$ millions)..........  ..........         1.2         2.4         4.5         5.6         4.7         6.8
Total Investment Required...............  (2008$ millions)..........  ..........        1.84        3.40        6.39        7.98        8.14       11.03
--------------------------------------------------------------------------------------------------------------------------------------------------------


           Table V.25--Manufacturer Impact Analysis for Traditional Direct Heating Equipment--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        17.9        16.3        14.9        11.9        10.4         9.9         7.2
Change in INPV..........................  (2008$ millions)..........  ..........       (1.6)       (3.1)       (6.0)       (7.6)       (8.0)      (10.8)
                                          (%).......................  ..........      -9.11%     -17.20%     -33.54%     -42.14%     -44.84%     -59.98%
Product Conversion Costs................  (2008$ millions)..........  ..........         0.6         1.0         1.9         2.4         3.5         4.3
Capital Conversion Costs................  (2008$ millions)..........  ..........         1.2         2.4         4.5         5.6         4.7         6.8
Total Investment Required...............  (2008$ millions)..........  ..........        1.84        3.40        6.39        7.98        8.14       11.03
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For traditional DHE, TSL 1 represents an improvement in efficiency 
from the baseline level of 74-percent AFUE to 75-percent AFUE for gas 
wall fan DHE, an improvement in efficiency from the baseline level of 
64-percent AFUE to 66-percent for gas wall gravity DHE, an improvement 
in efficiency from the baseline level of 57-percent AFUE to 58-percent 
AFUE for gas floor DHE (the max-tech level), and an improvement in 
efficiency from the baseline level of 64-percent AFUE to 66-percent 
AFUE for gas room DHE at their respective representative input rating 
ranges. DOE research suggests that manufacturers would use an 
intermittent ignition and a two-speed blower for gas wall fan DHE and 
an improved heat exchanger design for gas wall gravity, gas floor 
units, and gas room DHE to achieve the efficiencies required by TSL 1. 
At TSL 1, DOE estimates the impacts on INPV to range from $0.4 to -$1.6 
million, or a change

[[Page 65943]]

in INPV of -2.27 percent to -9.11 percent. At this level, the industry 
cash flow is estimated to decrease by approximately 45.7 percent, to 
$0.8 million, compared to the base-case value of $1.4 million in the 
year leading up to the standards. While some manufacturers may need to 
make redesigns to some of their products even at TSL 1, manufacturers 
generally have a significant number of products that meet the required 
efficiencies for most traditional DHE product types, and for this 
reason, a complete exit from the market by any manufacturer is 
unlikely.
    TSL 2 represents an improvement in efficiency from the baseline 
level of 74-percent AFUE to 76-percent for gas wall fan DHE, an 
improvement in efficiency from the baseline level of 64-percent AFUE to 
68-percent AFUE for gas wall gravity DHE, an improvement in efficiency 
from the baseline level of 57-percent AFUE to 58-percent AFUE for gas 
floor DHE (the max-tech level), and an improvement in efficiency from 
the baseline level of 64-percent AFUE to 67-percent for gas room DHE at 
the representative input rating ranges for each product type. DOE 
research suggests that at TSL 2, manufacturers would opt to use an 
improved heat exchanger and intermittent ignition for gas wall fan DHE, 
and make further improvements to the heat exchanger for gas wall 
gravity and gas room DHE, and use the same improved heat exchanger for 
gas floor DHE as at TSL 1 to reach the efficiency levels required by 
TSL 2. At TSL 2, DOE estimates the impacts in INPV to range from -$0.6 
million to -$3.1 million, or a change in INPV of -3.42 percent to -
17.20 percent. At this level, the industry cash flow is estimated to 
decrease by approximately 86.1 percent, to $0.2 million, compared to 
the base-case value of $1.4 million in the year leading up to the 
standards. At TSL 2, every manufacturer would face higher product 
development costs in order to offer a similar range of product 
offerings. However, at TSL 2, it is likely that more products would be 
discontinued because more of the current products on the market fall 
below the required efficiencies. As a result, manufacturers must either 
expend resources to cover the necessary product conversion and capital 
conversion costs, or they will be forced to discontinue some of their 
existing product lines. While TSL 2 would have a significant impact on 
manufacturers, most manufacturers would not be expected to face a 
complete redesign for most traditional DHE product types. Even if 
manufacturers lowered the number of product lines offered in certain 
product classes, manufacturers would have enough existing products that 
meet or exceed the required efficiencies to upgrade most of their 
existing product lines and maintain viable production volumes after the 
compliance date of the amended energy conservation standards.
    TSL 3 represents an improvement in efficiency from the baseline 
level of 74-percent AFUE to 77-percent for gas wall fan DHE, an 
improvement in efficiency from the baseline level of 64-percent AFUE to 
71-percent AFUE for gas wall gravity units, an improvement in 
efficiency from the baseline level of 57-percent AFUE to 58-percent 
AFUE for gas floor DHE (the max-tech level), and an improvement in 
efficiency from the baseline level of 64-percent AFUE to 68-percent for 
gas room DHE at the representative input rating ranges. DOE research 
suggests that manufacturers would improve baseline units by adding an 
intermittent ignition, a two-speed blower, and an improved heat 
exchanger for gas wall fan units, make further improvements to the heat 
exchanger used to reach TSL 2 for gas wall gravity and gas room units, 
and use the same improved heat exchanger for gas floor DHE as at TSL 1 
and TSL 2 to reach the efficiency levels of TSL 3. At TSL 3, DOE 
estimates the INPV impacts to range from -$1.1 million to -$6.0 
million, or a change in INPV of -5.91 percent to -33.54 percent. At 
this level, the industry cash flow is estimated to decrease by 
approximately 161.8 percent to -$0.9 million, compared to the base-case 
value of 1.4 million in the year leading up to the standards. The large 
estimated impact on INPV suggests that manufacturers would be 
substantially harmed if profitability were impacted.
    At TSL 3, products increasingly rely on purchased parts, making it 
more likely that manufacturers' profitability would decline. At TSL 3, 
it is likely that some manufacturers would reduce the number of product 
lines offered in order to lower the product conversion and capital 
conversion costs required at TSL 3. Discontinuing product lines would 
still have a negative impact on the manufacturers that selectively 
upgrade existing product lines since many manufacturers rely on 
aggregated production scale from all products they sell to secure 
favorable purchased part and raw material prices. The fixed portion of 
product conversion costs, such as certification and the total capital 
conversion costs, typically require a minimum shipment volume in order 
to be economically justifiable to the manufacturer. However, at TSL 3, 
most manufacturers have existing products that meet the required 
efficiencies in three out of the four product types of traditional DHE. 
Because manufacturers have a substantial number of product lines that 
meet the required efficiencies at TSL3, even if manufacturers 
selectively upgrade their existing product lines, they would be 
expected to maintain a viable production volume after the compliance 
date of the amended energy conservation and not exit the market 
completely.
    TSL 4 is the max-tech level for gas wall fan DHE. TSL 4 represents 
an improvement in efficiency from the baseline level of 74-percent AFUE 
to 80-percent for gas wall fan DHE at the representative input rating 
range. The efficiency requirements for gas wall gravity, gas floor, and 
gas room DHE are the same at TSL 4 as at TSL 3. To achieve the max-tech 
level for gas wall fan DHE, DOE research suggests that manufacturers 
would need to use an electronic ignition and induced draft. DOE 
anticipates that manufacturers would make the same improvements to the 
heat exchangers as necessary to achieve TSL 3 for gas wall gravity, gas 
floor, and gas-room DHE. At TSL 4, DOE estimates the INPV impacts to 
range from -$1.3 million to -$7.6 million, or a change in INPV of -7.16 
percent to -42.14 percent. At this level, the industry cash flow is 
estimated to decrease by approximately 202.3 percent to -$1.4 million, 
compared to the base-case value of $1.4 million in the year leading up 
to the standards.
    Most manufacturers' products are below the max-tech level for gas 
wall fan DHE, which further increases the total capital and product 
conversion costs over TSL 3. At TSL 4, most manufacturers would have to 
completely redesign their gas wall fan products and purchase new 
tooling. The discrepancy between the number of unit shipments and the 
number of product lines requiring significant product development to 
meet the potential energy conservation standards is a large driver of 
the negative impacts at TSL 4. When faced with these substantial costs, 
most manufacturers would likely discontinue products in this product 
class or possibly exit the market altogether. In addition, at TSL 4 
every manufacturer would face significant conversion costs in every 
product type, making it much more likely that the industry would offer 
far fewer products and that the industry would have fewer competitors 
after the compliance date of amended standards. Besides the likelihood 
of multiple manufacturers discontinuing product lines or exiting the 
market, the large impact on INPV shows that manufacturers would also be

[[Page 65944]]

substantially harmed if profitability were impacted for existing or 
redesigned products.
    TSL 5 represents an improvement in efficiency from the baseline 
level of 74-percent AFUE to 75-percent AFUE for gas wall fan DHE, an 
improvement in efficiency from the baseline level of 64-percent AFUE to 
72-percent AFUE for gas wall gravity units (the max-tech level), an 
improvement in efficiency from the baseline level of 57-percent AFUE to 
58-percent AFUE for gas floor DHE (the max-tech level), and an 
improvement in efficiency from the baseline level of 64-percent AFUE to 
83-percent AFUE (the max-tech level) for gas room DHE at the 
representative input rating ranges for each product type. To achieve 
the efficiencies required by TSL 5, DOE research suggests that 
manufacturers would need to use an intermittent ignition and a two-
speed blower for gas wall fan DHE, use an electronic ignition for gas 
wall gravity DHE, use an improved heat exchanger for gas floor DHE, and 
use electronic ignition and a multiple heat exchanger design for gas 
room DHE. At TSL 5, DOE estimates the impacts on INPV to range from -
$1.8 million to -$8.0 million, or a change in INPV of -9.99 percent to 
-44.84 percent. At this level, the industry cash flow is estimated to 
decrease by approximately 195.5 percent, to -$1.3 million, compared to 
the base-case value of $1.4 million in the year leading up to the 
standards.
    Most traditional DHE models available on the market today are below 
the max-tech level for gas wall gravity and gas room DHE, which leads 
to higher total capital and product conversion costs and more negative 
impacts on INPV at TSL 5 than TSL 4. DOE research suggests that at TSL 
5, most manufacturers would have to completely redesign and buy new 
tooling in order to offer gas wall gravity and gas room products at 
these efficiency levels. The small number of unit shipments and the 
large number of product lines that would require significant product 
development to meet the energy conservation standards is a large driver 
of the negative impacts at TSL 5. Hence, the potential number of 
product lines being discontinued and the number of manufacturers 
exiting the market at TSL 5 would be expected to be greater than at TSL 
4, with even greater repercussions on consumer choice, employment, and 
competition.
    TSL 6 is set at the max-tech level for all traditional DHE product 
classes. The efficiency requirements for gas wall gravity, gas floor, 
and gas room DHE are the same at TSL 6 as at TSL 5. However, TSL 6 also 
represents an improvement from 75-percent to 80-percent AFUE for gas 
wall fan DHE (the max-tech level). To achieve the max-tech level for 
gas wall fan DHE, DOE research suggests that manufacturers would need 
to use an electronic ignition and induced draft. As to the other 
products, DOE anticipates that manufacturers would need to use an 
electronic ignition for gas wall gravity DHE, use an improved heat 
exchanger for gas floor DHE, and use electronic ignition and a multiple 
heat exchanger design for gas room DHE. At the max-tech TSL (TSL 6), 
DOE estimates the INPV impacts to range from -$2.2 million to -$10.8 
million, or a change in INPV of -12.28 percent to -59.98. At this 
level, the industry cash flow is estimated to decrease by approximately 
269.5 percent to -$2.4 million, compared to the base-case value of $1.4 
million in the year leading up to the standards. Most products 
currently available are below the max-tech level for all product 
classes. At the max-tech level, most manufacturers would be faced with 
complete product redesigns for almost all product lines and significant 
plant changes to remain in the market. Most manufacturers would be 
expected to discontinue products or exit the market altogether. Due to 
the low volume of shipments in the industry, it unlikely that any 
manufacturer could offer close to the range of products currently 
offered today. Hence, some product classes may cease to be commercially 
available. It is very likely that multiple manufacturers would exit the 
market at the max-tech level for every product class.
ii. Cash-Flow Analysis Results for Gas Hearth Direct Heating Equipment

      Table V.26--Manufacturer Impact Analysis for Gas Hearth Direct Heating Equipment--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        86.4        85.5        85.5        85.5        88.8        88.8        96.6
Change in INPV..........................  (2008$ millions)..........  ..........       (0.9)       (0.9)       (0.9)         2.4         2.4        10.2
                                          (%).......................  ..........      -1.07%      -1.07%      -1.07%       2.80%       2.80%      11.82%
Product Conversion Costs................  (2008$ millions)..........  ..........        0.53        0.53        0.53        1.40        1.40        8.07
Capital Conversion Costs................  (2008$ millions)..........  ..........        0.20        0.20        0.20        0.53        0.53        4.03
Total Investment Required...............  (2008$ millions)..........  ..........        0.73        0.73        0.73        1.93        1.93       12.09
--------------------------------------------------------------------------------------------------------------------------------------------------------


           Table V.27--Manufacturer Impact Analysis for Gas Hearth Direct Heating Equipment--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        86.4        86.2        86.2        86.2        71.6        71.6        31.2
Change in INPV..........................  (2008$ millions)..........  ..........       (0.2)       (0.2)       (0.2)      (14.8)      (14.8)      (55.1)
                                          (%).......................  ..........      -0.22%      -0.22%      -0.22%     -17.13%     -17.13%     -63.83%
Product Conversion Costs................  (2008$ millions)..........  ..........        0.53        0.53        0.53        1.40        1.40        8.07
Capital Conversion Costs................  (2008$ millions)..........  ..........        0.20        0.20        0.20        0.53        0.53        4.03

[[Page 65945]]

 
Total Investment Required...............  (2008$ millions)..........  ..........        0.73        0.73        0.73        1.93        1.93       12.09
--------------------------------------------------------------------------------------------------------------------------------------------------------

    TSL 1 through TSL 3 represents an improvement in efficiency from 
the baseline level of 64-percent AFUE to 67-percent AFUE for gas hearth 
DHE at the 27,000 Btu/h to 46,000 Btu/h representative input rating 
range. To reach 67-percent AFUE from baseline efficiency, manufacturers 
would likely use an electronic ignition. At TSL 1 through TSL 3, DOE 
estimates the impacts on INPV to range from -$0.2 million to -$0.9 
million, or a change in INPV of -0.22 percent to -1.07 percent. At this 
level, the industry cash flow is estimated to decrease by approximately 
7.6 percent, to $2.6 million, compared to the base-case value of $2.8 
million in the year leading up to the standards. Most manufacturers 
offer multiple products that meet this efficiency level. Because there 
are so many product lines at the baseline efficiency, however, there 
could be fairly substantial product conversion costs at this TSL 
because manufacturers would have to slightly redesign all of the 
baseline products. In addition, some manufacturers could be required to 
make other minor changes to their production lines to accommodate other 
improvements such as additional baffling. DOE research suggests that 
such changes may be inexpensive since they would not require the 
industry to replace major hard tooling at TSL 1 through TSL 3. Because 
of the small change in product costs at TSL 1 through TSL 3, it is 
unlikely that manufacturer profitability would decrease appreciably to 
maintain the existing shipments.
    TSL 4 and TSL 5 represent an improvement in efficiency from the 
baseline level of 64-percent AFUE to 72-percent AFUE for gas hearth DHE 
at the 27,000 Btu/h to 46,000 Btu/h representative input rating range. 
DOE research suggests that fan-assisted gas hearth DHE products could 
reach 72-percent AFUE from baseline efficiency. At TSL 4 and TSL 5, DOE 
estimates the impacts on INPV to range from $2.4 million to -$14.8 
million, or a change in INPV of 2.80 percent to -17.13 percent. At this 
level, the industry cash flow is estimated to decrease by approximately 
19.9 percent, to $2.3 million, compared to the base-case value of $2.8 
million in the year leading up to the standards. At TSL 4 and TSL 5, 
gas hearth manufacturers would likely reduce the scope of their product 
offerings to lower the required conversion costs to comply with the 
energy conservation standard. Many of the smaller manufacturers could 
consider existing the market when faced with fairly substantial product 
and capital conversion costs that are not justified by their shipment 
volumes. Much of the capital conversion costs are expected to involve 
changes to handle new materials like additional insulation and 
baffling, changes to the heat shields, and new stamping dies for many 
manufacturers that need to greatly alter their existing designs. 
Manufacturers will also incur additional product conversion costs for 
product development and certification because most products currently 
sold would not meet the efficiency requirements of TSL 4 and TSL 5. 
While most of the changes above the baseline require manufacturers to 
purchase or manufacture more costly components that increase MPC, the 
resulting higher MSPs also concerned manufacturers. Manufacturers 
stated that the market is very price sensitive, so any increase in unit 
price could invariably lead to fewer sales. Hence, manufacturers expect 
that the industry would have to lower its profit margins in order to 
reduce shipments impacts that could result from cost increases related 
to potential energy efficiency improvements.
    TSL 6 represents an improvement in efficiency from the baseline 
level of 64-percent AFUE to 93-percent AFUE for gas hearth DHE at the 
27,000 Btu/h to 46,000 Btu/h representative input rating range. To 
reach 93-percent AFUE from the baseline efficiency, manufacturers would 
need to use a condensing design. At the max-tech TSL (TSL 6), DOE 
estimates the impacts on INPV to range from $10.2 million to -$55.1 
million, or a change in INPV of 11.82 percent to -63.83 percent. At 
this level, the industry cash flow is estimated to decrease by 
approximately 128.8 percent, to -$0.8 million, compared to the base-
case value of $2.8 million in the year leading up to the standards.
    At TSL 6, manufacturers indicated they would greatly reduce the 
scope of their product offerings to lower the required costs to comply 
with an amended energy conservation standard at this level. Because 
there are very few products on the market today that use this 
technology, the product development costs greatly increase at this TSL. 
DOE research suggests that manufacturers would likely need a secondary 
heat exchanger at the max-tech level, which could alter the size and 
structure of most existing product lines. Manufacturers expressed 
concern regarding their ability to use existing tooling and equipment, 
much of which may become obsolete when hearths have to be redesigned 
from the ground up to accommodate the efficiency requirements at this 
level. It is also very likely that many of the 10 small business 
manufacturers could be forced to exit the market when faced with these 
substantial conversion costs since they do not have the access to 
capital, the product development resources, or the shipment volumes to 
justify these conversion costs.
    Manufacturers also stated that they were concerned about consumer 
utility issues at TSL 6. Smaller units would likely be significantly 
impacted at this TSL because the low inherent interior volume makes it 
much more difficult to accommodate a secondary heat exchanger without 
narrowing the area available for the logs and flame. Manufacturers also 
indicated that it gets progressively more difficult to imitate a 
natural, wood-burning flame appearance at this efficiency level, which 
could hurt sales and reduce consumer utility. Finally, manufacturers 
were concerned that the MPCs at the max-tech level are estimated to be 
more than double the baseline costs for the representative input rating 
range. In order to maintain shipments of gas hearth DHE with 
substantially higher costs and potential consumer utility impacts, 
manufacturers believe that profitability would be greatly impacted.
c. Pool Heaters Cash-Flow Analysis Results
    Pool heater manufacturers expressed concern that amended energy

[[Page 65946]]

conservation standards could cause significant harm to their industry, 
because pool heaters are a luxury item and have low annual usage that 
would prevent the majority of consumers from recouping the greater 
initial price at higher efficiencies. Since pool heaters are considered 
a luxury product, manufacturers expect sales to decline as unit costs 
increase. As the required efficiencies approach a condensing 
technology, manufacturers would have to make more substantial changes 
to their existing products that add significant costs that would 
encourage repair instead of replacement of failed units, cause fuel 
switching (e.g., to heat pumps or solar systems), or make customers 
abandon heating their pool altogether.
    To assess the lower end of the range of potential impacts on pool 
heater manufacturers, DOE modeled the preservation of return on 
invested capital markup scenario. Besides the impact of changes in 
shipments on INPV and the required capital and product conversion 
costs, this case represents the lower end of the potential impacts on 
manufacturers because it assumes that manufacturers would earn a 
similar return on the investments required by amended energy 
conservation standards. To assess the higher end of the range of 
potential impacts on pool heater manufacturers, DOE modeled the 
preservation of operating profit markup scenario (i.e., constant 
absolute profit, regardless of cost increases, which leads to declining 
profit margins at higher costs). This scenario models manufacturers 
concerns that margins would be harmed at higher price points because 
they expect to lower their profit margins to minimize impacts due to 
lower sales.

             Table V.28--Manufacturer Impact Analysis for Gas-Fired Pool Heaters--Preservation of Return on Invested Capital Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        61.4        61.4        61.8        61.1        61.9        64.5        74.2
Change in INPV..........................  (2008$ millions)..........  ..........         0.1         0.4       (0.2)         0.5         3.1        12.9
                                          (%).......................  ..........       0.13%       0.66%      -0.39%       0.88%       5.03%      20.96%
Product Conversion Costs................  (2008$ millions)..........  ..........         0.0         0.0         2.6         2.6         4.6         5.5
Capital Conversion Costs................  (2008$ millions)..........  ..........         0.0         0.3         1.2         1.4         4.4         7.1
Total Investment Required...............  (2008$ millions)..........  ..........         0.0         0.3         3.8         4.0         9.0        12.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


                  Table V.29--Manufacturer Impact Analysis for Gas-Fired Pool Heaters--Preservation of Operating Profit Markup Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Trial standard level
                                                     Units             Base case -----------------------------------------------------------------------
                                                                                       1           2           3           4           5           6
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV....................................  (2008$ millions)..........        61.4        61.2        60.3        55.8        53.9        41.8        16.8
Change in INPV..........................  (2008$ millions)..........  ..........       (0.2)       (1.0)       (5.6)       (7.5)      (19.5)      (44.5)
                                          (%).......................  ..........      -0.29%      -1.66%      -9.06%     -12.15%     -31.82%     -72.59%
Product Conversion Costs................  (2008$ millions)..........  ..........         0.0         0.0         2.6         2.6         4.6         5.5
Capital Conversion Costs................  (2008$ millions)..........  ..........         0.0         0.3         1.2         1.4         4.4         7.1
Total Investment Required...............  (2008$ millions)..........  ..........         0.0         0.3         3.8         4.0         9.0        12.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    TSL 1 represents an improvement in efficiency from the baseline 
level of 78-percent thermal efficiency to 81-percent thermal efficiency 
for the representative input rating of 250,000 Btu/h. At TSL 1, DOE 
estimates the INPV impacts to range from $0.1 million to -$0.2 million, 
or a change in INPV of 0.13 percent to -0.29 percent. At this level, 
the industry cash flow would not be expected to change from the base-
case value of $2.7 million in the year leading up to the standards. 
Over 60 percent of current gas-fired pool heaters meet or exceed the 
efficiency requirements at TSL 1. DOE research suggests that changes to 
the heat exchanger would allow baseline products to meet TSL 1. These 
changes would not require major modifications to existing units, 
resulting in minimal impacts to manufacturers at TSL 1.
    TSL 2 represents an improvement in efficiency from the baseline 
level of 78-percent thermal efficiency to 82-percent thermal efficiency 
for the representative input rating of 250,000 Btu/h. At TSL 2, DOE 
estimates the INPV impacts to range from $0.4 to -$1.0 million, or a 
change in INPV of 0.66 percent to -1.66 percent. At this level, the 
industry cash flow is expected to decrease by approximately 3.9 percent 
to $2.6 million, compared to the base-case value of $2.7 million in the 
year leading up to the standards. Almost half of the pool heaters 
currently are sold at or above this efficiency level, and nearly all 
manufacturers make products that can achieve the efficiency required at 
TSL 2. DOE research suggests that minor improvements to heat exchangers 
and insulation surrounding the combustion chamber would need to be made 
to convert lower-efficiency units to this efficiency, causing 
manufacturers to incur small capital conversion costs. However, because 
the basic designs of atmospheric pool heaters that comprise the 
majority of current shipments remain relatively unchanged at TSL 2, 
there are minimal impacts on manufacturers.

[[Page 65947]]

    TSL 3 represents an improvement in efficiency from the baseline 
level of 78-percent thermal efficiency to 83-percent thermal efficiency 
for the representative input rating of 250,000 Btu/h. At TSL 3, DOE 
estimates the INPV impacts to range from -$0.2 to -$5.6 million, or a 
change in INPV of -0.39 percent to -9.06 percent. At this level, the 
industry cash flow is estimated to decrease by approximately 43.0 
percent to $1.6 million, compared to the base-case value of $2.7 
million in the year leading up to the standards. DOE research suggests 
that most manufacturers would have to improve some of their product 
lines to reach an 83-percent thermal efficiency by using power venting 
technology. DOE research also suggests that while the manufacturing 
production costs are not expected to increase significantly, most 
manufacturers would incur some product and capital conversion costs to 
increase their production of existing lower volume products at TSL 3. 
TSL 3 would eliminate most common atmospheric models on the market 
today, which could hurt profitability if consumer demand for gas-fired 
pool heaters holds at its current level despite the higher production 
costs at this TSL.
    TSL 4 represents an improvement in efficiency from the baseline 
level of 78-percent thermal efficiency to 84-percent thermal efficiency 
for the representative input rating of 250,000 Btu/h. At TSL 4, DOE 
estimates the INPV impacts to range from $0.5 million to -$7.5 million, 
or a change in INPV of 0.88 percent to -12.15 percent. At this level, 
the industry cash flow is estimated to decrease by approximately 45.9 
percent to $1.5 million, compared to the base-case value of $2.7 
million in the year leading up to the standards. Similar to TSL 3, TSL 
4 would require fairly substantial capital and product conversion 
costs. Because this efficiency level eliminates all atmospheric models 
that are currently on the market and requires additional improvements 
over TSL 3, the capital conversion costs are even higher at TSL 4. DOE 
research suggests that manufacturers would have to design products that 
use power venting and an improved heat exchanger, which could be costly 
to develop. Manufacturers stated that the high component costs at TSL 4 
would result in substantially higher costs for consumers. The higher 
production costs and conversion costs make it more likely that 
manufacturers' concerns about reduced profitability would be realized 
at TSL 4.
    TSL 5 represents an improvement in efficiency from the baseline 
level of 78-percent thermal efficiency to 86-percent thermal efficiency 
for the representative input rating of 250,000 Btu/h. At TSL 5, DOE 
estimates the INPV impacts to range from $3.1 million to -$19.5 
million, or a change in INPV of 5.03 percent to -31.82 percent. At this 
level, the industry cash flow is estimated to decrease by approximately 
108.9 percent to -$0.2 million, compared to the base-case value of $2.7 
million in the year leading up to the standards. Over 90 percent of 
current shipments are below this efficiency level. Manufacturers would 
incur significant conversion costs at TSL 5 and would likely 
significantly reduce the scope of their product offerings. DOE research 
suggests that manufacturers would switch remaining units to sealed 
combustion systems and improved heat exchanger designs, adding 
substantial production cost and eliminating unpowered units from the 
market. Manufacturers believe that consumers would look for 
alternatives to gas-fired pool heaters or not replace failed units due 
to the higher product costs that would result from an amended energy 
conservation standard at TSL 5. Manufacturers also indicated that 
problems at efficiencies they consider near-condensing could force some 
companies to only offer fully condensing units with even greater 
negative paybacks for consumers. A further concern of manufacturers 
relates to the current installer and maintenance base for pool heaters, 
which would require significant additional training to be able to 
properly install, troubleshoot, and service increasingly complex pool 
heaters.
    TSL 6 (max-tech level) represents an improvement in efficiency from 
the baseline level of 78-percent thermal efficiency to 95-percent 
thermal efficiency for the representative input rating of 250,000 Btu/
h. At TSL 6, DOE estimates the INPV impacts to range from $12.9 million 
to -$44.5 million, or a change in INPV of 20.96 percent to -72.59 
percent. At this level, the industry cash flow is estimated to decrease 
by approximately 157.2 percent to -$1.6 million, compared to the base-
case value of $2.7 million in the year leading up to the standards. 
Almost all gas-fired pool heaters currently on the market are well 
below this efficiency level. Manufacturers would face significant 
conversion costs at TSL 6 in order to develop condensing systems or 
refine existing designs to achieve lower cost condensing pool heaters. 
DOE research suggests that heat exchanger materials would need to 
withstand acidic condensate created by condensing pool heaters. In 
light of strong concerns about consumer reaction to a substantially-
increased first cost at TSL 6, manufacturers do not believe this 
efficiency level could be justified for residential pool heater 
consumers due to low usage and significantly higher costs. 
Manufacturers believe that consumers would not be willing to purchase 
such an expensive product and would either find an alternative to gas-
fired pool heaters or no longer purchase a gas-fired pool heater. In 
addition, at TSL 6 manufacturers are also concerned about the 
industry's ability to educate and retrain installers and servicers of 
pool heaters in time for the compliance date of the standard. 
Condensing units with sealed combustion are more complex than the vast 
majority of atmospheric units on the market today and would require 
significant additional training for safe installation and maintenance. 
Manufacturers also expect product support costs to increase 
significantly as complexity increases the likelihood and frequency of 
events such as component failures and unit lockouts that would require 
manufacturer support and servicing, as well as increased warranty 
costs. Besides increasing warranty costs for manufacturers, the issues 
and costs associated with proper unit maintenance post-warranty could 
potentially cause them to switch fuel sources (e.g., switching to heat 
pump or solar water heaters) or abandon pool heating altogether.
d. Impacts on Employment
    DOE quantitatively assessed the impacts of potential amended energy 
conservation standards on employment for each of the three types of 
heating products that are the subject of this rulemaking. DOE used the 
GRIM to estimate the domestic labor expenditures and number of domestic 
production workers in the base case and at each TSL from 2008 to 2045 
for the residential water heater industry and from 2008 to 2043 for the 
DHE and pool heater industries. DOE used statistical data from the U.S. 
Census Bureau, the results of the engineering analysis, and interviews 
with manufacturers to determine the inputs necessary to calculate 
industry-wide labor expenditures and domestic employment levels. Labor 
expenditures are a function of the labor intensity of the equipment, 
the sales volume, and an assumption that wages remain fixed in real 
terms over time.
    In each GRIM, DOE used the labor content of each product and the 
manufacturing production costs from the engineering analysis to 
estimate the annual labor expenditures in the

[[Page 65948]]

residential water heater, DHE, and pool heater industries. DOE used 
Census data and interviews with manufacturers to estimate the portion 
of the total labor expenditures that is for U.S. (i.e., domestic) 
labor.
    The estimates of production workers in this section only cover 
workers up to the line-supervisor level that are directly involved in 
fabricating and assembling a product within the Original Equipment 
Manufacturer (OEM) facility. Workers that perform services that are 
closely associated with production operations, such as material handing 
with a forklift, are also included as production labor. DOE's estimates 
only account for production workers that manufacture the specific 
products covered by this rulemaking. For example, a worker on a 
commercial water heater line would not be included with the estimate of 
the number of residential water heater production workers.
    The employment impacts shown in Table V.30 through Table V.34 
represent the potential production employment that could result 
following amended energy conservation standards. The upper end of the 
results in these tables estimates the maximum potential increase in 
production workers after amended energy conservation standards. The 
upper end of the results assumes manufacturers would continue to 
produce the same scope of covered products in the same production 
facilities. The upper end of the range also assumes that domestic 
production is not shifted to lower-labor-cost countries. Because there 
is a real risk of manufacturers exiting the market or no longer 
offering the same scope of covered products in response to amended 
energy conservation standards, the lower end of the range of employment 
results in Table V.30 through Table V.34 include the estimate of the 
total number of U.S. production workers in the industry that could lose 
their job if all existing production were to no longer be made 
domestically. While the results present a range of employment impacts 
following the compliance date of amended energy conservation standards, 
the discussion below also includes a qualitative discussion of the 
likelihood of negative employment impacts at the various TSLs. Finally, 
the employment impacts shown are independent of the employment impacts 
from the broader U.S. economy, which are documented in chapter 15, 
Employment Impact Analysis, of the NOPR TSD.
i. Gas-Fired and Electric Storage Water Heater Employment Impacts
    Using the GRIM, DOE estimates that would be 3,690 domestic gas-
fired and electric storage water heater production workers in 2015 
without amended energy conservation standards. Using Census Bureau data 
and interviews with manufacturers, DOE estimates that approximately 
two-thirds of gas-fired and electric storage water heaters sold in the 
United States are manufactured domestically. Table V.30 shows the range 
of the impacts of potential amended energy conservation standards on 
U.S. production workers in the gas-fired and electric storage water 
heater market.

          Table V.30.--Potential Changes in the Total Number of Domestic Gas-Fired and Electric Storage Water Heater Production Workers in 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Baseline          1             2             3             4             5              6               7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Number of Domestic Production          3,690         3,758         3,842         3,881         3,977         4,396           7.768           9,823
 Workers in 2015 (without changes in
 production locations)..............
Potential Changes in Domestic         ............    (3,690)-68   (3,690)-152   (3,690)-191   (3,690)-287   (3,690)-706   (3,690)-4,078   (3,690)-6,133
 Production Workers in 2015 *.......
--------------------------------------------------------------------------------------------------------------------------------------------------------
* DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

    During manufacturer interviews, gas-fired and electric storage 
water heater manufacturers stated that they expect employment levels to 
remain relatively constant at TSL 1 through TSL 4. At these TSLs, 
baseline gas-fired and electric storage water heaters would be improved 
by increasing the insulation thickness around the tank. These 
improvements would not greatly alter the manufacturing process and are 
not likely to significantly change employment levels.
    At TSL 5, domestic employment would be likely to increase if 
manufacturers built their dedicate heat pump line for large rated 
storage volumes in the United States. However, because the labor 
content to assemble fully integrated heat pump water heaters is much 
higher than most models currently on the market, manufacturers could 
also decide to build these lines in existing overseas production 
facilities. At TSL 5, the sourcing decisions would also impact the 
likely employment impacts. If manufacturers built a dedicated 
condensing line for large rated storage volumes in the United States, 
domestic employment could increase.
    TSL 6 and TSL 7 could also impact domestic gas-fired and electric 
storage water heater employment. These TSLs effectively would require 
the use of integrated heat pump water heater technology for electric 
storage water heaters for all rate volumes. Manufacturers stated that 
at these levels, they initially would expect to purchase fully-
assembled heat pump modules from off-shore suppliers because they do 
not have the manufacturing experience or the space in their existing 
facilities to accommodate assembling the heat hump modules. Once 
purchased, manufacturers would attach the modules to water heaters on 
lines modified to accommodate the very different assembly and testing

[[Page 65949]]

requirements of heat pump water heaters. While the industry typically 
has manufacturing facilities with a mix of dedicated and non-dedicated 
assembly lines by fuel type, flexible assembly lines may have to be 
discontinued at TSL 6, because heat pump water heaters are top-heavy, 
take longer to test, and take significantly longer to assemble than 
electric storage water heaters that use resistance-heater elements. 
Present facilities would likely need line extensions to accommodate the 
additional labor required for assembling heat pump water heaters. 
Therefore, if manufacturers source the heat pump modules and continue 
to assemble electric storage water heaters in their existing 
facilities, it is likely that employment would increase. However, the 
expected increase in the labor required to manufacture heat pump water 
heaters may also accelerate the trend of water heater manufacturers 
locating new production facilities outside the United States, 
especially if a manufacturer decides to assemble heat pump modules in-
house. Because TSL 7 requires additional improvements over TSL 6, the 
potential positive impacts on employment at TSL 7 are greater if 
manufacturers do not relocate because the additional improvements also 
require more labor.
    At TSL 7 (the max-tech level) gas-fired storage water heaters would 
have to operate in a fully-condensing mode. DOE research suggests that 
condensing gas-fired water heaters would be more complex than standard 
power-vent products and less efficient products and therefore would 
require additional labor to assemble. If manufacturers did not change 
their sourcing decisions at TSL 7, it is likely there would be positive 
employment impacts for gas-fired storage water heaters.
ii. Oil-Fired Storage Water Heater Employment Impacts
    Using the GRIM, DOE estimates there would be 38 oil-fired storage 
water heater production workers in the U.S. in 2015 in the absence of 
amended energy conservation standards. Using the Census data and 
interviews with manufacturers, DOE estimates that approximately 95 
percent of oil-fired water heaters sold in the United States are 
manufactured domestically. Table V.31 shows the impacts of amended 
energy conservation standards on U.S. production workers in the oil-
fired water heater market.

                 Table V.31--Potential Changes in the Total Number of Domestic Oil-Fired Storage Water Heater Production Workers in 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Trial standard level
                                                         -----------------------------------------------------------------------------------------------
                                                           Baseline        1           2           3           4           5           6           7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Number of Domestic Production Workers in 2015               38          37          40          37          37          37          37          47
 (without changes in production locations)..............
Potential Changes in Domestic Production Workers in 2015  ..........    (38)-(1)      (38)-2    (38)-(1)    (38)-(1)    (38)-(1)    (38)-(1)      (38)-9
 *......................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

    At TSL 1 through TSL 6, DOE does not expect substantial changes to 
domestic employment in the oil-fired storage water heater market if 
manufacturers are able to use the insulation type and thickness 
technology options in the engineering analysis to reach the efficiency 
requirements at these TSLs. At TSL 7, DOE research suggests that if all 
current suppliers continue to compete, domestic employment would likely 
increase slightly, because the non-proprietary, higher-efficiency heat 
exchangers required to reach this TSL would also require more labor to 
assemble. However, given the size of the oil-fired storage water heater 
market and the expected product conversion costs, companies that do not 
currently make oil-fired storage water heaters at these efficiency 
levels could exit the market. If the remaining manufacturers do not 
need to increase employment levels to meet the total market demand, 
employment in the residential oil-fired market could decline.
iii. Gas-Fired Instantaneous Water Heater Employment Impacts
    DOE's research suggests that currently no gas-fired instantaneous 
water heaters are made domestically. All manufacturers or their 
domestic distributors do maintain offices in the United States to 
handle technical support, training, certification, and other 
requirements. However, as amended energy conservation standards for 
instantaneous water heaters are raised, the additional complexity of 
standards-compliant water heaters may require additional training and 
field support, thereby resulting in higher employment levels. Thus 
domestic employment may increase marginally due to amended energy 
conservation standards.
iv. Traditional Direct Heating Equipment Employment Impacts
    Using the GRIM, DOE estimates there would be 300 traditional DHE 
production workers in the U.S. in 2013 in the absence of amended energy 
conservation standards. Using the Census Bureau data and interviews 
with manufacturers, DOE estimates that approximately 100 percent of the 
traditional DHE sold in the United States is manufactured domestically. 
Table V.32 shows the impacts of amended energy conservation standards 
on U.S. production workers in the traditional DHE market.

 Table V.32--Potential Changes in the Total Number of Domestic Traditional Direct Heating Production Workers in
                                                      2013
----------------------------------------------------------------------------------------------------------------
                                                             Trial standard level
                             -----------------------------------------------------------------------------------
                               Baseline        1           2           3           4           5           6
----------------------------------------------------------------------------------------------------------------
Total Number of Domestic             300         305         330         344         350         348         361
 Production Workers in 2013
 (without changes in
 production locations)......

[[Page 65950]]

 
Potential Changes in          ..........     (300)-5    (300)-30    (300)-44    (300)-50    (300)-48    (300)-61
 Domestic Production Workers
 in 2013 *..................
----------------------------------------------------------------------------------------------------------------
*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

    There could be negative employment impacts for DHE at any of the 
considered TSLs if manufacturers' expectations are realized regarding 
higher prices yielding reduced demand. Besides increasing component 
costs, more stringent TSLs put additional pressure on manufacturers 
that could require them to invest in low-volume products, discontinue 
product lines that do not meet the required efficiency level, or exit 
the market altogether.
    While multiple manufacturers could be adversely affected by amended 
energy conservation standards, at TSL 1 and TSL2, most businesses have 
existing products in at least three of the four traditional DHE product 
types. If manufacturers chose to expand production of those products 
that meet the required efficiencies, employment could increase. 
However, multiple small businesses would be adversely affected at any 
TSL and could decide to discontinue some product lines rather than 
invest in product lines with very low volumes. Any manufacturer that 
decided to discontinue product lines could reduce total employment 
within the industry if it impacted the availability of substitute 
replacement products. Net employment impacts if manufacturers 
discontinued product lines at TSL 1 and TSL 2 would depend on total 
product demand and the source of replacement production labor. At TSL 3 
and above, products become increasingly more complex, require higher 
capital and product conversion costs, and, hence, are likely to lead to 
the discontinuation of more product lines. Additionally, every 
manufacturer would face product conversion costs that required a 
complete redesign for at least one product class at TSL 3 and above. An 
amended energy conservation standard at TSL 3 and above could cause 
small businesses to exit the market completely or stop producing 
certain product classes. If small and large manufacturers discontinued 
product lines or exited the market, domestic employment would be 
impacted if replacements were not available or a manufacturer exited 
the market and its market share was not captured by another 
manufacturer.
v. Gas Hearth Direct Heating Equipment Employment Impacts
    Using the GRIM, DOE estimates there would be 1,243 gas hearth DHE 
production workers in the U.S. in 2013 in the absence of amended energy 
conservation standards. Based upon interviews with manufacturers, DOE 
estimates that approximately 80 percent of gas hearth DHE sold in the 
United States is manufactured domestically. Table V.33 shows the 
impacts of potential amended energy conservation standards on U.S. 
production workers in the gas hearth DHE market.

              Table V.33--Potential Changes in the Total Number of Domestic Gas Hearth Direct Heating Equipment Production Workers in 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Trial standard level
                                                         -----------------------------------------------------------------------------------------------
                                                           Baseline        1           2           3             4               5               6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Number of Domestic Production Workers in 2013            1,243       1,250       1,250       1,250           1,759           1,759           2,089
 (without changes in production locations)..............
Potential Changes in Domestic Production Workers in 2013  ..........   (1,243)-7   (1,243)-7   (1,243)-7     (1,243)-516     (1,243)-516     (1,243)-846
 *......................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
* DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

    DOE does not expect significant employment impacts at TSL 1 through 
TSL 3. A substantial portion of the industry already has products that 
meet the requisite efficiencies required by these TSLs and DOE research 
suggests manufacturers can make products at these TSLs by replacing 
standing pilot ignition systems with electronic ignition systems. For 
TSL 4 through TSL 6, manufacturers would be increasingly likely to exit 
the market or reduce their product offerings. At TSL 4 and TSL 5, air 
circulating blowers are required and, at TSL 6, condensing operation is 
required, making these products increasingly complex. At these levels, 
manufacturers suggested the size of the gas hearth DHE market covered 
by today's rulemaking could be impacted due possible consumer 
reactions, which could also put additional pressure on domestic firms 
to consolidate or exit the market. A smaller market could reduce 
employment if the higher labor content required to manufacturer 
standards-compliant products is more than offset by a decline industry 
sales.
vi. Gas-Fired Pool Heater Employment Impacts
    Using the GRIM, DOE estimates there would be 644 gas-fired pool 
heater production workers in the U.S. in 2013 in the absence of amended 
energy conservation standards. Using the Census Bureau data and 
interviews with manufacturers, DOE estimates that approximately 100 
percent of gas-fired pool heaters sold in the United States are 
manufactured domestically. Table V.34 shows the impacts of potential 
amended energy conservations standards on U.S. production workers in 
the gas-fired pool heater industry.

[[Page 65951]]



      Table V.34--Potential Changes in the Total Number of Domestic Pool Heater Production Workers in 2013
----------------------------------------------------------------------------------------------------------------
                                                             Trial standard level
                             -----------------------------------------------------------------------------------
                               Baseline        1           2           3           4           5           6
----------------------------------------------------------------------------------------------------------------
Total Number of Domestic             644         657         678         710         737         807         975
 Production Workers in 2013
 (without changes in
 production locations)......
Potential Changes in          ..........    (644)-13    (644)-34    (644)-66    (644)-93   (644)-163   (644)-331
 Domestic Production Workers
 in 2013 *..................
----------------------------------------------------------------------------------------------------------------
* DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

    DOE expects no significant direct employment impacts on gas-fired 
pool heater manufacturers for TSL 1 through TSL 4 because the 
technology options at these TSLs involve mostly component changes that 
do not greatly alter the labor content. For example, the technology 
changes for existing products that meet TSL 3 and TSL 4 involve power 
venting. While this technology would alter the installation of much of 
the installed base and cause manufacturers to increase the production 
of low-volume products, the basic assembly of the pool heaters at the 
point of manufacture is not substantially changed. Therefore, it is 
unlikely that employment levels would be substantially impacted. 
However, the existing products in the market at TSL 5 are near-
condensing products and products at TSL 6 use fully condensing 
technology. The higher-efficiency products are typically more complex 
and take longer to assemble, resulting in an increase in employment if 
shipments levels are maintained. However, manufacturers have stated 
that the higher prices of higher-efficiency products could result in a 
smaller number of annual shipments, which could cause a corresponding 
reduction in industry employment as well. At TSL 5 and TSL 6, 
manufacturers are particularly concerned that the closer their products 
become to condensing technology, the higher the product costs would be 
and the more likely it is that amended energy conservation standards 
would cause a drop in industry-wide shipments. If manufacturers 
experienced a drop in total shipments, the domestic employment in the 
gas-fired pool heater industry could be negatively affected.
e. Impacts on Manufacturing Capacity
i. Residential Gas-Fired and Electric Storage Water Heaters
    Amended energy conservation standards could cause short-term 
capacity constraints for gas-fired storage water heaters at TSL 7 and 
cause short-term capacity constraints for electric storage water 
heaters at TSL 6 and TSL 7. However, for the remaining TSLs, 
manufacturers could maintain capacity levels and continue to meet 
market demand under amended energy conservation standards.
    DOE research suggests for the efficiency requirements for gas-fired 
storage water heaters could be met by adding more foam insulation to 
all volume sizes at TSL 1 through TSL 4 and TSL 6. These changes would 
not require gas-fired storage water heater manufacturers to greatly 
alter their existing production facilities or equipment and would not 
cause capacity constraints. DOE also acknowledges that TSL 5 could also 
result in a constrained market for large volume sizes if manufacturers 
do not make the required investments to offer gas-fired condensing 
water heaters at relatively low shipment volumes. DOE also recognizes 
there will likely be significant impacts on manufacturers at any TSL 
that effectively requires gas-fired condensing.
    The dramatically different technology required at the max-tech 
level for gas-fired storage water heaters introduces problems that 
could cause short-term capacity constraints in the market. At TSL 7 
(the max-tech level), all manufacturers would need to redesign all of 
their existing products because none currently offers residential water 
heaters that use condensing technology. Manufacturers would also have 
to retrain their installers and servicers to handle technology that 
varies tremendously from the majority of exiting products on the 
market. The fundamental fabrication and production equipment of gas-
fired storage water heaters are substantially different for water 
heaters that use condensing technology. Equipment to manufacturer 
required heat exchangers and new tank designs would be required, as 
well as substantial changes to all subassembly and main assembly lines 
to handle the new technology. DOE estimates that manufacturers would 
incur over $110 million in capital conversion costs to make these plant 
modifications if all residential gas-fired storage water heaters 
required condensing technology. For comparison, the base-case estimate 
for the net PPE for gas-fired storage water heaters is approximately 
$166 million. This comparison of the estimate of current net PPE to the 
required capital conversion costs indicates the plant and equipment 
changes require manufacturers to almost completely modify or replace a 
substantial portion of their existing production assets for gas-fired 
storage water heaters. DOE also estimates that these changes would 
strand approximately $26 million of existing assists, mainly the book 
value of tank and coil equipment that can no longer be used with 
condensing technology. In addition, manufacturers believe that there 
could be problems with quality control to manufacture substantially 
more complex products on high-speed production lines. These problems 
could further increase the capital costs required if the line rates 
required manufacturers to install additional production lines. 
Manufacturers indicated that these potential problems and the extremely 
substantial changes that are required to their facilities could cause a 
constrained market until the production equipment is installed and the 
high-speed manufacturing of what are currently low-volume commercial 
products can be expanded to meet the demand of the gas-fired 
residential water heater market. Although these changes are 
substantial, DOE believes that the 5-year period before compliance with 
the standard is required would allow manufacturers sufficient time to 
make the necessary changes to meet demand for those products. The full 
range of products may not be available initially, however, since 
manufacturers would likely prioritize high-volume product lines ahead 
of lower-volume product lines.
    For electric storage water heaters, TSL 1 through TSL 3 would 
require only minor changes to existing products to increase the tank 
insulation thickness. At TSL 4, more substantial plant modifications 
would be required because changes to the insulation thickness would 
require more foaming stations and additional production lines due to a 
lower throughput. However,

[[Page 65952]]

electric storage water heater manufacturers would be able to maintain 
manufacturing capacity levels and continue to meet market demand under 
amended energy conservation standards for these TSLs. These TSLs do not 
require prohibitively costly or complex changes to existing facilities 
or most products on the market today.
    DOE also acknowledges that TSL 5 could also result in a constrained 
market for large volume sizes if manufacturers do not make the required 
investments to offer electric heat pump water heaters at relatively low 
shipment volumes. DOE also recognizes there will likely be significant 
impacts on manufacturers at any TSL that effectively requires electric 
heat pump water heaters.
    Electric storage water heater manufacturers indicated that there 
could be potential capacity impacts at TSL 6 or TSL 7, which would 
effectively require heat pump technology. However, manufacturers of 
electric storage water heaters indicated that significant changes to 
production facilities would be required if amended energy conservation 
standards effectively mandated heat pump water heaters for all rated 
volume sizes (TSL 6 and TSL 7). Several manufacturers stated that they 
could move all or part of their production to Mexico to take advantage 
of lower labor costs if more complex heat pump water heaters were 
required. DOE believes manufacturers would likely source the heat pump 
module initially if they were required to exclusively manufacture heat 
pump water heaters. However, such a dramatic increase in the demand for 
heat pump modules could strain suppliers, especially in the short-term. 
Finally, manufacturers also stated that they have very little 
experience with manufacturing heat pump water heaters. Manufacturers 
indicated that the changes to their facilities (including potential 
plant sourcing decisions) could cause a constrained market until the 
production equipment is installed and any problems with high-speed 
manufacturing are resolved. As discussed in section IV.B.3.b, DOE 
acknowledges there could be issues with converting entire production 
lines to manufacture heat pump water heaters before the compliance date 
of this standard. Given the five-year delay in the compliance date with 
the amended standard from the issuance from the final rule, and the 
fact that many manufacturers are already developing heat pump water 
heaters, DOE believes manufacturers may be able to convert all their 
product lines before the compliance date of an amended energy 
conservation standard.
ii. Residential Oil-Fired Storage Water Heaters
    While amended energy conservation standards could impact current 
market shares in the oil-fired storage water heater market, it is 
unlikely that standards would result in a constrained market. For oil-
fired storage water heaters, the fundamental fabrication and assembly 
equipment would not be expected to change significantly in order to 
comply with TSL 1 through TSL 6. While DOE research suggests that 
products that meet TSL 1 through TSL 6 require relatively minor changes 
to the insulation material or thickness, the product conversion costs 
necessary at these TSLs could cause at least one manufacturer with 
significant market share to exit the residential oil-fired storage 
water heater market due to the low total shipment volumes. At any 
efficiency level that would likely require a multi-flue heat exchanger 
(i.e., TSL 7), all but one manufacturer would need to make a 
significant and costly redesign of existing residential oil-fired 
product lines and related manufacturing facilities. These substantial 
changes could cause manufacturers to exit the residential oil-fired 
storage water heater market. However, even TSL 7 is unlikely to result 
in a constrained market even if any manufacturer exited the oil-fired 
residential water heater market. One residential oil-fired storage 
water heater manufacturer with significant market share has products 
that meet the max-tech level. Due to the low shipment volumes of oil-
fired storage water heaters, this manufacturer could meet the total 
industry demand and industry-wide capacity would not be impacted.
iii. Gas-Fired Instantaneous Water Heaters
    There may be short-term capacity constraints for gas-fired 
instantaneous water heaters at TSL 7. DOE research suggests that all 
gas-fired instantaneous water heaters are currently imported. If the 
amended energy conservation standards required more-efficient products 
than those currently offered, foreign manufacturers and parent 
companies would have to decide whether the relatively small market for 
gas-fired instantaneous water heaters in the United States could 
justify the required investments. DOE expects that TSL 1 through TSL 6 
would be unlikely to disrupt supply to the United States because of the 
number of existing product lines that manufacturers could offer without 
substantial product develop would not greatly change at the required 
efficiencies. The number of existing product lines on the market drops 
substantially at TSL 7. There could be capacity constraints in response 
to amended energy conservation standards at TSL 7 if manufacturers that 
do not have compliant products chose not to develop them for the United 
States market due to the current size of the market.
iv. Traditional Direct Heating Equipment
    Amended energy conservation standards could lead to a constrained 
traditional DHE market. DOE does not expect that traditional DHE 
manufacturers would need to substantially modify existing facilities in 
response to amended energy conservation standards at TSL 1 or TSL 2. 
However, at TSL 3 though TSL 6, some manufacturers would face complete 
product redesigns for either gas wall fan or gas room DHE. A complete 
redesign would entail significant product development, tooling, 
certification, and testing costs. Some manufacturers indicated that low 
shipment volumes would make these costs unjustifiable for many product 
lines, thereby leading to the discontinuation of those lines. Small 
businesses with less access to capital would be even more likely to 
face this problem than higher-volume, more diversified competitors, 
possibly resulting in further industry consolidation. Pressure that 
forced manufacturers to consolidate or exit the market could also 
strain the remaining manufacturers' capacity to increase production to 
meet industry demand. However at TSL 3, DOE believes that manufacturers 
have enough existing products in multiple product classes that they 
could selectively upgrade enough product lines to meet industry demand 
and remain in business. However, DOE believes setting an amended energy 
conservation standard above TSL 3 could lead to manufacturing capacity 
problems for certain product classes if manufacturers cannot make the 
tooling changes in time to meet the standard, if manufacturers do not 
have the resources to develop products that meet the required 
efficiencies, or if manufacturers discontinue product lines rather than 
invest an amount equal to the required conversion costs.
v. Gas Hearth Direct Heating Equipment
    Gas hearth DHE manufacturers did not indicate that amended energy 
conservation standards would lead to a

[[Page 65953]]

constrained market. Rather, such manufacturers are concerned that more 
stringent energy conservation standards could exert additional 
pressures on companies to consolidate or exit the market. Manufacturers 
predict that unit shipments would decline increasingly as the amended 
energy conservation standard is set closer to max-tech (i.e., TSL 6). 
Manufacturers also indicated that the high capital conversion costs 
would lead all manufacturers to drop product lines or not convert all 
existing product lines at TSL 4 through TSL 6 because of the smaller 
market for covered gas hearth products that is anticipated in the event 
of a more stringent amended energy conservation standard. The reduction 
in market demand and the lower number of product lines available would 
likely lead to an overcapacity of covered products within the industry, 
even if multiple lower-volume competitors exit the market.
vi. Gas-Fired Pool Heaters
    Manufacturers indicated that, while other potentially negative 
impacts were possible at lower TSLs, industry capacity could be 
impacted at more stringent TSLs. At TSL 1 through TSL 4, DOE research 
suggests that manufacturers could retool without causing capacity 
constraints in the market. If DOE were to set amended energy 
conservation standards at near-condensing or condensing level, most 
gas-fired pool heater manufacturers stated that short-term production 
capacity could be affected. While only TSL 6 requires fully-condensing 
products, manufacturers indicated that adoption of amended standards at 
TSL 5 and above could cause them to manufacture only fully-condensing 
products in order to minimize longevity and warranty issues. Thus, TSL 
5 and TSL 6 would require manufacturers to incur significant product 
and capital conversion costs. Consequently, DOE believes setting an 
amended energy conservation standard at or above TSL 5 could lead to 
short-term capacity problems if manufacturers cannot make the necessary 
tooling, equipment, and assembly changes in time to meet the standard.
f. Cumulative Regulatory Burden
    While any one regulation may not impose a significant burden on 
manufacturers, the combined effects of several impending regulations 
may have serious consequences for some manufacturers, groups of 
manufacturers, or an entire industry. Assessing the impact of a single 
regulation may overlook this cumulative regulatory burden. In addition 
to energy conservation standards, other regulations can significantly 
affect manufacturers' financial operations. Multiple regulations 
affecting the same manufacturer can strain company-wide resources and 
can lead companies to abandon product lines or markets with lower 
expected future returns than competing products. For these reasons, DOE 
conducts an analysis of cumulative regulatory burden as part of its 
rulemakings pertaining to appliance efficiency. During previous stages 
of this rulemaking, DOE identified several requirements, in addition to 
amended energy conservation standards for the three types of heating 
products that manufacturers will face for products manufactured three 
years before and three years after the anticipated compliance date of 
the amended energy conservation standards.
    During interviews and in their written comments, manufacturers 
stated that the most significant of these additional regulations are 
regional ultra-low-NOX requirements and environmental and 
safety regulations. In response to the preliminary analysis, BWC 
commented that there is a substantial cost increase to comply with 
ultra-low-NOX requirements. (BWC, No. 46 at p. 1) Noritz 
also stated that ultra-low-NOX requirements are the most 
significant regulation that will affect the gas-fired instantaneous 
water heating industry (Noritz, No. 36 at p. 3). AHRI and Rheem stated 
that gas-fired instantaneous water heater manufacturers will have to 
comply with ultra-low-NOX emissions requirements in 2012. 
(AHRI, Public Meeting Transcript, No. 34.4 at p. 134; Rheem, No. 48 at 
p. 7)
    Low and ultra-low-NOX regulations for gas-fired water 
heaters are being implemented regionally by air quality management 
districts, including the South Coast Air Quality Management District 
(SCAQMD), the Bay Area Air Quality Management District (BAAQMD), the 
San Joaquin Valley Unified Air Pollution Control District (the Valley 
Air District), and the Texas Commission on Environmental Equality 
(TCEQ). The ultra-low-NOX regional standards currently in 
place only cover gas-fired storage water heaters, but manufacturers are 
concerned that these standards could eventually affect additional types 
of gas-fired equipment. While the SCAQMD, the BAAQMD, and the Valley 
Air District all mandate ultra-low-NOX requirements, the 
TCEQ only has low-NOX requirements.
    DOE accounted for the added cost for manufacturers of gas-fired 
storage water heaters to comply with regional ultra-low NOX 
requirements (see section IV.C.2). DOE agrees with Noritz, AHRI, and 
Rheem that ultra-low-NOX requirements may affect 
instantaneous gas water heaters beginning in 2012. While the SCAQMD 
does not distinguish between gas-fired storage and gas-fired 
instantaneous water heaters, the BAAQMD and the Valley Air District 
have separate ultra-low-NOX regulations for natural gas-
fired instantaneous water heaters. Although the compliance dates of 
these regulations are pending, DOE is not aware of any ultra-low-
NOX instantaneous gas-fired water heaters currently on the 
market. Consequently, DOE could not create a separate cost curve to 
account for the additional cost of instantaneous water heaters that 
will meet the upcoming ultra-low-NOX emissions requirements.
    There are also existing FVIR and low and ultra-low-NOX 
requirements for gas-fired storage water heaters, ignition source 
requirements, amended energy conservation standards for other products 
made by heating products manufacturers, State energy conservation 
standards for other products, and international energy conservation 
standards. The cumulative burden focuses on other product-specific 
Federal requirements with a compliance date three years prior to and 
three years after the anticipated compliance dates of the amended 
energy conservation standards of this rulemaking. However, DOE 
discusses these and other regulations and includes the full details of 
the cumulative regulatory burden in chapter 12 of the NOPR TSD.
g. Impacts on Small Businesses
    As discussed in section IV.H.1.c, using average cost assumptions to 
develop an industry cash-flow estimate is not adequate for assessing 
differential impacts among manufacturer subgroups. Small manufacturers, 
niche equipment manufacturers, and manufacturers exhibiting a cost 
structure substantially different from the industry average could be 
affected disproportionately. DOE used the results of the industry 
characterization to group manufacturers exhibiting similar 
characteristics. Consequently, the only subgroup DOE identified was 
small manufacturers.
    DOE evaluated the impact of amended energy conservation standards 
on small manufacturers, as defined by SBA. As a result, DOE identified 
five residential water heater manufacturers, 12 DHE manufacturers, and 
one small gas-fired pool heater manufacturer that are classified as 
small businesses per the SBA definition. DOE describes the

[[Page 65954]]

differential impacts on these small businesses in section VI.B of 
today's notice. For a complete discussion of the impacts on small 
businesses, see chapter 12 of the NOPR TSD.
3. National Impact Analysis
a. Significance of Energy Savings
    To estimate the energy savings attributable to potential standards, 
DOE compared the energy consumption of the heating products under the 
base case (no standards) to anticipated energy consumption of these 
products under each TSL. Table V.35 through Table V.37 present DOE's 
NES estimates by product type and class for each TSL. Chapter 10 of the 
NOPR TSD describes these estimates in more detail.

                                         Table V.35--Water Heaters: Cumulative National Energy Savings in Quads
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Product class                             TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6        TSL 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired Storage............................................         0.83         1.29         1.29         1.29         1.46         1.29         5.33
Electric Storage.............................................         0.35         0.49         0.90         1.21         2.18         9.05        10.62
Oil-Fired Storage............................................         0.01         0.01         0.01         0.01         0.01         0.01         0.03
Gas-Fired Instantaneous......................................         0.08         0.08         0.08         0.08         0.08         0.08         0.87
                                                              ------------------------------------------------------------------------------------------
    Total....................................................         1.26         1.88         2.28         2.60         3.74        10.44        16.85
--------------------------------------------------------------------------------------------------------------------------------------------------------


                Table V.36--Direct Heating Equipment: Cumulative National Energy Savings in Quads
----------------------------------------------------------------------------------------------------------------
        Product class             TSL 1         TSL 2         TSL 3         TSL 4         TSL 5         TSL 6
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan................        0.007         0.01          0.01          0.02          0.01          0.02
Gas Wall Gravity............        0.008         0.02          0.06          0.06          0.10          0.10
Gas Floor...................        0.0001        0.0001        0.0001        0.0001        0.0001        0.0001
Gas Room....................        0.002         0.00          0.01          0.01          0.03          0.03
Gas Hearth..................        0.136         0.14          0.14          0.30          0.30          0.93
                             -----------------------------------------------------------------------------------
    Total...................        0.15          0.17          0.22          0.39          0.44          1.08
----------------------------------------------------------------------------------------------------------------


                      Table V.37--Pool Heaters: Cumulative National Energy Savings in Quads
----------------------------------------------------------------------------------------------------------------
                                  TSL 1         TSL 2         TSL 3         TSL 4         TSL 5         TSL 6
----------------------------------------------------------------------------------------------------------------
Gas-Fired...................         0.02          0.03          0.08          0.10          0.13          0.28
----------------------------------------------------------------------------------------------------------------

b. Net Present Value of Consumer Costs and Benefits
    DOE estimated the cumulative NPV to the Nation of total heating 
product consumer costs and savings that would result from particular 
standard levels. In accordance with the OMB Circular A-4, DOE 
calculated the NPV using both a 7-percent and a 3-percent real discount 
rate. The 7-percent rate is an estimate of the average before-tax rate 
of return to private capital in the U.S. economy, and reflects the 
returns to real estate and small business capital as well as corporate 
capital. DOE used this discount rate to approximate the opportunity 
cost of capital in the private sector, as OMB analysis has found the 
average rate of return to capital to be near this rate. In addition, 
DOE used the 3-percent rate to capture the potential effects of amended 
standards on private consumption (e.g., through higher prices for 
products and reduced purchases of energy). This rate represents the 
rate at which society discounts future consumption flows to their 
present value. This rate can be approximated by the real rate of return 
on long-term government debt (i.e., yield on Treasury notes minus 
annual rate of change in the Consumer Price Index), which has averaged 
about 3 percent on a pre-tax basis for the last 30 years.
    Table V.38 through Table V.40 show the consumer NPV results for 
each TSL DOE considered for the three types of heating products, using 
both a 7-percent and a 3-percent discount rate. See chapter 10 of the 
NOPR TSD for more detailed NPV results.

                                     Table V.38--Cumulative Net Present Value of Consumer Benefits for Water Heaters
                                                       [Impacts for units sold from 2015 to 2045]
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Product class                             TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6        TSL 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               billion 2008 dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 3%....................  Gas-Fired Storage......         7.58         9.04         9.04         9.04         9.63         9.04        11.27
                                      Electric Storage.......         2.19         3.16         4.73         6.02        11.67        31.90        41.94
                                      Oil-Fired Storage......         0.12         0.20         0.28         0.28         0.28         0.28         0.47
                                      Gas-Fired Instantaneous         0.30         0.30         0.30         0.30         0.30         0.30        -5.68
                                                              ------------------------------------------------------------------------------------------
                                         Total...............        10.20        12.71        14.36        15.64        21.89        41.52        47.99
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 7%....................  Gas-Fired Storage......         2.94         3.09         3.09         3.09         3.17         3.09        -1.10
                                      Electric Storage.......         0.69         1.03         1.32         1.59         3.35         5.22         8.50
                                      Oil-Fired Storage......         0.05         0.09         0.12         0.12         0.12         0.12         0.19

[[Page 65955]]

 
                                      Gas-Fired Instantaneous         0.01         0.01         0.01         0.01         0.01         0.01        -4.84
                                                              ------------------------------------------------------------------------------------------
                                         Total...............         3.69         4.20         4.53         4.79         6.64         8.43         2.75
--------------------------------------------------------------------------------------------------------------------------------------------------------


                               Table V.39--Cumulative Net Present Value of Consumer Benefits for Direct Heating Equipment
                                                       [Impacts for units sold from 2013 to 2043]
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                            Product class                                 TSL 1         TSL 2         TSL 3         TSL 4         TSL 5         TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                billion 2008 dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 3%........................  Gas Wall Fan..............        0.07          0.09          0.11          0.14          0.07          0.14
                                          Gas Wall Gravity..........        0.07          0.22          0.52          0.52          0.37          0.37
                                          Gas Floor.................        0.0003        0.0003        0.0003        0.0003        0.0003        0.0003
                                          Gas Room..................        0.02          0.05          0.08          0.08          0.35          0.35
                                          Gas Hearth................        1.52          1.52          1.52         -1.06         -1.06         -3.49
                                                                     -----------------------------------------------------------------------------------
                                             Total..................        1.68          1.87          2.22         -0.33         -0.26         -2.63
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 7%........................  Gas Wall Fan..............        0.03          0.04          0.04          0.04          0.03          0.04
                                          Gas Wall Gravity..........        0.03          0.09          0.20          0.20          0.06          0.06
                                          Gas Floor.................        0.0001        0.0001        0.0001        0.0001        0.0001        0.0001
                                          Gas Room..................        0.01          0.02          0.03          0.03          0.14          0.14
                                          Gas Hearth................        0.64          0.64          0.64         -1.16         -1.16         -3.78
                                                                     -----------------------------------------------------------------------------------
                                             Total..................        0.71          0.79          0.91         -0.89         -0.93         -3.54
--------------------------------------------------------------------------------------------------------------------------------------------------------


                 Table V.40--Cumulative Net Present Value of Consumer Benefits for Pool Heaters
                                   [Impacts for units sold from 2013 to 2043]
----------------------------------------------------------------------------------------------------------------
                                       TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6
----------------------------------------------------------------------------------------------------------------
                                                                billion 2008 dollars
----------------------------------------------------------------------------------------------------------------
Discounted at 3%..................         0.16         0.18         0.40         0.25        -1.97        -4.51
Discounted at 7%..................         0.08         0.07         0.14         0.03        -1.27        -2.94
----------------------------------------------------------------------------------------------------------------

c. Net Present Value of Benefits From Energy Price Impacts
    DOE estimated the cumulative NPV of the economy-wide savings in 
natural gas expenditures during the forecast period due to the 
projected decline in natural gas prices resulting from amended 
standards on water heaters. DOE calculated the cumulative NPV for the 
efficiency levels in each product class corresponding to each TSL using 
both a 7-percent and a 3-percent discount rate (Table V.41). (The 
impact of amended standards for direct heating equipment and pool 
heaters was not estimated for the reasons explained in section IV.F.) 
See chapter 10 of the NOPR TSD for further details. As discussed in 
section IV.F.2.g, DOE was not able to estimate the impact of the 
considered TSLs on electricity prices.

  Table V.41--Cumulative NPV of the Economy-Wide Savings in Natural Gas Expenditures Due to the Projected Decline in Natural Gas Prices Resulting From
                                                          Amended Standards for Water Heaters*
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Discount Rate                             TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6        TSL 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     billion $2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
3 percent....................................................          3.0          4.5          5.1          5.6          7.1         23.6         47.7
7 percent....................................................          1.4          2.2          2.5          2.7          3.4         12.0         24.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Impacts for units sold from 2015 to 2045.

d. Impacts on Employment
    Employment impacts consist of direct and indirect impacts. Direct 
employment impacts are any changes in the number of employees of 
manufacturers of the appliance products that are the subject of this 
rulemaking, their suppliers, and related service firms. Indirect 
employment impacts are changes in employment in the larger economy that 
occur due to the shift in expenditures and capital investment caused by 
the purchase and operation of more-efficient appliances. The MIA 
addresses the direct employment impacts that concern manufacturers of 
the three heating products (see section V.B.2 above).
    To estimate the indirect employment impacts of potential amended 
energy conservation standards, DOE used an input/output model of the 
U.S. economy

[[Page 65956]]

(see section IV.I)). The input/output model results suggest that 
amended standards would be likely to increase the net demand for labor 
in the economy slightly. Table V.42 presents the estimated net indirect 
employment impacts from the TSLs that DOE considered for water heaters. 
The estimated impacts from the potential amended standards for DHE and 
pool heaters would be much smaller. (Note that the input/output model 
DOE uses does not report the quality or wage level of the jobs.) See 
chapter 14 of the NOPR TSD for more detailed results.

                Table V.42--Net Increase in National Indirect Employment Under Water Heater TSLs
----------------------------------------------------------------------------------------------------------------
        Trial standard level            2015 thousands     2020 thousands     2030 thousands     2044 thousands
----------------------------------------------------------------------------------------------------------------
1...................................              -0.17               1.02               2.58               3.32
2...................................             -0.46q               1.20               3.36               4.38
3...................................              -0.55               1.97               5.27               6.70
4...................................              -0.62               2.58               6.75               8.49
5...................................              -0.77               5.63              13.95              17.82
6...................................              -2.47              18.48              45.72              55.67
7...................................              -6.98              19.37              54.03              68.11
----------------------------------------------------------------------------------------------------------------

    While DOE's analysis suggests that amended standards could increase 
the net demand for labor in the economy, the estimated gains would be 
very small relative to total national employment. Therefore, DOE has 
tentatively concluded that the considered standard levels would be 
likely to produce employment benefits sufficient to fully offset any 
adverse impacts on employment in the manufacturing industries related 
to the three types of heating products that are the subject of this 
rulemaking.
4. Impact on Utility or Performance of Products
    As discussed in section III.D.1.d, DOE has tentatively concluded 
that none of the efficiency levels considered in this notice would 
reduce the utility or performance of the three types of heating 
products. Furthermore, manufacturers of these products currently offer 
heating products that meet or exceed the proposed standards. (42 U.S.C. 
6295(o)(2)(B)(i)(IV))
5. Impact of Any Lessening of Competition
    DOE has also considered any lessening of competition likely to 
result from amended standards. The Attorney General determines the 
impact, if any, of any lessening of competition likely to result from a 
proposed standard, and transmits its determination to the Secretary, 
together with an analysis of the nature and extent of the impact. (42 
U.S.C. 6295(o)(2)(B)(i)(V) and (ii))
    To assist the Attorney General in making such a determination, DOE 
has provided DOJ with copies of this notice and the TSD for review. DOE 
will consider DOJ's comments on the proposed rule in preparing the 
final rule, and DOE will publish and respond to DOJ's comments in that 
document.
6. Need of the Nation To Conserve Energy
    Improving the energy efficiency of heating products when 
economically justified would likely improve the security of the 
Nation's energy system by reducing overall demand for energy. (42 
U.S.C. 6295(o)(2)(B)(i)(VI)) Reduced electricity demand may also 
improve the reliability of the electricity system.
    Energy savings from amended standards for heating products could 
also produce environmental benefits in the form of reduced emissions of 
air pollutants and greenhouse gases associated with energy production 
and the use of fossil fuels at the sites where heating products are 
used. Table V.43 and Table V.44 provide DOE's estimate of cumulative 
CO2, NOX, and Hg emissions reductions that would 
be expected to result from the TSLs considered in this rulemaking. In 
the environmental assessment (chapter 16 of the NOPR TSD), DOE reports 
the estimated annual change in CO2, NOX, and Hg 
emissions attributable to each TSL.
    For DHE, DOE estimates a very slight increase in Hg emissions under 
the proposed standard. The reason for this result is that the more-
efficient products save natural gas, but they also use more electricity 
due to electronic ignition and, for some DHE TSLs, use of a fan. This 
results in higher electricity generation than in the reference case, 
which leads to higher emissions. However, because the increase in 
electricity that these more efficient products are projected to use is 
comparatively small when compared to the reduction in natural gas 
usage, there will be an overall efficiency gain from the proposed 
standard. For CO2 and NOX, the higher emissions 
from the power sector would also be canceled out by lower household 
emissions from gas combustion, resulting in a total emissions decrease 
under the considered TSLs. This is not the case for Hg because there 
are no household Hg emissions to offset.
    As discussed in section IV.K, DOE does not report SO2 
emissions reductions from power plants because there is uncertainty 
about the effect of energy conservation standards on the overall level 
of SO2 emissions in the United States due to SO2 
emissions caps. DOE also did not include NOX emissions 
reduction from power plants in States subject to CAIR because an energy 
conservation standard would not affect the overall level of 
NOX emissions in those States due to the emissions caps 
mandated by CAIR.

                                           Table V.43--Summary of Emissions Reductions Under Water Heater TSLs
                                                         [Cumulative throughout forecast period]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       TSL
                     Emission Type                     -------------------------------------------------------------------------------------------------
                                                              1             2             3             4             5             6             7
--------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (Mt)..............................................         88.7         136.8         146.6         153.8         217.0         346.0         965.5
NOX (kt)..............................................         68.5         106           113           118           165           254           730

[[Page 65957]]

 
Hg (t)................................................          0.11          0.16          0.19          0.20          0.60          2.18          4.43
--------------------------------------------------------------------------------------------------------------------------------------------------------


         Table V.44--Summary of Emissions Reductions Under Direct Heating Equipment and Pool Heater TSLs
                                     [Cumulative throughout forecast period]
----------------------------------------------------------------------------------------------------------------
                                                                         TSL
           Emission Type           -----------------------------------------------------------------------------
                                         1            2            3            4            5            6
----------------------------------------------------------------------------------------------------------------
                                            Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)..........................         6.32         7.02         8.52        16.69        18.46        42.97
NOX (kt)..........................         5.79         6.42         7.74         15.2         16.9         39.6
Hg (t)............................       (0.02)       (0.02)       (0.02)       (0.00)       (0.01)       (0.01)
----------------------------------------------------------------------------------------------------------------
                                                  Pool Heaters
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)..........................        0.610         1.05         3.31         4.21         5.74        12.12
NOX (kt)..........................         0.55         0.94         2.98         3.74         5.10        10.77
Hg (t)............................         0.00         0.00         0.01         0.00         0.00         0.00
----------------------------------------------------------------------------------------------------------------

    DOE estimated the cumulative monetary value of the economic 
benefits associated with CO2 emissions reductions expected 
to result from amended standards for the three types of heating 
products. As discussed in section IV.K, in considering the potential 
global benefits resulting from reduced CO2 emissions, DOE 
used values based on a social cost of carbon of approximately $5, $10, 
$20, $34 and $56 per metric ton avoided in 2007 (values expressed in 
2008$). DOE also calculated the domestic benefits based on a value of 
approximately $1 per metric ton avoided in 2007. To monetize the 
CO2 emissions reductions expected to result from amended 
standards for heating products in 2013-2045, DOE escalated the above 
values for 2007 using a three-percent escalation rate. For each of the 
three types of heating products, DOE calculated the cumulative monetary 
value for each TSL using both a 7-percent and 3-percent discount rate 
(see Table V.45 through Table V.50).

           Table V.45--Estimates of the Value of CO2 Emissions Reductions for Water Heaters Under Trial Standard Levels Using 7% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Value of estimated CO2 emission reductions (million 2008$)*
                                                        ------------------------------------------------------------------------------------------------
                                                             Domestic                                         Global
                          TSL                           ------------------------------------------------------------------------------------------------
                                                                           CO2 value of    CO2 value of    CO2 value of    CO2 value of    CO2 value of
                                                         CO2 value of $1/  $5/metric ton  $10/metric ton  $20/metric ton  $34/metric ton  $56/metric ton
                                                          metric ton CO2        CO2             CO2             CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................................             48.0             211             421             800           1,390           2,317
2......................................................             74.1             325             650           1,235           2,145           3,575
3......................................................             79.4             348             697           1,324           2,299           3,832
4......................................................             83.4             366             732           1,390           2,414           4,024
5......................................................            112               492             983           1,869           3,246           5,409
6......................................................            171               749           1,497           2,845           4,941           8,235
7......................................................            487             2,134           4,268           8,110          14,085         23,476
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.


           Table V.46--Estimates of the Value of CO2 Emissions Reductions for Water Heaters Under Trial Standard Levels Using 3% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Value of estimated CO2 emission reductions (million 2008$)*
                                                         -----------------------------------------------------------------------------------------------
                                                             Domestic                                         Global
                           TSL                           -----------------------------------------------------------------------------------------------
                                                           CO2 value of    CO2 value of    CO2 value of    CO2 value of    CO2 value of    CO2 value of
                                                           $1/metric ton   $5/metric ton  $10/metric ton  $20/metric ton  $34/metric ton  $56/metric ton
                                                                CO2             CO2             CO2             CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................             110             480             961           1,826           3,171           5,285
2.......................................................             169             741           1,482           2,816           4,890           8,151
3.......................................................             181             794           1,588           3,017           5,239           8,732

[[Page 65958]]

 
4.......................................................             190             833           1,666           3,166           5,499           9,166
5.......................................................             265           1,162           2,325           4,417           7,672          12,787
6.......................................................             416           1,824           3,648           6,932          12,040          20,066
7.......................................................           1,170           5,132          10,263          19,500          33,868         56,447
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.


     Table V.47--Estimates of the Value of CO2 Emissions Reductions for Direct Heating Equipment Under Trial Standard Levels Using 7% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Value of estimated CO2 emission reductions (million 2008$)*
                                                       -------------------------------------------------------------------------------------------------
                                                           Domestic                                          Global
                          TSL                          -------------------------------------------------------------------------------------------------
                                                         CO2 value of                      CO2 value of    CO2 value of    CO2 value of    CO2 value of
                                                         $1/metric ton  CO2 value of $5/  $10/metric ton  $20/metric ton  $34/metric ton  $56/metric ton
                                                              CO2        metric ton CO2        CO2              CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.....................................................            3.69             16.2             32.4            61.5             107             178
2.....................................................            4.09             18.0             35.9            68.2             119             198
3.....................................................            4.96             21.8             43.6            82.8             144             240
4.....................................................            9.78             42.9             85.8             163             283             472
5.....................................................           10.8              47.4             94.8             180             313             521
6.....................................................           25.2             111              221               420             730          1,216
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.


     Table V.48--Estimates of the Value of CO2 Emissions Reductions for Direct Heating Equipment Under Trial Standard Levels Using 3% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Value of estimated CO2 emission reductions (million 2008$)*
                                                       -------------------------------------------------------------------------------------------------
                                                           Domestic                                          Global
                          TSL                          -------------------------------------------------------------------------------------------------
                                                         CO2 value of                      CO2 value of    CO2 value of    CO2 value of    CO2 value of
                                                         $1/metric ton  CO2 value of $5/  $10/metric ton  $20/metric ton  $34/metric ton  $56/metric ton
                                                              CO2        metric ton CO2        CO2              CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.....................................................            7.81             34.3             68.5             130             226             377
2.....................................................            8.68             38.1             76.1             145             251             419
3.....................................................           10.5              46.2             92.4             176             305             508
4.....................................................           20.6              90.5            181               344             598             996
5.....................................................           22.8             100              200               380             661           1,101
6.....................................................           53.1             233              466               886           1,538          2,564
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.


           Table V.49--Estimates of the Value of CO2 Emissions Reductions for Pool Heaters Under Trial Standard Levels Using 7% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Value of estimated CO2 emission reductions  (million 2008$)*
                                                     ---------------------------------------------------------------------------------------------------
                                                         Domestic                                           Global
                         TSL                         ---------------------------------------------------------------------------------------------------
                                                       CO2 value of                                        CO2 value of    CO2 value of    CO2 value of
                                                       $1/metric ton  CO2 value of $5/  CO2 value of $10/ $20/metric ton  $34/metric ton  $56/metric ton
                                                            CO2        metric ton CO2    metric ton CO2         CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................            0.37              1.63              3.27            6.21            10.8            18.0
2...................................................            0.64              2.81              5.61            10.7            18.5            30.9
3...................................................            2.02              8.86             17.7             33.7            58.5            97.4
4...................................................            2.55             11.2              22.4             42.5             73.             123
5...................................................            3.47             15.2              30.5             57.9             101             168
6...................................................            7.33             32.8              64.3              122             212            354
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.


[[Page 65959]]


           Table V.50--Estimates of the Value of CO2 Emissions Reductions for Pool Heaters Under Trial Standard Levels Using 3% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Value of estimated CO2 emission reductions  (million 2008$)*
                                                     ---------------------------------------------------------------------------------------------------
                                                         Domestic                                           Global
                         TSL                         ---------------------------------------------------------------------------------------------------
                                                       CO2 value of                                        CO2 value of    CO2 value of    CO2 value of
                                                       $1/metric ton  CO2 value of $5/  CO2 value of $10/ $20/metric ton  $34/metric ton  $56/metric ton
                                                            CO2        metric ton CO2    metric ton CO2         CO2             CO2             CO2
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...................................................            0.75              3.31              6.62            12.6            21.8            36.4
2...................................................            1.30              5.69             11.4             21.6            37.5            62.5
3...................................................            4.09             18.0              35.9             68.2             118             197
4...................................................            5.21             22.8              45.7             86.8             151             251
5...................................................            7.10             31.1              62.2              118             205             342
6...................................................           15.0              65.7             131                250             434            723
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unit values are approximate and are based on escalating 2007$ to 2008$ for consistency with other values presented in this notice.

    DOE also estimated a range for the cumulative monetary value of the 
economic benefits associated with NOX and Hg emissions 
reductions anticipated to result from amended standards for the three 
types of heating products under consideration in this rulemaking. Table 
V.51 through Table V.54 present the results for NOX 
emissions reductions. Table V.53 presents the results for Hg emissions 
reductions for water heaters. The values for Hg emissions reductions 
for direct heating equipment and pool heater TSLs are negligible.

Table V.51--Estimates of the Value of NOX Emissions Reductions for Water
                   Heaters Under Trial Standard Levels
------------------------------------------------------------------------
                                       Value at 7%        Value at 3%
                TSL                   discount rate      discount rate
                                      million 2008$      million 2008$
------------------------------------------------------------------------
1.................................          7.44-76.4           15.9-163
2.................................           11.5-118           24.5-252
3.................................           12.3-126           26.2-269
4.................................           12.9-132           27.4-282
5.................................           16.4-168           36.6-377
6.................................           23.0-236           54.1-556
7.................................           69.1-710          159-1,632
------------------------------------------------------------------------


   Table V.52--Estimates of the Value of NOX Emissions Reductions for
          Direct Heating Equipment Under Trial Standard Levels
------------------------------------------------------------------------
                                       Value at 7%        Value at 3%
                TSL                   discount rate      discount rate
                                      million 2008$      million 2008$
------------------------------------------------------------------------
1.................................          0.71-7.26         1.41-14.51
2.................................          0.78-8.04         1.56-16.07
3.................................          0.94-9.68         1.89-19.39
4.................................          1.87-19.2         3.73-38.32
5.................................          2.07-21.3         4.13-42.50
6.................................          4.86-50.0         9.67-99.45
------------------------------------------------------------------------


 Table V.53--Estimates of the Value of NOX Emissions Reductions for Pool
                   Heaters Under Trial Standard Levels
------------------------------------------------------------------------
                                       Value at 7%        Value at 3%
                TSL                   discount rate      discount rate
                                      million 2008$      million 2008$
------------------------------------------------------------------------
1.................................          0.07-0.75          0.14-1.43
2.................................          0.12-1.28          0.24-2.45
3.................................          0.39-4.05          0.75-7.73
4.................................          0.49-5.03          0.94-9.66
5.................................          0.67-6.86         1.28-13.16
6.................................         1.41-14.49         2.70-27.80
------------------------------------------------------------------------


[[Page 65960]]


 Table V.54--Estimates of the Value of Mercury Emissions Reductions for
                Water Heaters Under Trial Standard Levels
------------------------------------------------------------------------
                                       Value at 7%        Value at 3%
                TSL                   discount rate      discount rate
                                      million 2008$      million 2008$
------------------------------------------------------------------------
1.................................          0.03-1.20          0.05-2.17
2.................................          0.04-1.82          0.07-3.30
3.................................          0.05-2.07          0.08-3.74
4.................................          0.05-2.25          0.09-4.09
5.................................          0.16-6.94         0.28-12.53
6.................................          0.49-21.7          0.93-41.7
7.................................          0.99-44.1          1.90-84.8
------------------------------------------------------------------------

    The NPV of the monetized benefits associated with emissions 
reductions can be viewed as a complement to the NPV of the consumer 
savings calculated for each TSL considered in this rulemaking. Table 
V.55 presents the NPV values for water heaters that would result if DOE 
were to add the low- and high-end estimates of the potential benefits 
resulting from reduced CO2, NOX and Hg emissions 
to the NPV of consumer savings calculated for each TSL considered in 
this rulemaking, at both a 7- and 3-percent discount rate. Table V.56 
presents the NPV values for DHE that would result if DOE were to add 
the low- and high-end estimates of the potential global benefits 
resulting from reduced CO2 emissions to the NPV of consumer 
savings calculated for each TSL considered in this rulemaking, at both 
a 7- and 3-percent discount rate. Table V.57 presents the same NPV 
values for pool heaters. For CO2, only the low and high 
global benefit values are used for these tables ($5 and $56 in 2008$).
    Although adding the value of consumer savings to the values of 
emission reductions provides a valuable perspective, please note the 
following: 1) the national consumer savings are domestic U.S. consumer 
monetary savings found in market transactions, while the values of 
emission reductions are based on ranges of estimates of imputed 
marginal social costs, which, in the case of CO2, are meant 
to reflect global benefits; and 2) the assessments of consumer savings 
and emission-related benefits are performed with different computer 
models, leading to different time frames for the analyses. For water 
heaters, for example, the present value of national consumer savings is 
measured for the period 2015-2065 (30 years from 2015 to 2045, plus the 
longest lifetime of the equipment shipped in the 30th year). However, 
the time frames of the benefits associated with the emission reductions 
differ. For example, the value of CO2 emission reductions is 
meant to reflect the present value of all future climate-related 
impacts, even those beyond 2065.
    DOE seeks comment on its presentation of NPV values and on the 
consideration of GHG emissions in future energy conservation standards 
rulemakings, including alternative methodological approaches to 
including GHG emissions in its analysis. More specifically, DOE seeks 
comment on both how it integrates monetized GHG emissions or Social 
Cost of Carbon values, as well as other monetized benefits or costs, 
into its analysis and models, and also on suggested alternatives to the 
current approach.

  Table V.55--Estimates of Adding NPV of Consumer Savings to NPV of Low- and High-End Global Monetized Benefits
   From CO2, NOX, and Hg Emissions Reductions at All TSLs for Water Heaters at 3- and 7-Percent Discount Rates
----------------------------------------------------------------------------------------------------------------
                                                    CO2 value of $5/metric ton      CO2 value of $56/metric ton
                                                    CO2* and low values for NOX    CO2* and high values for NOX
                                                      and Hg** billion 2008$          and Hg*** billion 2008$
                       TSL                       ---------------------------------------------------------------
                                                     7-percent       3-percent       7-percent       3-percent
                                                   discount rate   discount rate   discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
1...............................................            3.90            10.7            6.08            15.6
2...............................................            4.54            13.5            7.90            21.1
3...............................................            4.89            15.2            8.49            23.4
4...............................................            5.17            16.5            8.95            25.1
5...............................................            7.14            23.1           12.2             35.1
6...............................................            9.20            43.4           16.9             62.2
7...............................................            4.95            53.3           27.0              106
----------------------------------------------------------------------------------------------------------------
* These values per ton represent the global negative externalities of CO2.
** Low Value corresponds to a value of $442 per ton of NOX emissions and $0.745 million per ton of Hg emissions.
*** High Value corresponds to a value of $4,540 per ton of NOX emissions and $33.3 million per ton of Hg
  emissions.


[[Page 65961]]


  Table V.56--Estimates of Adding NPV of Consumer Savings to NPV of Low- and High-End Global Monetized Benefits
        from CO2, NOX, and Hg Emissions Reductions at All TSLs for DHE at 3- and 7-Percent Discount Rates
----------------------------------------------------------------------------------------------------------------
                                               CO2 value of $5/metric ton CO2*  CO2 value of $56/metric ton CO2*
                                               and low values for NOX and Hg**     and high values for NOX and
                                                        billion 2008$                  Hg*** billion 2008$
                     TSL                     -------------------------------------------------------------------
                                                 7-percent        3-percent        7-percent        3-percent
                                               discount rate    discount rate    discount rate    discount rate
----------------------------------------------------------------------------------------------------------------
1...........................................           0.722             1.72            0.890             2.07
2...........................................           0.804             1.91            0.991             2.31
3...........................................           0.938             2.27             1.16             2.75
4...........................................         (0.840)          (0.233)          (0.394)            0.707
5...........................................         (0.855)          (0.156)          (0.392)            0.884
6...........................................          (3.42)           (2.38)           (2.27)            0.038
----------------------------------------------------------------------------------------------------------------
* These values per ton represent the global negative externalities of CO2.
** Low Value corresponds to a value of $442 per ton of NOX emissions and $0.745 million per ton of Hg emissions.
*** High Value corresponds to a value of $4,540 per ton of NOX emissions and $33.3 million per ton of Hg
  emissions.


Table V.57--Estimates of Adding NPV of Consumer Savings to NPV of Low- and High-End Monetized Benefits from CO2,
        NOX, and Hg Emissions Reductions at All TSLs for Pool Heaters at 3- and 7-Percent Discount Rates
----------------------------------------------------------------------------------------------------------------
                                                    CO2 value of $5/metric ton      CO2 value of $56/metric ton
                                                    CO2* and low values for NOX    CO2* and high values for NOX
                                                      and Hg** billion 2008$          and Hg*** billion 2008$
                       TSL                       ---------------------------------------------------------------
                                                     7-percent       3-percent       7-percent       3-percent
                                                   discount rate   discount rate   discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
1...............................................           0.077           0.019           0.094           0.053
2...............................................           0.078           0.033           0.107           0.092
3...............................................           0.147           0.100           0.239           0.287
4...............................................           0.044           0.121           0.161           0.358
5...............................................          (1.25)           0.166          (1.09)           0.489
6...............................................          (2.90)           0.353          (2.57)            1.03
----------------------------------------------------------------------------------------------------------------
* These values per ton represent the global negative externalities of CO2.
** Low Value corresponds to a value of $442 per ton of NOX emissions and $0.745 million per ton of Hg emissions.
*** High Value corresponds to a value of $4,540 per ton of NOX emissions and $33.3 million per ton of Hg
  emissions.


 Table V.58--Estimates of Adding NPV of Consumer Savings to NPV of Low- and High-End Monetized Benefits from CO2
   Emissions Reductions at All TSLs for Water Heaters, DHE and Pool Heaters at 3- and 7-Percent Discount Rate
----------------------------------------------------------------------------------------------------------------
                                                    CO2 value of $5/metric ton      CO2 value of $56/metric ton
                                                    CO2* and low values for NOX    CO2* and high values for NOX
                                                      and Hg** billion 2008$          and Hg*** billion 2008$
                       TSL                       ---------------------------------------------------------------
                                                     7-percent       3-percent       7-percent       3-percent
                                                   discount rate   discount rate   discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
1...............................................            4.69            12.4           2,517           5,710
2...............................................            5.41            15.4           3,808           8,647
3...............................................            5.96            17.5           4,174           9,455
4...............................................            4.36            16.4           4,622          10,428
5...............................................            4.99            23.1           6,102          14,252
6...............................................            2.85            41.3           9,807          23,392
7...............................................            1.45            51.1          25,042          59,779
----------------------------------------------------------------------------------------------------------------
* These values per ton represent the global negative externalities of CO2.
** Low Value corresponds to a value of $442 per ton of NOX emissions and $0.745 million per ton of Hg emissions.
*** High Value corresponds to a value of $4,540 per ton of NOX emissions and $33.3 million per ton of Hg
  emissions.

7. Other Factors
    In determining whether a standard is economically justified, the 
Secretary of Energy may consider any other factors that the Secretary 
deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) The Secretary 
has decided that the LCC impacts on identifiable groups of consumers, 
such as senior citizens and residents of multi-family housing who may 
be disproportionately affected by any national energy conservation 
standard level, is a relevant factor. The impacts on the identified 
consumer

[[Page 65962]]

subgroups are described in section V.B.1 above.
    DOE also believes that uncertainties associated with the heat pump 
water heater market (e.g., product availability) are relevant to 
consider. These uncertainties are discussed in section V.C below.

C. Proposed Standards

    When considering proposed standards, DOE recognizes that EPCA 
specifies that any new or amended energy conservation standard for any 
type (or class) of covered product shall be designed to achieve the 
maximum improvement in energy efficiency that the Secretary determines 
is technologically feasible and economically justified. (42 U.S.C. 
6295(o)(2)(A)) In determining whether a standard is economically 
justified, the Secretary must determine whether the benefits of the 
standard exceed its burdens to the greatest extent practicable, in 
light of the seven statutory factors discussed previously. (42 U.S.C. 
6295(o)(2)(B)(i)) The new or amended standard must also ``result in 
significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B))
    DOE considered the impacts of standards at each trial standard 
level, beginning with the maximum technologically feasible level, to 
determine whether each level was economically justified. If the max-
tech level is not justified, DOE then considers the next most efficient 
level and undertakes the same evaluation until it reached the highest 
level that is both technologically feasible and economically justified, 
and saves a significant amount of energy.
    To aid the reader as DOE discusses the benefits and/or burdens of 
each trial standard level, the tables in the following sections present 
summaries of the results of DOE's quantitative analysis at each TSL for 
each of the three heating products based on the methodology discussed 
above. Additional quantitative results (e.g., the cumulative NPV to 
natural gas consumers of the economy-wide savings in natural gas 
expenditures during the forecast period due to the projected decline in 
natural gas prices resulting from amended standards on the three types 
of heating products) are provided in section V.B.3.
    In addition to the quantitative results, DOE also considers other 
burdens and benefits that affect economic justification. These include 
the LCC impacts on identifiable subgroups of consumers, such as seniors 
and residents of multi-family housing, who may be disproportionately 
affected by any national energy conservation standard level, and the 
uncertainties associated with the heat pump water heater market.
    DOE also notes that the economics literature provides a wide-
ranging discussion of how consumers trade-off upfront costs and energy 
savings in the absence of government intervention. Much of this 
literature attempts to explain why consumers appear to undervalue 
energy efficiency improvements. This undervaluation suggests that 
regulation that promotes energy efficiency can produce significant net 
private gains (as well as producing social gains by, for example, 
reducing pollution). There is evidence that consumers undervalue future 
energy savings as a result of (1) A lack of information, (2) a lack of 
sufficient savings to warrant delaying or altering purchases (e.g. an 
inefficient ventilation fan in a new building or the delayed 
replacement of a water pump), (3) inconsistent (e.g. excessive short-
term) weighting of future energy cost savings relative to available 
returns on other investments, (4) computational or other difficulties 
associated with the evaluation of relevant tradeoffs, and (5) a 
divergence in incentives (e.g. renter versus owner; builder v. 
purchaser). Other literature indicates that with less than perfect 
foresight and a high degree of uncertainty about the future, consumers 
may tradeoff these types of investments at a higher than expected rate 
between current consumption and uncertain future energy cost savings. 
While DOE is not prepared at present to provide a fuller quantifiable 
framework for this discussion, DOE seeks comments on how to assess 
these possibilities.
1. Water Heaters
    Table V.59 presents a summary of the impacts for each water heater 
TSL.

                                                                        Table V.59--Summary of Results for Water Heaters
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             Category                      TSL 1                  TSL 2                  TSL 3                  TSL 4                  TSL 5                  TSL 6                 TSL 7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Energy Savings (quads)..  1.26.................  1.88.................  2.28.................  2.60.................  3.74.................  10.44...............  16.85
    3% discount rate.............  0.67.................  0.99.................  1.21.................  1.38.................  1.99.................  5.57................  8.98
    7% discount rate.............  0.32.................  0.47.................  0.58.................  0.66.................  0.96.................  2.71................  0.32
NPV of Consumer Benefits (2008$
 billion).
    3% discount rate.............  10.20................  12.71................  14.36................  15.64................  21.89................  41.52...............  47.99
    7% discount rate.............  3.69.................  4.20.................  4.53.................  4.79.................  6.64.................  8.43................  2.75
Industry Impacts
    Gas-Fired and Electric
     Storage.
        Industry NPV (2008$        (4)-(12).............  (5)-(31).............  (5)-(35).............  (3)-(79).............  (21)-(130)...........  (2)-(306)...........  63-(538)
         million).
        Industry NPV (% change)..  (0.5)-(1.5)..........  (0.6)-(3.6)..........  (0.6)-(4.2)..........  (0.4)-(9.4)..........  (2.5)-(15.4).........  (0.2)-(36.3)........  7.5-(63.8)
    Oil-Fired Storage............
        Industry NPV (2008$        (0.2)-(0.3)..........  (0.2)-(0.3)..........  (0.2)-(0.4)..........  (0.2)-(0.4)..........  (0.2)-(0.4)..........  (0.2)-(0.4).........  (1.3)-(3.5)
         million).
        Industry NPV (% change)..  (1.9)-(3.9)..........  (1.8)-(3.6)..........  (2.0)-(4.3)..........  (2.0)-(4.3)..........  (2.0)-(4.3)..........  (2.0)-(4.3).........  (14.8)-(39.9)
    Gas-Fired Instantaneous......
        Industry NPV (2008$        1.2-(1.8)............  1.2-(1.8)............  1.2-(1.8)............  1.2-(1.8)............  1.2-(1.8)............  1.2-(1.8)...........  80.3-(65.9)
         million).
        Industry NPV (% change)..  0.2-(0.3)............  0.2-(0.3)............  0.2-(0.3)............  0.2-(0.3)............  0.2-(0.3)............  0.2-(0.3)...........  13.3-(10.9)
Cumulative Emissions Reduction...

[[Page 65963]]

 
    CO2 (Mt).....................  88.7.................  137..................  147..................  154..................  217..................  346.................  965
    NOX (kt).....................  68.5.................  106..................  113..................  118..................  165..................  254.................  730
    Hg (t).......................  0.11.................  0.16.................  0.19.................  0.20.................  0.60.................  2.18................  4.43
Value of Cumulative Emissions
 Reduction (2008$
 million)[Dagger].
    CO2--3% discount rate........  480-5,285............  741-8,151............  794-8,732............  833-9,166............  1,162-12,787.........  1,824-20,066........  5,132-56,447
    CO2--7% discount rate........  211-2,317............  325-3,575............  348-3,832............  366-4,024............  492-5,409............  749-8,235...........  2,134-23,476
    NOX--3% discount rate........  16-163...............  24-252...............  26-269...............  27-282...............  37-377...............  54.1-556............  159-1,632
    NOX--7% discount rate........  7-76.................  11-118...............  12-126...............  13-132...............  16-168...............  23.0-236............  69-710
    Hg--3% discount rate.........  0.05-2.2.............  0.07-3.3.............  0.08-3.7.............  0.09-4.1.............  0.28-12.53...........  0.93-41.7...........  1.90-84.8
    Hg--7% discount rate.........  0.03-1.2.............  0.04-1.8.............  0.05-2.1.............  0.05-2.2.............  0.16-6.94............  0.49-21.7...........  0.99-44.1
Mean LCC Savings* (2008$)........
    Gas-Fired Storage............  69...................  68...................  68...................  68...................  78...................  68..................  (55)
    Electric Storage.............  16...................  23...................  32...................  39...................  96...................  224.................  273
    Oil-Fired Storage............  171..................  288..................  395..................  395..................  395..................  395.................  655
    Gas-Fired Instantaneous......  0....................  0....................  0....................  0....................  0....................  0...................  (307)
Median PBP (years)...............
    Gas-Fired Storage............  1.4..................  2.7..................  2.7..................  2.7..................  3.0..................  2.7.................  14.1
        Electric Storage.........  2.8..................  3.0..................  4.5..................  5.8..................  5.9..................  8.3.................  8.2
        Oil-Fired Storage........  0.7..................  0.4..................  0.5..................  0.5..................  0.5..................  0.5.................  1.4
        Gas-Fired Instantaneous..  23.5.................  23.5.................  23.5.................  23.5.................  23.5.................  23.5................  39.5
Distribution of Consumer LCC
 Impacts
    Gas-Fired Storage............
        Net Cost (%).............  9....................  15...................  15...................  15...................  16...................  15..................  62
        No Impact (%)............  22...................  17...................  17...................  17...................  16...................  17..................  1
        Net Benefit (%)..........  69...................  68...................  68...................  68...................  68...................  68..................  36
    Electric Storage.............
        Net Cost (%).............  10...................  11...................  20...................  25...................  25...................  45..................  45
        No Impact (%)............  32...................  29...................  14...................  10...................  10...................  5...................  1
        Net Benefit (%)..........  59...................  60...................  66...................  65...................  65...................  50..................  54
    Oil-Fired Storage............
        Net Cost (%).............  0....................  0....................  0....................  0....................  0....................  0...................  0
        No Impact (%)............  69...................  52...................  45...................  45...................  45...................  45..................  7
        Net Benefit (%)..........  31...................  48...................  55...................  55...................  55...................  55..................  93
    Gas-Fired Instantaneous......
        Net Cost (%).............  11...................  11...................  11...................  11...................  11...................  11..................  83
        No Impact (%)............  85...................  85...................  85...................  85...................  85...................  85..................  6
        Net Benefit (%)..........  4....................  4....................  4....................  4....................  4....................  4...................  12
Generation Capacity Change         (0.129)..............  (0.195)..............  (0.221)..............  (0.242)..............  (0.956)..............  (2.59)..............  (5.28)
 (GW)[dagger].
Employment Impacts
    Total Potential Changes in
     Domestic Production Workers
     in 2015.
        Gas-Fired and Electric     (3,690)-68...........  (3,690)-152..........  (3,690)-191..........  (3,690)-287..........  (3,690)-706..........  (3,690)-4,078.......  (3,690)-6,133
         Storage.
        Oil-Fired Storage........  (38)-(1).............  (38)-2...............  (38)-(1).............  (38)-(1).............  (38)-(1).............  (38)-(1)............  (38)-9
        Gas-Fired Instantaneous..  Not Applicable *.....  .....................  .....................  .....................  .....................  ....................  ....................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Indirect domestic jobs         3.32.................  4.38.................  6.70.................  8.49.................  17.82................  55.67...............  68.11
     (thousands) [dagger]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Parentheses indicate negative (-) values.
* For LCCs, a negative value means an increase in LCC by the amount indicated.
** The industry for gas-fired instantaneous water heaters is international.
[dagger] Changes in 2044
[Dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.

    DOE first considered TSL 7, which represents the max-tech 
efficiency levels for all four product classes. TSL 7 would save 16.85 
quads of energy, an amount DOE considers significant. TSL 7 would 
provide a NPV of consumer benefit of $2.75 billion, using a discount 
rate of 7 percent, and $48.0 billion, using a discount rate of 3 
percent.
    The cumulative emissions reductions at TSL 7 are 965 Mt of 
CO2, 730 kt of NOX, and 4.43 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 7 is $2.13 billion to $23.48 billion, using a 
discount rate of 7 percent, and $5.13 to $56.45 billion, using a 
discount rate of 3 percent. Total electricity generating capacity in 
2044 is estimated to decrease by 5.28 gigawatts (GW) under TSL 7.
    At TSL 7, DOE projects that the average LCC impact for consumers is 
a

[[Page 65964]]

loss of $55 for gas-fired storage water heaters, a gain of $273 for 
electric storage water heaters, a gain of $655 for oil-fired storage 
water heaters, and a loss of $307 for gas-fired instantaneous water 
heaters. The median payback period is 14.1 years for gas-fired storage 
water heaters, 8.2 years for electric storage water heaters, 1.4 years 
for oil-fired storage water heaters, and 39.5 years for gas-fired 
instantaneous water heaters (which is substantially longer than the 
mean lifetime of the product). At TSL 7, the fraction of consumers 
experiencing an LCC benefit is 36 percent for gas-fired storage water 
heaters, 54 percent for electric storage water heaters, 93 percent for 
oil-fired storage water heaters, and 12 percent for gas-fired 
instantaneous water heaters. The fraction of consumers experiencing an 
LCC cost is 62 percent for gas-fired storage water heaters, 45 percent 
for electric storage water heaters, 0 percent for oil-fired storage 
water heaters, and 83 percent for gas-fired instantaneous water 
heaters.
    At TSL 7, the projected change in the INPV is estimated to decrease 
up to $538 million for gas-fired and electric storage water heaters, a 
decrease of up to $3.5 million for residential oil-fired storage water 
heaters, and a decrease of up to $66 million for gas-fired 
instantaneous water waters, in 2008$. For gas and electric storage 
water heaters, the impacts are driven primarily by the assumptions 
regarding the ability for manufacturers to produce products at these 
efficiency levels in the volumes necessary to serve the entire market. 
Manufacturers would need to redesign almost all of their products at 
TSL 7, which would force manufacturers to incur significant product and 
capital conversion costs. Some loss in product utility may also occur 
for units that are presently installed in space-constrained 
applications because condensing and heat pump technologies would 
typically cause water heaters to have a larger footprint. At TSL 7, DOE 
recognizes the risk of very large negative impacts if manufacturers' 
expectations about reduced profit margins are realized. In particular, 
if the high end of the range of impacts is reached as DOE expects, TSL 
7 could result in a net loss of 63.8 percent in INPV for gas-fired and 
electric storage water heaters, a net loss of 39.9 percent in INPV for 
oil-fired storage water heaters, and a net loss of 10.9 percent in INPV 
for gas-fired instantaneous water heaters.
    At TSL 7, the average LCC savings are lower for all of the 
considered consumer subgroups than for the full household sample for 
electric and gas-fired storage water heaters. In the case of electric 
storage water heaters, the multi-family subgroup would experience an 
average negative LCC savings of $357 (i.e., the average LCC would 
increase), and three-fourths of the households would experience a net 
cost. For the other subgroups, the fraction of households that would 
experience a net cost is close to or just above 50 percent, which is 
slightly higher than for the full household sample. The impact on the 
multi-family subgroup is primarily due to the lower hot water use per 
family among these households.
    For gas-fired storage water heaters at TSL 7, condensing operation 
would be required. DOE has several concerns related to the condensing 
gas-fired storage water heater market. At the time of the NOPR 
analysis, there were no condensing gas-fired storage water heaters 
available to residential consumers in the United States. DOE is 
concerned about the ability of manufacturers to convert all product 
lines to manufacture condensing gas-fired storage water heaters in the 
volumes needed by the compliance date of the standard, because the 
manufacturers' ability to afford the necessary conversion costs is 
uncertain. In addition, uncertainties exist about whether manufacturers 
will be able to train enough installers and servicers of condensing 
gas-fired water heaters to serve the relevant market by the compliance 
date of the standard. As with electric storage heat pump water heaters, 
DOE is concerned that a typical installer or repair person will not 
have the knowledge required to troubleshoot or repair condensing gas-
fired storage water heaters since they are more complex than 
traditional gas-fired storage water heaters. It is unclear whether 
reliable installation and servicing could be achieved by the effective 
date for compliance with the standard.
    TSL 7 also includes an efficiency level for electric storage water 
heaters that will require the use of heat pump technology. The 
substantial average savings for customers estimated by DOE's analysis 
for TSL 7 are primarily driven by the results for heat pump water 
heaters. However, DOE has concerns about issues with the current heat 
pump water heater market that may prevent heat pump technology from 
being ready for full scale implementation. DOE fully discusses these 
concerns and seeks comments from interested parties on a variety of 
issues associated with heat pump water heaters in its discussion of the 
benefits and burdens of TSL 6, below.
    The Secretary tentatively concludes that at TSL 7, the benefits of 
energy savings, positive NPV of consumer benefits, generating capacity 
reductions, and emission reductions would be outweighed by the economic 
burden on a significant fraction of consumers due to the large 
increases in first costs associated with electric heat pump water 
heaters and gas-fired condensing water heaters, the disproportionate 
impacts to consumers in multi-family housing, the large capital 
conversion costs that could result in a large reduction in INPV for the 
manufacturers, as well as the uncertainty associated with providing 
products at the max-tech level on a scale necessary to serve the entire 
market. Consequently, the Secretary has tentatively concluded that TSL 
7 is not economically justified.
    Next, DOE considered TSL 6. The efficiency levels in TSL 6 include 
the ENERGY STAR program level for electric storage water heaters, which 
requires heat pump water heaters. TSL 6 would save 10.4 quads of 
energy, an amount DOE considers significant. TSL 6 would increase 
consumer NPV by $8.4 billion, using a discount rate of 7 percent, and 
increase the NPV by $41.5 billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 6 are 346 Mt of 
CO2, 254 kt of NOX, and 2.18 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 6 is $749 billion to $8.235 billion, using a discount 
rate of 7 percent, and $1.824 billion to $20.066 billion, using a 
discount rate of 3 percent. Total generating capacity in 2044 is 
estimated to decrease by 2.59 GW under TSL 6.
    At TSL 6, DOE projects that the average LCC impact is a gain of $68 
for gas-fired storage water heaters, a gain of $224 for electric 
storage water heaters, a gain of $395 for oil-fired storage water 
heaters, and no change for gas-fired instantaneous water heaters. The 
median payback period is 2.7 years for gas-fired storage water heaters, 
8.3 years for electric storage water heaters, 0.5 years for oil-fired 
storage water heaters, and 23.5 years for gas-fired instantaneous water 
heaters (which is longer than the mean lifetime of the product). At TSL 
6, the fraction of consumers experiencing an LCC benefit is 68 percent 
for gas-fired storage water heaters, 50 percent for electric storage 
water heaters, 55 percent for oil-fired storage water heaters, and 4 
percent for gas-fired instantaneous water heaters. The fraction of 
consumers experiencing an LCC cost is 15 percent for gas-fired storage 
water heaters, 45 percent for

[[Page 65965]]

electric storage water heaters, 0 percent for oil-fired storage water 
heaters, and 11 percent for gas-fired instantaneous water heaters.
    At TSL 6, the projected change in INPV ranges from a decrease of up 
to $305.8 million for gas-fired and electric storage water heaters, a 
decrease of up to $0.4 million for oil-fired storage water heaters, and 
a decrease of up to $1.8 million for gas-fired instantaneous water 
heaters, in 2008$. The negative impacts on INPV are driven largely by 
the required efficiencies for electric storage water heaters which 
effectively require heat pump technology. The oil-fired storage water 
heater and gas-fired instantaneous water heater efficiencies do not 
require substantial changes to the existing operations for some 
manufacturers. The significant changes for electric storage water 
heaters help to drive the INPVs negative, especially if profitability 
is impacted after the compliance date of the amended energy 
conservation standard. In particular, if the high end of the range of 
impacts is reached as DOE expects, TSL 6 could result in a net loss of 
36.3 percent in INPV for gas-fired and electric storage water heaters, 
a net loss of 4.3 percent in INPV for oil-fired storage water heaters, 
and a net loss of 0.3 percent in INPV for gas-fired instantaneous water 
heaters.
    TSL 6 includes efficiency levels for electric storage water heaters 
that are currently only achievable through the use of advanced heat 
pump technologies. DOE's analysis indicates that dramatic reductions in 
energy use and substantial economic savings are possible for electric 
water heaters with the use of these technologies. The average savings 
for electric water heater customers estimated by DOE's analysis for TSL 
6 are primarily driven by the results for heat pump water heaters. 
While DOE finds the potential energy savings resulting from a national 
heat pump water heater standard very favorable, DOE has some concerns 
regarding the manufacturability and the market for heat pump water 
heaters, which are further discussed below.
    Heat pump technologies are currently used in space heating and 
cooling, and other refrigeration-cycle products, indicating that this 
technology is a viable design option. The use of heat pump water 
heaters adds dramatically to the MSP estimates, increasing the MSP more 
than $400 over the baseline electric storage water heater. In part due 
to this change, the total installed cost to the consumer increases by 
an average of $900 for heat pump water heaters compared to traditional 
electric storage water heaters that use electric resistance heating 
elements. Even though there are potential benefits of adopting an 
amended energy conservation standard requiring heat pump technologies, 
DOE is concerned about the uncertainties currently experienced in the 
heat pump water heater market.
    Although most manufacturers are in the process of developing a heat 
pump water heater to offer to consumers in response to the ENERGY STAR 
program or have recently began to offer a heat pump water heater model 
for sale, heat pump water heaters were not offered for sale at the time 
DOE's analysis was developed. DOE's shipments model projects that by 
2015 heat pump water heaters will achieve approximately five percent 
market share. The manufacturer impacts are driven primarily by the 
assumptions regarding the ability of manufacturers to produce heat pump 
water heaters in the full range of rated storage volumes in the 
quantities necessary to serve the entire market. Though most electric 
storage water heater manufacturers indicated that they are in the 
process of developing heat pump water heaters, all manufacturers 
believe that an efficiency level that requires heat pump water heater 
technology is not appropriate as an amended energy conservation 
standard. Several manufacturers expect that they will have to buy the 
heat pump modules from outside vendors because most water heater 
manufacturers have no experience manufacturing heat pumps and have 
limited space in their facilities to produce heat pump systems. 
Manufacturers stated that they would consider moving all or part of 
their existing production capacity abroad if the energy conservation 
standard is set at TSL 6 because many manufacturers expect to have to 
redesign their facilities completely to accommodate a minimum energy 
conservation standard requiring heat pump water heaters. DOE is 
concerned about the capability of manufacturers to convert all product 
lines to manufacture heat pump water heaters in the volumes needed by 
the compliance date of the standard, because producing exclusively heat 
pump water heaters will require $119 million in conversion costs plus 
an additional $256 million in working capital for a $375 million cash 
requirement. In addition, water heater manufacturers would be dependent 
upon the ability of heat pump component manufacturers (e.g., compressor 
manufacturers) to ramp up production to support the new market by the 
compliance date of the amended standard. DOE invites comments on the 
viability for high-volume production of heat pump water heaters in the 
full range of rated storage volumes and also requests information or 
data that would allow an assessment of such viability to be conducted. 
(See Issue 11 under ``Issues on Which DOE Seeks Comment'' in section 
VII.E of this NOPR.)
    DOE also notes that the service industry has very little experience 
with integrated heat pump water heater designs because heat pump water 
heaters have only been available in the U.S. market in the past for 
short periods of time, and have only recently become available to the 
U.S. market once again. DOE is concerned that a typical installer or 
repair person would not have the requisite knowledge to troubleshoot or 
repair heat pump water heaters because they are more complex than 
traditional electric storage water heaters. It is unclear whether 
reliable installation and servicing could be achieved on the scale 
needed by the compliance date of the amended standard.
    In addition, although DOE's analysis reveals that heat pump water 
heaters are capable of being installed in all of the types of 
installations currently serviced by the residential electric storage 
water heating market, DOE found that in certain situations (especially 
indoor locations) installations could be very costly for consumers, 
requiring them to alter their existing space to accommodate a heat pump 
water heater. DOE estimates 30 to 40 percent of installations would 
require such building modifications. In part for this reason, DOE 
estimated that 12 percent of electric storage water heater consumers 
would experience an increase of more than $500 in their LCC compared to 
the base case.
    Another concern DOE has regarding heat pump water heaters is the 
impact on consumer utility in the instances when electric storage water 
heaters are installed in conditioned indoor spaces. DOE estimates that 
39 percent of electric storage water heaters are installed in 
conditioned spaces. In these cases, the cold air given off by the heat 
pump module may negatively impact consumer comfort due to uneven 
heating and cooling.
    DOE strongly considered TSL 6 as the proposed standard level for 
residential water heaters. DOE is concerned, however, about the ability 
for manufacturers to ramp up production in time to meet the demand by 
the compliance date of amended standards, the potential large increases 
in total installed cost to certain consumers, the ability for the 
service industry to gain the knowledge and experience necessary to 
provide reliable service to consumers, the potential impacts on

[[Page 65966]]

multi-family households, and the potential impacts on the space 
conditioning of the residence. DOE seeks comments and data from 
interested parties that will allow DOE to further bring clarity to the 
issues surrounding heat pump water heaters, and determine how the 
issues discussed in the paragraphs above could be adequately addressed 
prior to the compliance date of an amended national energy conservation 
standard for water heaters that would effectively require the use of 
such technology. (See Issue 16 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.) For today's proposed rule, 
the Secretary tentatively concludes that at TSL 6, the benefits of 
energy savings, generating capacity reductions, and emission reductions 
would be outweighed by the negative economic impacts on those consumers 
that would have to make structural changes to accommodate the larger 
footprint of the heat pump water heaters, the economic burden on a 
large fraction of consumers due to the large increases in first costs 
associated with heat pump water heaters, the disproportionate impacts 
to consumers in multi-family housing and others with comparatively low 
usage rates, the large capital conversion costs that could result in a 
large reduction in INPV for the manufacturers, and the uncertainties 
associated with the heat pump water heater market. DOE is particularly 
concerned about product availability for the heat pump water heater 
market since it is unclear whether manufacturers would be able to 
produce equipment in the volumes necessary to serve the entire market. 
DOE will revisit this decision and strongly reconsider adoption of TSL 
6 in the final rule in light of any comments and data submitted by 
interested parties.
    Next, DOE considered TSL 5, in which DOE paired efficiency levels 
that would effectively require different technologies for large-volume 
and small-volume gas-fired and electric storage water heaters in an 
effort to promote advance technology penetration into the market and 
potentially save additional energy. Specifically, TSL 5 would 
effectively require heat pump technology for electric storage water 
heaters greater than 55 gallons and condensing technology for gas-fired 
storage water heaters greater than 55 gallons.
    TSL 5 would save 3.7 quads of energy, an amount DOE considers 
significant. Under TSL 5, the NPV of consumer benefit would be $6.64 
billion, using a discount rate of 7 percent, and $21.89 billion, using 
a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 5 are 217 Mt of 
CO2, 165 kt of NOX, and 0.60 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 5 is $0.492 to $5.409 billion, using a discount rate 
of 7 percent, and $1.162 to $12.787 billion, using a discount rate of 3 
percent. Total generating capacity in 2044 is estimated to decrease by 
0.96 GW under TSL 5.
    At TSL 5, DOE projects that the average LCC impact is a gain 
(consumer cost savings) of $78 for gas-fired storage water heaters, a 
gain of $96 for electric storage water heaters, a gain of $395 for oil-
fired storage water heaters, and no change for gas-fired instantaneous 
water heaters. The median payback period is 3.0 years for gas-fired 
storage water heaters, 5.9 years for electric storage water heaters, 
0.5 years for oil-fired storage water heaters, and 23.5 years for gas-
fired instantaneous water heaters (which is longer than the mean 
lifetime of the product). At TSL 5, the fraction of consumers 
experiencing an LCC benefit is 68 percent for gas-fired storage water 
heaters, 65 percent for electric storage water heaters, 55 percent for 
oil-fired storage water heaters, and 4 percent for gas-fired 
instantaneous water heaters. The fraction of consumers experiencing an 
LCC cost is 16 percent for gas-fired storage water heaters, 25 percent 
for electric storage water heaters, 0 percent for oil-fired storage 
water heaters, and 11 percent for gas-fired instantaneous water 
heaters.
    At TSL 5, the projected change in INPV ranges from a decrease of up 
to $129.9 million for gas-fired and electric storage water heaters, a 
decrease of up to $0.4 million for oil-fired storage water heaters, and 
a decrease of up to $1.8 million for gas-fired instantaneous water 
heaters, in 2008$. The negative impacts on INPV are driven largely by 
the required efficiencies for gas-fired and electric storage water 
heaters with rated storage volumes above 55 gallons. TSL 5 would 
effectively require heat pump technology and condensing technology for 
the electric and gas-fired storage water heaters at these volume sizes. 
The efficiency requirements at TSL 5 for electric storage water heater 
with a rated volume less than 55 also result in negative impacts 
because such large increases in insulation also require manufacturers 
to implement changes to their existing equipment. The oil-fired storage 
water heater and gas-fired instantaneous water heater efficiencies at 
TSL 5 do not require substantial changes to the existing operations for 
some manufacturers. The significant changes gas-fired and electric 
storage water heaters with rated storage volumes greater than 55 
gallons help to drive the INPVs negative, especially if profitability 
is impacted after the compliance date of the amended energy 
conservation standard. In particular, if the high end of the range of 
impacts is reached as DOE expects, TSL 5 could result in a net loss of 
15.4 percent in INPV for gas-fired and electric storage water heaters, 
a net loss of 4.3 percent in INPV for oil-fired storage water heaters, 
and a net loss of 0.3 percent in INPV for gas-fired instantaneous water 
heaters.
    DOE believes TSL 5 would provide an effective mechanism for 
increasing the market penetration for advanced-technology water 
heaters. Given DOE's concerns with TSL 6 (which includes a national 
heat pump water heater standard for electric storage water heaters 
across the entire range of rated storage volumes) as described above, 
DOE also strongly considered proposing TSL 5. TSL 5 results in positive 
NPV of consumer benefit for both electric and gas-fired storage water 
heaters, while also providing additional energy and carbon savings.
    Using DOE's shipments model and market assessment, DOE estimated 
approximately 4 percent of gas-fired storage water heater shipments and 
11 percent of models would fall into the large-volume water heater 
category using the TSL 5 division (i.e., large water heaters with 
storage volumes above 55 gallons). Similarly, DOE estimated 
approximately 9 percent of electric storage water heater shipments and 
27 percent of models would fall into the large-volume water heater 
category using the TSL 5 division. Compared to TSL 6, TSL 5 effectively 
requires heat pump technology for a relatively small fraction of the 
electric storage water heater market, reduces the number of 
installations that would necessitate significant building modifications 
due to the size of heat pump water heaters, reduces the number of 
installations that have space conditioning impacts from cool air 
produced by the heat pump water heater operation, results in higher 
average savings and lower median payback periods, and reduces the 
negative impacts on consumer subgroups. For gas-fired storage water 
heaters, compared to a national condensing standard level (TSL 7), TSL 
5 requires condensing technology for a relatively small fraction of the 
gas storage water heater market, reduces the number of installations 
that require significant building modifications due to the size of 
condensing gas water heaters, and

[[Page 65967]]

results in higher average LCC savings and lower median payback period.
    Even though DOE has identified a number of benefits associated with 
TSL 5, DOE is aware that there are multiple issues associated with 
promulgating an amended energy conservation standard that affects only 
a subset of the products on the market. Potential issues with TSL 5 
affecting both heat pump water heaters and condensing gas-fired water 
heaters include: (1) Consumer acceptance; (2) training; (3) product 
substitution; (4) engineering resource constraints; (5) product 
discontinuation; and (6) manufacturing issues.
    First, consumers may elect not to buy the larger volume water 
heaters for a number of reasons, including increased first cost, being 
unfamiliar with the advanced technologies being used, and installation 
size constraints. Both heat pump and condensing water heaters are 
significantly more expensive than baseline water heaters of the same 
nominal capacity and take up more space per nominal gallon of capacity. 
As a result, consumers may buy multiple water heaters that are under 
the capacity limit and use them in parallel to achieve the same nominal 
capacity, although at a higher standby loss.
    Furthermore, the current water heater service and installation 
infrastructure has little to no experience installing and servicing 
these advanced-technology storage water heaters, leading to possible 
reluctance of contractors to install these products. To minimize unit 
damage and warranty claims and to improve market acceptance, 
manufacturers would likely have to expend significant additional 
resources to hire training staff to tour the country and to provide 
technical support at headquarters. Additionally, field technicians 
likely would need additional licenses and test equipment to be able to 
service heat pump water heaters properly (for example, to recover 
refrigerant). These additional requirements would likely increase 
installation and service costs beyond current levels, since consumers 
will have fewer servicers/installers to choose from and the products 
have become more complex.
    Due to the price discrepancy between the cost of commercial 
equipment (not covered by the heat pump and condensing requirement) and 
residential products of the same capacity, the use of commercially-
classified storage water heater equipment in residential applications 
would likely significantly expand beyond current levels under TSL 5. 
Such substitutions have health and safety considerations such as the 
typical lack of FVIR protection and the higher allowable set-point 
temperatures for commercial equipment.
    Manufacturers would likely face constraints regarding the abilities 
of their engineering teams to develop multiple water heater families, 
as most engineering departments have limited experience with either 
advanced technology. At a minimum, condensing gas-fired products would 
require manufacturers to convert existing commercial equipment lines to 
residential use. However, multiple manufacturers are expected to have 
to develop completely new platforms in order to remain cost-
competitive.
    In light of the above, manufacturers could decide that the demand 
for residential heat pump and condensing gas water heaters would likely 
drop to a point where product conversion and capital costs required to 
modify their operations are not justified. As a result, some 
manufacturers would likely no longer manufacture residential storage 
water heaters at rated storage volumes above the division point (i.e., 
56 gallons and above). Even if a manufacturer were to offer products, 
development and capital costs make it likely that consumers would have 
fewer product families to choose from than presently exist. Mass-
manufacturing facilities visited by DOE were typically fine-tuned for 
units with similar assembly processes and cannot accommodate units with 
a wide scope of assembly requirements. Units that fall outside these 
standardized (high-volume) production settings would likely have to be 
assembled on a separate line in a new facility adjacent to current 
manufacturing space. The costs to retrofit a manufacturing plant to 
allow production of these units are high and the industry reaction is 
uncertain. DOE seeks comments about whether manufacturers would upgrade 
just one of their facilities (and produce all heat pump and/or 
condensing units there) or would upgrade multiple facilities to 
minimize shipping costs and distribution costs. Additionally, 
manufacturers could continue the trend to relocate to new facilities or 
expand existing facilities abroad.
    DOE strongly considered TSL 5 and believes it would provide 
additional energy and carbon savings, while mitigating some of the 
issues associated with a national heat pump water heater standard. 
However, DOE has identified a number of potential issues with TSL 5 
related to proposing standards that effectively require different 
technologies for different subsets of products. For today's proposed 
rule, the Secretary tentatively concludes that at TSL 5, the benefits 
of energy savings, generating capacity reductions, economic savings for 
most consumers, and the emission reductions would be outweighed by the 
large capital conversion costs that could result in a large reduction 
in INPV for the manufacturers, the uncertainties associated with the 
rapid introduction of new product technologies, the large increases in 
first costs, especially for those consumers that would have to make 
structural changes, and the uncertainties associated with a 
promulgation of an amended energy conservation standards that only 
affects a subset of the market. DOE seeks comments and data from 
interested parties that will assist DOE in bringing further clarity to 
some of the issues surrounding the product division used in the two 
slope energy-efficiency equations, promulgation of different standards 
for a subset of products, the heat pump water heater market, the 
condensing water heater market, as well as help DOE determine how these 
issues can be adequately addressed prior to the compliance date of an 
amended energy conservation standard for residential water heaters. 
(See Issue 17 under ``Issues on Which DOE Seeks Comment'' in section 
VII.E of this NOPR.) DOE will revisit this decision and strongly 
consider adoption of TSL 5 in the final rule in light of any comments 
and data submitted by interested parties.
    Next, DOE considered TSL 4. TSL 4 would save 2.6 quads of energy, 
an amount DOE considers significant. Under TSL 4, the NPV of consumer 
benefit would be $4.8 billion, using a discount rate of 7 percent, and 
$15.6 billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 154 Mt of 
CO2, 118 kt of NOX, and 0.2 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 4 is $0.366 to $4.024 billion, using a discount rate 
of 7 percent, and $0.833 to $9.166 billion, using a discount rate of 3 
percent. Total generating capacity in 2044 is estimated to decrease by 
0.24 GW under TSL 4.
    At TSL 4, DOE projects that the average LCC impact is a gain of $68 
for gas-fired storage water heaters, a gain of $39 for electric storage 
water heaters, a gain of $395 for oil-fired storage water heaters, and 
no change for gas-fired instantaneous water heaters. The median payback 
period is 2.7 years for gas-fired storage water heaters, 5.8 years for 
electric storage water heaters, 0.5 years for oil-fired storage water 
heaters, and 23.5 years for gas-fired instantaneous water heaters 
(which is longer than the mean lifetime of the product). At TSL 4, the 
fraction of

[[Page 65968]]

consumers experiencing an LCC benefit is 68 percent for gas-fired 
storage water heaters, 65 percent for electric storage water heaters, 
55 percent for oil-fired storage water heaters, and 4 percent for gas-
fired instantaneous water heaters. The fraction of consumers 
experiencing an LCC cost is 15 percent for gas-fired storage water 
heaters, 25 percent for electric storage water heaters, 0 percent for 
oil-fired storage water heaters, and 11 percent for gas-fired 
instantaneous water heaters. For gas-fired instantaneous water heaters, 
85 percent of consumers would not be impacted at TSL 4 because DOE 
projects that they would purchase an appliance of equal or higher 
efficiency than the TSL 4 level.
    At TSL 4, the projected change in INPV ranges from a decrease of up 
to $79 million for gas-fired and electric storage water heaters, a 
decrease of up to $0.4 million for oil-fired storage water heaters, and 
a decrease of up to $1.8 million for gas-fired instantaneous water 
heaters, in 2008$. The impacts on manufacturers are less significant at 
TSL4 because the technology used at TSL 4 does not greatly differ from 
baseline models for gas-fired, electric, and oil-fired storage water 
heaters. In addition, most manufacturers of gas-fired instantaneous 
water heaters offer products that meet or exceed the efficiencies 
required at TSL 4. If the high end of the range of impacts is reached 
as DOE expects, TSL 4 could result in a net loss of 9.4 percent in INPV 
for gas-fired and electric storage water heaters, a net loss of 4.3 
percent in INPV for oil-fired storage water heaters, and a net loss of 
0.3 percent in INPV for gas-fired instantaneous water heaters.
    After considering the analysis, comments on the January 13, 2009, 
notice and the preliminary TSD, and the benefits and burdens of TSL 4, 
the Secretary tentatively concludes that this TSL will offer the 
maximum improvement in efficiency that is technologically feasible and 
economically justified, and will result in significant conservation of 
energy. Further, benefits from carbon dioxide reductions (at a central 
value of $20) would increase NPV by between $366 million and $4,024 
million (2008$) at a 7% discount rate and between $833 million and 
$9,166 million at a 3% discount rate. These benefits from carbon 
dioxide emission reductions, when considered in conjunction with the 
consumer savings NPV and other factors described above support DOE's 
tentative conclusion that trial standard level 4 is economically 
justified. Therefore, the Department today proposes to adopt TSL 4 as 
amended energy conservation standards for water heaters as shown in 
Table V.60.

 Table V.60--Proposed Minimum Energy Factor Requirements for Residential
                          Water Heaters (TSL 4)
------------------------------------------------------------------------
                                  Energy factor
        Product class              requirement
------------------------------------------------------------------------
Gas-fired Storage...........  For tanks with a      For tanks with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 60
                               60 gallons:.          gallons:
                              EF = 0.675 - (0.0012  EF = 0.717 -(0.0019
                               x Rated Storage       x Rated Storage
                               Volume in gallons).   Volume in gallons)
Electric Storage............  For tanks with a      For tanks with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 80
                               80 gallons:.          gallons:
                              EF = 0.96 - (.0003 x  EF = 1.088 - (.0019
                               Rated Storage         x Rated Storage
                               Volume in gallons).   Volume in gallons)
                             -------------------------------------------
Oil-fired Storage...........   EF = 0.68 - (.0019 x Rated Storage Volume
                                              in gallons)
Gas-fired Instantaneous.....   EF = 0.82 - (.0019 x Rated Storage Volume
                                              in gallons)
------------------------------------------------------------------------

    DOE also calculated the annualized values for certain benefits and 
costs under the considered TSLs. The annualized values refer to 
consumer operating cost savings, consumer incremental product and 
installation costs, the quantity of emissions reductions for 
CO2, NOX, and Hg, and the monetary value of 
CO2 emissions reductions (using a value of $20/t 
CO2, which is in the middle of the values considered by DOE 
for valuing the potential global benefits resulting from reduced 
CO2 emissions).
    DOE used a two-step calculation process to convert the time-series 
of costs and benefits into annualized values. First, DOE calculated a 
present value for the time-series of costs and benefits using a 
discount rate of either three or seven percent. From the present value, 
DOE then calculated the fixed annual payment over the analysis time 
period (2015 to 2045 for water heaters) that yielded the same present 
value. The fixed annual payment is the annualized value. Although DOE 
calculated annualized values, this does not imply that the time-series 
of cost and benefits from which the annualized values were determined 
are a steady stream of payments.
    Table V.61 presents the annualized values for each TSL considered 
for water heaters. The tables also present the annualized net benefit 
that results from summing the two monetary benefits and subtracting the 
consumer incremental product and installation costs. Although summing 
the value of operating savings with the value of CO2 
reductions provides a valuable perspective, please note the following. 
The operating cost savings are domestic U.S. consumer monetary savings 
found in market transactions while the CO2 value is based on 
an estimate of imputed marginal SCC, which is meant to reflect the 
global benefits of CO2 reductions. In addition, the SCC 
value considers a longer time frame than the period considered for 
operating cost savings.

                                   Table V.61--Annualized Benefits and Costs for Water Heaters by Trial Standard Level
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Primary estimate (AEO reference    Low estimate (AEO low growth    High estimate (high growth case)
                                                                  case)                             case)              ---------------------------------
    TSL           Category              Unit       --------------------------------------------------------------------
                                                           7%               3%               7%               3%               7%               3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 65969]]

 
1..........  Monetized           Million 2008$....  709.5..........  885.3..........  663.7..........  824.2..........  755.3..........  946.6
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  2.63...........  2.83...........  3.04...........  3.01...........  0.52...........  0.77
              Emissions
              Reductions.
                                 NOX (kt).........  2.04...........  2.19...........  2.38...........  2.35...........  0.47...........  0.67
                                 Hg (t)...........  0.005..........  0.004..........  (0.002)........  (0.006)........  0.005..........  0.007
             Monetized Avoided   Million 2008$....  90.4...........  108.0..........  105.1..........  126.5..........  17.6...........  30.8
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  292.9..........  282.3..........  277.2..........  265.3..........  308.7..........  299.4
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  507.0..........  711.0..........  491.6..........  685.4..........  464.3..........  677.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
2..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  1,051.1........  1,309.8........  984.4..........  1,220.4........  1,117.9........  1,399.4
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  4.07...........  4.37...........  4.68...........  4.63...........  0.85...........  1.24
              Emissions
              Reductions.
                                 NOX (kt).........  3.16...........  3.38...........  3.66...........  3.61...........  0.77...........  1.07
                                 Hg (t)...........  0.007..........  0.006..........  (0.003)........  (0.009)........  0.008..........  0.011
             Monetized Avoided   Million 2008$....  139.6..........  166.5..........  161.9..........  194.6..........  28.9...........  49.2
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  576.2..........  557.9..........  545.2..........  524.1..........  607.5..........  591.9
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  614.5..........  918.5..........  601.1..........  890.8..........  539.4..........  856.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
3..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  1,297.3........  1,610.6........  1,210.0........  1,496.1........  1,384.7........  1,725.0
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  4.36...........  4.68...........  5.05...........  5.00...........  0.72...........  1.13
              Emissions
              Reductions.
                                 NOX (kt).........  3.38...........  3.62...........  3.95...........  3.90...........  0.67...........  0.99
                                 Hg (t)...........  0.008..........  0.007..........  (0.003)........  (0.010)........  0.009..........  0.012
             Monetized Avoided   Million 2008$....  149.6..........  178.4..........  175.0..........  210.3..........  24.1...........  45.2
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  785.3..........  761.4..........  742.9..........  715.3..........  828.0..........  807.9
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  661.7..........  1,027.7........  642.0..........  991.2..........  580.8..........  962.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
4..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  1,487.1........  1,842.4........  1,383.7........  1,708.4........  1,590.5........  1,976.2
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  4.58...........  4.92...........  5.34...........  5.28...........  0.61...........  1.04
              Emissions
              Reductions.
                                 NOX (kt).........  3.54...........  3.79...........  4.17...........  4.11...........  0.58...........  0.92
                                 Hg (t)...........  0.009..........  0.008..........  (0.003)........  (0.011)........  0.010..........  0.013
             Monetized Avoided   Million 2008$....  157.1..........  187.3..........  184.8..........  222.1..........  20.2...........  41.9
              CO2 Value (at $19/
              t).
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 65970]]

 
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  945.5..........  917.3..........  894.4..........  861.7..........  997.0..........  973.4
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  698.8..........  1,112.4........  674.1..........  1,068.9........  613.7..........  1,044.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
5..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  2,163.1........  2,670.6........  2,005.0........  2,469.3........  2,320.8........  2,871.2
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  6.18...........  6.83...........  14.38..........  14.84..........  3.11...........  3.56
              Emissions
              Reductions.
                                 NOX (kt).........  4.72...........  5.20...........  11.09..........  11.41..........  2.43...........  2.78
                                 Hg (t)...........  0.023..........  0.022..........  0.038..........  0.030..........  0.011..........  0.017
             Monetized Avoided   Million 2008$....  211.2..........  261.2..........  318.5..........  383.1..........  26.2...........  52.1
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  1,413.1........  1,376.1........  1,336.7........  1,292.6........  1,490.2........  1,460.4
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  961.2..........  1555.7.........  668.3..........  1176.7.........  830.6..........  1410.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
6..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  6,331.1........  7,745.0........  5,801.0........  7,097.1........  6,857.9........  8,387.1
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  9.49...........  10.72..........  15.61..........  16.89..........  (2.13).........  (1.50)
              Emissions
              Reductions.
                                 NOX (kt).........  7.02...........  7.90...........  11.90..........  12.82..........  (1.58).........  (1.08)
                                 Hg (t)...........  0.077..........  0.075..........  0.038..........  0.036..........  0.004..........  0.012
             Monetized Avoided   Million 2008$....  321.6..........  410.0..........  537.9..........  646.5..........  (86.7).........  (62.2)
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  5,405.0........  5,315.6........  5,112.0........  4,992.4........  5,700.5........  5,641.7
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  1,247.7........  2,839.3........  689.0..........  2,104.7........  1,157.4........  2,745.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
7..........                                                                    Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  9,837.9........  12,187.1.......  9,105.6........  11,255.5.......  10,568.4.......  13,115.0
              Operating Cost
              Savings.
             Quantified          CO2 (Mt).........  26.82..........  30.05..........  39.27..........  39.00..........  3.17...........  5.19
              Emissions
              Reductions.
                                 NOX (kt).........  20.41..........  22.79..........  30.34..........  29.99..........  2.91...........  4.51
                                 Hg (t)...........  0.157..........  0.153..........  0.078..........  0.056..........  0.007..........  0.024
             Monetized Avoided   Million 2008$....  916.6..........  1,153.3........  1,357.0........  1,634.6........  85.6...........  192.1
              CO2 Value (at $19/
              t).
            --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Costs
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized           Million 2008$....  9,527.4........  9,348.7........  9,010.5........  8,779.1........  10,048.9.......  9,923.2
              Incremental
              Product and
              Installation
              Costs.
            --------------------------------------------------------------------------------------------------------------------------------------------

[[Page 65971]]

 
                                                                             Net Benefits
            --------------------------------------------------------------------------------------------------------------------------------------------
             Monetized Value...  Million 2008$....  1,227.2........  3,991.8........  1,452.1........  4,110.9........  605.1..........  3,383.9
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Direct Heating Equipment
    Table V.62 presents a summary of the impacts for each TSL 
considered for DHE.

                                               Table V.62--Summary of Results for Direct Heating Equipment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Category                               TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Energy Savings (quads).........................            0.15            0.17            0.22            0.39            0.44            1.08
    3% discount rate....................................            0.09            0.10            0.12            0.22            0.24            0.61
    7% discount rate....................................            0.04            0.05            0.06            0.11            0.12            0.31
NPV of Consumer Benefits (2008$ billion):
    3% discount rate....................................            1.68            1.87            2.22          (0.33)          (0.26)          (2.63)
    7% discount rate....................................            0.71            0.79            0.91          (0.89)          (0.93)          (3.54)
Industry Impacts:
    Traditional Direct Heating Equipment:
        Industry NPV (2008$ million)....................     (0.4)-(1.6)     (0.6)-(3.1)     (1.1)-(6.0)     (1.3)-(7.6)     (1.8)-(8.0)    (2.2)-(10.8)
        Industry NPV (% change).........................     (2.3)-(9.1)    (3.4)-(17.2)    (5.9)-(33.5)    (7.2)-(42.1)   (10.0)-(44.8)   (12.3)-(60.0)
    Gas Hearth Direct Heating Equipment:
        Industry NPV (2008$ million)....................     (0.2)-(0.9)     (0.2)-(0.9)     (0.2)-(0.9)      2.4-(14.8)      2.4-(14.8)     10.2-(55.1)
        Industry NPV (% change).........................     (0.2)-(1.1)     (0.2)-(1.1)     (0.2)-(1.1)      2.8-(17.1)      2.8-(17.1)     11.8-(63.8)
Cumulative Emissions Reduction*:
    CO2 (Mt)............................................             6.3             7.0             8.5            16.7            18.5            43.0
    NOX (kt)............................................             5.8             6.4             7.7            15.2            16.9            39.6
Value of Cumulative Emissions Reduction (2008$
 million)[Dagger]:
    CO2--3% discount rate...............................        34.3-377        38.1-419        46.2-508        90.5-996       100-1,101       233-2,564
    CO2--7% discount rate...............................        16.2-178        18.0-198        21.8-240        42.9-472        47.4-521       111-1,216
    NOX--3% discount rate...............................        1.4-14.5        1.6-16.1        1.9-19.4        3.7-38.3        4.1-42.5        9.7-99.4
    NOX--7% discount rate...............................         0.7-7.3         0.8-8.0         0.9-9.7        1.9-19.2        2.1-21.3        4.9-50.0
Mean LCC Savings** (2008$):
    Gas Wall Fan........................................              73              90             104             135              73             135
    Gas Wall Gravity....................................              25              83             192             192              68              68
    Gas Floor...........................................              13              13              13              13              13              13
    Gas Room............................................              42              96             143             143             646             646
    Gas Hearth..........................................              96              96              96            (70)            (70)           (253)
Median PBP (years):
    Gas Wall Fan........................................             3.1             3.9             6.0             9.8             3.1             9.8
    Gas Wall Gravity....................................             8.1             6.5             8.3             8.3            13.0            13.0
    Gas Floor...........................................            14.7            14.7            14.7            14.7            14.7            14.7
    Gas Room............................................             8.1             4.9             5.3             5.3             7.0             7.0
    Gas Hearth..........................................             0.0             0.0             0.0            25.9            25.9            37.5
Distribution of Consumer LCC Impacts
    Gas Wall Fan:
        Net Cost (%)....................................               3               5              30              44               3              44
        No Impact (%)...................................              59              55              14               5              59               5
        Net Benefit (%).................................              38              41              56              52              38              52
    Gas Wall Gravity:
        Net Cost (%)....................................              12              19              39              39              59              59
        No Impact (%)...................................              70              40               0               0               0               0
        Net Benefit (%).................................              18              41              61              61              41              41
    Gas Floor:
        Net Cost (%)....................................              25              25              25              25              25              25
        No Impact (%)...................................              57              57              57              57              57              57
        Net Benefit (%).................................              18              18              18              18              18              18
    Gas Room:
        Net Cost (%)....................................              19              19              20              20              26              26
        No Impact (%)...................................              50              25              25              25              25              25
        Net Benefit (%).................................              31              56              55              55              49              49

[[Page 65972]]

 
    Gas Hearth:
        Net Cost (%)....................................               9               9               9              69              69              81
        No Impact (%)...................................              51              51              51              13              13               0
        Net Benefit (%).................................              40              40              40              17              17              19
Generation Capacity Change (GW)***......................          +0.023          +0.025          +0.031          +0.045          +0.049          +0.119
Employment Impacts:
    Total Potential Changes in Domestic Production
     Workers in 2013:
        Traditional Direct Heating Equipment............         (300)-5        (300)-30        (300)-44        (300)-50        (300)-48        (300)-61
        Gas Hearth Direct Heating Equipment.............       (1,243)-7       (1,243)-7       (1,243)-7     (1,243)-516     (1,243)-516     (1,243)-846
    Indirect domestic jobs (thousands)***...............            0.16            0.18            0.23            0.08            0.09            0.24
--------------------------------------------------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.
* Hg emissions increase slightly (0.01 to 0.02 t) for the considered TSLs.
** For LCCs, a negative value means an increase in LCC by the amount indicated.
*** Changes in 2042.
[Dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.

    DOE first considered TSL 6, the max-tech level. TSL 6 would save 
1.08 quads of energy, an amount DOE considers significant. TSL 6 would 
decrease consumer NPV by $3.54 billion, using a discount rate of 7 
percent, and by $2.63 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 6 are 43.0 Mt of CO2 and 
39.6 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 6 is $111 to 
$1,216 million, using a discount rate of 7 percent, and $233 to $2,564 
million, using a discount rate of 3 percent. Total generating capacity 
in 2044 is estimated to increase slightly under TSL 6.
    At TSL 6, DOE projects that the average LCC impact for consumers is 
a gain of $135 for gas wall fan DHE, $68 for gas wall gravity DHE, $13 
for gas floor DHE, $646 for gas room DHE and a loss of $253 for gas 
hearth DHE. The median payback period is 9.8 years for gas wall fan 
DHE, 13.0 years for gas wall gravity DHE, 14.7 years for gas floor DHE, 
7.0 years for gas room DHE and 37.5 for gas hearth DHE (which is 
significantly longer than the mean lifetime of the product). At TSL 6, 
the fraction of consumers experiencing an LCC benefit is 52 percent for 
gas wall fan DHE, 41 percent for gas wall gravity DHE, 18 percent for 
gas floor DHE, 49 percent for gas room DHE and 19 percent for gas 
hearth DHE. The fraction of consumers experiencing an LCC cost is 44 
percent for gas wall fan DHE, 59 percent for gas wall gravity DHE, 25 
percent for gas floor DHE, 26 percent for gas room DHE and 81 percent 
for gas hearth DHE.
    At TSL 6, the projected change in INPV ranges from a decrease of up 
to $10.8 million for traditional DHE and a decrease of up to $55.1 
million for gas hearth DHE, in 2008$. Very few manufacturers offer 
products at the max-tech level for both traditional and gas hearth DHE. 
At TSL 6, almost every manufacturer would face substantial product and 
capital conversion costs to completely redesign most of their current 
products and existing production facilities. In addition, higher 
component costs could significantly harm profitability. If the high end 
of the range of impacts is reached as DOE expects, TSL 6 could result 
in a net loss of 60.0 percent in INPV for traditional DHE and a net 
loss of 63.8 percent in INPV for gas hearth DHE. In addition to the 
large, negative impacts on INPV at TSL 6, the required capital and 
product conversion costs could cause material harm to a significant 
number of small businesses in both the traditional and gas hearth DHE 
market. The conversion costs could cause many of these small businesses 
to exit the market.
    The Secretary tentatively concludes that at TSL 6, the benefits of 
energy savings, generating capacity reductions, and emission reductions 
would be outweighed by the negative impacts on consumer NPV, the 
economic burden on some consumers, the large capital conversion costs 
that could result in a large reduction in INPV for the manufacturers, 
and the potential impacts on a significant number of small businesses. 
Consequently, the Secretary has tentatively concluded that TSL 6 is not 
economically justified.
    Next, DOE considered TSL 5. TSL 5 would save 0.44 quads of energy, 
an amount DOE considers significant. TSL 5 would decrease consumer NPV 
by $0.93 billion, using a discount rate of 7 percent, and by $0.26 
billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 5 are 18.5 Mt of CO2 and 
16.9 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 5 is $47.4 to 
$521 million, using a discount rate of 7 percent, and $100 to $1,101 
million, using a discount rate of 3 percent. Total generating capacity 
in 2044 is estimated to increase slightly under TSL 5.
    At TSL 5, DOE projects that the average LCC impact for consumers is 
a gain of $73 for gas wall fan DHE, $68 for gas wall gravity DHE, $13 
for gas floor DHE, $646 for gas room DHE and a loss of $70 for gas 
hearth DHE. The median payback period is 3.1 years for gas wall fan 
DHE, 13.0 years for gas wall gravity DHE, 14.7 years for gas floor DHE, 
7.0 years for gas room DHE, and 25.9 for gas hearth DHE. At TSL 5, the 
fraction of consumers experiencing an LCC benefit is 38 percent for gas 
wall fan DHE, 41 percent for gas wall gravity DHE, 18 percent for gas 
floor DHE, 49 percent for gas room DHE, and 17 percent for gas hearth 
DHE. The fraction of consumers experiencing an LCC cost is 3 percent 
for gas wall fan DHE, 59 percent for gas wall gravity DHE, 25 percent 
for gas floor DHE, 26 percent for gas room DHE, and 69 percent for gas 
room DHE.
    At TSL 5, the projected change in INPV ranges from a decrease of up 
to $8 million for traditional DHE and a decrease of up to $15 million 
for gas hearth DHE, in 2008$. While some manufacturers offer a limited 
number of products at TSL 5, most of the current products would have to 
be redesigned to meet the required efficiencies at TSL 5. In addition, 
higher component costs for both traditional and gas hearth DHE could 
significantly harm profitability. If the high end of the range of 
impacts is reached as DOE expects, TSL 5 could

[[Page 65973]]

result in a net loss of 44.8 percent in INPV for traditional DHE and a 
net loss of 17.1 percent in INPV for gas hearth DHE. In addition to the 
large, negative impacts on INPV at TSL 5, the required capital and 
product conversion costs could cause material harm to a significant 
number of small businesses in both the traditional and gas hearth DHE 
market. These manufacturers could be forced to discontinue many of 
their existing product lines and, possibly, exit the market altogether.
    The Secretary tentatively concludes that at trial standard level 5, 
the benefits of energy savings, generating capacity reductions, and 
emission reductions would be outweighed by the negative impacts on 
consumer NPV, the economic burden on some consumers, the large capital 
conversion costs that could result in a large reduction in INPV for the 
manufacturers, and the potential for small businesses to have to reduce 
or discontinue a significant number of their product lines. 
Consequently, the Secretary has tentatively concluded that trial 
standard level 5 is not economically justified.
    Next, DOE considered TSL 4. TSL 4 would save 0.39 quads of energy, 
an amount DOE considers significant. TSL 4 would provide a NPV of 
consumer benefit of $0.89 billion, using a discount rate of 7 percent, 
and $0.33 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 4 are 16.7 Mt of CO2 and 
15.2 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 4 is $42.9 to 
$472 million, using a discount rate of 7 percent, and $90.5 to $996 
million, using a discount rate of 3 percent. Total generating capacity 
in 2044 is estimated to increase slightly under TSL 4.
    At TSL 4, DOE projects that the average LCC impact for consumers is 
a gain of $73 for gas wall fan DHE, $68 for gas wall gravity DHE, $13 
for gas floor DHE, $646 for gas room DHE, and a loss of $70 for gas 
hearth DHE. The median payback period is 9.8 years for gas wall fan 
DHE, 8.3 years for gas wall gravity DHE, 14.7 years for gas floor DHE, 
5.3 years for gas room DHE and 25.9 years for gas hearth DHE (which is 
significantly beyond the mean lifetime of the equipment). At TSL 4, the 
fraction of consumers experiencing an LCC benefit is 52 percent for gas 
wall fan DHE, 61 percent for gas wall gravity DHE, 18 percent for gas 
floor DHE, 55 percent for gas room DHE, and 17 percent for gas hearth 
DHE. The fraction of consumers experiencing an LCC cost is 44 percent 
for gas wall fan DHE, 39 percent for gas wall gravity DHE, 25 percent 
for gas floor DHE, 20 percent for gas room DHE and 69 percent for gas 
hearth DHE.
    At TSL 4, the projected change in INPV ranges from a decrease of up 
to $8 million for traditional DHE and decrease of up to $15 million for 
gas hearth DHE. While some manufacturers offer a limited number of 
products at TSL 4, most of the current products would have to be 
redesigned to meet the required efficiencies at TSL 4. In addition, 
higher component costs for both traditional and gas hearth DHE could 
significantly harm profitability. If the high end of the range of 
impacts is reached as DOE expects, TSL 4 could result in a net loss of 
42.1 percent in INPV for traditional DHE and a net loss of 17.1 percent 
in INPV for gas hearth DHE. In addition to the large, negative impacts 
on INPV at TSL 4, the required capital and product conversion costs 
could cause material harm to a significant number of small businesses 
in both the traditional and gas hearth DHE market. These manufacturers 
could be forced to reduce their product offerings to remain 
competitive.
    The Secretary tentatively concludes that at trial standard level 4, 
the benefits of energy savings, generating capacity reductions, and 
emission reductions would be outweighed by the negative impacts on 
consumer NPV, the economic burden on some consumers, the large capital 
conversion costs that could result in a large reduction in INPV for the 
manufacturers, and the potential for small businesses of DHE to reduce 
their product offerings. Consequently, the Secretary has tentatively 
concluded that trial standard level 4 is not economically justified.
    Next, DOE considered TSL 3. TSL 3 would save 0.22 quads of energy, 
an amount DOE considers significant. TSL 3 would provide a NPV of 
consumer benefit of $0.91 billion, using a discount rate of 7 percent, 
and $2.22 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 3 are 8.5 Mt of CO2 and 
7.7 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 3 is $21.8 to 
$240 million, using a discount rate of 7 percent, and $46.2 to $508 
million, using a discount rate of 3 percent. Total electric generating 
capacity in 2044 is estimated to increase slightly under TSL 3.
    At TSL 3, DOE projects that the average LCC impact for consumers is 
a gain of $104 for gas wall fan DHE, $192 for gas wall gravity DHE, $13 
for gas floor DHE, $143 for gas room DHE, and $96 for gas hearth DHE. 
The median payback period is 6.0 years for gas wall fan DHE, 8.3 years 
for gas wall gravity DHE, 14.7 years for gas floor DHE, 5.3 years for 
gas room DHE, and 0.0 years for gas hearth DHE. At TSL 3, the fraction 
of consumers experiencing an LCC benefit is 56 percent for gas wall fan 
DHE, 61 percent for gas wall gravity DHE, 18 percent for gas floor DHE, 
55 percent for gas room DHE, and 40 percent for gas hearth DHE. The 
fraction of consumers experiencing an LCC cost is 30 percent for gas 
wall fan DHE, 39 percent for gas wall gravity DHE, 25 percent for gas 
floor DHE, 20 percent for gas room DHE, and 9 percent for gas hearth 
DHE.
    At TSL 3, the projected change in INPV ranges from a decrease of up 
to $6 million for traditional DHE and decrease of up to $1 million for 
gas hearth DHE. Most traditional direct heating manufacturers have 
existing products that meet the efficiencies required at TSL 3 in three 
out of four product categories. The impacts on gas hearth manufacturers 
are less significant at TSL 3 because manufacturers offer a wide range 
of product lines that meet the required efficiencies at TSL 3 and most 
products that do not meet TSL 3 could be upgraded with inexpensive 
purchased parts and fairly small conversion costs. If the high end of 
the range of impacts is reached, TSL 3 could result in a net loss of 
33.5 percent in INPV for traditional DHE and a net loss of 1.1 percent 
in INPV for gas hearth DHE. In addition, the required capital and 
product conversion costs faced by small businesses decrease, mitigating 
the potential harm to a significant number of small businesses.
    After considering the analysis, comments on the January 13, 2009, 
notice and the preliminary TSD, and the benefits and burdens of TSL 3, 
the Secretary tentatively concludes that this trial standard level will 
offer the maximum improvement in efficiency that is technologically 
feasible and economically justified, and will result in significant 
conservation of energy. Further, benefits from carbon dioxide 
reductions (at a central value of $20) would increase NPV by between 
$21.8 million and $240 million (2008$) at a 7% discount rate and 
between $46.2 million and $508 million at a 3% discount rate. These 
benefits from carbon dioxide emission reductions, when considered in 
conjunction with the consumer savings NPV and other factors described 
above support DOE's tentative conclusion that trial standard level 3 is 
economically justified. Therefore, the Department today proposes to 
adopt the energy conservation standards for DHE at TSL 3, as shown in 
Table V.63.

[[Page 65974]]



    Table V.63--Proposed Minimum AFUE Requirements for Direct Heating
                            Equipment (TSL 3)
------------------------------------------------------------------------
                                                            Annual fuel
Direct heating equipment design    Product class input      utilization
              type                 capacity range Btu/h    efficiency %
------------------------------------------------------------------------
Gas wall fan...................  up to 42,000...........              76
                                 over 42,000............              77
Gas wall gravity...............  up to 27,000...........              70
                                 over 27,000 and up to                71
                                  46,000.
                                 over 46,000............              72
Gas floor......................  up to 37,000...........              57
                                 over 37,000............              58
Gas room.......................  up to 20,000...........              62
                                 over 20,000 and up to                67
                                  27,000.
                                 over 27,000 and up to                68
                                  46,000.
                                 over 46,000............              69
Gas hearth.....................  up to 20,000...........              61
                                 over 20,000 and up to                66
                                  27,000.
                                 over 27,000 and up to                67
                                  46,000.
                                 over 46,000............              68
------------------------------------------------------------------------

    DOE also calculated the annualized values for certain benefits and 
costs under the considered TSLs. The annualized values refer to 
consumer operating cost savings, consumer incremental product and 
installation costs, the quantity of emissions reductions for 
CO2, NOX, and Hg, and the monetary value of 
CO2 emissions reductions (using a value of $20/t 
CO2, which is in the middle of the values considered by DOE 
for valuing the potential global benefits resulting from reduced 
CO2 emissions).
    DOE used a two-step calculation process to convert the time-series 
of costs and benefits into annualized values. First, DOE calculated a 
present value for the time-series of costs and benefits using a 
discount rate of either three or seven percent. From the present value, 
DOE then calculated the fixed annual payment over the analysis time 
period (2013 to 2043 for DHE) that yielded the same present value. The 
fixed annual payment is the annualized value. Although DOE calculated 
annualized values, this does not imply that the time-series of cost and 
benefits from which the annualized values were determined are a steady 
stream of payments. Table V.64 presents the annualized values for each 
TSL considered for DHE.

                             Table V.64--Annualized Benefits and Costs for Direct Heating Equipment by Trial Standard Level
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Primary Estimate (AEO     Low Estimate (AEO low    High Estimate (AEO high
                                                                                 reference case)            growth case)              growth case)
        TSL                   Category                      Unit           -----------------------------------------------------------------------------
                                                                                 7%           3%           7%           3%           7%           3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
1..................  Monetized Operating Cost    Million 2008$............      97.7        121.1         93.5        115.5        100.7        125.0
                      Savings.
                     Quantified Emissions        CO2 (Mt).................       0.18         0.20         0.32         0.34         0.10         0.11
                      Reductions.
                                                 NOX (kt).................       0.16         0.18         0.27         0.28         0.10         0.12
                                                 Hg (t)...................      (0.000)      (0.000)      (0.000)      (0.001)      (0.000)      (0.000)
                     Monetized Avoided CO2       Million 2008$............       6.1          7.2          0.5          0.5         15.4         29.0
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Incremental       Million 2008$............      28.1         27.4         28.1         27.4         28.1         27.4
                      Product and Installation
                      Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............      75.7        100.9         65.8         88.7         88.0        126.5
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
2..................  Monetized.................  Million 2008$............     108.8        135.0        104.1        128.9        112.2        139.3
                     Operating Cost Savings....
                     Quantified Emissions        CO2 (Mt).................       0.20         0.22         0.35         0.37         0.11         0.12
                      Reductions.
                                                 NOX (kt).................       0.18         0.20         0.30         0.32         0.11         0.13
                                                 Hg (t)...................      (0.000)      (0.000)      (0.000)      (0.001)      (0.000)      (0.000)

[[Page 65975]]

 
                     Monetized Avoided CO2       Million 2008$............       6.7          8.1          0.8          0.9         25.3         46.4
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized.................  Million 2008$............      31.3         30.5         31.3         30.5         31.3         30.5
                     Incremental Product and
                      Installation Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............      84.2        112.6         73.6         99.3        106.1        155.2
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
3..................  Monetized Operating Cost    Million 2008$............     132.2        164.4        126.4        156.9        136.2        169.6
                      Savings.
                     Quantified Emissions        CO2 (Mt).................       0.24         0.27         0.43         0.46         0.13         0.14
                      Reductions.
                                                 NOX (kt).................       0.22         0.24         0.36         0.38         0.14         0.15
                                                 Hg (t)...................      (0.000)      (0.001)      (0.000)      (0.001)      (0.000)      (0.000)
                     Monetized Avoided CO2       Million 2008$............       8.2          9.8          2.5          2.9         21.0         42.6
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Incremental       Million 2008$............      41.8         40.6         41.8         40.6         41.8         40.6
                      Product and Installation
                      Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............      98.5        133.5         87.1        119.2        115.4        171.6
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
4..................  Monetized Operating Cost    Million 2008$............     250.4        310.9        239.6        297.0        257.9        320.7
                      Savings.
                     Quantified Emissions        CO2 (Mt).................       0.48         0.52         0.85         0.89         0.32         0.36
                      Reductions.
                                                 NOX (kt).................       0.43         0.48         0.71         0.75         0.32         0.36
                                                 Hg (t)...................       0.001        0.000       (0.003)      (0.004)      (0.000)       0.000
                     Monetized Avoided CO2       Million 2008$............      16.1         19.2          3.0          3.5         17.7         39.5
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Incremental       Million 2008$............     337.8        329.1        337.8        329.1        337.8        329.1
                      Product and Installation
                      Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............     (71.3)         1.0        (95.2)       (28.6)       (62.2)        31.1
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
5..................  Monetized Operating Cost    Million 2008$............     279.4        347.3        267.3        331.8        287.7        358.3
                      Savings.
                     Quantified Emissions        CO2 (Mt).................       0.53         0.58         0.93         0.99         0.35         0.40
                      Reductions.
                                                 NOX (kt).................       0.48         0.53         0.79         0.83         0.35         0.40
                                                 Hg (t)...................       0.001        0.000       (0.003)      (0.004)      (0.000)       0.000

[[Page 65976]]

 
                     Monetized Avoided CO2       Million 2008$............      17.8         21.2          4.1          4.7         65.3        152.0
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Incremental       Million 2008$............     371.6        361.8        371.6        361.8        371.6        361.8
                      Product and Installation
                      Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............     (74.5)         6.7       (100.1)       (25.3)       (18.6)       148.5
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
6..................  Monetized Operating Cost    Million 2008$............     686.8        850.9        656.6        811.8        707.9        878.5
                      Savings.
                     Quantified Emissions        CO2 (Mt).................       1.24         1.35         2.21         2.33         0.81         0.92
                      Reductions.
                                                 NOX (kt).................       1.13         1.23         1.87         1.98         0.82         0.93
                                                 Hg (t)...................       0.001        0.001       (0.007)      (0.011)      (0.000)       0.000
                     Monetized Avoided CO2       Million 2008$............      41.5         49.4          8.6         10.0         74.7        181.1
                      Value (at $19/t).
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Costs
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Incremental       Million 2008$............   1,036.2        997.3      1,036.2        997.3      1,036.2        997.3
                      Product and Installation
                      Costs.
                    ------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net Benefits
                    ------------------------------------------------------------------------------------------------------------------------------------
                     Monetized Value...........  Million 2008$............    (307.9)       (97.0)      (371.0)      (175.6)      (253.5)        62.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Pool Heaters
    Table V.65 presents a summary of the energy savings and economic 
impacts for each TSL considered for pool heaters.

                                                     Table V.65--Summary of Results for Pool Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Category                               TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Energy Savings (quads).........................            0.02            0.03            0.08            0.10            0.13            0.28
    3% discount rate....................................            0.01            0.02            0.05            0.06            0.08            0.16
    7% discount rate....................................            0.00            0.01            0.03            0.03            0.04            0.09
NPV of Consumer Benefits (2008$ billion):
    3% discount rate....................................            0.16            0.18            0.40            0.25          (1.97)          (4.51)
    7% discount rate....................................            0.08            0.07            0.14            0.03          (1.27)          (2.94)
Industry Impacts:
    Industry NPV (2008$ million)........................       0.1-(0.2)       0.4-(1.0)     (0.2)-(5.6)       0.5-(7.5)      3.1-(19.5)     12.9-(44.5)
    Industry NPV (% change).............................       0.1-(0.3)       0.7-(1.7)     (0.4)-(9.1)      0.9-(12.1)      5.0-(31.8)     21.0-(72.6)
Cumulative Emissions Reduction*:
    CO2 (Mt)............................................            0.61            1.05            3.31            4.21            5.74           12.12
    NOX (kt)............................................            0.55            0.94            2.98            3.74            5.10           10.77
Value of Cumulative Emissions Reduction (2008$ million)
 [Dagger]:
    CO2--3% discount rate...............................       3.3 to 36       5.7 to 63       18 to 197       23 to 251       31 to 342       66 to 723
    CO2--7% discount rate...............................       1.6 to 18       2.8 to 31       8.9 to 97       11 to 123       15 to 168       33 to 354
    NOX--3% discount rate...............................      0.1 to 1.4      0.2 to 2.4      0.7 to 7.7      0.9 to 9.7     1.3 to 13.2     2.7 to 27.8
    NOX--7% discount rate...............................      0.1 to 0.7      0.1 to 1.3      0.4 to 4.0      0.5 to 5.0      0.7 to 6.9     1.4 to 14.5
Mean LCC Savings** (2008$)..............................              24              18              39            (13)           (555)         (1,323)
Median PBP (years)......................................             2.5             7.4            10.6            13.0            28.6            28.1
Distribution of Consumer LCC Impacts:

[[Page 65977]]

 
    Net Cost (%)........................................               6              31              52              59              90              96
    No Impact (%).......................................              64              46              24              22               6               1
    Net Benefit (%).....................................              30              22              24              20               5               3
Generation Capacity Change (GW)***......................         + 0.002         + 0.004         + 0.011         + 0.012         + 0.016         + 0.034
Employment Impacts:
    Total Potential Changes in Domestic Production              (644)-13        (644)-34        (644)-66        (644)-93       (644)-163       (644)-331
     Workers in 2013....................................
    Indirect domestic jobs (thousands)***...............            3.32            4.38            6.70            8.49           50.59           14.82
--------------------------------------------------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.
* The impacts for Hg emissions are negligible (less than 0.01 ton).
** For LCCs, a negative value means an increase in LCC by the amount indicated.
*** Changes in 2042.
[Dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.

    DOE first considered TSL 6, the max-tech level. TSL 6 would save 
0.28 quads of energy, an amount DOE considers significant. TSL 6 would 
decrease consumer NPV by $2.9 billion, using a discount rate of 7 
percent, and by $4.5 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 6 are 12.1 Mt of CO2 and 
10.8 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 6 is $33 million 
to $354 million, using a discount rate of 7 percent, and $66 million to 
$723 million, using a discount rate of 3 percent. Total generating 
capacity in 2044 is estimated to increase slightly under TSL 6.
    At TSL 6, DOE projects that the average LCC impact for consumers is 
a loss of $1,323. The median payback period is 28.1 years (which is 
substantially longer than the mean lifetime of the product). At TSL 6, 
the fraction of consumers experiencing an LCC benefit is 3 percent. The 
fraction of consumers experiencing an LCC cost is 96 percent.
    At TSL 6, the projected change in INPV to decrease by up to $44.5 
million for gas-fired pool heaters. Currently, gas-fired pool heaters 
that meet the efficiencies required by TSL 6 are manufactured in 
extremely low volumes by a limited number of manufacturers. The 
significant impacts on manufacturers arise from the large costs to 
develop or increase the production of fully condensing products. In 
addition, manufacturers are significantly harmed if profitability is 
negatively impacted to keep consumers in the market for a luxury item 
that is significantly more expensive than most products currently sold. 
If the high end of the range of impacts is reached as DOE expects, TSL 
6 could result in a net loss of 72.6 percent in INPV for gas-fired pool 
heaters.
    The Secretary tentatively concludes that at TSL 6, the benefits of 
energy savings and emission reductions would be outweighed by the 
negative economic impacts to the Nation, the economic burden on some 
consumers (as indicated by the large increase in total installed cost), 
and the large capital conversion costs that could result in a large 
reduction in INPV for the manufacturers. Consequently, the Secretary 
has tentatively concluded that TSL 6 is not economically justified.
    Next, DOE considered TSL 5. TSL 5 would save 0.13 quads of energy, 
an amount DOE considers significant. TSL 5 would decrease consumer NPV 
by $1.3 billion, using a discount rate of 7 percent, and by $2.0 
billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 5 are 5.7 Mt of CO2 and 
5.1 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 5 is $15 million 
to $168 million, using a discount rate of 7 percent, and $31 million to 
$342 million, using a discount rate of 3 percent. Total generating 
capacity in 2044 is estimated to increase slightly under TSL 5.
    At TSL 5, DOE projects that the average LCC impact for consumers is 
a loss of $555. The median payback period is 28.6 years (which is 
substantially longer than the mean lifetime of the product). At TSL 5, 
the fraction of consumers experiencing an LCC benefit is 5 percent. The 
fraction of consumers experiencing an LCC cost is 90 percent.
    At TSL 5, the projected change in INPV to decrease by up to $19.5 
million for gas-fired pool heaters. Currently, gas-fired pool heaters 
that meet the efficiencies required by TSL 5 are manufactured in 
extremely low volumes by a limited number of manufacturers, as with TSL 
6. The significant adverse impacts on manufacturers arise from the 
large costs to develop or increase the production of products with 
multiple efficiency improvements. In addition, the potential for 
manufacturers to be significantly harmed increases if consumers 
purchasing decisions are impacted and shipments decline due to the 
large increases in first cost for a luxury item. If the high end of the 
range of impacts is reached as DOE expects, TSL 5 could result in a net 
loss of 31.8 percent in INPV for gas-fired pool heaters.
    The Secretary tentatively concludes that at TSL 5, the benefits of 
energy savings and emission reductions would be outweighed by the 
negative economic impacts to the Nation, the economic burden on some 
consumers (as indicated by the large increase in total installed cost), 
and the large capital conversion costs that could result in a large 
reduction in INPV for the manufacturers. Consequently, the Secretary 
has tentatively concluded that TSL 5 is not economically justified.
    Next, DOE considered TSL 4. TSL 4 would save 0.10 quads of energy, 
an amount DOE considers significant. TSL 4 would increase consumer NPV 
by $0.03 billion, using a discount rate of 7 percent, and by $0.25 
billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 4.2 Mt of 
CO2 and 3.7 kt of NOX. The estimated monetary 
value of the cumulative CO2 emissions reductions at TSL 4 is 
$11 million to $123 million, using a discount rate of 7 percent, and 
$23 million to $251 million, using a discount rate of 3 percent. Total 
generating capacity in 2044 is estimated to increase slightly under TSL 
4.
    At TSL 4, the estimated increase in the installed cost is $335. 
Because this increase is substantially balanced by a decrease in 
operating costs, DOE projects that the average LCC impact for consumers 
is a loss of $13 (note that this quantity represents only 0.2 percent 
of the average total LCC). The median payback period is 13.0 years, 
compared to a typical product life of 8 years. At TSL 4, the fraction 
of consumers

[[Page 65978]]

experiencing an LCC benefit is 20 percent. The fraction of consumers 
experiencing a net increase in LCC (mainly due to having low pool 
heater operation) is 59 percent. Of these consumers, the average net 
increase in LCC would be about $172, which is about 3 percent of the 
average LCC for these consumers.
    At TSL 4, DOE projects that INPV decreases by up to $7.5 million 
for gas-fired pool heaters. At TSL 4, manufacturers believe that 
profitability could be harmed in order to keep consumers in the market 
for a luxury item that is more expensive than the most common products 
currently sold. If the high end of the range of impacts is reached as 
DOE expects, TSL 4 could result in a net loss of 12.1 percent in INPV 
for gas-fired pool heaters.
    After considering the analysis, comments on the January 13, 2009, 
notice and the preliminary TSD, and the benefits and burdens of TSL 4, 
the Secretary tentatively concludes that this trial standard level will 
offer the maximum improvement in efficiency that is technologically 
feasible and economically justified, and will result in significant 
conservation of energy. Further, benefits from carbon dioxide 
reductions (at a central value of $20) would increase NPV by between 
$11 million and $123 million (2008$) at a 7% discount rate and between 
$23 million and $251 million at a 3% discount rate. These benefits from 
carbon dioxide emission reductions, when considered in conjunction with 
the consumer savings NPV and other factors described above support 
DOE's tentative conclusion that trial standard level 4 is economically 
justified. Therefore, the Department today proposes to adopt the energy 
conservation standards for pool heaters at TSL 4, which requires a 
thermal efficiency of 84 percent for gas-fired pool heaters as shown in 
Table V.66. As discussed above, approximately 59 percent of consumers 
with pool heaters would experience a life cycle cost from the proposed 
standard for pool heaters, TSL 4. Further, DOE estimates that one-
quarter of these consumers would experience LCC of less than 2%. 
Although most consumers would experience some savings or very small 
increases in life cycle costs, DOE is seeking comment regarding the 
appropriateness of proposing TSL 4 for pool heaters since this 
efficiency level would increase life-cycle costs for most consumers. 
DOE also seeks comment on its consideration of TSL 3 as an alternative 
for the final standard level for pool heaters. (See Issue 18 under 
``Issues on Which DOE Seeks Comment'' in section VII.E of this NOPR.)

  Table V.66--Proposed Minimum Thermal Efficiency Requirements for Pool
                             Heaters (TSL 4)
------------------------------------------------------------------------
                                                               Thermal
                       Product class                        efficiency %
------------------------------------------------------------------------
Gas-fired Pool Heaters....................................           84
------------------------------------------------------------------------

    DOE also calculated the annualized values for certain benefits and 
costs under the considered pool heater TSLs. The annualized values 
refer to consumer operating cost savings, consumer incremental product 
and installation costs, the quantity of emissions reductions of 
CO2, NOX, and Hg, and the monetary value of 
CO2 emissions reductions (using a value of $20/t 
CO2, which is in the middle of the values considered by DOE 
for valuing the potential global benefits resulting from reduced 
CO2 emissions).
    DOE used a two-step calculation process to convert the time-series 
of costs and benefits into annualized values. First, DOE calculated a 
present value for the time-series of costs and benefits using a 
discount rate of either three or seven percent. From the present value, 
DOE then calculated the fixed annual payment over the analysis time 
period (2013 to 2043 for pool heaters) that yielded the same present 
value. The fixed annual payment is the annualized value. Although DOE 
calculated annualized values, this does not imply that the time-series 
of costs and benefits from which the annualized values were determined 
are a steady stream of payments. Table V.67 presents the annualized 
values for each TSL considered for pool heaters.

                                   Table V.67--Annualized Benefits and Costs for Pool Heaters by Trial Standard Level
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Primary estimate (AEO  Low estimate  (AEO low    High estimate  (AEO
                                                                                      reference case)          growth case)          high growth case)
                TSL                        Category                 Unit         -----------------------------------------------------------------------
                                                                                      7%          3%          7%          3%          7%          3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................................  Monetized Operating    Million 2008$........       9.52       10.93        9.10       10.43        9.80       11.26
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.02        0.02        0.02        0.03        0.01        0.01
                                     Reductions.           NOX (kt).............      0.017       0.018       0.021       0.022       0.013       0.014
                                                           Hg (t)...............      0.000       0.000     (0.000)     (0.000)     (0.000)       0.000
                                    Monetized Avoided CO2  Million 2008$........       0.61        0.70        0.82        0.94        0.47        0.54
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........       2.06        1.98        2.06        1.98        2.06        1.98
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........       8.07        9.65        7.86        9.39        8.21        9.82
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 65979]]

 
2.................................  Monetized Operating    Million 2008$........      16.35       18.78       15.64       17.92       16.83       19.35
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.03        0.03        0.04        0.04        0.02        0.03
                                     Reductions.           NOX (kt).............      0.029       0.030       0.036       0.038       0.023       0.024
                                                           Hg (t)...............      0.000       0.000     (0.000)     (0.000)     (0.000)       0.000
                                    Monetized Avoided CO2  Million 2008$........       1.06        1.20        1.40        1.62        0.80        0.93
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........       8.98        8.66        8.98        8.66        8.98        8.66
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........       8.42       11.33        8.06       10.88        8.65       11.62
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.................................  Monetized Operating    Million 2008$........      50.33       57.83       48.16       55.20       51.79       59.57
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.10        0.11        0.13        0.14        0.08        0.08
                                     Reductions.           NOX (kt).............      0.091       0.095       0.113       0.120       0.072       0.077
                                                           Hg (t)...............      0.000       0.000     (0.000)     (0.001)     (0.000)       0.000
                                    Monetized Avoided CO2  Million 2008$........       3.33        3.80        4.42        5.10        2.55        2.93
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........      36.72       35.38       36.72       35.38       36.72       35.38
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........      16.94       26.25       15.86       24.92       17.62       27.12
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
4.................................  Monetized Operating    Million 2008$........      59.88       68.79       57.29       65.66       61.62       70.86
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.13        0.13        0.16        0.17        0.09        0.10
                                     Reductions.           NOX (kt).............      0.112       0.119       0.134       0.143       0.085       0.091
                                                           Hg (t)...............      0.000       0.000     (0.000)     (0.001)     (0.000)       0.000
                                    Monetized Avoided CO2  Million 2008$........       4.20        4.84        5.24        6.08        3.01        3.47
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........      56.66       54.59       56.66       54.59       56.66       54.59
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........       7.41       19.04        5.88       17.15        7.97       19.74
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
5.................................  Monetized Operating    Million 2008$........      82.08       94.30       78.54       90.00       84.48       97.14
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.17        0.18        0.21        0.23        0.12        0.13
                                     Reductions.           NOX (kt).............      0.153       0.162       0.183       0.195       0.116       0.124
                                                           Hg (t)...............      0.000       0.000     (0.000)     (0.001)     (0.000)       0.000

[[Page 65980]]

 
                                    Monetized Avoided CO2  Million 2008$........       5.72        6.58        7.15        8.25        4.11        4.73
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........     207.11      204.15      207.11      204.15      207.11      204.15
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........   (119.31)    (103.27)    (121.42)    (105.90)    (118.52)    (102.28)
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                          Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
6.................................  Monetized Operating    Million 2008$........     174.79      200.78      167.22      191.59      179.91      206.84
                                     Cost Savings.
                                    Quantified Emissions   CO2 (Mt).............       0.37        0.39        0.45        0.48        0.26        0.27
                                     Reductions.           NOX (kt).............      0.324       0.343       0.388       0.411       0.244       0.261
                                                           Hg (t)...............      0.000       0.000     (0.001)     (0.002)     (0.000)       0.000
                                    Monetized Avoided CO2  Million 2008$........      12.04       13.94       15.10       17.45        8.65        9.98
                                     Value (at $19/t).
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                            Costs
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Incremental  Million 2008$........     464.57      452.23      464.57      452.23      464.57      452.23
                                     Product and
                                     Installation Costs.
                                   ---------------------------------------------------------------------------------------------------------------------
                                                                                        Net Benefits
                                   ---------------------------------------------------------------------------------------------------------------------
                                    Monetized Value......  Million 2008$........   (277.74)    (237.52)    (282.25)    (243.19)    (276.01)    (235.41)
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Order 12866

    Section 1(b)(1) of Executive Order 12866, ``Regulatory Planning and 
Review,'' 58 FR 51735 (Oct. 4, 1993), requires each agency to identify 
in writing the market failure or other problem that it intends to 
address, and that warrants agency action (including where applicable, 
the failure of private markets or public institutions), as well as 
assess the significance of that problem, to enable assessment of 
whether any new regulation is warranted. The problems that today's 
proposed standards address are as follows:
    (1) There is a lack of consumer information and/or information 
processing capability about energy efficiency opportunities in the home 
appliance market.
    (2) There is asymmetric information (one party to a transaction has 
more and better information than the other) and/or high transactions 
costs (costs of gathering information and effecting exchanges of goods 
and services).
    (3) There are external benefits resulting from improved energy 
efficiency of heating products that are not captured by the users of 
such equipment. These benefits include externalities related to 
environmental protection and energy security that are not reflected in 
energy prices, such as reduced emissions of greenhouse gases.
    In addition, DOE has determined that today's regulatory action is a 
``significant regulatory action'' under section 3(f)(1) of Executive 
Order 12866. Accordingly, section 6(a)(3) of the Executive Order 
requires that DOE prepare a regulatory impact analysis (RIA) on today's 
proposed rule and that the Office of Information and Regulatory Affairs 
(OIRA) in the OMB review this proposed rule. DOE presented to OIRA for 
review the draft proposed rule and other documents prepared for this 
rulemaking, including the RIA, and has included these documents in the 
rulemaking record. They are available for public review in the Resource 
Room of DOE's Building Technologies Program, 950 L'Enfant Plaza, SW., 
Suite 600, Washington, DC 20024, (202) 586-2945, between 9:00 a.m. and 
4:00 p.m., Monday through Friday, except Federal holidays.
    The RIA is contained in the TSD prepared for the rulemaking. The 
RIA consists of: (1) A statement of the problem addressed by this 
regulation, and the mandate for government action; (2) a description 
and analysis of the feasible policy alternatives to this regulation; 
(3) a quantitative comparison of the impacts of the alternatives; and 
(4) the national economic impacts of the proposed standards.
    The RIA calculates the effects of feasible policy alternatives to 
mandatory standards for heating products, and provides a quantitative 
comparison of the impacts of the alternatives. DOE evaluated each 
alternative in terms of its ability to achieve significant energy 
savings at reasonable costs, and compared it to the effectiveness of 
the proposed rule. DOE analyzed these alternatives using a series of 
regulatory scenarios for the three types of heating products. It 
modified the heating

[[Page 65981]]

product NIA models to allow inputs for these policy alternatives. Of 
the four product classes of residential water heaters subject to 
proposed standards, this RIA concerns only gas-fired storage and 
electric storage water heaters, which together represent the majority 
of shipments. Of the five product classes of DHE, this RIA concerns 
only gas wall fan DHE and gas hearth DHE, which together represent the 
majority of DHE shipments.
    DOE identified the following major policy alternatives for 
achieving increased energy efficiency in the three types of heating 
products:
     No new regulatory action;
     Consumer rebates;
     Consumer tax credits;
     Manufacturer tax credits;
     Voluntary energy efficiency targets;
     Bulk government purchases;
     Early replacement programs; and
     The proposed approach (energy conservation standards).
    DOE evaluated each alternative in terms of its ability to achieve 
significant energy savings at reasonable costs and compared it to the 
effectiveness of the proposed rule. Table VI.1 through Table VI.5 show 
the results for energy savings and consumer NPV.

  Table VI.1--Impacts of Non-Regulatory Alternatives for Gas-Fired Storage Water Heaters That Meet the Proposed
                                                Standard (TSL 4)
----------------------------------------------------------------------------------------------------------------
                                                                              Net present value* billion 2008$
                  Policy alternative                      Primary energy   -------------------------------------
                                                          savings  quads     7% discount rate   3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..............................               0.00                0.00               0.00
Consumer Rebates......................................               0.51                1.19               3.46
Consumer Tax Credits..................................               0.31                0.72               2.08
Manufacturer Tax Credits..............................               0.15                0.36               1.04
Voluntary Energy Efficiency Targets...................               0.12                0.29               0.83
Early Replacement.....................................               0.001              -0.02              -0.04
Bulk Government Purchases.............................               0.005               0.01               0.04
Proposed Standard.....................................               1.29                3.09               9.04
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV from 2015 to 2045.


  Table VI.2--Impacts of Non-Regulatory Alternatives for Electric Storage Water Heaters That Meet the Proposed
                                                Standard (TSL 4)
----------------------------------------------------------------------------------------------------------------
                                                                              Net present value* billion 2008$
                  Policy alternative                     Primary energy   --------------------------------------
                                                         savings  quads     7% discount rate    3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action.............................              0.00                 0.00                0.00
Consumer Rebates.....................................              0.42                 0.47                1.87
Consumer Tax Credits.................................              0.25                 0.28                1.12
Manufacturer Tax Credits.............................              0.13                 0.14                0.56
Voluntary Energy Efficiency Targets..................              0.09                 0.19                0.60
Early Replacement....................................              0.0023              -0.03               -0.05
Bulk Government Purchases............................              0.0017               0.004               0.01
Proposed Standard....................................              1.21                 1.59                6.02
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV from 2015 to 2045.


 Table VI.3--Impacts of Non-Regulatory Alternatives for Gas Wall Fan DHE That Meet the Proposed Standard (TSL 3)
----------------------------------------------------------------------------------------------------------------
                                                                              Net present value* billion 2008$
                  Policy alternative                      Primary energy   -------------------------------------
                                                           savings quads     7% discount rate   3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..............................              0.00              0.00               0.00
Consumer Rebates......................................              0.003             0.010              0.023
Consumer Tax Credits..................................              0.002             0.006              0.006
Manufacturer Tax Credits..............................              0.001             0.003              0.003
Voluntary Energy Efficiency Targets...................              0.0003            0.001              0.001
Early Replacement.....................................             <0.0001           -0.00001           -0.00003
Bulk Government Purchases[dagger].....................             NA                NA                 NA
Proposed Standard.....................................              0.013             0.042              0.11
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV from 2013 to 2043.
[dagger] DOE did not evaluate the bulk government purchase alternative for gas wall fan DHE because the market
  share associated with publicly-owned housing is minimal.


[[Page 65982]]


  Table VI.4--Impacts of Non-Regulatory Alternatives for Gas Hearth DHE That Meet the Proposed Standard (TSL 3)
----------------------------------------------------------------------------------------------------------------
                                                                             Net present value* billion 2008$
                 Policy alternative                     Primary energy   ---------------------------------------
                                                         savings quads     7% discount rate    3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action............................               0.00                0.00                0.00
Consumer Rebates....................................               0.03                0.15                0.36
Consumer Tax Credits................................               0.02                0.09                0.22
Manufacturer Tax Credits............................               0.01                0.05                0.11
Voluntary Energy Efficiency Targets.................               0.012               0.06                0.15
Early Replacement...................................              <0.001              -0.005              -0.006
Bulk Government Purchases[dagger]...................              NA                  NA                  NA
Proposed Standard...................................               0.14                0. 64               1.52
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV from 2013 to 2043.
[dagger] DOE did not evaluate the bulk government purchase alternative for gas hearth DHE because the market
  share associated with publicly-owned housing is minimal.


  Table VI.5--Impacts of Non-Regulatory Alternatives for Pool Heaters That Meet the Proposed Standards (TSL 4)
----------------------------------------------------------------------------------------------------------------
                                                                             Net present value* billion 2008$
                 Policy alternative                     Primary energy   ---------------------------------------
                                                         savings quads     7% discount rate    3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action............................               0.00                0.00                0.00
Consumer Rebates....................................               0.02                0.01                0.04
Consumer Tax Credits................................               0.01                0.003               0.03
Manufacturer Tax Credits............................               0.005               0.002               0.01
Voluntary Energy Efficiency Targets.................               0.004               0.005               0.02
Early Replacement...................................              <0.001              -0.002              -0.003
Bulk Government Purchases [dagger]..................              NA                  NA                  NA
Proposed Standard...................................               0.10                0.03                0.25
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV from 2013 to 2043.
[dagger] DOE did not evaluate the bulk government purchase alternative for pool heaters because there is no
  market share associated with publicly-owned housing.

    The NPV amounts shown in Table VI.1 through Table VI.5 refer to the 
NPV of consumer benefits. The costs to the government of each policy 
(such as rebates or tax credits) are not included in the costs for the 
NPV since, on balance, consumers in the aggregate both pay for rebates 
and tax credits through taxes and receive their benefits. The following 
paragraphs discuss the cumulative effect of each policy alternative 
listed in Table VI.1 through Table VI.5. (See the regulatory impact 
analysis in the NOPR TSD for details.) For comparison with the results 
reported below for the non-regulatory policies, the combined impacts of 
the proposed standards for the considered products are projected as 
2.75 quads of national energy savings and an NPV of $5.39 billion (at a 
7-percent discount rate).
    No new regulatory action. The case in which no regulatory action is 
taken constitutes the ``base case'' (or ``no action'') scenario. Since 
this is the base case, energy savings and NPV are zero by definition.
    Rebates. If consumers were offered a rebate that covered a portion 
of the incremental price difference between products meeting baseline 
efficiency levels and those meeting the energy efficiency levels in the 
proposed standard, DOE estimates that the percentage of consumers 
purchasing the more-efficient products would increase by 17.5 percent 
to 40 percent, depending on the product and the product class. DOE 
assumed this policy would permanently transform the market so that the 
increased percentage of consumers purchasing more-efficient products 
seen in the first year of the program would be maintained throughout 
the forecast period. At the estimated participation rates, the rebates 
would provide 0.98 quads of national energy savings and an NPV of $1.83 
billion (at a 7-percent discount rate) for the considered products. 
Although DOE estimates that rebates would provide national benefits, 
they are expected to be much smaller than the benefits resulting from 
the proposed national standards.
    Consumer Tax Credits. If consumers were offered a tax credit that 
covered a portion of the incremental price difference between products 
meeting baseline efficiency levels and those meeting the energy 
efficiency levels in the proposed standards, DOE's research suggests 
that the number of consumers buying a water heater, pool heater, or DHE 
that would take advantage of the tax credit would be approximately 60 
percent of the number that would take advantage of rebates. As a result 
of the tax credit, the percentage of consumers purchasing more-
efficient products would increase by 10.5 percent to 24 percent, 
depending on the product and product class. Therefore, tax credits 
would yield a fraction of the benefits of rebates. DOE assumed this 
policy would permanently transform the market so that the increased 
percentage of consumers purchasing more-efficient products seen in the 
first year of the program would be maintained throughout the forecast 
period. At the estimated participation rates, consumer tax credits 
would provide 0.59 quads of national energy savings and an NPV of $1.10 
billion (at a seven-percent discount rate) for the considered products.
    Manufacturer Tax Credits. DOE believes even smaller benefits would

[[Page 65983]]

result from a manufacturer tax credit program that would effectively 
result in a lower price to the consumer by an amount that covers part 
of the incremental price difference between products meeting baseline 
efficiency levels and those meeting the proposed standards. Because 
these tax credits would go to manufacturers instead of consumers, DOE 
believes that fewer consumers would be aware of this program than a 
consumer tax credit program. DOE assumes that 50 percent of the 
consumers who would take advantage of consumer tax credits would buy 
more-efficient products offered through a manufacturer tax credit 
program. Thus, as a result of the manufacturer tax credit, the 
percentage of consumers purchasing the more-efficient products would 
increase by 5.2 percent to 12 percent (i.e., 50 percent of the impact 
of consumer tax credits), depending on the product class.
    DOE assumed this policy would permanently transform the market so 
that the increased percentage of consumers purchasing more-efficient 
products seen in the first year of the program would be maintained 
throughout the forecast period. At the estimated participation rates, 
the rebates would provide 0.30 quads of national energy savings and an 
NPV of $0.56 billion (at a seven-percent discount rate) for the 
considered products. Thus, DOE estimated that manufacturer tax credits 
would yield a fraction of the benefits that consumer tax credits and 
rebates would provide.
    Voluntary Energy Efficiency Targets. The Federal government's 
ENERGY STAR program has voluntary energy efficiency targets for gas-
fired and electric storage water heaters and gas-fired instantaneous 
water heaters. Some equipment purchases that result from the ENERGY 
STAR program already are reflected in DOE's base-case scenario. DOE 
evaluated the potential impacts of increased marketing efforts by 
ENERGY STAR that would encourage the purchase of products meeting the 
proposed standard. DOE modeled the voluntary efficiency program based 
on this scenario and assumed that the resulting increased percentage of 
consumers purchasing more-efficient products would be maintained 
throughout the forecast period. DOE estimated that the enhanced 
effectiveness of voluntary energy efficiency targets would provide 0.23 
quads of national energy savings and an NPV of $0.55 billion (at a 7-
percent discount rate) for the considered products. Although this would 
provide national benefits, they would be much smaller than the benefits 
resulting from the proposed national standards.
    Early Replacement Incentives. This policy alternative envisions a 
program to replace old, inefficient water heaters, DHE, and pool 
heaters with models meeting the efficiency levels in the proposed 
standards. DOE projected a 4-percent increase in the annual retirement 
rate of the existing stock in the first year of the program. It assumed 
the program would last as long as it took to completely replace all of 
the eligible existing stock in the year that the program begins (2013 
or 2015). DOE estimated that such an early replacement program would 
provide negligible national energy savings and NPV for the considered 
products. The national energy savings benefits would be negligible in 
comparison with the benefits resulting from the proposed national 
standards, and the NPV would actually be negative.
    Bulk Government Purchases. Under this policy alternative, the 
government would be encouraged to purchase increased amounts of 
equipment that meet the efficiency levels in the proposed standards. 
Federal, State, and local government agencies could administer such a 
program. At the Federal level, this would be an enhancement to the 
existing Federal Energy Management Program (FEMP). DOE modeled this 
program by assuming an increase in installation of equipment meeting 
the efficiency levels of the proposed standards among those households 
for whom government agencies purchase or influence the purchase of 
water heaters. (Because the market share of DHE units in publicly-owned 
housing is minimal and the market share of pool heaters in publicly-
owned housing is zero, the Department did not consider bulk government 
purchases for those products.) DOE estimated that bulk government 
purchases would provide negligible national energy savings (0.01 quads) 
and NPV ($0.14 billion) for the considered products, benefits that are 
much smaller than those estimated for the proposed national standards.
    Proposed Standards. DOE proposes to adopt the efficiency levels 
listed in section V.C. As indicated in the paragraphs above, none of 
the alternatives DOE examined would save as much energy as today's 
proposed standards. Also, several of the alternatives would require new 
enabling legislation because authority to carry out those alternatives 
may not exist.
    Additional Policy Evaluation. In addition to the above non-
regulatory policy alternatives, DOE evaluated the potential impacts of 
a policy that would allow States to require that some water heaters 
installed in new homes have an efficiency level higher than the Federal 
standard. At present, States are prohibited to require efficiency 
levels higher than the Federal standard; the considered policy would 
remove this prohibition in the case of residential water heaters. DOE 
notes that removing the prohibition would require either legislative 
authority or DOE approval, after a case-by-case basis consideration on 
the merits, of waivers submitted by States. For the present rulemaking, 
DOE evaluated the impacts that such a policy would have for electric 
storage water heaters.
    Specifically, DOE estimated the impacts for a policy case in which 
several States adopted provisions in their building codes that would 
require electric storage water heaters to meet efficiency level 6 (2.0 
EF, heat pump with two-inch insulation). DOE assumed that such codes 
would affect 25 percent of water heaters in all new homes built in the 
United States in 2015 and that the percentage would increase linearly 
to 75 percent by 2045. (DOE did not attempt to define the specific 
geographic areas that would be affected.) In this policy case, all 
other water heaters (those bought for replacement in existing homes) 
would meet the proposed standard level of 0.95 (efficiency level 5). 
DOE's analysis accounts for the estimate that some new homes would have 
a water heater with EF greater than or equal to 2.0 (e.g., heat pump 
technology) in the absence of any amended standards (the base case).
    Table VI.6 shows the additional estimated national energy savings 
that would result from the considered building code policy, as well as 
the net present value of additional benefits to consumers (the 
purchasers of new homes that have electric water heaters that have an 
EF of at least 2.0). The table also shows the estimated national energy 
savings and NPV for electric storage water heaters under the proposed 
standards. The energy savings from this State building code requirement 
for new homes would be greater than the savings from the proposed 
standard for electric storage water heaters. This contrasts with the 
non-regulatory policy alternatives discussed above, whose savings are 
lower than those of the proposed standards.

[[Page 65984]]



 Table VI.6--Impacts of Policy Allowing States To Incorporate Requirements for High-Efficiency Electric Storage
                                         Water Heaters in Building Codes
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value billion 2008$
                   Policy alternative                      Primary energy  -------------------------------------
                                                           savings quads     7% discount rate   3% discount rate
----------------------------------------------------------------------------------------------------------------
Proposed Standard (TSL 4) (Electric Storage Water                     1.21               1.59               6.02
 Heaters)..............................................
Proposed Standard (TSL 4) AND Policy Allowing States to               1.69               2.13               8.33
 Require Higher-Efficiency Electric Storage Water
 Heaters in New Homes..................................
----------------------------------------------------------------------------------------------------------------

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis (IRFA) for 
any rule that by law must be proposed for public comment, unless the 
agency certifies that the rule, if promulgated, will not have a 
significant economic impact on a substantial number of small entities. 
As required by Executive Order 13272, ``Proper Consideration of Small 
Entities in Agency Rulemaking'' 67 FR 53461 (August 16, 2002), DOE 
published procedures and policies on February 19, 2003, to ensure that 
the potential impacts of its rules on small entities are properly 
considered during the rulemaking process. 68 FR 7990. DOE has made its 
procedures and policies available on the Office of the General 
Counsel's Web site (http://www.gc.doe.gov).
    For the manufacturers of the three types of heating products, the 
Small Business Administration (SBA) has set a size threshold, which 
defines those entities classified as ``small businesses'' for the 
purposes of the statute. DOE used the SBA's small business size 
standards to determine whether any small entities would be subject to 
the requirements of the rule. 65 FR 30836, 30850 (May 15, 2000), as 
amended at 65 FR 53533, 53545 (September 5, 2000) and codified at 13 
CFR part 121.The size standards are listed by North American Industry 
Classification System (NAICS) code and industry description and are 
available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf. Residential water heater and pool 
heater manufacturing are classified under NAICS 335228, ``Other Major 
Household Appliance Manufacturing'' and DHE is classified under NAICS 
333414, ``Heating Equipment (except warm air furnaces) Manufacturing.'' 
The SBA sets a threshold of 500 employees or less for an entity to be 
considered as a small business for both of these categories as shown in 
Table VI.7.

         Table VI.7--SBA and NAICS Classification of Small Businesses Potentially Affected by This Rule
----------------------------------------------------------------------------------------------------------------
                  Industry description                     Revenue limit      Employee limit         NAICS
----------------------------------------------------------------------------------------------------------------
Residential Water Heater Manufacturing.................                N/A                500             335228
Direct Heating Manufacturing...........................                N/A                500             333414
Pool Heater Manufacturing..............................                N/A                500             335228
----------------------------------------------------------------------------------------------------------------

    DOE reviewed the potential standard levels considered in today's 
NOPR under the provisions of the Regulatory Flexibility Act and the 
procedures and policies published on February 19, 2003. To better 
assess the potential impacts of this rulemaking on small entities, DOE 
conducted a more focused inquiry of the companies that could be small 
business manufacturers of products covered by this rulemaking. During 
its market survey, DOE used all available public information to 
identify potential small manufacturers. DOE's research involved several 
industry trade association membership directories (including AHRI, 
HPBA, and APSP), product databases (e.g., AHRI, CEC, and ENERGY STAR 
databases), individual company Web sites, and marketing research tools 
(e.g., Dunn and Bradstreet reports) to create a list of every company 
that manufactures or sells water heaters, DHE, and gas-fired pool 
heaters covered by this rulemaking. DOE also asked stakeholders and 
industry representatives if they were aware of any other small 
manufacturers during manufacturer interviews and at previous DOE public 
meetings. DOE reviewed all publicly-available data and contacted select 
companies on its list, as necessary, to determine whether they met the 
SBA's definition of a small business manufacturer of covered 
residential water heaters, DHE, and pool heaters. DOE screened out 
companies that did not offer products covered by this rulemaking, did 
not meet the definition of a ``small business,'' or are foreign owned 
and operated. Ultimately, DOE identified five small residential water 
heater manufacturers, 12 small DHE manufacturers, and one small pool 
heater manufacturer that produce covered products and can be considered 
small businesses. Next, DOE attempted to contact these potential small 
business manufacturers to request an interview about the possible 
impacts on small business manufacturers. The results of discussions 
with manufacturers are set forth below. From these discussions, DOE 
determined the expected impacts of the rule on affected small entities.
    DOE looked at each type of heating product (water heaters, pool 
heaters, and direct heating) separately for purposes of determining 
whether certification was appropriate or an initial regulatory 
flexibility analysis was needed.
1. Water Heater Industry
    The majority of residential water heaters are currently 
manufactured in the United States. Three large manufacturers control 
the overwhelming majority of storage water heater sales. Many foreign-
owned and foreign-operated manufacturers of instantaneous gas-fired 
water heaters offer products for sale in the United States and make up 
part of the remaining domestic residential water heater market. A very 
small portion of the remaining residential water heater market is 
supplied by a combination of international and domestic companies, all 
of which have less than a one-

[[Page 65985]]

percent total market share. Part of the remaining market is also 
supplied by domestic companies that focus primarily on commercial, 
niche, or other products, but also manufacture residential water 
heaters that are covered by this rulemaking.
    DOE identified five domestic small businesses that manufacture 
residential water heaters. Each company's product offerings were 
examined to help determine the potential impact of amended energy 
conservation standards.
    Only one of the small businesses identified by DOE manufactures 
primarily products that are covered by this rulemaking. This company 
offers two gas-fired instantaneous water heaters and is also developing 
a heat pump water heater. The products offered by this manufacturer are 
expected to meet the ENERGY STAR criteria for residential water heaters 
and to achieve efficiencies higher than the levels being proposed in 
this NOPR. Therefore, DOE believes that none of the products offered by 
this manufacturer would be impacted by the proposed energy conservation 
standards for residential water heaters.
    Three of the small businesses identified by DOE manufacture covered 
oil-fired residential water heaters, but focus mainly on other 
products. One of these three small businesses holds a significant 
portion of the residential oil-fired water heater market. The products 
offered by this manufacturer exceed the efficiencies of the proposed 
standard levels for residential oil-fired storage water heaters. 
Therefore, DOE does not believe that the products offered by this 
manufacturer would be impacted by the proposed energy conservation 
standards for residential water heaters. The two other two small 
businesses that manufacture residential oil-fired storage water heaters 
both have a lower market share and collectively ship fewer than 5,000 
units per year. The first of these companies with low market share 
offers one residential oil-fired water heater model, but it would not 
need to be upgraded at the proposed energy conservation standard level. 
In addition, this manufacturer specializes in products outside of the 
scope of coverage for this rulemaking (e.g., commercial gas-fired 
storage water heaters, indirect water heaters, commercial electric 
storage water heaters, storage tanks, and boilers). The other company 
with low market share in the residential oil-fired market offers seven 
different oil-fired storage water heater models. However, this company 
does not certify these products on public databases and does not 
provide information about the input capacity or efficiency in its 
product literature, making it difficult to determine whether these are 
commercial or residential products and if they would need to be 
upgraded in response to the proposed energy conversation standards. 
However, from a review of the company Web site, DOE believes this 
manufacturer is also focused mostly on non-covered products.
    The final small manufacturer of residential water heaters has a 
full line of residential electric storage water heaters that would need 
to be upgraded or, possibly, discontinued in response to the proposed 
energy conservation standards. Depending on the importance of this 
residential line, this small business could exit the residential 
electric storage market rather than invest in the changes necessary to 
upgrade and recertify its existing electric storage products. However, 
this manufacturer has less than a one-percent market share in the 
residential storage water heater market. Product certification 
databases and the company Web site also indicate that this manufacturer 
focuses primarily on commercial water heaters and other non-covered 
products including indirect water heaters and boilers. Because of its 
focus on non-covered products, it is unlikely that this small business 
would be forced out of business in response to the proposed energy 
conservation standards.
    Because only one small manufacturer with very low market share in 
the electric storage water heater market and potentially one small 
business with very low market share in the residential oil-fired market 
would potentially be impacted by the proposed energy conservation 
standards in today's rule, DOE certifies that the standards for water 
heaters set forth in the proposed rule, if promulgated, would not have 
a significant economic impact on a substantial number of small 
entities. Accordingly, DOE has not prepared a regulatory flexibility 
analysis for the water heaters portion of this rulemaking. DOE will 
transmit the certification and supporting statement of factual basis to 
the Chief Counsel for Advocacy of the Small Business Administration for 
review under 5 U.S.C. 605(b).
    DOE requests comment on the above analysis, as well as any 
information concerning small businesses that could be impacted by this 
rulemaking and the nature and extent of those potential impacts of the 
proposed energy conservation standards on small residential water 
heater manufacturers. (See Issue 19 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.)
2. Pool Heater Industry
    The vast majority of residential pool heaters are currently 
manufactured in the United States. Four manufacturers supply over 95 
percent of the market. Based on its market research, DOE identified 
only one small manufacturer of residential gas-fired pool heaters. The 
small manufacturer specializes in high-efficiency products that exceed 
the proposed energy conservation standard level, and, therefore, DOE 
does not believe the products offered by this manufacturer would be 
impacted by the proposed amended energy conservation standards for 
residential pool heaters. Additionally, this small business 
manufacturer has a very low share of the residential gas-fired pool 
heater market. Because only one small business manufacturer of 
residential gas-fired pool heaters with small market share exists and 
because this company's product exceeds the proposed energy conservation 
standard levels, DOE certifies that the standards for pool heaters set 
forth in the proposed rule, if promulgated, would not have a 
significant economic impact on a substantial number of small entities 
in the gas-fired pool heater industry. Accordingly, DOE has not 
prepared a regulatory flexibility analysis for the pool heaters portion 
of this rulemaking. DOE will transmit this certification and supporting 
statement of factual basis to the Chief Counsel for Advocacy of the 
Small Business Administration for review under 5 U.S.C 605(b).
    DOE requests comment on the above analysis, as well as any 
information concerning small businesses that could be impacted by this 
rulemaking and the nature and extent of those potential impacts of the 
proposed energy conservation standards on small residential gas-fired 
pool heater manufacturers. (See Issue 20 under ``Issues on Which DOE 
Seeks Comment'' in section VII.E of this NOPR.)
3. Direct Heating Equipment Industry Characteristics
    As discussed in further detail below, DOE determined that it cannot 
certify that the proposed energy conservation standard levels for DHE, 
if promulgated, would not have a significant economic impact on a 
substantial number of small entities. This determination results from 
the large number of small DHE manufacturers and the expected impact of 
the proposed standards on these manufacturers, as well as the likely 
greater impact of the proposed standards on these small businesses.

[[Page 65986]]

Consequently, DOE has prepared an IRFA for the direct heating equipment 
portion of this rulemaking, a copy of which DOE will transmit to the 
Chief Counsel for Advocacy of the SBA for review under 5 U.S.C 605(b). 
As presented and discussed below, the IFRA describes potential impacts 
on small DHE manufacturers associated with the required capital and 
product conversion costs at each TSL and discusses alternatives that 
could minimize these impacts.
a. Description and Estimated Number of Small Entities Regulated
    After examining structure of the DHE industry, DOE determined it 
necessary to divide potential impacts on small DHE manufacturers into 
two broad categories: (1) Impacts on small manufacturers of traditional 
DHE (i.e., manufacturers of gas wall fan, gas wall gravity, gas floor, 
and gas room DHE); and (2) impacts on small manufacturers of gas hearth 
products. The IRFA presents the results for traditional DHE and gas 
hearth DHE separately to be consistent with the MIA results in section 
V.B.2.b, which also separate DHE in this manner. Traditional DHE and 
gas hearth DHE are made by different manufacturers (i.e., all 
manufacturers of gas hearth products do not manufacture traditional 
DHE, and vice versa, with one exception).
i. Traditional Direct Heating Equipment
    Three major manufacturers control almost 100 percent of the 
traditional DHE market. Two of the three major manufacturers of 
traditional DHE are small businesses. One of the small businesses 
produces only traditional DHE and has products in all four traditional 
DHE product classes (i.e., gas wall fan, gas wall gravity, gas floor, 
and gas room DHE). The second business produces all five products 
classes of DHE, including gas hearth DHE. DOE identified a third small 
business with less than a one-percent share of the traditional DHE 
market. This company offers two gas wall gravity models, but is mainly 
focused on specialty hearth products not covered by this rulemaking.
ii. Gas Hearth Direct Heating Equipment
    DOE identified 10 small manufacturers of gas hearth DHE. Before 
issuing this NOPR, DOE attempted to contact the small business 
manufacturers of gas hearth DHE. One of the small businesses consented 
to being interviewed during the MIA interviews, and DOE received 
feedback from an additional two small businesses through survey 
responses. DOE also obtained information about small business impacts 
while interviewing manufacturers that exceed the small business size 
threshold of 500 employees in this industry. Both small business 
manufacturers and large manufacturers indicated that the number of 
competitors in the market has been declining in recent years due to 
industry consolidation and smaller companies exiting the market. Three 
major domestic manufacturers now supply a majority of the marketplace. 
None of the three major manufacturers is considered a small business. 
The remainder of the market is either imported (mostly by Canadian 
companies) or produced by one of 12 domestic manufacturers that hold 
varying market shares.
b. Reasons for the Proposed Rule
    Title III of EPCA sets forth a variety of provisions designed to 
improve energy efficiency. Part A of Title III (42 U.S.C. 6291-6309) 
provides for the ``Energy Conservation Program for Consumer Products 
Other Than Automobiles.'' The program covers consumer products and 
certain commercial equipment, including residential DHE, and the 
statute directs DOE to consider new and amended energy conservation 
standards for those products. (42 U.S.C. 6292(9)) DOE is proposing in 
today's notice to amend energy conservation standards for DHE, as 
required by EPCA. (42 U.S.C. 6295(e)(4))
c. Objectives of, and Legal Basis for, the Proposed Rule
    EPCA provides criteria for prescribing new or amended standards for 
covered products and equipment. (42 U.S.C 6295(o)) As indicated above, 
any new or amended standard for the products must be designed to 
achieve the maximum improvement in energy efficiency that is 
technologically feasible and economically justified (42 U.S.C. 
6295(o)(2)(A)), although EPCA precludes DOE from adopting any standard 
that would not result in significant conservation of energy. (42 U.S.C. 
6295(o)(3)(B)) Moreover, DOE may not prescribe a standard: (1) For 
certain products, if no test procedure has been established for the 
product; or (2) if DOE determines by rule that the standard is not 
technologically feasible or economically justified. (42 U.S.C. 
6295(o)(3)) DOE's current test procedures for water heaters, vented 
DHE, and pool heaters appear at Title 10 Code of Federal Regulations 
(CFR) part 430, subpart B, appendices E, O and P, respectively. EPCA 
also provides that, in deciding whether a standard is economically 
justified, DOE must, after receiving comments on the proposed standard, 
determine whether the benefits of the standard exceed its burdens by 
considering to the greatest extent practicable seven enumerated factors 
(described in section II.B above of the preamble). (42 U.S.C. 
6295(o)(2)(B)(i))
    EPCA prescribes energy conservation standards for direct heating 
products, (42 U.S.C. 6295(e)(3)) and directs DOE to conduct two cycles 
of rulemakings to determine whether to amend these standards. (42 
U.S.C. 6295(e)(4)) This rulemaking represents the first round of 
amendments to the energy conservation standards for DHE.
d. Description and Estimate of Compliance Requirements
i. Traditional Direct Heating Equipment
    The number of manufacturers in the traditional DHE market has 
declined over the past decade and leveled off with three major 
manufacturers remaining. While DOE explicitly analyzed one 
representative input capacity range for the gas wall gravity, gas wall 
fan, gas floor, and gas room types of DHE, manufacturers offer product 
lines that typically span multiple BTU ranges with many different 
features. This can result in many individual products, or stock keeping 
units (SKUs), offered by each manufacturer per product line. The wide 
range of product offering by manufacturers is a legacy of a higher-
volume market that now typically supplies replacement units. The 
remaining manufacturers have stayed in business by consolidating brands 
and the legacy products of companies that are no longer in business to 
take increasing shares of a smaller total market. Because each product 
line is manufactured in low volumes, the discrepancy between unit 
shipments and the number of product lines requiring significant product 
and capital conversion costs results in negative impacts for all 
manufacturers. Many product development costs (e.g., testing, 
certification, and marketing) are somewhat fixed, making manufacturing 
scale an important consideration in determining whether the product 
conversion costs are economically justified. Similarly, even though any 
capital conversion costs can be capitalized over a number of years, 
these costs must be paid up front and have a large enough volume to 
justify an added per-unit cost.
    DOE calculated its capital and product conversion costs for 
traditional DHE by estimating a per-product-line

[[Page 65987]]

cost and assuming that every manufacturer would face the same per-
product-line cost within each product class. DOE also assumed that any 
product line that did not meet the efficiency level being analyzed 
would be upgraded, thereby requiring product conversion and capital 
conversion costs. DOE used public data to calculate the number of 
product lines that would need to be upgraded at each TSL for each 
product class. To show how the small businesses could be differentially 
harmed, DOE compared the conversion costs for a typical large 
manufacturer and a typical small manufacturer within the industry. To 
calculate the conversion costs for a typical small manufacturer and a 
typical large manufacturer, DOE used publicly-available information to 
determine the average number of product lines that met each efficiency 
level in each product category for a typical small manufacturer and a 
typical large manufacturer of traditional DHE. For both small and 
large, DOE multiplied the number of product lines that fell below the 
required efficiency level by its estimate of the per-line capital and 
product conversion cost. Table VI.8 and Table VI.9 show DOE's estimates 
for the average number of product lines at each TSL for a typical small 
manufacturer and a typical large manufacturer of traditional DHE, 
respectively.

                                           Table VI.8--Number of Product Lines of a Typical Small Manufacturer
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Number of gas wall
                                                      Number of gas wall     gravity-type        Number of gas    Number of gas room-    Total product
                                                       fan-type product    product lines at   floor-type product  type product lines     lines for all
                                                       lines at each TSL       each TSL        lines at each TSL      at each TSL       product classes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline............................................                 2                  *1.5                 0.5                 1                   5
TSL 1...............................................                 0                   1                   0.5                 0.5                 2
TSL 2...............................................                 1                   0.5                 0.5                 0.5                 2.5
TSL 3...............................................                 0.5                 0                   0.5                 0                   1
TSL 4...............................................                 1                   0                   0.5                 0                   1.5
TSL 5...............................................                 0                   1                   0.5                 0                   1.5
TSL 6...............................................                 1                   1                   0.5                 0                   2.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Fractions of product lines result from taking the average number of product lines from publicly-available information.


                                            Table VI.9--Number of Product Lines of Typical Large Manufacturer
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Number of gas wall
                                                      Number of gas wall     gravity-type        Number of gas    Number of gas room-    Total product
                                                       fan-type product    product lines at   floor-type product  type product lines     lines for all
                                                       lines at each TSL       each TSL        lines at each TSL      at each TSL       product classes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline............................................                   1                   0                   1                   0                   2
TSL 1...............................................                   1                   1                   1                   0                   3
TSL 2...............................................                   2                   3                   1                   0                   6
TSL 3...............................................                   2                   0                   1                   1                   4
TSL 4...............................................                   0                   0                   1                   1                   2
TSL 5...............................................                   1                   0                   1                   0                   2
TSL 6...............................................                   0                   0                   1                   0                   1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Amended energy conservation standards have the potential to 
differentially affect the small businesses, because they generally lack 
the large-scale resources to alter their existing products and 
production facilities for those TSLs requiring major redesigns. While 
all manufacturers would be expected to be negatively impacted by 
amended energy conservation standards to varying degrees, the small 
businesses would face higher product conversion costs at lower TSLs 
than their large competitor. Both large and small manufacturers have 
several product offerings in each product class, sometimes at varying 
efficiency levels, but the larger manufacturer produces products with 
higher efficiencies in larger volumes. As a result, the small 
manufacturers would have to upgrade more product lines than the large 
manufacturer at lower TSLs. As shown in Table VI.10 and Table VI.11, 
modifying facilities and developing new, more-efficient products would 
cause a typical small manufacturer to incur higher product conversion 
costs than a typical larger manufacturer for TSL 1 through TSL 5.

  Table VI.10--Total Conversion Costs for a Typical Small Manufacturer of Traditional Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                      Capital conversion  Product conversion   Total conversion
                                                          costs for a         costs for a         costs for a
                                                         typical small       typical small       typical small
                                                         manufacturer        manufacturer        manufacturer
                                                       (2008$ millions)    (2008$ millions)    (2008$ millions)
----------------------------------------------------------------------------------------------------------------
Baseline............................................                0                   0                   0
TSL 1...............................................                0.58                0.29                0.86
TSL 2...............................................                1.03                0.44                1.47
TSL 3...............................................                1.61                0.69                2.31
TSL 4...............................................                1.89                0.80                2.69
TSL 5...............................................                1.57                1.20                2.77
TSL 6...............................................                2.13                1.40                3.53
----------------------------------------------------------------------------------------------------------------


[[Page 65988]]


  Table VI.11--Total Conversion Costs for a Typical Large Manufacturer of Traditional Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                      Capital conversion  Product conversion   Total conversion
                                                          costs for a         costs for a         costs for a
                                                         typical large       typical large       typical large
                                                         manufacturer        manufacturer        manufacturer
                                                       (2008$ millions)    (2008$ millions)    (2008$ millions)
----------------------------------------------------------------------------------------------------------------
Baseline............................................                0                   0                   0
TSL 1...............................................                0.05                0.06                0.11
TSL 2...............................................                0.31                0.15                0.46
TSL 3...............................................                1.24                0.54                1.77
TSL 4...............................................                1.82                0.77                2.59
TSL 5...............................................                1.52                1.08                2.60
TSL 6...............................................                2.49                1.47                3.96
----------------------------------------------------------------------------------------------------------------

    Because the larger manufacturer offers more products at higher 
efficiencies, a typical small manufacturer faces disproportionate costs 
at the lower TSLs in absolute terms at TSL 1 through TSL 5. However, at 
TSL 4 through TSL 6 a typical small manufacturer and a typical large 
manufacturer face similar product and capital conversion costs because 
a similar number of product lines fall below the required efficiencies. 
Despite being similar in absolute terms, at these TSLs the small 
manufacturers would be more likely to be disproportionately harmed at 
any TSL because they have a much lower volume across which to spread 
similar costs. To show how a smaller scale would harm a typical small 
business manufacturer, DOE used estimates of the market shares within 
the industry for each product class to estimate the typical annual 
revenue, operating profit, research and development expense, and 
capital expenditures for a typical large manufacturer and a typical 
small manufacturer using the financial parameters in the DHE GRIM. 
Comparing the conversion costs of a typical small manufacturer to a 
typical large manufacturer with operating profit (earnings before 
interest and taxation (EBIT)) is a rough estimate of how quickly the 
investments could be recouped. Table VI.12 and Table VI.13 show these 
comparisons.

   Table VI.12--Comparison of a Typical Small Manufacturer's Conversion Costs to Annual Expenses, Revenue, and
                                                Operating Profit
----------------------------------------------------------------------------------------------------------------
                                           Capital
                                       conversion cost        Product        Total conversion   Total conversion
                                       as a  percentage   conversion cost       cost as a          cost as a
                                      of annual capital   as a percentage     percentage of      percentage of
                                         expenditures      of annual R&D      annual revenue      annual EBIT
                                          (percent)      expense (percent)      (percent)          (percent)
----------------------------------------------------------------------------------------------------------------
Baseline............................  .................  .................  .................  .................
TSL 1...............................                170                128                  6                163
TSL 2...............................                242                155                  8                221
TSL 3...............................                378                245                 12                347
TSL 4...............................                443                283                 14                404
TSL 5...............................                367                425                 15                416
TSL 6...............................                499                495                 19                531
----------------------------------------------------------------------------------------------------------------


   Table VI.13--Comparison of a Typical Large Manufacturer's Conversion Costs to Annual Expenses, Revenue, and
                                                Operating Profit
----------------------------------------------------------------------------------------------------------------
                                           Capital
                                       conversion cost        Product        Total conversion   Total conversion
                                       as a percentage    conversion cost       cost as a          cost as a
                                      of annual capital   as a percentage     percentage of      percentage of
                                         expenditures      of annual R&D      annual revenue      annual EBIT
                                          (percent)      expense (percent)      (percent)          (percent)
----------------------------------------------------------------------------------------------------------------
Baseline............................  .................  .................  .................  .................
TSL 1...............................                  7                 12                  0                 10
TSL 2...............................                 42                 30                  1                 40
TSL 3...............................                167                110                  5                154
TSL 4...............................                246                158                  8                225
TSL 5...............................                206                220                  8                225
TSL 6...............................                337                300                 12                344
----------------------------------------------------------------------------------------------------------------

    Table VI.12 and Table VI.13 illustrate that, although the 
investments required at each TSL can be considered substantial for all 
companies, the impacts could be greater for a typical small business 
because of much lower production volumes and a comparable number of 
product offerings. At higher TSLs, it is more likely that manufacturers 
of traditional DHE would reduce the number of product lines they offer 
to keep their conversion costs at manageable levels. At higher TSLs, 
small manufacturers would face increasingly difficult decisions on

[[Page 65989]]

whether to invest the capital required to be able to continue offering 
a full range of products, cut product lines, consolidate to maintain a 
large enough combined scale to spread the required conversion costs and 
operating expenses, or exit the market altogether. Because of the high 
conversion costs, manufacturers would likely eliminate their lower-
volume product lines. Small manufacturers might only be able to afford 
to selectively upgrade their most popular products and be forced to 
discontinue lower-volume products because the product development costs 
that would be required to upgrade all of their existing product lines 
would be too high.
    DOE's product line analysis reveals the potential for small 
businesses to be disproportionately harmed by the proposed standard 
levels and higher TSLs. Small traditional direct heating manufacturers 
have less access to capital than their larger competitor. Larger 
manufacturers profit from offering a variety of products and have the 
ability to fund required capital and product conversion costs using 
cash generated from all products. Unlike large manufacturers, the small 
manufacturers cannot leverage resources from other departments. With 
these considerations, it is more likely that the small businesses would 
have to spend an even greater proportion of their annual R&D and 
capital expenditures than shown in the industry-wide figures.
    In addition, small manufacturers have less buying power than their 
larger competitor. Traditional DHE is a low-volume industry, which can 
make it difficult for any manufacturer to take advantage of bulk 
purchasing power or economies of scale. The two small businesses have 
approximately half the market share of their large competitor, which 
puts them at a disadvantage when purchasing components and raw 
materials. In addition, the large manufacturer has a parent company 
that manufactures products and equipment other than traditional DHE. 
This manufacturer's larger scale and additional manufacturing capacity 
(required for products and equipment other than DHE) also give the 
company more leverage with its suppliers as it purchases greater 
volumes of components and raw materials. During the manufacturer 
interviews, the small businesses commented that to comply with amended 
energy conservation standards, they would likely need to buy more 
purchased parts instead of producing most of the final product in-
house. Because the large manufacturer has an advantage in purchasing 
power that would likely allow it to buy purchased parts at lower costs, 
an amended energy conservation standard that requires more purchased 
parts may differentially harm the profitability of the small 
businesses.
    Even though there is a potential for small businesses to be 
negatively impacted by the proposed standards, DOE believes that 
manufacturers, including the small businesses, would be able to 
maintain viable number of product offerings at TSL 3, the proposed 
standard level. A typical small business offers product families in 
three out of the four product types that would meet or exceed the 
proposed standard levels in today's NOPR. For example, products are 
currently available on the market at the proposed standard level for 
gas wall gravity DHE, which comprise over 60 percent of the traditional 
DHE market. The proposed standard levels do not require manufacturers, 
including those that are small, to completely redesign all their 
product lines. For those product lines that would need to be 
redesigned, DOE believes that small manufacturers would offer fewer 
product lines after amended energy conservation standards. However, DOE 
believes that the proposed standards would allow the small 
manufacturers to selectively upgrade their existing product lines and 
maintain viable production volumes after the compliance date of the 
amended energy conservation standards. DOE seeks comment on the 
potential impacts of amended standards on the small traditional DHE 
manufacturers. (See Issue 21 and 22 under ``Issues on Which DOE Seeks 
Comment'' in section VII.E of this NOPR.)
ii. Gas Hearth-Type Direct Heating Equipment
    While the three large manufacturers have a larger product offering 
than the smaller manufacturers, both small and large manufacturers 
typically offer a wide range of covered gas hearth DHE. During 
interviews, manufacturers indicated that product lines typically are 
not based on efficiency. Rather, product lines are groups of gas 
stoves, gas inserts, or gas fireplaces with similar appearances and 
shapes that span input ratings to appeal to a range of customers with 
different heating and aesthetic requirements. A product line is 
typically built on the same production platform and shares many of the 
same appearance and optional features. However, because products lines 
are based on appearance, features, and dimensions, product lines do not 
necessarily have the same efficiency across all input capacities.
    DOE calculated the anticipated capital and product development 
costs for gas hearth DHE by estimating per-line cost. DOE used 
certification databases, product catalogs, interviews with 
manufacturers, and sources of public information to estimate the number 
of product lines that meet each TSL for every gas hearth DHE 
manufacturer for which data was available. If a product line contained 
several products that met different efficiencies at different 
capacities, DOE assumed that the product line would be redesigned in 
response to amended energy conservation standards whenever the least-
efficient product did not meet the required efficiency level.
    To show how small manufacturers would be potentially impacted 
compared to the large manufacturers, DOE assumed that the entire gas 
hearth DHE industry was comprised of the 12 manufacturers identified in 
the market and technology assessment (see chapter 3 of the TSD for more 
information). Using all available public data, DOE then identified the 
product lines and the efficiency levels for each product line made by 
these manufacturers. DOE used this information calculate the product 
line offerings of a ``typical'' large manufacturer and small 
manufacturer. Table VI.14 and Table VI.15 show DOE's estimates for the 
product lines of a typical small and a typical large gas hearth 
manufacturer.

  Table VI.14--Number of Product Lines of a Typical Small Manufacturer
------------------------------------------------------------------------
                                                            Number of
                                       AFUE (percent)     product lines
------------------------------------------------------------------------
Baseline............................                64                 5
TSL 1, 2, and 3.....................                67                 3
TSL 4 and 5.........................                72                 1
TSL 6...............................                93                 0
------------------------------------------------------------------------


[[Page 65990]]


   Table VI.15--Number of Product Lines of Typical Large Manufacturer
------------------------------------------------------------------------
                                                            Number of
                                       AFUE (percent)     product lines
------------------------------------------------------------------------
Baseline............................                64                 8
TSL 1, 2, and 3.....................                67                 6
TSL 4 and 5.........................                72                 3
TSL 6...............................                93                 0
------------------------------------------------------------------------

    Table VI.14 shows that a typical small manufacturer currently 
offers nine total product lines: 5 at baseline efficiency (i.e., 64 
percent AFUE), 3 at 67 percent AFUE, and 1 at 72 percent AFUE. Table 
VI.14 suggests that a typical small manufacturer would need to upgrade 
up to five product lines at TSL 1 through TSL 3, up to eight product 
lines at TSL 4 and TSL 5, and up to nine at TSL 6. Table VI.15 shows 
that a typical large manufacturer currently offers 17 total product 
lines: Eight at the baseline (64 percent AFUE), six at 67 percent AFUE, 
and three at 72 percent AFUE. Table VI.15 suggests that a typical large 
manufacturer would upgrade up to eight product lines at TSL 1 through 
TSL 3, up to 14 product lines at TSL 4 and TSL 5, and up to 17 at TSL 
6. However, DOE recognizes that not all manufacturers of gas hearth DHE 
currently report the efficiency of their products using the DOE test 
procedure, and as a result they may offer products at other 
efficiencies. DOE requests comment on its characterization of a typical 
large and a typical small gas hearth DHE manufacturer. (See Issue 23 
under ``Issues on Which DOE Seeks Comment'' in section VII.E of this 
NOPR.)
    To calculate the capital and product conversion costs for a typical 
large and a typical small manufacturer, DOE multiplied its estimate of 
the per-product-line capital and product conversion costs by the number 
of product lines a typical large and a typical small manufacturer would 
need to upgrade at each TSL. As described in section IV.H.2 above, DOE 
assumed manufacturers would only upgrade fifty percent of their 
existing product lines that did not meet the required efficiencies at 
each TSL for gas hearth DHE. Table VI.16 and Table VI.17 show DOE's 
estimates for the product and capital conversion costs that a typical 
large manufacturer and a typical small manufacturer would be expected 
to incur at each TSL.

   Table VI.16--Total Conversion Costs for a Typical Small Manufacturer of Gas Hearth Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                                 Capital           Product
                                                            conversion costs  conversion costs  Total conversion
                                                              for a typical     for a typical      costs for a
                                                                  small             small         typical small
                                                              manufacturer      manufacturer      manufacturer
----------------------------------------------------------------------------------------------------------------
Baseline..................................................  ................  ................  ................
TSL 1, 2, and 3...........................................           $25,000           $66,667           $91,667
TSL 4 and 5...............................................            75,000           200,000           275,000
TSL 6.....................................................           400,000           800,000         1,200,000
----------------------------------------------------------------------------------------------------------------


   Table VI.17--Total Conversion Costs for a Typical Large Manufacturer of Gas Hearth Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                                 Capital           Product
                                                            conversion costs  conversion costs  Total conversion
                                                              for a typical     for a typical      costs for a
                                                                  large             large         typical large
                                                              manufacturer      manufacturer      manufacturer
----------------------------------------------------------------------------------------------------------------
Baseline..................................................  ................  ................  ................
TSL 1, 2, and 3...........................................           $50,000          $133,333          $183,333
TSL 4 and 5...............................................           125,000           333,333           458,333
TSL 6.....................................................           800,000         1,600,000         2,400,000
----------------------------------------------------------------------------------------------------------------

    Because a typical large manufacturer has significantly higher 
market shares and a greater number product lines, a large manufacturer 
would have higher conversion costs on an absolute basis than a typical 
small manufacturer. However, at every TSL, a typical small business 
manufacturer could be disproportionately impacted. To show how a much 
smaller manufacturing scale could harm small business manufacturers as 
compared to large manufacturers, DOE used the market share of a typical 
large manufacturer and a typical small manufacturer to estimate the 
annual revenue, EBIT, R&D expense, and capital expenditures for a 
typical large and typical small manufacturer. DOE then compared these 
costs to the required capital and product conversion costs at each TSL 
for a typical large and typical small manufacturer. Table VI.18 through 
Table VI.19 show these comparisons.

[[Page 65991]]



 Table VI.18--Comparison of a Typical Small Gas Hearth Direct Heating Equipment Manufacturer's Conversion Costs
                                     to Annual Expenses, Revenue, and Profit
----------------------------------------------------------------------------------------------------------------
                                               Capital
                                           conversion cost       Product      Total conversion  Total conversion
                                           as a percentage   conversion cost      cost as a         cost as a
                                              of annual      as a percentage    percentage of     percentage of
                                               capital        of annual R&D    annual revenue      annual EBIT
                                            expenditures         expense          (percent)         (percent)
                                              (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
Baseline................................  ................  ................  ................                 -
TSL 1, 2, and 3.........................              33.2             141.8               2.9              83.0
TSL 4 and 5.............................              99.7             425.5               8.8             248.9
TSL 6...................................             531.9           1,702.2              38.3           1,086.2
----------------------------------------------------------------------------------------------------------------


  Table VI.19--Comparison of a Typical Large Gas Hearth-Type Direct Heating Equipment Manufacturer's Conversion
                                  Costs to Annual Expenses, Revenue, and Profit
----------------------------------------------------------------------------------------------------------------
                                               Capital
                                           conversion cost       Product      Total conversion  Total conversion
                                           as a percentage   conversion cost      cost as a         cost as a
                                              of annual      as a percentage    percentage of     percentage of
                                               capital        of annual R&D    annual revenue      annual EBIT
                                            expenditures         expense          (percent)         (percent)
                                              (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
Baseline................................  ................  ................  ................  ................
TSL 1, 2, and 3.........................               3.2              13.5               0.3               7.9
TSL 4 and 5.............................               7.9              33.8               0.7              19.8
TSL 6...................................              50.7             162.1               3.6             103.4
----------------------------------------------------------------------------------------------------------------

    DOE's product line analysis illustrates that small businesses have 
the potential to be differentially impacted by any amended energy 
conservation standard because the small businesses have a 
disproportionate number of product lines relative to their much smaller 
scale. For TSLs 4, 5 and 6, amended energy conservation standards could 
force a typical small business to hire additional engineers, 
discontinue product lines, or selectively upgrade more popular products 
with their present limited engineering and product development 
resources. Because the annual shipments of small manufacturers are 
several times lower than those of major manufacturers and small 
manufacturers typically only manufacture gas hearth DHE, small 
companies have less buying power than their larger competitors. The 
much larger production volumes of large manufacturers give them more 
leverage to negotiate lower prices with component and material 
suppliers. Because these conversion costs are more substantial relative 
to the size of a typical small business, large manufacturers could take 
additional market share from small manufacturers at TSL 4 through TSL 
6. Because TSLs 4 and 5 require additional plant modifications, the 
added conversion costs make it more likely that small manufacturers 
could discontinue some of their least popular product lines at TSL 4 
and TSL 5. At TSL 6, the substantial conversion costs could cause even 
a large manufacturer to potentially decide to offer fewer product 
lines, to bring down the significant product conversion costs. 
Consequently, it is increasingly likely that higher conversion costs 
could cause many small businesses to exit the market or become severely 
constrained with the number of product lines offered at TSLs 4, 5, and 
6.
    At TSLs 1 through 3, a typical small manufacturer would not face 
prohibitively large conversion costs to meet the amended energy 
conservation standards. At these TSLs, the amended energy conservation 
standards could be met with products that use electric ignition, which 
is not particularly capital intensive. These changes would also not 
require significant investments in product development costs by small 
businesses. The most substantial portion of the conversion costs at 
TSLs 1 through 3 would be testing, recertifying, and remarketing all 
the existing product lines that currently meet the baseline 
efficiencies. In addition, at TSL 1 through TSL 3, it is likely that 
small manufacturers would not discontinue a large number of product 
lines to lower product and capital conversion costs because these costs 
are not substantial. A typical small manufacturer has multiple product 
lines that meet and exceed the required efficiencies at TSL 3. Also, 
the proposed standard levels do not require manufacturers to 
substantially redesign product lines that fall below TSL 3.
    DOE's analysis indicates that a typical small manufacturer of gas 
hearth DHE already offers multiple product lines that meet and exceed 
the required efficiencies at TSL 3, the proposed energy conservation 
standard. In addition, the proposed standard levels do not require 
substantial redesign to existing product lines that do not meet the 
proposed TSL 3. Because most of the product lines that do not meet the 
proposed TSL could be upgraded with relatively minor changes, DOE 
believes that manufacturers, including the small businesses, will be 
able to maintain a viable number of product offerings at the proposed 
standard level. DOE seeks comment on the potential impacts on the small 
gas hearth DHE manufacturers. (See Issue 24 under ``Issues on Which DOE 
Seeks Comment'' in section VII.E of this NOPR.)
e. Duplication, Overlap, and Conflict With Other Rules and Regulations
    DOE is not aware of any rules or regulations that duplicate, 
overlap, or conflict with the rule being considered today.
f. Significant Alternatives to the Proposed Rule
    The discussion above analyzes impacts on small businesses that 
would result from the other TSLs DOE considered. Though TSLs lower than 
the proposed TSLs are expected to reduce the impacts on small entities, 
DOE is required by EPCA to establish standards that achieve the maximum

[[Page 65992]]

improvement in energy efficiency that are technically feasible and 
economically justified, and result in a significant conservation of 
energy. Thus DOE rejected the lower TSLs.
    In addition to the other TSLs being considered, the NOPR TSD 
includes a regulatory impact analysis. For DHE, this report discusses 
the following policy alternatives: (1) No standard, (2) consumer 
rebates, (3) consumer tax credits, (4) manufacturer tax credits, and 
(5) early replacement. While these alternatives may mitigate the 
economic impacts on small entities compared to the proposed standards, 
the energy savings of these regulatory alternatives are at least four 
times smaller than those expected from the proposed standard levels. 
Thus, DOE rejected these alternatives and is proposing the standards 
set forth in this rulemaking.
    DOE continues to seek input from businesses that would be affected 
by this rulemaking and will consider comments received in the 
development of any final rule.

C. Review Under the Paperwork Reduction Act of 1995

    This rule contains a collection-of-information requirement subject 
to the Paperwork Reduction Act (PRA) which has been approved by OMB 
under control number 1910-1400. Public reporting burden for compliance 
reporting for energy and water conservation standards is estimated to 
average 30 hours per response, including the time for reviewing 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. Send comments regarding this burden 
estimate, or any other aspect of this data collection, including 
suggestions for reducing the burden, to DOE (see ADDRESSES) and by e-
mail to [email protected].
    Notwithstanding any other provision of the law, no person is 
required to respond to, nor shall any person be subject to a penalty 
for failure to comply with, a collection of information subject to the 
requirements of the PRA, unless that collection of information displays 
a currently valid OMB Control Number.

D. Review Under the National Environmental Policy Act of 1969

    DOE has prepared a draft environmental assessment (EA) of the 
impacts of the proposed rule, pursuant to the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321 et seq.), the regulations of the 
Council on Environmental Quality (40 CFR parts 1500-1508), and DOE's 
regulations for compliance with the National Environmental Policy Act 
(10 CFR part 1021). This assessment includes an examination of the 
potential effects of emission reductions likely to result from the rule 
in the context of global climate change, as well as other types of 
environmental impacts. The draft EA has been incorporated into the TSD. 
Before issuing a final rule for the three type of heating products, DOE 
will consider public comments and, as appropriate, determine whether to 
issue a finding of no significant impact (FONSI) as part of a final EA 
or to prepare an environmental impact statement (EIS) for this 
rulemaking.

E. Review Under Executive Order 13132

    Executive Order 13132, ``Federalism,'' 64 FR 43255 (August 4, 1999) 
imposes certain requirements on agencies formulating and implementing 
policies or regulations that preempt State law or that have Federalism 
implications. The Executive Order requires agencies to examine the 
constitutional and statutory authority supporting any action that would 
limit the policymaking discretion of the States and to carefully assess 
the necessity for such actions. The Executive Order also requires 
agencies to have an accountable process to ensure meaningful and timely 
input by State and local officials in the development of regulatory 
policies that have Federalism implications. On March 14, 2000, DOE 
published a statement of policy describing the intergovernmental 
consultation process it will follow in the development of such 
regulations. 65 FR 13735. DOE has examined today's proposed rule and 
has determined that it would not have a substantial direct effect on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. EPCA governs and prescribes Federal 
preemption of State regulations as to energy conservation for the 
products that are the subject of today's proposed rule. States can 
petition DOE for exemption from such preemption to the extent, and 
based on criteria, set forth in EPCA. (42 U.S.C. 6297(d)) No further 
action is required by Executive Order 13132.

F. Review Under Executive Order 12988

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

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) (UMRA) requires each Federal agency to assess the effects of Federal 
regulatory actions on State, local, and Tribal governments and the 
private sector. For a proposed regulatory action likely to result in a 
rule that may cause the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector of $100 million 
or more in any one year (adjusted annually for inflation), section 202 
of UMRA requires a Federal agency to publish a written statement that 
estimates the resulting costs, benefits, and other effects of the rule 
on the national economy. (2 U.S.C. 1532(a),(b)) The UMRA also requires 
a Federal agency to develop an effective process to permit timely input 
by elected officers of State, local, and Tribal governments on a 
proposed ``significant intergovernmental mandate,'' and requires an 
agency plan for giving notice and opportunity for timely input to 
potentially affected small governments before establishing any 
requirements that might significantly or uniquely affect small 
governments. On March 18, 1997, DOE published a statement of policy on 
its process for intergovernmental consultation under UMRA (62 FR 12820) 
(also available at http://

[[Page 65993]]

www.gc.doe.gov). Although today's proposed rule does not contain a 
Federal intergovernmental mandate, it may impose expenditures of $100 
million or more on the private sector.
    Today's proposed rule would likely result in a final rule that 
could impose expenditures of $100 million or more between 2013 and 2045 
in the residential sector. Therefore, DOE must publish a written 
statement assessing the costs, benefits, and other effects of the rule 
on the national economy. Section 205 of UMRA also requires DOE to 
identify and consider a reasonable number of regulatory alternatives 
before promulgating a rule for which UMRA requires such a written 
statement. DOE must select from those alternatives the most cost-
effective and least burdensome alternative that achieves the objectives 
of the rule, unless DOE publishes an explanation for doing otherwise or 
the selection of such an alternative is inconsistent with law.
    As required by EPCA (42 U.S.C. 6295(o)), today's proposed energy 
conservation standards for the three types of heating products would 
achieve the maximum improvement in energy efficiency that DOE has 
determined to be both technologically feasible and economically 
justified. DOE may not select a regulatory alternative that does not 
meet this statutory standard. A full discussion of the alternatives 
considered by DOE is presented in the ``Regulatory Impact Analysis'' 
section of the TSD for this proposed rule. Also, section 202(c) of UMRA 
authorizes an agency to prepare the written statement required by UMRA 
in conjunction with or as part of any other statement or analysis that 
accompanies the proposed rule. (2 U.S.C. 1532(c)) The TSD, preamble, 
and regulatory impact analysis for today's proposed rule contain a full 
discussion of the rule's costs, benefits, and other effects on the 
national economy, and, therefore satisfy UMRA's written statement 
requirement.

H. Review Under the Treasury and General Government Appropriations Act, 
1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any rule that may affect family well-being. 
This rule would not have any impact on the autonomy or integrity of the 
family as an institution. Accordingly, DOE has concluded that it is not 
necessary to prepare a Family Policymaking Assessment.

I. Review Under Executive Order 12630

    DOE has determined under Executive Order 12630, ``Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights,'' 53 FR 8859 (March 18, 1988), that this regulation would not 
result in any takings that might require compensation under the Fifth 
Amendment to the U.S. Constitution.

J. Review Under the Treasury and General Government Appropriations Act, 
2001

    Section 515 of the Treasury and General Government Appropriations 
Act, 2001 (44 U.S.C. 3516 note) provides for agencies to review most 
disseminations of information to the public under guidelines 
established by each agency pursuant to general guidelines issued by 
OMB. OMB's guidelines were published at 67 FR 8452 (Feb. 22, 2002), and 
DOE's guidelines were published at 67 FR 62446 (Oct. 7, 2002). DOE has 
reviewed today's notice under the OMB and DOE guidelines and has 
concluded that it is consistent with applicable policies in those 
guidelines.

K. Review Under Executive Order 13211

    Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use,'' 66 FR 28355 
(May 22, 2001), requires Federal agencies to prepare and submit to OIRA 
at OMB, a Statement of Energy Effects for any proposed significant 
energy action. A ``significant energy action'' is defined as any action 
by an agency that promulgates or is expected to lead to promulgation of 
a final rule, and that: (1) Is a significant regulatory action under 
Executive Order 12866, or any successor order; and (2) is likely to 
have a significant adverse effect on the supply, distribution, or use 
of energy; or (3) is designated by the Administrator of OIRA as a 
significant energy action. For any proposed significant energy action, 
the agency must give a detailed statement of any adverse effects on 
energy supply, distribution, or use should the proposal be implemented, 
and of reasonable alternatives to the action and their expected 
benefits on energy supply, distribution, and use.
    DOE has tentatively concluded that today's regulatory action, which 
sets forth energy conservation standards for three types of heating 
products, is not a ``significant energy action'' because the proposed 
standards are not likely to have a significant adverse effect on the 
supply, distribution, or use of energy, nor has it been designated as 
such by the Administrator at OIRA. Therefore, DOE has not prepared a 
Statement of Energy Effects on the proposed rule.

L. Review Under the Information Quality Bulletin for Peer Review

    On December 16, 2004, OMB, in consultation with the Office of 
Science and Technology (OSTP), issued its ``Final Information Quality 
Bulletin for Peer Review'' (the Bulletin). 70 FR 2664 (Jan. 14, 2005). 
The Bulletin establishes that certain scientific information shall be 
peer reviewed by qualified specialists before it is disseminated by the 
Federal government, including influential scientific information 
related to agency regulatory actions. The purpose of the Bulletin is to 
enhance the quality and credibility of the government's scientific 
information. Under the Bulletin, the energy conservation standards 
rulemaking analyses are ``influential scientific information,'' which 
the Bulletin defines as ``scientific information the agency reasonably 
can determine will have, or does have, a clear and substantial impact 
on important public policies or private sector decisions.'' 70 FR 2664, 
2667 (Jan. 14, 2005).
    In response to OMB's Bulletin, DOE conducted formal in-progress 
peer reviews of the energy conservation standards development process 
and analyses, and has prepared a Peer Review Report on the energy 
conservation standards rulemaking analyses. Generation of this report 
involved a rigorous, formal, and documented evaluation using objective 
criteria and qualified and independent reviewers to make a judgment as 
to the technical/scientific/business merit, the actual or anticipated 
results, and the productivity and management effectiveness of programs 
and/or projects. The ``Energy Conservation Standards Rulemaking Peer 
Review Report'' dated February 2007 has been disseminated and is 
available at the following Web site: http://www1.eere.energy.gov/buildings/appliance_standards/peer_review.htm.

VII. Public Participation

A. Public Meeting

    The time, date and location of the public meeting are listed in the 
DATES and ADDRESSES sections at the beginning of this document. To 
attend the public meeting, please notify Ms. Brenda Edwards at (202) 
586-2945 or [email protected]. As explained in the ADDRESSES 
section, foreign nationals visiting DOE Headquarters are subject to 
advance security screening procedures.

[[Page 65994]]

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. 
Such persons may 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 in the ADDRESSES section at the 
beginning of this NOPR between the hours of 9 a.m. and 4 p.m., Monday 
through Friday, except Federal holidays. Requests may also be sent by 
mail, or by e-mail to: [email protected].
    Persons requesting an opportunity to speak should briefly describe 
the nature of their interest in this rulemaking and provide a telephone 
number for contact. DOE requests persons scheduled to make an oral 
presentation to submit an advance copy of their statements at least one 
week before the public meeting. At its discretion, DOE may permit any 
person 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

    DOE 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 section 336 of EPCA. (42 U.S.C. 
6306) A court reporter will be present to record the proceedings and to 
prepare a transcript. DOE 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. DOE 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. DOE 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 from DOE and from other participants concerning these issues. 
DOE representatives may also ask questions of participants concerning 
other matters relevant to this rulemaking. 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.
    DOE will make the entire record of this proposed rulemaking, 
including the transcript from the public meeting, available for 
inspection at the U.S. Department of Energy, Resource Room of the 
Building Technologies Program, 950 L'Enfant Plaza, SW., Washington, DC 
20024, (202) 586-2945, between 9 a.m. and 4 p.m., Monday through 
Friday, except Federal holidays.

D. Submission of Comments

    DOE will accept comments, data, and other information on the 
proposed rule before or after the public meeting, but no later than the 
date provided at the beginning of this NOPR. Comments, data, and other 
information submitted to DOE's e-mail address for this rulemaking 
should be provided in WordPerfect, Microsoft Word, PDF, or text (ASCII) 
file format. Interested parties should avoid the use of special 
characters or any form of encryption and, wherever possible, comments 
should carry the electronic signature of the author. Comments, data, 
and information submitted to DOE via mail or hand delivery/courier 
should include one signed original paper copy. No telefacsimiles 
(faxes) will be accepted.
    According 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. DOE 
will make its own determination about the confidential status of the 
information and treat it according to its determination.
    Factors of interest to DOE 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

    DOE is particularly interested in receiving comments and views of 
interested parties concerning the following issues:
    1. The max-tech efficiency levels identified for the analyses, 
including whether the efficiency levels identified by DOE can be 
achieved using the technologies screened-in during the screening 
analysis (see section IV.B), and whether higher efficiencies are 
achievable using technologies that were screened-in during the 
screening analysis.
    2. The potential burdens to manufacturers of hearth-type DHE as a 
result of the testing, certification, reporting, and enforcement 
provisions.
    3. EPCA's efficiency descriptor requirements in any potential test 
procedure revisions for electric pool heaters.
    4. DOE's proposed definition for vented hearth heaters.
    5. DOE's product classes for water heaters. In particular, DOE is 
seeking comment about the need for a separate product class for low-boy 
water heaters.
    6. DOE's approach for analyzing ultra-low NOX gas-fired 
storage water heaters and the need for a separate product class.
    7. DOE's approach to developing the energy efficiency equations, 
the appropriate slope of energy efficiency equations at each efficiency 
level analyzed, and the appropriate storage volumes for changing the 
slope of the line. DOE is also interested in any alternatives to the 
energy efficiency equations that DOE should consider for the final 
rule.
    8. The need for a separate product class for heat pump water 
heaters. Specifically, DOE is interested in receiving comments on 
whether a heat pump water heater can be used as a direct replacement 
for an electric resistance water heater, and the types and frequency of 
instances a heat pump water heater cannot be used as a direct

[[Page 65995]]

replacement for an electric resistance water heater.
    9. DOE's proposed product classes for the four existing types of 
DHE.
    10. DOE's proposed product class divisions for gas hearth DHE.
    11. The manufacturability of heat pump water heaters and the 
capability of manufacturers to ramp up production of heat pump water 
heaters. Specifically, DOE is seeking comment on how long it would take 
and the magnitude of the costs for manufacturers to convert all product 
lines to heat pump water heaters if it were required by an amended 
energy conservation standard. In addition, DOE is seeking comment about 
the length of time required to retrain installers and servicers of 
water heaters for the installation and servicing of heat pump water 
heaters.
    12. DOE's estimated manufacturer production costs for storage water 
heaters at storage volumes outside of the representative volume.
    13. DOE's analysis of installation costs for water heaters. DOE is 
particularly interested in comments on its analysis of installation 
costs for heat pump water heaters.
    14. DOE's analysis of repair and maintenance costs for heat pump 
water heaters.
    15. DOE's approach for analyzing fuel switching that may result 
from the proposed standards on water heaters and the other heating 
products. In particular, DOE requests comments on its general approach, 
which does not involve price elasticities; its analysis of switching to 
gas-fired storage water heaters in the case of a standard that 
effectively requires an electric heat pump water heater; its conclusion 
that the proposed standards would not induce switching from a gas 
storage water heater to an electric storage water heater; and its 
conclusion that the proposed standards would not induce switching for 
gas-fired instantaneous water heaters, DHE, and pool heaters.
    16. DOE's consideration of TSL 6 in the final rule for residential 
water heaters and the associated issues DOE has identified surrounding 
heat pump water heaters.
    17. DOE's consideration of TSL 5 in the final rule for residential 
water heaters and the associated issues DOE has identified surrounding 
standards that effectively require different technologies for different 
subsets of products.
    18. The appropriateness of TSL 4 for residential pool heaters in 
light of the negative life cycle costs for a majority of consumers. In 
addition, DOE's consideration of other TSLs, including TSL 3, as an 
alternative for the final standard level.
    19. The impacts of the proposed amended energy conservation 
standards on small manufacturers of residential water heaters.
    20. The impacts of the proposed amended energy conservation 
standards on small manufacturers of gas-fired residential pool heaters.
    21. The impacts of the proposed amended energy conservation 
standards on small manufacturers of traditional DHE. DOE is interested 
in specific information regarding the potential for small manufacturers 
of traditional DHE to discontinue particular product lines as a result 
of the proposed standard, as well as the potential economic effect 
discontinuing those particular product lines would have on small 
manufacturers of traditional DHE.
    22. Alternatives to the proposed amended energy conservation 
standards for traditional DHE. Specifically, DOE is interested in 
information regarding alternatives that could provide significant cost-
savings for small manufacturers while meeting DOE's energy conservation 
goals.
    23. DOE's characterization of typical small and large gas hearth 
DHE manufacturers.
    24. The impacts of the proposed amended energy conservation 
standards on small manufacturers of gas hearth DHE.

VIII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of today's 
proposed rule.

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Confidential business 
information, Energy conservation, Household appliances, Imports, 
Intergovernmental relations, Reporting and recordkeeping requirements, 
and Small businesses.

    Issued in Washington, DC, on November 23, 2009.
Cathy Zoi,
Assistant Secretary, Energy Efficiency and Renewable Energy.
    For the reasons set forth in the preamble, DOE proposes to amend 
chapter II, subchapter D, of title 10 of the Code of Federal 
Regulations, as set forth below:

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

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

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

    2. In Sec.  430.2, add the definitions ``Direct heating equipment'' 
and ``Vented hearth heater,'' in alphabetical order to read as follows:


Sec.  430.2  Definitions.

* * * * *
    Direct heating equipment means vented home heating equipment and 
unvented home heating equipment.
* * * * *
    Vented hearth heater means a vented, freestanding, recessed, zero 
clearance fireplace heater, a gas fireplace insert or a gas-stove, 
which simulates a solid fuel fireplace and is designed to furnish warm 
air, without ducts to the space in which it is installed.
* * * * *
    3. In Sec.  430.32 revised paragraphs (d), (i), (k) to read as 
follows:


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

* * * * *
    (d) Water heaters. The energy factor of water heaters shall not be 
less than the following for products manufactured on or after the 
indicated dates.

------------------------------------------------------------------------
                                                    Energy factor as of
                                 Energy factor as   [INSERT DATE 5 YEARS
         Product class           of  January 20,       AFTER DATE OF
                                       2004          PUBLICATION OF THE
                                                        FINAL RULE]
------------------------------------------------------------------------
Gas-fired Water Heater........  0.67-(0.0019 x     For tanks with Rated
                                 Rated Storage      Storage Volume at or
                                 Volume in          below 60 gallons:
                                 gallons).          0.675-(0.0012 x
                                                    Rated Storage Volume
                                                    in gallons);
                                                   For tanks with Rated
                                                    Storage Volume above
                                                    60 gallons: 0.717-
                                                    (0.0019 x Rated
                                                    Storage Volume in
                                                    gallons).
Oil-fired Water Heater........  0.59-(0.0019 x     0.68-(0.0019 x Rated
                                 Rated Storage      Storage Volume in
                                 Volume in          gallons).
                                 gallons).
Electric Water Heater.........  0.97-(0.00132 x    For tanks with Rated
                                 Rated Storage      Storage Volume at or
                                 Volume in          below 80 gallons:
                                 gallons).          0.96-(0.0003 x Rated
                                                    Storage Volume in
                                                    gallons);

[[Page 65996]]

 
                                                   For tanks with Rated
                                                    Storage Volume above
                                                    80 gallons: 1.088-
                                                    (0.0019 x Rated
                                                    Storage Volume in
                                                    gallons).
Tabletop Water Heater.........  0.93-(0.00132 x    0.93-(0.00132 x Rated
                                 Rated Storage      Storage Volume in
                                 Volume in          gallons).
                                 gallons).
Instantaneous Gas-fired Water   0.62-(0.0019 x     0.82-(0.0019 x Rated
 Heater.                         Rated Storage      Storage Volume in
                                 Volume in          gallons).
                                 gallons).
Instantaneous Electric Water    0.93-(0.00132 x    0.93-(0.00132 x Rated
 Heater.                         Rated Storage      Storage Volume in
                                 Volume in          gallons).
                                 gallons).
------------------------------------------------------------------------
Note: The Rated Storage Volume equals the water storage capacity of a
  water heater, in gallons, as specified by the manufacturer.

* * * * *
    (i) Direct heating equipment. (1) Direct heating equipment 
manufactured on or after January 1, 1990 and before [INSERT DATE 3 
YEARS AFTER DATE OF PUBLICATION OF THE FINAL RULE], shall have an 
annual fuel utilization efficiency no less than:

------------------------------------------------------------------------
                                                 Annual fuel utilization
                 Product class                  efficiency, Jan. 1, 1990
                                                        (percent)
------------------------------------------------------------------------
1. Gas wall fan type up to 42,000 Btu/h.......                       73
2. Gas wall fan type over 42,000 Btu/h........                       74
3. Gas wall gravity type up to 10,000 Btu/h...                       59
4. Gas wall gravity type over 10,000 Btu/h up                        60
 to 12, 000 Btu/h.............................
5. Gas wall gravity type over 12,000 Btu/h up                        61
 to 15,000 Btu/h..............................
6. Gas wall gravity type over 15,000 Btu/h up                        62
 to 19,000 Btu/h..............................
7. Gas wall gravity type over 19,000 Btu/h and                       63
 up to 27,000 Btu/h...........................
8. Gas wall gravity type over 27,000 Btu/h and                       64
 up to 46,000 Btu/h...........................
9. Gas wall gravity type over 46,000 Btu/h....                       65
10. Gas floor up to 37,000 Btu/h..............                       56
11. Gas floor over 37,000 Btu/h...............                       57
12. Gas room up to 18,000 Btu/h...............                       57
13. Gas room over 18,000 Btu/h up to 20,000                          58
 Btu/h........................................
14. Gas room over 20,000 Btu/h up to 27,000                          63
 Btu/h........................................
15. Gas room over 27,000 Btu/h up to 46,000                          64
 Btu/h........................................
16. Gas room over 46,000 Btu/h................                       65
------------------------------------------------------------------------

     (2) Direct heating equipment manufactured on or after [INSERT DATE 
3 YEARS AFTER DATE OF PUBLICATION OF THE FINAL RULE], shall have an 
annual fuel utilization efficiency no less than:

------------------------------------------------------------------------
                                                 Annual fuel utilization
                                                efficiency, [INSERT DATE
                 Product class                    3 YEARS AFTER DATE OF
                                                PUBLICATION OF THE FINAL
                                                    RULE]  (percent)
------------------------------------------------------------------------
1. Gas wall fan type up to 42,000 Btu/h.......                       76
2. Gas wall fan type over 42,000 Btu/h........                       77
3. Gas wall gravity type up to 27,000 Btu/h...                       70
4. Gas wall gravity type over 27,000 Btu/h up                        71
 to 46,000 Btu/h..............................
5. Gas wall gravity type over 46,000 Btu/h....                       72
6. Gas floor up to 37,000 Btu/h...............                       57
7. Gas floor over 37,000 Btu/h................                       58
8. Gas room up to 20,000 Btu/h................                       62
9. Gas room over 20,000 Btu/h up to 27,000 Btu/                      67
 h............................................
10. Gas room over 27,000 Btu/h up to 46,000                          68
 Btu/h........................................
11. Gas room over 46,000 Btu/h................                       69
12. Gas hearth up to 20,000 Btu/h.............                       61
13. Gas hearth over 20,000 Btu/h and up to                           66
 27,000 Btu/h.................................
14. Gas hearth over 27,000 Btu/h and up to                           67
 46,000 Btu/h.................................
15. Gas hearth over 46,000 Btu/h..............                       68
------------------------------------------------------------------------


[[Page 65997]]

* * * * *
    (k) Pool heaters. (1) Gas-fired pool heaters manufactured on or 
after January 1, 1990 and before [INSERT DATE 3 YEARS AFTER DATE OF 
PUBLICATION OF THE FINAL RULE], shall have a thermal efficiency not 
less than 78%.
    (2) Gas-fired pool heaters manufactured on or after [INSERT DATE 3 
YEARS AFTER DATE OF PUBLCIATION OF THE FINAL RULE], shall have a 
thermal efficiency not less than 84%.
* * * * *
[FR Doc. E9-28774 Filed 12-10-09; 8:45 am]
BILLING CODE 6450-01-P