[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Proposed Rules]
[Pages 34440-34537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12178]



[[Page 34439]]

Vol. 81

Tuesday,

No. 104

May 31, 2016

Part II





Department of Energy





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10 CFR Parts 429 and 431





 Energy Conservation Program: Energy Conservation Standards for 
Commercial Water Heating Equipment; Proposed Rule

  Federal Register / Vol. 81 , No. 104 / Tuesday, May 31, 2016 / 
Proposed Rules  

[[Page 34440]]


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DEPARTMENT OF ENERGY

10 CFR Parts 429 and 431

[Docket Number EERE-2014-BT-STD-0042]
RIN 1904-AD34


Energy Conservation Program: Energy Conservation Standards for 
Commercial Water Heating Equipment

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

ACTION: Notice of proposed rulemaking and announcement of public 
meeting.

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SUMMARY: The Energy Policy and Conservation Act of 1975 (EPCA), as 
amended, prescribes energy conservation standards for various consumer 
products and certain commercial and industrial equipment, including 
commercial water heaters, hot water supply boilers, and unfired hot 
water storage tanks (hereinafter referred to as ``commercial water 
heating (CWH) equipment''). EPCA also requires that every 6 years, the 
U.S. Department of Energy (DOE) must determine whether more-stringent, 
amended standards would be technologically feasible and economically 
justified, and would save a significant amount of energy. In this 
action, DOE has tentatively concluded that there is clear and 
convincing evidence to support more-stringent standards for several 
classes of the equipment that are the subject of this rulemaking. DOE 
did not consider more-stringent standards in this action for commercial 
oil-fired storage water heaters, whose standards were recently amended. 
Therefore, DOE proposes amended energy conservation standards for 
certain commercial water heating equipment, and also announces a public 
meeting to receive comment on these proposed standards and associated 
analyses and results.

DATES: Meeting: DOE will hold a public meeting on June 6, 2016, from 
1:00 p.m. to 5:00 p.m., in Washington, DC. The meeting will also be 
broadcast as a webinar. See section VII, ``Public Participation,'' for 
webinar registration information, participant instructions, and 
information about the capabilities available to webinar participants.
    Comments: DOE will accept comments, data, and information regarding 
this notice of proposed rulemaking (NOPR) before and after the public 
meeting, but no later than August 1, 2016. See section VII, ``Public 
Participation,'' for details.
    Comments regarding the likely competitive impact of the proposed 
standards should be sent to the Department of Justice contact listed in 
the ADDRESSES section before June 30, 2016.

ADDRESSES: The public meeting will be held at the U.S. Department of 
Energy, Forrestal Building, Room 8E-089, 1000 Independence Avenue SW., 
Washington, DC 20585. To attend, please notify Ms. Brenda Edwards at 
(202) 586-2945. Please note that foreign nationals visiting DOE 
Headquarters are subject to advance security screening procedures. Any 
foreign national wishing to participate in the meeting should advise 
DOE as soon as possible by contacting Ms. Edwards to initiate the 
necessary procedures. Please also note that any person wishing to bring 
a laptop computer or tablet into the Forrestal Building will be 
required to obtain a property pass. Visitors should avoid bringing 
laptops, or allow an extra 45 minutes. Persons may also attend the 
public meeting via webinar. For more information, refer to section VII, 
``Public Participation,'' near the end of this notice.
    Instructions: Any comments submitted must identify the NOPR on 
Energy Conservation Standards for Commercial Water Heating Equipment, 
and provide docket number EERE-2014-BT-STD-0042 and/or regulatory 
information number (RIN) number 1904-AD34. Comments may be submitted 
using any of the following methods:
    1. Federal eRulemaking Portal: www.regulations.gov. Follow the 
instructions for submitting comments.
    2. Email: [email protected]. Include the docket 
number and/or RIN in the subject line of the message. Submit electronic 
comments in WordPerfect, Microsoft Word, PDF, or ASCII file format, and 
avoid the use of special characters or any form of encryption.
    3. Postal Mail: Ms. Brenda Edwards, U.S. Department of Energy, 
Building Technologies Office, Mailstop EE-5B, 1000 Independence Avenue 
SW., Washington, DC, 20585-0121. If possible, please submit all items 
on a compact disc (CD), in which case it is not necessary to include 
printed copies.
    4. Hand Delivery/Courier: Ms. Brenda Edwards, U.S. Department of 
Energy, Building Technologies Office, 950 L'Enfant Plaza SW., Suite 
600, Washington, DC, 20024. Telephone: (202) 586-2945. If possible, 
please submit all items on a CD, in which case it is not necessary to 
include printed copies.
    Written comments regarding the burden-hour estimates or other 
aspects of the collection-of-information requirements contained in this 
proposed rule may be submitted to the Office of Energy Efficiency and 
Renewable Energy through the methods listed above and by email to 
[email protected].
    EPCA requires the Attorney General to provide DOE a written 
determination of whether the proposed standard is likely to lessen 
competition. The U.S. Department of Justice Antitrust Division invites 
input from market participants and other interested persons with views 
on the likely competitive impact of the proposed standard. Interested 
persons may contact the Division at [email protected] before 
June 30, 2016. Please indicate in the ``Subject'' line of your email 
the title and Docket Number of this rulemaking notice.
    No telefacsimilies (faxes) will be accepted. For detailed 
instructions on submitting comments and additional information on the 
rulemaking process, see section VII of this document (Public 
Participation).
    Docket: The docket, which includes Federal Register notices, public 
meeting attendee lists and transcripts, comments, and other supporting 
documents/materials, is available for review at www.regulations.gov. 
All documents in the docket are listed in the www.regulations.gov 
index. However, some documents listed in the index may not be publicly 
available, such as those containing information that is exempt from 
public disclosure.
    A link to the docket Web page can be found at: http://www.regulations.gov/#!docketDetail;D=EERE-2014-BT-STD-0042. This Web 
page contains a link to the docket for this document on the 
www.regulations.gov site. The www.regulations.gov Web page contains 
simple instructions on how to access all documents, including public 
comments, in the docket. See section VII, ``Public Participation,'' for 
further information on how to submit comments through 
www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: 
Ms. Ashley Armstrong, U.S. Department of Energy, Office of Energy 
Efficiency and Renewable Energy, Building Technologies Office, EE-5B, 
1000 Independence Avenue SW., Washington, DC 20585-0121. Telephone: 
(202) 586-6590. Email: [email protected].
Mr. Eric Stas, U.S. Department of Energy, Office of the General 
Counsel, GC-33, 1000 Independence Avenue SW., Washington, DC 20585-
0121.

[[Page 34441]]

Telephone: (202) 586-9507. Email: [email protected].
    For information on how to submit or review public comments and the 
docket, contact Ms. Brenda Edwards at (202) 586-2945 or by email: 
[email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Synopsis of the Proposed Rule
    A. Benefits and Costs to Commercial Consumers
    B. Impact on Manufacturers
    C. National Benefits and Costs
    D. Conclusion
II. Introduction
    A. Authority
    B. Background
    1. Current Standards
    2. History of Standards Rulemaking for CWH Equipment
III. General Discussion
    A. Compliance Dates
    B. Test Procedures
    C. Scope of Rulemaking
    1. Commercial Water Heating Systems
    2. Residential-Duty Commercial Water Heaters
    3. Oil-Fired Commercial Water Heating Equipment
    4. Unfired Hot Water Storage Tanks
    5. Electric Instantaneous Water Heaters
    6. Commercial Heat Pump Water Heaters
    7. Electric Storage Water Heaters
    8. Instantaneous Water Heaters and Hot Water Supply Boilers
    D. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    E. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    F. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Manufacturers and Commercial Consumers
    b. Savings in Operating Costs Compared to Increase in Price 
(Life-Cycle Costs)
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Any Lessening of Competition
    f. Need for National Energy Conservation
    g. Other Factors
    2. Rebuttable Presumption
    G. Public Participation
    H. Revisions to Notes in Regulatory Text
    I. Certification, Compliance, and Enforcement Issues
    1. Rated and Measured Storage Volume
    2. Maximum Standby Loss Equations
IV. Methodology and Discussion of Related Comments
    A. Market and Technology Assessment
    1. Definitions
    2. Equipment Classes
    a. Storage-Type Instantaneous Water Heaters
    b. Tankless Water Heaters and Hot Water Supply Boilers
    c. Gas-Fired and Oil-Fired Storage Water Heaters
    d. Grid-Enabled Water Heaters
    e. Condensing Gas-Fired Water Heating Equipment
    3. Review of the Current Market for CWH Equipment
    4. Technology Options
    B. Screening Analysis
    1. Screened-Out Technologies
    2. Remaining Technologies
    C. Engineering Analysis
    1. Methodology
    2. Representative Equipment for Analysis
    3. Efficiency Levels for Analysis
    a. Baseline Efficiency Levels
    b. Intermediate and Max-Tech Efficiency Levels
    4. Teardown Analysis
    5. Manufacturing Production Costs
    6. Manufacturer Markup
    7. Shipping Costs
    8. Maximum Standby Loss Equations
    9. Conversion of Standards to Uniform Energy Factor
    D. Markups Analysis
    E. Energy Use Analysis
    F. Life-Cycle Cost and Payback Period Analysis
    1. Approach
    2. Life-Cycle Cost Inputs
    a. Equipment Prices
    b. Installation Costs
    c. Annual Energy Use
    d. Electricity and Natural Gas Prices
    e. Maintenance Costs
    f. Repair Costs
    g. Equipment Lifetime
    h. Discount Rate
    3. Payback Period
    G. Shipments Analysis
    H. National Impact Analysis
    1. Equipment Efficiency in the No-New-Standards Case and 
Standards Cases
    2. National Energy Savings
    3. Net Present Value
    I. Commercial Consumer Subgroup Analysis
    J. Manufacturer Impact Analysis
    1. Overview
    2. GRIM Analysis
    a. Government Regulatory Impact Model Key Inputs
    b. Government Regulatory Impact Model Scenarios
    3. Manufacturer Interviews
    K. Emission Analysis
    L. Monetizing Carbon Dioxide and Other Emissions Impacts
    1. Social Cost of Carbon
    a. Monetizing Carbon Dioxide Emissions
    b. Development of Social Cost of Carbon Values
    c. Current Approach and Key Assumptions
    2. Social Cost of Other Air Pollutants
    M. Utility Impact Analysis
    N. Employment Impact Analysis
V. Analytical Results and Conclusions
    A. Trial Standard Levels
    B. Economic Justification and Energy Savings
    1. Economic Impacts on Individual Commercial Consumers
    a. Life-Cycle Cost and Payback Period
    b. Life-Cycle Cost Subgroup Analysis
    c. Rebuttable Presumption Payback
    2. Economic Impact on Manufacturers
    a. Industry Cash-Flow Analysis Results
    b. Impacts on Direct Employment
    c. Impacts on Manufacturing Capacity
    d. Impacts on Subgroups of Manufacturers
    e. Cumulative Regulatory Burden
    3. National Impact Analysis
    a. Significance of Energy Savings
    b. Net Present Value of Commercial Consumer Costs and Benefits
    c. Indirect Impacts on Employment
    4. Impact on Utility or Performance of Equipment
    5. Impact of Any Lessening of Competition
    6. Need of the Nation To Conserve Energy
    7. Other Factors
    C. Proposed Standards
    1. Benefits and Burdens of Trial Standard Levels Considered for 
CWH Equipment
    2. Summary of Benefits and Costs (Annualized) of the Proposed 
Standards
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Orders 12866 and 13563
    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
VII. Public Participation
    A. Attendance at the Public Meeting
    B. Procedure for Submitting Requests To Speak and Prepared 
General Statements for Distribution
    C. Conduct of the Public Meeting
    D. Submission of Comments
    E. Issues on Which DOE Seeks Comment
VIII. Approval of the Office of the Secretary

I. Synopsis of the Proposed Rule

    Title III, Part C \1\ of the Energy Policy and Conservation Act of 
1975 (``EPCA'' or ``the Act''), Public Law 94-163 (42 U.S.C. 6311-6317, 
as codified), added by Public Law 95-619, Title IV, section 441(a), 
established the Energy Conservation Program for Certain Industrial 
Equipment,\2\ which sets forth a variety of provisions designed to 
improve energy efficiency. These encompass several types of commercial 
heating, air-conditioning, and water heating equipment, including the 
classes of CWH equipment that are the subject of this rulemaking. (42 
U.S.C. 6311(1)(K)) CWH equipment is also

[[Page 34442]]

covered under the American Society of Heating, Refrigerating, and Air-
Conditioning Engineers (ASHRAE) Standard 90.1 (ASHRAE Standard 90.1), 
``Energy Standard for Buildings Except Low-Rise Residential 
Buildings.''
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    \1\ For editorial reasons, upon codification in the U.S. Code, 
Part C was redesignated Part A-1.
    \2\ All references to EPCA in this document refer to the statute 
as amended through the Energy Efficiency Improvement Act of 2015 
(EEIA 2015), Public Law 114-11 (April 30, 2015).
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    EPCA, as amended by the Energy Independence and Security Act of 
2007 (EISA 2007), Public Law 110-140, requires DOE to conduct an 
evaluation of its standards for CWH equipment every 6 years and to 
publish either a notice of determination that such standards do not 
need to be amended or a notice of proposed rulemaking including 
proposed amended standards (42 U.S.C. 6313(a)(6)(C)(i)) Pursuant to 
these statutory requirements, DOE initiated this rulemaking to evaluate 
the energy conservation standards for covered CWH equipment and to 
determine whether new or amended standards are warranted.\3\
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    \3\ As explained in further detail in section II.B.1, DOE most 
recently issued a final rule amending standards for commercial oil-
fired storage water heaters on June 30, 2015, which was published in 
the Federal Register on July 17, 2015. 80 FR 42614. However, for all 
of the other water heating equipment that is the subject of this 
rulemaking, DOE last issued a final rule amending standards on 
January 4, 2001, which was published in the Federal Register on 
January 12, 2001. 66 FR 3336.
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    In addition, EPCA, as amended, also requires DOE to consider 
amending the existing Federal energy conservation standards for certain 
types of listed commercial and industrial equipment (generally, 
commercial water heaters, commercial packaged boilers, commercial air-
conditioning and heating equipment, and packaged terminal air 
conditioners and heat pumps) each time ASHRAE Standard 90.1 is amended 
with respect to such equipment. (42 U.S.C. 6313(a)(6)(A)) For each type 
of equipment, EPCA directs that if ASHRAE Standard 90.1 is amended, DOE 
must publish in the Federal Register an analysis of the energy savings 
potential of amended energy conservation standards within 180 days of 
the amendment of ASHRAE Standard 90.1. (42 U.S.C. 6313(a)(6)(A)(i)) 
EPCA further directs that DOE must adopt amended energy conservation 
standards at the new efficiency level in ASHRAE Standard 90.1, unless 
clear and convincing evidence supports a determination that adoption of 
a more-stringent efficiency level as a national standard would produce 
significant additional energy savings and be technologically feasible 
and economically justified. (42 U.S.C. 6313(a)(6)(A)(ii)) If DOE 
decides to adopt as a national standard the efficiency levels specified 
in the amended ASHRAE Standard 90.1, DOE must establish such a standard 
not later than 18 months after publication of the amended industry 
standard. (42 U.S.C. 6313(a)(6)(A)(ii)(I)) If DOE determines that a 
more-stringent standard is appropriate under the statutory criteria, 
DOE must establish such more-stringent standard not later than 30 
months after publication of the revised ASHRAE Standard 90.1. (42 
U.S.C. 6313(a)(6)(B)(i))
    On October 9, 2013, ASHRAE officially released ASHRAE Standard 
90.1-2013, which, among other things, amended standard levels for 
commercial oil-fired storage water heaters greater than 105,000 Btu/h 
and less than 4,000 Btu/h/gal, a category of CWH equipment covered 
under EPCA, thereby triggering DOE's statutory obligation to promulgate 
an amended uniform national standard at those levels, unless DOE 
determines that there is clear and convincing evidence supporting the 
adoption of more-stringent energy conservation standards than the 
ASHRAE Standard 90.1 levels. Pursuant to 42 U.S.C. 6313(a)(6), DOE 
determined in a final rule published on July 17, 2015 (``July 2015 
ASHRAE equipment final rule'') that a more-stringent thermal efficiency 
standard than the ASHRAE 90.1-2013 standard level for commercial oil-
fired water heaters is not justified. 80 FR 42614. Therefore, DOE 
adopted the ASHRAE 90.1-2013 thermal efficiency standard for commercial 
oil-fired storage water heaters in the Code of Federal Regulations 
(CFR) at 10 CFR 431.110 with a compliance date of October 9, 2015. Id. 
In this NOPR, DOE proposes to maintain the standard levels for 
commercial oil-fired storage water heaters adopted in that final rule. 
For the other types of CWH equipment,\4\ DOE was not triggered by 
ASHRAE action in adopting ASHRAE Standard 90.1-2013, so for those 
equipment classes, DOE proceeded under its 6-year-look-back authority. 
(42 U.S.C. 6313(a)(6)(C)(i))
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    \4\ Other types of CWH equipment include commercial electric 
storage water heaters, commercial gas-fired storage water heaters, 
residential-duty gas-fired storage water heaters, commercial gas-
fired instantaneous water heaters and hot water supply boilers, 
commercial oil-fired instantaneous water heaters and hot water 
supply boilers, and commercial electric instantaneous water heaters. 
Commercial heat pump water heaters and unfired hot water storage 
tanks were not considered in this NOPR and energy conservations 
standards for these classes will be considered in a future 
rulemaking(s). Commercial electric instantaneous water heaters and 
commercial oil-fired instantaneous water heaters and hot water 
supply boilers were not analyzed for amended energy conservation 
standards in this NOPR because DOE determined amendment of standards 
for these classes would result in negligible energy savings. Section 
III.C includes further discussion on the scope of equipment classes 
analyzed in this NOPR.
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    Also relevant here, the American Energy Manufacturing Technical 
Corrections Act (AEMTCA), Public Law 112-210 (Dec. 18, 2012), amended 
EPCA to require that DOE publish a final rule establishing a uniform 
efficiency descriptor and accompanying test methods for covered 
residential water heaters and some CWH equipment. (42 U.S.C. 
6295(e)(5)(B)) EPCA further requires the final rule must replace the 
current energy factor (for residential water heaters) and thermal 
efficiency and standby loss (for some commercial water heaters) metrics 
with a uniform efficiency descriptor. (42 U.S.C. 6295(e)(5)(C))
    Pursuant to 42 U.S.C. 6295(e), on July 11, 2014, DOE published a 
final rule for test procedures for residential and certain commercial 
water heaters (``July 2014 final rule'') that, among other things, 
established the uniform energy factor (UEF), a revised version of the 
current residential energy factor metric, as the uniform efficiency 
descriptor required by AEMTCA. 79 FR 40542, 40578. In addition, the 
July 2014 final rule defined the term ``residential-duty commercial 
water heater,'' an equipment type that is subject to the new UEF metric 
and the corresponding UEF test procedures. 79 FR 40542, 40586-88 (July 
11, 2014). DOE excludes from the UEF covered CWH equipment that is not 
a residential-duty commercial water heater. Id. Further details on the 
UEF metric and residential-duty commercial water heaters are discussed 
in section III.B of this document. For this NOPR, DOE analyzed and 
developed potential energy conservation standards for residential-duty 
commercial water heaters in terms of the current thermal efficiency and 
standby loss metrics because there are currently not sufficient test 
data for residential-duty commercial water heaters rated in UEF that 
DOE could use in its analyses for this NOPR. However, in a NOPR 
published on April 14, 2015 (``April 2015 NOPR''), DOE proposed, among 
other things, conversion factors from thermal efficiency and standby 
loss to UEF for residential-duty commercial water heaters. 80 FR 20116, 
20143. DOE applied these conversion factors in converting the proposed 
standards for residential-duty commercial water heaters to UEF in this 
rulemaking. All other CWH equipment classes continue to have standards 
measured in terms of the thermal efficiency and standby loss metrics, 
with the exception of unfired hot water storage tanks, for which the 
energy

[[Page 34443]]

conservation standard is a minimum R-value requirement for tank 
insulation.
    Pursuant to EPCA, any new or amended energy conservation standard 
that DOE prescribes for CWH equipment shall be designed to achieve 
significant additional conservation of energy that DOE determines, 
supported by clear and convincing evidence, is both technologically 
feasible and economically justified. (42 U.S.C. 6313(a)(6)(A)(ii)(II) 
and (C)) In accordance with these and other statutory provisions 
discussed in this document, DOE has examined all of the CWH equipment 
classes (except for commercial oil-fired water heaters, which were 
addressed in a separate rulemaking, as noted above, and unfired hot 
water storage tanks, which will be examined in a separate rulemaking, 
as discussed in section III.C.4). Because DOE did not analyze amended 
energy conservations standards for unfired hot water storage tanks in 
this rule, DOE proposes to maintain the current R-12.5 minimum thermal 
insulation requirement for this class. DOE has tentatively concluded 
that more-stringent standards for commercial gas-fired storage water 
heaters, residential-duty commercial gas-fired storage water heaters, 
gas-fired instantaneous water heaters and hot water supply boilers, and 
electric storage water heaters are warranted. Accordingly, DOE is 
proposing amended energy conservation standards for these classes of 
CWH equipment. The proposed standards, if adopted, would apply to all 
equipment listed in Table I.1 and Table I.2 and manufactured in, or 
imported into, the United States on and after the compliance date of 
the standards (i.e., 3 years after the publication date of the final 
rule). As shown in Table I.1 and Table I.2, the proposed standards are 
expressed in terms of: (1) Thermal efficiency, which describes the 
ratio of the heat energy (Btu/h) transferred to the water flowing 
through the water heater to the amount of energy (Btu/h) consumed by 
the water heater; (2) standby loss, which is the average hourly energy, 
expressed in Btu per hour, required to maintain the stored water 
temperature; or (3) uniform energy factor, which is a uniform 
efficiency descriptor that replaces thermal efficiency and standby loss 
for residential-duty commercial water heaters.

Table I.1--Proposed Energy Conservation Standards for Commercial Water Heating Equipment Except for Residential-
                                          Duty Commercial Water Heaters
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                                                          Energy conservation standards *
                                                    ------------------------------------------
           Equipment              Specifications **     Minimum thermal      Maximum standby    Compliance date
                                                     efficiency  (percent)         loss
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters.  All...............  N/A..................  0.84 x [0.30 + 27/ 3 years after
                                                                             Vr] (%/h).         publication of
                                                                                                final rule.
Gas-fired storage water heaters  All ***...........  95...................  0.63 x [Q/800 +    3 years after
                                                                             110(Vr) 1/2]       publication of
                                                                             (Btu/h).           final rule.
Oil-fired storage water heaters  All ***...........  80...................  Q/800 + 110(Vr) 1/ 10/09/2015
                                                                             2 (Btu/h).         [dagger].
Electric instantaneous water     <10 gal ***.......  80...................  N/A..............  01/01/1994
 heaters.                                                                                       [dagger].
                                 >=10 gal..........  77...................  2.30 + 67/Vr (%/   01/01/1994
                                                                             h).                [dagger].
Gas-fired instantaneous water
 heaters and hot water supply
 boilers:
    Instantaneous water heaters  <10 gal...........  94...................  N/A..............  3 years after
     (other than storage-type)                                                                  publication of
     and hot water supply                                                                       final rule.
     boilers.
    Instantaneous water heaters  >=10 gal..........  94...................  Q/800 + 110(Vr) 1/ 3 years after
     (other than storage-type)                                               2 (Btu/h).         publication of
     and hot water supply                                                                       final rule
     boilers.                                                                                   [dagger][dagger]
                                                                                                [dagger].
    Storage-type instantaneous   >=10 gal..........  95...................  0.63 x [Q/800 +    3 years after
     water heaters                                                           110(Vr) 1/2]       publication of
     [dagger][dagger].                                                       (Btu/h).           final rule.
Oil-fired instantaneous water
 heaters and hot water supply
 boilers:
    Instantaneous water heaters  <10 gal...........  80...................  N/A..............  10/09/2015
     and hot water supply                                                                       [dagger]
     boilers.
    Instantaneous water heaters  >=10 gal..........  78...................  Q/800 + 110(Vr) 1/ 10/29/2003
     and hot water supply                                                    2 (Btu/h).         [dagger].
     boilers.
----------------------------------------------------------------------------------------------------------------
* Vr is the rated volume in gallons. Q is the fuel input rate in Btu/h.
** These specifications only distinguish between classes of CWH equipment. The different classifications for
  consumer water heaters and commercial water heating equipment are specified by the definitions codified at 10
  CFR 430.2 and 10 CFR 431.102, respectively.
*** These standards only apply to commercial water heating equipment that does not meet the definition of
  ``residential-duty commercial water heater.'' See Table I.2 for energy conservation standards proposed for
  residential-duty commercial water heaters.
[dagger] Amended standards for these equipment classes were not analyzed in this NOPR. Section III.C includes a
  discussion of the scope of equipment analyzed in this NOPR. Standards for electric instantaneous water heaters
  are included in EPCA. (42 U.S.C. 6313(a)(5)(D)-(E)) In this NOPR, DOE proposes to codify these standards for
  electric instantaneous water heaters in its regulations at 10 CFR 431.110. Further discussion of standards for
  electric instantaneous water heaters is included in section III.C.5.

[[Page 34444]]

 
[dagger][dagger] DOE proposes a new equipment class for storage-type instantaneous water heaters. This class of
  equipment is similar to storage water heaters in design, cost, and application. However, it has a ratio of
  input capacity to storage volume greater than or equal to 4,000 Btu/h per gallon of water stored; therefore,
  it is properly classified as an instantaneous water heater by EPCA's definition at 42 U.S.C. 6311(12)(B).
  Because of its similarities with storage water heaters, DOE grouped these two equipment classes together in
  its analyses for this NOPR. Storage-type instantaneous water heaters are further discussed in section
  IV.A.2.a.
[dagger][dagger][dagger] Amended standby loss standards for instantaneous gas-fired water heaters and hot water
  supply boilers with greater than or equal to 10 gal water stored other than storage-type instantaneous water
  heaters were not analyzed in this NOPR. Section III.C.8 includes a discussion of the coverage of instantaneous
  water heaters and hot water supply boilers in this NOPR.


         Table I.2--Proposed Energy Conservation Standards for Residential-Duty Commercial Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                          Uniform energy
          Equipment            Specification *       Draw pattern **      factor [dagger]     Compliance date
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage [dagger]..  >75 kBtu/h and     Very Small............  0.4618 - (0.0010  3 years after
                               <=105 kBtu/h and  Low...................   x Vr).            publication of final
                               <=120 gal and                             0.6626 - (0.0009   rule.
                               <=180 [deg]F.                              x Vr).           3 years after
                                                                                            publication of final
                                                                                            rule.
                                                 Medium................  0.6996 - (0.0007  3 years after
                                                                          x Vr).            publication of final
                                                                                            rule.
                                                 High..................  0.7311 - (0.0006  3 years after
                                                                          x Vr).            publication of final
                                                                                            rule.
Oil-fired storage...........  >105 kBtu/h and    Very Small............  0.3206 - (0.0006  Conversion factor
                               <=140 kBtu/h and  Low...................   x Vr).            final rule
                               <=120 gal and                             0.5577 - (0.0019   publication
                               <=180 [deg]F.                              x Vr).            date.[dagger][dagger
                                                                                            ]
                                                                                           Conversion factor
                                                                                            final rule
                                                                                            publication
                                                                                            date.[dagger][dagger
                                                                                            ]
                                                 Medium................  0.6027 - (0.0019  Conversion factor
                                                                          x Vr).            final rule
                                                                                            publication
                                                                                            date.[dagger][dagger
                                                                                            ]
                                                 High..................  0.5446 - (0.0018  Conversion factor
                                                                          x Vr).            final rule
                                                                                            publication
                                                                                            date.[dagger][dagger
                                                                                            ]
----------------------------------------------------------------------------------------------------------------
* To be classified as a residential-duty water heater, a commercial water heater must, if requiring electricity,
  use single-phase external power supply, and not be designed to heat water at temperatures greater than 180
  [deg]F.
** Draw pattern is a classification of hot water use of a consumer water heater or residential-duty commercial
  water heater, based upon the first-hour rating. The draw pattern is determined using the Uniform Test Method
  for Measuring the Energy Consumption of Water Heaters in Appendix E to Subpart B of 10 CFR part 430.
[dagger] Energy conservation standards for residential-duty commercial gas-fired storage water heaters at all
  four draw patterns were converted from the thermal efficiency and standby loss metrics to the new UEF metric
  using the conversion factors proposed by DOE in the April 2015 NOPR. 80 FR 20116, 20143 (April 14, 2015). In
  these equations, Vr is the rated storage volume.
[dagger][dagger] Energy conservation standards in terms of UEF for residential-duty oil-fired storage water
  heaters will be established in a final rule for consumer water heaters and certain commercial water heaters,
  along with mathematical conversion factors for determining UEF. (See Docket No. EERE-2015-BT-TP-0007)

A. Benefits and Costs to Commercial Consumers

    Table I.3 presents DOE's evaluation of the economic impacts of the 
proposed energy conservation standards on commercial consumers of CWH 
equipment, as measured by the average life-cycle cost (LCC) savings and 
the simple payback period (PBP).\5\ The average LCC savings are 
positive for the standards DOE is proposing in this NOPR for all CWH 
equipment classes considered in this document. The estimated PBP for 
all proposed equipment classes are also less than the projected average 
lifetime of each equipment class, which varies from 10 to 25 years.
---------------------------------------------------------------------------

    \5\ The average LCC savings are measured relative to the no-new-
standards-case efficiency distribution, which depicts the commercial 
water heating market in the compliance year in the absence of 
amended standard levels (see section IV.H.1 and chapter 8H of the 
TSD). The simple PBP, which is designed to compare specific 
efficiency levels for CWH equipment, is aggregate average payback 
measured relative to baseline CWH equipment (see section IV.F.3 and 
chapter 8 of the TSD).

Table I.3--Impacts of Proposed Energy Conservation Standards on Commercial Consumers of Commercial Water Heating
                                                    Equipment
----------------------------------------------------------------------------------------------------------------
                                                                                                      Average
               Equipment class                  Average LCC     Simple  payback  period  years       lifetime
                                              savings  2014$                                           years
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters               794  4.3...............................              10
 and storage-type instantaneous water
 heaters *.
Residential-duty gas-fired storage water                  14  11.9..............................              12
 heaters.
Gas-fired instantaneous water heaters and              3,488  5.6...............................            22.6
 hot water supply boilers **.
    Tankless water heaters..................           1,119  Immediate [dagger]................              17
    Hot water supply boilers................           4,528  6.4...............................              25
Electric storage water heaters..............              47  6.5...............................              12
----------------------------------------------------------------------------------------------------------------
* DOE proposes a new equipment class for storage-type instantaneous water heaters, which are similar to storage
  water heaters with a ratio of input capacity to storage volume greater than or equal to 4,000 Btu/h per gallon
  of water stored. Storage-type instantaneous water heaters are further discussed in section IV.A.2.a.
** Average LCC and PBP for the gas-fired instantaneous water heaters and hot water supply boilers class reflect
  use of shipment-weighted inputs to these calculated values to provide results for the class as a whole.
  Average lifetime of the gas-fired instantaneous water heaters and hot water supply boilers equipment class was
  a shipment-weighted average of the tankless water heater and hot water supply boiler lifetimes.
[dagger] Immediate payback can result from a decrease in installation cost that is greater than the incremental
  increase in equipment cost.

    DOE's analysis of the impacts of the proposed standards on 
commercial consumers is described in section IV.F of this document.

[[Page 34445]]

B. Impact on Manufacturers

    The industry net present value (INPV) is the sum of the discounted 
cash flows to the industry from the base year through the end of the 
analysis period (2015 to 2048). Using a real discount rate of 9.1 
percent,\6\ DOE estimates that the INPV for CWH equipment manufacturers 
is $176.2 million in 2014$ using DOE's current standards as a baseline. 
Under the proposed standards, DOE expects that the change in INPV will 
range from 5.0 percent to -13.3 percent, which is approximately 
equivalent to an increase of $8.8 million to a reduction of $23.4 
million. Industry conversion costs are expected to total $29.8 million. 
Additional detail on DOE's calculations of INPV for CWH equipment 
manufacturers can be found in section V.B.2 of this NOPR and chapter 12 
of the NOPR TSD. Based on DOE's interviews with CWH equipment 
manufacturers, DOE does not expect any plant closings or significant 
loss of employment to result from the proposed standards.
---------------------------------------------------------------------------

    \6\ DOE estimated preliminary financial metrics, including the 
industry discount rate, based on data in Securities and Exchange 
Commission (SEC) filings and on industry-reviewed values published 
in prior water heating equipment final rules. DOE presented the 
preliminary financial metrics to manufacturers in manufacturer 
impact analysis (MIA) interviews. DOE adjusted those values based on 
feedback from manufacturers. The complete set of financial metrics 
and more detail about the methodology can be found in chapter 12 of 
the NOPR TSD.
---------------------------------------------------------------------------

C. National Benefits and Costs \7\
---------------------------------------------------------------------------

    \7\ All monetary values in this section are expressed in 2014 
dollars and, where appropriate, are discounted to 2015 unless 
explicitly stated otherwise. Energy savings in this section refer to 
the full-fuel-cycle savings (see section IV.H for discussion). 
National benefits of DOE's proposed standard levels are presented as 
compared to the current Federal standard levels as baseline.
---------------------------------------------------------------------------

    DOE's analyses indicate that the proposed energy conservation 
standards for CWH equipment would save a significant additional amount 
of energy. The cumulative lifetime energy savings for CWH equipment 
shipped in the 30-year period \8\ (which begins in the first full year 
of compliance with amended standards relative to the no-new-standards 
case without amended standards) amount to 1.8 quadrillion British 
thermal units (quads \9\) of cumulative full-fuel-cycle energy. This is 
a savings of 8 percent relative to the energy use of this equipment 
\10\ in the case without amended standards. More details on energy 
savings can be found in chapter 10 of the NOPR TSD and sections IV.H, 
IV.L, and V.B.3 of this document.
---------------------------------------------------------------------------

    \8\ The 30-year analysis period is 2019-2048 for electric and 
gas-fired CWH equipment.
    \9\ A quad is equal to 10\15\ British thermal units (Btu).
    \10\ The no-new-standards-case assumptions are described in 
section IV.H.1 of this notice.
---------------------------------------------------------------------------

    The cumulative net present value (NPV) of total commercial consumer 
costs and savings of the proposed CWH equipment standards in 2014$ 
ranges from $2.26 billion (at a 7-percent discount rate) to $6.75 
billion (at a 3-percent discount rate), respectively. This NPV 
expresses the estimated total value of future operating-cost savings 
minus the estimated increased equipment costs for CWH equipment shipped 
in 2019-2048 discounted back to the current year (2015). Chapter 10 of 
the NOPR TSD provides more details on the NPV analyses.
    In addition, the proposed standards would have significant 
environmental benefits. The energy savings are estimated to result in 
cumulative emission reductions (over the same period as for energy 
savings) of 98 million metric tons (Mt) \11\ of carbon dioxide 
(CO2), 1,172 thousand tons of methane (CH4), 0.2 
thousand tons of nitrous oxide (N2O), 1.6 thousand tons of 
sulfur dioxide (SO2), 316 thousand tons of nitrogen oxides 
(NOX), and 0.004 tons of mercury (Hg).\12\ The cumulative 
reduction in CO2 emissions through 2030 amounts to 15 Mt, 
which is equivalent to the emissions resulting from the annual 
electricity use of 2.1 million homes. More detailed emissions analysis 
results can be found in chapter 13 of the NOPR TSD.
---------------------------------------------------------------------------

    \11\ A metric ton is equivalent to 1.1 short tons. Results for 
emissions other than CO2 are presented in short tons.
    \12\ DOE calculated emissions reductions relative to the no-new-
standards case, which reflects key assumptions in the Annual Energy 
Outlook 2015 (AEO 2015) Reference case. AEO 2015 generally 
represents current legislation and environmental regulations for 
which implementing regulations were available as of October 31, 
2014.
---------------------------------------------------------------------------

    The value of the CO2 reductions is calculated using a 
range of values per metric ton of CO2 (otherwise known as 
the Social Cost of Carbon, or SCC) developed by a recent Federal 
interagency process.\13\ The derivation of the SCC values is discussed 
in section IV.L of this NOPR. Using discount rates appropriate for each 
set of SCC values, DOE estimates that the present monetary value of the 
CO2 emissions reduction described above is between $0.64 and 
$9.11 billion, with a value of $2.99 billion using the central SCC case 
represented by $40.0 per metric ton in 2015.\14\ Additionally, DOE 
estimates the present monetary value of the NOX emissions 
reduction to be from $373 million at a 7-percent discount rate to $970 
million at a 3-percent discount rate.\15\ More detailed results can be 
found in chapter 14 of the NOPR TSD.
---------------------------------------------------------------------------

    \13\ Technical Update of the Social Cost of Carbon for 
Regulatory Impact Analysis Under Executive Order 12866, Interagency 
Working Group on Social Cost of Carbon, United States Government 
(May 2013; revised July 2015) (Available at: https://www.whitehouse.gov/sites/default/files/omb/inforeg/scc-tsd-final-july-2015.pdf).
    \14\ The values only include CO2 emissions; 
CO2 equivalent emissions from other greenhouse gases are 
not included.
    \15\ DOE estimated the monetized value of NOX 
emissions reductions using benefit per ton estimates from the 
Regulatory Impact Analysis titled, ``Proposed Carbon Pollution 
Guidelines for Existing Power Plants and Emission Standards for 
Modified and Reconstructed Power Plants,'' published in June 2014 by 
EPA's Office of Air Quality Planning and Standards. (Available at 
www3.epa.gov/ttnecas1/regdata/RIAs/111dproposalRIAfinal0602.pdf.) 
See section IV.L.2 for further discussion. Note that the agency is 
presenting a national benefit-per-ton estimate for particulate 
matter emitted from the Electricity Generating Unit sector based on 
an estimate of premature mortality derived from the ACS study 
(Krewski et al. 2009). If the benefit-per-ton estimates were based 
on the Six Cities study (Lepuele et al. 2011), the values would be 
nearly two-and-a-half times larger. Because of the sensitivity of 
the benefit-per-ton estimate to the geographical considerations of 
sources and receptors of emissions, DOE intends to investigate 
refinements to the agency's current approach of one national 
estimate by assessing the regional approach taken by EPA's 
Regulatory Impact Analysis for the Clean Power Plan Final Rule. Note 
that DOE is currently investigating valuation of avoided 
SO2 and Hg emissions.
---------------------------------------------------------------------------

    Table I.4 summarizes the national economic benefits and costs 
expected to result from this NOPR's proposed standards for CWH 
equipment.

 Table I.4--Summary of National Economic Benefits and Costs of Proposed
Commercial Water Heating Equipment Energy Conservation Standards (TSL 3)
                                    *
------------------------------------------------------------------------
                                Present value billion
           Category                     2014$            Discount rate %
------------------------------------------------------------------------
                                Benefits
------------------------------------------------------------------------
Commercial Consumer Operating                      3.7  7
 Cost Savings.
                                                   9.3  3

[[Page 34446]]

 
CO2 Reduction (using mean SCC                      0.6  5
 at 5% discount rate) **.
CO2 Reduction (using mean SCC                      3.0  3
 at 3% discount rate) **.
CO2 Reduction (using mean SCC                      4.8  2.5
 at 2.5% discount rate) **.
CO2 Reduction (using 95th                          9.1  3 (95th
 percentile SCC at 3%                                    percentile)
 discount rate) **.
NOX Reduction [dagger].......                      0.4  7
                                                   1.0  3
Total Benefits                                     7.1  7
 [dagger][dagger].
                                                  13.2  3
------------------------------------------------------------------------
                                  Costs
------------------------------------------------------------------------
Incremental Equipment Costs..                      1.5  7
                                                   2.5  3
------------------------------------------------------------------------
                           Total Net Benefits
------------------------------------------------------------------------
Including CO2 and NOX                              5.6  7
 Reduction Monetized Value                        10.7  3
 [dagger].
------------------------------------------------------------------------
* This table presents the costs and benefits associated with CWH
  equipment shipped in 2019-2048. These results include benefits to
  consumers that accrue after 2048 from the equipment purchased in 2019-
  2048. The incremental installed costs include incremental equipment
  cost as well as installation costs. The CO2 reduction benefits are
  global benefits due to actions that occur nationally.
** The interagency group selected four sets of SCC values for use in
  regulatory analyses. Three sets of values are based on the average SCC
  from the integrated assessment models, at discount rates of 5, 3, and
  2.5 percent. For example, for 2015 emissions, these values are $12.2/
  metric ton, $40.0/metric ton, and $62.3/metric ton, in 2014$,
  respectively. The fourth set ($117 per metric ton in 2014$ for 2015
  emissions), which represents the 95th percentile of the SCC
  distribution calculated using 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. See section IV.L.1 for more details.
[dagger] The $/ton values used for NOX are described in section IV.L.
  DOE estimated the monetized value of NOX emissions reductions using
  benefit per ton estimates from the Regulatory Impact Analysis titled,
  ``Proposed Carbon Pollution Guidelines for Existing Power Plants and
  Emission Standards for Modified and Reconstructed Power Plants,''
  published in June 2014 by EPA's Office of Air Quality Planning and
  Standards. (Available at www3.epa.gov/ttnecas1/regdata/RIAs/111dproposalRIAfinal0602.pdf.) See section IV.L.2 for further
  discussion. Note that the agency is presenting a national benefit-per-
  ton estimate for particulate matter emitted from the Electric
  Generating Unit sector based on an estimate of premature mortality
  derived from the ACS study (Krewski et al. 2009). If the benefit-per-
  ton estimates were based on the Six Cities study (Lepuele et al.
  2011), the values would be nearly two-and-a-half times larger. Because
  of the sensitivity of the benefit-per-ton estimate to the geographical
  considerations of sources and receptors of emissions, DOE intends to
  investigate refinements to the agency's current approach of one
  national estimate by assessing the regional approach taken by EPA's
  Regulatory Impact Analysis for the Clean Power Plan Final Rule.
[dagger][dagger] Total benefits for both the 3-percent and 7-percent
  cases are presented using only the average SCC with 3-percent discount
  rate.

    The benefits and costs of the proposed energy conservation 
standards, for CWH equipment shipped in 2019-2048, can also be 
expressed in terms of annualized values. The monetary values for the 
total annualized net benefits are the sum of: (1) The national economic 
value of the benefits in reduced operating costs, minus (2) the 
increase in equipment purchase prices and installation costs, plus (3) 
the value of the benefits of CO2 and NOX emission 
reductions, all annualized.\16\
---------------------------------------------------------------------------

    \16\ To convert the time-series of costs and benefits into 
annualized values, DOE calculated a present value in 2015, the year 
used for discounting the NPV of total consumer costs and savings. 
For the benefits, DOE calculated a present value associated with 
each year's shipments in the year in which the shipments occur 
(e.g., 2020 or 2030), and then discounted the present value from 
each year to 2015. The calculation uses discount rates of 3 and 7 
percent for all costs and benefits except for the value of 
CO2 reductions, for which DOE used case-specific discount 
rates, as shown in Table I.3. Using the present value, DOE then 
calculated the fixed annual payment over a 30-year period starting 
in the compliance year that yields the same present value.
---------------------------------------------------------------------------

    The national operating savings are domestic private U.S. consumer 
monetary savings that occur as a result of purchasing this equipment. 
The national operating cost savings is measured for the lifetime of CWH 
equipment shipped in 2019-2048.
    The CO2 reduction is a benefit that accrues globally due 
to decreased domestic energy consumption that is expected to result 
from this rule. Because CO2 emissions have a very long 
residence time in the atmosphere,\17\ the SCC values in future years 
reflect future CO2-emissions impacts that continue beyond 
2100 through 2300.
---------------------------------------------------------------------------

    \17\ The atmospheric lifetime of CO2 is estimated to 
be on the order of 30-95 years. Jacobson, MZ, ``Correction to 
`Control of fossil-fuel particulate black carbon and organic matter, 
possibly the most effective method of slowing global warming,' '' J. 
Geophys. Res. 110. pp. D14105 (2005).
---------------------------------------------------------------------------

    Estimates of annualized benefits and costs of the proposed 
standards (over a 30-year period) are shown in Table I.5. The results 
under the primary estimate are as follows. Using a 7-percent discount 
rate for benefits and costs other than CO2 reduction (for 
which DOE used a 3-percent discount rate along with the average SCC 
series that has a value of $40.0 per metric ton in 2015), the estimated 
cost of the CWH standards proposed in this document is $144 million per 
year in increased equipment costs, while the estimated benefits are 
$367 million per year in reduced equipment operating costs, $166 
million per year from CO2 reductions, and $37 million per 
year from reduced NOX emissions. In this case, the 
annualized net benefit amounts to $427 million per year. Using a 3-
percent discount rate for all benefits and costs and the average SCC 
series that has a value of $40.0 per metric ton in 2015, the estimated 
cost of the CWH standards proposed in this NOPR is $141 million per 
year in increased equipment costs, while the benefits are $517 million 
per year in reduced operating costs, $166 million from CO2 
reductions, and $54 million in reduced NOX emissions. In 
this case, the

[[Page 34447]]

net benefit amounts to $597 million per year.

 Table I.5--Annualized Benefits and Costs of Proposed Energy Conservation Standards for Commercial Water Heating
                                               Equipment (TSL 3)*
----------------------------------------------------------------------------------------------------------------
                                                                           Low net benefits    High net benefits
                                                                               estimate            estimate
                                    Discount rate %    Primary estimate  ---------------------------------------
                                                                          million 2014$/year  million 2014$/year
----------------------------------------------------------------------------------------------------------------
                                                    Benefits
----------------------------------------------------------------------------------------------------------------
Commercial Consumer Operating     7.................  367...............  336...............  411.
 Cost Savings.
                                  3.................  517...............  465...............  588.
----------------------------------------------------------------------------------------------------------------
CO2 Reduction (using mean SCC at  5.................  48................  46................  50.
 5% discount rate)*,**.
CO2 Reduction (using mean SCC at  3.................  166...............  159...............  176.
 3% discount rate)*,**.
CO2 Reduction (using mean SCC at  2.5...............  245...............  234...............  259.
 2.5% discount rate)*,**.
CO2 Reduction (using 95th         3.................  508...............  485...............  536.
 percentile SCC at 3% discount
 rate)*,**.
NOX Reduction[dagger]...........  7.................  37................  35................  86.
                                  3.................  54................  52................  126.
Total Benefits[dagger][dagger]..  7% plus CO2 range.  452 to 912........  417 to 855........  547 to 1,033.
                                  7.................  571...............  530...............  673.
                                  3% plus CO2 range.  619 to 1,079......  563 to 1,001......  765 to 1,251.
                                  3.................  737...............  676...............  890.
----------------------------------------------------------------------------------------------------------------
                                                      Costs
----------------------------------------------------------------------------------------------------------------
Commercial Consumer Incremental   7.................  144...............  147...............  142.
 Equipment Costs.
                                  3.................  141...............  144...............  138.
----------------------------------------------------------------------------------------------------------------
                                               Net Benefits/Costs
----------------------------------------------------------------------------------------------------------------
    Total[dagger][dagger].......  7% plus CO2 range.  308 to 768........  270 to 709........  406 to 892.
                                  7.................  427...............  383...............  531.
                                  3% plus CO2 range.  478 to 938........  419 to 857........  627 to 1,113.
                                  3.................  597...............  532...............  752.
----------------------------------------------------------------------------------------------------------------
* This table presents the annualized costs and benefits associated with CWH equipment shipped in 2019-2048.
  These results include benefits to commercial consumers that accrue after 2048 from the equipment shipped in
  2019-2048. The Primary, Low Benefits, and High Benefits Estimates for operating cost savings utilize
  projections of energy prices and building growth (leading to higher shipments) from the AEO 2015 reference
  case, Low Estimate, and High Estimate, respectively. In addition, DOE used a constant price assumption as the
  default price projection; the cost to manufacture a given unit of higher efficiency neither increases nor
  decreases over time. The analysis of the price trends is described in section IV.F.2.a and appendix 10B of the
  NOPR TSD.
** The interagency group selected four sets of SCC values for use in regulatory analyses. Three sets of values
  are based on the average SCC from the integrated assessment models, at discount rates of 5, 3, and 2.5
  percent. For example, for 2015 emissions, these values are $12.2/metric ton, $40.0/metric ton, and $62.3/
  metric ton, in 2014$, respectively. The fourth set ($117 per metric ton in 2014$ for 2015 emissions), which
  represents the 95th percentile of the SCC distribution calculated using 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. The SCC values are emission year specific. See section IV.L
  for more detail.
[dagger] The $/ton values used for NOX are described in section IV.L. DOE estimated the monetized value of NOX
  emissions reductions using benefit per ton estimates from the Regulatory Impact Analysis titled, ``Proposed
  Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed
  Power Plants,'' published in June 2014 by EPA's Office of Air Quality Planning and Standards. (Available at
  www3.epa.gov/ttnecas1/regdata/RIAs/111dproposalRIAfinal0602.pdf.) See section IV.L.2 for further discussion.
  Note that the agency is presenting a national benefit-per-ton estimate for particulate matter emitted from the
  Electric Generating Unit sector based on an estimate of premature mortality derived from the ACS study
  (Krewski et al. 2009). If the benefit-per-ton estimates were based on the Six Cities study (Lepuele et al.
  2011), the values would be nearly two-and-a-half times larger. Because of the sensitivity of the benefit-per-
  ton estimate to the geographical considerations of sources and receptors of emissions, DOE intends to
  investigate refinements to the agency's current approach of one national estimate by assessing the regional
  approach taken by EPA's Regulatory Impact Analysis for the Clean Power Plan Final Rule.
[dagger][dagger] Total benefits for both the 3-percent and 7-percent cases are presented using only the average
  SCC with a 3-percent discount rate. In the rows labeled ``7% plus CO2 range'' and ``3% plus CO2 range,'' the
  operating cost and NOX benefits are calculated using the labeled discount rate, and those values are added to
  the full range of CO2 values.

D. Conclusion

    DOE has tentatively concluded that, based upon clear and convincing 
evidence, the proposed standards for the CWH equipment classes 
evaluated in this rulemaking represent the maximum improvement in 
energy efficiency that is technologically feasible and economically 
justified, and would result in the significant additional conservation 
of energy. DOE further notes that equipment achieving these standard 
levels is already commercially available for all equipment classes 
covered by this proposal. Based on the analytical results described in 
this section, DOE has tentatively concluded that the benefits of the 
proposed standards to the Nation (i.e., energy savings, positive NPV of 
commercial

[[Page 34448]]

consumer benefits, commercial consumer LCC savings, and emission 
reductions) would outweigh the burdens (loss of INPV for 
manufacturers).
    DOE also considered more-stringent energy efficiency levels as 
trial standard levels, and is still considering them in this 
rulemaking. However, DOE has tentatively concluded that the potential 
burdens of the more-stringent energy efficiency levels would outweigh 
the projected benefits. Based on consideration of the public comments 
DOE receives in response to this document and related information 
collected and analyzed during the course of this rulemaking effort, DOE 
may adopt energy efficiency levels presented in this document that are 
either higher or lower than the proposed standards, or some combination 
of level(s) that incorporate the proposed standards in part.

II. Introduction

    The following section briefly discusses the statutory authority 
underlying this proposal, as well as some of the relevant historical 
background related to the establishment of standards for CWH equipment.

A. Authority

    Title III, Part C \18\ of the Energy Policy and Conservation Act of 
1975 (``EPCA'' or ``the Act''), Public Law 94-163 (42 U.S.C. 6311-6317, 
as codified), added by Public Law 95-619, Title IV, Sec.  441(a), 
established the Energy Conservation Program for Certain Industrial 
Equipment, which sets forth a variety of provisions designed to improve 
energy efficiency. These encompass several types of heating, air-
conditioning, and water heating equipment, including the classes of CWH 
equipment that are the subject of this rulemaking.\19\ (42 U.S.C. 
6311(1)(K)) In general, this program addresses the energy efficiency of 
certain types of commercial and industrial equipment. Relevant 
provisions of the Act specifically include definitions (42 U.S.C. 
6311), energy conservation standards (42 U.S.C. 6313), test procedures 
(42 U.S.C. 6314), labelling provisions (42 U.S.C. 6315), and the 
authority to require information and reports from manufacturers (42 
U.S.C. 6316).
---------------------------------------------------------------------------

    \18\ For editorial reasons, upon codification in the U.S. Code, 
Part C was redesignated Part A-1.
    \19\ All references to EPCA in this document refer to the 
statute as amended through the Energy Efficiency Improvement Act of 
2015 (EEIA 2015), Public Law 114-11 (April 30, 2015).
---------------------------------------------------------------------------

    The initial Federal energy conservation standards and test 
procedures for CWH equipment were added to EPCA by the Energy Policy 
Act of 1992 (EPACT 1992), Public Law 102-486. (42 U.S.C. 6313(a)(5) and 
42 U.S.C. 6314(a)(4)(A)) These initial CWH standards mirrored the 
levels and equipment classes in ASHRAE Standard 90.1-1989.
    In acknowledgment of technological changes that yield energy 
efficiency benefits, the U.S. Congress further directed DOE through 
EPCA to evaluate and consider amending its energy conservation 
standards for certain commercial and industrial equipment (i.e., 
specified heating, air-conditioning, and water heating equipment) each 
time ASHRAE Standard 90.1 is updated with respect to such equipment. 
(42 U.S.C. 6313(a)(6)(A)) Such review is to be conducted in accordance 
with the statutory procedures set forth in 42 U.S.C. 6313(a)(6)(B). 
Pursuant to 42 U.S.C. 6313(a)(6)(A), for CWH equipment, EPCA directs 
that if ASHRAE Standard 90.1 is amended, DOE must publish in the 
Federal Register an analysis of the energy savings potential of amended 
energy conservation standards within 180 days of the amendment of 
ASHRAE Standard 90.1. (42 U.S.C. 6313(a)(6)(A)(i)) EPCA further directs 
that DOE must adopt amended standards at the new efficiency level in 
ASHRAE Standard 90.1, unless clear and convincing evidence supports a 
determination that adoption of a more-stringent level would produce 
significant additional energy savings and be technologically feasible 
and economically justified. (42 U.S.C. 6313(a)(6)(A)(ii)) If DOE 
decides to adopt as a national standard the efficiency levels specified 
in the amended ASHRAE Standard 90.1, DOE must establish such standard 
not later than 18 months after publication of the amended industry 
standard. (42 U.S.C. 6313(a)(6)(A)(ii)(I)) If DOE determines that a 
more-stringent standard is appropriate under the statutory criteria, 
DOE must establish such more-stringent standard not later than 30 
months after publication of the revised ASHRAE Standard 90.1. (42 
U.S.C. 6313(a)(6)(B)(i))
    In addition, DOE notes that pursuant to the EISA 2007 amendments to 
EPCA, the agency must periodically review its already-established 
energy conservation standards for covered ASHRAE equipment and publish 
either a notice of proposed rulemaking with amended standards or a 
determination that the standards do not need to be amended. (42 U.S.C. 
6313(a)(6)(C)(i)) In December 2012, this provision was further amended 
by AEMTCA to clarify that DOE's periodic review of ASHRAE equipment 
must occur ``[e]very six years.'' (42 U.S.C. 6313(a)(6)(C)(i)) AEMTCA 
also modified EPCA to specify that any amendments to the design 
requirements with respect to the ASHRAE equipment would trigger DOE 
review of the potential energy savings under 42 U.S.C. 
6313(a)(6)(A)(i). AEMTCA also added a requirement that DOE must 
initiate a rulemaking to consider amending the energy conservation 
standards for any covered equipment for which more than 6 years has 
elapsed since the issuance of the most recent final rule establishing 
or amending a standard for the product as of the date of AEMTCA's 
enactment (i.e., December 18, 2012), in which case DOE must publish 
either: (1) a notice of determination that the current standards do not 
need to be amended, or (2) a notice of proposed rulemaking containing 
proposed standards. (42 U.S.C. 6313(a)(6)(C)(vi))
    DOE published the most recent final rule for energy conservation 
standards for CWH equipment on January 12, 2001 (``January 2001 final 
rule''), which adopted efficiency levels in ASHRAE Standard 90.1-1999. 
66 FR 3336, 3356. Because more than 6 years have passed since issuance 
of the last final rule for CWH equipment, DOE is required to publish 
either a notice of determination that the current standards for these 
equipment types do not need to be amended, or a notice of proposed 
rulemaking proposing amended energy conservation standards for these 
equipment types.
    When setting standards for the equipment addressed by this 
document, EPCA, as amended by AEMTCA, prescribes specific statutory 
criteria for DOE to consider when determining whether an amended 
standard level more stringent than that in ASHRAE Standard 90.1 is 
economically justified. See generally 42 U.S.C. 6313(a)(6)(A)-(C). 
First, EPCA requires that any amended standards for CWH equipment must 
be designed to achieve significant additional conservation of energy 
that DOE determines, supported by clear and convincing evidence, and be 
both technologically feasible and economically justified. (42 U.S.C. 
6313(a)(6)(A)(ii)(II) and (C)) Furthermore, DOE may not adopt any 
standard that would increase the maximum allowable energy use or 
decrease the minimum required energy efficiency of covered equipment. 
(42 U.S.C. 6313(a)(6)(B)(iii)(I) and (C)(i)) In deciding whether a 
proposed standard is economically justified, DOE must determine whether 
the benefits of the standard exceed its burdens by considering, to the 
maximum extent

[[Page 34449]]

practicable, the following seven statutory 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 product in the type (or class) compared to any increase in 
the price, initial charges, or maintenance expenses of the products 
likely to result from the standard;
    (3) The total projected amount of energy savings likely to result 
directly from the standard;
    (4) Any lessening of the utility or the performance of the products 
likely to result from the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant.
    (42 U.S.C. 6313(a)(6)(B)(ii) and (C)(i))
    Subject to certain criteria and conditions, DOE is required to 
develop test procedures to measure the energy efficiency, energy use, 
or estimated annual operating cost of covered equipment. (42 U.S.C. 
6314) Specifically, EPCA requires that if a test procedure referenced 
in ASHRAE Standard 90.1 is updated, DOE must update its test procedure 
to be consistent with the amended test procedure in ASHRAE Standard 
90.1, unless DOE determines that the amended test procedure is not 
reasonably designed to produce test results that reflect the energy 
efficiency, energy use, or estimated operating costs of the ASHRAE 
equipment during a representative average use cycle. In addition, DOE 
must determine that the amended test procedure is not unduly burdensome 
to conduct. (42 U.S.C. 6314(a)(2) and (4)) Manufacturers of covered 
equipment must use the prescribed DOE test procedure as the basis for 
certifying to DOE that their equipment complies with the applicable 
energy conservation standards adopted under EPCA and when making 
representations to the public regarding the energy use or efficiency of 
such equipment. (42 U.S.C. 6314(d)) Similarly, DOE must use these test 
procedures to determine whether the equipment complies with standards 
adopted pursuant to EPCA. The DOE test procedure for CWH equipment 
currently appears at 10 CFR 431.106.
    EPCA, as codified, also contains what is known as an ``anti-
backsliding'' provision, which prevents 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. 6313(a)(6)(B)(iii)(I) and (C)(i)) Furthermore, the 
Secretary may not prescribe an amended or new standard if interested 
persons have established by a preponderance of the evidence that the 
standard is likely to result in the unavailability in the United States 
of any covered product type (or class) of 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. 
6313(a)(6)(B)(iii)(II)(aa) and (C)(i))
    Further, EPCA, as codified, establishes a rebuttable presumption 
that a standard is economically justified if the Secretary finds that 
the additional costs 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 applicable test procedure.
    Additionally, EPCA specifies criteria when promulgating a standard 
for a type or class of covered equipment that has two or more 
subcategories that may justify different standard levels. DOE must 
specify a different standard level than that which applies generally to 
such type or class of equipment for any group of covered products that 
has the same function or intended use if DOE determines that 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 which justifies a 
higher or lower standard. In determining whether a performance-related 
feature justifies a different standard for a group of products, DOE 
generally considers such factors as the utility to the commercial 
consumer of the feature and other factors DOE deems appropriate. In a 
rule prescribing such a standard, DOE includes an explanation of the 
basis on which such higher or lower level was established. DOE 
considered these criteria in the context of this rulemaking.
    Other than the exceptions specified in 42 U.S.C. 6316, Federal 
energy conservation requirements generally supersede State laws or 
regulations concerning energy conservation testing, labeling, and 
standards for covered CWH equipment. (42 U.S.C. 6316(b))

B. Background

1. Current Standards
    As noted above, DOE most recently amended energy conservation 
standards for certain CWH equipment in the July 2015 ASHRAE equipment 
final rule. 80 FR 42614, 42667 (July 17, 2015). The current standards 
for all CWH equipment classes are set forth in Table II.1.

                   Table II.1--Current Federal Energy Conservation Standards for CWH Equipment
----------------------------------------------------------------------------------------------------------------
                                                                           Energy conservation standards *
                                                                   ---------------------------------------------
                                                                     Minimum thermal
                                                                       efficiency
                Product                             Size               (equipment        Maximum standby loss
                                                                     manufactured on  (equipment manufactured on
                                                                        and after        and after October 29,
                                                                    October 9, 2015)   2003) ** [dagger][dagger]
                                                                    ** [dagger]  (%)
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters.........  All......................               N/A  0.30 + 27/Vm (%/h)
Gas-fired storage water heaters........  <=155,000 Btu/h..........                80  Q/800 + 110(Vr)\1/2\ (Btu/
                                         >155,000 Btu/h...........                80   h)
                                                                                      Q/800 + 110(Vr)\1/2\ (Btu/
                                                                                       h)
Oil-fired storage water heaters........  <=155,000 Btu/h..........        80[dagger]  Q/800 + 110(Vr)\1/2\ (Btu/
                                         >155,000 Btu/h...........        80[dagger]   h)
                                                                                      Q/800 + 110(Vr)\1/2\ (Btu/
                                                                                       h)

[[Page 34450]]

 
Electric instantaneous water             <10 gal..................                80  N/A
 heaters[dagger][dagger][dagger].        >=10 gal.................                77  2.30 + 67/Vm (%/h)
Gas-fired instantaneous water heaters    <10 gal..................                80  N/A
 and hot water supply boilers.           >=10 gal.................                80  Q/800 + 110(Vr)\1/2\ (Btu/
                                                                                       h)
Oil-fired instantaneous water heater     <10 gal..................                80  N/A
 and hot water supply boilers.           >=10 gal.................                78  Q/800 + 110(Vr)\1/2\ (Btu/
                                                                                       h)
                                                                   ---------------------------------------------
                                                                             Minimum thermal insulation
                                                                   ---------------------------------------------
Unfired hot water storage tank.........  All......................                     R-12.5
----------------------------------------------------------------------------------------------------------------
* Vm is the measured storage volume, and Vr is the rated volume, both in gallons. Q is the nameplate input rate
  in Btu/h.
** For hot water supply boilers with a capacity of less than 10 gallons: (1) The standards are mandatory for
  products manufactured on an after October 21, 2005 and (2) products manufactured prior to that date, and on or
  after October 23, 2003, must meet either the standards listed in this table or the applicable standards in
  Subpart E of this Part for a ``commercial packaged boiler.''
[dagger] For oil-fired storage water heaters: (1) The standards are mandatory for equipment manufactured on and
  after October 9, 2015 and (2) equipment manufactured prior to that date must meet a minimum thermal efficiency
  level of 78 percent.
[dagger][dagger] Water heaters and hot water supply boilers having more than 140 gallons of storage capacity
  need not meet the standby loss requirement if: (1) The tank surface area is thermally insulated to R-12.5 or
  more, (2) a standing pilot light is not used, and (3) for gas or oil-fired storage water heaters, they have a
  fire damper or fan assisted combustion.
[dagger][dagger][dagger] Energy conservation standards for electric instantaneous water heaters are included in
  EPCA. (42 U.S.C. 6313(a)(5)(D)-(E)) The compliance date for these energy conservation standards is January 1,
  1994. In this NOPR, DOE proposes to codify these standards for electric instantaneous water heaters in its
  regulations at 10 CFR 431.110. Further discussion of standards for electric instantaneous water heaters is
  included in section III.C.5.

2. History of Standards Rulemaking for CWH Equipment
    The Energy Policy Act of 1992 (EPACT), Public Law 102-486, amended 
EPCA to prescribe mandatory energy conservation standards for CWH 
equipment, including storage water heaters, instantaneous water 
heaters, and unfired hot water storage tanks. (42 U.S.C. 6313(a)(5)) 
These statutory energy conservation standards corresponded to the 
efficiency levels in ASHRAE Standard 90.1-1989.
    As noted in section II.A of this document, on October 29, 1999, 
ASHRAE released Standard 90.1-1999, which included new efficiency 
levels for numerous categories of CWH equipment. DOE evaluated these 
new standards and subsequently amended energy conservation standards 
for CWH equipment in a final rule published in the Federal Register on 
January 12, 2001. 66 FR 3336. DOE adopted the levels in ASHRAE Standard 
90.1-1999 for all types of CWH equipment, except for electric storage 
water heaters. For electric storage water heaters, the standard in 
ASHRAE Standard 90.1-1999 was less stringent than the standard 
prescribed in EPCA and, consequently, would have increased energy 
consumption.
    Under those circumstances, DOE could not adopt the new efficiency 
level for electric storage water heaters in ASHRAE Standard 90.1-1999. 
Id. at 3350. In the January 2001 final rule, DOE also adopted the 
efficiency levels contained in the Addendum to ASHRAE Standard 90.1-
1989 for hot water supply boilers, which were identical to the 
efficiency levels for instantaneous water heaters. Id. at 3356.
    As noted above, ASHRAE increased the thermal efficiency level for 
commercial oil-fired storage water heaters greater than 105,000 Btu/h 
and less than 4,000 Btu/h/gal in Standard 90.1-2013, thereby triggering 
DOE's statutory obligation to promulgate an amended uniform national 
standard at those levels, unless DOE determines that there is clear and 
convincing evidence supporting the adoption of more-stringent energy 
conservation standards than the ASHRAE levels. As a first step in this 
process, DOE published an energy savings analysis as a Notice of Data 
Availability (NODA) in the Federal Register on April 11, 2014. 79 FR 
20114. In this NODA, DOE tentatively decided that energy savings were 
not significant enough to justify further analysis of increasing 
standards for commercial oil-fired storage water heaters beyond the 
standard levels in ASHRAE 90.1-2013. DOE published a notice of proposed 
rulemaking in the Federal Register on January 8, 2015, which took a 
consistent position vis-[agrave]-vis commercial oil-fired storage water 
heaters. 80 FR 1172. Subsequently, in the July 2015 ASHRAE equipment 
final rule, among other things, DOE adopted the standard for commercial 
oil-fired storage water heaters at the level set forth in ASHRAE 90.1-
2013. 80 FR 42614 (July 17, 2015). This adopted standard is shown in 
Table II.2.

 Table II.2--Federal Energy Conservation Standards for Thermal Efficiency for Commercial Oil-Fired Storage Water
                                                     Heaters
----------------------------------------------------------------------------------------------------------------
                                                Input capacity/stored volume btu/     Thermal       Compliance
            Regulatory requirement                          (gal x h)             efficiency (%)       date
----------------------------------------------------------------------------------------------------------------
Previous Federal Standard.....................  <4,000..........................              78     10/29/2003.

[[Page 34451]]

 
Amended Federal Standard (ASHRAE 90.1-2013      <4,000..........................              80     10/09/2015.
 Level)
----------------------------------------------------------------------------------------------------------------

    In addition to requiring rulemaking when triggered by ASHRAE 
action, EPCA also requires DOE to conduct an evaluation of its 
standards for CWH equipment every 6 years, and to publish either a 
notice of determination that such standards do not need to be amended 
or a notice of proposed rulemaking, including proposed amended 
standards. (42 U.S.C. 6313(a)(6)(C)(i)) Pursuant to this statutory 
requirement, DOE initiated this rulemaking to evaluate the energy 
conservation standards for covered CWH equipment and to determine 
whether new or amended standards are warranted. As an initial step for 
reviewing energy conservation standards for CWH equipment, DOE 
published a request for information for CWH equipment on October 21, 
2014 (``October 2014 RFI''). 79 FR 62899. The October 2014 request for 
information (RFI) solicited information from the public to help DOE 
determine whether more-stringent energy conservation standards for CWH 
equipment would result in a significant amount of additional energy 
savings, and whether those standards would be technologically feasible 
and economically justified. Id. at 62899-900.
    DOE received a number of comments from interested parties in 
response to the October 2014 RFI. These commenters are identified in 
Table II.3. DOE considered these comments in the preparation of this 
NOPR. In this document, DOE addresses the relevant public comments it 
received in the appropriate sections.

Table II.3--Interested Parties Providing Written Comments on the CWH RFI
------------------------------------------------------------------------
             Name                  Abbreviation      Commenter type\*\
------------------------------------------------------------------------
A.O. Smith Corporation........  A.O. Smith.......  M
Bradford White Corporation....  Bradford White...  M
American Gas Association......  AGA..............  IR
Air-Conditioning, Heating and   AHRI.............  IR
 Refrigeration Institute.
Steffes Corporation...........  Steffes..........  M
Appliance Standards Awareness   Joint Advocates    EA
 Project, American Council for   (including ASAP,
 an Energy-Efficient Economy,    ACEEE, and NRDC).
 Natural Resources Defense
 Council.
Edison Electric Institute.....  EEI..............  IR
University of Michigan Plant    UM...............  OS
 Operations.
Rheem Corporation.............  Rheem............  M
National Rural Electric         NRECA............  IR
 Cooperative Association.
------------------------------------------------------------------------
* ``IR'': Industry Representative; ``M'': Manufacturer; ``EA'':
  Efficiency/Environmental Advocate; ``OS'': Other Stakeholder.

III. General Discussion

A. Compliance Dates

    In 42 U.S.C. 6313(a), EPCA prescribes a number of compliance dates 
for any resulting amended standards for CWH equipment. These compliance 
dates vary depending on specific statutory authority under which DOE is 
conducting its review (i.e., whether DOE is triggered by a revision to 
ASHRAE Standard 90.1 or whether DOE is undertaking a ``6-year look 
back'' review), and the action taken (i.e., whether DOE is adopting 
ASHRAE Standard 90.1 levels or more-stringent levels). The discussion 
that follows explains the potential compliance dates as they pertain to 
this rulemaking.
    As noted previously, EPCA requires that at least once every 6 
years, DOE must review standards for covered equipment and publish 
either a notice of determination that standards do not need to be 
amended or a NOPR proposing new standards. (42 U.S.C 6313(a)(6)(C)(i)) 
For any NOPR published pursuant to 42 U.S.C. 6313(a)(6)(C), the final 
rule would apply on the date that is the later of: (1) The date 3 years 
after publication of the final rule establishing a new standard or (2) 
the date 6 years after the effective date of the current standard for a 
covered product. (42 U.S.C. 6313(a)(6)(C)(iv)) For the CWH equipment 
for which DOE is proposing amended standards, the date 3 years after 
the publication of the final rule would be later than the date 6 years 
after the effective date of the current standard. As a result, 
compliance with any amended energy conservation standards, if adopted 
by a final rule in this rulemaking, would be required beginning on the 
date 3 years after the publication of the final rule.

B. Test Procedures

    DOE's existing test procedure for CWH equipment is specified at 10 
CFR 431.106, and incorporates by reference American National Standards 
Institute (ANSI) Standard Z21.10.3-2011 (ANSI Z21.10.3-2011), ``Gas 
Water Heaters, Volume III, Storage Water Heaters With Input Ratings 
Above 75,000 Btu Per Hour, Circulating and Instantaneous.'' The test 
procedure provides mandatory methods for determining the thermal 
efficiency and standby loss of certain classes of CWH equipment. In 10 
CFR 431.104, DOE provides two sources for guidance on how to determine 
R-value of unfired hot water storage tanks.
    On October 21, 2004, DOE published a direct final rule in the 
Federal Register that adopted amended test procedures for CWH 
equipment. 69 FR 61974. These test procedure amendments incorporated by 
reference certain sections of ANSI Z21.10.3-1998, ``Gas Water Heaters, 
Volume III, Storage Water Heaters with Input Ratings above 75,000 Btu 
per Hour, Circulating and Instantaneous.'' Id. at 61983. On May 16, 
2012, DOE published a final rule for certain commercial heating, air-
conditioning, and water heating

[[Page 34452]]

equipment in the Federal Register that, among other things, updated the 
test procedures for certain CWH equipment by incorporating by reference 
ANSI Z21.10.3-2011. 77 FR 28928. These updates did not materially alter 
DOE's test procedure for CWH equipment.
    AEMTCA amended EPCA to require that DOE publish a final rule 
establishing a uniform efficiency descriptor and accompanying test 
methods for covered residential water heaters and certain CWH 
equipment. (42 U.S.C. 6295(e)(5)(B)) The final rule must replace the 
current energy factor (for residential water heaters) and thermal 
efficiency and standby loss (for commercial water heaters) metrics with 
a uniform efficiency descriptor. (42 U.S.C. 6295(e)(5)(C)) AEMTCA 
allowed DOE to provide an exclusion from the uniform efficiency 
descriptor for specific categories of covered water heaters that do not 
have residential uses, that can be clearly described, and that are 
effectively rated using the current thermal efficiency and standby loss 
descriptors. (42 U.S.C. 6295(e)(5)(F))
    EPCA further requires that, along with developing a uniform 
descriptor, DOE must also develop a mathematical conversion factor to 
translate the results based upon use of the efficiency metric under the 
test procedure in effect on December 18, 2012, to the new energy 
descriptor. (42 U.S.C. 6295(e)(5)(E)(i)) In addition, pursuant to 42 
U.S.C. 6295(e)(5)(E)(ii) and (iii), the conversion factor must not 
affect the minimum efficiency requirements for covered water heaters, 
including residential-duty commercial water heaters. Furthermore, such 
conversions must not lead to a change in measured energy efficiency for 
covered residential and residential-duty commercial water heaters 
manufactured and tested prior to the final rule establishing the 
uniform efficiency descriptor. Id. In the July 2014 final rule, DOE 
interpreted these statutory requirements in 42 U.S.C. 6295(e)(5)(E) to 
mean that DOE must translate existing standards and ratings from the 
current metrics to the new metric, while maintaining the stringency of 
the current standards. 79 FR 40542, 40558 (July 11, 2014).
    In the July 2014 final rule, DOE, among other things, established 
the uniform energy factor (UEF), a revised version of the current 
residential energy factor metric, as the uniform efficiency descriptor 
required by AEMTCA. 79 FR 40542, 40578-40579 (July 11, 2014). The 
uniform efficiency descriptor established in the July 2014 final rule 
only applies to commercial water heaters that meet the definition of 
``residential-duty commercial water heater,'' which is defined as any 
gas-fired, electric, or oil-fired storage water heater or instantaneous 
commercial water heater that meets the following conditions:
    (1) For models requiring electricity, uses single-phase external 
power supply;
    (2) Is not designed to provide outlet hot water at temperatures 
greater than 180[emsp14][deg]F; and
    (3) Is not excluded by any of the specified limitations regarding 
rated input and storage volume shown in Table III.1, which reflects the 
table in 10 CFR 431.102.

Id. at 40586.

 Table III.1--Rated Input and Storage Volume Ranges for Non-Residential-
                      Duty Commercial Water Heaters
------------------------------------------------------------------------
                                        Indicator of non-residential
         Water heater type                       application
------------------------------------------------------------------------
Gas-fired Storage.................  Rated input >105 kBtu/h; Rated
                                     storage volume >120 gallons.
Oil-fired Storage.................  Rated input >140 kBtu/h; Rated
                                     storage volume >120 gallons.
Electric Storage..................  Rated input >12 kW; Rated storage
                                     volume >120 gallons.
Heat Pump with Storage............  Rated input >12 kW; Rated current
                                     >24 A at a rated voltage of not
                                     greater than 250 V; Rated storage
                                     volume >120 gallons.
Gas-fired Instantaneous...........  Rated input >200 kBtu/h; Rated
                                     storage volume >2 gallons.
Electric Instantaneous............  Rated input >58.6 kW; Rated storage
                                     volume >2 gallons.
Oil-fired Instantaneous...........  Rated input >210 kBtu/h; Rated
                                     storage volume >2 gallons.
------------------------------------------------------------------------

    CWH equipment not meeting the definition of ``residential-duty 
commercial water heater'' was deemed to be sufficiently characterized 
by the current thermal efficiency and standby loss metrics.
    In April, 2016, DOE issued a NOPR proposing to amend the test 
procedures for certain other CWH equipment (``2016 CWH TP NOPR''). (See 
Docket No. EERE-2014-BT-TP-0008). In the 2016 CWH TP NOPR, DOE proposed 
several changes, including: (1) Updating references of industry test 
standards to incorporate by reference the most recent versions of the 
industry standards (including updating references from ANSI Z21.10.3-
2011 to ANSI Standard Z21.10.3-2015 (ANSI Z21.10.3-2015), ``Gas Water 
Heaters, Volume III, Storage Water Heaters With Input Ratings Above 
75,000 Btu Per Hour, Circulating and Instantaneous''; (2) modifying the 
thermal efficiency and standby loss tests for certain classes of CWH 
equipment to improve repeatability; (3) developing a test method for 
determining the efficiency of unfired hot water storage tanks in terms 
of a standby loss metric; (4) changing the method for setting the 
thermostat for storage water heaters and storage-type instantaneous 
water heaters; (5) clarifying the thermal efficiency and standby loss 
test procedures with regard to stored energy loss and manipulation of 
settings during efficiency testing; (6) defining ``storage-type 
instantaneous water heaters'' and modifying several definitions for 
consumer water heaters and commercial water heating equipment included 
at 10 CFR 430.2 and 10 CFR 431.102, respectively; (7) developing a test 
procedure for measurement of standby loss for flow-activated 
instantaneous water heaters; (8) establishing temperature-sensing 
requirements for thermal efficiency and standby loss testing of 
instantaneous water heaters and hot water supply boilers; (9) modifying 
the standby loss test procedure for instantaneous water heaters and hot 
water supply boilers; (10) developing a test procedure for commercial 
heat pump water heaters; (11) establishing a procedure for determining 
the fuel input rate of gas-fired and oil-fired CWH equipment and 
clarifying DOE's enforcement provisions regarding fuel input rate; (12) 
modifying several definitions included in DOE's regulations for CWH 
equipment at 10 CFR 431.102; (13) establishing default values for 
certain testing parameters to be used if these parameters are not 
specified in product literature or supplemental test instructions; and 
(14) modifying DOE's certification requirements for CWH equipment. (See 
EERE-2014-BT-TP-0008) Discussion of DOE's treatment of unfired hot 
water storage tanks and commercial heat pump water heaters with respect 
to energy conservation standards can be

[[Page 34453]]

found in sections III.C.4 and III.C.6, respectively.
    For four classes of residential-duty commercial water heaters--
electric storage water heaters, heat pump water heaters, gas-fired 
instantaneous water heaters, and oil-fired instantaneous water 
heaters--the input criteria established to separate residential-duty 
commercial water heaters and commercial water heaters are identical to 
those codified at 10 CFR 430.2 that separate consumer water heaters and 
commercial water heaters. Because these input criteria are identical, 
by definition, no models can be classified under these four 
residential-duty equipment classes. Therefore, to eliminate potential 
confusion, DOE proposed in the 2016 CWH TP NOPR to remove these classes 
from the definition for ``residential-duty commercial water heater'' 
codified at 10 CFR 431.102. (See EERE-2014-BT-TP-0008) For electric 
instantaneous water heaters, the rated maximum input criterion for 
residential-duty commercial water heaters is 58.6 kW, higher than 12 
kW, which is the maximum input rate for residential electric 
instantaneous water heaters as defined in EPCA. (42 U.S.C. 6291(27)(B)) 
Therefore, there are models on the market that qualify as residential-
duty commercial electric instantaneous water heaters. DOE's treatment 
of electric instantaneous water heaters in this rule is discussed in 
section III.C.5 of this document.

C. Scope of Rulemaking

    In response to the 2014 RFI, DOE received several comments on the 
scope of this rulemaking. These comments cover specific equipment 
classes, as well as the improvement of overall water heating systems.
1. Commercial Water Heating Systems
    The University of Michigan recommended that DOE fund research to 
develop best concepts for design, installation, and operation standards 
and codes. (UM, No. 9 at p. 3) \20\ Additionally, Joint Advocates 
recommended that DOE consider that many CWH equipment systems are 
designed very inefficiently, citing unnecessary recirculation loops. 
(Joint Advocates, No. 7 at p. 2) Furthermore, the University of 
Michigan recommended that DOE approach the American Society of 
Mechanical Engineers (ASME) and ASHRAE to determine whether the scope 
of their existing standards can be expanded. (UM, No. 9 at p. 2)
---------------------------------------------------------------------------

    \20\ A notation in this form provides a reference for 
information that is in the docket of DOE's rulemaking to develop 
energy conservation standards for commercial water heating equipment 
(Docket No. EERE-2014-BT-STD-0042, which is maintained at http://www.regulations.gov/#!docketDetail;D=EERE-2014-BT-STD-0042). This 
particular notation refers to a comment; (1) submitted by UM; (2) 
appearing in document number 0009; and (3) appearing on page 3 of 
that document.
---------------------------------------------------------------------------

    In response, DOE notes that its Office of Energy Efficiency and 
Renewable Energy (EERE) already supports research and development in 
multiple areas of water-heating energy efficiency technology, including 
building codes and roadmaps for emerging water heating 
technologies.\21\ In the context of this rulemaking, however, DOE must 
follow congressionally-mandated requirements and processes for setting 
standards and test procedures for CWH equipment, and DOE may not 
delegate its standard-setting responsibilities under the statute to 
ASME, ASHRAE, or any other organization. These processes are codified 
in the United States Code, Title 42, Chapter 77, Subchapter III, Part 
A--Energy Conservation Program for Consumer Products Other Than 
Automobiles and Part A-1--Certain Industrial Equipment. DOE notes that 
ASHRAE does set minimum efficiency levels for CWH equipment in ASHRAE 
Standard 90.1 and did recently update thermal efficiency levels for 
certain oil-fired CWH equipment as discussed in section II.B.2, but has 
not updated levels for other CWH equipment analyzed in this document 
within the last 6 years. DOE also notes that its energy conservation 
standards apply at the point of manufacture. DOE must consider energy 
conservation standards with respect to the CWH equipment as shipped 
from the manufacturer and using the statutory criteria contained in 
EPCA. DOE does not have authority to set standards for efficiency of 
installed CWH building systems.
---------------------------------------------------------------------------

    \21\ For an overview of DOE's energy efficiency related 
research, see http://energy.gov/eere/efficiency.
---------------------------------------------------------------------------

2. Residential-Duty Commercial Water Heaters
    DOE analyzed equipment classes for commercial water heaters and 
residential-duty commercial water heaters separately in this 
rulemaking. This rulemaking, therefore, includes CWH equipment classes 
that are covered by the UEF metric, as well as CWH equipment classes 
that continue to be covered by the existing thermal efficiency and 
standby loss metrics. However, DOE has conducted all analyses for 
selecting proposed standards in this document using the existing 
thermal efficiency and standby loss metrics, because there was no 
efficiency data in terms of UEF available when DOE undertook the 
analyses for this NOPR.
    In the April 2015 NOPR, DOE proposed conversion factors to 
determine UEF for residential and residential-duty commercial water 
heaters from their current rated energy factor and thermal efficiency 
and standby loss values. 80 FR 20116, 20142-43 (April 14, 2015). For 
residential-duty commercial water heaters, conversion factors for 
determining UEF were proposed for the four draw patterns specified in 
the July 2014 test procedure final rule: high, medium, low, and very 
small. Id. at 20143. DOE then converted standard levels proposed in 
this NOPR for residential-duty commercial water heaters based upon the 
thermal efficiency and standby loss metrics to standards based upon the 
UEF metric, using the conversion factors proposed in the April 2015 
NOPR. This conversion of standards from thermal efficiency and standby 
loss to UEF is described in further detail in section IV.C.9 of this 
NOPR.
3. Oil-Fired Commercial Water Heating Equipment
    ASHRAE Standard 90.1-2013 raised the thermal efficiency level for 
commercial oil-fired storage water heaters from 78 percent to 80 
percent. In the July 2015 ASHRAE equipment final rule, DOE adopted the 
ASHRAE Standard 90.1 efficiency level of 80 percent because DOE 
determined that there was insufficient potential for energy savings to 
justify further increasing the standard. 80 FR 42614 (July 17, 2015). 
Therefore, because thermal efficiency standards for commercial oil-
fired storage water heater were just recently addressed in a separate 
rulemaking under the ASHRAE trigger, DOE did not consider further 
increasing thermal efficiency standards for commercial oil-fired 
storage water heaters in this rulemaking, as circumstances have not 
changed appreciably regarding this equipment during the intervening 
period. Consequently, this equipment class was not included in any of 
the analyses described in this document. For this NOPR, DOE also 
considered whether amended standby loss standards for commercial oil-
fired water heaters would be warranted. DOE has tentatively concluded 
that a change in the maximum standby loss level would likely effect 
less of a change to energy consumption of oil-fired storage water 
heaters than would a change in the thermal efficiency. Therefore, an 
amended standby loss standard is

[[Page 34454]]

unlikely to result in significant additional energy savings. Thus, DOE 
has not analyzed amended standby loss standards for commercial oil-
fired storage water heaters in this rulemaking. Similarly, DOE 
considered oil-fired instantaneous water heaters and hot water supply 
boilers, and did not identify any units currently on the market that 
would meet the DOE definition. Therefore, DOE estimates that there are 
very few, if any, annual shipments for this equipment class. Therefore, 
DOE has tentatively concluded that the energy savings possible from 
amended standards for such equipment is de minimis, and thus, did not 
analyze amended standards for commercial oil-fired instantaneous water 
heaters for this NOPR.
    Issue 1: DOE seeks comment on its tentative conclusions regarding 
the potential energy savings from analyzing amended standards for 
standby loss of commercial oil-fired storage water heaters and for 
thermal efficiency of commercial oil-fired instantaneous water heaters.
4. Unfired Hot Water Storage Tanks
    The current Federal energy conservation standard for unfired hot 
water storage tanks is expressed as an R-value requirement for the tank 
thermal insulation. In the 2016 CWH TP NOPR, DOE proposed a new test 
procedure for unfired hot water storage tanks using a new standby loss 
metric, which would replace the current R-value requirement. (See EERE-
2014-BT-TP-0008) In the October 2014 RFI, DOE stated that any amended 
energy conservation standards for unfired hot water storage tanks would 
be in terms of the metric to be established in the noted test procedure 
rulemaking. 79 FR 62899, 62903 (Oct. 21, 2014). Given the lack of 
testing data for the new metric and test procedure proposed in the 2016 
CWH TP NOPR, DOE plans to consider energy conservation standards for 
unfired hot water storage tanks in a separate rulemaking. Therefore, 
DOE did not evaluate potential amendments to standards for unfired hot 
water storage tanks in this NOPR.
5. Electric Instantaneous Water Heaters
    EPCA prescribes energy conservation standards for several classes 
of commercial water heating equipment manufactured on or after January 
1, 1994. (42 U.S.C. 6313(a)(5)) DOE codified these standards in its 
regulations for commercial water heating equipment at 10 CFR 431.110. 
However, when codifying these standards from EPCA, DOE inadvertently 
omitted the standards put in place by EPCA for electric instantaneous 
water heaters. Specifically, for instantaneous water heaters with a 
storage volume of less than 10 gallons, EPCA prescribes a minimum 
thermal efficiency of 80 percent. For instantaneous water heaters with 
a storage volume of 10 gallons or more, EPCA prescribes a minimum 
thermal efficiency of 77 percent and a maximum standby loss, in 
percent/hour, of 2.30 + (67/measured volume [in gallons]). (42 U.S.C. 
6313(a)(5)(D) and (E)) Although DOE's regulations at 10 CFR 431.110 do 
not currently include energy conservation standards for electric 
instantaneous water heaters, these standards prescribed in EPCA are 
applicable. Therefore, DOE proposes to codify these standards in its 
regulations at 10 CFR 431.110.
    DOE received several comments on the analysis of commercial 
electric instantaneous water heaters. A.O. Smith stated that commercial 
electric instantaneous water heaters should be included in the scope of 
this rulemaking. (A.O. Smith, No. 2 at p. 1) Similarly, Bradford White 
and AHRI stated that electric instantaneous units should be included in 
the scope of this rulemaking, in separate equipment classes. (Bradford 
White, No. 3 at p. 1; AHRI, No. 5 at p. 2)
    Rheem stated that electric instantaneous water heaters should not 
be included in the scope of this rulemaking because of the limited 
applications of this equipment. (Rheem, No. 10 at p. 1) Joint Advocates 
recommended that electric instantaneous water heaters not be included 
in this rulemaking, unless there is evidence of particularly 
inefficient models on the market. (Joint Advocates, No. 7 at p. 3)
    While it is within the Department's authority to propose amended 
standards for electric instantaneous water heaters, DOE has tentatively 
concluded that there is little potential for additional energy savings 
from doing so. The thermal efficiency of electric instantaneous water 
heaters is already at nearly 100 percent due to the high efficiency of 
electric resistance heating elements, thus providing little reason to 
propose an amended standard for this equipment class. Additionally, DOE 
tentatively concluded that amending the standby loss standard for this 
class would result in minimal energy savings.
6. Commercial Heat Pump Water Heaters
    A.O. Smith also stated that commercial heat pump water heaters, of 
add-on, integrated, air-source, and water-source categories, should be 
included in the scope of this rulemaking. (A.O. Smith, No. 2 at p. 1) 
Similarly, Bradford White, Rheem, and AHRI stated that add-on, 
integrated, air-source, and water-source heat pump water heaters should 
be included in this rulemaking. (Bradford White, No. 3 at p. 1; Rheem, 
No. 10 at p. 1; AHRI, No. 5 at p. 2) Rheem also commented that 
integrated and add-on heat pump water heaters differ by construction, 
application, life-cycle cost, and energy consumption, and that both 
air-source and water-source heat pump water heaters are currently 
available on the market. AHRI also commented that electric 
instantaneous water heaters and heat pump water heaters should be 
considered as separate equipment classes, and that if integrated heat 
pump water heaters are not included, then units falling outside of the 
definition for residential heat pump water heaters will go unregulated.
    Joint Advocates stated that DOE should develop a test procedure for 
both integrated and add-on commercial heat pump water heaters. Joint 
Advocates stated that such a test procedure should have low enough 
operating temperature conditions to gauge whether units operate in 
electric resistance heating mode during cold weather, and that a DOE 
test procedure would help grow the market by allowing for greater use 
of rebate programs. Joint Advocates also commented that air-source 
units should be included, but that inclusion of water-source units 
would be complicated due to varying inlet water conditions for water-
source and ground-source applications. (Joint Advocates, No. 7 at p. 3)
    While DOE agrees that integrated, add-on, and air-source and water-
source commercial heat pump water heaters meet EPCA's definitions for 
commercial storage and instantaneous water heaters, DOE is not 
proposing amended standards for any of these classes of commercial heat 
pump water heaters in this NOPR. DOE has found no evidence of any 
commercial integrated heat pump water heaters on the market. All 
commercial heat pump water heaters that DOE identified as currently on 
the market are ``add-on'' units, which are designed to be paired with 
either an electric storage water heater or unfired hot water storage 
tank in the field.
    As discussed in section III.B, a test procedure for commercial heat 
pump water heaters was proposed in the 2016 CWH TP NOPR. (See EERE-
2014-BT-TP-0008) Because the test procedure has not yet been 
established in a final rule and there is not sufficient test data with 
the proposed test method for units

[[Page 34455]]

currently on the market, DOE plans to consider energy conservation 
standards for commercial heat pump water heaters in a future 
rulemaking.
7. Electric Storage Water Heaters
    DOE did not include electric storage water heaters in the analysis 
of amended thermal efficiency standards. Electric storage water heaters 
do not currently have a thermal efficiency requirement under 10 CFR 
431.110. Electric storage water heaters typically use electric 
resistance coils as their heating elements, which are highly efficient. 
The thermal efficiency of these units already approaches 100 percent. 
Therefore, there are no options for increasing the rated thermal 
efficiency of this equipment, and the impact of setting thermal 
efficiency energy conservation standards for these products would be 
negligible. However, DOE has considered amended standby loss standards 
for electric storage water heaters.
8. Instantaneous Water Heaters and Hot Water Supply Boilers
    In its analysis of amended standby loss standards, DOE did not 
include instantaneous water heaters and hot waters supply boilers other 
than storage-type instantaneous water heaters.\22\ Instantaneous water 
heaters and hot waters supply boilers other than storage-type 
instantaneous water heaters with greater than 10 gallons of water 
stored do have a standby loss requirement under 10 CFR 431.110. 
However, DOE did not analyze more-stringent standby loss standards for 
these units because it tentatively determined that such amended 
standards would result in minimal energy savings. DOE identified only 
26 models on the market of instantaneous water heaters or hot water 
supply boilers with greater than 10 gallons of water stored (other than 
storage-type instantaneous water heaters), and 14 of the identified 
models have less than 15 gallons of water stored. DOE tentatively 
concluded that hot water supply boilers with less than 10 gallons would 
not have significantly different costs and benefits as compared to hot 
water supply boilers with greater than 10 gallons. Therefore, DOE 
analyzed both equipment classes of instantaneous water heaters and hot 
water supply boilers (less than 10 gallons and greater than 10 gallons 
stored volume) together for thermal efficiency standard levels in this 
NOPR. DOE also tentatively determined that establishing standby loss 
standards for instantaneous water heaters and hot water supply boilers 
with less than or equal to 10 gallons waters stored would result in 
minimal energy savings.
---------------------------------------------------------------------------

    \22\ DOE proposed a definition for ``storage-type instantaneous 
water heater'' in the 2016 CWH TP NOPR. (See EERE-2014-BT-TP-0008) 
Storage-type instantaneous water heaters are discussed in section 
IV.A.2.a of this NOPR.
---------------------------------------------------------------------------

D. Technological Feasibility

1. General
    In each energy conservation standards rulemaking, DOE conducts a 
screening analysis based on information gathered on all current 
technology options and prototype designs that could improve the 
efficiency of the products or equipment that is the subject of the 
rulemaking. As the first step in such an analysis, DOE conducts a 
market and technology assessment that develops a list of technology 
options for consideration in consultation with manufacturers, design 
engineers, and other interested parties. DOE then determines which of 
those means for improving efficiency are technologically feasible. DOE 
considers technologies incorporated in commercially-available equipment 
or in working prototypes to be technologically feasible. 10 CFR part 
430, subpart C, appendix A, section 4(a)(4)(i).
    After DOE has determined that particular technology options are 
technologically feasible, it further evaluates each technology option 
in light of the following additional screening criteria: (1) 
Practicability to manufacture, install, and service; (2) adverse 
impacts on product utility or availability; and (3) adverse impacts on 
health or safety. 10 CFR part 430, subpart C, appendix A, section 
4(a)(4)(ii)-(iv). Additionally, DOE notes that the four screening 
criteria do not directly address the propriety status of design 
options. DOE only considers efficiency levels achieved through the use 
of proprietary designs in the engineering analysis if they are not part 
of a unique path to achieve that efficiency level (i.e., if there are 
other non-proprietary technologies capable of achieving the same 
efficiency). Section IV.B of this document discusses the results of the 
screening analysis for CWH equipment, particularly the designs DOE 
considered, those it screened out, and those that are the basis for the 
trial standard levels (TSLs) in this rulemaking. For further details on 
the screening analysis for this rulemaking, see chapter 4 of the NOPR 
technical support document (TSD).
2. Maximum Technologically Feasible Levels
    When DOE proposes to adopt an amended standard for a type or class 
of covered equipment, it must determine the maximum improvement in 
energy efficiency or maximum reduction in energy use that is 
technologically feasible for such equipment. Accordingly, in the 
engineering analysis, DOE determined the maximum technologically 
feasible (``max-tech'') improvements in energy efficiency for CWH 
equipment, using the design parameters for the most efficient products 
available on the market. The max-tech levels that DOE determined for 
this rulemaking are described in section IV.C.3.b of this proposed 
rule. Chapter 5 of the NOPR TSD includes more detail on the selected 
max-tech efficiency levels.

E. Energy Savings

1. Determination of Savings
    For each TSL, DOE projected energy savings from the classes of 
equipment that are the subjects of this rulemaking shipped in the 30-
year period that begins in the year of compliance with amended 
standards (2019-2048 for gas-fired CWH equipment and electric CWH 
equipment).\23\ The savings are measured over the entire lifetime of 
equipment shipped in the 30-year analysis period.\24\ DOE quantified 
the energy savings attributable to each TSL as the difference in energy 
consumption between standards and no-new-standards cases. The no-new-
standards case represents a projection of energy consumption in the 
absence of amended mandatory energy conservation standards, and it 
considers market forces and policies that affect current demand for 
more-efficient equipment over the analysis period.
---------------------------------------------------------------------------

    \23\ DOE also presents a sensitivity analysis that considers 
impacts for equipment shipped in a 9-year period.
    \24\ In the past, DOE presented energy savings results for only 
the 30-year period that begins in the year of compliance. In the 
calculation of economic impacts, however, DOE considered operating 
cost savings measured over the entire lifetime of equipment shipped 
in the 30-year period. DOE has chosen to modify its presentation of 
national energy savings to be consistent with the approach used for 
its national economic analysis.
---------------------------------------------------------------------------

    DOE used its national impact analysis (NIA) spreadsheet model to 
estimate national energy savings (NES) from potential amended standards 
for commercial water heating equipment. The NIA spreadsheet model 
(described in section IV.H of this document) calculates energy savings 
in terms of site energy, which is the energy directly consumed by 
equipment at the locations where they are used. For electric commercial 
water heaters, DOE calculates NES on an annual basis in

[[Page 34456]]

terms of primary energy \25\ savings, which is the savings in the 
energy that is used to generate and transmit the site electricity. To 
calculate primary energy savings from site electricity savings, DOE 
derived annual conversion factors from the model used to prepare the 
Energy Information Administration (EIA)'s AEO 2015. For natural gas- 
and oil-fired commercial water heaters, the primary energy savings are 
considered equal to the site energy savings because they are supplied 
to the user without transformation from another form of energy.
---------------------------------------------------------------------------

    \25\ Primary energy consumption refers to the direct use at 
source, or supply to users without transformation, of crude energy; 
that is, energy that has not been subjected to any conversion or 
transformation process.
---------------------------------------------------------------------------

    In addition to primary energy savings, DOE also calculates full-
fuel-cycle (FFC) energy savings. As discussed in DOE's statement of 
policy and notice of policy amendment, the FFC metric includes the 
energy consumed in extracting, processing, and transporting primary 
fuels (e.g., coal, natural gas, petroleum fuels), and, thus, presents a 
more complete picture of the impacts of energy conservation standards. 
76 FR 51281 (August 18, 2011), as amended at 77 FR 49701 (August 17, 
2012). For FFC energy savings, DOE's approach is based on the 
calculation of an FFC multiplier for each of the energy types used by 
covered equipment.\26\ For more information, see section IV.H.2 of this 
document.
---------------------------------------------------------------------------

    \26\ Natural gas and electricity were the energy types analyzed 
in the FFC calculations.
---------------------------------------------------------------------------

    Issue 2: The agency assumes no growth in equipment efficiency in 
absence of new standards; however, DOE requests comment on expected 
changes over the analysis period in market share by energy efficiency 
level or average shipment-weighted efficiency for the analyzed CWH 
equipment classes in the no-new-standards case.
2. Significance of Savings
    To amend standards for commercial water heating equipment, DOE must 
determine with clear and convincing evidence that the standards would 
result in ``significant'' additional energy savings. (42 U.S.C. 
6313(a)(6)(A)(ii)(II) and (C)(i)) Although the term ``significant'' is 
not defined in the Act, the U.S. Court of Appeals for the District of 
Columbia Circuit, in Natural Resources Defense Council v. Herrington, 
768 F.2d 1355, 1373 (D.C. Cir. 1985), indicated that Congress intended 
``significant'' energy savings in this context to be savings that were 
not ``genuinely trivial.'' The energy savings for all of the TSLs 
considered in this rulemaking, including the proposed standards 
(presented in section V.C.1), are nontrivial. Therefore, DOE has 
tentatively concluded that the energy savings associated with the 
proposed standards in this NOPR--1.8 quads due to commercial water 
heating equipment shipped in 2019-2048--are ``significant,'' as 
required by 42 U.S.C. 6313(a)(6)(A)(ii)(II) and (C)(i).

F. Economic Justification

1. Specific Criteria
    EPCA provides seven factors to be evaluated in determining whether 
a potential energy conservation standard for commercial water heating 
equipment is economically justified. (42 U.S.C. 6313(a)(6)(B)(ii)(I)-
(VII) and (C)(i)) The following sections discuss how DOE has addressed 
each of those seven factors in this rulemaking.
a. Economic Impact on Manufacturers and Commercial Consumers
    EPCA requires DOE to consider the economic impact of a standard on 
manufacturers and the commercial consumers of the products subject to 
the standard. (42 U.S.C. 6313(a)(6)(B)(I) and (C)(i)) In determining 
the impacts of a potential amended standard on manufacturers, DOE 
conducts a manufacturer impact analysis (MIA), as discussed in section 
IV.J of this NOPR. DOE first uses an annual cash-flow approach to 
determine the quantitative impacts. This step incorporates both a 
short-term impact assessment (based on the cost and capital 
requirements during the period between when a regulation is issued and 
when entities must comply with the regulation) and a long-term impact 
assessment (over a 30-year period).\27\ The industry-wide impacts 
analyzed include: (1) Industry net present value (INPV), which values 
the industry on the basis of expected future cash flows; (2) cash flows 
by year; (3) changes in revenue and income; and (4) other measures of 
impact, as appropriate. Second, DOE analyzes and reports the impacts on 
different types of manufacturers (manufacturer subgroups), including 
impacts on small manufacturers. Third, DOE considers the impact of 
standards on domestic manufacturer employment and manufacturing 
capacity, as well as the potential for new and amended standards to 
result in plant closures and loss of capital investment. Finally, DOE 
takes into account cumulative impacts of various DOE regulations and 
other regulatory requirements on manufacturers.
---------------------------------------------------------------------------

    \27\ DOE also presents a sensitivity analysis that considers 
impacts for equipment shipped in a 9-year period, which is a proxy 
for the timeline in EPCA for the review of certain energy 
conservation standards and potential revision of and compliance with 
such revised standards.
---------------------------------------------------------------------------

    For individual commercial consumers, measures of economic impact 
include the changes in LCC and PBP associated with new or amended 
standards. These measures are discussed further in the following 
section. For commercial consumers in the aggregate, DOE also calculates 
the national net present value of the economic impacts applicable to a 
particular rulemaking. DOE also evaluates the LCC impacts of potential 
standards on identifiable subgroups of commercial consumers that may be 
affected disproportionately by a national standard.
b. Savings in Operating Costs Compared To Increase in Price (Life-Cycle 
Costs)
    EPCA requires DOE to consider the savings in operating costs 
throughout the estimated average life of commercial water heating 
equipment compared to any increase in the price of the equipment that 
is likely to result from the standard. (42 U.S.C. 6313(a)(6)(B)(ii)(II) 
and (C)(i)) DOE conducts this comparison in its LCC and PBP analysis.
    The LCC is the sum of the purchase price of a piece of equipment 
(including installation cost and sales tax) and the operating expense 
(including energy, maintenance, and repair expenditures) discounted 
over the lifetime of the equipment. To account for uncertainty and 
variability in specific inputs, such as equipment lifetime and discount 
rate, DOE uses a distribution of values, with probabilities attached to 
each value. For its analysis, DOE assumes that commercial consumers 
will purchase the covered equipment in the first year of compliance 
with amended standards.
    The PBP is the estimated amount of time (in years) it takes 
consumers to recover the increased purchase cost (including 
installation) of a more-efficient product through lower operating 
costs. DOE calculates the PBP by dividing the change in purchase cost 
due to a more-stringent standard by the change in annual operating cost 
for the year that standards are assumed to take effect.
    The LCC savings are calculated relative to a no-new-standards case 
that reflects projected market trends in the absence of amended 
standards. DOE identifies the percentage of commercial consumers 
estimated to receive LCC savings or experience an LCC increase, in 
addition to the average LCC savings associated with a particular 
standard level. DOE's LCC analysis is discussed

[[Page 34457]]

in further detail in section IV.F of this NOPR.
c. Energy Savings
    Although significant conservation of energy is a separate statutory 
requirement for adopting an energy conservation standard, EPCA requires 
DOE, in determining the economic justification of a standard, to 
consider the total projected energy savings that are expected to result 
directly from the standard. (42 U.S.C. 6313(a)(6)(B)(ii)(III) and 
(C)(i)) As discussed in section IV.H and chapter 10 of the NOPR TSD, 
DOE uses the NIA spreadsheet to project NES.
d. Lessening of Utility or Performance of Products
    In establishing classes of products, and in evaluating design 
options and the impact of potential standard levels, DOE must consider 
any lessening of the utility or performance of the considered products 
likely to result from the standard. (42 U.S.C. 6313(a)(6)(B)(ii)(IV) 
and (C)(i)) Based on data available to DOE, the standards proposed in 
this document would not reduce the utility or performance of the CWH 
equipment under consideration in this rulemaking. Section IV.B of this 
document and Chapter 4 of the NOPR TSD provide detailed discussion on 
the potential impact of amended standards on equipment utility and 
performance.
e. Impact of Any Lessening of Competition
    EPCA directs DOE to consider any lessening of competition that is 
likely to result from energy conservation standards. It also directs 
the Attorney General of the United States (Attorney General) to 
determine the impact, if any, of lessening of competition likely to 
result from a proposed standard and to transmit such determination in 
writing to the Secretary, together with an analysis of the nature and 
extent of such impact. (42 U.S.C. 6313(a)(6)(B)(ii)(V) and (C)(i)) To 
assist the Attorney General in making such determination, DOE will 
transmit a copy of this proposed rule and the TSD to the Attorney 
General for review with a request that the Department of Justice (DOJ) 
provide its determination on this issue. DOE will publish and address 
the Attorney General's determination in the final rule. DOE invites 
comment from the public regarding the competitive impacts that are 
likely to result from this proposed rule. In addition, stakeholders may 
also provide comments separately to DOJ regarding these potential 
impacts. See the ADDRESSES section for information to send comments to 
DOJ.
f. Need for National Energy Conservation
    In considering new or amended energy conservation standards, EPCA 
also directs DOE to consider the need for national energy conservation. 
(42 U.S.C. 6313(a)(6)(B)(ii)(VII) and (C)(i)) DOE expects that the 
energy savings from the proposed standards are likely to provide 
improvements to the security and reliability of the nation's energy 
system. Reductions in the demand for electricity also may result in 
reduced costs for maintaining the nation's electricity system. DOE 
conducts a utility impact analysis to estimate how standards may affect 
the nation's needed power generation capacity, as discussed in section 
IV.M.
    The proposed standards also are likely to result in environmental 
benefits in the form of reduced emissions of air pollutants and 
greenhouse gases associated with energy production. DOE reports the 
emissions impacts from the proposed standards of this rulemaking, and 
from each TSL it considered, in sections IV.K and V.B.6 of this NOPR. 
DOE also reports estimates of the economic value of emissions 
reductions resulting from the considered TSLs, as discussed in section 
IV.L of this NOPR.
g. Other Factors
    EPCA allows the Secretary of Energy, in determining whether a 
standard is economically justified, to consider any other factors that 
the Secretary deems to be relevant. (42 U.S.C. 6313(a)(6)(B)(ii)(VII) 
and (C)(i)) DOE did not consider other factors for this document.
2. Rebuttable Presumption
    EPCA creates a rebuttable presumption that an energy conservation 
standard is economically justified if the additional cost to the 
consumer of a product that meets the standard is less than three times 
the value of the first year's energy savings resulting from the 
standard, as calculated under the applicable DOE test procedure. DOE's 
LCC and PBP analyses generate values used to calculate the effects that 
proposed energy conservation standards would have on the payback period 
for commercial consumers. These analyses include, but are not limited 
to, the 3-year payback period contemplated under the rebuttable-
presumption test.
    In addition, DOE routinely conducts an economic analysis that 
considers the full range of impacts to commercial consumers, 
manufacturers, the Nation, and the environment, as required under 42 
U.S.C. 6313(a)(6)(B)(ii) and (C)(i). The results of this analysis serve 
as the basis for DOE's evaluation of the economic justification for a 
potential standard level (thereby supporting or rebutting the results 
of any preliminary determination of economic justification). The 
rebuttable presumption payback calculation is discussed in section 
V.B.1.c of this proposed rule.

G. Public Participation

    UM commented that because of the number of issues on which DOE 
seeks comment, only stakeholders who have staff dedicated to regulatory 
processes would be able to comment on all issues involved in this 
rulemaking. (UM, No. 9 at p. 1) UM stated that a large rulemaking like 
this one favors trade associations over end users who have limited 
means to respond. UM recommended that DOE break up the rulemaking into 
smaller, more manageable pieces, thereby allowing more stakeholders to 
provide comments. (UM, No. 9 at p. 2)
    DOE notes that pursuant to EPCA requirements, DOE provides an equal 
opportunity for the public to provide comment in response to rulemaking 
notices published in the Federal Register or during DOE rulemaking 
public meetings. DOE solicits data and information throughout the 
rulemaking process to validate and improve its analyses. Although DOE 
welcomes comments on any aspect of a rulemaking notice, to better 
facilitate public comments, DOE clearly lists the issues on which it is 
particularly interested in receiving comments and views of interested 
parties, as shown in section VII.E of this document. All stakeholders 
may comment on any or all of the issues so that their relevant views 
are considered in DOE's analysis. Furthermore, to offer enough time for 
the public to respond, DOE typically provides 60 days for the public to 
provide comment after publication of a NOPR for energy conservation 
standards. Therefore, DOE believes it provides the interested public an 
equal opportunity and adequate time to respond to a rulemaking without 
being overly burdensome for commenters.
    In addition, DOE disagrees with UM's assertion that its rulemaking 
public participation process disproportionally benefits certain groups 
over end users. All stakeholders' views, data, and other relevant 
information are taken into account in developing and implementing final 
regulations. DOE is also statutorily mandated to evaluate the

[[Page 34458]]

impact on commercial consumers that could be potentially affected by 
increased standards. As detailed in sections III.F.1, IV.F, and V.B.1 
of this document, DOE thoroughly evaluates the impact on commercial 
consumers in determining whether a proposed standard is economically 
justified. Therefore, DOE believes comments from end users of covered 
equipment are equally and appropriately considered in this rulemaking.
    In response to UM's comments regarding breaking the rulemaking into 
smaller pieces, DOE clarifies that its rulemaking notices already 
separate the analysis into analytical subsections as shown in sections 
III, IV, and V of this document. In each analytical subsection, DOE 
presents the applicable analytical tools, resources, and data used for 
the analysis. DOE also clarifies the issues pertaining to the analysis 
on which it seeks public comment in each subsection. Therefore, DOE 
views the current structure of its rulemaking notices as sufficient to 
allow the public to consider and provide comment on specific sections 
of its rulemaking. As with all rulemakings, DOE encourages stakeholder 
review and feedback on the analyses described in this NOPR and in the 
NOPR TSD.

H. Revisions to Notes in Regulatory Text

    DOE proposes to modify the three notes to the table of energy 
conservation standards in 10 CFR 431.110. First, DOE proposes to modify 
the note to the table of energy conservation standards denoted by 
subscript ``a'' to maintain consistency with DOE's procedure and 
enforcement provisions for determining fuel input rate of gas-fired and 
oil-fired CWH equipment that were proposed in the 2016 CWH TP NOPR. 
Among these changes, DOE proposed that the fuel input rate be used to 
determine equipment classes and calculate the standby loss standard. 
(See EERE-2014-BT-TP-0008) Therefore, in this NOPR, DOE proposes to 
replace the term ``nameplate input rate'' with the term ``fuel input 
rate.''
    Additionally, DOE proposes to remove the note to the table of 
energy conservation standards denoted by subscript ``b.'' This note 
clarifies the compliance dates for energy conservation standards for 
units manufactured after 2005 and between 2003 and 2005. DOE has 
determined that this note is no longer needed because both of these 
compliance dates are over 10 years before the compliance date of 
standards proposed in this NOPR.
    DOE also proposes to modify the note to the table of energy 
conservation standards denoted by subscript ``c,'' which establishes 
design requirements for water heaters and hot water supply boilers 
having more than 140 gallons of storage capacity that do not meet the 
standby loss standard. DOE proposes to replace the phrase ``fire 
damper'' with the phrase ``flue damper,'' because DOE believes that 
``flue damper'' was the intended meaning, and that ``fire damper'' was 
a typographical error. DOE believes the intent of this design 
requirement was to require that any water heaters or hot water supply 
boilers greater than 140 gallons that do not meet the standby loss 
standard must have some device that physically restricts heat loss 
through the flue, either a flue damper or blower that sits atop the 
flue.
    Issue 3: DOE seeks comment on its proposed revisions to notes to 
the table of energy conservation standards in 10 CFR 431.110.

I. Certification, Compliance, and Enforcement Issues

1. Rated and Measured Storage Volume
    In this NOPR, DOE proposes to make two changes to its 
certification, compliance, and enforcement regulations at 10 CFR Part 
429. First, DOE proposes to add requirements to 10 CFR 429.44 that the 
rated value of storage tank volume must equal the mean of the measured 
storage volume of the units in the sample. There are currently no 
requirements from the Department limiting the amount of difference that 
is allowable between the tested (i.e., measured) storage volume and the 
``rated'' storage volume that is specified by the manufacturer for CWH 
equipment other than residential-duty commercial water heaters. In the 
July 2014 final rule, DOE established a requirement for residential 
water heaters and residential-duty commercial water heaters that 
requires the rated volume to be equal to the mean of the measured 
volumes in a sample. 79 FR 40542, 40565 (July 11, 2014).
    From examination of reported data in the AHRI Directory, DOE 
observed that many units are rated at storage volumes above the 
measured storage volume. DOE's maximum standby loss equations for gas-
fired and oil-fired CWH equipment are based on the rated storage 
volume, and the maximum standby loss increases as rated storage volume 
increases. DOE believes commercial consumers often look to storage 
volume as a key factor in choosing a storage water heater. 
Consequently, DOE proposes to adopt rating requirements that the rated 
storage volume must be equal to the mean of the values measured using 
DOE's test procedure. In the 2016 CWH TP NOPR, DOE proposed a test 
procedure for measuring the storage volume of CWH equipment that is 
similar to the method contained in section 5.27 of ANSI Z21.10.3-2015. 
(See EERE-2014-BT-TP-0008) In addition, DOE proposes to specify that 
for DOE-initiated testing, the mean of the measured storage volumes 
must be within five percent of the rated volume in order to use the 
rated storage volume in calculation of maximum standby loss. If the 
mean of the measured storage volumes is more than five percent 
different than the rated storage volume, then DOE proposes to use the 
mean of the measured values in calculation of maximum standby loss. DOE 
notes that similar changes were made to DOE's certification, 
compliance, and enforcement regulations for residential and 
residential-duty water heaters in the July 2014 final rule. 79 FR 
40542, 40565 (July 11, 2014).
    Issue 4: DOE requests comment on its proposed changes to its 
certification, compliance, and enforcement regulations requiring the 
rated volume to be equal to the mean of the measured volumes in a 
sample.
2. Maximum Standby Loss Equations
    As discussed in section III.I.1, DOE proposes to add requirements 
to 10 CFR 429.44 that the rated value of storage tank volume must equal 
the mean of the measured storage volumes of the units in the sample. In 
addition, DOE proposes to specify that for DOE-initiated testing, a 
tested value within 5 percent of the rated value would be a valid test 
result, such that the rated storage volume would then be used in 
downstream calculations. If the test result of the volume is invalid 
(i.e., the measured value is more than 5 percent different than the 
rated value), then DOE proposed to use the measured value in 
determining the applicable minimum energy conservation standard and 
calculations within the test procedure. Specifically, the storage 
volume is used to calculate standby loss for CWH equipment.
    To be consistent with the proposed changes to its certification, 
compliance, and enforcement regulations, DOE has tentatively concluded 
that the maximum standby loss equations for CWH equipment should be set 
in terms of rated volume. The current standby loss standards for water 
heaters differ in the storage volume metric used in calculation of the 
standby loss standard (rated storage volume is used for certain 
classes, while measured storage volume is used for others). 
Specifically, the

[[Page 34459]]

maximum standby loss equation for gas-fired and oil-fired water heaters 
depends on the rated storage volume of the water heater. However, the 
maximum standby loss equations for electric water heaters depends on 
the measured storage volume of the water heater. DOE notes there is 
often a difference between the measured and rated volumes of water 
heaters, as reported in data in the AHRI Directory. Therefore, DOE 
proposes to modify the maximum standby loss equations for electric 
water heaters to depend on rated volume. Specifically, DOE proposes to 
modify the maximum standby loss equation for electric storage water 
heaters as shown in the following equation.
[GRAPHIC] [TIFF OMITTED] TP31MY16.000

    Additionally, DOE proposes to modify the maximum standby loss 
equation for electric instantaneous water heaters with storage capacity 
greater than or equal to ten gallons as shown in the following 
equation. Further discussion of energy conservation standards for 
electric instantaneous water heaters is included in section III.C.5.
[GRAPHIC] [TIFF OMITTED] TP31MY16.001

    Issue 5: DOE requests comment on its proposed modification of the 
maximum standby loss equations for electric storage and instantaneous 
water heaters to depend on rated volume instead of measured volume.

IV. Methodology and Discussion of Related Comments

    This section addresses the analyses DOE has performed for this 
rulemaking with regard to CWH equipment. A separate subsection 
addresses each component of the analyses.
    In overview, DOE used several analytical tools to estimate the 
impact of the standards proposed in this document. The first tool is a 
spreadsheet that calculates the LCC and PBP of potential amended or new 
energy conservation standards. The national impacts analysis (NIA) uses 
a second spreadsheet set that provides shipments forecasts and 
calculates national energy savings and net present value resulting from 
potential new or amended energy conservation standards. DOE uses the 
third spreadsheet tool, the Government Regulatory Impact Model (GRIM), 
to assess manufacturer impacts of potential new or amended standards. 
These three spreadsheet tools are available on the DOE Web site for 
this rulemaking: https://www1.eere.energy.gov/buildings/appliance_standards/standards.aspx?productid=36.
    Additionally, DOE estimated the impacts on electricity demand and 
air emissions from utilities due to the amended energy conservation 
standards for CWH equipment. DOE used a version of EIA's National 
Energy Modeling System (NEMS) for the electricity and air emissions 
analyses. The NEMS model simulates the energy sector of the U.S. 
economy. EIA uses NEMS \28\ to prepare its AEO, a widely known baseline 
energy forecast for the United States. The version of NEMS used for 
appliance standards analysis, which makes minor modifications to the 
AEO version, is called NEMS-BT.\29\ NEMS-BT accounts for the 
interactions among the various energy supply and demand sectors and the 
economy as a whole.
---------------------------------------------------------------------------

    \28\ For more information on NEMS, refer to The National Energy 
Modeling System: An Overview. U.S. Energy Information Administration 
(EIA) (2009) DOE/EIA-0581(2009) (Available at: www.eia.gov/oiaf/aeo/overview).
    \29\ EIA approves the use of the name ``NEMS'' to describe only 
an AEO version of the model without any modification to code or 
data. 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 
Office.)
---------------------------------------------------------------------------

A. Market and Technology Assessment

    For the market and technology assessment for CWH equipment, DOE 
gathered information that provides an overall picture of the market for 
the equipment concerned, including the purpose of the equipment, the 
industry structure, manufacturers, market characteristics, and 
technologies used in the equipment. This activity included both 
quantitative and qualitative assessments, based primarily on publicly-
available information. The subjects addressed in the market and 
technology assessment for this rulemaking include: (1) A determination 
of equipment classes; (2) manufacturers and industry structure; (3) 
types and quantities of CWH equipment sold; (4) existing efficiency 
programs; and (5) technologies that could improve the energy efficiency 
of CWH equipment. The key findings of DOE's market assessment are 
summarized below. Chapter 3 of the NOPR TSD provides further discussion 
of the market and technology assessment.
1. Definitions
    EPCA includes the following categories of CWH equipment as covered 
industrial equipment: storage water heaters, instantaneous water 
heaters, and unfired hot water storage tanks. EPCA defines a ``storage 
water heater'' as a water heater that heats and stores water internally 
at a thermostatically controlled temperature for use on demand. This 
term does not include units that heat with an input rating of 4,000 Btu 
per hour or more per gallon of stored water. EPCA defines an 
``instantaneous water heater'' as a water heater that heats with an 
input rating of at least 4,000 Btu per hour per gallon of stored water. 
Lastly, EPCA defines an ``unfired hot water storage tank'' as a tank 
that is used to store water that is heated external to the tank. (42 
U.S.C. 6311(12)(A)-(C))
    DOE codified the following more specific definitions for CWH 
equipment in 10 CFR 431.102 in a final rule published in the Federal 
Register on October 21, 2004 (``October 2004 final rule''). 69 FR 
61974, 61983.\30\
---------------------------------------------------------------------------

    \30\ In the 2016 CWH TP NOPR, DOE proposed to amend its 
definitions for commercial water heating equipment by changing the 
phrase ``input rating'' to ``fuel input rate'' for gas-fired and 
oil-fired equipment, in order to match DOE's proposed regulations 
regarding fuel input rate. (See EERE-2014-BT-TP-0008)
---------------------------------------------------------------------------

    Specifically, DOE defined ``hot water supply boiler'' as a packaged 
boiler that is industrial equipment and that: (1) Has an input rating 
from 300,000 Btu/h to 12,500,000 Btu/h and of at least 4,000 Btu/h per 
gallon of stored water, (2) is suitable for heating potable water, and 
(3) has the temperature and pressure controls necessary for heating 
potable water for purposes other than space heating, and/or the 
manufacturer's product literature, product markings, product marketing, 
or product installation and operation instructions indicate that the 
boiler's intended uses include heating potable water for purposes other 
than space heating.\31\
---------------------------------------------------------------------------

    \31\ In the 2016 CWH TP NOPR, DOE proposed to amend its 
definition for ``hot water supply boiler'' by citing the definition 
for ``packaged boiler'' included in Sec.  431.82 instead of a 
duplicated definition for ``packaged boiler'' in Sec.  431.102, 
which DOE proposed to remove. (See EERE-2014-BT-TP-0008)
---------------------------------------------------------------------------

    DOE also defined an ``instantaneous water heater'' as a water 
heater that has an input rating not less than 4,000 Btu/h per gallon of 
stored water, and that is industrial equipment, including products 
meeting this description that are designed to heat water to 
temperatures of 180[emsp14][deg]F or higher.\32\
---------------------------------------------------------------------------

    \32\ In the 2016 CWH TP NOPR, DOE proposed to amend its 
definition for ``instantaneous water heater'' by making the 
following changes: (1) Removing the clause stating that products 
designed to heat water to temperatures of 180[emsp14][deg]F or 
higher are included; (2) removing the clause ``that is industrial 
equipment''; and (3) adding the input criteria that separate 
consumer and commercial instantaneous water heaters for each energy 
source (i.e., gas, oil, and electricity). (See EERE-2014-BT-TP-0008)

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

[[Page 34460]]

    DOE defined a ``storage water heater'' as a water heater that heats 
and stores water within the appliance at a thermostatically controlled 
temperature for delivery on demand and that is industrial equipment, 
and does not include units with an input rating of 4,000 Btu/h or more 
per gallon of stored water.\33\
---------------------------------------------------------------------------

    \33\ In the 2016 CWH TP NOPR, DOE proposed to amend its 
definition for ``storage water heater'' by adding the input criteria 
that separate consumer and commercial storage water heaters for each 
energy source (i.e., gas, oil, and electricity). (See EERE-2014-BT-
TP-0008)
---------------------------------------------------------------------------

    Lastly, DOE defined an ``unfired hot water storage tank'' as a tank 
used to store water that is heated externally, and that is industrial 
equipment.
Id.
2. Equipment Classes
    When evaluating and establishing energy conservation standards, DOE 
generally divides covered equipment into equipment classes by the type 
of energy used or by capacity or other performance-related features 
that justify a different standard. In determining whether a 
performance-related feature justifies a different standard, DOE 
considers such factors as the utility to the commercial consumers of 
the feature and other factors DOE determines are appropriate.
    DOE currently divides CWH equipment classes based on the energy 
source, equipment category (i.e., storage vs. instantaneous and hot 
water supply boilers), and size (i.e., input capacity rating and rated 
storage volume). Unfired hot water storage tanks are also included as a 
separate equipment class. Table IV.1 shows DOE's current CWH equipment 
classes and energy conservation standards.

                   Table IV.1--Current CWH Equipment Classes and Energy Conservation Standards
----------------------------------------------------------------------------------------------------------------
                                                                           Energy conservation standards *
                                                                   ---------------------------------------------
                                                                                           Maximum standby  loss
                                                                       Minimum thermal           (equipment
          Equipment class                        Size               efficiency (equipment   manufactured on and
                                                                      manufactured on and    after October 29,
                                                                       after October 9,           2003)**
                                                                       2015)** [dagger]       [dagger][dagger]
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters....  All...........................  N/A..................  0.30 + 27/Vm (%/h)
Gas-fired storage water heaters...  <=155,000 Btu/h...............  80%..................  Q/800 + 110(Vr)1/2
                                    >155,000 Btu/h................  80%..................   (Btu/h)
                                                                                           Q/800 + 110(Vr)1/2
                                                                                            (Btu/h)
Oil-fired storage water heaters...  <=155,000 Btu/h...............  80%[dagger]..........  Q/800 + 110(Vr)1/2
                                    >155,000 Btu/h................  80%[dagger]..........   (Btu/h)
                                                                                           Q/800 + 110(Vr)1/2
                                                                                            (Btu/h)
Electric instantaneous water        <10 gal.......................  80%..................  N/A
 heaters[dagger][dagger][dagger].   >=10 gal......................  77%..................  2.30 + 67/Vm (%/h)
Gas-fired instantaneous water       <10 gal.......................  80%..................  N/A
 heaters and hot water supply       >=10 gal......................  80%..................  Q/800 + 110(Vr)1/2
 boilers.                                                                                   (Btu/h)
Oil-fired instantaneous water       <10 gal.......................  80%..................  N/A
 heater and hot water supply        >=10 gal......................  78%..................  Q/800 + 110(Vr)1/2
 boilers.                                                                                   (Btu/h)
                                                                   ---------------------------------------------
                                                                             Minimum thermal insulation
                                                                   ---------------------------------------------
Unfired hot water storage tank....  All...........................                     R-12.5
----------------------------------------------------------------------------------------------------------------
\*\Vm is the measured storage volume, and Vr is the rated volume, both in gallons. Q is the nameplate input rate
  in Btu/h.
** For hot water supply boilers with a capacity of less than 10 gallons: (1) the standards are mandatory for
  products manufactured on an after October 21, 2005 and (2) products manufactured prior to that date, and on or
  after October 23, 2003, must meet either the standards listed in this table or the applicable standards in
  Subpart E of this Part for a ``commercial packaged boiler.''
[dagger] For oil-fired storage water heaters: (1) The standards are mandatory for equipment manufactured on and
  after October 9, 2015 and (2) equipment manufactured prior to that date must meet a minimum thermal efficiency
  level of 78 percent.
[dagger][dagger] Water heaters and hot water supply boilers having more than 140 gallons of storage capacity
  need not meet the standby loss requirement if: (1) The tank surface area is thermally insulated to R-12.5 or
  more, (2) a standing pilot light is not used, and (3) for gas or oil-fired storage water heaters, they have a
  fire damper or fan assisted combustion.
[dagger][dagger][dagger] Energy conservation standards for electric instantaneous water heaters are included in
  EPCA. (42 U.S.C. 6313(a)(5)(D)-(E)) The compliance date for these energy conservation standards is January 1,
  1994. In this NOPR, DOE proposes to codify these standards for electric instantaneous water heaters in its
  regulations at 10 CFR 431.110. Further discussion of standards for electric instantaneous water heaters is
  included in section III.C.5.

    Table IV.2 presents the proposed equipment classes for CWH 
equipment. The following text provides additional details, discussion 
of comments relating to the equipment classes, proposed definitions, as 
well as issues on which DOE is seeking comments.

                Table IV.2 Proposed CWH Equipment Classes
------------------------------------------------------------------------
            Equipment class                      Specifications*
------------------------------------------------------------------------
Electric storage water heaters.........  All
Gas-fired storage water heaters:
    Commercial.........................  Rated input >105 kBtu/h or
                                          rated storage volume >120 gal
    Residential-Duty**.................  Rated input <=105 kBtu/h and
                                          rated storage volume <=120 gal
Oil-fired storage water heaters:
    Commercial.........................  Rated input >140 kBtu/h or
                                          rated storage volume >120 gal
    Residential-Duty**.................  Rated input <=140 kBtu/h and
                                          rated storage volume <=120 gal
Electric instantaneous water heaters     <10 gal
 [dagger], [dagger][dagger].             >=10 gal

[[Page 34461]]

 
Gas-fired instantaneous water heaters
 and hot water supply boilers
 [dagger][dagger]
    Instantaneous water heaters (other   <10 gal
     than storage-type) and hot water    >=10 gal
     supply boilers.
    Storage-type instantaneous water     >=10 gal
     heaters [dagger][dagger][dagger].
Oil-fired instantaneous water heaters    <10 gal
 and hot water supply boilers            >=10 gal
 [dagger][dagger].
Unfired hot water storage tanks........  All
------------------------------------------------------------------------
* These specifications only distinguish between classes of CWH
  equipment. The different classifications of consumer water heaters and
  commercial water heating equipment are specified by the definitions
  codified at 10 CFR 430.2 and 10 CFR 431.102, respectively.
** In addition to the listed specifications, to be classified as a
  residential-duty commercial water heater, a commercial water heater
  must, if requiring electricity, use single-phase external power
  supply, and not be designed to heat water at temperatures greater than
  180[emsp14][deg]F. 79 FR 40542, 40586 (July 11, 2014).
[dagger] Energy conservation standards for electric instantaneous water
  heaters are included in EPCA. (42 U.S.C. 6313(a)(5)(D) (E)) In this
  NOPR, DOE proposes to codify these equipment classes and corresponding
  energy conservation standards for electric instantaneous water heaters
  in its regulations at 10 CFR 431.110. Further discussion of standards
  for electric instantaneous water heaters is included in section
  III.C.5.
[dagger][dagger] To be considered an instantaneous water heater or hot
  water supply boiler, CWH equipment must heat greater than 4,000 Btu
  per gallon of water stored.
[dagger][dagger][dagger] DOE proposes a new equipment class for storage-
  type instantaneous water heaters, which are similar to storage water
  heaters, but with a ratio of input capacity to storage volume greater
  than or equal to 4,000 Btu/h per gallon of water stored. DOE proposed
  a definition for ``storage-type instantaneous water heater'' in the
  2016 CWH TP NOPR. (See EERE-2014-BT-TP-0008)

    In the October 2014 RFI, DOE sought comment on several issues 
regarding the equipment class structure for CWH equipment. 79 FR 62899, 
62904-09 (Oct. 21, 2014). In response, A.O. Smith, Bradford White, and 
AHRI all recommended that the equipment class structure be simplified 
by establishing the following equipment classes: (1) Commercial gas-
fired water heaters and hot water supply boilers <10 gallons; (2) 
commercial-fired gas water heaters and hot water supply boilers >=10 
gallons; (3) commercial oil-fired water heaters and hot water supply 
boilers <10 gallons; and (4) commercial oil-fired water heaters and hot 
water supply boilers >=10 gallons. (A.O. Smith, No. 2 at p. 1; Bradford 
White, No. 3 at p. 1; AHRI, No. 5 at p. 1)
    DOE disagrees that the equipment class structure should be 
simplified in the manner the commenters suggested because commercial 
instantaneous water heaters and hot water supply boilers with a storage 
volume greater than 10 gallons would include units with significant 
variation in design and utility. Specifically, this equipment class 
currently contains both hot water supply boilers and storage-type water 
heaters with greater than 4,000 Btu/h per gallon of water stored, which 
DOE believes may require separate equipment classes for reasons 
detailed in the discussion immediately below. Therefore, DOE has 
tentatively concluded that instantaneous water heaters with a storage 
volume greater than 10 gallons and storage water heaters should remain 
in separate equipment classes.
a. Storage-Type Instantaneous Water Heaters
    In the 2016 CWH TP NOPR, DOE noted that the ``gas-fired 
instantaneous water heaters and hot water supply boilers'' equipment 
class with a storage volume greater than or equal to 10 gallons 
encompasses both instantaneous water heaters and hot water supply 
boilers with large volume heat exchangers, as well as instantaneous 
water heaters with storage tanks (but with at least 4,000 Btu/h of 
input per gallon of water stored). (See EERE-2014-BT-TP-0008) 
Therefore, DOE proposed to separate these units into classes--storage-
type instantaneous water heaters with greater than 4,000 Btu/h per 
gallon of stored water, and instantaneous water heaters (other than 
storage-type) and hot water supply boilers with greater than 10 gallons 
of stored water, with the following definition for ``storage-type 
instantaneous water heater'':
    Storage-type instantaneous water heater means an instantaneous 
water heater comprising a storage tank with a submerged heat 
exchanger(s) or heating element(s).
    It is DOE's understanding that gas-fired storage-type instantaneous 
water heaters are very similar to gas-fired storage water heaters, but 
with a higher ratio of input rating to tank volume. This higher input-
volume ratio is achieved with a relatively larger heat exchanger paired 
with a relatively smaller tank. Increasing either the input capacity or 
storage volume increases the recovery capacity of the water heater. 
However, through a review of product literature, DOE noted no 
significant design differences that would warrant different energy 
conservation standard levels (for either thermal efficiency or standby 
loss) between models in these two proposed equipment classes. 
Therefore, DOE grouped the two equipment classes together in its 
analyses for this rulemaking. As a result, DOE proposes the same 
standard levels for commercial gas-fired storage water heaters and 
commercial gas-fired storage-type instantaneous water heaters.
    Issue 6: DOE requests comment on whether there are significant 
differences between storage water heaters and storage-type 
instantaneous water heaters that would justify analyzing these classes 
separately for amended energy conservations standards.
b. Tankless Water Heaters and Hot Water Supply Boilers
    DOE notes that there are also significant differences in design and 
application between equipment within the ``gas-fired instantaneous 
water heaters and hot water supply boilers'' equipment class with 
storage volume less than 10 gallons. Specifically, DOE has identified 
two kinds of equipment within this class: Tankless water heaters and 
hot water supply boilers. From examination of equipment literature and 
discussion with manufacturers, DOE understands that tankless water 
heaters are typically used without a storage tank, flow-activated, 
wall-mounted, and capable of higher temperature rises. Hot water supply 
boilers, conversely, are typically used with a storage tank and 
recirculation loop, thermostatically-activated, and not wall-mounted. 
However, despite these differences, tankless water heaters and hot 
water supply boilers share basic similarities: both kinds of equipment 
supply hot

[[Page 34462]]

water in commercial applications with at least 4,000 Btu/h per gallon 
of stored water, and both include heat exchangers through which 
incoming water flows and is heated by combustion flue gases that flow 
around the heat exchanger tubes. Because of these basic similarities, 
DOE continued to group these types of equipment into a single equipment 
class and analyzed tankless water heaters and hot water supply boilers 
as two separate kinds of representative equipment for the instantaneous 
water heaters and hot water supply boilers equipment class for this 
NOPR.
    Issue 7: DOE requests comment on whether tankless water heaters and 
hot water supply boilers should be treated as separate equipment 
classes in DOE's energy conservation standards for CWH equipment and 
whether proposing the same standards incentivizes any switching in 
shipments from one equipment class to the other. Additionally, DOE 
requests feedback on what criteria should be used to distinguish 
between tankless water heaters and hot water supply boilers if separate 
equipment classes are established.
    DOE only considered gas-fired instantaneous water heaters and hot 
water supply boilers with an input capacity greater than 200,000 Btu/h 
in its analysis, because EPCA includes gas-fired instantaneous water 
heaters with an input capacity less than or equal to 200,000 Btu/h in 
its definition of consumer ``water heater.'' (42 U.S.C. 6291(27)(b))
c. Gas-Fired and Oil-Fired Storage Water Heaters
    A.O. Smith, Bradford White, Rheem, and AHRI commented that the 
current separation of commercial gas and oil storage water heaters into 
classes with input capacity less than or equal to 155,000 Btu/h and 
greater than 155,000 Btu/h is not needed, arguing that such distinction 
should be eliminated. (A.O. Smith, No. 2 at p. 1; Bradford White, No. 3 
at p. 1; Rheem, No. 10 at p. 1; AHRI, No. 5 at p. 2)
    DOE agrees with the commenters, and proposes to consolidate 
commercial gas-fired and oil-fired storage equipment classes that are 
currently divided by input rates of 155,000 Btu/h. DOE is now proposing 
the following two equipment classes without an input rate distinction: 
(1) Gas-fired storage water heaters and (2) oil-fired storage water 
heaters. The input rate of 155,000 Btu/h was first used as a dividing 
criterion for storage water heaters in the EPACT 1992 amendments to 
EPCA, which mirrored the standard levels and equipment classes in 
ASHRAE Standard 90.1-1989. (42 U.S.C. 6313(a)(5)(B)-(C)) ASHRAE has 
since updated its efficiency levels for oil-fired and gas-fired storage 
water heaters in ASHRAE Standard 90.1-1999 by consolidating equipment 
classes that were divided by input rate of 155,000 Btu/h. Pursuant to 
requirements in EPCA, DOE adopted the increased standards in ASHRAE 
Standard 90.1-1999, but did not correspondingly consolidate the 
equipment classes above and below 155,000 Btu/h. As a result, DOE's 
current standards are identical for the equipment classes that are 
divided by input rate of 155,000 Btu/h. Therefore, DOE tentatively 
concluded that eliminating the dividing criterion for commercial gas-
fired and oil-fired storage water heaters at 155,000 Btu/h would 
simplify the equipment class structure and make the structure more 
consistent with that in ASHRAE Standard 90.1.
d. Grid-Enabled Water Heaters
    A. O. Smith, Rheem, and AHRI suggested that DOE should adopt a 
separate equipment class for grid-enabled electric storage water 
heaters. (A.O. Smith, No. 2 at p. 1; Rheem, No. 10 at p. 1; AHRI, No. 5 
at p. 1) NRECA stated that DOE should not adopt any standards that 
effectively eliminate water heating technologies used for demand 
response and thermal storage. (NRECA, No. 11 at p. 2) Steffes 
recommended establishing a sub-class for grid-interactive electric 
storage units, due to their different operating schedules and economic 
considerations. (Steffes, No. 6 at p. 2)
    DOE tentatively concludes that a separate equipment class for grid-
enabled commercial electric storage water heaters is not warranted. 
First, as discussed in section III.B, there are no units in the 
residential-duty electric storage equipment class, as the dividing 
criteria for residential and commercial electric storage units match 
those for residential-duty and commercial electric storage units. 
Therefore, electric storage water heaters can only be classified as 
residential or commercial, and an equipment class of grid-enabled 
residential-duty water heaters would comprise no units. Second, for 
commercial electric storage water heaters, DOE only prescribes a 
standby loss standard. DOE does not believe an increased standby loss 
standard level would be likely to affect grid-enabled technology 
because the more-stringent standby loss level analyzed for electric 
storage water heaters is most commonly met by increasing insulation 
thickness, which would not differentially affect grid-enabled 
technology. Therefore, DOE is not proposing a separate equipment class 
for grid-enabled commercial electric storage water heaters in this 
rulemaking.
e. Condensing Gas-Fired Water Heating Equipment
    AGA suggested that DOE should analyze commercial gas condensing and 
non-condensing water heaters as separate equipment classes. (AGA, No. 4 
at p. 2) AGA stated that replacement of non-condensing gas water 
heaters with condensing gas water heaters can be problematic due to the 
separate venting needed and condensate disposal issues. AGA opined that 
the ability of non-condensing gas water heaters to be common-vented 
with other gas appliances into chimneys is a performance feature that 
justifies analyzing non-condensing and condensing gas water heaters 
separately. AGA also cited precedent for such a separation in analysis 
in the residential clothes dryer energy conservation standards 
rulemaking.
    Regarding the separation of vented and vent-less clothes dryers 
into two product classes in the residential clothes dryer rulemaking as 
cited by AGA, DOE has found the circumstances in that rulemaking to be 
distinguishable from the present rulemaking. More specifically, in a 
direct final rule for energy conservation standards for residential 
clothes dryers and room air conditioners published on April 21, 2011 
(``April 2011 final rule''), DOE established separate product classes 
for vented and vent-less clothes dryers because of the unique utility 
they offer consumers (i.e., the ability to be installed in space-
constrained locations, such as high-rise apartments and recreational 
vehicles, where venting dryers would be precluded entirely due to 
venting restrictions). 76 FR 22454, 22485. In the April 2011 final 
rule, ventless dryers provided that subset of consumers the utility of 
being able to dry their clothes at all, so it is not simply a matter of 
additional installation cost, as confronts us in this rulemaking for 
CWH equipment. Id. Consequently, DOE believes that such a distinction 
would not apply to commercial gas-fired water heaters, because all gas-
fired water heaters require venting and all installations could 
accommodate a condensing gas water heater.
    DOE reiterates that disparate equipment may have very different 
consumer utilities, thereby making direct comparisons difficult and 
potentially misleading. For instance, in the April 2011 final rule, DOE

[[Page 34463]]

established separate product classes for vented and ventless clothes 
dryers because of their unique utility to consumers, as previously 
discussed. But in a final rule for energy conservation standards for 
residential water heaters, pool heaters, and direct heating equipment 
published on April 16, 2010, DOE determined that water heaters that 
utilize heat pump technology did not need to be put in a separate 
product class from conventional types of hot water heaters that utilize 
electric resistance technology, even though water heaters utilizing 
heat pumps require the additional installation of a condensate drain 
that a hot water heater utilizing electric resistance technology does 
not require. 75 FR 20112, 20134-20135. DOE found that regardless of 
these installation factors, the heat pump water heater and the 
conventional water heater still had the same utility to the consumer: 
Providing hot water. Id. In both cases, DOE made its finding based on 
consumer type and utility type, rather than product design criteria 
that impact product efficiency or installation costs. These 
distinctions in both the consumer type and the utility type are 
important because, as DOE has previously pointed out, taken to the 
extreme, each different design could be designated a different 
``product class'' and, therefore, require different energy conservation 
standards.
    Tying the concept of ``feature'' to a specific technology would 
effectively lock-in the currently existing technology as the ceiling 
for product efficiency and eliminate DOE's ability to address 
technological advances that could yield significant consumer benefits 
in the form of lower energy costs while providing the same 
functionality for the consumer. DOE is very concerned that determining 
features solely on product technology could undermine the Department's 
Appliance Standards Program. If DOE is required to maintain separate 
product classes to preserve less-efficient technologies, future 
advancements in the energy efficiency of covered products would become 
largely voluntary, an outcome which seems inimical to Congress's 
purposes and goals in enacting EPCA.
    DOE tentatively concludes that both non-condensing and condensing 
commercial gas-fired CWH equipment provide the same hot water for use 
by commercial consumers. Furthermore, DOE has tentatively concluded 
that condensing gas-fired water heaters could replace non-condensing 
gas-fired water heaters in all commercial settings, although in certain 
instances this may lead to significant installation costs. DOE 
recognizes the potential increased installation costs that a proposed 
condensing standard might impose on some subset of consumers, and has 
factored such installation costs in its LCC analysis. However, the 
possibility that installing a non-condensing commercial water heater 
may be less costly than a condensing commercial water heater because of 
the difference in venting methods does not justify separating the two 
kinds of equipment. Condensing technology is discussed in more detail 
in the screening analysis at section IV.B, and installation costs for 
all equipment classes are discussed in more detail in section IV.F.2.b 
of this NOPR and in chapter 8 of the NOPR TSD.
    Issue 8: DOE seeks comment on its proposed equipment class 
structure, and whether any equipment classes are unnecessary or 
additional equipment classes are needed.
3. Review of the Current Market for CWH Equipment
    In order to gather information needed for the market assessment for 
CWH equipment, DOE consulted a variety of sources, including 
manufacturer literature, manufacturer Web sites, the AHRI Directory of 
Certified Product Performance,\34\ the California Energy Commission 
(CEC) Appliance Efficiency Database,\35\ and DOE's Compliance 
Certification Database.\36\ DOE used these sources to compile a 
database of CWH equipment that served as resource material throughout 
the analyses conducted for this rulemaking. This database contained the 
following counts of unique models: 269 commercial gas-fired storage 
water heaters, 67 residential-duty commercial gas-fired storage water 
heaters, 71 electric storage water heaters, 59 commercial gas-fired 
storage-type instantaneous water heaters (storage water heaters with 
greater than 4,000 Btu/h per gallon of stored water), 25 gas-fired 
tankless water heaters, 239 gas-fired hot water supply boilers, 15 
commercial oil-fired storage water heaters, 5 residential-duty 
commercial oil-fired storage water heaters, and 4 commercial oil-fired 
storage-type instantaneous water heaters. No oil-fired instantaneous 
water heaters or hot water supply boilers were found on the market. As 
the database was compiled mostly from certification databases, 
efficiency data--standby loss and thermal efficiency for storage water 
heaters, thermal efficiency for instantaneous water heaters and hot 
water supply boilers--were available for all models considered. Chapter 
3 of the NOPR TSD provides more information on the CWH equipment 
currently available on the market, including a full breakdown of these 
units into their equipment classes and graphs showing performance data.
---------------------------------------------------------------------------

    \34\ Based on listings in the AHRI Directory last accessed in 
September, 2014. (Available at: https://www.ahridirectory.org/ahridirectory/pages/home.aspx). Standby loss data for electric 
storage water heaters were updated on March 17, 2015. Details of the 
data comprising the database used for analysis are described in 
Chapter 3 of the NOPR TSD.
    \35\ Available at http://www.appliances.energy.ca.gov/AdvancedSearch.aspx.
    \36\ Available at https://www.regulations.doe.gov/certification-data/
---------------------------------------------------------------------------

4. Technology Options
    As part of the market and technology assessment, DOE uses 
information about commercially-available technology options and 
prototype designs to help identify technologies the manufacturers could 
use to improve energy efficiency for CWH equipment. This effort 
produces an initial list of all the technologies that DOE believes are 
technologically feasible. This assessment provides the technical 
background and structure on which DOE bases its screening and 
engineering analyses. Chapter 3 of the NOPR TSD includes descriptions 
of all technology options identified for this equipment.
    In the October 2014 RFI, DOE listed twelve technology options and 
requested comment regarding their applicability to the current market 
and their impact on energy efficiency of CWH equipment. 79 FR 62899, 
62904 (Oct. 21, 2014). The technology options identified in the October 
2014 RFI were as follows:

 Heat traps
 Improved insulation (including increasing jacket insulation, 
insulating tank bottom, or using a plastic tank (electric only), 
advanced insulation types, foam insulation, and pipe and fitting 
insulation)
 Power and direct venting
 Fully condensing technology (including storage, instantaneous, 
and hybrid, as well as pulse combustion)
 Improved flue design (including high-efficiency flue baffles, 
multiple flues, submerged combustion chamber, and optimized flue 
geometry)
 Sidearm heating and two-phase thermosiphon technology
 Electronic ignition systems
 Improved heat pump water heaters
 Thermovoltaic and thermoelectric generators
 Improved controls (including timer controls, modulating 
controls, and intelligent and wireless controls and communication)
 Self-cleaning

[[Page 34464]]

 Improved burners (including variable firing-rate burners, low-
stage firing burners, and modulating burners)
Id.
    DOE also solicited information on potential additional energy-
efficiency-improving technology options that DOE should consider for 
the purposes of this rulemaking in the October 2014 RFI. 79 FR 62899, 
62904 (Oct. 21, 2014). Several parties commented on the list of 
technologies. A.O. Smith, Bradford White, Rheem, and AHRI all commented 
that self-cleaning should not be included in the list because it is a 
feature that improves maintenance of storage water heaters, not 
efficiency. (A.O. Smith, No. 2 at p. 2; Bradford White, No. 3 at p. 2; 
Rheem, No. 10 at p. 1; AHRI, No. 5 at p. 2) Bradford White, Rheem, and 
AHRI also commented that heat traps should not be included because heat 
traps are installed in external piping for commercial water heater 
installations. (Bradford White, No. 3 at p. 2; Rheem, No. 10 at p. 1; 
AHRI, No. 5 at p. 2) AHRI added that ASHRAE Standard 90.1 requires 
inclusion of heat traps for CWH equipment when installed, not when 
manufactured. (AHRI, No. 5 at p. 2) A. O. Smith also stated that fully 
condensing technology should not be considered for oil-fired units, as 
it is not feasible to develop given the size of the market. (A.O. 
Smith, No. 2 at p. 2)
    DOE agrees with the commenters that self-cleaning technology would 
not affect the thermal efficiency or standby loss of a storage water 
heater. DOE also agrees that heat traps are most commonly installed in 
piping, not in CWH equipment. Section 7.4.6 of ASHRAE Standard 90.1-
2013 requires heat traps be installed either integral to the water 
heater or storage tank, or in both the inlet and outlet piping as close 
as possible to the storage tank, if not part of a recirculating 
system.\37\ DOE was not able to find evidence of a significant number 
of models of CWH equipment on the market with installed heat traps. 
Therefore, for the reasons above, DOE has removed these two 
technologies from the list of potential technology options considered. 
Regarding condensing technology for oil-fired water heaters, DOE did 
not analyze oil-fired water heaters in this rulemaking, as discussed 
previously in section III.C of this document. However, condensing 
technology was analyzed as a technology option for gas-fired CWH 
equipment.
---------------------------------------------------------------------------

    \37\ ASHRAE, Standard 90.1-2013 (Available at www.ashrae.org).
---------------------------------------------------------------------------

    Steffes recommended that grid-interactive technology for electric 
storage water heaters be added to the list of technologies, as they 
achieve significant system efficiency improvements and carbon 
reductions. (Steffes, No. 6 at p. 2) Because the efficiency examined in 
this rulemaking is that of CWH equipment at the point of manufacture as 
measured by the DOE test procedure, and not of the entire energy grid, 
DOE has tentatively concluded that grid-interactive technology would 
not improve the efficiency of CWH equipment as measured by its test 
procedure.
    Because thermal efficiency, standby loss, and UEF are the relevant 
performance metrics in this rulemaking, DOE did not consider 
technologies that have no effect on these metrics. However, DOE does 
not discourage manufacturers from using these other technologies 
because they might reduce annual energy consumption. The following list 
includes the technologies that DOE did not consider because they do not 
affect efficiency as measured by the DOE test procedure. Chapter 3 of 
the NOPR TSD provides details and reasoning of exclusion for each 
technology option not considered further, as listed here.

 Plastic tank
 Direct vent
 Timer controls
 Intelligent and wireless controls
 Modulating combustion (for storage water heaters; including 
modulating controls and variable firing-rate burners, low-stage firing 
burners, and modulating burners) \38\
---------------------------------------------------------------------------

    \38\ DOE considers modulating combustion to be a baseline design 
feature for gas-fired tankless water heaters.
---------------------------------------------------------------------------

 Self-cleaning
    DOE also did not consider technologies as options for increasing 
efficiency if they are included in baseline equipment, as determined 
from an assessment of units on the market. DOE's research suggests that 
electromechanical flue dampers and electronic ignition are technologies 
included in baseline equipment for commercial gas-fired storage water 
heaters; therefore, they were not included as technology options for 
that equipment class. However, electromechanical flue dampers and 
electronic ignition were not identified on baseline units for 
residential-duty gas-fired storage water heaters, and these options 
were, therefore, considered for increasing efficiency of residential-
duty gas-fired storage water heaters. DOE also considered insulation of 
fittings around pipes and ports in the tank to be included in baseline 
equipment; therefore, such insulation was not considered as a 
technology option for the analysis. While insulation of pipes does 
reduce heat losses, DOE does not consider CWH equipment to include 
external piping; therefore, piping insulation was not considered as a 
technology option for CWH equipment.
    After considering the comments above, DOE below lists all of the 
technology options considered for improving the energy efficiency of 
CWH equipment as part of this NOPR. This list includes those options 
identified in the October 2014 RFI (discussed previously), with the 
exception of those subsequently determined not to improve energy 
efficiency. In addition, DOE has identified electromechanical flue 
dampers as a technology option that can increase the efficiency of 
water heaters. DOE also included three separate technology options 
often used in condensing CWH equipment: (1) Mechanical draft; (2) 
condensing heat exchangers, and (3) premix burners. DOE did not 
consider CO2 heat pump water heaters for analysis because, 
as explained in section III.C, commercial electric heat pump water 
heaters were not analyzed for this NOPR. The technology options 
selected are discussed in further detail in Chapter 3 of the NOPR TSD. 
In summary, DOE has identified and considered in this NOPR the 
following potential technologies for improving the energy efficiency of 
CWH equipment:

 Improved insulation (including increasing jacket insulation, 
insulating tank bottom, advanced insulation types, and foam insulation)
 Mechanical draft (including induced draft, also known as power 
vent, and forced draft)
 Condensing heat exchanger (for all gas-fired equipment 
classes, and including optimized flue geometry)
 Condensing pulse combustion
 Improved heat exchanger design (including increased surface 
area and increased baffling)
 Sidearm heating and two-phase thermosiphon technology
 Electronic ignition systems
 Improved heat pump water heaters (including gas absorption 
heat pump water heaters)
 Thermovoltaic and thermoelectric generators
 Premix burner (including submerged combustion chamber for gas-
fired storage water heaters and storage-type instantaneous water 
heaters)
 Electromechanical flue damper.

B. Screening Analysis

    DOE uses the following four screening criteria to determine which 
technology

[[Page 34465]]

options are suitable for further consideration in an energy 
conservation standards rulemaking:
    1. Technological feasibility. DOE will consider technologies 
incorporated in commercial products or in working prototypes to be 
technologically feasible. Technologies that are not incorporated in 
commercial equipment or in working prototypes are not considered in 
this NOPR.
    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 of the compliance date of the standard, 
then DOE will consider that technology practicable to manufacture, 
install, and service.
    3. Adverse impacts on product utility or product availability. If 
DOE determines a technology would have a significant adverse impact on 
the utility of the product to significant subgroups of consumers, or 
would result in the unavailability of any covered product type with 
performance characteristics (including reliability), features, sizes, 
capacities, and volumes that are substantially the same as products 
generally available in the United States at the time, it will not 
consider this technology further.
    4. Adverse impacts on health or safety. If DOE determines that a 
technology will have significant adverse impacts on health or safety, 
it will not consider this technology further.
    10 CFR part 430, subpart C, appendix A, 4(a)(4) and 5(b).
    These four screening criteria do not include the proprietary status 
of design options. As noted previously in section III.D.1, DOE only 
considers efficiency levels achieved through the use of proprietary 
designs in the engineering analysis if they are not part of a unique 
path to achieve that efficiency level. DOE's research has not shown any 
of the technologies identified in the technology assessment to be 
proprietary, and thus, DOE did not eliminate any technologies for that 
reason.
    Issue 9: DOE seeks comment on its tentative conclusion that none of 
the identified technology options are proprietary, and if any 
technologies are proprietary, requests additional information regarding 
proprietary designs and patented technologies.
1. Screened-Out Technologies
    Technologies that pass through the screening analysis are 
subsequently examined in the engineering analysis for consideration in 
DOE's downstream cost-benefit analysis. Based upon a review under the 
above factors, DOE screened out the design options listed in Table IV.3 
for the reasons provided. Chapter 4 of the NOPR TSD contains additional 
details on the screening analysis, including a discussion of why each 
technology option was screened out.

                                                 Table IV.3--Summary of Screened-Out Technology Options
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Reasons for exclusion
                                                                             ---------------------------------------------------------------------------
                                                                                                 Practicability to
         Excluded technology option           Applicable equipment classes *    Technological       manufacture,     Adverse impacts    Adverse impacts
                                                                                 feasibility        install, and        on product        on health or
                                                                                                      service            utility             safety
--------------------------------------------------------------------------------------------------------------------------------------------------------
Advanced insulation types...................  All storage water heaters.....                 X                  X   .................  .................
Condensing pulse combustion.................  All gas-fired equipment                        X                  X   .................  .................
                                               classes.
Sidearm heating.............................  All gas-fired storage.........                 X                  X   .................  .................
Two-phase thermosiphon technology...........  All gas-fired storage.........  .................                 X   .................  .................
Gas absorption heat pump water heaters......  Gas-fired instantaneous water   .................                 X   .................  .................
                                               heaters.
Thermovoltaic and thermoelectric generators.  All gas-fired equipment                        X                  X   .................  .................
                                               classes.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\*\ All mentions of storage water heaters in this column refer to both storage water heaters and storage-type instantaneous water heaters.

2. Remaining Technologies
    After screening out or otherwise removing from consideration 
certain technologies, the remaining technologies are passed through for 
consideration in the engineering analysis. Table IV.4 presents 
identified technologies for consideration in the engineering analysis. 
Chapter 3 of the NOPR TSD contains additional details on the technology 
assessment and the technologies analyzed.

                                           Table IV.4--Technology Options Considered for Engineering Analysis
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Improved
                                      insulation                                      Increased  heat                                        Electro-
         Equipment class             (thickness,       Mechanical       Condensing        exchanger       Electronic     Premix  burner     mechanical
                                     tank bottom,        draft       heat  exchanger   area, baffling      ignition                        flue damper
                                        foam)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Electric storage water heaters...               X   ...............  ...............  ...............  ...............  ...............  ...............
Commercial gas-fired storage                    X                X                X                X   ...............               X   ...............
 water heaters and storage-type
 instantaneous water heaters.....
Residential-duty gas-fired                      X                X                X                X                X                X                X
 storage water heaters...........

[[Page 34466]]

 
Gas-fired instantaneous water      ...............               X                X                X   ...............               X   ...............
 heaters and hot water supply
 boilers.........................
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Engineering Analysis

    The engineering analysis establishes the relationship between an 
increase in energy efficiency of the equipment and the increase in 
manufacturer selling price (MSP) associated with that efficiency level. 
This relationship serves as the basis for the cost-benefit calculations 
for commercial consumers, manufacturers, and the Nation. In determining 
the cost-efficiency relationship, DOE estimates the increase in 
manufacturer cost associated with increasing the efficiency of 
equipment above the baseline up to the maximum technologically feasible 
(``max-tech'') efficiency level for each equipment class.
1. Methodology
    DOE typically structures its engineering analysis using one of 
three approaches: (1) Design-option; (2) efficiency-level; or (3) 
reverse engineering (or cost-assessment). A design-option approach 
identifies individual technology options (from the market and 
technology assessment) that can be used alone or in combination with 
other technology options to increase the energy efficiency of a 
baseline unit of equipment. Under this approach, cost estimates of the 
baseline equipment and more-efficient equipment that incorporates 
design options are modeled based on manufacturer or component supplier 
data or engineering computer simulation models. Individual design 
options, or combinations of design options, are added to the baseline 
model in descending order of cost-effectiveness. An efficiency-level 
approach establishes the relationship between manufacturer cost and 
increased efficiency at predetermined efficiency levels above the 
baseline. Under this approach, DOE typically assesses increases in 
manufacturer cost for incremental increases in efficiency, rather than 
the technology or design options that would be used to achieve such 
increases. The efficiency level approach uses estimates of cost and 
efficiency at distinct levels of efficiency from publicly-available 
information, and information gathered in manufacturer interviews that 
is supplemented and verified through technology reviews. A reverse-
engineering, or cost-assessment, approach involves disassembling 
representative units of CWH equipment, and estimating the manufacturing 
costs based on a ``bottom-up'' manufacturing cost assessment; such 
assessments use detailed data to estimate the costs for parts and 
materials, labor, shipping/packaging, and investment for models that 
operate at particular efficiency levels. The reverse-engineering 
approach involves testing products for efficiency and determining costs 
from a detailed bill of materials (BOM) derived from reverse 
engineering representative equipment.
    DOE conducted this engineering analysis for CWH equipment using a 
combination of the efficiency-level and cost-assessment approaches. For 
the analysis of thermal efficiency levels for commercial and 
residential-duty storage and instantaneous water heaters, DOE 
identified the efficiency levels for the analysis based on market data 
and then used the cost-assessment approach to determine the 
manufacturing costs at those levels. For the analysis of standby loss 
levels for storage water heaters, DOE identified efficiency levels for 
analysis based on market data and commonly used technology options 
(i.e., insulation type, thickness), and then used the cost-assessment 
approach to determine the manufacturing costs of models at those 
levels.
    DOE received several comments from interested parties on the 
approach to the engineering analysis. A.O. Smith, Bradford White, 
Rheem, and AHRI all agreed with the use of the reverse-engineering 
approach, but stated that appropriate cost estimates for components, 
materials, and labor should be used. (A.O. Smith, No. 2 at p. 2; 
Bradford White, No. 3 at p. 2; Rheem, No. 10 at p. 2; AHRI, No. 5 at p. 
3) DOE notes that it solicited input from manufacturers during 
manufacturer interviews on the above cost estimates, other relevant 
engineering assumptions, and other issues regarding this rulemaking. 
The manufacturer interview process is described in more detail in 
section IV.J.3 and chapter 12 of the NOPR TSD.
2. Representative Equipment for Analysis
    For the engineering analysis, DOE reviewed all CWH equipment 
classes analyzed in this rulemaking. Because the storage volume and 
input capacity can affect the energy efficiency of CWH equipment, DOE 
examined each equipment class separately. Within each equipment class, 
DOE analyzed the distribution of models available on the market and 
held discussions with manufacturers to determine appropriate 
representative equipment for each equipment class.
    For storage water heaters, the volume of the tank is a significant 
factor for costs and efficiency. Water heaters with larger volumes have 
higher materials, labor, and shipping costs. A larger tank volume is 
likely to lead to a larger tank surface area, thereby increasing the 
standby loss of the tank (assuming other factors are held constant, 
e.g., same insulation thickness and materials). The current standby 
loss standards for storage water heaters are, in part, a function of 
volume to account for this variation with tank size. The incremental 
cost of increasing insulation thickness varies as the tank volume 
increases, and there may be additional installation concerns for 
increasing the insulation thickness on larger tanks. Installation 
concerns are discussed in more detail in section IV.F.2.b. DOE examined 
specific storage volumes for gas-fired and electric storage water 
heaters (referred to as representative storage volumes). Because DOE 
lacked specific information on shipments, DOE examined the number of 
models at each storage volume listed in the AHRI Directory to determine 
the representative storage volume, and also solicited feedback from 
manufacturers during manufacturer interviews as to which storage 
volumes corresponded to

[[Page 34467]]

the most shipments. Table IV.5 shows the representative storage volumes 
that DOE determined best characterize each equipment class.
    The current standby loss standards for commercial storage water 
heaters differ in the storage volume metric used in calculation of the 
standby loss standard (rated storage volume is used for certain 
classes, while measured storage volume is used for others). 
Specifically, the standby loss standard for gas-fired and oil-fired 
storage water heaters depends on the rated storage volume of the water 
heater. However, the standby loss standard for electric storage water 
heaters depends on the measured storage volume of the water heater. DOE 
notes there is often a difference between the measured and rated 
volumes of water heaters, as reported in data in the AHRI Directory. 
Therefore, to calculate standby loss levels for a representative 
electric storage water heater, a representative measured storage volume 
is needed. In section III.I of this NOPR, DOE proposes to require that 
the rated storage volume equal the measured storage volume. Therefore, 
DOE selected a representative measured storage volume for electric 
storage water heaters based upon data for measured volumes for units at 
the selected representative rated storage volume in the AHRI Directory. 
Table IV.5 shows both selected representative storage volumes for 
electric storage water heaters.
    For all CWH equipment classes, the input capacity is also a 
significant factor for cost and efficiency. Fossil-fuel-fired water 
heaters with higher input capacities have higher materials costs, and 
may also have higher labor and shipping costs. Fossil-fuel-fired 
storage water heaters with higher input capacities may have additional 
heat exchanger length to transfer more heat. This leads to higher 
material costs, and may require the tank to expand to compensate for 
the displaced volume. Tankless water heaters and hot water supply 
boilers require larger heat exchangers to transfer more heat with a 
higher input capacity. Electric storage water heaters with higher input 
capacities have higher-wattage resistance heating elements, which can 
increase the cost of purchased parts for the water heater manufacturer. 
DOE examined input capacities for units in all CWH equipment classes to 
determine representative input capacities. Because DOE did not receive 
any shipments data for specific input capacities, DOE considered the 
number of models at each input capacity in the database of models it 
compiled (based on the AHRI Directory, CEC Appliance Database, and 
manufacturer literature) as well as feedback from manufacturer 
interviews. DOE used this information to select representative input 
capacities for each equipment class, which are shown in Table IV.5.

                         Table IV.5--Representative Storage Volumes and Input Capacities
----------------------------------------------------------------------------------------------------------------
                                                                 Representative storage    Representative input
           Equipment class                  Specifications           volume (gal) *      capacity (kBtu/h or kW)
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters.......  N/A....................  119 (rated), 114         18 kW.
                                                                 (measured).
Commercial gas-fired storage water     >105 kBtu/h or >120 gal  100....................  199 kBtu/h.
 heaters and gas-fired storage-type
 instantaneous water heaters.
Residential-duty gas-fired storage     <=105 kBtu/h and <=120   75.....................  76 kBtu/h.
 water heaters **.                      gal.
Gas-fired instantaneous water heaters
 and hot water supply boilers:
    Tankless water heaters...........  <10 gal................  .......................  250 kBtu/h.
    Hot water supply boilers.........  All [dagger]...........  .......................  399 kBtu/h
----------------------------------------------------------------------------------------------------------------
* For all equipment classes where not specified, the representative volume is a rated storage volume, not a
  measured storage volume.
** To be classified as a residential-duty water heater, a commercial water heater must, if requiring
  electricity, use single-phase external power supply, and not be designed to heat water at temperatures greater
  than 180 [deg]F. 79 FR 40542, 40586 (July 11, 2014).
[dagger] For the engineering analysis, hot water supply boilers <10 gallons and >=10 gallons were analyzed in
  the same equipment class. Amended standby loss standards for hot water supply boilers >=10 gallons were not
  analyzed in this NOPR, as discussed in section III.C.8. Therefore, no representative storage volume was chosen
  for instantaneous water heaters or hot water supply boilers.

    Issue 10: DOE seeks comment on the representative CWH equipment 
used in the engineering analysis.
3. Efficiency Levels for Analysis
    For each equipment class, DOE analyzed multiple efficiency levels 
and estimated manufacturer production costs at each efficiency level. 
The following subsections provide a description of the full efficiency 
level range that DOE analyzed from the baseline efficiency level to the 
maximum technologically feasible (``max-tech'') efficiency level for 
each equipment class. DOE conducted a survey of its CWH equipment 
database and manufacturers' Web sites to determine the highest thermal 
efficiency levels on the market for each equipment class. DOE 
identified the most stringent standby loss level for each class by 
consideration of rated standby loss values of units currently on the 
market as well as technology options that DOE believes to be feasible 
but may not currently be included in units on the market in each 
equipment class. Thermal efficiency levels were analyzed for all CWH 
equipment considered in this rulemaking except for electric storage 
water heaters. Standby loss levels were analyzed for all commercial and 
residential-duty storage water heaters and storage-type instantaneous 
water heaters.
a. Baseline Efficiency Levels
    Baseline equipment is used as a reference point for each equipment 
class in the engineering analysis and the life-cycle cost and payback-
period analyses, which provides a starting point for analyzing 
potential technologies that provide energy efficiency improvements. 
Generally, DOE considers ``baseline'' equipment to refer to a model or 
models having features and technologies that just meet, but do not 
exceed, the Federal energy conservation standard and provide basic 
consumer utility. In establishing the baseline thermal efficiency 
levels for this analysis, DOE used the current energy conservation 
standards for CWH equipment to identify baseline units.
    The baseline thermal efficiency levels used for analysis for each 
equipment class are presented in Table IV.6.

[[Page 34468]]



    Table IV.6--Baseline Thermal Efficiency Levels for CWH Equipment
------------------------------------------------------------------------
                                                              Thermal
                     Equipment class                        efficiency
                                                                (%)
------------------------------------------------------------------------
Electric storage water heaters..........................  ..............
Commercial gas-fired storage water heaters and gas-fired              80
 storage-type instantaneous water heaters...............
Residential-duty gas-fired storage water heaters........              80
    Gas-fired instantaneous water heaters and hot water
     supply boilers:
    Tankless water heaters..............................              80
    Hot water supply boilers............................              80
------------------------------------------------------------------------

    DOE used the current energy conservation standards for standby loss 
to set the baseline standby loss levels. Table IV.7 shows these 
baseline standby loss levels for representative equipment for each 
equipment class.

                    Table IV.7--Baseline Standby Loss Levels for Representative CWH Equipment
----------------------------------------------------------------------------------------------------------------
                                                                                                     Baseline
             Equipment class                Representative storage       Representative input      standby loss
                                                volume (gal) *         capacity  (kBtu/h or kW)   level  (Btu/h)
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters..........  119 (rated), 114            18 kW.....................             353
                                           (measured).
Commercial gas-fired storage water        100.......................  199 kBtu/h................            1349
 heaters and gas-fired storage-type
 instantaneous water heaters.
Residential-duty gas-fired storage water  75........................  76 kBtu/h.................            1048
 heaters.
Gas-fired instantaneous water heaters
 and hot water supply boilers:
    Tankless water heaters..............  ..........................  250 kBtu/h................  ..............
    Hot water supply boilers............  ..........................  399 kBtu/h................  ..............
----------------------------------------------------------------------------------------------------------------
* For all equipment classes where not specified, the representative volume is a rated storage volume, not a
  measured storage volume.

    In the October 2014 RFI, DOE sought comment on approaches to 
consider when establishing baseline efficiency levels for equipment 
classes transitioning to the UEF metric. 79 FR 62899, 62905 (Oct. 21, 
2014). A.O. Smith, Bradford White, Rheem, and AHRI commented that DOE 
should convert the current thermal efficiency and standby loss 
standards to UEF to use as the baseline levels. (A.O. Smith, No. 2 at 
p. 2; Bradford White, No. 3 at p. 2; Rheem, No. 10 at p. 1; AHRI, No. 5 
at p. 3) DOE has conducted an analysis for residential-duty water 
heaters using thermal efficiency and standby loss. Because UEF rating 
data were not available when this analysis was conducted, DOE is using 
the mathematical conversion factors proposed in the April 2015 NOPR to 
translate the results of the analyzed thermal efficiency and standby 
loss levels to UEF levels. 80 FR 20116, 20143 (April 14, 2015). This 
conversion of the existing standards to UEF is described in more detail 
in section IV.C.9. Therefore, the current thermal efficiency and 
standby loss standards were used as baseline levels.
b. Intermediate and Max-Tech Efficiency Levels
    For each equipment class, DOE analyzes several efficiency levels 
and determines the manufacturing cost at each of these levels. For this 
NOPR, DOE developed efficiency levels based on a review of available 
equipment. As noted previously, DOE compiled a database of CWH 
equipment to determine what types of equipment are currently available 
to commercial consumers. For each representative equipment type, DOE 
surveyed various manufacturers' equipment offerings to identify the 
commonly available efficiency levels. By identifying the most prevalent 
energy efficiency levels in the range of available equipment and 
examining models at these levels, DOE can establish a technology path 
that manufacturers would typically use to increase the thermal 
efficiency of CWH equipment.
    DOE established intermediate thermal efficiency levels for each 
equipment class. The intermediate thermal efficiency levels are 
representative of the most common efficiency levels and those that 
represent significant technological changes in the design of CWH 
equipment. For commercial gas-fired storage water heaters, DOE chose 
four thermal efficiency levels between the baseline and max-tech levels 
for analysis. For residential-duty gas-fired storage water heaters, DOE 
chose three thermal efficiency levels between the baseline and max-tech 
levels for analysis. For commercial gas-fired instantaneous water 
heaters and hot water supply boilers, DOE chose four thermal efficiency 
levels between the baseline and max-tech levels for analysis. DOE also 
selected the highest thermal efficiency level identified on the market 
for each equipment class (i.e., the ``max-tech'' level). The selected 
thermal efficiency levels are shown in Table IV.8.

[[Page 34469]]



                       Table IV.8--Baseline, Intermediate, and Max-Tech Thermal Efficiency Levels for Representative CWH Equipment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Thermal efficiency levels
                                                         -----------------------------------------------------------------------------------------------
                     Equipment class                       Baseline-- Et
                                                              EL0 (%)       Et EL1 (%)      Et EL2 (%)      Et EL3 (%)     Et EL4 * (%)    Et EL5 ** (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Electric storage water heaters..........................               -               -               -               -               -               -
Commercial gas-fired storage water heaters and gas-fired              80              82              90              92              95              99
 storage-type instantaneous water heaters...............
Residential-duty gas-fired storage water heaters........              80              82              90              95              97               -
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Tankless water heaters..............................              80              82              84              92              94              96
    Hot water supply boilers............................              80              82              84              92              94              96
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Et EL4 is the max-tech efficiency level for residential-duty gas-fired storage water heaters.
** Et EL5 is the max-tech efficiency level for commercial gas-fired storage water heaters and storage-type instantaneous water heaters, as well as for
  gas-fired instantaneous water heaters and hot water supply boilers.

    In response to the October 2014 RFI, A. O. Smith stated that max-
tech efficiency levels should be condensing for gas-fired storage water 
heaters, heat pump for electric storage water heaters, and ``near 
condensing'' for oil-fired storage water heaters. (A. O. Smith, No. 2 
at p. 2) Bradford White stated that the max-tech efficiency levels are 
condensing for gas-fired storage water heaters and heat pump for 
electric storage water heaters (Bradford White, No. 3 at p. 2) Rheem 
responded that max-tech efficiency levels within Rheem products are 98 
percent thermal efficiency and 325 Btu/h standby loss for electric 
storage water heaters, 97 percent thermal efficiency and 960 Btu/h for 
gas-fired storage water heaters, and 94 percent thermal efficiency for 
gas-fired instantaneous water heaters. (Rheem, No. 10 at p. 3) AHRI 
commented that max-tech efficiency levels should be determined for each 
equipment class individually, as condensing would not be an achievable 
max-tech level for oil-fired storage water heaters. (AHRI, No. 5 at p. 
3)
    DOE notes that the analyzed max-tech level for commercial gas-fired 
storage water heaters is condensing as suggested by A. O. Smith and 
Bradford White. DOE did not consider commercial integrated heat pump 
water heaters as the max-tech for electric storage water heaters 
because DOE did not identify any such units on the market. DOE selected 
higher max-tech thermal efficiency levels than suggested by Rheem, 
because DOE identified equipment for sale at even higher thermal 
efficiency levels, which does not appear to make use of any proprietary 
technology. Given the commercial availability of designs at higher 
thermal efficiency levels than suggested by Rheem as max-tech, DOE has 
tentatively concluded that such efficiency levels should be included in 
the engineering analysis. In response to AHRI, DOE notes that it 
established max-tech efficiency levels separately for each equipment 
class, only considering the highest efficiency level on the market 
within each equipment class. DOE also notes that it did not consider 
amended energy conservation standards for oil-fired storage water 
heaters in this NOPR; therefore, these units were not included in the 
engineering analysis.
    EEI commented that DOE should adopt the amended efficiency levels 
in ASHRAE Standard 90.1-2013 for all CWH equipment classes, arguing 
this would prevent confusion in the marketplace and allow for earlier 
compliance dates than if higher standards are proposed. (EEI, No. 8 at 
p. 2) In response, DOE notes that ASHRAE Standard 90.1-2013 only raised 
efficiency standards for commercial oil-fired storage water heaters, 
but DOE also has an independent statutory obligation to review 
standards for the other CWH equipment classes. In the July 2015 ASHRAE 
equipment final rule, DOE determined that a thermal efficiency level 
for oil-fired storage water heaters more stringent than that adopted in 
ASHRAE Standard 90.1-2013 would not be economically justified and 
technologically feasible according to the seven criteria outlined in 
section II.A. 80 FR 42614 (July 17, 2015). Therefore, DOE adopted the 
amended thermal efficiency level from ASHRAE Standard 90.1-2013 for 
commercial oil-fired storage water heaters with a compliance date of 
October 9, 2015, as required by the statute. Id. Thus, any proposed 
increased standards in this rulemaking will not affect the compliance 
date for the amended standard adopted from ASHRAE Standard 90.1-2013. 
Because DOE is not considering higher thermal efficiency standards for 
commercial oil-fired storage water heaters in this rulemaking and given 
DOE's history of amending energy conservation standards for ASHRAE 
Standard 90.1 equipment, DOE does not believe proposed increased 
standards in this rulemaking will lead to confusion in the marketplace.
    Joint Advocates commented that the max-tech efficiency levels 
should be identified by examining the most efficient technologies on 
the global market as opposed to just the U.S. market. (Joint Advocates, 
No. 7 at p. 3) As an example, Joint Advocates stated that 
CO2 heat pump water heaters should be considered as a max-
tech technology. As parts of its energy conservation standards 
rulemaking process, DOE considers equipment and designs sold both in 
the U.S. market and in the broader global market. However, for each 
technology identified from the global market, DOE must also consider 
its applicability and market barriers specifically for the U.S. market, 
and, thus, availability in other non-U.S. markets does not necessarily 
mean a technology will be technologically feasible in the domestic 
market. DOE considers technologies and their applicability to the U.S. 
markets in the rulemaking analyses. With regard to the specific 
recommendation to consider CO2 heat pump water heaters, as 
discussed in section III.C.6, DOE notes that it does not currently have 
a test procedure for commercial heat pump water heaters (including 
CO2 heat pump water heaters), and plans to consider energy 
conservation standards for

[[Page 34470]]

commercial heat pump water heaters in a future rulemaking.
    DOE established intermediate and max-tech standby loss efficiency 
levels for each equipment class of storage water heaters. Standby loss 
is a function of rated volume for gas-fired storage water heaters; 
however, in section III.I of this NOPR, DOE proposes changes to its 
certification, compliance, and enforcement regulations that would 
require the rated volume to be based on the mean of the measured 
volumes in the sample. DOE believes that to be compliant with these 
proposed changes, most manufacturers with units having a rated storage 
volume that does not equal the measured volume will re-rate the storage 
volumes of their current models based on the measured volumes, as 
opposed to changing their designs so that the measured storage volume 
increases to the current rated volume. Therefore, in analyzing market 
standby loss data for this NOPR, DOE accounted for this change by 
calculating the maximum standby loss levels under consideration using 
the measured volume as reported in the AHRI Directory for each model.
    Standby loss is a function of storage volume (and input for gas-
fired and oil-fired storage water heaters) and is affected by many 
aspects of the design of a water heater. Additionally, standby loss is 
not widely reported in manufacturer literature. DOE was not able to 
find any CWH equipment literature that reported standby loss, and, 
therefore, relied on data obtained from the AHRI Directory. However, 
there is significant variation in reported standby loss values in the 
AHRI Directory--i.e., standby loss values for power-vented non-
condensing residential-duty gas-fired storage water heaters range from 
48 percent to 102 percent \39\ of the current standby loss standard. 
Also, most manufacturers do not disclose the presence of technology 
options that affect standby loss, including insulation thickness and 
type, and baffle design, in their publicly-available literature. 
Therefore, DOE analyzed technology options commonly used on the market 
to help guide its selection of standby loss levels.
---------------------------------------------------------------------------

    \39\ Because DOE calculated the maximum standby loss using 
measured storage volume instead of the rated storage volume, some 
units at or near the maximum allowable standby loss level have a 
standby loss level that exceeds the current standard when calculated 
using the measured volume.
---------------------------------------------------------------------------

    One possible source of variation in reported standby loss values is 
variation in unreported technology options, as previously discussed. 
Additionally, during manufacturer interviews, manufacturers explained 
that the current standby loss test procedure leads to significant 
variation in test results from lab to lab, and sometimes even within 
the same lab. Several reasons given for this variation include the air 
draft in the area around the water heater, the wide tolerance for 
ambient temperature, lack of humidity specification, and variation in 
venting and insulation of connections. DOE addressed some of these 
sources of variation in the revised standby loss test procedure for 
commercial water heaters proposed in the 2016 CWH TP NOPR. (See EERE-
2014-BT-TP-0008)
    DOE developed its incremental and max-tech standby loss levels by 
considering levels currently on the market, designs detailed in 
publicly-available equipment literature, observations from equipment 
teardowns, and feedback from manufacturer interviews. For commercial 
gas-fired storage water heaters, DOE determined that the current 
minimum Federal standard can be met with installation of 1 inch of 
fiberglass insulation around the walls of the tank. Therefore, DOE 
considered 1 inch of fiberglass insulation to correspond to the 
baseline standby loss efficiency level. DOE then considered the next 
incremental standby loss level to correspond to the use of sprayed 
polyurethane foam insulation instead of fiberglass insulation. From a 
survey of units on the market, DOE considers switching from 1 inch of 
fiberglass insulation to 1 inch of foam insulation a more commonly used 
pathway to decrease standby loss than using 2 inches of fiberglass 
insulation. From equipment teardowns and manufacturer interviews, DOE 
found the highest insulation thickness available for commercial gas-
fired water heaters to be 2 inches. Therefore, DOE considered the next 
incremental standby loss level, SL EL2, to correspond to 2 inches of 
polyurethane foam. While more-stringent standby loss levels than SL EL2 
exist on the market, these more-stringent values are only rated for 
condensing units with specific heat exchanger designs. Because DOE does 
not wish to mandate specific heat exchanger designs for achieving 
condensing thermal efficiency levels, standby loss levels more 
stringent than SL EL2 were not analyzed. Therefore, DOE considered SL 
EL2 as the max-tech standby loss level for commercial gas-fired storage 
water heaters. Table IV.9 shows the technology options identified for 
each standby loss level for commercial gas-fired storage water heaters.
    Based on a review of available equipment on the market and feedback 
from manufacturers, DOE analyzed all non-condensing commercial gas-
fired storage water heaters (i.e., water heaters rated at thermal 
efficiency levels between 80 percent and 82 percent) as including 
electromechanical flue dampers. Electromechanical flue dampers were 
only included in the analysis for non-condensing commercial gas-fired 
storage water heaters, because flue dampers are not used with 
mechanical draft systems, which are required for condensing units. In 
place of standby loss reduction from electromechanical flue dampers, 
DOE included standby loss reduction from mechanical draft systems for 
all condensing commercial gas-fired storage water heaters in its 
calculated standby loss levels. Therefore, for commercial gas-fired 
storage water heaters, DOE considered baseline non-condensing equipment 
to include electromechanical flue dampers and all condensing equipment 
to include mechanical draft systems, both of which act to reduce 
standby losses out the flue.

     Table IV.9--Technology Options Identified at Each Standby Loss
     Efficiency Level for Commercial Gas-Fired Storage Water Heaters
------------------------------------------------------------------------
            Standby loss level                   Technology Options
------------------------------------------------------------------------
SL EL0--Baseline..........................  1'' fiberglass insulation.
SL EL1....................................  1'' foam insulation.
SL EL2....................................  2'' foam insulation.
------------------------------------------------------------------------

    For residential-duty gas-fired storage water heaters, DOE has 
tentatively concluded that the current Federal standard may be met 
through use of 1 inch of polyurethane foam insulation. From surveying 
commercially-available equipment, DOE notes that all baseline 
residential-duty gas-fired storage water heaters have a standing pilot 
and do not use flue dampers. Therefore, in addition to increasing the 
thickness of foam insulation, DOE also considered electromechanical 
flue dampers and electronic ignition as technology options for reducing 
standby loss. Electromechanical flue dampers were only considered as a 
technology option for non-condensing residential-duty gas-fired storage 
water heaters, because flue dampers are not used with mechanical draft 
systems. Therefore, for residential-duty gas-fired storage water 
heaters, DOE considered electromechanical flue dampers to be a 
technology option not featured in baseline non-condensing equipment, 
and considered mechanical draft systems to be featured in all 
condensing equipment. Similarly to commercial gas-fired storage water

[[Page 34471]]

heaters, both of these technologies act to reduce standby losses out 
the flue.
    For condensing residential-duty gas-fired storage water heaters, 
rated standby loss market data show that the most-efficient standby 
levels are only achieved by models with particular condensing heat 
exchanger designs. Specifically, DOE observed that the most-efficient 
standby loss level on the market is only achieved by a model with 90-
percent thermal efficiency. It is not evident that this standby level 
can be reached by heat exchanger designs that also yield more-efficient 
condensing thermal efficiency levels. DOE chose not to analyze standby 
loss levels that have not been demonstrated to be achievable with more-
efficient thermal efficiency level designs, because thermal efficiency 
typically will have a greater impact on the energy use of CWH equipment 
than standby loss. To ensure the continued availability of condensing 
CWH equipment with thermal efficiencies above 90 percent, DOE has 
considered an amended standby loss level that is reduced to 48 percent 
of the current standby loss standard as the max-tech standby loss 
level. DOE's market assessment shows that this standby loss level can 
be achieved by all condensing residential-duty gas-fired storage water 
heaters currently on the market. To inform the selection of SL EL0 for 
condensing residential-duty gas-fired storage water heaters, DOE 
considered the increase in standby loss that would occur from reducing 
the thickness of polyurethane foam insulation from 2 inches to 1 inch. 
Table IV.10 shows the technology options corresponding to each standby 
loss level selected for residential-duty gas-fired storage water 
heaters. As previously discussed, electromechanical flue dampers were 
only considered as a technology option for non-condensing equipment; 
therefore, SL EL2 and SL EL3 were only analyzed for non-condensing 
residential-duty gas-fired storage water heaters.

     Table IV.10--Technology Options Identified at Each Standby Loss
  Efficiency Level for Residential-Duty Gas-Fired Storage Water Heaters
------------------------------------------------------------------------
            Standby loss level                   Technology options
------------------------------------------------------------------------
SL EL0--Baseline..........................  1'' foam insulation,
                                             standing pilot.
SL EL1....................................  2'' foam insulation,
                                             electronic ignition.
SL EL2....................................  1'' foam insulation,
                                             electronic ignition,
                                             electromechanical flue
                                             damper.
SL EL3....................................  2'' foam insulation,
                                             electronic ignition,
                                             electromechanical flue
                                             damper.
------------------------------------------------------------------------

    For electric storage water heaters, DOE determined that the current 
Federal standard may be met through use of 2 inches of polyurethane 
foam insulation. Therefore, this design was selected to represent the 
baseline standby loss level. The more-stringent standby loss level that 
DOE considered, representing the max-tech efficiency level, corresponds 
to 3 inches of polyurethane foam insulation. Table IV.11 shows the 
standby loss levels and technology options identified at each level for 
electric storage water heaters.

     Table IV.11--Technology Options Identified at Each Standby Loss
           Efficiency Level for Electric Storage Water Heaters
------------------------------------------------------------------------
            Standby loss level                   Technology options
------------------------------------------------------------------------
SL EL0--Baseline..........................  2'' foam insulation.
SL EL1....................................  3'' foam insulation.
------------------------------------------------------------------------

    To inform the selection of standby loss levels, DOE performed heat 
loss calculations for representative equipment for each equipment 
class. These calculations yielded more stringent standby loss levels 
corresponding to the identified technology options. Chapter 5 of the 
NOPR TSD provides details on these heat loss calculations. Standby loss 
levels are shown in Table IV.12, Table IV.13, and Table IV.14 in terms 
of Btu/h for the representative equipment. However, to modify the 
current Federal standard, factors were developed to multiply by the 
current maximum standby loss equation for each equipment class, based 
on the ratio of standby loss at each efficiency level to the current 
standby loss standard. The translation from standby loss values to 
maximum standby loss equations is described in further detail in 
section IV.C.8.
    For commercial and residential-duty gas-fired storage water 
heaters, standby loss is measured predominantly as a function of fuel 
flow used to heat the stored water during the standby loss test, with a 
small contribution of electric power consumption (if the unit requires 
a power supply). Because standby loss is calculated using the fuel 
consumed during the test to maintain the water temperature, the standby 
loss is dependent on the thermal efficiency of the water heater. DOE 
used data from independent testing of CWH equipment at a third-party 
laboratory to estimate the fraction of standby loss that can be 
attributed to fuel consumption or electric power consumption. For a 
given standby loss level (i.e., SL EL0, SL EL1, or SL EL2), DOE scaled 
down (i.e., made more stringent) the portion of the standby loss 
attributable to fuel consumption as thermal efficiency increased. 
Chapter 5 of the NOPR TSD explains these calculations, and the 
interdependence of thermal efficiency (Et) and standby loss 
(SL) are explained in more detail. However, for condensing thermal 
efficiency levels for residential-duty gas-fired storage water heaters, 
DOE did not include dependence on thermal efficiency in its standby 
loss levels. As previously discussed, the most stringent standby loss 
level examined was a level that can be achieved by all condensing 
residential-duty gas-fired storage water heaters currently on the 
market. Because the examined level is currently met by all equipment at 
condensing thermal efficiency levels, DOE did not lower the stringency 
of the standby loss level for lower condensing thermal efficiency 
levels. Table IV.12, Table IV.13, and Table IV.14 show the examined 
standby loss levels for commercial gas-fired storage water heaters, 
residential-duty gas-fired storage water heaters, and electric storage 
water heaters, respectively.

[[Page 34472]]



    Table IV.12--Standby Loss Levels for Commercial Gas-Fired Storage Water Heaters, 100 Gallon Rated Storage
                                      Volume, 199,000 Btu/h Input Capacity
----------------------------------------------------------------------------------------------------------------
                                                                               Standby loss (Btu/h)
            Thermal efficiency level                  Thermal    -----------------------------------------------
                                                  efficiency (%)      SL EL0          SL EL1          SL EL2
----------------------------------------------------------------------------------------------------------------
Et EL0..........................................              80            1349            1148             993
Et EL1..........................................              82            1316            1120             969
Et EL2..........................................              90            1225            1043             902
Et EL3..........................................              92            1199            1021             883
Et EL4..........................................              95            1163             989             856
Et EL5..........................................              99            1117             951             823
----------------------------------------------------------------------------------------------------------------


 Table IV.13--Standby Loss Levels for Residential-Duty Gas-Fired Storage Water Heaters, 75 Gallon Rated Storage
                                       Volume, 76,000 Btu/h Input Capacity
----------------------------------------------------------------------------------------------------------------
                                                                       Standby loss (Btu/h)
    Thermal efficiency level          Thermal    ---------------------------------------------------------------
                                  efficiency (%)      SL EL0          SL EL1         SL EL2 *        SL EL3 *
----------------------------------------------------------------------------------------------------------------
Et EL0..........................              80            1048             836             811             707
Et EL1..........................              82            1022             816             791             690
Et EL2..........................              90             624             503  ..............  ..............
Et EL3..........................              95             624             503  ..............  ..............
Et EL4..........................              97             624             503  ..............  ..............
----------------------------------------------------------------------------------------------------------------
* Electromechanical flue dampers were not considered as a technology option for condensing water heaters because
  flue dampers are not used with mechanical draft systems.


     Table IV.14--Standby Loss Levels for Electric Storage Water Heaters, 114 Gallon Measured Storage Volume
----------------------------------------------------------------------------------------------------------------
                                                                              Standby loss (%/h)
                                             Standby loss  --------------------------------------------------------
            Thermal efficiency                 (Btu/h)
                                                                 SL EL0           SL EL1           SL EL0      EL1
------------------------------------------------------------------------------------------------------------- -----
98%......................................             353              298             0.54             0.45
----------------------------------------------------------------------------------------------------------------

    DOE notes that because of its use of heat loss calculations 
corresponding to commonly used technology options to inform the 
selection of standby loss levels in addition to rated standby loss 
market data, the most stringent analyzed standby loss levels do not 
necessarily reflect the current market max-tech level for each 
equipment class. For some equipment thermal efficiency levels, the most 
stringent analyzed standby loss level may be less efficient than that 
of the most efficient unit on the market, and for other levels, it may 
be more efficient. While there may not be units on the market with a 
rated standby loss as efficient as some of the examined standby loss 
levels, DOE has determined these levels would be achievable through 
various technology options, including, but not limited to, those DOE 
examined for this analysis. Chapter 5 of the NOPR TSD includes a 
discussion of the following technology options with the potential to 
reduce standby loss that DOE did not consider for this analysis and the 
reasons for their exclusion: (1) Changing tank aspect ratio; (2) 
improved insulation on tank top and bottom; (3) greater coverage of 
foam insulation; and (4) improved baffling. DOE did not include standby 
loss reduction from baffling because of insufficient data for 
estimating the reduction, and therefore, DOE requests input on this 
matter as well as DOE's estimated standby loss reduction for 
electromechanical flue dampers and mechanical draft.
    Issue 11: DOE seeks comment on all efficiency levels analyzed for 
CWH equipment, including thermal efficiency and standby loss levels. In 
particular, DOE is interested in the feasibility of the max-tech 
thermal efficiency levels and standby loss levels, including whether 
these efficiency levels can be achieved using the technologies 
screened-in during the screening analysis (see section IV.B), and 
whether higher efficiencies are achievable using technologies that were 
screened-in during the screening analysis. DOE is also interested in 
the feasibility of achieving the analyzed standby loss levels using the 
identified technology options.
    Issue 12: DOE seeks input on the reduction in standby loss of gas-
fired storage water heaters from the technology options for which DOE 
estimated standby loss levels (i.e., varying insulation type and 
thickness, electromechanical flue dampers, and mechanical draft) and 
the technology options for which DOE did not have sufficient data to 
develop an estimate (including baffling).
4. Teardown Analysis
    After selecting a representative input capacity and representative 
storage volume (for storage water heaters) for each equipment class, 
DOE selected equipment near both the representative values and the 
selected efficiency levels for its teardown analysis. DOE gathered 
information from these teardowns to create detailed BOMs that included 
all components and processes used to manufacture the equipment. To 
assemble the BOMs and to calculate the manufacturing product costs 
(MPCs) of CWH equipment, DOE disassembled multiple units into their 
base

[[Page 34473]]

components and estimated the materials, processes, and labor required 
for the manufacture of each individual component, a process known as a 
``physical teardown.'' Using the data gathered from the physical 
teardowns, DOE characterized each component according to its weight, 
dimensions, material, quantity, and the manufacturing processes used to 
fabricate and assemble it.
    DOE also used a supplementary method called a ``catalog teardown,'' 
which examines published manufacturer catalogs and supplementary 
component data to allow DOE to estimate the major differences between a 
unit of equipment that was physically disassembled and a similar unit 
of equipment that was not. For catalog teardowns, DOE gathered product 
data such as dimensions, weight, and design features from publicly-
available information (e.g., manufacturer catalogs and manufacturer Web 
sites). DOE also obtained information and data not typically found in 
catalogs, such as fan motor details or assembly details, from physical 
teardowns of similar equipment or through estimates based on industry 
knowledge. The teardown analysis used data from 11 physical teardowns 
and 21 catalog teardowns to inform development of cost estimates for 
CWH equipment.
    The teardown analysis allowed DOE to identify the technologies that 
manufacturers typically incorporate into their equipment, along with 
the efficiency levels associated with each technology or combination of 
technologies. The end result of each teardown is a structured BOM, 
which DOE developed for each of the physical and catalog teardowns. The 
BOMs incorporate all materials, components, and fasteners (classified 
as either raw materials or purchased parts and assemblies) and 
characterize the materials and components by weight, manufacturing 
processes used, dimensions, material, and quantity. The BOMs from the 
teardown analysis were then used to calculate the MPCs for each type of 
equipment that was torn down. The MPCs resulting from the teardowns 
were then used to develop an industry average MPC for each equipment 
class analyzed. Chapter 5 of the NOPR TSD provides more details on BOMs 
and how they were used in determining the manufacturing cost estimates.
    During the manufacturer interviews, DOE requested feedback on the 
engineering analysis and the assumptions that DOE used. DOE used the 
information it gathered from those interviews, along with the 
information obtained through the teardown analysis, to refine the 
assumptions and data used to develop MPCs. Chapter 5 of the NOPR TSD 
provides additional details on the teardown process.
    During the teardown process, DOE gained insight into the typical 
technology options manufacturers use to reach specific efficiency 
levels. DOE can also determine the efficiency levels at which 
manufacturers tend to make major technological design changes. Table 
IV.15, Table IV.16, Table IV.17, and Table IV.18 show the major 
technology options DOE observed and analyzed for each thermal 
efficiency level and equipment class. Technology options that 
manufacturers use to reach each standby loss level are discussed in 
section IV.C.3.b. DOE notes that in equipment above the baseline, and 
sometimes even at the baseline efficiency, additional features and 
functionalities that do not impact efficiency are often used to address 
non-efficiency-related consumer demands (e.g., related to comfort or 
noise when operating). DOE did not include the additional costs for 
options such as advanced building communication and control systems or 
powered anode rods that are included in many of the high-efficiency 
units currently on the market, as they do not improve efficiency but do 
add cost to the unit. In other words, DOE assumed the same level of 
non-efficiency related features and functionality at all efficiency 
levels.

  Table IV.15--Technologies Identified at Each Thermal Efficiency Level
             for Commercial Gas-Fired Storage Water Heaters
------------------------------------------------------------------------
                                        Thermal
     Thermal efficiency level       efficiency (%)    Design changes *
------------------------------------------------------------------------
Et EL0............................              80  ....................
Et EL1............................              82  Increased heat
                                                     exchanger area.
Et EL2............................              90  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner.
Et EL3............................              92  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
Et EL4............................              95  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
Et EL5............................              99  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
------------------------------------------------------------------------
* The condensing heat exchanger surface area incrementally increases at
  each EL from Et EL2 to Et EL5.


  Table IV.16--Technologies Identified at Each Thermal Efficiency Level
          for Residential-Duty Gas-Fired Storage Water Heaters
------------------------------------------------------------------------
                                        Thermal
     Thermal efficiency level       efficiency (%)    Design changes *
------------------------------------------------------------------------
Et EL0............................              80  ....................
Et EL1............................              82  Increased heat
                                                     exchanger area.
Et EL2............................              90  Condensing heat
                                                     exchanger, induced
                                                     draft blower.
Et EL3............................              95  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
Et EL4............................              97  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
------------------------------------------------------------------------
* The condensing heat exchanger surface area incrementally increases at
  each EL from Et EL2 to Et EL4.


[[Page 34474]]


  Table IV.17--Technologies Identified at Each Thermal Efficiency Level
                  for Gas-Fired Tankless Water Heaters
------------------------------------------------------------------------
                                        Thermal
     Thermal efficiency level       efficiency (%)    Design changes *
------------------------------------------------------------------------
Et EL0............................              80  ....................
Et EL1............................              82  Increased heat
                                                     exchanger area.
Et EL2............................              84  Increased heat
                                                     exchanger area.
Et EL3............................              92  Secondary condensing
                                                     heat exchanger.
Et EL4............................              94  Secondary condensing
                                                     heat exchanger,
                                                     increased heat
                                                     exchanger surface
                                                     area.
Et EL5............................              96  Secondary condensing
                                                     heat exchanger,
                                                     increased heat
                                                     exchanger surface
                                                     area.
------------------------------------------------------------------------
* The heat exchanger surface area incrementally increases at each EL
  from Et EL0 to Et EL2 and from Et EL3 to Et EL5.


  Table IV.18--Technologies Identified at Each Thermal Efficiency Level
                 for Gas-Fired Hot Water Supply Boilers
------------------------------------------------------------------------
                                        Thermal
     Thermal efficiency level       efficiency (%)    Design changes *
------------------------------------------------------------------------
Et EL0............................              80  ....................
Et EL1............................              82  Increased heat
                                                     exchanger area.
Et EL2............................              84  Increased heat
                                                     exchanger area,
                                                     inducer blower.
Et EL3............................              92  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner.
Et EL4............................              94  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
Et EL5............................              96  Condensing heat
                                                     exchanger, forced
                                                     draft blower,
                                                     premix burner,
                                                     increased heat
                                                     exchanger surface
                                                     area.
------------------------------------------------------------------------
*The heat exchanger surface area incrementally increases at each EL from
  Et EL0 to Et EL2 and from Et EL3 to Et EL5.

    DOE notes from surveying units currently on the market that the 
only design change for many efficiency levels is an increased heat 
exchanger surface area. Based upon heat exchanger calculations and 
feedback from manufacturer interviews, DOE determined a factor by which 
heat exchangers would need to expand to reach higher thermal efficiency 
levels. This factor was higher for condensing efficiency levels than 
for non-condensing efficiency levels. Chapter 5 of the NOPR TSD 
provides more information on these heat exchanger sizing calculations, 
as well as on the technology options DOE considered at each efficiency 
level.
5. Manufacturing Production Costs
    After calculating the cost estimates for all the components in each 
teardown unit, DOE totaled the cost of materials, labor, depreciation, 
and direct overhead used to manufacture each type of equipment in order 
to calculate the manufacturing production cost (MPC). DOE used the 
results of the teardowns on a market-share weighted average basis to 
determine the industry average cost increase to move from one 
efficiency level to the next. DOE reported the MPCs in aggregated form 
to maintain confidentiality of sensitive component data. DOE obtained 
input from manufacturers during the manufacturer interview process on 
the MPC estimates and assumptions. Chapter 5 of the NOPR TSD contains 
additional details on how DOE developed the MPCs and related results.
    DOE estimated the MPC at each combination of thermal efficiency and 
standby loss levels considered for representative equipment of each 
equipment class. Table IV.19, Table IV.20, Table IV.21, and Table IV.22 
show the MPC for each efficiency level for each equipment class. DOE 
calculated the percentages attributable to each element of total 
production costs (i.e., materials, labor, depreciation, and overhead). 
These percentages are used to validate the assumptions by comparing 
them to manufacturers' actual financial data published in annual 
reports, along with feedback obtained from manufacturers during 
interviews. DOE uses these production cost percentages in the MIA (see 
chapter 12 of the NOPR TSD).

   Table IV.19--Manufacturer Production Costs for Commercial Gas-Fired Storage Water Heaters, 100-Gallon Rated
                                  Storage Volume, 199,000 Btu/h Input Capacity
----------------------------------------------------------------------------------------------------------------
                                                                           Standby loss efficiency level
            Thermal efficiency level                  Thermal    -----------------------------------------------
                                                  efficiency (%)      SL EL0          SL EL1          SL EL2
----------------------------------------------------------------------------------------------------------------
Et EL0..........................................              80       $1,023.59       $1,029.70       $1,051.20
Et EL1..........................................              82        1,046.14        1,052.31        1,074.10
Et EL2..........................................              90        1,253.56        1,259.97        1,282.19
Et EL3..........................................              92        1,263.93        1,270.35        1,292.63
Et EL4..........................................              95        1,288.05        1,294.51        1,316.95
Et EL5..........................................              99        1,331.09        1,335.00        1,360.66
----------------------------------------------------------------------------------------------------------------


[[Page 34475]]


Table IV.20--Manufacturer Production Costs for Residential-Duty Gas-Fired Storage Water Heaters, 75-Gallon Rated
                                   Storage Volume, 76,000 Btu/h Input Capacity
----------------------------------------------------------------------------------------------------------------
                                                                   Standby loss efficiency level
    Thermal efficiency level          Thermal    ---------------------------------------------------------------
                                  efficiency (%)      SL EL0          SL EL1          SL EL2          SL EL3
----------------------------------------------------------------------------------------------------------------
Et EL0..........................              80         $354.00         $401.35         $441.95         $462.14
Et EL1..........................              82          359.37          407.06          447.89          468.18
Et EL2..........................              90          667.75          685.67  ..............  ..............
Et EL3..........................              95          810.33          828.15  ..............  ..............
Et EL4..........................              97          818.60          836.43  ..............  ..............
----------------------------------------------------------------------------------------------------------------


  Table IV.21--Manufacturer Production Costs for Electric Storage Water
               Heaters, 114-Gallon Measured Storage Volume
------------------------------------------------------------------------
                                           Standby loss efficiency level
           Thermal efficiency            -------------------------------
                                              SL EL0          SL EL1
------------------------------------------------------------------------
98%.....................................         $854.25         $883.40
------------------------------------------------------------------------


    Table IV.22--Manufacturer Production Costs for Gas-Fired Instantaneous Water Heaters and Hot Water Supply
                                                     Boilers
----------------------------------------------------------------------------------------------------------------
                                                                                          Equipment group
                                                                                 -------------------------------
                                                                                     Gas-fired    Gas-fired  hot
                    Thermal efficiency level                          Thermal     tankless water   water  supply
                                                                  efficiency (%)      heaters         boilers
                                                                                 -------------------------------
                                                                                   250,000 Btu/h   399,000 Btu/h
----------------------------------------------------------------------------------------------------------------
Et EL0..........................................................              80         $629.67       $1,182.00
Et EL1..........................................................              82          638.62        1,205.56
Et EL2..........................................................              84          647.38        1,411.17
Et EL3..........................................................              92          790.45        2,671.86
Et EL4..........................................................              94          804.87        2,826.90
Et EL5..........................................................              96          824.45        2,981.94
----------------------------------------------------------------------------------------------------------------

6. Manufacturer Markup
    To account for manufacturers' non-production costs and profit 
margin, DOE applies a non-production cost multiplier (the manufacturer 
markup) to the full MPC. The resulting MSP is the price at which the 
manufacturer can recover all production and non-production costs and 
earn a profit. To meet new or amended energy conservation standards, 
manufacturers often introduce design changes to their equipment lines 
that result in increased MPCs. Depending on the competitive pressures, 
some or all of the increased production costs may be passed from 
manufacturers to retailers and eventually to commercial consumers in 
the form of higher purchase prices. As production costs increase, 
manufacturers typically incur additional overhead. The MSP should be 
high enough to recover the full cost of the equipment (i.e., full 
production and non-production costs) and yield a profit. The 
manufacturer markup has an important bearing on profitability. A high 
markup under a standards scenario suggests manufacturers can readily 
pass along the increased variable costs and some of the capital and 
product conversion costs (the one-time expenditure) to commercial 
consumers. A low markup suggests that manufacturers will not be able to 
recover as much of the necessary investment in plant and equipment.
    To calculate the manufacturer markups, DOE used 10-K reports \40\ 
submitted to the U.S. Securities and Exchange Commission (SEC) by the 
three publicly-owned companies that manufacture CWH equipment. The 
financial figures necessary for calculating the manufacturer markup are 
net sales, costs of sales, and gross profit. DOE averaged the financial 
figures spanning the years 2008 to 2013 in order to calculate the 
markups for CWH equipment. DOE acknowledges that there are numerous 
manufacturers of CWH equipment that are privately-held companies, which 
do not file SEC 10-K reports. In addition, while the publicly-owned 
companies file SEC 10-K reports, the financial information summarized 
may not be exclusively for the CWH portion of their business and can 
also include financial information from other product sectors, whose 
margins could be quite different from that of the CWH industry. DOE 
discussed the manufacturer markup with manufacturers during interviews, 
and used the feedback to modify the markup calculated through review of 
SEC 10-K reports. See chapter 5 of the NOPR TSD for more details about 
the manufacturer markup calculation.
---------------------------------------------------------------------------

    \40\ U.S. Securities and Exchange Commission, Annual 10-K 
Reports (Various Years) (Available at: http://sec.gov).
---------------------------------------------------------------------------

7. Shipping Costs
    Manufacturers of CWH equipment typically pay for shipping to the 
first step in the distribution chain. Freight is not a manufacturing 
cost, but because it

[[Page 34476]]

is a substantial cost incurred by the manufacturer, DOE accounted for 
shipping costs of CWH equipment separately from other non-production 
costs that comprise the manufacturer markup. To calculate the MSP for 
CWH equipment, DOE multiplied the calculated MPC at each efficiency 
level by the manufacturer markup and added shipping costs for equipment 
at the given efficiency level.
    In this rulemaking, shipping costs for all classes of CWH equipment 
were determined based on the area of floor space occupied by the unit. 
Most CWH equipment units are typically too tall to be double-stacked in 
a vertical fashion, and they cannot be shipped in any other orientation 
other than vertical. To calculate these shipping costs, DOE calculated 
the cost per area of a trailer, based on the standard dimensions of a 
53-foot trailer and an estimated 5-year average cost per shipping load 
that approximates the cost of shipping the equipment from the middle of 
the country to either coast. Next, DOE examined the average sizes of 
equipment in each equipment class at each efficiency level and 
determined the number of units that would fit in a trailer. DOE then 
calculated the market-weighted average shipping cost per unit using the 
cost per trailer load. For gas-fired tankless water heaters, DOE 
assumed units could be double-stacked, due to the smaller size and 
weight of these units. DOE also assumed tankless water heaters would be 
manufactured overseas, and, therefore, costs of shipping a 40-foot 
container on both a cargo ship and a truck were included. Chapter 5 of 
the NOPR TSD contains additional details about DOE's shipping cost 
assumptions and DOE's shipping cost estimates.
    Issue 13: DOE seeks comment on its methodology for manufacturer 
production cost, manufacturer selling price, and shipping cost 
estimates for each equipment class and efficiency level.
8. Maximum Standby Loss Equations
    As part of the engineering analysis for commercial storage water 
heaters and residential-duty commercial storage water heaters, DOE 
reviewed the maximum standby loss equations that define the existing 
Federal energy conservation standards for gas-fired and electric 
storage water heaters. The equations allow DOE to expand the analysis 
on the representative rated input capacity and storage volume to the 
full range of values covered under the existing Federal energy 
conservation standards.
    DOE uses equations to characterize the relationship between rated 
input capacity, rated storage volume, and standby loss. The equations 
allow DOE to account for the increases in standby loss as input 
capacity and tank volume increase. As the tank storage volume 
increases, the tank surface area increases. The larger surface area 
results in higher heat transfer rates that result in higher jacket 
losses. As the input capacity increases for gas-fired and oil-fired 
water heaters, the surface area of flue tubes may increase, thereby 
providing additional area for heat loss through the flue tubes. The 
current equations show that for each storage water heater equipment 
class, the allowable standby loss increases as the rated storage volume 
increases, and also as the input rating increases for gas-fired and 
oil-fired water heaters. The current form of the standby loss standard 
(in Btu/h) for commercial and residential-duty commercial gas-fired and 
oil-fired water heaters is shown in the multivariable equation below, 
depending upon both rated input (Q, Btu/h) and rated storage volume 
(Vr, gal).
[GRAPHIC] [TIFF OMITTED] TP31MY16.002

    The current form of the standby loss standard (in %/h) for electric 
storage water heaters is shown below, dependent only on measured 
storage volume (Vm, gal). DOE notes that standby loss for electric 
storage water heaters is not dependent on input capacity because there 
are no flue tubes or heat exchangers, and a higher input capacity is 
met with technology options that do not significantly affect the 
standby loss, typically a combination of either more heating elements 
or higher-power heating elements.
[GRAPHIC] [TIFF OMITTED] TP31MY16.003

    In order to consider amended standby loss standards for CWH 
equipment, which are in equation form, DOE would need to consider 
revising the current standards equations. However, in the October 2014 
RFI, DOE identified two potential issues with considering amended 
maximum standby loss standards equations for commercial gas-fired and 
oil-fired storage water heaters, and requested comment on approaches 
for amending the equations. 79 FR 62899, 62905 (Oct. 21, 2014). The 
first potential issue DOE recognized was how to modify the equation 
given that there is no intercept in the equation. Because the current 
standard depends on both volume and input without an intercept, it is 
only possible to change the slopes for each variable when modifying the 
standard to fit the analyzed efficiency levels. Changing the slopes 
could be undesirable if shifting the standard up or down (while 
maintaining the slopes) would better fit the distribution of units 
outside the representative input and volume. DOE sought feedback on 
this issue including the proposal of establishing discrete bins for one 
variable (volume or input), thereby yielding single-variable equations 
in each bin. The second issue raised in the RFI was that DOE observed 
that standby loss is dependent on thermal efficiency (as discussed in 
section IV.C.3.b of this document) and sought comment on whether 
thermal efficiency should be taken into account in the standby loss 
standard. Id.
    A.O. Smith, Bradford White, Rheem, and AHRI all commented that the 
structure of the current standby loss standard should not be changed, 
as it was developed as the result of deliberate, technical discussions. 
All of these commenters also stated that any changes to the existing 
structure would bring unnecessary complexity to the analysis, and could 
require test procedure changes. (A.O. Smith, No. 2 at p. 3; Bradford 
White, No. 3 at p. 2; Rheem, No. 10 at p. 1; AHRI, No. 5 at p. 3) Joint 
Advocates suggested that the use of discrete bins would be problematic, 
due to discontinuities at the bin boundaries. (Joint Advocates, No. 7 
at p. 4) Joint Advocates also mentioned allowing the use of rated 
volume for classification but measured volume for standby loss 
calculation as an advantage of using continuous equations over bins. 
Further, Joint Advocates suggested that a standby loss standard should 
be set that requires some kind of design option that limits flue losses 
in standby mode. (Joint Advocates, No. 7 at p. 4)
    DOE agrees with the commenters that bringing unnecessary complexity 
to the analysis is not desirable. Therefore, DOE has tentatively 
decided to consider more-stringent standby loss standards by 
multiplying the current maximum standby loss equations by reduction 
factors. The use of reduction factors maintains the structure of the 
current maximum standby loss equations and does not require the 
creation of bins or an intercept for altering the equations. This 
approach does not change the dependence of maximum standby loss on 
input and rated storage volume or introduce undesirable complexity to 
the equation, but still allows DOE to consider increased stringency for 
standby loss energy conservation

[[Page 34477]]

standards. This reduction factor is the product of two multipliers: one 
that reduces the standard based upon thermal efficiency, and one that 
reduces the standard based upon heat loss calculations for standby-
loss-reducing technology options identified by DOE (see section 
IV.C.3.b). The multiplier based upon thermal efficiency uses the ratio 
of the proposed thermal efficiency level to the current thermal 
efficiency standard, and takes into account the portion (if any) of 
standby loss attributable to electric power consumption. The multiplier 
based upon heat loss calculations uses the ratio of standby loss at 
each standby loss efficiency level (at the baseline thermal efficiency 
level) to the current standby loss standard. However, as discussed in 
section IV.C.3.b, DOE used market standby loss data instead of heat 
loss calculations and thermal efficiency levels to develop standby loss 
reduction factors for condensing residential-duty gas-fired storage 
water heaters. Table IV.23, Table IV.24, and Table IV.25 show the 
overall standby loss reduction factors for each equipment class and 
efficiency level. The factors corresponding to the proposed TSL in this 
NOPR were multiplied by the current standby loss equation to yield the 
proposed maximum standby loss equations for each equipment class (see 
section V.C). Chapter 5 of the NOPR TSD includes more detail on the 
calculation of the standby loss reduction factor and the thermal 
efficiency-based and heat loss-based multipliers it comprises.

           Table IV.23--Standby Loss Reduction Factors for Commercial Gas-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                           Standby loss reduction factor
           Thermal  efficiency  level                 Thermal    -----------------------------------------------
                                                  efficiency (%)      SL EL0          SL EL1          SL EL2
----------------------------------------------------------------------------------------------------------------
Et EL0..........................................              80            1.00            0.85            0.74
Et EL1..........................................              82            0.98            0.83            0.72
Et EL2..........................................              90            0.91            0.77            0.67
Et EL3..........................................              92            0.89            0.76            0.65
Et EL4..........................................              95            0.86            0.73            0.63
Et EL5..........................................              99            0.83            0.70            0.61
----------------------------------------------------------------------------------------------------------------


        Table IV.24--Standby Loss Reduction Factors for Residential-Duty Gas-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                      Thermal                      Standby loss reduction factor
   Thermal  efficiency  level       efficiency   ---------------------------------------------------------------
                                        (%)           SL EL0          SL EL1          SL EL2          SL EL3
----------------------------------------------------------------------------------------------------------------
Et EL0..........................              80            1.00            0.80            0.77            0.67
Et EL1..........................              82            0.98            0.78            0.76            0.66
Et EL2..........................              90            0.60            0.48  ..............  ..............
Et EL3..........................              95            0.60            0.48  ..............  ..............
Et EL4..........................              97            0.60            0.48  ..............  ..............
----------------------------------------------------------------------------------------------------------------


 Table IV.25--Standby Loss Reduction Factors for Electric Storage Water
                                 Heaters
------------------------------------------------------------------------
                                           Standby loss reduction factor
           Thermal efficiency            -------------------------------
                                              SL EL0          SL EL1
------------------------------------------------------------------------
98%.....................................            1.00            0.84
------------------------------------------------------------------------

    In response to Joint Advocates, DOE notes that although the 
proposed standby loss equations depend on rated volume, DOE proposes 
changes in section III.I of this NOPR to its certification, compliance, 
and enforcement regulations that require that the rated volume must 
equal the mean of the measured storage volumes of the units in the 
sample. DOE also notes that it has selected standby loss levels for 
analysis of non-condensing residential-duty commercial gas-fired 
storage water heaters that DOE believes would be achieved through the 
incorporation of electromechanical flue dampers, despite the fact that 
DOE observed no residential-duty gas-fired storage water heaters with 
electromechanical flue dampers currently on the market. However, 
pursuant to EPCA, DOE can establish energy conservation standards that 
set either a single performance standard or a single design 
requirement, not both. (42 U.S.C. 6311(18)) Therefore, DOE has not 
proposed a design requirement for a feature that decreases flue standby 
losses. After examining the market, DOE has tentatively concluded that 
all commercial gas-fired storage water heaters on the market currently 
use electromechanical flue dampers. DOE also notes that a flue damper 
would not be used with a condensing gas-fired water heater.
    Issue 14: DOE seeks comment on its proposed method for modifying 
the maximum standby loss equations for commercial gas-fired storage 
water heaters and residential-duty storage water heaters.
9. Conversion of Standards to Uniform Energy Factor
    As part of the analysis in this rulemaking, DOE analyzed efficiency 
levels for residential-duty commercial water heaters in terms of the 
thermal efficiency and standby loss metrics. However, in the July 2014 
final rule, DOE established that residential-duty commercial water 
heaters would be covered by the new UEF metric. 79 40542, 40586 (July 
11, 2014). Further, DOE proposed a method for converting the thermal 
efficiency and standby loss ratings to UEF using conversion factors in 
the April 2015 NOPR. 80 FR 20116, 20143 (April 14, 2015). In this NOPR, 
DOE converted the efficiency levels analyzed for residential-duty 
commercial gas-fired water heaters from thermal efficiency and standby 
loss to UEF using the conversion factors proposed in the April 2015 
NOPR for residential-duty water heaters for all four draw patterns: 
High, medium, low, and very small.
    For residential-duty commercial storage water heaters, DOE applied 
each analyzed standby loss level to each unit on the market, 
calculating the allowed maximum standby loss. The UEF was then 
calculated for each unit for each draw pattern using this standby loss 
level and each thermal efficiency level. Because the energy 
conservation standards for residential-duty commercial water heaters 
proposed in

[[Page 34478]]

the April 2015 NOPR were denominated in terms of UEF and had linear 
equations dependent only on rated volume, in this NOPR DOE developed 
UEF standard equations for residential-duty gas storage water heaters 
consistent with this equation format. 80 FR 20116, 20147 (April 14, 
2015). However, in section III.I, DOE proposes changes to its 
certification, compliance, and enforcement regulations that would 
require the rated volume to be based upon the mean of the measured 
volumes in a sample. Therefore, the maximum standby loss of units in 
this analysis to convert efficiency levels to UEF was calculated using 
the currently reported measured volume instead of the rated volume. A 
linear regression was performed between the measured volume of each 
unit and the calculated UEF for each unit, yielding a line of best-fit. 
Therefore, a line of best-fit was drawn relating UEF to measured volume 
for each of the four draw patterns. For each line of best-fit, the 
intercept was then decreased to translate the line down to pass through 
the point furthest below the line of best-fit (the point with the 
largest negative residual), creating a minimum line. DOE adopted these 
minimum lines when establishing the trial standard levels and as the 
proposed energy conservation standards for residential-duty commercial 
water heaters in this NOPR. Chapter 5 of the NOPR TSD includes 
additional detail on the conversion of energy conservation standards to 
UEF for residential-duty commercial water heaters.
    Issue 15: DOE seeks comment on its approach to convert the thermal 
efficiency and standby loss levels analyzed for residential-duty 
commercial water heaters to UEF.
    Table IV.26 shows the UEF levels calculated for each combination of 
thermal efficiency level and standby loss level, using the conversion 
factors proposed in the April 2015 NOPR.

               Table IV.26--UEF Levels Corresponding to Thermal Efficiency and Standby Loss Levels
----------------------------------------------------------------------------------------------------------------
                                      Thermal                      Standby loss efficiency level
   Thermal  efficiency  level       efficiency   ---------------------------------------------------------------
                                        (%)           SL EL0          SL EL1          SL EL2          SL EL3
----------------------------------------------------------------------------------------------------------------
Et EL0..........................              80            0.57            0.60            0.60            0.61
Et EL1..........................              82            0.58            0.61            0.61            0.62
Et EL2..........................              90            0.67            0.69  ..............  ..............
Et EL3..........................              95            0.69            0.72  ..............  ..............
Et EL4..........................              97            0.70            0.73  ..............  ..............
----------------------------------------------------------------------------------------------------------------

D. Markups Analysis

    The markups analysis develops appropriate markups in the 
distribution chain (e.g., manufacturer markups, retailer markups, 
distributer markups, contractor markups, and sales taxes) to convert 
the estimates of manufacturer selling price derived in the engineering 
analysis to commercial consumer prices, which are then used in the LCC 
and PBP analysis and in the manufacturer impact analysis. DOE develops 
baseline and incremental markups based on the equipment markups at each 
step in the distribution chain. DOE developed supply chain markups in 
the form of multipliers that represent increases above equipment 
purchase costs for key market participants, including commercial water 
heating equipment wholesalers/distributors, modular building 
manufacturers and wholesalers/distributors, retailers, and mechanical 
contractors and general contractors working on behalf of commercial 
consumers. The incremental markup relates the change in the 
manufacturer sales price of higher-efficiency models (the incremental 
cost increase) to the change in commercial consumer price.
    Four different markets exist for commercial water heating 
equipment: (1) New construction in the residential buildings sector, 
(2) new construction in the commercial buildings sector, (3) 
replacements in the residential buildings sector, and (4) replacements 
in the commercial buildings sector. DOE developed eight distribution 
channels to address these four markets.
    For the residential and commercial buildings sectors, DOE 
characterizes the replacement distribution channels as follows:

 Manufacturer [rarr] Wholesaler [rarr] Mechanical Contractor 
[rarr] Commercial Consumer
 Manufacturer [rarr] Manufacturer Representative [rarr] 
Mechanical Contractor [rarr] Commercial Consumer
 Manufacturer [rarr] Retailer [rarr] Mechanical Contractor 
[rarr] Commercial Consumer

    DOE characterizes the new construction distribution channels for 
the residential and commercial buildings sectors as follows:

 Manufacturer [rarr] Wholesaler [rarr] Mechanical Contractor 
[rarr] General Contractor [rarr] Commercial Consumer
 Manufacturer [rarr] Manufacturer Representative [rarr] 
Mechanical Contractor [rarr] General Contractor [rarr] Commercial 
Consumer
 Manufacturer [rarr] Retailer [rarr] General Contractor [rarr] 
Commercial Consumer

    In addition to these distribution channels, there are scenarios in 
which manufacturers sell commercial water heating equipment directly to 
a commercial consumer through a national account, or a commercial 
consumer purchases the equipment directly from a retailer. These 
scenarios occur in both new construction and replacements markets and 
in both the residential and commercial sectors. In these instances, 
installation is typically accomplished by site personnel. These 
distribution channels are depicted as follows:

 Manufacturer [rarr] Commercial Consumer
 Manufacturer [rarr] Retailer [rarr] Commercial Consumer

    In response to the October 2014 RFI, several stakeholders commented 
on distribution channels. First, stakeholders provided inputs regarding 
the types of distribution channels for commercial water heating 
equipment. Rheem agreed that the distribution channel types outlined in 
the October 2014 RFI were appropriate and sufficient to describe the 
existing U.S. market. (Rheem, No. 10 at p. 4) AHRI and Bradford White 
suggested that DOE should address a distribution channel that goes from 
a manufacturer to a manufacturer's representative, who then sells to 
the commercial consumer. (AHRI, No. 5 at p. 4; Bradford White, No. 3 at 
p. 2) DOE addressed this comment by incorporating a manufacturer's 
representative distribution channel in its markups analysis for the 
NOPR.
    In the October 2014 RFI, DOE also sought input on the percentage of 
equipment distributed through the various types of distribution 
channels. 79 FR 62899, 62906 (Oct. 21, 2014). Rheem stated that the 
vast majority of

[[Page 34479]]

commercial water heating equipment is distributed through the wholesale 
channel. (Rheem, No. 10 at p. 4) DOE assumes that Rheem's responses 
reflect its experience, rather than a characterization of the industry 
overall. For this document, DOE estimated the percentage of shipments 
going through each distribution channel for each equipment class. The 
majority of shipments were allocated to the wholesaler channel, ranging 
from 60 to 70 percent, depending on the equipment class and market 
type.
    Last, DOE asked in the October 2014 RFI for recent data and 
recommendations to establish the markups for the parties involved with 
the distribution of the equipment. 79 FR 62899, 62906 (Oct. 21, 2014). 
In response, Rheem stated that the markups varied within each market, 
making it difficult to roll up to a total market analysis. Distributors 
and their commercial consumers were reticent to provide Rheem with 
markup data. (Rheem, No. 10 at p. 4) DOE acknowledges that private 
businesses were reticent to provide potentially sensitive information 
about pricing to other market participants or DOE. To develop markups 
for this NOPR, DOE utilized several sources, including: (1) The 
Heating, Air-Conditioning & Refrigeration Distributors International 
(HARDI) 2013 Profit Report \41\ to develop wholesaler markups; (2) the 
2005 Air Conditioning Contractors of America's (ACCA) financial 
analysis for the heating, ventilation, air-conditioning, and 
refrigeration (HVACR) contracting industry \42\ to develop mechanical 
contractor markups; (3) the U.S. Census Bureau's 2007 Economic Census 
data \43\ for the commercial and institutional building construction 
industry to develop mechanical and general contractor markups; and (4) 
the U.S. Census Bureau's 2012 Annual Retail Trade Survey \44\ data to 
develop retail markups.
---------------------------------------------------------------------------

    \41\ Heating Air-conditioning & Refrigeration Distributors 
International. Heating, Air-Conditioning & Refrigeration 
Distributors International 2013 Profit Report.
    \42\ Air Conditioning Contractors of America (ACCA). Financial 
Analysis for the HVACR Contracting Industry: 2005.
    \43\ U.S. Census Bureau. 2007 Economic Census Data (2007) 
(Available at: http://www.census.gov/econ/).
    \44\ U.S. Census Bureau. 2012 Annual Retail Trade Survey (2012) 
(Available at: http://www.census.gov/retail/).
---------------------------------------------------------------------------

    In addition to markups of distribution channel costs, DOE derived 
State and local taxes from data provided by the Sales Tax 
Clearinghouse.\45\ Because both distribution channel costs and sales 
tax vary by State, DOE developed its markups to vary by State. Chapter 
6 of the NOPR TSD provides additional detail on markups.
---------------------------------------------------------------------------

    \45\ The Sales Tax Clearing House (2014) (Available at: 
www.thestc.com/STrates.stm) (Last accessed Feb. 7, 2014).
---------------------------------------------------------------------------

    Issue 16: DOE seeks comment on the percentages of shipments 
allocated to the distribution channels relevant to each equipment 
class.
    Issue 17: DOE requests comment on the estimated market and sector 
weights for shipments by equipment class.
    Issue 18: DOE requests comment on the development of markups at 
each point in the distribution chain and the overall markup by 
equipment class.

E. Energy Use Analysis

    The purpose of the energy use analysis is to assess the energy 
requirements (i.e., annual energy consumption) of commercial water 
heating (CWH) equipment described in the engineering analysis for a 
representative sample of building types that utilize the equipment, and 
to assess the energy-savings potential of increased equipment 
efficiencies. DOE uses the annual energy consumption and energy-savings 
potential in the LCC and PBP analysis to establish the operating cost 
savings at various equipment efficiency levels.\46\ DOE estimated the 
annual energy consumption of CWH equipment at specified energy 
efficiency levels across a range of climate zones, building 
characteristics, and water heating applications. The annual energy 
consumption includes use of natural gas, liquefied petroleum gas (LPG), 
or electricity for hot water production, as well as use of electricity 
for auxiliary components.
---------------------------------------------------------------------------

    \46\ In this case, these efficiency levels comprise combinations 
of thermal efficiency and standby mode performance.
---------------------------------------------------------------------------

    In the October 2014 RFI, DOE indicated that it would estimate the 
annual energy consumption of CWH equipment at specified energy 
efficiency levels across a range of applications, building types, and 
climate zones. 79 FR 62899, 62906-62907 (Oct. 21, 2014). DOE developed 
representative hot water volumetric loads and water heating energy 
usage for the selected representative products for each equipment class 
and building type combination analyzed. This approach captures the 
variability in CWH equipment use due to factors such as building 
activity, schedule, occupancy, tank losses, and distribution system 
piping losses.
    For commercial building types, DOE used the daily load schedules 
and normalized peaks from the 2013 DOE Commercial Prototype Building 
Models \47\ to develop gallons-per-day hot water loads for the analyzed 
commercial building types.\48\ DOE assigned these hot water loads on a 
square-foot basis to associated commercial building records in the 
EIA's 2003 Commercial Building Energy Consumption Survey \49\ (CBECS) 
in accordance with their principal building activity subcategories. For 
residential building types, DOE used the hot water loads model 
developed by Lawrence Berkeley National Laboratory (LBNL) for the 2010 
rulemaking for ``Energy Conservation Standards for Residential Water 
Heaters, Direct Heating Equipment, and Pool Heaters.'' \50\ DOE applied 
this model to the residential building records in the EIA's 2009 
Residential Energy Consumption Survey (RECS).\51\ For RECS housing 
records in multi-family buildings, DOE focused only on apartment units 
that share water heaters with other units in the building. Since the 
LBNL model was developed to analyze individual apartment loads, DOE had 
to modify it for the analysis of whole building loads. DOE established 
statistical average occupancy of RECS apartment unit records when 
determining the individual apartment unit's load. DOE also developed 
individual apartment loads as if they were equipped with a storage 
water heater in accordance with LBNL's methodology. Then, DOE 
multiplied the apartment unit's load by the number of units in the 
building to determine the building's total hot water load.
---------------------------------------------------------------------------

    \47\ U.S. Department of Energy--Office of Energy Efficiency and 
Renewable Energy, Commercial Prototype Building Models (2013) 
(Available at: http://www.energycodes.gov/commercial-prototype-building-models).
    \48\ Such commercial building types included the following 
types: Small office, medium office, large office, stand-alone 
retail, strip mall, primary school, secondary school, outpatient 
healthcare, hospital, small hotel, large hotel, warehouse, quick 
service restaurant, and full service restaurant.
    \49\ U.S. Energy Information Administration (EIA). 2003 
Commercial Building Energy Consumption Survey (CBECS) Data (2003) 
(Available at: http://www.eia.gov/consumption/commercial/data/2003/ 2003/
).
    \50\ U.S. Department of Energy-Office of Energy Efficiency and 
Renewable Energy. Final Rule Technical Support Document: Energy 
Conservation Standards for Residential Water Heaters, Direct Heating 
Equipment, and Pool Heaters (April 8, 2010) EERE-2006-STD-0129-0149 
(Available at: http://www.regulations.gov/#!documentDetail;D=EERE-
2006-STD-0129-0149).
    \51\ U.S. Energy Information Administration (EIA), 2009 
Residential Energy Consumption Survey (RECS) Data (2009) (Available 
at: http://www.eia.gov/consumption/residential/data/2009/).
---------------------------------------------------------------------------

    DOE converted daily volumetric hot water loads into daily Btu 
energy loads

[[Page 34480]]

by using an equation that multiplies a building's gallons-per-day 
consumption of hot water by the density of water,\52\ specific heat of 
water,\53\ and the hot water temperature rise. To calculate temperature 
rise, DOE developed monthly dry bulb temperature estimates for each 
U.S. State using typical mean year (TMY) temperature data as captured 
in location files provided for use with the DOE EnergyPlus Energy 
Simulation Software.\54\ Then these dry bulb temperatures were used to 
develop inlet water temperatures using an equation and methodology 
developed by the National Renewable Energy Laboratory (NREL).\55\ DOE 
took the difference between the building's water heater setpoint 
temperature and inlet temperature to determine temperature rise. In 
addition, DOE developed building-specific Btu load adders to account 
for the heat losses of building types that typically use recirculation 
loops to distribute hot water to end uses. DOE converted daily hot 
water building loads (calculated for each month using monthly inlet 
water temperatures) to annual water heater Btu loads for use in 
determining annual energy use of water heaters at each efficiency 
level.
---------------------------------------------------------------------------

    \52\ DOE used 8.29 gallons per pound.
    \53\ DOE used 1.000743 Btu per pound per degree Fahrenheit.
    \54\ U.S. Department of Energy--Office of Energy Efficiency and 
Renewable Energy. EnergyPlus Energy Simulation Software, TMY3 data 
(Available at: http://apps1.eere.energy.gov/buildings/energyplus/cfm/weather_data3.cfm/region=4_north_and_central_america_wmo_region_4/country=1_usa/cname=USA) (Last accessed October 2014).
    \55\ Hendron, R., Building America Research Benchmark 
Definition, Updated December 15, 2006 (January 2007) National 
Renewable Energy Laboratory: Golden, CO. Report No. TP-550-40968 
(Available at: http://www.nrel.gov/docs/fy07osti/40968.pdf).
---------------------------------------------------------------------------

    DOE developed a maximum hot water loads methodology for buildings 
using the calculations from a major water heater manufacturer's sizing 
calculators,\56\ which were considered more comprehensive in their 
maximum hot water load calculations than other publicly-available 
sizing calculators. This methodology was applied to commercial building 
records in 2003 CBECS and residential building records in 2009 RECS to 
determine their maximum gallons-per-hour requirements, assuming a 
temperature rise specific to the building. DOE divided these maximum 
building loads by the first-hour capability of the baseline 
representative model of each equipment class to determine the number of 
water heater units required to service the maximum load. For buildings 
with maximum load durations of two or three hours, DOE divided maximum 
loads by the two- or three-hour delivery capability of the baseline 
representative model. For each equipment class, DOE sampled CBECS and 
RECS building loads in need of at least 0.9 water heaters, based on the 
representative model analyzed, to fulfill their maximum load 
requirements. Due to the maximum input capacity and storage 
specifications of residential-duty commercial gas-fired storage water 
heaters, DOE limited the buildings sample of this equipment to building 
records requiring four or fewer representative water heaters to fulfill 
maximum load since larger maximum load requirements are more likely 
served by larger capacity equipment. For gas-fired tankless water 
heaters, an adjustment factor was applied to the first-hour capability 
to account for the shorter time duration for sizing this equipment, 
given its minimal stored water volume. DOE used the modified Hunter's 
curve \57\ for sizing of gas-fired tankless water heaters to develop 
the adjustment factors. Gas-fired hot water supply boilers were teamed 
with unfired storage tanks to determine their first-hour capabilities 
since this is the predominant installation approach for this equipment.
---------------------------------------------------------------------------

    \56\ A.O. Smith, Pro-Size Water Heater Sizing Program (Available 
at: http://www.hotwatersizing.com/) (Last accessed in March 2015).
    \57\ PVI Industries Inc., ``Water Heater Sizing Guide for 
Engineers,'' Section X, pp 18-19 (Available at: http://sizing.pvi.com/PV592%20Sizing%20Guide%2011-2011.pdf).
---------------------------------------------------------------------------

    Given the hot water load requirements as well as the equipment 
needs of the sampled buildings, DOE was able to calculate the hours of 
operation to serve hot water loads and the hours of standby mode for 
the representative model of each equipment class to service each 
sampled building. Since the number of water heaters allocated to a 
specific building was held constant at the baseline efficiency level, a 
water heater's hours of operation decreased as its thermal efficiency 
improved. This decrease in operation, in combination with standby loss 
performance, led to the energy savings achieved at each efficiency 
level above the baseline. For storage water heaters, DOE used the 
standby loss levels identified in the engineering analysis to estimate 
energy savings from more-stringent standby loss levels. Section 
IV.C.3.b and Chapter 5 of the NOPR TSD include additional details on 
the standby loss levels analyzed in the engineering analysis.
    For this NOPR, DOE also consulted the ASHRAE \58\ and Electric 
Power Research Institute (EPRI) \59\ handbooks. These resources contain 
data on distribution losses and maximum load requirements of different 
building types and applications, which were used to compare and 
corroborate analyses of the average and peak loads derived from the 
CBECS and RECS data.
---------------------------------------------------------------------------

    \58\ American Society of Heating, Refrigerating and Air-
Conditioning Engineers, Inc. (ASHRAE), ASHRAE Handbook of HVAC 
Applications: Chapter 50 (Service Water Heating) (2011) pp. 50.1-
50.32 (Available at: https://www.ashrae.org/resources-publications/handbook).
    \59\ Electric Power Research Institute (EPRI), Commercial Water 
Heating Applications Handbook (1992) Electric Power Research 
Institute: Palo Alto, CA. Report No. TR-100212 (Available at: http://www.epri.com/abstracts/Pages/ProductAbstract.aspx?ProductId=TR-100212).
---------------------------------------------------------------------------

    In response to the proposed method of determining water heating 
energy use in the RFI, stakeholders expressed concerns regarding the 
climate zones in DOE's annual energy consumption analysis for 
commercial water heating equipment. In general, the commenters 
emphasized the importance of appropriately sizing the equipment under 
analysis for water heating energy use. A.O. Smith commented that 
``analysis across climate zones is unnecessary except for air-source 
HPWH's, as incoming water temperature is a more determinate parameter 
for other technology classes.'' (A.O. Smith, No. 2 at p. 3) Along the 
same lines, AHRI commented that it was overly complicated to have the 
proposed annual energy consumption analysis consider a range of 
applications of building types and climate zones. According to AHRI, 
the analysis should assume that the water heating equipment had been 
sized to meet the building load, regardless of building type or 
location. (AHRI, No. 5 at p. 4) In addition, Bradford White commented 
that the approach of the Energy Use Analysis was too involved and 
needed to be simplified. (Bradford White, No. 3 at p. 2) AHRI also 
commented that DOE could use manufacturers' sizing tools to size water 
heaters to the right application. (AHRI, No. 5, at pp. 4-5) AHRI 
cautioned that sizing methods are different than overall usage 
profiles. (AHRI, No. 5 at pp. 4-5) Rheem Manufacturing Company 
commented that commercial water heating equipment should be sized to 
meet the building's peak demand. (Rheem, No. 10 at p. 5) Lastly, 
Steffes recommended that DOE should use RECS 2009 in its analysis 
(particularly Table CE4.6). (Steffes, No. 6 at p. 2)
    In the October 2014 RFI, DOE sought input and sources of data or

[[Page 34481]]

recommendations for tools to support sizing of CWH equipment typically 
found in commercial and residential applications. 79 FR 62899, 62907 
(Oct. 21, 2014). In response, Rheem Manufacturing Company commented 
that it had an online tool for projecting hot water demand, found 
online at http://www.rheem.com/certispec. (Rheem, No. 10 at p. 5) A.O. 
Smith responded that most manufacturers, including A.O. Smith, have 
sizing calculators on their Web site, citing its own sizing calculators 
at http://www.hotwatersizing.com and http://www.lochinvar.com/sizingguide.aspx. (A.O. Smith, No. 2 at p. 3) Bradford White commented 
that its Web site had the RightSpec[supreg] Product Sizing Guide to 
size water heating systems to commercial applications. (Bradford White, 
No. 3 at p. 3)
    DOE considered these comments in designing its energy use analysis. 
As recommended by Steffes, DOE utilized 2009 RECS building 
characteristics data for determining residential building hot water 
loads and maximum load sizing requirements. DOE also used 2003 CBECS 
building characteristics data for determining commercial building hot 
water loads and maximum load sizing requirements. While recognizing 
AHRI and Bradford White's concern for the complexity of the analysis, 
DOE determined that assessing the energy use of CWH equipment across a 
range of operating applications and climates specific to the building 
types and locations in the 2009 RECS and 2003 CBECS data improves the 
estimated hot water load associated with equipment sized for the 
applications. This analytical approach enables DOE to evaluate the 
impacts of the proposed energy conservation standards comprehensively, 
accounting for the hot water requirements of U.S. commercial consumers 
across a multitude of scenarios.
    A.O. Smith and AHRI expressed concerns about analyzing the energy 
use of CWH equipment across climate zones. Based on the comment 
received, DOE believes that this concern was unfounded. As discussed 
previously, DOE's analysis utilized climate zone data, in the form of 
location-based dry bulb temperature data, which was then used to 
estimate the inlet water temperature specific to each sampled 
building's location, a key parameter identified by A.O. Smith. This 
approach captured the effect of inlet water temperature on CWH 
equipment hot water loads and maximum load sizing. As recommended by 
AHRI, Rheem, A.O. Smith, and Bradford White, DOE used a major 
manufacturer's peak sizing calculators as the basis for sizing CWH 
equipment to the maximum hot water loads predicted for the sampled 
CBECS and RECS building records.
    For details of DOE's energy use analysis, see chapter 7 of the NOPR 
TSD.

F. Life-Cycle Cost and Payback Period Analysis

    The purpose of the LCC and PBP analysis is to analyze the effects 
of potential amended energy conservation standards on commercial 
consumers of CWH equipment by determining how a potential amended 
standard affects their operating expenses (usually decreased) and their 
total installed costs (usually increased). DOE used the following two 
metrics to measure commercial consumer impacts:
     The LCC (life-cycle cost) is the total consumer cost of an 
appliance or equipment over the life of the equipment. The LCC 
calculation includes total installed cost (equipment manufacturer 
selling price, distribution chain markups, sales tax, and installation 
costs), operating costs (energy, repair, and maintenance costs), 
product lifetime, and discount rate. DOE discounts future operating 
costs to the time of the purchase using a commercial consumer discount 
rate.
     The PBP (payback period) is the estimated amount of time 
(in years) it takes commercial consumers to recover the increased total 
installed cost (including equipment and installation costs) of a more-
efficient type of equipment through reduced operating costs. DOE 
calculates the PBP by dividing the change in total installed cost 
(normally higher) due to a proposed new or amended energy conservation 
standard by the change in annual operating cost (normally lower) that 
results from that potential standard. For a given efficiency level, DOE 
measures the change in LCC, or the LCC savings, relative to an estimate 
of the no-new-standards-case efficiency level. The no-new-standards-
case estimates reflect the market in the absence of amended energy 
conservation standards, including market trends for equipment that 
exceed the current energy conservation standards.
    For the NOPR, DOE analyzed the potential for variability by 
performing the LCC and PBP calculations on a nationally representative 
sample of individual commercial and residential buildings. DOE utilized 
the sample of buildings developed for the energy use analysis and the 
corresponding simulations results.\60\ DOE expressed the LCC and PBP 
results on a single, per-unit, commercial water heating equipment 
basis, considered at each thermal efficiency and standby loss level. In 
addition, DOE reported the LCC results as the percentage of CWH 
equipment consumers experiencing differing economic impacts (LCC 
savings of greater than 0 indicate net benefit; LCC savings of less 
than 0 indicate net cost; and LCC savings equal to 0 indicate no 
impact).
---------------------------------------------------------------------------

    \60\ DOE utilized the building types defined in CBECS 2003, as 
well as residential buildings defined in RECS 2009. More information 
on the types of buildings considered is discussed later in this 
section. (CBECS: http://www.eia.gov/consumption/commercial/data/2003/) (RECS: http://www.eia.gov/consumption/residential/) (Both 
links last accessed on 04/06/2015).
---------------------------------------------------------------------------

    DOE modeled uncertainty for specific inputs to the LCC and PBP 
analysis by using Monte Carlo simulation coupled with the corresponding 
probability distributions, including distributions describing 
efficiency of units shipped in the no-new-standards case. The Monte 
Carlo simulations, performed by Crystal Ball (a commercially-available 
software program), randomly sampled input values from each of the 
probability distributions. Then, the model calculated the LCC and PBP 
for equipment at each efficiency level for the 10,000 simulations. More 
details on the incorporation of uncertainty and variability in the LCC 
are available in appendix 8B of the NOPR TSD.
    DOE conducted the LCC and PBP analyses using a commercially-
available spreadsheet tool and a purpose-built spreadsheet model, 
available on DOE's Web site.\61\ This spreadsheet model developed by 
DOE accounts for variability in energy use and prices, installation 
costs, repair and maintenance costs, and energy costs. As a result, the 
LCC results are displayed as distributions of impacts compared to the 
no-new-standards case (without amended standards) conditions. The 
results of DOE's LCC and PBP analysis are summarized in section V.B and 
described in detail in chapter 8 of the NOPR TSD.
---------------------------------------------------------------------------

    \61\ DOE's Web page for commercial water heating equipment is 
available at: https://www1.eere.energy.gov/buildings/appliance_standards/standards.aspx?productid=36.
---------------------------------------------------------------------------

    EPCA establishes a rebuttable presumption that a standard is 
economically justified if the Secretary finds that the additional cost 
to the consumer of purchasing a product complying with an energy 
conservation standard level will be less than three times the value of 
the energy (and, as applicable, water) savings during the first year 
that the consumer will receive

[[Page 34482]]

as a result of the standard, as calculated under the test procedure in 
place for that standard. For each considered efficiency level, DOE 
typically determines the value of the first year's energy savings,\62\ 
and multiplies that amount by the average energy price forecast for the 
year in which compliance with the amended standards would be required. 
This value, in conjunction with equipment cost, was used in a 
rebuttable payback calculation for each equipment class.
---------------------------------------------------------------------------

    \62\ The DOE test procedure for commercial water heating 
equipment at 10 CFR 431.106 does not specify a calculation method 
for determining energy use. For the rebuttable presumption PBP 
calculation, DOE used average energy use estimates.
---------------------------------------------------------------------------

    DOE calculated the LCC and PBP for all commercial consumers as if 
each would purchase a new CWH unit in the year that compliance with 
amended standards is required. As discussed above, DOE is conducting 
this rulemaking pursuant to its 6-year-lookback authority under 42 
U.S.C. 6313(a)(6)(C), and EPCA directs DOE to publish a final rule 
amending the standard for the equipment covered in this document no 
later than 2 years after a NOPR is issued. (42 U.S.C. 
6313(a)(6)(C)(iii)) At the time of preparation of the NOPR analyses, 
the expected issuance date was 2015, leading to an anticipated final 
rule publication in 2016. EPCA also states that amended standards 
prescribed under this subsection shall apply to equipment manufactured 
after a date that is later of: (I) The date that is 3 years after 
publication of the final rule establishing a new standard; or (II) the 
date that is 6 years after the effective date of the current standard 
for a covered equipment. (42 U.S.C. 6313(a)(6)(C)(iv)) The date under 
clause (I), currently projected to be 2019, is later than the date 
under clause (II), which is 2009. Therefore, for the purposes of its 
analysis for this NOPR, DOE used January 1, 2019 as the beginning of 
compliance with potential amended standards for CWH equipment.
    As noted above, DOE's LCC and PBP analyses generate values that 
calculate the PBP for commercial consumers of potential energy 
conservation standards, which includes, but is not limited to, the 3-
year PBP contemplated under the rebuttable presumption test. 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. 6313(a)(6)(ii). 
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).
    In the October 2014 RFI, DOE requested comment from stakeholders on 
the overall method that it intended to use in conducting the LCC and 
PBP analysis for CWH equipment. 79 FR 62899, 62907 (Oct. 21, 2014). In 
response to this request, several stakeholders provided comment. A. O. 
Smith and Rheem stated that the LCC and PBP methods were acceptable but 
were dependent upon accurate assumptions and data. (A. O. Smith, No. 2 
at p. 3; Rheem, No. 10 at p. 6) AHRI agreed, and mentioned potential 
issues in selecting the inputs for the analysis. (AHRI, No. 5 at p. 4) 
Bradford White further stated that while it had no issue with the 
proposed method for the LCC and PBP analyses, it would like 
representative cost estimates to be used. (Bradford White, No. 3 at p. 
3)
1. Approach
    Recognizing that each business that uses CWH equipment is unique, 
DOE analyzed variability and uncertainty by performing the LCC and PBP 
calculations on a nationally representative stock of commercial and 
residential buildings. Commercial buildings can be categorized based on 
their specific activity, and DOE considered commercial buildings such 
as offices (small, medium, and large), stand-alone retail and strip-
malls, schools (primary and secondary), hospitals and outpatient 
healthcare facilities, hotels (small and large), warehouses, 
restaurants (quick service and full service), assemblies, nursing 
homes, and dormitories. These encompass 89.1 percent of the total 
sample of commercial building stock in the United States. The 
residential buildings can be categorized based on the type of housing 
unit, and DOE considered single-family (attached and detached) and 
multi-family (with 2-4 units and 5+ units) buildings in its analysis. 
This encompassed 95.5 percent of the total sample of residential 
building stock in the United States, though not all of this sample 
would use CWH equipment. DOE developed financial data appropriate for 
the commercial consumers in each business and building type. Each type 
of building has typical commercial consumers who have different costs 
of financing because of the nature of the business. DOE derived the 
financing costs based on data from the Damodaran Online Web site.\63\ 
For residential applications, the entire population was categorized 
into six income bins, and DOE developed the probability distribution of 
real interest rates for each income bin by using data from the Federal 
Reserve Board's Survey of Consumer Finances.\64\
---------------------------------------------------------------------------

    \63\ Damodaran Online (Commercial Applications) (Available at: 
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm) (Last 
accessed on 04/04/2015).
    \64\ The real interest rates data for the six income groups 
(residential sector) can be obtained from the Survey of Consumer 
Finances. The Federal Reserve Board. Survey of Consumer Finances. 
1989, 1992, 1995, 1998, 2001, 2004, 2007, 2010 (Available at: http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html). Survey of 
Consumer Finances (Estimate using 1995, 1998, 2001, 2004, 2007, and 
2010 databases) (Residential Applications) (Available at: http://www.federalreserve.gov/econresdata/scf/aboutscf.htm) (Last accessed 
on May 14, 2015).
---------------------------------------------------------------------------

    The LCC analysis used the estimated annual energy use for every 
unit of CWH equipment described in section IV.C. Aside from energy use, 
other important factors influencing the LCC and PBP analyses are energy 
prices, installation costs, and equipment distribution markups. At the 
national level, the LCC spreadsheets explicitly model both the 
uncertainty and the variability in the model's inputs, using 
probability distribution functions.
    As mentioned earlier, DOE generated LCC and PBP results for 
commercial consumers using business type data aligned with building 
type and by geographic location, and DOE developed weighting factors to 
generate national average LCC savings and PBPs for each efficiency 
level. As there is a unique LCC and PBP for each calculated combination 
of building type and geographic location, the outcomes of the analysis 
can also be expressed as probability distributions with a range of LCC 
and PBP results. A distinct advantage of this type of approach is that 
DOE can identify the percentage of commercial consumers achieving LCC 
savings or attaining certain PBP values due to an increased efficiency 
level, in addition to the average LCC savings or average PBP for that 
efficiency level.
2. Life-Cycle Cost Inputs
    For each efficiency level that DOE analyzed, the LCC analysis 
required input data for the total installed cost of the equipment, its 
operating cost, and the discount rate. Table IV.27 summarizes the 
inputs and key assumptions DOE used to calculate the commercial 
consumer economic impacts of all energy efficiency levels analyzed in 
this rulemaking. A more detailed discussion of the inputs follows.

[[Page 34483]]



 Table IV.27--Summary of Inputs and Key Assumptions Used in the LCC and
                              PBP Analyses
------------------------------------------------------------------------
              Inputs                             Description
------------------------------------------------------------------------
                        Affecting Installed Costs
------------------------------------------------------------------------
Equipment Price...................  Equipment price derived by
                                     multiplying manufacturer sales
                                     price or MSP (calculated in the
                                     engineering analysis) by
                                     distribution channel markups, as
                                     needed, plus sales tax from the
                                     markups analysis.
Installation Cost.................  Installation cost includes
                                     installation labor, installer
                                     overhead, and any miscellaneous
                                     materials and parts, derived
                                     principally from RS Means 2015 data
                                     books a b c and converted to 2014$.
------------------------------------------------------------------------
                        Affecting Operating Costs
------------------------------------------------------------------------
Annual Energy Use.................  Annual unit energy consumption for
                                     each class of equipment at each
                                     efficiency and standby loss level
                                     estimated at different locations
                                     and by building type using building-
                                     specific load models and a
                                     population-based mapping of climate
                                     locations. The geographic scale
                                     used for commercial and residential
                                     applications are Census Divisions
                                     and reportable domains
                                     respectively.
Electricity Prices, Natural Gas     DOE developed average residential
 Prices, and Oil Prices.             and commercial electricity prices
                                     based on EIA Form 861 data for
                                     2013.\d\ Future electricity prices
                                     are projected based on AEO 2015.
                                     DOE developed residential and
                                     commercial natural gas prices based
                                     on EIA State-level prices in EIA
                                     Natural Gas Navigator.\e\ Future
                                     natural gas prices are projected
                                     based on AEO 2015.
Maintenance Cost..................  Annual maintenance cost did not vary
                                     as a function of efficiency.
Repair Cost.......................  DOE determined that the materials
                                     portion of the repair costs for gas-
                                     fired equipment changes with the
                                     efficiency level for products. The
                                     different combustion systems varied
                                     among different efficiency levels,
                                     which eventually led to different
                                     repair costs.
------------------------------------------------------------------------
        Affecting Present Value of Annual Operating Cost Savings
------------------------------------------------------------------------
Equipment Lifetime................  Table IV.29 provides lifetime
                                     estimates for equipment class. DOE
                                     estimated that the average CWH
                                     equipment lifetimes range between
                                     10 and 25 years, with the average
                                     lifespan dependent on equipment
                                     class based on estimates cited in
                                     available literature.g h
Discount Rate.....................  Mean real discount rates (weighted)
                                     for all buildings range from 3.6%
                                     to 5.1%, for the six income bins
                                     relevant to residential
                                     applications. For commercial
                                     applications, DOE considered mean
                                     real discount rates (weighted) from
                                     ten different commercial sectors,
                                     and the rates ranged between 3.5%
                                     and 6%.
Analysis Start Year...............  Start year for LCC is 2019, which is
                                     the anticipated compliance date for
                                     any potential amended standards if
                                     adopted by a final rule of this
                                     rulemaking.
------------------------------------------------------------------------
                       Analyzed Efficiency Levels
------------------------------------------------------------------------
Analyzed Efficiency Levels........  DOE analyzed baseline efficiency
                                     levels and up to five higher
                                     thermal efficiency levels. DOE also
                                     analyzed baseline and up to three
                                     higher efficiency standby loss
                                     levels. See the engineering
                                     analysis for additional details on
                                     selections of efficiency levels and
                                     costs.
------------------------------------------------------------------------
\a\ RSMeans, RSMeans Building Construction Cost Data 2015, 73rd ed.
  (2014) (Available at: http://www.rsmeans.com).
\b\ RSMeans, RSMeans Contractor's Pricing Guide Residential Repair &
  Remodeling Costs 2015 (2014) (Available at: http://www.rsmeans.com).
\c\ RSMeans, RSMeans Mechanical Cost Data 2015. 38th Annual ed. (2014)
  (Available at: www.rsmeans.com).
\d\ U.S. Energy Information Administration (EIA), Electric Sales,
  Revenue, and Average Price 2013: Select table Sales and Revenue Data
  by State, Monthly Back to 1990 (Form EIA-826) (Available at: http://www.eia.gov/cneaf/electricity/page/sales_revenue.xls) (Last accessed
  on 04/04/2015).
\e\ U.S. Energy Information Administration (EIA), Average Price of
  Natural Gas Sold to Commercial Consumers--by State (Available at:
  http://www.eia.gov/dnav/ng/ng_pri_sum_a_EPG0_PCS_DMcf_a.htm) (Last
  accessed on 04/04/2015).
\f\ U.S. Energy Information Administration (EIA), State Energy Data
  System (SEDS) (Available at: http://www.eia.gov/state/seds/) (Last
  accessed 04/04/2015).
\g\ American Society of Heating, Refrigerating, and Air-Conditioning
  Engineers, 2011 ASHRAE Handbook: Heating, Ventilating, and Air-
  Conditioning Applications (2011) (Available at: https://www.ashrae.org/resources-publications).
\h\ Abramson, B., D. Herman, and L. Wong, Interactive Web-based Owning
  and Operating Cost Database (2005) Final Report ASHRAE Research
  Project RP-1237 (Available at: https://www.ashrae.org/resources-publications publications).

a. Equipment Prices
    The price of CWH equipment reflects the application of distribution 
channel markups (mechanical contractor markups) and sales tax to the 
MSP, which is the cost established in the engineering analysis. As 
described in section IV.D, DOE determined distribution channel costs 
and markups for commercial water heating equipment. For each equipment 
class, the engineering analysis provided contractor costs for the 
baseline equipment and up to five higher equipment efficiencies. DOE 
examined whether equipment prices for CWH equipment would change over 
time. DOE tentatively determined that there is no clear historical 
price trend for CWH equipment. Therefore, DOE used costs established in 
the engineering analysis directly for determining 2019 equipment prices 
and future equipment prices (equipment is purchased by the commercial 
consumer during the first year in 2019 at the estimated equipment 
price, after which the equipment price remains constant). See section 
IV.H.3 of this document and appendix 10B of the NOPR TSD for more 
details.
    The markup is the percentage increase in price as the CWH equipment 
passes through distribution channels. As explained in section IV.D, CWH 
equipment is assumed to be delivered by the manufacturer through a 
variety of distribution channels. There are several distribution 
pathways that involve different combinations of the costs and markups 
of commercial water heating equipment. The overall markups used in the 
LCC analysis are weighted averages of all of the relevant distribution 
channel markups.
    UM was concerned that this rulemaking would quickly drive up the 
cost of water heaters without addressing the inefficiencies of related 
systems. (UM, No. 9 at p. 2) In response, DOE does address the 
inefficiencies of

[[Page 34484]]

building systems, including water heating systems, through its Building 
Energy Codes Program. However, the present CWH rulemaking is initiated 
as part of the Appliances and Equipment Standards Program, and through 
this program, DOE can only set equipment standards that are 
technologically feasible and economically justified, but does not 
address other inefficiencies found in building systems.
b. Installation Costs
    The primary inputs for establishing the total installed cost are 
the baseline commercial consumer price, standard-level commercial 
consumer price increases, and installation costs (labor and material 
costs), where the primary installation costs changes, by efficiency 
level, are the venting costs for high-efficiency gas-fired products. 
Baseline commercial consumer prices and standard-level commercial 
consumer price increases will be determined by applying markups to 
manufacturer selling price estimates, including sales tax where 
appropriate. For new installations, the installation cost is added to 
the commercial consumer price to arrive at a total installed cost. For 
replacement installations, the cost to remove the previous equipment 
(including venting when necessary) and the installation cost for new 
equipment are added to the commercial consumer price to arrive at the 
total replacement installation cost.
    In the October 2014 RFI, DOE stated that it intended to develop 
installation costs using the most recent RS Means 
data.65 66 67 68 69 79 FR 62899, 62907 (Oct. 21, 2014). In 
addition, DOE sought inputs on its approach of using RS Means to 
develop installation costs. Id. Several stakeholders commented on the 
data sources for the installation cost analysis. AHRI commented that it 
was not familiar enough with the development process of the RS Means 
Mechanical Cost Data to be confident in its accuracy. (AHRI, No. 5 at 
p. 5) A. O. Smith also commented that it was not familiar enough with 
the development process of the RS Means Mechanical Cost Data to be 
confident in its accuracy. (A. O. Smith, No. 2 at p. 3) Rheem opined 
that RS Means Mechanical Cost Data was not appropriate for LCC and PBP 
analysis. Rheem commented that installation cost was a function of fuel 
input, and replacement installation was double the cost of new 
construction installation. (Rheem, No. 10 at p. 6)
---------------------------------------------------------------------------

    \65\ RSMeans, RSMeans Building Construction Cost Data 2015. 73rd 
ed. (2014) (Available at: http://www.rsmeans.com).
    \66\ RSMeans, RSMeans Contractor's Pricing Guide Residential 
Repair & Remodeling Costs 2015 (2014) (Available at: http://www.rsmeans.com).
    \67\ RSMeans, RSMeans Mechanical Cost Data 2015. 38th Annual ed. 
(2014) (Available at: http://www.rsmeans.com).
    \68\ RSMeans, RSMeans Electrical Cost Data 2015. 38th Annual ed. 
(2014) (Available at: http://www.rsmeans.com).
    \69\ RSMeans, RSMeans Plumbing Cost Data 2015. 38th Annual ed. 
(2014) (Available at: http://www.rsmeans.com).
---------------------------------------------------------------------------

    To summarize DOE's approach, DOE derived national average 
installation costs for commercial equipment from data provided in RS 
Means 2015 data books.\70\ RS Means provides estimates for installation 
costs for CWH units by equipment capacity, as well as cost indices that 
reflect the variation in installation costs for 295 cities in the 
United States. The RS Means data identify several cities in all 50 
States and the District of Columbia. DOE incorporated location-based 
cost indices into the analysis to capture variation in installation 
costs, depending on the location of the commercial consumer. Based upon 
the RS Means data, relationships were developed for each product 
subcategory to relate the amount of labor to the size of the product--
either the storage volume or the input rate. In response to the 
comments received, DOE compared the RS Means data to other publically-
available sources of similar national information, specifically 
Engineering News-Record (ENR) \71\ and Whitestone Research.\72\ 
Specifically, this approach was intended to address the concerns of 
Joint Advocates, as no independent calibration of the RS Means data was 
readily available. (Joint Advocates, No. 7 at p. 4) Generally, the RS 
Means data were found to be in agreement with other national sources. 
In certain specific instances when the RS Means data were found to be 
significantly higher than the average, DOE scaled the RS means 
relationship to represent the average of the available data sources. In 
the specific cases where the modeled labor hours resulted in excessive 
amounts of time in a given day, the number of laborers in the crew was 
increased by one person, while the labor hour calculations were reduced 
by a factor. This approach is in agreement with Rheem's comment that 
the water heater is a critical building component and will be repaired 
or replaced quickly to maintain operation of the building. (Rheem, No. 
10 at p. 7) As none of the received comments identified alternative 
sources of data, and with this comparison complete, DOE confirms the RS 
Means data to be sufficient for this analysis.
---------------------------------------------------------------------------

    \70\ DOE notes that RS Means publishes data books in one year 
for use the following year; hence, the 2015 data book was published 
in 2014.
    \71\ Engineering News-Record, Mechanical Contracting Costbook 
2015 Edition, Volume 8 (2014). McGraw-Hill Publishing Company, Inc.: 
New York, NY.
    \72\ Whitestone Research, The Whitestone Facility Maintenance 
and Repair Cost Reference 2012-2013, 17th Annual ed. (2012) 
Whitestone Research: Santa Barbara, CA.
---------------------------------------------------------------------------

    For products requiring venting, DOE calculated venting costs for 
each building in the Commercial Building Energy Consumption Survey 
(CBECS) and Residential Energy Consumption Survey (RECS). A variety of 
installation parameters impact venting costs; among these, DOE 
simulated the type of installation (new construction or retrofit), 
draft type (atmospheric venting or power venting), water heater fuel 
type, building vintage, number of stories, and presence of a chimney. A 
logic sequence was applied to the identified variables in order to 
accurately determine the venting costs for each instance of equipment 
and building within the Monte Carlo analysis. The primary assumptions 
used in this logic are listed below:
     25 percent of commercial buildings built prior to 1980 
were assumed to have a masonry chimney, and 25 percent of masonry 
chimneys required relining.
     Condensing products with vent diameters smaller than 5 
inches were modeled using PVC (polyvinyl chloride) as the vent 
material.
     Condensing products with vent diameters larger than 8 
inches were modeled using AL29-4C as the vent material.
     Condensing products with vent diameters of 5 inches and up 
to and including 8 inches were modeled using a random selection process 
where on average 50 percent of installations use PVC as the vent 
material and the remaining use AL29-4C.
     5 percent of all condensing water heater installations 
were modeled as direct vent installations, where flue lengths would 
allow. The intake air pipe material for condensing products was modeled 
as PVC.

Additional details of the venting logic sequence can be found in 
Chapter 8 of the NOPR TSD. In addition, total installed costs can be 
found below in tables V.4, V.6, V.8, V.10, and V.14.
    Issue 19: DOE seeks comment on the assumptions used in determining 
the venting costs for the relevant types of CWH equipment.
    Issue 20: DOE seeks comment on the percentage of installations 
using polypropylene venting materials in this industry and any 
limitations such venting has as to maximum available diameters or other 
limitations.

[[Page 34485]]

    DOE recognized that basic installation costs are higher for larger 
units, but did not identify any significant basic installation cost 
increases for higher-efficiency CWH equipment. These relationships were 
consistent in the RS Means data. Therefore, DOE utilized RS Means 
installation cost data to derive installation cost curves by equipment 
size. As the data sources available to DOE did not have data to 
calibrate the extent to which installation costs might change as 
efficiency increased, DOE assumed for the NOPR LCC analysis that basic 
installation cost would not increase as a function of increased 
efficiency.
    Rheem argued that the labor cost to remove a product was equal to 
the labor cost to install an identical appliance. (Rheem, No. 10 at p. 
7) Determination of the amount of labor was expected to be either a 
constant percentage based upon the installation cost, as suggested by 
Rheem, or a linear relationship of the percentage of the installation 
cost related to the volume of the tank in question. However, inspection 
of the available RS Means data demonstrated that the labor required for 
removing a storage tank smaller than approximately 250 gallons required 
approximately 20 percent of the labor necessary to complete the 
installation. The percentage of labor required for removal, compared to 
the labor required for installation, continued to increase with the 
storage volume until it reached approximately 54 percent of 
installation labor at a volume of 1,200 gallons. This relationship was 
observed to be non-linear in nature, which would significantly 
complicate the analysis, and did not agree with stakeholder feedback or 
DOE's understanding of the costs.
    Therefore, DOE estimated the labor required to remove CWH equipment 
by averaging the calculated percentage of labor to remove a water 
heater compared to the amount of labor required to install the water 
heater with respect to the storage volume. As reported in RS Means 
data, the average percentage of removal labor hours in terms of 
installation labor hours was found to be 37.5 percent of the labor to 
install a water heater, and this percentage was used to determine the 
amount of labor required to remove a given unit of CWH equipment at the 
end of service condition.
    DOE did not find a source of data on the cost for venting system 
removal. However, DOE understands that removal of venting requires many 
similar tasks in handling components as installation does, but without 
the same necessary care to ensure vent integrity. As found in the 
equipment removal cost, the amount of labor required for removing 
venting is less than the amount of labor required to install said 
venting. Furthermore, DOE notes that the amount of labor required for 
removal of the venting will increase significantly as the venting 
diameter increases due to the difficulty of managing the components 
during removal. Therefore, DOE modeled the labor required to remove an 
existing venting system as 50 percent of the labor required to complete 
an installation of a new venting system, as this presents a 
conservative estimate of the amount of labor required for removal.
    Issue 21: DOE seeks comment on the installation labor and labor to 
remove equipment and venting in this analysis.
    Issue 22: DOE seeks comment on the overall installed costs by TSL 
for each equipment class as shown in the Average LCC and PBP Results 
tables found in section V.B.1.a, Table V.4 through Table V.14.
c. Annual Energy Use
    DOE estimated the annual electricity and natural gas consumed by 
each class of CWH equipment, by efficiency and standby loss level, 
based on the energy use analysis described in section IV.E and in 
chapter 7 of the NOPR TSD.
d. Electricity and Natural Gas Prices
    Electricity and natural gas prices are used to convert changes in 
the energy consumption from higher-efficiency equipment into energy 
cost savings. It is important to consider regional differences in 
electricity and natural gas prices, because the variation in those 
prices can impact electricity and natural gas consumption savings and 
equipment costs across the country. DOE determined average effective 
commercial electricity prices \73\ and commercial natural gas prices 
\74\ at the State level from Energy Information Administration (EIA) 
data for 2014. DOE used data from EIA's Form 861 \75\ to calculate 
commercial and residential sector electricity prices, and EIA's Natural 
Gas Navigator \76\ to calculate commercial and residential sector 
natural gas prices. Future energy prices were projected using trends 
from the EIA's AEO 2015.\77\ This approach captured a wide range of 
commercial electricity and natural gas prices across the United States.
---------------------------------------------------------------------------

    \73\ U.S. Energy Information Administration (EIA), Form EIA-826 
Database Monthly Electric Utility Sales and Revenue Data (EIA-826 
Sales and Revenue Spreadsheets) (Available at: http://www.eia.gov/electricity/data/eia826/ On the right side of the screen under 
Aggregated, select 1990-current). (Last accessed on 04/04/2015.)
    \74\ U.S. Energy Information Administration (EIA), Natural Gas 
Prices (Available at: http://www.eia.gov/dnav/ng/ng_pri_sum_a_EPG0_PCS_DMcf_a.htm) (Last accessed on 04/04/2015).
    \75\ U.S. Energy Information Administration (EIA), Survey form 
EIA-861--Annual Electric Power Industry Report (Available at: http://www.eia.gov/electricity/data/eia861/index.html) (Last accessed on 
04/04/2015).
    \76\ U.S. Energy Information Administration (EIA), Natural Gas 
Navigator (Available at: http://tonto.eia.doe.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm) (Last accessed on 04/04/2015).
    \77\ U.S. Energy Information Administration (EIA), 2015 Annual 
Energy Outlook (2015) Full report. DOE/EIA-0383(2015) (Available at: 
http://www.eia.gov/forecasts/aeo/) (Last accessed on 04/04/2015).
---------------------------------------------------------------------------

    CBECS and RECS report data based on different geographic scales. 
The various States in the United States are aggregated into different 
geographic scales such as Census Divisions (for CBECS) and reportable 
domains (for RECS). Hence, DOE weighted electricity and natural gas 
prices in each State based on the cumulative population in the cluster 
of one or more States that comprise each Census Division or reportable 
domain respectively. See chapter 8 of the NOPR TSD for further details.
    The electricity and natural gas price trends provide the relative 
change in electricity and natural gas costs for future years. DOE used 
the AEO 2015 Reference case to provide the default electricity and 
natural gas price forecast scenarios. DOE extrapolated the trend in 
values at the Census Division level to establish prices beyond 2040.
    Several stakeholders suggested further items to consider for the 
electricity and gas price analysis. Steffes stated that using average 
electric rates where demand and energy charges were bundled together in 
LCC and PBP calculations would often fail to capture financial impact. 
(Steffes, No. 6 at p. 2) Bradford White recommended that DOE reach out 
to the Energy Solutions Center for natural gas pricing. (Bradford 
White, No. 3 at p. 3) AGA recommended that DOE use marginal gas-price 
analysis when evaluating monetary savings in the LCC, arguing that a 
shift from a non-condensing water heater to a condensing water heater 
would not alter fixed costs. (AGA, No. 4 at p. 5) DOE considered each 
of these comments carefully, and in response, developed the LCC 
analysis using a marginal fuel price approach to convert fuel savings 
into corresponding financial benefits for the different equipment 
classes. This approach was based on the development of marginal price 
factors for gas and electric fuels based on historical data relating 
monthly expenditures and consumption. For details of DOE's

[[Page 34486]]

marginal fuel price approach, see chapter 8 of the NOPR TSD.
e. Maintenance Costs
    Maintenance costs are the routine annual costs to the commercial 
consumer of ensuring continued equipment operation. DOE utilized The 
Whitestone Facility Maintenance and Repair Cost Reference 2012-2013 
\78\ to determine the amount of labor and material costs required for 
maintenance of each of the relevant CWH equipment subcategories. 
Maintenance costs include services such as cleaning the burner and flue 
and changing anodes. DOE estimated average annual routine maintenance 
costs for each class of CWH equipment based on equipment groupings. 
Table IV.28 presents various maintenance services identified and the 
amount of labor required to service each equipment class in this 
analysis.
---------------------------------------------------------------------------

    \78\ Whitestone Research, The Whitestone Facility Maintenance 
and Repair Cost Reference 2012-2013 (17th Annual ed. 2012) 
Whitestone Research: Santa Barbara, CA.

          Table IV.28--Summary of Maintenance Labor Hours and Schedule Used in the LCC and PBP Analyses
----------------------------------------------------------------------------------------------------------------
             Equipment class                          Description                Labor hours     Frequency years
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water         Clean (Volume <=275 gallons).....              2.67                 1
 heaters/Residential-duty gas-fired        Clean (Volume >275 gallons)......                 8                 2
 storage water heaters.                    Overhaul.........................              1.84                 5
Gas-fired instantaneous water heaters and  Service..........................              0.33                 1
 hot water supply boilers.
Electric storage water heaters...........  Check............................              0.33                 3
                                           Drain & Flush (Volume <=30                     2.67                 7
                                            gallons).                                        4                 7
                                           Drain & Flush (Volume >30
                                            gallons).
----------------------------------------------------------------------------------------------------------------

    Because data were not available to indicate how maintenance costs 
vary with equipment efficiency, DOE used preventive maintenance costs 
that remain constant as equipment efficiency increases. Additional 
information relating to maintenance of CWH equipment can be found in 
Chapter 8 of the TSD.
    Issue 23: DOE seeks comment on maintenance labor estimates used in 
the LCC analysis and the assumption that maintenance costs remain 
constant as efficiency increases.
f. Repair Costs
    The repair cost is the cost to the commercial consumer of replacing 
or repairing components that have failed in the CWH equipment.
    In the October 2014 RFI, DOE sought input on its intention to use 
the most recent RS Means Facilities Maintenance & Repair Cost data for 
developing maintenance costs. 79 FR 62899, 62908 (Oct. 21, 2014). Joint 
Advocates stated they were not aware of studies with independent 
calibration of RS Means Facilities Maintenance & Repair Cost data and 
suggested that DOE could survey a metropolitan area to perform such a 
calibration. (Joint Advocates, No. 7 at p. 4) Rheem commented that RS 
Means Facilities Maintenance & Repair Cost data presented best 
practices but stated that there are a wide range of practices in the 
field. (Rheem, No. 10 at p. 7) A.O. Smith and AHRI commented that each 
was not familiar enough with the development process of the RS Means 
Facilities Maintenance & Repair Cost Data to be confident in its 
accuracy. (A.O. Smith, No. 2 at p. 4; AHRI, No. 5 at p. 5)
    In response to these comments, DOE conducted further research to 
identify alternative sources of data relating to the repair of CWH 
equipment and identified The Whitestone Facility Maintenance and Repair 
Cost Reference 2012-2013 \79\ as an alternative source of information. 
Upon evaluation of the Whitestone Research data, and in consideration 
of the comments received, DOE adopted a simplified analysis for 
repairs. Specifically, although the Weibull probability distribution 
may be utilized, Joint Advocates and Rheem consider this approach to 
generalize equipment failure rates, and hence maintenance rates, across 
environmental conditions, installation variations, design approaches, 
and manufacturing processes which have changed with time. (Joint 
Advocates, No. 7 at p. 4; Rheem, No. 10 at p. 8) As an alternative to 
Weibull probability distribution, for this aspect of the analysis, DOE 
calculated repair costs based on an assumed typical product level 
failure rate of 2 percent per year, with an additional assumption of an 
average of five components that are field replaceable during the 
equipment's lifetime. These assumptions equate to a component failure 
rate of 0.4 percent of shipments per year. This repair rate extends 
through the life of the equipment.
---------------------------------------------------------------------------

    \79\ The Whitestone Facility Maintenance and Repair Cost 
Reference 2012-2013, 17th Annual ed. (2012) Whitestone Research: 
Santa Barbara, CA (Whitestone Research) (Available at: http://whitestoneresearch.com/CBRE-Store/Books.html).
---------------------------------------------------------------------------

    The labor required to replace a component was estimated as 2 hours 
for combustion systems, 1 hour for combustion controls, and \3/4\ hour 
to replace an electric water heater thermostat. The Department 
estimates that a service technician would require 3 hours on average to 
replace an electric heating element, accounting for the time required 
to drain a storage tank prior to element replacement and refilling the 
tank afterwards.
    In the October 2014 RFI, DOE asked if repair costs vary as a 
function of equipment efficiency. 79 FR 62899, 62908 (Oct. 21, 2014). 
Several stakeholders commented on the relationship between equipment 
efficiency and repair costs. Bradford White, A.O. Smith, and AHRI 
commented that to the extent that higher-efficiency equipment 
incorporates additional components and more complex controls, the 
repair costs would likely be higher. (Bradford White, No. 3 at p. 3; 
A.O. Smith, No. 2 at p. 4; AHRI, No. 5 at p. 5) Along the same line, 
Rheem stated that repair costs could be greater for new, more-efficient 
technologies. These repairs were more frequent, required more labor 
hours, and had parts that were less likely to be available and may 
require the cost of premium freight. (Rheem, No. 10 at p. 7)
    DOE considered the feedback from the stakeholders and undertook 
further research to identify components and subsystems commonly 
replaced in order to evaluate differences in repair costs relative to 
efficiency levels.
    The combustion systems and controls used in gas-fired CWH equipment 
were found to have different costs related to the efficiency levels of 
these products. This is in agreement with comments provided by AHRI, 
Bradford White,

[[Page 34487]]

Rheem, and A.O. Smith (AHRI, No. 5 at p. 5; Bradford White, No. 3 at p. 
3; Rheem, No. 10 at p. 7; A.O. Smith, No. 2 at p. 4). For the 
combustion systems, these differences relate predominately to 
atmospheric combustion, powered atmospheric combustion, and pre-mixed 
modulating combustion systems used on baseline-efficiency, moderate-
efficiency, and high-efficiency products respectively. The control 
systems employed on atmospheric combustion systems were found to be 
significantly less expensive than the controller used on powered 
combustion systems, which was observed to include a microprocessor in 
some products.
    A simpler analysis was used to account for repair costs in the LCC 
model for electric water heaters. Component costs used in repairs were 
taken from average prices found on manufacturers' Web sites, 
Grainger.com, and Internet searches.
    The repair cost of equipment with multiple service parts was 
estimated as the average cost of all of the components identified in 
the Internet search. This cost was applied at the frequency identified 
earlier in this section. DOE understands that this approach may 
conservatively estimate the total cost of repair for purposes of DOE's 
analysis, but the percentage of total repair cost remains small 
compared to the commercial consumer price and the total installation 
price. Additionally, DOE prefers to use this component level approach 
to understand the incremental repair cost difference between efficiency 
levels of equipment. Additional details of this analysis are found in 
Chapter 8 of the NOPR TSD and Appendix 8E of the NOPR TSD.
    Issue 24: DOE seeks comment on the findings of the repair costs of 
CWH equipment, labor estimates for repairs, and the estimated rate of 
component repair.
g. Equipment Lifetime
    Equipment lifetime is the age when a unit of CWH equipment is 
retired from service. In the October 2014 RFI, DOE presented various 
sources that estimate the average lifetime for CWH equipment to be 
between 7 and 25 years based on the application and equipment class. 79 
FR 62899, 62908 (Oct. 21, 2014). In addition, DOE stated in the October 
2014 RFI that it intended to determine average lifetime for each CWH 
equipment class as the primary input for developing a Weibull 
probability distribution to characterize CWH lifetime. DOE sought 
comment on its approach of using a Weibull probability distribution to 
characterize equipment lifetime. Id.
    In response to DOE's request for comment, Joint Advocates stated 
that Weibull survivorship was the ``least bad'' option for lifetime 
estimation. However, that method also assumed that changing water 
heater-related materials and processes relative to water heaters that 
have already died would not affect the lifetime of future units. Joint 
Advocates further pointed out that this assumption may not be valid, 
particularly for early generation of technologies. (Joint Advocates, 
No. 7 at p. 4) Lastly, Rheem agreed with DOE's approach of using 
Weibull probability distribution for lifetime analysis but cautioned 
that applications impact lifetime considerably. (Rheem, No. 10 at p. 8)
    In response to the Joint Advocates' comment on Weibull 
survivorship, DOE acknowledges that changing equipment, water heater-
related materials, and design processes may have an impact on future 
product life. DOE has not been able to obtain any information (nor have 
commenters provided such information) to assess how possible new 
designs and processes may impact future equipment life or how the use 
of early generation technologies informs or influences the life of 
equipment analyzed in this rule. Without such information, consistent 
with the Joint Advocates comment, DOE continued to assess lifetime of 
equipment in its analysis using historical data and a Weibull approach 
to allow for variability in equipment life within the LCC. Based on the 
parameters of the Weibull distribution, the lifetime for the equipment 
varies within each simulation run.
    For the analysis of this NOPR, DOE did not obtain additional data 
that conflicted with its findings of an average lifetime between 10 and 
25 years for different classes of CWH equipment. Consequently, DOE used 
a distribution of lifetimes, with the weighted averages ranging between 
10 years and 25 years as shown in Table IV.29, based on a review of a 
range of CWH equipment lifetime estimates found in published studies 
and online documents. DOE applied a distribution to all classes of CWH 
equipment analyzed. Chapter 8 of the NOPR TSD contains a detailed 
discussion of CWH equipment lifetimes.

         Table IV.29--Average CWH Lifetime Used in NOPR Analyses
------------------------------------------------------------------------
                                                            Average
                  CWH equipment class                      lifetime
                                                            (years)
-----------------------------------------------------------------------
Commercial gas-fired storage water heaters and gas-                 10
 fired storage-type instantaneous water heaters.......
Residential-duty gas-fired storage water heaters......              12
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Tankless water heaters............................              17
    Hot water supply boilers..........................              25
Electric storage water heaters........................              12
------------------------------------------------------------------------

h. Discount Rate
    The discount rate is the rate at which future expenditures are 
discounted to establish their present value. DOE determined the 
discount rate by estimating the cost of capital for purchasers of CWH 
equipment. Most purchasers use both debt and equity capital to fund 
investments. Therefore, for most purchasers, the discount rate is the 
weighted-average cost of debt and equity financing, or the weighted-
average cost of capital (WACC), less the expected inflation.
    To estimate the WACC of CWH equipment purchasers, DOE used a sample 
of more than 340 companies grouped to be representative of operators of 
different businesses, drawn from a database of 7,766 U.S. companies 
presented on the Damodaran Online Web site.\80\ This database includes 
most of the publicly-traded companies in the United States. The WACC 
approach for determining discount rates accounts for the current tax 
status of individual firms on an overall corporate basis. DOE did not 
evaluate the marginal effects of

[[Page 34488]]

increased costs, and, thus, depreciation due to more expensive 
equipment, on the overall tax status.
---------------------------------------------------------------------------

    \80\ Damodaran Online. Damodaran financial data used for 
determining cost of capital (Available at: http://
pages.stern.nyu.edu/~adamodar/) (Last accessed on 04/05/2015).
---------------------------------------------------------------------------

    DOE used the final sample of companies to represent purchasers of 
CWH equipment. For each company in the sample, DOE derived the cost of 
debt, percentage of debt financing, and systematic company risk from 
information on the Damodaran Online Web site. Damodaran estimated the 
cost of debt financing from the nominal long-term Federal government 
bond rate and the standard deviation of the stock price. DOE then 
determined the weighted average values for the cost of debt, range of 
values, and standard deviation of WACC for each category of the sample 
companies. Deducting expected inflation from the cost of capital 
provided estimates of the real discount rate by ownership category.
    For most educational buildings and a portion of the office 
buildings occupied by public schools, universities, and State and local 
government agencies, DOE estimated the cost of capital based on a 40-
year geometric mean of an index of long-term tax-exempt municipal bonds 
(>20 years).\81\ Federal office space was assumed to use the Federal 
bond rate, derived as the 40-year geometric average of long-term (>10 
years) U.S. government securities.\82\
---------------------------------------------------------------------------

    \81\ Federal Reserve Bank of St. Louis, State and Local Bonds--
Bond Buyer Go 20-Bond Municipal Bond Index (Available at: http://research.stlouisfed.org/fred2/series/MSLB20/downloaddata?cid=32995) 
(Last accessed 04/05/2015).
    \82\ Rate calculated with 1973-2013 data. Data source: U.S. 
Federal Reserve (Available at: http://www.federalreserve.gov/releases/h15/data.htm) (Last accessed on 04/05/2015).
---------------------------------------------------------------------------

    Based on this database, DOE calculated the weighted-average, after-
tax discount rate for CWH equipment purchases, adjusted for inflation. 
Chapter 8 of the NOPR TSD contains the detailed calculations related to 
discount rates.
3. Payback Period
    DOE also determined the economic impact of potential amended energy 
conservation standards on commercial consumers by calculating the PBP 
of more-stringent efficiency levels relative to the baseline efficiency 
levels. The PBP measures the amount of time it takes the commercial 
consumer to recover the assumed higher purchase expense of more-
efficient equipment through lower operating costs. Similar to the LCC, 
the PBP is based on the total installed cost and the operating expenses 
for all building types and purchase locations for the water-heating 
equipment. Because the simple PBP does not take into account changes in 
operating expense over time or the time value of money, DOE considered 
only the first year's operating expenses, including annualized repair 
and maintenance expenses, to calculate the PBP, unlike the LCC, which 
is calculated over the lifetime of the equipment. Chapter 8 of the NOPR 
TSD provides additional details about the PBP.

G. Shipments Analysis

    In its shipments analysis, DOE developed shipment projections for 
commercial water heating equipment and, in turn, calculated equipment 
stock over the course of the analysis period. DOE uses the shipments 
projection and the equipment stock to calculate the national impacts of 
potential amended energy conservation standards on energy use, NPV, and 
future manufacturer cash flows. DOE develops shipment projections based 
on historical data and an analysis of key market drivers for each type 
of equipment.
    To develop the shipments model, DOE started with known information 
on shipments of commercial electric and gas-fired storage water heaters 
collected for the years 1994-2013 from the AHRI Web site,\83\ and 
extended back to 1989 with data contained in a DOE rulemaking document 
published in 2000.\84\ The historical shipments of commercial electric 
and gas-fired storage water heaters are summarized in Table IV.30. 
Given that the estimated average useful lifetimes of these two types of 
equipment are 12 and 10 years, respectively, the historical shipments 
provided a basis for the development of a multi-year series of stock 
values. Using the stock values, a saturation rate was determined by 
dividing equipment stock by building stock, and this saturation rate 
was combined with annual building stock additions to estimate the 
shipments to new construction. With these data elements, a yearly 
accounting model was developed for the historical period to identify 
shipments deriving from new construction and from replacements of 
existing equipment. The accounting model also identified commercial 
consumer migration into or out of the storage water heater equipment 
classes by calculating the difference between new plus replacement 
shipments and the actual historical shipments.
---------------------------------------------------------------------------

    \83\ Air Conditioning, Heating, and Refrigeration Institute, 
Commercial Storage Water Heaters Historical Data (Available at: 
http://www.ahrinet.org/site/494/Resources/Statistics/Historical-Data/Commercial-Storage-Water-Heaters-Historical-Data) (Last 
accessed April 1, 2015).
    \84\ U.S. Department of Energy, Screening Analysis for EPACT-
Covered Commercial HVAC and Water-Heating Equipment. Volume 1--Main 
Report (2000). EERE-2006-STD-0098-0015 (Available at: http://www.regulations.gov/#!documentDetail;D=EERE-2006-STD-0098-0015).

 Table IV.30--Historical Shipments of Commercial Gas-Fired and Electric
                          Storage Water Heaters
------------------------------------------------------------------------
                                                 Commercial   Commercial
                     Year                        gas-fired     electric
                                                  storage      storage
------------------------------------------------------------------------
1994..........................................       91,027       22,288
1995..........................................       96,913       23,905
1996..........................................      127,978       26,954
1997..........................................       96,501       30,339
1998..........................................       94,577       35,586
1999..........................................      100,701       39,845
2000..........................................       99,317       44,162
2001..........................................       93,969       46,508
2002..........................................       96,582       45,819
2003..........................................       90,292       48,137
2004..........................................       96,481       57,944
2005..........................................       82,521       56,178
2006..........................................       84,653       63,170
2007..........................................       90,345       67,985
2008..........................................       88,265       68,686
2009..........................................       75,487       55,625
2010..........................................       78,614       58,349
2011..........................................       84,705       60,257
2012..........................................       80,490       67,265
2013..........................................       88,539       69,160
------------------------------------------------------------------------
Source: AHRI web site, http://www.ahrinet.org/site/494/Resources/Statistics/Historical-Data/Commercial-Storage-Water-Heaters-Historical-Data Data.

    No historical shipment information was available for residential-
duty gas-fired storage water heaters, gas-fired tankless waters, or 
gas-fired hot water supply boilers. The stock accounting model requires 
historical stock and shipments, so DOE estimated past shipments for 
these equipment classes. The stock of equipment for each equipment 
class was developed in the same manner described for the gas-fired and 
electric storage water heaters.
    For residential-duty gas-fired storage equipment, DOE assumed 
equivalency in shipments per basic model between the commercial and the 
residential-duty gas-fired storage water heaters. The ratio of the 
number of unique residential-duty gas-fired water heaters (67) to 
commercial gas-fired water heaters (328) listed in the analysis 
database was applied to the gas-fired water heater shipments, with the 
result being an estimated historical series of residential-duty gas-
fired water heaters.
    For gas-fired tankless water heaters, DOE used an estimation method 
discussed in industry sources (e.g., the Consortium for Energy 
Efficiency).\85\

[[Page 34489]]

This estimation method holds that tankless water heaters constitute 10 
percent of the total CWH market. Because the only data widely available 
are for gas-fired and electric storage unit shipments, DOE implemented 
this by assuming that tankless water heaters constitute 10 percent of 
the total shipments of gas-fired storage water heaters, electric 
storage water heaters, and gas-fired tankless water heaters, and that 
the resulting number of tankless water heaters would be split between 
fuel types based on relative percentages of storage water heaters. DOE 
performed this calculation for 2013 shipments. Shipments were estimated 
for earlier years by applying a year-to-year growth rate in total 
imports and exports (net of re-exports) of gas-fired tankless water 
heaters obtained from a United Nations Web site.\86\
---------------------------------------------------------------------------

    \85\ Consortium for Energy Efficiency (CEE), CEE Commercial 
Water Heating Initiative Description (2012) (Available at: http://library.cee1.org/sites/default/files/library/7521/CEE_GasComm_WHInitiative_5Jun2012.pdf).
    \86\ United Nations, Department of Economic and Social Affairs 
Statistics Division, Trade Statistics, UN Comtrade--data extraction 
interface (Available at: http://comtrade.un.org/data/) (Last 
accessed April 1, 2015).
---------------------------------------------------------------------------

    To estimate historical shipments of instantaneous water heaters and 
hot water supply boilers, DOE started with an estimate of the total 
stock of instantaneous equipment in commercial buildings for the year 
2008.\87\ Based on information derived from CBECS,\88\ the DOE study 
estimated the total stock of instantaneous water heaters and hot water 
supply boilers in commercial buildings to be 600,000 units. However, 
because CBECS data do not distinguish well between residential-rated 
and commercial-rated equipment, it is likely that some residential-
rated tankless equipment is included in the estimated total stock. 
Using the shipments of commercial tankless water heaters discussed in 
the prior paragraph, DOE estimated the 2008 stock of commercial 
tankless water heaters in commercial buildings and subtracted it from 
the total instantaneous stock. Since DOE believes the total stock of 
instantaneous equipment identified in the DOE study includes tankless 
units that are classified by DOE as residential equipment, to account 
for residential tankless units, DOE assumed that the residential and 
commercial tankless water heaters exist in the same numbers. The 
difference between the total instantaneous equipment stock and the 
stock of residential and commercial tankless water heaters is assumed 
to be the 2008 stock of hot water supply boilers. Shipments of hot 
water supply boilers were estimated simplistically by dividing the 
stock by the assumed 25-year life. The pre-2008 shipments were held 
constant for the 25 years leading up to 2008, and post-2008 shipments 
were generated by linking the 2008 value to the annual percentage 
change in gas-fired storage shipments.
---------------------------------------------------------------------------

    \87\ Navigant, Energy Savings Potential and RD&D Opportunities 
for Commercial Building Appliances. 2009. Prepared for the U.S. 
Department of Energy, Energy Efficiency and Renewable Energy, 
Building Technologies Program (Available at: http://apps1.eere.energy.gov/buildings/publications/pdfs/corporate/commercial_appliances_report_12-09.pdf).
    \88\ Energy Information Administration (EIA), 2003 Commercial 
Building Energy Consumption Survey (CBECS) Data (2003) (Available 
at: http://www.eia.gov/consumption/commercial/data/2003/ 2003/).
---------------------------------------------------------------------------

    To project shipments and stock for 2014 through the end of the 30-
year analysis period (2048), DOE relied on a stock accounting model. 
For each class of equipment, DOE projected replacement shipments based 
on the historical shipments, the expected useful lifetime of each 
equipment class, and a Weibull distribution that identifies a 
percentage of units still in existence from a prior year that will fail 
and need to be replaced in the current year. In each year, DOE assumed 
a fraction of the replacement market will be retired rather than 
replaced due to the demolition of buildings in which this CWH equipment 
resides. This retirement fraction was derived from building stock data 
from the AEO 2015.\89\
---------------------------------------------------------------------------

    \89\ U.S. Energy Information Administration (EIA), 2015 Annual 
Energy Outlook (2015) Full report. DOE/EIA-0383 (2014) (Available 
at: http://www.eia.gov/forecasts/aeo/).
---------------------------------------------------------------------------

    To project shipments of commercial water heating equipment for new 
construction, DOE relied on building stock data obtained from the AEO 
2015. For this rulemaking, DOE assumes commercial water heating 
equipment is used in both commercial and residential buildings, 
including residential multi-family dwellings. DOE estimated a 
saturation rate for each equipment type using building and equipment 
stock values. The saturation rate was applied to new building additions 
in each year, yielding shipments to new buildings. The building stock 
and additions projections from the AEO 2015 are shown Table IV.31.

                                     Table IV.31--Building Stock Projections
----------------------------------------------------------------------------------------------------------------
                                                       Total        Commercial         Total        Residential
                                                    commercial    building stock    residential      building
                      Year                        building stock     additions    building stock     additions
                                                   (million sq.    (million sq.    (millions of    (millions of
                                                       ft.)            ft.)           units)          units)
----------------------------------------------------------------------------------------------------------------
2013............................................          81,382           1,451          114.33            0.99
2019............................................          85,888           2,077          119.41            1.67
2020............................................          86,938           2,089          120.51            1.69
2025............................................          92,037           2,027          125.82            1.70
2030............................................          96,380           1,987          131.09            1.66
2035............................................         100,920           2,302          136.04            1.62
2040............................................         106,649           2,408          140.96            1.62
2045............................................         112,186           2,651          146.22            1.73
2048............................................         115,646           2,808          149.48            1.77
----------------------------------------------------------------------------------------------------------------
Source: EIA AEO 2015.

    The final component in the stock accounting model is shifts to or 
away from particular equipment classes. Based on the historic data, 
there is an apparent shift toward electric storage water heaters. The 
historical shipments summarized in Table IV.30 showed a fairly steady 
growth in commercial electric storage water heaters, with shipments 
growing from 22,288 in 1994 to 69,160 in 2013. Over the same time 
period, commercial gas-fired storage water heaters have seen a decline 
in shipments from 91,027 in 1994, to a low of 75,487 in 2009, and to 
the higher value of 88,539 in 2013. Thus, there is an apparent shift 
away from gas-fired storage units, and because residential-

[[Page 34490]]

duty gas-fired storage water heaters and gas-fired hot water supply 
boiler shipments were linked to gas-fired storage units, there is an 
apparent shift away from the residential-duty and hot water supply 
boiler equipment classes as well in the shipments analysis. These 
apparent shifts were developed for each equipment class and are 
captured in DOE's shipments model. The development of the apparent 
shifts and the effect on projected equipment class shipments is 
detailed in Chapter 7 of the TSD.
    For each equipment class, there are factors that influence the 
magnitude of the apparent shifts, including relative fuel prices and 
the resultant energy cost of competing products, relative equipment and 
installation costs, repair and maintenance costs, commercial consumer 
preferences, and outside influences such as ENERGY STAR and utility 
conservation or marketing programs. If the slope of the apparent shifts 
in shipments is held constant at the values developed for 2013, the 
last year of historical data, over the study period commercial gas-
fired storage water heater shipments would continue to decline, falling 
to 79,000 units by 2048, while over the same time period the commercial 
electric storage water heater shipments would climb to over 200,000 
units. Nothing in the long term historical data indicates that such a 
wide disparity between gas-fired and electric storage water heater 
equipment shipments would develop. The historical data summarized in 
Table IV.30 show the growth rate in commercial gas-fired storage water 
heater equipment shipments over time to be flat, or increasing if one 
looks at the last 5 years. Rather than showing shifts that result in 
the wide disparity between commercial gas-fired and electric storage 
units, for the NOPR analyses DOE used a shift value equal to the 2013 
shift values adjusted downward by 50 percent. The resulting shipment 
projection continues the observed trends of electric storage water 
heater shipments increasing over time at a rate faster than the 
commercial gas-fired water heater equipment. The resulting projection 
shows commercial electric storage water heater shipments exceeding 
commercial gas-fired storage shipments by 2030. The commercial electric 
storage water heater shipments exceed commercial gas-fired storage 
water heater shipments by approximately 25 percent in final year of the 
study period (2048).
    For all equipment classes, DOE assumed that the apparent shift is 
most likely to occur in new installations rather than in the 
replacement installations. As described in chapter 9 of the TSD, DOE 
assumed that a shift is twice as likely to take place in a new 
installation as in a replacement installation. For example, if DOE 
estimated that in 2014, 20 percent of shipments for an equipment class 
went to new installations and 80 percent went for replacements in the 
absence of switching, DOE multiplied the 20 percent multiplied by 2 (40 
percent) and added the 80 percent (which equals 120 percent). Both the 
40 percent for new and the 80 percent for replacement were then divided 
by 120 percent to normalize to 100 percent.
    The resulting shipment projection is shown in Table IV.32.

                          Table IV.32--Shipments of Commercial Water Heating Equipment
----------------------------------------------------------------------------------------------------------------
                                                   Residential-
                                  Commercial gas-    duty gas-       Gas-fired     Gas-fired hot     Electric
              Year                 fired storage   fired storage  tankless water   water supply    storage water
                                   water heaters   water heaters      heaters         boilers         heaters
----------------------------------------------------------------------------------------------------------------
2013............................          88,539          18,086           9,838          15,858          69,160
2019............................          95,145          19,534           8,940          21,959          86,782
2020............................          92,054          19,402          11,128          22,060          89,390
2025............................         102,269          19,243          13,323          21,969          91,501
2030............................         103,025          21,590          14,957          21,957         105,626
2035............................         109,539          20,911          14,606          22,383         121,567
2040............................         115,788          22,647          22,817          26,637         131,683
2045............................         121,163          23,725          22,625          31,671         153,854
2048............................         130,779          23,726          24,170          32,951         164,934
----------------------------------------------------------------------------------------------------------------

    Because the estimated energy usage of CWH equipment differs by 
commercial and residential setting, the NIA employs the same fractions 
of shipments (or sales) to commercial and to residential commercial 
consumers used by the LCC analysis. The fractions of shipments by type 
of commercial consumer are shown in Table IV.33.

       Table IV.33--Shipment Shares by Type of Commercial Consumer
------------------------------------------------------------------------
                                                            Residential
             Equipment class              Commercial (%)        (%)
------------------------------------------------------------------------
Commercial gas-fired storage water                  81.0            19.0
 heaters and gas-fired storage-type
 instantaneous water heaters............
Residential-duty gas-fired storage water            48.0            52.0
 heaters................................
Gas-fired instantaneous water heaters
 and hot water supply boilers:
    Gas-fired tankless water heaters....            67.0            33.0
    Gas-fired hot water supply boilers..            82.0            18.0
Electric storage water heaters..........            77.0            23.0
------------------------------------------------------------------------

    Issue 25: DOE seeks input on actual historical shipments for the 
three equipment classes for which no historical shipments data exist--
residential-duty gas-fired storage water heaters, gas-fired tankless 
water heaters, and gas-fired hot water supply boilers.
    Issue 26: DOE seeks input on the methodology used to estimate the 
historical shipments for the residential-duty gas-fired storage water 
heater, gas-fired tankless water heater, and hot water supply boiler 
equipment classes, particularly in the absence of actual historic 
shipments data.

[[Page 34491]]

    Issue 27: DOE seeks input on commercial consumer switching between 
equipment types or fuel types, and specific information that DOE can 
use to model such commercial consumer switching. For example, if a 
commercial consumer switches away from commercial gas-fired storage 
water heaters, to what type of equipment is the commercial consumer 
most likely to switch, and is it a one-for-one switch or some other 
ratio?
    Issue 28: DOE seeks input on the shares of shipments allocated to 
commercial and to residential consumer types.
    For the NIA model, shipments must be disaggregated by efficiency 
levels that correspond to the levels analyzed in the engineering and 
LCC analyses. To identify the percentage of shipments corresponding to 
each efficiency level, DOE compiled and analyzed a database of 
equipment currently produced and sold by manufacturers. The sources of 
information for this database included the AHRI Certification 
Directory,\90\ the California Energy Commission Appliance Efficiency 
Database,\91\ and manufacturer catalogs and Web sites. DOE recognizes 
that demand varies across different models of equipment, and that by 
relying on the database of existing equipment DOE is explicitly 
assuming each model of equipment is equally likely to be shipped for 
sale to commercial consumers. Lacking data to the contrary, DOE 
determined that the distribution of shipments by efficiency level 
derived from available equipment models is a reasonable approximation 
of the distribution that would be derived from actual equipment 
shipments.
---------------------------------------------------------------------------

    \90\ AHRI Certification Directory is available at: https://www.ahridirectory.org/ahridirectory/pages/home.aspx.
    \91\ California Energy Commission Appliance Efficiency Database 
is available at: https://cacertappliances.energy.ca.gov/Pages/ApplianceSearch.aspx.
---------------------------------------------------------------------------

    Pursuant to DOE's October 2014 RFI, stakeholders commented on 
inputs to the shipment analysis and offered support. AHRI mentioned 
that it was consulting with its members to develop information that 
addressed efficiency market shares of shipments and would provide the 
findings to DOE once they were collated. (AHRI, No. 5 at p. 6) Rheem 
stated that over the last 3 years, the shipments mix had increased 
towards high-efficiency gas-fired condensing water heaters. (Rheem, No. 
10 at p. 8) Bradford White stated that it would work with AHRI to 
respond on current and historical efficiency shares of shipments. 
(Bradford White, No. 3 at p. 3) DOE appreciates the offer of assistance 
from AHRI and manufacturers. DOE notes that this information was not 
received (or at least, not received in time for use in this NOPR), but 
DOE remains hopeful that AHRI and manufacturers can provide information 
on shipments, generally, and on shipment efficiency distributions for 
use in the next phase of this rulemaking.
    Rheem stated that the percentage of commercial water heaters used 
in single-family residential-duty applications is minimal. (Rheem, No. 
10 at p. 6) DOE's LCC analysis estimated the fraction of each equipment 
type that is applied to residential or commercial building types. For 
the shipment analysis, the distinction between single-family and 
multifamily construction would have a second-order impact on the 
estimates of shipments. DOE uses the building stock estimates to derive 
annual saturation rates, which are then applied to estimated new 
construction. For the NOPR, DOE used total residential building stocks. 
If DOE used only multifamily stocks, the saturation rates would be 
higher, but the stock against which it is applied would be smaller, so 
from a mathematical perspective, the results would be similar. The main 
difference would derive from the fact that multifamily construction 
would be projected to grow at different rates by EIA than would total 
residential construction. Over the 30-year analysis period, total 
residential stock grows at 1.0 percent while multifamily stock grows at 
0.8 percent.
    Issue 29: DOE seeks input on whether the shipment model should 
assume that multifamily buildings are the only residential building 
stock in which CWH equipment is used, or whether DOE should continue to 
use total residential building stocks.
    In terms of evaluating shipment growth, DOE used the projected 
number of millions of square feet of floor space additions and new 
residential construction to drive the new additions forecast. A number 
of the topics discussed in the Joint Advocates comment, such as the 
impact of increased equipment height or diameter on the ease with which 
the equipment can physically be carried into a building, were 
considered in the estimation of installation costs in the LCC analysis.

H. National Impact Analysis

    The national impact analysis (NIA) analyzes the effects of a 
potential energy conservation standard from a national perspective. The 
NIA assesses the NES and the NPV of total commercial consumer costs and 
savings that would be expected to result from the amended standards. 
The NES and NPV are analyzed at specific efficiency levels (i.e., TSLs) 
for each equipment class of CWH equipment. DOE calculates the NES and 
NPV based on projections of annual equipment shipments, along with the 
annual energy consumption and total installed cost data from the LCC 
analysis. For the NOPR analysis, DOE forecasted the energy savings, 
operating cost savings, equipment costs, and NPV of commercial consumer 
benefits for equipment shipped from 2019 through 2048--the year in 
which the last standards-compliant equipment would be shipped during 
the 30-year analysis period.
    DOE evaluates the impacts of the new and amended standards by 
comparing no-new-standards-case projections with standards-case 
projections. The no-new-standards-case projections characterize energy 
use and commercial consumer costs for each equipment class in the 
absence of any new or amended energy conservation standards. DOE 
compares these no-new-standards-case projections with projections 
characterizing the market for each equipment class if DOE adopted the 
amended standards at each TSL. For the standards cases, DOE assumed a 
``roll-up'' scenario in which equipment at efficiency levels that do 
not meet the standard level under consideration would ``roll up'' to 
the efficiency level that just meets the proposed standard level, and 
equipment already being purchased at efficiency levels at or above the 
proposed standard level would remain unaffected.
    DOE uses a computer spreadsheet model to calculate the energy 
savings and the national commercial consumer costs and savings from 
each TSL. Chapter 10 and appendix 10A of the NOPR TSD explain the 
models and how to use them, and interested parties can review DOE's 
analyses by interacting with these spreadsheets. The models and 
documentation are available on DOE's Web site.\92\ Interested parties 
can review DOE's analyses by changing various input quantities within 
the spreadsheet.
---------------------------------------------------------------------------

    \92\ DOE's Web page on commercial water heating equipment is 
available at: https://www1.eere.energy.gov/buildings/appliance_standards/standards.aspx?productid=36.
---------------------------------------------------------------------------

    Unlike the LCC analysis, the NES analysis does not use 
distributions for inputs or outputs, but relies on national average 
equipment costs and energy costs. DOE used the NES spreadsheet to 
perform calculations of energy savings and NPV using the annual energy 
consumption, maintenance and repair costs, and total installed cost 
data from the LCC analysis. The NIA also uses

[[Page 34492]]

projections of energy prices and building stock and additions from the 
AEO 2015 Reference case. Additionally, DOE analyzed scenarios that used 
inputs from the AEO 2015 Low Economic Growth and High Economic Growth 
cases. These cases have lower and higher energy price trends, 
respectively, compared to the Reference case. NIA results based on 
these cases are presented in chapter 10 of the NOPR TSD.
    A detailed description of the procedure to calculate NES and NPV 
and inputs for this analysis are provided in chapter 10 of the NOPR 
TSD.
1. Equipment Efficiency in the No-New-Standards Case and Standards 
Cases
    DOE uses a no-new-standards-case distribution of efficiency levels 
to project what the CWH equipment market would look like in the absence 
of amended standards. DOE developed the no-new-standards-case 
distribution of equipment by thermal efficiency levels, and by standby 
loss efficiency levels, for CWH equipment by analyzing a database \93\ 
of equipment currently available. DOE applied the percentages of models 
within each efficiency range to the total unit shipments for a given 
equipment class to estimate the distribution of shipments for the no-
new-standards case. Then, from those market shares and projections of 
shipments by equipment class, DOE extrapolated future equipment 
efficiency trends both for a no-new-standards-case scenario and for 
standards-case scenarios.
---------------------------------------------------------------------------

    \93\ This database was developed using model data from the AHRI 
Certification Directory (available at: https://www.ahridirectory.org/ahridirectory/pages/home.aspx), California 
Energy Commission Appliance Efficiency Database (available at: 
https://cacertappliances.energy.ca.gov/Pages/ApplianceSearch.aspx), 
and manufacturer Web sites and catalogs.
---------------------------------------------------------------------------

    This rulemaking is examining potential improvements for both 
thermal efficiency of equipment and in the standby energy usage. Thus, 
two sets of efficiency distributions for the no-new standards-case 
scenario were developed for these classes. Table IV.34 shows the 
distribution of equipment by thermal efficiency level. The standby loss 
efficiency distribution is summarized in Table IV.35.

                                                Table IV.34--Market Shares by Thermal Efficiency Level *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                     Equipment class                       Et EL0 ** (%)    Et EL1 (%)      Et EL2 (%)      Et EL3 (%)      Et EL4 (%)      Et EL5 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and gas-fired              57              12               0               6              23               1
 storage-type instantaneous water heaters...............
Residential-duty gas-fired storage water heaters........              66               9               3              16               6
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Gas-fired tankless water heaters....................              16              40              28               4               4               8
    Gas-fired hot water supply boilers..................              40              24              14               2               7              13
Electric storage water heaters..........................             100
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Due to rounding, shares for each equipment class might not add to 100 percent.
** Et EL refers to Thermal Efficiency Level.


                                               Table IV.35--Market Shares by Standby Loss Efficiency Level
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     Standby loss level
          Equipment class                    **             Et EL0 * %      Et EL1 (%)      Et EL2 (%)      Et EL3 (%)      Et EL4 (%)      Et EL5 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial gas-fired Storage and    SL EL0..............              76              88               0              67              33              75
 storage-type instantaneous water   SL EL1..............              20               0               0              19              14              25
 heaters.                           SL EL2..............               4              13             100              14              53               0
Residential-duty gas-fired storage  SL EL0..............              82              17               0               0               0
 water heaters.                     SL EL1..............              11               0             100             100             100  ..............
                                    SL EL2..............               5              17               0               0               0  ..............
                                    SL EL3..............               2              67               0               0               0  ..............
Electric storage water heaters....  SL EL1..............              97
                                    SL EL2..............               3  ..............  ..............  ..............  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Et EL refers to Thermal Efficiency Level.
** SL EL refers to Standby Loss Efficiency Level.

    For each efficiency level analyzed, DOE used a ``roll-up'' scenario 
to establish the market shares by efficiency level for the year that 
compliance would be required with amended standards. The analysis 
starts with the no-new-standards-case distributions wherein shipments 
are assumed to be distributed across thermal efficiency levels as shown 
in Table IV.34. When potential standard levels above the base level are 
analyzed, as the name implies, the shipments in the no-new-standards 
case that did not meet the thermal efficiency standard level being 
considered would roll up to meet the amended standard level. This 
information also suggests that equipment efficiencies in the no-new-
standards case that were above the standard level under consideration 
would not be affected.
    For the equipment classes for which standby loss standards are 
being considered, the analysis takes into account a two-dimensional 
rollup. Equipment is distributed across the thermal efficiency levels, 
and for 3 classes, across the SL efficiency levels. Thus, in the 
analysis, a second roll-up

[[Page 34493]]

occurs starting with equipment distributed across SL efficiency levels 
as shown in Table IV.35. As higher SL levels are considered, equipment 
not meeting the standard being considered would roll-up to the SL level 
being considered. The no-new-standards-case efficiency distributions 
for each equipment class are discussed more fully in chapter 10 of the 
NOPR TSD.
2. National Energy Savings
    The inputs for determining the NES are: (1) Annual energy 
consumption per unit; (2) shipments; (3) equipment stock; and (4) site-
to-source and full-fuel-cycle conversion factors.
    DOE calculated the NES associated with the difference between the 
per-unit energy use under a standards-case scenario and the per-unit 
energy use in the no-new-standards case. The average energy per unit 
used by the commercial water heating equipment stock gradually 
decreases in the standards case relative to the no-new-standards case 
as more-efficient commercial water heating units gradually replaces 
less-efficient units.
    Unit energy consumption values for each equipment class are taken 
from the LCC spreadsheet for each efficiency level and weighted based 
on market efficiency distributions. To estimate the total energy 
savings for each efficiency level, DOE first calculated the per-unit 
energy reduction (i.e., the difference between the energy directly 
consumed by a unit of equipment in operation in the no-new-standards 
case and the standards case) for each class of commercial water heating 
equipment for each year of the analysis period. The analysis period 
begins with the expected compliance date of amended energy conservation 
standards (i.e., 2019, or 3 years after the publication of a final rule 
issued as a result of this rulemaking). Second, DOE determined the 
annual site energy savings by multiplying the stock of each equipment 
class by vintage (i.e., year of shipment) by the per-unit energy 
reduction for each vintage (from step one). Third, DOE converted the 
annual site electricity savings into the annual amount of energy saved 
at the source of electricity generation (the source or primary energy), 
using a time series of conversion factors derived from the latest 
version of EIA's National Energy Modeling System (NEMS). Finally, DOE 
summed the annual primary energy savings for the lifetime of units 
shipped over a 30-year period to calculate the total NES. DOE performed 
these calculations for each efficiency level considered for commercial 
water heating equipment in this rulemaking.
    DOE has historically presented NES in terms of primary energy 
savings. In the case of electricity use and savings, primary energy 
savings include the energy lost in the power system in the form of 
losses as well as the energy input required at the electric generation 
station in order to convert and deliver the energy required at the site 
of consumption. DOE uses a multiplicative factor called the ``site-to-
source conversion factor'' to convert site energy consumption to 
primary energy consumption.
    In response to the recommendations of a committee on ``Point-of-Use 
and Full-Fuel-Cycle Measurement Approaches to Energy Efficiency 
Standards'' appointed by the National Academy of Sciences, DOE 
announced its intention to use full-fuel-cycle (FFC) measures of energy 
use and greenhouse gas and other emissions in the national impact 
analyses and emissions analyses included in future energy conservation 
standards rulemakings. 76 FR 51281 (August 18, 2011). While DOE stated 
in that notice that it intended to use the Greenhouse Gases, Regulated 
Emissions, and Energy Use in Transportation (GREET) model to conduct 
the analysis, it also said it would review alternative methods, 
including the use of NEMS. After evaluating both models and the 
approaches discussed in the August 18, 2011 notice, DOE published a 
statement of amended policy in the Federal Register in which DOE 
explained its determination that NEMS is a more appropriate tool for 
its FFC analysis and its intention to use NEMS for that purpose. 77 FR 
49701 (August 17, 2012). DOE received one comment, which was supportive 
of the use of NEMS for DOE's FFC analysis.\94\
---------------------------------------------------------------------------

    \94\ Docket ID: EERE-2010-BT-NOA-0028, comment by Kirk 
Lundblade.
---------------------------------------------------------------------------

    The approach used for this NOPR, the site-to-source ratios, and the 
FFC multipliers that were applied are described in appendix 10D of the 
NOPR TSD. NES results are presented in both primary and FFC savings in 
section V.B.3.a.
    DOE considered whether a rebound effect is applicable in its NES 
analysis for commercial water heating equipment. A rebound effect 
occurs when an increase in equipment efficiency leads to increased 
demand for its service. For example, when a commercial consumer 
realizes that a more-efficient water heating device will lower the 
energy bill, that person may opt to increase his or her amenity level, 
for example, by taking longer showers and thereby consuming more hot 
water. In this way, the commercial consumer gives up a portion of the 
energy cost savings in favor of the increased amenity. For the CWH 
equipment market, there are two ways that a rebound effect could occur: 
(1) Increased use of hot water within the buildings in which such units 
are installed; and (2) additional hot water outlets that were not 
previously installed. Because the CWH equipment that are the subject of 
this notice are commercial equipment, the person owning the equipment 
(i.e., the apartment or commercial building owner) is usually not the 
person operating the equipment (e.g., the apartment renter, or the 
restaurant employee using hot water to wash dishes). Because the 
operator usually does not own the equipment, that person will not have 
the operating cost information necessary to influence his or her 
operation of the equipment. Therefore, DOE believes the first type of 
rebound is unlikely to occur at levels that could be considered 
significant. Similarly, the second type of rebound is unlikely because 
a small change in efficiency is insignificant among the factors that 
determine whether a company will invest the money required to pipe hot 
water to additional outlets.
    In the October 2014 RFI, DOE sought comments and data on any 
rebound effect that may be associated with more efficient commercial 
water heaters. 79 FR 62908 (October 21, 2014). DOE received two 
comments. Both A. O. Smith and Joint Advocates did not believe a 
rebound effect would be significant. A.O. Smith commented that water 
usage is based on demand and more efficient water heaters won't change 
the demand. (A. O. Smith, No. 2 at p. 4) Joint Advocates commented that 
with the marginal change in energy bill for small business owners, they 
would expect little increased hot water usage, and that for tenant-
occupied buildings it would be ``difficult to infer that more tenants 
will wash their hands longer because the hot water costs the building 
owner less.'' Thus, Joint Advocates thought the likelihood of a strong 
rebound effect is very low. (Joint Advocates, No. 7 at p. 5) Based on 
its understanding of CWH equipment use as well as comments received 
from stakeholders, DOE concurs that the likelihood of a rebound effect 
is small and has not included a rebound effect in the analysis.
    American Gas Association suggested that DOE use full-fuel-cycle 
measurements in its analysis. (AGA, No. 4 at p. 2) DOE agrees with the 
suggestion.
    Issue 30: DOE seeks input on the possibility that rebound effect 
would be

[[Page 34494]]

significant, and if so, estimates of the impact of the rebound effect 
on NES.
3. Net Present Value
    To estimate the NPV, DOE calculated the net impact as the 
difference between total operating cost savings and increases in total 
installed costs. DOE calculated the NPV of each considered standard 
level over the life of the equipment using the following three steps.
    First, DOE determined the difference between the equipment costs 
under the standard-level case and the no-new-standards case in order to 
obtain the net equipment cost increase resulting from the higher 
standard level. As noted in section IV.F.2.a, DOE used a constant real 
price assumption as the default price projection; the cost to 
manufacture a given unit of higher efficiency neither increases nor 
decreases over time. The analysis of the price trends is described in 
appendix 10B of the NOPR TSD.
    Second, DOE determined the difference between the no-new-standards-
case operating costs and the standard-level operating costs in order to 
obtain the net operating cost savings from each higher efficiency 
level. Third, DOE determined the difference between the net operating 
cost savings and the net equipment cost increase in order to obtain the 
net savings (or expense) for each year. DOE then discounted the annual 
net savings (or expenses) to 2015 for CWH equipment bought on or after 
2019 and summed the discounted values to provide the NPV for an 
efficiency level.
    In accordance with the OMB's guidelines on regulatory analysis,\95\ 
DOE calculated NPV using both a 7-percent and a 3-percent real discount 
rate. The 7-percent rate is an estimate of the average before-tax rate 
of return on private capital in the U.S. economy. DOE used this 
discount rate to approximate the opportunity cost of capital in the 
private sector, because recent OMB analysis has found the average rate 
of return on capital to be near this rate. DOE used the 3-percent rate 
to capture the potential effects of standards on private consumption 
(e.g., through higher prices for products and reduced purchases of 
energy). This is the rate at which society discounts future consumption 
flows to their present value. This rate can be approximated by the real 
rate of return on long-term government debt (i.e., yield on United 
States Treasury notes minus annual rate of change in the Consumer Price 
Index), which has averaged about 3 percent on a pre-tax basis for the 
past 30 years.
---------------------------------------------------------------------------

    \95\ Office of Management and Budget, section E in OMB Circular 
A-4 (Sept. 17, 2003) (Available at: www.whitehouse.gov/omb/circulars_a004_a-4).
---------------------------------------------------------------------------

    American Gas Association recommended that DOE include a fuel 
switching analysis to ensure that standards would not result in 
switching to less-efficient energy sources. (AGA, No. 4 at p. 2) As 
part of the analysis, DOE examined the possibility of fuel switching by 
using NIA inputs to examine commercial consumer payback periods in 
situations where commercial consumers switch from gas-fired to electric 
water heaters. In an attempt to make the values comparable, DOE 
adjusted values using ratios based on the first-hour ratings shown in 
Table IV.36. In the case of moving from a commercial gas-fired to an 
electric storage water heater, the electric water heater would cost 
more to purchase and install and cost more to operate. In the 
comparison of residential-duty gas-fired to electric storage water 
heaters, the electric water heater would be less expensive to purchase 
and install, but sufficiently more expensive to operate, such that the 
upfront cost savings would be outweighed by higher operating costs in 3 
years. Based on the comparison of storage water heating equipment, DOE 
does not believe fuel switching from gas to electricity to be an issue.

                    Table IV.36--First-Hour Equipment Ratings Used In Fuel Switching Analysis
----------------------------------------------------------------------------------------------------------------
                                  Commercial gas-  Residential-
                                  fired  storage  duty gas-fired     Gas-fired     Gas-fired hot     Electric
              Year                     water       storage water  tankless water   water supply   storage  water
                                      heaters         heaters         heaters         boilers         heaters
----------------------------------------------------------------------------------------------------------------
First-Hour Rating (gal).........             283             134             268             664             165
Ratio to Commercial Gas-fired               1.00            0.47          * 0.32            2.34            0.58
 Storage........................
----------------------------------------------------------------------------------------------------------------
* The ratio of the number of installed commercial gas-fired storage water heaters to installed gas-fired
  tankless water heaters is not directly comparable using only first-hour ratings. The ratio shown reflects in-
  use delivery capability of the representative gas-fired tankless water heater model relative to the delivery
  capability of the representative commercial gas-fired storage water heater, and includes an estimated 3-to-1
  delivery capability tradeoff in combination with the first-hour rating.

    DOE did not consider instantaneous gas-fired equipment and electric 
storage to be likely objects of gas-to-electric fuel switching, largely 
due to the disparity in hot water delivery capacity between the 
instantaneous gas-fired equipment and commercial electric storage 
equipment. As the first-hour ratings indicate in Table IV.36, a 
commercial consumer would need to purchase between 2 and 4 electric 
storage water heaters to switch from instantaneous gas-fired equipment 
to the electric storage equipment. While feasible for commercial 
consumers not facing space constraints, DOE considered it unlikely that 
these consumers would chose to replace one wall-mounted tankless unit 
with two much larger floor-mounted electric storage water heaters. It 
also seemed unlikely that consumers would replace one hot water supply 
boiler with multiple electric storage water heaters.
    Accordingly, for the NOPR, DOE did not explicitly include fuel 
switching beyond the continuation of historical trends discussed in 
section IV.G.

I. Commercial Consumer Subgroup Analysis

    In analyzing the potential impact of new or amended standards on 
commercial consumers, DOE evaluates the impact on identifiable groups 
(i.e., subgroups) of consumers, such as consumers at comparatively 
lower income levels that may be disproportionately affected by a new or 
revised national energy conservation standard level. The purpose of the 
subgroup analysis is to determine the extent of any such 
disproportionate impacts. For this rulemaking, DOE identified 
commercial consumers at the lowest income bracket in the residential 
sector and only included them for the residential sector subgroup 
analysis. Additionally, DOE identified small

[[Page 34495]]

business groups in CBECS and only included those samples in the 
commercial sector subgroup analysis. The following provides further 
detail regarding DOE's consumer subgroup analysis.
    Residential Sector Subgroup Analysis: The RECS database divides the 
residential samples into 24 income bins. The income bins represent 
total gross annual household income. As far as discount rates are 
concerned, the survey of consumer finances divides the residential 
population into six different income bins: Income bin 1 (0-20% income 
percentile), income bin 2 (20-40% income percentile), income bin 3 (40-
60% income percentile), income bin 4 (60-80% income percentile), income 
bin 5 (80-90% income percentile), and income bin 6 (90-100% income 
percentile). In general, consumers in the lower income groups tend to 
discount future streams of benefits at a higher rate, when compared to 
consumers in the higher income groups.
    Hence, to analyze the influence of a national standard on the low-
income group population, DOE conducted a (residential) subgroup 
analysis where only the 0-20% income percentile samples were included 
for the entire simulation run. Subsequently, the results of the 
subgroup analysis are compared to the results from all commercial 
consumers.
    Commercial Sector Subgroup Analysis: DOE identified small 
businesses within CBECS by using threshold levels in different building 
types. Threshold levels indicating maximum number of employees in each 
building type (such as Assembly, Education, Food Service, Office, 
Retail, and Warehouse) are used to identify small business within 
CBECS. Subsequently, in addition to the discount rate chosen for each 
``small business'' sample, a premium of 1.9 percent is added to 
evaluate future benefit and cost streams.\96\ A premium of 1.9 
percentage points is added to each discounted rate by business type 
from the central LCC to reflect the appropriate discount costs for 
small business entities of that business type. This analytical setup 
reflects the fact that in general, smaller businesses tend to discount 
future streams of monetary flows at higher rates.
---------------------------------------------------------------------------

    \96\ U.S. Small Business Administration, The Small Business 
Economy (Available at: https://www.sba.gov/advocacy/small-business-economy) (Last accessed May 26, 2015).
---------------------------------------------------------------------------

    The results of DOE's LCC subgroup analysis for both subgroups are 
summarized in section V.B.1.b of this notice and described in detail in 
chapter 11 of the NOPR TSD.

J. Manufacturer Impact Analysis

1. Overview
    DOE performed a manufacturer impact analysis (MIA) to determine the 
financial impact of amended energy conservation standards on 
manufacturers of CWH equipment and to estimate the potential impact of 
amended standards on employment and manufacturing capacity. The MIA has 
both quantitative and qualitative aspects. The quantitative part of the 
MIA primarily relies on the Government Regulatory Impact Model (GRIM), 
an industry cash-flow model with inputs specific to this rulemaking. 
The key GRIM inputs are industry cost structure data, shipment data, 
equipment costs, and assumptions about markups and conversion costs. 
The key output is the industry net present value (INPV). DOE used the 
GRIM to calculate cash flows using standard accounting principles and 
to compare changes in INPV between a no-new-standards case and various 
TSLs (the standards cases). The difference in INPV between the no-new-
standards case and standards cases represents the financial impact of 
amended energy conservation standards on manufacturers of CWH 
equipment. DOE used different sets of assumptions (markup scenarios) to 
represent the uncertainty surrounding potential impacts on prices and 
manufacturer profitability as a result of amended standards. These 
different assumptions produce a range of INPV results. The qualitative 
part of the MIA addresses the proposed standard's potential impacts on 
manufacturing capacity and industry competition, as well as any 
differential impacts the proposed standard may have on any particular 
subgroup of manufacturers. The qualitative aspect of the analysis also 
addresses product characteristics, as well as any significant market or 
product trends. The complete MIA is outlined in chapter 12 of the NOPR 
TSD.
    DOE conducted the MIA for this rulemaking in three phases. In the 
first phase of the MIA, DOE prepared an industry characterization based 
on the market and technology assessment, preliminary manufacturer 
interviews, and publicly-available information. As part of its profile 
of the CWH industry, DOE also conducted a top-down cost analysis of 
manufacturers in order to derive preliminary financial inputs for the 
GRIM (e.g., sales, general, and administration (SG&A) expenses; 
research and development (R&D) expenses; and tax rates). DOE used 
public sources of information, including company SEC 10-K filings,\97\ 
corporate annual reports, the U.S. Census Bureau's Economic Census,\98\ 
and Hoover's reports \99\ to conduct this analysis.
---------------------------------------------------------------------------

    \97\ U.S. Securities and Exchange Commission, Annual 10-K 
Reports (Various Years) (Available at: http://www.sec.gov/edgar/searchedgar/companysearch.html).
    \98\ U.S. Census Bureau, Annual Survey of Manufacturers: General 
Statistics: Statistics for Industry Groups and Industries (2011) 
(Available at: http://factfinder2.census.gov/faces/nav/jsf/pages/searchresults.xhtml?refresh=t).
    \99\ Hoovers Inc. Company Profiles, Various Companies (Available 
at: http://www.hoovers.com).
---------------------------------------------------------------------------

    In the second phase of the MIA, DOE prepared an industry cash-flow 
analysis to quantify the potential impacts of amended energy 
conservation standards. In general, energy conservation standards can 
affect manufacturer cash flow in three distinct ways. These include: 
(1) Creating a need for increased investment; (2) raising production 
costs per unit; and (3) altering revenue due to higher per-unit prices 
and due to possible changes in sales volumes. DOE estimated industry 
cash flows in the GRIM at various potential standard levels using 
industry financial parameters derived in the first phase and the 
shipment scenario used in the NIA. DOE used the GRIM to model impacts 
from proposed energy conservation standards for both thermal efficiency 
and standby loss. The GRIM results for the standards for both metrics 
were analyzed together because the examined trial standard levels 
include both thermal efficiency and standby loss levels (see section 
V.A for more detail).
    In the third phase of the MIA, DOE conducted structured, detailed 
interviews with a variety of manufacturers that represent approximately 
88 percent of domestic sales of CWH equipment covered by this 
rulemaking. During these interviews, DOE discussed engineering, 
manufacturing, procurement, and financial topics to validate 
assumptions used in the GRIM. DOE also solicited information about 
manufacturers' views of the industry as a whole and their key concerns 
regarding this rulemaking. Section IV.J.3 includes a description of the 
key issues manufacturers raised during the interviews.
    Additionally, in the third phase, DOE evaluated subgroups of 
manufacturers that may be disproportionately impacted by amended 
standards or that may not be accurately represented by the average cost 
assumptions used to develop the industry cash-flow analysis. For 
example, small manufacturers, niche players, or manufacturers 
exhibiting a cost structure that largely

[[Page 34496]]

differs from the industry average could be more negatively affected by 
amended energy conservation standards. DOE identified one subgroup 
(small manufacturers) for a separate impact analysis.
    To identify small businesses for this analysis, DOE applied the 
small business size standards published by the Small Business 
Administration (SBA) to determine whether a company is considered a 
small business. 65 FR 30836, 30848 (May 15, 2000), as amended at 77 FR 
49991, 50000, 50011 (August 20, 2012) and codified at 13 CFR part 121. 
The small business size standards are listed by North American Industry 
Classification System (NAICS) code and industry description and are 
available at: http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf. CWH manufacturing is classified under NAICS 
code 333318, ``Other Commercial and Service Industry Machinery 
Manufacturing.'' To be considered a small business under this category, 
a CWH equipment manufacturer may employ a maximum of 1,000 employees. 
This 1,000-employee threshold includes all employees in a business's 
parent company and any other subsidiaries. Based on this 
classification, DOE identified 13 manufacturers of CWH equipment that 
qualify as small businesses. The CWH small manufacturer subgroup is 
discussed in section VI.B of this NOPR and in chapter 12 of the NOPR 
TSD.
2. GRIM Analysis
    DOE uses the GRIM to quantify the potential changes in cash flow 
due to amended standards that result in a higher or lower industry 
value. The GRIM is used to conduct an annual cash-flow analysis using 
standard accounting principles that incorporates manufacturer costs, 
markups, shipments, and industry financial information as inputs. DOE 
thereby calculated a series of annual cash flows, beginning in 2015 
(the base year of the analysis) and continuing to 2048. DOE summed the 
stream of annual discounted cash flows during this period to calculate 
INPVs at each TSL. For CWH equipment manufacturers, DOE used a real 
discount rate of 9.1 percent, which was derived from industry financial 
information and then modified according to feedback received during 
manufacturer interviews. DOE also used the GRIM to model changes in 
costs, shipments, investments, and manufacturer margins that could 
result from amended energy conservation standards.
    After calculating industry cash flows and INPV, DOE compared 
changes in INPV between the no-new-standards case and each standards 
case. The difference in INPV between the no-new-standards case and a 
standards case represents the financial impact of the amended energy 
conservation standard on manufacturers at a particular TSL. As 
discussed previously, DOE collected this information on GRIM inputs 
from a number of sources, including publicly-available data and 
confidential interviews with a number of manufacturers. GRIM inputs are 
discussed in more detail in the next section. The GRIM results are 
discussed in section V.B.2. Additional details about the GRIM, the 
discount rate, and other financial parameters can be found in chapter 
12 of the NOPR TSD.
    For consideration of amended standby loss standards, DOE modeled 
the impacts to manufacturers of adapting their currently-offered 
equipment to comply with each potential standby loss level analyzed in 
the engineering analysis. The GRIM analysis incorporates the 
incremental increases in MPC at each standby loss level and the 
resulting impacts on markups. Section IV.C.3 and chapter 5 of the NOPR 
TSD include further discussion of efficiency levels and equipment 
classes analyzed.
a. Government Regulatory Impact Model Key Inputs
Manufacturer Production Costs
    Manufacturing higher-efficiency equipment is typically more 
expensive than manufacturing baseline equipment due to the use of more 
complex and costly components. The changes in the MPCs of the analyzed 
equipment can affect the revenues, gross margins, and cash flow of the 
industry. As a result, MPCs are key GRIM inputs for DOE's analysis.
    In the MIA, DOE used the MPCs for each considered efficiency level 
calculated in the engineering analysis, as described in section IV.C 
and further detailed in chapter 5 of the NOPR TSD. In addition, DOE 
used information from its teardown analysis (described in chapter 5 of 
the TSD) to disaggregate the MPCs into material, labor, depreciation, 
and overhead costs. To calculate the MPCs for equipment at and above 
the baseline, DOE performed teardowns and cost analysis that allowed 
DOE to estimate the incremental material, labor, depreciation, and 
overhead costs for equipment above the baseline. These cost breakdowns 
and equipment markups were validated and revised with input from 
manufacturers during manufacturer interviews.
Shipments Forecast
    The GRIM estimates manufacturer revenues based on total unit 
shipment forecasts and the distribution of these values by efficiency 
level. Changes in sales volumes and efficiency mix over time can 
significantly affect manufacturer finances. For this analysis, the GRIM 
uses the NIA's annual shipment forecasts derived from the shipments 
analysis from 2015 (the base year) to 2048 (the end year of the 
analysis period). The shipments model divides the shipments of CWH 
equipment into specific market segments. The model starts from a 
historical base year and calculates retirements and shipments by market 
segment for each year of the analysis period. This approach produces an 
estimate of the total equipment stock, broken down by age or vintage, 
in each year of the analysis period. In addition, the equipment stock 
efficiency distribution is calculated for the no-new-standards case and 
for each standards case for each equipment class. The NIA shipments 
forecasts are based on a roll-up scenario. The forecast assumes that 
equipment in the no-new-standards case that does not meet the standard 
under consideration would ``roll up'' to meet the amended standard 
beginning in the compliance year of 2019. Section IV.G and chapter 9 of 
the NOPR TSD include additional details on the shipments analysis.
Product and Capital Conversion Costs
    Amended energy conservation standards would cause manufacturers to 
incur one-time conversion costs to bring their production facilities 
and equipment designs into compliance. DOE evaluated the level of 
conversion-related expenditures that would be needed to comply with 
each considered efficiency level for each equipment class. For the MIA, 
DOE classified these conversion costs into two major groups: (1) 
Capital conversion costs; and (2) product conversion costs. Capital 
conversion costs are one-time investments in property, plant, and 
equipment necessary to adapt or change existing production facilities 
such that new compliant equipment designs can be fabricated and 
assembled. Product conversion costs are one-time investments in 
research, development, testing, marketing, and other non-capitalized 
costs necessary to make equipment designs comply with amended energy 
conservation standards.

[[Page 34497]]

    To develop conversion cost estimates, DOE used feedback received 
during manufacturer interviews, as well as data on manufacturing and 
equipment development costs derived from the equipment teardowns and 
engineering analysis discussed in chapter 5 of the NOPR TSD. DOE 
estimated conversion costs required to meet higher thermal efficiency 
levels for each equipment class and also evaluated conversion costs 
required to achieve higher standby loss levels, where applicable.
    To evaluate the level of capital conversion expenditures 
manufacturers would likely incur to comply with amended thermal 
efficiency levels, DOE used data derived from the engineering analysis 
and equipment teardowns. DOE used these analyses to estimate 
investments in property, plant, and equipment that would be necessary 
to achieve higher thermal efficiency levels. DOE also used results from 
the engineering analysis to estimate capital expenditures manufacturers 
may have to make to upgrade their R&D and testing facilities.
    To evaluate the level of product conversion costs manufacturers 
would likely incur to comply with amended thermal efficiency standards, 
DOE estimated the number of platforms each manufacturer would have to 
modify in order to move their equipment lines to each incremental 
efficiency level. These platform number estimates were based on the 
variation of units by input capacity offered by each manufacturer. DOE 
then developed the product conversion costs by estimating the amount of 
labor per platform manufacturers would need for research and 
development to raise models to each incremental efficiency level.
    To evaluate the level of conversion costs manufacturers would 
likely incur to comply with amended standby loss standards, DOE used 
feedback received during manufacturer interviews, as well as data 
derived from the engineering analysis. For both commercial gas-fired 
storage water heaters and electric storage water heaters, DOE estimated 
that manufacturers would incur approximately $1.1 million in capital 
conversion costs at all standby loss levels above the baseline. For 
residential-duty gas-fired storage water heaters, DOE did not include 
capital conversion costs at the analyzed standby loss levels, because 
DOE has tentatively concluded that manufacturers already possess the 
machinery and tooling necessary to achieve those levels as part of 
their current production capabilities for either residential water 
heaters or residential-duty commercial water heaters. DOE does not 
expect manufacturers to incur any product conversion costs related to 
amended standby loss standards, because DOE expects no substantial 
redesign work or research and development would be necessary to achieve 
the standby loss levels analyzed in the engineering analysis. Section 
IV.C.3.b of this NOPR and Chapter 5 of the NOPR TSD include additional 
details on the efficiency levels analyzed in the engineering analysis.
    Issue 31: DOE requests comment on whether manufacturers would incur 
any product conversion costs (i.e., substantial redesign work or 
research and development) related to the standby loss levels analyzed 
in this NOPR.
    In general, DOE assumes that all conversion-related investments 
occur between the year of publication of the final rule and the year by 
which manufacturers must comply with the amended standards. The 
conversion cost figures used in the GRIM can be found in section V.B.2 
of this notice. For additional information on the estimated product and 
capital conversion costs, see chapter 12 of the NOPR TSD.
b. Government Regulatory Impact Model Scenarios
Markup Scenarios
    As discussed in the previous section, MSPs include direct 
manufacturing production costs (i.e., labor, materials, depreciation, 
and overhead estimated in DOE's MPCs) and all non-production costs 
(i.e., SG&A, R&D, and interest), along with profit. To calculate the 
MSPs in the GRIM, DOE applied non-production cost markups to the MPCs 
estimated in the engineering analysis for each equipment class and 
efficiency level. Specifically, the manufacturer markup is a multiplier 
that is applied to the MPC. The MSP is calculated by adding the 
shipping cost to the product of the MPC and manufacturer markup. 
Modifying these markups in the standards case yields different sets of 
impacts on manufacturers. For the MIA, DOE modeled two standards-case 
markup scenarios to represent the uncertainty regarding the potential 
impacts on prices and profitability for manufacturers following the 
implementation of amended energy conservation standards: (1) A 
preservation of gross margin percentage markup scenario; and (2) a 
preservation of per-unit operating profit markup scenario. These 
scenarios lead to different markup values that, when applied to the 
inputted MPCs, result in varying revenue and cash-flow impacts.
    Under the preservation of gross margin percentage markup scenario, 
DOE applied a single uniform ``gross margin percentage'' markup across 
all efficiency levels, which assumes that following amended standards, 
manufacturers would be able to maintain the same amount of profit as a 
percentage of revenue at all efficiency levels within an equipment 
class. As production costs increase with efficiency, this scenario 
implies that the absolute dollar markup will increase as well. Because 
manufacturers are able to fully pass through additional costs due to 
standards to commercial consumers, the preservation of gross margin 
percentage markup scenario represents the upper bound of the CWH 
industry's profitability in the standards case.
    To estimate the average non-production cost markup used in the 
preservation of gross margin percentage markup scenario, DOE analyzed 
publicly-available financial information for manufacturers of CWH 
equipment. DOE then requested feedback on its initial markup estimates 
during manufacturer interviews. The revised markups, which are used in 
DOE's quantitative analysis of industry financial impacts, are 
presented in Table IV.37. These markups capture all non-production 
costs, including SG&A expenses, R&D expenses, interest expenses, and 
profit.

Table IV.37--Manufacturer Markups by Equipment Class for Preservation of
                          Gross Margin Scenario
------------------------------------------------------------------------
                   Equipment class                         Markup
-----------------------------------------------------------------------
Commercial gas-fired storage and gas-fired storage-               1.45
 type instantaneous water heaters...................
Residential-duty gas-fired storage water heaters....              1.45
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Tankless water heaters..........................              1.43
    Hot water supply boilers........................              1.43
Electric storage water heaters......................              1.41
------------------------------------------------------------------------


[[Page 34498]]

    DOE also models the preservation of per-unit operating profit 
scenario because manufacturers stated that they do not expect to be 
able to mark up the full cost of production in the standards case, 
given the highly competitive nature of the CWH market. In this 
scenario, manufacturer markups are set so that operating profit one 
year after the compliance date of amended energy conservation standards 
is the same as in the no-new-standards case on a per-unit basis. In 
other words, manufacturers are not able to garner additional operating 
profit from the higher production costs and the investments that are 
required to comply with the amended standards; however, they are able 
to maintain the same operating profit in the standards case that was 
earned in the no-new-standards case. Therefore, operating margin in 
percentage terms is reduced between the no-new-standards case and 
standards case. DOE adjusted the manufacturer markups in the GRIM at 
each TSL to yield approximately the same per-unit earnings before 
interest and taxes in the standards case as in the no-new-standards 
case. The preservation of per-unit operating profit markup scenario 
represents the lower bound of industry profitability in the standards 
case. This is because manufacturers are not able to fully pass through 
to commercial consumers the additional costs necessitated by amended 
standards for CWH equipment, as they are able to do in the preservation 
of gross margin percentage markup scenario.
3. Manufacturer Interviews
    DOE interviewed manufacturers representing approximately 88 percent 
of the CWH market by revenue. DOE contractors endeavor to conduct 
interviews with a representative cross-section of manufacturers 
(including large and small manufacturers, covering all equipment 
classes and product offerings). DOE contractors reached out to all the 
small business manufacturers that were identified as part of the 
analysis, as well as larger manufacturers that have significant market 
share in the CWH market. As part of these interviews, DOE gathered 
manufacturer feedback regarding both the engineering analysis and MIA 
for this rulemaking. The information gathered during these interviews 
enabled DOE to tailor the GRIM to reflect the unique financial 
characteristics of the CWH industry. All interviews provided 
information that DOE used to evaluate the impacts of potential amended 
energy conservation standards on manufacturer cash flows, manufacturing 
capacities, and employment levels.
    In interviews, DOE asked manufacturers to describe their major 
concerns with potential standards arising from a rulemaking involving 
CWH equipment. Manufacturer interviews are conducted under non-
disclosure agreements (NDAs), so DOE does not document these 
discussions in the same way that it does public comments in the comment 
summaries and DOE's responses throughout the rest of this notice. The 
following sections highlight the most significant of manufacturers' 
statements that helped shape DOE's understanding of potential impacts 
of an amended standard on the industry. Common issues raised by 
manufacturers in interviews included: the magnitude of conversion costs 
and the complexity and cost of retrofits.
Magnitude of Conversion Costs
    Manufacturers stated in interviews that an increase in the 
stringency of energy conservation standards may cause them to face 
significant capital and product conversion costs to bring their 
equipment into compliance if DOE were to propose a standard that 
necessitates condensing technology. While all major CWH manufacturers 
currently produce condensing equipment, most also offer a wide range of 
non-condensing equipment that they stated is important in serving the 
replacement market. Manufacturers stated that eliminating non-
condensing equipment would strand production assets and could result in 
manufacturers having to make capital investments in machinery and 
tooling to increase their condensing equipment production capacity.
    Manufacturers also stated that shifting their entire product line 
to condensing equipment would require significant product conversion 
costs for R&D and testing. Most manufacturers currently offer a less 
diverse product line of condensing equipment, compared to their non-
condensing equipment offerings. Several stated that in order to serve 
the replacement market and remain competitive, they would need to 
develop a range of sizes and capacities of condensing equipment that 
they currently only offer at non-condensing thermal efficiency levels. 
Manufacturers stated that this would require a substantial engineering 
effort.
Complexity and Cost of Retrofits
    In interviews, several manufacturers pointed out that approximately 
85 percent of CWH equipment sales are conducted in the replacement 
channel, rather than the new construction channel. They stated that the 
majority of the CWH market is structured around the legacy venting 
infrastructure designed for non-condensing equipment. Manufacturers 
stated that these venting systems are not designed to handle the acidic 
condensate that develops in condensing equipment. Manufacturers were 
concerned that commercial consumers would have to make expensive 
retrofits to install condensing products. According to manufacturers, 
this may result in commercial consumers repairing water heaters, rather 
than replacing them, which manufacturers argued would not save energy.
Impacts on Innovation
    Manufacturers expressed concern that more-stringent energy 
conservation standards may stifle innovation in the industry by causing 
manufacturers to spend funds set aside for product innovation on 
compliance efforts instead. Several manufacturers pointed out that it 
is important for them to continually develop unique and innovative 
products in order to differentiate their brands in the market. They 
pointed out that it is difficult to accomplish this when engineering 
resources are diverted to focus on compliance with amended DOE 
standards. Manufacturers stated that this concern is particularly 
important for small manufacturers' ability to compete in the market. 
Small manufacturers generally have fewer resources to devote to 
compliance, and so may be at a disadvantage if DOE amends energy 
conservation standards.

K. Emission Analysis

    The emissions analysis consists of two components. The first 
component estimates the effect of potential energy conservation 
standards on power sector and site (where applicable) combustion 
emissions of CO2, NOX, SO2, and Hg. 
The second component estimates the impacts of potential standards on 
emissions of two additional greenhouse gases, CH4 and 
N2O, as well as the reductions to emissions of all species 
due to ``upstream'' activities in the fuel production chain. These 
upstream activities comprise extraction, processing, and transporting 
fuels to the site of combustion. The associated emissions are referred 
to as upstream emissions.
    The analysis of power sector emissions uses marginal emissions 
factors calculated using a methodology based on results published for 
the AEO 2015 Reference case and a set of side cases that implement a 
variety of efficiency-related policies. The methodology is described in 
chapter 15 of the NOPR TSD.

[[Page 34499]]

    Combustion emissions of CH4 and N2O are 
estimated using emissions intensity factors published by the EPA, GHG 
Emissions Factors Hub.\100\ The FFC upstream emissions are estimated 
based on the methodology described in chapter 15 of the NOPR TSD. The 
upstream emissions include both emissions from fuel combustion during 
extraction, processing, and transportation of fuel, and ``fugitive'' 
emissions (direct leakage to the atmosphere) of CH4 and 
CO2.
---------------------------------------------------------------------------

    \100\ Available at: http://www.epa.gov/climateleadership/inventory/ghg-emissions.html.
---------------------------------------------------------------------------

    The emissions intensity factors are expressed in terms of physical 
units per MWh or MMBtu of site energy savings. Total emissions 
reductions are estimated using the energy savings calculated in the 
national impact analysis.
    For CH4 and N2O, DOE calculated emissions 
reduction in tons and also in terms of units of carbon dioxide 
equivalent (CO2eq). Gases are converted to CO2eq 
by multiplying the physical units by the gas's global warming potential 
(GWP) over a 100-year time horizon. Based on the Fifth Assessment 
Report of the Intergovernmental Panel on Climate Change,\101\ DOE used 
GWP values of 28 for CH4 and 265 for N2O.
---------------------------------------------------------------------------

    \101\ IPCC (2013): Climate Change 2013: The Physical Science 
Basis. Contribution of Working Group I to the Fifth Assessment 
Report of the Intergovernmental Panel on Climate Change [Stocker, 
T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. 
Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge 
University Press, Cambridge, United Kingdom and New York, NY, USA. 
Chapter 8.
---------------------------------------------------------------------------

    Because the on-site operation of some CWH equipment requires use of 
fossil fuels and results in emissions of CO2, 
NOX, and SO2 at the sites where these appliances 
are used, DOE also accounted for the reduction in these site emissions 
and the associated upstream emissions due to potential standards. Site 
emissions were estimated using emissions intensity factors from an EPA 
publication.\102\
---------------------------------------------------------------------------

    \102\ U.S. Environmental Protection Agency, Compilation of Air 
Pollutant Emission Factors, AP-42, Fifth Edition, Volume I: 
Stationary Point and Area Sources (1998) (Available at: http://www.epa.gov/ttn/chief/ap42/index.html).
---------------------------------------------------------------------------

    The AEO incorporates the projected impacts of existing air quality 
regulations on emissions. AEO 2015 generally represents current 
legislation and environmental regulations, including recent government 
actions, for which implementing regulations were available as of 
October 31, 2014. DOE's estimation of impacts accounts for the presence 
of the emissions control programs discussed in the following 
paragraphs.
    SO2 emissions from affected electric generating units 
(EGUs) are subject to nationwide and regional emissions cap-and-trade 
programs. Title IV of the Clean Air Act sets an annual emissions cap on 
SO2 for affected EGUs in the 48 contiguous States and the 
District of Columbia (DC). (42 U.S.C. 7651 et seq.) SO2 
emissions from 28 eastern States and DC were also limited under the 
Clean Air Interstate Rule (CAIR). 70 FR 25162 (May 12, 2005). CAIR 
created an allowance-based trading program that operates along with the 
Title IV program. In 2008, CAIR was remanded to EPA by the U.S. Court 
of Appeals for the District of Columbia Circuit, but it remained in 
effect.\103\ In 2011, EPA issued a replacement for CAIR, the Cross-
State Air Pollution Rule (CSAPR). 76 FR 48208 (August 8, 2011). On 
August 21, 2012, the DC Circuit issued a decision to vacate CSAPR,\104\ 
and the court ordered EPA to continue administering CAIR. On April 29, 
2014, the U.S. Supreme Court reversed the judgment of the DC Circuit 
and remanded the case for further proceedings consistent with the 
Supreme Court's opinion.\105\ On October 23, 2014, the DC Circuit 
lifted the stay of CSAPR.\106\ Pursuant to this action, CSAPR went into 
effect (and CAIR ceased to be in effect) as of January 1, 2015. On July 
28, 2015, the DC Circuit issued its opinion regarding CSAPR on remand 
from the Supreme Court. The court largely upheld CSAPR, but remanded to 
EPA without vacatur certain States' emissions budgets for 
reconsideration.\107\
---------------------------------------------------------------------------

    \103\ See North Carolina v. EPA, 550 F.3d 1176 (D.C. Cir. 2008); 
North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008).
    \104\ See EME Homer City Generation, LP v. EPA, 696 F.3d 7, 38 
(D.C. Cir. 2012), cert. granted, 81 U.S.L.W. 3567, 81 U.S.L.W. 3696, 
81 U.S.L.W. 3702 (U.S. June 24, 2013) (No. 12-1182).
    \105\ EPA v. EME Homer City Generation, 134 S.Ct. 1584, 1610 
(U.S. 2014). The Supreme Court held in part that EPA's methodology 
for quantifying emissions that must be eliminated in certain States 
due to their impacts in other downwind States was based on a 
permissible, workable, and equitable interpretation of the Clean Air 
Act provision that provides statutory authority for CSAPR.
    \106\ EME Homer City Generation v. EPA, Order (D. C. Cir. filed 
October 23, 2014) (No. 11-1302).
    \107\ EME Homer City Generation, LP v. EPA 795 F.3d 118 (D.C. 
Cir. 2015).
---------------------------------------------------------------------------

    EIA was not able to incorporate CSAPR into AEO 2015, so it assumes 
implementation of CAIR. Accordingly, DOE's analysis used emissions 
factors that assume that CAIR, not CSAPR, is the regulation in force. 
However, the difference between CAIR and CSAPR is not significant for 
the purpose of DOE's analysis of emissions impacts from energy 
conservation standards.
    The attainment of emissions caps is typically flexible among EGUs 
and is enforced through the use of emissions allowances and tradable 
permits. Under existing EPA regulations, any excess SO2 
emissions allowances resulting from the lower electricity demand caused 
by the adoption of an efficiency standard could be used to permit 
offsetting increases in SO2 emissions by any regulated EGU. 
In past rulemakings, DOE recognized that there was uncertainty about 
the effects of efficiency standards on SO2 emissions covered 
by the existing cap-and-trade system, but it concluded that negligible 
reductions in power sector SO2 emissions would occur as a 
result of standards.
    Beginning around 2016, however, SO2 emissions will fall 
as a result of the Mercury and Air Toxics Standards (MATS) for power 
plants.\108\ 77 FR 9304 (Feb. 16, 2012). In the final MATS rule, EPA 
established a standard for hydrogen chloride as a surrogate for acid 
gas hazardous air pollutants (HAP), and also established a standard for 
SO2 (a non-HAP acid gas) as an alternative equivalent 
surrogate standard for acid gas HAP. The same controls are used to 
reduce HAP and non-HAP acid gas; thus, SO2 emissions will be 
reduced as a result of the control technologies installed on coal-fired 
power plants to comply with the MATS requirements for acid gas. AEO 
2015 assumes that, in order to continue operating, coal plants must 
have either flue gas desulfurization or dry sorbent injection systems 
installed by 2016. Both technologies, which are used to reduce acid gas 
emissions, also reduce SO2 emissions. Under the MATS, 
emissions will be far below the cap that would be established by CAIR, 
so it is unlikely that excess SO2 emissions allowances 
resulting from the lower electricity

[[Page 34500]]

demand would be needed or used to permit offsetting increases in 
SO2 emissions by any regulated EGU. Therefore, DOE believes 
that energy conservation standards will reduce SO2 emissions 
in 2016 and beyond.
---------------------------------------------------------------------------

    \108\ DOE notes that on June 29, 2015, the U.S. Supreme Court 
ruled that the EPA erred when the agency concluded that cost did not 
need to be considered in the finding that regulation of hazardous 
air pollutants from coal- and oil-fired electric utility steam 
generating units is appropriate and necessary. Michigan v. 
Environmental Protection Agency, 576 U.S. ___ (2015). The Supreme 
Court did not vacate the MATS rule, and DOE has tentatively 
determined that the Court's decision on the MATS rule does not 
change the assumptions regarding the impact of energy conservation 
standards on SO2 emissions (see chapter 13 of the NOPR 
TSD for further discussion). Further, the Court's decision does not 
change the impact of the energy conservation standards on mercury 
emissions. The EPA, in response to the U.S. Supreme Court's 
direction, has now considered cost in the appropriate and necessary 
finding. On November 20, 2015, the EPA proposed a supplemental 
finding that including a consideration of cost does not alter the 
EPA's previous determination that it is appropriate to regulate air 
toxics, including mercury, from power plants.
---------------------------------------------------------------------------

    CAIR established a cap on NOX emissions in 28 eastern 
States and the District of Columbia.\109\ Energy conservation standards 
are expected to have little effect on NOX emissions in those 
States covered by CAIR because excess NOX emissions 
allowances resulting from the lower electricity demand could be used to 
permit offsetting increases in NOX emissions from other 
facilities. However, standards would be expected to reduce 
NOX emissions in the States not affected by the caps, so DOE 
estimated NOX emissions reductions from the standards 
considered in this NOPR for these States.
---------------------------------------------------------------------------

    \109\ CSAPR also applies to NOX, and it would 
supersede the regulation of NOX under CAIR. As stated 
previously, the current analysis assumes that CAIR, not CSAPR, is 
the regulation in force. The difference between CAIR and CSAPR with 
regard to DOE's analysis of NOX emissions is slight.
---------------------------------------------------------------------------

    The MATS limit mercury emissions from power plants, but they do not 
include emissions caps, and as such, DOE's energy conservation 
standards would likely reduce Hg emissions. DOE estimated mercury 
emissions reduction using emissions factors based on AEO 2015, which 
incorporates MATS.

L. Monetizing Carbon Dioxide and Other Emissions Impacts

    As part of the development of this NOPR, DOE considered the 
estimated monetary benefits from the reduced emissions of 
CO2 and NOX that are expected to result from each 
of the TSLs considered. In order to make this calculation similar to 
the calculation of the NPV of commercial consumer benefit, DOE 
considered the reduced emissions expected to result over the lifetime 
of equipment shipped in the forecast period for each TSL. This section 
summarizes the basis for the monetary values used for CO2 
and NOX emissions and presents the values considered in this 
NOPR.
    For this NOPR, DOE is relying on a set of values for the social 
cost of carbon (SCC) that was developed by an interagency process. A 
summary of the basis for those values is provided in the following 
subsection, and a more detailed description of the methodologies used 
is provided as an appendix to chapter 14 of the NOPR TSD.
1. Social Cost of Carbon
    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. Estimates of the SCC are provided 
in dollars per metric ton of carbon dioxide. 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.
    Under section 1(b)(6) of Executive Order 12866, ``Regulatory 
Planning and Review,'' 58 FR 51735 (Oct. 4, 1993), agencies must, to 
the extent permitted by law, 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 monetized social benefits of 
reducing CO2 emissions into cost-benefit analyses of 
regulatory actions. 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.
    As part of the interagency process that developed the 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.
a. Monetizing Carbon Dioxide Emissions
    When attempting to assess the incremental economic impacts of 
carbon dioxide emissions, the analyst faces a number of challenges. A 
recent report from the National Research Council\110\ 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 questions of 
science, economics, and ethics and should be viewed as provisional.
---------------------------------------------------------------------------

    \110\ National Research Council, Hidden Costs of Energy: 
Unpriced Consequences of Energy Production and Use, National 
Academies Press: Washington, DC (2009).
---------------------------------------------------------------------------

    Despite the limits of both quantification and monetization, SCC 
estimates can be useful in estimating the social benefits of reducing 
carbon dioxide emissions. The agency can estimate the benefits from 
reduced (or costs from increased) emissions in any future year 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 the future benefits by an appropriate 
discount factor and summing across all affected years.
    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. In the meantime, the interagency group will continue to 
explore the issues raised by this analysis and consider public comments 
as part of the ongoing interagency process.
b. Development of Social Cost of Carbon Values
    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$) of $55, $33, 
$19, $10, and $5 per metric ton of CO2. These interim values 
represented the first sustained interagency effort within the U.S. 
government to develop

[[Page 34501]]

an SCC for use in regulatory analysis. The results of this preliminary 
effort were presented in several proposed and final rules.
c. Current Approach and Key Assumptions
    After the release of the interim values, the interagency group 
reconvened on a regular basis to generate improved SCC estimates. 
Specifically, the group considered public comments and further explored 
the technical literature in relevant fields. The interagency group 
relied on three integrated assessment models commonly used to estimate 
the SCC: the FUND, DICE, and PAGE models. These models are frequently 
cited in the peer-reviewed literature and were used in the last 
assessment of the Intergovernmental Panel on Climate Change (IPCC). 
Each model was given equal weight in the SCC values that were 
developed.
    Each model takes a slightly different approach to model how changes 
in emissions result in changes in economic damages. A key objective of 
the interagency process was to enable a consistent exploration of the 
three models, while respecting the different approaches to quantifying 
damages taken by the key modelers in the field. An extensive review of 
the literature was conducted to select three sets of input parameters 
for these models: Climate sensitivity, socio-economic and emissions 
trajectories, and discount rates. A probability distribution for 
climate sensitivity was specified as an input into all three models. In 
addition, the interagency group used a range of scenarios for the 
socio-economic parameters and a range of values for the discount rate. 
All other model features were left unchanged, relying on the model 
developers' best estimates and judgments.
    In 2010, the interagency group selected four sets of SCC values for 
use in regulatory analyses. Three sets of values are based on the 
average SCC from three integrated assessment models, at discount rates 
of 2.5 percent, 3 percent, and 5 percent. The fourth set, 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 climate change further out in the tails of the 
SCC distribution. The values grow in real terms over time. 
Additionally, the interagency group determined that a range of values 
from 7 percent to 23 percent should be used to adjust the global SCC to 
calculate domestic effects,\111\ although preference is given to 
consideration of the global benefits of reducing CO2 
emissions. Table IV.38 presents the values in the 2010 interagency 
group report,\112\ which is reproduced in appendix 14A of the NOPR TSD.
---------------------------------------------------------------------------

    \111\ It is recognized that this calculation for domestic values 
is approximate, provisional, and highly speculative. There is no a 
priori reason why domestic benefits should be a constant fraction of 
net global damages over time.
    \112\ Interagency Working Group on Social Cost of Carbon, United 
States Government, Social Cost of Carbon for Regulatory Impact 
Analysis Under Executive Order 12866 (February 2010) (Available at: 
http://www.whitehouse.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf).

                     Table IV.38--Annual SCC Values From 2010 Interagency Report, 2010-2050
                                      [In 2007 dollars per metric ton CO2]
----------------------------------------------------------------------------------------------------------------
                                                                           Discount rate
                                                 ---------------------------------------------------------------
                                                        5%              3%             2.5%             3%
                      Year                       ---------------------------------------------------------------
                                                                                                       95th
                                                      Average         Average         Average       Percentile
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------

    The SCC values used for this document were generated using the most 
recent versions of the three integrated assessment models that have 
been published in the peer-reviewed literature, as described in the 
2013 update from the interagency working group (revised July 
2015).\113\ Table IV.39 shows the updated sets of SCC estimates from 
the latest interagency update in 5-year increments from 2010 to 2050. 
The full set of annual SCC values between 2010 and 2050 is reported in 
appendix 14B of the NOPR TSD. The central value that emerges is the 
average SCC across models at the 3-percent discount rate. However, for 
purposes of capturing the uncertainties involved in regulatory impact 
analysis, the interagency group emphasizes the importance of including 
all four sets of SCC values.
---------------------------------------------------------------------------

    \113\ Technical Update of the Social Cost of Carbon for 
Regulatory Impact Analysis Under Executive Order 12866, Interagency 
Working Group on Social Cost of Carbon, United States Government 
(May 2013; revised July 2015) (Available at: http://www.whitehouse.gov/sites/default/files/omb/inforeg/scc-tsd-final-july-2015.pdf).

           Table IV.39--Annual SCC Values From 2013 Interagency Update (Revised July 2015), 2010-2050
                                      [In 2007 dollars per metric ton CO2]
----------------------------------------------------------------------------------------------------------------
                                                                           Discount rate
                                                 ---------------------------------------------------------------
                                                        5%              3%             2.5%             3%
                      Year                       ---------------------------------------------------------------
                                                                                                       95th
                                                      Average         Average         Average       Percentile
----------------------------------------------------------------------------------------------------------------
2010............................................              10              31              50              86

[[Page 34502]]

 
2015............................................              11              36              56             105
2020............................................              12              42              62             123
2025............................................              14              46              68             138
2030............................................              16              50              73             152
2035............................................              18              55              78             168
2040............................................              21              60              84             183
2045............................................              23              64              89             197
2050............................................              26              69              95             212
----------------------------------------------------------------------------------------------------------------

    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 Research 
Council report mentioned above 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 analytical challenges that 
are being addressed by the research community, including research 
programs housed in many of the Federal agencies participating in the 
interagency process to estimate the SCC. The interagency group intends 
to periodically review and reconsider those estimates to reflect 
increasing knowledge of the science and economics of climate impacts, 
as well as improvements in modeling. Although uncertainties remain, the 
revised estimates used for this NOPR are based on the best available 
scientific information on the impacts of climate change. The current 
estimates of the SCC have been developed over many years, and with 
input from the public. In November 2013, OMB announced a new 
opportunity for public comments on the interagency technical support 
document underlying the revised SCC estimates. 78 FR 70586 (Nov. 26, 
2013). In July 2015, OMB published a detailed summary and formal 
response to the many comments that were received.\114\ It also stated 
its intention to seek independent expert advice on opportunities to 
improve the estimates, including many of the approaches suggested by 
commenters. DOE stands ready to work with OMB and the other members of 
the interagency working group on further review and revision of the SCC 
estimates as appropriate.
---------------------------------------------------------------------------

    \114\ Available at: https://www.whitehouse.gov/blog/2015/07/02/estimating-benefits-carbon-dioxide-emissions-reductions.
---------------------------------------------------------------------------

    In summary, in considering the potential global benefits resulting 
from reduced CO2 emissions, DOE used the values from the 
2013 interagency report (revised July 2015), adjusted to 2014$ using 
the gross domestic product (GDP) price deflator from the Bureau of 
Economic Analysis. For each of the four cases specified, the values 
used for emissions in 2015 were $12.2, $40.0, $62.3, and $117 per 
metric ton avoided (values expressed in 2014$). DOE derived values 
after 2050 using the relevant growth rates for the 2040-2050 period in 
the interagency update.
    DOE multiplied the CO2 emissions reduction estimated for 
each year by the SCC value for that year in each of the four cases. To 
calculate a present value of the stream of monetary values, DOE 
discounted the values in each of the four cases using the specific 
discount rate that had been used to obtain the SCC values in each case.
2. Social Cost of Other Air Pollutants
    As noted previously, DOE has estimated how the considered energy 
conservation standards would reduce site NOX emissions 
nationwide and decrease power sector NOX emissions in those 
22 States not affected by the CAIR.
    DOE estimated the monetized value of NOX emissions 
reductions using benefit per ton estimates from the Regulatory Impact 
Analysis titled, ``Proposed Carbon Pollution Guidelines for Existing 
Power Plants and Emission Standards for Modified and Reconstructed 
Power Plants,'' published in June 2014 by EPA's Office of Air Quality 
Planning and Standards. The report includes high and low values for 
NOX (as PM2.5) for 2020, 2025, and 2030 
discounted at 3 percent and 7 percent,\115\ which are presented in 
chapter 14 of the NOPR TSD. DOE assigned values for 2021-2024 and 2026-
2029 using, respectively, the values for 2020 and 2025. DOE assigned 
values after 2030 using the value for 2030.
---------------------------------------------------------------------------

    \115\ For the monetized NOX benefits associated with 
PM2.5, the related benefits (derived from benefit-per-ton 
values) are based on an estimate of premature mortality derived from 
the ACS study (Krewski et al. 2009), which is the lower of the two 
EPA central tendencies. Using the lower value is more conservative 
when making the policy decision concerning whether a particular 
standard level is economically justified so using the higher value 
would also be justified. If the benefit-per-ton estimates were based 
on the Six Cities study (Lepuele et al. 2012), the values would be 
nearly two-and-a-half times larger. (See chapter 14 of the NOPR TSD 
for further description of the studies mentioned above.)
---------------------------------------------------------------------------

    DOE multiplied the emissions reduction (tons) in each year by the 
associated $/ton values, and then discounted each series using discount 
rates of 3 percent and 7 percent as appropriate. DOE will continue for 
evaluate the monetization of avoided NOX emissions and will 
make any appropriate updates of the current analysis for the final 
rulemaking.
    DOE is evaluating appropriate monetization of avoided 
SO2 and Hg emissions in energy conservation standards 
rulemakings. DOE has not included monetization of those emissions in 
the current analysis.

M. Utility Impact Analysis

    The utility impact analysis estimates several effects on the 
electric power generation industry that would result from the adoption 
of new or amended energy conservation standards. The utility impact 
analysis estimates the changes in installed electrical capacity and 
generation that would result for each TSL. The analysis is based on 
published output from NEMS, associated with AEO 2015. NEMS produces the 
AEO Reference case, as well as a number of side cases that

[[Page 34503]]

estimate the economy-wide impacts of changes to energy supply and 
demand. DOE uses published side cases that incorporate efficiency-
related policies to estimate the marginal impacts of reduced energy 
demand on the utility sector. These marginal factors are estimated 
based on the changes to electricity sector generation, installed 
capacity, fuel consumption and emissions in the AEO Reference case and 
various side cases. Details of the methodology are provided in the 
appendices to Chapters 13 and 15 of the NOPR TSD.
    The output of this analysis is a set of time-dependent coefficients 
that capture the change in electricity generation, primary fuel 
consumption, installed capacity, and power sector emissions due to a 
unit reduction in demand for a given end use. These coefficients are 
multiplied by the stream of electricity savings calculated in the NIA 
to provide estimates of selected utility impacts of new or amended 
energy conservation standards.

N. Employment Impact Analysis

    Employment impacts from new or amended energy conservation 
standards include direct and indirect impacts. Direct employment 
impacts are any changes in the number of employees of manufacturers of 
the equipment subject to standards; the MIA addresses those impacts. 
Indirect employment impacts are changes in national employment that 
occur due to the shift in expenditures and capital investment caused by 
the purchase and operation of more-efficient appliances. Indirect 
employment impacts from standards consist of the 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; (2) reduced spending on new energy supply by the utility 
industry; (3) increased commercial consumer spending on the purchase of 
new equipment; and (4) the effects of those three factors throughout 
the economy.
    One method for assessing the possible effects on the demand for 
labor of such shifts in economic activity is to compare sector 
employment statistics developed by the Labor Department's Bureau of 
Labor Statistics (BLS). 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.\116\ 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. Energy 
conservation standards have the effect of reducing commercial consumer 
utility bills. Because reduced commercial 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 service 
sectors). Thus, based on the BLS data alone, DOE tentatively concludes 
net national employment may increase because of shifts in economic 
activity resulting from amended energy conservation standards for CWH 
equipment.
---------------------------------------------------------------------------

    \116\ 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).
---------------------------------------------------------------------------

    For the amended standard levels considered in this NOPR, DOE 
estimated indirect national employment impacts using an input/output 
model of the U.S. economy called Impact of Sector Energy Technologies 
version 3.1.1 (ImSET).\117\ ImSET is a special-purpose version of the 
``U.S. Benchmark National Input-Output'' (I-O) model, which was 
designed to estimate the national employment and income effects of 
energy-saving technologies. The ImSET software includes a computer-
based I-O model having structural coefficients that characterize 
economic flows among the 187 sectors. ImSET's national economic I-O 
structure is based on a 2002 U.S. benchmark table, specially aggregated 
to the 187 sectors most relevant to industrial, commercial, and 
residential building energy use. DOE notes that ImSET is not a general 
equilibrium forecasting model, and understands the uncertainties 
involved in projecting employment impacts, especially changes in the 
later years of the analysis. Because ImSET does not incorporate price 
changes, the employment effects predicted by ImSET may over-estimate 
actual job impacts over the long run. For the NOPR, DOE used ImSET only 
to estimate short-term (through 2023) employment impacts.
---------------------------------------------------------------------------

    \117\ M. J. Scott, O. V. Livingston, P. J. Balducci, J. M. Roop, 
and R. W. Schultz, ImSET 3.1: Impact of Sector Energy Technologies 
(2009) Pacific Northwest National Laboratory: Report No. PNNL-18412 
(Available at: www.pnl.gov/main/publications/external/technical_reports/PNNL-18412.pdf).
---------------------------------------------------------------------------

    For more details on the employment impact analysis, see chapter 16 
of the NOPR TSD.

V. Analytical Results and Conclusions

    The following section addresses the results from DOE's analyses 
with respect to potential amended energy conservation standards for the 
CWH equipment that is the subject of this rulemaking. It addresses the 
TSLs examined by DOE, the projected impacts of each of these levels if 
adopted as energy conservation standards for CWH equipment, and the 
proposed standard levels that DOE sets forth in this NOPR. Additional 
details regarding DOE's analyses are contained in the TSD chapters 
supporting this document.

A. Trial Standard Levels

    DOE developed trial standard levels (TSLs) that combine efficiency 
levels for each analyzed equipment class of CWH equipment. DOE 
developed TSLs so that each TSL is composed of energy efficiency levels 
from each equipment class that exhibit similar characteristics, such as 
efficiency, or meet certain economic criteria. For example, one of the 
TSLs consists of the max-tech efficiency levels from each equipment 
class being considered for this rulemaking. DOE attempted to limit the 
number of TSLs considered for the NOPR by only considering efficiency 
levels that exhibit significantly different economic and/or engineering 
characteristics from the efficiency levels already selected as a TSL. 
DOE developed TSLs that include efficiency levels for both thermal 
efficiency and standby loss because standby loss is dependent upon 
thermal efficiency. This dependence of standby loss on thermal 
efficiency is discussed in detail in section IV.C.3.b and chapter 5 of 
the NOPR TSD. DOE developed the efficiency levels for thermal 
efficiency and standby loss for each equipment class in each TSL that 
DOE has identified for CWH equipment, as described below and as 
presented in Table V.1.
    TSL 4 consists of the max-tech efficiency levels. The efficiency 
levels in TSL 4 also provide the highest NPV using a 7-percent discount 
rate.
    TSL 3 consists of intermediate condensing efficiency levels for 
each gas-fired equipment class with the exception of the residential-
duty gas-fired storage water heater equipment class, which has a 
minimum condensing level. All equipment classes have positive life-
cycle cost savings at TSL 3. For this TSL, DOE selected thermal 
efficiency levels closest to the current

[[Page 34504]]

ENERGY STAR level \118\ for commercial gas-fired storage water heaters 
and gas-fired instantaneous water heaters and hot water supply boilers. 
For this TSL, all selected standby loss levels maximize energy savings 
and have a positive NPV using a 7-percent discount rate.
---------------------------------------------------------------------------

    \118\ Chapter 3 of the NOPR TSD includes more detail on the 
ENERGY STAR program for commercial water heaters.
---------------------------------------------------------------------------

    TSL 2 consists of minimum condensing thermal efficiency levels for 
each gas-fired equipment class. For this TSL, all selected standby loss 
levels maximize both energy savings and NPV using a 7-percent discount 
rate.
    TSL 1 consists of maximum non-condensing thermal efficiency levels 
for each gas-fired equipment class. For this TSL, all selected standby 
loss levels maximize energy savings and have a positive NPV using a 7-
percent discount rate.
    Table V.1 presents the efficiency levels for thermal efficiency and 
standby loss for each equipment class in each TSL that DOE has 
identified for CWH equipment. Table V.2 presents the thermal efficiency 
value and standby loss reduction factor for each equipment class in 
each TSL that DOE considered, with the exception of residential-duty 
gas-fired storage water heaters. The standby loss reduction factor is a 
multiplier representing the reduction in allowed standby loss relative 
to the current standby loss standard. For residential-duty gas-fired 
storage water heaters, DOE must set standards in terms of the uniform 
efficiency descriptor (UEF) metric established in the July 2014 final 
rule. 79 FR 40542, 40578-79 (July 11, 2014). Table V.3 presents the UEF 
equations for residential-duty gas-fired storage water heaters 
corresponding to each TSL that DOE considered, developed using the 
conversion factors proposed in the April 2015 NOPR. 80 FR 20116, 20143 
(April 14, 2015).

                                         Table V.1--Trial Standard Levels for CWH Equipment by Efficiency Level
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Trial standard level * **
                                                         -----------------------------------------------------------------------------------------------
                     Equipment class                                 1                       2                       3                       4
                                                         -----------------------------------------------------------------------------------------------
                                                              Et          SL          Et          SL          Et          SL          Et          SL
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and storage-            1           2           2           2           4           2           5           2
 type instantaneous water heaters.......................
Residential-duty gas-fired storage water heaters........           1           3           2           1           2           1           4           1
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Tankless water heaters..............................           2  ..........           3  ..........           4  ..........           5  ..........
    Hot water supply boilers............................           2  ..........           3  ..........           4  ..........           5  ..........
Electric storage water heaters..........................  ..........           1  ..........           1  ..........           1  ..........           1
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Et stands for thermal efficiency, and SL stands for standby loss.
** As discussed in sections III.C.7 and III.C.8, DOE did not analyze amended energy conservations standards for standby loss of instantaneous water
  heaters and hot water supply boilers or for thermal efficiency of electric storage water heaters.


                       Table V.2--Trial Standard Levels for CWH Equipment by Thermal Efficiency and Standby Loss Reduction Factor
                                                [Except residential-duty gas-fired storage water heaters]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Trial standard level * **
                                                         -----------------------------------------------------------------------------------------------
                                                                     1                       2                       3                       4
                     Equipment class                     -----------------------------------------------------------------------------------------------
                                                                       SL factor               SL factor               SL factor               SL factor
                                                            Et (%)     [dagger]     Et (%)     [dagger]     Et (%)     [dagger]     Et (%)     [dagger]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and storage-           82        0.72          90        0.67          95        0.63          99        0.61
 type instantaneous water heaters.......................
Gas-fired instantaneous water heaters and hot water
 supply boilers:
    Tankless water heaters..............................          84  ..........          92  ..........          94  ..........          96  ..........
    Hot water supply boilers............................          84  ..........          92  ..........          94  ..........          96  ..........
Electric storage water heaters..........................  ..........        0.84  ..........        0.84  ..........        0.84  ..........        0.84
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Et stands for thermal efficiency, and SL stands for standby loss.
** As discussed in sections III.C.7 and III.C.8, DOE did not analyze amended energy conservations standards for standby loss of instantaneous water
  heaters and hot water supply boilers or for thermal efficiency of electric storage water heaters.
[dagger] Standby loss reduction factor is a factor that is multiplied by the current maximum standby loss equations for each equipment class, as
  applicable. DOE used reduction factors to develop the amended maximum standby loss equation for each TSL. These reduction factors and maximum standby
  loss equations are discussed in section IV.C.8.


                                                  Table V.3--Trial Standard Levels by UEF for Residential-Duty Gas-Fired Storage Water Heaters
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
         Draw pattern *                        TSL 0                           TSL 1                           TSL 2                           TSL 3                           TSL 4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
High............................  0.6215-(0.0007 x Vr)            0.6646-(0.0006 x Vr)            0.7311-(0.0006 x Vr)            0.7311-(0.0006 x Vr)            0.7718-(0.0006 x Vr)

[[Page 34505]]

 
Medium..........................  0.5781-(0.0009 x Vr)            0.6304-(0.0007 x Vr)            0.6996-(0.0007 x Vr)            0.6996-(0.0007 x Vr)            0.7357-(0.0008 x Vr)
Low.............................  0.5316-(0.0009 x Vr)            0.5915-(0.0009 x Vr)            0.6626-(0.0009 x Vr)            0.6626-(0.0009 x Vr)            0.6939-(0.0010 x Vr)
Very Small......................  0.3371-(0.0007 x Vr)            0.3986-(0.0009 x Vr)            0.4618-(0.0010 x Vr)            0.4618-(0.0010 x Vr)            0.4730-(0.0011 x Vr)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Draw pattern is a classification of hot water use of a consumer water heater or residential-duty commercial water heater, based upon the first-hour rating. The draw pattern is determined
  using the Uniform Test Method for Measuring the Energy Consumption of Water Heaters in in appendix E to subpart B of 10 CFR Part 430.
Note: TSL 0 represents the baseline, and Vr is rated volume in gallons.

B. Economic Justification and Energy Savings

1. Economic Impacts on Individual Commercial Consumers
    DOE analyzed the economic impacts on CWH commercial consumers by 
looking at the effects potential amended standards would have on the 
LCC and PBP. DOE also examined the impacts of potential standards on 
commercial consumer subgroups. These analyses are discussed in the 
following subsections.
a. Life-Cycle Cost and Payback Period
    To evaluate the net economic impact of potential amended energy 
conservation standards on commercial consumers of CWH equipment, DOE 
conducted LCC and PBP analyses for each TSL. In general, higher-
efficiency equipment would affect commercial consumers in two ways: (1) 
Annual operating expenses would decrease, and (2) purchase price would 
increase. The results of the LCC analysis for each TSL were obtained by 
comparing the installed and operating costs of the equipment in the no-
new-standards-case scenario (see section IV.F for a discussion of no-
new-standards-case efficiency distribution) against the standards-case 
scenarios at each TSL. Inputs used for calculating the LCC and PBP 
include total installed costs (i.e., equipment price plus installation 
costs), operating expenses (i.e., annual energy use, energy prices, 
energy price trends, repair costs, and maintenance costs), equipment 
lifetime, and discount rates.
    The LCC analysis is carried out using Monte Carlo simulations. 
Consequently, the results of the LCC analysis are distributions 
covering a range of values, as opposed to a single deterministic value. 
DOE presents the mean values calculated from the distributions of 
results. The LCC analysis also provides information on the percentage 
of commercial consumers for whom an increase in the minimum efficiency 
standard would have a positive impact (net benefit), a negative impact 
(net cost), or no impact.
    DOE also performed a PBP analysis as part of the LCC analysis. The 
PBP is the number of years it would take for the commercial consumer to 
recover the increased costs of higher-efficiency equipment as a result 
of energy savings based on the operating cost savings. The PBP is an 
economic benefit-cost measure that uses benefits and costs without 
discounting. Chapter 8 of the NOPR TSD provides detailed information on 
the LCC and PBP analyses.
    As described in section IV.H of this document, DOE used a ``roll-
up'' scenario in this rulemaking. Under the roll-up scenario, DOE 
assumes that the market shares of the efficiency levels in the no-new-
standards case that do not meet the new or amended standard level under 
consideration would ``roll up'' into (meaning ``be added to'') the 
market share of the efficiency level at the standard level under 
consideration, and the market shares of efficiency levels that are 
above the standard level under consideration would remain unaffected. 
Commercial consumers in the no-new-standards-case scenario who buy the 
equipment at or above the TSL under consideration, would be unaffected 
if the standard were to be set at that TSL. Commercial consumers in the 
no-new-standards-case scenario who buy equipment below the TSL under 
consideration would be affected if the standard were to be set at that 
TSL. Among these affected commercial consumers, some may benefit from 
lower LCCs of the equipment, and some may incur net cost due to higher 
LCCs, depending on the inputs to the LCC analysis such as electricity 
prices, discount rates, installation costs, and markups.
    DOE's LCC and PBP analyses provided key outputs for each efficiency 
level above the baseline for each equipment class, as reported in Table 
V.4 to Table V.15. Two tables are presented for each equipment class, 
with separate pairs of tables shown for tankless gas-fired water 
heaters and for gas-fired hot water supply boilers, two product groups 
within the class of gas-fired instantaneous water heaters and hot water 
supply boilers. LCC results for this class as a whole are also shown 
based on shipment weighting of both equipment groups. The first table 
in each pair presents the results of the LCC analysis by efficiency 
level and TSL and shows installed costs, first year's operating cost, 
lifetime operating cost, and mean LCC, as well as simple PBP. The 
second table presents the percentage of commercial consumers who 
experience a net cost, as well as the mean LCC savings for all 
commercial consumers.
    Analysis of all equipment classes showed positive mean LCC savings 
values at TSL 4, the max-tech efficiency level. The percentage of 
consumers experiencing net cost at TSL 4 varied from 14 percent for 
electric storage water heaters to 36 percent for residential duty gas-
fired storage water heaters.
    For commercial gas-fired storage and residential-duty gas-fired 
storage water heaters, the trend is generally an increase in LCC 
savings from TSL 2 to 4, going from lowest to highest condensing 
efficiency level examined. Average LCC savings are positive at TSL 1 
through TSL 4 for all equipment classes.
    For commercial gas-fired storage water heaters, and gas-fired 
instantaneous water heaters and hot water supply boilers, TSL 2 showed 
positive mean LCC savings, with between 22 and 38 percent of commercial 
consumers showing negative LCC savings. For residential-duty gas-fired 
storage water heaters, 42 percent of consumers experienced net cost at 
TSL 2. TSL 1 showed positive LCC savings for all equipment classes.
    The simple PBP values for TSLs 2 through 4 are generally less than 
7 years, except for residential-duty gas-fired storage water heater 
class, which has a simple payback ranging from 10.2 to 11.9 years, 
depending on TSL. Analyzed payback periods for the equipment group of 
gas-fired tankless water heaters were immediate at TSL 2 through TSL 4, 
resulting from reduced venting costs that offset equipment cost 
increases, particularly in new construction. The PBP was less than the 
average lifetime in all cases.

[[Page 34506]]



                        Table V.4--Average LCC and PBP Results by Efficiency Level for Commercial Gas-Fired Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Simple payback period (years)
                                              Thermal      Standby loss    Average costs ---------------------------------------------------------------
                  TSL *                     efficiency      (SL) factor       (2014$)                      First year's      Lifetime
                                             (Et) (%)                                     Installed cost  operating cost  operating cost        LCC
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................              80            1.00           4,316           2,225          20,011          24,327  ..............
1.......................................              82            0.72           4,581           2,156          19,378          23,959             3.8
2.......................................              90            0.67           5,467           2,023          18,149          23,615             5.7
3.......................................              95            0.63           5,537           1,944          17,415          22,952             4.3
4.......................................              99            0.61           5,624           1,883          16,863          22,488             3.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The results for each TSL are calculated assuming that all commercial consumers use equipment with that efficiency level. The PBP is measured relative
  to the baseline equipment.
Note: TSL 0 represents the baseline.


Table V.5--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Commercial Gas-
                                           Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                                      Life-cycle cost savings
                                                                                 -------------------------------
                                                      Thermal                      Percentage of
                       TSL                          efficiency     Standby loss     commercial     Average life-
                                                    (Et) level      (SL) factor   consumers that    cycle cost
                                                                                   experience a      savings *
                                                                                     net cost         (2014$)
----------------------------------------------------------------------------------------------------------------
0...............................................              80            1.00               0  ..............
1...............................................              82            0.72               8             219
2...............................................              90            0.67              30             317
3...............................................              95            0.63              24             794
4...............................................              99            0.61              21           1,252
----------------------------------------------------------------------------------------------------------------
* The calculation includes commercial consumers with zero LCC savings (no impact).
Note: TSL 0 represents the baseline.


                     Table V.6--Average LCC and PBP Results by Efficiency Level for Residential-Duty Gas-Fired Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Simple payback period (years)
                                                                           Average costs ---------------------------------------------------------------
                          TSL *                                 UEF           (2014$)                      First year's      Lifetime
                                                                                          Installed cost  operating cost  operating cost        LCC
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................            0.57           2,090           1,252          13,066          15,156  ..............
1.......................................................            0.62           2,528           1,210          12,609          15,136            10.5
2, 3....................................................            0.69           3,361           1,145          11,886          15,248            11.9
4.......................................................            0.73           3,669           1,096          11,361          15,030            10.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The results for each TSL are calculated assuming all commercial consumers use equipment with that efficiency level. The PBP is measured relative to
  the baseline equipment. UEF values are for the representative model.
Note: TSL 0 represents the baseline.


  Table V.7--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Residential-
                                      Duty Gas-Fired Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                                     Life-cycle cost savings *
                                                                                 -------------------------------
                                                                                   Percentage of
                               TSL                                      UEF         commercial     Average life-
                                                                                  consumers that    cycle cost
                                                                                   experience a     savings **
                                                                                     net cost         (2014$)
----------------------------------------------------------------------------------------------------------------
0...............................................................            0.57               0  ..............
1...............................................................            0.62              32             537
2, 3............................................................            0.69              42              14

[[Page 34507]]

 
4...............................................................            0.73              36             241
----------------------------------------------------------------------------------------------------------------
* A value in parentheses is a negative number.
** The calculation includes commercial consumers with zero LCC savings (no impact).
Note: UEF values are for the representative model.
TSL 0 represents the baseline.


                             Table V.8--Average LCC and PBP Results by Efficiency Level for Gas-Fired Tankless Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Average costs (2014$)
                                               Thermal    ----------------------------------------------------------------
                   TSL*                      efficiency                     First year's      Lifetime                      Simple payback period years
                                              (Et) (%)     Installed cost  operating cost  operating cost        LCC
--------------------------------------------------------------------------------------------------------------------------------------------------------
0........................................              80           4,273             690           9,607          13,880  .............................
1........................................              84           4,337             668           9,283          13,620  2.9
2........................................              92           3,819             622           8,628          12,447  Immediate.
3........................................              94           3,849             611           8,474          12,322  Immediate.
4........................................              96           3,884             600           8,325          12,209  Immediate.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The results for each TSL are calculated assuming that all commercial consumers use equipment with that efficiency level. The PBP is measured relative
  to the baseline equipment.
Note: Immediate payback can result from a decrease in installation cost that is greater than the incremental increase in equipment cost.
TSL 0 represents the baseline.


   Table V.9--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Gas-Fired
                                             Tankless Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                                      Life-cycle cost savings
                                                                                 -------------------------------
                                                                      Thermal      Percentage of
                               TSL                                  efficiency      commercial     Average life-
                                                                     (Et) (%)     consumers that    cycle cost
                                                                                   experience a      savings *
                                                                                     net cost         (2014$)
----------------------------------------------------------------------------------------------------------------
0...............................................................              80               0  ..............
1...............................................................              84              11              86
2...............................................................              92              38           1,009
3...............................................................              94              35           1,119
4...............................................................              96              33           1,224
----------------------------------------------------------------------------------------------------------------
* The calculation includes commercial consumers with zero LCC savings (no impact).
Note: TSL 0 represents the baseline.


                           Table V.10--Average LCC and PBP Results by Efficiency Level for Gas-Fired Hot Water Supply Boilers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Average costs (2014$)
                                                              Thermal    ---------------------------------------------------------------- Simple payback
                          TSL*                              efficiency                     First year's      Lifetime                          period
                                                             (Et) (%)     Installed cost  operating cost  operating cost        LCC           (years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................              80           7,372           3,990          74,284          81,656  ..............
1.......................................................              84           7,961           3,828          71,216          79,178             3.6
2.......................................................              92          10,113           3,579          65,754          75,867             6.7
3.......................................................              94          10,433           3,514          64,516          74,949             6.4
4.......................................................              96          10,754           3,452          63,325          74,079             6.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The results for each TSL are calculated assuming that all commercial consumers use equipment with that efficiency level. The PBP is measured relative
  to the baseline equipment.
Note: TSL 0 represents the baseline.


[[Page 34508]]


 Table V.11--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Gas-Fired Hot
                                              Water Supply Boilers
----------------------------------------------------------------------------------------------------------------
                                                                                      Life-cycle cost savings
                                                                                 -------------------------------
                                                                      Thermal      Percentage of
                               TSL                                  efficiency      commercial     Average life-
                                                                     (Et) (%)     consumers that    cycle cost
                                                                                   experience a      savings *
                                                                                     net cost         (2014$)
----------------------------------------------------------------------------------------------------------------
0...............................................................              80               0  ..............
1...............................................................              84              15           1,245
2...............................................................              92              22           3,794
3...............................................................              94              22           4,528
4...............................................................              96              24           5,285
----------------------------------------------------------------------------------------------------------------
* The calculation includes commercial consumers with zero LCC savings (no impact).
Note: TSL 0 represents the baseline.


          Table V.12--Average LCC and PBP Results by Efficiency Level for Gas-Fired Instantaneous Water Heaters and Hot Water Supply Boilers *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Average costs (2014$)
                                                              Thermal    ---------------------------------------------------------------- Simple payback
                          TSL**                             efficiency                     First year's      Lifetime                         period
                                                             (Et) (%)     Installed cost  operating cost  operating cost        LCC           (years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................              80           6,427           2,984          54,556          60,983  ..............
1.......................................................              84           6,856           2,864          52,325          59,181             3.6
2.......................................................              92           8,193           2,677          48,330          56,523             5.8
3.......................................................              94           8,425           2,629          47,422          55,846             5.6
4.......................................................              96           8,658           2,582          46,549          55,207             5.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This table shows results for the gas-fired instantaneous water heaters and hot water supply boilers equipment class (i.e., both tankless water heaters
  and hot water supply boilers), and reflects a weighted average result of Tables V.8 and V.10.
** The results for each TSL are calculated assuming that all commercial consumers use equipment with that efficiency level. The PBP is measured relative
  to the baseline equipment.
Note: TSL 0 represents the baseline.


   Table V.13--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Gas-Fired
                           Instantaneous Water Heaters and Hot Water Supply Boilers *
----------------------------------------------------------------------------------------------------------------
                                                                                   Life-cycle cost savings
                                                                           -------------------------------------
                                                              Thermal         Percentage of
                          TSL                             efficiency (Et)       commercial       Average life-
                                                                (%)           consumers that       cycle cost
                                                                             experience a net      savings **
                                                                                   cost             (2014$)
----------------------------------------------------------------------------------------------------------------
0......................................................                 80                  0
1......................................................                 84                 14                891
2......................................................                 92                 27              2,944
3......................................................                 94                 26              3,488
4......................................................                 96                 27              4,046
----------------------------------------------------------------------------------------------------------------
* This table shows results for the gas-fired instantaneous water heaters and hot water supply boilers equipment
  class (i.e., both tankless water heaters and hot water supply boilers), and reflects a weighted average result
  of Tables V.9 and V.11.
** The calculation includes commercial consumers with zero LCC savings (no impact).
Note: TSL 0 represents the baseline.


                             Table V.14--Average LCC and PBP Results by Efficiency Level for Electric Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Average costs (2014$)
                                                           Standby loss  ---------------------------------------------------------------- Simple payback
                          TSL *                             (SL) factor                    First year's      Lifetime                     period (years)
                                                                          Installed cost  operating cost  operating cost        LCC
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................            1.00           3,649           1,743          17,094          20,743
1, 2, 3, 4..............................................            0.84           3,743           1,728          16,952          20,694             6.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The results for each TSL are calculated assuming that all commercial consumers use equipment with that efficiency level. The PBP is measured relative
  to the baseline equipment.
Note: TSL 0 represents the baseline.


[[Page 34509]]


   Table V.15--Average LCC Savings Relative to the No-New-Standards-Case Efficiency Distribution for Electric
                                              Storage Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                                      Life-cycle cost savings
                                                                                 -------------------------------
                                                                                   Percentage of
                               TSL                                 Standby loss     commercial     Average life-
                                                                    (SL) level    consumers that    cycle cost
                                                                                   experience a      savings *
                                                                                     net cost         (2014$)
----------------------------------------------------------------------------------------------------------------
0...............................................................            1.00               0
1, 2, 3, 4......................................................            0.84              14              47
----------------------------------------------------------------------------------------------------------------
* The calculation includes commercial consumers with zero LCC savings (no impact).
Note: TSL 0 represents the baseline.

b. Life-Cycle Cost Subgroup Analysis
    As described in section IV.I, DOE estimated the impact of amended 
energy conservation standards for commercial water heating equipment. 
Using the LCC spreadsheet model, DOE estimated the impacts of the TSLs 
on the following commercial consumer subgroups: Low-income residential 
population (0-20 percent percentile gross annual household income) and 
small businesses. DOE estimated the average LCC savings and PBP for the 
low-income subgroup compared with average CWH commercial consumers, as 
shown in Table V.16 through Table V.21. DOE also estimated LCC savings 
and PBP for small businesses, presenting the results in Table V.16 
through Table V.21.
    The results of the life-cycle cost subgroup analysis indicate that 
for CWH equipment, the low-income residential subgroup in general had a 
slightly higher LCC savings when compared to the general commercial 
consumer population, due in part to greater hot water use than the 
average commercial consumer for all equipment classes with the 
exception of residential-duty. However, for both residential-duty gas-
fired commercial storage water heaters and for tankless water heating 
equipment, the low-income residential subgroup analyzed had somewhat 
lower hot water usage than the average commercial consumer of this 
equipment, which contributed to lower LCC savings for some TSLs. In 
particular, the low-income residential subgroup for the Residential-
Duty Low-Income Gas-Fired Storage Water Heaters equipment class at TSL 
2/3 would experience negative LCC savings and an associated payback 
period longer than the estimated 12 year lifetime of the product. DOE 
requests comment on any potential impacts of the estimated increased 
costs of the proposed standards on the low-income residential subgroup 
and whether this would impact the rate of replacement of the existing 
products due to low-income consumers choosing to repair as opposed to 
replace their water heater. In addition, DOE requests comment on the 
assumptions used in the LCC and PBP analysis such as the estimated 
installation costs of $3,361, which includes all applicable costs and 
markups for this equipment class. DOE also requests comment on the 
potential for product switching from either smaller Residential (>55 
gallon, <=75,000 Btu/h) or larger commercial (>105,000 Btu/h) gas 
storage hot water heaters to the Residential-Duty Gas-Fired Storage 
Water Heaters (>75,000 Btu/h and <=105,000 Btu/h) equipment class if 
the agency were to adopt a less costly alternative for the Residential-
Duty Gas-Fired Storage Water Heaters equipment class.
    For the small business subgroups, the LCC savings were consistently 
lower than those of the average commercial consumer. Chapter 11 of the 
NOPR TSD provides more detailed discussion on the LCC subgroup analysis 
and results.

                 Table V.16--Comparison of Impacts for Consumer Subgroups With All Consumers, Commercial Gas-Fired Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    LCC savings (2014$) *              Simple payback period (years)
                                                    Thermal      Standby   -----------------------------------------------------------------------------
                       TSL                         efficiency   loss (SL)                 Commercial                             Commercial
                                                    (Et) (%)      factor    Residential     small         All      Residential     small         All
                                                                             low-income    business                 low-income    business
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................           82         0.72          345          179          219          3.2          3.8          3.8
2...............................................           90         0.67          731          243          317          4.7          5.5          5.7
3...............................................           95         0.63        1,399          679          794          3.5          4.2          4.3
4...............................................           99         0.61        2,046        1,093        1,252          3.1          3.7          3.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.


[[Page 34510]]


              Table V.17--Comparison of Impacts for Consumer Subgroups With All Consumers, Residential-Duty Gas-Fired Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       LCC savings (2014$) *                       Simple payback period (years)
                                                         -----------------------------------------------------------------------------------------------
                   TSL                          UEF         Residential     Commercial                      Residential     Commercial
                                                            low-income    small business        All         low-income    small business        All
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................            0.62             587             467             537             9.8            10.5            10.5
2, 3....................................            0.69            (17)              48              14            12.4            10.1            11.9
4.......................................            0.73             251             250             241            10.4             8.7            10.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.


                      Table V.18--Comparison of Impacts for Consumer Subgroups With All Consumers, Gas-Fired Tankless Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             LCC savings (2014$) *                            Simple payback period (years)
                                    Thermal    ---------------------------------------------------------------------------------------------------------
              TSL                 efficiency      Residential     Commercial                     Residential low-    Commercial small
                                   (Et) (%)       low-income    small business        All             income             business             All
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................              84              94              62              86  2.9...............  3.1..............  2.9
2.............................              92             748           1,036           1,009  Immediate.........  Immediate........  Immediate.
3.............................              94             869           1,121           1,119  Immediate.........  Immediate........  Immediate.
4.............................              96             985           1,199           1,224  Immediate.........  Immediate........  Immediate.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.
Note: Immediate payback can result from a decrease in installation cost that is greater than the incremental increase in equipment cost.


                     Table V.19--Comparison of Impacts for Consumer Subgroups With All Consumers, Gas-Fired Hot Water Supply Boilers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       LCC savings (2014$) *                       Simple payback period (years)
                                              Thermal    -----------------------------------------------------------------------------------------------
                   TSL                      efficiency      Residential     Commercial                      Residential     Commercial
                                             (Et) (%)       low-income    small business        All         low-income    small business        All
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................              84           2,937             401           1,245             2.1             6.4             3.6
2.......................................              92           9,568             761           3,794             4.1            12.2             6.7
3.......................................              94          11,302             979           4,528             4.0            11.7             6.4
4.......................................              96          13,101           1,192           5,285             3.8            11.4             6.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.


    Table V.20--Comparison of Impacts for Consumer Subgroups With All Consumers, Gas-Fired Instantaneous Water Heaters and Hot Water Supply Boilers *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       LCC savings (2014$) *                       Simple payback period (years)
                                              Thermal    -----------------------------------------------------------------------------------------------
                   TSL                      efficiency      Residential     Commercial                      Residential     Commercial
                                             (Et) (%)       low-income    small business        All         low-income    small business        All
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................              84           2,070             298             891             2.1             6.1             3.6
2.......................................              92           6,878             845           2,944             3.9             9.7             5.8
3.......................................              94           8,120           1,022           3,488             3.8             9.5             5.6
4.......................................              96           9,406           1,195           4,046             3.7             9.3             5.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This table shows results for the gas-fired instantaneous water heaters and hot water supply boilers equipment class (i.e., both tankless water heaters
  and hot water supply boilers), and reflects a weighted average result of Tables V.18 and V.19.
** Parentheses indicate negative values.


[[Page 34511]]


                       Table V.21--Comparison of Impacts for Consumer Subgroups With All Consumers, Electric Storage Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  LCC savings (2014$) *                          Simple payback period (years)
                                     Standby loss  -----------------------------------------------------------------------------------------------------
               TSL                   (SL) factor    Residential low-    Commercial                     Residential low-    Commercial
                                                         income       small business        All             income       small business        All
--------------------------------------------------------------------------------------------------------------------------------------------------------
1,2,3,4..........................            0.84               87               26               47              5.5              6.9              6.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.

c. Rebuttable Presumption Payback
    As discussed in section III.F.2, EPCA establishes a rebuttable 
presumption that an energy conservation standard is economically 
justified if the increased purchase cost for a product that meets the 
standard is less than three times the value of the first-year energy 
savings resulting from the standard. Accordingly, DOE calculated a 
rebuttable presumption payback period for each TSL for commercial water 
heating equipment using average installed cost to the commercial 
consumer and first-year energy savings. However, DOE routinely conducts 
a full economic analysis that considers the full range of impacts, 
including those to the commercial consumer, manufacturer, Nation, and 
environment, as required by EPCA under 42 U.S.C. 6313(a)(6)(B)(ii) and 
(C)(i). The results of this more detailed analysis serve as the basis 
for DOE to definitively evaluate the economic justification for a 
potential standard level, thereby supporting or rebutting the results 
of any preliminary determination of economic justification. Table V.22 
shows the rebuttable presumption payback periods for each CWH equipment 
class by TSL level. Rebuttable payback periods were greater than 3 
years for all CWH equipment except the tankless water heaters subclass. 
Tankless water heaters had rebuttable presumption payback periods of 
less than 3 years at all TSL levels.

        Table V.22--Rebuttable Presumption Payback Periods for Commercial Water Heating Equipment Classes
----------------------------------------------------------------------------------------------------------------
                                                     Rebuttable presumption payback (years)
        Equipment class        ---------------------------------------------------------------------------------
                                     TSL 1              TSL 2                 TSL 3                 TSL 4
----------------------------------------------------------------------------------------------------------------
Gas-fired storage water                    3.8  5.6.................  4.2.................  3.7.
 heaters and storage-type
 instantaneous water heaters.
Residential-duty gas-fired                10.5  11.3................  11.3................  9.6.
 storage water heaters.
Gas-fired instantaneous water              3.4  5.1.................  5.0.................  5.0.
 heaters and hot water supply
 boilers.
    Tankless water heaters....             2.3  Immediate...........  Immediate...........  Immediate.
    Hot water supply boilers..             3.5  5.9.................  5.8.................  5.7.
Electric storage water heaters             6.5  6.5.................  6.5.................  6.5.
----------------------------------------------------------------------------------------------------------------
Note: Immediate payback can result from a decrease in installation cost that is greater than the incremental
  increase in equipment cost.

2. Economic Impact on Manufacturers
    As noted previously, DOE performed an MIA to estimate the impact of 
amended energy conservation standards on manufacturers of CWH 
equipment. The following section describes the expected impacts on 
manufacturers at each considered TSL. Chapter 12 of the NOPR TSD 
explains the analysis in further detail.
a. Industry Cash-Flow Analysis Results
    Table V.23 and Table V.24 depict the estimated financial impacts 
(represented by changes in INPV) of amended energy conservation 
standards on CWH equipment manufacturers, as well as the conversion 
costs that DOE expects manufacturers would incur for all equipment 
classes at each TSL. To evaluate the range of cash-flow impacts on the 
CWH industry, DOE modeled two markup scenarios using different 
assumptions that correspond to the range of anticipated market 
responses to amended energy conservation standards: (1) The 
preservation of gross margin percentage markup scenario; and (2) the 
preservation of per-unit operating profit markup scenario. Each of 
these scenarios is discussed immediately below.
    To assess the less severe end of the range of potential impacts, 
DOE modeled a preservation of gross margin percentage markup scenario, 
in which a uniform ``gross margin percentage'' markup is applied across 
all potential efficiency levels. In this scenario, DOE assumed that a 
manufacturer's absolute dollar markup would increase as production 
costs increase in the standards case.
    To assess the more severe end of the range of potential impacts, 
DOE modeled the preservation of per-unit operating profit markup 
scenario, which assumes that manufacturers would not be able to 
generate greater operating profit on a per-unit basis in the standards 
case as compared to the no-new-standards case. Rather, as manufacturers 
make the necessary investments required to convert their facilities to 
produce new standards-compliant equipment and incur higher costs of 
goods sold, their percentage markup decreases. Operating profit does 
not change in absolute dollars and decreases as a percentage of 
revenue.
    As noted in the MIA methodology discussion (see section IV.J.2), in 
addition to markup scenarios, the MPCs, shipments, and conversion cost 
assumptions also affect INPV results.
    The results in Table V.23 and Table V.24 show potential INPV 
impacts for CWH equipment manufacturers. Table V.23 reflects the less 
severe set of potential impacts, and Table V.24 represents the more 
severe set of potential impacts. In the following discussion, the INPV 
results refer to the difference in industry value between the no-new-
standards case and each standards case that results from the sum of 
discounted cash flows from the base

[[Page 34512]]

year 2015 through 2048, the end of the analysis period.
    To provide perspective on the short-run cash flow impact, DOE 
discusses the change in free cash flow between the no-new-standards 
case and the standards case at each TSL in the year before new 
standards take effect. These figures provide an understanding of the 
magnitude of the required conversion costs at each TSL relative to the 
cash flow generated by the industry in the no-new-standards case.

                       Table V.23--Manufacturer Impact Analysis Results--Preservation of Gross Margin Percentage Markup Scenario *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Trial standard level
                                                     Units                    No-new-    ---------------------------------------------------------------
                                                                          standards case         1               2               3               4
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV................................  2014$ millions....................           176.2           177.4           187.8           185.0           166.6
Change in INPV......................  2014$ millions....................  ..............             1.2            11.6             8.8           (9.7)
                                      %.................................  ..............             0.7             6.6             5.0           (5.5)
Free Cash Flow (2018)...............  2014$ millions....................            12.8            10.9             5.6             2.5          (10.2)
Change in Free Cash Flow............  2014$ millions....................  ..............           (2.0)           (7.3)          (10.3)          (23.1)
                                      %.................................  ..............          (15.5)          (56.7)          (80.4)         (179.8)
Product Conversion Costs............  2014$ millions....................  ..............             3.6            12.5            18.1            48.2
Capital Conversion Costs............  2014$ millions....................  ..............             2.2             8.4            11.7            21.3
                                                                         -------------------------------------------------------------------------------
    Total Conversion Costs..........  2014$ millions....................  ..............             5.8            20.9            29.8            69.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.


                      Table V.24--Manufacturer Impact Analysis Results--Preservation of Per-Unit Operating Profit Markup Scenario *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Trial standard level
                                                     Units                    No-new-    ---------------------------------------------------------------
                                                                          standards case         1               2               3               4
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV................................  2014$ millions....................           176.2           171.5           158.8           152.8           128.6
Change in INPV......................  2014$ millions....................  ..............           (4.7)          (17.4)          (23.4)          (47.6)
                                      %.................................  ..............           (2.7)           (9.9)          (13.3)          (27.0)
Free Cash Flow (2018)...............  2014$ millions....................            12.8            10.9             5.6             2.5          (10.2)
Change in Free Cash Flow............  2014$ millions....................  ..............           (2.0)           (7.3)          (10.3)          (23.1)
                                      %.................................  ..............          (15.5)          (56.7)          (80.4)         (179.8)
Product Conversion Costs............  2014$ millions....................  ..............             3.6            12.5            18.1            48.2
Capital Conversion Costs............  2014$ millions....................  ..............             2.2             8.4            11.7            21.3
                                                                         -------------------------------------------------------------------------------
    Total Conversion Costs..........  2014$ millions....................  ..............             5.8            20.9            29.8            69.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative values.

    At TSL 1, DOE estimates impacts on INPV for CWH equipment 
manufacturers to range from -2.7 percent to 0.7 percent, or a change of 
-$4.7 million to $1.2 million. At this level, DOE estimates that 
industry free cash flow would decrease by approximately 15.5 percent to 
$10.9 million, compared to the no-new-standards-case value of $12.8 
million in the year before compliance (2018).
    DOE estimates that in the year of compliance (2019), 27 percent of 
CWH shipments in the no-new-standards case would already meet or exceed 
the thermal efficiency and standby loss standards at TSL 1. At this 
level, DOE expects CWH equipment manufacturers to incur $3.6 million in 
product conversion costs to redesign and test their equipment. DOE does 
not expect the modest increases in thermal efficiency standards at this 
TSL to require major equipment redesigns or capital investments. 
However, DOE expects manufacturers to incur approximately $2.2 million 
in capital conversion costs in order to comply with the proposed 
standby loss levels at this TSL. DOE expects manufacturers will incur 
these costs to purchase new tooling for the machinery used to make the 
jackets for storage water heaters, which would need to expand to 
enclose a thicker tank insulation layer.
    At TSL 1, under the preservation of gross margin percentage 
scenario, the shipment-weighted average price per unit increases by 4.5 
percent relative to the no-new-standards-case price per unit in the 
year of compliance (2019). In this scenario, manufacturers are able to 
fully pass on this cost increase to commercial consumers. This slight 
price increase would mitigate the $5.8 million in total conversion 
costs estimated at TSL 1, resulting in slightly positive INPV impacts 
at TSL 1 under this scenario. Under the preservation of per-unit 
operating profit markup scenario, manufacturers earn the same operating 
profit as would be earned in the no-new-standards case, but do not earn 
additional profit from their investments. A weighted-average price 
increase of 4.1 percent in this scenario is outweighed by the expected 
$5.8 million in total conversion costs, resulting in slightly negative 
impacts at TSL 1.
    At TSL 2, DOE estimates impacts on INPV for CWH manufacturers to 
range from -9.9 percent to 6.6 percent, or a change in INPV of -$17.4 
million to $11.6 million. At this potential standard level, industry 
free cash flow would decrease by approximately 56.7 percent to $5.6 
million, compared to the base-case value of $12.8 million in the year 
before compliance (2018).
    DOE estimates that in the year of compliance (2019), 19 percent of 
CWH shipments in the no-new-standards case would already meet or exceed 
the thermal efficiency and standby loss standards at TSL 2. DOE 
estimates that conversion costs would increase significantly at this 
TSL because manufacturers would meet these

[[Page 34513]]

thermal efficiency levels for gas-fired CWH equipment classes by using 
condensing technology, which significantly changes the equipment 
design. DOE estimates that most of these costs would be driven by 
commercial and residential-duty commercial gas-fired storage water 
heaters and gas-fired hot water supply boilers. DOE acknowledges that 
different manufacturers would likely make different investments in 
order to meet these thermal efficiency levels, because condensing heat 
exchanger designs vary from manufacturer to manufacturer. Manufacturers 
of gas-fired storage water heaters that use helical condensing heat 
exchanger designs may have to increase their tube-bending capacity to 
increase their production capacity of condensing heat exchangers, as 
would be required by a condensing standard. Other manufacturers may 
have to invest to increase their welding capacity. Additionally, 
manufacturers could incur capital costs for new press dies to form the 
holes for flue pipes in the top and bottom bells of storage water 
heaters. DOE estimated that manufacturers of the instantaneous CWH 
equipment classes would likely incur low capital conversion costs at 
this TSL. DOE assumes that tankless water heater manufacturers produce 
far more residential products than commercial products and that these 
products are manufactured in the same facilities with shared equipment. 
Therefore, DOE has tentatively concluded that increased production of 
condensing commercial tankless water heaters would not require high 
conversion costs because many more condensing residential tankless 
water heaters are already made. For hot water supply boilers, DOE 
assumes that manufacturers would likely choose to purchase condensing 
heat exchangers rather than design and manufacture them. While this 
shift to a purchased heat exchanger might affect the vertically-
integrated structure of the manufacturer, DOE does not believe it would 
lead to high conversion costs. Overall, DOE estimates that 
manufacturers would incur $12.5 million in product conversion costs and 
$8.4 million in capital conversion costs to bring their CWH equipment 
portfolios into compliance with a standard set to TSL 2.
    At TSL 2, under the preservation of gross margin percentage 
scenario, the shipment-weighted average price per unit increases by 
20.9 percent relative to the no-new-standards-case price per unit in 
the year of compliance (2019). In this scenario, INPV impacts are 
positive because manufacturers' ability to pass higher production costs 
onto commercial consumers outweighs the $20.9 million in expected total 
conversion costs. However, under the preservation of per-unit operating 
profit markup scenario, a lower markup means the weighted average price 
per unit increases by only 18.9 percent compared to the no-new-
standards case price per unit in the year of compliance (2019). In this 
case, conversion costs outweigh the gain in weighted average price per 
unit, resulting in moderately negative impacts at TSL 2.
    At TSL 3, DOE estimates impacts on INPV for CWH manufacturers to 
range from -13.3 percent to 5.0 percent, or a change in INPV of -$23.4 
million to $8.8 million. At this potential standard level, DOE 
estimates industry free cash flow would decrease by approximately 80.4 
percent to $2.5 million compared to the no-new-standards-case value of 
$12.8 million in the year before compliance (2018).
    The impacts on INPV at TSL 3 are slightly more negative than at TSL 
2. DOE estimates that in the year of compliance (2019), 16 percent of 
CWH shipments in the no-new-standards case would meet or exceed the 
thermal efficiency and standby loss standards at TSL 3. At this level, 
DOE estimates that product conversion costs would increase as 
manufacturers would have to redesign a larger percentage of their 
offerings to meet the higher thermal efficiency levels, which would 
require increased engineering resources. Additionally, capital 
conversion costs would increase as manufacturers may have to upgrade 
their laboratories and test facilities to increase capacity for 
research, development, and testing for their gas-fired storage water 
heater offerings. Overall, DOE estimates that manufacturers would incur 
$18.1 million in product conversion costs and $11.7 million in capital 
conversion costs to bring their CWH equipment portfolios into 
compliance with a standard set to TSL 3.
    At TSL 3, under the preservation of gross margin percentage markup 
scenario, the shipment-weighted average price per unit in the year of 
compliance (2019) increases by 23.1 percent relative to the no-new-
standards case price per unit. In this scenario, INPV impacts are 
positive because manufacturers' ability to pass higher production costs 
onto commercial consumers outweighs the $29.8 million in total 
conversion costs. However, under the preservation of per-unit operating 
profit markup scenario, a lower markup means the weighted average price 
per unit increases by only 20.9 percent compared to the no-new-
standards case price per unit in the year of compliance (2019). In this 
case, conversion costs outweigh the gain in weighted average price per 
unit, resulting in moderately negative impacts at TSL 3.
    TSL 4 represents the max-tech thermal efficiency and standby loss 
levels for all equipment classes analyzed. At TSL 4, DOE estimates 
impacts on INPV for CWH equipment manufacturers to range from -27.0 
percent to -5.5 percent, or a change in INPV of -$47.6 million to -$9.7 
million. At this TSL, DOE estimates industry free cash flow in the year 
before compliance (2018) would decrease by approximately 179.8 percent 
to -$10.2 million compared to the no-new-standards case value of $12.8 
million.
    The impacts on INPV at TSL 4 are negative under both markup 
scenarios. DOE estimates that in 2019, only 4 percent of CWH equipment 
shipments would already meet or exceed the efficiency levels prescribed 
at TSL 4. DOE expects conversion costs to continue to increase at TSL 
4, as almost all equipment on the market would have to be redesigned 
and many new products would have to be developed. DOE estimates that 
product conversion costs would increase to $48.2 million, as 
manufacturers would have to redesign a larger percentage of their 
offerings to meet max-tech for all classes. In particular, 
manufacturers of commercial gas-fired storage water heaters would need 
to extensively redesign almost all of their product offerings. This 
extensive redesign would likely include many rounds of research and 
development and testing across most equipment platforms. DOE estimates 
that manufacturers would also incur $21.3 million in capital conversion 
costs. In addition to upgrading production lines, DOE has tentatively 
concluded that manufacturers would likely be required to make extensive 
modifications and upgrades to their laboratories and possibly add 
laboratory space in order to develop and test products that meet max-
tech efficiency levels, particularly for commercial gas-fired storage 
water heaters.
    At TSL 4, under the preservation of gross margin percentage markup 
scenario, the shipment-weighted average price per unit in the year of 
compliance (2019) increases by 27.1 percent relative to the no-new-
standards case price per unit. In this scenario, INPV impacts are 
negative because manufacturers' ability to pass higher production costs 
onto consumers is outweighed by the $69.6 million in total conversion 
costs. Under the

[[Page 34514]]

preservation of per-unit operating profit markup scenario, a lower 
markup means the weighted-average price per unit increases by only 24.5 
percent compared to the no-new-standards case price per unit in the 
year of compliance (2019). In this case, conversion costs outweigh the 
gain in weighted-average price per unit, resulting in significantly 
negative impacts at TSL 4.
b. Impacts on Direct Employment
    To quantitatively assess the impacts of energy conservation 
standards on direct employment in the CWH industry, DOE used the GRIM 
to estimate the domestic labor expenditures and number of employees in 
the no-new-standards case and at each TSL in 2019. DOE used statistical 
data from the U.S. Census Bureau's 2013 Annual Survey of Manufacturers 
(ASM),\119\ the results of the engineering analysis, and interviews 
with manufacturers to determine the inputs necessary to calculate 
industry-wide labor expenditures and domestic employment levels. Labor 
expenditures related to manufacturing of the product are a function of 
the labor intensity of the product, the sales volume, and an assumption 
that wages remain fixed in real terms over time. The total labor 
expenditures in each year are calculated by multiplying the MPCs by the 
labor percentage of MPCs.
---------------------------------------------------------------------------

    \119\ U.S. Census Bureau, Annual Survey of Manufacturers: 
General Statistics: Statistics for Industry Groups and Industries 
(2013) (Available at http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ASM_2013_31GS101&prodType=table).
---------------------------------------------------------------------------

    The total labor expenditures in the GRIM are converted to domestic 
production employment levels by dividing production labor expenditures 
by the annual payment per production worker (production worker hours 
times the labor rate found in the U.S. Census Bureau's 2013 ASM). The 
estimates of production workers in this section cover workers, 
including line-supervisors who are directly involved in fabricating and 
assembling a product within the manufacturing facility. Workers 
performing services that are closely associated with production 
operations, such as materials handling tasks using forklifts, are also 
included as production labor. DOE's estimates only account for 
production workers who manufacture the specific products covered by 
this rulemaking. The total direct employment impacts calculated in the 
GRIM are the sum of the changes in the number of production workers 
resulting from the amended energy conservation standards for CWH 
equipment, as compared to the no-new-standards case.
    To estimate an upper bound to direct employment under amended 
standards, DOE assumes all domestic manufacturers would choose to 
continue producing CWH equipment in the United States and would not 
move production to foreign countries. To estimate a lower bound to 
direct employment under amended standards, DOE considers a case where 
some manufacturers choose to relocate some production overseas rather 
than make the necessary conversions at domestic production facilities. 
To establish the lower bound employment under amended standards, DOE 
estimated the maximum potential job loss due to manufacturers either 
leaving the industry or moving production to foreign locations as a 
result of amended standards. Due to shipping costs, most manufacturers 
agreed that more-stringent energy conservation standards for CWH 
equipment would probably not push their production overseas. Some 
manufacturers stated that producing higher-efficiency equipment is 
generally a more labor-intensive process and may cause them to hire 
additional production employees. They also noted, however, that higher 
efficiency standards could potentially shift the production of some of 
the value content of CWH equipment overseas, causing U.S. manufacturers 
to become less vertically integrated. In particular, manufacturers of 
hot water supply boilers could choose to source condensing heat 
exchangers, most of which are made overseas, rather than manufacture 
them at domestic production facilities.
    DOE estimates that 90 percent of CWH equipment sold in the United 
States is currently manufactured domestically. In the absence of 
amended energy conservation standards, DOE estimates that there would 
be 377 domestic production workers in the CWH industry in 2019, the 
year of compliance. Table V.25 presents the range of potential impacts 
of amended energy conservation standards on U.S. production workers of 
CWH equipment.

          Table V.25--Potential Changes in the Total Number of CWH Equipment Production Workers in 2019
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
        Worker estimates              No new     ---------------------------------------------------------------
                                     standard            1               2               3               4
----------------------------------------------------------------------------------------------------------------
Total Number of Domestic                     377      389 to 241      406 to 212      408 to 199      416 to 153
 Production Workers (2019)......
Potential Changes in Domestic     ..............     12 to (136)     29 to (165)     31 to (178)     39 to (224)
 Production Workers (2019)......
----------------------------------------------------------------------------------------------------------------
* Numbers in parentheses indicate negative numbers.

    At the upper end of the range, all examined TSLs show positive 
impacts on domestic employment levels. Producing more-efficient CWH 
equipment tends to require more labor, and DOE estimates that if CWH 
equipment manufacturers chose to keep their current production in the 
United States, domestic employment could increase at each TSL. In 
interviews, several manufacturers that produce high-efficiency CWH 
equipment stated that a standard that went to condensing levels could 
cause them to hire more employees to increase their production 
capacity. Others stated that a condensing standard would require 
additional engineers to redesign CWH equipment and production 
processes.
    Regarding potential negative impacts on domestic direct employment, 
DOE does not expect significant changes at TSL 1. Most manufacturers 
agreed that these efficiency levels would require minimal changes to 
their production processes and that most employees would be retained. 
DOE estimates that there could be a more significant loss of domestic 
employment at TSLs 2, 3, and 4 due to the fact that these TSLs require 
condensing technology for gas-fired equipment classes. The lower bound 
of employment under amended standards assumes manufacturers choose to 
lay off some employees who work on their lower-efficiency, commodity 
products. At these TSLs, CWH manufacturers could also choose to source 
more components from overseas, limiting their need for production 
employees. To derive the lower bound of direct employment under amended 
standards, DOE estimated the percentage of CWH models that 
manufacturers would have to redesign at each TSL and assumed

[[Page 34515]]

domestic direct employment in the industry would decline by an equal 
proportion. This is intended to serve as a conservative assumption and 
represents the lower bound of a range of potential direct employment 
levels in the CWH industry under amended standards.
    DOE notes that the employment impacts discussed here are 
independent of the indirect employment impacts to the broader U.S. 
economy, which are documented in chapter 15 of the NOPR TSD.
    Issue 32: DOE seeks comment on its assessment of amended standards' 
potential impacts on direct employment.
c. Impacts on Manufacturing Capacity
    Based on manufacturer feedback, DOE estimates that the average CWH 
equipment manufacturer's current production is running at approximately 
60-percent capacity. Most manufacturers stated in interviews that they 
generally did not anticipate production capacity constraints associated 
with this rulemaking. Some noted that condensing equipment is generally 
more labor-intensive and takes longer to build; however, most agreed 
they could increase capacity by implementing a second shift with the 
current machinery they have, or by expanding production capacity. Some 
manufacturers did express concerns about engineering and laboratory 
resources if standards were set at a high level. However, given the 
compliance period, DOE believes that because most manufacturers already 
make equipment that meets the efficiency levels proposed in this NOPR, 
manufacturers would have time to redesign their product lines and 
production processes.
    Issue 33: DOE seeks comment on its assessment of amended standards' 
potential impacts on manufacturing capacity.
d. Impacts on Subgroups of Manufacturers
    Small manufacturers, niche equipment manufacturers, and 
manufacturers exhibiting a cost structure substantially different from 
the industry average could be affected disproportionately. Using 
average cost assumptions developed for an industry cash-flow estimate 
is inadequate to assess differential impacts among manufacturer 
subgroups.
    For the CWH equipment industry, DOE identified and evaluated the 
impact of amended energy conservation standards on one subgroup--small 
manufacturers. The SBA defines a ``small business'' as having 1,000 
employees or fewer for NAICS code 333318, ``Other Commercial and 
Service Industry Machinery Manufacturing.'' Based on this definition, 
DOE identified 13 domestic manufacturers in the CWH equipment industry 
that qualify as small businesses. For a discussion of the impacts on 
the small manufacturer subgroup, see the regulatory flexibility 
analysis in section VI.B of this notice and chapter 12 of the NOPR TSD.
e. Cumulative Regulatory Burden
    While any one regulation may not impose a significant burden on 
manufacturers, the combined effects of recent or impending regulations 
may have serious consequences for some manufacturers, groups of 
manufacturers, or an entire industry. Assessing the impact of a single 
regulation may overlook this cumulative regulatory burden. In addition 
to energy conservation standards, other regulations can significantly 
affect manufacturers' financial operations. Multiple regulations 
affecting the same manufacturer can strain profits and lead companies 
to abandon product lines or markets with lower expected future returns 
than competing products. For these reasons, DOE conducts an analysis of 
cumulative regulatory burden as part of its rulemakings pertaining to 
energy conservation standards for commercial equipment.
    For the cumulative regulatory burden analysis, DOE looks at other 
regulations that could affect CWH equipment manufacturers that will 
take effect approximately three years before or after the 2019 
compliance date of amended energy conservation standards for these 
equipment types. In interviews, manufacturers cited Federal regulations 
on equipment other than CWH equipment that contribute to their 
cumulative regulatory burden. The compliance years and expected 
industry conversion costs of relevant amended energy conservation 
standards are indicated in Table V.26.

Table V.26--Compliance Dates and Expected Conversion Expenses of Federal
  Energy Conservation Standards Affecting the Commercial Water Heating
                                Industry
------------------------------------------------------------------------
                                                        Estimated total
   Federal energy conservation        Approximate          industry
            standards               compliance date   conversion expense
------------------------------------------------------------------------
Commercial Packaged Air-          2018 and 2023 *...  $520.8M (2014$).
 Conditioning and Heating
 Equipment 81 FR 2420 (January
 15, 2016).
Residential Furnace Fans 79 FR    2019..............  $40.6M (2013$).
 38129 (July 3, 2014).
Residential Boilers 81 FR 2320    2021..............  $2.5M (2014$).
 (January 15, 2016).
Commercial Packaged Boilers **..  2020..............  TBD.
Residential Furnaces 80 FR 13120  2021..............  $55M (2013$).
 (March 12, 2015) (NOPR).
Direct Heating Equipment/Pool     2021..............  TBD.
 Heaters **.
Residential Water Heaters **....  2021..............  TBD.
------------------------------------------------------------------------
* This rule has multiple compliance dates.
** The NOPR and final rule for this energy conservation standard have
  not been published. The compliance date and analysis of conversion
  costs are estimates and have not been finalized at this time.

    In addition to Federal energy conservation standards, DOE 
identified another regulatory burden that would affect manufacturers of 
CWH equipment:
Environmental Protection Agency (EPA) Significant New Alternatives 
Policy (SNAP) Program
    Several manufacturers raised concerns in interviews about EPA's 
SNAP program and, in particular, a proposed rule to modify the listings 
for certain hydrofluorocarbons in various end-uses in the aerosols, 
refrigeration and air conditioning, and foam blowing sectors. 79 FR 
46126 (August 6, 2014). On July 20, 2015, the EPA published a final 
rule under the SNAP program that adopts modifications similar to those 
outlined in the August 6, 2014 proposed rule. 80 FR 42870, 42923-24. 
Specifically, the final rule changed the status of several 
hydrofluorocarbons to

[[Page 34516]]

unacceptable for use as foam blowing agents beginning January 1, 2020. 
Several manufacturers of CWH equipment use these materials (i.e., HFC-
245fa) as blowing agents to insulate their CWH equipment. DOE 
acknowledges that the EPA ban on these substances will impact the 
materials used by some CWH equipment manufacturers, which could require 
them to alter the design of certain equipment.
    Issue 34: DOE requests comment on whether the classification of 
unacceptable blowing agents in the EPA's SNAP final rule will affect 
the insulating properties of foam insulation used in CWH equipment 
analyzed in this NOPR. Specifically, DOE seeks data that show the 
difference in thermal resistivity (i.e., R-value per inch) between 
insulation currently used in storage water heaters and insulation that 
would be compliant with the regulations amended in the SNAP final rule, 
if currently used blowing agents are classified as unacceptable.
3. National Impact Analysis
a. Significance of Energy Savings
    For each TSL, DOE projected energy savings for CWH equipment 
shipped in the 30-year period that begins in the year of anticipated 
compliance with amended standards (2019-2048). The savings are measured 
over the entire lifetime of equipment shipped in the 30-year period. 
DOE quantified the energy savings attributable to each TSL as the 
difference in energy consumption between each standards case and the 
no-new-standards case.
    Table V.27 presents the estimated primary energy savings for each 
considered TSL, and Table V.28 presents the estimated FFC energy 
savings for each TSL. The approach for estimating national energy 
savings is further described in section IV.H. Table V.29 shows 
cumulative primary national energy savings by TSL as a percentage of 
the no-new-standards-case primary energy usage.

Table V.27--Cumulative National Primary Energy Savings for CWH Equipment Trial Standard Levels for Units Shipped
                                                  in 2019-2048
                                                     [Quads]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and             0.160           0.505           0.716           0.924
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters           0.024           0.069           0.069           0.102
Gas-fired instantaneous water heaters and hot              0.179           0.661           0.772           0.888
 water supply boilers...........................
  Tankless water heaters........................           0.009           0.048           0.057           0.066
  Hot water supply boilers......................           0.169           0.613           0.715           0.822
Electric storage water heaters..................           0.048           0.048           0.048           0.048
                                                 ---------------------------------------------------------------
        Total...................................           0.410           1.282           1.604           1.961
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.


Table V.28--Cumulative National Full-Fuel-Cycle Energy Savings for CWH Equipment Trial Standard Levels for Units
                                              Shipped in 2019-2048
                                                     [Quads]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and             0.179           0.569           0.805           1.038
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters           0.027           0.078           0.078           0.115
Gas-fired instantaneous water heaters and hot              0.200           0.741           0.865           0.996
 water supply boilers...........................
    Tankless water heaters......................           0.011           0.054           0.064           0.074
    Hot water supply boilers....................           0.190           0.687           0.801           0.921
Electric storage water heaters..................           0.050           0.050           0.050           0.050
                                                 ---------------------------------------------------------------
        Total...................................           0.457           1.438           1.798           2.199
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.


  Table V.29--Cumulative Primary National Energy Savings by TSL as a Percentage of Cumulative No-New-Standards-
                             Case Energy Usage of CWH Equipment Shipped in 2019-2048
----------------------------------------------------------------------------------------------------------------
                                      No-new-         TSL savings as percent of no-new-standards-case usage *
                                    standards-   ---------------------------------------------------------------
         Equipment class            case energy
                                  usage  (quads)     TSL 1 (%)       TSL 2 (%)       TSL 3 (%)       TSL 4 (%)
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage                 6.0               3               8              12              15
 water heaters and gas-fired
 storage-type instantaneous
 water heaters..................
Residential-duty gas-fired                   0.7               4              10              10              15
 storage water heaters..........
Gas-fired instantaneous water                7.2               2               9              11              12
 heaters and hot water supply
 boilers........................
    Tankless water heaters......             0.5               2               9              11              12

[[Page 34517]]

 
    Hot water supply boilers....             6.7               3               9              11              12
Electric storage water heaters..             5.9               1               1               1               1
                                 -------------------------------------------------------------------------------
        Total...................            19.8               2               6               8              10
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.

    Circular A-4 \120\ requires agencies to present analytical results, 
including separate schedules of the monetized benefits and costs that 
show the type and timing of benefits and costs. Circular A-4 also 
directs agencies to consider the variability of key elements underlying 
the estimates of benefits and costs. For this rulemaking, DOE undertook 
a sensitivity analysis using 9 years, rather than 30 years, of 
equipment shipments. The choice of a 9-year period is a proxy for the 
timeline in EPCA for the review of certain energy conservation 
standards and potential revision of and compliance with such revised 
standards.\121\ The review timeframe established in EPCA is generally 
not synchronized with the equipment lifetime, equipment manufacturing 
cycles, or other factors specific to CWH equipment. Thus, such results 
are presented for informational purposes only and are not indicative of 
any change in DOE's analytical methodology. The full-fuel-cycle NES 
results based on a nine-year analytical period are presented in Table 
V.30. The impacts are counted over the lifetime of products shipped in 
2019-2027.
---------------------------------------------------------------------------

    \120\ U.S. Office of Management and Budget, ``Circular A-4: 
Regulatory Analysis'' (Sept. 17, 2003) (Available at: http://www.whitehouse.gov/omb/circulars_a004_a-4/).
    \121\ EPCA requires DOE to review its standards at least once 
every 6 years, and requires, for certain equipment, a 3-year period 
after any new standard is promulgated before compliance is required, 
except that in no case may any new standards be required within 6 
years of the compliance date of the previous standards. (42 U.S.C. 
6313(a)(6)(C)) While adding a 6-year review to the 3-year compliance 
period adds up to 9 years, DOE notes that it may undertake reviews 
at any time within the 6-year period and that the 3-year compliance 
date may yield to the 6-year backstop. A 9-year analysis period may 
not be appropriate given the variability that occurs in the timing 
of standards reviews and the fact that for some commercial 
equipment, the compliance period is 5 years rather than 3 years.

  Table V.30--Cumulative Full-Fuel-Cycle National Energy Savings for Trial Standard Levels for Commercial Water
                                     Heating Equipment Shipped in 2019-2027
                                                     [Quads]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and             0.048           0.153           0.216           0.279
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters           0.007           0.021           0.021           0.031
Gas-fired instantaneous water heaters and hot              0.053           0.197           0.230           0.264
 water supply boilers...........................
    Tankless water heaters......................           0.002           0.013           0.015           0.017
    Hot water supply boilers....................           0.051           0.184           0.215           0.247
Electric storage water heaters..................           0.012           0.012           0.012           0.012
                                                 ---------------------------------------------------------------
        Total...................................           0.121           0.382           0.479           0.586
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.

b. Net Present Value of Commercial Consumer Costs and Benefits
    DOE estimated the cumulative NPV of the total costs and savings for 
commercial consumers that would result from the TSLs considered for CWH 
equipment. In accordance with OMB's guidelines on regulatory 
analysis,\122\ DOE calculated NPV using both a 3-percent and a 7-
percent real discount rate. Table V.31 and Table V.32 show the 
commercial consumer NPV results at 3-percent and 7-percent discount 
rates respectively for each TSL considered for the CWH equipment 
covered in this rulemaking. In each case, the impacts cover the 
lifetime of equipment shipped in 2019-2048. Results for all equipment 
classes using the EPCA baseline can be found in chapter 10 of the NOPR 
TSD.
---------------------------------------------------------------------------

    \122\ OMB Circular A-4, section E (Sept. 17, 2003) (Available at 
http://www.whitehouse.gov/omb/circulars_a004_a-4).

[[Page 34518]]



 Table V.31--Cumulative Net Present Value of Commercial Consumer Benefit for CWH Equipment Trial Standard Levels
                         at a 3-Percent Discount Rate for Equipment Shipped in 2019-2048
                                                 [Billion 2014$]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and              0.65            1.96            3.15            4.30
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters            0.04            0.16            0.16            0.28
Gas-fired instantaneous water heaters and hot               0.84            2.78            3.30            3.83
 water supply boilers...........................
    Tankless water heaters......................            0.04            0.34            0.39            0.43
    Hot water supply boilers....................            0.80            2.44            2.91            3.40
Electric storage water heaters..................            0.14            0.14            0.14            0.14
                                                 ---------------------------------------------------------------
        Total...................................            1.68            5.04            6.75            8.55
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.


 Table V.32--Cumulative Net Present Value of Commercial Consumer Benefit for CWH Equipment Trial Standard Levels
                         at a 7-Percent Discount Rate for Equipment Shipped in 2019-2048
                                                 [Billion 2014$]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and              0.26            0.71            1.23            1.73
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters           0.006            0.03            0.03            0.07
Gas-fired instantaneous water heaters and hot               0.26            0.80            0.96            1.13
 water supply boilers...........................
    Tankless water heaters......................            0.01            0.13            0.15            0.16
    Hot water supply boilers....................            0.25            0.67            0.82            0.96
Electric storage water heaters..................            0.04            0.04            0.04            0.04
                                                 ---------------------------------------------------------------
        Total...................................            0.57            1.58            2.26            2.96
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.

    The NPV results based on the aforementioned nine-year analytical 
period are presented in Table V.33 and Table V.34. The impacts are 
counted over the lifetime of equipment shipped in 2019-2027. As 
mentioned previously, such results are presented for informational 
purposes only and are not indicative of any change in DOE's analytical 
methodology or decision criteria.

 Table V.33--Cumulative Net Present Value of Commercial Consumer Benefit for CWH Equipment Trial Standard Levels
                         at a 3-percent Discount Rate for Equipment Shipped in 2019-2027
                                                 [Billion 2014$]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and              0.19            0.41            0.78            1.13
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters            0.01            0.00            0.00            0.04
Gas-fired instantaneous water heaters and hot               0.25            0.74            0.89            1.05
 water supply boilers...........................
    Tankless water heaters......................            0.01            0.07            0.09            0.10
    Hot water supply boilers....................            0.24            0.67            0.80            0.95
Electric storage water heaters..................            0.04            0.04            0.04            0.04
                                                 ---------------------------------------------------------------
        Total...................................            0.48            1.19            1.71            2.25
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.


[[Page 34519]]


 Table V.34--Cumulative Net Present Value of Commercial Consumer Benefit for CWH Equipment Trial Standard Levels
                         at a 7-percent Discount Rate for Equipment Shipped in 2019-2027
                                                 [Billion 2014$]
----------------------------------------------------------------------------------------------------------------
                                                                      Trial standard level *
                 Equipment class                 ---------------------------------------------------------------
                                                       TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage water heaters and              0.10            0.20            0.43            0.64
 gas-fired storage-type instantaneous water
 heaters........................................
Residential-duty gas-fired storage water heaters          -0.001           -0.01           -0.01            0.00
Gas-fired instantaneous water heaters and hot               0.11            0.30            0.37            0.43
 water supply boilers...........................
    Tankless water heaters......................            0.00            0.04            0.05            0.06
    Hot water supply boilers....................            0.11            0.26            0.32            0.38
Electric storage water heaters..................            0.02            0.02            0.02            0.02
                                                 ---------------------------------------------------------------
        Total...................................            0.23            0.50            0.80            1.10
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.

    The results presented in this section reflect an assumption of no 
change in CWH equipment prices by efficiency level over the forecast 
period. For this NOPR, DOE conducted sensitivity analyses to examine 
NIA results with varying inputs. The main reason for assuming no change 
in CWH equipment prices was data limitations, and the same limitations 
made alternative price trends problematic as well, so in the 
sensitivity analyses, the high and low price trends were also assumed 
to be ``no change'' trends. Sensitivity analyses are described in 
appendix 10B of the NOPR TSD.
c. Indirect Impacts on Employment
    DOE expects that amended energy conservation standards for CWH 
equipment would reduce energy costs for equipment owners, with the 
resulting net savings being redirected to other forms of economic 
activity. Those shifts in spending and economic activity could affect 
the demand for labor. As described in section IV.N, DOE used an input/
output model of the U.S. economy to estimate indirect employment 
impacts of the TSLs that DOE considered in this rulemaking. DOE 
understands that there are uncertainties involved in projecting 
employment impacts, especially changes in the later years of the 
analysis. Therefore, DOE generated results for near-term time frames 
(2019-2025), where these uncertainties are reduced.
    The results suggest that these proposed standards would be likely 
to have a negligible impact on the net demand for labor in the economy. 
The net change in jobs is so small that it would be imperceptible in 
national labor statistics and might be offset by other, unanticipated 
effects on employment. Chapter 16 of the NOPR TSD presents more 
detailed results about anticipated indirect employment impacts.
4. Impact on Utility or Performance of Equipment
    DOE has tentatively concluded that the amended standards it is 
proposing in this NOPR would not lessen the utility or performance of 
CWH equipment.
5. Impact of Any Lessening of Competition
    DOE has also considered any lessening of competition that is likely 
to result from new and amended standards. The Attorney General 
determines the impact, if any, of any lessening of competition likely 
to result from a proposed standard, and transmits such determination in 
writing to the Secretary, together with an analysis of the nature and 
extent of such impact. (42 U.S.C. 6313(a)(6)(B)(ii)(V) and (C)(i))
    To assist the Attorney General in making such determination, DOE 
has provided the Department of Justice (DOJ) with copies of this NOPR 
and the TSD for review. DOE will consider DOJ's comments on the 
proposed rule in preparing the final rule, and DOE will publish and 
respond to DOJ's comments in that document. DOE invites comment from 
the public regarding the competitive impacts that are likely to result 
from this proposed rule. In addition, stakeholders may also provide 
comments separately to DOJ regarding those potential impacts. See the 
ADDRESSES section for information to send comments to DOJ.
6. Need of the Nation To Conserve Energy
    An improvement in the energy efficiency of the equipment subject to 
this rule is likely to improve the security of the nation's energy 
system by reducing overall demand for energy. Reduced energy demand may 
also improve the reliability of the energy system. DOE evaluated the 
impact on national electric generating capacity for each considered 
TSL. Chapter 15 of the NOPR TSD provides more details of the TSLs' 
impact on the electricity and natural gas utilities.
    Potential energy savings from the proposed amended standards for 
the considered CWH equipment classes could also produce environmental 
benefits in the form of reduced emissions of air pollutants and 
greenhouse gases associated with electricity production. Table V.35 
provides DOE's estimate of cumulative emissions reductions projected to 
result from the TSLs considered in this rulemaking. The table includes 
both power sector emissions and upstream emissions. The upstream 
emissions were calculated using the multipliers discussed in section 
IV.K. DOE reports annual CO2, NOX, and Hg 
emissions reductions for each TSL in chapter 13 of the NOPR TSD.

[[Page 34520]]



     Table V.35--Cumulative Emissions Reduction for Potential Amended Standards for Commercial Water Heating
                                         Equipment Shipped in 2019-2048
----------------------------------------------------------------------------------------------------------------
                                                                                TSL
                                                 ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                        Power Sector and Site Emissions *
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................              22              68              85             104
NOX (thousand tons).............................              30              97             121             148
Hg (tons).......................................            0.01           0.004           0.004           0.005
N2O (thousand tons).............................            0.08            0.16            0.20            0.24
CH4 (thousand tons).............................            0.66            1.52            1.89            2.30
SO2 (thousand tons).............................            2.02            1.36            1.57            1.82
----------------------------------------------------------------------------------------------------------------
                                               Upstream Emissions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................               3              10              12              15
NOX (thousand tons).............................              47             156             195             239
Hg (tons).......................................          0.0001         0.00004         0.00004         0.00005
N2O (thousand tons).............................            0.01            0.02            0.02            0.03
CH4 (thousand tons).............................             279             934           1,170           1,432
SO2 (thousand tons).............................            0.05            0.06            0.08            0.09
----------------------------------------------------------------------------------------------------------------
                                                 Total Emissions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................              25              78              98             119
NOX (thousand tons).............................              77             252             316             386
Hg (tons).......................................            0.01           0.004           0.004           0.005
N2O (thousand tons).............................            0.08            0.18            0.22            0.26
N2O (thousand tons CO2eq) **....................              22              47              58              70
CH4 (thousand tons).............................             279             936           1,172           1,434
CH4 (thousand tons CO2eq) **....................           7,821          26,197          32,812          40,149
SO2 (thousand tons).............................            2.07            1.42            1.65            1.91
----------------------------------------------------------------------------------------------------------------
* Includes emissions from additional gas use of more-efficient CWH equipment.
** CO2eq is the quantity of CO2 that would have the same global warming potential (GWP).

    As part of the analysis for this NOPR, DOE estimated monetary 
benefits likely to result from the reduced emissions of CO2 
and NOX estimated for each of the TSLs considered for CWH 
equipment. As discussed in section IV.L, for CO2, DOE used 
the most recent values for the SCC developed by an interagency process. 
The interagency group selected four sets of SCC values for use in 
regulatory analyses. Three sets are based on the average SCC from three 
integrated assessment models, at discount rates of 2.5 percent, 3 
percent, and 5 percent. The fourth set, 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. 
The four SCC values for CO2 emissions reductions in 2015, 
expressed in 2014$, are $12.2 per metric ton, $40.0 per metric ton, 
$62.3 per metric ton, and $117 per metric ton. The values for later 
years are higher due to increasing emissions-related costs as the 
magnitude of projected climate change increases.
    Table V.36 presents the global value of CO2 emissions 
reductions at each TSL. DOE calculated domestic values as a range from 
7 percent to 23 percent of the global values, and these results are 
presented in chapter 14 of the NOPR TSD.

Table V.36--Global Present Value of CO2 Emissions Reduction for Potential Standards for CWH Equipment Shipped in
                                                    2019-2048
----------------------------------------------------------------------------------------------------------------
                                                                          SCC scenario *
                                                 ---------------------------------------------------------------
                                                                           Million 2014$
                       TSL                       ---------------------------------------------------------------
                                                                                                    3% discount
                                                    5% discount     3% discount    2.5% discount    rate, 95th
                                                   rate, average   rate, average   rate, average    percentile
----------------------------------------------------------------------------------------------------------------
                                       Power Sector and Site Emissions **
----------------------------------------------------------------------------------------------------------------
1...............................................             145             680           1,085           2,073
2...............................................             441           2,081           3,327           6,348
3...............................................             555           2,612           4,173           7,967
4...............................................             682           3,202           5,113           9,765
----------------------------------------------------------------------------------------------------------------
                                               Upstream Emissions
----------------------------------------------------------------------------------------------------------------
1...............................................              19              90             143             273

[[Page 34521]]

 
2...............................................              63             297             474             905
3...............................................              79             373             596           1,138
4...............................................              98             458             731           1,396
----------------------------------------------------------------------------------------------------------------
                                                 Total Emissions
----------------------------------------------------------------------------------------------------------------
1...............................................             164             769           1,228           2,346
2...............................................             504           2,378           3,801           7,253
3...............................................             635           2,985           4,769           9,105
4...............................................             780           3,660           5,844          11,161
----------------------------------------------------------------------------------------------------------------
* For each of the four cases, the corresponding SCC value for emissions in 2015 is $12.2, $40.0, $62.3 and $117
  per metric ton (2014$). The values are for CO2 only (i.e., no CO2eq of other greenhouse gases).
** Includes site emissions associated with use of gas-fired CWH equipment.

    DOE is well aware that scientific and economic knowledge continues 
to evolve rapidly regarding the contribution of CO2 and 
other greenhouse gas (GHG) emissions to changes in the future global 
climate and the potential resulting damages to the world economy. 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 NOPR the most recent values and analyses resulting 
from the interagency review process.
    DOE also estimated the cumulative monetary value of the economic 
benefits associated with NOX emissions reductions 
anticipated to result from the considered TSLs for amended standards 
for the CWH equipment that is the subject of this NOPR. The dollar-per-
ton values that DOE used are discussed in section IV.L. Table V.37 
presents the cumulative present value for NOX emissions for 
each TSL calculated using the average dollar-per-ton values and 7-
percent and 3-percent discount rates. This table presents values that 
use the low dollar-per-ton values, which reflect DOE's primary 
estimate. Results that reflect the range of NOX dollar-per-
ton values are presented in Table V.37. Detailed discussions on 
NOX emissions reductions are available in chapter 14 of the 
NOPR TSD.

   Table V.37--Present Value of NOX Emissions Reduction for Potential
                       Standards for CWH Equipment
------------------------------------------------------------------------
                                                   Million 2014$
                                         -------------------------------
                   TSL                      3% discount     7% discount
                                               rate            rate
------------------------------------------------------------------------
                    Power Sector and Site Emissions *
------------------------------------------------------------------------
1.......................................              93              36
2.......................................             294             112
3.......................................             371             142
4.......................................             456             176
------------------------------------------------------------------------
                           Upstream Emissions
------------------------------------------------------------------------
1.......................................             143              55
2.......................................             475             181
3.......................................             599             231
4.......................................             737             285
------------------------------------------------------------------------
                             Total Emissions
------------------------------------------------------------------------
1.......................................             236              91
2.......................................             769             294
3.......................................             970             373
4.......................................           1,193             461
------------------------------------------------------------------------
* Includes site emissions associated with use of gas-fired CWH
  equipment.

    The NPV of the monetized benefits associated with emissions 
reductions can be viewed as a complement to the NPV of the consumer 
savings calculated for each TSL considered in this rulemaking. Table 
V.38 presents the NPV values that result from adding 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 for CWH equipment 
considered in this rulemaking, at both a 7-percent and 3-percent 
discount rate. The CO2 values used in the columns correspond 
to the four sets of SCC values discussed in section IV.L.1.

[[Page 34522]]



    Table V.38--CWH Equipment TSLs: Net Present Value of Consumer Savings Combined With Net Present Value of
                            Monetized Benefits From CO2 and NOX Emissions Reductions
----------------------------------------------------------------------------------------------------------------
                                                   Consumer NPV at 3% discount rate added with: (billion 2014$)
                                                 ---------------------------------------------------------------
                                                                                                       95th
                       TSL                           SCC at 5%       SCC at 3%      SCC at 2.5%   percentile SCC
                                                   discount rate   discount rate   discount rate  at 3% discount
                                                   * and 3% low    * and 3% low    * and 3% low    rate * and 3%
                                                     NOX value       NOX value       NOX value     low NOX value
----------------------------------------------------------------------------------------------------------------
1...............................................           2.105           2.711           3.170           4.287
2...............................................           6.398           8.272           9.695          13.147
3...............................................           8.463          10.814          12.598          16.933
4...............................................          10.656          13.537          15.721          21.038
----------------------------------------------------------------------------------------------------------------
                                                   Consumer NPV at 7% discount rate added with: (billion 2014$)
                                                 ---------------------------------------------------------------
                       TSL                           SCC at 5%       SCC at 3%      SCC at 2.5%        95th
                                                  discount rate*  discount rate*  discount rate*  percentile SCC
                                                  and 7% low NOX  and 7% low NOX  and 7% low NOX  at 3% discount
                                                       value           value           value       rate * and 7%
                                                                                                   low NOX value
----------------------------------------------------------------------------------------------------------------
1...............................................           0.831           1.436           1.895           3.013
2...............................................           2.403           4.277           5.700           9.152
3...............................................           3.302           5.653           7.437          11.772
4...............................................           4.242           7.123           9.307          14.624
----------------------------------------------------------------------------------------------------------------
* The interagency group selected four sets of SCC values for use in regulatory analyses. Three sets of values
  are based on the average SCC from the integrated assessment models, at discount rates of 5, 3, and 2.5
  percent. For example, for 2015 emissions, these values are $12.2/metric ton, $40.0/metric ton, and $62.3/
  metric ton, in 2014$, respectively. The fourth set ($117 per metric ton in 2014$ for 2015 emissions), 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. The SCC values are emission year specific. For NOX emissions, the 3 and 7-percent values are
  discussed in more detail in section IV.L.2.

    In considering the above results, two issues are relevant. First, 
the national operating cost savings are domestic U.S. commercial 
consumer monetary savings that occur as a result of market 
transactions, while the value of CO2 reductions is based on 
a global value. Second, the assessments of operating cost savings and 
the SCC are performed with different methods that use quite different 
time frames for analysis. The national operating cost savings is 
measured for the lifetime of products shipped in 2019-2048. Because 
CO2 emissions have a very long residence time in the 
atmosphere,\123\ the SCC values in future years reflect future 
CO2 emissions impacts that continue beyond 2100 through 
2300.
---------------------------------------------------------------------------

    \123\ The atmospheric lifetime of CO2 is estimated of 
the order of 30-95 years. Jacobson, MZ, ``Correction to `Control of 
fossil-fuel particulate black carbon and organic matter, possibly 
the most effective method of slowing global warming,' '' J. Geophys. 
Res. 110. pp. D14105 (2005).
---------------------------------------------------------------------------

7. Other Factors
    The Secretary of Energy, in determining whether a standard is 
economically justified, may consider any other factors that the 
Secretary deems to be relevant. (42 U.S.C. 6313(a)(6)(B)(ii)(VII) and 
(C)(i)) No other factors were considered in this analysis.

C. Proposed Standards

    To adopt national standards more stringent than the current 
standards for CWH equipment, DOE must determine that such action would 
result in significant additional conservation of energy and is 
technologically feasible and economically justified. (42 U.S.C. 
6313(a)(6)(A)(ii) and (C)(i)) In determining whether a standard is 
economically justified, the Secretary must determine whether the 
benefits of the standard exceed its burdens by, to the greatest extent 
practicable, considering the seven statutory factors discussed 
previously. (42 U.S.C. 6313(a)(6)(B)(ii)(I)-(VII) and (C)(i))
    For this NOPR, DOE considered the impacts of amended standards for 
CWH equipment at each TSL, beginning with the maximum technologically 
feasible level, to determine whether that level was economically 
justified. Where the max-tech level was not justified, DOE then 
considered the next most efficient level and undertook the same 
evaluation until it reached the highest efficiency level that is both 
technologically feasible and economically justified and saves a 
significant additional amount of energy.
    To aid the reader in understanding the benefits and/or burdens of 
each TSL, tables in this section present a summary of the results of 
DOE's quantitative analysis for each TSL. In addition to the 
quantitative results presented in the tables, DOE also considers other 
burdens and benefits that affect economic justification. These include 
the impacts on identifiable subgroups of commercial consumers who may 
be disproportionately affected by a national standard and impacts on 
employment.
1. Benefits and Burdens of Trial Standard Levels Considered for CWH 
Equipment
    Table V.39, Table V.40, and Table V.41 summarize the quantitative 
impacts estimated for each TSL for CWH equipment. The national impacts 
are measured over the lifetime of CWH equipment shipped in the 30-year 
period that begins in the year of compliance with amended standards 
(2019-2048). The energy savings, emissions reductions, and value of 
emissions reductions refer to full-fuel-cycle results.

[[Page 34523]]



                                      Table V.39--Summary of Analytical Results for CWH Equipment: National Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Category                           TSL 1                        TSL 2                        TSL 3                        TSL 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
National FFC Energy Savings (quads).  0.457......................  1.438......................  1.798......................  2.199.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   NPV of Commercial Consumer Benefits (billion 2014$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
3% discount rate....................  1.68.......................  5.04.......................  6.75.......................  8.55.
7% discount rate....................  0.57.......................  1.58.......................  2.26.......................  2.96.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Manufacturer Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry NPV (2014$ million):
    No-new-standards case INPV =      171.5 to 177.4.............  158.8 to 187.8.............  152.8 to 185.0.............  128.6 to 166.6.
     176.2.
Change in Industry NPV (2014$         (4.7) to 1.2...............  (17.4) to 11.6.............  (23.4) to 8.8..............  (47.6) to (9.7).
 million).
Change in Industry NPV (%)..........  (2.7) to 0.7...............  (9.9) to 6.6...............  (13.3) to 5.0..............  (27.0) to (5.5).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Cumulative Emissions Reduction (Total FFC Emissions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (million metric tons)...........  25.08......................  78.06......................  97.63......................  119.34.
NOX (thousand tons).................  76.93......................  252.35.....................  315.95.....................  386.48.
Hg (tons)...........................  0.01.......................  0.004......................  0.004......................  0.005.
N2O (thousand tons).................  0.08.......................  0.18.......................  0.22.......................  0.26.
N2O (thousand tons CO2eq)...........  22.11......................  46.63......................  57.76......................  70.14.
CH4 (thousand tons).................  279........................  936........................  1,172......................  1,434.
CH4 (thousand tons CO2eq) *.........  7,821......................  26,197.....................  32,812.....................  40,149.
SO2 (thousand tons).................  2.07.......................  1.42.......................  1.65.......................  1.91.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Value of Emissions Reduction (Total FFC Emissions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CO2 (2014$ million) **..............  164 to 2,346...............  504 to 7,253...............  635 to 9,105...............  780 to 11,161.
NOX--3% discount rate (2014$          236 to 524.................  769 to 1,703...............  970 to 2,148...............  1,193 to 2,643.
 million).
NOX--7% discount rate (2014$          91 to 203..................  294 to 655.................  373 to 833.................  461 to 1,030.
 million).
--------------------------------------------------------------------------------------------------------------------------------------------------------
* CO2eq is the quantity of CO2 that would have the same global warming potential (GWP).
** Range of the economic value of CO2 reductions is based on estimates of the global benefit of reduced CO2 emissions.
Note: Parentheses indicate negative values.


  Table V.40--Summary of Analytical Results for CWH Equipment: NPV of Commercial Consumer Benefits by Equipment
                                                      Class
----------------------------------------------------------------------------------------------------------------
                                                               Trial standard level * Billion 2014$
         Equipment class           Discount rate ---------------------------------------------------------------
                                        (%)              1               2               3               4
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage                   3           0.654           1.958           3.154           4.302
 water heaters and gas-fired
 storage-type instantaneous
 water heaters..................
                                               7           0.256           0.708           1.231           1.727
Residential-duty gas-fired                     3           0.044           0.163           0.163           0.282
 storage water heaters..........
                                               7           0.006           0.026           0.026           0.067
Gas-fired instantaneous water                  3           0.842           2.778           3.296           3.832
 heaters and hot water supply
 boilers........................
                                               7           0.265           0.805           0.964           1.128
    Tankless water heaters......               3           0.038           0.340           0.387           0.433
                                               7           0.013           0.130           0.147           0.163
    Hot water supply boilers....               3           0.804           2.438           2.909           3.399
                                               7           0.251           0.674           0.817           0.964
Electric storage water heaters..               3           0.138           0.138           0.138           0.138
                                               7           0.042           0.042           0.042           0.042
        Total--All Classes......               3           1.679           5.037           6.750           8.553
                                               7           0.568           1.580           2.263           2.963
----------------------------------------------------------------------------------------------------------------
* Note: Components may not sum to total due to rounding.


            Table V.41--Summary of Analytical Results for CWH Equipment: Commercial Consumer Impacts
----------------------------------------------------------------------------------------------------------------
                                         TSL 1               TSL 2               TSL 3               TSL 4
----------------------------------------------------------------------------------------------------------------
                                  Commercial Consumer Mean LCC Savings (2014$)
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage      219...............  317...............  794...............  1,252
 water heaters.
Residential-duty gas-fired        537...............  14................  14................  241
 storage water heaters.
Gas-fired instantaneous water     891...............  2,944.............  3,488.............  4,046
 heaters and hot water supply
 boilers.
Gas-fired tankless water heaters  86................  1,009.............  1,119.............  1,224
Gas-fired hot water supply        1,245.............  3,794.............  4,528.............  5,285
 boilers.

[[Page 34524]]

 
Electric storage water heaters..  47................  47................  47................  47
----------------------------------------------------------------------------------------------------------------
                                     Commercial Consumer Simple PBP (years)
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage      3.8...............  5.7...............  4.3...............  3.8
 water heaters.
Residential-duty gas-fired        10.5..............  11.9..............  11.9..............  10.2
 storage water heaters.
Gas-fired instantaneous water     3.6...............  5.8...............  5.6...............  5.6
 heaters and hot water supply
 boilers.
Gas-fired tankless water heaters  2.9...............  Immediate.........  Immediate.........  Immediate
Gas-fired hot water supply        3.6...............  6.7...............  6.4...............  6.3
 boilers.
Electric storage water heaters..  6.5...............  6.5...............  6.5...............  6.5
----------------------------------------------------------------------------------------------------------------
                          Distribution of Commercial Consumer LCC Impacts (Net Cost %)
----------------------------------------------------------------------------------------------------------------
Commercial gas-fired storage      8.................  30................  24................  21
 water heaters.
Residential-duty gas-fired        32................  42................  42................  36
 storage water heaters.
Gas-fired instantaneous water     14................  27................  26................  27
 heaters and hot water supply
 boilers.
Gas-fired tankless water heaters  11................  38................  35................  33
Gas-fired hot water supply        15................  22................  22................  24
 boilers.
Electric storage water heaters..  14................  14................  14................  14
----------------------------------------------------------------------------------------------------------------
Note: Parentheses indicate negative values. Immediate payback can result from a decrease in installation cost
  that is greater than the incremental increase in equipment cost.

    DOE also notes that the economics literature provides a wide-
ranging discussion of how consumers trade off upfront costs and energy 
savings in the absence of government intervention. Much of this 
literature attempts to explain why consumers appear to undervalue 
energy efficiency improvements. There is evidence that consumers 
undervalue future energy savings as a result of: (1) A lack of 
information; (2) a lack of sufficient salience of the long-term or 
aggregate benefits; (3) a lack of sufficient savings to warrant 
delaying or altering purchases (e.g., an inefficient ventilation fan in 
a new building or the delayed replacement of a water pump); (4) 
excessive focus on the short term, in the form of inconsistent 
weighting of future energy cost savings relative to available returns 
on other investments; (5) computational or other difficulties 
associated with the evaluation of relevant tradeoffs; and (6) a 
divergence in incentives (e.g., renter versus building owner, builder 
versus home buyer). Other literature indicates that with less than 
perfect foresight and a high degree of uncertainty about the future, 
consumers may trade off these types of investments at a higher-than-
expected rate between current consumption and uncertain future energy 
cost savings. This undervaluation suggests that regulation that 
promotes energy efficiency can produce significant net private gains 
(as well as producing social gains by, for example, reducing 
pollution).
    While DOE is not prepared at present to provide a fuller 
quantifiable framework for estimating the benefits and costs of changes 
in consumer purchase decisions due to an amended energy conservation 
standard, DOE is committed to developing a framework that can support 
empirical quantitative tools for improved assessment of the consumer 
welfare impacts of appliance standards. DOE has posted a paper that 
discusses the issue of consumer welfare impacts of appliance energy 
efficiency standards, and potential enhancements to the methodology by 
which these impacts are defined and estimated in the regulatory 
process.\124\ DOE welcomes comments on how to more fully assess the 
potential impact of energy conservation standards on consumer choice 
and methods to quantify this impact in its regulatory analysis.
---------------------------------------------------------------------------

    \124\ Sanstad, A., Notes on the Economics of Household Energy 
Consumption and Technology Choice, Lawrence Berkeley National 
Laboratory (2010) (Available at: <www1.eere.energy.gov/buildings/appliance_standards/pdfs/consumer_ee_theory.pdf>).
---------------------------------------------------------------------------

    First, DOE considered TSL 4, which corresponds to the max-tech 
level for all the equipment classes and offers the potential for the 
highest cumulative energy savings through the analysis period from 2019 
through 2048. The estimated energy savings from TSL 4 are 2.2 quads of 
energy, an amount DOE considers significant. TSL 4 has an estimated NPV 
of commercial consumer benefit of $2.96 billion using a 7-percent 
discount rate, and $8.55 billion using a 3-percent discount rate.
    The cumulative emissions reductions at TSL 4 are 119 million metric 
tons of CO2, 1.9 thousand tons of SO2, 386 
thousand tons of NOX, 0.005 tons of Hg, 1,434 thousand tons 
of CH4, and 0.3 thousand tons of N2O. The 
estimated monetary value of the CO2 emissions reductions at 
TSL 4 ranges from $780 million to $11,161 million.
    At TSL 4, the average LCC savings range from $47 to $4,046, and the 
simple PBP ranges from 3.8 to 10.2 years, depending on equipment class. 
The fraction of commercial consumers incurring a net LCC cost ranges 
from 14 percent for electric storage water heaters to 36 percent for 
residential-duty gas-fired storage water heaters.
    At TSL 4, the projected change in INPV ranges from a decrease of 
$47.6 million to a decrease of $9.7 million. If the lower bound of the 
range of impacts is reached, as DOE expects, TSL 4 could result in a 
net loss of up to 27.0 percent in INPV for manufacturers of covered CWH 
equipment.
    Accordingly, the Secretary tentatively concludes that at TSL 4 for 
CWH equipment, the benefits of energy savings, positive NPV of 
commercial consumer benefits, emission reductions, and the estimated 
monetary value of the CO2 and NOX emissions 
reductions would be outweighed by the large reduction in INPV at TSL 4. 
Consequently, DOE has tentatively concluded that TSL 4 is not 
economically justified.
    Next DOE considered TSL 3, which would save an estimated 1.8 quads 
of energy, an amount DOE considers significant. TSL 3 has an estimated 
NPV of commercial consumer benefit of $2.26 billion using a 7-percent 
discount rate, and $6.75 billion using a 3-percent discount rate.
    The cumulative emissions reductions at TSL 3 are 98 million metric 
tons of CO2, 1.6 thousand tons of SO2, 316

[[Page 34525]]

thousand tons of NOX, 0.004 tons of Hg, 1,172 thousand tons 
of CH4, and 0.2 thousand tons of N2O. The 
estimated monetary value of the CO2 emissions reductions at 
TSL 3 ranges from $635 million to $9,105 million.
    At TSL 3, the average LCC savings ranges from $47 to $3,488, and 
the simple PBP ranges from 4.3 to 11.9 years, depending on equipment 
class. The fraction of commercial consumers incurring a net LCC cost 
ranges from 14 percent for electric storage water heaters to 42 percent 
for residential-duty gas-fired storage water heaters.
    At TSL 3, the projected change in INPV ranges from a decrease of 
$23.4 million to an increase of $8.8 million. At TSL 3, DOE recognizes 
the risk of negative impacts if manufacturers' expectations concerning 
reduced profit margins are realized. If the lower bound of the range of 
impacts is reached, as DOE expects, TSL 3 could result in a net loss of 
up to 13.3 percent in INPV for manufacturers of covered CWH equipment.
    After carefully considering the analytical results and weighing the 
benefits and burdens, DOE has tentatively concluded that at TSL 3 for 
CWH equipment, the benefits of energy savings, positive NPV of 
commercial consumer benefit, positive impacts on commercial consumers 
through reduced life-cycle costs, emissions reductions, and the 
estimated monetary value of emissions reductions would outweigh the 
potential reductions in INPV for manufacturers. Accordingly, the 
Secretary of Energy has tentatively concluded that TSL 3 would save a 
significant additional amount of energy and is technologically feasible 
and economically justified.
    Therefore, based upon the above considerations, DOE proposes to 
adopt amended energy conservation standards for commercial water 
heating equipment at TSL 3. Table V.42 and Table V.43 present the 
proposed energy conservation standards for commercial water heating 
equipment.

  Table V.42--Proposed Amended Energy Conservation Standards for Commercial Water Heating Equipment Except for
                                    Residential-Duty Commercial Water Heaters
                                                     [TSL 3]
----------------------------------------------------------------------------------------------------------------
                                                                           Energy conservation standards *
                                                                    --------------------------------------------
           Equipment class **                  Specifications         Minimum thermal
                                                                      efficiency  (%)     Maximum standby loss
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters.........  All.......................               N/A  0.84 x [0.30+27/Vr] (%/
                                                                                        h).
Gas-fired storage water heaters........  All [dagger]..............                95  0.63 x [Q/800 + 110(Vr)1/
                                                                                        2] (Btu/h).
Gas-fired instantaneous water heaters
 and hot water supply boilers:
    Instantaneous water heaters (other   <10 gal...................                94  N/A.
     than storage-type) and hot water
     supply boilers.
    Instantaneous water heaters (other   >=10 gal..................                94  Q/800 + 110(Vr)1/2 (Btu/
     than storage-type) and hot water                                                   h).
     supply boilers.
    Storage-type instantaneous water     >=10 gal..................                95  0.63 x [Q/800 + 110(Vr)1/
     heaters.                                                                           2] (Btu/h).
----------------------------------------------------------------------------------------------------------------
* Vr is the rated volume in gallons. Q is the fuel input rate in Btu/h.
** DOE proposes a new equipment class for storage-type instantaneous water heaters. This class of equipment is
  similar to storage water heaters in design, cost, and application. However, it has a ratio of input capacity
  to storage volume greater than or equal to 4,000 Btu/h per gallon of water stored; therefore, it is classified
  as an instantaneous water heater by EPCA's definition at 42 U.S.C. 6311(12)(B). Because of the similarities to
  storage water heaters, DOE grouped these two equipment classes together in its analyses for this NOPR. Storage-
  type instantaneous water heaters are further discussed in section IV.A.2.a.
[dagger] These standards only apply to commercial water heating equipment that does not meet the definition of
  ``residential-duty commercial water heater.'' See Table V.43 for energy conservation standards proposed for
  residential-duty commercial water heaters.


   Table V.43--Proposed Energy Conservation Standards for Residential-Duty Commercial Water Heating Equipment
                                                     [TSL 3]
----------------------------------------------------------------------------------------------------------------
                                                                                          Uniform energy factor
           Equipment class                 Specification *            Draw pattern                  **
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage [dagger]...........  >75 kBtu/h and.........  Very Small.............  0.4618-(0.0010 x Vr).
                                       <=105 kBtu/h and.......  Low....................  0.6626-(0.0009 x Vr).
                                       <=120 gal and..........  Medium.................  0.6996-(0.0007 x Vr).
                                       <=180 [deg]F...........  High...................  0.7311-(0.0006 x Vr).
----------------------------------------------------------------------------------------------------------------
* To be classified as a residential-duty commercial water heater, a commercial water heater must, if requiring
  electricity, use single-phase external power supply, and not be designed to heat water at temperatures greater
  than 180[emsp14][deg]F.
** Vr is the rated storage volume.
[dagger] Energy conservation standards for residential-duty commercial gas-fired storage water heaters were
  converted from the thermal efficiency and standby loss metrics to the new UEF metric using conversion factors
  proposed by DOE in the April 2015 NOPR for all four draw patterns: Very small, low, medium, and high. 80 FR
  20116, 20143 (April 14, 2015).

2. Summary of Benefits and Costs (Annualized) of the Proposed Standards
    The benefits and costs of the proposed standards in this document 
can also be expressed in terms of annualized values. The annualized 
monetary values are the sum of: (1) The annualized national economic 
value (expressed in 2014$) of the benefits from operating equipment 
that meets the proposed standards (consisting primarily of operating 
cost savings from using less energy, minus increases in equipment 
purchase costs, which is another way of representing commercial 
consumer NPV), and (2) the annualized monetary value of the benefits of 
emission reductions,

[[Page 34526]]

including CO2 emission reductions.\125\ The value of the 
CO2 reductions, otherwise known as the Social Cost of Carbon 
(SCC), is calculated using a range of values per metric ton of 
CO2 developed by a recent interagency process.
---------------------------------------------------------------------------

    \125\ To convert the time-series of costs and benefits into 
annualized values, DOE calculated a present value in 2015, the year 
used for discounting the NPV of total consumer costs and savings. 
For the benefits, DOE calculated a present value associated with 
each year's shipments in the year in which the shipments occur 
(2020, 2030, etc.), and then discounted the present value from each 
year to 2015. The calculation uses discount rates of 3 and 7 percent 
for all costs and benefits except for the value of CO2 
reductions, for which DOE used case-specific discount rates. Using 
the present value, DOE then calculated the fixed annual payment over 
a 30-year period, starting in the compliance year that yields the 
same present value.
---------------------------------------------------------------------------

    The national operating savings are domestic private U.S. consumer 
monetary savings that occur as a result of purchasing these equipment. 
The national operating cost savings is measured for the lifetime of CWH 
equipment shipped in 2019-2048.
    The CO2 reduction is a benefit that accrues globally due 
to decreased domestic energy consumption that is expected to result 
from this rule. Because CO2 emissions have a very long 
residence time in the atmosphere,\126\ the SCC values in future years 
reflect future CO2-emissions impacts that continue beyond 
2100 through 2300.
---------------------------------------------------------------------------

    \126\ The atmospheric lifetime of CO2 is estimated to 
be on the order of 30-95 years. Jacobson, MZ, ``Correction to 
`Control of fossil-fuel particulate black carbon and organic matter, 
possibly the most effective method of slowing global warming,' '' J. 
Geophys. Res. 110. pp. D14105 (2005).
---------------------------------------------------------------------------

    Table V.44 shows the annualized benefit and cost values for the 
proposed standards for CWH equipment under TSL 3, expressed in 2014$. 
The results under the primary estimate are as follows.
    Using a 7-percent discount rate for benefits and costs other than 
CO2 reduction (for which DOE used a 3-percent discount rate 
along with the average SCC series that has a value of $40.0 per metric 
ton in 2015), the estimated cost of the CWH standards proposed in this 
document is $144 million per year in increased equipment costs, while 
the estimated benefits are $367 million per year in reduced equipment 
operating costs, $166 million per year from CO2 reductions, 
and $37 million per year from reduced NOX emissions. In this 
case, the annualized net benefit amounts to $427 million per year.
    Using a 3-percent discount rate for benefits and costs and the 
average SCC series that has a value of $40.0 per metric ton in 2015, 
the estimated cost of the CWH standards proposed in this NOPR is $141 
million per year in increased equipment costs, while the estimated 
benefits are $517 million per year in reduced operating costs, $166 
million per year from CO2 reductions, and $54 million per 
year in reduced NOX emissions. In this case, the net benefit 
amounts to $597 million per year.

                               Table V.44--Annualized Benefits and Costs of Proposed Standards (TSL 3) for CWH Equipment *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Million 2014$/year
                                                                     -----------------------------------------------------------------------------------
                                              Discount rate                                        Low net benefits estimate  High net benefits estimate
                                                                          Primary  estimate *                  *                           *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial Consumer Operating Cost  7%..............................  367.......................  336.......................  411.
 Savings *.
                                    3%..............................  517.......................  465.......................  588.
CO2 Reduction (using mean SCC at    5%..............................  48........................  46........................  50.
 5% discount rate) **.
CO2 Reduction (using mean SCC at    3%..............................  166.......................  159.......................  176.
 3% discount rate) **.
CO2 Reduction (using mean SCC at    2.5%............................  245.......................  234.......................  259.
 2.5% discount rate) **.
CO2 Reduction (using 95th           3%..............................  508.......................  485.......................  536.
 percentile SCC at 3% discount
 rate) **.
NOX Reduction [dagger]............  7%..............................  37........................  35........................  86.
                                    3%..............................  54........................  52........................  126.
    Total Benefits                  7% plus CO2 range...............  452 to 912................  417 to 855................  547 to 1,033.
     [dagger][dagger].
                                    7%..............................  571.......................  530.......................  673.
                                    3% plus CO2 range...............  619 to 1,079..............  563 to 1,001..............  765 to 1,251.
                                    3%..............................  737.......................  676.......................  890.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial Consumer Incremental     7%..............................  144.......................  147.......................  142.
 Equipment Costs.
                                    3%..............................  141.......................  144.......................  138.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Net Benefits/Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total [dagger][dagger]........  7% plus CO2 range...............  308 to 768................  270 to 709................  406 to 892.
                                    7%..............................  427.......................  383.......................  531.
                                    3% plus CO2 range...............  478 to 938................  419 to 857................  627 to 1,113.
                                    3%..............................  597.......................  532.......................  752.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This table presents the annualized costs and benefits associated with commercial water heating equipment shipped in 2019-2048. These results include
  benefits to commercial consumers that accrue after 2048 from the equipment shipped in 2019-2048. The Primary, Low Benefits, and High Benefits
  Estimates for operating cost savings utilize projections of energy prices and building growth (leading to higher shipments) from the AEO 2015
  Reference case, Low Estimate, and High Estimate, respectively. In addition, DOE used a constant price assumption as the default price projection; the
  cost to manufacture a given unit of higher efficiency neither increases nor decreases over time. The analysis of the price trends is described in
  section IV.F.2.a and appendix 10B of the NOPR TSD.
** The interagency group selected four sets of SCC values for use in regulatory analyses. Three sets of values are based on the average SCC from the
  integrated assessment models, at discount rates of 5, 3, and 2.5 percent. For example, for 2015 emissions, these values are $12.2/metric ton, $40.0/
  metric ton, and $62.3/metric ton, in 2014$, respectively. The fourth set ($117 per metric ton in 2014$ for 2015 emissions), which represents the 95th
  percentile of the SCC distribution calculated using 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. The SCC values are emission year specific. See section
  IV.L for more details.

[[Page 34527]]

 
[dagger] The $/ton values used for NOX are described in section IV.L. DOE estimated the monetized value of NOX emissions reductions using benefit per
  ton estimates from the Regulatory Impact Analysis titled, ``Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for
  Modified and Reconstructed Power Plants,'' published in June 2014 by EPA's Office of Air Quality Planning and Standards. (Available at www3.epa.gov/ttnecas1/regdata/RIAs/111dproposalRIAfinal0602.pdf.) See section IV.L.2 for further discussion. Note that the agency is presenting a national benefit-
  per-ton estimate for particulate matter emitted from the Electric Generating Unit sector based on an estimate of premature mortality derived from the
  ACS study (Krewski et al. 2009). If the benefit-per-ton estimates were based on the Six Cities study (Lepuele et al. 2011), the values would be nearly
  two-and-a-half times larger. Because of the sensitivity of the benefit-per-ton estimate to the geographical considerations of sources and receptors of
  emissions, DOE intends to investigate refinements to the agency's current approach of one national estimate by assessing the regional approach taken
  by EPA's Regulatory Impact Analysis for the Clean Power Plan Final Rule.
[dagger][dagger] Total benefits for both the 3-percent and 7-percent cases are derived using the series corresponding to SCC value of $40.0/metric ton .
  In the rows labeled ``7% plus CO2 range'' and ``3% plus CO2 range,'' the operating cost and NOX benefits are calculated using the labeled discount
  rate, and those values are added to the full range of CO2 values.

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Orders 12866 and 13563

    Section 1(b)(1) of Executive Order 12866, ``Regulatory Planning and 
Review,'' 58 FR 51735 (Oct. 4, 1993), requires each agency to identify 
the problem that it intends to address, including, where applicable, 
the failures of private markets or public institutions that warrant new 
agency action, as well as to assess the significance of that problem. 
The problems that this document's proposed standards address are as 
follows:
    (1) Insufficient information and the high costs of gathering and 
analyzing relevant information lead some commercial consumers to miss 
opportunities to make cost-effective investments in energy efficiency.
    (2) In some cases, the benefits of more-efficient equipment are not 
realized due to misaligned incentives between purchasers and users. An 
example of such a case is when the equipment purchase decision is made 
by a building contractor or building owner who does not pay the energy 
costs of operating the equipment.
    (3) There are external benefits resulting from improved energy 
efficiency of CWH equipment that are not captured by the users of such 
equipment. These benefits include externalities related to public 
health, environmental protection, and energy security that are not 
reflected in energy prices, such as reduced air pollutants and 
emissions of greenhouse gases that impact human health and global 
warming. DOE attempts to quantify some of the external benefits through 
use of Social Cost of Carbon values.
    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA) in the OMB has determined that the regulatory action 
proposed in this document is a ``significant regulatory action'' under 
section (3)(f) of Executive Order 12866. Accordingly, pursuant to 
section 6(a)(3)(B) of the Executive Order, DOE has provided to OIRA: 
(i) The text of the draft regulatory action, together with a reasonably 
detailed description of the need for the regulatory action and an 
explanation of how the regulatory action will meet that need; and (ii) 
An assessment of the potential costs and benefits of the regulatory 
action, including an explanation of the manner in which the regulatory 
action is consistent with a statutory mandate. DOE has included these 
documents in the rulemaking record.
    In addition, the Administrator of OIRA has determined that the 
proposed regulatory action is an ``economically significant regulatory 
action'' under section (3)(f)(1) of Executive Order 12866. Accordingly, 
pursuant to section 6(a)(3)(C) of the Executive Order, DOE has provided 
to OIRA a regulatory impact analysis (RIA), including the underlying 
analysis, of benefits and costs anticipated from the regulatory action, 
together with, to the extent feasible, a quantification of those costs; 
and an assessment, including the underlying analysis, of costs and 
benefits of potentially effective and reasonably feasible alternatives 
to the planned regulation, and an explanation why the planned 
regulatory action is preferable to the identified potential 
alternatives. These assessments prepared pursuant to Executive Order 
12866 can be found in the technical support document for this 
rulemaking. These documents have also been included in the rulemaking 
record.
    DOE has also reviewed this regulation pursuant to Executive Order 
13563, issued on January 18, 2011. 76 FR 3281 (Jan. 21, 2011). 
Executive Order 13563 is supplemental to and explicitly reaffirms the 
principles, structures, and definitions governing regulatory review 
established in Executive Order 12866. To the extent permitted by law, 
agencies are required by Executive Order 13563 to: (1) Propose or adopt 
a regulation only upon a reasoned determination that its benefits 
justify its costs (recognizing that some benefits and costs are 
difficult to quantify); (2) tailor regulations to impose the least 
burden on society, consistent with obtaining regulatory objectives, 
taking into account, among other things, and to the extent practicable, 
the costs of cumulative regulations; (3) select, in choosing among 
alternative regulatory approaches, those approaches that maximize net 
benefits (including potential economic, environmental, public health 
and safety, and other advantages; distributive impacts; and equity); 
(4) to the extent feasible, specify performance objectives, rather than 
specifying the behavior or manner of compliance that regulated entities 
must adopt; and (5) identify and assess available alternatives to 
direct regulation, including providing economic incentives to encourage 
the desired behavior, such as user fees or marketable permits, or 
providing information upon which choices can be made by the public.
    DOE emphasizes as well that Executive Order 13563 requires agencies 
to use the best available techniques to quantify anticipated present 
and future benefits and costs as accurately as possible. In its 
guidance, the Office of Information and Regulatory Affairs has 
emphasized that such techniques may include identifying changing future 
compliance costs that might result from technological innovation or 
anticipated behavioral changes. For the reasons stated in the preamble, 
DOE believes that this NOPR is consistent with these principles, 
including the requirement that, to the extent permitted by law, 
benefits justify costs and that net benefits are maximized.

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis (IRFA) for 
any rule that by law must be proposed for public comment, unless the 
agency certifies that the rule, if promulgated, will not have a 
significant economic impact on a substantial number of small entities. 
As required by Executive Order 13272, ``Proper Consideration of Small 
Entities in Agency Rulemaking,'' 67 FR 53461 (August 16, 2002), DOE 
published procedures and policies on February 19, 2003, to ensure that 
the potential impacts of its rules on small entities are properly 
considered during the

[[Page 34528]]

rulemaking process. 68 FR 7990. DOE has made its procedures and 
policies available on the Office of the General Counsel's Web site 
(http://energy.gov/gc/office-general-counsel). DOE has prepared the 
following IRFA for the equipment that is the subject of this 
rulemaking.
    For manufacturers of CWH equipment, 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, 30848 (May 15, 2000), as amended at 77 FR 49991, 
50000, 50011 (August 20, 2012) 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/category/navigation-structure/contracting/contracting-officials/small-business-size-standards. Manufacturing of 
CWH equipment is classified under NAICS 333318, ``Other Commercial and 
Service Industry Machinery Manufacturing.'' The SBA sets a threshold of 
1,000 employees or less for an entity to be considered as a small 
business for this category.
1. Description and Estimated Number of Small Entities Regulated
    To estimate the number of companies that could be small business 
manufacturers of equipment covered by this rulemaking, DOE conducted a 
market survey using publicly-available information to identify 
potential small manufacturers. DOE's research involved industry trade 
association membership directories (including AHRI \127\), public 
databases (e.g., the California Energy Commission Appliance Efficiency 
Database \128\ and DOE's Compliance Certification Database \129\), 
individual company Web sites, and market research tools (e.g., Hoovers 
reports \130\) to create a list of companies that manufacture or sell 
equipment covered by this rulemaking. DOE also asked stakeholders and 
industry representatives if they were aware of any other small 
manufacturers during manufacturer interviews. DOE reviewed publicly-
available data and contacted select companies on its list, as 
necessary, to determine whether they met the SBA's definition of a 
small business manufacturer of covered CWH equipment. DOE screened out 
companies that do not offer equipment covered by this rulemaking, do 
not meet the definition of a ``small business,'' or are foreign owned 
and operated.
---------------------------------------------------------------------------

    \127\ The AHRI Directory is available at: www.ahridirectory.org/ahriDirectory/pages/home.aspx.
    \128\ The CEC database is available at: http://www.energy.ca.gov/appliances/.
    \129\ DOE's Compliance Certification Database is available at 
http://www.regulations.doe.gov/certification-data/.
    \130\ Hoovers Inc., Company Profiles, Various Companies 
(Available at: www.hoovers.com/).
---------------------------------------------------------------------------

    DOE identified 25 manufacturers of commercial water heaters sold in 
the U.S. Of these 25, DOE identified 13 as domestic small businesses. 
Twelve of the 13 domestic small businesses are original equipment 
manufacturers (OEMs) of CWH equipment covered by this rulemaking, while 
one rebrands equipment manufactured by other OEMs.
    Before issuing this NOPR, DOE attempted to contact all the small 
business manufacturers of CWH equipment it had identified. Two of the 
small businesses agreed to take part in an MIA interview. DOE also 
obtained information about small business impacts while interviewing 
large manufacturers.
    DOE estimates that small manufacturers control approximately 7 
percent of the CWH market. Based on DOE's research, six small 
businesses are primarily boiler manufacturers that produce hot water 
supply boilers covered under this rulemaking. Two of these 
manufacturers primarily produce high-efficiency condensing equipment, 
while the remaining four do not produce equipment that meet the 
efficiency level at the proposed TSL (TSL 3). DOE notes, however, that 
three of these four manufacturers offer condensing commercial packaged 
boilers. DOE believes the condensing heat exchanger designs for 
commercial packaged boilers could be adapted for use in hot water 
supply boilers. Five of the small businesses primarily manufacture 
commercial gas-fired storage and electric storage water heaters. Three 
of these five companies produce primarily high-efficiency condensing 
gas-fired equipment, while two of the five primarily produce baseline 
equipment. However, both of the latter companies offer at least one 
condensing model. Of the remaining small businesses, one exclusively 
manufacturers condensing gas-fired tankless water heaters, and one 
rebrands equipment that is produced by other CWH equipment 
manufacturers.
2. Description and Estimate of Compliance Requirements
    As previously mentioned, in addition to direct interviews of small 
manufacturers, DOE also used feedback from other manufacturer 
interviews to help evaluate the potential impacts of potential amended 
standards on small businesses. In addition, DOE used product listings 
data to better understand the percentage of models small manufacturers 
may have to convert in order to comply with standards.
    In interviews, small manufacturers stated that they may be 
disproportionately affected by product conversion costs. Product 
redesign, testing, and certification costs tend to be fixed and do not 
scale with sales volume. When confronted with new or amended energy 
conservation standards, small businesses must make investments in 
research and development to redesign their equipment, but because they 
often have lower sales volumes, they may need to spread these costs 
across fewer units. Small manufacturers also stated that they have 
limited lab space, personnel, and equipment to test their CWH 
equipment. They argued that they would experience higher testing costs 
relative to larger manufacturers, as they would need to outsource some 
or all of their testing at a higher per-unit cost. Small manufacturers 
pointed out that in general, because they have fewer engineers and 
product development resources, they would likely have to divert 
engineering resources from customer and new product initiatives for a 
longer period of time than would their larger competitors.
    These product conversion cost and engineering resource 
considerations are particularly applicable to the two small 
manufacturers that primarily offer baseline commercial gas-fired 
storage water heaters and the four manufacturers that only offer lower-
efficiency hot water supply boilers. DOE estimates that approximately 
57 percent of commercial gas-fired storage models produced by small CWH 
equipment manufacturers do not meet the thermal efficiency level 
proposed in TSL 3. For the two manufacturers that primarily offer 
baseline commercial gas-fired storage water heaters, DOE estimates that 
88 percent of their models do not meet the proposed efficiency levels 
at TSL 3. For reference, DOE estimates that large commercial gas-fired 
storage water heater manufacturers would have to convert approximately 
76 percent of their commercial gas-fired storage water heater models at 
TSL 3. For hot water supply boilers, DOE estimates that small and large 
manufacturers would need to redesign similar proportions of their 
product offerings. Approximately 86 percent of the models currently

[[Page 34529]]

produced by small CWH equipment manufacturers do not meet the level in 
TSL 3, while 79 percent of hot water supply boilers produced by large 
manufacturers do not meet the level in TSL 3.
    Smaller manufacturers also stated that they lack the purchasing 
power of larger manufacturers. The purchasing power issue may be of 
particular concern to the four manufacturers that produce lower-
efficiency hot water supply boilers, because many manufacturers would 
purchase heat exchangers to comply with the thermal efficiency level 
proposed in TSL 3. Few hot water supply boiler manufacturers produce 
condensing boiler heat exchangers domestically, and most condensing 
boiler heat exchangers are sourced from European companies. A 
condensing standard, as proposed in TSL 3, could require small 
manufacturers to purchase a greater proportion of their components. 
This could exacerbate any pricing disadvantages small businesses 
experience due to lower purchasing volumes.
    Issue 35: DOE seeks comment on the number of small manufacturers, 
on the potential impacts of amended energy conservation standards on 
those small manufacturers, and on the severity of those impacts.
3. Duplication, Overlap, and Conflict With Other Rules and Regulations
    DOE is not aware of any rules or regulations that duplicate, 
overlap, or conflict with the rule being proposed in this document.
4. Significant Alternatives to the Rule
    The discussion in section V.B.2.d analyzes impacts on small 
businesses that would result from DOE's proposed rule. In addition to 
the other TSLs being considered, the NOPR TSD includes a regulatory 
impact analysis (RIA) which addresses the following policy 
alternatives: (1) No change in standard; (2) consumer rebates; (3) 
consumer tax credits; (4) voluntary energy efficiency programs; and (5) 
early replacement.\131\ While these alternatives may mitigate to some 
varying extent the economic impacts on small entities compared to the 
proposed standards, DOE does not intend to consider these alternatives 
further because in several cases, they would not be feasible to 
implement without authority and funding from Congress, and in all 
cases, DOE has determined that the energy savings of these regulatory 
alternatives are from 70 to 80 percent smaller than those that would be 
expected to result from adoption of the proposed standard levels. 
Accordingly, DOE is declining to adopt any of these alternatives and is 
proposing the standards set forth in this document. (See chapter 17 of 
the NOPR TSD for further detail on the policy alternatives DOE 
considered.)
---------------------------------------------------------------------------

    \131\ The early replacement option includes bulk government 
purchases, manufacturer promotions, utility incentives, and 
commercial consumer incentives.
---------------------------------------------------------------------------

    Additional compliance flexibilities may be available through other 
means. For example, individual manufacturers may petition for a waiver 
of the applicable test procedure. (See 10 CFR 431.401.) Further, EPCA 
provides that a manufacturer whose annual gross revenue from all of its 
operations does not exceed $8,000,000 may apply for an exemption from 
all or part of an energy conservation standard for a period not longer 
than 24 months after the effective date of a final rule establishing 
the standard. Additionally, Section 504 of the Department of Energy 
Organization Act, 42 U.S.C. 7194, provides authority for the Secretary 
to adjust a rule issued under EPCA in order to prevent ``special 
hardship, inequity, or unfair distribution of burdens'' that may be 
imposed on that manufacturer as a result of such rule. Manufacturers 
should refer to 10 CFR part 430, subpart E, and part 1003 for 
additional details.

C. Review Under the Paperwork Reduction Act of 1995

    Manufacturers of CWH equipment must certify to DOE that their 
equipment complies with any applicable energy conservation standards. 
In certifying compliance, manufacturers must test their equipment 
according to the applicable DOE test procedures for CWH equipment, 
including any amendments adopted for those test procedures on the date 
that compliance is required. DOE has established regulations for the 
certification and recordkeeping requirements for all covered commercial 
consumer products and commercial equipment, including CWH equipment. 76 
FR 12422 (March 7, 2011); 80 FR 5099 (Jan. 30, 2015). The collection-
of-information requirement for the certification and recordkeeping is 
subject to review and approval by OMB under the Paperwork Reduction Act 
(PRA). This requirement has been approved by OMB under OMB Control 
Number 1910-1400. Public reporting burden for the certification 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.
    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

    Pursuant to the National Environmental Policy Act (NEPA) of 1969, 
DOE has determined that the proposed rule fits within the category of 
actions included in Categorical Exclusion (CX) B5.1 and otherwise meets 
the requirements for application of a CX. See 10 CFR part 1021, App. B, 
B5.1(b); 1021.410(b) and App. B, B(1)-(5). The proposed rule fits 
within this category of actions because it is a rulemaking that 
establishes energy conservation standards for consumer products or 
industrial equipment, and for which none of the exceptions identified 
in CX B5.1(b) apply. Therefore, DOE has made a CX determination for 
this rulemaking, and DOE does not need to prepare an Environmental 
Assessment or Environmental Impact Statement for this proposed rule. 
DOE's CX determination for this proposed rule is available at http://energy.gov/nepa/categorical-exclusion-cx-determinations-cx/.

E. Review Under Executive Order 13132

    Executive Order 13132, ``Federalism,'' 64 FR 43255 (August 10, 
1999), imposes certain requirements on Federal 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 that it will follow in the 
development of such regulations. 65 FR 13735. DOE has examined this 
proposed rule and has tentatively 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

[[Page 34530]]

responsibilities among the various levels of government. EPCA governs 
and prescribes Federal preemption of State regulations as to energy 
conservation for the equipment that is the subject of this proposed 
rule. States can petition DOE for exemption from such preemption to the 
extent, and based on criteria, set forth in EPCA (42 U.S.C. 6297). 
Therefore, Executive Order 13132 requires no further action.

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

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires each Federal agency to assess the effects of Federal 
regulatory actions on State, local, and Tribal governments and the 
private sector. Public Law 104-4, sec. 201 (codified at 2 U.S.C. 1531). 
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 on the national economy. 
(2 U.S.C. 1532(a), (b)) The UMRA also requires a Federal agency to 
develop an effective process to permit timely input by elected officers 
of State, local, and Tribal governments on a proposed ``significant 
intergovernmental mandate,'' and requires an agency plan for giving 
notice and opportunity for timely input to potentially affected small 
governments before establishing any requirements that might 
significantly or uniquely affect them. On March 18, 1997, DOE published 
a statement of policy on its process for intergovernmental consultation 
under UMRA. 62 FR 12820. DOE's policy statement is also available at 
www.energy.gov/gc/office-general-counsel.
    Although this proposed rule, which proposes amended energy 
conservation standards for CWH equipment, does not contain a Federal 
intergovernmental mandate, it may require annual expenditures of $100 
million or more by the private sector. Specifically, the proposed rule 
would likely result in a final rule that could require expenditures of 
$100 million or more, including: (1) Investment in research and 
development and in capital expenditures by CWH equipment manufacturers 
in the years between the final rule and the compliance date for the 
amended standards, and (2) incremental additional expenditures by 
consumers to purchase higher-efficiency CWH equipment, starting at the 
compliance date for the applicable standard.
    Section 202 of UMRA authorizes a Federal agency to respond to the 
content requirements of UMRA in any other statement or analysis that 
accompanies the proposed rule. (2 U.S.C. 1532(c)) The content 
requirements of section 202(b) of UMRA relevant to a private sector 
mandate substantially overlap the economic analysis requirements that 
apply under section 325(o) of EPCA and Executive Order 12866. The 
SUPPLEMENTARY INFORMATION section of the NOPR and the ``Regulatory 
Impact Analysis'' section of the TSD for this proposed rule respond to 
those requirements.
    Under section 205 of UMRA, the Department is obligated to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under section 202 is 
required. (2 U.S.C. 1535(a)) DOE is required to select from those 
alternatives the most cost-effective and least burdensome alternative 
that achieves the objectives of the proposed rule unless DOE publishes 
an explanation for doing otherwise, or the selection of such an 
alternative is inconsistent with law. As required by 42 U.S.C. 6313(a), 
this proposed rule would establish amended energy conservation 
standards for CWH equipment that are designed to achieve the maximum 
improvement in energy efficiency that DOE has determined to be both 
technologically feasible and economically justified. A full discussion 
of the alternatives considered by DOE is presented in the ``Regulatory 
Impact Analysis'' section of the TSD for this proposed rule.

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

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

I. Review Under Executive Order 12630

    Pursuant to Executive Order 12630, ``Governmental Actions and 
Interference with Constitutionally Protected Property Rights,'' 53 FR 
8859 (March 15, 1988), DOE has determined that this proposed rule would 
not result in any takings that might require compensation under the 
Fifth Amendment to the U.S. Constitution.

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

    Section 515 of the Treasury and General Government Appropriations 
Act, 2001 (44 U.S.C. 3516 note) provides for Federal agencies to review 
most disseminations of information to the public under information 
quality 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 this NOPR 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

[[Page 34531]]

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

L. Review Under the Information Quality Bulletin for Peer Review

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

VII. Public Participation

A. Attendance at the Public Meeting

    The time, date, and location of the public meeting are listed in 
the DATES and ADDRESSES sections at the beginning of this document. If 
you plan to attend the public meeting, please notify Ms. Brenda Edwards 
at (202) 586-2945 or [email protected]. As explained in the 
ADDRESSES section, foreign nationals visiting DOE Headquarters are 
subject to advance security screening procedures which require advance 
notice prior to attendance at the public meeting. If a foreign national 
wishes to participate in the public meeting, please inform DOE of this 
fact as soon as possible by contacting Ms. Regina Washington at (202) 
586-1214 or by email: [email protected] so that the 
necessary procedures can be completed.
    DOE requires visitors to have laptops and other devices, such as 
tablets, checked upon entry into the building. Any person wishing to 
bring these devices into the Forrestal Building will be required to 
obtain a property pass. Visitors should avoid bringing these devices, 
or allow an extra 45 minutes to check in. Please report to the 
visitor's desk to have devices checked before proceeding through 
security.
    Due to the REAL ID Act implemented by the Department of Homeland 
Security (DHS), there have been recent changes regarding ID 
requirements for individuals wishing to enter Federal buildings from 
specific States and U.S. territories. Driver's licenses from the 
following States or territory will not be accepted for building entry, 
and one of the alternate forms of ID listed below will be required. DHS 
has determined that regular driver's licenses (and ID cards) from the 
following jurisdictions are not acceptable for entry into DOE 
facilities: Alaska, American Samoa, Arizona, Louisiana, Maine, 
Massachusetts, Minnesota, New York, Oklahoma, and Washington. 
Acceptable alternate forms of Photo-ID include: U.S. Passport or 
Passport Card; an Enhanced Driver's License or Enhanced ID-Card issued 
by the States of Minnesota, New York, or Washington (Enhanced licenses 
issued by these States are clearly marked Enhanced or Enhanced Driver's 
License); a military ID or other Federal government issued Photo-ID 
card.
    In addition, you can attend the public meeting via webinar. Webinar 
registration information, participant instructions, and information 
about the capabilities available to webinar participants will be 
published on DOE's Web site at: https://www1.eere.energy.gov/buildings/appliance_standards/standards.aspx?productid=36. Participants are 
responsible for ensuring their systems are compatible with the webinar 
software.

B. Procedure for Submitting Requests To Speak and Prepared General 
Statements for Distribution

    Any person who has an interest in the topics addressed in this 
document, or who is representative of a group or class of persons that 
has an interest in these issues, may request an opportunity to make an 
oral presentation at the public meeting. Such persons may hand-deliver 
requests to speak to the address shown in the ADDRESSES section at the 
beginning of this document between 9:00 a.m. and 4:00 p.m., Monday 
through Friday, except Federal holidays. Requests may also be sent by 
mail or email to: Ms. Brenda Edwards, U.S. Department of Energy, 
Building Technologies Office, Mailstop EE-5B, 1000 Independence Avenue 
SW., Washington, DC 20585-0121, or [email protected]. Persons 
who wish to speak should include with their request a computer diskette 
or CD-ROM in WordPerfect, Microsoft Word, PDF, or text (ASCII) file 
format that briefly describes the nature of their interest in this 
rulemaking and the topics they wish to discuss. Such persons should 
also provide a daytime telephone number where they can be reached.
    DOE requests persons scheduled to make an oral presentation to 
submit an advance copy of their statements at least one week before the 
public meeting. DOE may permit persons who cannot supply an advance 
copy of their statement to participate, if those persons have made 
advance alternative arrangements with the Building

[[Page 34532]]

Technologies Program. As necessary, requests to give an oral 
presentation should ask for such alternative arrangements.

C. Conduct of the Public Meeting

    DOE will designate a DOE official to preside at the public meeting 
and may also use a professional facilitator to aid discussion. The 
meeting will not be a judicial or evidentiary-type public hearing, but 
DOE will conduct it in accordance with section 336 of EPCA (42 U.S.C. 
6306). A court reporter will be present to record the proceedings and 
prepare a transcript. DOE reserves the right to schedule the order of 
presentations and to establish the procedures governing the conduct of 
the public meeting. There shall not be discussion of proprietary 
information, costs or prices, market share, or other commercial matters 
regulated by U.S. anti-trust laws. After the public meeting, interested 
parties may submit further comments on the proceedings, as well as on 
any aspect of the rulemaking, until the end of the comment period.
    The public meeting will be conducted in an informal, conference 
style. DOE will present summaries of comments received before the 
public meeting, allow time for prepared general statements by 
participants, and encourage all interested parties to share their views 
on issues affecting this rulemaking. Each participant will be allowed 
to make a general statement (within time limits determined by DOE), 
before the discussion of specific topics. DOE will allow, as time 
permits, other participants to comment briefly on any general 
statements.
    At the end of all prepared statements on a topic, DOE will permit 
participants to clarify their statements briefly and comment on 
statements made by others. Participants should be prepared to answer 
questions by DOE and by other participants concerning these issues. DOE 
representatives may also ask questions of participants concerning other 
matters relevant to this rulemaking. The official conducting the public 
meeting will accept additional comments or questions from those 
attending, as time permits. The presiding official will announce any 
further procedural rules or modification of the above procedures that 
may be needed for the proper conduct of the public meeting.
    A transcript of the public meeting will be included in the docket, 
which can be viewed as described in the Docket section at the beginning 
of this document and will be accessible on the DOE Web site. In 
addition, any person may buy a copy of the transcript from the 
transcribing reporter.

D. Submission of Comments

    DOE will accept comments, data, and information regarding this 
proposed rule before or after the public meeting, but no later than the 
date provided in the DATES section at the beginning of this proposed 
rule. Interested parties may submit comments, data, and other 
information using any of the methods described in the ADDRESSES section 
at the beginning of this document.
    Submitting comments via www.regulations.gov. The 
www.regulations.gov Web page will require you to provide your name and 
contact information. Your contact information will be viewable to DOE 
Building Technologies staff only. Your contact information will not be 
publicly viewable except for your first and last names, organization 
name (if any), and submitter representative name (if any). If your 
comment is not processed properly because of technical difficulties, 
DOE will use this information to contact you. If DOE cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, DOE may not be able to consider your comment.
    However, your contact information will be publicly viewable if you 
include it in the comment itself or in any documents attached to your 
comment. Any information that you do not want to be publicly viewable 
should not be included in your comment, nor in any document attached to 
your comment. Otherwise, persons viewing comments will see only first 
and last names, organization names, correspondence containing comments, 
and any documents submitted with the comments.
    Do not submit to www.regulations.gov information for which 
disclosure is restricted by statute, such as trade secrets and 
commercial or financial information (hereinafter referred to as 
Confidential Business Information (CBI)). Comments submitted through 
www.regulations.gov cannot be claimed as CBI. Comments received through 
the Web site will waive any CBI claims for the information submitted. 
For information on submitting CBI, see the Confidential Business 
Information section below.
    DOE processes submissions made through www.regulations.gov before 
posting. Normally, comments will be posted within a few days of being 
submitted. However, if large volumes of comments are being processed 
simultaneously, your comment may not be viewable for up to several 
weeks. Please keep the comment tracking number that www.regulations.gov 
provides after you have successfully uploaded your comment.
    Submitting comments via email, hand delivery/courier, or mail. 
Comments and documents submitted via email, hand delivery, or mail also 
will be posted to www.regulations.gov. If you do not want your personal 
contact information to be publicly viewable, do not include it in your 
comment or any accompanying documents. Instead, provide your contact 
information in a cover letter. Include your first and last names, email 
address, telephone number, and optional mailing address. The cover 
letter will not be publicly viewable as long as it does not include any 
comments.
    Include contact information each time you submit comments, data, 
documents, and other information to DOE. If you submit via mail or hand 
delivery/courier, please provide all items on a CD, if feasible, in 
which case it is not necessary to submit printed copies. No 
telefacsimiles (faxes) will be accepted.
    Comments, data, and other information submitted to DOE 
electronically should be provided in PDF (preferred), Microsoft Word or 
Excel, WordPerfect, or text (ASCII) file format. Provide documents that 
are not secured, that are written in English, and that are free of any 
defects or viruses. Documents should not contain special characters or 
any form of encryption and, if possible, they should carry the 
electronic signature of the author.
    Campaign form letters. Please submit campaign form letters by the 
originating organization in batches of between 50 to 500 form letters 
per PDF or as one form letter with a list of supporters' names compiled 
into one or more PDFs. This reduces comment processing and posting 
time.
    Confidential Business Information. Pursuant to 10 CFR 1004.11, any 
person submitting information that he or she believes to be 
confidential and exempt by law from public disclosure should submit via 
email, postal mail, or hand delivery/courier two well-marked copies: 
One copy of the document marked ``confidential'' including all the 
information believed to be confidential, and one copy of the document 
marked ``non-confidential'' with the information believed to be 
confidential deleted. Submit these documents via email or on a CD, if 
feasible. DOE will make its own determination about the confidential 
status of the information and treat it according to its determination.
    Factors of interest to DOE when evaluating requests to treat 
submitted information as confidential include: (1)

[[Page 34533]]

A description of the items; (2) whether and why such items are 
customarily treated as confidential within the industry; (3) whether 
the information is generally known by or available from other sources; 
(4) whether the information has previously been made available to 
others without obligation concerning its confidentiality; (5) an 
explanation of the competitive injury to the submitting person which 
would result from public disclosure; (6) when such information might 
lose its confidential character due to the passage of time; and (7) why 
disclosure of the information would be contrary to the public interest.
    It is DOE's policy that all comments may be included in the public 
docket, without change and as received, including any personal 
information provided in the comments (except information deemed to be 
exempt from public disclosure).

E. Issues on Which DOE Seeks Comment

    Although DOE welcomes comments on any aspect of this proposal, DOE 
is particularly interested in receiving comments and views of 
interested parties concerning the following issues:
    Issue 1: DOE seeks comment on its tentative conclusions regarding 
the potential energy savings from analyzing amended standards for 
standby loss of commercial oil-fired storage water heaters and for 
thermal efficiency of commercial oil-fired instantaneous water heaters.
    Issue 2: The agency assumes no growth in equipment efficiency in 
absence of new standards; however, DOE requests comment on expected 
changes over the analysis period in market share by energy efficiency 
level or average shipment-weighted efficiency for the analyzed CWH 
equipment classes in the no-new-standards case.
    Issue 3: DOE seeks comment on its proposed revisions to notes to 
the table of energy conservation standards in 10 CFR 431.110.
    Issue 4: DOE requests comment on its proposed changes to its 
certification, compliance, and enforcement regulations requiring the 
rated volume to be equal to the mean of the measured volumes in a 
sample.
    Issue 5: DOE requests comment on its proposed modification of the 
maximum standby loss equations for electric storage and instantaneous 
water heaters to depend on rated volume instead of measured volume.
    Issue 6: DOE requests comment on whether there are significant 
differences between storage water heaters and storage-type 
instantaneous water heaters that would justify analyzing these classes 
separately for amended energy conservations standards.
    Issue 7: DOE requests comment on whether tankless water heaters and 
hot water supply boilers should be treated as separate equipment 
classes in DOE's energy conservation standards for CWH equipment and 
whether proposing the same standards incentivizes any switching in 
shipments from one equipment class to the other. Additionally, DOE 
requests feedback on what criteria should be used to distinguish 
between tankless water heaters and hot water supply boilers if separate 
equipment classes are established.
    Issue 8: DOE seeks comment on its proposed equipment class 
structure, and whether any equipment classes are unnecessary or 
additional equipment classes are needed.
    Issue 9: DOE seeks comment on its tentative conclusion that none of 
the identified technology options are proprietary, and if any 
technologies are proprietary, requests additional information regarding 
proprietary designs and patented technologies.
    Issue 10: DOE seeks comment on the representative CWH equipment 
used in the engineering analysis.
    Issue 11: DOE seeks comment on all efficiency levels analyzed for 
CWH equipment, including thermal efficiency and standby loss levels. In 
particular, DOE is interested in the feasibility of the max-tech 
thermal efficiency levels and standby loss levels, including whether 
these efficiency levels can be achieved using the technologies 
screened-in during the screening analysis (see section IV.B), and 
whether higher efficiencies are achievable using technologies that were 
screened-in during the screening analysis. DOE is also interested in 
the feasibility of achieving the analyzed standby loss levels using the 
identified technology options.
    Issue 12: DOE seeks input on the reduction in standby loss of gas-
fired storage water heaters from the technology options for which DOE 
estimated standby loss levels (i.e., varying insulation type and 
thickness, electromechanical flue dampers, and mechanical draft) and 
the technology options for which DOE did not have sufficient data to 
develop an estimate (including baffling).
    Issue 13: DOE seeks comment on its methodology for manufacturer 
production cost, manufacturer selling price, and shipping cost 
estimates for each equipment class and efficiency level.
    Issue 14: DOE seeks comment on its proposed method for modifying 
the maximum standby loss equations for commercial gas-fired storage 
water heaters and residential-duty storage water heaters.
    Issue 15: DOE seeks comment on its approach to convert the thermal 
efficiency and standby loss levels analyzed for residential-duty 
commercial water heaters to UEF.
    Issue 16: DOE seeks comment on the percentages of shipments 
allocated to the distribution channels relevant to each equipment 
class.
    Issue 17: DOE requests comment on the estimated market and sector 
weights for shipments by equipment class.
    Issue 18: DOE requests comment on the development of markups at 
each point in the distribution chain and the overall markup by 
equipment class.
    Issue 19: DOE seeks comment on the assumptions used in determining 
the venting costs for the relevant types of CWH equipment.
    Issue 20: DOE seeks comment on the percentage of installations 
using polypropylene venting materials in this industry and any 
limitations such venting has as to maximum available diameters or other 
limitations.
    Issue 21: DOE seeks comment on the installation labor and labor to 
remove equipment and venting in this analysis.
    Issue 22: DOE seeks comment on the overall installed costs by TSL 
for each equipment class as shown in the Average LCC and PBP Results 
tables found in section V.B.1.a, Table V.4 through Table V.14.
    Issue 23: DOE seeks comment on maintenance labor estimates used in 
the LCC analysis and the assumption that maintenance costs remain 
constant as efficiency increases.
    Issue 24: DOE seeks comment on the findings of the repair costs of 
CWH equipment, labor estimates for repairs, and the estimated rate of 
component repair.
    Issue 25: DOE seeks input on actual historical shipments for the 
three equipment classes for which no historical shipments data exist--
residential-duty gas-fired storage water heaters, gas-fired tankless 
water heaters, and gas-fired hot water supply boilers.
    Issue 26: DOE seeks input on the methodology used to estimate the 
historical shipments for the residential-duty gas-fired storage water 
heater, gas-fired tankless water heater, and hot water supply boiler 
equipment classes, particularly in the absence of actual historic 
shipments data.
    Issue 27: DOE seeks input on commercial consumer switching between 
equipment types or fuel types, and specific information that DOE can 
use to model such commercial

[[Page 34534]]

consumer switching. For example, if a commercial consumer switches away 
from commercial gas-fired storage water heaters, to what type of 
equipment is the commercial consumer most likely to switch, and is it a 
one-for-one switch or some other ratio?
    Issue 28: DOE seeks input on the shares of shipments allocated to 
commercial and to residential consumer types.
    Issue 29: DOE seeks input on whether the shipment model should 
assume that multifamily buildings are the only residential building 
stock in which CWH equipment is used, or whether DOE should continue to 
use total residential building stocks.
    Issue 30: DOE seeks input on the possibility that rebound effect 
would be significant, and if so, estimates of the impact of the rebound 
effect on NES.
    Issue 31: DOE requests comment on whether manufacturers would incur 
any product conversion costs (i.e., substantial redesign work or 
research and development) related to the standby loss levels analyzed 
in this NOPR.
    Issue 32: DOE seeks comment on its assessment of amended standards' 
potential impacts on direct employment.
    Issue 33: DOE seeks comment on its assessment of amended standards' 
potential impacts on manufacturing capacity.
    Issue 34: DOE requests comment on whether the classification of 
unacceptable blowing agents in the EPA's SNAP final rule will affect 
the insulating properties of foam insulation used in CWH equipment 
analyzed in this NOPR. Specifically, DOE seeks data that show the 
difference in thermal resistivity (i.e., R-value per inch) between 
insulation currently used in storage water heaters and insulation that 
would be compliant with the regulations amended in the SNAP final rule, 
if currently used blowing agents are classified as unacceptable.
    Issue 35: DOE seeks comment on the number of small manufacturers, 
on the potential impacts of amended energy conservation standards on 
those small manufacturers, and on the severity of those impacts.

VIII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of this notice of 
proposed rulemaking.

List of Subjects

10 CFR Part 429

    Confidential business information, Energy conservation, Imports, 
Measurement standards, Reporting and recordkeeping requirements.

10 CFR Part 431

    Administrative practice and procedure, Confidential business 
information, Test procedures, Reporting and recordkeeping requirements.

    Issued In Washington, DC, on April 19, 2016.
David Friedman,
Principal Deputy Assistant Secretary, Energy Efficiency and Renewable 
Energy.
    For the reasons set forth in the preamble, DOE proposes to amend 
parts 429 and 431 of chapter II, subchapter D of title 10, Code of 
Federal Regulations, as set forth below:

PART 429--CERTIFICATION, COMPLIANCE, AND ENFORCEMENT FOR CONSUMER 
PRODUCTS AND COMMERCIAL AND INDUSTRIAL EQUIPMENT

0
1. The authority citation for part 429 continues to read as follows:

    Authority: 42 U.S.C. 6291-6317.

0
2. Section 429.44 is amended by:
0
a. Adding paragraph (b)(1)(ii)(C) [paragraph (b) proposed at 81 FR 
28588 (May 9, 2016)];
0
b. Revising paragraph (c)(2);
0
c. Redesignating existing paragraphs (c)(3) and (4) as (c)(4) and (5); 
and
0
d. Adding new paragraph (c)(3).
    The additions and revisions read as follows:


Sec.  429.44  Commercial water heating equipment.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (C) Any represented value of the rated storage volume must be equal 
to the mean of the measured storage volumes of all the units within the 
sample.
* * * * *
    (c) * * *
    (2) Pursuant to Sec.  429.12(b)(13), a certification report for 
equipment manufactured before (date 3 years after publication in the 
Federal Register of the final rule establishing amended energy 
conservation standards for commercial water-heating equipment) must 
include the following public equipment-specific information:
    (i) Commercial electric storage water heaters: The standby loss in 
percent per hour (%/h) and the measured storage volume in gallons 
(gal).
    (ii) Commercial gas-fired and oil-fired storage water heaters: The 
thermal efficiency in percent (%), the standby loss in British thermal 
units per hour (Btu/h), the rated storage volume in gallons (gal), and 
the fuel input rate in Btu/h rounded to the nearest 1,000 Btu/h.
    (iii) Commercial water heaters and hot water supply boilers with 
storage capacity greater than 140 gallons: The thermal efficiency in 
percent (%); whether the storage volume is greater than 140 gallons 
(Yes/No); whether the tank surface area is insulated with at least R-
12.5 (Yes/No); whether a standing pilot light is used (Yes/No); for gas 
or oil-fired water heaters, whether the basic model has a flue damper 
or fan assisted combustion (Yes/No); and, if applicable, pursuant to 10 
CFR 431.110 of this chapter, the standby loss in British thermal units 
per hour (Btu/h) and measured storage volume in gallons (gal).
    (iv) Commercial gas-fired and oil-fired instantaneous water heaters 
with storage capacity greater than or equal to 10 gallons and gas-fired 
and oil-fired hot water supply boilers with storage capacity greater 
than or equal to 10 gallons: The thermal efficiency in percent (%); the 
standby loss in British thermal units per hour (Btu/h); the rated 
storage volume in gallons (gal); the fuel input rate in Btu/h rounded 
to the nearest 1,000 Btu/h; whether a submerged heat exchanger is used 
(Yes/No); and whether flow through the water heater is required to 
initiate burner ignition (Yes/No).
    (v) Commercial gas-fired and oil-fired instantaneous water heaters 
with storage capacity less than 10 gallons and gas-fired and oil-fired 
hot water supply boilers with storage capacity less than 10 gallons: 
The thermal efficiency in percent (%), the rated storage volume in 
gallons (gal), and the fuel input rate in British thermal units per 
hour (Btu/h) rounded to the nearest 1,000 Btu/h.
    (vi) Commercial electric instantaneous water heaters with storage 
capacity greater than or equal to 10 gallons: The thermal efficiency in 
percent (%), the standby loss in percent per hour (%/h), and the 
measured storage volume in gallons (gal).
    (vii) Commercial electric instantaneous water heaters with storage 
capacity less than 10 gallons: The thermal efficiency in percent (%) 
and the measured storage volume in gallons (gal).
    (viii) Commercial unfired hot water storage tanks: The thermal 
insulation (i.e., R-value) and stored volume in gallons (gal).
    (3) Pursuant to Sec.  429.12(b)(13), a certification report for 
equipment manufactured on or after (date 3 years after publication in 
the Federal Register of the final rule establishing

[[Page 34535]]

amended energy conservation standards for commercial water-heating 
equipment) must include the following public equipment-specific 
information:
    (i) Commercial electric storage water heaters: The standby loss in 
percent per hour (%/h) and the rated storage volume in gallons (gal).
    (ii) Commercial gas-fired and oil-fired storage water heaters: The 
thermal efficiency in percent (%), the standby loss in British thermal 
units per hour (Btu/h), the rated storage volume in gallons (gal), and 
the fuel input rate in British thermal units per hour (Btu/h) rounded 
to the nearest 1,000 Btu/h.
    (iii) Commercial water heaters and hot water supply boilers with 
storage capacity greater than 140 gallons: The thermal efficiency in 
percent (%), whether the storage volume is greater than 140 gallons 
(Yes/No); whether the tank surface area is insulated with at least R-
12.5 (Yes/No); whether a standing pilot light is used (Yes/No); for gas 
or oil-fired water heaters, whether the basic model has a flue damper 
or fan assisted combustion (Yes/No); and, if applicable, pursuant to 10 
CFR 431.110 of this chapter, the standby loss in British thermal units 
per hour (Btu/h) and rated storage volume in gallons (gal).
    (iv) Commercial gas-fired and oil-fired instantaneous water heaters 
with storage capacity greater than or equal to 10 gallons and gas-fired 
and oil-fired hot water supply boilers with storage capacity greater 
than or equal to 10 gallons: The thermal efficiency in percent (%), the 
standby loss in British thermal units per hour (Btu/h), the rated 
storage volume in gallons (gal), and the fuel input rate in Btu/h 
rounded to the nearest 1,000 Btu/h; whether a submerged heat exchanger 
is used (Yes/No); and whether flow through the water heater is required 
to initiate burner ignition (Yes/No).
    (v) Commercial gas-fired and oil-fired instantaneous water heaters 
with storage capacity less than 10 gallons and gas-fired and oil-fired 
hot water supply boilers with storage capacity less than 10 gallons: 
The thermal efficiency in percent (%), the rated storage volume in 
gallons (gal), and the fuel input rate in British thermal units per 
hour (Btu/h) rounded to the nearest 1,000 Btu/h.
    (vi) Commercial electric instantaneous water heaters with storage 
capacity greater than or equal to 10 gallons: The thermal efficiency in 
percent (%), the standby loss in percent per hour (%/h), and the rated 
storage volume in gallons (gal).
    (vii) Commercial electric instantaneous water heaters with storage 
capacity less than 10 gallons: The thermal efficiency in percent (%) 
and the rated storage volume in gallons (gal).
    (viii) Commercial unfired hot water storage tanks: The thermal 
insulation (i.e., R-value) and rated storage volume in gallons (gal).
* * * * *
0
3. Section 429.134 is amended by revising paragraph (m)(2) [proposed at 
81 FR 28588 (May 9, 2016)] to read as follows:


Sec.  429.134  Product-specific enforcement provisions.

* * * * *
    (m) * * *
    (2) Verification of rated storage volume. The following provisions 
apply to commercial water heating equipment manufactured on or after 
(date 3 years after publication in the Federal Register of the final 
rule establishing amended energy conservation standards for commercial 
water-heating equipment). The storage volume of the basic model will be 
measured pursuant to the test requirements of 10 CFR part 431 for each 
unit tested. The mean of the measured values will be compared to the 
rated storage volume as certified by the manufacturer. The rated value 
will be considered valid only if the measurement is within five percent 
of the certified rating.
    (i) If the rated storage volume is found to be within 5 percent of 
the mean of the measured value of storage volume, then that value will 
be used as the basis for calculation of the maximum standby loss for 
the basic model.
    (ii) If the rated storage volume is found to vary more than 5 
percent from the mean of the measured values, then the mean of the 
measured values will be used as the basis for calculation of the 
maximum standby loss for the basic model.

PART 431--ENERGY EFFICIENCY PROGRAM FOR CERTAIN COMMERCIAL AND 
INDUSTRIAL EQUIPMENT

0
4. The authority citation for part 431 continues to read as follows:

    Authority: 42 U.S.C. 6291-6317.

0
5. Section 431.110 is revised to read as follows:


Sec.  431.110  Energy conservation standards and their effective dates.

    (a) Each commercial storage water heater, instantaneous water 
heater, and hot water supply boiler \1\ (except for residential-duty 
commercial water heaters) must meet the applicable energy conservation 
standard level(s) as follows:
---------------------------------------------------------------------------

    \1\ Any packaged boiler that provides service water that meets 
the definition of ``commercial packaged boiler'' in subpart E of 
this part, but does not meet the definition of ``hot water supply 
boiler'' in subpart G, must meet the requirements that apply to it 
under subpart E.

----------------------------------------------------------------------------------------------------------------
                                                                           Energy conservation standards \a\
                                                                     -------------------------------------------
                                                                          Minimum
                                                                          thermal
                                                                        efficiency       Maximum standby loss
                Equipment                            Size               (equipment    (equipment manufactured on
                                                                       manufactured      and after October 29,
                                                                       on and after            2003) \b\
                                                                        October 9,
                                                                         2015) (%)
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters..........  All.......................             N/A  0.30 + 27/Vm (%/h).
Gas-fired storage water heaters.........  <=155,000 Btu/h...........              80  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).
                                          >155,000 Btu/h............              80  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).
Oil-fired storage water heaters.........  <=155,000 Btu/h...........              80  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).
                                          >155,000 Btu/h............              80  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).
Electric instantaneous water heaters \c\  <10 gal...................              80  N/A.
                                          >=10 gal..................              77  2.30 + 67/Vm (%/h).
Gas-fired instantaneous water heaters     <10 gal...................              80  N/A.
 and hot water supply boilers.            >=10 gal..................              80  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).

[[Page 34536]]

 
Oil-fired instantaneous water heater and  <10 gal...................              80  N/A.
 hot water supply boilers.                >=10 gal..................              78  Q/800 + 110(Vr)1/2 (Btu/
                                                                                       h).
----------------------------------------------------------------------------------------------------------------
\a\ Vm is the measured storage volume, and Vr is the rated volume, both in gallons. Q is the fuel input rate in
  Btu/hr.
\b\ Water heaters and hot water supply boilers having more than 140 gallons of storage capacity need not meet
  the standby loss requirement if (1) the tank surface area is thermally insulated to R-12.5 or more; (2) a
  standing pilot light is not used; and (3) for gas or oil-fired storage water heaters, they have a flue damper
  or fan assisted combustion.
\c\ The compliance date for energy conservation standards for electric instantaneous water heaters is January 1,
  1994.

    (b) Each unfired hot water storage tank manufactured on or after 
October 29, 2003, must have a minimum thermal insulation of R-12.5.
    (c) Each commercial water heater, instantaneous water heater, 
unfired hot water storage tank and hot water supply boiler \2\ (except 
for residential-duty commercial water heaters) manufactured on or after 
(date 3 years after publication in the Federal Register of the final 
rule establishing amended energy conservation standards for commercial 
water-heating equipment) must meet the applicable energy conservation 
standard level(s) as follows:
---------------------------------------------------------------------------

    \2\ Any packaged boiler that provides service water that meets 
the definition of ``commercial packaged boiler'' in subpart E of 
this part, but does not meet the definition of ``hot water supply 
boiler'' in subpart G, must meet the requirements that apply to it 
under subpart E.

----------------------------------------------------------------------------------------------------------------
                                                                           Energy conservation standards \a\
                                                                     -------------------------------------------
                Equipment                       Specifications            Minimum
                                                                          thermal      Maximum standby loss \b\
                                                                        efficiency
----------------------------------------------------------------------------------------------------------------
Electric storage water heaters..........  All.......................             N/A  0.84 x [0.30 + 27/Vr] (%/
                                                                                       h).
Gas-fired storage water heaters.........  All \c\...................              95  0.63 x [Q/800 + 110(Vr) 1/
                                                                                       2] (Btu/h).
Oil-fired storage water heaters.........  All \c\...................              80  Q/800 + 110(Vr) 1/2 (Btu/
                                                                                       h).
Electric instantaneous water heaters....  <10 gal \c\...............              80  N/A.
                                          >=10 gal..................              77  2.30 + 67/Vr (%/h).
Gas-fired instantaneous water heaters
 and hot water supply boilers
    Instantaneous water heaters (other    <10 gal...................              94  N/A.
     than storage-type) and hot water
     supply boilers.
                                          >=10 gal..................              94  Q/800 + 110(Vr) 1/2 (Btu/
                                                                                       h).
    Storage-type instantaneous water      >=10 gal..................              95  0.63 x [Q/800 + 110(Vr) 1/
     heaters.                                                                          2] (Btu/h).
Oil-fired instantaneous water heaters     <10 gal...................              80  N/A.
 and hot water supply boilers.
                                          >=10 gal..................              78  Q/800 + 110(Vr) 1/2 (Btu/
                                                                                       h).
----------------------------------------------------------------------------------------------------------------
\a\ Vr is the rated volume in gallons. Q is the fuel input rate in Btu/h.
\b\ Water heaters and hot water supply boilers having more than 140 gallons of storage capacity need not meet
  the standby loss requirement if (1) the tank surface area is thermally insulated to R-12.5 or more; (2) a
  standing pilot light is not used; and (3) for gas or oil-fired storage water heaters, they have a flue damper
  or fan assisted combustion.
\c\ These standards apply to commercial water heating equipment that does not meet the definition of
  ``residential-duty commercial water heater.'' See paragraph (c) of this section for energy conservation
  standards applicable to residential-duty commercial water heaters.

    (d) Each residential-duty commercial water heater manufactured 
prior to (date 3 years after publication in the Federal Register of the 
final rule establishing amended energy conservation standards for 
commercial water-heating equipment) must meet the applicable energy 
conservation standard level(s) as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                          Uniform energy factor
              Equipment                   Specifications \a\          Draw pattern                 \b\
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage....................  >75 kBtu/hr and........  Very Small.............  0.3261 - (0.0006 x Vr).
                                       <=105 kBtu/hr and......  Low....................  0.5219 - (0.0008 x Vr).
                                       <=120 gal..............  Medium.................  0.5585 - (0.0006 x Vr).
                                                                High...................  0.6044 - (0.0005 x Vr).
Oil-fired Storage....................  >105 kBtu/hr and.......  Very Small.............  0.3206 - (0.0006 x Vr).
                                       <=140 kBtu/hr and......  Low....................  0.5577 - (0.0019 x Vr).
                                       <=120 gal..............  Medium.................  0.6027 - (0.0019 x Vr).
                                                                High...................  0.5446 - (0.0018 x Vr).

[[Page 34537]]

 
Electric Instantaneous...............  >12 kW and <=58.6 kW     [Reserved].............  [Reserved].
                                        and <=2 gal.
----------------------------------------------------------------------------------------------------------------
\a\ Additionally, to be classified as a residential-duty commercial water heater, a commercial water heater must
  meet the following conditions: (1) If the water heater requires electricity, it must use a single-phase
  external power supply; and (2) the water heater must not be designed to heat water to temperatures greater
  than 180 [deg]F.
\b\ Vr is the rated storage volume in gallons.

    (e) Each residential-duty commercial water heater manufactured on 
and after (date 3 years after publication in the Federal Register of 
the final rule establishing amended energy conservation standards for 
commercial water-heating equipment) must meet the applicable energy 
conservation standard level(s) as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                          Uniform energy factor
              Equipment                   Specifications \a\          Draw pattern                 \b\
----------------------------------------------------------------------------------------------------------------
Gas-fired Storage....................  >75 kBtu/h and.........  Very Small.............  0.4618 - (0.0010 x Vr).
                                       <=105 kBtu/h and.......  Low....................  0.6626 - (0.0009 x Vr).
                                       <=120 gal..............  Medium.................  0.6996 - (0.0007 x Vr).
                                                                High...................  0.7311 - (0.0006 x Vr).
Oil-fired storage....................  >105 kBtu/h and........  Very Small.............  0.3206 - (0.0006 x Vr).
                                       <=140 kBtu/h and.......  Low....................  0.5577 - (0.0019 x Vr).
                                       <=120 gal..............  Medium.................  0.6027 - (0.0019 x Vr).
                                                                High...................  0.5446 - (0.0018 x Vr).
Electric Instantaneous...............  >12 kW and <=58.6 kW     [Reserved].............  [Reserved].
                                        and <=2 gal.
----------------------------------------------------------------------------------------------------------------
\a\ Additionally, to be classified as a residential-duty commercial water heater, a commercial water heater must
  meet the following conditions: (1) If the water heater requires electricity, it must use a single-phase
  external power supply; and (2) the water heater must not be designed to heat water to temperatures greater
  than 180 [deg]F.
\b\ Vr is the rated storage volume in gallons.

[FR Doc. 2016-12178 Filed 5-27-16; 8:45 am]
BILLING CODE 6450-01-P