[Federal Register Volume 75, Number 73 (Friday, April 16, 2010)]
[Rules and Regulations]
[Pages 20112-20236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-7611]



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Part III





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; 
Final Rule

  Federal Register / Vol. 75, No. 73 / Friday, April 16, 2010 / Rules 
and Regulations  

[[Page 20112]]


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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: Final rule.

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SUMMARY: The U.S. Department of Energy (DOE) is amending the existing 
energy conservation standards for residential water heaters (other than 
tabletop and electric instantaneous models), gas-fired direct heating 
equipment, and gas-fired pool heaters. It has determined that the 
amended energy conservation standards for these products would result 
in significant conservation of energy, and are technologically feasible 
and economically justified.

DATES: The effective date of this rule is June 15, 2010. Compliance 
with the amended standards established for residential water heaters in 
today's final rule is required starting on April 16, 2015, and 
compliance with the standards established for DHE and pool heaters is 
required starting on April 16, 2013.

ADDRESSES: For access to the docket to read background documents, the 
technical support document, transcripts of the public meetings in this 
proceeding, or comments received, visit the U.S. Department of Energy, 
Resource Room of the Building Technologies Program, 950 L'Enfant Plaza, 
SW., 6th Floor, Washington, DC 20024, (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. You may also obtain 
copies of certain previous rulemaking documents in this proceeding 
(i.e., framework document, notice of public meeting and announcement of 
a preliminary technical support document (TSD), notice of proposed 
rulemaking), draft analyses, public meeting materials, and related test 
procedure documents from the Office of Energy Efficiency and Renewable 
Energy's Web site at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/waterheaters.html.

FOR FURTHER INFORMATION CONTACT: Mr. Mohammed Khan, U.S. Department of 
Energy, 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, U.S. Department of Energy, Office of the General 
Counsel, GC-71, 1000 Independence Avenue, SW., Washington, DC 20585-
0121. Telephone: (202) 586-9507. E-mail: [email protected].

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Summary of the Final Rule and Its Benefits
    A. The Energy Conservation Standard Levels
    B. Benefits and Costs to Purchasers of the Three Heating 
Products
    1. Water Heaters
    2. Direct Heating Equipment
    3. Pool Heaters
    C. Impact on Manufacturers
    1. Water Heaters
    2. Direct Heating Equipment
    3. Pool Heaters
    D. National Benefits
    E. Conclusion
II. Introduction
    A. Authority
    B. Background
    1. Current Standards
    2. History of Standards Rulemaking for the Three Heating 
Products
III. General Discussion
    A. Test Procedures
    B. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    C. Energy Savings
    D. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Consumers and Manufacturers
    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 of Comments on Methodology
    A. Market and Technology Assessment
    1. DOE's Determinations as to the Inclusion of Products in This 
Rulemaking
    a. Whether Certain Products Are Covered Under the Act
    b. Covered Products Not Included in This Rulemaking
    2. Product Classes
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    B. Screening Analysis
    1. Comments on the Screening Analysis
    2. Heat Pump Water Heater and Condensing Gas-Fired Storage Water 
Heater Discussion
    a. Condensing Gas-Fired Water Heaters
    b. Heat Pump Water Heaters
    C. Engineering Analysis
    1. Representative Products for Analysis
    2. Efficiency Levels Analyzed
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    3. Cost Assessment Methodology
    a. Manufacturer Production Cost
    b. Manufacturer Selling Price
    4. Engineering Analysis Results
    5. Scaling to Additional Rated Storage Capacities
    6. Water Heater Energy Efficiency Equations
    D. Markups To Determine Product Price
    E. Energy Use Characterization
    1. Water Heaters
    2. Direct Heating Equipment
    3. Pool Heaters
    F. Life-Cycle Cost and Payback Period Analyses
    1. Product Price
    2. Installation Cost
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    3. Annual Energy Use
    4. Energy Prices
    5. Energy Price Trend
    6. Repair and Maintenance Costs
    7. Product Lifetime
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    8. Discount Rates
    9. Compliance Date
    10. Product Energy Efficiency in the Base Case
    11. Inputs to Payback Period Analysis
    G. National Impact Analysis--National Energy Savings and Net 
Present Value Analysis
    1. General
    2. Shipments
    a. Water Heaters
    b. Direct Heating Equipment
    c. Pool Heaters
    d. Impact of Standards on Shipments
    3. Base-Case and Standards-Case Efficiency Distributions
    4. National Energy Savings
    a. Annual Unit Energy Consumption
    b. Site-to-Source Energy Conversion
    5. Consumer Net Present Value
    a. Increased Total Installed Costs and Operating Cost Savings
    b. Discount Rates
    H. Consumer Subgroup Analysis
    I. Manufacturer Impact Analysis
    1. Water Heater Conversion Costs
    2. Manufacturer Markups and Markup Scenarios
    3. Pool Heater Conversion Costs
    4. Employment
    5. Access to Capital
    J. Employment Impact Analysis
    K. Utility Impact Analysis
    1. Effects of Standards on Energy Prices and Associated Benefits
    L. Environmental Assessment
    M. Monetizing Carbon Dioxide and Other Emissions Impacts

[[Page 20113]]

    1. Social Cost of Carbon
    a. Monetizing Carbon Dioxide Emissions
    b. Social Cost of Carbon Values Used in Past Regulatory Analyses
    c. Approach and Key Assumptions
    2. Monetary Values of Non-Carbon Emissions
V. Discussion of Other Comments
    A. Trial Standard Levels and Proposed Standards
    1. Water Heaters
    2. Direct Heating Equipment
    3. Pool Heaters
    B. Compliance Date of Amended Standards
VI. Analytical Results and Conclusions
    A. Trial Standard Levels
    1. Water Heaters
    2. Direct Heating Equipment
    3. Gas-Fired Pool Heaters
    B. Significance of Energy Savings
    C. Economic Justification
    1. Economic Impact on Consumers
    a. Life-Cycle Costs and Payback Period
    b. Consumer Subgroup Analysis
    c. Rebuttable Presumption Payback
    2. Economic Impact on Manufacturers
    a. Cash-Flow Analysis Results for Water Heaters
    b. Cash-Flow Analysis Results for Direct Heating Equipment
    c. Cash-Flow Analysis Results for Pool Heaters
    d. Impacts on Employment
    e. Impacts on Manufacturing Capacity
    f. Cumulative Regulatory Burden
    g. Impacts on Manufacturers That Are Small Businesses
    3. National Net Present Value of Consumer Costs and Benefits and 
National Employment Impacts
    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
    D. Conclusion
    1. Overview
    2. Water Heaters
    3. Direct Heating Equipment
    4. Pool Heaters
VII. Procedural Issues and Regulatory Review
    A. Review Under Executive Order 12866
    B. Review Under the Regulatory Flexibility Act
    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
    M. Congressional Notification
VIII. Approval of the Office of the Secretary

I. Summary of the Final Rule and Its Benefits

A. The Energy Conservation Standard Levels

    The Energy Policy and Conservation Act, as amended (42 U.S.C. 6291 
et seq.; EPCA or the Act), provides that any new or amended energy 
conservation standard the Department of Energy (DOE) prescribes for 
covered consumer products, including residential water heaters, direct 
heating equipment (DHE), and pool heaters (collectively referred to in 
this document as the ``three heating products'') must be designed to 
``achieve the maximum improvement in energy efficiency * * * which the 
Secretary [of Energy] 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)) The standards in today's final 
rule, which apply to certain types of the three heating products, 
satisfy these requirements.
    Table I.1 shows the standard levels DOE is adopting today. These 
standards will apply to the types of the three heating products listed 
in the table and manufactured for sale in the United States, or 
imported into the United States, on or after April 16, 2015 in the case 
of water heaters, or on or after April 15, 2013 in the case of direct 
heating equipment and pool heaters.

 Table I.1--Amended Energy Conservation Standards for Residential Water
           Heaters, Direct Heating Equipment, and Pool Heaters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
        Product class                       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 55
                               55 gallons:           gallons:
                              EF = 0.675-(0.0015 x  EF = 0.8012-(0.00078
                               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 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)
                                                     .
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                        Standard level
------------------------------------------------------------------------
Direct heating equipment**
------------------------------------------------------------------------
Gas wall fan type up to 42,000     AFUE = 75%
 Btu/h.
Gas wall fan type over 42,000 Btu/ AFUE = 76%
 h.
Gas wall gravity type up to        AFUE = 65%
 27,000 Btu/h.
Gas wall gravity type over 27,000  AFUE = 66%
 Btu/h up to 46,000 Btu/h.
Gas wall gravity type over 46,000  AFUE = 67%
 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 = 61%
Gas room over 20,000 Btu/h up to   AFUE = 66%
 27,000 Btu/h.
Gas room over 27,000 Btu/h up to   AFUE = 67%
 46,000 Btu/h.
Gas room over 46,000 Btu/h.......  AFUE = 68%
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.

[[Page 20114]]

 
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 = 82%
------------------------------------------------------------------------
* 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.''

B. Benefits and Costs to Purchasers of the Three Heating Products

1. Water Heaters
    Table I.2 presents the implications of today's standards for 
consumers of residential water heaters. The economic impacts of the 
standards on consumers, as measured by the average life-cycle cost 
(LCC) savings, are positive, even though the standards may increase 
some initial costs. For example, a typical gas storage water heater has 
an average installed price of $1,079 and average lifetime operating 
costs (discounted) of $2,473. To meet the amended standards, DOE 
estimates that the average installed price of such equipment will 
increase by $120, which will be offset by savings of $143 in average 
lifetime operating costs (discounted).

                Table I.2--Implications of Standards for Purchasers of Residential Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                      Average         Average
                                     Energy          baseline        installed     Average life-  Median payback
         Product class            conservation       installed    price increase    cycle cost     period years
                                  standard EF *      price** $           $         savings*** $
----------------------------------------------------------------------------------------------------------------
Gas-Fired Storage Water Heater  0.62 (40                  $1,072             $92              $6             2.0
                                 gallons).
                                0.76 (56                   1,261             805              77             9.8
                                 gallons).
                                Weighted........           1,079             120              18             2.3
Electric Storage Water Heater.  0.95 (50                     554             140              10             6.9
                                 gallons).
                                2.0 (56 gallons)             729             974             626             6.0
                                Weighted........             569             213              64             6.8
Oil-Fired Storage Water Heater  0.62 (32                   1,974              67             295             0.5
                                 gallons).
Gas-Fired Instantaneous Water   0.82 (0 gallons)           1,779             601               6            14.8
 Heater.
----------------------------------------------------------------------------------------------------------------
* The values are for the representative storage volumes (40 gallons for gas-fired storage water heaters, 50
  gallons for electric storage water heaters, 32 gallons for oil-fired storage water heaters, and 0 gallons for
  gas-fired instantaneous water heaters). The standard level is represented by an energy-efficiency equation,
  which specifies an EF level over the entire storage volume range.
** For a baseline model.
*** The average life-cycle cost savings refers to the average savings in the discounted life-cycle costs of
  owning and operating the product due to the standard. This value represents the net benefit (or cost) of a
  more-efficient product after considering both the increased installed price and the lifetime operating cost
  savings.

2. Direct Heating Equipment
    Table I.3 presents the implications of today's standards for 
consumers of direct heating equipment. The economic impacts of the 
standards on consumers, as measured by the average LCC savings, are 
positive, even though the standards may increase some initial costs. 
For example, a typical gas wall fan DHE has an average installed price 
of $1,832 and average lifetime operating costs (discounted) of $5,544. 
To meet the amended standards, DOE estimates that the average installed 
price of such equipment will increase by $81, which will be more than 
offset by savings of $249 in average lifetime operating costs 
(discounted).

   Table I.3--Implications of Standards for Purchasers of Direct Heating Equipment at the Representative Rated
                                              Input Capacity Range
----------------------------------------------------------------------------------------------------------------
                                      Energy          Average         Average
                                   conservation      baseline        installed     Average life-  Median payback
          Product class           standard* AFUE     installed    price increase    cycle cost     period Years
                                        (%)          price** $           $         savings*** $
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan....................              76          $1,832             $81            $102             3.2
Gas Wall Gravity................              66           1,433              61              21             7.5
Gas Floor.......................              58           2,209              54              13            10.7
Gas Room........................              67           1,208              83              60             4.5
Gas Hearth......................              67           1,603              82             112             0.0
----------------------------------------------------------------------------------------------------------------
* The values are for the representative input capacity ranges (>42,000 Btu/h for wall fan, >27,000 Btu/h and
  <=46,000 Btu/h for wall gravity, >37,000 Btu/h for floor, >27,000 Btu/h and <=46,000 Btu/h for room, and
  >27,000 Btu/h and <=46,000 Btu/h for hearth). The standard levels vary by input capacity range.
** For a baseline model.
*** The average life-cycle cost savings refers to the average savings in the discounted life-cycle costs of
  owning and operating the product due to the standard. This value represents the net benefit (or cost) of a
  more-efficient product after considering both the increased installed price and the lifetime operating cost
  savings.


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3. Pool Heaters
    Table I.4 presents the implications of today's standards for 
consumers of pool heaters. The economic impacts of the standards on 
consumers, as measured by the average LCC savings, are positive, even 
though the standards may increase some initial costs. For example, a 
typical pool heater has an average installed price of $3,240 and 
average lifetime operating costs (discounted) of $5,099. To meet the 
amended standards, DOE estimates that the average installed price of 
such equipment will increase by $103, which will be offset by savings 
of $226 in average lifetime operating costs (discounted).

              Table I.4--Implications of Standards for Purchasers of Pool Heaters at 250,000 Btu/h
----------------------------------------------------------------------------------------------------------------
                                      Energy
                                   conservation       Average         Average      Average life-
          Product class              standard*       baseline        installed      cycle cost    Median payback
                                      Thermal        installed    price increase   savings*** $    period Years
                                  Efficiency (%)     price** $           $
----------------------------------------------------------------------------------------------------------------
Gas-fired.......................              82          $3,240            $103             $22             8.6
----------------------------------------------------------------------------------------------------------------
* The values are for the representative input capacity of 250,000 Btu/h.
** For a baseline model.
*** The average life-cycle cost savings refers to the average savings in the discounted life-cycle costs of
  owning and operating the product due to the standard. This value represents the net benefit (or cost) of a
  more-efficient product after considering both the increased installed price and the lifetime operating cost
  savings.

C. Impact on Manufacturers

1. Water Heaters
    Using a real corporate discount rate of 8.9 percent for gas-fired 
and electric storage water heaters, 7.6 percent for oil-fired storage 
water heaters, and 9.5 percent for gas-fired instantaneous water 
heaters, which DOE calculated by examining the financial statements of 
residential water heater manufacturers, DOE estimates the industry net 
present value (INPV) of the manufacturing industry to be $880 million 
for gas-fired and electric storage water heaters, $9 million for oil-
fired storage water heaters, and $648 million for gas-fired 
instantaneous water heaters (all figures in 2009$). DOE expects the 
impact of the standards on the INPV of manufacturers of gas-fired and 
electric storage water heaters to range from a loss of 2.9 percent to a 
loss of 13.9 percent (a loss of $25.9 million to a loss of $122.6 
million). DOE expects the impact of the standards on the INPV of 
manufacturers of oil-fired storage water heaters to range from a loss 
of 2.0 percent to a loss of 4.2 percent (a loss of $0.2 million to a 
loss of $0.4 million). DOE expects the impact of the standards on the 
INPV of manufacturers of gas-fired instantaneous water heaters to range 
from an increase of 0.4 percent to a loss of 0.2 percent (an increase 
of $2.3 million to a loss of $1.2 million). Based on DOE's interviews 
with the major manufacturers of residential water heaters, DOE expects 
minimal plant closings or loss of employment as a result of the 
standards. At the amended standard level, DOE does not expect 
significant impacts on competition in the overall water heater market. 
For gas-fired and electric storage water heaters, DOE believes there 
are primarily three major manufacturers who have established market 
positions. In addition, DOE believes there is another major appliance 
manufacturer with significant resources that has recently announced 
intentions to scale its efforts in the water heating market. For oil-
fired storage water heaters and gas-fired instantaneous water heaters, 
DOE believes the standards-case market can at least sustain the base-
case level of competition.
2. Direct Heating Equipment
    Using a real corporate discount rate of 8.5 percent, which DOE 
calculated by examining the financial statements of direct heating 
equipment manufacturers, DOE estimates the INPV of the manufacturing 
industry to be $17 million for traditional direct heating equipment and 
$77 million for hearth direct heating equipment (both figures in 
2009$). DOE expects the impact of the standards on the INPV of 
manufacturers of traditional direct heating equipment to range from a 
loss of 7.2 percent to a loss of 23.6 percent (a loss of $1.2 million 
to a loss of $3.9 million). DOE expects the impact of the standards on 
the INPV of manufacturers of hearth direct heating equipment to range 
from a loss of 0.3 percent to a loss of 1.2 percent (a loss of $0.2 
million to a loss of $0.9 million). Based on DOE's interviews with the 
major manufacturers of both traditional and hearth direct heating 
equipment, DOE expects minimal plant closings or loss of employment as 
a result of the standards. DOE believes the impact of the amended 
standards on competition in the traditional and hearth DHE market will 
not be significant because small manufacturers will be able to upgrade 
enough product lines to meet the standard, which in combination with 
product lines that currently meet the standard, will enable them to 
remain viable competitors.
3. Pool Heaters
    Using a real corporate discount rate of 7.4 percent, which DOE 
calculated by examining the financial statements of pool heater 
manufacturers, DOE estimates the INPV of the manufacturing industry to 
be $49 million for gas-fired pool heaters (figures in 2009$). DOE 
expects the impact of the standards on the INPV of manufacturers of 
gas-fired pool heaters to range from an increase of 0.5 percent to a 
loss of 1.7 percent (an increase of $0.3 million to a loss of $0.8 
million). Based on DOE's interviews with the major manufacturers of 
pool heaters, DOE expects minimal plant closings or loss of employment 
as a result of the standards. DOE does not believe there will be any 
lessening of competition in the pool heater market as a result of the 
standards established by today's final rule, because all of the 
manufacturers already offer at least one product line that meets or 
exceeds the standard level promulgated by today's final rule.

D. National Benefits

    DOE estimates the standards will save approximately 2.81 quads 
(quadrillion or 10\15\) British thermal units (Btu) of energy over a 
30-year period: 2.58 quads for residential water heaters during 2015-
2045, and 0.21 and 0.02 quads for DHE and pool heaters, respectively, 
during 2013-2043. The total of 2.81 quads is equivalent to all the 
energy consumed by nearly 15 million American households in a single 
year. By 2045, DOE expects the energy savings from today's standards to 
eliminate the need for approximately three new 250 MW power plants.
    These energy savings will result in cumulative greenhouse gas 
emission

[[Page 20116]]

reductions of approximately 164 million tons (Mt) of carbon dioxide 
(CO2), or an amount equal to that produced by approximately 
46 million cars every year. Additionally, the standards will help 
alleviate air pollution by resulting in cumulative emissions reductions 
of approximately 125 kilotons (kt) for nitrogen oxides (NOX) 
and 0.54 tons for power plant mercury (Hg).
    The estimated monetary value of the cumulative CO2 
emissions reductions, based on a range of values from a recent 
interagency process, is $560 to $8,725 million. The estimated monetary 
value of the cumulative CO2 emissions reductions, based on 
the central value from the interagency process, is $2,861 million. The 
estimated net present monetary value of the other emissions reductions 
(discounted to 2010 using a 7-percent discount rate and expressed in 
2009$) is $12.2 to 125 million for NOX. At a 3-percent 
discount rate, the estimated net present value of these emissions 
reductions is $27.2 to 284 million for NOX.
    The national NPV of consumer benefit of today's standards is $1.98 
billion using a 7-percent discount rate and $10.11 billion using a 3-
percent discount rate, cumulative from 2013 to 2043 for DHE and pool 
heaters, and from 2015 to 2045 for water heaters, in 2009$. This is the 
estimated present value of future operating cost savings minus the 
estimated increased costs of purchasing and installing the three types 
of heating products, discounted to 2010.
    The benefits and costs of today's rule can also be expressed in 
terms of annualized values from 2013 to 2043 for DHE and pool heaters, 
and from 2015 to 2045 for water heaters. Estimates of annualized values 
for the three types of heating products are shown in Table I.5, Table 
I.6, and Table I.7. The annualized monetary benefits are the sum of the 
annualized national economic value of operating cost savings (energy, 
maintenance, and repair), expressed in 2009$, plus the monetary value 
of the benefits of CO2 and NOX emission 
reductions. For the value of CO2 emission reductions, DOE 
uses the global Social Cost of Carbon (SCC) calculated using the 
average value derived using a 3-percent discount rate (equivalent to 
$21.40 per metric ton of CO2 emitted in 2010, in 2007$). 
This value is a central value from a recent interagency process. The 
derivation of this value is discussed in section IV.M. The monetary 
benefits of cumulative emissions reductions are reported in 2009$ so 
that they can be compared with the other costs and benefits in the same 
dollar units.
    Although the above consideration of benefits provides a valuable 
perspective, please note the following: (1) The national operating cost 
savings are domestic U.S. consumer monetary savings found in market 
transactions, while the value of CO2 reductions is based on 
a global value. Also, note that the central value is only one of four 
SCC developed by the interagency workgroup. Other marginal SCC values 
for 2010 are $4.70, $35.10, and $64.90 per metric ton (2007$ for 
emissions in 2010), which reflect different discount rates and, for the 
highest value, the possibility of higher-than-expected impacts further 
out in the tails of the SCC distribution. (2) The assessments of 
operating cost savings and CO2 savings are performed with 
different computer models, leading to different time frames for 
analysis. The national operating cost savings is measured for the 
lifetime of heating products shipped in the period 2013-2043 (for DHE 
and pool heaters) or 2015-2045 (for water heaters). The value of 
CO2, on the other hand, reflects the present value of all 
future climate-related impacts (out to 2300) due to emitting a ton of 
carbon dioxide in each year of the forecast period.
    Using a 7-percent discount rate and the central SCC value, the 
combined cost of the standards adopted in today's final rule for 
heating products is $1,285 million per year in increased equipment and 
installation costs, while the annualized benefits are $1,500 million 
per year in reduced equipment operating costs, $169 million in 
CO2 reductions, and $7.7 million in reduced NOX 
emissions. At a 7-percent discount rate, the net benefit amounts to 
$391 million per year. Using a 3-percent discount rate and the central 
SCC value, the cost of the standards adopted in today's rule is $1,249 
million per year in increased equipment and installation costs, while 
the benefits of today's standards are $1,843 million per year in 
reduced operating costs, $169 million in CO2 reductions, and 
$9.2 million in reduced NOX emissions. At a 3-percent 
discount rate, the net benefit amounts to $771 million per year.

                                           Table I.5--Annualized Benefits and Costs for Water Heaters (TSL 5)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Units
                                        Primary estimate    Low estimate      High estimate  -----------------------------------------------------------
               Category                  (AEO reference      (low energy      (high energy                                                Period covered
                                              case)          price case)       price case)     Year dollars           Disc. rate            (2015-2045)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Energy Annualized Monetized (millions$/           1407.0            1275.5            1537.5            2009  7%                                      30
 year).
                                                  1729.6            1556.1            1902.9            2009  3%                                      30
CO2 Monetized Value (at $4.7/Metric                 43.5              43.5              43.5            2009  5%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $21.4/Metric               158.6             158.6             158.6            2009  3%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $35.1/Metric               245.7             245.7             245.7            2009  2.5%                                    30
 Ton, millions$/year)*.
CO2 Monetized Value (at $64.9/Metric               483.8             483.8             483.8            2009  3%                                      30
 Ton, millions$/year)*.
NOx Monetized Value (at $2,437/Metric                7.0               7.0               7.0            2009  7%                                      30
 Ton, millions$/year).
                                                     8.5               8.5               8.5            2009  3%                                      30
Total Monetary Benefits (millions$/        1457.5-1897.8       1326-1766.3       1588-2028.3            2009  7% range                                30
 year)**.
                                                  1572.7            1441.1            1703.2            2009  7%                          ..............
                                                  1896.7            1723.2            2070.0            2009  3%                          ..............

[[Page 20117]]

 
                                           1781.5-2221.8       1608-2048.3     1954.9-2395.2            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized (millions$/year).            1250.3            1184.5            1321.6            2009  7%                                      30
                                                  1216.6            1145.7            1295.6            2009  3%                                      30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Net Benefits/Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized, including CO2          207.2-647.5       141.5-581.8       266.4-706.7            2009  7% range                                30
 Benefits (million$/year)**.
                                                   322.4             256.6             381.5            2009  7%                                      30
                                                   680.1             577.5             774.4            2009  3%                                      30
                                              565-1005.3       462.3-902.6      659.3-1099.6            2009  3% range                               30
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These values represent global values (in 2009$) of the social cost of CO2 emissions in 2010 under several scenarios. The values of $4.7, $21.4, and
  $35.1 per ton are the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The value of $64.9 per ton
  represents the 95th percentile of the SCC distribution calculated using a 3% discount rate. See section IV.M for details.
** Total Monetary Benefits for both the 3% and 7% cases utilize the central estimate of social cost of CO2 emissions calculated at a 3% discount rate
  (averaged across three Integrated Assessment Models (IAMs)), which is equal to $21.4/ton in 2010 (in 2009$). The rows labeled as ``7% Range'' and ``3%
  Range'' calculate consumer and NOX cases with the labeled discount rate but add these values to the full range of CO2 values with the $4.7/ton value
  at the low end, and the $64.9/ton value at the high end.


                                          Table I.6--Annualized Benefits and Costs for Direct Heating Equipment
                                                                         [TSL 2]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Units
                                        Primary estimate    Low estimate      High estimate  -----------------------------------------------------------
               Category                  (AEO reference      (low energy      (high energy                                                    Period
                                              case)          price case)       price case)     Year dollars           Disc. rate          covered (2013-
                                                                                                                                               2043)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Energy Annualized Monetized (millions$/             82.2              78.8              84.6            2009  7%                                      30
 year).
                                                   100.6              96.3             103.6            2009  3%                                      30
CO2 Monetized Value (at $4.7/Metric                  2.5               2.5               2.5            2009  5%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $21.4/Metric                 9.2               9.2               9.2            2009  3%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $35.1/Metric                14.3              14.3              14.3            2009  2.5%                                    30
 Ton, millions$/year)*.
CO2 Monetized Value (at $64.9/Metric                28.1              28.1              28.1            2009  3%                                      30
 Ton, millions$/year)*.
NOX Monetized Value (at $2,437/Metric                0.6               0.6               0.6            2009  7%                                      30
 Ton, millions$/year).
                                                     0.6               0.6               0.6            2009  3%                                      30
Total Monetary Benefits (millions$/           85.2-110.8        81.8-107.4        87.7-113.2            2009  7% range                                30
 year)**.
                                                    91.9              88.5              94.4            2009  7%                          ..............
                                                   110.4             106.2             113.4            2009  3%                          ..............
                                             103.7-129.3          99.5-125       106.7-132.3            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized (millions$/year).              27.7              27.7              27.7            2009  7%                                      30
                                                    26.0              26.0              26.0            2009  3%                                      30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Net Benefits/Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized, including CO2            57.6-83.1         54.1-79.7           60-85.6            2009  7% range                                30
 Benefits (millions$/year)**.
                                                    64.3              60.8              66.7            2009  7%                                      30
                                                    84.4              80.1              87.4            2009  3%                                      30

[[Page 20118]]

 
                                              77.7-103.2           73.4-99        80.7-106.3            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These values represent global values (in 2009$) of the social cost of CO2 emissions in 2010 under several scenarios. The values of $4.7, $21.4, and
  $35.1 per ton are the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The value of $64.9 per ton
  represents the 95th percentile of the SCC distribution calculated using a 3% discount rate. See section IV.M for details.
** Total Monetary Benefits for both the 3% and 7% cases utilize the central estimate of social cost of CO2 emissions calculated at a 3% discount rate
  (averaged across three IAMs), which is equal to $21.4/ton in 2010 (in 2009$). The rows labeled as ``7% Range'' and ``3% Range'' calculate consumer and
  NOX cases with the labeled discount rate but add these values to the full range of CO2 values with the $4.7/ton value at the low end, and the $64.9/
  ton value at the high end.


                                                Table I.7--Annualized Benefits and Costs for Pool Heaters
                                                                         [TSL 2]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Units
                                             Primary        Low estimate      High estimate  -----------------------------------------------------------
               Category                   estimate (AEO      (low energy      (high energy                                                    Period
                                         reference case)     price case)       price case)     Year dollars           Disc. rate          covered  (2013-
                                                                                                                                               2043)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Energy Annualized Monetized (millions$/             10.6              10.1              10.9            2009  7%                                      30
 year).
                                                    12.5              12.0              12.9            2009  3%                                      30
CO2 Monetized Value (at $4.7/Metric                  0.2               0.2               0.2            2009  5%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $21.4/Metric                 0.8               0.8               0.8            2009  3%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $35.1/Metric                 1.3               1.3               1.3            2009  2.5%                                    30
 Ton, millions$/year)*.
CO2 Monetized Value (at $64.9/Metric                 2.4               2.4               2.4            2009  3%                                      30
 Ton, millions$/year)*.
NOX Monetized Value (at $2,437/Metric                0.1               0.1               0.1            2009  7%                                      30
 Ton, millions$/year).
                                                     0.1               0.1               0.1            2009  3%                                      30
Total Monetary Benefits (millions$/              10.8-13         10.4-12.6         11.1-13.3            2009  7% range                                30
 year)**.
                                                    11.4              11.0              11.7            2009  7%                          ..............
                                                    13.4              12.8              13.7            2009  3%                          ..............
                                                 12.8-15         12.3-14.4         13.2-15.3            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized (millions$/year).               6.9               6.9               6.9            2009  7%                                      30
                                                     6.7               6.7               6.7            2009  3%                                      30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Net Benefits/Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized, including CO2              3.9-6.1           3.4-5.6           4.2-6.4            2009  7% range                                30
 Benefits (millions$/year)**.
                                                     4.5               4.0               4.8            2009  7%                                      30
                                                     6.7               6.2               7.1            2009  3%                                      30
                                                 6.1-8.3           5.6-7.8           6.5-8.7            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These values represent global values (in 2009$) of the social cost of CO2 emissions in 2010 under several scenarios. The values of $4.7, $21.4, and
  $35.1 per ton are the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The value of $64.9 per ton
  represents the 95th percentile of the SCC distribution calculated using a 3% discount rate. See section IV.M for details.
** Total Monetary Benefits for both the 3% and 7% cases utilize the central estimate of social cost of CO2 emissions calculated at a 3% discount rate
  (averaged across three IAMs), which is equal to $21.4/ton in 2010 (in 2009$). The rows labeled as ``7% Range'' and ``3% Range'' calculate consumer and
  NOX cases with the labeled discount rate but add these values to the full range of CO2 values with the $4.7/ton value at the low end, and the $64.9/
  ton value at the high end.


[[Page 20119]]


                                     Table I.8--Sum of Annualized Benefits and Costs for Heating Products Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Primary estimate    Low estimate      High estimate                              Units
               Category                  (AEO reference      (low energy      (high energy   -----------------------------------------------------------
                                              case)          price case)       price case)     Year dollars           Disc. rate          Period covered
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Energy Annualized Monetized (millions$/           1499.8            1364.4            1633.0            2009  7%                                      30
 year).
                                                  1842.7            1664.4            2019.4            2009  3%                                      30
CO2 Monetized Value (at $4.7/Metric                 46.2              46.2              46.2            2009  5%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $21.4/Metric               168.6             168.6             168.6            2009  3%                                      30
 Ton, millions$/year)*.
CO2 Monetized Value (at $35.1/Metric               261.3             261.3             261.3            2009  2.5%                                    30
 Ton, millions$/year)*.
CO2 Monetized Value (at $64.9/Metric               514.2             514.2             514.2            2009  3%                                      30
 Ton, millions$/year)*.
NOX Monetized Value (at $2,437/Metric                7.6               7.6               7.6            2009  7%                                      30
 Ton, millions$/year).
                                                     9.2               9.2               9.2            2009  3%                                      30
Total Monetary Benefits (millions$/        1553.5-2021.6     1418.2-1886.3     1686.8-2154.8            2009  7% range                                30
 year)**.
                                                  1676.0            1540.6            1809.2            2009  7%                          ..............
                                                  2020.5            1842.2            2197.2            2009  3%                          ..............
                                             1898-2366.1     1719.8-2187.7     2074.8-2542.8            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized Monetized..................            1284.9            1219.1            1356.3            2009  7%                                      30
(millions$/year)......................
                                                  1249.3            1178.4            1328.3            2009  3%                                      30
Annualized Monetized, including CO2          268.7-736.7         199-667.1       330.6-798.7            2009  7% range                                30
 Benefits (millions$/year)**.
                                                   391.1             321.5             453.0            2009  7%                                      30
                                                   771.2             663.8             868.9            2009  3%                                      30
                                            648.8-1116.8      541.3-1009.4      746.5-1214.6            2009  3% range                                30
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These values represent global values (in 2009$) of the social cost of CO2 emissions in 2010 under several scenarios. The values of $4.7, $21.4, and
  $35.1 per ton are the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The value of $64.9 per ton
  represents the 95th percentile of the SCC distribution calculated using a 3% discount rate. See section IV.M for details.
** Total Monetary Benefits for both the 3% and 7% cases utilize the central estimate of social cost of CO2 emissions calculated at a 3% discount rate
  (averaged across three IAMs), which is equal to $21.4/ton in 2010 (in 2009$). The rows labeled as ``7% Range'' and ``3% Range'' calculate consumer and
  NOX cases with the labeled discount rate but add these values to the full range of CO2 values with the $4.7/ton value at the low end, and the $64.9/
  ton value at the high end.

E. Conclusion

    Based upon the analysis culminating in this final rule, DOE has 
concluded that the benefits (energy savings, consumer LCC savings, 
positive national NPV, and emissions reductions) to the Nation of 
today's amended standards outweigh their costs (a potential loss of 
manufacturer INPV and consumer LCC increases for some users of the 
three heating products). Table 1.9 below summarizes total annualized 
monetized benefits and costs for these energy conservation standards. 
Today's standards also represent the maximum improvement in energy 
efficiency that is technologically feasible and economically justified, 
and will result in significant energy savings for all three types of 
the heating products. At present, residential water heaters, DHE, and 
pool heaters that meet the new standard levels are either commercially 
available or available as prototypes.

                           Table I.9--Summary Annualized Monetized Benefits and Costs
----------------------------------------------------------------------------------------------------------------
                           Category                                 ($million/year)           Discount rate
----------------------------------------------------------------------------------------------------------------
Benefits*
                                                                                 1676.0                       7%
                                                                                 2020.5                       3%
----------------------------------------------------------------------------------------------------------------
Costs
                                                                                 1284.9                       7%
                                                                                 1249.3                       3%
----------------------------------------------------------------------------------------------------------------
Net Benefits/Costs*
                                                                                  391.1                       7%
                                                                                  771.2                       3%
----------------------------------------------------------------------------------------------------------------
*Annualized Monetized, including monetized CO2 and NOX benefits.


[[Page 20120]]

II. Introduction

A. 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) 
provides for the Energy Conservation Program for Consumer Products 
Other Than Automobiles. The program covers consumer products and 
certain commercial products (all of which are referred to hereafter as 
``covered products''), including the three heating products that are 
the subject of this rulemaking. (42 U.S.C. 6292(a)(4), (9), (11)) DOE 
publishes today's final rule pursuant to Part A of Title III, which 
also provides for test procedures, labeling, and energy conservation 
standards for the three heating products and certain other types of 
products, and authorizes DOE to require information and reports from 
manufacturers. The test procedures for water heaters, vented DHE, and 
pool heaters appear at Title 10 of the Code of Federal Regulations 
(CFR) part 430, subpart B, appendices E, O, and P, respectively.
---------------------------------------------------------------------------

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

    EPCA prescribes specific 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)) 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. The notice of proposed rulemaking (NOPR) in this proceeding 
(the December 2009 NOPR; 74 FR 65852, 65858-59, 65866 (Dec. 11, 2009), 
and section II.B.2 below, provide additional detail on the nature and 
statutory history of the requirements for the three types of heating 
products.
    EPCA also provides criteria for prescribing amended standards for 
covered products generally, including the three heating products. As 
indicated above, any such amended standard 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)) 
Additionally, EPCA provides specific prohibitions on prescribing such 
standards. DOE may not prescribe an amended standard for any of the 
three heating products for which it has not established a test 
procedure. (42 U.S.C. 6295(o)(3)(A)) Further, DOE may not prescribe a 
standard if DOE determines by rule that such standard would not result 
in ``significant conservation of energy,'' or ``is not technologically 
feasible or economically justified.'' (42 U.S.C. 6295(o)(3)(B))
    EPCA also provides that in deciding whether a standard is 
economically justified for covered products, 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, 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 of Energy (Secretary) considers 
relevant. (42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))
    In addition, EPCA, as amended, establishes a rebuttable presumption 
that any standard for covered products 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 (and as 
applicable, water) savings during the first year that the consumer will 
receive as a result of the standard,'' as calculated under the test 
procedure in place for that standard. (42 U.S.C. 6295(o)(2)(B)(iii))
    EPCA also contains what is commonly known as an ``anti-
backsliding'' provision. (42 U.S.C. 6295(o)(1)) This provision mandates 
that the Secretary not prescribe any amended standard that either 
increases the maximum allowable energy use or decreases the minimum 
required energy efficiency of a covered product. EPCA further provides 
that the Secretary may not prescribe an 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 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 at the time of the Secretary's finding. (42 U.S.C. 6295(o)(4))
    Under 42 U.S.C. 6295(q)(1), EPCA specifies requirements applicable 
to promulgating standards for any type or class of covered product that 
has two or more subcategories. Under this provision, DOE must specify a 
different standard level than that which applies generally to such type 
or class of product for any group of 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 such 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 DOE established such higher or lower level. (42 U.S.C. 
6295(q)(2))
    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 DOE is adopting 
today's final rule before July 2010, this requirement does not apply in 
this rulemaking, and DOE has not specifically addressed standby mode or 
off mode energy use here. DOE is currently working on a test procedure 
rulemaking to address the measurement of standby mode and off

[[Page 20121]]

mode energy consumption for the three types of heating products that 
are the subject of this rulemaking.
    Finally, Federal energy conservation requirements for covered 
products generally supersede State laws or regulations concerning 
energy conservation testing, labeling, and standards. (42 U.S.C. 
6297(a)-(c)) DOE can, however, 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))

B. Background

1. Current Standards
    On January 17, 2001, DOE published a final rule prescribing the 
current Federal energy conservation standards for residential water 
heaters manufactured on or after January 20, 2004, which set minimum 
energy factors (EFs) 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. 66 FR 
4474; 10 CFR 430.32(d). EPCA prescribes the Federal energy conservation 
standards for DHE and pool heaters. For DHE, these consist of minimum 
annual fuel utilization efficiency (AFUE) levels, each of which applies 
to a type of unit (i.e., wall fan, wall gravity, floor, or room) and 
heating capacity range. (42 U.S.C. 6295(e)(3)); 10 CFR 430.32(i). For 
pool heaters, the Federal energy conservation standard prescribed by 
EPCA includes a single minimum thermal efficiency level. (42 U.S.C. 
6295(e)(2)); 10 CFR 430.32(k).
    Table II.1, Table II.2, and Table II.3 present the current Federal 
energy conservation standards for residential water heaters, DHE, and 
pool heaters, respectively. The water heater standards, set forth in 10 
CFR 430.32(d), consist of minimum energy factors (EF) that vary based 
on the rated 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. The DHE standards, set forth in 42 
U.S.C. 6295(e)(3) and 10 CFR 430.32(i), consist of minimum annual fuel 
utilization efficiency (AFUE) levels, each of which applies to a 
particular type of gas-fired product (i.e., wall fan, wall gravity, 
floor, room) and input heating capacity range. (Although electric DHE 
are available, no Federal energy conservation standards exist for these 
products, and today's final rule contains no such standards. For a more 
detailed discussion of DHE coverage under EPCA, see 74 FR 65852, 65866 
(Dec. 11, 2009) (the December 2009 NOPR)). The pool heater standards, 
set forth at 42 U.S.C. 6295(e)(2) and 10 CFR 430.32(k), consist of a 
thermal efficiency level. (Similar to the situation with DHE, this 
standard applies only to gas-fired products. Although electric pool 
heaters are available, no Federal energy conservation standards 
currently exist for other pool heaters, and today's final rule contains 
no such standard. For a more detailed discussion of pool heater 
coverage, see 74 FR 65852, 65866-67 (Dec. 11, 2009).)

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


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


   Table II.3--Current Federal Energy Conservation Standards for Pool
                                 Heaters
------------------------------------------------------------------------
                                             Thermal efficiency as of
             Product class                       January 1, 1990
------------------------------------------------------------------------
Gas-Fired Pool Heater..................  Thermal Efficiency = 78%
------------------------------------------------------------------------


[[Page 20122]]

2. History of Standards Rulemaking for the Three Heating Products
    Prior to being amended in 1987, EPCA included water heaters and 
home heating equipment as covered products. The amendments to EPCA 
effected by the National Appliance Energy Conservation Act of 1987 
(NAECA; Pub. L. 100-12) included replacing the term ``home heating 
equipment'' with ``direct heating equipment,'' adding pool heaters as a 
covered product, establishing standards for the three heating products, 
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 commenced 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_equipment 
framework_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 framework document public meeting on January 16, 2009.
    On January 5, 2009, having considered these comments, gathered 
additional information, and performed preliminary analyses as to 
standards for the three heating products, DOE announced an informal 
public meeting and the availability on its Web site of a preliminary 
technical support document (preliminary TSD). 74 FR 1643 (Jan. 13, 
2009). The preliminary TSD is available at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/water_pool_heaters_prelim_tsd.html. The preliminary TSD discussed the 
comments DOE had received at the framework stage of this rulemaking and 
described the actions DOE had taken, the analytical framework DOE was 
using, and the content and results of DOE's preliminary analyses. Id. 
at 1644, 1645. DOE convened the public meeting to discuss and receive 
comments on: (1) These subjects, (2) DOE's proposed product classes, 
(3) potential standard levels that DOE might consider, and (4) other 
issues participants believed were relevant to the rulemaking. Id. at 
1643, 1646. DOE also invited written comments on these matters. The 
public meeting took place on February 9, 2009. Many interested parties 
participated, and submitted written comments during the comment period.
    On December 11, 2009, DOE published a NOPR to consider amending the 
existing residential water heater, direct heating equipment, and pool 
heater energy conservation standards. 74 FR 65852. Shortly after, DOE 
also published on its Web site the complete TSD for the proposed rule, 
which incorporated the completed analyses DOE conducted and technical 
documentation for each analysis. The TSD included the LCC spreadsheet, 
the national impact analysis spreadsheet, and the manufacturer impact 
analysis (MIA) spreadsheet--all of which are available at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/water_pool_heaters_nopr.html. In the December 2009 NOPR, DOE proposed 
amended energy conservation standards for the three heating products as 
follows:

     Table II.4--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        Volume above 60
                                   below 60 gallons:   gallons:
                                  EF = 0.675 -        EF = 0.717 -
                                   (0.0012 x Rated     (0.0019 x Rated
                                   Storage Volume in   Storage Volume in
                                   gallons).           gallons).
------------------------------------------------------------------------
Electric Storage................  For tanks with a    For tanks with a
                                   Rated Storage       Rated Storage
                                   Volume at or        Volume above 80
                                   below 80 gallons:   gallons:
                                  EF = 0.96 -         EF = 1.088 -
                                   (0.0003 x Rated     (0.0019 x Rated
                                   Storage Volume in   Storage 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).
------------------------------------------------------------------------


Direct Heating Equipment **
------------------------------------------------------------------------
                  Product Class                      Proposed Standard
                                                           Level
------------------------------------------------------------------------
Gas wall fan type up to 42,000 Btu/h............  AFUE = 76%.
Gas wall fan type over 42,000 Btu/h.............  AFUE = 77%.
Gas wall gravity type up to 27,000 Btu/h........  AFUE = 70%.
Gas wall gravity type over 27,000 Btu/h up to     AFUE = 71%.
 46,000 Btu/h.
Gas wall gravity type over 46,000 Btu/h.........  AFUE = 72%.
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 27,000 Btu/h...  AFUE = 67%.
Gas room over 27,000 Btu/h up to 46,000 Btu/h...  AFUE = 68%.
Gas room over 46,000 Btu/h......................  AFUE = 69%.

[[Page 20123]]

 
Gas hearth up to 20,000 Btu/h...................  AFUE = 61%.
Gas hearth over 20,000 Btu/h and up to 27,000     AFUE = 66%.
 Btu/h.
Gas hearth over 27,000 Btu/h and up to 46,000     AFUE = 67%.
 Btu/h.
Gas hearth over 46,000 Btu/h....................  AFUE = 68%.
------------------------------------------------------------------------
Pool Heaters
------------------------------------------------------------------------
                  Product Class                      Proposed Standard
                                                           Level
------------------------------------------------------------------------
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.''

    In the December 2009 NOPR, DOE identified 24 specific issues on 
which it was particularly interested in receiving the comments and 
views of interested parties. 74 FR 65852, 65994-95 (Dec. 11, 2009). In 
addition, DOE also specifically requested comments and data that would 
allow DOE to further bring clarity to the issues surrounding heat pump 
water heaters and condensing water heaters, and determine how the 
issues discussed in the December 2009 NOPR 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. 74 FR 65852, 65966-67 (Dec. 11, 2009). DOE 
also held a public meeting in Washington, DC, on January 7, 2010, to 
hear oral comments on and solicit information on the issues just 
mentioned and any other matters relevant to the proposed rule. Finally, 
DOE received many written comments on these and other issues in 
response to the December 2009 NOPR, which are further presented and 
addressed throughout today's notice. The December 2009 NOPR included 
additional, detailed background information on the history of this 
rulemaking. See 74 FR at 65852, 65859-60 (Dec. 11, 2009).

III. General Discussion

A. Test Procedures

    As noted above, DOE's test procedures for residential water 
heaters, vented DHE, and pool heaters are set forth at 10 CFR part 430, 
subpart B, appendices E, O, and P, respectively. These test procedures 
are currently used to determine whether the three heating products 
comply with applicable energy conservation standards and as a basis for 
manufacturers' representations as to the energy efficiency of these 
products.
    During this rulemaking, interested parties have asserted that the 
residential water heater test procedure does not: (1) Reflect actual 
use of these water heaters by consumers; (2) permit accurate (i.e., 
consistent and repeatable) measurement of the efficiencies of electric 
resistance water heaters that have an EF of 0.95 EF and above; or (3) 
include all of the cost-effective efficiency measures available for 
water heaters. 74 FR 65852, 65860-61 (Dec. 11, 2009).
    As to the first point, DOE believes the test procedure does reflect 
actual use of water heaters. It employs a hot water draw model, and 
data that incorporate correction factors that account for actual use of 
water heaters in U.S. homes. 74 FR 65852, 65860 (Dec. 11, 2009). As to 
the second point, concerning accuracy of the test procedure, DOE 
explains in the December 2009 NOPR that manufacturer certification of 
several electric resistance water heaters with EFs of 0.95, as well as 
DOE testing of such models, demonstrate that the DOE test procedure can 
accurately measure the efficiencies of units at that level that use 
conventional, electric resistance technologies. 74 FR 65852, 65680-81 
(Dec. 11, 2009). As the December 2009 NOPR also indicates, units with 
efficiencies significantly above that level must use advanced 
technologies, for which the test procedure also permits accurate 
measurement of EF levels. 74 FR 65852, 65681 (Dec. 11, 2009). Thus, 
because today's standards for electric water heaters have two 
substantially different tiers--for capacities at or below 55 gallons, 
minimum EF levels equivalent to 0.95 at the representative storage 
capacity, and for larger capacities substantially higher minimum EF 
levels--DOE confirms that the existing test procedure will accurately 
determine the efficiencies of both models using conventional 
technologies to meet the lower tier and models that will have to use 
advanced technologies to meet the higher tier. Finally, the only 
specific cost-effective efficiency measure that commenters cited as 
being absent from DOE's water heater test procedure is insulation on 
the tank bottom. 74 FR 65852, 65861 (Dec. 11, 2009). To the contrary, 
however, the test procedure addresses and gives credit for inclusion of 
such insulation in water heaters. 10 CFR part 430, subpart B, appendix 
E, section 5. Although DOE recognizes that the test procedure does not 
reflect certain recent advances in energy saving technology, it is 
aware of no evidence that such technologies actually do or would result 
in significant, cost-effective energy savings under normal operating 
conditions for water heaters. Hence, omission of these technologies 
from the test procedure does not affect the efficiency levels 
considered in this rulemaking. DOE received no comments on this issue 
at the NOPR stage. Thus, DOE continues to believe, as stated in the 
December 2009 NOPR, that the appropriate time to address such omission 
is during the next revision of the test procedure.
    As to the DHE and pool heater test procedures, in the December 2009 
NOPR, DOE proposed that its test procedures for vented DHE be applied 
to establish the efficiencies of vented gas hearth DHE. 74 FR 65852, 
65861 (Dec. 11, 2009). DOE received no comments from interested parties 
raising any concern in this rulemaking about application of the DOE 
test procedures for vented DHE to other types of this product. In 
addition, DOE received no comments regarding application of its test 
procedures for pool heaters.
    EPCA, as amended by EISA 2007, requires DOE to amend the test 
procedures for the three types of heating products to include 
provisions for measurement of the products' standby mode and off mode 
energy consumption. (42 U.S.C. 6295(gg)(2)(B)(v)) DOE is actively 
working on a separate rulemaking to amend its test procedures for the 
three types of heating products to incorporate these measurements of 
standby mode and off mode energy consumption in the future.

B. Technological Feasibility

1. General
    As stated above, any standard that DOE establishes for any of the 
three heating products must be technologically feasible. (42 U.S.C. 
6295(o)(2)(A) and (3)(B)) DOE considers a design or technology option 
to be technologically feasible if it is in use by the respective 
industry or if research has progressed to the development of a

[[Page 20124]]

working prototype. ``Technologies incorporated in commercial products 
or in working prototypes will be considered technologically feasible.'' 
10 CFR part 430, subpart C, appendix A, section 4(a)(4)(i). Once DOE 
has determined that particular technology options are technologically 
feasible, it evaluates each technology 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.
    This final rule considers the same technology options as those 
evaluated in the December 2009 NOPR. (See chapter 3 and 4 of the TSD 
accompanying this notice.) All of these technologies have been used or 
are in use in commercially-available products, or exist in working 
prototypes. Also, these technologies all incorporate materials and 
components that are commercially available in today's supply markets 
for the products covered by this final rule. DOE received several 
comments on the technology options considered in the rulemaking and the 
preliminary conclusions drawn by applying the four screening criteria 
to them. A detailed discussion of the comment and response can be found 
in section IV.B. Therefore, DOE determined that all of the efficiency 
levels evaluated in this notice are technologically feasible.
2. Maximum Technologically Feasible Levels
    As required by 42 U.S.C. 6295(p)(1), in developing the December 
2009 NOPR, DOE identified the efficiency levels that would achieve the 
maximum improvements in energy efficiency that are technologically 
feasible (max-tech levels) for the three heating products. 74 FR 65852, 
65861-62 (Dec. 11, 2009). (See chapter 5 of the TSD.) Except for the 
levels for electric and gas-fired storage water heaters and gas wall 
gravity DHE, DOE received no comments on the December 2009 proposed 
rule to lead DOE to consider changes to these levels. Therefore, for 
today's final rule, the max-tech levels for all classes of the three 
heating products, except for the electric and gas-fired water heaters 
and gas wall gravity DHE, are the max-tech levels identified in the 
December 2009 NOPR.
    The max-tech levels considered for today's rule are provided in 
Table III.1. See section IV.C.2 for additional details of the max-tech 
efficiency levels and discussion of related comments from interested 
parties on the December 2009 NOPR.

 Table III.1--Max-Tech Efficiency Levels for the Residential Heating Products Rulemaking for the Representative
                                                    Products
----------------------------------------------------------------------------------------------------------------
             Product class                 Representative product             Max-Tech efficiency level
----------------------------------------------------------------------------------------------------------------
Residential Water Heaters
----------------------------------------------------------------------------------------------------------------
Gas-Fired Storage Water Heater.........  Rated Storage Volume = 40   EF = 0.77.
                                          Gallons.
Electric Storage Water Heater..........  Rated Storage Volume = 50   EF = 2.35.
                                          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 = 70%.
                                          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.
----------------------------------------------------------------------------------------------------------------

C. Energy Savings

    DOE forecasted energy savings over a 30-year analysis period in its 
national impact analysis (NIA) through the use of an NIA spreadsheet 
tool, as discussed in the December 2009 NOPR. 74 FR 65862, 65908-14, 
65954 (Dec. 11, 2009).
    One of the criteria that governs DOE's adoption of standards for 
covered products is that the standard must result in ``significant 
conservation of energy.'' (42 U.S.C. 6295(o)(3)(B)) While EPCA does not 
define the term ``significant,'' the U.S. Court of Appeals for the 
District of Columbia Circuit, in Natural Resources Defense Council v. 
Herrington, 768 F.2d 1355, 1373 (DC Cir. 1985), indicated that Congress 
intended ``significant'' energy savings in this context to be savings 
that were not ``genuinely trivial.'' DOE's estimates of the energy 
savings for energy conservation standards at each of the TSLs 
considered for today's rule indicate that the energy savings each would 
achieve are nontrivial. Therefore, DOE considers these savings 
``significant'' within the meaning of Section 325 of EPCA.

D. Economic Justification

    The following section discusses how DOE has addressed each of the 
seven factors that it uses to determine if energy conservation 
standards are economically justified. The comments DOE received on 
specific analyses and DOE's response to those comments are summarized 
and presented throughout section IV.
1. Specific Criteria
    As noted earlier, EPCA provides seven factors to evaluate in 
determining whether an energy conservation standard for covered 
products is economically justified. (42 U.S.C. 6295(o)(2)(B)(i)) The 
following sections summarize how DOE has addressed each of those seven 
factors in evaluating efficiency standards for the three heating 
products.

[[Page 20125]]

a. Economic Impact on Consumers and Manufacturers
    As required by EPCA, DOE considered the economic impact of 
potential standards on consumers and manufacturers of the three heating 
products. (42 U.S.C. 6295(o)(2)(B)(i)(I)) For consumers, DOE measured 
the economic impact as the change in installed cost and life-cycle 
operating costs (i.e., the change in LCC). (See section IV.F and 
VI.C.1.a, and chapter 8 of the final rule TSD.) DOE investigated the 
impacts on manufacturers through the manufacturer impact analysis 
(MIA). (See sections IV.I and VI.C.2 of today's final rule, and chapter 
12 of the final rule TSD.) The economic impact on consumers and 
manufacturers is discussed in detail in the December 2009 NOPR. 74 FR 
65852, 65862-63, 65897-908, 65915-22, 65932-54, 65984-92 (Dec. 11, 
2009).
b. Life-Cycle Costs
    As required by EPCA, DOE considered the life-cycle costs of the 
three heating products. (42 U.S.C. 6295(o)(2)(B)(i)(II)) LCC is 
discussed at length in the December 2009 NOPR. 74 FR 65852, 65863, 
65897-908, 65915, 65932-35 (Dec. 11, 2009). DOE calculated the sum of 
the purchase price (including associated installation costs) and the 
operating expense (including energy, maintenance, and repair 
expenditures), discounted over the lifetime of the equipment, to 
estimate the range in LCC benefits that consumers would expect to 
achieve due to standards.
c. Energy Savings
    Although significant conservation of energy is a separate statutory 
requirement for imposing an energy conservation standard, EPCA also 
requires DOE, in determining the economic justification of a proposed 
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)) As in the December 2009 NOPR, for today's final 
rule, DOE used the NIA spreadsheet results in its consideration of 
total projected savings that are directly attributable to the standard 
levels DOE considered. 74 FR 65852, 65862, 65908-14, 65954 (Dec. 11, 
2009).
d. Lessening of Utility or Performance of Products
    In selecting today's standard levels, DOE did not consider trial 
standard levels for the three heating products that would lessen the 
utility or performance of such products. (42 U.S.C. 
6295(o)(2)(B)(i)(IV)). As explained in the December 2009 NOPR, DOE 
determined that none of the trial standard levels under considerations 
would reduce the utility or performance of the products subject to this 
rulemaking. 74 FR 65852, 65863, 65956 (Dec. 11, 2009).
e. Impact of Any Lessening of Competition
    DOE considers any lessening of competition that is likely to result 
from standards. Accordingly, as discussed in the December 2009 NOPR (74 
FR 65852, 65863, 65956 (Dec. 11, 2009)), DOE requested that the 
Attorney General transmit to the Secretary, not later than 60 days 
after publication of the proposed rule, a written determination of the 
impact, if any, of any lessening of competition likely to result from 
the standards proposed in the December 2009 NOPR, 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))
    To assist the Attorney General in making such a determination, DOE 
provided the U.S. Department of Justice (DOJ) with copies of the 
December 2009 proposed rule and the NOPR TSD for review. The Attorney 
General's determination is discussed in section VI.C.5 below, and is 
reprinted at the end of this rule. DOJ did not believe the standards 
proposed in the December 2009 NOPR for water heaters and pool heaters 
would likely lead to a lessening of competition. However, DOJ was 
concerned about the potential of the proposed standards to impact 
competition in the traditional DHE categories if no more than one or 
two DHE manufacturers chose to continue to produce products in any one 
of the categories. DOJ requested that DOE consider the potential impact 
on competition in determining the final standards for these categories. 
(DOJ, No. 99 at pp. 1-2) \2\ DOJ's comment and DOE's response are 
further described in section VI.C.5.
---------------------------------------------------------------------------

    \2\ ``DOJ, No. 99 at pp. 1-2'' refers to: (1) To a statement 
that was submitted by the U.S. Department of Justice. 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 99; and (2) a passage that appears on pages 1 
through 2 of that statement.
---------------------------------------------------------------------------

f. Need of the Nation To Conserve Energy
    In considering standards for the three heating products, the 
Secretary must consider the need of the Nation to conserve energy. (42 
U.S.C. 6295(o)(2)(B)(i)(VI)) The Secretary recognizes that energy 
conservation benefits the Nation in several important ways. The non-
monetary benefits of standards are likely to be reflected in 
improvements to the security and reliability of the Nation's energy 
system. Today's standards will also result in environmental benefits. 
As discussed in detail in the December 2009 NOPR (74 FR 65852, 65863, 
65923-29, 65956-61 (Dec. 11, 2009)) and in sections IV.K, IV.L, and 
IV.M, DOE has considered these factors in considering whether to adopt 
standards for the three heating products, primarily through its utility 
impact analysis, environmental assessment, and monetization of 
anticipated emissions reductions.
g. Other Factors
    EPCA directs 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)) 
In adopting today's standards, the Secretary considered the potential 
impact of standards on certain identifiable groups of consumers who 
might be disproportionately impacted by any national energy 
conservation standard level. For certain water heaters and DHE, DOE 
considered the impacts of standards on low-income households and 
senior-only households, and of these water heaters, DOE also considered 
the impacts of standards on households in multi-family housing and in 
manufactured homes. 74 FR 65852, 65863, 65934-35, 65961-62 (Dec. 11, 
2009).
    In addition, DOE considered the uncertainties associated with 
whether, in order to adequately serve the water heater market: (1) 
Manufacturers could ramp up production of heat pump water heaters; (2) 
heat pump component manufacturers could increase production; and (3) 
enough servicers and installers of water heaters could be retrained. 74 
FR 65852, 65863-64, 65877-78, 65962, 65965-66 (Dec. 11, 2009). Lastly, 
DOE considered the issues identified in the December 2009 NOPR 
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, as well as the 
condensing water heater market. 74 FR 65852, 65966-67 (Dec. 11, 2009). 
These issues are addressed as presented below in section VI.D.2.
2. Rebuttable Presumption
    As set forth in 42 U.S.C. 6295(o)(2)(B)(iii), EPCA states that 
there is a rebuttable presumption that an energy conservation standard 
is economically justified if the increased

[[Page 20126]]

installed cost for a product that meets the standard 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. DOE's LCC and payback period (PBP) analyses 
generate values that calculate the payback period for consumers of 
potential energy conservation standards, which include, but are not 
limited to, the payback period contemplated under the rebuttable 
presumption test described 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 results of DOE's PBP analysis can be found 
in sections VI.C.1.a and VI.C.1.c.

IV. Methodology and Discussion of Comments on Methodology

    DOE used several analytical tools that it developed previously and 
adapted for use in this rulemaking. One is a spreadsheet that 
calculates LCC and PBP. Another tool calculates national energy savings 
and national NPV that would result from the adoption of energy 
conservation standards. DOE also used the Government Regulatory Impact 
Model (GRIM), along with other methods, in its MIA to determine the 
impacts on manufacturers of standards for the three heating products. 
Finally, DOE developed an approach using the Energy Information 
Administration's (EIA) National Energy Modeling System \3\ (NEMS) to 
estimate the impacts of such standards on utilities and the 
environment. Chapters 3 through 16 of the TSD and the December 2009 
NOPR discuss each of these analytical tools in detail. 74 FR 65852, 
65897-919, 65923-29 (Dec. 11, 2009).
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    As a basis for this final rule, DOE has continued to use the 
spreadsheets and approaches explained in the December 2009 NOPR. DOE 
used the same general methodology as applied in the December 2009 NOPR, 
but revised some of the assumptions and inputs for the final rule in 
response to stakeholder comments. The following sections discuss these 
comments and revisions.

A. Market and Technology Assessment

    When beginning an energy conservation standards rulemaking, DOE 
develops information that provides an overall picture of the market for 
the products concerned, including the purpose of the products, the 
industry structure, and market characteristics. This activity includes 
both quantitative and qualitative assessments based primarily on 
publicly-available information. DOE presented its market and technology 
assessment for this rulemaking in the December 2009 NOPR and chapter 3 
of the NOPR TSD. 74 FR 65852, 65864-72 (Dec. 11, 2009). The assessment 
included product definitions, delineation of the products included in 
the rulemaking, product classes, manufacturers, quantities and types of 
products offered for sale, retail market trends, and regulatory and 
non-regulatory initiative programs. As discussed below, commenters 
raised a variety of issues related to the market and technology 
assessment, to which DOE responds in the following sections.
1. DOE's Determinations as to the Inclusion of Products in This 
Rulemaking
a. Whether Certain Products Are Covered Under the Act
i. Solar-Powered Water Heaters and Pool Heaters
    As fully explained in the December 2009 NOPR, DOE has concluded 
that it presently lacks authority to prescribe standards for these 
products 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. 74 FR 65852, 65864 (Dec. 
11, 2009). In addition, DOE currently lacks authority to adopt 
standards for solar-powered water heaters because EPCA's definition of 
``water heater'' includes only products that use ``oil, gas, or 
electricity to heat potable water.'' (42 U.S.C. 6291(27); 10 CFR 430.2) 
Because DOE did not receive additional feedback from interested 
parties, DOE did not change its position on solar-powered water heaters 
and pool heaters as presented in the December 2009 NOPR and summarized 
above.
ii. Add-On Heat Pump Water Heaters
    DOE did not propose in the December 2009 NOPR to adopt standards 
for a residential product that 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 electric 
storage water heater. 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. DOE has concluded, therefore, that the device does not 
meet EPCA's definition of a ``water heater'' and currently is not a 
covered product. 74 FR 65852, 65865 (Dec. 11, 2009).
    In response to DOE's preliminary conclusions set forth in the 
December 2009 NOPR regarding add-on heat pump water heaters, the 
American Council for an Energy Efficient Economy (ACEEE) stated that 
add-on heat pump water heaters should not have been excluded from the 
rulemaking. (ACEEE, No. 79 at p. 5) According to the commenter, the 
December 2009 NOPR language used to exclude them could as readily be 
used to exclude split system air conditioners as add-ins to furnace 
systems, since they are not fully functional without the furnace's air 
handler. ACEEE argued that add-on heat pump water heaters could provide 
an important opportunity for cost-effective resistive unit retrofits, 
and standards are required to help exclude low-performance units that 
will not meet consumer needs. Otherwise, ACEEE asserted that there is 
danger that failures of low-performance add-on units will damage the 
reputation of the integral heat pump water heater product class, as it 
is not clear that consumers will easily differentiate the two product 
subclasses.
    In response, DOE does not agree with ACEEE's comparison of add-on 
heat pump water heaters to central air conditioning and heating 
systems. Unlike components in a split air-conditioning system, add-on 
heat pump water heaters are paired to an electric storage water heater 
which is fully functional when it leaves the manufacturing facility. 
Components in a split air-conditioning system do not work independently 
until paired

[[Page 20127]]

together in the field. As DOE previously stated, 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. DOE is not swayed by the 
commenter's speculative assertions regarding the future performance of 
add-on heat pump water heaters. Accordingly, DOE has concluded that an 
add-on heat pump water heater does not meet EPCA's definition of a 
``water heater'' and currently is not a covered product.
iii. Gas-Fired Instantaneous Water Heaters With Inputs Above and Below 
Certain Levels
    During this rulemaking, DOE considered whether to evaluate for 
standards gas-fired instantaneous water heaters with inputs greater 
than 200,000 Btu/h or less than 50,000 Btu/h. DOE determined that the 
former do not meet EPCA's definition of a ``water heater,'' given the 
specific portions of the definition pertaining to ``instantaneous type 
units.'' (42 U.S.C. 6291(27)(B)) As to the latter, DOE determined that 
manufacturers are not currently producing any gas-fired instantaneous 
water heaters with an input capacity less than 50,000 Btu/h. Therefore, 
DOE did not propose standards for products with an input capacity above 
200,000 Btu/h or below 50,000 Btu/h. 74 FR 65852, 65865 (Dec. 11, 
2009). DOE did not receive any comments on this issue at the NOPR 
stage, so the above approach has been retained for this final rule, and 
accordingly, no standards are being adopted for gas-fired instantaneous 
water heaters with inputs greater than 200,000 Btu/h or less than 
50,000 Btu/h.
iv. Residential Pool Heaters With Input Capacities Above Certain Levels 
and Coverage of Spa Heaters
    At the framework stage of this rulemaking, DOE considered excluding 
pool heaters with an input capacity greater than 1 million Btu/h, and 
commenters suggested that DOE should exclude products with an input 
capacity greater than 400,000 Btu/h. The rulemaking covers pool heaters 
that meet EPCA's definitions of ``pool heater'' (which provides no 
capacity limitation) and of ``consumer product.'' (42 U.S.C. 6291(25); 
42 U.S.C. 6291(1)). DOE tentatively concluded that these provisions, 
and standards adopted under them, would apply to any pool heater 
distributed to any significant extent as a consumer product for 
residential use, regardless of input capacity. In addition, DOE 
tentatively concluded that pool heaters marketed as commercial 
equipment, which contain additional design modifications related to 
safety requirements for commercial installation, would not be covered 
by such standards. Therefore, DOE did not propose to limit application 
of the standards developed in this rulemaking to pool heaters with an 
input capacity below a specified level. 74 FR 65852, 65865 (Dec. 11, 
2009).
    In response to this position in the December 2009 NOPR, DOE 
received three comments urging DOE to establish an input capacity limit 
for residential pool heaters.
    Zodiac Pool Systems (Zodiac) asserted that DOE should consider 
setting different minimum efficiency levels for pool heaters with input 
ratings of up to 400,000 British thermal units per hour (Btu/h) and for 
those with input ratings above 400,000 Btu/h. Zodiac stated its belief 
that there may be some benefits to be gained if what Zodiac referred to 
as ``commercial'' pool heaters (i.e., those units rated above 400,000 
Btu/h input) required a higher minimum efficiency level than that for 
``residential'' pool heaters (i.e., those units rated up to 400,000 
Btu/h input). According to the commenter, commercial-type units are 
operated longer and in general, continuously, thereby increasing the 
potential payback in efficiency and energy savings over the life of the 
product. (Zodiac, No. 68 at p. 2)
    Lochinvar asserted that DOE should limit the input capacity for 
residential pool heaters to 400,000 Btu/h and that DOE should add an 
additional classification for commercial pool heaters above 400,000 
Btu/h. According to the commenter, practically all of the residential 
pool heaters sold today have pool heater inputs of 400,000 Btu/h and 
below. Lochinvar stated that residential pool heater sales by pool 
heater manufacturers do not include pumps. Residential pool heaters are 
designed to accept a wide range of water flows to meet the customers' 
demands because the residential market is mature with a wide variety of 
pool distribution accessories (e.g., pumps that mate with water 
filtration systems, water temperature controls, and valving 
components). Therefore, pumps are not supplied because this is a 
variable that cannot be anticipated by the pool heater manufacturer. 
Thus, for efficiency rating purposes, pool heater thermal efficiency, 
as calculated by DOE's test procedure, does not include the pump 
energy. In contrast, Lochinvar pointed out that commercial pool heater 
applications require much higher volumes of water to be circulated in a 
primary pool loop that incorporates large filtration systems and pool 
water conditioning and monitoring equipment. Commercial pool heaters 
are designed to tap off of the primary pool loop and, via means of a 
separate pump, circulate pool water through the commercial pool heater 
to be heated and then delivered back to the pool loop. The ratio of 
water flow through commercial pool loop systems to that flowing through 
the pool heater is anywhere from 5 to 15 times. In these applications, 
commercial pool heater sales always provide or specify matching pumps 
to ensure sufficient water flow through the heat exchanger. 
Accordingly, the contribution of pump energy is included in the 
industry commercial pool heater test procedure and combustion 
efficiency metric. (Lochinvar, No. 56.6 at p. 2)
    AHRI recommended that consideration be given in the future to 
creating separate subclasses to distinguish between commercial and 
residential pool heaters from a market perspective. Comments have 
previously been provided noting the major differences between pool 
heaters for commercial applications versus residential applications, 
specifically in terms of construction, control schemes, and how they go 
to market. (AHRI, No. 91 at p. 10)
    As DOE discussed in the December 2009 NOPR, EPCA places no capacity 
limit on the pool heaters it covers in terms of its definition of 
``pool heater.'' (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. In light of the above 
and based upon the distinct differences articulated by commenters 
between the residential and commercial pool heater markets and 
products, DOE has concluded that further delineation by adding an input 
capacity limit is not necessary. Specifically, 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. This would include pool 
heating systems that are designed to meet a high volume flow and are 
matched with a pump from the point of manufacture to accommodate the 
needs of commercial facilities. DOE believes manufacturers can 
distinguish those

[[Page 20128]]

units from pool heaters distributed to any significant extent as a 
consumer product for residential use, regardless of input capacity.
    As to spa heaters, the EPCA definition for ``pool heater'' clearly 
encompasses them. (42 U.S.C. 6291(25)) Therefore, in the December 2009 
NOPR, DOE tentatively concluded that they are covered by EPCA, and 
included them in this rulemaking. Furthermore, DOE tentatively 
concluded that because spa heaters and pool heaters perform similar 
functions, include similar features, and lack performance or operating 
features that would cause them to have inherently different energy 
efficiencies, a separate product class for such units is not warranted. 
74 FR 65852, 65865-66 (Dec. 11, 2009). DOE did not receive any comments 
in response to its proposed treatment of spa heaters in the December 
2009 NOPR. Consequently, DOE has concluded that spa heaters are 
included within EPCA under the definition of ``pool heater'' and do not 
warrant a separate product class.
v. Vented Hearth Products
    The following two paragraphs summarize DOE's reasons, explained in 
greater detail in the December 2009 NOPR for concluding that EPCA 
covers vented hearth products and for including them in this 
rulemaking. 74 FR 65852, 65866 (Dec. 11, 2009).
    When EPCA was amended to include energy conservation standards for 
``direct heating equipment,'' that term replaced the term ``home 
heating equipment'' in the Act. However, EPCA has never defined either 
of these terms. Instead, DOE regulations define ``home heating 
equipment,'' stating that the term includes ``vented home heating 
equipment.'' 10 CFR 430.2. These definitions inform the meaning of 
``direct heating equipment,'' but, to provide clarity in the future, in 
today's rule DOE is incorporating into its regulations a definition of 
this term that is identical to the existing definition of ``home 
heating equipment.''
    Vented hearth products include gas-fired products such as 
fireplaces, fireplace inserts, stoves, and log sets that typically 
include aesthetic features and that provide space heating. DOE has 
concluded that such products meet its definition of ``vented home 
heating equipment,'' because they are designed to furnish warmed air to 
the living space of a residence. DOE has also concluded, therefore, 
that they are covered products under EPCA and are properly classified 
as DHE. Accordingly, DOE proposed and today is adopting standards for 
vented hearth products.
    In the December 2009 NOPR, DOE also pointed out that vented hearth 
products would be subject to the same product testing and certification 
requirements that currently apply to DHE. 74 FR 65852, 65866 (Dec. 11, 
2009). In order to help manufacturers determine more easily whether 
their vented hearth direct heating equipment is covered under DOE's 
regulations, DOE proposed to adopt the following definition of ``vented 
hearth heater'':

    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.

74 FR 65852, 65867-68 (Dec. 11, 2009).

    The Air-Conditioning, Heating, and Refrigerating Institute (AHRI), 
the Hearth, Patio, and Barbeque Association (HPBA), and Empire Comfort 
Systems (Empire) do not support DOE's proposed definition ``vented 
hearth heater'' as presented above and in the December 2009 NOPR. 
However, these three interested parties do support DOE's decision to 
establish vented gas fireplace heaters as a separate type of direct 
heating equipment. AHRI, HPBA, and Empire urged DOE to use the 
definition of ``vented gas fireplace heater'' as presented in the 
American National Standards Institute (ANSI) Standard Z21.88, Vented 
Gas Fireplace Heaters, so as to directly connect it to this safety 
standard. By law, manufacturers are required to list and label these 
types of appliances to approved safety standards such as ANSI Z21.88. 
By using this safety standard reference, the interested parties argued 
that DOE and others would be able to distinguish vented gas fireplace 
heaters from decorative gas appliances certified to ANSI Z21.50, Vented 
Gas Fireplaces, and ANSI Z21.60, Decorative Gas Appliances for 
Installation in Solid-Fuel Burning Fireplaces, thereby eliminating a 
significant opportunity for confusion in the marketplace after the new 
energy conservation standards take effect. The interested parties 
argued that when the National Appliance Energy Conservation Act was 
being developed, it was recognized that there were decorative gas 
appliances that were marketed based on the aesthetic appeal of a 
simulated solid fuel fireplace or stove. The interested parties 
asserted that those same products are available in the marketplace 
today and need to be excluded from inclusion in this rulemaking in a 
proactive manner, preferably by using the consensus safety standard 
designation in the definition and adding an explanatory note to the 
definition stating that ANSI Z21.50 and ANSI Z21.60 appliances are not 
vented gas fireplace heaters. The interested parties suggested the 
following definition of ``vented gas fireplace heater'':

    Vented Gas Fireplace Heater. A vented appliance which simulates 
a solid fuel fireplace and furnishes warm air, with or 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 heated 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.

(AHRI, No. 91 at pp. 13-14; HPBA, No. 75 at p. 1; Empire, No. 100 at p. 
3; AHRI, Public Meeting Transcript, No. 57.4 at pp. 48-49; HPBA, Public 
Meeting Transcript, No. 57.4 at pp. 42 and 51; and Empire, Public 
Meeting Transcript, No. 57.4 at pp. 50)

    ACEEE also suggested that it would be reasonable for DOE to not set 
efficiency regulations for purely decorative products with an output 
capacity less than or equal to 6,000 Btu/h. However, ACEEE asserted 
that an upper limit is necessary to prevent subterfuge and confusion 
with actual heating appliances. (ACEEE, No. 79 at p. 6)
    DOE agrees with the interested parties that further modification to 
the definition of ``vented hearth heater'' is necessary to provide 
clear guidance to the industry regarding which products are covered 
under DOE's regulations. DOE's definition of ``vented home heating 
equipment'' limits the coverage of vented home heating equipment to 
include only those units ``designed to furnish warmed air to the living 
space of a residence.'' 10 CFR 430.2. DOE notes that it is often 
difficult to determine the intended purpose of fireplace product 
currently sold. Units designed to furnish warmed air to the living 
space and purely decorative units often share very similar external 
appearances, unit construction, and input capacities. Some interested 
parties suggested DOE use the ANSI safety standards to distinguish 
coverage in the marketplace. DOE does not believe that using ANSI 
safety standards would be a suitable solution to this problem since 
many of those products classified as ``decorative fireplaces'' under 
the ANSI safety standards are very similar in construction to fireplace 
heaters and provide warm air to the residence.
    DOE notes that the primary difference between the two types of 
hearth products is that decorative units are intended only to provide 
the ambiance and aesthetic utility associated with a

[[Page 20129]]

solid fuel (e.g., wood-burning) fireplace with little or no heat output 
to the living space, while heating hearth products are intended to 
provide heat to the living space along with the aesthetic utility. 
Heating-type products are often shipped with additional accessories 
that decorative products do not have, such as thermostats to control 
the heat output and blowers that distribute hot air to the room. DOE 
research suggests that this additional equipment is typically optional 
and hence not very useful to distinguish between heaters and decorative 
units.
    After carefully considering the public comments and conducting 
additional research, DOE believes implementing a maximum input capacity 
limit will likely result in a clear distinguishable way for DOE, 
manufacturers, and consumers to identify which products provide 
``warmed air to the residence,'' as compared with those designed purely 
for aesthetic purposes. Because of the nature of hearth products (i.e., 
the presence of a flame), all hearth products create heat and nearly 
all of the hearth products provide some amount of that heat, however 
small that may be, to the surrounding living space.
    Unlike fireplace heaters, decorative hearth products provide a 
unique utility, specifically offering the ambiance and aesthetic appeal 
provided by the flame without adding significant heat to the 
conditioned space. By way of explanation, some consumers that wish to 
purchase purely decorative hearth products live in warmer climates 
where any additional heat provided to the residence would be 
undesirable. However, these consumers still want the aesthetic appeal 
provided by the flame. As the efficiency of the vented hearth product 
is increased, the more useful heat is provided to the space. So in 
response to comments, DOE is adopting an approach that would maintain 
the utility and availability of decorative hearth products.
    In order to determine whether a maximum input capacity limit is a 
good indicator of intended use, DOE reviewed the market for vented 
hearth products, including those products marketed as heaters and 
decorative appliances. DOE research identified products marketed for 
heating and decorative purposes offered across the entire range of 
input capacities. Many of the units produced solely for decorative 
purposes come with the capability to vary the input capacity in order 
to change the magnitude of the flame. Since manufacturers provide 
consumers, installers, and contractor with a means to change the input 
capacity of the unit to better match consumers' aesthetic desires and 
heating needs, DOE believes input capacity is indicative of the type of 
intended use of the vented hearth heater.
    DOE believes that consumers desiring a purely decorative unit will 
chose to buy units which minimize the heat furnished to their living 
space, thereby reducing the impacts on the cooling loads of their house 
for those living in warmer climates. DOE contacted several contractors 
in warmer climates, where decorative appeal is presumably the 
consumers' top priority. From these discussions and further review of 
the product literature, DOE found that many hearth products allow the 
input capacity to be modulated via the gas valve. In warmer climates, 
contractors frequently suggest to their customer to turn down the gas 
supply to minimize the amount of heat radiated and convected to the air 
within the residence. Some installation companies even offer optional 
venting products and dampers, which attempt to direct the heat to other 
parts of the residence or outdoors. Even though decorative hearth 
products are offered with a large range of input capacities, DOE 
research hence suggests that the input rating is typically 
significantly reduced for applications in conditions in which the 
flames are purely ornamental to minimize heat provided to the 
residence. This is shown by the variability in the input ratings 
offered for a given model as described in manufacturer catalog data, 
which can be field-adjusted based on the amount of heat desired within 
the residence.
    DOE believes that hearth products intended for decorative purposes 
provide a specific aesthetic utility that consumers value. In its 
analysis, DOE considered the value of this aesthetic quality and the 
additional heat load that such systems produce. DOE believes that a 
maximum input capacity of 9,000 Btu/h is an appropriate cut-off for 
decorative appliances since existing hearth-type DHE units featuring 
adjustable input capacities operate at or below this input capacity 
limit. DOE chose 9,000 Btu/h because other gas appliances found in a 
house, which may have unintended heating loads, such as a burner on a 
gas-cook top, are also found at this input capacity. By allowing 
manufacturers the option of producing vented hearth heaters that are 
excluded from the standards amended in today's final rule, DOE is 
preserving the ability of manufacturers to continue selling decorative 
units, consumers can continue to enjoy them, and unintended heat loads 
are limited to no more than \1/2\ of a ton of heating capacity per 
decorative unit. DOE research suggests that manufacturers can comply 
relatively inexpensively with the coverage established by the ``vented 
hearth heater'' definition by reducing the maximum input capacity of 
the gas delivery system through the use of a restrictor plate, 
modifying the gas valve, or altering the flame orifice. All of these 
options are currently available or utilized within the industry today. 
DOE believes the most likely solution that will be used by hearth 
manufacturers to meet DOE's restriction on input capacity would be to 
use a restrictor plate because it is the most inexpensive. A restrictor 
plate would ensure that limitations were placed upon the gas line such 
that the maximum input capacity of the fireplace is less than 9,000 
Btu/h. DOE notes that all vented hearth heaters which manufacturers 
produce to be purely decorative units must be designed so that the 
consumer cannot override this 9,000 Btu/h maximum input capacity limit 
in the field.
    DOE chose to include a maximum input capacity limitation, instead 
of an output capacity limit as ACEEE suggested, because a very 
inefficient unit could have a very high input capacity and use a lot of 
energy, while meeting DOE's limitation on output capacity.
    DOE realizes its amended definition of ``vented hearth heater'' 
will include all types of hearth units with maximum input capacities 
above the specified limit, including all products that are currently 
referred to as fireplace heaters and some products that are currently 
deemed as decorative within the marketplace. DOE also notes that this 
maximum input capacity corresponds to the output capacity suggested by 
ACEEE, assuming the unit is about two-thirds efficient, which is an 
efficiency that is comparable to the standard level being adopted today 
for vented gas hearth heaters. Therefore, DOE is modifying the ``vented 
hearth heater'' definition to include a maximum input capacity limit of 
9,000 Btu/h for purely decorative units.
    AHRI, HBPA, and Empire asserted that DOE should amend its 
definition of ``vented hearth heater'' to include duct connections. 
While duct connections were excluded from the original ``direct heating 
equipment'' definition, the interested parties stated that this 
exclusion is unnecessary for vented gas fireplace heaters because they 
are allowed to have duct connections by design. The interested parties 
argued that there is no reason for DOE to exclude these currently-
available appliances merely based upon the

[[Page 20130]]

presence of ducting, particularly given that the limiting definition of 
``vented home heating equipment'' was written before the products were 
introduced. (AHRI, No. 91 at pp. 13-14; HPBA, No. 75 at pp. 1-2; 
Empire, No. 100 at p. 3)
    DOE agrees with these interested parties and is extending coverage 
to both ducted and ductless vented hearth heater products. DOE believes 
this modification will provide equal treatment to similar products 
offered on the market today. DOE's research confirmed that some vented 
hearth heater models have the ability to connect to ducts and 
distribute the heat furnished to the space throughout the house. In 
order to include both ducted and ductless vented hearth products, DOE 
is amending the definitions of ``vented hearth heater'' and ``vented 
home heating equipment'' for inclusion at 10 CFR 430.2. Lastly, DOE is 
making a number of editorial changes to the definition of ``vented 
hearth heater'' proposed in the December 2009 NOPR, in order to make 
the definition easier to read. As adopted, these definitions read as 
follows:
    Vented hearth heater means a vented appliance which simulates a 
solid fuel fireplace and is designed to furnish warm air, with or 
without duct connections, to the space in which it is installed. The 
circulation of heated room air may be by gravity or mechanical means. A 
vented hearth heater may be freestanding, recessed, zero clearance, or 
a gas fireplace insert or stove. Those heaters with a maximum input 
capacity less than or equal to 9,000 British thermal units per hour 
(Btu/h), as measured using DOE's test procedure for vented home heating 
equipment (10 CFR part 430, subpart B, appendix O), are considered 
purely decorative and are excluded from DOE's regulations.
    DOE is also amending its definition of ``vented home heating 
equipment or vented heater'' in 10 CFR 430.2 to include vented hearth 
heaters with duct connections. This modification is necessary in order 
for the definition of ``vented home heating equipment or vented 
heater'' to be consistent with the definition of ``vented hearth 
heater.'' DOE is also amending this definition to add ``vented hearth 
heater'' to the list of products--``vented wall furnace, vented floor 
furnace, and vented room heater''--that the definition currently states 
are included as vented home heating equipment. As stated in the 
December 2009 NOPR and above, vented hearth products already meet DOE's 
definition for ``vented home heating equipment.'' This is true 
regardless of whether the term ``vented hearth heater'' is added to 
that definition. Thus, the addition of that term merely clarifies the 
existing definition, and is a technical correction that does not alter 
the substance of the definition. As amended, the definition reads as 
follows:
    Vented home heating equipment or vented heater means 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 except for vented hearth 
heaters, which may be with or without duct connections) and includes: 
vented wall furnace, vented floor furnace, vented room heater, and 
vented hearth heater.
b. Covered Products Not Included in This Rulemaking
    As the December 2009 NOPR explains in detail, unvented direct 
heating equipment, electric pool heaters, and combination water 
heating/space heating products all are covered products under EPCA, but 
no Federal energy conservation standards exist for them. 74 FR 65852, 
65866-76 (Dec. 11, 2009). DOE did not propose standards for them in 
this rulemaking, because, in the case of unvented DHE, a standard could 
produce little energy savings (largely due to the fact that any heat 
losses are dissipated directly into the conditioned space) and because 
of limitations in the applicable DOE test procedure, and in the case of 
the other two products, because of the lack of an appropriate DOE test 
procedure. Id.
    By contrast, standards currently apply to tabletop and electric 
instantaneous water heaters. (10 CFR 430.32(d)) But, as explained in 
the December 2009 NOPR, an increase in the current standard levels for 
tabletop products is not feasible, and would force them off the market, 
and an increase in the levels for electric instantaneous products 
would, at best, save little energy. 74 FR 65852, 65867 (Dec. 11, 2009). 
Therefore, DOE also did not propose amended standards for these 
products.
    With regard to these five covered products, DOE sees no reason to 
change the conclusions expressed in the December 2009 NOPR, and takes 
no further action in today's final rule. DOE did not receive any 
comments in response to its proposed treatment of these five covered 
products in the December 2009 NOPR. Consequently, DOE is not adopting 
standards for these products in today's final rule.
2. 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 and a discussion of 
comments relating to the product classes for the three heating products 
in response to the December 2009 NOPR proposals.

       Table IV.1--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.

[[Page 20131]]

 
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
    As presented in the December 2009 NOPR, 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. 74 FR 65852, 
65868-71 (Dec. 11, 2009). 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. 74 FR 65852, 65868 (Dec. 11, 2009).
    In response to the December 2009 NOPR analysis and the issues for 
which DOE specifically sought comment, DOE received several comments 
from interested parties about DOE's proposed product classes and their 
organization for residential water heaters. These comments are 
summarized and addressed immediately below.
i. Low-Boy Water Heaters
    General Electric (GE), A.O. Smith Corporation (A.O. Smith), 
Bradford White Corporation (BWC), and AHRI supported the need for a 
separate product class for low-boy water heaters, which are electric 
storage water heaters that are shorter in height and wider in diameter 
than traditional water heaters. (GE, No. 84 at p. 1; A.O. Smith, No. 76 
at p. 2; BWC, No. 61 at p. 3; AHRI, No. 91 at p. 3; Rheem, No. 89 at p. 
11; and A. O. Smith, Public Meeting Transcript, No. 57.4 at pp. 55-56) 
ACEEE, EarthJustice, and ASAP disagreed and supported DOE's position in 
the December 2009 NOPR, which did not establish a separate product 
class for low-boy electric storage water heaters. (ACEEE, No. 79 at p. 
8; EarthJustice, No. 83 at p. 1; and ASAP, Public Meeting Transcript, 
No. 57.4 at p. 60) The individual commenters' rationales and further 
justification are presented below.
    GE asserted the low-boy water heaters should be separated into 
their own product class, because in some categories, the benefits of 
unique size, configuration, and functionality are very important to 
consumers. In this product category, the unique functionality of a low-
boy water heater happens to focus on the physical dimensions of the 
product. GE asserted that some consumers prefer or require the lower 
overall product height, as they do not have the space available for a 
standard-sized water heater. (GE, No. 84 at p. 1)
    A.O. Smith strongly asserted that a separate class for low-boy 
water heaters is justified, for many of the same reasons that a 
separate class is already established for table-top water heaters. 
According to the commenter, low-boy water heaters are predominately 
used in installations where height is a constraint, such as where a 
furnace or air-handler is mounted on a rack above the low-boy water 
heater in an equipment closet. Because low-boy water heaters are 
already a larger diameter unit than the baseline design, increasing the 
diameter even more by requiring additional insulation thickness would 
make the heater too large to fit into the space available in most 
replacement situations (again, such as the closet/rack example above). 
A.O. Smith stated its belief that there will be a loss of utility for 
low-boy heaters if they are not put into a separate class with an EF 
less than proposed for the ``standard'' heater. (A.O. Smith, No. 76 at 
p. 2)
    BWC supports a separate product class for low-boy water heaters 
because they have very specific applications. Low-boy water heaters are 
frequently used in condominiums where additional space is unavailable 
and a gas water heater cannot be used due to venting limitations. When 
used in these applications, BWC claimed that low-boys use less water 
than typical standard electric water heaters. Therefore, BWC asserted 
low-boy water heaters have a different utility than standard electric 
water heaters. (BWC, No. 61 at p. 3)
    AHRI asserted that low-boy water heaters use electricity, but are 
not offered in the same range of volumes as standard electric storage 
water heaters. Most low-boys are offered in 30-gallon and 40-gallon 
sizes. AHRI asserted that the December 2009 NOPR mischaracterizes the 
functionality or utility of these products. Low-boy models have the 
unique feature of being able to be installed in short, confined spaces 
in a dwelling. But, as is the case with countertop electric water 
heaters, the constraints dictated by the spaces in which these products 
are installed affect the options for increasing the efficiency of low-
boy electric models. Many low-boy models today may have efficiencies 
comparable to standard size electric water heaters, but they do not 
have the same potential for further increasing their efficiency. 
Accordingly, AHRI argued that this separate product class should have a 
minimum EF standard that is 0.01 less than that proposed for electric 
storage water heaters. (AHRI, No. 91 at p. 3)
    Rheem asserted that low-boy electric water heaters (i.e., electric 
storage water heaters ranging from 20 to 50 gallons) are typically 
installed under a counter or stacked (air handler) in high-density 
housing, such as apartment and condominium communities. According to 
Rheem, any size increase driven by a significant change in the EF

[[Page 20132]]

requirements would affect the product geometry (diameter and height) 
and drive the potential use of multiple, smaller, point-of-use electric 
or instantaneous electric water heaters. (Rheem, No. 89 at p. 11)
    ACEEE asserted that low-boy water heaters designed to fit beneath 
conventional cabinets are similar to ``table-top'' units, with similar 
trade-offs in terms of capacity and improved efficiency (through 
thicker insulation). ACEEE agrees with DOE's reasoning in the December 
2009 NOPR that low-boys can be designed to meet the proposed standards 
by using thicker insulation, higher set-point settings, and a tempering 
valve, and, therefore, ACEEE opined that, in general, no special 
product class is needed. However, as a compromise, ACEEE stated that it 
could support a special class for low-boys designed for small living 
units, but with an upper capacity limit of 30 gallons, in order to 
prevent ``leakage'' of lower-efficiency units into the general water 
heater applications. If larger units are also included, ACEEE expressed 
concern that significant growth in low-boy sales would be expected, 
leading to a significant loss in energy savings relative to use of 
higher-efficiency conventional units. (ACEEE, No. 79 at pp. 8-9)
    EarthJustice stated that a separate product class for low-boy water 
heaters is not justified. According to the commenter, DOE's analyses 
demonstrate that water heaters in these configurations can meet the 
efficiency standards under consideration for electric-storage and gas-
storage water heaters, respectively (see 74 FR 65852, 65869 (Dec. 11, 
2009)). (EarthJustice, No. 83 at p. 1)
    NRDC also stated that ``low-boy'' water heaters do not warrant a 
separate product class, because these products could become a low-cost 
loophole to the standard if allowed to be less efficient than 
traditional tank-type water heaters. (NRDC, No. 85 at p. 6)
    ASAP agreed with DOE's position not to establish a separate product 
class for low-boy water heaters, as presented in the December 2009 
NOPR. ASAP warned DOE to keep a close eye on lower standards for 
particular product classes, which can result in market shares for those 
products increasing and reduction of the overall energy savings 
associated with the energy conservation standards. (ASAP, Public 
Meeting Transcript, No. 57.4 at p. 60)
    After careful consideration, DOE does not agree with certain 
commenters that a separate product class needs to be established for 
low-boy 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 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 as other water heaters (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. DOE acknowledges that low-boy water heaters are only 
offered in certain volume sizes, which tend to be at the lower end of 
the range (i.e., below 50 gallons). While many of the commenters 
pointed to specific size-constrained applications where low-boy water 
heaters are installed, DOE reviewed the market and found that low-boy 
water heaters are generally classified as water heaters that have a 
shorter height and wider diameter. However, unlike tabletop water 
heaters, low-boy water heaters did not seem to have a uniform or common 
platform size. Instead, the physical dimensions of low-boy water 
heaters varied by manufacturer, model, and efficiency, but this is also 
true of the entire electric storage water heating market. Water heater 
manufacturers offer a range of options to consumers, including various 
physical dimensions that are not unique to low-boy units. (See chapter 
3 of the TSD.) Furthermore, DOE does not believe each different 
combination of physical dimensions currently available on the market 
warrants a separate product class. DOE reaffirmed its position in the 
December 2009 NOPR that 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's research suggests that there 
are currently multiple low-boy units offered that will meet the 
standards being adopted in today's final rule for electric storage 
water heater less than 55 gallons. Specifically, DOE found multiple 
low-boy models at 0.95 EF with a rated storage volume of 50 gallons. 
Consequently, for the reasons above, DOE is not establishing a separate 
product class for low-boy water heaters.
ii. Ultra-Low NOX Water Heaters
    In the December 2009 NOPR analysis, DOE did not propose to 
establish a separate product class for ultra-low NOX gas-
fired storage water heaters. 74 FR 65852, 65869-70 (Dec. 11, 2009). 
However, DOE did specifically analyze these water heaters as compared 
to traditional gas-fired storage water heaters with standard burners. 
74 FR 65852, 65882-83 (Dec. 11, 2009). In response to the treatment of 
ultra-low NOX gas-fired storage water heaters in the 
December 2009 NOPR, DOE received a number of different comments. A.O. 
Smith, BWC, AHRI, and Rheem urged DOE to establish a separate product 
class for ultra-low NOX gas-fired water heaters. (A.O. 
Smith, No. 76 at p. 2; BWC, 61 at p. 3; AHRI, No. 91 at p. 3; A.O. 
Smith, Public Meeting Transcript, No. 57.4 at pp. 56-57; and AHRI, 
Public Meeting Transcript, No. 57.4 at pp. 57-58) On the other hand, 
ACEEE, EarthJustice, and NRDC agreed with DOE's position in the 
December 2009 NOPR that ultra-low NOX gas-fired water 
heaters should not have their own product class. Further details 
provided by each commenter are presented below.
    A.O. Smith asserted that the burner technology needed to comply 
with the South Coast Air Quality Management District's (SCAQMD) ultra-
low NOX requirements and the changes to the water heater 
technology that are needed to meet increased efficiency requirement are 
``operationally contradictory'' with each other. The types of burners 
currently used to comply with the ultra-low NOX requirement 
in atmospheric heaters are much more restrictive (higher pressure drop) 
than conventional burners. Since these ultra-low NOX heaters 
also must comply with the flammable vapor ignition resistance 
requirements, they also have flame arrestors on the air inlet, which 
add more restriction (pressure drop) to the system. In order to boost 
the efficiency, the flue baffle must be made more effective, which 
means making it more restrictive. The increased pressure drops due to 
all three components taken together is enough to offset the thermal 
buoyancy of the atmospheric venting design, and cause the heater to no 
longer work. The only way to overcome the additional restriction would 
be to add a blower and/or power-burner to the heater, which would 
greatly increase the manufacturing and installation costs of the 
heater. (A.O. Smith, No. 76 at p. 2)
    BWC asserted that ultra-low NOX gas-fired water heaters 
should be a separate product class because they have distinct design 
differences compared to standard atmospheric gas water heaters. The 
unique design requirements for ultra-low NOX gas-fired water 
heaters greatly limit their capacity to increase the efficiency while 
maintaining a lower level of emissions. (BWC, 61 at p. 3)

[[Page 20133]]

    AHRI challenged the December 2009 NOPR's tentative conclusions that 
ultra-low NOX gas-fired models provide the same utility as 
standard gas-fired storage water heaters, while simply using a distinct 
burner to achieve the ultra-low NOX emissions. AHRI argued 
that standard gas-fired water heaters do not offer the same utility as 
the ultra-low NOX models because the standard gas-fired 
water heater cannot heat water efficiently while also emitting 
NOX at a very low rate. Regardless of its efficiency, a 
standard residential gas-fired water heater cannot be sold or installed 
in many areas in California. According to AHRI, the feature of ultra-
low NOX emissions is a unique performance characteristic 
that imposes different conditions on how, and at what expense, the 
efficiency of these models can be increased. As is the case with low-
boy electric models, AHRI asserted that ultra-low NOX water 
heaters should have a separate product class with a minimum EF standard 
that is 0.01 less than that proposed for gas-fired storage water 
heaters. (AHRI, No. 91 at p. 4)
    ACEEE stated that there is no reason for a separate product class 
with separate standards for ultra-low NOX water heaters. 
According to ACEEE, these units can meet the same standards as 
conventional equipment, if they incorporate induced draft (power vent) 
to compensate for the combined pressure drop of the better baffle, 
FVIR, and ultra-low NOX burner. If stakeholders want an 
exception, the commenter suggested that this should be dealt with by 
the waiver process rather than by establishing another dead-end class 
of atmospherically vented equipment. (ACEEE, No. 79 at p. 9)
    EarthJustice stated that a separate product class for ultra-low 
NOX gas-fired water heaters is not justified. The commenter 
pointed to DOE's own analysis, which arguably demonstrates that water 
heaters in these configurations can meet the efficiency standards under 
consideration for electric storage and gas storage water heaters, 
respectively (see 74 FR 65852, 65869, 65881 (Dec. 11, 2009)). 
(EarthJustice, No. 83 at p. 1)
    NRDC likewise argued that there should not be a separate product 
class for ultra-low NOX gas-fired water heaters. NRDC stated 
that the efficiency requirements considered in the rulemaking can be 
met in ultra-low NOX gas-fired units by moving to power vent 
technology and probably with other routes. Therefore, the commenter 
concluded that there is no need to allow a less-stringent standard for 
these products when the proposed requirements can be met. (NRDC, No. 85 
at p. 6)
    After considering public comments on this issue, DOE has decided 
not to change its position from the December 2009 NOPR and continues to 
believe that a separate product class does not need 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. Some 
of the commenters pointed out that the increased pressure drops could 
adversely impact the efficiency levels. DOE agreed with this assertion 
and maintained its methodology for handling ultra-low NOX 
gas-fired storage water heaters, which included development of a 
separate analysis for these products, as detailed in the December 2009 
NOPR. 74 FR 65852, 65881-82 (Dec. 11, 2009). See section IV.C.2.a for 
additional details. This analysis showed that implementing power 
venting and the same insulation increases as those for standard gas-
fired water heaters would result in slightly lower efficiencies due to 
the additional pressure restrictions resulting from the addition of the 
ultra-low NOX burner. Therefore, DOE implemented 
technologies at lower efficiency levels for ultra-low NOX 
gas-fired storage water heaters in order to achieve the same 
efficiencies as those identified for standard gas-fired storage water 
heaters. Based on the teardown analysis of ultra-low NOX 
water heaters, DOE believes that ultra-low NOX gas-fired 
storage water heaters will be able to meet the standards that are being 
adopted in today's final rule using available technologies currently on 
the market. Therefore, for the above reasons, DOE has decided not to 
establish a separate product class for ultra-low NOX gas-
fired storage water heaters in this final rule.
iii. Heat Pump Water Heaters
    Throughout the rulemaking, DOE has treated heat pump water heaters 
as a design option for electric storage water heaters rather than a 
separate product class, as further explained and detailed in the 
preliminary analysis. (See Chapter 2 of the preliminary analysis TSD 
and the discussion in the December 2009 NOPR (74 FR 65852, 65870-81 
(Dec. 11, 2009).) A heat pump water heater represents a merging of two 
technologies: (1) An electric resistance storage water heater with tank 
and controls; and (2) a refrigeration circuit similar to that found in 
a residential air-conditioner. Heat pump water heaters use existing 
heat pump technology to extract heat from the surrounding air 
(typically at room temperature) for heating stored water. For electric 
water heaters, this is an alternative to resistive heating, which 
transfers heat from the electric resistance element to the water. DOE 
received several comments from interested parties in response to its 
treatment of heat pump water heaters and its request for comment on 
some of the issues identified surrounding heat pump water heaters. Some 
commenters urged DOE to establish separate product classes for 
traditional electric resistance storage water heaters and heat pump 
water heaters, while others agreed with DOE's classification of heat 
pump water heaters. Their specific comments and DOE's response are 
presented below.
    General Electric stated support for DOE's proposal to not create a 
separate product class for heat pump water heaters, as they are 
designed to replace traditional electric water heaters in most 
residences, and have similar consumer functionalities. (GE, No. 84 at 
p. 1)
    Daikin asserted that electric resistance water heaters should be 
placed in the same product class as heat pump water heaters. 
Anecdotally, Daikin stated that in the European Union, the European 
Parliament has classified both of these products in the same category 
for energy efficiency regulatory purposes, and the commenter further 
stated that in Japan, electric resistance water heaters have 
practically disappeared from the market as of 2010. In addition, Daikin 
stated that heat pump water heaters usually have a back-up electric 
heater. If heat pump water heaters are classified separately, there 
will be a difficult question about whether the back-up electric heater 
requires heat pump water heating systems to remain in the other

[[Page 20134]]

category for some purposes. However, Daikin suggested that if DOE 
decides to establish a heat pump water heater product class, then it 
should be subdivided based on the following three criteria: (1) 
Refrigerant type; (2) heat source (i.e., air to water heat pump); and 
(3) add-on or integrated type system (i.e., heat pump system and a 
tank). (Daikin, No. 82 at pp. 1-2)
    Northwest Energy Efficiency Alliance (NEEA) stated there is not a 
need for a separate class of water heaters based on heat pump versus 
resistance elements. According to NEEA, all of the current product 
offerings have a first-hour rating that is equivalent to an electric 
resistance heated product of the same size. From a consumer utility 
standpoint, the products are equivalent in terms of delivery of hot 
water for an equivalent tank size. These products are all designed as 
integrated, ``drop-in'' replacement units according to product 
literature that NEAA has reviewed from A.O. Smith, Rheem, and General 
Electric. (NEEA, No. 88 at p. 2)
    In its comments, EarthJustice opposed establishing a separate 
product class for heat pump water heaters, based on the following 
rationale. EarthJustice asserted that EPCA provides both mandatory and 
permissive authority for DOE to establish new product classes for 
covered products. (See 42 U.S.C. 6295(o)(4) and (q)(1)) However, aside 
from the unique situation of a covered product capable of consuming 
different kinds of energy (42 U.S.C. 6295(q)(1)(A)), EarthJustice 
argued that EPCA only mandates the creation of multiple product classes 
when the failure to do so would eliminate certain truly unique product 
attributes from the market. (42 U.S.C. 6295(o)(4)) In contrast, while 
DOE does have discretion to create separate classes for products based 
on the presence of ``a capacity or other performance[hyphen]related 
feature,'' the Department may exercise this authority only if ``such 
feature justifies a [different] standard.'' 42 U.S.C. 6295(q)(1)(B)) 
For the reasons explained below, EarthJustice argued that the plain 
language of EPCA forecloses an interpretation that the establishment of 
separate product classes for electric resistance and heat pump water 
heaters is warranted or required. First, EarthJustice stated that as 
DOE notes in the December 2009 NOPR, there is no distinction between 
heat pump and electric resistance water heaters with regard to 
operational utility. Accordingly, EarthJustice argued that because heat 
pump and electric resistance water heaters provide identical service, 
there is no basis for DOE to conclude that separate product classes for 
these technologies are necessary to preserve the availability in the 
market of a distinct ``feature'' with utility to the user of the 
product (see 42 U.S.C. 6295(o)(4)).
    At the public hearing on the December 2009 NOPR, representatives 
from some manufacturers asserted that a separate product class for heat 
pump water heaters was needed to address the fraction of households 
that would otherwise experience higher-than-normal installation costs 
to replace a water heater using electric resistance heating with one 
using a heat pump. However, EarthJustice stated that even if DOE's 
analysis confirms that there is a cost penalty to install a heat pump 
water heater in some applications, this fact, standing alone, would not 
support the creation of separate product classes for heat pump and 
electric resistance water heaters. In all standards rulemakings, 
EarthJustice reasoned that some households will face higher incremental 
costs to install products meeting revised standards, but the proper 
approach under EPCA is to consider these impacts in calculating 
consumers' average lifecycle cost and payback period for the standard 
levels under consideration (see 42 U.S.C. 6295(o)(2)(B)(i)(II)). 
According to EarthJustice, to use an increase in the installed cost for 
a portion of shipments as the basis for a separate product class would 
be an end[hyphen]run around the other factors Congress required DOE to 
consider in assessing the economic justification for a standard (see 42 
U.S.C. 6295(o)(2)(B)(i)). The commenter suggested that DOE's recent 
statements in the commercial clothes washers rulemaking reinforce this 
point. There, an industry commenter argued that a particular product 
design merited a separate product class on the basis of its low 
installed cost. 75 FR 1122, 1130 (Jan. 8, 2010). In response, DOE 
explained that it ``does not consider first cost a `feature' that 
provides consumer utility for purposes of EPCA. DOE acknowledges that 
price is an important consideration to consumers, but DOE accounts for 
such consumer impacts in the [lifecycle cost] and [payback period] 
analyses conducted in support of this rulemaking.'' Id. at 1134. 
EarthJustice stated that DOE's refusal to use installed costs as the 
basis for a separate product class for commercial clothes washers is 
faithful to EPCA's text, and there is no justification for adopting a 
contrary approach for water heaters. (EarthJustice, No. 73 at pp. 1-3)
    NRDC also stated that heat pump water heaters do not warrant a 
separate product class since heat pump water heater and an electric 
tank type water heater provide the same consumer utility. (NRDC, No. 85 
at p. 5)
    On the other hand, Southern Company (Southern) stated its belief 
that there is more of a functional difference between heat pump water 
heaters and electric resistance water heaters than with other products 
for which DOE has established separate product classes, including 
refrigerators (top freezer versus side-by-side), window air 
conditioners (for location of louvers), and transformers (a multitude 
of different phases and sizes). Southern Company argued that heat pump 
water heaters should be treated as a separate product class because the 
heat pump water heater transfers cold air from the heat pump to the 
surrounding space and are noisier than electric resistance water 
heaters. (Southern, No. 90 at p. 5)
    BWC recommended a separate product class be established for heat 
pump water heaters because the primary fuel source is air instead of 
electricity. Heat pump water heaters can attain greater efficiencies, 
because while electricity is being converted to heat the water like a 
typical electric resistance water heaters, heat is also being moved 
from the surrounding environment to the stored water via the heat pump. 
In order for heat pump water heaters to maximize efficiency, they must 
recover slowly, which changes the utility of the water heater. 
According to BWC, the same size heat pump water heater is not providing 
the same performance as the equivalent size electric resistance heater. 
(BWC, No. 61 at p. 4)
    AHRI reaffirmed its position that heat pump water heaters should be 
a separate product class. AHRI argued that DOE's tentative conclusion 
that heat pump water heaters do not require a separate product class 
because they provide hot water just like a traditional electric storage 
water heater is invalid because it fails to recognize how the heat pump 
water heater produces that hot water and how the heat pump water 
heater's performance is effected by the environment in which it is 
installed. AHRI asserted that the following characteristics make heat 
pump water heaters unique: (1) Water is heated by energy extracted from 
the air; (2) the heating capacity is variable depending on the 
temperature of the air provided to the heat pump; (3) the unit cannot 
heat water above approximately 135 degrees Fahrenheit; (4) the unit 
must be installed in a space large enough to provide the necessary 
volume of air for the unit to adequately heat water; (5) the unit cools 
the air in the household; (6) the unit requires a condensate drain as 
part of the installation; (7) the unit cannot be adjusted to meet 
increases in

[[Page 20135]]

demand without relying on the electric resistance elements; (8) the 
unit can heat water as long as there is adequate airflow through the 
heat pump, and thus, a heat pump with electrical power but with a 
clogged air filter will not heat water; and (9) the unit needs a back 
up water heating means that can operate when the heat pump cannot meet 
the load. (AHRI, No. 91 at pp. 4-6)
    In response to these NOPR comments, DOE does not agree that heat 
pump water heaters meet the requirements for establishing 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 does. 
While AHRI noted that heat pump water heaters utilize heat extracted 
from the air to heat the water, both heat pump water heaters and 
traditional electric resistance storage water heaters use electricity 
as the primary fuel source. AHRI's recitation of operational 
differences associated with water heaters that utilize heat pump 
technology does not establish that the mode of heating water is 
performance-related feature or provides a unique utility. As pointed 
out by GE, current manufacturers of heat pump water heaters are 
marketing these products as direct replacements for traditional 
electric resistance water heaters. The rated storage volumes and first 
hour ratings of the heat pump water heaters currently on the market are 
comparable to the traditional electric resistance water heaters. Some 
of the commenters pointed out that heat pump water heaters require 
special installation considerations, but to account for this, DOE 
applied in its analysis specific installation costs, where applicable, 
to heat pump water heaters. (See section IV.F.2 of today's notice for 
more details on treatment of the installation costs.) Consequently, DOE 
has concluded that heat pump water heaters can replace traditional 
electric resistance storage water heaters in most residences, although 
the installation requirements may be quite costly. For these reasons, 
DOE has decided not to establish a separate product class for heat pump 
water heaters.
iv. Unpowered Gas-Fired Water Heaters
    The American Gas Association (AGA) asserted that unpowered gas-
fired storage water heaters should be an independent product class. An 
unpowered gas-fired storage water heater is one that does not utilize 
line electricity in order to provide hot water to the residence. For 
many customers during a power outage, unpowered gas-fired water heaters 
are the only utility system that provides a source of heat. AGA 
believes that this occurrence is sufficiently frequent to justify the 
treatment of unpowered gas-fired storage water heaters as an 
independent product class, consistent with DOE's charge to establish 
product classes based on type of energy used, capacity, and in this 
case, ``other performance-related feature'' such as those that provide 
utility to consumers. (AGA, No. 78 at pp. 6-7)
    DOE does not agree with AGA's assertion that unpowered gas-fired 
storage water heaters meet the criteria for the establishment of a 
separate product class. Both powered and unpowered gas-fired storage 
water heaters use gas as the primary fuel source, and both provide the 
same basic utility to consumers, which is to supply hot water to the 
residence. DOE does not believe that having the ability to maintain hot 
water during power outages when the electricity is not working provides 
enough additional utility to consumers to warrant a separate product 
class. DOE believes that power outages are infrequent events that can 
be handled by a number of different market solutions such as back-up 
power systems.
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 (e.g., fan wall 
units contain circulation blowers), intended installation (e.g., floor 
furnaces are installed with the majority of the unit outside of the 
conditioned space), and input capacity.
    In the December 2009 NOPR, DOE proposed consolidating the product 
classes for four types of DHE and adding product classes for one type 
of DHE. DOE discusses the full details of its proposals in the December 
2009 NOPR. 74 FR 65852, 65871-72 (Dec. 11, 2009). In response to the 
proposed product class consolidation, AHRI took the position that the 
Federal energy conservation standards should not change for direct 
heating equipment, which would include not consolidating any of the 
existing BTU range categories or range levels. (AHRI, Public Meeting 
Transcript, No. 57.4 at p. 85)
    Empire Comfort Products (Empire) stated that if DOE condenses the 
product classes for direct heating equipment, it will reduce the 
manufacturers' flexibility to increase efficiency. (Empire, Public 
Meeting Transcript, No. 57.4 at p. 86)
    Neither AHRI nor Empire provided any additional insight to explain 
why the proposed reduction in product classes would limit a 
manufacturer's ability to increase the efficiency of direct heating 
equipment. DOE believes the consolidation of product classes reflects 
the current models offered by manufacturers. As discussed in the 
December 2009 NOPR, DOE carefully reviewed product catalogs and 
performance directories to determine the relationship between AFUE and 
input rating found among products listed in the AHRI Directory. For 
each of the five types of DHE, DOE found that manufacturers do not 
produce products in some of the input capacity ranges or that some of 
the efficiency characteristics of these products are similar. DOE 
explained each of these changes in the NOPR along with its proposal to 
further consolidate the product classes, where applicable. 74 FR 65852, 
65871-72 (Dec. 11, 2009). For each product class, DOE characterized 
this relationship, and the commenters have provided no data or 
rationale as to why DOE's characterization was incorrect. Consequently, 
DOE is adopting the consolidated product classes as proposed in the 
December 2009 NOPR. Table IV.2 presents the product classes for DHE 
being adopted by this rulemaking.

                            Table IV.2--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.

[[Page 20136]]

 
                                             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 in the December 2009 NOPR, 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). 74 FR 65852, 65872 (Dec. 11, 2009).

B. Screening Analysis

    The purpose of the screening analysis is to evaluate the technology 
options identified in the market and technology assessment as having 
the potential to improve the efficiency of products and to determine 
which technologies to consider further and which to screen out based on 
the four screening criteria. DOE consulted with industry, technical 
experts, and other interested parties to develop a list of technologies 
for consideration. DOE then applied the following four screening 
criteria to determine which design options are suitable for further 
consideration in the standards rulemaking:
    1. Technological feasibility. DOE considers 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 considers 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.

See 10 CFR part 430, subpart C, appendix A, (4)(a)(4) and (5)(b).
    As presented in the December 2009 NOPR, DOE identified a number of 
technology options that might be used to improve the efficiency of 
residential heating products during the market and technology 
assessment. 74 FR 65852, 65872-79 (Dec. 11, 2009). See chapter 3 of the 
December 2009 NOPR and final rule TSDs for more information and the 
complete list of technologies identified by DOE. DOE then applied the 
screening criteria listed above to determine which technologies would 
be carried through the analysis. Table IV.3 through Table IV.5 show the 
technology options that were screened-in during the December 2009 NOPR 
screening analysis.

                Table IV.3--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
----------------------------------------------------------------------------------------------------------------


[[Page 20137]]


Table IV.4--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.5--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.
------------------------------------------------------------------------

1. Comments on the Screening Analysis
    In response to the screening analysis presented in the December 
2009 NOPR, DOE received several comments from interested parties.
    In the December 2009 NOPR, CO2 heat pump water heaters 
were a technology option screened out by DOE for electric storage 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. 74 FR 65852, 65873 (Dec. 11, 
2009). In general, ACEEE stated that it strongly objected to the 
screening analysis because DOE considered only technologies available 
in U.S.-manufactured water heaters and screened out technologies used 
in other domestic products, as well as ones used in the global market. 
(ACEEE, No. 79 at p. 2) ACEEE stated that DOE's screening out of 
CO2 as a heat pump water heater refrigerant is absurd, given 
the fact that 1.7 million of them had been sold worldwide through the 
end of 2008, and that there is a 5-year lead time before the standards 
compliance date in which manufacturers could design a CO2 
heat pump water heater. (ACEEE, No. 79 at p. 2)
    Conversely, Rheem commented that CO2 refrigerants were 
appropriately screened out. (Rheem, No. 89 at p. 8) AHRI noted that 
there is a huge heat pump business in the U.S. for air conditioning and 
space heating, and no significant percentage of those products use 
CO2 as the refrigerant. DOE believes AHRI is using the air 
conditioning and space heating industry as an example of an industry 
with significant expertise in working refrigerants, but that still does 
not use CO2 refrigerants in its heating and cooling 
products. Even though DOE is investigating the use of CO2 as 
a refrigerant in water heating applications, AHRI's example 
demonstrates that U.S. manufacturers and service industries do not have 
the expertise in using or handling CO2 as a typical 
refrigerant in cooling applications. Therefore, AHRI stated its belief 
that CO2 heat pumps have been properly screened out because 
it is not the prevailing technology in North America. Further, AHRI 
stated that for standards that will apply to U.S. industry, DOE should 
not unnecessarily expand this rulemaking by looking at what might be 
happening in other parts of the world. (AHRI, Public Meeting 
Transcript, No. 57.4 at pp. 133-134) A.O. Smith stated that 
CO2 heat pump water heaters sold and installed in Japan are 
certified to different levels of standards requirements than those that 
exist in the U.S., and those heat pump water heaters would not be 
certifiable in the U.S. (A.O. Smith, Public Meeting Transcript, No. 
57.4 at pp. 134-135)
    In response, DOE believes that CO2 heat pump water 
heaters were properly screened out during the December 2009 NOPR 
analysis. DOE notes that technologies are not screened out solely 
because they are not yet available in the U.S. market. Technologies, 
such as CO2 heat pump water heaters, which are available 
overseas, are screened out if the U.S. does not have the necessary 
infrastructure to support such a technology on the scale necessary by 
the compliance date of the standard. As described in chapter 4 of the 
final rule TSD (Screening Analysis), CO2 heat pump water 
heaters were screened out because the necessary infrastructure to 
support manufacturing, installation, and service of CO2 heat 
pump water heaters is not available in the United States, and will not 
be available on the scale necessary to serve the relevant market at the 
time of the compliance date of the standard. ACEEE did not provide any 
new evidence that would cause DOE to change its position on this issue, 
and, therefore, DOE continued to screen out CO2 heat pump 
water heaters for the final rule analysis. DOE notes that pursuant to 
Section 612 of the Clean Air Act, the U.S. EPA has found CO2 
an acceptable refrigerant for use in the U.S. in certain applications 
(e.g., retail food refrigeration), but has not made such a ruling on 
the use of CO2 in water heating heat pumps. EPA indicates 
that to date it has not received any submission under the SNAP program 
for the use of CO2 in such devices. For additional 
information on EPA's Significant New Alternative Policy (SNAP) program 
(see http://www.epa.gov/ozone/snap/.)
    ACEEE asserted that DOE fails to differentiate between low-voltage 
(i.e., 24 volt) and line-voltage (i.e., 120 volt) power requirements 
for gas-fired equipment auxiliaries such as igniters, controls, and 
fans. The commenter stated that line voltage requires a power outlet 
reachable by a 6 foot power cord on the water heater, which would 
require a new outlet in some retrofits, while a remote low-voltage 
plug-in power supply can use much longer supply lines that could 
support electronic ignition and electro-mechanical flue dampers. ACEEE 
stated that a recent study of standby losses of atmospheric water 
heaters shows losses large enough that ACEEE infers that these features 
would be quite cost-effective, and that such products have been 
demonstrated in the past (for the SCAQMD) and in gas stoves. (ACEEE, 
No. 79 at p. 3) ACEEE stated that requiring gas-fired appliances to 
have an electrical connection does not diminish utility because it is 
not an issue in the minds of the public, and if the capability of gas-
fired products to operate during power outages was important, then 
local building codes would require backup non-electric heating 
capabilities for houses with electric water heaters. (ACEEE, Public 
Meeting Transcript, No. 57.4 at pp. 38-39)
    In response, DOE agrees with ACEEE that requiring gas-fired 
appliances to have an electrical connection does not diminish utility, 
and DOE notes that this rationale was not provided for screening out 
any of the technologies that DOE did not consider in the analysis. 
Further, DOE notes that many of the design options for gas-fired 
appliances included electronic components, such as electronic ignitions 
and power venting.
    Louisville Tin & Stove (LTS) commented that the proposed standards 
for DHE would reduce consumer utility because they would lose the 
ability to heat without electricity and/or lose the ability to 
retrofit. (LTS, No. 56.7 at p. 2) Empire stated adding components that 
require electricity would cause the elimination of the gas wall 
gravity, gas room, gas floor, and gas hearth categories because their 
main purpose is to provide efficient heating and be able to provide 
heat during a power outage

[[Page 20138]]

or for consumers who do not have electricity. (Empire, No. 100 at p. 2)
    Although DOE recognizes the consumer utility of direct heating 
equipment that can be operated in the event of a power outage, DOE also 
notes that there are direct heating equipment available on the market 
equipped with an electronic ignition that utilize battery backup 
systems to allow for operation during power outages. As a result, DOE 
does not believe the use of an electronic ignition would reduce the 
consumer utility of direct heating equipment. DOE also does not believe 
that adding electrical components would reduce the ability to retrofit 
these products, thereby causing the elimination of product classes. The 
addition of certain electrical components (e.g., an electronic 
ignition) does not require products to be any larger than products 
currently available that have no electric components, and thus, DOE 
does not believe this will prevent products from being retrofitted. DOE 
also does not believe adding larger electrical components (e.g., blower 
fans) would cause the elimination of any products, because DOE only 
considers the addition of blower fans for certain product classes which 
have products that have demonstrated that the technology is possible 
(i.e., gas wall fan DHE, gas room DHE, and gas hearth DHE). For gas 
wall gravity DHE, where the inclusion of a fan would shift products 
into the gas wall fan DHE product class, DOE does not consider a fan as 
a design option.
    However, DOE does recognize that in certain instances, consumers 
will have to install electrical power outlets near the heating 
equipment, thereby increasing the cost of retrofitting the product. 
These costs are addressed during DOE's analysis of installation costs 
and are described in section IV.F.2 of this document. Accordingly, DOE 
continued to screen-in electronic ignition and other electronic 
components for the final rule analysis of direct heating equipment.
2. Heat Pump Water Heater and Condensing Gas-Fired Storage Water Heater 
Discussion
    In the December 2009 NOPR, DOE specifically requested comment 
regarding the screening process for the advanced technologies used as 
the basis for the max-tech levels for gas-fired storage and electric 
storage water heater (i.e., heat pump water heaters and condensing gas-
fired storage water heaters). 74 FR 65852, 65878 (Dec. 11, 2009). DOE 
received a multitude of comments on this topic, which are summarized 
below.
a. Condensing Gas-Fired Water Heaters
    DOE received several comments specifically related to condensing 
gas-fired water heater technology. ACEEE noted that all three of the 
full-line water heater manufacturers in the U.S. currently manufacture 
commercial condensing products. (ACEEE, Public Meeting Transcript, No. 
57.4 at p. 127) Further, ACEEE stated that at least one condensing gas-
fired storage water heater is actively marketed for residential 
applications and is shipped with a residential thermostat. ACEEE 
recognized that this product is easy to install, with height, diameter, 
and installation requirements similar to standard power-vent units. 
ACEEE asserted that the only skills required for installing condensing 
gas-fired water heaters, beyond those already required for installing 
conventional gas-fired water heaters, are those common to the 
installation of condensing furnaces and air conditioners--cutting and 
gluing PVC pipe, and hooking up a condensate pump, if required. (ACEEE, 
No. 79 at p. 11)
    ASAP stated that the manufacturing capacity required for condensing 
gas-fired storage water heaters at TSL 5 (i.e., approximately 4 
percent, as estimated in the December 2009 NOPR) would be well within 
the capacity of manufacturers to serve the market. (ASAP, Public 
Meeting Transcript, No. 57.4 at p. 126) AHRI stated that manufacturers 
could probably convert their production of 75-gallon gas-fired water 
heaters to make only condensing 75-gallon gas-fired storage water 
heaters within five years. (AHRI, Public Meeting Transcript, No. 57.4 
at p. 119)
    In addition, A.O. Smith stated that they manufacture commercial 
condensing gas-fired water heaters that are ultra-low NOX, 
and, therefore, it is technologically feasible to have an ultra-low 
NOX condensing water heater. (A.O. Smith, Public Meeting 
Transcript, No. 57.4 at p. 123)
    In light of the comments above from interested parties supporting 
the technologically feasibility and the practicability of 
manufacturing, installing, and servicing condensing gas-fired water 
heaters, DOE has concluded that this technology option was 
appropriately screened-in and considered during the December 2009 NOPR 
analysis, and DOE continued to consider condensing gas-fired water 
heaters in the final rule analysis.
b. Heat Pump Water Heaters
    DOE received several comments specifically related to the screening 
analysis for heat pump water heater technology. These comments related 
to adverse impacts on product utility, as well as the practicability to 
manufacture, install, and service heat pump water heaters.
    Regarding adverse impacts on product utility, the American Public 
Power Association (APPA) commented that for electric storage water 
heaters at TSL 5 and TSL 6 (i.e., levels requiring heat pump water 
heater technology), the utility of the product would be lessened, 
although no further explanation was provided. (APPA, No. 92 at p. 3) 
Rheem stated that the utility of heat pump water heaters is not 
equivalent to electric storage water heaters because of the reduced 
delivery performance of heat pump water heaters. As evidence of the 
reduced delivery performance, Rheem cited ENERGY STAR's requirement of 
a minimum first hour rating of 50 gallons for heat pump water heaters, 
which is below the 67 gallons that Rheem claimed is typical for 
conventional technologies at that capacity. (Rheem, No. 89 at p. 8) The 
first hour rating is the amount of hot water in gallons the heater can 
supply per hour (starting with a tank full of hot water). If the first 
hour rating were reduced for heat pump water heaters, this would impact 
consumer utility because the water heater would not provide the 
consumer with the same amount of hot water as with a traditional 
electric resistance water heater.
    In response, DOE does not believe that any lessening of utility 
will occur for electric storage water heaters that use heat pump water 
heater technology, as asserted by APPA and Rheem. In response to APPA's 
comment (as explained in the December 2009 NOPR), DOE does not believe 
the use of heat pump technology will diminish the utility of electric 
storage water heaters, and DOE believes that these products will 
provide the same utility to the consumer as electric storage water 
heaters using traditional electric resistance technology. 72 FR 65852, 
65876-77 (Dec. 11, 2009). In response to Rheem's assertion that heat 
pump water heaters provide a reduced first hour rating, and thereby 
reduce consumer utility, DOE examined the first hour ratings of heat 
pump water heaters available on the market. DOE identified heat pump 
water heaters currently available on the market that have first hour 
ratings of up to 67 gallons, which Rheem states is typical for an 
electric resistance water heater. DOE also notes that electric storage 
water heater models in the AHRI Directory of certified equipment at the 
representative 50-gallon storage volume have first hour

[[Page 20139]]

ratings ranging from 48 to 68 gallons, and for 50-gallon heat pump 
water heaters currently available on the market, the first hour ratings 
range from 63 to 67 gallons. Thus, DOE has concluded that the 
integrated heat pump water heater technology does not cause any 
lessening of utility since it provides similar first hour ratings as 
water heaters that utilize electric resistance technology.
    Regarding practicability to manufacture, install, and service heat 
pump water heaters, DOE received numerous comments from interested 
parties. The views of interested parties are summarized below, along 
with DOE's conclusions based on the results of the comments received.
    AHRI stated that to convert the U.S. water heater industry from 
producing four million electric resistance units per year to all heat 
pump water heaters is an unreasonable expectation. (AHRI, Public 
Meeting Transcript, No. 57.4 at p. 90) AHRI pointed out that converting 
existing product lines to manufacturing of heat pump water heaters 
would be difficult, because manufacturers would continue to manufacture 
electric resistance water heaters in order to meet consumer demand 
before the compliance date of the standard. (AHRI, Public Meeting 
Transcript, No. 57.4 at pp. 101-103)
    Bock asserted that with heat pump water heaters, there is no 
infrastructure to teach and train technicians to properly install and 
maintain those units. Bock asserted that training technicians of 
electric resistance, gas-fired, and oil-fired water heaters to install 
and maintain heat pump water heaters could not be done quickly. (Bock, 
Public Meeting Transcript, No. 57.4 at p. 96) Similarly, Bradford White 
stated that there is no infrastructure to repair and maintain heat pump 
water heaters. Bradford White stated that water heater service 
contractors would need to be extensively retrained, and that it would 
be impossible for them to train plumbers to install and maintain heat 
pump water heaters in sufficient time. (Bradford White, No. 61 at p. 3)
    In support of heat pump water heaters, GE stated that it does 
believe that heat pump water heaters are manufacturable in a reasonable 
timeframe. (GE, No. 84 at p. 1) Further, GE commented that it currently 
has a nationwide network for heat pump water heater product service, 
and is developing a nationwide installation base to ensure that its 
consumers can readily purchase, install, and repair their heat pump 
water heaters. (GE, No. 84 at p. 1) The commenter noted that it is 
currently working with two national partners and numerous regional 
distributors to have its heat pump water heater available in most 
markets and to develop its water heater installation network. GE 
forecasted that the availability, service, installation, and 
manufacturability of heat pump water heaters will not present a 
significant obstacle to the market acceptance of such units. (GE, No. 
84 at p. 2) The commenter stated that installation of a heat pump water 
heater is only slightly more complex than installing an electric 
resistance water heater, and is easily within the capabilities of any 
residential plumber. GE did acknowledge that service of the sealed 
refrigeration system can be more complex, but stated that it believes 
that this can be adequately handled by the national network of 
appliance technicians and plumbers. (GE, No. 84 at p. 2)
    NPCC commented that several manufacturers already have heat pump 
water heater products and business plans to sell heat pump water 
heaters over the next five years, a schedule well before the compliance 
date of the relevant amended energy conservation standards. Therefore, 
NPCC believes that it is within the ability of manufacturers to produce 
heat pump water heater units on the scale necessary to serve the market 
for large-volume products. (NPCC, Public Meeting Transcript, No. 57.4 
at p. 107) NPCC also stated that it believes there is adequate lead 
time for those manufacturers who still must develop new products, since 
standards will not take effect for five years. (NPCC, No. 87 at p. 5) 
Further, NPCC stated that DOE's concern about the manufacturability of 
heat pump water heaters and the capacity of manufacturers to ramp up 
production are overstated, because two major manufacturers already 
appear committed to manufacturing significant quantities of heat pump 
water heaters and a third manufacturer also appears likely to do the 
same. NPCC asserted that because new energy conservation standards for 
water heaters will not go into effect for five years, manufacturers 
will have ample time to ``ramp up'' the production of these high-
efficiency models to meet the limited market expected at TSL 5. (NPCC, 
No. 87 at pp. 5-6) Regarding practicability to install heat pump water 
heaters, the commenter stated that heat pump water heaters currently on 
the market are drop-in replacements for electric resistance water 
heaters, and are advertised as such by manufacturer literature. NPCC 
commented that this fact, along with the fact that a national home 
improvement chain has agreed to sell Rheem's heat pump water heater 
unit, are evidence that both manufacturers and retailers believe that 
the installation of ``advanced'' water heater technology is not a 
significant barrier to its adoption. (NPCC, No. 87 at pp.3-4) NPCC 
stated that DOE's concern regarding whether the service 
infrastructure's lack of familiarity with advanced technologies would 
act as a deterrent to their adoption also appears unwarranted, due to 
the fact that: (1) Manufacturers are already offering these products; 
(2) manufacturers will have 5 years to train and deploy a service 
force; (3) major manufacturers with product on the market offer a 10-
year warranty; (4) GE has a set up a nationwide network of authorized 
service technicians who are being trained to both install and service 
its ``advanced technology'' water heaters; and (5) Rheem has stated 
that its heat pump water heater uses a sealed heat pump and that no 
HVAC experience is needed, so no additional service technician training 
is required. (NPCC, No. 87 at p. 4)
    NEEP stated that based on the documented ENERGY STAR-qualified 
water heating units on the market, heat pump water heaters and 
condensing gas water heaters are commercially viable, manufacturable, 
and have a growing infrastructure of service and maintenance 
professionals. (NEEP, No. 86 at p.1) NEEP stated that according to a 
recent advertisement by Rheem and the Home Depot, their ENERGY STAR-
qualified heat pump water heater ``installs as easily as a standard 
electric storage water heater,'' and thus, NEEP commented that 
installation issues are clearly not as serious as many manufacturers 
claim. (NEEP, No. 86 at p. 2)
    NEEA commented that regarding a potential scale-up in response to a 
large utility program opportunity that was being considered for heat 
pump water heaters, major manufacturers assured them that scale-up to 
large manufacturing numbers is not a limiting factor. (NEEA, No. 88 at 
pp. 2-3) The commenter stated all of the heat pump water heater units 
being offered for sale are designed as drop-in integrated units that 
require no more connections than a conventional electric resistance 
tank. NEEA asserted that there is nothing in principle about heat pump 
water heater technology that makes it substantively more difficult than 
a current replacement with a standard electric tank. NEEA also stated 
that all heat pump water heaters offered for sale in 2010 have sealed 
refrigeration components (similar to a refrigerator or a room air-
conditioner that do not

[[Page 20140]]

require service) and have 10-year warranties, an indication of 
manufacturers' confidence in the long-term reliability of the systems. 
NEEA commented that a duct to vent cold air to the outdoors is required 
in some heat pump water heater installations, and that installing such 
a duct is no more complicated than installing a flue for a gas-fired 
water heater, which is well within the skill set of existing water 
heater installers. (NEEA, No. 88 at p. 3)
    ACEEE commented that five years from final rule publication to the 
compliance date is sufficient time to design, test, tool up, 
manufacture, and certify a brand new product. (ACEEE, No. 79 at pp. 13) 
ACEEE stated that manufacturing capacity should not be a concern for 
heat pump water heaters, given the five-year lead time between the 
standards' effective date and compliance date. The commenter also 
stated that resistive tank water heaters and refrigeration engines like 
the ones used in heat pump water heaters are mature technologies that 
can be integrated to manufacture heat pump water heaters. (ACEEE, No. 
79 at p. 4) ACEEE commented that TSL 5 would require new production 
lines for about 9 percent of the product, which should be manageable 
and in the scale of expected investments in new production lines. 
(ACEEE, No. 79 at p. 10) Regarding practicability to install heat pump 
water heaters, ACEEE stated that the arguments regarding training time 
for installers and servicers are vastly overblown. The commenter noted 
further that the Web sites of the leading providers of ENERGY STAR heat 
pump water heaters do not contain language that would void warrantees 
if such units are home-owner installed, and such units are now sold by 
major ``big box'' retailers and Internet sales outlets. (ACEEE, No. 79 
at p. 10) With regard to servicing, ACEEE stated that although a heat 
pump water heater operates more hours per year than a room air 
conditioner, it is basically the same kind of technology, and will 
require no routine service beyond that which can be done by the 
homeowner (i.e., filter cleaning). Thus, ACEEE argued that at least for 
heat pump water heaters with appropriate diagnostics, there are no 
skills required beyond those one would expect from a typical 
refrigerator repair person. (ACEEE, No. 79 at p. 10) ACEEE stated that 
in January 2010, the GE Hybrid electric heat pump water heater will be 
sold at Lowe's, Sears, and other locations, presumably to do-it-
yourself installers, and in examining the warranties available on-line, 
ACEEE found no restrictions as would limit product installation to 
certified or qualified trades people. From this, the commenter inferred 
that there are no special skills expected for installation of these 
heat pump water heater products. (ACEEE, No. 79 at p. 12) ACEEE 
asserted that the skill set required to service heat pump water heaters 
is the same as the skill set associated with fixing the refrigeration 
engines of room air conditioners, refrigerators, and similar light 
equipment. Similarly, the commenter argued that servicing of condensing 
gas water heaters uses the same skill sets as condensing boilers. Thus, 
ACEEE stated that it believes that over the next five years, the 
emergence and market penetration of incentive programs for both types 
of products will lead to adequate supplies of servicers with the 
requisite skills. (ACEEE, No. 79 at p. 12)
    The Joint Advocacy comment \4\ (submitted by ASAP) stated that the 
limited scope of the December 2009 NOPR TSL 5 (i.e., the TSL requiring 
electric storage water heaters larger than 55 gallons to use heat pump 
water heater technology), combined with the five-year lead time before 
the compliance date, will make the new standards more manageable for 
manufacturers, equipment installers, and servicers than standards which 
effectively require heat pump water heaters and condensing gas products 
in all sizes. (The Joint Advocacy Comment, No. 102 at p. 2)
---------------------------------------------------------------------------

    \4\ The joint advocacy comment was submitted by ASAP on behalf 
of multiple organizations, including: ACEEE, National Association of 
State Energy Officers, California Energy Commission, Consumer 
Federation of America, PG&E, ASE, ASAP, National Consumer Law 
Foundation, NRDC, National Grid, National Insulation Association, 
North American Insulation Manufacturers Association, NEEP, NPCC, 
Sierra Club, Iowa Office of Energy, New Hampshire Office of Energy 
and Planning, Office of the Ohio Consumers' Council, California 
Public Utilities Commission, New Mexico Public Regulation 
Commission, Public Utility Commission of Oregon, New Jersey Board of 
Public Utilities, Community Environmental Center, Conservation Law 
Foundation, Environmental Defense Fund, Environment America, 
Environmental Law and Policy Center, Environmental and Energy Study 
Institute, Midwest Energy Efficiency Alliance, Southern Alliance for 
Clean Energy, Southwest Energy Efficiency Project, Urban Green 
Council (U.S. Green Building Council of New York), Arizona PIRG, 
Energy Coordinating Agency of Philadelphia, Environment Illinois, 
Environment Texas, Michigan Environmental Council, NW Energy 
Coalition, Ohio Environmental Council, Oklahoma Sustainability 
Network, Texas Ratepayer's Organization to Save Energy, National 
Community Action Foundation, and Fresh Energy.
---------------------------------------------------------------------------

    ASE stated that for the December 2009 NOPR's TSL 5, the advanced 
technology requirements are limited to a modest share of total water 
heater shipments, which is a sensible means of addressing the issue of 
manufacturers being able to scale up the production of these products 
to meet the needs of the market. (ASE, No. 77 at p. 2)
    A.O. Smith stated that a facility to produce 2 million heat pump 
water heaters per year (i.e., A.O. Smith's approximate share of the 
entire electric storage water heater market) would take 2-3 years to 
implement. (A.O. Smith, No. 76 at p. 3)
    Daikin stated that heat pump technology can be easily introduced to 
existing electric resistance water heater manufacturers from the air 
conditioning and refrigerator manufacturing sectors. The commenter 
noted that European and Japanese electric resistance heat pump 
manufacturers have already obtained the necessary heat pump technology 
and have heat pump water heater manufacturing lines up and running. 
Daikin stated its belief that taking into account the significance of 
the introduction of heat pump technology to unfamiliar manufacturers, 
at least one to two years would be required for this change to be 
implemented after publication of the final rule. (Daikin, No. 82 at p. 
2)
    After reviewing the comments from interested parties above, DOE 
believes that integrated heat pump water heaters and condensing gas-
fired storage water heaters were properly screened in for the December 
2009 NOPR analysis, and DOE continued to consider this technology for 
the final rule analysis. Based on the comments of interested parties, 
including those from manufacturers, DOE has concluded that given the 
five-year lead time, the practicability to manufacture, install, and 
service heat pump water heaters and condensing gas-fired storage water 
heaters is not a concern that would justify eliminating these 
technologies from consideration in this analysis. However, DOE further 
considered the concerns of interested parties regarding heat pump water 
heaters and condensing gas-fired storage water heaters for the 
selection of the final standard level.
    Because DOE did not change any of its conclusions about the 
screening analysis for technologies for the December 2009 NOPR 
analysis, DOE screened in the same technologies for the final rule 
(shown in Table IV.3 through Table IV.5). For more information about 
the technologies that were screened out, and the reasoning for those 
options being screened out, see chapter 4 of the final rule TSD.
    DOE believes that all of the efficiency levels discussed in today's 
notice are technologically feasible. The technologies that DOE examined 
have been used (or are being used) in

[[Page 20141]]

commercially-available products or working prototypes. Furthermore, 
these technologies all incorporate materials and components that are 
commercially available in today's supply markets for the residential 
heating products that are the subject of this final rule.

C. Engineering Analysis

    The engineering analysis develops cost-efficiency relationships to 
show the manufacturing costs of achieving increased efficiency. As 
explained in the December 2009 NOPR, DOE conducted the engineering 
analysis for heating products using both the efficiency level approach 
to identify incremental improvements in efficiency for each product and 
the cost-assessment approach to develop the manufacturer production 
cost (MPC) at each efficiency level. 74 FR 65852, 65879-96 (Dec. 11, 
2009). DOE first identified the most common residential heating 
products on the market and determined their corresponding efficiencies 
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 information about these 
selected products 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 used information gathered by reverse-engineering multiple 
manufacturers' products spanning the range of efficiency levels for 
each of the three product categories to generate bills of materials 
(BOMs), which describe each product in detail, including all 
manufacturing steps required to make and/or assemble each part. DOE 
developed a cost model that converted the raw information BOMs into 
MPCs. By applying derived manufacturer markups to the MPCs, DOE 
calculated the manufacturer selling prices (MSPs) and constructed 
industry cost-efficiency curves.
    In response to the December 2009 NOPR, DOE received comments from 
interested parties on various aspects of the engineering analysis, 
including: (1) Efficiency levels analyzed and technology options; (2) 
manufacturer production costs; (3) shipping costs; (4) scaling of 
storage water heater MPCs to other storage volumes; and (5) the energy 
efficiency equations. A further discussion of the engineering analysis 
methodology, a discussion of the comments DOE received, DOE's response 
to those comments, and any changes 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 final rule TSD for 
additional details about the engineering analysis.
1. Representative Products for Analysis
    As explained in the December 2009 NOPR, DOE reviewed all of the 
product classes of residential water heaters, DHE, and pool heaters for 
the engineering analysis. Within each product type, DOE chose units for 
analysis that represent a cross-section of the residential heating 
products market. The December 2009 NOPR contains specific details about 
DOE's selection of representative units for each type of heating 
product. 74 FR 65852, 65879-81 (Dec. 11, 2009). The analysis of these 
representative products 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. In response to 
the December 2009 NOPR, DOE did not receive any comments regarding the 
representative units analyzed, and as a result, DOE did not change the 
representative units from the December 2009 NOPR analysis. The 
representative units for each product class are shown in Table IV.6 
below. For more details about the selection of the representative units 
for each product class, see chapter 5 of the final rule TSD.

                                  Table IV.6--Representative Products Analyzed
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                            Residential Water Heaters
----------------------------------------------------------------------------------------------------------------
     Residential water heater class                           Representative storage volume
                                         (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).
----------------------------------------------------------------------------------------------------------------
                                            Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
  Direct heating equipment design type                  Representative input rating 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.
----------------------------------------------------------------------------------------------------------------
                                            Residential Pool Heaters
----------------------------------------------------------------------------------------------------------------
       Pool heaters product class                          Representative input rating (Btu/h)
----------------------------------------------------------------------------------------------------------------
Gas-fired Pool Heaters.................  250,000.
----------------------------------------------------------------------------------------------------------------

2. Efficiency Levels Analyzed
    For each of the representative products, DOE analyzed multiple 
efficiency levels and estimated manufacturer production costs at each 
efficiency level. These efficiency levels were presented in detail in 
the December 2009 NOPR. 74 FR 65852, 65881-89 (Dec. 11, 2009). DOE 
analyzed

[[Page 20142]]

from the baseline efficiency level to the maximum technologically 
feasible (max-tech) efficiency level for each product class. The 
baseline units in each product class were used as reference points 
against which DOE measured changes resulting from potential amended 
energy conservation standards. These units generally represent the 
basic characteristics of equipment in that product class, just meet 
current Federal energy conservation standards, and provide basic 
consumer utility. DOE established intermediate energy efficiency levels 
for each of the product classes that are representative of efficiencies 
that are typically available on the market through a complete review of 
AHRI's product certification directory, manufacturer catalogs, and 
other publicly-available literature. 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.
a. Water Heaters
    Table IV.7 through Table IV.11 in this section show the efficiency 
levels analyzed at the representative rated storage volume for each of 
the water heater product classes for the final rule. These tables also 
show the technology pathways identified by DOE which could be used to 
reach the identified efficiency levels. DOE received several comments 
(discussed below) in response to the efficiency levels and possible 
technology pathways presented in the December 2009 NOPR for gas-fired 
storage water heater.
    Rheem stated that for 40-gallon gas-fired storage water heaters at 
TSL 4 (i.e., 0.63 EF), DOE underestimates the insulation thickness that 
would be required. Rheem asserted that 3 inches of insulation would be 
required to reach this efficiency level, instead of the 2 inches that 
DOE estimated in the December 2009 NOPR. In addition, Rheem stated that 
for 50-gallon electric storage water heaters, DOE estimates 4 inches of 
foam insulation are needed to achieve TSL 4 (i.e., 0.95 EF) but that 
DOE should recognize there are diminishing returns for added foam 
insulation. Further, Rheem asserted that the increased insulation 
requirements will result in increased product cost, shipping cost, 
life-cycle cost, space constraint frequency, and reduce consumer 
payback. (Rheem, No. 89 at p. 10) Similarly, Bradford White stated that 
when increasing insulation thickness to improve water heater 
efficiency, there is a diminishing return and a point at which 
increasing insulation does not result in any further efficiency gain. 
Bradford White asserted that to attain the efficiencies in the December 
2009 NOPR, additional changes would be required besides increasing 
insulation thickness. (Bradford White, No. 61 at p. 1)
    As described in the December 2009 NOPR, DOE performed extensive 
research regarding the technologies required to reach each efficiency 
level for the representative rated storage volumes analyzed. 74 FR 
65852, 65884 (December 11, 2009). DOE research suggested that the 
insulation thicknesses listed at various efficiency levels identified 
are consistent with products available on the market. DOE reviewed 
manufacturer literature (which typically includes information on energy 
factor and insulation thicknesses) and then reverse-engineered several 
gas-fired water heaters to verify the technologies used to improve 
energy efficiency, including insulation thicknesses. For the December 
2009 NOPR analysis, DOE also hired an independent testing facility to 
determine the EF of a representative sample of water heaters across 
multiple efficiency levels. (See chapter 5 of the December 2009 NOPR 
TSD for additional details.) These water heaters were subsequently 
disassembled to verify the technologies used to increase energy 
efficiency. DOE was able to measure the insulation thicknesses on the 
sides, top, and bottom of each water heater unit disassembled. For 
these reasons, DOE believes the results of its assessment of insulation 
thicknesses at various efficiency levels are accurate and maintained 
the same insulation thicknesses for the final rule analysis.
    AGA stated that efficiency level 2 for gas-fired storage water 
heaters should include power venting, because according to industry 
testing and research, the prevailing technology at that level will be a 
power-vented design, not an atmospheric design. (AGA, Public Meeting 
Transcript, No. 57.4 at pp. 35-36) Further, AGA stated that the 
majority of the models on the market rated at this efficiency level are 
not atmospherically vented, and contended that atmospherically-vented 
models at 0.63 EF would have recovery efficiencies high enough such 
that they require venting modifications because of the possibility for 
corrosive condensate to occur. (AGA, No. 78 at p. 8) If proper venting 
is not installed, corrosion from condensate can cause leaks in the 
venting system, which in turn can allow combustion by-products (e.g., 
carbon monoxide) to infiltrate into areas where such by-products are 
not desirable, possibly leading to serious injury or death. Thus, AGA 
recommended that DOE should consider only power-venting technology as 
the design option at efficiency level 2 for reasons of installation 
safety and practicality, and asserted that continuing to rely upon 
atmospheric technology for the efficiency level 2 design would violate 
statutory requirements for DOE to avoid implementing efficiency 
standards that would pose an increased safety risk to consumers. (AGA, 
No. 78 at p. 10)
    In response, DOE notes that there are products currently available 
on the market at efficiency level 2 that do not use a power-venting 
design. The manufacturer literature for these products does not 
indicate that there are certain instances in which the installation of 
these products would be unsafe. Therefore, DOE did not change its 
technology options at efficiency level 2. However, DOE does recognize 
the venting concerns of gas-fired storage water heaters at efficiency 
level 2 with high recovery efficiencies. DOE addresses this issue in 
section IV.F.2 (Installation Cost).
    A.O. Smith strongly recommended that DOE lower the max-tech level 
for gas-fired storage water heaters from the 0.80 EF level identified 
in the December 2009 NOPR for the representative 40-gallon storage 
volume. A.O. Smith stated that the 0.80 EF level identified as the max-
tech for gas-fired storage water heaters by the Super Efficient Gas 
Water Heating Appliance Initiative (SEGWHAI) program and in a 
presentation by A.O. Smith at the 2009 ACEEE Hot Water Forum were based 
on theoretical modeling, and not operational prototypes. A.O. Smith 
also commented that the ENERGY STAR level of 0.80 EF is based on 
similar modeling, and stated that discussions are underway with DOE 
regarding the need to lower the Energy Star level to 0.77 EF. A.O. 
Smith stated they have recently built and tested a number of condensing 
gas-fired water heater prototypes that result in actual performance 
that is somewhat lower than predicted by the models. Consequently, A.O. 
Smith expressed support for 0.77 EF as the max-tech level for 40 gallon 
gas-fired storage water heaters. (A.O. Smith, No. 76 at pp. 1-2)

[[Page 20143]]

    In the preliminary analysis, DOE proposed to use 0.77 EF as the 
max-tech level for gas-fired storage water heaters at the 
representative rated storage volume (see chapter 5 of the preliminary 
analysis TSD for more details). In response to this proposal in the 
preliminary analysis, DOE received comments from interested parties 
stating that the max-tech efficiency level considered for gas-fired 
storage water heaters in this rulemaking should be harmonized with the 
ENERGY STAR level for residential condensing gas-fired storage water 
heaters, and DOE subsequently revised the max-tech level to 0.80 EF for 
the December 2009 NOPR analysis. 74 FR 65852, 65883 (Dec. 11, 2009). 
DOE believes there is some uncertainty regarding the efficiencies that 
can be achieved by gas-fired storage water heaters because there are no 
products currently available on the market and to date only prototypes 
have been developed for residential applications. For the final rule, 
DOE has reviewed confidential data characterizing the performance of 
residential gas-fired storage water heater prototypes and has concluded 
that 0.77 EF is more representative of the condensing water heaters 
likely to enter the market. As such, DOE has revised its max-tech 
efficiency level for the final rule so that at the 40-gallon 
representative capacity, the efficiency level is 0.77 EF, as shown in 
Table IV.7.


    Table IV.7--Forty-Gallon Gas-Fired Storage Water Heater (Standard
                        Burner) Efficiency Levels
------------------------------------------------------------------------
         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 =       Condensing, Power Vent, 2''
 0.77).                                   Insulation.
------------------------------------------------------------------------

    Regarding the technology options for ultra-low NOX gas-
fired storage water heaters, ACEEE stated that once an inducer fan is 
added to an ultra-low NOX product, the ultra-low 
NOX design factor is not a prohibitive feature. (ACEEE, 
Public Meeting Transcript, No. 57.4 at pp. 127) A.O. Smith stated that 
the only way for ultra-low NOX water heaters to overcome the 
additional restriction added by increased flue baffling (needed to 
promote heat exchange and increase efficiency) would be to add a blower 
and/or power-burner to the heater, which would greatly increase the 
manufacturing and installation costs of the heater. (A.O. Smith, No. 76 
at p. 2)
    DOE tentatively concluded in the December 2009 NOPR that ultra-low 
NOX gas-fired water heaters require the introduction of 
additional technologies to achieve the same efficiency as standard gas-
fired water heaters. For the December 2009 NOPR, DOE performed a 
teardown analysis of ultra-low NOX gas-fired storage water 
heaters. 74 FR 65852, 65881 (Dec. 11, 2009). (Details about DOE's 
December 2009 NOPR analysis of ultra-low NOX storage water 
heaters are available in chapter 5 of the December 2009 NOPR TSD.) DOE 
research showed that implementing power venting and the same insulation 
increases as those for standard gas-fired water heaters would result in 
slightly lower efficiencies due to the additional pressure restrictions 
resulting from the addition of the ultra-low NOX burner. 
Therefore, DOE implemented technologies at lower efficiency levels for 
ultra-low NOX gas-fired storage water heaters in order to 
achieve the same efficiencies as those identified for standard gas-
fired storage water heaters. Based on the teardown analysis of ultra-
low NOX water heaters, DOE believes that the levels 
identified for ultra-low NOX gas-fired storage water heaters 
are achievable using the technologies identified in Table IV.8. In its 
comments, ACEEE does not present any new data or evidence to support 
its assertion that once a power venting design is implemented, ultra-
low NOX gas-fired storage water heaters can achieve the same 
efficiencies as gas-fired water heaters with standard burners. As a 
result, DOE maintained the technologies and efficiency levels 
identified in the December 2009 NOPR for the final rule, with the 
exception of the max-tech level, which was reduced to 0.77 EF for the 
reasons described above.

 Table IV.8--Forty-Gallon Gas-Fired Storage Water Heater (Ultra-Low NOX
                        Burner) Efficiency Levels
------------------------------------------------------------------------
         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 =       Condensing, Power Vent, 2''
 0.77).                                   Insulation.
------------------------------------------------------------------------

    DOE also received several comments relating to the max-tech 
efficiency levels for electric storage water heaters, which was 
identified as 2.2 EF at the 50-gallon representative rated storage 
volume in the December 2009 NOPR. 74 FR 65852, 65884 (Dec. 11, 2009). 
GE stated that the heat pump water heater it has in production has an 
EF of 2.35 at standard DOE test conditions, which is higher than the 
max-tech level identified in the December 2009 NOPR for electric 
storage water heaters. (GE, No. 84 at p. 1) A.O. Smith also stated that 
the 2.2 EF max-tech in the December 2009 NOPR is too low, citing the GE 
heat pump water heater that is rated at 2.3 EF as evidence. A.O. Smith 
stated that the heat pump water heater max-tech level should be 
increased to 2.3 EF or higher if there is data available showing higher

[[Page 20144]]

levels are feasible. (A.O. Smith, No. 76 at p. 2) Further, A.O. Smith 
stated that because of heat pumps using CO2 as a refrigerant 
and because other heat pump technologies exist, the max-tech possibly 
is higher than 2.2 EF. (A.O. Smith, Public Meeting Transcript, No. 57.4 
at p. 131) ACEEE stated that DOE does not have an appropriate max-tech 
for electric storage water heaters because it inappropriately screened 
out CO2 heat pump water heaters, which are commercially 
available in other countries. (ACEEE, Public Meeting Transcript, No. 
57.4 at p. 130) Additionally, ACEEE stated that the GE product with an 
EF of 2.35 exceeds DOE's December 2009 NOPR max-tech level of 2.2 EF 
(ACEEE, No. 79 at p. 8)
    Daikin stated that DOE's proposed max-tech for heat pump water 
heaters of 2.2 EF is reasonable and appropriate, and is an achievable 
standard for heat pump water heaters. (Daikin, No. 82 at p. 1)
    In response, DOE estimated the max-tech efficiency for electric 
storage water heaters for the December 2009 NOPR before any integrated 
heat pump water heaters were commercially available on the market. In 
the time since the December 2009 NOPR's publication, several heat pump 
water heater models have become available to consumers. The highest EF 
of the heat pump water heater models currently available on the market 
is 2.35 EF at 50 gallons. While DOE does acknowledge A.O. Smith's and 
ACEEE's point that a CO2 heat pump water heater could 
provide an even higher EF, that technology was screened out during the 
screening process (see section IV.B.1), and DOE is not considering that 
technology as a viable way of reaching the max-tech level. As a result, 
DOE has revised the max-tech level for the final rule to be 2.35 EF at 
the representative 50-gallon rated storage volume, as shown in Table 
IV.9.

Table IV.9--Fifty-Gallon Electric Storage Water Heater Efficiency Levels
------------------------------------------------------------------------
         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 =       Heat Pump Water Heater, More-
 2.35).                                   Efficient Compressor.
------------------------------------------------------------------------

    DOE received only one comment in response to the efficiency levels 
and technology pathways presented in the December 2009 NOPR for oil-
fired storage water heaters. In the December 2009 NOPR, DOE determined 
that oil-fired storage water heaters would have to use a multi-flue 
design to achieve efficiency levels 6 and 7 (i.e., 0.66 and 0.68 EF for 
the 32-gallon representative rated storage volume). 74 FR 65852, 65885-
86 (Dec. 11, 2009). Bradford White stated that at the efficiency level 
proposed in the December 2009 NOPR for oil-fired storage water heaters 
(i.e., efficiency level 5, or 0.62 EF for the 32-gallon representative 
rated storage volume), reaching the required efficiency will likely 
require the use of multi-flue designs, thereby adding tremendous cost 
to residential designs. (Bradford White, No. 61 at p. 2)
    In response, DOE identified the technologies at each efficiency 
level by examining the designs of products currently available on the 
market at each efficiency level. Oil-fired storage water heaters are 
currently available on the market at 0.62 EF, which do not utilize a 
multi-flue design or other proprietary technology. As a result, DOE 
believes that the technology options identified in the December 2009 
NOPR at efficiency level 5 are appropriate, and has retained the same 
efficiency levels and technologies for the final rule. Accordingly, DOE 
did not include a multi-flue design at efficiency level 5 for the final 
rule analysis.


   Table IV.10--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 =       1'' Foam Insulation, and Multi-
 0.68).                                   Flue Design.
------------------------------------------------------------------------

    DOE did not receive any comments in response to the efficiency 
levels and technology options presented in the December 2009 NOPR 
analysis for gas-fired instantaneous water heaters. 74 FR 65852, 65886-
87 (Dec. 11, 2009). DOE believes that the efficiencies and technology 
options presented for gas-fired instantaneous water heaters in the 
December 2009 NOPR are still valid and continued to use the same 
technologies and efficiency levels in the final rule analysis.

[[Page 20145]]



 TABLE IV.11--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).
------------------------------------------------------------------------

b. Direct Heating Equipment
    Table IV.12 through Table IV.16 present the efficiency levels DOE 
examined for the final rule analysis for DHE. In the December 2009 NOPR 
analysis, DOE identified various efficiency levels for gas wall fan 
DHE. 74 FR 65852, 65887 (Dec. 11, 2009). DOE did not receive any 
comments pertaining to its efficiency levels or technologies identified 
for the gas wall fan product in the December 2009 NOPR analysis. After 
reviewing the efficiency levels and technologies, DOE has determined 
that the same efficiency levels and technologies are still appropriate 
and continued to use them in the final rule analysis.

Table IV.12--Gas Wall Fan-Type DHE (Over 42,000 Btu/h) Efficiency Levels
------------------------------------------------------------------------
        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 =     Induced Draft and Electronic
 80).                                     Ignition.
------------------------------------------------------------------------

    For gas wall gravity DHE, DOE identified efficiency levels and 
technology options in the December 2009 NOPR analysis, which included a 
72-percent AFUE level as the max-tech that could be achieved using 
electronic ignition. 74 FR 65852, 65887-88 (Dec. 11, 2009). DOE 
received several comments in response to the efficiency levels and 
technologies for gas wall gravity DHE presented in the December 2009 
NOPR. These comments and DOE's response are discussed below.
    Williams stated that due to factors such as interior stud-wall 
installation, the lack of an electricity requirement, and limited 
height footprint, gravity wall heaters do not lend themselves to the 
addition of a fan, and the commenter asserted that the TSD 
recommendations centered almost exclusively on the incorporation of a 
fan for improving efficiency of DHE. (Williams, No. 96 at p. 2) 
Further, Williams stated that a three-percent AFUE difference between a 
gravity wall and fan wall heater is not plausible. Williams also 
commented that DOE's assumption that increased efficiencies of three 
percent to nine percent can be attained by using an electronic ignition 
is unproven. (Williams, No. 96 at p. 2)
    Empire stated that to improve efficiency of DHE, larger heat 
exchanger surface areas would be needed and, as a result, the overall 
size of the unit may increase. Furthermore, Empire stated that many of 
the modifications necessary to improve the efficiency of gas wall 
gravity DHE would require electricity. (Empire, Public Meeting 
Transcript, No. 57.4 at p. 166) LTS stated that it is not optimistic 
that it could manufacture gravity wall furnaces at the proposed level, 
because meeting that level would require a larger heat exchanger and 
cabinet and, consequently, the product would lose its retrofit ability. 
(LTS, No. 56.7 at p. 1)
    In consideration of the comments above, DOE reevaluated its 
efficiency levels and technologies for gas wall gravity DHE for the 
final rule. After reexamining the current market for gas wall gravity 
DHE for the final rule, DOE concluded that at the efficiency levels 
analyzed by DOE in the December 2009 NOPR, some gas wall gravity DHE 
models are available on the market, but these models are not in the 
representative rated capacity range. Therefore, DOE revised the 
efficiency levels analyzed for the final rule to more accurately 
reflect the current market for products within the representative rated 
capacity. DOE notes that the revised efficiency levels do not require 
the use fans, and allow for heat exchangers to be sized so that the 
units can be easily retrofitted. In addition, although no gas wall 
gravity products that use an electronic ignition system are available 
on the market, DOE maintained the assumption from the December 2009 
NOPR that an electronic ignition could be added to gas wall gravity 
products to improve the AFUE by 1 percent. DOE does not believe that a 
reduction of consumer utility will occur by requiring electrical power 
for an electronic ignition because these products could incorporate a 
battery backup to mitigate any concerns about operation during power 
outages.
    Regarding Williams' assertion that the AFUE increases from an 
electronic ignition have not been proven, DOE agrees that the actual 
AFUE increase resulting from the addition of an electronic ignition 
will be highly variable based on the characteristics of each individual 
product, and the results of this have not been demonstrated in gas wall 
gravity DHE on the market. Because no products are available on the 
market in this product class that utilize electronic ignition, it is 
difficult to determine the exact impact of utilizing an electronic 
ignition for gas wall gravity DHE. However, consideration under the DOE 
test procedures for vented home heating

[[Page 20146]]

equipment (10 CFR part 430, subpart B, appendix O) led DOE to believe 
it is reasonable to assume that a 1-percent increase in AFUE would be 
achieved with the addition of an electronic ignition. Section 4.1.17 of 
DOE's test procedures for vented home heating equipment lists the AFUE 
equation as:

AFUE = 0.968[eta]ss-wt - 1.78DF - 
1.89DS - 129PF - 2.8LJ + 1.81

    Of particular relevance in the AFUE equation above is the 
PF term, which is the pilot fraction and accounts for the 
AFUE reduction caused by the standing pilot. PF is defined 
as the ratio of the pilot light input to the total input of the 
product. If DOE assumes a typical pilot light input of 400 Btu/h, the 
minimum pilot fraction for the representative input range for gas wall 
gravity DHE would be 0.009. When multiplied by the 129 coefficient 
provided in the equation, a pilot fraction of 0.009 would yield 
slightly over a 1-percent AFUE reduction according to the equation. 
Therefore, DOE assumes that the elimination of a standing pilot would 
provide about a 1-percent AFUE increase for the representative capacity 
range. DOE used gas wall gravity DHE with an electronic ignition to 
represent the max-tech efficiency level because the incorporation of 
electronic ignition does not require significant modifications to the 
installation space that would limit consumers' ability to retrofit the 
product. Table IV.13 shows the revised efficiency levels for gas wall 
gravity DHE that were used in the final rule analysis.

  Table IV.13--Gas Wall Gravity DHE (Over 27,000 Btu/h and Up to 46,000
                        Btu/h) Efficiency Levels
------------------------------------------------------------------------
        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 = 69).........  Standing Pilot and Improved
                                          Heat Exchanger.
Efficiency Level 4--Max Tech (AFUE =     Electronic Ignition.
 70).
------------------------------------------------------------------------

    For gas floor DHE, gas room DHE, and gas hearth DHE, DOE surveyed 
the market and identified a number of efficiency levels for these 
products based on the technologies available for each product class in 
the December 2009 NOPR analysis. 74 FR 65852, 65888 (Dec. 11, 2009). 
DOE did not receive any comments about the efficiency levels and 
technologies identified for these products. After reviewing the 
efficiency levels and technologies for each of these three product 
classes, DOE determined that the efficiency levels and technologies 
examined in the December 2009 NOPR are still appropriate and maintained 
them for the final rule analysis. Table IV.14 through Table IV.16 show 
the efficiency levels analyzed for gas floor, gas room, and gas hearth 
DHE.

    Table IV.14--Gas Floor DHE (Over 37,000 Btu/h) Efficiency Levels
------------------------------------------------------------------------
        Efficiency level (AFUE)                     Technology
------------------------------------------------------------------------
Baseline (AFUE = 57)...................  Standing Pilot.
Efficiency Level 1--Max Tech (AFUE =     Standing Pilot and Improved
 58).                                     Heat Exchanger.
------------------------------------------------------------------------


  Table IV.15--Gas Room DHE (Over 27,000 Btu/h and Up to 46,000 Btu/h)
                            Efficiency Levels
------------------------------------------------------------------------
        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 =     Electronic Ignition and
 83).                                     Multiple Heat Exchanger
                                          Design.
------------------------------------------------------------------------


 Table IV.16--Gas Hearth DHE (Over 27,000 Btu/h and Up to 46,000 Btu/h)
                            Efficiency Levels
------------------------------------------------------------------------
        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).
------------------------------------------------------------------------

c. Pool Heaters
    Table IV.17 shows the efficiency levels analyzed for the final rule 
analysis for pool heaters. In response to the December 2009 NOPR 
analysis, DOE received several comments related to the efficiency 
levels and technologies identified for pool heaters, particularly for 
efficiency level 5 (i.e., 84-percent thermal efficiency).
    AHRI asserted that DOE has incorrectly analyzed the measures 
required to manufacture gas-fired pool heaters capable of achieving a 
minimum thermal efficiency of 84 percent. Further, AHRI stated that 
manufacturers must design products to address the entire range of 
installation situations that the product could experience, and if a 
particular replacement installation presents concerns about possible

[[Page 20147]]

excessive condensation for a heater with 83- or 84-percent thermal 
efficiency, the option currently exists to install a slightly less 
efficient pool heater and minimize this concern. However, AHRI asserted 
that because this option will no longer exist if DOE adopts TSL 4, 
manufacturers will have to use more corrosion-resistant (and more 
expensive) stainless steel in the heat exchangers. (AHRI, No. 91 at p. 
9)
    Similarly, Raypak stated its belief, based on their own testing 
conducted to evaluate ways to achieve higher efficiency from their 
products that more-expensive stainless steel materials will be required 
to properly deal with the increased amount of condensate at higher 
efficiency levels (i.e., anything greater than TSL 2). Further, Raypak 
stated that atmospheric products currently on the market do condense 
(although they are designed to minimize condensation), so increasing 
the efficiency level will both increase the amount of condensation and 
reduce the life of the product, unless more-expensive stainless steel 
materials are used to manage condensate more effectively. (Raypak, No. 
67 at p. 3)
    Zodiac also stated that 84-percent thermal efficiency for gas-fired 
pool heaters approaches the point at which condensing occurs, and that 
condensation as a byproduct of combustion is acidic and can cause 
corrosion to important components of the heater, including the venting 
material if the proper type of venting is not installed. Zodiac stated 
that corrosion from condensate can lead to leaks in the venting system, 
which in turn can allow combustion by-products to infiltrate into areas 
where such by-products are not desirable. Zodiac asserted this can 
subsequently contribute to creating a carbon monoxide hazard in the 
event that abnormal combustion ever occurs, which can lead to serious 
injury or death. (Zodiac, No. 68 at pp. 1-2)
    In response to these comments, DOE notes that in the engineering 
analysis, DOE examined pool heaters that are currently available on the 
market at 84-percent thermal efficiency. DOE determined that these 
products did not incorporate stainless steel heat exchangers. In 
addition, manufacturer literature does not specify instances when these 
products could cause unsafe installations, and where less-efficient 
products should be used to minimize corrosive condensate. Instead, 
manufacturer literature advertises safety features that minimize 
condensate, such as a manual bypass that will raise the incoming water 
temperature to reduce the formation of corrosive condensate. Because 
these products currently exist on the market and seem to be capable of 
safe operation with condensate being mitigated using less expensive 
methods than incorporating stainless steel materials, DOE did not 
consider stainless steel heat exchangers at 84-percent thermal 
efficiency for the final rule. Additionally, DOE notes that typically 
pool heaters are installed outdoors or outside of the living space, so 
these products are unlikely to cause safety concerns in most 
installations. DOE does not believe manufacturers would largely deviate 
from the designs currently on the market in the event of a standard at 
this efficiency level, and, thus, DOE based its technologies on 
products currently available on the market at 84-percent thermal 
efficiency. As a result, DOE maintained the pool heater efficiency 
levels analyzed for the December 2009 NOPR in the final rule analysis.

  Table IV.17--Gas-Fired Pool Heater (250,000 Btu/h) Efficiency Levels
------------------------------------------------------------------------
     Efficiency level (thermal
            efficiency)                          Technology
------------------------------------------------------------------------
Baseline (Thermal Efficiency =      ....................................
 78)*..
Efficiency Level 1 (Thermal         Improved Heat Exchanger Design.
 Efficiency = 79)*.
Efficiency Level 2 (Thermal         Improved Heat Exchanger Design.
 Efficiency = 81)*.
Efficiency Level 3 (Thermal         Improved Heat Exchanger Design, More
 Efficiency = 82)*.                  Effective Insulation (Combustion
                                     Chamber).
Efficiency Level 4 (Thermal         Power Venting.
 Efficiency = 83).
Efficiency Level 5 (Thermal         Power Venting, Improved Heat
 Efficiency = 84).                   Exchanger Design.
Efficiency Level 6 (Thermal         Sealed Combustion, Improved Heat
 Efficiency = 86).                   Exchanger Design.
Efficiency Level 7 (Thermal         Sealed Combustion, Condensing.
 Efficiency = 90).
Efficiency Level 8--Max-Tech        Sealed Combustion, Condensing,
 (Thermal Efficiency = 95).          Improved Heat Exchanger Design.
------------------------------------------------------------------------
* Technologies incorporating either a standing pilot or electronic
  ignition. Efficiency Levels above 3 include electronic ignition.

3. Cost Assessment Methodology
a. Manufacturer Production Cost
    As explained in the December 2009 NOPR, DOE's process for 
developing manufacturer production costs (MPCs) consisted of several 
steps. First, DOE selected representative models that corresponded to 
the representative rated storage volumes and input capacities, and that 
represented the most common designs and characteristics available in 
products on the market. DOE then performed a teardown analysis of the 
selected models, which included disassembling the selected products 
into their base components and characterizing each component according 
to its weight, dimensions, material, quantity, and the manufacturing 
processes used to fabricate and assemble it. The teardown analysis for 
this rulemaking included a total of over 60 physical and virtual 
teardowns of water heaters, DHE, and pool heaters during the 
preliminary and NOPR analysis phases. 74 FR 65852, 65889-93 (Dec. 11, 
2009).
    DOE used the data gathered during the teardown analysis to generate 
bills of materials (BOMs) that 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. DOE 
developed a cost model using Microsoft Excel 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, 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 final rule analysis, DOE updated all of the labor rates, 
tooling costs, raw material prices, and the

[[Page 20148]]

purchased parts costs. DOE calculated new 5-year average materials 
prices 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, 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 2009$ using the 
gross domestic product implicit price deflator. Chapter 5 of the final 
rule TSD describes DOE's cost model and definitions, assumptions, and 
estimates.
    Additionally, because integrated heat pump water heaters became 
available on the market before the completion of the final rule 
analysis, DOE was able to perform teardown analyses and develop 
detailed BOMs for multiple heat pump water heaters. DOE used the BOMs 
to develop the MPCs for heat pump water heaters, which DOE found 
affirmed the MPCs developed for the December 2009 NOPR analysis that 
were based on a theoretical heat pump water heater design (since no 
heat pump water heaters were available on the market at the time of the 
December 2009 NOPR analysis). The teardown analysis of heat pump water 
heaters allowed DOE to refine its MPCs for these products for the final 
rule analysis.
    DOE received several comments in response to the manufacturer 
production costs and methodology presented in the December 2009 NOPR. 
ACEEE stated its disappointment that DOE did not perform retrospective 
analysis of the costs of products affected by changes in efficiency 
standards. ACEEE recommended that DOE balance the current approach to 
developing the cost-efficiency relationship by considering the 
historical results of rulemakings, arguing that manufacturer production 
costs for product redesigns almost inevitably result in lower consumer 
prices for more-efficient goods than DOE has typically estimated in its 
rulemaking analyses for energy conservation standards. Further, ACEEE 
stated that DOE's reasoning that it cannot speculate about specific 
changes manufacturers might adopt, is no reason to reject analysis of 
the historical pattern of manufacturer responses. ACEEE cited published 
work by a DOE contractor purportedly showing that most standards yield 
consumer prices lower than projected by the Department, and ACEEE 
stated that empirical results are simply more credible than those 
relied upon in DOE's rulemaking record, particularly for the future 
costs of products that include technology shifts and very low market 
shares today, such as heat pump water heaters. (ACEEE, No. 79 at p. 3)
    In response, DOE reiterates its tentative conclusion in the 
December 2009 NOPR that 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. 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 based upon 
relevant data is particularly important given EPCA's anti-backsliding 
provision at 42 U.S.C. 6295(o)(1).
    At the December 2009 NOPR public meeting, A.O. Smith stated that 
the cost impact studies for ultra-low NOX in combination 
with condensing technology should be reworked extensively because it is 
significantly more complex to implement an ultra-low NOX 
design with a condensing gas-fired water heater than a non-condensing 
gas-fired water heater. (A.O. Smith, Public Meeting Transcript, No. 
57.4 at p. 124) A.O. Smith also commented at the public meeting that 
for ultra-low NOX gas-fired storage water heaters, the MPC 
at efficiency level 6 for an ultra-low NOX condensing gas 
water heater is considerably too low (A.O. Smith, Public Meeting 
Transcript, No. 57.4 at p. 139) However, in its written submission, 
A.O. Smith stated that they believe DOE's manufacturer production costs 
in the December 2009 NOPR are all reasonably accurate. (A.O. Smith, No. 
76 at p. 3) DOE believes A.O. Smith's written statement clarified A.O. 
Smith's opinion regarding the manufacturer production costs, and thus, 
DOE did not change its approach to developing MPCs for ultra-low 
NOX condensing water heaters.
    Turning to pool heaters, AHRI stated that the manufacturing cost 
for pool heater models to comply with TSL 4 (i.e., 84-percent thermal 
efficiency) is underestimated by DOE. (AHRI, No. 91 at p. 8) Similarly, 
Raypak asserted that DOE does not account for the stainless steel 
material improvements (a significant cost increase) at any TSL below 
fully condensing. (Raypak, No. 67 at p. 3)
    In response, DOE did not include the cost of a stainless steel heat 
exchanger design in its analysis of pool heaters at 84-percent thermal 
efficiency, because DOE's MPC for this product is based on models at 
84-percent thermal efficiency that are currently available on the 
market, as explained in section IV.C.2.c, DOE does not have sufficient 
reason to believe that in the event of a minimum energy conservation 
standard at this efficiency level, manufacturers would completely 
redesign their products at this efficiency. Thus, DOE disagrees with 
AHRI and Raypak, and does not believe that the pool heater MPC at 84-
percent thermal efficiency was underestimated for the December 2009 
NOPR and has continued to use that MPC for the final rule analysis.
b. Manufacturer Selling Price
    The manufacturer selling price (MSP) is the price at which the 
manufacturer can recover all production and non-production costs and 
earn a profit. 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. For heating products, DOE calculates the MSP in one of 
two ways, depending on the product type. For gas-fired instantaneous 
water heaters, DHE, and pool heaters, the MSP is the MPC multiplied by 
a manufacturer markup. For gas-fired, electric, and oil-fired storage 
water heaters, the size of the unit is largely dependent on the final 
standard requirement, and as a result, the shipping costs are much 
different at each efficiency level. Therefore, in the December 2009 
NOPR analysis, DOE separated the shipping costs of storage water 
heaters from the manufacturer markup to more transparently show the 
impacts of standards on the shipping costs of storage water heaters. 
The MSP for gas-fired, electric, and oil-fired storage water heaters 
was calculated as the MPC multiplied by the manufacturer markup (less 
the percentage of markup

[[Page 20149]]

usually attributed to shipping cost) plus the shipping cost per unit. 
See chapter 5 of the final rule TSD for more information regarding the 
manufacturer markup.
i. Manufacturer Markup
    The manufacturer markup is a non-production cost multiplier that 
DOE applies to the full MPC to account for corporate non-production 
costs and profit. To calculate the manufacturer markups for the 
preliminary analysis, DOE used 10-K reports from publicly-owned 
residential heating products companies. DOE presented the calculated 
markups to manufacturers during interviews conducted for the December 
2009 NOPR MIA analysis, and considered the feedback from manufacturers 
in order to supplement the calculated markup. DOE then refined the 
markups for each type of residential heating product to better reflect 
the residential heating products market. DOE used a constant markup to 
reflect the MSPs of the baseline products as well as more-efficient 
products. DOE used this approach because amended standards may result 
in high-efficiency products (which currently are considered premium 
products) becoming the baselines.
    In regard to the manufacturer markups and methodology for 
determining manufacturer markups in the December 2009 NOPR, DOE did not 
receive any feedback from interested parties. After reviewing the 
manufacturer markups used for the December 2009 NOPR, DOE continued to 
use the same manufacturer markups for the final rule.
ii. Shipping Cost for Storage Water Heaters
    The final step in DOE's cost-assessment methodology was to 
calculate the shipping cost for storage water heaters. Typically, the 
cost of shipping is fully accounted for in the manufacturer markup, and 
as noted above, this was DOE's approach for direct heating equipment, 
pool heaters, and gas-fired instantaneous water heaters. For storage 
water heaters, however, shipping costs are highly variable because the 
size of the unit is largely dependent upon the efficiency level being 
considered. Thus, DOE separated the shipping cost from manufacturer 
markup for storage water heaters.
    For the final rule, DOE used many of the same assumptions used in 
the December 2009 NOPR to calculate shipping costs. DOE calculated 
shipping costs based on a typical 53-foot straight-frame trailer with a 
storage volume of 4,240 cubic feet, and assumed an average cost of 
$4,000 per trailer load. DOE examined the average sizes of water 
heaters at each efficiency level and storage volume, and determined the 
number of units that would fit in each trailer based on assumptions 
about the arrangement of water heaters in the trailer.
    In response to the shipping costs presented in the December 2009 
NOPR, Bradford White stated that the increases in shipping costs at 
higher efficiency levels are far too low. (Bradford White, Public 
Meeting Transcript, No. 57.4 at pp. 40-41) However, DOE notes that 
Bradford White did not provide any new data regarding shipping costs in 
response to the December 2009 NOPR. Further, Bradford White expressed 
strong disagreement with the shipping costs used for the December 2009 
NOPR analysis, arguing that at the increased insulation thicknesses 
presented in the December 2009 NOPR, DOE's shipping costs are very much 
underestimated. (Bradford White, No. 61 at p. 1)
    In response to these comments, DOE reexamined the shipping costs 
for the final rule analysis. DOE made several changes to its December 
2009 NOPR assumptions for the final rule, including changes to the 
packaging dimensions of heat pump water heaters and changes to 
assumptions about the arrangement power vented gas-fired units on the 
trailer. For example, for the final rule analysis, DOE was able to 
examine actual heat pump water heaters available on the market, which 
allowed DOE to refine its estimated shipping dimensions of these units 
by increasing the dimensions to more accurately reflect the packaging 
of products that have recently become available to consumers. The 
increased shipping dimensions led to an increase the shipping cost (as 
manufacturers would be able to fit fewer units per shipping load). As a 
result, DOE was able to revise its shipping costs to more accurately 
reflect the cost to ship products currently available on the market. 
However, DOE notes that the shipping costs developed for the final rule 
represent estimates of the cost per unit shipped if the trailer were 
fully loaded with the same product (i.e., same type of water heater at 
the same efficiency level and same storage volume). DOE recognizes that 
in reality, manufacturers will likely mix different products of various 
storage volumes and efficiencies to try to optimize the use of space 
within the trailer, which will cause some variation in the actual 
shipping costs per unit. For a full description of shipping costs for 
storage water heaters, see chapter 5 of the final rule TSD.
4. Engineering Analysis Results
    The results of the engineering analysis are reported as cost-
efficiency data in the form of MSP (in dollars) versus efficiency (EF 
for water heaters, AFUE for DHE, and thermal efficiency for pool 
heaters). The results from the engineering analysis are the basis for 
the subsequent analyses in the final rule and were used in the LCC 
analysis to determine consumer prices for residential heating products 
at the various potential standard levels. Chapter 5 of the final rule 
TSD provides the full list of MPCs and MSPs at each efficiency level 
for each analyzed representative product.
5. Scaling to Additional Rated Storage Capacities
    As discussed in the December 2009 NOPR, 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 for the 
representative rated storage volumes to several discrete rated storage 
volumes higher and lower than the representative storage volume for 
each storage water heater product class. 74 FR 65852, 65893-94 (Dec. 
11, 2009) DOE developed the MPCs for water heaters at each of the rated 
storage volumes shown in Table IV.18. 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.F).

      Table IV.18--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.

[[Page 20150]]

 
Oil-fired Storage................  50.
------------------------------------------------------------------------

    As described in the December 2009 NOPR, DOE developed the MPCs for 
the analysis of additional storage volumes by creating a cost model 
based on teardowns of products at nominal storage volumes outside the 
representative volume across a range of efficiencies and manufacturers. 
The cost model accounts for changes in the size of water heater 
components that would scale with tank volume, while assuming other 
components (e.g., gas valves, thermostats, controls) remain largely the 
same across the different storage volume sizes. DOE estimated the 
changes in material and labor costs that occur at volume sizes higher 
and lower than the representative volume based on observations made 
during teardowns, which allowed DOE to accurately model certain 
characteristics that are not identifiable in manufacturer literature. 
Additional details and the results of DOE's analysis for the additional 
storage volumes are presented in chapter 5 of the final rule TSD 
(engineering analysis).
    In response to the scaled MPCs developed for the December 2009 NOPR 
analysis, DOE received feedback from several interested parties. 
Southern Company and AHRI commented that DOE's assumption that for heat 
pump water heaters, the heat pump output capacity would not change as a 
function of tank size is likely incorrect. Southern Company stated that 
a heat pump with a higher capacity would be used on a 119-gallon tank 
than on a 30-gallon tank. As a result, the commenters stated their 
belief that DOE's scaling of costs for the heat pump water heater 
efficiency levels may be incorrect. (Public Meeting Transcript, No. 
57.4 at pp. 152-155) Further, Southern Company stated that the reason 
the heating elements in electric resistance heaters have the same 
output capacity across the full range of gallon sizes is because they 
max-out the standard circuit. (Southern Company, Public Meeting 
Transcript, No. 57.4 at p. 155) A.O. Smith also commented that a 119-
gallon heat pump water heater would likely have a higher-capacity 
refrigerant circuit than a 30-gallon heat pump water heater. (A.O. 
Smith, Public Meeting Transcript, No. 57.4 at p. 157)
    DOE's analysis of electric storage water heaters currently 
available on the market revealed that electric storage water heaters 
use the same capacity heating elements across the range of storage 
volumes to provide the same amount of heat input to the water. DOE 
notes that for heat pump water heaters, the heat pump unit serves 
essentially the same function as the electric resistance element in 
electric storage water heaters (i.e., heating the water). Because heat 
pump modules paired with electric water heaters currently available on 
the market demonstrate that the same amount of heating capability as 
compared to the electric elements found in conventional water heaters 
and both of these types of heaters can be used to satisfy the heating 
requirements of the full range of water heater storage volumes, DOE 
believes the same amount of heat input from a heat pump can also be 
used to satisfy the heating requirements for the full range of storage 
volumes. Therefore, DOE does not believe an increase in the heat pump 
capacity would be required at larger tank storage volumes. DOE believes 
that the same amount of heat pump heating capacity will be adequate to 
serve the water heating needs across the entire range of storage 
volumes, and as a result manufacturers would be unlikely to increase 
the size and capacity of the heat pump unit as the storage volume 
increases. Therefore, DOE maintained the assumption that the heat pump 
unit will not scale with storage volume for the final rule analysis.
    EEI stated that for large water heaters (66 to 119 gallons), DOE's 
costs to go from TSL 4 (electric resistance) to TSL 5 (heat pump water 
heaters) are between $20 and $26, which are vastly understated. (EEI, 
No. 95 at p. 5)
    In response, DOE believes that EEI misinterpreted the scaled MPCs 
presented in the December 2009 NOPR analysis. EEI appears to have been 
considering the MPC differences between TSLs, whereas the December 2009 
NOPR only lists the cost differences between efficiency levels. Heat 
pump water heater technology is implemented for larger-storage-volume 
products at the December 2009 NOPR TSL 5; however, DOE does not 
consider heat pump water heater technology in the engineering analysis 
for efficiency level 5, but instead considers it at efficiency level 6 
for all product classes. The December 2009 NOPR TSL 5 was a combination 
of efficiency level 5 for the smaller storage volume sizes (55 gallons 
or less), and efficiency level 6 for the larger storage volume sizes 
(greater than 55 gallons). Thus, DOE believes the scaled MPCs at the 
higher gallon sizes and higher efficiency levels presented in the 
December 2009 NOPR were correct.
6. Water Heater Energy Efficiency Equations
    For this rulemaking, DOE reviewed the energy efficiency equations 
that define the existing Federal energy conservation standards for 
residential water heaters. The energy efficiency equations characterize 
the relationship between rated storage volume and energy factor and 
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. The energy efficiency equations 
allow DOE to account for the increases in standby losses as tank volume 
increases. The current energy efficiency equations show that for each 
water heater class, the minimum energy factor decreases as the rated 
storage volume increases.
    As described in the December 2009 NOPR, DOE reviewed market data 
and product literature for gas-fired and electric storage water heaters 
and developed two approaches for amending the existing energy 
efficiency equations for gas-fired and electric storage water heaters 
in the preliminary analysis. 74 FR 65852, 65894-96 (Dec. 11, 2009). One 
approach was to maintain the same slope used in the existing equations 
(found at 10 CFR 430.32(d)), but to incrementally increase the 
intercepts. The 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 the second approach 
was to acknowledge the changes in the product efficiencies that have 
occurred since the previous standards were set, and to account for 
these changes. DOE examined the efficiencies of models with varying 
storage volumes, but with the same or similar design features and 
varied the slope of the line to maximize the number of models in the 
series that meet the efficiency levels that DOE is considering in the 
full range of rated storage volumes.

[[Page 20151]]

    The standard levels proposed in the December 2009 NOPR were based 
on the results of the second approach for gas-fired and electric 
storage water heaters. For oil-fired storage water heaters and gas-
fired instantaneous water heaters, DOE only used the first approach to 
develop energy efficiency equations due to the limited number of models 
available on the market and limited data to justify modifying the 
equations. In response to the energy efficiency equations presented in 
the December 2009 NOPR, DOE received feedback from several interested 
parties.
    A.O. Smith stated it supports the energy-efficiency equations as 
generally being appropriate for the various efficiency levels. A.O. 
Smith endorsed the equations applicable to TSL 4, and strongly 
recommended that they not be revised from those proposed in the 
December 2009 NOPR. (A.O. Smith, No. 76 at p. 2)
    Bradford White expressed its disagreement with the energy 
efficiency equations proposed for electric storage water heaters. In 
particular, Bradford White commented that the efficiency level 4 
equation (EF = -0.00060(VR) + 0.965) should be used for 
VR <= 65 gallons and that the efficiency level 3 equation 
(EF = -0.00155(VR) + 1.026) should be used for VR 
> 65 gallons. Bradford White asserted that these changes are necessary 
to prevent the disproportionate EF increase that was proposed on larger 
volumes that have to combat higher standby losses. (Bradford White, No. 
61 at p. 4)
    Similarly, AHRI recommended that DOE revise the energy efficiency 
equation for TSL 4 for electric storage water heaters above 65 gallons, 
because AHRI believes it represents a disproportionately large increase 
in the EF requirement for these units. AHRI asserts that because larger 
electric storage water heaters have a smaller surface-area-to-volume 
ratio, increased insulation is less effective in achieving energy 
efficiency gains, and as a result, the projected efficiencies are 
overstated. AHRI recommended that for electric storage water heaters 
above 65 gallons, DOE should select the equation for TSL 3 (EF = 1.051 
- (0.00168 * Rated Storage Volume)) as the standard. (AHRI, No. 91 at 
p. 2)
    Rheem also stated that the energy-efficiency equation for gas-fired 
storage water heaters at TSL 4 disproportionately imposes higher 
minimum EF values for large-capacity gas-fired storage water heaters. 
Rheem expressed concern that the uneven treatment of large-capacity 
units would encourage work-around solutions and product shifts. In 
addition, Rheem stated that the energy efficiency equation for electric 
storage water heaters at TSL 4 disproportionately impacts large-
capacity electric storage water heaters. Rheem recommends that the 
equation read EF = 1.026 - (0.00155 x Rated Storage Volume in gallons) 
for capacities above 55 gallons, in order to yield balance for high-
capacity units. (Rheem, No. 89 at p. 12)
    In light of the comments above, DOE reexamined the energy 
efficiency equations proposed in the December 2009 NOPR for gas-fired 
and electric storage water heaters. The energy efficiency equations are 
intended to represent the relationship between efficiency and storage 
volume so that the same technology could be used to meet the EF 
requirement for the entire range of gallon capacities. After examining 
the characteristics of products on the market at each efficiency level 
and gallon size, and based on the results of the testing and teardown 
analysis done prior to the December 2009 NOPR, DOE believes that the 
energy efficiency equations, as presented in the December 2009 NOPR, 
accurately represent the relationship between efficiency and storage 
volume. The equations developed by DOE have two slopes and decline 
faster for the larger storage volumes than the smaller storage volumes. 
The slopes developed for the December 2009 NOPR incorporated the 
results of testing and a physical examination (through teardowns) of 
the features incorporated into units across various gallon sizes and 
efficiency levels. Through this process, DOE was able to determine the 
efficiencies that can be achieved using the same technologies across 
the range of rated storage volumes. DOE then developed equations based 
on the results of this analysis to create efficiency levels that allow 
products to utilize the same technology across the range of storage 
volumes.
    DOE believes that the equations have a proportionate impact on both 
larger-storage-volume units and smaller-storage-volume units. While DOE 
acknowledges that the efficiency levels in the proposed TSLs (which are 
determined based on a variety of factors, see section VI.A for more 
details) may be paired in a way which requires different efficiency 
levels utilizing different technologies for water heaters at various 
storage volumes, DOE does not believe this applies for the energy 
efficiency equations in the engineering analysis, which are based on 
constant technologies across the full range of storage volumes. The 
commenters did not provide any new data or evidence to lead DOE to 
conclude that the outcome of its analysis for the December 2009 NOPR is 
not valid.
    As a result, DOE is maintaining the energy efficiency equations 
presented in the December 2009 NOPR, with only minor changes to account 
for the new max-tech levels described in section IV.C.2. For the max-
tech energy efficiency equation (i.e., EL 6) for gas-fired storage 
water heaters, DOE maintained the slope used in the December 2009 NOPR, 
but shifted the efficiency requirements down so that the EF requirement 
at the 40-gallon representative rated storage volume is 0.77 EF instead 
of 0.80 EF. Similarly, for the max-tech equation (i.e., EL 7) for 
electric storage water heaters, DOE maintained the same slope, but 
shifted the equation upwards so that the efficiency requirement at the 
50-gallon representative rated storage volume is 2.35 EF instead of 2.2 
EF. See section IV.C.2.a for discussion of the max-tech efficiency 
levels.
    DOE did not receive any comments regarding the proposed approach 
for oil-fired storage water heater energy efficiency equations 
presented in the December 2009 NOPR and has used the same approach in 
the final rule. Similarly, DOE did not receive any comments objecting 
to the proposed approach for gas-fired instantaneous water heater 
energy efficiency equations presented in the December 2009 NOPR and has 
used the same approach in the final rule. Table IV.19 through Table 
IV.22 show the energy efficiency equations for residential water 
heaters. For more information on the energy efficiency equations, see 
chapter 5 of the final rule TSD.


                  Table IV.19--Energy Efficiency Equations for Gas-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                     Minimum energy factor (20    Minimum energy factor  (Over 60 and up to 100
         Efficiency level                 to 60 gallons)                            gallons)
----------------------------------------------------------------------------------------------------------------
Baseline Energy Efficiency          EF = -0.00190(VR) + 0.670
 Equation.

[[Page 20152]]

 
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) + 0.8012
----------------------------------------------------------------------------------------------------------------


                   Table IV.20--Energy Efficiency Equations for Electric Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                        Minimum energy factor   Minimum energy factor  (Over 80
                   Efficiency level                       (20 to 80 gallons)         and up to 120 gallons)
----------------------------------------------------------------------------------------------------------------
Baseline Energy Efficiency Equation...................  EF = 0.00132(VR) +
                                                         0.97.
----------------------------------------------------------------------------------------------------------------
EL 1 Energy Efficiency Equation.......................  EF = -0.00113(VR) +    EF = -0.00149(VR) + 0.999.
                                                         0.97.
----------------------------------------------------------------------------------------------------------------
EL 2 Energy Efficiency Equation.......................  EF = -0.00095(VR) +    EF = -0.00153(VR) + 1.013.
                                                         0.967.
----------------------------------------------------------------------------------------------------------------
EL 3 Energy Efficiency Equation.......................  EF = -0.00080(VR) +    EF = -0.00155(VR) + 1.026.
                                                         0.966.
----------------------------------------------------------------------------------------------------------------
EL 4 Energy Efficiency Equation.......................  EF = -0.00060(VR) +    EF = -0.00168(VR) + 1.051.
                                                         0.965.
----------------------------------------------------------------------------------------------------------------
EL 5 Energy Efficiency Equation.......................  EF = -0.00030(VR) +    EF = -0.00190(VR) + 1.088.
                                                         0.960.
----------------------------------------------------------------------------------------------------------------
EL 6 Energy Efficiency Equation.......................  EF = -0.00113(VR) + 2.057
----------------------------------------------------------------------------------------------------------------
EL 7 Energy Efficiency Equation.......................  EF = -0.00113(VR) + 2.406
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------



                  Table IV.21--Energy Efficiency Equations for Oil-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                Efficiency level                                       Minimum energy factor
----------------------------------------------------------------------------------------------------------------
EL 1 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.60.
----------------------------------------------------------------------------------------------------------------
EL 2 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.62.
----------------------------------------------------------------------------------------------------------------
EL 3 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.64.
----------------------------------------------------------------------------------------------------------------
EL 4 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.66.
----------------------------------------------------------------------------------------------------------------
EL 5 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.68.
----------------------------------------------------------------------------------------------------------------
EL 6 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.72.
----------------------------------------------------------------------------------------------------------------
EL 7 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.74.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------


               Table IV.22--Energy Efficiency Equations for Gas-Fired Instantaneous Water Heaters
----------------------------------------------------------------------------------------------------------------
                Efficiency Level                                       Minimum energy factor
----------------------------------------------------------------------------------------------------------------
EL 1 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.69.
----------------------------------------------------------------------------------------------------------------
EL 2 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.78.
----------------------------------------------------------------------------------------------------------------

[[Page 20153]]

 
EL 3 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.80.
----------------------------------------------------------------------------------------------------------------
EL 4 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.82.
----------------------------------------------------------------------------------------------------------------
EL 5 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.84.
----------------------------------------------------------------------------------------------------------------
EL 6 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.85.
----------------------------------------------------------------------------------------------------------------
EL 7 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.92.
----------------------------------------------------------------------------------------------------------------
EL 8 Energy Efficiency Equation.................  EF = -0.0019(VR) + 0.95.
----------------------------------------------------------------------------------------------------------------

D. Markups To Determine Product Price

    DOE used manufacturer-to-consumer markups to convert the 
manufacturer selling prices estimated in the engineering analysis to 
customer prices, which then were used in the life-cycle cost (LCC), 
payback period (PBP), and manufacturer impact analyses. DOE calculates 
markups for baseline products (baseline markups) and for more-efficient 
products (incremental markups) based on the markups at each step in the 
distribution channel. The overall incremental markup relates the change 
in the manufacturer sales price of higher-efficiency models (the 
incremental cost increase) to the change in the retailer or distributor 
sales price.
    In order to develop markups, DOE identifies how the products are 
distributed from the manufacturer to the customer (the distribution 
channels). DOE estimated manufacturer-to-customer markups for 
residential heating products based on separate distribution channels 
for water heaters, direct heating equipment, and pool heaters. After 
establishing appropriate distribution channels for each of the product 
classes, DOE relied on economic data from the U.S. Census Bureau and 
other sources to define how prices are marked up as the products pass 
from the manufacturer to the customer. A detailed description of the 
distribution channels and the markup applied at each step in the 
distribution process can be found in chapter 6 of the December 2009 
NOPR TSD. DOE did not receive any comments on development of markups, 
and it used the same approach for the final rule as it used for the 
December 2009 NOPR.

E. Energy Use Characterization

    The energy use characterization, which assesses the energy savings 
potential from adopting higher efficiency standards, provides the basis 
for the energy savings values used in the LCC and subsequent analyses. 
For each considered efficiency level within each heating product class, 
DOE calculated the potential energy savings compared to baseline 
models. As part of the characterization, DOE made certain engineering 
assumptions regarding product application, including how the products 
are operated and under what conditions. Those assumptions are 
documented in chapter 7 of the TSD, which also provides more detail 
about DOE's approach.
    DOE determined the annual energy use in the field by using a 
nationally-representative set of housing units for each type of 
product. The housing units were selected from EIA's Residential Energy 
Consumption Survey (RECS). The December 2009 NOPR analysis and today's 
final rule used the 2005 RECS, which was the latest data set available. 
(See http://www.eia.doe.gov/emeu/recs/ recs/.)
1. Water Heaters
    For residential storage-type water heaters, DOE relied on an energy 
use analysis tool, the water heater analysis model (WHAM), and a hot 
water draw model. For this rulemaking, DOE modified earlier versions of 
the tools, which were used to conduct the previous rulemaking that 
concluded in 2001. Combined with data from the 2005 RECS, these 
analytical tools enable DOE to establish the variation in water heater 
energy consumption in the United States.
    DOE determined the annual energy consumption of water heaters in 
actual housing units by considering the primary factors that determine 
energy use: (1) Hot water use per household; (2) the energy efficiency 
characteristics of the water heater; and (3) water heater operating 
conditions other than hot water draws. DOE used a hot water draw model 
to determine hot water use for each household in the sample. The 
characteristics of each water heater's energy efficiency were taken 
from the engineering analysis. DOE developed water heater operating 
conditions (other than hot water draws) from weather data and other 
relevant sources. DOE calculated the energy use of water heaters using 
WHAM, which accounts for a range of operating conditions and energy 
efficiency characteristics of water heaters.
    For heat pump water heaters that would be located indoors, 
overcooling of the indoor space as a result of the unit's operation is 
a potential problem. DOE assumed that the majority of 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. To account for this indirect increase in 
home heating (and the decrease in cooling during summer months), DOE 
estimated the associated energy consumption by space heating and air 
conditioning equipment for the appropriate homes in the RECS subsample 
for electric water heaters, and included this energy use in its 
analysis.
    A.O. Smith stated that to replace an electric resistance water 
heater with a heat pump water heater, the heat pump water heater will 
either require a larger tank to effectively utilize the heat pump 
cycle, or if a larger tank is not provided, the unit will run in the 
electric resistance mode and diminish the benefits of having a heat 
pump water heater. (A.O. Smith, No. 76 at pp. 2-3) In the December 2009 
NOPR analysis and the final rule analysis, DOE estimated the fraction 
of heat pump water heater operation that would be in electric 
resistance mode for each unit in the subsample. The fraction estimated 
to be in electric resistance mode varies from 10 to 50 percent in the 
subsample.
    Southern stated that heat pump water heaters do not perform well in 
temperatures outside the 45[deg]-120 [deg]F range, and it pointed out 
that there are locations where ambient temperatures are outside this 
range. (Southern, No. 90 at p. 3) DOE accounted for the ambient 
temperatures likely to be faced in heat

[[Page 20154]]

pump water heater locations by assuming electric resistance heating 
operation under extreme temperatures.
    For gas-fired instantaneous water heaters, DOE modified the 
approach used for storage water heaters to account for the absence of a 
storage tank. DOE applied a performance adjustment factor to account 
for evidence that the rated energy efficiency of instantaneous water 
heaters does not accurately portray actual performance.
2. Direct Heating Equipment
    The household sample developed for DHE is comprised of 2005 RECS 
housing units that used a floor/wall furnace, fireplace, or heater as 
the primary or secondary source of heat. DOE relied on the assumptions 
in the DOE test procedure (10 CFR part 430, subpart B, appendix O) to 
establish the typical annual energy consumption of direct heating 
equipment. However, to better reflect actual operating conditions, DOE 
used home heating loads derived from RECS instead of the average 
assumptions in the test procedure.
    Williams stated that DHE is used in many applications as a 
secondary heat source, where the primary heat source is turned down and 
the DHE provides heat to the occupied zone only. (Williams, No. 96 at 
p. 1) For the December 2009 NOPR and today's final rule, for those RECS 
households that used a gas furnace as the primary heating equipment and 
direct heating equipment as a secondary heat source, DOE adjusted the 
house heating load to estimate the portion of the load met by only the 
direct heating equipment.
    DOE did not receive any other comments on its approach for 
estimating energy consumption of direct heating equipment, and it has 
used essentially the same approach and data for the final rule.
3. Pool Heaters
    DOE estimated energy consumption of pool heaters in a 
representative sample of housing units from the 2005 RECS. DOE relied 
on the assumptions in the DOE test procedure (10 CFR part 430, subpart 
B, appendix P) to establish the typical annual energy consumption of 
pool heaters. However, to better reflect actual operating conditions, 
DOE used pool heater heating loads derived from RECS instead of the 
average test procedure assumptions.
    The calculation of pool heater energy consumption at each 
considered efficiency level depends on the assumed fraction of products 
that use a pilot light. In the December 2009 NOPR analysis, DOE used 
data based on the number of models in the market to estimate that 26.5 
percent of units use a pilot light. Raypak stated that 8 percent of 
pool heaters are millivolt pool heaters (i.e., use a pilot light). 
(Raypak, No. 67 at p. 2) Given that Raypak's estimate is based upon 
actual shipments data, DOE believes that the value it cited likely 
better reflects the actual market than the NOPR estimate based on the 
number of models. Therefore, for the final rule analysis, DOE adopted 
the value cited by Raypak.

F. Life-Cycle Cost and Payback Period Analyses

    DOE 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, and 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 the 2005 RECS. The housing units include five types: 
Single-family (attached), single-family (detached), multi-family (2-5 
units), multi-family (more than 4 units), and manufactured homes. For 
each sample household, DOE determined the energy consumption for the 
heating product and the energy price faced by the household. 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.
    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. For many of the above 
inputs, DOE created distributions of values to account for uncertainty 
and variability. Within each distribution, 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.23 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 December 2009 NOPR TSD, as well as the 
changes made for today's final rule. The following subsections discuss 
the main inputs and the changes DOE made to them.

[[Page 20155]]



  Table IV.23--Summary of Inputs and Key Assumptions in the LCC and PBP
                               Analyses *
------------------------------------------------------------------------
                                                       Changes for the
           Inputs                     NOPR               final rule
------------------------------------------------------------------------
                             Installed Costs
------------------------------------------------------------------------
Product Price...............  Derived by            Updated manufacturer
                               multiplying           product costs (see
                               manufacturer cost     section IV.C.3.a).
                               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   Modified fraction of
                               on data from RS       installations with
                               Means.                pilot light.
------------------------------------------------------------------------
                             Operating Costs
------------------------------------------------------------------------
Annual Energy Use...........  Water Heaters: Used   No change.
                               hot water draw
                               model to calculate
                               hot water use for
                               each household in
                               the sample from
                               RECS 2005.
                               Calculated energy
                               use using the water
                               heater analysis
                               model (WHAM).
------------------------------------------------------------------------
                              DHE: Based on sample  No change.
                               and data from RECS
                               2005.
                             -------------------------------------------
                              Pool Heaters: Based   Based on sample and
                               on sample and data    data from RECS 2001
                               from RECS 1993 to     and 2005. Included
                               2005.                 spa heaters.
------------------------------------------------------------------------
Energy Prices...............  Electricity: Based    Electricity: Updated
                               on EIA's 2007 Form    using data from
                               861 data.             EIA's 2008 Form 861
                              Natural Gas: Based     data and EIA's Form
                               on EIA's 2007         826.
                               Natural Gas          Natural Gas: Updated
                               Navigator.            using EIA's 2008
                              Variability:           Natural Gas
                               Regional energy       Navigator.
                               prices determined    Variability: No
                               for 13 geographic     change.
                               areas **.
------------------------------------------------------------------------
Energy Price Trends.........  Forecasted using      Forecasts updated
                               EIA's AEO2009.        using EIA's AEO2010
                                                     (Early Release).
------------------------------------------------------------------------
Repair and Maintenance Costs  Water Heaters: Based  No change.
                               on RS Means and
                               other sources.
                             -------------------------------------------
                              DHE: Based on RS      No change.
                               Means and other
                               sources.
                             -------------------------------------------
                              Pool Heaters: Based   No change.
                               on RS Means and
                               other sources.
                             -------------------------------------------
                 Present Value of Operating Cost Savings
------------------------------------------------------------------------
Product Lifetime............  Water Heaters: Based  No change.
                               on data from RECS,
                               AHS, and shipments.
                               Variability and
                               uncertainty:
                               Characterized using
                               Weibull probability
                               distributions.
                             -------------------------------------------
                              Set lifetime of oil-  No change.
                               fired storage water
                               heater equal to
                               that of gas-fired
                               storage water
                               heater.
                             -------------------------------------------
                              DHE: Based on range   No change.
                               of lifetimes from
                               various sources.
                             -------------------------------------------
                              Variability and
                               uncertainty:
                               Characterized using
                               Weibull probability
                               distributions.
                             -------------------------------------------
                              Pool Heaters: Based   Average lifetime
                               on range of           increased from 8
                               lifetimes from        years to 10 years.
                               various sources.
                               Variability and
                               uncertainty:
                               characterized using
                               Weibull probability
                               distributions..
------------------------------------------------------------------------
Discount Rates..............  Approach based on     No change in
                               the cost to finance   approach; added
                               an appliance          data for asset
                               purchase. Primary     classes.
                               data source was the
                               Federal Reserve
                               Board's SCF *** for
                               1989, 1992, 1995,
                               1998, 2001, 2004,
                               and 2007.
------------------------------------------------------------------------
Standard Compliance Date....  Water heaters: 2015.  No change.
                              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 December
  2009 NOPR TSD.
** Consisting of the nine U.S. Census Divisions, with four large States
  (New York, Florida, Texas, and California) treated separately.
*** Survey of Consumer Finances.


[[Page 20156]]

1. Product Price
    To calculate consumer product prices, DOE multiplied the 
manufacturer selling prices developed in the engineering analysis by 
the supply-chain markups described above (along with sales taxes where 
appropriate). 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. The 
estimated product prices at the considered efficiency levels are 
included in Chapter 8 in the TSD.
2. Installation Cost
    Installation costs include labor, overhead, and any miscellaneous 
materials and parts. The following sections discuss DOE's treatment of 
installation costs for each of the three heating products for the 
December 2009 NOPR, describe and address significant comments received, 
and discuss changes that DOE made for today's final rule.
a. Water Heaters
    In its preliminary analysis, DOE included several installation 
costs to address the space constraints that water heaters having 
thicker insulation may face. DOE assumed that major modifications for 
replacement installations of electric storage water heaters would occur 
40 percent of the time for water heater designs with 3 inches or 
greater insulation. To estimate the fraction of households that would 
require various modifications, DOE used the water heater location 
determined for 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.
    Generally, DOE maintained the above approach for the December 2009 
NOPR. However, in response to comments on the space constraints for 
water heaters with increased insulation thickness, for the NOPR 
analysis, DOE investigated the issue of space constraints for electric 
and gas-fired storage water heaters with an insulation thickness of 2 
inches or more. Based upon the results of this inquiry, DOE expanded 
the percentage of installations that may have space constraints to also 
include water heaters with 2-3 inches of insulation. DOE assumed that 
major modifications for replacement installations of electric and gas 
storage water heaters would occur 20 percent of the time for water 
heater designs with 2-3 inches of insulation. DOE also added for all 
water heaters a cost for extra labor needed to install water heaters in 
attics, and for installing larger water heaters.
    Commenting on the December 2009 NOPR analysis, Rheem and Southern 
stated that DOE has not adequately considered the space constraints 
faced by manufactured housing, although no data were provided relevant 
to this issue. (Rheem, No. 89 at pp. 11-12; Southern, No. 90 at pp. 3-
4) In response, DOE reviewed its assumptions regarding space 
constraints faced by manufactured housing, and based on its assessment 
of likely water heater locations from 2005 RECS, it approximately 
doubled the fraction of installations deemed to have space constraints. 
These installations would incur costs as described above to address the 
space constraints faced by water heater designs with more insulation.
    Regarding installation of gas-fired storage water heaters, A.O. 
Smith stated that the need (and cost) to add electrical power and 
condensate disposal to existing installations appears to be understated 
in the December 2009 NOPR. (A.O. Smith, No. 76 at p. 4) DOE notes that 
the commenter did not provide any data to support its position. DOE 
reviewed the available sources, which are based on RS Means and 
consultant reports, concluded that they provide a reasonable basis for 
its estimates, and therefore it has maintained the NOPR estimates for 
the final rule.
    AHRI stated that replacing larger gas-fired storage water heaters 
with condensing water heaters would require the added cost of new 
venting system, electrical connection, and a condensate disposal 
system, and sometimes an electric supply circuit. (AHRI, No. 91 at p. 
7) Rheem stated that external power would be required to operate max-
tech gas-fired storage water heaters, that venting would typically 
change to a positive pressure system with plastic venting, and that 
condensate lines, pumps, and proper disposal methods would be required. 
(Rheem, No. 89 at pp. 3-4) For the final rule analysis, DOE included a 
range of installation costs for the condensing water heater design that 
include all of the items cited by AHRI and Rheem.
    In its preliminary analysis, DOE applied a distribution of costs 
for heat pump water heater installations in indoor locations, including 
situations where modifications would be required. In response to 
comments on the assumed costs, for the December 2009 NOPR analysis, DOE 
made a number of changes, which are discussed below. Additional 
comments on these issues at the NOPR stage and DOE's response are 
likewise presented below.
    In 20 percent of replacement installations, DOE assumed that a 
household facing space constraints would install a smaller water heater 
and use tempering valves. BWC stated that adjusting the thermostat 
higher on a smaller-volume heat pump water heater and using a tempering 
valve cannot be done. It noted that the viable refrigerants available 
limit the water heater to lower temperatures (typically ~130 [deg]F 
maximum), and to achieve temperatures above this level, an electric 
resistance element must be used, which decreases the efficiency of the 
water heater. (BWC, No. 61 at p. 2) Rheem raised similar concerns. 
(Rheem, No. 89 at p. 8) DOE finds some merit in the above comments. 
Therefore, it reduced the fraction of installations that would use a 
tempering valve to include only those cases where the water heater 
setpoint would not need to exceed 140 [deg]F, as recommended in 
manufacturer product literature. DOE assumed that those households for 
which the tempering valve strategy is not viable would incur 
significant costs to modify the space to accommodate the heat pump 
water heater.
    For the December 2009 NOPR, DOE assumed that some households that 
would experience significant indoor cooling due to operation of the 
heat pump water heater in the heating months would have a venting 
system installed to exhaust and supply air. DOE estimated that 40 
percent of households facing a significant cooling effect would incur 
this cost, which averages $460. A.O. Smith stated that heat pump water 
heaters will not be vented due to the exorbitant costs of such a 
venting system and the fact that the venting will not fit within the 
existing studs and will need to be installed outside the current wall 
structure, where it will either be exposed, or have to be covered with 
additional material. (A.O. Smith, No. 76 at p. 3) DOE agrees that the 
costs of a venting system could be high in some cases, but its analysis 
assumes that venting will occur in some cases, and the associated costs 
are included in its LCC analysis. DOE also agrees that in some cases it 
would be necessary to install the venting system outside the wall 
structure, where the exposed vents would likely be covered. Therefore, 
for the final rule analysis, DOE has assumed that one-fourth of the 
venting system installations would incur an additional cost (on average 
$581) for covering the exposed vents.
    For half of indoor replacement installations, DOE added a cost for

[[Page 20157]]

installing a fully-louvered closet door to permit adequate air flow for 
the operation of the unit. A.O. Smith stated that putting a louvered 
door on a closet will not provide adequate air volume for a heat pump 
water heater to function correctly. (A.O. Smith, No. 76 at p. 3) 
Southern raised similar concerns about closet installations. (Southern, 
No. 90 at pp. 3-4) AHRI also commented that heat pump water heaters 
installed in replacement situations may require costly alterations so 
that the heat pump water heater can perform efficiently. (AHRI, No. 91 
at p. 6) DOE agrees that there are legitimate concerns about the extent 
to which installing a louvered door will provide adequate air flow for 
closet installations of heat pump water heaters. For the final rule 
analysis, DOE decreased the fraction of indoor replacement 
installations that add a louvered door. DOE now assumes that all indoor 
replacement installations where the household would face a significant 
cooling effect would use a venting system (costing on average $469), 
which would provide adequate air flow and also alleviate excessive 
cooling of the indoor space near the water heater.
    GE stated that DOE overstated the installation costs for heat pump 
water heaters, and claimed that their heat pump water heater has not 
required more labor, larger drain pans, tempering valves, or closet 
door redesigns. (GE, No. 84 at p. 1) DOE's estimates of installation 
costs for heat pump water heaters seek to account for the full range of 
installation situations that might be faced in all replacements of 
conventional electric storage water heaters. DOE agrees that in many 
installations, particularly those not located indoors, the additional 
costs associated with heat pump water heater installation may be small, 
and DOE's analysis accounts for those installations as well as those 
where higher costs may be incurred. Chapter 8 of the final rule TSD 
provides further details about DOE's analysis of installation costs for 
heat pump water heaters.
    For the December 2009 NOPR, DOE's design for gas-fired storage 
water heaters at efficiency level 2 (0.63 EF for the representative 40-
gallon unit) assumed natural draft (atmospheric venting) operation. 
DOE's analysis assumed that installations with water heaters with 
recovery efficiency (RE) of 80 percent or higher (which accounted for a 
small fraction of models at 0.63 EF) would use stainless steel vent 
connectors. Without such vent connectors, there is a potential for 
corrosion of the vent due to condensation of flue gases, which can lead 
to safety concerns.
    AGA expressed concerns about the safety of atmospheric venting at 
efficiency level 2. AGA referred to analysis by the Gas Technology 
Institute of vent temperatures from water heaters with high recovery 
efficiency, and voiced concern for recovery efficiencies of 78 percent 
and higher regarding condensation and the resulting corrosive 
environment in vent connectors during water heater cycling. AGA 
insisted that, for venting integrity and occupant safety, 100 percent 
of installations of units with recovery efficiency of 78 percent and 
higher should include the cost of a stainless steel vent connector. It 
added that the combined concerns of vent connector corrosion and 
venting system buoyancy suggest that the proper vent connector should 
be stainless steel Type B. (AGA, No. 78 at p. 9) A.O. Smith also 
expressed concerns that efficiency level 2 could potentially lead to 
increased vent corrosion and raise issues that may require revisiting 
the venting table in the National Fuel Gas Code.\5\ (A.O. Smith, No. 76 
at p. 1)
---------------------------------------------------------------------------

    \5\ National Fire Protection Association, National Fuel Gas 
Code--2009 Edition. Available at: http://www.nfpa.org/AboutTheCodes/AboutTheCodes.asp?DocNum=54.
---------------------------------------------------------------------------

    In response, DOE appreciates the information provided by AGA 
regarding the safety of atmospheric venting at efficiency level 2. 
Although there are several 40-gallon gas-fired water heater models 
currently available to consumers at 0.63 EF that utilize atmospheric 
venting and do not have any instructions directing installers to use 
special venting for these products, DOE believes that the prudent 
course is to assume that a stainless steel vent connector would be 
required for all models with RE of 78 percent and higher. Applying this 
assumption resulted in DOE using a cost for a stainless steel vent 
connector for 57 percent of installations at efficiency level 2, for 53 
percent of installations at efficiency level 1, and for 24 percent of 
installations at the baseline level. DOE agrees that there remain 
issues that may require revisiting the venting table in the National 
Fuel Gas Code, and discusses these issues in section VI.D.2 below.
b. Direct Heating Equipment
    DOE used the approach in the 1993 TSD \6\ to calculate installation 
costs for baseline direct heating equipment for its December 2009 NOPR 
analysis, as it believed 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 included 
installation costs for designs that require electricity (the average 
cost is $181). DOE made this adjustment for the replacement market 
only, because wiring is considered part of the general electrical work 
in new construction.
---------------------------------------------------------------------------

    \6\ U.S. Department of Energy--Office of Codes and Standards, 
Technical Support Document: Energy Efficiency Standards for Consumer 
Products: Room Air Conditioners, Water Heaters, Direct Heating 
Equipment, Mobile Home Furnaces, Kitchen Ranges and Ovens, Pool 
Heaters, Fluorescent Lamp Ballasts & Television Sets, 1993. 
Washington, DC. Vol. 1 of 3. Report No. DOE/EE-0009.
---------------------------------------------------------------------------

    LTS commented that the proposed standards for the gravity wall 
furnace category (71-percent AFUE for furnaces in the input capacity 
range over 27,000 and up to 46,000 Btu/h) would not allow the product 
to keep the same characteristics, particularly cabinet size and 
combustion chamber sizes. The commenter claims that with a bigger 
cabinet and heat exchanger dimensions, installation would require more 
carpenter work, possible drywall work, and, in some cases, changing or 
replacing the vent. According to LTS, these changes would be in 
addition to providing an electrical port. (LTS, No. 56.7 at pp. 1-2)
    In response, DOE found that gravity wall furnaces that have 
dimensions to fit in replacement applications are currently available 
on the market with efficiencies ranging from 64-percent to 69-percent 
AFUE in the representative capacity range. There are currently no 71-
percent or 72-percent AFUE models within the representative capacity 
range offered by any of the manufacturers. DOE agrees that models at 
71-percent or 72-percent AFUE are likely to have larger dimensions and/
or include electronic ignition, either of which would require an 
additional installation cost. As discussed in section IV.C.2.b, for the 
final rule, DOE decided to remove the 71-percent and 72-percent AFUE 
levels from its analysis. DOE introduced the 70-percent AFUE level, 
which it believes has the necessary dimensions to fit in replacement 
applications. This level includes electronic ignition, and DOE included 
a cost for installation of electrical wiring.
    Regarding gas wall fan type DHE, AHRI commented that adding to the 
heat exchanger to increase efficiency would make the upright models 
bigger, such that they may not be able to fit in the same space as the 
unit they are replacing. The result could be added installation costs. 
For the max-tech level for gas wall fan type DHE (80-percent AFUE), DOE 
added carpentry cost for cutting and repairing the wall to increase the 
dimensions of the wall opening for a fraction of installations. That 
fraction also takes into account

[[Page 20158]]

that some installations are ``console units'' and do not have this 
issue, and that some upright installations are not installed inside the 
wall and, therefore, do not have this issue.
c. Pool Heaters
    DOE developed installation cost data for the baseline pool heater 
in its December 2009 NOPR analysis using RS Means and information in a 
consultant's report. DOE incorporated additional installation costs for 
designs involving electronic ignition and/or condensing technology.
    In the December 2009 NOPR analysis, DOE included a cost for adding 
electricity at efficiencies above 82 percent (which use electronic 
ignition only) for installations where the unit currently uses a pilot 
light. For the December 2009 NOPR, DOE estimated that 26.5 percent of 
installations would incur this cost. Raypak stated that 8 percent of 
pool heaters are millivolt pool heaters (i.e., use a pilot light), and 
the cost of adding electricity is not insignificant. (Raypak, No. 67 at 
p. 2) For the final rule, DOE has adopted the 8-percent value provided 
by Raypak to estimate the fraction of installations that would require 
addition of electricity at efficiencies above 82 percent. For further 
details on DOE's derivation of installation costs for pool heaters, see 
chapter 8 of the TSD.
3. Annual Energy Use
    DOE determined the annual energy use in the field for the three 
types of heating products as described above in section IV.E.
4. Energy Prices
    For the December 2009 NOPR analysis, 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.
    DOE estimated residential electricity prices for each of the 
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 average annual regional 
residential electricity prices as well as average monthly regional 
electricity prices. For the December 2009 NOPR, DOE used data from 
2007. For the final rule analysis, DOE used more recent 2008 data from 
the same sources.
    DOE estimated average annual residential natural gas prices in each 
of the 13 geographic areas based on data from EIA's Natural Gas 
Navigator.\7\ For the December 2009 NOPR, DOE used EIA data from 2007. 
For today's final rule, DOE used more recent 2008 data from the same 
source.
---------------------------------------------------------------------------

    \7\ See Energy Information Administration, Natural Gas Navigator 
(2009). Available at: http://tonto.eia.doe.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm.
---------------------------------------------------------------------------

    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.\8\ For the 
December 2009 NOPR, DOE used data from 2006. For today's final rule, 
DOE used the more recent 2007 data from the same source.
---------------------------------------------------------------------------

    \8\ See Energy Information Administration, 2007 State Energy 
Consumption, Price, and Expenditure Estimates (SEDS). Available at: 
http://www.eia.doe.gov/emeu/states/_seds.html.
---------------------------------------------------------------------------

    DOE estimated average residential prices for oil in each of the 13 
geographic areas based on data from EIA's Petroleum Navigator.\9\ For 
the December 2009 NOPR, DOE used data from 2007. For today's final 
rule, DOE used more recent 2008 data from the same source.
---------------------------------------------------------------------------

    \9\ See Energy Information Administration, Petroleum Navigator, 
December (2009). Available at: http://tonto.eia.doe.gov/dnav/pet/pet_cons_821dsta_a_EPD0_VAR_Mgal_a.htm.
---------------------------------------------------------------------------

5. Energy Price Trend
    To estimate the trends in electricity prices for the December 2009 
NOPR, DOE used the regional price forecasts in the 2009 Annual Energy 
Outlook (AEO 2009) April Release.\10\ To arrive at prices in future 
years, DOE multiplied the average prices described above by the 
forecast of annual average price changes in each region. Because the 
AEO 2009 forecasts prices only to 2030, DOE followed past guidelines 
provided to the Federal Energy Management Program by EIA and used the 
average rate of change during 2020-2030 to estimate the price trends 
beyond 2030. For today's final rule, DOE updated its analysis to use 
the price forecasts in the AEO 2010 Early Release, which includes price 
forecasts until 2035. DOE used the average rate of change from 2025 to 
2035 to estimate price trends beyond 2035.
---------------------------------------------------------------------------

    \10\ All AEO publications are available online at: http://www.eia.doe.gov/oiaf/aeo/.
---------------------------------------------------------------------------

    The spreadsheet tools used to conduct the LCC and PBP analysis 
allow users to select either the AEO's high-price case or low-price 
case price forecasts to estimate the sensitivity of the LCC and PBP to 
different energy price forecasts. The AEO 2009 April Release and AEO 
2010 Early Release only provide forecasts for the Reference Case. 
Therefore, for the December 2009 NOPR, DOE used the AEO 2009 March 
Release high-price or low-price forecasts directly to estimate high-
price and low-price trends. For today's final rule, DOE updated the 
low-price and high-price forecasts to be based on the ratio between the 
AEO 2009 March Release low- or high-price forecasts and the AEO 2009 
March Release reference case. DOE then applied these ratios to the AEO 
2010 Early Release reference case to construct its high-price and low-
price forecasts. DOE did not receive any substantive comments on its 
forecast of energy price trends. Thus, DOE retained the same approach 
for the final rule.
6. 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. Addressing water heaters, A.O. 
Smith commented that the repair and maintenance costs presented in the 
December 2009 NOPR are reasonably accurate. (A.O. Smith, No. 76 at p. 
4) For more information on DOE's development of repair and maintenance 
cost estimates, see chapter 8 of the TSD.
    For the December 2009 NOPR analysis, DOE assumed that there would 
be some instances where professional maintenance would be needed for 
heat pump water heaters. 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 to 
much of the United States.
    Commenting on the December 2009 NOPR, BWC stated that heat pump 
water heaters are installed with an optional component and that the 
repair and maintenance costs of the optional components were not taken 
into account, although the commenter provided no specific information 
regarding the nature or prevalence of such optional components. (BWC, 
No. 61 at p. 3) Daikin stated that heat pump water heaters generally do 
not require maintenance for the first 10 years of operation. (Daikin, 
No. 82 at p. 2) GE stated that the maintenance cost for heat pump water 
heaters is overstated. (GE, No. 84 at p. 1) In response, DOE 
acknowledges that many heat pump water heaters may require little or no 
maintenance. However, DOE believes that because the field experience 
with

[[Page 20159]]

heat pump water heaters is limited, it is reasonable to apply a 
maintenance cost for some installations. DOE assumed that optional 
components, which are an addition to the water heater, are not 
uniformly applicable, and thus, it did not include them in its 
analysis.
    Therefore, for the reasons above, DOE has retained the approach to 
repair and maintenance costs used for the December 2009 NOPR for the 
final rule. The approach also accounts for repair or replacement of 
common components such as heating elements, fans, and compressors.
7. Product Lifetime
    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 water heater product class and for DHE and pool 
heaters, DOE characterized the product lifetime using a Weibull 
probability distribution that ranged from minimum to maximum lifetime 
estimates. See chapter 8 of the December 2009 NOPR TSD for further 
details on the sources DOE used to develop product lifetimes.
a. Water Heaters
    For the December 2009 NOPR analysis, DOE used an average lifetime 
of 13 years for gas-fired, electric, and oil-fired storage water 
heaters. DOE did not receive any comments on this value, and it 
continued to use it for the final rule.
    For the December 2009 NOPR analysis, DOE used an average lifetime 
of 20 years for gas-fired instantaneous water heaters. A.O. Smith 
stated that a 20 year lifetime for gas-fired instantaneous water 
heaters is too long, and is largely based on manufacturers' literature 
or advertising claims. It referred to its experience with commercial 
water heating equipment that uses a similar copper-tube type heat 
exchanger as gas-fired instantaneous water heaters and similar input 
combustion systems of around 200,000 Btu/h, and the commenter concluded 
that the same service life (i.e., 13 years) as a tank-type heater 
should be used for gas-fired instantaneous water heaters. (A.O. Smith, 
No. 76 at pp. 4-5)
    DOE acknowledges that, given that long-term field experience with 
gas-fired instantaneous water heaters is relatively limited, there is 
uncertainty regarding the lifetime of these products. Furthermore, the 
lifetime is influenced by maintenance practices. The 20-year mean 
lifetime used by DOE is primarily based on the value reported in the 
National Association of Home Builders/Bank of America Home Equity Study 
of Life Expectancy of Home Components, which is 20+ years.\11\ 
Regarding the analogy between gas-fired instantaneous water heaters and 
commercial water heating equipment mentioned by A.O. Smith, DOE notes 
that the usage patterns in residential applications are different 
(e.g., less hot water use), and these patterns have a significant 
impact on the lifetime. Given the available data, DOE decided to retain 
the mean lifetime of 20 years for the final rule analysis.
---------------------------------------------------------------------------

    \11\ National Association of Home Builders (NAHB), ``Study of 
Life Expectancy of Home Components'' (Feb. 2007). Available at: 
http://www.nahb.org/fileUpload_details.aspx?contentID=99359.
---------------------------------------------------------------------------

b. Direct Heating Equipment
    For the December 2009 NOPR analysis, DOE used an average lifetime 
of 15 years for DHE. DOE did not receive any comments on this value, 
and it continued to use it for the final rule.
c. Pool Heaters
    For the December 2009 NOPR analysis, DOE used an average lifetime 
of 8 years for pool heaters. In the public meeting, Lochinvar stated 
that pool heaters live longer than 6-8 years. (Lochinvar, Public 
Meeting Transcript, No. 57.4 at p. 224) For the final rule, DOE 
subsequently reviewed information provided by an expert consultant and 
based upon this information, decided to use a mean lifetime of 10 years 
for pool heaters, with the same distribution as in the December 2009 
NOPR analysis (3 to 20 years).
8. Discount Rates
    For the December 2009 NOPR, DOE developed separate distributions of 
discount rates for new construction and replacement applications. 
Because the cost of heating products installed in new homes is part of 
the home selling price, 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. 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, 2004, and 2007.\12\ 
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 seven surveys 
averaged 3.0 percent.
---------------------------------------------------------------------------

    \12\ The Federal Reserve Board, Survey of Consumer Finances 
1989, 1992, 1995, 1998, 2001, 2004, 2007. Available at: http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
---------------------------------------------------------------------------

    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 the final rule, it added 2009 values for interest 
or return rates to the distributions for some of the asset classes. The 
resulting average rate across all types of household debt and equity, 
weighted by the shares of each class, is 5.1 percent.
    DOE did not receive any comments on the discount rates it used in 
the LCC analysis, and it continued to apply the approach used in the 
December 2009 NOPR, with the updates discussed above, for the final 
rule.
9. Compliance Date
    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 the Energy Policy Act of 2005 and section 305 of the 
Energy Independence and Security Act of 2007,\13\ 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). Comments on the compliance date for the three types of 
heating products are presented and responded to in section V.B of this 
final rule. 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.
---------------------------------------------------------------------------

    \13\ Available at: http://www1.eere.energy.gov/buildings/appliance_standards/pdfs/2010_feb_report_to_congress.pdf.

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

[[Page 20160]]

10. 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.
    To estimate the base-case market shares of various energy 
efficiency levels for water heaters in the compliance 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. (See chapter 8 of the TSD for 
citations for these data sources.) For the final rule, DOE updated its 
estimates using the February 2010 AHRI Directory. To estimate the base-
case market shares of gas-fired and electric storage water heaters, DOE 
considered the market penetration goals set by the ENERGY STAR program, 
in combination with its assessment of constraints on such penetration. 
The projected base-case energy efficiency market shares for water 
heaters that DOE used for the final rule, shown in Table IV.24, are 
half of the ENERGY STAR goal for heat pump water heaters (EF of 2.0 and 
2.2), and one-fifth of the ENERGY STAR goal for gas-fired condensing 
water heaters (EF of 0.77). These market shares represent the products 
that households would purchase in 2015 in the absence of revised energy 
conservation standards.

                     Table IV.24--Water Heaters: Base-Case Energy Efficiency Market Shares*
----------------------------------------------------------------------------------------------------------------
                  Gas storage                     Electric storage         Oil storage            Gas-fired
-------------------------------------------------------------------------------------------     instantaneous
                                                                                           ---------------------
                EF                    Market       EF       Market       EF       Market                Market
                                    share (%)             share (%)             share (%)      EF     share (%)
----------------------------------------------------------------------------------------------------------------
0.59.............................         63.9     0.90         29.8     0.53          0.0     0.62          1.0
0.62.............................         23.4     0.91         16.8     0.54         20.0     0.69          2.9
0.63.............................          1.6     0.92         11.2     0.56          0.0     0.78          1.0
0.64.............................          4.8     0.93         26.1     0.58          0.0     0.80          4.9
0.65.............................          0.0     0.94          7.5     0.60         10.0     0.82         52.4
0.67.............................          5.3     0.95          3.7     0.62         20.0     0.84          1.9
0.77.............................          1.0      2.0          4.0     0.66         25.0     0.85          3.9
                                                    2.2          1.0     0.68         25.0     0.92         20.4
                                                                                               0.95         11.7
                                          100%                  100%                  100%                  100%
----------------------------------------------------------------------------------------------------------------
* The base-case market shares of each product class are estimated in the shipment analysis, as described in
  chapter 9 of the final rule TSD.

    For DHE, DOE estimated the market shares of different energy 
efficiency levels within each product class in the base case using data 
in the AHRI Directory. For the final rule, DOE updated its estimates 
using the February 2010 AHRI Directory, and for hearth products, DOE 
also consulted manufacturers' Web sites in addition to the 2010 AHRI 
Directory (see chapter 8 of the TSD for the citation and detailed 
information). For pool heaters, DOE estimated the market shares of 
different energy efficiency levels in the base-case by using 2008 data 
from the Federal Trade Commission (FTC) on the number of gas-fired pool 
heater models at different energy efficiency levels as a proxy for 
shipments. For the final rule, DOE updated its estimates using 2009 FTC 
data.
    DOE did not receive any comments on its estimation of base-case 
energy efficiency market shares for the three types of heating 
products. For further information on DOE's estimation of base-case 
market shares, see chapter 8 of the TSD.
11. 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. For these 
calculations, DOE uses a simple payback period, which 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. DOE did not 
receive any comments on its methodology for the payback period 
analysis.
    As noted above, EPCA, as amended, 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 (and, as applicable, water) savings 
during the first year that the consumer will receive as a result of the 
standard, as calculated under the test procedure in place for that 
standard. (42 U.S.C. 6295(o)(2)(B)(iii)) For each TSL, DOE determined 
the value of the first year's energy savings by calculating the 
quantity of those savings in accordance with the applicable DOE test 
procedure, and multiplying that amount by the average energy price 
forecast for the year in which compliance with the amended standard 
would be required.
    Results of DOE's payback period analysis, including both the 
rebuttable presumption analysis and the payback period analysis 
considering all of the relevant statutory factors, are discussed in 
section VI.

[[Page 20161]]

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

1. General
    DOE's National Impact Analysis (NIA) assesses the national energy 
savings (NES) and the national net present value (NPV) of total 
consumer costs and savings expected to result from standards at 
specific efficiency levels. DOE applied the NIA spreadsheet to 
calculate NES and NPV, using the annual energy consumption and total 
installed cost data from the LCC analysis. DOE forecasted the energy 
savings, energy cost savings, equipment costs, and NPV for each product 
class from 2013 through 2043 for DHE and pool heaters, and from 2015 
through 2045 for water heaters. The forecasts provide annual and 
cumulative values for all four parameters. In addition, DOE 
incorporated into its NIA spreadsheet the capability to analyze the 
sensitivity of the results to forecasted energy prices and equipment 
efficiency trends. Table IV.25 summarizes the approach and data DOE 
used to derive the inputs to the NES and NPV analyses for the December 
2009 NOPR, and also summarizes the changes DOE made for today's final 
rule. These changes are described in the following sections, and more 
details are available in chapter 10 of the final rule TSD. Comments on 
the NIA, as presented in the December 2009 NOPR, and DOE's response are 
presented in the sections that follow.

  Table IV.25--Approach and Data Used for the National Impacts Analysis
------------------------------------------------------------------------
                                                       Changes for the
           Inputs                     NOPR               final rule
------------------------------------------------------------------------
Shipments...................  Annual shipments      See table IV.4.
                               from shipments
                               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. Sales-          shares for water
                               weighted energy       heaters and DHE
                               factor (SWEF)         estimated for
                               remains constant      compliance year.
                               except for gas and
                               electric water
                               heaters, for which
                               SWEF increases
                               slightly over
                               forecast period.
Standards-Case Forecasted      ``Roll-up''          No change in
 Efficiencies.                 scenario used for     approach.
                               determining SWEF in
                               2013 (or 2015) for
                               each standards
                               case. SWEF remains
                               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 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.  AEO2009 forecasts     Updated using
                               (to 2030) and         AEO2010 (Early
                               extrapolation to      Release) forecasts.
                               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   No change.
                               discounted to 2010,
                               when the final rule
                               will be published.
------------------------------------------------------------------------

2. 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.26 summarizes the approach and data DOE used to derive the 
inputs to the shipments analysis for the December 2009 NOPR analysis, 
and the changes DOE made for today's final rule, based on public 
comments. A discussion of these inputs and changes follows. For details 
on the shipments analysis, see chapter 9 of the TSD.

     Table IV.26--Approach and Data Used for the Shipments Analysis
------------------------------------------------------------------------
                                                       Changes for the
           Inputs                 NOPR analysis          final rule
------------------------------------------------------------------------
Historical Shipments........  Water Heaters: Data   Water Heaters: Used
                               provided by AHRI.     new data for GIWH
                                                     for 2008 and 2009.
                              DHE: Data provided    DHE: Derived new
                               by AHRI and DOE       data based on
                               estimates, and data   manufacturer input.
                               from manufacturers
                               and the trade
                               association for
                               hearth products.

[[Page 20162]]

 
                              Pool Heaters: Data    Pool Heaters: Used
                               from 1993 TSD,        data provided by
                               inputs from           manufacturers trade
                               manufacturers, and    association.
                               DOE estimates.
New Construction Shipments..  For water heaters     No change in
                               and pool heaters,     approach. New
                               determined by         housing forecast
                               multiplying housing   updated with
                               forecasts by          AEO2010
                               forecasted            projections.
                               saturation of
                               products in new
                               housing.
                              Housing forecasts
                               based on AEO2009
                               projections.
                              New housing product
                               saturations based
                               on American Housing
                               Survey for water
                               heaters, consultant
                               data for pool
                               heaters.
Replacements................  For water heaters     No change.
                               and pool heaters,
                               determined by
                               tracking total
                               product stock by
                               vintage and
                               establishing the
                               failure of the
                               stock using
                               retirement
                               functions from the
                               LCC and PBP
                               analysis. For pool
                               heaters, included
                               estimated non-
                               replacement of some
                               pool heaters.
------------------------------------------------------------------------

    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 
2008 for new housing completions and mobile home placements and adopted 
the projections from AEO2009 for 2009 to 2030. DOE updated its new 
housing projections for today's final rule using AEO2010 Early Release, 
which provides projections from 2010 to 2035. DOE kept completions 
constant after 2035. DOE estimated replacements using historical 
shipments data and product retirement functions that it developed from 
product lifetimes. Table IV.27 provides a summary of total shipments in 
2009 for residential water heaters, direct heating equipment, and pool 
heaters.

  Table IV.27--Residential Water Heaters, Direct Heating Equipment and
                      Pool Heaters Shipments (2009)
------------------------------------------------------------------------
                                                                 Total
                                                               shipments
                                                               (million)
------------------------------------------------------------------------
                        Residential Water Heaters
------------------------------------------------------------------------
Gas-fired Storage...........................................      3.76
Electric Storage............................................      3.75
Oil-fired Storage...........................................    * 0.031
Gas-fired Instantaneous.....................................    * 0.384
------------------------------------------------------------------------
                        Direct Heating Equipment
------------------------------------------------------------------------
Gas Wall Fan................................................    * 0.030
Gas Wall Gravity............................................    * 0.103
Gas Floor...................................................    * 0.003
Gas Room....................................................    * 0.020
Gas Hearth..................................................    * 0.286
------------------------------------------------------------------------
                              Pool Heaters
------------------------------------------------------------------------
Gas-fired...................................................      0.118
------------------------------------------------------------------------
* Estimated.

a. Water Heaters
    For the December 2009 NOPR analysis, DOE used information on choice 
of water heater products in recently-built housing to estimate 
shipments of each product class to the new construction market. DOE 
calculated the average market shares of water heaters using a 
particular fuel in new homes during 2000 to 2008, and assumed that 
these shares would hold throughout the forecast period. AGA stated that 
DOE should not fix market shares, and should realize that increasing 
disparity between gas and electric installed cost will exacerbate a 
trend away from gas-fired units. (AGA, No. 78 at pp. 7-8) In response, 
DOE notes that its data on water heater choice in new homes does not 
show a clear trend away from gas-fired units during the period from 
2000 to 2008 (as documented in chapter 9 of the TSD), nor did AGA 
provide any data to substantiate such a trend. DOE recognizes that 
future market dynamics may result in changes from the average pattern 
seen in 2000 to 2008, but DOE does not have sufficient information to 
forecast the various factors that affect water heater choice in new 
homes. Therefore, DOE has retained the approach used in the December 
2009 NOPR analysis for the final rule.
    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.G.2.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 products (20 to 55 gallons rated storage volume) 
and large-volume products (over 55 gallons rated storage volume) would 
remain the same throughout the forecast period. The shipments market 
shares for large-volume products are 4 percent for gas-fired storage 
water heaters and 9 percent for electric storage water heaters.
    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 
scenarios of their market penetration 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 chapter 9 of 
the TSD for information on the past and projected market penetration in 
Australia.)
    Commenting on the December 2009 NOPR approach, AHRI stated that the 
experience of gas-fired instantaneous water heaters in Australia is too 
dissimilar to the U.S. market to be used to predict future U.S. 
shipments. (AHRI, No. 91 at p. 3) Rheem stated that the Australian 
market was primarily based on outdoor installations, and was influenced 
by local government programs. (Rheem, No. 89 at p. 13) A.O. Smith 
stated that in 2009, gas-fired instantaneous water heater shipments 
will be about 9.4 percent of the total gas market, not 20 percent as 
the DOE forecast suggests. A.O. Smith estimated a more moderate growth 
curve for gas-fired instantaneous water heaters, growing to 13-15 
percent of the gas market, consistent with DOE's low-

[[Page 20163]]

penetration scenario. Moreover, A.O. Smith stated that this level will 
not be reached for 5-7 years, unlike the DOE forecast of 1-2 years. 
(A.O. Smith, No. 76 at p. 5)
    In response, DOE acknowledges the uncertainty associated with 
basing its forecasted market penetration of gas-fired instantaneous 
water heaters on the Australian experience, but it believes that there 
is no other market that could provide an approximate model for 
forecasting U.S. market penetration. In making use of the Australian 
experience, DOE's December 2009 NOPR analysis 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. In response to the comments 
from A.O. Smith, however, DOE made modifications to its approach for 
the final rule. First, it incorporated A.O. Smith's estimated market 
share for 2009 (as well as data it provided on the actual share in 
2008). Second, based on the new data on shipments, DOE significantly 
moderated the growth curve for gas-fired instantaneous water heater 
market penetration such that the rise is less steep than had been 
assumed for the December 2009 NOPR. Because of broad similarities 
between the U.S. and Australian water heating markets, DOE continued to 
use scenarios of market penetration that are partly based on the 
Australian experience for the final rule. Differences in retail prices 
and installation costs for instantaneous water heaters, as well as in 
government incentives, suggest that the growth in the U.S. market will 
be less strong than in Australia. However, DOE believes that the rapid 
growth seen in the U.S. before 2008, together with the reputation of 
instantaneous gas-fired water heaters as an energy-efficient water 
heating option suggest that the ultimate market penetration may be 
higher than 13 to 15 percent of the gas water heating market. 
Therefore, DOE estimated that the U.S. market share (i.e., 28 percent) 
approaches a level equal to half of the Australian level (i.e., 56 
percent) by around 2025. Chapter 9 of the TSD presents more details on 
DOE's projection.
b. Direct Heating Equipment
    To estimate historical shipments of direct heating equipment for 
the December 2009 NOPR analysis, DOE used two sets of data from AHRI 
and information from the 1993 TSD. As noted above, 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, along with assumptions regarding future trends. For 
gas hearth DHE shipments, the forecast used for the December 2009 NOPR 
related shipments to projected new housing completions.
    AHRI stated that the December 2009 NOPR assumption that future 
shipments of traditional DHE (i.e., all of the product classes except 
gas hearth DHE) will be flat is unrealistically optimistic and contrary 
to the last 30 years of shipment history. The commenter stated that 
this is a declining market not only because these products are sold 
primarily as replacements, but also because in some cases, the failing 
unit is replaced not with a similar model but rather with a vented 
fireplace heater. AHRI recommended that, at a minimum, the shipment 
forecast for traditional DHE use a 30-percent decrease over the next 30 
years. (AHRI, No. 91 at p. 11) In response, for the final rule 
analysis, DOE modified its forecast such that total shipments of 
traditional DHE decrease by 30 percent between 2005 and 2042. The 
modification of the shipments forecast for each of the four traditional 
DHE product classes is described in chapter 9 of the TSD.
c. Pool Heaters
    To forecast pool heater shipments for new construction for the 
December 2009 NOPR 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. In 
addition, DOE assumed that some households would not replace their pool 
heater when it fails due to cost considerations. 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.
    The Association of Pool and Spa Professionals (APSP) stated that 
DOE's data on pool heater shipments are overstated, and they submitted 
shipments data for 2003-2009. (APSP, No. 64 at p. 1) AHRI made similar 
comments. (AHRI, No. 91 at p. 8) DOE appreciates the information 
provided by APSP. For the final rule, it used the data for 2003-2009 as 
a basis for its shipments forecast.
    Raypak stated that the pool heater forecasts are overstated, and 
that DOE's projection of a huge recovery in first-time pool owners is 
inaccurate, because of the significant reduction in property values and 
more difficult access to credit. (Raypak, Public Meeting Transcript, 
No. 57.4 at pp. 258-259) AHRI stated that DOE did not recognize the 
increasing sales of electric heat pump pool heaters, which will reduce 
the shipments of gas-fired pool heaters. (AHRI, No. 91 at p. 9) In 
response, DOE notes that incorporating the new data for 2003-2009 
reduces the forecast of future shipments. DOE agrees with Raypak 
regarding first-time pool owners and reduced the number of such 
installations in the early years of its forecast. DOE was not able to 
consider the impact of heat pump pool heaters as well as electric 
resistance pool heaters on the market because shipments data were not 
available. Furthermore, DOE did not include electric pool heaters in 
the current rulemaking for reasons explained in the NOPR. 74 FR 65852, 
65866 (Dec. 11, 2009). Finally, DOE notes that the longer pool heater 
lifetime used for the final rule (as described in section IV.F.7.c) 
results in fewer replacement shipments.
d. Impact of Standards on Shipments
i. Water Heaters
    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 a natural gas supply 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 December 2009 NOPR 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 three potential combinations 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 power vent; and (3) electric 
heat pump water heater and a gas-fired storage water heater using 
condensing

[[Page 20164]]

technology. DOE used data from the 2005 RECS to estimate the percentage 
of households expected to purchase an electric water heater in the base 
case that could switch to gas-fired water heater because they had the 
necessary infrastructure. To estimate how many of these households 
would switch to gas-fired water heaters, 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. The estimated 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 require 
condensing technology, to 9 percent with a standard level for gas-fired 
storage water heaters that require power vent technology.
    DOE did not quantify the potential for switching to gas water 
heating in the case of a standard that requires 0.95 EF for some or all 
electric water heaters, as the installed cost is only moderately higher 
than the baseline electric water heater (0.90 EF). DOE judged that this 
increase would not be sufficient to prompt consumers to consider 
switching to gas water heating, given the higher cost of a gas water 
heater and the fact that such switching would usually require 
installation of a venting system, which adds significant cost.
    Commenting on DOE's December 2009 NOPR analysis, A.O. Smith stated 
that there will not be appreciable fuel switching in retrofits. (A.O. 
Smith, No. 76 at p. 4) GE stated that fuel switching is impractical for 
most consumers. (GE, No. 84 at p. 2) The American Public Power 
Association (APPA) stated that TSL 3 and TSL 4 would not likely induce 
fuel switching, but higher TSLs would. (APPA, No. 92 at p. 4) Rheem 
stated that TSL 6 (i.e., requiring heat pump water heaters) would 
encourage a shift to instantaneous electric water heaters. In response, 
DOE believes that the high equipment and installation cost of 
instantaneous electric water heaters, which may involve upgrading the 
electrical wiring, along with the high operating cost, will limit the 
prevalence of a shift to these products. Given that the remaining 
comments are generally supportive of the estimates in the December 2009 
NOPR, DOE retained its December 2009 NOPR analysis of fuel switching 
for the final rule. However, DOE expanded its analysis to consider the 
potential for product switching within the same fuel type, as discussed 
below.
    In the December 2009 NOPR analysis, for TSL 5, DOE combined an 
efficiency level requiring heat pump technology for large-volume 
electric storage water heaters with an efficiency level requiring 
condensing technology for large-volume gas storage water heaters. 
Because these technologies have roughly comparable estimated installed 
costs and there are constraints in switching from gas to electric or 
from electric to gas water heaters, DOE did not project that fuel 
switching would occur under TSL 5.
    DOE received a number of comments on potential reaction of 
consumers to TSL 5. Rheem stated that TSL 5 would provide a strong 
value incentive for the replacement consumer to replace one large 
electric resistance unit with two smaller electric storage water 
heaters to avoid the higher first cost impact associated with a heat 
pump water heater. It also pointed to other approaches consumers might 
choose, and noted that TSL 5 could encourage installation of large 
commercial tank type models in residential applications, where such 
products often lack an equitable certification status for safe 
operation. (Rheem, No. 89 at p. 6) A.O. Smith stated that the added 
cost of a heat pump water heater would induce consumers to install two 
smaller-storage-capacity, lower-cost heaters in the place of one 
larger-capacity unit. (A.O. Smith, No. 76 at p. 4) AHRI stated that the 
market may react to TSL 5 by replacing a large electric storage water 
heater with either a 50-gallon model with a tempering valve, a 50-
gallon model with higher input heating elements, two smaller storage 
water heaters, or multiple instantaneous water heaters. (AHRI, No. 91 
at p. 7) NPCC stated that in emergency replacements of electric water 
heaters, switching to two smaller water heaters is unlikely because it 
would require a new 30 amp circuit, which would require a contractor. 
(NPCC, Public Meeting Transcript, No. 57.4 at pp. 106-107) Regarding 
TSL 5's requirement of condensing gas-fired storage water heaters for 
large-volume water heaters, Southern stated that consumers could 
instead install a non-condensing unit with a 75,000 Btu burner and 55-
gallon tank. (Southern, No. 90 at pp. 6-7) In contrast to these 
comments, NRDC opined that it is unlikely that TSL 5 would cause 
product switching. (NRDC, No. 85 at p. 6)
    In response, DOE agrees that the December 2009 NOPR TSL 5 would 
present consumers of large water heaters with a total installed cost 
that could lead some of them to consider alternatives to purchasing a 
new large water heater. To estimate the likely incidence of switching 
away from large-volume units under TSL 5 and TSL 6 in today's final 
rule (see section VI.A for description of TSLs), DOE considered several 
alternatives to purchasing a new large water heater, as well as 
constraints that would likely limit their adoption.
    First, DOE considered factors that would cause some households to 
choose not to install an alternative to a new large-volume unit. Most 
important is the need for emergency replacement, which, according to 
comments from Bradford White (BWC, No. 62 at p. 4), accounts for 95 
percent of water heater replacements. This may preclude consideration 
of switching in some cases. In addition, based on shipments data from 
AHRI \14\ and equipment stock information from AEO 2010 \15\, DOE 
determined that at least 15 percent of furnace shipments go to 
households that are switching from non-condensing to condensing gas 
furnace and also have a gas water heater. Some of these households may 
want to also install a condensing gas water heater to avoid complex 
venting system modifications. The details are described in chapter 9 of 
the TSD. DOE judged that the above factors would reduce the fraction of 
installations estimated to adopt an alternative to purchasing a large-
volume water heater by 25 percent.
---------------------------------------------------------------------------

    \14\ AHRI furnace shipment data. Available at http://www.ahrinet.org/Content/Furnaces_609.aspx.
    \15\ AEO 2010 (Early Release): Table 31. Residential Sector 
Equipment Stock and Efficiency. Available at: http://www.eia.doe.gov/oiaf/aeo/supplement/supref.html.
---------------------------------------------------------------------------

    One alternative applicable to both gas-fired storage water heaters 
and electric storage water heaters involves installing a small-volume 
water heater, increasing the setpoint, and applying a tempering valve. 
DOE believes that this strategy would only be viable for a fraction of 
66-gallon units.\16\ This strategy results in the household having 
roughly the same amount of hot water with a small-volume water heater 
as they would have with a large-volume unit; higher-temperature water 
is stored in a smaller tank, and then mixed with cold water using the 
valve. For units larger than 66 gallons, meeting the household's hot 
water demand would require increasing the setpoint above the 140 [deg]F 
limit, which could result in deposits on the internal surface of the 
tank. To assess the viability of this approach for each of the sample 
households with 66-gallon

[[Page 20165]]

water heaters, DOE calculated whether the first-hour rating of a small-
volume water heater with a tempering valve would meet the first-hour 
rating of the existing 66-gallon water heater without exceeding a 140 
[deg]F setpoint. (The first hour rating is the amount of hot water in 
gallons the heater can supply per hour, starting with a tank full of 
hot water). If so, DOE assumed the household would choose this option.
---------------------------------------------------------------------------

    \16\ DOE notes that production of large gas-fired water heaters 
tends to be clustered around models with a rated storage volume of 
66 gallons or 75 gallons. DOE assumed that the strategies discussed 
here are likewise relevant to water heaters with a rated capacity 
from 56 gallons to 66 gallons.
---------------------------------------------------------------------------

    For gas-fired storage water heaters, DOE considered the approach of 
switching to a small-volume unit with high input capacity (larger 
burner). DOE understands that designs for units below 56-gallon rated 
volume that have very high rated input (e.g., 75 kBtu/h) are not 
common. There are some 50-gallon models with an input of 65 kBtu/h; 
these designs usually incorporate a 5-inch internal flue tube (instead 
of 4-inch), and the tank is usually taller to accommodate the same 
water storage volume. These units are likely to require venting 
modifications (upgrade to 4-inch vent). In addition, for many 
installations the input rate for the existing 66-gallon or larger unit 
is already 55 kBtu/h or higher, and a 50-gallon unit with a high-
capacity burner may not satisfy the household hot water requirements. 
DOE accounted for the above constraints to estimate the fraction of 
installations that would switch to a small-volume with high input 
capacity. DOE also evaluated a similar strategy for electric storage 
water heaters that involves switching to a small-volume unit with high 
input heating elements.
    To consider the alternative of installing two small-volume units, 
for each sample household with a large-volume water heater that, 
according to DOE's estimation, would not adopt either of the above two 
strategies, DOE first considered space constraints that would limit 
this approach, depending on the water heater location. For those 
households judged not to have such constraints, DOE compared the total 
installed cost of either a heat pump water heater or a gas-fired 
condensing water heater with the alternative of installing two small-
volume units. For the cost of this alternative, DOE used information 
from a consultant report. Because installing two small-volume units is 
more complicated and takes longer, DOE assumed that households would 
choose to install two small-volume units only if the total installed 
cost was at least 10 percent less than the cost for a heat pump water 
heater or a gas-fired condensing water heater.
    The results of DOE's analysis indicate that switching away from a 
large-volume water heater would occur in 37 percent of large-volume 
electric storage water heater installations and in 22 percent of large-
volume gas-fired storage water heater installations. The details of 
DOE's approach and the estimated degree of switching using each of the 
alternatives described above are provided in chapter 9 of the TSD.
ii. Direct Heating Equipment and Pool Heaters
    For DHE and pool heaters, in the December 2009 NOPR analysis, DOE 
did not find any data it could use to estimate the extent of switching 
away from the products subject to this rulemaking if energy 
conservation standards were to result in a significant increase in 
installed costs. Raypak stated that as pool heaters become more 
expensive, more may be repaired instead of being replaced, so the 
fraction of non-replacements should be higher. (Raypak, Public Meeting 
Transcript, No. 57.4 at p. 249) It also stated that the proposed 
standard for pool heaters would induce product switching to solar or 
heat pump pool heaters. (Raypak, No. 67 at p. 3) In response, DOE 
believes that the standard adopted for pool heaters in this final rule 
(82-percent thermal efficiency) does not increase the installed cost 
enough to induce most consumers to not replace the product or to switch 
to a different product.
3. Base-Case and Standards-Case Efficiency Distributions
    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 December 2009 NOPR analysis, DOE used the shipment-weighted 
average energy efficiencies for 2013 (for DHE and pool heaters) or 2015 
(for water heaters) 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-fired 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 recently-established 
ENERGY STAR efficiency levels for water heaters (see section IV.F.10). 
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 its determination of standards-case forecasted efficiencies, 
DOE used a ``roll-up'' scenario in the preliminary analysis and the 
December 2009 NOPR to establish the SWEF for the year that compliance 
with the standards would be required 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. DOE did not receive any comments on its forecasts of 
energy efficiency distributions, so for today's final rule, DOE 
maintained the approach described above.
4. National Energy Savings
    DOE calculates NES for each year as the difference between energy 
consumption of the product stock using the average unit energy 
consumption (UEC) of the stock in the base case (without new standards) 
or in a case given new standards. In addition to annual shipments, key 
inputs for determining NES are annual UEC and the site-to-source 
conversion factor.
a. Annual Unit Energy Consumption
    For each year in the forecast period, DOE used the shipments-
weighted energy efficiencies for the base case and standards cases, 
along with the data on annual energy use by efficiency level, to 
estimate the shipments-weighted average annual per-unit energy 
consumption for each product class under the base case and standards 
cases. When calculating energy consumption at each considered 
efficiency level above the baseline, DOE applied a rebound effect of 10 
percent for water heaters, 15 percent for DHE, and 10 percent for pool 
heaters. A rebound effect refers to increased energy

[[Page 20166]]

consumption resulting from actions that increase energy efficiency and 
reduce consumer costs. (For example, if energy efficiency improvements 
were to reduce the energy consumption of a room air conditioner 
(thereby decreasing its electricity costs), a consumer may choose to 
run the unit more often, thereby increasing comfort but returning a 
portion of the savings arising from DOE's standards.) When the rebound 
effect is incorporated, calculated energy savings are lower than if no 
rebound effect were considered.
    DOE's calculation of UEC accounts for the product switching that 
DOE anticipates will occur under specific TSLs. That is, DOE accounted 
for the energy use of the products to which some fraction of households 
are assumed to switch. For example, in the case of switching from a 
large-volume water heater to two small-volume units, DOE calculated and 
incorporated the energy use of the two small-volume units.
b. 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 December 2009 NOPR analysis, DOE used annual site-to-source 
conversion factors based on the version of NEMS that corresponds to 
AEO2009. For today's final rule, DOE updated its conversion factors 
based on AEO2010 Early Release. The AEO does not provide energy 
forecasts beyond 2035; DOE used conversion factors that remain constant 
at the 2035 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.\17\
---------------------------------------------------------------------------

    \17\ 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 
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.\18\
---------------------------------------------------------------------------

    \18\ 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 (Sept. 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 timeframes 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

[[Page 20167]]

generation by fuel type can be used to estimate the impact of a 
changing mix of fuels. However, NEMS currently provides no information 
on potential changes to the relative ease with which the different 
fuels can be extracted and processed.
    AGA stated that the December 2009 NOPR's energy consumption 
estimates for specific design options do not reflect a full-fuel-cycle 
analysis of the energy consumed. Referring to the NRC committee's 
report, AGA recommended that DOE use ``extended site energy'' analysis 
in the near term.\19\ (AGA, No. 78 at pp. 2-3) In response, DOE refers 
to the preceding discussion of why it has not yet adopted a full-fuel-
cycle measure of energy use. DOE's calculation of national energy 
savings does in fact use the extended site measure of energy 
consumption, which includes generation, transmission, and distribution 
but, unlike the full-fuel-cycle measure, does not include the energy 
consumed in extracting, processing, and transporting primary fuels. The 
calculation of energy consumption that DOE uses in the LCC analysis 
does not use an extended site energy measure, because the purpose of 
the calculation is to estimate the operating costs that consumers will 
face with alternative appliance efficiency levels. The site energy 
calculated in the LCC analysis is converted to extended site energy 
(i.e., source or primary energy) in the NIA. 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.
---------------------------------------------------------------------------

    \19\ AGA cited the ``Report'' issued by the National Academy of 
Sciences, but it is evident that AGA was referring to the report by 
the NRC committee cited in footnote 12.
---------------------------------------------------------------------------

5. Consumer Net Present Value
    The consumer NPV is the net value in the present of the costs and 
savings experienced by consumers of the considered products. DOE 
calculates the NPV using the value of increased total installed costs, 
the value of operating cost savings (including energy, repair, and 
maintenance costs) in each year in which such savings occur, and a 
discount rate.
a. Increased Total Installed Costs and Operating Cost Savings
    The increase in total annual installed cost is equal to the annual 
change in the per-unit total installed cost (difference between base 
case and standards cases) multiplied by the shipments forecasted for 
the standards case. Similarly, the total annual savings in operating 
costs are equal to the change in annual operating costs (difference 
between base case and standards case) per unit multiplied by the 
shipments forecasted for the standards case.
    DOE's calculation of total annual installed cost and total annual 
savings in operating costs accounts for the fuel and product switching 
that was estimated to occur under specific TSLs (see section IV.G.2.d). 
The accounting of the energy use of the products to which a fraction of 
households are assumed to switch was described above in section 
IV.G.4.a. DOE also accounted for the installed cost of those products. 
For example, in the case of switching from a large-volume water heater 
to two small-volume units, DOE calculated and incorporated the 
installed cost of the two units.
b. Discount Rates
    DOE multiplies monetary values in future years by the discount 
factor to determine the present value. For the December 2009 NOPR 
analysis and today's final rule, 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''). DOE did not receive any comments on the discount rates used 
to calculate the NPV of appliance consumer benefits, and consequently, 
DOE has retained those discount rates in this final rule.

H. Consumer Subgroup Analysis

    In analyzing the potential impact of new or amended energy 
conservation 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. For the 
December 2009 NOPR and today's final rule, DOE used 2005 RECS data to 
analyze the potential effect of energy conservation standards on the 
considered consumer subgroups for selected heating products. 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.
    DOE did not receive any comments on its approach for the consumer 
subgroup analysis, and for today's final rule, DOE has made no change 
to its method for estimating consumer subgroup impacts. Details on the 
consumer subgroup analysis and results can be found in chapter 11 of 
the TSD.

I. Manufacturer Impact Analysis

    DOE conducted the MIA to estimate the financial impact of amended 
energy conservation standards on water heater, DHE, and pool heater 
manufacturers and to calculate the impact of such standards on gross 
domestic manufacturing employment and capacity. The MIA has both 
quantitative and qualitative aspects. The quantitative part of the MIA 
primarily relies on the GRIM--an industry-cash-flow model customized 
for the three products covered by this rulemaking. The GRIM inputs are 
data characterizing the industry cost structure, investments, 
shipments, and markups. The key MIA output is the INPV. Different sets 
of assumptions (scenarios) produce different results. DOE presents the 
industry impacts by the major product types. DOE estimated the industry 
impacts for gas-fired and electric storage water heaters together 
because these product groupings represent a market that is served by 
the same manufacturers and these products are typically produced in the 
same factories. Similarly, DOE presents the other MIA results 
separately for oil-fired storage water heaters, gas-fired instantaneous 
water heaters, the traditional DHE product categories, gas hearth DHE, 
and gas-fired pool heaters.
    The qualitative part of the MIA addresses factors such as product 
characteristics, market and product

[[Page 20168]]

trends, as well as an assessment of the impacts of standards on 
subgroups of manufacturers. DOE outlined its methodology for the MIA in 
the December 2009 NOPR. 74 FR 65852, 65915-22 (December 11, 2009). The 
complete MIA for the December 2009 NOPR is presented in chapter 12 of 
the NOPR TSD.
    In overview, for the final rule, DOE updated the MIA to reflect 
changes in the outputs of two other key DOE analyses that feed into the 
GRIM. Product costs are key inputs to the GRIM. For today's final rule, 
DOE incorporated the changes made to the engineering analysis, 
including updates to the MPCs (see section IV.C). In the MIA, DOE 
updated its shipment forecasts and efficiency distributions. In turn, 
DOE updated the GRIM to incorporate these revised costs and shipments.
    For consistency in nominal dollars, for the final rule, DOE 
inflated the NOPR capital and product conversion costs to 2009$ from 
2008$ using producer price index (PPI) information for the relevant 
industries. See http://data.bls.gov:8080/PDQ/outside.jsp?survey=pc. The 
PPI industry information is related to the North American Industry 
Classification System (NAICS) code. For gas-fired storage, oil-fired 
storage, and gas-fired instantaneous water heaters, DOE updated the 
conversion costs using PPI information under series id 
PCU3352283352283--``Household water heaters, except electric.'' DOE 
updated the conversion costs for electric storage water heaters using 
series id PCU3352283352281--``Household water heaters, electric, for 
permanent installation.'' DOE updated the DHE conversion costs using 
series id PCU3334143334147--``Floor and wall furnaces, unit heaters, 
infrared heaters, and mechanical stokers.'' Finally, DOE updated the 
conversion costs for pool heaters using series id PCU3334143334149--
``Other heating equipment, except electric.'' For the final rule, DOE 
also updated its traditional DHE product line analysis used to 
calculate industry-wide conversion costs to account for new products 
that have come on to the market and to account for changes to the 
traditional DHE efficiency levels and TSLs, as reflected in the most 
current information in the AHRI certification database (see http://www.ahridirectory.org/ahridirectory/pages/home.aspx.).
    DOE used the GRIM to revise the MIA results from the December 2009 
NOPR to reflect the updated MPCs, shipments, and conversion costs. For 
direct employment calculations, DOE revised the GRIM to include the 
latest U.S. Census information available from the 2007 Economic 
Census.\20\
---------------------------------------------------------------------------

    \20\ Annual Economic Census: 2007, American FactFinder, Bureau 
of the Census (Available at: http://www.census.gov/econ/census07/) 
(Last accessed Feb. 2010).
---------------------------------------------------------------------------

    The following sections discuss interested parties' comments on the 
December 2009 NOPR MIA methodology. In general, DOE provides background 
on an issue that was raised by interested parties, summarizes the 
interested parties' comment, and discusses DOE's response to the 
comments.
1. Water Heater Conversion Costs
    For the MIA, DOE classified one-time conversion costs into two 
major categories: (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.
    In response to the December 2009 NOPR, AHRI stated that TSL 4 would 
require more than 75 percent of gas 40-gallon water heater models and 
more than 90 percent of electric 50-gallon water heater models from the 
AHRI Directory to be either redesigned or dropped from production. AHRI 
added that the severity of this change is even greater than this 
example suggests because shipments are more skewed towards current 
Federal minimum efficiency standards than the proportion of models 
suggests. (AHRI, No. 91 at pp. 1-2)
    DOE acknowledges that a significant effort may be necessary for 
manufacturers to reach the efficiencies required by TSL 4. In the 
December 2009 NOPR, DOE noted that over 80 percent of the gas-fired 
water heaters currently sold do not meet the efficiency requirements at 
TSL 2 through TSL 4 and that only a small portion of the electric 
storage water heaters currently on the market meet the required 
efficiencies at TSL 4. This current product distribution drives the 
estimate of capital conversion costs at TSL 4 and, consequently, 
contributes to the overall results. These conversion costs reflect the 
need for manufacturers to add foaming stations and additional 
production lines to maintain current production levels with water 
heaters that require much thicker insulation. 74 FR 65852, 65936-37 
(Dec. 11, 2009).
    BWC commented that the significant increase in insulation thickness 
necessary to achieve the proposed level for water heaters would require 
additional assembly time to manufacture the same production quantity. 
In order to achieve the same manufacturing capacity, BWC stated that it 
would require a combination of more labor, a reconfiguration of 
production lines, more foaming equipment on production lines, and/or 
additional production lines. BWC stated that any of these options 
result in expensive capital conversion costs, which BWC does not 
believe were fully taken into consideration. (BWC, No. 61 at pp. 1-2)
    DOE's initial estimates for the capital conversion costs for water 
heaters at each TSL can be found in the December 2009 NOPR. 74 FR 
65852, 65936-41 (Dec. 11, 2009). During interviews with manufacturers 
prior to the publication of the December 2009 NOPR, DOE solicited 
confidential information about the required capital conversion costs at 
each efficiency level. In the December 2009 NOPR, DOE stated that it 
based its capital conversion costs for gas-fired and electric storage 
water heaters on information learned during these interviews. 74 FR 
65852, 65917-18 (Dec. 11, 2009). DOE verified its industry-wide 
estimates for the gas-fired and electric storage water heaters by 
comparing the NOPR estimates to a separate bottoms-up estimate of the 
sub-assembly lines, assembly lines, and tooling changes required by 
each manufacturer and the level of investments that would be required 
to maintain a historic value for net plant, property, and equipment as 
a ratio of total revenue. For oil-fired storage and gas-fired 
instantaneous water heaters, DOE estimated its capital conversion costs 
using 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 
both oil-fired storage and gas-fired instantaneous water heaters at 
each TSL. Id. Pages 12-35 to 12-39 of the December 2009 NOPR TSD also 
contained DOE's estimated capital conversion costs as well as 
additional information about the assumptions

[[Page 20169]]

behind the required changes at each efficiency level.
    For the gas-fired and electric storage water heater capital 
conversion costs at TSL 4 and TSL 5 in the December 2009 NOPR, DOE 
noted and agrees with BWC's comment that the increased insulation 
thickness would require manufacturers to lengthen existing assembly 
lines or add additional assembly lines because the much thicker 
insulation requirements lower the throughput of existing assembly 
lines. However, DOE continues to believe it has adequately addressed 
BWC's concerns about the capital conversion cost estimates for two 
reasons. First, DOE's capital conversion cost estimates are drawn from 
industry-wide aggregated data gathered during manufacturer interviews. 
Second, DOE's assumptions regarding the required plant changes at the 
proposed TSL in the December 2009 NOPR are consistent with the plant 
changes noted in BWC's comment. Finally, BWC did not provide any 
additional data supporting its comment that DOE's capital conversion 
cost estimates did not fully capture the potential costs.
    For today's final rule, DOE continues to use the same methodology 
to calculate the water heater conversion costs. Additional details of 
DOE's estimates can be found in chapter 12 of the TSD.
    DOE also received several comments from manufacturers regarding 
issues that would arise under a potential amended standard for electric 
storage water heaters that would effectively require heat pump water 
heaters (i.e., TSL 5 through TSL 8). Broadly, the comments addressed 
three issues: (1) Potential changes to current facilities; (2) the cost 
to manufacture heat pump water heaters; and (3) the unique challenges 
presented by the December 2009 NOPR TSL 5.
    At the public meeting, A.O. Smith stated that it is in the final 
stages of implementing production for heat pump water heaters on a 
small scale relative to what would be required if the entire market 
moved to heat pump water heaters. (A.O. Smith, Public Meeting 
Transcript, No. 57.4 at pp. 91-92) In written comments, A.O. Smith 
extrapolated the cost of setting up this limited production line to 
estimate the cost of shifting the entirety of its electric storage 
market share to heat pump water heaters. A.O. Smith stated that a new 
facility capable of producing two million heat pump water heaters 
annually would cost $90 million to build--before accounting for 
investment in land and other fees--and would take 2-3 years to 
complete. A.O. Smith stated that it would likely build a new facility 
because line speed and assembly operations would not allow for the 
product to be integrated into current production lines at high shipment 
volumes. A.O. Smith also stated that it would probably be cheaper to 
set up a new line than to rework the production lines in existing 
facilities. (A.O. Smith, Public Meeting Transcript, No. 57.4 at p. 92)
    AHRI stated that an amended standard effectively requiring heat 
pump water heaters would force all manufacturers to continue to provide 
electric storage water heaters utilizing resistance technologies until 
the compliance date of the amended standard due to competitive 
pressures. A competitor that did not have to continue manufacturing 
resistance water heaters until the compliance date (because, 
presumably, it did not serve this market in the base case) could have 
an advantage. (AHRI, Public Meeting Transcript, No. 57.4 at pp. 100-
103) BWC added that a standard that required heat pump water heaters 
would disrupt its manufacturing facility since existing manufacturing 
lines are optimized for specific products. Heat pump water heaters 
would require production lines to be redesigned to handle all new 
components and their assembly. Finally, a combination of additional 
production lines and/or a new manufacturing facility would be required 
to manufacture heat pump water heaters without interrupting current 
production. (BWC, No. 61 at pp. 2-3)
    DOE agrees that modifying existing production facilities to 
exclusively heat pump water heaters could be very disruptive to ongoing 
operations there. During on-site manufacturing impact interviews, most 
manufacturers were still developing their heat pump water heaters. At 
that time, manufacturers responded to questions about how they would 
approach the manufacture of heat pump water heaters by describing the 
necessary changes to existing facilities. For example, manufacturers 
anticipated that they would purchase the heat pump modules from outside 
vendors if heat pump water heaters were required for all electric 
storage water heaters for three reasons: (1) They lacked experience 
manufacturing high-volume sealed refrigeration systems; (2) they had 
limited refrigeration engineering expertise; and (3) they lacked space 
in their facilities to produce heat pump module subassemblies. DOE 
incorporated these comments into its NOPR capital cost conversion 
analysis in the following manner: (1) Manufacturers would initially 
source the heat pump modules; (2) electric storage water heater 
assembly and subassembly lines would have to be modified to accommodate 
the assembly of heat pump water heaters; (3) assembly lines would need 
to be lengthened to merge new tank assemblies with the heat pump 
modules; and (4) heat pump water heater integration would require 
manufacturers to install advanced testing equipment to verify 
performance, operation, etc. In sum, DOE estimated in the NOPR that 
manufacturers would incur almost $70 million in capital conversion 
costs to modify their production facilities to exclusively manufacture 
heat pump electric storage water heaters. DOE estimated these 
investments take place between 2010, the announcement date of the 
standard, and 2015, the year manufacturers must comply with the 
standard. However, the capital conversion cost estimates did not 
include the cost of building manufacturing capacity to produce the heat 
pump modules in house because DOE believed manufacturers would likely 
purchase these as subassemblies. 74 FR 65852, 65921, 65938 (Dec. 11, 
2009).
    Manufacturers can choose among multiple design paths and production 
options for heat pump water heaters, so capital, manufacturing, and 
product development expenses will vary accordingly. DOE agrees with 
A.O. Smith that one possible reaction by manufacturers at the NOPR TSL 
6 or TSL 7 (equivalently, TSL 7 and TSL 8 in the final rule) could be 
to build a new facility to exclusively manufacture heat pump water 
heaters. In the December 2009 NOPR, DOE stated that manufacturers could 
consider moving all or part of their existing production capacity 
abroad if NOPR TSL 6 were selected, as the benefit to the manufacturer 
of a new facility abroad could be greater than modifying an existing 
facility. In the NOPR, DOE noted that building a new facility could 
entail less business disruption risk than attempting to completely 
redesign and upgrade existing facilities. Combined with lower labor 
rates overseas, this prospect could compel manufacturers to move their 
production facilities outside of the U.S. 74 FR 65852, 65938, 65952 
(Dec. 11, 2009).
    While acknowledging there are multiple strategic paths to 
manufacturer heat pump water heaters, DOE believes it has used a 
consistent approach to characterize the costs facing the industry. DOE 
also believes its approach captures manufacturers' concerns about the 
technology changes required at the

[[Page 20170]]

NOPR TSL 6 and TSL 7. While DOE did not include the conversion costs to 
manufacture the heat pump module or to build new facilities, DOE did 
include the substantial costs to modify all existing production lines. 
Furthermore, DOE believes that existing facilities could be modified to 
produce heat pump water heaters at the final rule TSL 7 and TSL 8, 
although at a substantial capital conversion cost. Supporting this 
notion, DOE notes that most existing heat pump water heater designs 
from major manufacturers incorporate parts of standard electric 
resistance water heaters. For example, the tank portion of existing 
heat pump water heater designs are very similar to electric resistance 
water heater designs, thereby limiting most changes to the assembly 
line area of a plant. The designs of heat pump water heaters at TSL 7 
or TSL 8 would likely be similar to recently-released heat pump water 
heaters and would maintain these similarities with electric resistance 
water heaters.
    Current manufacturing operations are highly optimized to 
manufacture water heaters that utilize resistive elements and 
relatively few additional components (e.g., thermostats), whereas heat 
pump water heater modules require additional assembly steps even if 
they are purchased as completed sub-assemblies. While a new 
manufacturing facility would make the integration of heat pump modules 
simpler, the $90 million estimate for such a facility projected by A.O. 
Smith indicates that this approach could also be more costly. 
Alternatively, manufacturers could choose to build an annex for 
assembling heat pump water heater modules and then deliver them to the 
final assembly area in a manner similar to completed tank assemblies. 
When queried in manufacturer impact interviews, no manufacturer of 
electric water heater with traditional resistive elements had yet 
decided on a specific path towards high-volume heat pump water heater 
production. However, DOE believes that the capital conversion costs 
that assume manufacturers modify existing facilities to accommodate 
integrating a sourced heat pump module would be the most likely 
scenario on account of lower capital expenditures than a ``green 
field'' facility, established supplier bases, trained work force, etc. 
Hence, DOE believes that this scenario captures the significant impacts 
on electric storage water heater manufacturers.
    Finally, both the preservation of return on invested capital 
scenario and the preservation of operating profit scenario incorporate 
the financial burdens to substantially modify facilities to manufacture 
heat pump water heaters and the significant expenses that would be 
required to carry inventory that is many times more expensive than in 
the base case (because the MPCs of heat pump water heaters are multiple 
times the MPCs of resistance water heaters). In addition, the 
preservation of operating profit scenario models the impacts on 
manufacturers that would occur after the compliance date of the 
standard if they cannot fully markup the substantial cost of a sourced 
heat pump module. Therefore, the costs and market disruption to 
manufacture heat pump water heaters are modeled in the MIA scenarios.
    In response to DOE's request for comment at the public meeting on 
the required conversion costs for all considered NOPR TSLs, Rheem did 
not comment specifically because it deemed conversion costs 
confidential and proprietary. However, Rheem wished to advise DOE that 
this information was submitted confidentially to DOE's contractor 
during MIA interviews. (Rheem, No. 89 at p. 9) During the public 
meeting, Rheem did state that converting all of its electric water 
heater models to heat pump water heaters (as the December 2009 NOPR TSL 
6 or TSL 7 would require) would be a very significant undertaking 
requiring capital and new manufacturing capabilities. As evidence to 
that point, Rheem noted that it has to date released only one heat pump 
water heater model. (Rheem, Public Meeting Transcript No. 57.4 at p. 
93-94)
    DOE agrees that migrating electric storage production entirely to 
heat pump water heater production would require a significant 
investment in time and resources. DOE asked each participant during 
manufacturer interviews to quantify the costs to manufacture 
exclusively heat pump water heaters. DOE's own analysis of these 
conversion costs proved consistent with the estimates submitted by the 
industry at large. Therefore, DOE believes that its capital conversion 
costs for the industry are reasonable and that it has adequately 
modeled the impacts of the significant plant changes that would be 
required to exclusively manufacture heat pump water heaters in the 
electric storage water heaters product class. The significant product 
and capital conversion costs associated with the technology and the 
required production changes contribute to large, negative impacts on 
INPV at the December 2009 NOPR TSL 6 and TSL 7.
    As discussed earlier, the December 2009 NOPR TSL 5 would 
effectively require heat pump water heaters for tanks with rated 
storage volumes greater than 55 gallons. BWC commented that this 
proposed level would likely result in a smaller percentage of the 
market above the 55-gallon breakpoint, which would make it more 
difficult to finance the high conversion costs for moving large tank 
production to heat pump water heaters. BWC also stated it would have to 
cut down on its product offerings due to the high development and 
capital conversion costs. (BWC, No. 61 at p. 2) A.O. Smith stated it 
has two dedicated factories that build commercial condensing products, 
and the commenter stated, after studying the production volumes at the 
December 2009 NOPR TSL 5, that it would likely have to add production 
lines. Water heater manufacturers would have to invest a significant 
amount to learn how to manufacture a device with a refrigerant circuit 
for a small number of units per year. (A.O. Smith, Public Meeting 
Transcript, 122-123, 126) In its written comments, Rheem added that the 
December 2009 NOPR TSL 5 introduces added burden and risk because it 
requires manufacturers to continue to produce conventional storage 
products in large quantities while incrementally preparing for 
production of maximum technology products which could involve 
additional production lines and new facilities. (Rheem, No. 89 at p. 
10) AHRI stated that separate minimum efficiency levels for larger size 
water heaters would require separate production lines for these models. 
Given the significant differences in the process of manufacturing 
either heat pump water heaters or condensing gas-fired water heaters, 
these models could not be interspersed into the high-speed production 
lines currently operating in water heater manufacturing plants. (AHRI, 
No. 91 at p. 6) Finally, BWC, A.O. Smith, and Rheem all commented that 
the lower volume of water heaters above 55-gallons made the business 
case for the investments in the advanced technology harder to justify. 
(BWC, No. 61 at p. 2; A.O. Smith, Public Meeting Transcript, No. 57.4 
at pp. 98-99; Rheem, Public Meeting Transcript No. 57.4 at pp. 99-100)
    DOE agrees with BWC, A.O. Smith, Rheem, and AHRI that the December 
2009 NOPR TSL 5 (i.e., TSL 6 for this final rule) would likely require 
additional production lines for manufacturers to produce heat pump 
water heaters and condensing products for high-volume products. While 
DOE believes that existing facilities could be modified to manufacture 
exclusively heat pump water heaters, DOE does not believe individual 
manufacturers could

[[Page 20171]]

integrate heat pump water heaters or condensing gas-fired water heaters 
above 55-gallons into existing production lines. Rather, DOE calculated 
the cost for each manufacturer to build a separate production line as 
an annex to an existing facility to maintain their current market share 
of the gas-fired and electric storage water heater markets above 55-
gallons. DOE also assumed that the capital conversion costs for rated 
storage volumes less than 55-gallons at the NOPR TSL 5 would not 
decline if the efficiency requirements were higher for rated storage 
volumes greater than 55-gallons (see pages 12-36 to 12-37 of the 
December 2009 NOPR TSD). 74 FR 65852, 65918 (Dec. 11, 2009). In 
addition, DOE calculated the product conversion costs for large rated 
storage volumes at the December 2009 NOPR TSL 5 by multiplying its 
estimate for the industry to offer heat pump products at TSL 6 and 
condensing gas-fired products at TSL 7 for all rated storage volumes by 
the percentage of total electric storage and gas-fired storage water 
heater models that exceed a 55-gallon rated volume. 74 FR 65852, 65917 
(Dec. 11, 2009). DOE did not modify its approach to calculate the 
conversion costs at TSL 5 and TSL 6 for the final rule because its 
approach is consistent with manufacturers' comments. Finally, DOE notes 
that there are a disproportionately large number of models above 55-
gallons relative to the shipment volumes of those products. Thus, the 
economic impacts to convert those products to a new technology are 
proportionately more burdensome for those manufacturers. Therefore, DOE 
agrees that the business case is harder to justify for the larger 
storage volumes and that this is captured by the MIA, but notes that 
the impacts are still less severe than requiring manufacturers to 
exclusively offer either advanced technology.
    DOE also received a number of comments about the impacts of the 
oil-fired storage water heater conversion costs on manufacturers. BWC 
stated that the business case to make the investments at the December 
2009 NOPR TSL 4 is difficult because the industry is small and 
declining and could lead them to exit the oil-fired market. (BWC, No. 
61 at p. 2; Public Meeting Transcript, No. 57.4 at p. 289) AHRI stated 
that the cost to redesign, develop, and retool production for oil-fired 
models is high at the proposed December 2009 NOPR TSL 4 compared to the 
very small market, which offers limited opportunity for a return. AHRI 
added that this TSL is not currently met by all current 50-gallon 
residential oil-fired water heaters and all 30-gallon and 32-gallon 
models except those offered by one manufacturer. Consequently, some 
manufacturers could drop out of the oil water heater market. (AHRI, No. 
91 at p. 2)
    DOE agrees that there are no existing 50-gallon oil-fired water 
heaters on the market that meet the efficiencies required at the 
December 2009 NOPR TSL 4. However, DOE notes that there are three 
existing 30-gallon products from two manufacturers that meet these 
efficiencies using conventional technology. Therefore, DOE continues to 
believe that models that do not meet the required efficiencies could be 
made to do so by manufacturers using insulation changes. While not 
insignificant, the conversion costs to make insulation changes to 
existing products would not be as substantial as a higher efficiency 
requirement, which could require manufacturers to use significantly 
different technology. DOE noted in the December 2009 NOPR that if any 
manufacturer had to meet the standard using a more complex technology, 
these costs could force them to exit the oil-fired storage water heater 
market. 74 FR 65852, 65940 (Dec. 11, 2009). Whether a given 
manufacturer chooses to exit the market will depend on a variety of 
internal and external factors, but based upon the available 
information, DOE believes it has appropriately captured the magnitude 
of investments that the various TSLs require.
2. Manufacturer Markups and Markup Scenarios
    The MPCs from the engineering analysis are key inputs to the GRIMs 
used in this rule. For water heaters, the MSP is comprised of 
production costs (the direct manufacturing costs or MPCs), non-
production costs (indirect costs like selling, general, and 
administrative expenses (SG&A)), and profit. For gas-fired, electric, 
and oil-fired storage water heaters in the MIA, MSP is calculated by 
multiplying the MPC by the manufacturer markup and adding the shipping 
cost. For all other products, MSP is calculated by multiplying the MPC 
by the appropriate manufacturer markup. DOE used several standards-case 
markup scenarios to bound the range of uncertainty about the potential 
impacts on prices and profitability following the implementation of 
amended energy conservation standards.
    In both its written submission and comments at the public meeting, 
BWC stated that profit margins for water heater manufacturers are 
falling due to the decline of new construction and the industry having 
excess capacity. BWC argued that because the profitability estimates in 
DOE's analysis are incorrect, it would be difficult to sustain the 
costs associated with the December 2009 NOPR TSL 4. Detailed profit 
data were supplied by BWC in previous communication with DOE's 
contractor. (BWC, No. 61 at p. 2; Public Meeting Transcript, No. 57.4 
at p. 40)
    As background, DOE used publicly-available information to calculate 
its initial markup estimates. Because not all manufacturers in the 
industry are public and because those that are public often compete in 
different businesses, DOE calibrated its initial estimates based on 
information received during manufacturer interviews. During the NOPR 
phase, DOE refined the manufacturer markup based on feedback from 
manufacturers to better reflect the residential heating products 
market. 74 FR 65852, 65892 (Dec. 11, 2009). Given this process, DOE 
believes the manufacturer markups used in the engineering analysis and 
manufacturer impact analysis are representative of the industry as a 
whole. In addition, DOE used estimated market shares to weigh feedback 
it received on the financial parameters (including the industry capital 
structure) to determine an aggregate number representative of the 
entire industry. While individual manufacturers have different gross 
margins depending on a variety of factors, DOE's use of weighted 
average financial parameters yields cash flow from operations that are 
consistent with the overall industry. For example, in the base case, 
earnings before interest and taxes (EBIT) for gas-fired and electric 
storage water heating manufacturing is approximately 5 percent. 
Finally, with respect to BWC's concern that margins have compressed due 
to the housing downturn, DOE acknowledges that the current economic 
environment, particularly in new construction, has adversely impacted 
the industry. DOE notes that the two markup scenarios it models are 
used to bound the potential impacts on manufacturers due to amended 
energy conservation standards, in light of the inherent uncertainty in 
how pricing will adjust in the marketplace. The preservation of 
operating profit scenario models a case in which margins and 
profitability decline in response to amended energy conservation 
standards. DOE believes that the impacts captured by the preservation 
of operating profit scenario would be a better indicator of the likely 
impacts on manufacturers than specifically attempting to model a short-
term effect that also impacts margins in

[[Page 20172]]

the base case. A short-term effect that would be impacted in the base 
case and standards case would not model long-term financial impacts 
caused by standards and would not consider the impacts on INPV over the 
entire analysis period. Consequently, DOE has decided to continue to 
use the markup scenarios modeled in the December 2009 NOPR.
    DOE also received comments from traditional DHE manufacturers about 
the markup scenarios in the MIA. As opposed to the preservation of 
return on invested capital scenario, LTS stated that it expects 
profitability to decrease, possibly to zero or below in the event of 
standards. LTS argued this outcome is likely because manufacturers will 
either have to abandon some product categories or face lower consumer 
demand following standards because features the consumer wants would no 
longer be available, such as the ability to retrofit replacement 
products and operate without line power. (LTS, No. 56.7 at p. 2; Public 
Meeting Transcript, No. 57.4 at p. 21) LTS further argued that the 
preservation of operating profit scenario is too optimistic in the 
event product offerings are reduced. (LTS, No. 56.7 at p. 2) Finally, 
LTS stated that the large negative impacts on industry net present 
values suggest that manufacturers would be substantially harmed if 
profitability were impacted. (LTS, Public Meeting Transcript, No. 57.4 
at pp. 21-22)
    In response, DOE created two markup scenarios to bound the 
potential impacts on DHE manufacturers, as discussed in TSD chapter 12. 
DOE believes the less optimistic scenario--in which manufacturers do 
not earn any additional profit from any of the changes required by 
standards despite increased investment--captures LTS's concerns. DOE 
agrees with LTS that profitability could decrease if consumer demand 
was lower or product lines were dropped. At the same time, if 
manufacturers dropped selected product lines, they would not incur the 
capital investments included in DOE's estimates because DOE assumes 
manufacturers convert all product lines. While DOE acknowledges that 
manufacturers could choose to eliminate certain product lines, DOE 
believes that its markup scenarios would still reflect the negative 
impact on industry value. DOE also agrees that lower consumer demand 
would impact profitability. All of the concerns raised by manufacturers 
indicate that the range of impacts would be towards the higher end 
calculated by DOE. While DOE's results changed slightly from the NOPR 
to account for the latest available data on the industry's product 
lines, as discussed in chapter 12 of the TSD, DOE believes that the 
analytical tools correctly capture the impacts on traditional DHE 
manufacturers. DOE is not adopting the same TSL for traditional DHE as 
was proposed in the NOPR, in part because of these impacts. DOE further 
discusses how it weighs the benefits and burden of the amended energy 
conservation standards, including the impact on traditional DHE 
manufacturers, in section VI.D.3.
3. Pool Heater Conversion Costs
    Raypak agreed with DOE's statement that TSL 5 and TSL 6 would 
require manufacturers to incur significant product and capital 
conversion costs. Raypak commented that this statement is also true for 
TSL 3 and TSL 4. While most manufacturers have some products at these 
efficiency levels, Raypak argued that manufacturing all products at the 
levels proposed in the December 2009 NOPR would require substantial 
tooling and product conversion costs. (Raypak, No. 67 at p. 2; Public 
Meeting Transcript, No. 57.4 at p. 308) In addition, Zodiac stated that 
even small efficiency improvements often require significant efforts 
and burden manufacturers. (Zodiac, No. 68 at p. 1)
    DOE agrees that the conversion costs at TSL 3 and TSL 4 are also 
significant. However, DOE notes that the plant changes at TSL 5 and TSL 
6 increase substantially over those necessary at TSL 4, because 
manufacturers would have to make changes to both component parts 
(including heating exchanger fabrication) and their main assembly 
lines. DOE calculated the conversion costs for manufacturers to convert 
all existing products that did not meet the standard. Therefore, the 
conversion costs for each manufacturer would vary depending on their 
experience with high-efficiency products and the range of their current 
product offerings. DOE believes it has adequately captured the impacts 
of the conversion costs in the MIA.
4. Employment
    Bock stated that the employment impacts discussion in the December 
2009 NOPR for oil-fired water heaters did not take into consideration 
manufacturers shutting down or moving production outside of the United 
States. (Bock, No. 101 at p. 2)
    In the December 2009 NOPR, DOE calculated the potential impacts of 
amended energy conservation standards on direct employment by bounding 
the range of potential impacts. 74 FR 65852, 65947-49 (Dec. 11, 2009). 
For the upper end of the range, the direct employment analysis 
estimated the number of U.S. production workers who are impacted by 
this rulemaking, assuming that manufacturers continue to produce the 
same scope of covered products after the compliance date and that the 
existing domestic production is not shifted to other countries. In this 
best case scenario, the direct employment impact analysis shows 
approximately no change in the number of U.S. production workers in the 
residential oil-fired storage water heater market. To calculate the 
lower bound of the range of potential impacts, DOE calculated the total 
number of domestic production workers that would lose their jobs if all 
production were no longer made domestically. Id. In this scenario, 
manufacturers respond to the higher labor requirements by shifting 
production to lower-labor-cost countries or exit the oil-fired market. 
Since a major US manufacturer has oil-fired storage water heaters that 
exceed the standard proposed in the December 2009 NOPR, a complete exit 
from the market or a complete shift to lower-labor-cost countries by 
industry is unlikely. In the December 2009 NOPR, DOE did not expect 
substantial changes to U.S. production workers in the residential oil-
fired market if manufacturers were able to implement the insulation 
design options presented in the engineering analysis. 74 FR 65852, 
65949 (Dec. 11, 2009).
    A.O. Smith stated that the December 2009 NOPR TSL 6 or TSL 7 would 
require manufacturers to keep their electric resistance water heater 
lines running while implementing new heat pump water heater production 
lines. This assumption implies manufacturers would be building new 
factories or production lines, which could be outside of the United 
States. (A.O. Smith, Public Meeting Transcript, No. 57.4 at pp. 316-
317) A.O. Smith also noted that it would expect to utilize low-cost-
labor countries to produce the heat pump portion of the assembly, 
similar to the trend in the room air conditioning industry. (A.O. 
Smith, No. 76 at p. 4) BWC added that a disruptive heat pump water 
heater standard could cause a new manufacturing facility to be located 
abroad to not disrupt manufacturing in their existing U.S. facility. 
(BWC, No. 61 at pp. 2-3)
    As stated in section IV.I.1, DOE believes that an electric storage 
water heater standard that effectively mandated heat pump water heaters 
would not require manufacturers to build new production facilities, 
because those products would mimic current heat pump water heater 
designs that simplify manufacturing by maintaining

[[Page 20173]]

similarities with electric resistance water heaters. However, DOE does 
recognize that heat pump water heaters have higher labor content than 
water heaters that only use a resistance element, which could put 
additional pressure on U.S. manufacturing employment. DOE also believes 
that these pressures exist at a standard level that would only 
effectively require heat pump water heaters for products with rated 
storage volumes greater than 55-gallons. In particular, DOE believes 
TSL 5 or TSL 6 could cause a change in direct employment if 
manufacturers with multiple facilities in the U.S. build a dedicated 
heat pump water heater line at a factory abroad or relocate domestic 
production for large rated storage volumes.
    Also in response to the December 2009 NOPR, ACEEE stated that 
focusing on manufacturing jobs within the heating products industry is 
too narrow, because energy savings creates more jobs, including direct 
employment impacts as noted by DOE's statement that significant 
technology changes (such as heat pump water heaters) could increase 
other manufacturing employment. Finally, ACEEE expressed its belief 
that compared to the total number of jobs in the US economy and given 
the uncertainties of projections five years into the future, the small 
employment numbers estimated are not significant and should not be a 
determining factor in DOE's decision. (ACEEE, No. 79 at pp. 3-4)
    DOE agrees with ACEEE that the energy savings from more-efficient 
standards would likely result in increased net employment. DOE analyzes 
how consumer savings increase employment in other sectors of the 
economy in the indirect employment analysis (see section IV.J). 
Furthermore, DOE agrees that more-efficient technologies such as heat 
pump water heaters could increase direct employment in the United 
States. DOE noted that even at the December 2009 NOPR TSL 5, if 
manufacturers build a dedicated heat pump water heater line in the 
United States, additional labor would be required. DOE also noted that 
even sourcing heat pump modules could increase U.S. employment because 
existing assembly lines would need to be lengthened and the 
manufacturing process would take additional time to assemble and test. 
74 FR 65852, 65948-49 (Dec. 11, 2009). However, DOE continues to 
believe that the higher labor content for assembling heat pump water 
heaters could also put additional pressure on manufacturers to relocate 
existing manufacturing facilities in lower-labor-cost countries. 
Therefore, in light of the multiple strategic options manufacturers 
could pursue, DOE believes that presentation and consideration of the 
range of direct employment impacts is appropriate, in that it 
represents these possibilities. Lastly, while not the only determining 
factor, a potential reduction in industry employment is a consideration 
in terms of the impacts on manufacturers for the MIA.
    DOE received a number of comments about the direct employment 
impacts for traditional DHE at the standard levels proposed in the 
December 2009 NOPR. Specifically, LTS expressed its agreement with 
DOE's statement that TSL 3 would likely lead to the discontinuation of 
product lines and could cause small businesses to exit the market 
completely. LTS believes that both of these outcomes could be possible 
and that either would have a significant impact on future employment in 
their industry. (LTS, No. 56.7 at p. 2; Public Meeting Transcript, No. 
57.4 at p. 22) LTS also stated that reduced demand, if product features 
like retrofitability were eliminated, would also harm employment. (LTS, 
Public Meeting Transcript, No. 57.4 at p. 317) Empire stated that jobs 
would be lost due to poor prospects for a sufficient return on 
investment needed in the traditional DHE categories. (Empire, No. 100 
at p. 1; Public Meeting Transcript, No. 57.4 at p. 299) Finally, 
Williams added that increased efficiency standards would force them to 
eliminate jobs as a result of current products not meeting the new 
standards. (Williams, No. 96 at p. 1)
    In response, DOE notes that it calculated the potential impacts of 
amended energy conservation standards on domestic production employment 
for traditional DHE by bounding the range of potential impacts. The 
upper end of the range assumes that domestic production is not shifted 
to lower-labor-cost countries and that production volume does not 
decrease. In this best-case scenario, where shipments do not decrease 
and higher-efficiency products require more labor, the direct 
employment impact analysis shows a net increase in the number of 
domestic jobs for traditional direct heating equipment. To calculate 
the upper end of the range of direct employment impacts, DOE believes 
it is reasonable to assume that production volume could be sustained by 
selectively upgrading certain product lines and increasing shipments of 
products that meet the amended energy conservation standard. Under this 
set of assumptions, customers would likely continue to demand these 
products for the replacement market, and manufacturers would likely 
selectively upgrade their most popular products to maintain as many 
sales as possible with their limited resources.
    However, at some standard levels, including the December 2009 NOPR 
TSL 3, the capital conversion and product development costs could be 
prohibitive for the small domestic manufacturers of traditional DHE. 
Because DOE agrees that the December 2009 NOPR TSL 3 could lead to the 
risk of manufacturers exiting the market or reducing the scope of their 
product lines, the lower end of the range illustrates the industry 
dynamic in which not all product lines continue to be produced in the 
U.S. In this scenario, small domestic manufacturers could exit the 
market rather than invest in new designs, which would result in a loss 
of domestic employment at these firms. In summary, DOE agrees that all 
the possibilities raised by manufacturers could result in a loss of 
direct employment in the traditional DHE market. DOE acknowledged this 
possibility in the December 2009 NOPR. 74 FR 65852, 65949-50 (Dec. 11, 
2009). However, DOE believes it has appropriately bounded the range of 
employment impacts. DOE continues to believe that amended energy 
conservation standards could impact DHE direct employment, but believes 
it has taken the potential into consideration in examining the economic 
impact on manufacturers in the industry. DOE also notes that it has 
reviewed its analysis on the potential impacts on small business 
manufacturers in light of the changes made since the December 2009 NOPR 
publication and believes it has taken the necessary steps to limit the 
possibility of manufacturers exiting the market.
    AHRI stated that the negative direct employment impacts for 
traditional direct heating equipment could be larger than the indirect 
employment gains. (AHRI, Public Meeting Transcript, No. 57.4 at pp. 
324-325)
    In response, DOE notes that direct and indirect employment impacts 
are assessed in different analyses for this rulemaking. The MIA 
assesses the direct employment impacts on manufacturers that make the 
covered products. The indirect employment impacts are jobs that are 
created from the consumer savings on energy as a result of the amended 
energy conservation standards. In light of the results of these 
analyses, DOE agrees with AHRI that the positive, indirect employment 
impacts due to the traditional DHE energy conservation standards could 
be offset by possible direct industry employment

[[Page 20174]]

losses. Specifically, DOE calculated that the indirect net employment 
benefits would be fewer than 250 jobs gained in any year, whereas DOE 
calculated that there are approximately 300 production workers 
currently in the traditional DHE market. See chapter 14 of the TSD for 
a more complete discussion of the indirect employment impacts related 
to the traditional DHE industry.
    BWC stated that while it does not meet the SBA definition of a 
small business, BWC is a small company, especially compared to its 
closest competitors. BWC stated that the December 2009 NOPR TSL 4, and 
the large cost increases and capital investments it would entail, could 
threaten the company's survival, because it would place a 
disproportionate burden on their small company. (BWC, No. 61 at p. 1)
    While BWC is not a small business, DOE recognizes that the impacts 
on all manufacturers are not uniform. However, DOE believes that as a 
full-line competitor in the residential water heater market, BWC's 
concerns about the capital investments are most appropriately captured 
in the industry-wide impacts which are considered when determining what 
TSL is economically justifiable. DOE also notes that DOJ was primarily 
concerned about the potential impacts on competition in the traditional 
DHE market which is discussed in section VI.C.5.
5. Access to Capital
    BWC stated that financing the costs associated with the December 
2009 NOPR TSL 4 for water heaters would be difficult, because banks are 
more hesitant to lend in the current economic environment. (BWC, No. 61 
at p. 2)
    In response, DOE acknowledges that it may be difficult for a given 
manufacturer to access the capital necessary to finance the investments 
required by this final rule, particularly given the recent state of 
capital markets. In response to a similar comment in the December 2009 
NOPR, DOE noted that the compliance date for the residential water 
heater standard is 2015. In the GRIM, DOE assumes the product 
conversion and capital conversion costs are allocated in between the 
announcement of the final rule adopting amended energy conservation 
standards (estimated to be March 2010) and the compliance date of the 
standard, with more of conversion costs occurring 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, the economic conditions at that time will likely be 
different than they are currently. 74 FR 65852, 65919 (Dec. 11, 2009). 
With that said, DOE's current analytical tools do not have the 
capability to model the state of financial markets in future years, nor 
how those changes will impact the industry's financing capabilities. 
DOE acknowledges that the impacts on individual manufacturers are not 
uniform, particularly in terms of access to capital. However, during 
the course of manufacturer interviews, DOE received feedback from 
manufacturers on their capital structure, and DOE adjusted the discount 
rate for each of the water heater product types to be reflective of the 
manufacturers in the industry. While it could be difficult to obtain 
the necessary funding for TSL 4 and higher TSLs, DOE believes it has 
accurately captured the requisite level of expenditures to meet the 
amended energy conservation standards.
    LTS stated it does not have the required capital estimated by DOE 
to make the necessary conversions at TSL 3 and, with the current credit 
markets, LTS does not think it can borrow it. (LTS, No. 56.7 at pp. 2-
3; Public Meeting Transcript, No. 57.4 at p. 23)
    Again, DOE acknowledges that it may be difficult for a given 
manufacturer to access the capital necessary to finance the investments 
required by this final rule, particularly given the recent state of 
capital markets. This is particularly true for small business 
manufacturers who cannot rely on a parent company's other operations to 
help finance the necessary investments. At the same time, DOE believes 
it would be inappropriate to extrapolate the health of the financial 
markets at any one particular time to future periods of time. As 
discussed above, there is a real possibility that small manufacturers 
may choose not to improve all product lines, whether due to limited 
access to capital or insufficient expected return on capital. To that 
point, DOE believes it has captured the level of expenditures necessary 
to meet the amended energy conservation standards and included the cost 
for manufacturers to convert all existing product lines to model the 
impacts these changes would have on the industry. These considerations 
are included in the assessment of the economic justification of the 
standard. Finally, DOE notes that the impact of amended energy 
conservation standards specifically considered the potential impacts on 
small business manufacturers.

J. Employment Impact Analysis

    DOE considers employment impacts in the domestic economy as one 
factor in selecting an energy conservation standard. Employment impacts 
include direct and indirect impacts. Direct employment impacts are 
changes in the number of employees for manufacturers of equipment 
subject to standards, their suppliers, and related service firms. The 
MIA addresses these impacts.
    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 the purchase price of new 
equipment; 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 employment 
statistics in different economic sectors, which are compiled and 
published by the Bureau of Labor Statistics (BLS). 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.\21\ 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). Thus, based on the BLS data alone, DOE believes 
net national employment will increase due

[[Page 20175]]

to shifts in economic activity resulting from standards.
---------------------------------------------------------------------------

    \21\ See U.S. Department of Commerce, Bureau of Economic 
Analysis, ``Regional Multipliers: A User Handbook for the Regional 
Input-Output Modeling System (RIMS II)'' (1992).
---------------------------------------------------------------------------

    In developing the December 2009 NOPR, DOE estimated indirect 
national employment impacts using an input/output model of the U.S. 
economy called Impact of Sector Energy Technologies (ImSET).\22\ 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 188 sectors most relevant to 
industrial, commercial, and residential building energy use.
---------------------------------------------------------------------------

    \22\ More information regarding ImSET is available online at: 
http://www.pnl.gov/main/publications/external/technical_reports/PNNL-15273.pdf.
---------------------------------------------------------------------------

    DOE did not receive any comments on its employment impacts 
analysis, and DOE has made no change to its method for estimating 
employment impacts for today's final rule. For further details, see 
chapter 14 of the final rule TSD.

K. Utility Impact Analysis

    The utility impact analysis estimates the change in the forecasted 
power generation capacity for the Nation that would be expected to 
result from adoption of new energy conservation standards. For the 
December 2009 NOPR and today's final rule, DOE calculated this change 
using the NEMS-BT computer model. NEMS-BT models certain policy 
scenarios such as the effect of reduced energy consumption by fuel 
type. The output of the analysis provides a forecast for the needed 
generation capacities at each TSL. While DOE was able to use the 
forecasts from the AEO 2010 Early Release for the national impacts 
analysis, the NEMS-BT model corresponding to this case was not yet 
available. Thus, for the utility impact analysis, the estimated net 
benefit of the standards in today's final rule is the difference 
between the forecasted generation capacities by NEMS-BT and the AEO 
2009 April Release Reference Case. DOE expects that the results would 
be only minimally different if it had been able to use the NEMS-BT 
model corresponding to the AEO 2010 Early Release. DOE obtained the 
energy savings inputs associated with efficiency improvements to 
considered products from the NIA. These inputs reflect the effects of 
both fuel (natural gas) and electricity consumption savings. Chapter 13 
of the final rule TSD presents more information on the utility impact 
analysis.
1. Effects of Standards on Energy Prices and Associated Benefits
    To evaluate potentially important indirect effects of energy 
conservation standards on energy users in general, in its December 2009 
NOPR 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 users in all sectors of the economy. 74 FR 
65852, 65914-15 (Dec. 11, 2009). (DOE did not include natural gas 
savings from amended standards on DHE and pool heaters in its analysis 
because they are not large enough to have a noticeable impact.) DOE 
used NEMS-BT to model the impact of the natural gas savings associated 
with possible standards on natural gas prices. 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 observed in the NEMS output 
changes over the forecast period based on the model's dynamics of 
natural gas supply and demand. For each year, DOE calculated the 
nominal savings in total natural gas expenditures by multiplying the 
estimated annual change in the average end-user natural gas price by 
the annual total U.S. natural gas consumption, adjusted for the 
estimated natural gas savings associated with each TSL. 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. 
However, 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.
    NRDC stated that DOE should give full weight to the aggregate 
benefit of reduced natural gas prices that result from the standards. 
NRDC stated that this consumer benefit needs to be quantified and 
included in the national impact analysis. NRDC disagreed with DOE that 
this factor not be given heavy weight because lower natural gas prices 
may be a benefits transfer from producers to consumers, and stated that 
there is no logical or statutory basis for failing to give the 
reduction in natural gas prices from efficiency standards their full 
weight (NRDC, No. 85 at p. 4) In response, DOE notes that the benefits 
to all consumers associated with reductions in energy prices resulting 
from standards is not listed among the seven factors that EPCA directs 
DOE to evaluate in determining whether an energy conservation standard 
for covered products is economically justified. (42 U.S.C. 
6295(o)(2)(B)(i)(I)-(VII)) Indeed, EPCA specifically directs DOE to 
consider the economic impact of the standard on manufacturers and 
consumers of the products subject to the standard. While it is true 
that EPCA directs DOE to consider other factors the Secretary of Energy 
considers relevant, in so doing, DOE takes under advisement the 
guidance provided by OMB on the development of regulatory analysis. 
Specifically, at page 38, Circular A-4 states, ``You should not include 
transfers in the estimates of the benefits and costs of a regulation.''
    As discussed in the December 2009 NOPR, when gas prices drop in 
response to lower demand and 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. DOE is continuing to investigate the extent to 
which a change in natural gas prices projected to result from standards 
represents a net gain to society. At this time, however, DOE retains 
the position that it should not give a heavy weight to this factor in 
its consideration of the economic justification of standards on heating 
products.
    In its December 2009 NOPR analysis, DOE also considered the 
possibility of estimating the impact of specific standard levels on 
electricity prices. Investigation conducted for the rulemaking for 
general service fluorescent lamps and incandescent reflector lamps \23\ 
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 actors are

[[Page 20176]]

more diverse. For these and other reasons, DOE decided not to estimate 
the value of potentially reduced electricity costs for all consumers 
associated with amended standards for heating products.
---------------------------------------------------------------------------

    \23\ 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, 16978-79 (April 13, 2009).
---------------------------------------------------------------------------

    NPCC stated that DOE should estimate the economic benefits of the 
reduced need for new electric power plants and infrastructure and 
include such estimation in the utility impacts analysis. It stated that 
since a primary goal of the Federal appliance standards program is to 
avoid construction and operation of unnecessary generating facilities 
and their associated environmental impacts, failure to quantify the 
economic value of doing so appears to be a fundamental oversight. 
(NPPC, No. 87 at p. 6) In a similar vein, NRDC criticized DOE for not 
analyzing the benefits associated with reduced electricity prices 
resulting from standards. NDRC stated that the use of NEMS-BT should be 
explored as a way to quantify the benefit of avoided generation and the 
corresponding rate impact, and that DOE should give full weight to the 
aggregate benefit of reduced electricity prices that result from the 
standards. (NRDC, No. 85 at p. 4-5)
    In response to the above comments, DOE used NEMS-BT to assess the 
impacts of the reduced need for new electric power plants and 
infrastructure projected to result from standards. In NEMS-BT, changes 
in power generation infrastructure affect utility revenue requirements, 
which in turn affect electricity prices. As described in chapter 13 of 
the TSD, DOE found that the impact on electricity prices from a change 
in electricity demand is smaller than the impact seen for natural gas 
prices. Although the aggregate benefits for all electricity users are 
potentially large, DOE believes that there is uncertainty about the 
extent to which the calculated impacts from reduced electricity prices 
are a benefits transfer from the actors involved in electricity supply. 
Because of the aforementioned complexity and diversity of the electric 
power sector in the U.S., DOE has concluded that, at present, it should 
not give a heavy weight to this factor in its consideration of the 
economic justification of standards on heating products. DOE is 
continuing to investigate the extent to which change in electricity 
prices projected to result from standards represents a net gain to 
society.

L. Environmental Assessment

    Pursuant to the National Environmental Policy Act of 1969 (NEPA) 
(42 U.S.C. 4321 et seq.) 42 U.S.C. 6295(o)(2)(B)(i)(VI), DOE prepared a 
draft environmental assessment (EA) of the potential impacts of the 
standards for heating products in today's final rule, which it has 
included as chapter 16 of the TSD. DOE found that the environmental 
effects associated with the standards for heating products were not 
significant. Therefore, DOE is issuing a Finding of No Significant 
Impact (FONSI), pursuant to NEPA, the regulations of the Council on 
Environmental Quality (40 CFR parts 1500-1508), and DOE's regulations 
for compliance with NEPA (10 CFR part 1021). The FONSI is available in 
the docket for this rulemaking.
    In the EA, DOE estimated the reduction in power sector emissions of 
CO2, NOX, and Hg using the NEMS-BT computer 
model. In the EA, NEMS-BT is run similarly to the AEO NEMS, except that 
energy use of the heating products is reduced by the amount of energy 
saved (by fuel type) due to the TSLs. The inputs of national energy 
savings come from the NIA analysis; the output is the forecasted 
physical emissions. The estimated net benefit of the standards in 
today's final rule is the difference between the forecasted emissions 
by NEMS-BT at each TSL and the AEO 2009 April Early Release 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. 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.
    DOE has 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 
impact of energy conservation standards on SO2 emissions. 
Because of the cap, energy reductions due to energy conservation 
standards result in no reduction in SO2 emissions, although 
the costs of meeting such emission cap requirements are reflected in 
the electricity prices and forecasts used in DOE's analysis of the 
standards. 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. Under existing EPA 
regulations, any excess SO2 emission allowances resulting 
from the lower electricity demand caused by the imposition of an 
efficiency standard could be used to permit offsetting increases in 
SO2 emissions by any regulated EGU. However, if the standard 
resulted in a permanent increase in the quantity of unused emission 
allowances, there would be an overall reduction in SO2 
emissions from the standards. While there remains some uncertainty 
about the ultimate effects of efficiency standards on SO2 
emissions covered by the existing cap-and-trade system, the NEMS-BT 
modeling system that DOE uses to forecast emissions reductions 
currently indicates that no physical reductions in power sector 
emissions would occur for SO2.
    Much like SO2 emissions, NOX emissions from 
28 eastern States and D.C. are limited under the CAIR. Although CAIR 
has been remanded to EPA by the U.S. Court of Appeals for the District 
of Columbia Circuit (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). These court 
positions were taken into account in the analysis conducted for the 
December 2009 NOPR and in today's final rule. 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 D.C. where CAIR is in effect, DOE's 
forecasts indicate that no NOX emissions reductions will 
occur due to energy conservation standards because of the permanent 
cap. Energy conservation standards have the potential to produce an 
economic impact in the form of lower prices for NOX 
emissions allowances, if their impact on electricity demand is large 
enough. However, DOE has concluded that the standards in today's final 
rule will not have such an effect because the estimated reduction in 
electricity demand in States covered by the CAIR cap would be too small 
to affect allowance prices for NOX under the CAIR.
    New or amended energy conservation standards would reduce 
NOX emissions

[[Page 20177]]

in those 22 States that are not affected by the CAIR. DOE used the 
NEMS-BT to forecast emission reductions from the standards in today's 
final rule.
    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 from 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, which reflects CAMR being vacated and does not 
incorporate CAMR emission caps, to estimate the changes in Hg emissions 
resulting from today's final rule. However, DOE continues to review the 
impact of rules that reduce energy consumption on Hg emissions, and may 
revise its assessment of Hg emission reductions in future rulemakings.
    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 standards in today's final rule on the above site 
emissions based on emissions factors derived from the literature. See 
Chapter 16 of the final rule TSD for additional details.
    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-
based 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. 95 at p. 5)
    As noted in chapter 16 of the TSD, DOE developed only qualitative 
estimates of effects on upstream fuel-cycle emissions because NEMS-BT 
does a thorough accounting only of emissions at the power plant due to 
downstream energy consumption. In other words, NEMS-BT does not account 
for upstream emissions. Therefore, the environmental assessment for 
today's final rule reports only power plant emissions.
    EEI stated that DOE should consider the production process in the 
EA, especially if higher efficiency standards result in more water 
heaters being manufactured in other countries. (EEI, No. 95 at p. 5) In 
response, DOE believes that the standards in today's final rule are 
unlikely to result in significant change in the location of water 
heater manufacturing. The dimensions and weight of water heaters, and 
the resulting shipping expense, mitigate against overseas production of 
the entire unit.

M. Monetizing Carbon Dioxide and Other Emissions Impacts

    As part of the development of this final rule, DOE considered the 
estimated monetary benefits likely to result from the reduced emissions 
of CO2 and other pollutants that are expected to result from 
each of the TSLs considered. This section summarizes the basis for the 
estimated monetary values used for each of these emissions and presents 
the benefits estimates considered.
    For today's final rule, DOE is relying on a new set of values for 
the social cost of carbon (SCC) that were recently developed by an 
interagency process. A summary of the basis for these new values is 
provided below, and a more detailed description of the methodologies 
used is provided as an Annex to Chapter 16 of the TSD.
1. Social Cost of Carbon
    Under Executive Order 12866, agencies are required, to the extent 
permitted by law, ``to assess both the costs and the benefits of the 
intended regulation and, recognizing that some costs and benefits are 
difficult to quantify, propose or adopt a regulation only upon a 
reasoned determination that the benefits of the intended regulation 
justify its costs.'' The purpose of the SCC estimates presented here is 
to allow agencies to incorporate the social benefits of reducing 
CO2 emissions into cost-benefit analyses of regulatory 
actions that have small, or ``marginal,'' impacts on cumulative global 
emissions. The estimates are presented with an acknowledgement of the 
many uncertainties involved and with a clear understanding that they 
should be updated over time to reflect increasing knowledge of the 
science and economics of climate impacts.
    The SCC is an estimate of the monetized damages associated with an 
incremental increase in carbon emissions in a given year. It is 
intended to include (but is not limited to) changes in net agricultural 
productivity, human health, property damages from increased flood risk, 
and the value of ecosystem services due to climate change.
    As part of the interagency process that developed these SCC 
estimates, technical experts from numerous agencies met on a regular 
basis to consider public comments, explore the technical literature in 
relevant fields, and discuss key model inputs and assumptions. The main 
objective of this process was to develop a range of SCC values using a 
defensible set of input assumptions grounded in the existing scientific 
and economic literatures. In this way, key uncertainties and model 
differences transparently and consistently inform the range of SCC 
estimates used in the rulemaking process.
    The interagency group selected four SCC values for use in 
regulatory analyses. Three values are based on the average SCC from 
three integrated assessment models, at discount rates of 2.5, 3, and 5 
percent. The fourth value, which represents the 95th percentile SCC 
estimate across all three models at a 3-percent discount rate, is 
included to represent higher-than-expected impacts from temperature 
change further out in the tails of the SCC distribution.

                          Table IV.28--Social Cost of CO2, 2010-2050 (in 2007 dollars)
----------------------------------------------------------------------------------------------------------------
            Discount year                   5% Avg             3% Avg            2.5% Avg           3% 95th
----------------------------------------------------------------------------------------------------------------
2010................................                4.7               21.4               35.1               64.9
2015................................                5.7               23.8               38.4               72.8
2020................................                6.8               26.3               41.7               80.7
2025................................                8.2               29.6               45.9               90.4
2030................................                9.7               32.8               50.0              100.0
2035................................               11.2               36.0               54.2              109.7
2040................................               12.7               39.2               58.4              119.3
2045................................               14.2               42.1               61.7              127.8
2050................................               15.7               44.9               65.0              136.2
----------------------------------------------------------------------------------------------------------------


[[Page 20178]]

a. Monetizing Carbon Dioxide Emissions
    The ``social cost of carbon'' (SCC) is an estimate of the monetized 
damages associated with an incremental increase in carbon emissions in 
a given year. It is intended to include (but is not limited to) changes 
in net agricultural productivity, human health, property damages from 
increased flood risk, and the value of ecosystem services. Estimates of 
the social cost of carbon are provided in dollars per metric ton of 
carbon dioxide. \24\
---------------------------------------------------------------------------

    \24\ In this document, DOE presents all values of the SCC as the 
cost per metric ton of CO2 emissions. Alternatively, one 
could report the SCC as the cost per metric ton of carbon emissions. 
The multiplier for translating between mass of CO2 and 
the mass of carbon is 3.67 (the molecular weight of CO2 
divided by the molecular weight of carbon = 44/12 = 3.67).
---------------------------------------------------------------------------

    When attempting to assess the incremental economic impacts of 
carbon dioxide emissions, the analyst faces a number of serious 
challenges. A recent report from the National Academies of Science 
(Hidden Costs of Energy: Unpriced Consequences of Energy Production and 
Use. National Academies Press. 2009) points out that any assessment 
will suffer from uncertainty, speculation, and lack of information 
about: (1) Future emissions of greenhouse gases, (2) the effects of 
past and future emissions on the climate system, (3) the impact of 
changes in climate on the physical and biological environment, and (4) 
the translation of these environmental impacts into economic damages. 
As a result, any effort to quantify and monetize the harms associated 
with climate change will raise serious questions of science, economics, 
and ethics and should be viewed as provisional.
    Despite the serious limits of both quantification and monetization, 
SCC estimates can be useful in estimating the social benefits of 
reducing carbon dioxide emissions. Under Executive Order 12866, 
agencies are required, to the extent permitted by law, ``to assess both 
the costs and the benefits of the intended regulation and, recognizing 
that some costs and benefits are difficult to quantify, propose or 
adopt a regulation only upon a reasoned determination that the benefits 
of the intended regulation justify its costs.'' The purpose of the SCC 
estimates presented here is to make it possible for agencies to 
incorporate the social benefits from reducing carbon dioxide emissions 
into cost-benefit analyses of regulatory actions that have small, or 
``marginal,'' impacts on cumulative global emissions. Most Federal 
regulatory actions can be expected to have marginal impacts on global 
emissions.
    For such policies, the benefits from reduced (or costs from 
increased) emissions in any future year can be estimated by multiplying 
the change in emissions in that year by the SCC value appropriate for 
that year. The net present value of the benefits can then be calculated 
by multiplying each of these future benefits by an appropriate discount 
factor and summing across all affected years. This approach assumes 
that the marginal damages from increased emissions are constant for 
small departures from the baseline emissions path, an approximation 
that is reasonable for policies that have effects on emissions that are 
small relative to cumulative global carbon dioxide emissions. For 
policies that have a large (non-marginal) impact on global cumulative 
emissions, there is a separate question of whether the SCC is an 
appropriate tool for calculating the benefits of reduced emissions; we 
do not attempt to answer that question here.
    An interagency group convened on a regular basis to consider public 
comments, explore the technical literature in relevant fields, and 
discuss key inputs and assumptions in order to generate SCC estimates. 
Agencies that actively participated in the interagency process include 
the Environmental Protection Agency, and the Departments of 
Agriculture, Commerce, Energy, Transportation, and Treasury. This 
process was convened by the Council of Economic Advisers and the Office 
of Management and Budget, with active participation and regular input 
from the Council on Environmental Quality, National Economic Council, 
Office of Energy and Climate Change, and Office of Science and 
Technology Policy. The main objective of this process was to develop a 
range of SCC values using a defensible set of input assumptions that 
are grounded in the existing literature. In this way, key uncertainties 
and model differences can more transparently and consistently inform 
the range of SCC estimates used in the rulemaking process.
    The interagency group selected four SCC estimates for use in 
regulatory analyses. For 2010, these estimates are $4.7, $21.4, $35.1, 
and $64.9 (in 2007 dollars). The first three estimates are based on the 
average SCC across models and socio-economic and emissions scenarios at 
the 5, 3, and 2.5-percent discount rates, respectively. The fourth 
value is included to represent the higher-than-expected impacts from 
temperature change further out in the tails of the SCC distribution. 
For this purpose, we use the SCC value for the 95th percentile at a 3-
percent discount rate. The central value is the average SCC across 
models at the 3-percent discount rate. For purposes of capturing the 
uncertainties involved in regulatory impact analysis, we emphasize the 
importance and value of considering the full range. These SCC estimates 
also grow over time. For instance, the central value increases to $24 
per ton of CO2 in 2015 and $26 per ton of CO2 in 
2020. See Appendix A of the Annex to Chapter 16 of the TSD for the full 
range of annual SCC estimates from 2010 to 2050.
    It is important to emphasize that the interagency process is 
committed to updating these estimates as the science and economic 
understanding of climate change and its impacts on society improves 
over time. Specifically, the interagency group set a preliminary goal 
of revisiting the SCC values within two years or at such time as 
substantially updated models become available, and to continue to 
support research in this area. In the meantime, we will continue to 
explore the issues raised by this analysis and consider public comments 
as part of the ongoing interagency process.
b. Social Cost of Carbon Values Used in Past Regulatory Analyses
    To date, economic analyses for Federal regulations have used a wide 
range of values to estimate the benefits associated with reducing 
carbon dioxide emissions. In the final model year 2011 CAFE rule, the 
Department of Transportation (DOT) used both a ``domestic'' SCC value 
of $2 per ton of CO2 and a ``global'' SCC value of $33 per 
ton of CO2 for 2007 emission reductions (in 2007 dollars), 
increasing both values at 2.4 percent per year. It also included a 
sensitivity analysis at $80 per ton of CO2. A domestic SCC 
value is meant to reflect the value of damages in the United States 
resulting from a unit change in carbon dioxide emissions, while a 
global SCC value is meant to reflect the value of damages worldwide.
    A 2008 regulation proposed by DOT assumed a domestic SCC value of 
$7 per ton CO2 (in 2006 dollars) for 2011 emission 
reductions (with a range of $0-$14 for sensitivity analysis), also 
increasing at 2.4 percent per year. A regulation finalized by DOE in 
October of 2008 used a domestic SCC range of $0 to $20 per ton 
CO2 for 2007 emission reductions (in 2007 dollars). In 
addition, EPA's 2008 Advance Notice of Proposed Rulemaking for 
Greenhouse Gases identified what it described as ``very preliminary'' 
SCC estimates subject to revision. EPA's global mean values were

[[Page 20179]]

$68 and $40 per ton CO2 for discount rates of approximately 
2 percent and 3 percent, respectively (in 2006 dollars for 2007 
emissions).
    In 2009, an interagency process was initiated to offer a 
preliminary assessment of how best to quantify the benefits from 
reducing carbon dioxide emissions. To ensure consistency in how 
benefits are evaluated across agencies, the Administration sought to 
develop a transparent and defensible method, specifically designed for 
the rulemaking process, to quantify avoided climate change damages from 
reduced CO2 emissions. The interagency group did not 
undertake any original analysis. Instead, it combined SCC estimates 
from the existing literature to use as interim values until a more 
comprehensive analysis could be conducted.
    The outcome of the preliminary assessment by the interagency group 
was a set of five interim values: Global SCC estimates for 2007 (in 
2006 dollars) of $55, $33, $19, $10, and $5 per ton of CO2. 
The $33 and $5 values represented model-weighted means of the published 
estimates produced from the most recently available versions of three 
integrated assessment models--DICE, PAGE, and FUND--at approximately 3 
and 5 percent discount rates. The $55 and $10 values were derived by 
adjusting the published estimates for uncertainty in the discount rate 
(using factors developed by Newell and Pizer (2003)) at 3 and 5 percent 
discount rates, respectively. The $19 value was chosen as a central 
value between the $5 and $33 per ton estimates. All of these values 
were assumed to increase at 3 percent annually to represent growth in 
incremental damages over time as the magnitude of climate change 
increases.
    These interim values represent the first sustained interagency 
effort within the U.S. Government to develop an SCC for use in 
regulatory analysis. The results of this preliminary effort were 
presented in several proposed and final rules and were offered for 
public comment in connection with proposed rules, including the joint 
EPA-DOT fuel economy and CO2 tailpipe emission proposed 
rules.
c. Approach and Key Assumptions
    Since the release of the interim values, interagency group 
reconvened on a regular basis to generate improved SCC estimates 
considered for this final rule. Specifically, the group considered 
public comments and further explored the technical literature in 
relevant fields.
    It is important to recognize that a number of key uncertainties 
remain, and that current SCC estimates should be treated as provisional 
and revisable since they will evolve with improved scientific and 
economic understanding. The interagency group also recognizes that the 
existing models are imperfect and incomplete. The National Academy of 
Science (2009) points out that there is tension between the goal of 
producing quantified estimates of the economic damages from an 
incremental ton of carbon and the limits of existing efforts to model 
these effects. There are a number of concerns and problems that should 
be addressed by the research community, including research programs 
housed in many of the agencies participating in the interagency process 
to estimate the SCC.
    The U.S. Government will periodically review and reconsider 
estimates of the SCC used for cost-benefit analyses to reflect 
increasing knowledge of the science and economics of climate impacts, 
as well as improvements in modeling. In this context, statements 
recognizing the limitations of the analysis and calling for further 
research take on exceptional significance. The interagency group offers 
the new SCC values with all due humility about the uncertainties 
embedded in them and with a sincere promise to continue work to improve 
them.
    In summary, in considering the potential global benefits resulting 
from reduced CO2 emissions, DOE used the most recent values 
identified by the interagency process, adjusted to 2009$ using the 
standard GDP deflator values for 2008 and 2009. For each of the four 
cases specified, the values for emissions in 2010 used were 
approximately $5, $22, $36, and $67 per metric ton avoided (values 
expressed in 2009$). To monetize the CO2 emissions 
reductions expected to result from amended standards for residential 
water heaters in 2015-2045 and for direct heating equipment and pool 
heaters in 2013-2043, DOE used the values identified in Table A1 of the 
``Social Cost of Carbon for Regulatory Impact Analysis Under Executive 
Order 12866,'' which is reprinted as an Annex to Chapter 16 of the TSD, 
appropriately escalated to 2009$. To calculate a present value of the 
stream of monetary values, DOE discounted the values in each of the 
four cases using the discount rates that had been used to obtain the 
SCC values in each case.
    NRDC stated that the economic impacts of avoided CO2 
emissions should be aggregated into the NIA. (NRDC, No. 85 at p. 3) As 
discussed in section IV.G.1, the NIA assesses the national energy 
savings and the national net present value of total consumer costs and 
savings expected to result from standards at specific efficiency 
levels. The NPV is not intended as a measure of all national economic 
benefits associated with standards. Although DOE does not aggregate the 
estimated economic benefits of avoided CO2 emissions (and 
other emissions) into the NIA, it does believe that 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. Therefore, in section VI of this 
final rule, DOE presents the NPV values that would result if DOE were 
to add the estimates of the potential economic benefits resulting from 
reduced CO2 and NOX emissions in each of four 
valuation scenarios to the NPV of consumer savings calculated for each 
TSL considered in this rulemaking.
2. Monetary Values of Non-Carbon Emissions
    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 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 (although there remains uncertainty about whether 
physical reduction of SO2 will occur), 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 of factors such as credit banking that can change the 
trajectory of prices. From its modeling to date, DOE is unable to 
estimate a benefit from energy conservation standards on the prices of 
emissions allowances at this time. See the environmental assessment in 
the final rule TSD for further details.
    DOE also investigated the potential monetary benefit of reduced 
NOX emissions from the TSLs it considered. As noted above, 
new or amended energy conservation standards would reduce 
NOX emissions in those 22 States that are not affected by 
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 final rule based on environmental damage estimates from the 
literature. Available estimates suggest a very wide range of monetary 
values for NOX emissions, ranging from $370 per ton to 
$3,800 per ton of NOX from stationary sources, measured in 
2001$ (equivalent to a

[[Page 20180]]

range of $447 to $4,591 per ton in 2009$).\25\
---------------------------------------------------------------------------

    \25\ 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.
---------------------------------------------------------------------------

    EEI stated that the costs of remediating emissions are included in 
the electricity rates that consumers pay, and care should be taken not 
to double count the benefits of reduced emissions. (EEI, No. 95 at p. 
5) 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 and NOX emissions by avoiding 
electricity generation. Because these emissions impose societal costs, 
their reduction has an economic value that can be estimated.
    DOE is not including monetization estimates of Hg in today's final 
rule. DOE is aware of multiple agency efforts to determine the 
appropriate range of values used in evaluating the potential economic 
benefits of reduced Hg emissions. DOE has decided to await further 
guidance regarding consistent valuation and reporting of Hg emissions 
before further monetizing Hg in its rulemakings. As explained earlier, 
DOE was able to use the NEMS-BT model to estimate the changes in Hg 
emissions resulting from today's final rule, and it has considered 
these physical emissions reductions as part of the standard-setting 
process. DOE notes that the amounts of Hg under consideration in 
today's final rule are not large, so the monetized results would be 
unlikely to be significant as compared to the total costs and benefits 
of the rule.

V. Discussion of Other Comments

A. Trial Standard Levels and Proposed Standards

    Since DOE opened the docket for this rulemaking, it has received 
more than one hundred unique written comments, with hundreds of 
signatories, from a diverse set of parties, including manufacturers and 
their representatives, State Attorneys General, members of Congress, 
energy conservation advocates, consumer advocacy groups, electric and 
gas utilities, and private citizens. DOE also received more than 17,000 
form letter submissions recommending that DOE strengthen the proposed 
energy conservation standards. All substantive comments on the 
analytical methodologies DOE used are discussed above. DOE also 
received many comments related to the relative merits of various TSLs. 
Generally, these comments either stated that a certain TSL was 
economically justified, technologically feasible, and maximized energy, 
or they argued how DOE should weigh the various factors that go into 
making that determination. See section VI.D for a discussion of DOE's 
analytical results and how it weighed those factors in establishing 
today's final rule.
    For today's final rule, DOE has revised the NOPR TSLs for water 
heaters and direct heating equipment and continued to analyze the same 
TSLs for pool heaters. A detailed description of these TSL revisions 
for water heaters and direct heating equipment is provided in section 
VI.A. A brief summary is provided in the sections that follow.
1. Water Heaters
    In the NOPR, DOE proposed TSL 4 for water heaters. 74 FR 65852, 
65854 (Dec. 11, 2009). As discussed in that document, DOE strongly 
considered NOPR TSL 5, which would provide additional energy and carbon 
savings, while mitigating some of the issues associated with a national 
heat pump water heater standard, but it identified a number of 
potential issues for which DOE did not have adequate information to 
address before the publication of the NOPR. (See 74 FR 65852, 65965-67 
(Dec. 11, 2009)). DOE is adding a new TSL 5 for the final rule, which 
is a slight modification of the NOPR TSL 5. The NOPR TSL 5 is now 
referred to as TSL 6 for the final rule. DOE tentatively concluded that 
at NOPR TSL 5 (now final rule TSL 6), the benefits would be outweighed 
by several burdens, but it stated that it will revisit this decision 
and strongly consider adoption of TSL 6 in the final rule in light of 
any comments and data submitted by interested parties. Many of those 
comments were discussed in section IV. Below DOE presents further 
comments on NOPR TSL 5 (now final rule TSL 6), as well as on the 
proposed NOPR TSL 4.
    Support for setting a standard at NOPR TSL 5 (TSL 6 for this final 
rule) was expressed by several interested parties. As noted above, DOE 
received over 17,000 form letters from private citizens advocating 
stronger standards for water heaters. (Private Citizens, No. 63 and 74) 
The Joint Advocacy comment (submitted by ASAP) stated that its 
signatories are very pleased with the DOE's proposed new efficiency 
standards for most storage-type residential water heaters but urged DOE 
to adopt stronger efficiency levels (NOPR TSL 5) for the largest units, 
which would help assure a market for these new emerging products where 
they are most cost-effective. It stated that NOPR TSL 5 offers a middle 
ground that increases savings relative to NOPR TSL 4 while also 
fostering the development of precisely the knowledge base and market 
infrastructure needed for a longer term, market-wide transition to 
high-efficiency technologies. It strongly urged DOE to choose NOPR TSL 
5 (now TSL 6), for the final rule. (ASAP, No. 102 at p. 2) NRDC stated 
that NOPR TSL 5 should be adopted for water heaters as it is 
technically feasible, economically justified, and provides significant 
additional energy, economic, and environmental savings. (NRDC, No. 85 
at p. 2) A comment provided by eight utilities stated support for NOPR 
TSL 5 because stronger standards for the biggest units would boost 
total energy and economic savings by more than 40 percent compared to 
the proposed rule, and DOE would be helping advanced technologies 
become mainstream products, thereby speeding transition to next-
generation water heaters. (Eight utilities, No. 72 at p. 1) ASE stated 
that at NOPR TSL 5 the advanced technology requirements are limited to 
a modest share of total water heater shipments, which is a sensible 
means of addressing the issue of manufacturers being able to scale up 
the production of these products to meet the needs of the market. (ASE, 
No. 77 at p. 2) Other parties expressing support for choosing NOPR TSL 
5 included Alabama Consumer Advocate, Avista, Energy Consumers Alliance 
of New England, KCP&L, Energy Trust of Oregon, Alliance to Save Energy, 
and NEEA. (ACA, No. 60 at p. 1; Avista, No. 66 at pp.1-2; Energy 
Consumers Alliance of New England, No. 59 at p. 1; KCP&L, No. 97 at p. 
1; Energy Trust of Oregon, No. 69 at p. 1; Alliance to Save Energy, No. 
56.4 at p.1; NEEA, No. 88 at p. 1)
    Opposition to setting a standard at NOPR TSL 5 (now TSL 6 for the 
final rule) was also expressed by several interested parties. AHRI 
stated that NOPR TSL 5 would cause installation issues for large-
volume, advanced-technology models and that consumers may opt for less-
efficient alternative options. It stated that DOE's analysis has 
undervalued these factors, and as a result, AHRI expects that the 
actual energy savings will fall well short of the savings projected in 
the TSD. (AHRI, No. 91 at p. 6) A.O. Smith stated that it does not 
support NOPR TSL 5. It believes that the energy savings are overstated 
because many consumers,

[[Page 20181]]

when faced with the increased cost of large-storage-capacity water 
heaters that are required to use either condensing gas or electric heat 
pump technology, would elect to install two smaller-storage-capacity 
water heaters instead of one larger capacity unit. (A.O. Smith, No. 76 
at p. 4) Rheem commented that the energy savings from TSL 6 are 
significantly overstated, and it pointed to several options for 
consumers to work around the standards on large-volume units. (Rheem, 
No. 89 at pp. 6-7) BWC stated that the efficiency levels under 
consideration for larger-capacity water heaters would be difficult and 
expensive to obtain. (BWC, No. 61 at p. 1) Referring to NOPR TSL 5 and 
NOPR TSL 6, APPA stated that they do not support a standard that 
eliminates high efficiency electric resistance water heaters as a 
consumer option. It believes that these TSLs would cause an adverse 
economic impact for consumers and lessen the utility of the product. 
(APPA, No. 92 at p. 2) Southern Company stated that it does not agree 
with NOPR TSL 6 because performance of heat pump water heaters depends 
on climate and installation location. (Southern, No. 90 at pp. 3-4)
    Support for NOPR TSL 4 (unchanged in the final rule), was expressed 
by APPA and A.O. Smith. (APPA, No. 92 at p. 2; A.O. Smith, No. 76 at p. 
1) AHRI recommended that DOE should adopt minimum efficiency 
requirements for gas-fired and electric storage water heaters that have 
their basis in TSL 4 but have been modified to address issues related 
to the needs of the replacement market and unique attributes of some 
models. For electric storage water heaters 65 gallons and larger, AHRI 
recommended that DOE select TSL 3 (also unchanged for the final rule), 
as TSL 4 for this size presents a disproportionately large increase in 
efficiency. For oil-fired storage water heaters it recommended that DOE 
adopt TSL 3. For gas-fired instantaneous water heaters, AHRI 
recommended that the standard be changed to a minimum EF of 0.80 for 
models using an external electric supply and a minimum EF of 0.78 for 
models that do not use an external electric supply. (AHRI, No. 91 at p. 
1) Rheem also supported a 0.80 EF level for gas-fired instantaneous 
water heaters and noted that the 0.82 EF level has a high payback 
period. (Rheem, No. 89 at p. 13) Bock supported TSL 3 because all 
storage water heater manufacturers are capable of meeting the standard, 
and it would allow consumers to have abundant hot water at a reasonable 
cost. (Bock, No. 101 at p. 3)
    DOE acknowledges the positions expressed regarding adoption of 
either the proposed standards (TSL 4) or NOPR TSL 5 for water heaters. 
It addresses the arguments raised by the commenters, as well as other 
factors, in its discussion of the merits of the various considered TSLs 
in section VI.D.
2. Direct Heating Equipment
    In the NOPR, DOE proposed TSL 3 for direct heating equipment. 74 FR 
65852, 65854 (Dec. 11, 2009). The only modifications made to the TSLs 
analyzed for the final rule compared to those analyzed for the NOPR 
were to the efficiency levels in TSLs 3, 4, 5, and 6 for gas wall 
gravity DHE. DOE revised the efficiency levels analyzed for gas wall 
gravity DHE in the final rule to more accurately reflect the current 
market for products within the representative rated capacity. A 
detailed description of these changes is provided in section IV.C.2.b.
    AHRI stated that no amended energy conservation standards should be 
set for traditional DHE because of the significant impact on 
manufacturers and the small energy savings. (AHRI, No. 91 at p. 10) AGA 
stated that standards should not be set for DHE because the low and 
declining shipments represent a minimal opportunity for energy savings, 
and the increased installed cost of DHE may lead to greater use of 
central heating, thereby increasing overall energy consumption (AGA, 
No. 78 at p. 11) Williams recommended that DOE not adopt standards for 
DHE because of the significant impact on manufacturers, the unique 
utility of DHE to heat homes without ductwork, design constraints, and 
safety concerns. Williams stated that manufacturers, as well as 
consumers, would be negatively impacted by the proposed rule. 
(Williams, No. 96 at pp. 1-2)
    AHRI stated its belief that the proposed standards for traditional 
DHE (NOPR TSL 3) are too high and that the impact on manufacturers 
needs to be reconsidered. According to the commenter, the proposed 
levels would have very significant and costly effects on manufacturers. 
The DHE results show negative impact on the profitability of the 
manufacturers, all of which are small manufacturers, and there is a 
real concern about whether they could stay in business and make a 
profit at these levels. (AHRI, Public Meeting Transcript, No. 57.4 at 
pp. 28-29) AHRI reiterated DOE's estimates for the INPV decreasing 
between 6 and 33.5 percent at the proposed level, industry cash flow 
dropping from $1.4 million to -$0.9 million (a 162-percent decrease), 
and the conversion costs reaching $2.31 million per manufacturer (about 
350 percent of estimated earnings before interest and taxation). AHRI 
also stated that the number of product lines per manufacturer would 
drop from 5 to 3 and that all of AHRI's members indicated a loss of 
employment would result. Finally, AHRI stated all these negative 
impacts would be compounded by a decline in sales. Because of all these 
negative impacts and insignificant energy savings, AHRI stated that DOE 
should not consider TSL 3 for the final rule (AHRI, No. 91 at p. 13)
    LTS stated that DOE estimated that the conversion costs for a 
typical small DHE manufacturer at the proposed level would be $2.3 
million or 347 percent of each company's earnings before interest and 
taxes. LTS questioned having to spend three or four years' profit to 
meet a standard they are certain will make them less profitable 
overall. (LTS, No. 56.7 at pp. 2-3; Public Meeting Transcript, No. 57.4 
at p. 23) LTS reiterated the NOPR's estimate that industry cash flow 
could decrease up to 161.8 percent. Finally, LTS reiterated DOE's 
statement that the large estimated impact on INPV suggests that 
manufacturers would be substantially harmed if profitability were 
impacted. (LTS, No. 56.7 at p. 2)
    Congressman Costello and Congressman Shimkus urged DOE to consider 
Empire's testimony and related concerns. Congressman Costello and 
Congressman Shimkus stated that Empire strongly believes the technology 
necessary to meet these proposed efficiency standards is not in place 
and that the cost of retrofitting these product lines does not justify 
the small energy savings for the small traditional DHE market. 
(Costello, No. 62 at p. 1)
    DOE acknowledges the positions expressed regarding adoption of the 
proposed standards (TSL 3) for direct heating equipment. It addresses 
the arguments raised by the commenters, as well as other factors, in 
its discussion of the merits of the various considered TSLs in section 
VI.D.
3. Pool Heaters
    In the NOPR, DOE proposed NOPR TSL 3 for pool heaters. 74 FR 65852, 
65854 (Dec. 11, 2009). The TSLs analyzed in the final rule are 
identical to those analyzed in the NOPR. AHRI stated that the proposed 
standard for pool heaters is not economically justified because its 
payback period well exceeds product lifetime. It recommended the 
proposed standard for pool heaters be lowered to 81 percent. (AHRI, No. 
91 at p. 9) Raypak stated that the proposed standard for pool heaters

[[Page 20182]]

has a very high payback period which is outside the lifetime of the 
appliance, so the commenter argued that such level should not be 
considered economically justified. Raypak supported adoption of amended 
energy conservation standards at TSL 1 for pool heaters because it 
would raise the efficiency level by 3 percentage points, while 
preventing the elimination of the millivolt design option. (Raypak, No. 
67 at pp. 3-4) APSP stated that the proposed level could result in a 
significantly negative impact on the pool heater industry in these 
already turbulent economic times. (APSP, No. 64 at p. 1)
    DOE acknowledges the positions expressed regarding adoption of the 
proposed standards (TSL 3) for pool heaters. It addresses the arguments 
raised by the commenters, as well as other factors, in its discussion 
of the merits of the various considered TSLs in section VI.D.

B. Compliance Date of Amended Standards

    As discussed in section IV.F.9, compliance with amended energy 
conservation standards for direct heating equipment and pool heaters is 
required three years after the final rule is published in the Federal 
Register (i.e., in 2013); compliance with amended energy conservation 
standards for water heaters is required five years after the final rule 
is published (i.e., in 2015).
    Raypak stated that the date of when the standard goes into effect 
should be changed to five years for pool heaters. (Raypak, No. 67 at p. 
3) In response, DOE notes that the language in 42 U.S.C. 6295(e)(4) 
specifies compliance dates for amended standards (if any) for the 
heating products that are the subject of this rulemaking. These 
statutory dates were set such that they were to apply to products 
manufactured on or after the 36-month period beginning on the date such 
final rule was to be published for the first iteration of rulemaking 
and on or after the 60-month period beginning on the date such final 
rule was to be 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 pool heaters 
that are manufactured precisely three years after publication of the 
final rule and prospectively thereafter. Although DOE did not meet the 
rulemaking dates set by the statute, DOE continues to believe 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. Consequently, for the final 
rule, DOE has maintained a compliance date corresponding to three years 
after final rule publication in the Federal Register for direct heating 
equipment and pool heaters, and five years after the date of 
publication in the Federal Register for water heaters.

VI. Analytical Results and Conclusions

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 December 2009 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. 
For the December 2009 NOPR, DOE analyzed seven TSLs for water heaters, 
six TSLs for direct heating equipment, and six TSLs for pool heaters. 
74 FR 65852, 65929-32 (Dec. 11, 2009).
    For today's final rule, DOE has revised the TSLs for water heaters 
and direct heating equipment and continued to analyze the same TSLs for 
pool heaters. 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 used in TSL 
combinations in today's final rule, DOE presents the results for all 
efficiency levels analyzed in the final rule TSD.
1. Water Heaters
    Table VI.1 shows the eight TSLs DOE analyzed for water heaters for 
the final rule. 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 further discussed in the December 2009 NOPR (74 FR 65852, 65929 
(Dec. 11, 2009)), 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 TSLs 1, 2, 3, and 4, DOE is using the rated storage volume 
divisions developed in the engineering analysis and the energy 
efficiency equations as shown in section IV.C.6, which specify a two-
slope approach. TSLs 1, 2, 3, and 4 are identical to those presented in 
the December 2009 NOPR. 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.
    DOE is adding a new TSL 5 for the final rule, which is a slight 
modification of the December 2009 NOPR TSL 5 (currently referred to as 
TSL 6 for the final rule). For both TSL 5 and TSL 6, DOE considered 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 category. 
Consequently, DOE pairs an efficiency level effectively 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 effectively 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. The only 
difference between TSL 5 and TSL 6 for the final rule is the 
requirements for gas-fired storage water heaters. DOE reanalyzed these 
levels due to potential safety concerns, which were discussed above and 
are further discussed below. For gas-fired water heaters at TSL 5, DOE 
analyzed energy efficiency level 1 for small volumes paired with 
efficiency level 6 for large volumes. For gas-fired water heaters at 
TSL 6, DOE analyzed energy efficiency level 2 for small volumes paired 
with efficiency level 6 for large volumes.
    Although it paired different technologies for small-volume and 
large-volume products for TSL 5 and TSL 6, DOE maintained the same

[[Page 20183]]

division point between small-volume and large-volume gas-fired and 
electric storage water heaters just as was done in the December 2009 
NOPR. As further explained in the December 2009 NOPR, DOE is concerned 
that increased standards for large-volume water heaters may drive 
production and sales of water heaters at volumes just below the 
division points. 74 FR 65852, 65929 (Dec. 11, 2009). As a result, in 
analyzing TSL 5 and 6 for the final rule, DOE is using the same 
division points as it used for the December 2009 NOPR TSL 5, which is 
55 gallons for gas-fired and electric storage water heaters, to attempt 
to mitigate the potential migration to small-volume units described 
above. TSL 5 and 6 include 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 and TSL 6 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 and TSL 6 division.
    TSL 7 uses the same divisions as TSLs 1, 2, 3, and 4 for gas-fired 
water heaters (i.e., does not include the distinction at TSL 5 and TSL 
6 for units above and below a 55-gallon storage capacity). TSL 7 is 
identical to TSL 4 except DOE is considering what is effectively a heat 
pump water heater level for electric storage water heaters across the 
entire range of storage volumes that is compatible with ENERGY STAR 
criteria for electric storage water heaters at the representative rated 
storage volume.
    TSL 8 consists of the max-tech efficiency levels for each of the 
water heater product classes at the time the analysis was developed. 
The max-tech efficiency levels were revised for the final rule as 
described in the engineering analysis. TSL 7 and 8 both set efficiency 
levels that effectively require use of heat pump technology for 
electric storage water heaters. TSL 8, however, requires a higher 
efficiency level than TSL 7, which corresponds to the max-tech 
efficiency level for the representative rated storage capacity (i.e., 
2.35 EF at 50 gallons). TSL 8 also sets efficiency levels that 
effectively require use of condensing technology for gas-fired storage 
and instantaneous water heaters.
    Table VI.1 presents the energy efficiency equations and associated 
two-slope divisions for TSL 1 through TSL 8.

 Table VI.1--Trial Standard Levels for Residential Water Heaters (Energy
                                 Factor)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
    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):

[[Page 20184]]

 
                              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 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 80
                               80 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).
                             -------------------------------------------
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-(0.0015 x  EF = 0.8012-(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 55
                               55 gallons:           gallons:
                              EF = 0.675-(0.0012 x  EF = 0.8012-(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 7.......................  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 8.......................  For GSWHs (over the Entire Rated Storage
                               Volume range):
                              EF = 0.8012-(0.00078 x Rated Storage
                               Volume in gallons).
                             -------------------------------------------
                              For ESWHs (over the Entire Rated Storage
                               Volume range):
                              EF = 2.406-(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).
                             -------------------------------------------

[[Page 20185]]

 
                              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 VI.2 presents the six TSLs DOE analyzed for DHE in the final 
rule. The only modifications made to the TSLs analyzed for the final 
rule compared to those analyzed for the December 2009 NOPR were to the 
efficiency levels in TSLs 3, 4, 5, and 6 for gas wall gravity DHE. 
These changes were made due to a review of the gas wall gravity units 
currently offered for sale and the adjustment of the max-tech 
efficiency level in response to commenters.
    In general, 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 for all of the DHE product 
classes.

                      Table VI.2--Trial Standard Levels for Direct Heating Equipment (AFUE)
----------------------------------------------------------------------------------------------------------------
           Product class               TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan (over 42,000 Btu/h)..          75%          76%          77%          80%          75%          80%
Gas Wall Gravity (over 27,000 and           66%          66%          69%          69%          70%          70%
 up to 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             66%          67%          68%          68%          83%          83%
 46,000 Btu/h)....................
Gas Hearth (over 27,000 and up to           67%          67%          67%          72%          72%          93%
 46,000 Btu/h)....................
----------------------------------------------------------------------------------------------------------------

3. Gas-Fired Pool Heaters
    Table VI.3 shows the six TSLs DOE analyzed for pool heaters, which 
are identical to the TSLs analyzed in the December 2009 NOPR. TSL 1 
consists of the efficiency level that is close to the current shipment-
weighted average efficiency. TSL 2 and TSL 3 consist of 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.

                     Table VI.3--Trial Standard Levels for Pool Heaters (Thermal Efficiency)
----------------------------------------------------------------------------------------------------------------
        Product class             TSL 1         TSL 2         TSL 3         TSL 4         TSL 5         TSL 6
----------------------------------------------------------------------------------------------------------------
Gas-fired...................          81%           82%           83%           84%           86%           95%
----------------------------------------------------------------------------------------------------------------

B. Significance of Energy Savings

    To estimate the energy savings due to potential standards, from 
2013 to 2043 for DHE and pool heaters and from 2015 to 2045 for water 
heaters, DOE compared the energy consumption attributable to the three 
types of heating products under the base case (no standards) to energy 
consumption attributable to these products under each standards case 
(each TSL that DOE has considered). Table VI.4, Table VI.5, and Table 
VI.6 present DOE's national energy savings (NES) estimates 
(undiscounted) for each of the three types of heating products, by 
product class at each TSL. Chapter 10 of the TSD describes these 
estimates in more detail.

                                         Table VI.4--Water Heaters: Cumulative National Energy Savings in Quads
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Product class                          TSL 1       TSL 2       TSL 3       TSL 4       TSL 5       TSL 6       TSL 7       TSL 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired Storage.......................................        0.69        1.17        1.17        1.17        0.81        1.29        1.17        4.91
Electric Storage........................................        0.29        0.41        0.79        1.09        1.67        1.67        8.90       11.22
Oil-Fired Storage.......................................        0.00        0.01        0.01        0.01        0.01        0.01        0.01        0.02
Gas-Fired Instantaneous.................................        0.08        0.08        0.08        0.08        0.08        0.08        0.08        0.58
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................        1.07        1.66        2.05        2.35        2.58        3.06       10.16       16.73
--------------------------------------------------------------------------------------------------------------------------------------------------------


                Table VI.5--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......................       0.01         0.01         0.01         0.03         0.01         0.03
Gas Wall Gravity..................       0.01         0.01         0.03         0.03         0.06         0.06
Gas Floor.........................       0.0001       0.0001       0.0001       0.0001       0.0001       0.0001
Gas Room..........................       0.001        0.002        0.004        0.004        0.04         0.04
Gas Hearth........................       0.19         0.19         0.19         0.37         0.37         1.13
                                   -----------------------------------------------------------------------------
    Total.........................       0.20         0.21         0.23         0.43         0.48         1.26
----------------------------------------------------------------------------------------------------------------


[[Page 20186]]


                      Table VI.6--Pool Heaters: Cumulative National Energy Savings in Quads
----------------------------------------------------------------------------------------------------------------
                                       TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6
----------------------------------------------------------------------------------------------------------------
Gas-Fired.........................        0.01         0.02         0.04         0.06         0.09         0.22
----------------------------------------------------------------------------------------------------------------

C. Economic Justification

1. Economic Impact on Consumers
a. Life-Cycle Costs and Payback Period
    Consumers affected by amended standards usually experience higher 
product purchase prices and lower operating costs. Generally, these 
impacts are captured by changes in life-cycle costs and by the payback 
period. Therefore, DOE calculated the LCC and PBP for the standard 
levels considered in this rulemaking.
    DOE's LCC and PBP analyses provide seven key outputs for each TSL, 
which are reported in Table VI.7 through Table VI.16 below. The first 
two of these outputs is the average LCC and average LCC savings. (A 
negative ``LCC savings'' for a standard level indicates that the life-
cycle cost of a standards-compliant product would be higher than the 
life-cycle cost of a baseline product.) The next three outputs are the 
proportion of purchases of the product that already comply with the TSL 
and that would create a net life-cycle cost, no impact, or a net life-
cycle savings for the purchaser.
    The sixth and seventh outputs are the median and average PBPs, 
respectively, for the consumer purchasing a design that complies with 
the TSL compared with purchasing a baseline product. The PBP is the 
number of years it would take for the purchaser to recover, as a result 
of energy savings, the increased cost of a higher-efficiency product 
based on operating cost savings from the first year of ownership. The 
PBP is an economic benefit-cost measure that uses benefits and costs 
without discounting. DOE's analysis includes both the analysis 
contemplated under the rebuttable presumption test, which is based on 
energy use as determined under conditions prescribed by the DOE test 
procedure, and analysis of the payback period based on conditions of 
actual use of the product by purchasers. DOE derived the median and 
average PBPs in Table VI.7 through Table VI.16 by using the latter 
method. While DOE examined the rebuttable presumption criterion (see 
chapter 8 of the TSD), it also evaluated the standard levels adopted in 
today's rule through a more detailed analysis of the economic impacts 
of these levels pursuant to section 325(o)(2)(B)(i) of EPCA. (42 U.S.C. 
6295(o)(2)(B)(i))
    TSD chapter 8 provides detailed information on the LCC and PBP 
analyses.

                                            Table VI.7--Gas-Fired Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62       $3,528          $16           25           36           39          2.0         17.0
2, 3, 4.........................................         0.63        3,537            7           32           22           45          4.5         18.6
5 *.............................................         0.62        3,528           18           27           33           40          2.3         16.9
6 *.............................................         0.63        3,537            9           34           21           46          4.7         18.3
7...............................................         0.67        3,793         -218           70            6           23         21.5         27.1
8...............................................         0.77        3,771         -195           70            1           28         15.6         16.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and 6, 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 (40 gal).


                                             Table VI.8--Electric Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92       $3,255           $5           11           44           45          4.0         10.2
2...............................................         0.93        3,245           11           12           39           48          4.0         10.0
3...............................................         0.94        3,236           18           21           17           62          5.0          9.3
4...............................................         0.95        3,236           18           32           10           59          6.7          9.9
5, 6............................................       * 1.04        3,188           64           33            9           58          6.8         10.2
7...............................................         2.00        3,136          112           50            5           45          9.4         26.2
8...............................................         2.35        3,076          171           50            1           49          9.0         20.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and 6, 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).


[[Page 20187]]


                                            Table VI.9--Oil-Fired Storage Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Average LCC 2009$                       Payback period
                                                                           -----------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor        LCC      Average LCC ---------------------------------------    Median      Average
                                                                              savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.58       $8,102         $101            0           76           24          0.9          0.9
2...............................................         0.60        7,885          203            0           54           46          0.3          0.2
3, 4, 5, 6, 7...................................         0.62        7,721          295            0           47           53          0.5          0.7
8...............................................         0.68        7,463          495            0           17           83          1.9          2.1
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                         Table VI.10--Gas-Fired Instantaneous Water Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 through 7.....................................         0.82       $5,505           $9            5           91            4         14.8         24.3
8...............................................         0.95        5,913         -259           77           12           11         38.7         55.0
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                   Table VI.11--Gas Wall Fan DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 5............................................           75       $7,170          $83            0           60           40          2.7          2.7
2...............................................           76        7,131          102            3           53           44          3.2          3.9
3...............................................           77        7,114          114           19           26           55          5.0          9.9
4, 6............................................           80        7,189           43           53            7           40         12.2         33.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                 Table VI.12--Gas Wall Gravity DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2............................................           66       $6,848          $21           10           75           15          7.5         13.8
3, 4............................................           69        6,760           64           33           37           30         11.0         22.5
5, 6............................................           70        6,880          -56           70            0           30         16.5         18.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                     Table VI.13--Gas Floor DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2, 3, 4, 5, 6................................           58       $7,755          $13           23           58           19         10.7         16.5
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 20188]]


                                                     Table VI.14--Gas Room DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           66       $7,349          $26            9           74           16          6.7         11.8
2...............................................           67        7,284           60           12           50           38          4.5          8.3
3, 4............................................           68        7,226          104           19           25           57          4.8          8.2
5, 6............................................           83        6,628          702           32            0           68          6.9          8.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Table VI.15--Gas Hearth DHE: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                                                                    Households with
                       TSL                           AFUE %    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1, 2, 3.........................................           67       $5,146         $112            3           61           37          0.0          3.1
4, 5............................................           72        5,324          -28           55           23           21         17.1           47
6...............................................           93        5,475         -179           77            1           22         26.8         60.2
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                Table VI.16--Gas-Fired Pool Heaters: LCC and PBP Results
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                    Thermal                                         Households with
                       TSL                         efficiency  Average LCC  Average LCC ---------------------------------------    Median      Average
                                                       %          2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           81       $8,212          $25            5           72           23          2.7          5.4
2...............................................           82        8,217           22           27           51           22          8.6         15.2
3...............................................           83        8,264           -6           60           23           17         18.2         32.3
4...............................................           84        8,322          -52           64           21           15         19.2         39.0
5...............................................           86        8,959         -632           88            9            3         38.1         85.8
6...............................................           95        9,698       -1,361           95            1            4         33.2         74.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    b. Consumer Subgroup Analysis
    For water heaters, DOE estimated consumer subgroup impacts for low-
income households and senior-only households by determining the LCC 
impacts of the TSLs considered for gas-fired and electric storage water 
heaters. In addition, DOE estimated consumer subgroup impacts on 
households in multi-family housing and households in manufactured homes 
for the TSLs considered for gas-fired and electric storage water 
heaters. DOE also estimated the consumer subgroup impacts for low-
income households and senior-only households for gas wall fan and gas 
wall gravity DHE.
    For gas-fired storage water heaters, the impacts of the standard in 
today's final rule are roughly the same for the senior-only subgroup 
and the low-income subgroup as they are for the full household sample 
for this product class (see Table VI.17 and Table VI.18). For the 
multi-family subgroup, the results report an average LCC increase 
(i.e., negative savings) of $13, and they also show a 36-percent share 
of households with a net LCC benefit, and a 31-percent share of 
households with a net LCC cost (see Table VI.19). For the manufactured 
home subgroup, the results report an average LCC increase (i.e., 
negative savings) of $17, and they also show a 35-percent share of 
households with a net LCC benefit, and a 36-percent share of households 
with a net LCC cost (see Table VI.20).

                              Table VI.17--Gas-Fired Storage Water Heaters: LCC and PBP Results for Senior-Only Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62       $3,072          $14           27           32           41          1.9         19.4
2, 3, 4.........................................         0.63        3,081            7           34           19           47          4.1         19.5
5 *.............................................         0.62        3,071           16           27           31           41          2.0         19.4
6 *.............................................         0.63        3,079            9           34           19           47          4.2         19.3
7...............................................         0.67        3,355         -235           71            6           22         22.5         27.8

[[Page 20189]]

 
8...............................................         0.77        3,377         -257           75            1           24         17.4         18.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 (40 gal).


                               Table VI.18--Gas-Fired Storage Water Heaters: LCC and PBP Results for Low-Income Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62       $3,591           $9           29           31           40          2.1         18.7
2, 3, 4.........................................         0.63        3,610           -8           36           19           45          6.1         21.2
5 *.............................................         0.62        3,586           15           29           31           41          2.1         18.7
6 *.............................................         0.63        3,605           -2           36           19           45          6.2         21.2
7...............................................         0.67        3,877         -243           71            6           23         22.9         28.5
8...............................................         0.77        3,847         -213           70            2           28         16.4         17.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 (40 gal).


                              Table VI.19--Gas-Fired Storage Water Heaters: LCC and PBP Results for Multi-Family Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62       $2,825         -$11           31           33           36          2.4         26.5
2, 3, 4.........................................         0.63        2,868          -45           41           21           38         11.0         27.2
5 *.............................................         0.62        2,827          -13           31           32           36          2.5         26.5
6 *.............................................         0.63        2,870          -46           41           21           37         11.0         27.2
7...............................................         0.67        3,182         -324           74            6           19         27.2         35.2
8...............................................         0.77        3,239         -380           79            2           19         21.2         23.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 (40 gal).


                           Table VI.20--Gas-Fired Storage Water Heaters: LCC and PBP Results for Manufactured Home Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.62       $4,035         -$17           36           29           35          9.9         25.1
2, 3, 4.........................................         0.63        4,082          -59           48           17           34         13.1         26.7
5 *.............................................         0.62        4,035          -17           36           29           35          9.9         25.1
6 *.............................................         0.63        4,082          -59           48           17           34         13.1         26.7
7...............................................         0.67        4,275         -232           69            6           25         21.1         27.3
8...............................................         0.77        4,207         -164           64            2           34         14.7         17.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 (40 gal).

    For electric storage water heaters, the impacts of the standard in 
today's final rule are approximately the same for the senior-only 
subgroup as they are for the full household sample for this product 
class (see Table VI.21). For the low-income subgroup, the results show 
an average LCC savings of $18, a 53-percent share of households with a 
net LCC

[[Page 20190]]

benefit, and a 39-percent share of households with a net LCC cost (see 
Table VI.22). For the multi-family subgroup, the results report an 
average LCC increase (i.e., negative savings) of $8, and they also show 
a 53-percent share of households with a net LCC benefit, and a 38-
percent share of households with a net LCC cost (see Table VI.23). For 
the manufactured home subgroup, the results report an average LCC 
increase (i.e., negative savings) of $20, and they also show a 38-
percent share of households with a net LCC benefit, and a 54-percent 
share of households with a net LCC cost (see Table VI.24).

                               Table VI.21--Electric Storage Water Heaters: LCC and PBP Results for Senior-Only Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92       $2,859           $6           11           42           47          3.8         10.1
2...............................................         0.93        2,849           11           12           38           50          3.8          9.9
3...............................................         0.94        2,839           19           21           16           63          5.0          9.2
4...............................................         0.95        2,837           20           30           10           60          6.3          9.6
5, 6............................................       * 1.04        2,826           31           32            9           59          6.6         10.1
7...............................................         2.00        2,937          -76           59            5           36         11.0         21.6
8...............................................         2.35        2,895          -34           58            1           41         10.5         17.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 VI.22--Electric Storage Water Heaters: LCC and PBP Results for Low-Income Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92       $3,203          -$3           15           39           46          4.2         12.4
2...............................................         0.93        3,196            1           16           36           48          4.2         12.2
3...............................................         0.94        3,196            0           29           14           57          5.5         11.1
4...............................................         0.95        3,197           -1           38            9           53          7.1         11.3
5, 6............................................       * 1.04        3,178           18           39            9           53          7.3         11.5
7...............................................         2.00        3,132           61           54            5           41         10.1         28.4
8...............................................         2.35        3,078          114           54            1           45          9.9         23.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 VI.23--Electric Storage Water Heaters: LCC and PBP Results for Multi-Family Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92       $2,015          -$2           14           35           50          4.0         11.6
2...............................................         0.93        2,009            1           15           32           52          4.0         11.3
3...............................................         0.94        2,017           -6           31           13           56          5.6         11.7
4...............................................         0.95        2,018           -7           37            9           54          6.9         11.6
5, 6............................................       * 1.04        2,019           -8           38            9           53          7.0         11.9
7...............................................         2.00        2,468         -436           79            5           16         25.5         67.9
8...............................................         2.35        2,479         -447           81            1           18         24.4         50.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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 VI.24--Electric Storage Water Heaters: LCC and PBP Results for Manufactured Home Households
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             LCC                                     Payback period
                                                              ------------------------------------------------------------------------------------------
                                                     Energy                                         Households with
                       TSL                           factor    Average LCC  Average LCC ---------------------------------------    Median      Average
                                                                  2009$       savings                              Net benefit     years        years
                                                                               2009$      Net cost %  No impact %       %
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................         0.92       $3,152         -$32           31           35           33          7.0         21.8
2...............................................         0.93        3,151          -31           33           33           35          7.7         21.4

[[Page 20191]]

 
3...............................................         0.94        3,153          -33           47           14           40         13.0         15.4
4...............................................         0.95        3,154          -35           54            9           38         12.9         14.8
5, 6............................................       * 1.04        3,140          -20           54            9           38         13.4         15.0
7...............................................         2.00        3,103           14           56            5           39         10.5         25.0
8...............................................         2.35        3,055           61           55            1           44         10.1         21.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For TSL 5 and TSL 6, 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).

    For gas wall fan and gas wall gravity DHE, DOE estimated that the 
impacts of the standards in today's final rule 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. For gas hearth DHE, 
DOE performed the senior-only analysis but did not perform the low-
income analysis due to the extremely small sample size and relatively 
high product cost. The results for the gas hearth DHE senior-only 
sample were about the same as for the full household sample. (See 
tables in chapter 11 of the TSD).
    DOE did not estimate the impacts of consumer subgroups for oil-
fired storage water heaters, gas floor DHE, and gas room DHE due to low 
product shipments, and for gas-fired instantaneous water heaters due to 
insufficient data. For pool heaters, DOE did not perform consumer 
subgroup analyses since this product is typically not owned by these 
subgroups.
    Chapter 11 of the TSD explains DOE's methodology for conducting the 
consumer subgroup analysis and presents the detailed results of that 
analysis for each considered efficiency level.
c. Rebuttable Presumption Payback
    As discussed in section III.D.2, EPCA provides a rebuttable 
presumption that an energy conservation standard is economically 
justified if the increase in purchase cost for a product that meets the 
standard is less than three times the value of the first-year energy 
(and, as applicable, water) savings resulting from the standard. DOE's 
LCC and PBP analyses generate values that calculate the payback period 
for consumers of potential energy conservation standards, which 
include, but are not limited to, the 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 evaluate definitively 
the economic justification for a potential standard level (thereby 
supporting or rebutting the results of any preliminary determination of 
economic justification).
    As required by EPCA, DOE based the calculation of rebuttable 
presumption payback period on the assumptions in the DOE test 
procedures for each of the three types of heating products. For water 
heaters and DHE, respectively, Table VI.24 and Table VI.25 show the 
rebuttable presumption PBPs for those TSLs that have a rebuttable 
presumption payback period of less than 3 years. For pool heaters, only 
one of the considered efficiency levels has a rebuttable presumption 
payback period of less than 3 years--81 percent thermal efficiency has 
a rebuttable presumption payback period of 2.7 years.

                       Table VI.24--Water Heaters: Rebuttable Presumption Payback Periods
----------------------------------------------------------------------------------------------------------------
                                                                       Payback period, years
                                                 ---------------------------------------------------------------
                       TSL                           Gas-fired       Electric        Oil-fired       Gas-fired
                                                      storage         storage         storage      instantaneous
----------------------------------------------------------------------------------------------------------------
1...............................................              >3              >3             0.8              >3
2...............................................              >3              >3             0.4              >3
3...............................................              >3              >3             0.6              >3
4...............................................              >3              >3             0.6              >3
5...............................................              >3              >3             0.6              >3
6...............................................              >3              >3             0.6              >3
7...............................................              >3              >3             0.6              >3
8...............................................              >3              >3             0.9              >3
----------------------------------------------------------------------------------------------------------------


                  Table VI.25--Direct Heating Equipment: Rebuttable Presumption Payback Periods
----------------------------------------------------------------------------------------------------------------
                                                                      Payback period, years
                                                ----------------------------------------------------------------
                      TSL                          Gas wall     Gas wall   Gas furnace    Gas wall    Gas hearth
                                                   fan DHE    gravity DHE      DHE        room DHE       DHE
----------------------------------------------------------------------------------------------------------------
1..............................................           >3           >3           >3           >3          2.5
2..............................................           >3           >3           >3           >3          2.5

[[Page 20192]]

 
3..............................................           >3           >3           >3           >3          2.5
4..............................................           >3           >3           >3           >3           >3
5..............................................           >3           >3           >3           >3           >3
6..............................................           >3           >3           >3           >3           >3
----------------------------------------------------------------------------------------------------------------

2. Economic Impact on Manufacturers
    For the MIA in the December 2009 NOPR, DOE used the INPV to compare 
the financial impacts of different TSLs on water heater, DHE, and pool 
heater manufacturers. 74 FR 65852, 65935-47 (Dec. 11, 2009). DOE 
presented the results by grouping product classes made by the same 
manufacturers and uses the scenarios that show the likely changes in 
industry value following amended energy conservation standards. DOE 
used the GRIM to compare the INPV of the base case (no new energy 
conservation standards) to that of each TSL for each covered product. 
The INPV is the sum of all net cash flows discounted by the industry's 
cost of capital (discount rate). The difference in INPV between the 
base case and the standards case is an estimate of the economic impacts 
that implementing that standard level would have on the entire 
industry.
    For today's final rule, DOE continues to use the methodology 
presented in the December 2009 NOPR (74 FR 65852, 65915-22 (Dec. 11, 
2009)) and in section IV.I. DOE modeled two different markup scenarios 
to estimate the potential impacts of amended energy conservation 
standards on manufacturers. To assess the lower end of the range of 
potential impacts on manufacturers, DOE modeled the preservation of 
return on invested capital scenario. In addition to the impact of the 
main NIA shipment scenario and the required capital and product 
conversion costs on INPV, this case models a situation in which 
manufacturers would maintain the base-case return on invested capital 
in the standards case. This scenario represents the lower (more 
favorable) end of the range of potential impacts on manufacturers 
because the industry generates a historical rate of 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 manufacturers of the three types of heating products, DOE 
modeled the preservation of operating profit markup scenario in which 
higher energy conservation standards result in lower manufacturer 
markups. This scenario models a scenario in which the higher production 
costs of more-efficient technology and required investments are not 
fully passed on to customers, consequently lowering operating profit 
margins. This 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 to meet the amended energy 
conservation standards.
    In overview, DOE notes that for water heaters, the main NIA 
scenario used the Reference Case gas-fired instantaneous water heater 
market share scenario, the AEO Reference Case economic growth scenario, 
and the moderate rate of efficiency growth scenarios. The main NIA 
scenario for water heaters also accounts for fuel switching at a level 
that effectively requires HPWHs for all rated storage volumes (final 
rule TSL 7 and TSL 8) and capacity switching at a level that required 
advanced technology for water heaters with rated storage volumes above 
55 gallons (final rule TSL 5 and TSL 6). In all standards-case shipment 
scenarios for all three types of heating products, DOE assumed that 
shipments at efficiencies below the projected minimum standard levels 
would roll up to the new standard levels in response to amended energy 
conservation standards.
    The sections below outline comments on the economic impacts on 
manufacturers presented in the December 2009 NOPR and provide DOE's 
response. The complete MIA results section can be found in the December 
2009 NOPR (74 FR 65852, 65935-54 (Dec. 11, 2009)) and chapter 12 of the 
TSD.
a. Cash-Flow Analysis Results for Water Heaters
i. Cash-Flow Analysis Results for Gas-Fired and Electric Storage Water 
Heaters

 Table VI.26--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...     $880.4     $875.5     $876.0     $875.1     $875.5     $854.4     $856.8     $869.9     $959.6
Change in INPV..................  (2009$ millions)...  .........       -4.9       -4.3       -5.2       -4.8      -25.9      -23.6      -10.5       79.2
                                  (%)................  .........     -0.56%     -0.49%     -0.59%     -0.55%     -2.94%     -2.68%     -1.19%      9.00%
                                 -----------------------------------------------------------------------------------------------------------------------
Product Conversion Costs........  (2009$ millions)...  .........       12.1       14.5       14.5       14.5       31.8       31.8       61.1       79.7
Capital Conversion Costs........  (2009$ millions)...  .........        0.0        4.3        4.3       40.7       63.7       63.7       76.0      208.0
                                 -----------------------------------------------------------------------------------------------------------------------
    Total Conversion Costs......  (2009$ millions)...  .........       12.1       18.7       18.7       55.1       95.4       95.4      137.1      287.8
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 20193]]


      Table VI.27--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...     $880.4     $866.1     $849.0     $842.1     $790.9     $757.8     $745.7     $530.2     $233.4
Change in INPV..................  (2009$ millions)...  .........      -14.2      -31.4      -38.3      -89.4     -122.6     -134.6     -350.2     -647.0
                                  (%)................  .........      -1.62      -3.56      -4.35     -10.16     -13.93     -15.29     -39.78     -73.49
Product Conversion Costs........  (2009$ millions)...  .........       12.1       14.5       14.5       14.5       31.8       31.8       61.1       79.7
Capital Conversion Costs........  (2009$ millions)...  .........        0.0        4.3        4.3       40.7       63.7       63.7       76.0      208.0
Total Conversion Costs..........  (2009$ millions)...  .........       12.1       18.7       18.7       55.1       95.4       95.4      137.1      287.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for gas-fired and electric 
storage water heater manufacturers in further detail. 74 FR 65852, 
65936-39 (Dec. 11, 2009). DOE did not receive any comments on the gas-
fired and electric storage water heaters INPV results. Those comments 
related to conversion costs and methodology are discussed in section 
IV.I.1.
ii. Cash-Flow Analysis Results for Oil-Fired Storage Water Heaters

        Table VI.28--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...       $9.1       $8.9       $8.9       $8.9       $8.9       $8.9       $8.9       $8.9       $7.7
Change in INPV..................  (2009$ millions)...  .........      (0.2)      (0.2)      (0.2)      (0.2)      (0.2)      (0.2)      (0.2)      (1.4)
                                  (%)................  .........      -1.98      -1.85      -2.01      -2.01      -2.01      -2.01      -2.01     -15.37
Product Conversion Costs........  (2009$ millions)...  .........        0.3        0.3        0.3        0.3        0.3        0.3        0.3        1.1
Capital Conversion Costs........  (2009$ millions)...  .........        0.2        0.2        0.2        0.2        0.2        0.2        0.2        4.0
Total Conversion Costs..........  (2009$ millions)...  .........        0.5        0.5        0.5        0.5        0.5        0.5        0.5        5.1
--------------------------------------------------------------------------------------------------------------------------------------------------------


             Table VI.29--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...       $9.1       $8.8       $8.8       $8.7       $8.7       $8.7       $8.7       $8.7       $5.3
Change in INPV..................  (2009$ millions)...  .........      (0.4)      (0.3)      (0.4)      (0.4)      (0.4)      (0.4)      (0.4)      (3.8)
                                  (%)................  .........      -3.85      -3.56      -4.23      -4.23      -4.23      -4.23      -4.23     -41.44
Product Conversion Costs........  (2009$ millions)...  .........        0.3        0.3        0.3        0.3        0.3        0.3        0.3        1.1
Capital Conversion Costs........  (2009$ millions)...  .........        0.2        0.2        0.2        0.2        0.2        0.2        0.2        4.0
Total Conversion Costs..........  (2009$ millions)...  .........        0.5        0.5        0.5        0.5        0.5        0.5        0.5        5.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for oil-fired storage water 
heater manufacturers in further detail. 74 FR 65852, 65939-40 (Dec. 11, 
2009). DOE did not receive any comments on the oil-fired water heaters 
INPV results. Those comments related to conversion costs and 
methodology are discussed in section IV.I.1.
iii. Cash-Flow Analysis Results for Gas-Fired Instantaneous Water 
Heaters

     Table VI.30--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...     $648.2     $650.6     $650.6     $650.6     $650.6     $650.6     $650.6     $650.6     $739.7
Change in INPV..................  (2009$ millions)...  .........        2.3        2.3        2.3        2.3        2.3        2.3        2.3       91.4
                                  (%)................  .........       0.36       0.36       0.36       0.36       0.36       0.36       0.36      14.10
Product Conversion Costs........  (2009$ millions)...  .........        0.0        0.0        0.0        0.0        0.0        0.0        0.0        8.8
Capital Conversion Costs........  (2009$ millions)...  .........        0.0       0.00       0.00        0.0        0.0        0.0        0.0       10.6
Total Conversion Costs..........  (2009$ millions)...  .........        0.0        0.0        0.0        0.0        0.0        0.0        0.0       19.4
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 20194]]


      Table VI.31--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          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV............................  (2009$ millions)...     $648.2     $647.0     $647.0     $647.0     $647.0     $647.0     $647.0     $647.0     $590.6
Change in INPV..................  (2009$ millions)...  .........      (1.2)      (1.2)      (1.2)      (1.2)      (1.2)      (1.2)      (1.2)     (57.6)
                                  (%)................  .........     -0.19%     -0.19%     -0.19%     -0.19%     -0.19%     -0.19%     -0.19%     -8.89%
Product Conversion Costs........  (2009$ millions)...  .........        0.0        0.0        0.0        0.0        0.0        0.0        0.0        8.8
Capital Conversion Costs........  (2009$ millions)...  .........        0.0       0.00       0.00        0.0        0.0        0.0        0.0       10.6
Total Conversion Costs..........  (2009$ millions)...  .........        0.0        0.0        0.0        0.0        0.0        0.0        0.0       19.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for gas-fired instantaneous water 
heater manufacturers in further detail. 74 FR 65852, 65940-41 (Dec. 11, 
2009). DOE did not receive any comments on the gas-fired instantaneous 
water heater INPV results.
b. Cash-Flow Analysis Results for Direct Heating Equipment
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 VI.32--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....................................  (2009$ millions)..........       $16.6       $15.7       $15.4       $14.7       $14.7       $12.8       $12.7
Change in INPV..........................  (2009$ millions)..........  ..........       (0.9)       (1.2)       (1.9)       (1.9)       (3.8)       (3.9)
                                          (%).......................  ..........      -5.24%      -7.17%     -11.31%     -11.62%     -22.74%     -23.65%
Product Conversion Costs................  (2009$ millions)..........  ..........        0.95        1.38        2.41        2.95        5.02        5.91
Capital Conversion Costs................  (2009$ millions)..........  ..........        1.96        3.24        5.60        6.95        6.75        9.11
Total Conversion Costs..................  (2009$ millions)..........  ..........        2.91        4.62        8.00        9.90       11.77       15.02
--------------------------------------------------------------------------------------------------------------------------------------------------------


          Table VI.33--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....................................  (2009$ millions)..........       $16.6       $14.1       $12.7        $9.6        $7.8        $6.2        $3.2
Change in INPV..........................  (2009$ millions)..........  ..........       (2.5)       (3.9)       (7.0)       (8.8)      (10.4)      (13.4)
                                          (%).......................  ..........     -14.88%     -23.61%     -42.38%     -53.12%     -62.40%     -80.85%
Product Conversion Costs................  (2009$ millions)..........  ..........        0.95        1.38        2.41        2.95        5.02        5.91
Capital Conversion Costs................  (2009$ millions)..........  ..........        1.96        3.24        5.60        6.95        6.75        9.11
Total Conversion Costs..................  (2009$ millions)..........  ..........        2.91        4.62        8.00        9.90       11.77       15.02
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for traditional DHE manufacturers 
in further detail. 74 FR 65852, 65942-44 (Dec. 11, 2009). DOE addresses 
all the comments about the impacts on traditional DHE manufacturers in 
sections IV.I.4 and VII.B of today's final rule.
ii. Cash-Flow Analysis Results for Gas Hearth Direct Heating Equipment

      Table VI.34--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....................................  (2009$ millions)..........       $77.1       $76.2       $76.2       $76.2       $78.7       $78.7       $85.7
Change in INPV..........................  (2009$ millions)..........  ..........       (0.9)       (0.9)       (0.9)         1.6         1.6         8.6
                                          (%).......................  ..........      -1.22%      -1.22%      -1.22%       2.04%       2.04%      11.09%

[[Page 20195]]

 
Product Conversion Costs................  (2009$ millions)..........  ..........        0.56        0.56        0.56        1.46        1.46        8.42
Capital Conversion Costs................  (2009$ millions)..........  ..........        0.21        0.21        0.21        0.55        0.55        4.20
Total Conversion Costs..................  (2009$ millions)..........  ..........        0.77        0.77        0.77        2.01        2.01       12.62
--------------------------------------------------------------------------------------------------------------------------------------------------------


           Table VI.35--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....................................  (2009$ millions)..........       $77.1       $76.9       $76.9       $76.9       $63.9       $63.9       $23.5
Change in INPV..........................  (2009$ millions)..........  ..........       (0.2)       (0.2)       (0.2)      (13.2)      (13.2)      (53.6)
                                          (%).......................  ..........      -0.30%      -0.30%      -0.30%     -17.13%     -17.13%     -69.49%
Product Conversion Costs................  (2009$ millions)..........  ..........        0.56        0.56        0.56        1.46        1.46        8.42
Capital Conversion Costs................  (2009$ millions)..........  ..........        0.21        0.21        0.21        0.55        0.55        4.20
Total Conversion Costs..................  (2009$ millions)..........  ..........        0.77        0.77        0.77        2.01        2.01       12.62
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for gas hearth DHE manufacturers 
in further detail. 74 FR 65852, 65944-45 (Dec. 11, 2009). DOE did not 
receive any comments on the gas hearth DHE INPV results.
c. Cash-Flow Analysis Results for Pool Heaters

            Table VI.36--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....................................  (2009$ millions)..........       $49.0       $49.1       $49.3       $48.2       $48.7       $49.8       $56.4
Change in INPV..........................  (2009$ millions)..........  ..........         0.0         0.3       (0.8)       (0.3)         0.8         7.3
                                          (%).......................  ..........       0.10%       0.54%      -1.72%      -0.63%       1.61%      14.93%
Product Conversion Costs................  (2009$ millions)..........  ..........         0.0         0.0         2.7         2.7         4.8         5.7
Capital Conversion Costs................  (2009$ millions)..........  ..........         0.0         0.3         1.3         1.5         4.6         7.4
Total Conversion Costs..................  (2009$ millions)..........  ..........         0.0         0.3         4.0         4.2         9.4        13.1
--------------------------------------------------------------------------------------------------------------------------------------------------------


                 Table VI.37--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....................................  (2009$ millions)..........       $49.0       $48.9       $48.2       $44.0       $42.4       $31.9       $10.8
Change in INPV..........................  (2009$ millions)..........  ..........       (0.1)       (0.8)       (5.0)       (6.6)      (17.2)      (38.3)
                                          (%).......................  ..........      -0.25%      -1.72%     -10.22%     -13.48%     -35.05%     -78.00%
Product Conversion Costs................  (2009$ millions)..........  ..........         0.0         0.0         2.7         2.7         4.8         5.7
Capital Conversion Costs................  (2009$ millions)..........  ..........         0.0         0.3         1.3         1.5         4.6         7.4
Total Conversion Costs..................  (2009$ millions)..........  ..........         0.0         0.3         4.0         4.2         9.4        13.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The December 2009 NOPR discusses the estimated impact of amended 
energy conservation standards on INPV for gas-fired pool heaters in 
further detail. 74 FR 65852, 65945-47 (Dec. 11, 2009). DOE did not 
receive any comments on the pool heaters INPV results. Those comments 
related to conversion costs

[[Page 20196]]

and methodology are discussed in section IV.I.3.
d. Impacts on Employment
    As discussed in detail in the December 2009 NOPR and in today's 
final rule, DOE quantitatively assessed the impacts of potential 
amended energy conservation standards on gross employment for each of 
the three types of heating products that are the subject of this 
rulemaking. DOE presented a range of the potential production 
employment levels that could result following the implementation of 
amended energy conservation standards. The upper end of the results 
represented the maximum potential increase in production workers after 
amended energy conservation standards if manufacturers continue to 
produce the same scope of covered products in the same production 
facilities. The lower end of the range of employment results included 
the estimate of the total number of U.S. production workers in the 
industry that could lose their jobs if all existing production were to 
no longer be made domestically. For example, DOE calculates that the 
impacts on gas-fired and electric storage water heaters could range 
from an increase of 439 employees to a decrease of 3,610. For oil-fired 
water heaters, DOE expects an increase of one employee to a decrease of 
37 employees. Similarly, at the upper end of modeled impacts, the 
traditional DHE, gas hearth DHE, and pool heater industries could 
experience an increase of six, six, and 19 employees, respectively. At 
the low end, these three industries could sustain decreases in direct 
employment of 275, 1280, and 512 employees, respectively. 74 FR 65852, 
65947-51 (Dec. 11, 2009). Further details are also found in chapter 12 
of the TSD. DOE discusses and responds to public comments received 
regarding the impacts on the direct employment in section IV.I.4.
e. Impacts on Manufacturing Capacity
    In the December 2009 NOPR, DOE provided a complete discussion of 
the potential impacts on manufacturing capacity for the three types of 
heating products as a result of amended energy conservation standards. 
74 FR 65852, 65951-53 (Dec. 11, 2009).
    In response to that discussion, Raypak stated that it does not 
believe three years would allow sufficient time for the proper 
development, testing, and tooling necessary to achieve reliable pool 
heater products, because pool heaters are installed outdoors and face 
harsher operating conditions than the other products covered by this 
rulemaking. (Raypak, No. 67 at p. 3) The commenter agreed with DOE's 
statement that setting an amended energy conservation standard for pool 
heaters at or above TSL 5, which would require condensing or near-
condensing technology, could lead to short-term capacity problems if 
manufacturers cannot make the substantially higher tooling, equipment, 
and assembly changes required at these levels in time to meet the 
standard. Moreover, Raypak argued that these same issues exist at TSL 3 
and TSL 4, because at TSL 3 and above manufacturers would have 
difficulty changing their production lines and tooling to a new 
construction while still producing product to meet current market 
demands. (Raypak, No. 67 at p. 2; Public Meeting Transcript, No. 57.4 
at pp. 308-310)
    In response, DOE agrees that the proposed standard in the December 
2009 NOPR would require substantial changes for pool heater 
manufacturers. At an 84-percent thermal efficiency level, manufacturers 
would be required to make multiple improvements over the most common 
atmospheric models on the market today. However, DOE did not receive 
any comments that suggested the conversion costs for the industry 
presented in the NOPR were not representative at any TSL. Also, 
multiple manufacturers have products that meet and/or exceed the 
proposed standard in the December 2009 NOPR. While manufacturers would 
be required to spend resources to increase the production of those 
products or to modify existing products, DOE believes that 
manufacturers have the experience necessary to achieve the requisite 
operating conditions at the level proposed in the December 2009 NOPR 
(TSL 4) and, in general, to offer durable products by the compliance 
date for the amended standards being adopted in this final rule.
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. The cumulative regulatory 
burden focuses on the impacts on manufacturers of other 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. The cumulative burden was 
outlined in the December 2009 NOPR, which included a discussion of the 
impact of low and ultra-low NOX regulations and other 
environmental and safety regulations. 74 FR 65852, 65953 (Dec. 11, 
2009). For further detail, see the cumulative regulatory burden 
discussion in Chapter 12 of the TSD.
    Regarding the cumulative regulatory burden discussed in the NOPR, 
BWC stated that refrigerant regulations are constantly changing and 
could force manufacturers to redesign heat pump water heaters that have 
been recently commercialized. To this point, BWC noted that R-134a is 
being phased out in Europe, but the prospect of a similar phase-out in 
the U.S. was not considered in the NOPR analysis. (BWC, No. 61 at p. 2) 
Rheem also stated that proposed legislation that phases out 
hydrofluorocarbons (HFCs) would require double the amount of 
refrigerant, because the alternative is not as efficient. Rheem also 
added that a cap-and-trade program would have a significant effect on 
the heat pump water heater business. (Rheem, Public Meeting Transcript 
No. 57.4 at pp. 294-295)
    DOE acknowledges that an HFC phase-out or alternative legislation 
requiring a refrigerant change could necessitate substantial design 
changes for heat pump water heaters. However, for this heating products 
energy conservation standards rulemaking, DOE did not consider proposed 
legislation that would require a reduction in consumption of HFCs 
including refrigerants (i.e., phase-down) or a cap and trade program. 
It would be highly speculative to try to predict the passage of such 
legislation, much less the details of its provisions, all of which are 
highly uncertain.
    BWC stated that DOE should consider that additional Air Quality 
Management Districts have enacted standards since the rulemaking began. 
(BWC, No. 61 at pp. 3-4) In response, DOE has monitored the Air Quality 
Management Districts' regulations. In the analysis, DOE assumed that 
the Air Quality Managements Districts with ultra-low NOX 
requirements would represent 50 percent of shipments to California, or 
8.7 percent of shipments nationally, by the compliance date of today's 
final rule in 2015. Thus, DOE's analysis of the ultra-low 
NOX water heater shipments is up to date. DOE accounted for 
the higher costs of these ultra-low NOX gas-fired water 
heaters in both the LCC and the MIA.
    AHRI stated lower NOX requirements will affect future 
designs of gas-fired

[[Page 20197]]

instantaneous water heaters and may cause design changes that reduce 
the efficiency of the product. (AHRI, No. 91 at p. 3)
    DOE accounted for the added production costs for manufacturers of 
gas-fired storage water heaters to comply with regional ultra-low 
NOX requirements (see section IV.C.2). DOE agrees with AHRI 
that the California Air Quality Management Districts will begin to 
regulate the emissions of gas-fired instantaneous water heaters 
beginning in 2012. However, DOE is not aware of any ultra-low 
NOX instantaneous gas-fired water heaters currently on the 
market and could not create a separate cost curve to account for the 
additional cost of instantaneous water heaters.
    Raypak stated that pool heaters are not exempt from ultra-low 
NOX requirements, but have only been exempted from any 
revisions to the existing requirements. Raypak stated that pool heaters 
are required to meet a maximum of 55 ppm of NOX in the South 
Coast Air Quality Management District. In addition, the Bay Area Air 
Quality Management District has implemented new NOX 
requirements for pool heaters starting on January 1, 2012. (Raypak, No. 
67 at p. 2; Public Meeting Transcript, No. 57.4 at pp. 336-37)
    DOE agrees with Raypak that it should have indicated that gas-fired 
pool heaters were only exempted from revisions to existing low-
NOX requirements that would have required more-stringent 
emission standards. Furthermore, DOE agrees with Raypak that gas-fired 
pool heaters must meet the local low-NOX requirements in the 
Air Quality Management Districts shown in Table 12.7.9 of the TSD. In 
the engineering analysis, DOE examined several low-NOX pool 
heaters and believes its analysis is representative of both types of 
pool heaters. Chapter 12 of the TSD also addresses in greater detail 
the issue of cumulative regulatory burden.
g. Impacts on Manufacturers That Are Small Businesses
    As discussed in the December 2009 NOPR, DOE identified small 
business manufacturers of all three types of heating products. 74 FR 
65852, 65953-54 (Dec. 11, 2009). Due to the large number of comments 
about the impacts on traditional DHE manufacturers, DOE has moved and 
addressed all these comments in sections IV.I and VII.B. Section VII.B 
also contains DOE's discussion about the impacts of amended energy 
conservation standards on small business manufacturers.
3. National Net Present Value of Consumer Costs and Benefits and 
National Employment Impacts
    The NPV analysis estimates the cumulative benefits or costs to the 
Nation of total heating product consumer costs and savings that would 
result from particular standard levels. The NPV analysis estimates the 
national economic impacts of each such level relative to the base case. 
In accordance with the OMB Circular A-4, DOE calculated the NPV using 
both a 7-percent and a 3-percent real discount rate. Table VI.38 
through Table VI.40 show the consumer NPV results for each TSL DOE 
considered for the three types of heating products. See chapter 10 of 
the December 2009 NOPR TSD for more detailed NPV results.

                                    Table VI.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      TSL 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  billion 2009 dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 3%:
    Gas-Fired Storage......................  2.72..........................       3.13       3.13       3.13       2.38       2.78       3.13      -7.47
    Electric Storage.......................  1.35..........................       2.10       3.46       3.96       5.84       5.84      19.80      32.24
    Oil-Fired Storage......................  0.08..........................       0.15       0.22       0.22       0.22       0.22       0.22       0.38
    Gas-Fired Instantaneous................  0.24..........................       0.24       0.24       0.24       0.24       0.24       0.24      -8.27
                                            ------------------------------------------------------------------------------------------------------------
        Total..............................  4.39..........................       5.62       7.05       7.55       8.67       9.08      23.39      16.87
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discounted at 7%:
    Gas-Fired Storage......................  0.59..........................       0.22       0.22       0.22       0.27      -0.10       0.22      -9.95
    Electric Storage.......................  0.35..........................       0.61       0.85       0.73       1.03       1.03      -0.52       3.25
    Oil-Fired Storage......................  0.03..........................       0.06       0.09       0.09       0.09       0.09       0.09       0.15
    Gas-Fired Instantaneous................  -0.004........................     -0.004     -0.004     -0.004     -0.004     -0.004     -0.004      -5.02
                                            ------------------------------------------------------------------------------------------------------------
        Total..............................  0.96..........................       0.88       1.55       1.03       1.39       1.01      -0.22     -11.57
--------------------------------------------------------------------------------------------------------------------------------------------------------


           Table VI.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 2009 dollars
----------------------------------------------------------------------------------------------------------------
Discounted at 3%:
    Gas Wall Fan..................  0.06.................       0.07       0.07      -0.01       0.06      -0.01
    Gas Wall Gravity..............  0.04.................       0.04       0.07       0.07      -0.12      -0.12
    Gas Floor.....................  0.0002...............     0.0002     0.0002     0.0002     0.0002     0.0002
    Gas Room......................  0.01.................       0.02       0.03       0.03       0.20       0.20
    Gas Hearth....................  1.21.................       1.21       1.21      -1.35      -1.35      -5.04
                                   -----------------------------------------------------------------------------
        Total.....................  1.32.................       1.34       1.39      -1.26      -1.22      -4.97
----------------------------------------------------------------------------------------------------------------
Discounted at 7%:
    Gas Wall Fan..................  0.02.................       0.03       0.03      -0.03       0.02      -0.03

[[Page 20198]]

 
    Gas Wall Gravity..............  0.01.................       0.01       0.02       0.02      -0.14      -0.14
    Gas Floor.....................  0.0001...............     0.0001     0.0001     0.0001     0.0001     0.0001
    Gas Room......................  0.003................       0.01       0.01       0.01       0.07       0.07
    Gas Hearth....................  0.50.................       0.50       0.50      -1.19      -1.19      -4.28
        Total.....................  0.54.................       0.55       0.56      -1.19      -1.24      -4.38
----------------------------------------------------------------------------------------------------------------


                 Table VI.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 2009 dollars
----------------------------------------------------------------------------------------------------------------
Discounted at 3%..................         0.10         0.10        -0.01        -0.15        -2.33        -4.57
Discounted at 7%..................         0.04         0.04        -0.06        -0.16        -1.39        -2.87
----------------------------------------------------------------------------------------------------------------

    DOE also estimated for each TSL the indirect employment impact of 
standards--the impact on the economy in general--in addition to 
considering the direct employment impacts on manufacturers of products 
covered in this rulemaking as discussed in section IV.I.4. DOE expects 
that consumers will redirect the net monetary savings from standards to 
other forms of economic activity, and that these shifts in spending and 
economic activity will affect the demand for labor. As shown in Table 
VI.41, DOE estimates that net indirect employment impacts from energy 
conservation standards for water heaters would be positive, though very 
small relative to total national employment. These increases would 
likely be sufficient to offset fully any adverse impacts on employment 
that might occur in the water heater industry. The estimated impacts 
from the amended standards for DHE and pool heaters are much smaller. 
For details on the employment impact analysis methods and results, see 
TSD Chapter 14.

                  Table VI.41--Increase in National Indirect Employment Under Water Heater TSLs
----------------------------------------------------------------------------------------------------------------
              Trial standard level                2015 thousands  2020 thousands  2030 thousands  2044 thousands
----------------------------------------------------------------------------------------------------------------
1...............................................           -0.40            0.44            1.56            2.06
2...............................................           -0.72            0.48            2.08            2.80
3...............................................           -0.83            1.04            3.54            4.60
4...............................................           -0.97            1.43            4.63            5.96
5...............................................           -0.85            3.07            8.34           10.41
6...............................................           -1.20            2.89            8.37           10.56
7...............................................           -3.89           12.70           34.97           43.46
8...............................................           -8.21           13.82           43.69           56.26
----------------------------------------------------------------------------------------------------------------

4. Impact on Utility or Performance of Products
    As indicated in section III.D.1.d, DOE has concluded that the TSLs 
it considered for the three types of heating products would not lessen 
the utility or performance of those products. Manufacturers of these 
products currently offer heating products that meet or exceed the 
efficiency levels being considered and would not necessitate changes in 
product design that would reduce the overall utility or performance of 
the three types of heating products that are the subject of this 
rulemaking. Therefore, DOE has concluded that none of the TSLs 
presented in today's final rule would reduce the utility or performance 
of the products under consideration.
5. Impact of Any Lessening of Competition
    As discussed in the December 2009 NOPR (74 FR 65852, 65863, 65956 
(Dec. 11, 2009)) and in section III.D.1.e of this preamble, DOE 
considers any lessening of competition likely to result from standards; 
the Attorney General determines, in writing, the impact, if any, of any 
such lessening of competition. (42 U.S.C. 6295(o)(2)(B)(i)(V) and (ii)) 
The Attorney General's determination (DOJ determination) is summarized 
below, along with DOE's response, and it is also reprinted in its 
entirety at the end of this final rule.
    After considering the NOPR, DOJ determined that DOE's proposed 
standards for water heaters, pool heaters, and gas hearth DHE are not 
likely to lead to a lessening of competition; however, DOJ expressed 
concern that the proposed standards could adversely affect competition 
in the traditional DHE product categories. DOJ noted that only three 
manufacturers currently market products for each of the four 
traditional DHE categories. DOJ stated that the proposed standards 
could require manufacturers, even those currently producing models that 
meet the proposed standards, to make a substantial capital investment 
to convert or expand their production facilities. DOJ also stated that 
it also appeared that each manufacturer would have to commit 
significant resources for research and development. DOJ believed these 
costs create a significant risk that

[[Page 20199]]

no more than one or two DHE manufacturers would choose to continue to 
produce products in any one DHE category. DOJ asked DOE to consider the 
possible impact on competition in determining its final energy 
efficiency standards for DHE. (DOJ, No. 99 at p. 2)
    DOE is also concerned about the impacts on competition in the 
traditional DHE market. For any new or amended energy conservation 
standard, DOE must consider the impacts on manufacturers and consumers 
of the products in addition to the impacts of any lessening of 
competition. (42 U.S.C. 6295(o)(2)(B)(i)) DOE notes that the potential 
impacts on small business manufacturers factored heavily in DOE's 
proposed standard. 74 FR 65852, 65972-73 (Dec. 11, 2009).
    DOE has carefully considered the potential adverse impacts on 
traditional DHE manufacturers in setting the amended energy 
conservation standards (see section VI.D.3). In total, DOE estimates 
that it will take approximately $4.6 million for the traditional DHE 
industry to upgrade all of it products to meet the amended energy 
conservation standards. Despite including the conversion costs for the 
additional product lines that were released since the December 2009 
NOPR analysis was completed, the total conversion costs estimated by 
the industry to upgrade all products that do not meet the amended 
energy conservation standards is down $1.8 million from the $6.4 
million total estimated for the proposed standards in the December 2009 
NOPR. The conversion costs have been revised downward for gas wall 
gravity DHE due to the changes in the engineering analysis and a new 
TSL structure for gas wall gravity DHE that resulted in AFUE 
requirements that were 5 percentage points less stringent than the 
level proposed in the December 2009 NOPR. Finally, for other product 
categories, setting a lower TSL than proposed in the December 2009 NOPR 
also resulted in fewer product lines across the industry that need to 
be upgraded to meet the level established by today's final rule.
    For the amended energy conservation standards for traditional DHE, 
one major manufacturer has a total of 3 product lines (7 models) that 
do not meet the amended energy conservation standards in the two 
smallest categories (gas floor and gas room DHE) but has a majority of 
product lines and models that meet the amended standards in the two 
largest product categories (gas wall fan and gas wall gravity). The 
other two major manufacturers have existing product lines that meet the 
amended energy conservation standards in all 4 product categories. 
Therefore, without incurring any conversion costs, at least two 
manufacturers already have existing products in all four product 
categories. In the most important gas wall gravity category, 57 percent 
of the existing models and 71 percent of the existing product lines 
identified by DOE already meet the amended energy conservation 
standards. One manufacturer indicated in written comments that the 
important gas wall gravity products that meet the amended energy 
conservation standard represent a small portion of total sales. 
However, DOE believes it has addressed the concerns of this 
manufacturer by setting an amended energy conservation standard that 
would require much less substantial changes than those proposed in the 
December 2009 NOPR (a two percentage point improvement in AFUE versus 
the six percentage point improvement in AFUE proposed in the December 
2009 NOPR). While the $4.6 million in total conversion costs to upgrade 
all product lines that do not meet the amended energy conservation 
standards is substantial, DOE believes that a combination of products 
that meet the amended energy conservation standards and selectively 
upgrading popular product lines that fall below the standards will 
allow all three traditional DHE manufacturers to maintain a viable 
production volume. Because DOE has fully addressed the comments raised 
about the impacts on traditional DHE manufacturers, has considered the 
potential impacts on small business manufacturers of traditional DHE, 
and has adopted a less stringent standard than originally proposed for 
these products, DOE believes it has taken the potential impacts on 
competition in the traditional DHE market into consideration for 
today's final rule.
    DOE also prepared a final regulatory flexibility analysis (FRFA) 
for direct heating equipment pursuant to the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.). In particular, the FRFA carefully considers the 
impacts of the rule on the two manufacturers in the traditional DHE 
market that are small businesses. DOE's FRFA is found in section VII.B 
of today's final rule.
    Several comments on the December 2009 NOPR raised issues related to 
competitive impacts. These comments and DOE's response are discussed 
below. In both its written submission and comments at the NOPR public 
meeting, Empire expressed concern about the potential for amended 
standards to create monopolies in certain DHE product categories. 
(Empire, Public Meeting Transcript, No. 57.4 at p. 300; Empire, No. 100 
at p. 1) In addition, Empire stated that in order to increase 
efficiency, the industry would need to spend millions of dollars. With 
the small number of shipments and the shrinking market for traditional 
DHE, Empire opined that manufacturers would likely eliminate product 
categories. For those few categories where only one manufacturer meets 
the minimums (e.g., floor furnaces), a monopoly would be created. 
(Empire, No. 100 at p. 2)
    In response and as noted above, DOE is concerned about the impacts 
on competition in the traditional DHE market and has considered these 
impacts for today's final rule. In response to the concern that the 
amended energy conservation standards could create a monopoly in the 
floor furnace category, DOE notes that two of the major manufacturers 
currently offer products in the AHRI certification database that meet 
the required efficiencies, which implies that the creation of a 
monopoly is unlikely to result due to amended energy conservation 
standards. Additionally, DOE also recognizes that the traditional DHE 
market is mostly a replacement market. Even if only one manufacturer 
offered floor furnaces, for example, in response to the energy 
conservation standards, all other DHE categories are also potential 
substitutes. Finally, DOE has included the conversion costs for 
manufacturers to convert all existing products that do not meet the 
required efficiencies. While manufacturers currently in the industry 
would likely upgrade their most popular products that did not meet the 
standards, DOE notes that these conversion costs could also be made by 
manufacturers that are not currently in the market (i.e., new entrants 
to the market).
    Rheem stated that the U.S. residential water heater market 
currently has little or no presence of max-tech systems. Rheem 
commented that as a current manufacturer of conventional storage water 
heater products, it would be competitively disadvantaged by a standard 
at TSL 5 or higher in the December 2009 NOPR, as compared to companies 
that do not manufacture conventional technology. (Rheem, No. 89 at p. 
9)
    In response, DOE does not believe offering conventional technology 
would place a manufacturer at a disadvantage if DOE selected a TSL that 
used advanced technology. While TSL 5 or higher would drive a market 
for the advanced technology, full-line manufacturers that offer 
commercial condensing products, for example, could actually be in a 
better position because of their experience with the

[[Page 20200]]

condensing technology. Most water heaters sales are made on a 
replacement basis. The large installed base of existing manufacturers 
could make it more difficult for new entrants to gain market share if 
customers look for a similar replacement. Also, the major manufacturers 
have very established brands. In short, there are too many factors to 
conclude that manufacturers who produce conventional storage water 
heaters would be placed at a competitive disadvantage.
    Bock claimed that the proposed amended energy conservation 
standards for oil-fired water heaters would lessen competition. Bock 
stated that many manufacturers have exited the market since the last 
water heater rulemaking in the 1990s (Bock, No. 101 at p. 3)
    In response, DOE notes that whether a given manufacturer chooses to 
exit the residential oil-fired water heater market will depend on a 
variety of internal and external factors, and DOE also believes that 
the decision of any manufacturer to exit the market would not 
necessarily result in a lessening of competition. Consumers today have 
a number of fuel sources that could be substituted for oil-fired 
products if any decrease in competition resulted in higher prices for 
consumers. Furthermore, any increase in prices could also attract new 
entrants to the market. While there are only two manufacturers that 
have a significant market share in the residential oil-fired water 
heater market, there are a number of manufacturers that offer lower 
volumes of residential oil-fired water heaters, commercial oil-fired 
water heaters, and oil-fired boilers. Any of these manufacturers could 
find it attractive to enter this market or expand production, if other 
manufacturers exited the residential oil-fired water heater market. 
Finally, as noted above, DOJ did not express concern about the 
potential lessening of competition in the oil-fired water heater market 
at the proposed standard level. (DOJ, No. 99 at pp. 1-2)
6. Need of the Nation To Conserve Energy
    Improving the energy efficiency of heating products, where 
economically justified, would likely improve the security of the 
Nation's energy system by reducing overall demand for energy, thereby 
reducing the Nation's reliance on foreign sources of energy. Reduced 
electricity demand may also improve the reliability of the electricity 
system, particularly during peak-load periods. As a measure of this 
reduced demand, DOE expects the energy savings from today's standards 
for the three types of heating products to eliminate the need for 
approximately 0.857 gigawatts (GW) of generating capacity by 2045.
    As discussed in section IV.K.1, DOE analyzed the potential impact 
on natural gas prices resulting from amended standards on water heaters 
and the associated benefits for all natural gas users in all sectors of 
the economy. DOE also analyzed the potential impact on electricity 
prices resulting from amended standards on water heaters and the 
associated benefits for all electricity users in all sectors of the 
economy. The estimated present value of the benefits to consumers are 
presented in chapter 13 of the TSD.
    As discussed in section IV.K.1, DOE believes that there is 
uncertainty about the extent to which the calculated impacts from 
reduced energy prices are a benefits transfer from energy producers to 
energy consumers. Therefore, DOE has concluded that, at present, it 
should not give a heavy weight to this factor in its consideration of 
the economic justification of standards on heating products. DOE is 
continuing to investigate the extent to which benefits associated with 
change in energy prices projected to result from standards represents a 
net gain to society.
    Enhanced energy efficiency also produces environmental benefits in 
the form of reduced emissions of air pollutants and greenhouse gases 
associated with energy production. Table VI.42 and Table VI.43 provide 
DOE's estimate of cumulative CO2, NOX, and Hg 
emissions reductions expected to result from the TSLs considered in 
this rulemaking. The estimated cumulative CO2, 
NOX, and Hg emissions reductions for the standards in 
today's rule are 164 Mt for CO2, 125 kt for NOX, 
and 0.54 tons for Hg. The expected energy savings from these standards 
may also reduce the cost of maintaining nationwide emissions standards 
and constraints. In the environmental assessment (chapter 16 of the 
TSD), DOE reports estimated annual changes in CO2, 
NOX, and Hg emissions attributable to each TSL.

                                          Table VI.42--Summary of Emissions Reductions Under Water Heater TSLs
                                                    [Cumulative for products sold from 2015 to 2045]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            TSL
                          Emission type                          ---------------------------------------------------------------------------------------
                                                                      1          2          3          4          5          6          7          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (Mt)........................................................       74.3        122        131        137        154        209        609      1,001
NOX (kt)........................................................       57.5       94.3        101        106        116        159        456        755
Hg (t)..........................................................      0.056      0.090      0.103      0.113      0.553      0.704       2.32       3.59
--------------------------------------------------------------------------------------------------------------------------------------------------------


        Table VI.43--Summary of Emissions Reductions Under Direct Heating Equipment and Pool Heater TSLs
                                [Cumulative for products sold from 2013 to 2043]
----------------------------------------------------------------------------------------------------------------
                                                                         TSL
           Emission type           -----------------------------------------------------------------------------
                                         1            2            3            4            5            6
----------------------------------------------------------------------------------------------------------------
                                            Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)..........................          8.3          8.8          9.3         17.9         20.2         49.9
NOX (kt)..........................          7.5          8.1          8.5         16.4         18.6         46.0
Hg (t)............................       (0.01)       (0.01)       (0.01)         0.03         0.03         0.08
----------------------------------------------------------------------------------------------------------------
                                                  Pool Heaters
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)..........................         0.41         0.75         1.72         2.38         3.61         8.89

[[Page 20201]]

 
NOX (kt)..........................         0.37         0.67         1.53         2.10         3.18         7.84
Hg (t)............................         0.00         0.00         0.00         0.00         0.00         0.00
----------------------------------------------------------------------------------------------------------------

    As noted in section IV.L of this final rule, DOE does not report 
SO2 emissions reductions from power plants because DOE is 
uncertain that an energy conservation standard would affect the overall 
level of U.S. SO2 emissions due to emissions caps. DOE also 
did not include NOX emissions reduction from power plants in 
States subject to CAIR because an energy conservation standard would 
likely not affect the overall level of NOX emissions in 
those States due to the emissions caps mandated by CAIR.
    It should be noted that, for DHE, DOE estimates a very small 
increase in Hg emissions under the adopted 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 AEO Reference Case, which leads to higher emissions. For 
CO2 and NOX, the higher emissions from the power 
sector are more than canceled out by lower household emissions from gas 
combustion, such that total emissions decrease under the considered 
TSLs. For Hg, this is not the case because there are no offsetting 
household emissions.
    In the December 2009 NOPR, DOE investigated and considered the 
potential monetary benefit of reduced CO2 emissions that 
could result from the TSLs it considered. 74 FR 65852, 65924-28 (Dec. 
11, 2009). DOE valued the potential global benefits resulting from such 
reductions at the interim values of $5, $10, $20, $34, and $57 per 
metric ton in 2007 (in 2008$), and also valued the domestic benefits at 
approximately $1 per metric ton. For today's final rule, DOE has 
updated its analysis to reflect the outcome of the most recent 
interagency process regarding the social cost of carbon dioxide 
emissions (SCC). See section IV.M for a full discussion. The four 
values of CO2 emissions reductions resulting from that 
process (expressed in 2007$) are $4.70/ton (the average value from a 
distribution that uses a 5-percent discount rate), $21.40/ton (the 
average value from a distribution that uses a 3-percent discount rate), 
$35.10/ton (the average value from a distribution that uses a 2.5-
percent discount rate), and $64.90/ton (the 95th-percentile value from 
a distribution that uses a 3-percent discount rate). These values 
correspond to the value of emission reductions in 2010; the values for 
later years are higher due to increasing damages as the magnitude of 
climate change increases. Table VI.44, Table VI.45, and Table VI.46 
present the global values of emissions reductions at each TSL. For each 
of the four cases, DOE calculated a present value of the stream of 
annual values using the same discount rate as was used in the studies 
upon which the dollar-per-ton values are based. DOE calculated domestic 
values as a range from 7 percent to 23 percent of the global values, 
and these results are presented in Table VI.47, Table VI.48, and Table 
VI.49.

 Table VI.44--Estimates of Global Present Value of CO2 Emissions Reductions for the Period 2015-2045 Under Water
                                          Heater Trial Standard Levels
----------------------------------------------------------------------------------------------------------------
                                                      Global Value of CO2 Emission Reductions, Million 2009$
                                 Cumulative CO2  ---------------------------------------------------------------
              TSL                   emission                                                        3% discount
                                 reductions, Mt     5% discount     3% discount    2.5% discount    rate, 95th
                                                  rate, average*  rate, average*  rate, average*    percentile*
----------------------------------------------------------------------------------------------------------------
1.............................              74.3             266           1,351           2,285           4,122
2.............................             122               436           2,213           3,742           6,750
3.............................             131               468           2,374           4,014           7,242
4.............................             137               492           2,496           4,220           7,614
5.............................             154               524           2,682           4,545           8,179
6.............................             209               714           3,653           6,190          11,142
7.............................             609             2,060          10,560          17,898          32,204
8.............................           1,001             3,399          17,411          29,505          53,098
----------------------------------------------------------------------------------------------------------------
* Columns are labeled by the discount rate used to calculate the SCC and whether it is an average value or drawn
  from a different part of the distribution. Values presented in the table are based on escalating 2007$ to
  2009$ for consistency with other values presented in this notice, and incorporate the escalation of the SCC
  with each year.


[[Page 20202]]


Table VI.45--Estimates of Global Present Value of CO2 Emissions Reductions for the Period 2013-2043 Under Direct
                                     Heating Equipment Trial Standard Levels
----------------------------------------------------------------------------------------------------------------
                                                      Global value of CO2 emission reductions, million 2009$
                                  Cumulative CO2 ---------------------------------------------------------------
               TSL                   emission                                                       3% discount
                                  reductions, Mt    5% discount     3% discount    2.5% discount    rate, 95th
                                                  rate, average*  rate, average*  rate, average*    percentile*
----------------------------------------------------------------------------------------------------------------
1...............................             8.2              31             154             259             470
2...............................             8.8              33             165             278             503
3...............................             9.3              35             174             293             530
4...............................            17.9              67             335             565           1,023
5...............................            20.2              76             378             637           1,154
6...............................            49.9             187             933           1,572           2,849
----------------------------------------------------------------------------------------------------------------
* Columns are labeled by the discount rate used to calculate the SCC and whether it is an average value or drawn
  from a different part of the distribution. Values presented in the table are based on escalating 2007$ to
  2009$ for consistency with other values presented in this notice, and incorporate the escalation of the SCC
  with each year.


 Table VI.46--Estimates of Global Present Value of CO2 Emissions Reductions for the Period 2013-2043 Under Pool
                                          Heater Trial Standard Levels
----------------------------------------------------------------------------------------------------------------
                                                      Global value of CO2 emission reductions, million 2009$
                                  Cumulative CO2 ---------------------------------------------------------------
               TSL                   emission                                                       3% discount
                                  reductions, Mt    5% discount     3% discount    2.5% discount    rate, 95th
                                                  rate, average*  rate, average*  rate, average*    percentile*
----------------------------------------------------------------------------------------------------------------
1...............................             0.4               2               8              13              24
2...............................             0.8               3              14              24              43
3...............................             1.7               6              32              54              99
4...............................             2.4               9              45              75             136
5...............................             3.6              14              68             114             206
6...............................             8.9              33             167             281             509
----------------------------------------------------------------------------------------------------------------
* Columns are labeled by the discount rate used to calculate the SCC and whether it is an average value or drawn
  from a different part of the distribution. Values presented in the table are based on escalating 2007$ to
  2009$ for consistency with other values presented in this notice, and incorporate the escalation of the SCC
  with each year.


     Table VI.47--Estimates of Domestic Present Value of CO2 Emissions Reductions for the Period 2015-2045 Under Water Heater Trial Standard Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Domestic value of CO2 emission reductions, million 2009$ *
                                    --------------------------------------------------------------------------------------------------------------------
                TSL                                                                                 2.5% discount rate,         3% discount rate, 95th
                                      5% discount rate, average**  3% discount rate, average**           average**                   percentile**
--------------------------------------------------------------------------------------------------------------------------------------------------------
1..................................  18.6 to 61.3................  94.6 to 311................  160 to 526.................  289 to 948.
2..................................  30.5 to 100.................  155 to 509.................  262 to 861.................  473 to 1,553.
3..................................  32.8 to 108.................  166 to 546.................  281 to 923.................  507 to 1,666.
4..................................  34.4 to 113.................  175 to 574.................  295 to 971.................  533 to 1,751.
5..................................  36.7 to 120.................  188 to 617.................  318 to 1,045...............  573 to 1,881.
6..................................  50.0 to 164.................  256 to 840.................  433 to 1,424...............  780 to 2,563.
7..................................  144 to 474..................  739 to 2,429...............  1,253 to 4,117.............  2,254 to 7,407.
8..................................  248 to 782..................  1,219 to 4,005.............  2,065 to 6,786.............  3,717 to 12,212.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Domestic values are presented as a range between 7% and 23% of the global values.
** Columns are labeled by the discount rate used to calculate the SCC and whether it is an average value or drawn from a different part of the
  distribution. Values presented in the table are based on escalating 2007$ to 2009$ for consistency with other values presented in this notice, and
  incorporate the escalation of the SCC with each year.


   Table VI.48--Estimates of Domestic Present Value of CO2 Emissions Reductions for the Period 2013-2043 Under Direct Heating Equipment Trial Standard
                                                                         Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Domestic value of CO2 emission reductions, million 2009$ *
                                    --------------------------------------------------------------------------------------------------------------------
                TSL                                                                                 2.5% discount rate,         3% discount rate, 95th
                                      5% discount rate, average**  3% discount rate, average**           average**                   percentile**
--------------------------------------------------------------------------------------------------------------------------------------------------------
1..................................  2.2 to 7.1..................  10.8 to 35.4...............  18.2 to 59.6...............  32.9 to 108.0.
2..................................  2.3 to 7.6..................  11.5 to 37.9...............  19.5 to 63.9...............  35.2 to 115.8.
3..................................  2.4 to 8.0..................  12.2 to 39.9...............  20.5 to 67.3...............  37.1 to 121.9.
4..................................  4.7 to 15.4.................  23.5 to 77.1...............  39.5 to 129.9..............  71.6 to 235.4.
5..................................  5.3 to 17.4.................  26.5 to 87.0...............  44.6 to 146.6..............  80.8 to 265.5.
6..................................  13.1 to 43.0................  65.3 to 214.7..............  110.1 to 361.7.............  199.4 to 655.2.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Domestic values are presented as a range between 7% and 23% of the global values.

[[Page 20203]]

 
** Columns are labeled by the discount rate used to calculate SCC and whether it is an average value or drawn from a different part of the distribution.
  Values presented in the table are based on escalating 2007$ to 2009$ for consistency with other values presented in this notice, and incorporate the
  escalation of the SCC with each year.


     Table VI.49--Estimates of Domestic Present Value of CO2 Emissions Reductions for the Period 2013-2043 Under Pool Heaters Trial Standard Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Domestic value of CO2 emission reductions, million 2009$ *
                                    --------------------------------------------------------------------------------------------------------------------
                TSL                                                                                 2.5% discount rate,         3% discount rate, 95th
                                      5% discount rate, average**  3% discount rate, average**           average**                   percentile**
--------------------------------------------------------------------------------------------------------------------------------------------------------
1..................................  0.1 to 0.4..................  0.5 to 1.8.................  0.9 to 3.0.................  1.7 to 5.5.
2..................................  0.2 to 0.7..................  1.0 to 3.2.................  1.7 to 5.4.................  3.0 to 9.9.
3..................................  0.5 to 1.5..................  2.3 to 7.4.................  3.8 to 12.5................  6.9 to 22.7.
4..................................  0.6 to 2.1..................  3.1 to 10.3................  5.3 to 17.3................  9.5 to 31.4.
5..................................  1.0 to 3.1..................  4.7 to 15.5................  8.0 to 26.2................  14.4 to 47.5.
6..................................  2.3 to 7.7..................  11.7 to 38.3...............  19.6 to 64.6...............  35.6 to 117.0.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Domestic values are presented as a range between 7% and 23% of the global values.
** Columns are labeled by the discount rate used to calculate the SCC and whether it is an average value or drawn from a different part of the
  distribution. Values presented in the table are based on escalating 2007$ to 2009$ for consistency with other values presented in this notice, and
  incorporate the escalation of the SCC with each year.

    DOE is well aware that scientific and economic knowledge about the 
contribution of CO2 and other GHG emissions 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 reducing CO2 emissions 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 GHG 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 rule the most 
recent values and analyses resulting from the ongoing interagency 
review process.
    DOE also estimated a range for the cumulative monetary value of the 
economic benefits associated with NOX emissions reductions 
anticipated to result from amended standards for heating products. The 
dollar-per-ton values that DOE used are discussed in section IV.M of 
this final rule. Table VI.50 through Table VI.55 present the estimates 
calculated using seven-percent and three-percent discount rates, 
respectively.

  Table VI.50--Estimates of Value of Reductions of NOX Emissions Under
   Water Heater Trial Standard Levels at a Seven-Percent Discount Rate
------------------------------------------------------------------------
                                 Cumulative NOX    Value of NOX emission
             TSL                    emission        reductions, million
                                 reductions, kt            2009$
------------------------------------------------------------------------
1............................                57.5  6.6 to 67.8.
2............................                94.3  10.8 to 111.
3............................               101    11.6 to 119.
4............................               106    12.1 to 125.
5............................               116    11.0 to 113.
6............................               159    15.2 to 157.
7............................               456    42.6 to 438.
8............................               755    71.4 to 734.
------------------------------------------------------------------------


  Table VI.51--Estimates of Value of Reductions of NOX Emissions Under
   Water Heater Trial Standard Levels at a Three-Percent Discount Rate
------------------------------------------------------------------------
                                 Cumulative NOX    Value of NOX emission
             TSL                    emission        reductions, million
                                 reductions, kt            2009$
------------------------------------------------------------------------
1............................                57.5  13.7 to 141.
2............................                94.3  22.5 to 231.
3............................               101    24.0 to 247.
4............................               106    25.2 to 259.
5............................               116    25.4 to 261.
6............................               159    34.9 to 358.
7............................               456    99.1 to 1,018.
8............................               755    165 to 1,694.
------------------------------------------------------------------------


[[Page 20204]]


  Table VI.52--Estimates of Value of Reductions of NOX Emissions Under
    Direct Heating Equipment Trial Standard Levels at a Seven-Percent
                              Discount Rate
------------------------------------------------------------------------
                                  Cumulative NOX   Value of NOX emission
              TSL                    emission       reductions, million
                                  reductions, kt           2009$
------------------------------------------------------------------------
1.............................                7.5  1.0 to 10.2.
2.............................                8.1  1.1 to 10.9.
3.............................                8.5  1.1 to 11.4.
4.............................               16.4  2.2 to 22.3.
5.............................               18.6  2.5 to 25.3.
6.............................               46.0  6.1 to 62.5.
------------------------------------------------------------------------


  Table VI.53--Estimates of Value of Reductions of NOX Emissions Under
    Direct Heating Equipment Trial Standard Levels at a Three-Percent
                              Discount Rate
------------------------------------------------------------------------
                                  Cumulative NOX   Value of NOX emission
              TSL                    emission       reductions, million
                                  reductions, kt           2009$
------------------------------------------------------------------------
1.............................                7.5  1.9 to 19.6.
2.............................                8.1  2.0 to 21.0.
3.............................                8.5  2.1 to 22.1.
4.............................               16.4  4.2 to 42.9.
5.............................               18.6  4.7 to 48.7.
6.............................               46.0  11.7 to 120.2.
------------------------------------------------------------------------


  Table VI.54--Estimates of Value of Reductions of NOX Emissions Under
   Pool Heater Trial Standard Levels at a Seven-Percent Discount Rate
------------------------------------------------------------------------
                                  Cumulative NOX   Value of NOX emission
              TSL                    emission       reductions, million
                                  reductions, kt           2009$
------------------------------------------------------------------------
1.............................                0.4  0.1 to 0.5.
2.............................                0.7  0.1 to 0.9.
3.............................                1.5  0.2 to 2.2.
4.............................                2.1  0.3 to 2.9.
5.............................                3.2  0.4 to 4.5.
6.............................                7.8  1.1 to 11.0.
------------------------------------------------------------------------


  Table VI.55--Estimates of Value of Reductions of NOX Emissions Under
   Pool Heater Trial Standard Levels at a Three-Percent Discount Rate
------------------------------------------------------------------------
                                  Cumulative NOX   Value of NOX emission
              TSL                    emission       reductions, million
                                  reductions, kt           2009$
------------------------------------------------------------------------
1.............................                0.4  0.1 to 1.0.
2.............................                0.7  0.2 to 1.8.
3.............................                1.5  0.4 to 4.1.
4.............................                2.1  0.5 to 5.6.
5.............................                3.2  0.8 to 8.4.
6.............................                7.8  2.0 to 20.8.
------------------------------------------------------------------------

    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 
VI.57 through Table VI.62 present the NPV values for heating products 
that would result if DOE were to add the estimates of the potential 
economic benefits resulting from reduced CO2 and 
NOX emissions in each of four valuation scenarios to the NPV 
of consumer savings calculated for each TSL considered in this 
rulemaking, at both a seven-percent and three-percent discount rate. 
The CO2 values used in the columns of each table correspond 
to the four scenarios for the valuation of CO2 emission 
reductions presented in section IV.M. Table VI.56 shows an example of 
the calculation of the NPV including benefits from emissions reductions 
for the case of TSL 5 for water heaters.
    Although adding the value of consumer savings to the values of 
emission reductions provides a valuable perspective, the following 
should be considered: (1) The national consumer savings are domestic 
U.S. consumer

[[Page 20205]]

monetary savings found in market transactions, while the values of 
emissions reductions are based on estimates of marginal social costs, 
which, in the case of CO2, are based on a global value; (2) 
The assessments of consumer savings and emission-related benefits are 
performed with different computer models, leading to different 
timeframes for analysis. For heating products, the present value of 
national consumer savings is measured for the period in which units 
shipped (2015 to 2045 for water heaters, and 2013 to 2043 for DHE and 
pool heaters) continue to operate. However, the time frames of the 
benefits associated with the emission reductions differ. For example, 
the value of CO2 emissions reductions reflects the present 
value of all future climate-related impacts due to emitting a ton of 
carbon dioxide in that year, out to 2300.

Table VI.56--Estimate of Adding Net Present Value of Consumer Savings to
     Present Value of Monetized Benefits From CO2 and NOX Emissions
                  Reductions at TSL 5 for Water Heaters
------------------------------------------------------------------------
                                      Present value      Discount rate
             Category                 billion 2009$        (percent)
------------------------------------------------------------------------
                                Benefits
------------------------------------------------------------------------
Operating Cost Savings............               12.4                  7
                                                 29.2                  3
CO2 Monetized Value...............                0.5                  5
(at $4.7/Metric Ton)*.............
CO2 Monetized Value...............                2.7                  3
(at $21.4/Metric Ton)*............
CO2 Monetized Value...............                4.5                2.5
(at $35.1/Metric Ton)*............
CO2 Monetized Value...............                8.2                  3
(at $64.9/Metric Ton)*............
NOX Monetized Value...............                0.1                  7
(at $2,437/Metric Ton)............
                                                  0.1                  3
Total Monetary Benefits **........               15.2                  7
                                                 32.1                  3
------------------------------------------------------------------------
                                  Costs
------------------------------------------------------------------------
Total Monetary Costs..............              -11.1                  7
                                                -20.6                  3
------------------------------------------------------------------------
                           Net Benefits/Costs
------------------------------------------------------------------------
Including CO2 and NOX**...........                4.1                  7
                                                 11.5                  3
------------------------------------------------------------------------
* These values represent global values (in 2007$) of the social cost of
  CO2 emissions in 2010 under several scenarios. The values of $4.7,
  $21.4, and $35.1 per ton are the averages of SCC distributions
  calculated using 5%, 3%, and 2.5% discount rates, respectively. The
  value of $64.9 per ton represents the 95th percentile of the SCC
  distribution calculated using a 3% discount rate. See section IV.M for
  details.
** Total Monetary Benefits for both the 3% and 7% cases utilize the
  central estimate of social cost of CO2 emissions calculated at a 3%
  discount rate (averaged across three IAMs), which is equal to $21.4/
  ton in 2010 (in 2007$).


   Table VI.57--Estimates of Adding Net Present Value of Consumer Savings (at 7% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                            Levels for Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 7% discount rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 Value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and Low value for   CO2* and Medium    CO2* and Medium     CO2* and high
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               1.24               2.35               3.29               5.15
2...................................               1.33               3.16               4.69               7.74
3...................................               1.63               3.59               5.23               8.52
4...................................               1.54               3.60               5.32               8.77
5...................................               1.92               4.13               5.99               9.68
6...................................               1.74               4.75               7.29              12.31
7...................................               1.89              10.59              17.92              32.43
8...................................             (8.10)               6.24              18.34              42.26
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the global SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low values correspond to $447 per ton of NOX emissions.
*** Medium values correspond to $2,519 per ton of NOX emissions.
**** High values correspond to $4,591 per ton of NOX emissions.


[[Page 20206]]


   Table VI.58--Estimates of Adding Net Present Value of Consumer Savings (at 3% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                            Levels for Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 3% Discount Rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and Low value for   CO2* and Medium    CO2* and Medium     CO2* and High
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               4.67               5.82               6.75               8.65
2...................................               6.08               7.96               9.49              12.60
3...................................               7.54               9.56              11.20              14.54
4...................................               8.07              10.19              11.91              15.42
5...................................               9.22              11.50              13.36              17.11
6...................................               9.83              12.93              15.47              20.58
7...................................              25.55              34.51              41.84              56.61
8...................................              20.44              35.21              47.31              71.67
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the global SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low value corresponds to $447 per ton of NOX emissions.
*** Medium value corresponds to $2,519 per ton of NOX emissions.
**** High value corresponds to $4,591 per ton of NOX emissions.


   Table VI.59--Estimates of Adding Net Present Value of Consumer Savings (at 7% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                       Levels for Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 7% discount rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and low value for   CO2* and medium    CO2* and medium     CO2* and high
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               0.58               0.70               0.81               1.02
2...................................               0.61               0.74               0.86               1.09
3...................................               0.60               0.74               0.86               1.10
4...................................             (1.12)             (0.84)             (0.61)             (0.14)
5...................................             (1.16)             (0.85)             (0.59)             (0.06)
6...................................             (4.18)             (3.41)             (2.77)             (1.47)
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the global SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low value corresponds to $447 per ton of NOX emissions.
*** Medium value corresponds to $2,519 per ton of NOX emissions.
**** High value corresponds to $4,591 per ton of NOX emissions.
Parentheses indicate negative (-) values.


   Table VI.60--Estimates of Adding Net Present Value of Consumer Savings (at 3% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                       Levels for Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 3% discount rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and low value for   CO2* and medium    CO2* and medium     CO2* and high
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               1.35               1.48               1.59               1.80
2...................................               1.42               1.56               1.68               1.91
3...................................               1.43               1.58               1.70               1.94
4...................................             (1.18)             (0.90)             (0.67)             (0.19)
5...................................             (1.14)             (0.81)             (0.55)             (0.02)
6...................................             (4.77)             (3.97)             (3.33)             (2.00)
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the global SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low value corresponds to $447 per ton of NOX emissions.
*** Medium value corresponds to $2,519 per ton of NOX emissions.
**** High value corresponds to $4,591 per ton of NOX emissions.
Parentheses indicate negative (-) values.


[[Page 20207]]


   Table VI.61--Estimates of Adding Net Present Value of Consumer Savings (at 7% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                             Levels for Pool Heaters
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 7% discount rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and low value for   CO2* and medium    CO2* and medium     CO2* and high
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               0.05               0.05               0.06               0.07
2...................................               0.04               0.05               0.06               0.08
3...................................             (0.05)             (0.03)             (0.00)               0.04
4...................................             (0.15)             (0.11)             (0.08)             (0.02)
5...................................             (1.38)             (1.32)             (1.28)             (1.18)
6...................................             (2.84)             (2.70)             (2.59)             (2.35)
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the global SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low value corresponds to $447 per ton of NOX emissions.
*** Medium value corresponds to $2,519 per ton of NOX emissions.
**** High value corresponds to $4,591 per ton of NOX emissions.
Parentheses indicate negative (-) values.


   Table VI.62--Estimates of Adding Net Present Value of Consumer Savings (at 3% Discount Rate) to Net Present
 Value of Low, Central, and High-End Monetized Benefits From CO2 and NOX Emissions Reductions at Trial Standard
                                             Levels for Pool Heaters
----------------------------------------------------------------------------------------------------------------
                                                     Consumer NPV at 3% discount rate added with:
                                     ---------------------------------------------------------------------------
                                      CO2 value of $4.7/    CO2 value of       CO2 value of       CO2 value of
                 TSL                   metric ton CO2*    $21.4/metric ton   $35.1/metric ton   $64.9/metric ton
                                      and low value for   CO2* and medium    CO2* and medium     CO2* and high
                                        NOX** billion     value for NOX***   value for NOX***  value for NOX****
                                            2009$          billion 2009$      billion 2009$      billion 2009$
----------------------------------------------------------------------------------------------------------------
1...................................               0.10               0.11               0.11               0.12
2...................................               0.11               0.12               0.13               0.15
3...................................             (0.01)               0.02               0.04               0.09
4...................................             (0.14)             (0.10)             (0.07)             (0.01)
5...................................             (2.31)             (2.26)             (2.21)             (2.11)
6...................................             (4.53)             (4.39)             (4.28)             (4.04)
----------------------------------------------------------------------------------------------------------------
* These label values per ton represent the SCC of CO2 in 2010, in 2007$. Their present values have been
  calculated with scenario-consistent discount rates. See section IV.M for a full discussion of the derivation
  of these values.
** Low value corresponds to $447 per ton of NOX emissions.
*** Medium value corresponds to $2,519 per ton of NOX emissions.
**** High value corresponds to $4,591 per ton of NOX emissions.
 Parentheses indicate negative (-) values.

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 subgroups are described in section VI.C.1.b above. DOE also 
believes that uncertainties associated with the heat pump water heater 
market (e.g., product availability, servicing, and manufacturability) 
are relevant to consider as described in section VI.D.2 below. Lastly, 
DOE believes that another relevant consideration is the potential 
safety concerns surrounding gas-fired storage water heaters that are 
atmospherically vented with high recovery efficiencies that potentially 
may be installed with improper venting in certain installations, which 
are also discussed in section VI.D.2 below.

D. Conclusion

1. Overview
    As discussed above, EPCA contains a number of criteria and other 
provisions which must be followed when prescribing new or amended 
energy conservation standards. Specifically, the statute provides that 
any such standard for any type (or class) of covered product must 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. (42 U.S.C. 
6295(o)(2)(B)(i)) DOE must do so after receiving public 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 the manufacturers and 
consumers of the products subject to such standard;
    2. The savings in operating costs throughout the estimated average 
life of the covered product in the type (or class) compared to any 
increase in the price of, initial charges for, or maintenance expenses 
of the covered

[[Page 20208]]

products likely to result from imposition of the standard;
    3. The total projected amount of energy (or, as applicable, water) 
savings likely to result directly from imposition of the standard;
    4. Any lessening of the utility or performance of the covered 
products likely to result from imposition of the standard;
    5. The impact of any lessening of competition, as determined in 
writing by the Attorney General, likely to result from 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))
    A determination of whether a standard level is economically 
justified is not based on any one factor in isolation. The Secretary 
must weigh each of these seven factors in total. In addition, the 
Secretary may not establish any standard if such standard would not 
result in ``significant conservation of energy'' or ``is not 
technologically feasible or economically justified.'' (42 U.S.C. 
6295(o)(3)(B)) Furthermore, EPCA's ``anti-backsliding'' provision 
prohibits 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))
    In selecting today's energy conservation standards for the three 
heating products, DOE started by examining whether the maximum 
technologically feasible levels were economically justified. Upon 
finding that the maximum technologically feasible levels were not 
economically justified, DOE analyzed the next lower TSL to determine 
whether that level was economically justified. DOE follows this 
procedure until it: (1) Identifies a TSL that is both technologically 
feasible and economically justified, and saves a significant amount of 
energy; or (2) determines that no TSL is economically justified.
    Tables in each section below for each of the three types of heating 
products summarize DOE's quantitative analytical results for each TSL 
it considered for this final rule. These tables will aid the reader in 
understanding the costs and benefits of each TSL that DOE considered in 
adopting standards in this final rule.
2. Water Heaters
    Table VI.63 summarizes the results of DOE's quantitative analysis 
for each TSL it considered for this final rule for water heaters.

                                                                  Table VI.63--Summary of Analytical Results for Water Heaters
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                          Category                                 TSL 1           TSL 2           TSL 3           TSL 4           TSL 5           TSL 6            TSL 7             TSL 8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Energy Savings (quads).............................            1.07            1.66            2.05            2.35            2.58            3.06             10.16             16.73
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            NPV of Consumer Benefits (2009$ billion)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3% discount rate............................................            4.39            5.62            7.05            7.55            8.67            9.08             23.39             16.87
7% discount rate............................................            0.96            0.88            1.15            1.03            1.39            1.01            (0.22)           (11.57)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Industry Impacts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired and Electric Storage:
    Industry NPV (2009$ million)............................    (4.9)-(14.2)    (4.3)-(31.4)    (5.2)-(38.3)    (4.8)-(89.4)  (25.9)-(122.6)  (23.6)-(134.6)    (10.5)-(350.2)      79.2-(647.0)
    Industry NPV (% change).................................     (0.6)-(1.6)     (0.5)-(3.6)     (0.6)-(4.3)    (0.5)-(10.2)    (2.9)-(13.9)    (2.7)-(15.3)      (1.2)-(39.8)        9.0-(73.5)
Oil-Fired Storage:
    Industry NPV (2009$ million)............................     (0.2)-(0.4)     (0.2)-(0.3)     (0.2)-(0.4)     (0.2)-(0.4)     (0.2)-(0.4)     (0.2)-(0.4)       (0.2)-(0.4)       (1.4)-(3.8)
    Industry NPV (% change).................................     (2.0)-(3.9)     (1.8)-(3.6)     (2.0)-(4.2)     (2.0)-(4.2)     (2.0)-(4.2)     (2.0)-(4.2)       (2.0)-(4.2)     (15.4)-(41.4)
Gas-Fired Instantaneous:
    Industry NPV (2009$ million)............................       2.3-(1.2)       2.3-(1.2)       2.3-(1.2)       2.3-(1.2)       2.3-(1.2)       2.3-(1.2)         2.3-(1.2)       91.4-(57.6)
    Industry NPV (% change).................................       0.4-(0.2)       0.4-(0.2)       0.4-(0.2)       0.4-(0.2)       0.4-(0.2)       0.4-(0.2)         0.4-(0.2)        14.1-(8.9)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Cumulative Emissions Reduction
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (Mt)....................................................            74.3             122             131             137             154             209               609             1,001
    NOX (kt)................................................            57.5            94.3             101             106             116             159               456               755
    Hg (t)..................................................           0.056           0.090           0.103           0.113           0.553           0.704              2.32              3.59
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Value of Cumulative Emissions Reduction (2009$ million) [dagger][dagger]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO2.........................................................    266 to 4,122    436 to 6,750    468 to 7,242    492 to 7,614    524 to 8,179   714 to 11,142   2,060 to 32,204   3,399 to 53,098
NOX--3% discount rate.......................................     13.7 to 141     22.5 to 231       24 to 247       25 to 259       25 to 261       35 to 358       99 to 1,019      165 to 1,694
NOX--7% discount rate.......................................     6.6 to 67.9     10.8 to 111     11.6 to 119     12.2 to 125     11.0 to 113     15.2 to 157       42.6 to 438       71.5 to 734
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Mean LCC Savings * (2009$)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired Storage...........................................              16               7               7               7              18               9             (218)             (195)
Electric Storage............................................               5              11              18              18              64              64               112               171
Oil-Fired Storage...........................................             101             203             295             295             295             295               295               495
Gas-Fired Instantaneous.....................................               9               9               9               9               9               9                 9             (259)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 20209]]

 
                                                                                       Median PBP (years)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired Storage...........................................             2.0             4.5             4.5             4.5             2.3             4.7              21.5              15.6
Electric Storage............................................             4.0             4.0             5.0             6.7             6.8             6.8               9.4               9.0
Oil-Fired Storage...........................................             0.9             0.3             0.5             0.5             0.5             0.5               0.5               1.9
Gas-Fired Instantaneous.....................................            14.8            14.8            14.8            14.8            14.8            14.8              14.8              38.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Distribution of Consumer LCC Impacts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-Fired Storage:
    Net Cost (%)............................................              25              32              32              32              27              34                70                70
    No Impact (%)...........................................              36              22              22              22              33              21                 6                 1
    Net Benefit (%).........................................              39              45              45              45              40              46                23                28
Electric Storage:
    Net Cost (%)............................................              11              12              21              32              33              33                50                50
    No Impact (%)...........................................              44              39              17              10               9               9                 5                 1
    Net Benefit (%).........................................              45              48              62              59              58              58                45                49
Oil-Fired Storage:
    Net Cost (%)............................................               0               0               0               0               0               0                 0                 0
    No Impact (%)...........................................              76              54              47              47              47              47                47                17
    Net Benefit (%).........................................              24              46              53              53              53              53                53                83
Gas-Fired Instantaneous:
    Net Cost (%)............................................               5               5               5               5               5               5                 5                77
    No Impact (%)...........................................              91              91              91              91              91              91                91                12
    Net Benefit (%).........................................               4               4               4               4               4               4                 4                11
    Generation Capacity Change (GW in 2045).................         (0.168)         (0.270)         (0.309)         (0.339)         (0.829)          (1.05)            (3.49)            (5.39)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Employment Impacts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Potential Changes in Domestic Production Workers in
 2015:
    Gas-Fired and Electric Storage..........................      (3,610)-55     (3,610)-128     (3,610)-168     (3,610)-256     (3,610)-439     (3,610)-500     (3,610)-3,253     (3,610)-6,313
    Oil-Fired storage.......................................          (37)-0          (37)-0          (37)-1          (37)-1          (37)-1          (37)-1            (37)-1           (37)-18
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Gas-Fired Instantaneous.................................                                                Not Applicable [dagger][dagger][dagger]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Net Change in National Indirect Employment in 2044                   2.1             2.8             4.6             6.0            10.4            10.6              43.5              56.3
     thousands) [dagger][dagger][dagger][dagger]............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.
* For LCCs, a negative value means an increase in LCC by the amount indicated.
[dagger][dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.
[dagger][dagger][dagger] The industry for gas-fired instantaneous water heaters is international.
[dagger][dagger][dagger][dagger] National Indirect Employment Impacts exclude direct impacts.

    DOE first considered TSL 8, which represents the max-tech 
efficiency levels for all four product classes. TSL 8 includes a 
national standard effectively requiring the use of condensing 
technology for gas-fired storage and instantaneous water heaters, a 
national standard effectively requiring the use of heat pump water 
heater technology for electric storage water heaters, and a national 
standard effectively requiring the use of a multi-flue design for oil-
fired water heaters. TSL 8 would save 16.7 quads of energy, an amount 
DOE considers significant. TSL 8 would result in a NPV of consumer cost 
of $11.6 billion, using a discount rate of 7 percent, and consumer 
benefit of $16.9 billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 8 are 1,001 Mt of 
CO2, 755 kt of NOX, and 3.6 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 8 is $3,399 million to $53,098 million. Total 
electricity generating capacity in 2045 is estimated to decrease by 
5.39 gigawatts (GW) under TSL 8.
    At TSL 8, DOE projects that the average LCC impact for consumers is 
a loss of $195 for gas-fired storage water heaters, a gain of $171 for 
electric storage water heaters, a gain of $495 for oil-fired storage 
water heaters, and a loss of $259 for gas-fired instantaneous water 
heaters. The median payback period is 15.6 years for gas-fired storage 
water heaters, 9.0 years for electric storage water heaters, 1.9 years 
for oil-fired storage water heaters, and 38.7 years for gas-fired 
instantaneous water heaters (which is substantially longer than the 
mean lifetime of the product). At TSL 8, the fraction of consumers 
experiencing an LCC benefit is 28 percent for gas-fired storage water 
heaters, 49 percent for electric storage water heaters, 83 percent for 
oil-fired storage water heaters, and 11percent for gas-fired 
instantaneous water heaters. The fraction of consumers experiencing an 
LCC cost is 70 percent for gas-fired storage water heaters, 50 percent 
for electric storage water heaters, 0 percent for oil-fired storage 
water heaters, and

[[Page 20210]]

77 percent for gas-fired instantaneous water heaters.
    At TSL 8, the average LCC savings are negative for all of the 
considered consumer subgroups for gas-fired storage water heaters, and 
a majority of the households in each subgroup experience a net cost. In 
the case of electric storage water heaters, the average LCC savings are 
negative for senior-only and multi-family households, but positive for 
low-income and manufactured home households. In all cases, however, a 
majority of the households in each subgroup experience a net cost.
    At TSL 8, the projected change in the INPV is estimated to decrease 
up to $647 million for gas-fired and electric storage water heaters, a 
decrease of up to $3.8 million for residential oil-fired storage water 
heaters, and a decrease of up to $58 million for gas-fired 
instantaneous water waters, in 2009$. For gas-fired 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 8, 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 8, 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 
8 could result in a net loss of 73.5 percent in INPV for gas-fired and 
electric storage water heaters, a net loss of 41.4 percent in INPV for 
oil-fired storage water heaters, and a net loss of 8.9 percent in INPV 
for gas-fired instantaneous water heaters.
    For gas-fired storage and instantaneous water heaters at TSL 8, 
condensing operation would be required. As further described in the 
December 2009 NOPR, DOE outlined several concerns related to the 
condensing gas-fired storage water heater market. 74 FR 65852, 65963-64 
(Dec. 11, 2009). The main concerns included the ability for the 
industry to produce condensing gas-fired storage water heaters and 
provide installation and servicing on a scale necessary to serve the 
entire volume of the market (i.e., approximately, 4.6 million units 
annually). TSL 8 also includes an efficiency level for electric storage 
water heaters that would require the use of heat pump technology. The 
substantial average savings for customers estimated by DOE's analysis 
for TSL 8 are primarily driven by the results for heat pump water 
heaters. However, DOE outlined a handful of concerns in the December 
2009 NOPR with the current heat pump water heater market that may 
prevent heat pump technology from being ready for full-scale 
implementation for all consumers. 74 FR 65852, 65965 (Dec. 11, 2009). 
These included manufacturability, serviceability, the ability to 
retrofit existing installations, and potential impacts on the space 
conditioning loads in the house. All four major storage water heater 
manufacturers within the industry echoed these concerns regarding the 
max-tech efficiency level products.
    Therefore, the Secretary has concluded that at TSL 8, the benefits 
of energy savings, positive NPV of consumer benefits (at 3-percent 
discount rate), generating capacity reductions, and emission reductions 
are 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 concluded that TSL 8 is not economically justified.
    Next, DOE considered TSL 7. The efficiency levels in TSL 7 include 
the ENERGY STAR program level for electric storage water heaters, which 
effectively requires the use of heat pump water heating technologies. 
However, TSL 7 allows the use of atmospherically-vented gas-fired 
storage water heaters. TSL 7 would save 10.16 quads of energy, an 
amount DOE considers significant. TSL 7 would result in a negative 
consumer NPV of $0.22 billion, using a discount rate of 7 percent, and 
a consumer NPV benefit of $23.4 billion, using a discount rate of 3 
percent.
    The cumulative emissions reductions at TSL 7 are 609 Mt of 
CO2, 456 kt of NOX, and 2.32 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 7 is $2,060 million to $32,204 million. Total 
generating capacity in 2045 is estimated to decrease by 3.49 GW under 
TSL 7.
    At TSL 7, DOE projects that the average LCC impact is a loss of 
$218 for gas-fired storage water heaters, a gain of $112 for electric 
storage water heaters, a gain of $295 for oil-fired storage water 
heaters, and a gain of $9 for gas-fired instantaneous water heaters. 
The median payback period is 21.5 years for gas-fired storage water 
heaters, 9.4 years for electric storage water heaters, 0.5 years for 
oil-fired storage water heaters, and 14.8 years for gas-fired 
instantaneous water heaters. At TSL 7, the fraction of consumers 
experiencing an LCC benefit is 23 percent for gas-fired storage water 
heaters, 45 percent for electric storage water heaters, 53 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 70 percent for gas-fired storage water heaters, 50 percent 
for electric storage water heaters, 0 percent for oil-fired storage 
water heaters, and 5 percent for gas-fired instantaneous water heaters.
    At TSL 7, the estimated average LCC savings are negative for all of 
the considered consumer subgroups for gas-fired storage water heaters, 
and a majority of the households in each subgroup experience a net 
cost. In the case of electric storage water heaters, the average LCC 
savings are negative for senior-only and multi-family households, but 
positive for low-income and manufactured home households. In all cases, 
however, a majority of the households in each subgroup experience a net 
cost.
    At TSL 7, the projected change in INPV ranges from a decrease of up 
to $350.2 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 $1.2 million for gas-fired instantaneous water 
heaters, in 2009$. 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 7 could result in a net loss of 
39.8 percent in INPV for gas-fired and electric storage

[[Page 20211]]

water heaters, a net loss of 4.2 percent in INPV for oil-fired storage 
water heaters, and a net loss of 0.2 percent in INPV for gas-fired 
instantaneous water heaters.
    TSL 7 includes efficiency levels for the entire market of 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. 
As with TSL 8, the average savings for electric water heater customers 
estimated by DOE's analysis for TSL 7 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 outlined a number of concerns regarding 
the manufacturability and the market for heat pump water heaters in the 
December 2009 NOPR. 74 FR 65852, 65965 (Dec. 11, 2009). These included 
manufacturability, serviceability, the ability to retrofit existing 
installations, and potential impacts on the space conditioning loads in 
the house.
    DOE further researched the heat pump water heater market for the 
final rule. Since the analysis was conducted for the December 2009 
NOPR, several heat pump water heater models have been introduced into 
the market by major manufacturers. DOE's engineering analysis for the 
final rule confirmed that the use of heat pump water heaters adds 
dramatically to the MSP estimates, increasing the MSP more than $588 
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 $915 for heat pump water heaters compared to traditional 
electric storage water heaters that use electric resistance heating 
elements.
    In the December 2009 NOPR, DOE posed a series of questions for 
interested parties regarding the manufacturability of heat pump water 
heaters to meet the demands of the entire market (i.e., approximately 
5.8 million units). Even though DOE acknowledged in the December 2009 
NOPR that 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 begun to offer a heat pump water heater model 
for sale, DOE questioned whether it was possible for manufacturers to 
convert all of their existing product lines over to produce heat pump 
water heaters within 5 years. 74 FR 65852, 65965 (Dec. 11, 2009). In 
response to DOE's question in the December 2009 NOPR, A.O. Smith, 
Rheem, and Bradford White all agreed that producing heat pump water 
heaters in the volumes necessary to service the market would be quite a 
transformation and investment for manufacturers. DOE estimates that it 
would take a total of $76 million in capital conversion costs and an 
additional $55 million in product conversion costs for the industry to 
offer exclusively HPWHs. In addition, the significantly higher 
production costs would require an additional $273 million in working 
capital to purchase 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 $404 million in an electric storage market 
valued at approximately $301 million. Furthermore, manufacturers would 
find it extremely difficult to create a service structure for over five 
million electric storage water heaters that use a relatively new 
technology by the compliance date of the final rule. Finally, DOE 
believes it is unlikely that manufacturers 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. Even with the ENERGY STAR incentive program, 
DOE's only projects the market penetration of heat pump water heaters 
will be 5 percent in 2015.
    In the December 2009 NOPR, DOE questioned whether the service 
industry would be capable of providing the same level of service for 
heat pump water heaters that consumers are accustomed to receiving from 
a typical installer or repair person. 74 FR 65852, 65965 (Dec. 11, 
2009). DOE sought input from commenters about whether reliable 
installation and servicing could be achieved on the scale needed by the 
compliance date of the amended standard. Id. As further detailed in 
section IV.B.2.b, DOE received comments supporting both sides of the 
arguments. Some manufacturers believe the training of service 
technicians and infrastructure needed to provide service to the heat 
pump water heating industry is not adequate and would not be available 
by the compliance date of the standard to serve the needs of the entire 
market. Others, including a manufacturer of heat pump water heaters, 
asserted that a nationwide network for heat pump water heater product 
service currently exists to service the limited heat pump water heater 
market today. Also, this manufacturer is currently developing a 
nationwide installation base to ensure that its consumers can readily 
purchase, install, and repair their heat pump water heaters. Other 
commenters pointed out that the skills needed to service heat pump 
water heaters are similar to the skill set of technicians in the 
residential refrigerator industry, which has an extensive servicing 
base.
    While DOE believes that heat pump water heaters could require 
different servicing needs compared to traditional electric resistance 
storage water heaters, DOE also believes that the service industry will 
adapt to provide reliable installation, repair, and maintenance for 
heat pump water heaters by the compliance date of amended energy 
conservation standards for a subset of the entire market. Heat pump 
water heaters will require additional servicing needs for the sealed 
system portion of the unit. This includes handling a working 
refrigerant in addition to the typical plumbing type issues associated 
with residential water heaters. Even though DOE believes this 
additional servicing requirement can be adequately handled by a 
national servicing network of appliance technicians, DOE questions 
whether this can be done in the near-term at a level necessary to 
service the entire market.
    In the December 2009 NOPR, DOE also questioned whether heat pump 
water heaters were capable of being installed in all types of 
installations currently serviced by the residential electric storage 
water heating market. 74 FR 65852, 65965 (Dec. 11, 2009). 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. In some indoor 
installations, the consumer needs to address space constraints issues, 
a requirement for sufficient air volume to maintain adequate operation 
of the water heater, and the impact of the water heater cooling off the 
space during the heating season. Id. DOE stated in the December 2009 
NOPR that according to DOE's estimates, 12 percent of electric storage 
water heater consumers would experience an increase of more than $500 
in their LCC compared to the base case. 74 FR 65852, 65965 (Dec. 11, 
2009).
    DOE strongly considered TSL 7 as the standard level for residential 
water heaters. Even though the commenters provided useful insight 
regarding the

[[Page 20212]]

potential manufacturability, serviceability, and capabilities of these 
units to be installed in similar types of installations where current 
electric storage water heaters are located, DOE is still concerned 
about some of the issues identified in the December 2009 NOPR and 
outlined above regarding a national heat pump water heater standard. 
Specifically, DOE is still concerned about the ability for 
manufacturers to ramp up production in time to meet the demand by the 
compliance date of amended standards, the potentially large increases 
in total installed cost to certain consumers, the potential impacts on 
multi-family households, and the potential impacts on the heating and 
cooling load of the residence. Consequently, for today's final rule, 
the Secretary has concluded that at TSL 7, the benefits of energy 
savings, positive consumer NPV (at 3-percent discount rate), 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 significant fraction of 
consumers due to the large increases in total installed 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.
    Next, DOE considered TSL 6, 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 to 
potentially save additional energy. Specifically, TSL 6 would 
effectively require heat pump technology for electric storage water 
heaters with a rated storage volume greater than 55 gallons and 
condensing technology for gas-fired storage water heaters with a rated 
storage volume greater than 55 gallons. For electric storage water 
heaters at TSL 6, DOE considered efficiency level 6 (i.e., the lowest 
efficiency level DOE analyzed effectively requiring heat pump 
technology), instead of the max-tech efficiency level 7 for large water 
heaters, because at the time of the analysis, only one manufacturer had 
demonstrated the capability of reaching the efficiencies required by 
the max-tech energy efficiency equation for electric storage water 
heaters. Under this slightly lower efficiency level, manufacturers can 
better maintain design flexibility, and it encourages competition in 
the heat pump water heater market. DOE believes this level represents 
an efficiency level that is likely to result in efficient heat pump 
technologies, yet also maintains maximum flexibility regarding specific 
heat pump water heater designs. For electric storage water heaters with 
a rated storage volume of 55 gallons or less, TSL 6 also includes 
requirements which continue to allow the use of electric resistance 
elements. TSL 6 also includes requirements allowing atmospherically-
vented gas-fired storage water heaters with a rated storage volume at 
or below 55 gallons. As an example, a gas-fired water heater with a 
rated storage volume of 40 gallons would be required to meet a 0.63 EF 
under TSL 6. As described above and further detailed below, this 
efficiency level, which is pushing the limits of atmospherically-vented 
gas-fired storage water heaters is where DOE has concerns over consumer 
safety for units with high recovery efficiencies in certain 
installations. These concerns are further described below.
    TSL 6 would save 3.06 quads of energy, an amount DOE considers 
significant. Under TSL 6, the NPV of consumer benefit would be $1.01 
billion, using a discount rate of 7 percent, and $9.08 billion, using a 
discount rate of 3 percent.
    The cumulative emissions reductions at TSL 6 are 209 Mt of 
CO2, 159 kt of NOX, and 0.704 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 6 is $714 million to $11,142 million. Total 
generating capacity in 2045 is estimated to decrease by 1.05 GW under 
TSL 6.
    At TSL 6, DOE projects that the average LCC impact is a gain 
(consumer cost savings) of $9 for gas-fired storage water heaters, a 
gain of $64 for electric storage water heaters, a gain of $295 for oil-
fired storage water heaters, and a gain of $9 for gas-fired 
instantaneous water heaters. The median payback period is 4.7 years for 
gas-fired storage water heaters, 6.8 years for electric storage water 
heaters, 0.5 years for oil-fired storage water heaters, and 14.8 years 
for gas-fired instantaneous water heaters. At TSL 6, the fraction of 
consumers experiencing an LCC benefit is 46 percent for gas-fired 
storage water heaters, 58 percent for electric storage water heaters, 
53 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 34 percent for gas-fired storage water 
heaters, 33 percent for electric storage water heaters, 0 percent for 
oil-fired storage water heaters, and 5 percent for gas-fired 
instantaneous water heaters.
    At TSL 6, the estimated average LCC savings for gas-fired storage 
water heaters are negative for multi-family households and manufactured 
home households, slightly negative for low-income households, and 
slightly positive for senior-only households. In the case of electric 
storage water heaters, the average LCC savings are positive for senior-
only and low-income households, slightly negative for multi-family 
households, and negative for manufactured home households. In all cases 
except manufactured home households, a majority of the households in 
each subgroup experience a net benefit.
    At TSL 6, the projected change in INPV ranges from a decrease of up 
to $134.6 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 $1.2 million for gas-fired instantaneous water 
heaters, in 2009$. 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 6 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 6 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 6 do not require substantial changes to the existing operations for 
some manufacturers. The significant changes to 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 6 could result in a net loss of 
15.3 percent in INPV for gas-fired and electric storage water heaters, 
a net loss of 4.2 percent in INPV for oil-fired storage water heaters, 
and a net loss of 0.2 percent in INPV for gas-fired instantaneous water 
heaters.
    DOE believes TSL 6 would provide an effective mechanism for 
increasing the

[[Page 20213]]

market penetration for advanced-technology water heaters. Given DOE's 
concerns with TSL 7 (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 
adopting TSL 6. TSL 6 results in positive NPV of consumer benefit for 
both electric and gas-fired storage water heaters, while also providing 
considerable 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 6 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 6 division. Compared to TSL 7, TSL 6 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 structural 
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 LCC savings and shorter 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 8), TSL 
6 requires condensing technology for a relatively small fraction of the 
gas-fired storage water heater market, reduces the number of 
installations that require significant building modifications due to 
the size of condensing gas-fired water heaters, and results in higher 
average LCC savings and shorter median payback period.
    Although DOE has identified a number of benefits associated with 
TSL 6, DOE is aware that there are multiple issues associated with 
promulgating an amended energy conservation standard at this level. 
Potential issues with TSL 6 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. 
DOE fully discusses each of these in great detail in the December 2009 
NOPR. 74 FR 65852, 65966-67 (Dec. 11, 2009). The lack of clarity on 
many of these issues contributed to DOE's tentative conclusion at the 
NOPR stage that a determination could not be made that NOPR TSL 5 
(which contained different standards based upon the 55-gallon capacity 
division) is economically justified. However, comments and other 
information on these issues in response to the NOPR allowed DOE to make 
a more informed decision for the final rule.
    As far as consumer acceptance, DOE questioned whether consumers may 
elect not to buy the larger-volume water heaters for a number of 
reasons (e.g., including increases in first costs, unfamiliarity with 
the product, or space-constraint issues) and instead buy multiple water 
heaters that are under the capacity limit in the December 2009 NOPR. 74 
FR 65852, 65967 (Dec. 11, 2009). In the final rule, DOE has now 
accounted for the equipment switching to lower rated storage volume 
water heaters in its analysis. DOE believes it has captured any 
potential impacts from that fraction of consumers who might elect to 
install one or two smaller water heaters. DOE derived the fraction of 
households which could switch from a large water heater to two smaller 
water heaters by comparing the total installed costs. DOE also 
considered the feasibility of switching a large water heater to a 
smaller water heater based on hot water needs of the household. DOE 
also took into consideration other factors such as whether some 
households would account for the operating cost advantages, need for 
emergency replacement, and avoiding costly venting system modifications 
when also installing a condensing gas furnace. See section IV.G.2.d for 
additional details.
    As far as the reliable installation, servicing, and repair network 
that would be needed to service the market, DOE believes TSL 6 
mitigates these problems for the reasons that follow. Because TSL 6 
only impacts at most 9 percent of the electric storage water heater 
market, DOE believes the service industry will be able to provide 
adequate service to this subset of consumers. In addition, DOE believes 
that with the ENERGY STAR program and major water heater manufacturers 
continuing to introduce products into the market, the service industry 
will also continue to evolve. Given that this standard level does not 
impact the entire market and with the 5-year lead time, DOE believes 
the service industry will be able to properly train technicians and 
provide a nationwide network, which includes plumbers and refrigeration 
technicians to properly service heat pump water heaters by 2015.
    As far as manufacturability, DOE estimates that it would take a 
total of $14.2 million and $26.1 million in capital conversion costs 
and product conversion costs for the industry to offer condensing 
products and heat pump water heaters for units with rated storage 
volumes above 55-gallons, respectively. While the total required 
investments (including working capital) to manufacture exclusively 
HPWHs greatly exceed the total industry value, the total conversion 
costs for converting only products with rated storage volumes above 55-
gallons represent just 2.4 percent and 8.7 percent of the total value 
of the gas-fired and electric storage markets, respectively. 
Additionally, TSL 6 requires far less investment in working capital 
than TSL 7. Specifically, as compared to the $273 million required by 
TSL 7 for electric storage water heaters, TSL 6 would necessitate an 
investment of $45 million. Similarly, for gas-fired storage water 
heaters, TSL 8 requires an increase of $177 million in working capital 
needs, while TSL 6 requires an increase of $20 million. These much 
higher investments at TSL 7 and TSL 8, relative to TSL 6, are reflected 
in the mitigated INPV impacts shown in the MIA results.
    DOE also believes that manufacturers would be better able to make 
the technological changes required at TSL 6 than TSL 7 before the 
compliance date, due, in part, to the experience of all three major 
manufacturers in producing large-volume condensing products for the 
commercial sector. DOE believes manufacturers can rely on this 
experience to adapt to TSL 6 to an extent they could not at TSL 8, at 
which smaller-volume products would also have to be converted. 
Furthermore, two of the three major manufacturers have some experience 
in manufacturing heat pump water heaters for the residential sector. 
The efficiency requirements for products only above 55-gallons rated 
storage volume would not require manufacturers to greatly alter most of 
their existing production lines. DOE believes that manufactures would 
create separate production lines for these products, which would be 
less disruptive to current facilities. In addition, five years should 
offer enough lead time for the product development and capital changes 
for these larger-rated-volume products. Lastly, DOE believes that 
manufacturers would be more likely to maintain an historic level of 
return on investment on large-volume products, relative to small-volume

[[Page 20214]]

products, because that market contains a greater mix of high-end 
consumers.
    DOE strongly considered TSL 6 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, TSL 6 also includes a level for gas-fired storage water 
heaters with rated storage volumes at or below 55 gallons that has 
caused DOE some reservations related to consumer safety. These concerns 
came to light during the course of DOE's consideration of public 
comments on the NOPR. Specifically, TSL 6 for smaller-volume gas-fired 
storage water heaters effectively continues to allow the use of 
atmospherically-vented technology. DOE reviewed the current market at 
40 gallons rated storage volume and two current designs offered at a 
0.63 EF: (1) An atmospherically-vented unit and (2) a fan-assisted 
unit. Over 50 percent of these models have corresponding recovery 
efficiencies at or above 78 percent.
    The efficiency of a gas-fired water heater is characterized by a 
number of factors, including the energy factor, the first hour rating, 
and the recovery efficiency. For atmospherically-vented gas-fired 
storage water heaters, manufacturers primarily modify either the 
insulation thickness to increase the energy factor or the baffling to 
increase the recovery efficiency. The recovery efficiency characterizes 
how efficiently the heat from the energy source is transferred to the 
water. For each design and energy factor analyzed by DOE, manufacturers 
offer units in a range of recovery efficiencies. As the recovery 
efficiency increases, the risk for condensation to occur in the vent 
increases. Recovery efficiencies at or above 78 percent present a 
potential safety risk if condensation occurs in certain installations 
and the proper venting has not been installed in the residence, thereby 
potentially allowing carbon monoxide to enter and build up in the 
living space.
    As explained in section IV.F.2.a above, DOE's analysis assumed that 
installations with water heaters with recovery efficiency of 78 percent 
or higher (which accounted for 57 percent of installations at TSL 6) 
would use stainless steel vent connectors. Without such vent 
connectors, there is a potential for corrosion of the vent due to 
condensation of flue gases. At present, however, the National Fuel Gas 
Code venting tables that are used as guidelines for installation are 
based on assumed recovery efficiencies of 76 percent, and they do not 
mention use of stainless steel vent connectors. Therefore, there is a 
possibility that some installations could occur without use of 
stainless steel vent connectors.
    DOE found that there are several 40-gallon gas-fired water heater 
models corresponding to TSL 6 efficiency levels that are currently 
available to consumers and that do not utilize power venting. These 
models do not have any venting or installation instructions directing 
installers to use special venting (other than what is already required 
by the National Fuel Gas Code and/or local codes) for these products, 
and it is unclear why the concerns raised have not been an issue for 
these products currently available on the market.
    However, in considering the adoption of a minimum standard for gas-
fired water heaters at TSL 6 with rated storage volumes at or below 55 
gallons, DOE believes there may be an increased risk of potential 
safety concerns due to improper installation of units with high 
recovery efficiencies. While DOE realizes there are units with recovery 
efficiencies offered in a range of energy factors, DOE also believes 
this risks increases as the limits of atmospherically-vented technology 
are reached.
    Ideally, DOE believes the National Fuel Gas Code venting tables 
should be modified to properly address condensation-related issues for 
the units on the market with recovery efficiencies at or above 76 
percent. This would include a recommendation to use stainless steel 
vent connectors at these recovery efficiencies regardless of energy 
factor and in order to mitigate most of the safety concerns for 
atmospherically-vented units. However, DOE cannot be certain whether 
such changes would occur before the compliance date of amended energy 
conservation standards for water heaters. Thus, in practice, there 
remains the possibility that some installations of TSL 6 gas-fired 
water heaters with recovery efficiencies at or above 78 percent would 
not use stainless steel vent connectors, which could result in safety 
problems in a likely small, but uncertain, number of cases.
    Therefore, for today's final rule, the Secretary tentatively 
concludes that at TSL 6, the benefits of energy savings, positive 
consumer NPV, generating capacity reductions, economic savings for most 
consumers, and emission reductions would be outweighed the large 
capital conversion costs that could result in a large reduction in INPV 
for the manufacturers, the negative impacts on some consumer groups, 
and the safety concerns due to the corrosive condensate forming in the 
venting system of specific installations.
    Next, DOE considered TSL 5, which is very similar to TSL 6 except 
that it considers a lower efficiency level for gas-fired storage water 
heaters with rated storage volumes less than or equal to 55 gallons. 
TSL 5 still pairs 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 to potentially save 
additional energy. Specifically, TSL 5 would effectively require heat 
pump technology for electric storage water heaters with rated storage 
volumes greater than 55 gallons and condensing technology for gas-fired 
storage water heaters with rated storage volumes greater than 55 
gallons. For gas-fired water heaters at TSL 5, DOE analyzed energy 
efficiency level 1 for small-volume units due to the potential safety 
concerns with corrosive condensate formation.
    TSL 5 would save 2.58 quads of energy, an amount DOE considers 
significant. Under TSL 5, the NPV of consumer benefit would be $1.39 
billion, using a discount rate of 7 percent, and $8.67 billion, using a 
discount rate of 3 percent.
    The cumulative emissions reductions at TSL 5 are 154 Mt of 
CO2, 116 kt of NOX, and 0.553 t of Hg. The 
estimated monetary value of the cumulative CO2 emissions 
reductions at TSL 5 is $524 million to $8,179 million. Total generating 
capacity in 2045 is estimated to decrease by 0.83 GW under TSL 5.
    At TSL 5, DOE projects that the average LCC impact is a gain 
(consumer cost savings) of $18 for gas-fired storage water heaters, a 
gain of $64 for electric storage water heaters, a gain of $295 for oil-
fired storage water heaters, and a gain of $9 for gas-fired 
instantaneous water heaters. The median payback period is 2.3 years for 
gas-fired storage water heaters, 6.8 years for electric storage water 
heaters, 0.5 years for oil-fired storage water heaters, and 14.8 years 
for gas-fired instantaneous water heaters. At TSL 5, the fraction of 
consumers experiencing an LCC benefit is 40 percent for gas-fired 
storage water heaters, 58 percent for electric storage water heaters, 
53 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 27 percent for gas-fired storage water 
heaters, 33 percent for electric storage water heaters, 0 percent for 
oil-fired storage water heaters, and 5 percent for gas-fired 
instantaneous water heaters.

[[Page 20215]]

    At TSL 5, the estimated average LCC savings for gas-fired storage 
water heaters are slightly negative for multi-family households and 
manufactured home households, and slightly positive for senior-only 
households and low-income households. For all of the subgroups, a 
higher share of households have a net benefit than have a net cost. In 
the case of electric storage water heaters, the average LCC savings are 
positive for senior-only and low-income households, slightly negative 
for multi-family households, and negative for manufactured home 
households. In all cases except manufactured home households, a 
majority of the households in each subgroup experience a net benefit.
    At TSL 5, the projected change in INPV ranges from a decrease of up 
to $122.6 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 $1.2 million for gas-fired instantaneous water 
heaters, in 2009$. 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 gallons 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 to 
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 13.9 percent in INPV for gas-fired and electric storage water 
heaters, a net loss of 4.2 percent in INPV for oil-fired storage water 
heaters, and a net loss of 0.2 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 7 (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 adopting TSL 5. TSL 5 results in positive 
NPV of consumer benefit for both electric and gas-fired storage water 
heaters, and provides substantial energy and carbon savings, while 
mitigating some of the issues associated with a national heat pump 
water heater standard (TSL 7). Moreover, TSL 5 also reduces the risk of 
safety concerns for small-volume gas-fired storage water heaters by 
providing manufacturers with additional flexibility in reaching TSL 5 
efficiency levels.
    Therefore, for today's final rule, the Secretary has concluded that 
at TSL 5, the benefits of energy savings, positive consumer NPV, 
generating capacity reductions, economic savings for most consumers, 
and emission reductions (both in physical quantities and the monetized 
value of those emissions) outweigh the large capital conversion costs 
that could result in a large reduction in INPV for the manufacturers 
and the negative impacts on some consumer subgroups. Further, global 
benefits from carbon dioxide reductions (at a central value of $21.4 
per ton for emissions in 2010) would have a present value of $2.7 
billion. These benefits from carbon dioxide emission reductions, when 
considered in conjunction with the consumer savings NPV and other 
factors described above, support DOE's conclusion that TSL 5 is 
economically justified. Consequently, DOE is adopting TSL 5 for 
residential water heaters. Table VI.64 shows the standard levels DOE is 
adopting today for residential water heaters.

Table VI.64--Amended Energy Conservation Standards for Residential Water
                                 Heaters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Residential Water Heaters
------------------------------------------------------------------------
Product Class                               Standard Level
------------------------------------------------------------------------
Gas-fired Storage...........  For tanks with a      For tanks with a
                               Rated Storage         Rated Storage
                               Volume at or below    Volume above 55
                               55 gallons: EF =      gallons: EF =
                               0.675-(0.0015 x       0.8012-(0.00078 x
                               Rated Storage         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 55
                               55 gallons: EF =      gallons: EF = 2.057-
                               0.960-(0.0003 x       (0.00113 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)
------------------------------------------------------------------------

3. Direct Heating Equipment
    Table VI.65 summarizes the results of DOE's quantitative analysis 
for each TSL it considered for this final rule for direct heating 
equipment.

                     Table VI.65--Summary of Analytical Results for Direct Heating Equipment
----------------------------------------------------------------------------------------------------------------
             Category                  TSL 1        TSL 2        TSL 3        TSL 4        TSL 5        TSL 6
----------------------------------------------------------------------------------------------------------------
National Energy Savings (quads)...         0.20         0.21         0.23         0.43         0.48         1.26
----------------------------------------------------------------------------------------------------------------
                                    NPV of Consumer Benefits (2009$ billion)
----------------------------------------------------------------------------------------------------------------
3% discount rate..................         1.32         1.34         1.39       (1.26)       (1.22)       (4.97)

[[Page 20216]]

 
7% discount rate..................         0.54         0.55         0.56       (1.19)       (1.24)       (4.38)
----------------------------------------------------------------------------------------------------------------
                                                Industry Impacts:
----------------------------------------------------------------------------------------------------------------
Traditional Direct Heating
 Equipment:.......................
    Industry NPV (2009$ million)..  (0.9)-(2.5)  (1.2)-(3.9)  (1.9)-(7.0)  (1.9)-(8.8)  (3.8)-(10.4  (3.9)-(13.4
                                                                                                  )            )
    Industry NPV (% change).......  (5.2)-(14.9  (7.2)-(23.6  (11.3)-(42.  (11.6)-(53.  (22.7)-(64.  (23.6)-(80.
                                              )            )           4)           1)           2)           8)
Gas Hearth Direct Heating
 Equipment:.......................
    Industry NPV (2009$ million)..  (0.2)-(0.9)  (0.2)-(0.9)  (0.2)-(0.9)   1.6-(13.2)   1.6-(13.2)   8.6-(53.6)
    Industry NPV (% change).......  (0.3)-(1.2)  (0.3)-(1.2)  (0.3)-(1.2)   2.0-(17.1)   2.0-(17.1)  11.1-(69.5)
----------------------------------------------------------------------------------------------------------------
                                        Cumulative Emissions Reduction*:
----------------------------------------------------------------------------------------------------------------
    CO2 (Mt)......................          8.2          8.8          9.3         17.9         20.2         49.9
    NOX (kt)......................          7.5          8.1          8.5         16.4         18.6         46.0
----------------------------------------------------------------------------------------------------------------
                    Value of Cumulative Emissions Reduction (2009$ million) [dagger][dagger]:
----------------------------------------------------------------------------------------------------------------
    CO2...........................       31-470       33-503       35-530     67-1,023     76-1,154    187-2,849
    NOX-3% discount rate..........     1.9-19.6     2.0-21.0     2.1-22.1     4.2-42.9     4.7-48.7     11.7-120
    NOX-7% discount rate..........    0.99-10.2    1.06-10.9     1.1-11.4     2.2-22.3     2.5-25.3     6.1-62.5
----------------------------------------------------------------------------------------------------------------
                                          Mean LCC Savings ** (2009$):
----------------------------------------------------------------------------------------------------------------
    Gas Wall Fan..................           83          102          114           43           83           43
    Gas Wall Gravity..............           21           21           64           64         (56)         (56)
    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..................          2.7          3.2          5.0         12.2          2.7         12.2
    Gas Wall Gravity..............          7.5          7.5         11.0         11.0         16.5         16.5
    Gas Floor.....................         10.7         10.7         10.7         10.7         10.7         10.7
    Gas Room......................          6.7          4.5          4.8          4.8          6.9          6.9
    Gas Hearth....................            0            0            0         17.1         17.1         26.8
----------------------------------------------------------------------------------------------------------------
                                      Distribution of Consumer LCC Impacts:
----------------------------------------------------------------------------------------------------------------
Gas Wall Fan:.....................
    Net Cost (%)..................            0            3           19           53            0           53
    No Impact (%).................           60           53           26            7           60            7
    Net Benefit (%)...............           40           44           55           40           40           40
Gas Wall Gravity:
    Net Cost (%)..................           10           10           33           33           70           70
    No Impact (%).................           75           75           37           37            0            0
    Net Benefit (%)...............           15           15           30           30           30           30
Gas Floor:
    Net Cost (%)..................           25           25           25           25           25           25
    No Impact (%).................           18           18           18           18           18           18
    Net Benefit (%)...............           57           57           57           57           57           57
Gas Room:
    Net Cost (%)..................           19           19           20           20           26           26
    No Impact (%).................           31           56           55           55           49           49
    Net Benefit (%)...............           50           25           25           25           25           25
Gas Hearth:
    Net Cost (%)..................            9            9            9           69           69           81
    No Impact (%).................           40           40           40           17           17           19
    Net Benefit (%)...............           51           51           51           13           13            0
Generation Capacity Change (GW in         0.024        0.026        0.028        0.036        0.041        0.103
 2042)............................
----------------------------------------------------------------------------------------------------------------
                                               Employment Impacts:
----------------------------------------------------------------------------------------------------------------
Total Potential Changes in
 Domestic Production Workers in
 2013:............................
    Traditional Direct Heating          (275)-4      (275)-6     (275)-33     (275)-37     (275)-35     (275)-44
     Equipment....................
    Gas Hearth Direct Heating         (1,280)-6    (1,280)-6    (1,280)-6  (1,280)-448  (1,280)-448  (1,280)-770
     Equipment....................
Net Change in National Indirect            0.21         0.22         0.23         0.16         0.19        0.51
 Employment in 2042 (thousands)
 [dagger][dagger][dagger].........
----------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.

[[Page 20217]]

 
* 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.
[dagger][dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of
  reduced CO2 emissions.
[dagger][dagger][dagger] National Indirect Employment Impacts exclude direct impacts.

    DOE first considered TSL 6, the max-tech level. TSL 6 would save 
1.26 quads of energy, an amount DOE considers significant. TSL 6 would 
decrease consumer NPV by $4.38 billion, using a discount rate of 7 
percent, and by $4.97 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 6 are 49.9 Mt of CO2 and 
46.0 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 6 is $187 million 
to $2,849 million. Total generating capacity in 2042 is estimated to 
increase slightly under TSL 6.
    At TSL 6, DOE projects that the average LCC impact for consumers is 
a gain of $43 for gas wall fan DHE, a loss of $56 for gas wall gravity 
DHE, a gain of $13 for gas floor DHE, a gain of $646 for gas room DHE, 
and a loss of $253 for gas hearth DHE. The median payback period is 
12.2 years for gas wall fan DHE, 16.5 years for gas wall gravity DHE, 
10.7 years for gas floor DHE, 6.9 years for gas room DHE, and 26.8 
years 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 40 percent for gas wall fan DHE, 30 
percent for gas wall gravity DHE, 57 percent for gas floor DHE, 25 
percent for gas room DHE, and 0 percent for gas hearth DHE. The 
fraction of consumers experiencing an LCC cost is 53 percent for gas 
wall fan DHE, 70 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.
    With respect to consumer subgroups, DOE estimated that the impacts 
of TSL 6 would be approximately the same for the senior-only and low-
income subgroups as they are for the full household sample.
    At TSL 6, the projected change in INPV ranges from a decrease of up 
to $13.4 million for traditional DHE and a decrease of up to $53.6 
million for gas hearth DHE, in 2009$. 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 80.8 percent in INPV for traditional DHE and a net 
loss of 69.5 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 business manufacturers in both the traditional and gas 
hearth DHE market. The conversion costs could cause many of these small 
business manufacturers to exit the market.
    Therefore, the Secretary concludes that at TSL 6, the benefits of 
energy savings 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 business manufacturers. 
Consequently, the Secretary has concluded that TSL 6 is not 
economically justified.
    Next, DOE considered TSL 5. TSL 5 would save 0.48 quads of energy, 
an amount DOE considers significant. TSL 5 would decrease consumer NPV 
by $1.24 billion, using a discount rate of 7 percent, and by $1.22 
billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 5 are 20.2 Mt of CO2 and 
18.6 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 5 is $76 million 
to $1,154 million. Total generating capacity in 2042 is estimated to 
increase slightly under TSL 5.
    At TSL 5, DOE projects that the average LCC impact for consumers is 
a gain of $83 for gas wall fan DHE, a loss of $56 for gas wall gravity 
DHE, a gain of $13 for gas floor DHE, a gain of $646 for gas room DHE, 
and a loss of $70 for gas hearth DHE. The median payback period is 2.7 
years for gas wall fan DHE, 16.5 years for gas wall gravity DHE, 10.7 
years for gas floor DHE, 6.9 years for gas room DHE, and 17.1 years for 
gas hearth DHE. At TSL 5, the fraction of consumers experiencing an LCC 
benefit is 40 percent for gas wall fan DHE, 30 percent for gas wall 
gravity DHE, 57 percent for gas floor DHE, 25 percent for gas room DHE, 
and 13 percent for gas hearth DHE. The fraction of consumers 
experiencing an LCC cost is 0 percent for gas wall fan DHE, 70 percent 
for gas wall gravity DHE, 25 percent for gas floor DHE, 26 percent for 
gas room DHE, and 69 percent for gas hearth DHE.
    With respect to consumer subgroups, DOE estimated that the impacts 
of TSL 5 would be approximately the same for the senior-only and low-
income subgroups as they are for the full household sample.
    At TSL 5, the projected change in INPV ranges from a decrease of up 
to $10.4 million for traditional DHE and a decrease of up to $13.2 
million for gas hearth DHE, in 2009$. 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 result in a net 
loss of 62.4 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 
business manufacturers 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.
    Therefore, the Secretary concludes that at trial standard level 5, 
the benefits of energy savings 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 business manufacturers to have to reduce or discontinue a 
significant number of their product lines. Consequently, the Secretary 
has concluded that trial standard level 5 is not economically 
justified.
    Next, DOE considered TSL 4. TSL 4 would save 0.43 quads of energy, 
an amount DOE considers significant. TSL 4 would decrease consumer NPV 
by $1.19 billion, using a discount rate of 7 percent, and $1.26 
billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 4 are 17.9 Mt of CO2 and 
16.4 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 4 is $67 million 
to $1,023 million. Total generating capacity in 2042 is

[[Page 20218]]

estimated to increase slightly under TSL 4.
    At TSL 4, DOE projects that the average LCC impact for consumers is 
a gain of $43 for gas wall fan DHE, a gain of $64 for gas wall gravity 
DHE, a gain of $13 for gas floor DHE, a gain of $143 for gas room DHE, 
and a loss of $70 for gas hearth DHE. The median payback period is 12.2 
years for gas wall fan DHE, 11.0 years for gas wall gravity DHE, 10.7 
years for gas floor DHE, 4.8 years for gas room DHE, and 17.1 years for 
gas hearth DHE. At TSL 4, the fraction of consumers experiencing an LCC 
benefit is 40 percent for gas wall fan DHE, 30 percent for gas wall 
gravity DHE, 57 percent for gas floor DHE, 57 percent for gas room DHE, 
and 13 percent for gas hearth DHE. The fraction of consumers 
experiencing an LCC cost is 53 percent for gas wall fan DHE, 33 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.
    With respect to consumer subgroups, DOE estimated that the impacts 
of TSL 4 would be approximately the same for the senior-only and low-
income subgroups as they are for the full household sample.
    At TSL 4, the projected change in INPV ranges from a decrease of up 
to $8.8 million for traditional DHE and decrease of up to $13.2 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 
53.1 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 business 
manufacturers in both the traditional and gas hearth DHE market. These 
manufacturers could be forced to reduce their product offerings to 
remain competitive.
    Therefore, the Secretary concludes that at trial standard level 4, 
the benefits of energy savings 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 business manufacturers of DHE to have to reduce their product 
offerings. Consequently, the Secretary has concluded that trial 
standard level 4 is not economically justified.
    Next, DOE considered TSL 3. TSL 3 would save 0.23 quads of energy, 
an amount DOE considers significant. TSL 3 would provide an NPV of 
consumer benefit of $0.56 billion, using a discount rate of 7 percent, 
and $1.39 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 3 are 9.3 Mt of CO2 and 
8.5 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 3 is $35 million 
to $530 million. Total electric generating capacity in 2042 is 
estimated to increase slightly under TSL 3.
    At TSL 3, DOE projects that the average LCC impact for consumers is 
a gain of $114 for gas wall fan DHE, a gain of $64 for gas wall gravity 
DHE, a gain of $13 for gas floor DHE, a gain of $143 for gas room DHE, 
and a gain of $96 for gas hearth DHE. The median payback period is 5.0 
years for gas wall fan DHE, 11.0 years for gas wall gravity DHE, 10.7 
years for gas floor DHE, 4.8 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 55 percent for gas wall fan DHE, 30 percent for gas wall 
gravity DHE, 57 percent for gas floor DHE, 25 percent for gas room DHE, 
and 51 percent for gas hearth DHE. The fraction of consumers 
experiencing an LCC cost is 19 percent for gas wall fan DHE, 33 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.
    With respect to consumer subgroups, DOE estimated that the impacts 
of TSL 3 would be approximately the same for the senior-only and low-
income subgroups as they are for the full household sample.
    At TSL 3, the projected change in INPV ranges from a decrease of up 
to $7 million for traditional DHE and decrease of up to $0.9 million 
for gas hearth DHE. If the high end of the range of impacts is reached, 
TSL 3 could result in a net loss of 42.4 percent in INPV for 
traditional DHE and a net loss of 1.2 percent in INPV for gas hearth 
DHE. The impacts on gas hearth DHE 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.
    For traditional direct heating equipment, however, not all 
manufacturers have a substantial number of existing products that meet 
the efficiencies required at TSL 3. The industry has consolidated 
significantly over the last decade due to a steady decline in 
shipments. The three competitors that account for nearly 100 percent of 
the market have survived by consolidating a variety of legacy brands 
and products and providing them in replacement situations. Thus, each 
of the three competitors, two of which are small business 
manufacturers, would face the prospect of significantly upgrading 
several low-volume product lines. For the most part, manufacturers do 
not have significant volume over which to spread the capital conversion 
costs required by TSL 3, meaning that margins will likely be pressured 
unless consumers accept large increases in product price. As a whole, 
DOE expects the industry would be required to invest $8.0 million to 
convert its product lines to meet TSL 3, or roughly half of the 
industry value. Because shipments are expected to remain flat or 
continue to decline, there may be limited opportunity for all 
manufacturers to recoup the investment necessary at TSL 3 to upgrade 
their product lines.
    At TSL 3, the impacts on small business manufacturers are even more 
harmful than to the industry as a whole. For example, the typical small 
business manufacturer in the industry would require investment equal to 
426 percent of its annual earnings before interest and taxes. With 
these prospects, it is likely manufacturers would drop a number of 
product lines or exit the market entirely. The small business 
manufacturers would likely be disproportionately affected by TSL 3 
because they would need to spread the product development costs, 
including R&D, over lower volumes. Finally, in the important gas wall 
gravity category, small business manufacturers have a limited number of 
products that meet the required efficiencies. The two small business 
manufacturers with significant market shares have a total of 6 models 
that meet the required efficiencies out of a total of 29 models for gas 
wall gravity DHE. Based on the public comments of these small 
manufacturers, these products also represent a small percentage of 
total sales. To offer a full range of the most popular replacements, a 
typical small manufacturer would have to convert over 70 percent of its 
gas wall gravity product lines, including multiple modifications to 
their most popular products.
    Therefore, the Secretary concludes that at TSL 3, the benefits of 
energy savings, emission reductions, and consumer NPV benefits would be 
outweighed by the economic burden on

[[Page 20219]]

some consumers, the large capital conversion costs that could result in 
a large reduction in INPV for the manufacturers of traditional DHE, and 
the potential for small business manufacturers of DHE to reduce their 
product offerings or to be forced to exit the market completely, 
thereby reducing competition in the traditional DHE market. 
Consequently, the Secretary has concluded that TSL 3 is not 
economically justified.
    Next, DOE considered TSL 2. TSL 2 would save 0.21 quads of energy, 
an amount DOE considers significant. TSL 2 would provide a NPV of 
consumer benefit of $0.55 billion, using a discount rate of 7 percent, 
and $1.34 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 2 are 8.8 Mt of CO2 and 
8.1 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 2 is $33 million 
to $503 million. Total electric generating capacity in 2042 is 
estimated to increase slightly under TSL 2.
    At TSL 2, DOE projects that the average LCC impact for consumers is 
a gain of $102 for gas wall fan DHE, a gain of $21 for gas wall gravity 
DHE, a gain of $13 for gas floor DHE, a gain of $96 for gas room DHE, 
and a gain of $96 for gas hearth DHE. The median payback period is 3.2 
years for gas wall fan DHE, 7.5 years for gas wall gravity DHE, 10.7 
years for gas floor DHE, 4.5 years for gas room DHE, and 0.0 years for 
gas hearth DHE. At TSL 2, the fraction of consumers experiencing an LCC 
benefit is 44 percent for gas wall fan DHE, 15 percent for gas wall 
gravity DHE, 57 percent for gas floor DHE, 25 percent for gas room DHE, 
and 51 percent for gas hearth DHE. The fraction of consumers 
experiencing an LCC cost is 3 percent for gas wall fan DHE, 10 percent 
for gas wall gravity DHE, 25 percent for gas floor DHE, 19 percent for 
gas room DHE, and 9 percent for gas hearth DHE.
    With respect to consumer subgroups, DOE estimated that the impacts 
of TSL 2 would be approximately the same for the senior-only and low-
income subgroups as they are for the full household sample.
    At TSL 2, the projected change in INPV ranges from a decrease of up 
to $3.9 million for traditional DHE and decrease of up to $0.9 million 
for gas hearth DHE. The impacts on gas hearth DHE manufacturers are 
less significant at TSL 2 because manufacturers offer a wide range of 
product lines that meet the required efficiencies at TSL 2, and most 
products that do not meet TSL 2 could be upgraded with inexpensive 
purchased parts at fairly small conversion costs. If the high end of 
the range of impacts is reached, TSL 2 could result in a net loss of 
23.6 percent in INPV for traditional DHE and a net loss of 1.2 percent 
in INPV for gas hearth DHE. In addition, the required capital and 
product conversion costs faced by small business manufacturers at this 
level decrease substantially, thereby mitigating the potential harm to 
a significant number of small business manufacturers.
    In total, DOE estimates that it will take approximately $4.6 
million for the industry to upgrade all of it products to meet the 
amended energy conservation standards. Despite including the conversion 
costs for the additional product lines that were released since the 
NOPR analysis was completed, the total conversion costs estimated by 
the industry to upgrade all products that do not meet the amended 
energy conservation standards is down $1.8 million from the $6.4 
million total estimated for the proposed standards in the December 2009 
NOPR, given the change in the standard level DOE has ultimately decided 
to adopt. For the amended energy conservation standards, one major 
manufacturer has a total of 3 product lines (7 models) that do not meet 
the amended energy conservation standards in the two smallest 
categories (gas floor and gas room DHE) but has a majority of product 
lines and models that meet the amended standards in the two largest 
product categories (gas wall fan and gas wall gravity). The other two 
major manufacturers have existing product lines that meet the amended 
energy conservation standards in all 4 product categories. Therefore, 
without spending any conversion costs, at least two manufacturers 
already have existing products in all four product categories. In the 
most important gas wall gravity category, 57 percent of the existing 
models and 71 percent of the existing product lines identified by DOE 
meet the amended energy conservation standards. One manufacturer 
indicated in written comments that the important gas wall gravity 
products that meet the amended energy conversation standard represent a 
small portion of total sales. However, DOE believes it has addressed 
the concerns of this manufacturer by setting an amended energy 
conservation standard that would require much less substantial changes 
than those proposed in the NOPR (a two percentage point improvement in 
AFUE versus the six percentage point improvement proposed in the NOPR). 
While the $4.6 million in total conversion costs to upgrade all product 
lines that do not meet the amended energy conservation standards is 
substantial, DOE believes that a combination of products that meet the 
amended energy conservation standards and selectively upgrading popular 
product lines that fall below the standards will allow all three 
traditional DHE manufacturers to maintain a viable production volume.
    After considering the analysis, comments on the December 2009 NOPR, 
and the benefits and burdens of TSL 2, the Secretary 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, global 
benefits from carbon dioxide reductions (at a central value of $21.4 
for emissions in 2010) would have a present value of $165 million. 
These benefits from carbon dioxide emission reductions (both in 
physical reductions and the monetized value of those reductions), when 
considered in conjunction with the consumer savings NPV and other 
factors described above, outweigh the potential reduction in INPV for 
manufacturers and support DOE's conclusion that trial standard level 2 
is economically justified. Therefore, the Department today adopts the 
energy conservation standards for direct heating equipment at TSL 2, as 
shown in Table VI.66.

  Table VI.66--Amended Energy Conservation Standards for Direct Heating
                                Equipment
------------------------------------------------------------------------
                        Direct heating equipment
-------------------------------------------------------------------------
               Product class                        Standard level
------------------------------------------------------------------------
Gas wall fan type up to 42,000 Btu/h.......  AFUE = 75%.
Gas wall fan type over 42,000 Btu/h........  AFUE = 76%.
Gas wall gravity type up to 27,000 Btu/h...  AFUE = 65%.
Gas wall gravity type over 27,000 Btu/h up   AFUE = 66%.
 to 46,000 Btu/h.
Gas wall gravity type over 46,000 Btu/h....  AFUE = 67%.

[[Page 20220]]

 
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 = 61%.
Gas room over 20,000 Btu/h up to 27,000 Btu/ AFUE = 66%.
 h.
Gas room over 27,000 Btu/h up to 46,000 Btu/ AFUE = 67%.
 h.
Gas room over 46,000 Btu/h.................  AFUE = 68%.
Gas hearth up to 20,000 Btu/h..............  AFUE = 61%.
Gas hearth over 20,000 Btu/h and up to       AFUE = 66%.
 27,000 Btu/h.
Gas hearth over 27,000 Btu/h and up to       AFUE = 67%.
 46,000 Btu/h.
Gas hearth over 46,000 Btu/h...............  AFUE = 68%.
------------------------------------------------------------------------

4. Pool Heaters
    Table VI.67 summarizes the results of DOE's quantitative analysis 
for each TSL it considered for this final rule for pool heaters.

                                               Table VI.67--Summary of Analytical Results for Pool Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Category                     TSL 1               TSL 2               TSL 3               TSL 4               TSL 5               TSL 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Energy Savings (quads).  0.01..............  0.02..............  0.04..............  0.06..............  0.09..............  0.22
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        NPV of Consumer Benefits (2009$ billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
    3% discount rate............  0.10..............  0.10..............  (0.01)............  (0.15)............  (2.32)............  (4.56)
    7% discount rate............  0.04..............  0.04..............  (0.06)............  (0.16)............  (1.39)............  (2.87)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Industry Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Industry NPV (2009$ million)  0.0-(0.1).........  0.3-(0.8).........  (0.8)-(5.0).......  (0.3)-(6.6).......  0.8-(17.2)........  7.3-(38.3)
    Industry NPV (% change).....  0.1-(0.2).........  0.5-(1.7).........  (1.7)-(10.2)......  (0.6)-(13.5)......  1.6-(35.0)........  14.9-(78.0)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Cumulative Emissions Reduction *
--------------------------------------------------------------------------------------------------------------------------------------------------------
    CO2 (Mt)....................  0.41..............  0.75..............  1.72..............  2.38..............  3.61..............  8.89
    NOX (kt)....................  0.37..............  0.67..............  1.53..............  2.10..............  3.18..............  7.84
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Value of Cumulative Emissions Reduction (2009$ million) [dagger][dagger]
--------------------------------------------------------------------------------------------------------------------------------------------------------
    CO2.........................  2 to 24...........  3 to 43...........  6 to 99...........  9 to 136..........  14 to 206.........  33 to 509
    NOX--3% discount rate.......  0.1 to 1.0........  0. 2 to 1.8.......  0.4 to 4.1........  0.5 to 5.6........  0.8 to 8.4........  2.0 to 20.77
    NOX--7% discount rate.......  0.1 to 0.5........  0.1 to 0.9........  0.2 to 2.2........  0.29 to 2.9.......  0.4 to 4.5........  1.1 to 11.0
    Mean LCC Savings ** (2009$).  25................  22................  (6)...............  (52)..............  (632).............  (1,361)
    Median PBP (years)..........  2.7...............  8.6...............  18.2..............  19.2..............  38.1..............  33.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Distribution of Consumer LCC Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Net Cost (%)................  5.................  27................  60................  64................  88................  95
    No Impact (%)...............  72................  51................  23................  21................  9.................  1
    Net Benefit (%).............  23................  22................  17................  15................  3.................  4
Generation Capacity Change (GW    0.00..............  0.00..............  0.00..............  +0.01.............  +0.01.............  +0.03
 in 2042).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Employment Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total Potential Changes in    (512)-7...........  (512)-19..........  (512)-58..........  (512)-81..........  (512)-135.........  (512)-268
     Domestic Production Workers
     in 2013.
Net Change in National Indirect   0.01..............  0.02..............  0.02..............  0.02..............  0.04..............  (0.07)
 Employment in 2042 (thousands)
 [dagger][dagger][dagger].
--------------------------------------------------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.
* The impacts for Hg emissions are negligible.
** For LCCs, a negative value means an increase in LCC by the amount indicated.
[dagger][dagger] Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.
[dagger][dagger][dagger] National Indirect Employment Impacts exclude direct impacts.


[[Page 20221]]

    DOE first considered TSL 6, the max-tech level. TSL 6 would save 
0.22 quads of energy, an amount DOE considers significant. TSL 6 would 
decrease consumer NPV by $2.87 billion, using a discount rate of 7 
percent, and by $4.56 billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 6 are 8.89 Mt of CO2 and 
7.84 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 6 is $33 million 
to $509 million, using a discount rate of 7 percent. Total generating 
capacity in 2042 is estimated to increase slightly under TSL 6.
    At TSL 6, DOE projects that the average LCC impact for consumers is 
a loss of $1,361. The median payback period is 33.2 years (which is 
substantially longer than the mean lifetime of the product). At TSL 6, 
the fraction of consumers experiencing an LCC benefit is 4 percent. The 
fraction of consumers experiencing an LCC cost is 95 percent.
    At TSL 6, the INPV is projected to decrease by up to $38.3 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 78 percent in INPV for gas-fired pool heaters.
    Therefore, the Secretary has concluded that at TSL 6, the benefits 
of energy savings and emission reductions would be outweighed by the 
negative impacts on consumer NPV, 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 
concluded that TSL 6 is not economically justified.
    Next, DOE considered TSL 5. TSL 5 would save 0.09 quads of energy, 
an amount DOE considers significant. TSL 5 would decrease consumer NPV 
by $1.39 billion, using a discount rate of 7 percent, and by $2.32 
billion, using a discount rate of 3 percent.
    The emissions reductions at TSL 5 are 3.6 Mt of CO2 and 
3.2 kt of NOX. The estimated monetary value of the 
cumulative CO2 emissions reductions at TSL 5 is $14 million 
to $206 million. Total generating capacity in 2042 is estimated to 
increase slightly under TSL 5.
    At TSL 5, DOE projects that the average LCC impact for consumers is 
a loss of $632. The median payback period is 38.1 years (which is 
substantially longer than the mean lifetime of the product). At TSL 5, 
the fraction of consumers experiencing an LCC benefit is 3 percent. The 
fraction of consumers experiencing an LCC cost is 88 percent.
    At TSL 5, the projected change in INPV is a decrease of up to $17.2 
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 35 percent in INPV for gas-fired pool heaters.
    Therefore, the Secretary has concluded that at TSL 5, the benefits 
of energy savings and emission reductions would be outweighed by the 
negative impacts on consumer NPV, the economic burden on some 
consumers, and the large capital conversion costs that could result in 
a large reduction in INPV for the manufacturers. Consequently, the 
Secretary has concluded that TSL 5 is not economically justified.
    Next, DOE considered TSL 4. TSL 4 would save 0.06 quads of energy, 
an amount DOE considers significant. TSL 4 would decrease consumer NPV 
by $0.16 billion, using a discount rate of 7 percent, and by $0.15 
billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 2.38 Mt of 
CO2 and 2.10 kt of NOX. The estimated monetary 
value of the cumulative CO2 emissions reductions at TSL 4 is 
$9 million to $136 million. Total generating capacity in 2042 is 
estimated to increase slightly under TSL 4.
    At TSL 4, DOE projects that the average LCC impact for consumers is 
a loss of $52. The median payback period is 19.2 years (which is 
substantially longer than the mean lifetime of the product). At TSL 4, 
the fraction of consumers experiencing an LCC benefit is 15 percent. 
The fraction of consumers experiencing an LCC cost is 64 percent.
    At TSL 4, DOE projects that INPV decreases by up to $6.6 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 13.5 percent in INPV 
for gas-fired pool heaters.
    Therefore, the Secretary has concluded that at TSL 4, the benefits 
of energy savings and emission reductions would be outweighed by the 
negative impacts on consumer NPV, the economic burden on some 
consumers, and the large capital conversion costs that could result in 
a large reduction in INPV for the manufacturers. Consequently, the 
Secretary has concluded that TSL 4 is not economically justified.
    Next, DOE considered TSL 3. TSL 3 would save 0.04 quads of energy, 
an amount DOE considers significant. TSL 3 would decrease consumer NPV 
by $0.06 billion, using a discount rate of 7 percent, and by $0.01 
billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 3 are 1.72 Mt of 
CO2 and 1.53 kt of NOX. The estimated monetary 
value of the cumulative CO2 emissions reductions at TSL 3 is 
$6 million to $99 million. Total generating capacity in 2042 is 
estimated to stay the same under TSL 3.
    At TSL 3, DOE projects that the average LCC impact for consumers is 
a loss of $6. The median payback period is 18.2 years (which is 
substantially longer than the mean lifetime of the product). At TSL 3, 
the fraction of consumers experiencing an LCC benefit is 17 percent. 
The fraction of consumers experiencing an LCC cost is 60 percent.
    At TSL 3, DOE projects that INPV decreases by up to $5 million for 
gas-fired pool heaters. At TSL 3, 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, as with TSL 4. If the high end of the range of impacts 
is reached as DOE expects, TSL 3 could result in a net loss of 10 
percent in INPV for gas-fired pool heaters.
    Therefore, the Secretary has concluded that at TSL 3, the benefits 
of energy savings and emission reductions would be outweighed by the 
negative

[[Page 20222]]

impacts on consumer NPV, the economic burden on some consumers, and the 
large capital conversion costs that could result in a large reduction 
in INPV for the manufacturers. Consequently, the Secretary has 
concluded that TSL 3 is not economically justified.
    Next, DOE considered TSL 2. TSL 2 would save 0.02 quads of energy, 
an amount DOE considers significant. TSL 2 would increase consumer NPV 
by $0.04 billion, using a discount rate of 7 percent, and by $0.10 
billion, using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 2 are 0.75 Mt of 
CO2 and 0.67 kt of NOX. The estimated monetary 
value of the cumulative CO2 emissions reductions at TSL 2 is 
$3 million to $43 million. Total generating capacity in 2042 is 
estimated to stay the same under TSL 2.
    At TSL 2, DOE projects that the average LCC impact for consumers is 
a savings of $22. The median payback period is 8.6 years. At TSL 2, the 
fraction of consumers experiencing an LCC benefit is 22 percent. The 
fraction of consumers experiencing an LCC cost is 27 percent.
    At TSL 2, DOE projects that INPV decreases by up to $0.8 million 
for gas-fired pool heaters. At TSL 2, 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, as with TSL 3 and 4. If the high end of the range of 
impacts is reached as DOE expects, TSL 2 could result in a net loss of 
2 percent in INPV for gas-fired pool heaters.
    After considering the analysis and the benefits and burdens of TSL 
2, the Secretary has concluded 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, global benefits from carbon dioxide 
reductions (at a central value of $21.4 for emissions in 2010) have a 
present value of $14 million. These benefits from carbon dioxide 
emission reductions (in both physical reductions and the monetized 
value of those reductions), when considered in conjunction with the 
consumer savings NPV and other factors described above, outweigh the 
potential reduction in INPV for manufacturers and support DOE's 
conclusion that trial standard level 2 is economically justified. 
Therefore, the Department today adopts the energy conservation 
standards for pool heaters at TSL 2, which requires a thermal 
efficiency of 82 percent for gas-fired pool heaters as shown in Table 
VI.68.

   Table VI.68--Amended Energy Conservation Standard for Pool Heaters
------------------------------------------------------------------------
                                                              Minimum
                      Product class                           thermal
                                                           efficiency %
------------------------------------------------------------------------
Gas-fired Pool Heaters..................................              82
------------------------------------------------------------------------

VII. 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 
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 
rule and that the Office of Information and Regulatory Affairs (OIRA) 
in the Office of Management and Budget (OMB) review this rule. DOE 
presented to OIRA for review the draft 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 a.m. and 4 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) specific national impacts of the 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 standards in today's rule. DOE analyzed these alternatives using a 
series of regulatory scenarios for the three types of heating products. 
It modified the heating product NIA models to allow inputs for these 
policy alternatives. Of the four product classes of residential water 
heaters subject to 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 regulatory action (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 today's rule. Table VII.1 through Table VII.5 show the 
results for energy savings and consumer NPV.

[[Page 20223]]



 Table VII.1--Impacts of Non-Regulatory Alternatives for Gas-Fired Storage Water Heaters That Meet the Standard
                                                     (TSL 5)
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value* billion 2009$
                    Policy alternative                       Primary energy  -----------------------------------
                                                              savings quads   7% discount rate  3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..................................              0.00              0.00              0.00
Consumer Rebates..........................................              0.21              0.05              0.55
Consumer Tax Credits......................................              0.12              0.03              0.33
Manufacturer Tax Credits..................................              0.06              0.01              0.17
Voluntary Energy Efficiency Targets.......................              0.12              0.05              0.38
Early Replacement.........................................             0.001             -0.03             -0.05
Bulk Government Purchases.................................             0.003             0.004              0.01
Energy Conservation Standard..............................              0.81              0.27              2.37
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV of consumer benefit for product shipments from 2015 to 2045.


  Table VII.2--Impacts of Non-Regulatory Alternatives for Electric Storage Water Heaters That Meet the Standard
                                                     (TSL 5)
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value* billion 2009$
                    Policy alternative                       Primary energy  -----------------------------------
                                                              savings quads   7% discount rate  3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..................................              0.00              0.00              0.00
Consumer Rebates..........................................              0.53              0.19              1.50
Consumer Tax Credits......................................              0.32              0.12              0.90
Manufacturer Tax Credits..................................              0.16              0.06              0.45
Voluntary Energy Efficiency Targets.......................              0.17              0.29              0.99
Early Replacement.........................................             0.003             -0.05             -0.08
Bulk Government Purchases.................................             0.003             0.004              0.01
Energy Conservation Standard..............................              1.67              1.03              5.84
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV of consumer benefit for product shipments from 2015 to 2045.


     Table VII.3--Impacts of Non-Regulatory Alternatives for Gas Wall Fan DHE That Meet the Standard (TSL 2)
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value* billion 2009$
                    Policy alternative                       Primary energy  -----------------------------------
                                                              savings quads   7% discount rate  3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..................................              0.00              0.00              0.00
Consumer Rebates..........................................             0.004             0.007             0.018
Consumer Tax Credits......................................             0.002             0.004             0.011
Manufacturer Tax Credits..................................             0.001             0.002             0.005
Voluntary Energy Efficiency Targets.......................             0.001             0.003             0.007
Early Replacement.........................................           <0.0001             0.000             0.000
Bulk Government Purchases [dagger]........................                NA                NA                NA
Energy Conservation Standard..............................              0.01              0.03              0.07
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV of consumer benefit for product shipments 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.


      Table VII.4--Impacts of Non-Regulatory Alternatives for Gas Hearth DHE That Meet the Standard (TSL 2)
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value* billion 2009$
                    Policy alternative                       Primary energy  -----------------------------------
                                                              savings quads   7% discount rate  3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..................................              0.00              0.00              0.00
Consumer Rebates..........................................              0.04              0.10              0.23
Consumer Tax Credits......................................              0.02              0.06              0.14
Manufacturer Tax Credits..................................              0.01              0.03              0.07
Voluntary Energy Efficiency Targets.......................              0.02              0.05              0.14
Early Replacement.........................................            <0.001             0.000             0.000
Bulk Government Purchases[dagger].........................                NA                NA                NA
Energy Conservation Standard..............................              0.19              0.50              1.21
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV of consumer benefit for product shipments 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.


[[Page 20224]]


       Table VII.5--Impacts of Non-Regulatory Alternatives for Pool Heaters That Meet the Standard (TSL 2)
----------------------------------------------------------------------------------------------------------------
                                                                               Net present value* billion 2009$
                    Policy alternative                       Primary energy  -----------------------------------
                                                              savings quads   7% discount rate  3% discount rate
----------------------------------------------------------------------------------------------------------------
No New Regulatory Action..................................              0.00              0.00              0.00
Consumer Rebates..........................................             0.006              0.01              0.03
Consumer Tax Credits......................................             0.003             0.006              0.02
Manufacturer Tax Credits..................................             0.002             0.003              0.01
Voluntary Energy Efficiency Targets.......................             0.002             0.004              0.01
Early Replacement.........................................            <0.001             0.000             0.000
Bulk Government Purchases [dagger]........................                NA                NA                NA
Energy Conservation Standard..............................              0.02              0.04              0.11
----------------------------------------------------------------------------------------------------------------
* DOE determined the NPV of consumer benefit for product shipments 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 VII.1 through Table VII.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 VII.1 through Table VII.5. (See the 
regulatory impact analysis in the final rule TSD for details.) For 
comparison with the results reported below for the non-regulatory 
policies, the combined impacts of the standards for all product classes 
considered in this rulemaking are projected to result in 2.81 quads of 
national energy savings and an NPV of consumer benefit of $1.98 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.
    Consumer 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 standards, the number of consumers buying a more-
efficient water heater, pool heater, or DHE would increase relative to 
the base case. For example, as a result of the consumer rebates, DOE's 
analysis suggests that the market share of water heaters meeting the 
standard level would increase from 35 percent (in the base case) to 62 
percent for gas-fired storage products, and from 9 percent (in the base 
case) to 48 percent for electric storage products. 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 
0.79 quads of national energy savings and an NPV of consumer benefit of 
$0.36 billion (at a 7-percent discount rate) for the five considered 
product classes. Although DOE estimated that rebates would provide 
national benefits, they would be much smaller than the benefits 
resulting from the 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 standards, DOE's analysis 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. For 
example, as a result of the consumer tax credit, the market share of 
water heaters meeting the standard level would increase from 35 percent 
(in the base case) to 51 percent for gas-fired storage products and 
from 9 percent (in the base case) to 31 percent for electric storage 
products. 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 0.47 quads of 
national energy savings and an NPV of consumer benefit of $0.22 billion 
(at a seven-percent discount rate) for the five considered products. 
Hence, DOE estimated that consumer tax credits would yield a fraction 
of the benefits that consumer rebates would provide.
    Manufacturer Tax Credits. DOE estimates that even smaller benefits 
would 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 standards. 
Because these tax credits would go to manufacturers instead of 
consumers, DOE assumed that fewer consumers would be aware of this 
program than would be aware of 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. For example, as a result of the 
manufacturer tax credit, the market share of water heaters meeting the 
standard would increase from 35 percent (in the base case) to 43 
percent for gas-fired storage products and from 9 percent (in the base 
case) to 20 percent for electric storage products. 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 
0.23 quads of national energy savings and an NPV of consumer benefit of 
$0.1 billion (at a seven-percent discount rate) for the five 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. Some equipment purchases that 
result from the ENERGY STAR program already are reflected in DOE's 
base-case scenario for gas-fired and electric storage water heaters. 
DOE evaluated the potential

[[Page 20225]]

impacts of increased marketing efforts by ENERGY STAR that would 
encourage the purchase of water heaters meeting the standard. For 
direct heating equipment and pool heaters, DOE evaluated a hypothetical 
ENERGY STAR program for these products with market impacts comparable 
to the impacts of existing ENERGY STAR programs for similar products. 
DOE modeled the voluntary efficiency program based on these scenarios. 
DOE estimated that the enhanced effectiveness of voluntary energy 
efficiency targets would provide 0.31 quads of national energy savings 
and an NPV of consumer benefit of $0.40 billion (at a 7-percent 
discount rate) for the five considered products. Although this would 
provide national benefits, they would be much smaller than the benefits 
resulting from the 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 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 for such an early replacement program, the national 
energy savings benefits would be negligible in comparison with the 
benefits resulting from the 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 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 water heaters meeting the 
efficiency levels of the 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 and NPV for 
the considered products, benefits that would be much smaller than those 
estimated for the national standards.
    Energy Conservation Standards. DOE is adopting the energy 
conservation standards listed in section VI.D. As indicated in the 
paragraphs above, none of the alternatives DOE examined would save as 
much energy as today's 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 from requiring 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).
    DOE estimated that a policy that would allow States to require that 
some electric storage water heaters installed in new homes have an 
efficiency level higher than the Federal standard would provide 2.18 
quads of national energy savings and an NPV of consumer benefit of 
$1.23 billion (at a 7-percent discount rate). The energy savings from 
this State building code requirement for new homes would be greater 
than the savings from today's energy conservation standard for electric 
storage water heaters. This contrasts with the non-regulatory policy 
alternatives discussed above, whose savings are lower than those of the 
considered standards.

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, and a final 
regulatory flexibility analysis (FRFA) for any such rule that an agency 
adopts as a final rule, 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.energy.gov/). 
DOE reviewed the December 2009 NOPR and today's final rule under the 
provisions of the Regulatory Flexibility Act and the procedure and 
policies published on February 19, 2003.
    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 (Sept. 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 
manufacturing is classified under NAICS 335228--``Other Major Household 
Appliance Manufacturing.'' DHE and pool heater manufacturing are 
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 VII.6.

[[Page 20226]]



Table VII.6--SBA and NAICS Classification of Small Business Manufacturers Potentially Affected by This Rule \26\
----------------------------------------------------------------------------------------------------------------
                  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             333414
----------------------------------------------------------------------------------------------------------------

    In the December 2009 NOPR, 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. 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 manufacturers. 
74 FR 65852, 65984-86 (Dec. 11, 2009). DOE concluded that the proposed 
standards for residential water heaters and gas-fired pool heaters set 
forth in the proposed rule, if promulgated, would not have a 
significant economic impact on a substantial number of small entities. 
DOE also sought comment on the impacts of the proposed amended energy 
conservation standards on small business manufacturers of residential 
water heaters and the impacts of the proposed amended energy 
conservation standards on small business manufacturers of gas-fired 
residential pool heaters. DOE received no comments on the certification 
or its additional requests for comment on small business impacts in 
response to the December 2009 NOPR for residential water heaters and 
gas-fired pool heaters. Comments related to the economic impacts of the 
proposed rule generally are discussed elsewhere in the preamble, and no 
changes were made to the certification as a result of these comments. 
Thus, DOE reaffirms the certification and has not prepared a FRFA for 
this final rule for those products.
---------------------------------------------------------------------------

    \26\ In the December 2009 NOPR, DOE mistakenly listed gas-fired 
pool heater manufacturing under NAICS code 335228. 74 FR 65852, 
65984 (Dec. 11, 2009). The correct classification for pool heater 
manufacturing is 333414. Both NAICS categories have the same 500 
employee limit.
---------------------------------------------------------------------------

    DOE determined, however, that it could not certify that the 
proposed standards, if promulgated, would not have significant impact 
on a substantial number of small entities in the direct heating 
equipment industry. DOE made the determination that small business 
manufacturers of both traditional and gas hearth DHE could be 
negatively impacted by the standards proposed in the December 2009 
NOPR. 74 FR 65852, 65985-86 (Dec. 11, 2009). Because of the potential 
impacts on small DHE manufacturers, DOE prepared an IRFA for DHE during 
the NOPR stage of this rulemaking. DOE provided the IRFA in its 
entirety in the December 2009 NOPR. 74 FR 65852, 65984-92 (Dec. 11, 
2009). Chapter 12 of the TSD contains more information about the impact 
of this rulemaking on manufacturers. DOE presents the FRFA conducted 
for this rulemaking in the following discussion. Comments received in 
response to the IRFA are also presented below.
    DOE's determination that the rule may have a significant economic 
impact on a substantial number of small entities results from the large 
number of small DHE manufacturers and the expected impact of the 
standards on these small businesses. As presented and discussed below, 
the FRFA describes potential impacts on small business DHE 
manufacturers associated with the required capital and product 
conversion costs at each TSL and discusses alternatives that could 
minimize these impacts.
Succinct Statement of the Need for, and Objectives of, the Rule
    The statement of the need for and objectives of the rule is set 
forth elsewhere in the preamble and is not repeated here.
Description and Estimated Number of Small Entities Regulated
    After examining structure of the DHE industry, DOE determined it 
was 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 FRFA presents the results for traditional DHE 
and gas hearth DHE separately to be consistent with the MIA results in 
section VI.C.2 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).
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 business manufacturers. One of the small 
business manufacturers 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 small business 
manufacturer produces all five products classes of DHE, including gas 
hearth DHE. DOE identified a third small business manufacturer 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.
Gas Hearth Direct Heating Equipment
    DOE identified 10 small business manufacturers of gas hearth DHE. 
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.
Significant Issues Raised by Public Comments
    A number of interested parties commented on the appropriateness of 
the proposed standard level for traditional DHE, given the impacts DOE 
calculated in the MIA, and urged DOE to reconsider the traditional DHE 
standards for the final rule. See section V.A.2 for a summary of these 
comments, and see section VI.D.3 for a discussion of DOE's conclusion 
about the final amended energy conservation standard for traditional 
DHE in light of these and other comments.
    DOE also received a number of comments from industry groups and

[[Page 20227]]

manufacturers, including two small business manufacturers, about the 
potential of the proposed standards to have a tremendous impact on 
direct employment in the traditional DHE market. See section IV.I.4 for 
a discussion of these comments. Interested parties also commented on 
the MIA scenarios and profitability in the traditional DHE market after 
the compliance date of the amended energy conservation standards 
(section IV.I.2). Another issue raised by interested parties that could 
impact small business manufacturers and the industry in general is 
securing the funding for the conversion costs estimated by DOE (see 
section IV.I.5).
    Several comments argued that TSL 3, as presented in the December 
2009 NOPR, presented a very negative business case for traditional DHE 
manufacturers, especially small business manufacturers. In general, 
AHRI and the small business manufacturers argued that the market for 
traditional DHE would not support the sales volume necessary to recoup 
the investments in R&D and capital equipment required by TSL 3. 
Essentially, two factors drive this argument: (1) The costs required by 
amended standards; and (2) revenues that follow the standards. On the 
cost side, AHRI stated that manufacturers cannot afford the necessary 
investment for product development and redesign for nearly all of their 
models; the retooling and changing of their production lines; and the 
testing of those redesigned models to certify compliance with the 
applicable safety standards. On the revenue side, AHRI and 
manufacturers attributed the lack of volume necessary to recoup these 
costs to three factors: (1) The market has already been in steady 
decline in the base case; (2) there would be fewer retrofits--the 
products' primary market--because of space constraints and the 
increased size associated with higher-efficiency products; and (3) 
higher first costs, including higher installation costs, would further 
reduce demand. (Williams, No. 96 at p. 1; Empire, Public Meeting 
Transcript, No. 57.4 at pp. 298-300; AHRI, No. 91 at p. 10) AHRI and 
the manufacturers argued that the prospect of declining sales and the 
aforementioned costs would force those manufacturers to either drop 
product lines or exit the market entirely. (AHRI, No. 91 at p. 10; LTS, 
Public Meeting Transcript, No. 57.4 at p. 25) As a result, some 
segments of the traditional DHE market may shrink to only one or two 
manufacturers. (AHRI, No. 91 at p. 10) As mentioned in section VI.C.5, 
DOJ expressed concern that the proposed standards could adversely 
affect competition in the traditional DHE product categories. (DOJ, No. 
99 at p. 2)
    DOE also received comments specific to the small business analysis 
presented in the IRFA section of the December 2009 NOPR. LTS agreed 
that most manufacturers have existing products that meet the required 
efficiencies in three out of the four product types of traditional DHE, 
but said that that statement is misleading because only 15 percent of 
LTS' total sales come from products that meet the proposed standards. 
LTS stated its belief that its competitors similarly derive only a 
small portion of total revenue from products that would meet the 
proposed standards. (LTS, No. 56.7 at p. 2; Public Meeting Transcript, 
No. 57.4 at p. 22) LTS also disagreed with DOE's statement in the 
December 2009 NOPR that small business manufacturers would be left with 
a viable number of product lines that meet the new standards, 
particularly for the gravity wall category which represents 60 percent 
of their business. Because only one manufacturer has two gas wall 
gravity models that would meet the proposed standard (which represent 5 
percent of sales and only have lower input ratings less than 25,000 
BTU), LTS stated that these few products do not lead to maintaining a 
viable number of product offerings. (LTS, No. 56.7 at p. 3; LTS, Public 
Meeting Transcript, No. 57.4 at pp. 23-24; 286-287) Therefore, LTS did 
not agree with DOE's conclusion that manufacturers would have a viable 
number of product lines at TSL 3 to maintain a sufficient production 
volume and remain in the market. (LTS, No. 56.7 at p. 2)
    DOE acknowledges that, according to the AHRI database, LTS produces 
only a few gas wall gravity DHE models that would meet the standards 
being adopted in this final rule. According to the AHRI directory, LTS 
has certified four models that meet the proposed gas wall gravity 
standard in the 2009 NOPR. These four models are two basic products 
that are listed twice in the directory (once for using natural gas as a 
fuel source and once for using propane gas as a fuel source). DOE also 
understands that these products currently reflect a small share of the 
market and that few of LTS's current products in other categories would 
meet the standards proposed in the December 2009 NOPR. To clarify, in 
the December 2009 NOPR, DOE concluded that a combination of existing 
product lines that currently meet the standard and other select product 
lines--which would have to be upgraded--would allow manufacturers to 
offer a viable number of product lines after the compliance date of the 
amended energy conservation standard. DOE did and does not assume that 
only products that meet the current standard will be sufficient to 
support manufacturers after compliance with the amended standards is 
required.
    For these reasons, in the IRFA, DOE accounted for the costs the 
industry would incur to upgrade all of its other gas wall gravity 
product lines at the proposed standard. For the final rule, DOE used 
the AHRI database to update the number of product lines manufacturers 
currently have, and continued to use this methodology to estimate its 
capital conversion costs. DOE recognizes that its conversion costs may, 
therefore, be conservative because manufacturers may choose not to 
upgrade all of their current product lines. However, DOE assumed 
manufacturers would have to invest to maintain the shipment volumes 
forecasted in the NIA. See chapter 12 of the TSD for more details on 
DOE's product line analysis.
    AHRI stated that because manufacturers in the traditional DHE 
market provide products of every type, the total shipments of 
traditional DHE must be considered since that is the true base of 
manufacturers' business. According to the commenter, DOE must 
reconsider its analysis for traditional DHE, both relative to the 
impacts on manufacturers and on national energy savings, given that 
total future shipments are expected to continue to decrease. (AHRI, No. 
91 at p. 11) AHRI stated that, to date, the traditional DHE 
manufacturers have survived by offering replacements. Dropping product 
lines or dropping categories would hurt manufacturers because they 
would no longer be able to offer all replacements for all products, 
which could cause a complete exit from the market rather than upgrading 
some product lines. (AHRI, Public Meeting Transcript, No. 57.4 at pp. 
297-298) Williams stated that offering a range of products is critical 
to traditional DHE manufacturers, arguing that in a small, niche 
category, part of viability is being able to offer a breadth of 
products. Williams commented that it needs to be able to be able to 
offer like replacements, including units without electricity. 
(Williams, Public Meeting Transcript, No. 57.4 at pp. 301-302)
    DOE agrees with AHRI and Williams that total sales and offering a 
broad range of products are critical to traditional DHE manufacturers. 
In the December 2009 NOPR, DOE noted that the wide range of product 
offerings by

[[Page 20228]]

manufacturers is a legacy of a once 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 maintaining a sufficiently broad product 
line is so critical to traditional DHE manufacturers, DOE conducted its 
small business impact analysis by examining how the conversion costs to 
convert all product lines would impact small business manufacturers. 
Because each product line is manufactured in relatively 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. 74 FR 65852, 65986 (Dec. 11, 
2009).
    DOE notes that the comments it received on the IRFA pertain to the 
conclusion DOE drew from the results, rather than the methodology or 
results themselves. As such, DOE has maintained its methodology from 
the December 2009 NOPR (discussed in more detail in section IV.I) and 
believes it has appropriately captured the costs to traditional DHE 
manufacturers of upgrading all of their product lines to the TSLs. The 
cash flow impacts presented in section VI.C.2.b are reflective of this 
assumption. However, DOE recognizes the significant costs small 
business manufacturers could face in converting product lines. In light 
of these costs and the need to maintain a viable number of products to 
offer in the marketplace, DOE is adopting a different TSL for 
traditional DHE in today's final rule. Particularly in light of this 
change, DOE continues to believe that manufacturers, including the 
small business manufacturers, will be able to maintain a viable number 
of products after the compliance date of the amended energy 
conservation standards.
    DOE did not receive any specific comments on the MIA for gas hearth 
DHE manufacturers. DOE also did not receive any comments on its request 
for comment on the characterization of a typical large and small 
business manufacturer of gas hearth DHE nor its request for comment on 
the potential impacts on small business manufacturers of gas hearth 
DHE.
Description and Estimate of Compliance Requirements
Traditional DHE
    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 models offered by each manufacturer per product line. 
Again, the wide range of product offerings by manufacturers is a legacy 
of a once 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, so 
achieving manufacturing scale is 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 there must be a large enough volume to justify an added per-unit 
cost.
    DOE calculated capital and product conversion costs for traditional 
DHE by estimating a per-product-line 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 does 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 
business manufacturers could be differentially harmed, DOE compared the 
conversion costs for a typical large manufacturer and a typical small 
business manufacturer within the industry. To calculate the conversion 
costs for a typical small business manufacturer and a typical large 
manufacturer, DOE used publicly-available information to determine the 
average number of product lines that meet each efficiency level in each 
product category for a typical small business manufacturer and a 
typical large manufacturer of traditional DHE. DOE updated this 
information for the final rule, adding products that had been released 
since the December 2009 NOPR analysis. For both small business and 
large manufacturers, 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 VII.7 and Table VII.8 
show DOE's estimates of the average number of product lines requiring 
conversion at each TSL for a typical small business manufacturer and a 
typical large manufacturer of traditional DHE, respectively.

     Table VII.7--Number of Product Lines Requiring Conversion for a Typical Small Business Manufacturer of
                                      Traditional Direct Heating Equipment*
----------------------------------------------------------------------------------------------------------------
                                              Number of
                                Number of     gas wall      Number of     Number of   Total number      Total
                              gas wall fan     gravity      gas floor     gas room     of product      product
                                 product       product       product       product        lines      lines that
                                  lines         lines         lines         lines       requiring   meet each or
                                requiring     requiring     requiring     requiring    conversion    exceed each
                               conversion    conversion    conversion    conversion                      TSL
----------------------------------------------------------------------------------------------------------------
Baseline....................           0             0             0             0             0            13
TSL 1.......................           2             2.5           0.5           1             6             7
TSL 2.......................           2             2.5           0.5           1.5           6.5           6.5
TSL 3.......................           3             4             0.5           2             9.5           3.5
TSL 4.......................           3.5           4             0.5           2            10             3
TSL 5.......................           2             4             0.5           2             8.5           4.5
TSL 6.......................           3.5           4             0.5           2            10             3
----------------------------------------------------------------------------------------------------------------
* Fractions of product lines result from taking the average number of product lines from publicly-available
  information.


[[Page 20229]]


Table VII.8--Number of Product Lines Requiring Conversion for a Typical Large Manufacturer of Traditional Direct
                                                Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                  Number of
                                     Number of     gas wall    Number of    Number of      Total        Total
                                      gas wall     gravity     gas floor     gas room    number of     product
                                    fan product    product      product      product      product     lines that
                                       lines        lines        lines        lines        lines      meet each
                                     requiring    requiring    requiring    requiring    requiring    or exceed
                                     conversion   conversion   conversion   conversion   conversion    each TSL
----------------------------------------------------------------------------------------------------------------
Baseline..........................            0            0            0            0            0           18
TSL 1.............................            1            0            1            1            3           15
TSL 2.............................            2            0            1            1            4           14
TSL 3.............................            4            3            1            2           10            8
TSL 4.............................            7            3            1            2           13            5
TSL 5.............................            1            6            1            3           11            7
TSL 6.............................            7            6            1            3           17            1
----------------------------------------------------------------------------------------------------------------

    Amended energy conservation standards have the potential to 
differentially affect the small business manufacturers, 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 business manufacturers would face higher product conversion 
costs at lower TSLs than their large competitor. Both large and small 
business 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, to produce a sufficiently large volume, the small 
business manufacturers would have to upgrade more product lines at 
lower TSLs than the large manufacturer at lower TSLs. As shown in Table 
VII.9 and Table VII.10, modifying facilities and developing new, more-
efficient products would cause a typical small business manufacturer to 
incur higher conversion costs than a typical larger manufacturer for 
TSL 1 through TSL 3.

   Table VII.9--Total Conversion Costs for a Typical Small Business Manufacturer of Traditional Direct Heating
                                                    Equipment
----------------------------------------------------------------------------------------------------------------
                                                                   Capital          Product           Total
                                                                  conversion       conversion       conversion
                                                                 costs for a      costs for a      costs for a
                                                                typical small    typical small    typical small
                                                                   business         business         business
                                                                 manufacturer     manufacturer     manufacturer
                                                                    (2009$           (2009$           (2009$
                                                                  millions)        millions)        millions)
----------------------------------------------------------------------------------------------------------------
Baseline.....................................................  ...............  ...............  ...............
TSL 1........................................................             0.86             0.41             1.27
TSL 2........................................................             1.35             0.57             1.92
TSL 3........................................................             1.89             0.81             2.70
TSL 4........................................................             2.18             0.92             3.10
TSL 5........................................................             1.93             1.44             3.37
TSL 6........................................................             2.52             1.65             4.17
----------------------------------------------------------------------------------------------------------------


  Table VII.10--Total Conversion Costs for a Typical Large Manufacturer of Traditional 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
                                                            (2009$ millions)  (2009$ millions)  (2009$ millions)
----------------------------------------------------------------------------------------------------------------
Baseline..................................................  ................  ................  ................
TSL 1.....................................................              0.23              0.14              0.38
TSL 2.....................................................              0.54              0.25              0.79
TSL 3.....................................................              1.81              0.79              2.60
TSL 4.....................................................              2.59              1.11              3.70
TSL 5.....................................................              2.90              2.13              5.03
TSL 6.....................................................              4.08              2.61              6.69
----------------------------------------------------------------------------------------------------------------

    Because the larger manufacturer offers more products at higher 
efficiencies, a typical small business manufacturer faces 
disproportionate costs at the lower TSLs in absolute terms at TSL 1 
through TSL 3. Despite being similar in absolute terms, at these TSLs, 
the small business 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

[[Page 20230]]

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 
business manufacturer using the financial parameters in the DHE GRIM. 
Comparing the conversion costs of a typical small business manufacturer 
to a typical large manufacturer with operating profit provides a rough 
estimate of how quickly the investments could be recouped. Table VII.11 
and Table VII.12 show these comparisons.

    Table VII.11--Comparison of a Typical Small Business 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      as a percentage    percentage of     percentage of
                                               capital        of annual R&D    annual revenue      annual EBIT
                                            expenditures         expense
----------------------------------------------------------------------------------------------------------------
Baseline................................  ................  ................  ................  ................
TSL 1...................................               267               190                 9               252
TSL 2...................................               332               210                11               302
TSL 3...................................               466               299                15               426
TSL 4...................................               537               341                17               489
TSL 5...................................               474               535                19               531
TSL 6...................................               619               612                23               657
----------------------------------------------------------------------------------------------------------------


  Table VII.12--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      as a percentage    percentage of     percentage of
                                               capital        of annual R&D    annual revenue      annual EBIT
                                            expenditures         expense
----------------------------------------------------------------------------------------------------------------
Baseline................................  ................  ................  ................  ................
TSL 1...................................                33                30                 1                34
TSL 2...................................                77                53                 3                72
TSL 3...................................               257               169                 8               237
TSL 4...................................               368               237                12               337
TSL 5...................................               412               456                16               458
TSL 6...................................               580               559                22               610
----------------------------------------------------------------------------------------------------------------

    Table VII.11 and Table VII.12 illustrate that, although the 
investments required at each TSL can be considered substantial for all 
companies, the impacts could be relatively greater for a typical small 
business manufacturer, 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 business manufacturers would face 
increasingly difficult decisions on whether to: (1) Invest the capital 
required to be able to continue offering a full range of products; (2) 
cut product lines; (3) consolidate to maintain a large enough combined 
scale to spread the required conversion costs and operating expenses; 
or (4) exit the market altogether. Because of the high conversion costs 
at higher TSLs, manufacturers would likely eliminate their lower-volume 
product lines. Small business 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 revealed the potential for small 
businesses manufacturers to be disproportionately harmed by the 
proposed standard levels and higher TSLs. Additionally, DOE agrees with 
comments that small business traditional DHE 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 business 
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 business 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 business 
manufacturers 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 manufacturers 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

[[Page 20231]]

costs, an amended energy conservation standard that requires more 
purchased parts may differentially harm the profitability of the small 
business manufacturers.
    Even though there is a potential for the small business 
manufacturers to be negatively impacted by today's final rule, DOE 
believes that manufacturers, including the small businesses, would be 
able to maintain a viable number of product offerings at TSL 2, the 
adopted standard level. A typical small business manufacturer of 
traditional DHE offers product families in the four product types that 
would meet or exceed the standard levels adopted in today's final rule. 
For example, over two-thirds of the product lines identified by DOE as 
currently on the market meet the standard established by today's final 
rule for gas wall gravity DHE, which comprise over 60 percent of the 
traditional DHE market. While recognizing that the product lines that 
currently meet the standard represent a minority of current revenue, 
the standard levels do not require manufacturers, including those that 
are small businesses, to completely redesign all their product lines. 
For those product lines that would need to be redesigned, DOE believes 
that small business manufacturers would offer fewer product lines in 
response to the amended energy conservation standards. However, DOE 
believes that the standards adopted in today's final rule will allow 
the small business manufacturers to selectively upgrade their existing 
product lines and maintain viable production volumes after the 
compliance date of the amended energy conservation standards.
Gas Hearth DHE
    For gas hearth DHE in the IRFA, DOE used publicly-available 
information to estimate the conversion costs for a typical large and a 
typical small business manufacturer of gas hearth DHE as shown in the 
December 2009 NOPR. 74 FR 65852, 65984-92 (Dec. 11, 2009). DOE 
tentatively concluded that a typical small business manufacturer could 
be differentially impacted by amended energy conservation standards 
because of their smaller scale. However, DOE believed that a typical 
small business manufacturer would not face prohibitively large 
conversion costs and that the required changes would not require 
significant investments in product development. DOE tentatively 
concluded that because a typical manufacturer of gas hearth DHE already 
offers multiple product lines that meet and exceed the required 
efficiencies and because most product lines that did not meet the 
proposed standard could be upgraded with relatively minor changes, 
manufacturers, including the small business manufacturers, would be 
able to maintain a viable number of product offerings. 74 FR 65852, 
65991 (Dec. 11, 2009). In this final rule, while DOE is adopting a 
different TSL for direct heating equipment (i.e., TSL 2), the 
efficiency requirements are identical to the proposed amended energy 
conservation standard for gas hearth DHE. Additionally, because DOE did 
not receive any comments on the IRFA or the potential impacts on small 
business manufacturers of gas hearth DHE, DOE continues to believe that 
the analysis developed for the IRFA and presented in the December 2009 
NOPR accurately presents the potential impacts on small business 
manufacturers of gas hearth DHE. (See 74 FR 65852, 65989-91 (Dec. 11, 
2009) for additional details.) Therefore, for the FRFA detailed in 
today's final rule, DOE continues to believe that gas hearth DHE 
manufacturers, including the small business manufacturers, will be able 
to maintain a viable number of product offerings following the 
compliance date of the amended energy conservation standard.
Description of the Steps DOE Has Taken To Minimize the Significant 
Economic Impact on Small Entities Consistent With the Stated Objectives 
of Applicable Statutes
    DOE acknowledges all the potential impacts highlighted by 
manufacturers and industry and updated its small business analysis for 
the impacts on traditional DHE manufacturers in light of these comments 
and additional information and analysis. The impacts on small business 
manufacturers of traditional DHE, as illustrated in public comments, 
contributed to DOE's ultimate determination that the TSL proposed in 
the December 2009 NOPR for traditional DHE (TSL 3) was not economically 
justified.
    DOE discusses how it has considered the new information about the 
impacts on traditional DHE in section VI.D.3. Even though there is a 
potential for the small business manufacturers to be negatively 
impacted by today's final rule, DOE believes that manufacturers, 
including the small businesses, would be able to maintain a viable 
number of product offerings at TSL 2, the adopted standard level. For 
today's final rule, the small business manufacturers of traditional DHE 
have an average of 6.5 product lines out of 13 that already meet the 
required efficiencies. In total, 61 percent of the models offered by a 
typical small business manufacturer meet the amended energy 
conservation standards. DOE also reviewed the conversion costs required 
for each of the small business manufacturers to upgrade an average of 
approximately seven product lines for a capital cost totaling $1.35 
million to offer replacements for all models that do not meet the 
standard. At the proposed standards in the December 2009 NOPR, DOE 
estimated small business manufacturers would be required to spend 
approximately 3.5 years worth of operating profit to convert every 
product line. For todays final rule, that estimate has fallen to 3.0 
years despite changes to the analysis that lowered annual shipments and 
updates to the product line analysis to include new product lines. 
While DOE believes that this would still be a substantial undertaking, 
DOE has carefully reviewed the impact of the conversion costs on small 
business manufacturers and has carefully considered what would be 
required for these manufacturers to continue to offer a viable number 
of replacement models that are critical to their ability to remain in 
the market. In sum, DOE has concluded that adoption of a standard level 
at TSL 2 in this final rule (as compared to TSL 3 proposed in the NOPR) 
minimizes the impact on small business manufacturers to the extent 
possible, given EPCA's requirements for setting energy conservation 
standards.
    Although the TSL lower than the adopted TSL would be expected to 
further reduce the impacts on small entities, DOE is required by EPCA 
to establish standards that achieve the maximum improvement in energy 
efficiency that are technically feasible and economically justified, 
and result in a significant conservation of energy, after considering a 
variety of factors. As explained earlier in the preamble, DOE rejected 
the lower TSL based on its analysis conducted pursuant to these EPCA 
requirements.
    In addition to the other TSLs being considered, the December 2009 
NOPR TSD included a regulatory impact analysis. For DHE, this report 
discusses the following policy alternatives: (1) No new regulatory 
action; (2) consumer rebates; (3) consumer tax credits; (4) 
manufacturer tax credits; (5) voluntary energy efficiency targets; (6) 
early replacement incentives; and (7) bulk government purchases. While 
these alternatives may mitigate the economic impacts on small entities 
compared to the adopted standards, the energy savings of these 
regulatory alternatives are significantly smaller than those expected 
to result from the adopted

[[Page 20232]]

standard levels. Thus, DOE rejected these alternatives and is adopting 
the standards set forth in this rulemaking.

C. Review Under the Paperwork Reduction Act of 1995

    This rule contains a collection-of-information requirement subject 
to the Paperwork Reduction Act of 1995 (PRA) which has been approved by 
OMB under control number 1910-1400. As described in the December 2009 
NOPR, 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. 74 FR 65852, 
65992 (Dec. 11, 2009). DOE did not receive any comments regarding this 
burden estimate, or any other aspect of this data collection in 
response to its proposals. DOE believes that the collection of 
information required by this final rule is the least burdensome method 
of meeting the statutory requirements.
    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 prepared an environmental assessment (EA) of the impacts of 
today's final rule, pursuant to the National Environmental Policy Act 
of 1969 (NEPA) (42 U.S.C. 4321 et seq.), the regulations of the Council 
on Environmental Quality (40 CFR parts 1500-1508), and DOE's 
regulations for compliance with NEPA (10 CFR part 1021). 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 
final EA has been incorporated into the final rule TSD at chapter 16. 
DOE found the environmental effects associated with today's standard 
levels for water heaters, direct heating equipment, and pool heaters to 
be insignificant. Therefore, DOE is issuing a finding of no significant 
impact (FONSI) as part of the final EA. The FONSI is available in the 
docket for this rulemaking.

E. Review Under Executive Order 13132

    DOE reviewed this rule pursuant to Executive Order 13132, 
``Federalism,'' 64 FR 43255 (August 4, 1999), which 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 final rule and has 
determined that it would not have a substantial direct effect on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. EPCA governs and prescribes Federal 
preemption of State regulations as to energy conservation for the 
products that are the subject of today's final 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)) Therefore, 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 Federal 
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 final rule meets the relevant standards of 
Executive Order 12988.

G. Review Under the Unfunded Mandates Reform Act of 1995

    As indicated in the December 2009 NOPR, DOE reviewed the proposed 
rule under Title II of the Unfunded Mandates Reform Act of 1995 (Pub. 
L. 104-4) (UMRA), which requires each Federal agency to assess the 
effects of their Federal regulatory actions on State, local, and Tribal 
governments and the private sector. See 74 FR 65852, 65992-93 (Dec. 11, 
2009). 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 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://www.gc.doe.gov). Although today's final rule does not contain 
a Federal intergovernmental mandate, it may impose expenditures of $100 
million or more on the private sector.
    DOE has concluded that this final rule would likely result in a 
final rule that could impose expenditures of $100 million or more 
between 2013 and 2045 in the private sector. For the final rule, DOE 
estimated annualized impacts for the final standards using the results 
of

[[Page 20233]]

the national impacts analysis. The national impact analysis results, 
expressed as annualized values, range from $1.55-$2.03 billion (at a 7-
percent discount rate) and $1.90-$2.38 billion (at a 3-percent discount 
rate) in total annualized benefits from the final rule. The NIA also 
reports $1.28 billion (at a 7-percent discount rate) and $1.25 billion 
(at a 3-percent discount rate) in annualized costs, and $0.27-$0.75 
billion (at a 7-percent discount rate) and $0.65-$1.13 billion (at a 3-
percent discount rate) in annualized net benefits. Details are provided 
in chapter 10 of the TSD. 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 energy 
conservation standards for residential water heaters, direct heating 
equipment, and pool heaters 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 discussion of 
the alternatives considered by DOE is presented in the ``Regulatory 
Impact Analysis'' section of the TSD for this final 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 final 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. 
In the December 2009 NOPR, DOE tentatively determined that this 
rulemaking would not have any impact on the autonomy or integrity of 
the family as an institution, and, accordingly, that it is not 
necessary to prepare a Family Policymaking Assessment. See 74 FR 65852, 
65993 (Dec. 11, 2009). DOE received no comments concerning Section 654 
in response to the December 2009 NOPR, and, therefore, has concluded 
that no further action is necessary in today's final rule with respect 
to this provision.

I. Review Under Executive Order 12630

    DOE tentatively determined under Executive Order 12630, 
``Governmental Actions and Interference with Constitutionally Protected 
Property Rights,'' 53 FR 8859 (March 18, 1988), that this rule would 
not result in any takings that might require compensation under the 
Fifth Amendment to the U.S. Constitution. 74 FR 65852, 65993 (Dec. 11, 
2009). DOE received no comments concerning Executive Order 12630 in 
response to the December 2009 NOPR, and, therefore, has concluded that 
no further action is necessary in today's final rule with respect to 
this Executive Order.

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 final rule 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 the 
Office of Information and Regulatory Affairs (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 determined that today's rule, which sets energy 
conservation standards for residential water heaters, direct heating 
equipment, and pool heaters, is not a ``significant energy action'' 
within the meaning of Executive Order 13211, because the 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 of OIRA. Accordingly, DOE has not prepared a 
Statement of Energy Effects.

L. Review Under the Information Quality Bulletin for Peer Review

    In consultation with the Office of Science and Technology Policy 
(OSTP), OMB issued on December 16, 2004, 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 
that 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

[[Page 20234]]

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.

M. Congressional Notification

    As required by 5 U.S.C. 801, DOE will submit to Congress a report 
regarding the issuance of today's final rule prior to the effective 
date set forth at the outset of this notice. The report will state that 
it has been determined that the rule is a ``major rule'' as defined by 
5 U.S.C. 804(2). DOE also will submit the supporting analyses to the 
Comptroller General in the U.S. Government Accountability Office (GAO) 
and make them available to each House of Congress.

VIII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of today's final 
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 March 22, 2010.
Cathy Zoi,
Assistant Secretary, Energy Efficiency and Renewable Energy.

0
For the reasons set forth in the preamble, DOE amends part 430 of 
chapter II, subchapter D, of title 10 of the Code of Federal 
Regulations, to read as set forth below:

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

0
1. The authority citation for part 430 continues to read as follows:

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


0
2. In Sec.  430.2, add the definitions ``Direct heating equipment'' and 
``Vented hearth heater,'' in alphabetical order and revise the 
definition ``Vented home heating equipment,'' 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 appliance which simulates a 
solid fuel fireplace and is designed to furnish warm air, with or 
without duct connections, to the space in which it is installed. The 
circulation of heated room air may be by gravity or mechanical means. A 
vented hearth heater may be freestanding, recessed, zero clearance, or 
a gas fireplace insert or stove. Those heaters with a maximum input 
capacity less than or equal to 9,000 British thermal units per hour 
(Btu/h), as measured using DOE's test procedure for vented home heating 
equipment (10 CFR part 430, subpart B, appendix O), are considered 
purely decorative and are excluded from DOE's regulations.
    Vented home heating equipment or vented heater means 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 except for vented hearth 
heaters, which may be with or without duct connections) and includes: 
vented wall furnace, vented floor furnace, vented room heater, and 
vented hearth heater.
* * * * *

0
3. In Sec.  430.32, revise 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
         Product class            of January 20,    Energy factor as of
                                       2004            April 16, 2015
------------------------------------------------------------------------
Gas-fired Water Heater........  0.67-(0.0019 x     For tanks with a
                                 Rated Storage      Rated Storage Volume
                                 Volume in          at or below 55
                                 gallons).          gallons: EF = 0.675-
                                                    (0.0015 x Rated
                                                    Storage Volume in
                                                    gallons).
                                                   For tanks with a
                                                    Rated Storage Volume
                                                    above 55 gallons:
                                                   EF = 0.8012-(0.00078
                                                    x Rated Storage
                                                    Volume in gallons).
Oil-fired Water Heater........  0.59-(0.0019 x     EF = 0.68-(0.0019 x
                                 Rated Storage      Rated Storage Volume
                                 Volume in          in gallons).
                                 gallons).
Electric Water Heater.........  0.97-(0.00132 x    For tanks with a
                                 Rated Storage      Rated Storage Volume
                                 Volume in          at or below 55
                                 gallons).          gallons: EF = 0.960-
                                                    (0.0003 x Rated
                                                    Storage Volume in
                                                    gallons).
                                                   For tanks with a
                                                    Rated Storage Volume
                                                    above 55 gallons:
                                                   EF = 2.057-(0.00113 x
                                                    Rated Storage Volume
                                                    in gallons).
Tabletop Water Heater.........  0.93-(0.00132 x    EF = 0.93-(0.00132 x
                                 Rated Storage      Rated Storage Volume
                                 Volume in          in gallons).
                                 gallons).
Instantaneous Gas-fired Water   0.62-(0.0019 x     EF = 0.82-(0.0019 x
 Heater.                         Rated Storage      Rated Storage Volume
                                 Volume in          in gallons).
                                 gallons).
Instantaneous Electric Water    0.93-(0.00132 x    EF = 0.93-(0.00132 x
 Heater.                         Rated Storage      Rated Storage Volume
                                 Volume in          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) Vented home heating equipment 
manufactured on or after January 1, 1990 and before April 16, 2013, 
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

[[Page 20235]]

 
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 Btu/                      58
 h.............................................
14. Gas room over 20,000 Btu/h up to 27,000 Btu/                      63
 h.............................................
15. Gas room over 27,000 Btu/h up to 46,000 Btu/                      64
 h.............................................
16. Gas room over 46,000 Btu/h.................                       65
------------------------------------------------------------------------

     (2) Vented home heating equipment manufactured on or after April 
16, 2013, shall have an annual fuel utilization efficiency no less 
than:

------------------------------------------------------------------------
                                                 Annual fuel utilization
                 Product class                    efficiency, April 16,
                                                      2013 (percent)
------------------------------------------------------------------------
1. Gas wall fan type up to 42,000 Btu/h........                       75
2. Gas wall fan type over 42,000 Btu/h.........                       76
3. Gas wall gravity type up to 27,000 Btu/h....                       65
4. Gas wall gravity type over 27,000 Btu/h up                         66
 to 46,000 Btu/h...............................
5. Gas wall gravity type over 46,000 Btu/h.....                       67
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.................                       61
9. Gas room over 20,000 Btu/h up to 27,000 Btu/                       66
 h.............................................
10. Gas room over 27,000 Btu/h up to 46,000 Btu/                      67
 h.............................................
11. Gas room over 46,000 Btu/h.................                       68
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
------------------------------------------------------------------------

* * * * *
    (k) Pool heaters. (1) Gas-fired pool heaters manufactured on or 
after January 1, 1990 and before April 16, 2013, shall have a thermal 
efficiency not less than 78%.
    (2) Gas-fired pool heaters manufactured on or after April 16, 2013, 
shall have a thermal efficiency not less than 82%.
* * * * *

Appendix

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

DEPARTMENT OF JUSTICE, Antitrust Division

CHRISTINE A. VARNEY, Assistant Attorney General, Main Justice 
Building, 950 Pennsylvania Avenue, N.W., Washington, D.C 20530-0001, 
(202) 514-2401/(202) 616-2645 (Fax) E-mail: [email protected], 
Web site: http://www.usdoj.gov/atr

February 12, 2010

Robert H. Edwards, Jr., Deputy General Counsel for Energy Policy, 
Department of Energy, Washington, DC 20585
Dear Deputy General Counsel Edwards:

    I am responding to your letter seeking the views of the Attorney 
General about the potential impact on competition of proposed energy 
conservation standards for residential water heaters, direct heating 
equipment and pool heaters (collectively, residential heating 
products). Your request was submitted pursuant to Section 
325(0)(2)(B)(i)(V) of the Energy Policy and Conservation Act, as 
amended, (``EPCA''), 42 U.S.C. Sec.  6295(0)(B)(i)(V), which 
requires the Attorney General to make a determination of the impact 
of any lessening of competition that is likely to result from the 
imposition of proposed energy conservation standards. The Attorney 
General's responsibility for responding to requests from other 
departments about the effect of a program on competition has been 
delegated to the Assistant Attorney General for the Antitrust 
Division in 28 CFR Sec.  0.40(g).
    In conducting its analysis, the Antitrust Division examines 
whether a proposed standard may lessen competition, for example, by 
substantially limiting consumer choice, leaving consumers with fewer 
competitive alternatives, placing certain manufacturers of a product 
at an unjustified competitive disadvantage compared to other 
manufacturers, or by inducing avoidable inefficiencies in production 
or distribution of particular products.
    We have reviewed the proposed standards contained in the Notice 
of Proposed Rulemaking (``NOPR'') (74 Fed. Reg. 65852, December 11, 
2009) and the supplementary information submitted to the Attorney 
General, and attended the January 7, 2010 public hearing on the 
proposed standards.
    Based on this review, the Department of Justice does not believe 
that the proposed standard for residential hot water heaters or pool 
heaters would likely lead to a lessening of competition. Our review 
has focused upon the standards DOE has proposed adopting; we have 
not determined the impact on competition of more stringent standards 
than those proposed in the NOPR.
    With respect to direct heating equipment (DHE), the Department 
does not see any competitive issue with gas hearth-heaters. The 
Department, however, is concerned that the proposed efficiency 
standards could adversely affect competition in the traditional DHE 
product categories: (1) gravity wall furnaces; (2) fan-forced wall 
furnaces; (3) floor furnaces; and (4) room heaters.

[[Page 20236]]

    The Department notes that essentially only three manufacturers 
currently market products for each of these four traditional DHE 
categories. It appears from the record that meeting the proposed 
standards may require the manufacturers, even those currently 
producing models that meet the proposed standards, to make a 
substantial capital investment to convert or expand their production 
facilities. It also appears that each manufacturer will have to 
commit significant resources for research and development.
    Based on our review, the proposed efficiency standards could 
affect competition by limiting the number of competitors in each 
category. Given the capital investments and research and development 
costs required to produce products meeting the standards, there is a 
significant risk that no more than one or two DHE manufacturers will 
choose to continue to produce products in anyone DHE category.
    Although the Department of Justice is not in a position to judge 
whether manufacturers will be able to meet--or choose to make the 
capital expenditures to meet--the proposed standards, we ask the 
Department of Energy to take into account the possible impact on 
competition in determining its final energy efficiency standards for 
DHE.

Sincerely,

Christine A. Varney

[FR Doc. 2010-7611 Filed 4-15-10; 8:45 am]
BILLING CODE 6450-01-P