[Federal Register: October 6, 2006 (Volume 71, Number 194)]
[Proposed Rules]
[Page 59203-59259]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc06-17]
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Part II
Department of Energy
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Office of Energy Efficiency and Renewable Energy
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10 CFR Part 430
Energy Conservation Program for Consumer Products: Energy Conservation
Standards for Residential Furnaces and Boilers; Proposed Rule
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DEPARTMENT OF ENERGY
Office of Energy Efficiency and Renewable Energy
10 CFR Part 430
[Docket Number EE-RM/STD-01-350]
RIN 1904-AA78
Energy Conservation Program for Consumer Products: Energy
Conservation Standards for Residential Furnaces and Boilers
AGENCY: Office of Energy Efficiency and Renewable Energy, Department of
Energy.
ACTION: Notice of proposed rulemaking and public meeting.
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SUMMARY: The Energy Policy and Conservation Act (EPCA or the Act)
prescribes energy conservation standards for various consumer products
and commercial and industrial equipment, and requires the Department of
Energy (DOE or the Department) to determine if amendments to increase
the stringency of the standards are technologically feasible and
economically justified, and if they would save a significant amount of
energy. In this notice, the Department is proposing to amend the energy
conservation standards for residential furnaces and boilers and is
announcing a public meeting.
DATES: The Department will hold a public meeting on October 30, 2006,
from 9 a.m. to 4 p.m., in Washington, DC. The Department must receive
requests to speak at the public meeting before 4 p.m., October 16,
2006. The Department must receive a signed original and an electronic
copy of statements to be given at the public meeting before 4 p.m.,
October 16, 2006.
The Department will accept comments, data, and information
regarding the notice of proposed rulemaking (NOPR) before and after the
public meeting, but no later than January 15, 2007. See section VII,
``Public Participation,'' of this notice for details.
ADDRESSES: You may submit comments, identified by docket number EE-RM/
STD-01-350 and/or regulatory information number (RIN) 1904-AA78, by any
of the following methods:
1. Federal eRulemaking Portal: http://www.regulations.gov. Follow
the instructions for submitting comments.
2. E-mail: ResidentialFBNOPR[fxsp0]Comments@ee.doe.gov. Include
docket number EE-RM/STD-01-350 and/or RIN number 1904-AA78 in the
subject line of the message.
3. Mail: Ms. Brenda Edwards-Jones, U.S. Department of Energy,
Building Technologies Program, Mailstop EE-2J, NOPR for Residential
Furnaces and Boilers, Docket Number EE-RM/STD-01-350 and/or RIN number
1904-AA78, 1000 Independence Avenue, SW., Washington, DC 20585-0121.
Please submit one signed original paper copy.
4. Hand Delivery/Courier: Ms. Brenda Edwards-Jones, U.S. Department
of Energy, Building Technologies Program, Room 1J-018, 1000
Independence Avenue, SW., Washington, DC 20585-0121. Telephone: (202)
586-2945. Please submit one signed original paper copy.
Instructions: All submissions received must include the agency name
and Docket Number or RIN for this rulemaking. For detailed instructions
on submitting comments and additional information on the rulemaking
process, see section VII, ``Public Participation,'' of this notice for
details.
Docket: For access to the docket to read background documents or
comments received, visit the U.S. Department of Energy, Forrestal
Building, Room 1J-018 (Resource Room of the Building Technologies
Program), 1000 Independence Avenue, SW., Washington, DC 20585-0121,
(202) 586-2945, between 9 a.m. and 4 p.m., Monday through Friday,
except Federal holidays. Please call Ms. Brenda Edwards-Jones at the
above telephone number for additional information regarding visiting
the Resource Room. Please note: The Department's Freedom of Information
Reading Room (formerly Room 1E-190 at the Forrestal Building) is no
longer housing rulemaking materials.
FOR FURTHER INFORMATION CONTACT: Mohammed Khan, Project Manager, Energy
Conservation Standards for Residential Furnaces and Boilers, U.S.
Department of Energy, Energy Efficiency and Renewable Energy, Building
Technologies Program, EE-2J, 1000 Independence Avenue, SW., Washington,
DC 20585-0121, (202) 586-7892, e-mail: Mohammed.Khan@ee.doe.gov.
Francine Pinto, Esq., U.S. Department of Energy, Office of the
General Counsel, GC-72, 1000 Independence Avenue, SW., Washington, DC
20585-0121, (202) 586-9507, e-mail: Francine.Pinto@hq.doe.gov.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Summary of the Proposed Rule
II. Introduction
A. Consumer Overview
B. Authority
C. Background
1. Current Standards
2. History of Standards Rulemaking for Residential Furnaces and
Boilers
3. Process Improvement
D. Negotiated Boiler Standards Agreement
III. General Discussion
A. General Issues
1. Impact of Furnace and Boiler Standards on Future Natural Gas
Prices
2. Inclusion of Electricity Consumption in Furnace and Boiler
Standards
3. Separate Standards for Equipment Installed in New Homes and
as Replacements
4. Separate Standards for Different Regions
B. Test Procedures
C. Technological Feasibility
1. General
2. Maximum Technologically Feasible Levels
D. Energy Savings
1. Determination of Savings
2. Significance of Savings
E. Economic Justification
1. Specific Criteria
a. Economic Impact on Manufacturers and Consumers
b. Life-Cycle Costs
c. Energy Savings
d. Lessening of Utility or Performance of Products
e. Impact of Any Lessening of Competition f. Need of the Nation
to Conserve Energy
g. Other Factors
2. Rebuttable Presumption
IV. Methodology and Discussion of Comments
A. Product Classes
B. Engineering Analysis
1. Manufacturing Costs
2. Markups
3. Installation Costs
a. Non-Weatherized Gas Furnaces
b. Other Product Classes
4. Maintenance Costs
5. Rebuttable-Presumption Payback Period
C. Life-Cycle Cost and Payback Period Analysis
1. Equipment Prices
2. Installation Costs
3. Household Annual Energy Consumption
4. Energy Prices
5. Maintenance Costs
6. Equipment Lifetime
7. Discount Rates
8. Effective Date of the New Standards
9. Inputs to Payback Period Analysis
10. Base-Case Equipment
D. National Impact Analysis--National Energy Savings and Net
Present Value Analysis
1. Shipments, National Energy Savings, and Net Present Value
2. Annual Unit Energy Consumption
3. Site-to-Source Conversion Factors
4. Installed Equipment Costs
5. Maintenance Costs
6. Energy Prices
7. Discount Rates
E. Consumer Subgroup Analysis
F. Manufacturer Impact Analysis
1. General Description
2. Industry Profile
3. Industry Cash Flow Analysis
4. Subgroup Impact Analysis
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5. Government Regulatory Impact Model Analysis
6. Manufacturer Interviews
a. Issues
b. GRIM Scenarios and Key Inputs
1. Shipments Forecast
2. Markups
3. Product and Capital Conversion Costs
G. Employment Impact Analysis
H. Utility Impact Analysis
I. Environmental Analysis
V. Analytical Results
A. Trial Standard Levels
B. Economic Justification and Energy Savings
1. Economic Impacts on Consumers
a. Life-Cycle Cost and Payback Period
b. Consumer Subgroup Analysis
c. Rebuttable-Presumption Payback
2. Economic Impacts on Manufacturers
a. Industry Cash Flow Analysis Results
i. Non-Weatherized Gas Furnaces
ii. Weatherized Gas Furnaces
iii. Mobile Home Gas Furnaces
iv. Oil-Fired Furnaces
v. Gas Boilers
vi. Oil-Fired Boilers
b. Impacts on Manufacturing Capacity
c. Impacts on Subgroups of Manufacturers
d. Cumulative Regulatory Burden
3. National Impact Analysis
a. Significance of Energy Savings
b. Net Present Value
c. Impacts on Employment
4. Impact on Utility or Performance of Products
5. Impact of Any Lessening of Competition
6. Need of the Nation to Conserve Energy
7. Other Factors
C. Proposed Standard
VI. Procedural Issues and Regulatory Review
A. Review Under Executive Order 12866
B. Review Under the Regulatory Flexibility Act
C. Review Under the Paperwork Reduction Act
D. Review Under the National Environmental Policy Act
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 of 1999
I. Review Under Executive Order 12630
J. Review Under the Treasury and General Government
Appropriations Act of 2001
K. Review Under Executive Order 13211
L. Review Under the Information Quality Bulletin for Peer Review
M. Review Under Executive Order 12898
VII. Public Participation
A. Attendance at Public Meeting
B. Procedure for Submitting Requests to Speak
C. Conduct of Public Meeting
D. Submission of Comments
E. Issues on Which DOE Seeks Comment
VIII. Approval of the Office of the Secretary
I. Summary of the Proposed Rule
The Energy Policy and Conservation Act (EPCA or the Act), as
amended, specifies that any new or amended energy conservation standard
the Department of Energy (DOE or the Department) prescribes for
consumer products shall be designed to ``achieve the maximum
improvement in energy efficiency * * * which the Secretary determines
is technologically feasible and economically justified.'' (42 U.S.C.
6295(o)(2)(A)) Furthermore, the new or amended standard must ``result
in significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B)) In
accordance with these and other statutory criteria discussed in this
notice, the Department proposes to amend the residential furnace and
boiler energy conservation standards and raise efficiency levels as
shown in Table I.1. The proposed standards would apply to all covered
furnaces and boilers offered for sale in the United States, effective
on January 1, 2015.
Table I.1.--Proposed Standard Levels for Furnaces and Boilers
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Product class AFUE (%)
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Non-weatherized gas furnaces................................. 80
Weatherized gas furnaces..................................... 83
Mobile home gas furnaces..................................... 80
Oil-fired furnaces........................................... 82
Gas boilers.................................................. 84
Oil-fired boilers............................................ 83
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AFUE = annual fuel utilization efficiency.
The Department's analyses indicate that the proposed standards
would save a significant amount of energy--an estimated 0.41
quadrillion British thermal units (Btu), or quads, of cumulative energy
over 24 years (2015-2038). For comparison, approximately six quads are
used annually for space heating in U.S. homes. The economic impacts on
consumers--i.e., the average life-cycle cost (LCC) savings--are
positive.
The cumulative national net present value (NPV) of total consumer
costs and savings of the proposed standard (DOE's trial standard level
2, or TSL2) from 2015 to 2038, in 2004$, ranges from $650 million
(seven-percent discount rate) to $2.48 billion (three-percent discount
rate). This is the estimated total value of future operating-cost-
savings minus the estimated increased equipment costs, discounted to
2004. The Department estimated the furnace and boiler industry net
present value (INPV) to be approximately $1.6 billion in 2004$. If the
Department adopts the proposed standard, it expects manufacturers will
lose 4.1 to 7 percent of the INPV, which is approximately $65-114
million. The NPV for consumers (at the seven-percent discount rate)
exceeds industry losses due to energy efficiency standards by about
seven times.
The proposed standard will lead to reductions in greenhouse gas
emissions, resulting in cumulative (undiscounted) emission reductions
of 19.6 million tons (Mt) of carbon dioxide (CO2) from 2015
to 2038. Additionally, the standard would result in 13.0 thousand tons
(kt) of nitrogen oxides (NOX) emissions reductions or
generate a similar amount of NOX emissions allowance credits
in areas where such emissions are subject to emissions caps. The
standard would also generate 1.5 kt of sulfur dioxide (SO2)
emissions reductions from 2015 to 2038. Most of the energy saved is
natural gas. In addition, the Department expects the energy savings
from the proposed standards to eliminate the need for approximately 14
megawatts (MW) of generating capacity by 2030.
The above results reflect the Department's use of energy price
projections from the U.S. Energy Information Administration (EIA)'s
Annual Energy Outlook 2005 (AEO2005). In addition, the Department
performed a sensitivity analysis to assess the impacts of the standard
using the Annual Energy Outlook 2006 (AEO2006) energy price forecasts.
In this sensitivity analysis, the proposed standards would save the
same amount of energy (0.41 quads) over 2015-2038. The cumulative NPV
of total consumer costs and savings of the proposed standard from 2015
to 2038, in 2004$, ranges from $820 million (seven-percent discount
rate) to $3.02 billion (three-percent discount rate). The other results
are approximately the same as in the analysis using AEO2005.
The Department has found the proposed standard represents the
maximum improvement in energy efficiency that is technologically
feasible and economically justified. The Department found the benefits
to the Nation of the proposed standard (energy savings, consumer
average LCC savings, national NPV increase, and emission reductions)
outweigh the costs (loss of manufacturer NPV, and LCC increases for
some consumers). The Department considered higher energy efficiency
levels as trial standard levels; however, it found the burdens of the
higher efficiency levels (loss of manufacturer NPV, LCC increases for
some consumers, and safety concerns) outweigh the benefits (energy
savings, LCC savings for some consumers, national NPV increase, and
emission reductions). The Department concludes that the proposed
standard is economically justified. Furthermore, DOE has found that the
proposed standard is technologically feasible since products achieving
these
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efficiencies already are commercially available.
II. Introduction
A. Consumer Overview
The Department is proposing to raise the energy conservation
standard levels for residential furnaces and boilers as shown above in
Table II.1. The proposed efficiency standard would apply to all covered
furnaces and boilers offered for sale in the United States, effective
on January 1, 2015. Relative to the current standard levels, the
proposed levels for residential furnaces and boilers represent an
improvement in energy efficiency of one to five percent, depending on
the product class.
Table II.1.--Proposed Standard Levels for Furnaces and Boilers
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AFUE
Product class (%)
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Non-weatherized gas furnaces................................... 80
Weatherized gas furnaces....................................... 83
Mobile home gas furnaces....................................... 80
Oil-fired furnaces............................................. 82
Gas boilers.................................................... 84
Oil-fired boilers.............................................. 83
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AFUE = annual fuel utilization efficiency.
B. Authority
Title III of EPCA sets forth a variety of provisions designed to
improve energy efficiency. Part B of title III (42 U.S.C. 6291-6309)
provides for the Energy Conservation Program for Consumer Products
other than Automobiles. The program covers consumer products (referred
to hereafter as ``covered products''), including residential furnaces
and boilers. (42 U.S.C. 6292(a)(5))
Under the Act, the program consists essentially of these parts:
Testing, labeling, and Federal energy conservation standards. The
Federal Trade Commission (FTC) is responsible for labeling, and DOE
implements the remainder of the program. Section 323 of the Act
authorizes the Department, with assistance from the National Institute
of Standards and Technology (NIST) and subject to certain criteria and
conditions, to develop test procedures to measure the energy
efficiency, energy use, or estimated annual operating cost of each
covered product. (42 U.S.C. 6293) The furnace and boiler test
procedures appear at Title 10 of the Code of Federal Regulations (CFR)
part 430, subpart B, Appendix N.
EPCA provides criteria for prescribing new or amended standards for
covered products. As indicated above, any new or amended standard for a
covered product must be designed to achieve the maximum improvement in
energy efficiency that is technologically feasible and economically
justified. (42 U.S.C. 6295(o)(2)(A)) EPCA precludes the Department from
adopting any standard that would not result in significant conservation
of energy. (42 U.S.C. 6295(o)(3)(B)) Moreover, the Department may not
prescribe a standard: (1) For certain products, if no test procedure
has been established for the product, or (2) if DOE determines by rule
that the standard is not technologically feasible or economically
justified. (42 U.S.C. 6295(o)(3)(B) The Act (42 U.S.C.
6295(o)(2)(B)(i)) also provides that, in deciding whether a standard is
economically justified, DOE must, after receiving comments on the
proposed standard, determine whether the benefits of the standard
exceed its burdens by considering, to the greatest extent practicable,
the following seven factors:
(1) The economic impact of the standard on manufacturers and
consumers of the products subject to the standard;
(2) The savings in operating costs throughout the estimated
average life of the covered products in the type (or class) compared
to any increase in the price, initial charges, or maintenance
expenses for the covered products that are likely to result from the
imposition of the standard;
(3) The total projected amount of energy savings likely to
result directly from the imposition of the standard;
(4) Any lessening of the utility or the performance of the
covered products likely to result from the imposition of the
standard;
(5) The impact of any lessening of competition, as determined in
writing by the Attorney General, that is likely to result from the
imposition of the standard;
(6) The need for national energy conservation; and
(7) Other factors the Secretary considers relevant.
EPCA contains what is commonly known as an ``anti-backsliding''
provision. (42 U.S.C. 6295(o)(1)) This provision mandates that the
Secretary not prescribe any amended standard that either increases the
maximum allowable energy use or decreases the minimum required energy
efficiency of a covered product. Also, the Secretary may not prescribe
an amended or a 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) with performance characteristics, features, sizes,
capacities, and volume that are substantially the same as those
generally available in the United States. (42 U.S.C. 6295 (o)(4))
In addition, section 325(o)(2)(B)(iii) of 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 efficiency standard level
will be less than three times the value of the energy * * * savings
during the first year that the consumer will receive as a result of the
standard, as calculated under the applicable test procedure * * *.''
The rebuttable-presumption test is an alternative path to establishing
economic justification. (42 U.S.C. 6295(o)(2)(B)(iii))
Section 325(q)(1) of EPCA is applicable to promulgating a standard
for a type or class of covered product that has two or more
subcategories. The Department must specify a different standard level
than that which applies generally to such type or class of products
``for any group of covered products which have the same function or
intended use, if * * * products within such group--(A) Consume a
different kind of energy from that consumed by other covered products
within such type (or class); or (B) have a capacity or other
performance-related feature which other products within such type (or
class) do not have and such feature justifies a higher or lower
standard'' that applies or will apply to the other products. (42
U.S.C.6295(q)(l)) In determining whether a performance-related feature
justifies such a different standard for a group of products, the
Department must consider ``such factors as the utility to the consumer
of such a feature'' and other factors DOE deems appropriate. Any rule
prescribing such a standard must include an explanation of the basis on
which such higher or lower level was established. (42 U.S.C.
6295(q)(2))
Federal energy conservation requirements generally supersede State
laws or regulations concerning energy conservation testing, labeling,
and standards. (42 U.S.C. 6297 (a)-(c)) The Department can, however,
grant waivers of preemption for particular State laws or regulations,
in accordance with the procedures and other provisions of section
327(d) of the Act. (42 U.S.C. 6297(d)) Specifically, States with a
regulation that provides for an energy conservation standard for any
type of covered product for which there is a Federal energy
conservation standard may petition the Secretary for a DOE rule that
allows the State regulation to become effective with respect to such
covered product. The Department must prescribe a rule granting the
petition if the State establishes by a preponderance
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of the evidence that its regulation is needed to meet ``unusual and
compelling State or local energy * * * interests.'' (42 U.S.C.
6297(d)(1)(B))
C. Background
1. Current Standards
EPCA established an energy conservation standard for residential
furnaces and boilers.\1\ It set the standard in terms of the annual
fuel utilization efficiency (AFUE) descriptor at a minimum value of 78
percent for most furnaces. It set the minimum AFUE at 75 percent for
gas steam boilers and 80 percent for other boilers. For mobile home
furnaces, EPCA set the minimum AFUE at 75 percent. These standards
became effective on January 1, 1992, with the exception of the standard
for mobile home furnaces, for which the effective date was September 1,
1990. (42 U.S.C. 6295(f)(1)-(2))
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\1\ EPCA states that a ``furnace'' includes forced-air and
gravity central furnaces and low-pressure steam and hot water
boilers, and that it must have a heat input rate of less than
225,000 Btu/h for forced-air and gravity central furnaces, and less
than 300,000 Btu/h for boilers. (42 U.S.C. 6291(23)) However, in
this notice, DOE has adopted the terminology used in the heating,
ventilating, and air conditioning industry, which considers furnaces
and boilers as separate categories.
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2. History of Standards Rulemaking for Residential Furnaces and Boilers
For ``small'' gas furnaces (those having an input rate of less than
45,000 Btu per hour), the Department published a final rule on November
17, 1989, in which it set the minimum AFUE for these products at 78
percent, effective January 1, 1992. 54 FR 47916.
For mobile home furnaces, the Department issued an advance notice
of proposed rulemaking (ANOPR) on September 28, 1990 (55 FR 39624),
followed by a proposed rule on March 4, 1994. 59 FR 10464. The Interior
and Related Agencies Appropriations for Fiscal Year 1996 (Pub. L. 104-
34) included a moratorium on appliance standards rulemakings,
preventing DOE from finalizing the standards on mobile home furnaces.
The Department responded to the moratorium by developing an improved
process, known as the Process Rule, for its energy conservation
standards rulemakings (Procedures for Consideration of New or Revised
Energy Conservation Standards for Consumer Products, Title 10 CFR part
430, Subpart C, Appendix A). 61 FR 36974. The Process Rule provided
guidance on how DOE prioritizes its standards rulemakings. As a result,
the Department pursued standards rulemakings for other products rather
than finalizing the proposed standard for mobile home furnaces.
Therefore, the Department did not publish a final rule for amending
mobile home furnace standards and the minimum energy conservation
standard remained at 75 percent AFUE.
The Act also directed the Department to publish a final rule to
determine whether the standards should be amended for all furnaces and
boilers. (42 U.S.C. 6295(f)(3)(B)) On September 8, 1993, the Department
published an ANOPR (hereafter referred to as the September 1993 ANOPR)
in which it presented the product classes for furnaces that it planned
to analyze, and a detailed discussion of the analytical methodology
that it expected to use in this rulemaking. 58 FR 47326. The Department
invited stakeholders to submit comments and data on the planned
methodology. However, the 1996 moratorium on appliance standards
rulemakings prevented DOE from proceeding further with the rulemaking
process.\2\
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\2\ Pub. L. 104-34, the Department of the Interior and Related
Agencies Appropriations Act for Fiscal Year 1996 which included a
moratorium on proposing or issuing energy conservation appliance
standard for FY 1996.
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In the fiscal year 2001 Priority Setting for the Appliance
Rulemaking Process, DOE assigned a high level of priority to a
rulemaking to consider amendments to the energy conservation standards
for residential furnaces and boilers, including mobile home furnaces.
On June 13, 2001, DOE published a Framework Document for Residential
Furnaces and Boilers Standards Rulemaking (Framework Document). The
Department held a public meeting on July 17, 2001, to discuss the
procedural and analytical approaches in this rulemaking, and to seek
stakeholder comments on the Framework Document.
The Department held another public meeting on May 8, 2002, to
receive and discuss comments on issues related to venting
installations. In June 2002, the Gas Appliance Manufacturers
Association (GAMA) commented on DOE's analysis of manufacturing costs.
In August 2002, GAMA convened a meeting with DOE and the American
Council for an Energy-Efficient Economy (ACEEE) to discuss approaches
for analyzing electricity use in furnaces. In September 2002, the
Department posted its engineering analysis and received stakeholder
comments. The Department published an ANOPR on July 29, 2004 (hereafter
referred to as the 2004 ANOPR), and held a public meeting on September
29, 2004, to present the methodology and results of the ANOPR analyses.
69 FR 45419.
As set forth in the updated rulemaking timeline published in the
Department's Semi-annual Regulatory Agenda on December 13, 2004, DOE
expects to issue a final rule in 2007. 69 FR 72713. The effective date
for any new standards for furnaces and boilers published in 2007 would
be 2015, or eight years after publication as a final rule in the
Federal Register. (42 U.S.C. 6295 (f)(3)(B))
3. Process Improvement
The Process Rule applies to the development of energy conservation
standards for all consumer products, including those for residential
furnaces and boilers. 61 FR 36974. In this notice, the Department
describes the framework and methodologies by which it is developing the
standard. The framework and methodologies reflect improvements made and
steps taken in accordance with the Process Rule, including the use of
improved economic models and analytical tools. The rulemaking process
is dynamic, and as timely new data, models, or tools that enhance the
development of standards become available, the Department will
incorporate them into the rulemaking.
In response to the DOE's 2004 ANOPR, the American Gas Association
(AGA) asserted that the spreadsheets used by the Department do not meet
the requirements of the Process Rule, which specifies the use of
transparent and robust analytical methods ``that are fully documented
for the public and that produce results that can be explained and
reproduced * * *.'' AGA suggested that DOE (1) explore simpler
analytical methods for its analyses, or (2) provide stakeholders with
more direct means of testing alternate assumptions and sensitivities.
(AGA, No. 78 at p. 2) \3\ Southern Company (Southern) commented that it
would be helpful if DOE provided tools for the review of its analysis
results that could be used more easily. (Southern, No. 71 at p. 3)
After the 2004 ANOPR, DOE improved the design and user-friendliness of
the analytical spreadsheets by creating process diagrams and by adding
additional summary worksheets, help screens to assist the user, and
input screens to allow the testing of alternate assumptions. The
Department also expanded its documentation by adding
[[Page 59208]]
appendices that explain in detail the design and use of the
spreadsheets.
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\3\ A notation in the form ``AGA, No. 78 at p. 2'' identifies a
written comment the Department has received and has included in the
docket of this rulemaking. This particular notation refers to a
comment (1) By the American Gas Association (AGA), (2) in the
document number 78 in the docket of this rulemaking (maintained in
the Resource Room of the Building Technologies Program), and (3)
appear on page 2 of document number 78.
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GAMA commented that there should be more informal communication
between DOE and the furnace industry during the course of the
rulemaking. (GAMA, No. 67 at p. 8) In accordance with the Process Rule,
DOE sought stakeholder review at several points in the rulemaking and
organized public meetings, webcasts, and conference calls to discuss
important issues. The Department recognizes the value of having
informal, open communication with stakeholders, as stakeholder input
can contribute significantly to the quality of the Department's
analyses and improve the Department's decision making. However, the
open nature of the process has introduced substantial delays in the
Department's rulemaking schedules. Such delays have been an unintended
consequence of the Process Rule. The Department therefore, recognizes
the need for a balance in the allowance of stakeholder input and
maintaining rulemaking schedules, and will better integrate stakeholder
input and expert review within the scope of the structured notice-and-
comment rulemaking process.
D. Negotiated Boiler Standards Agreement
On July 14, 2006, GAMA and ACEEE, on behalf of 28 residential
boiler manufacturers and four energy efficiency organizations,
submitted a negotiated agreement recommending new national standards
for residential boilers that would consist of a performance requirement
(minimum AFUE levels) and design requirements. The recommended
performance levels are the maximum that the industry feels would
safeguard against corrosion and ensure safe venting. Both GAMA and
ACEEE believe that the design requirements would bring about
additional, non-trivial energy savings.
For gas-fired boilers, both water and steam types, the agreement
calls for a ban on standing pilots. For gas-fired water boilers only,
there are two design requirements. In addition to the ban on standing
pilots, the agreement also requires a ``temperature reset'' feature
that automatically adjusts the boiler output according to the outdoor
ambient air temperature. For oil-fired water boilers, the agreement
contains the design requirement for the same ``temperature reset''
feature.
The Department sincerely appreciates the effort stakeholders have
made to propose an agreement for the boiler portion of this rulemaking.
However, the Department has determined that the recommended standards
in the negotiated agreement are beyond the scope of its legal
authority. The Energy Policy and Conservation Act (EPCA) authorizes the
Secretary to amend energy conservation standards for specified
products. (42 U.S.C. 6295) Section 321(6) of the EPCA defines the term
``energy conservation standard'' as
(A) A performance standard which prescribes a minimum level of
energy efficiency or a maximum quantity of energy use, * * * or
(B) A design requirement for the products specified in paragraphs
(6), (7), (8), (10), (15), (16), (17), and (19) of section 322(a) * * *
[of this title.]
(42 U.S.C. 6291(6))
The language of EPCA authorizes the Department to establish a
performance standard or a single design standard. EPCA's list of
specified products for which a design standard can be established does
not include residential furnaces and boilers. As such, a standard that
establishes both a performance standard and a design requirement is
beyond the scope of the Department's legal authority. In the case of
gas-fired water boilers, the agreement recommends two design
requirements which is contrary to EPCA's limit of one design
requirement for the specified covered products.
The Department's staff met with representatives from GAMA and ACEEE
on August 1, 2006, and August 7, 2006, respectively, to discuss the
Department's legal position on the negotiated agreement. The Department
regrets that this negotiated agreement does not meet the statutory
criteria in EPCA and therefore cannot be accepted. The Department
strongly encourages stakeholders to continue to work together to
propose agreements to the Department in the future, understanding that
the Department must comply with EPCA's statutory requirements.
III. General Discussion
A. General Issues
The Department received comments on several general issues related
to the furnace and boiler rulemaking. Those issues are related to the
impact of the standards on future natural gas prices, furnace
electricity consumption, separate standards for equipment in new homes
and replacements, and separate standards for different regions.
1. Impact of Furnace and Boiler Standards on Future Natural Gas Prices
The Natural Resources Defense Council (NRDC), American Chemistry
Council (ACC), ACEEE, and Dow Chemical Company commented that more
stringent furnace and boiler standards may result in lower natural gas
prices in the future, and that DOE should account for the associated
benefit for all gas consumers. (NRDC, No. 52 at p. 2; ACC, No. 62 at p.
3; ACEEE, No. 84 at p. 9; and Joint Comment by NRDC and Dow, No. 64 at
p. 3) The impact of appliance standards on energy prices has not
historically been a part of DOE's analysis. Estimating such impacts
would require new analytical methods. The Department evaluated a recent
study that includes consideration of the impacts of furnace and boiler
standards on natural gas prices.\4\ While this study finds that
standards could result in a small decrease in natural gas prices, the
Department's review of the study reveals that there is no conclusive
evidence that furnace and boiler standards will affect overall natural
gas prices. If the stakeholders' assertion is correct, then consumer
gas prices will decrease, in turn decreasing the income of gas
utilities--resulting in a transfer of benefits from the natural gas
producers to the consumers. However, on a societal level, there is no
clear evidence that there will be any impact on natural gas prices
resulting from the furnace and boiler standards. Furthermore, DOE
believes it is currently impossible, within the framework of a
standards rulemaking, to estimate the possible impact of energy
conservation standards on utility prices. Therefore, the Department did
not consider these impacts in the current rulemaking.
---------------------------------------------------------------------------
\4\ Wiser, R., M. Bolinger, M. St. Clair. Easing the Natural Gas
Crisis: Reducing Natural Gas Prices through Increased Deployment of
Renewable Energy and Energy Efficiency. LBNL. January 2005. (http://eetd.lbl.gov/EA/EMP/reports/56756.pdf
).
---------------------------------------------------------------------------
2. Inclusion of Electricity Consumption in Furnace and Boiler Standards
The Department received a number of comments regarding the
inclusion of furnace and boiler electricity consumption in amended
standards for furnaces and boilers. The Department was recently given
authority to regulate the electricity consumed by furnaces for the
purposes of circulating air by the Energy Policy Act of 2005, Pub. L.
104-58 (EPACT 2005). EPACT 2005, section 135(c), amended section 325 of
EPCA (42 U.S.C. 6295(f)(3)) to include the following: ``[T]he Secretary
may consider and prescribe energy conservation standards or energy use
standards for electricity used for purposes of circulating air through
duct work.'' However, at the November 15, 2005, public meeting to
discuss DOE's appliance-standards-program schedule-setting, the
Department received comments from GAMA and the
[[Page 59209]]
Appliance Standards Awareness Project (ASAP) urging the Department to
complete the AFUE standard rulemaking as soon as possible. Furthermore,
GAMA and ASAP expressed their preference that DOE address furnace
blower electricity consumption separately from the AFUE standard
rulemaking. Since adding electricity consumption standards to this
rulemaking would likely cause further substantial delay in the
rulemaking process, the Department accepts the recommendations from
GAMA and ASAP and has decided not to address furnace electricity
consumption in this rulemaking. It will consider furnace electricity
consumption separately to enable it complete the furnace and boiler
AFUE rulemaking as expeditiously as possible.
3. Separate Standards for Equipment Installed in New Homes and as
Replacements
ACEEE suggested that DOE consider separate standards for new
construction and retrofits. (ACEEE, No. 53 at p. 5) EPCA directs the
Department to establish performance standards that prescribe minimum
levels of energy efficiency or maximum levels of energy use for covered
products. The Act does not authorize DOE to set multiple levels of
efficiency for a given covered product, depending on where the product
is installed--either in terms of a given region of the country or in
terms of home type, i.e., new or existing. (42 U.S.C. 6291(6)(A)) The
Department believes it does not have the authority to set separate
standards for furnaces and boilers for new homes and for existing homes
and, therefore, rejects the suggestion that it consider separate
standards for new construction and retrofits.
4. Separate Standards for Different Regions
The Department received numerous comments regarding the setting of
separate furnace and boiler standards for different regions of the
country. Some of the commentators expressed reasons why separate
standards would be beneficial or asked if DOE had the authority to set
regional standards. (Ohio Consumers' Counsel (OCC), No. 70 at p. 5;
Individuals, No. 73 at p. 1; Baltimore Gas and Electricity (BGE), No.
75 at p. 1; National Association of Regulatory Utility Commissioners
(NARUC), No. 77 at p. 5; ACEEE, No. 59.8 at pp. 36 \5\ and 165;
Individual, No. 87 at p. 1; Northeast Energy Efficiency Partnerships
(NEEP), No. 55 at pp. 2 and 3; NRDC, No. 59.8 at pp. 29 and 33, and No.
63 at p. 9; Oregon Department of Energy (ODOE), No. 61 at p. 2;
National Consumer Law Center (NCLC), No. 66 at pp. 7 and 8; New Jersey
Board of Public Utilities (NJBPU), No. 83 at p. 1; Izaak Walton League
of America (IWL), No. 88 at p. 1; Southern, No. 71 at p. 21 and No.
59.8 at p. 219; Trane, No. 59.8 at p. 207; GAMA, No. 59.8 at pp. 206
and 217; York, No. 65 at p. 2; Edison Electric Institute (EEI), No. 69
at p. 2; Manufactured Housing Institute (MHI), No. 89 at p. 2; National
Propane Gas Association (NPGA), No. 72 at p. 2; AGA, No. 59.8 at p. 40;
Alliance to Save Energy (ASE), No. 80 at p. 2; North American
Insulation Manufacturers Association (NAIMA), No. 60 at p. 1; and
Lennox, No. 79 at p. 3)
---------------------------------------------------------------------------
\5\ A notation in the form ``ACEEE, No. 59.8 at p. 36,''
identifies a comment in the transcript of the Public Meeting on
Standards for Furnaces and Boilers held in Washington, DC, 9/29/
2004, which is document number 59.8 in the docket of this
rulemaking. This particular notation refers to a comment (1) by the
American Council for an Energy-Efficient Economy (ACEEE), (2) in the
document number 59.8 in the docket of this rulemaking (maintained in
the Resource Room of the Building Technologies Program), and (3)
appearing on page 36 of document number 59.8.
---------------------------------------------------------------------------
As discussed in the 2004 ANOPR, the Department has determined that
EPCA does not authorize DOE to set regional energy conservation
standards; instead, the Department can only establish national
standards. 69 FR 45419. None of the comments received in response to
the 2004 ANOPR provided a basis for changing that determination.
However, the Department notes that EPCA allows states to seek from
the Department a waiver of Federal preemption of state or local energy
conservation standards. Section 327(d) of EPCA, ``Waiver of Federal
Preemption,'' states that, ``Any State * * * with a State regulation
which provides for any energy conservation standard * * * for any type
* * * of covered product for which there is a Federal energy
conservation standard * * * may file a petition with the Secretary
requesting a rule that such State regulation become effective with
respect to such covered product.'' (42 U.S.C. 6297(d)(1)(A)) Within a
maximum of one year, DOE must act on any such petition. (42 U.S.C.
6297(d)(2))
The Department must prescribe a rule granting a waiver from Federal
preemption if, subject to the condition specified in section 327(d),
the State establishes by a preponderance of the evidence that its
regulation is needed to meet ``unusual and compelling State or local
energy * * * interests.'' (42 U.S.C. 6297(d)(1)(B)) The statute states
that the phrase ``unusual and compelling State or local energy * * *
interests'' means interests which:
(i) Are substantially different in nature or magnitude than
those prevailing in the United States generally; and (ii) are such
that the costs, benefits, burdens, and reliability of energy * * *
savings resulting from the State regulation make such regulation
preferable or necessary when measured against the costs, benefits,
burdens, and reliability of alternative approaches to energy * * *
savings or production, including reliance on reasonably predictable
market-induced improvements in efficiency of all products subject to
the State regulation.
The factors described in clause (ii) shall be evaluated within
the context of the State's energy plan and forecast, and, with
respect to a State regulation for which a petition has been
submitted to the Secretary * * * [42 U.S.C. 6297(d)(1)(c)]
In evaluating the evidence that a State regulation is needed to
meet unusual and compelling State energy interests, the Department will
consider the factors described in 42 U.S.C. 6297(d)(1)(C)(i) and (ii).
It appears to the Department that in the context of residential
furnaces and boilers, where regional climatic effects can have
significant impact on whether a specified energy conservation standard
would be technologically feasible and economically justified in that
region, such regional climatic effects will be important in DOE's
assessment of whether there are ``unusual and compelling State or local
energy interests'' for State energy conservation standards. States
having higher-than-average, population-weighted heating degree days
(HDDs) based on long-term National Oceanic and Atmospheric
Administration data \6\ would seem to have the best prospects for
demonstrating ``unusual and compelling'' interests to support a waiver
of preemption in the particular circumstances presented here.\7\ (In
conducting its analysis, the Department used average heating degree
days within a State to divide States into groups for purposes of
assessing standards.) States with significantly higher heating
requirements have significantly higher furnace use. This may indicate
that, for
[[Page 59210]]
those States, a State energy conservation standard which is higher than
the Federal standard would be cost-effective and would provide
significantly more energy savings than the Federal standard. If those
States, particularly the ones most severely affected, adopted standards
higher than DOE's proposed standards, and sought waivers, it could
result in certain contiguous States with higher requirements, which
would lessen the impact on manufacturers.
---------------------------------------------------------------------------
\6\ State, Regional, And National Monthly Heating Degree Days
Weighted By Population (2000 Census), 1971--2000 (and previous
normal periods). Historical Climatography Series No. 5-1. National
Environmental Satellite, Data, and Information Service, National
Oceanic and Atmospheric Administration. Available at: http://www5.ncdc.noaa.gov/climatenormals/hcs/HCS_51.pdf
.
\7\ Nationwide, the U.S. averages 5528 HDDs. The following
States average 6000 or more HDDs: Alaska, Colorado, Connecticut,
Idaho, Illinois, Iowa, Maine, Massachusetts, Michigan, Minnesota,
Montana, Nebraska, New Hampshire, New York, North Dakota, South
Dakota, Utah, Vermont, Wisconsin, and Wyoming.
---------------------------------------------------------------------------
Another way to address the benefits and costs of proposed State
regulations with higher energy conservation standards would be for a
State in its application for a waiver of preemption to identify the
saturation of homes with products that already meet those higher
standards. For example, a State could provide evidence that a
significant percentage of gas furnaces sold today in that State already
meets, for example, a 90-percent-AFUE condensing standard.
A State applying to DOE for a preemption waiver also could identify
any subsidies and/or incentives, such as tax rebates or purchase price
rebates, that the State or other entities are offering. To the extent
States demonstrate that these programs have not worked, they may be
able to show that ``the costs, benefits, burdens, and reliability'' of
energy savings from mandatory State energy conservation regulations
make such regulations preferable to their voluntary programs.
EPCA section 327(d)(3) further provides that DOE may not grant a
waiver if interested persons establish by a preponderance of the
evidence that the State regulation would significantly burden
manufacturing, marketing, distribution, sale, or servicing of the
covered product on a national basis. (42 U.S.C. 6297(d)(3)) In
determining whether the State regulation meets this criterion, the
Department must consider the extent to which the State regulation
addresses several factors.
The first factor is ``the extent to which the State regulation will
increase manufacturing or distribution costs of manufacturers,
distributors, and others * * *.'' (42 U.S.C. 6297(d)(3)(A)) In
addressing this factor, a State seeking a waiver of federal preemption
likely would want to address the extent to which manufacturers already
produce and sell products that would meet the State's proposed
standard. This description also could include information describing
how efficiencies of shipments to that State already vary from current
DOE efficiency levels.
The second factor is ``the extent to which the State regulation
will disadvantage smaller manufacturers, distributors, or dealers or
lessen competition in the sale of the covered product in the State * *
*.'' (42 U.S.C. 6297(d)(3)(B)) Similar to the prior factor, in
addressing this factor, a State seeking a waiver of federal preemption
might wish to provide evidence with its petition that demonstrates that
there are no, or just insignificant, differences between small and
large manufacturers with respect to producing and selling furnaces in
that State. A State also could offer other evidence as to why its
regulation would not disadvantage these entities or lessen competition,
based on the particular circumstances in that State. For example, a
State could seek to demonstrate that the differences (or lack of
differences) between small and large manufacturers, with respect to
producing and selling furnaces in that State, indicate that the
regulation would not disadvantage the smaller manufacturers.
The third factor is ``the extent to which the State regulation
would cause a burden to manufacturers to redesign and produce the
covered product type * * *, taking into consideration the extent to
which the regulation would result in a reduction (i) in the current
models, or in the projected availability of models, that could be
shipped on the effective date of the regulation to the State and within
the United States; or (ii) in the current or projected sales volume of
the covered product type * * * in the State and the United States * *
*.'' (42 U.S.C. 6297(d)(3)(c)) In addressing this factor, a State
seeking a waiver of federal preemption might seek to demonstrate that
high-efficiency heating equipment, such as condensing furnaces, already
have achieved significant market shares in that State. In some
relatively cold States with significant heating requirements, sales of
condensing furnaces are reported to be on the order of 50 percent. A
State also might wish to submit other information that addresses why it
believes its regulation would not affect sales volumes or the number of
models available (except for elimination of lower efficiency models).
The fourth factor is ``the extent to which the State regulation is
likely to contribute significantly to a proliferation of State
appliance efficiency requirements and the cumulative impact such
requirements would have.'' (42 U.S.C. 6297(d)(3)(D)) In addressing this
factor, a State seeking a waiver from DOE may wish to seek to
demonstrate, for example, the extent to which it has chosen identical
standard levels as other States that have developed proposed
regulations or States that have regulations already in place.
An additional factor DOE must consider is the extent to which ``the
State regulation is likely to result in the unavailability in the State
of any covered product type * * * of performance characteristics
(including reliability), features, sizes, capacities, and volumes that
are substantially the same as those generally available in the State *
* *.'' (42 U.S.C. 6297(d)(4)) A State seeking preemption waiver may
wish to explain in its petition or accompanying documents why it
believes its regulation would not affect the characteristics and
features (other than efficiency) of the furnaces that would be offered
for sale in that State. It might seek to demonstrate, for example, that
among products currently offered for sale in that or other States, high
efficiency furnaces already have all of the characteristics and
features available in less efficient furnaces sold in that State.
The Department recognizes that States have set, or are considering,
standards for furnaces and that some may wish to seek a determination
from DOE that their standards are needed to meet ``unusual and
compelling State or local energy interests.'' The Department encourages
States to coordinate among themselves the submission of any waiver
petitions they may wish to file. The Department will consider an
aggregate petition from multiple States as long as the petition
individually addresses the statutory criteria for each of the States.
The Department believes the approach taken in evaluating the regional
impacts of standards in its analysis represents a reasonable approach
for estimating the national impacts of having a Federal standard and
one or more higher State energy conservation standards for furnaces and
boilers. All petitions for waivers also must comply with requirements
as described in 10 CFR Part 430.41(a)(1).
B. Test Procedures
Section 7(b) of the Process Rule provides that the Department will
propose necessary modifications to the test procedures for a product
before issuing the proposed rule concerning energy conservation
standards for that product. For furnaces and boilers, the Department
believes modifications are not currently necessary, so it has not
proposed to modify the existing test procedure.
C. Technological Feasibility
1. General
The Department considers a design option to be technologically
feasible if it is in use by the respective industry or
[[Page 59211]]
if research has progressed to the development of a working prototype.
The Process Rule sets forth a definition of technological feasibility
as follows: ``Technologies incorporated in commercial products or in
working prototypes will be considered technologically feasible.'' 10
CFR part 430, Subpart C, Appendix A, section 4(a)(4)(i).
In each standards rulemaking, the Department conducts a screening
analysis, which it bases on information gathered regarding existing
technology options and prototype designs. In consultation with
manufacturers, design engineers, and other stakeholders, the Department
develops a list of design options for consideration in the rulemaking.
Once the Department has determined that a particular design option is
technologically feasible, it further evaluates each design option in
light of the other three criteria in the Process Rule. 10 CFR part 430,
Subpart C, Appendix A, section 4(a)(3) and (4). The three additional
criteria are: (a) Practicability to manufacture, install, and service,
(b) adverse impacts on product utility or availability, or (c) health
or safety concerns that cannot be resolved. All design options that
pass these screening criteria are candidates for further assessment.
As discussed in the 2004 ANOPR, the Department is not considering
the following design options because they do not meet one or more of
the screening criteria: self-generation of electric power, fuel-driven
heat pumps, flue-gas recirculation, and smart valves. 69 FR 45387. In
this notice, DOE has not changed the list of technology options that it
screened out of the analysis. (See the Technical Support Document (TSD)
accompanying this notice, Chapter 4.)
Lennox, Carrier, Trane, York, NPGA, Alagasco, and MHI commented
that the maximum efficiency level considered for non-condensing, non-
weatherized gas furnaces should be 80-percent AFUE. They contended
that, at 81-percent AFUE, there would be a significant increase of risk
to the consumer because of an increased potential for vent-system
failure. These comments cited concerns regarding corrosion in vents
from condensation, and noted that conditions under which consumers use
the product are much more severe than lab conditions. (Lennox, Public
Meeting Transcript, No. 59.8 at p. 27 and No. 79 at p. 1; Carrier,
Public Meeting Transcript, No. 59.8 at p. 188 and No. 68 at p. 1;
Trane, Public Meeting Transcript, No. 59.8 at p. 227; York, No. 65 at
p. 7; NPGA, No. 72 at p. 3; Alagasco, No. 82 at p. 2; and MHI, No. 89
at p. 4) NAIMA, OCC, and NJBPU disagreed with limiting consideration to
an 80-percent-AFUE level. (NAIMA, No. 60 at p. 1; OCC, No. 70 at p. 5;
and NJBPU, No. 83 at p. 2) The Department has reviewed the manufacturer
literature and found that products at 81-percent AFUE are available for
sale. It believes the fact that such products are being offered for
sale demonstrates that they are practicable to manufacture, install,
and service and cannot be excluded from consideration in this
rulemaking.
The Department recognizes that this AFUE level of 81 percent may
pose health or safety concerns in certain conditions, but it believes
that the concerns can likely be resolved with proper equipment and
venting system design, as discussed in section IV.B.3. Therefore, DOE
considered 81-percent AFUE in its analysis for non-weatherized gas
furnaces, and took into account the stakeholders' concerns.
The 2004 ANOPR analysis included non-weatherized gas furnaces at 82
and 83-percent AFUE. However, because it is well understood that
significant vent system corrosion problems, which can lead to potential
safety issues, may exist at these efficiency levels for non-weatherized
gas furnaces, the Department does not believe these products can be
mass-produced and be reliable to install and service on the scale
necessary to serve the relevant market by the effective date of the
proposed standard. Therefore, DOE did not consider non-weatherized gas
furnaces at 82 and 83-percent AFUE in the analysis for today's proposed
rule.
The evaluated technologies all have been used (or are being used)
in commercially available products or working prototypes. The designs
all incorporate materials and components that are commercially
available in today's furnace and boiler supply market. The Department
believes all of the efficiency levels evaluated in this notice are
technologically feasible.
2. Maximum Technologically Feasible Levels
In developing today's proposed rule, the Department followed the
provisions of section 325(p)(2) of the Act, which states that, when the
Department proposes to adopt, or to decline to adopt, an amended or new
standard for each type (or class) of covered product, ``the Secretary
shall determine the maximum improvement in energy efficiency or maximum
reduction in energy use that is technologically feasible * * * .'' The
Department determined the maximum technologically feasible (``max
tech'') efficiency level in the engineering analysis using the most
efficient design parameters that lead to the creation of the highest
equipment efficiencies achievable. (See TSD Chapter 6.) Table III.1
lists the max tech levels that the Department determined for this
rulemaking.
Table III.1.--Max Tech Levels Considered in Furnace and Boiler
Rulemaking
------------------------------------------------------------------------
Product class AFUE (%)
------------------------------------------------------------------------
Non-weatherized gas furnaces................................. 96
Weatherized gas furnaces..................................... 83
Mobile home gas furnaces..................................... 90
Oil-fired furnaces........................................... 85
Gas boilers.................................................. 99
Oil-fired boilers............................................ 95
------------------------------------------------------------------------
For all product classes, products with these efficiency levels
already are being sold in small quantities. (There is one weatherized
gas furnace listed in the GAMA directory at 82.8-percent AFUE.) No
production models or prototypes of equipment at higher efficiency
levels are currently available. For weatherized gas furnaces, the
Department recognizes that the 83-percent-AFUE level may pose health or
safety concerns in certain installations. DOE believes these concerns
can be resolved with proper equipment and system design and proper
installation.
D. Energy Savings
1. Determination of Savings
The Department used its national energy savings (NES) spreadsheet
to estimate energy savings from amended standards for furnaces and
boilers. (The NES Spreadsheet Model is described in section IV.D of
this notice.) The Department forecasted energy savings over the period
of analysis (beginning with 2015, the year that amended standards would
go into effect, and ending in 2038) for each trial standard level,
relative to the base case. It quantified the energy savings
attributable to amended energy conservation standards as the difference
in energy consumption between the standards case and the base case. The
base case represents the forecast of energy consumption in the absence
of amended energy conservation standards. The base case considers
market demand for more-efficient products; for example, in the case of
non-weatherized gas furnaces, the base case forecasts an increase in
the market share of condensing furnaces by 2015.
The NES Spreadsheet Model calculates the electricity savings in
``site energy'' expressed in kilowatt-hours
[[Page 59212]]
(kWh). Site energy is the energy directly consumed on location by the
furnace or boiler. The Department reports national energy savings in
terms of the source energy savings, which is the savings of the energy
that is used to generate and transmit the energy consumed at the site.
(See TSD, Chapter 10.) The Department derived these conversion factors,
which change with time, from the EIA's AEO2005.\8\
---------------------------------------------------------------------------
\8\ The Department conducted an energy price sensitivity
analysis using EIA's AEO2006. Section IV.C.4 provides further
explanation and details of the energy price sensitivity analysis.
---------------------------------------------------------------------------
AGA commented that DOE should consider the ``rebound effect'' that
may occur as a result of more intensive use of a more energy-efficient
appliance, leading to higher energy consumption. (AGA, No. 54 at p. 3)
ACEEE stated that the rebound effect has often been hypothesized, but
actual field experience indicates that there is rarely a rebound effect
resulting from use of more-efficient appliances. (ACEEE, No. 84 at p.
13)
The Department examined a summary of the literature regarding the
rebound effect in relation to space heating equipment.\9\ Based on five
studies chosen for their robust methodology, the summary concluded
that, for a 100 percent increase in fuel efficiency, values of ``take-
back'' or rebound for space heating are between 10 and 30 percent of
the energy consumption savings. The National Energy Modeling System
(NEMS), which is used for developing EIA's AEO, incorporates a rebound
effect for space heating. According to an EIA report,\10\ the rebound
effect for the residential module in NEMS results in a 0.15 percent
increase in energy consumption for a 1 percent increase in efficiency.
In keeping with EIA's approach, the Department chose to apply a rebound
effect of 15 percent (for a 100 percent increase in efficiency) in its
analysis of furnace and boiler standards. That is, DOE reduced the
calculated energy savings and associated emissions reductions by 15
percent.
---------------------------------------------------------------------------
\9\ Greening, L.A., D.L. Greene, and C. Difiglio. Energy
efficiency and consumption--the rebound effect--a survey. Energy
Policy. 2000. 28: pp. 389-401.
\10\ EIA, Price Responsiveness in the AEO2003 NEMS Residential
and Commercial Buildings Sector Models (p. 3).
---------------------------------------------------------------------------
The take-back in energy consumption associated with the rebound
effect provides consumers with increased value (e.g., a warmer indoor
environment, since the increased efficiency enables consumers to use
their heating equipment more intensively). The impact on consumers is
thus the sum of the change in the cost of owning the heating equipment
(i.e., life-cycle cost) and the increased value for the warmer indoor
environment. However, the Department is unable to monetize this
increase in consumer value in the LCC analysis. The Department believes
that, if it were able to monetize the increased value to consumers
added by the rebound effect, this value would be at least as great as
the value of the foregone energy savings. For this analysis, the
Department estimates that this value is equivalent to the monetary
value of the energy savings that would have occurred without the
rebound effect. Therefore, the economic impacts on consumers with or
without the rebound effect, as measured in the LCC and NPV analyses,
are the same.
2. Significance of Savings
Section 325 of the Act prohibits the Department from adopting a
standard for a product if that standard would not result in
``significant'' energy savings. (42 U.S.C. 6295(o)(3)(B)) While the Act
does not define the term ``significant,'' the U.S. Court of Appeals, 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 energy conservation standards at each
of the trial standard levels considered in this rulemaking are
nontrivial, and therefore the Department considers them ``significant''
within the meaning of section 325 of the Act.
E. Economic Justification
1. Specific Criteria
As noted earlier, EPCA provides seven factors to be evaluated in
determining whether an energy conservation standard is economically
justified. (42 U.S.C. 6295(o)(2)(B)) The following sections discuss how
the Department has addressed each of those seven factors in this
rulemaking.
a. Economic Impact on Manufacturers and Consumers. The Process Rule
established procedures, interpretations, and policies to guide the
Department in the consideration of new or revised appliance energy
conservation standards. The provisions of the rule have direct bearing
on the implementation of the manufacturer impact analysis (MIA). First,
as provided in Section 10 of the Process Rule (Principles for the
Analysis of Impacts on Manufacturers), the Department uses an annual-
cash-flow approach in determining the quantitative impacts of a new or
amended standard on manufacturers. This includes both a short-term
assessment, based on the cost and capital requirements during the
period between the announcement of a regulation and the time when the
regulation becomes effective, and a long-term assessment. The impacts
analyzed include INPV, cash flows by year, changes in revenue and
income, and other measures of impact, as appropriate. Second, the
Department analyzes and reports the impacts on different types of
manufacturers, with particular attention to impacts on small
manufacturers. Third, the Department considers the impact of standards
on domestic manufacturer employment, manufacturing capacity, plant
closures, and loss of capital investment. Finally, the Department takes
into account cumulative impacts of different DOE regulations on
manufacturers.
For consumers, measures of economic impact include the changes in
LCC and payback period for each trial standard level. As the Act sets
forth, the LCC is one of the seven factors to be considered in
determining economic justification. (42 U.S.C. 6295(o)(2)(B)(i)(II)) It
is discussed in detail in the section below.
ODOE commented that the simple payback period is not a useful
metric, since it fails to take into account the rising costs of fuel.
(ODOE, No. 61 at p. 10) The Department uses simple-payback-period
results as one of the factors in evaluating the economic impacts of
standards on consumers, but it relies more heavily on the impacts on
LCC to take into account the changing cost of fuel.
b. Life-Cycle Costs. The LCC is the sum of the purchase price of
equipment, including the installation, and the operating expense,
including energy and maintenance expenditures, discounted over the
lifetime of the equipment. Where possible in estimating the energy
costs in the LCC calculation, DOE uses consumer marginal energy rates,
which are the energy rates that correspond to incremental changes in
energy use.
For each furnace and boiler product class, the Department
calculated both LCC and LCC savings for various efficiency levels. The
LCC analysis estimated the LCC for representative equipment in housing
units that are representative of the segment of the U.S. housing stock
that uses furnaces and boilers. To account for uncertainty and
variability in specific inputs, such as equipment lifetime and discount
rate, it used a distribution of values with probabilities attached to
each value. For each housing unit, DOE sampled the values of these
inputs from the probability distributions. As a result, the
[[Page 59213]]
analysis produced a range of LCCs. A distinct advantage of this
approach is that DOE can identify the percentage of consumers achieving
LCC savings or attaining certain payback values due to an increased
energy conservation standard, in addition to the average LCC savings or
average payback for that standard. The Department gives the LCC savings
as a distribution, with a mean value and a range. The Department
assumed in its analysis that the consumer purchases the furnace or
boiler in 2015.
c. Energy Savings. While significant conservation of energy is a
separate statutory requirement for imposing an energy conservation
standard, the Act requires DOE, in determining the economic
justification of a standard, to consider the total projected energy
savings that are expected to result directly from the standard. (42
U.S.C. 6295(o)(2)(B)(i)(III)) The Department used the NES Spreadsheet
results in its consideration of total projected savings.
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, the Department aimed to develop standards
for residential furnaces and boilers which would not lessen the utility
or performance of the products under consideration in this rulemaking.
(42 U.S.C. 6295(o)(2)(B)(i)(IV)) None of the considered trial standard
levels would reduce the utility or performance of furnaces and boilers.
The efficiency levels considered in this rulemaking do not involve
changes in equipment design or unusual installation requirements that
could reduce the utility or performance of furnaces and boilers.
e. Impact of Any Lessening of Competition. The Act directs the
Department to consider any lessening of competition that is likely to
result from standards. It directs the Attorney General to determine the
impact, if any, of any lessening of competition likely to result from a
proposed standard and to transmit such determination to the Secretary,
not later than 60 days after the publication of a proposed rule,
together with an analysis of the nature and extent of such impact. (42
U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii)) The Department has transmitted
a copy of today's proposed rule to the Attorney General and has
requested that the Department of Justice (DOJ) provide its
determination on this issue.
f. Need of the Nation To Conserve Energy. The non-monetary benefits
of the proposed standard are likely to be reflected in improvements to
the security and reliability of the Nation's energy system--namely,
reductions in the overall demand for energy will result in reduced
costs for maintaining reliability of the Nation's electricity system.
The Department conducts a utility impact analysis to estimate how
standards may impact the Nation's needed power generation capacity.
This analysis captures the effects of efficiency improvements on
furnace electricity consumption, as well as impacts associated with the
market shift from natural gas heating to electric heating that DOE
estimates will occur at higher gas-furnace efficiency levels. This
market shift more than offsets the electricity savings from more
efficient furnace designs, resulting in an increase in projected
generating capacity for the higher trial standard levels.
The Department has determined that the energy conservation
standards proposed today would result in reductions in greenhouse gas
emissions. The Department quantified a range of primary energy
conversion factors and estimated the emissions reductions associated
with the generation displaced by the energy conservation standards. The
Department reports the environmental effects of amended energy
conservation standards at each trial standard level for this equipment
in the TSD environmental assessment.
g. Other Factors. The Act allows the Secretary of Energy, in
determining whether a standard is economically justified, to consider
any other factors the Secretary deems to be relevant. (42 U.S.C. 6295
(o)(2) (B)(i)(VII)) Under this provision, the Department considered the
potential for furnace and boiler standards to pose public health risks
due to carbon monoxide release into the home as a result of venting
system failure.
2. Rebuttable Presumption
As set forth in section 325(o)(2)(B)(iii) of EPCA, 42 U.S.C.
6295(o)(2)(B)(iii), there is a rebuttable presumption that an energy
conservation standard is economically justified if the increased
installed 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. However, although the Department examined the rebuttable-
presumption criteria, it determined economic justification for the
proposed standard levels through a more detailed analysis of the
economic impacts of increased efficiency as described above, pursuant
to section 325(o)(2)(B)(i) of EPCA. (42 U.S.C. 6295(o)(2)(B)(i)) The
rebuttable presumption payback calculation is discussed in section
IV.B.5 of this notice.
IV. Methodology and Discussion of Comments
The Department used spreadsheet models to meet certain objectives
of the Process Rule for this rulemaking. It used the Engineering
Spreadsheet to develop the relationship between cost and efficiency for
furnaces and boilers and to calculate the simple payback for the
purposes of satisfying the rebuttable payback requirements. The LCC
Spreadsheet calculates the consumer benefits and payback periods for
amended energy conservation standards. The National Impact Analysis
Spreadsheet provides shipments forecasts and then calculates NES and
NPV impacts of potential amended energy conservation standards. The
Department also assessed manufacturer impacts, largely through the use
of the Government Regulatory Impact Model (GRIM).
Additionally, DOE estimated the impacts of residential furnace and
boiler energy conservation standards on utilities and the environment.
The Department used a version of EIA's NEMS for the utility and
environmental analyses. The NEMS model simulates the energy economy of
the U.S. and has been developed over several years by the EIA primarily
for the purpose of preparing the AEO. The NEMS produces forecasts for
the U.S. that are available in the public domain. The version of NEMS
used for appliance standards analysis is called NEMS-BT, and is
primarily based on the AEO2005 version with minor modifications.\11\
The NEMS offers a sophisticated picture of the effect of standards,
since it accounts for the interactions between the various energy
supply and demand sectors and the economy as a whole.
---------------------------------------------------------------------------
\11\ The EIA approves the use of the name NEMS to describe only
an AEO version of the model without any modification to code or
data. 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. For more information on NEMS, refer to The National
Energy Modeling System: An Overview. DOE/EIA-0581 (98), February,
1998. BT is DOE's Building Technologies Program. NEMS-BT was
formerly called NEMS-BRS.
---------------------------------------------------------------------------
The Department invites comments on the validity of the analytical
methods used in this rulemaking and the appropriateness of the
interpretation and use of the results of the analysis.
A. Product Classes
For this rulemaking, the Department initially considered the
product classes
[[Page 59214]]
discussed in the 1993 ANOPR. In 1987, the Act set the initial Federal
energy conservation standard, which covered furnaces, boilers, mobile
home furnaces, and ``small'' furnaces. In the 1993 ANOPR, the
Department expanded the product classes to differentiate fuel type,
heat transfer medium (i.e., hot water or steam for boilers), and
outdoor and indoor installation suitability (i.e., weatherized or non-
weatherized). Table IV.1 lists the product classes DOE initially
considered in this rulemaking.
Table IV.1.--Product Classes Considered in Furnace and Boiler Rulemaking
------------------------------------------------------------------------
Product Characteristics
------------------------------------------------------------------------
Gas furnaces........................... Non-weatherized and
weatherized.
Oil-fired furnaces..................... Non-weatherized and
weatherized.
Mobile home furnaces................... Gas and oil-fired.
Electric resistance furnaces........... Electric.
Hot water boilers...................... Gas and oil-fired.
Steam boilers.......................... Gas and oil-fired.
------------------------------------------------------------------------
Based on the market assessment and stakeholder comments, the
Department grouped the product classes into three categories for the
analysis for today's proposed rule. The first category consists of the
most widely used product class, non-weatherized gas furnaces.
The second category consists of those classes that have fewer
shipments, but typically more than 100,000 per year: Weatherized gas
furnaces, mobile home gas furnaces, non-weatherized oil-fired furnaces,
hot-water gas boilers, and hot-water oil-fired boilers. The
Department's analysis of these product classes was similar to its
analysis of non-weatherized gas furnaces.
The third category includes product classes for which DOE did not
perform analyses and is not proposing an amendment to the current
standards for these products. This category includes steam gas boilers
and steam oil-fired boilers, which have annual shipments below 40,000
units and show a declining trend of shipments. This category also
includes weatherized oil-fired furnaces, mobile home oil-fired
furnaces, and electric furnaces. Weatherized oil-fired furnaces and
mobile home oil-fired furnaces have very low shipments and are
represented by only a few models in the GAMA directory; promulgating a
higher standard for these products would result in de minimis energy
savings. Additionally, all of the GAMA-listed models for weatherized
oil-fired furnaces and mobile home oil-fired furnaces exceed the
current 78-percent-AFUE standard. Therefore, for these classes, DOE is
not proposing an update of the existing standard. The Department did
not consider electric furnaces since their efficiency approaches 100-
percent AFUE and improvements to them would also have de minimis
energy-savings potential. Therefore, for electric furnaces, DOE is not
proposing a standard.
B. Engineering Analysis
The purpose of the engineering analysis is to characterize the
relationship between efficiency and cost of furnaces and boilers. The
Department used this efficiency/cost relationship as input to the
payback period, LCC, and NES analyses.
The engineering analysis develops data that can be used to
establish the consumer price of more-efficient equipment. These data
include manufacturing costs, markups, installation costs, and
maintenance costs.
To generate the manufacturing costs, the Department identified
three basic methodologies: (1) The design-option approach, which
provides the incremental costs of adding design options to a baseline
model that will improve efficiency; (2) the efficiency-level approach,
which provides the incremental costs of moving to higher energy-
efficiency levels, without regard to the particular design option(s)
used to achieve such increases; and (3) the cost-assessment (or
reverse-engineering) approach, which provides ``bottom-up''
manufacturing cost assessments for achieving various levels of
increased efficiency, based on detailed data on costs for parts and
material, labor, shipping/packaging, and investment for models that
operate at particular efficiency levels.
The Department began the manufacturing cost analysis by exploring
how manufacturers would likely design products to perform at the
various efficiency levels considered and to thoroughly understand the
relationships between different equipment configurations and
efficiency. The Department initially considered several design options
that could meet each considered efficiency level. It selected the
design option(s) it believed manufacturers would most likely implement
to achieve a given considered energy efficiency level. To estimate the
manufacturing costs of these design options, the Department relied
primarily on the cost-assessment (or reverse-engineering) approach, but
also used the design-option approach.
To compare the total additional consumer cost of improved equipment
efficiency, the Department defined a baseline design for each product
class. The baseline model establishes the starting point for analyzing
technologies that provide energy-efficiency improvement. Based on its
market assessment and input provided by GAMA, the Department defined a
baseline model as an appliance with an efficiency at the minimum level
prescribed by EPCA (i.e., 78-percent AFUE for non-weatherized gas
furnaces), and having commonly available features and technologies.
The Department next determined markups, installation cost, and
maintenance cost to complete the engineering analysis. It estimated
markups using publicly available corporate and industry data and, for
mobile home furnaces, data from MHI. To estimate installation costs,
DOE created an Installation Model to assess venting costs, and verified
it against known existing data. It estimated maintenance costs using
publicly available industry data.
Table IV.2 summarizes the approach and data DOE used to derive the
inputs to the engineering analysis for the 2004 ANOPR analysis, and the
changes made in the analysis for today's proposed rule. Discussion of
the changes follows in the sections below.
[[Page 59215]]
Table IV.2.--Approach and Data Used To Derive the Inputs to the
Engineering Analysis
------------------------------------------------------------------------
Proposed rule
Input 2004 ANOPR analysis analysis
------------------------------------------------------------------------
Equipment Cost.............. For the most widely Added cost of drip
used efficiency pan for condensing
levels, used a cost units. Some units
model of omit a combustion
manufacturing costs air pipe. Updated
created by tear- underlying metal
down analysis; for and cost data to
the remaining 2004 via Consumer
levels, used design- Price Index. Did
opinion analysis. not consider design
Incorporated options at 82-
industry feedback percent and 83-
from GAMA and percent AFUE for
individual non-weatherized gas
manufacturers to furnaces due to
generate potential safety
manufacturing-cost- hazards. Updated
versus-efficiency manufacturing-cost-
curves. versus-efficiency
curves.
Markups..................... Derived markups from No change.
an analysis of
corporate financial
data. Multiplied
manufacturing costs
by manufacturer,
distributor,
contractor, and
builder markups,
and sales tax, as
appropriate, to get
equipment price.
Installation Cost........... Used a distribution Same method; new
of weighted-average assumption that all
installation costs 81-percent AFUE gas
from the furnaces use double
Installation Model. wall vents.
Installation
configuration are
weight-averaged by
frequency of
occurrence in the
field, and vary by
installation size.
The Installation
Model is based on a
commonly used cost-
estimation method
and is comparable
to available, known
data.
Maintenance Costs........... Used Gas Research Same sources, but
Institute data for accounted for
gas furnaces and higher maintenance
boilers, water frequency for
heater rulemaking modulating design
survey results for option, and used
oil-fired same costs for
equipment, and data condensing and non-
from the 1993 condensing
rulemaking for equipment.
mobile home
furnaces.
Annual Energy Use*.......... Calculated energy No change.
use using the DOE
test procedure.**
Energy Prices*.............. AEO2003 forecast AEO2005 forecast
prices for year prices for
2012. effective date of
2015.
------------------------------------------------------------------------
* Inputs required to calculate rebuttable-presumption payback period.
For more details on the rebuttable-presumption payback period, refer
to section IV.B.5.
** The Department uses field-representative energy use values in the LCC
and payback period analysis. Refer to section IV.C.3. for more
details.
The Department received comments concerning the efficiency levels
it should consider in the engineering analysis.
GAMA and Rheem expressed concern about producing an entire family
of gas furnaces at 81-percent AFUE and suggested that, for some, and
not all, furnace models within a given family, it is possible to design
and produce units that can safely perform at the 81-percent level. They
indicated that developing a complete family of furnaces, spanning the
full range of capacities, in which all units could safely operate at
81-percent AFUE, would be difficult due to confining design and
manufacturing procedures. (GAMA, Public Meeting Transcript, No. 59.8 at
p. 177; Rheem, Public Meeting Transcript, No. 59.8 at p. 179) In
response to these comments, DOE conducted an analysis evaluating
approaches necessary to manufacture a full line of product that can
perform at 81-percent AFUE and the additional costs involved for
producing such a family of furnaces.
To perform this analysis, the Department identified an approach to
manufacturing an entire furnace family at 81-percent AFUE without
posing unacceptable safety and reliability risks. The Department
identified two potential cases for producing an entire family of 81-
percent AFUE non-weatherized gas furnaces, and the additional per-unit
cost associated with each case. The Department based the estimates for
both cases on manufacturer-provided data, which an independent
consultant reviewed. The first case, estimate case 1, includes SKU cost
(Stock Keeping Unit and customization development cost), parts cost
increases, and vent connector cost; case 2, in addition to the above
costs, assumes that a heat exchanger redesign cost would be needed. The
estimated additional per-unit cost for producing a family of furnaces
that can achieve reliable, safe operation at 81-percent AFUE is $47.20
for case 1 (the default case) and $88.70 for case 2.
York asserted that DOE cannot set the proposed standard for mobile
home furnaces above 80-percent AFUE, since section 325(o)(4) of EPCA,
42 U.S.C. 6295(o)(4), provides that DOE may not prescribe an amended
standard if ``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.'' York also stated that there are no
non-condensing mobile home furnaces currently available on the market
that exceed 80-percent AFUE. Additionally, York stated that their
interpretation of this EPCA provision also applies to 90-percent AFUE
units for mobile home furnaces. (York, No. 65 at p. 7)
After considering the comments from York, DOE concluded that
section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not require it to
set a new or amended energy conservation standard either at an
efficiency level currently available in the U.S., or at an efficiency
level that would ensure all products meeting the standard would have
all of the attributes of currently available products. The
``performance characteristics'' and ``features'' referred to in section
325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), do not include efficiency or
energy-use levels. Rather, these terms refer to other types of product
characteristics of concern to consumers, such as features affecting
temperature control or user comfort. To
[[Page 59216]]
interpret section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), otherwise
would bar DOE from ever prescribing higher minimum standard levels,
because any such higher levels necessarily result in new energy-
efficiency-improving technologies incorporated into the product and the
unavailability of products including less efficient technologies. This
interpretation would be inconsistent with EPCA's other provisions and
its purpose of improving product efficiencies. Thus, the lack of
currently available, non-condensing, mobile home furnaces above 80-
percent AFUE does not mean that section 325(o)(4) of EPCA, 42 U.S.C.
6295(o)(4), bars DOE from adopting a level higher than that as a
minimum standard for this product class. Thus, DOE believes that
section 325(o)(4) of EPCA, 42 U.S.C. 6295(o)(4), does not preclude DOE
from considering efficiencies for mobile home furnaces above a given
level, such as 80-percent AFUE. As discussed in section III.C.2 above,
DOE identified 90-percent AFUE as the maximum technologically feasible
level for mobile home furnaces. The Department analyzed efficiency
levels that include 80-percent and 90-percent AFUE for mobile home
furnaces and the results are presented in section V.C.
1. Manufacturing Costs
The Department adjusted its engineering cost model based on cost
data received from several individual manufacturers, and used the model
to create new cost-efficiency curves for the industry. The Department
then used these cost-efficiency curves as manufacturing cost inputs for
the MIA. Details of the MIA are in Chapter 12 of the TSD.
Lennox, York, and GAMA commented that the cost of materials in the
2004 ANOPR TSD was outdated. (Lennox, Public Meeting Transcript, No.
59.8 at p. 66; York, No. 65 at p. 3; and GAMA, No. 67 at p. 6) For the
2004 ANOPR engineering analysis, reviewed by manufacturers, the
Department used a five-year average of material prices from years 2000
through 2004. In response to various comments, the Department reviewed
material-cost data from the first quarter of 2005 and found prices
higher than those in the reference scenario that it used in the 2004
ANOPR analysis. Based on the more recent data, DOE updated the five-
year average prices used in the analysis for this notice and conducted
a material price sensitivity analysis with two additional material-
price scenarios. The reference case uses a revised five-year average of
material prices from years 2000 through 2004. The new prices of copper,
aluminum, steel, and stainless steel reflect prices from the Bureau of
Labor Statistics (BLS) Producer Price Indices (PPIs) spanning 2000-
2004. The Department used the PPIs for copper rolling, drawing, and
extruding, and for steel mill products, and adjusted them to 2004$
using the gross-domestic-product implicit-price deflator.
The Department created two scenarios for the material-price
sensitivity analysis: a low-bound and a high-bound. It calculated the
low-bound scenario by finding the lowest price per pound of M6 core
steel between 2000 and 2004. The lowest price of M6 core steel on a
per-pound basis occurred in 2002. Then, DOE applied a 15-percent
reduction to each of the raw material costs in that same year. It used
these prices to determine their effect on the cost-efficiency
relationship. Likewise, DOE calculated the high-bound scenario using
the average price for each of the raw materials from the first quarter
of 2005, when prices of raw materials were uncharacteristically high.
The Department evaluated the results of the material price sensitivity
analysis, using all three material-cost scenarios, in the engineering
analysis and then used them as inputs for the LCC analysis. The results
for the material-price-sensitivity analysis are presented in Appendix Z
of the TSD.
GAMA stated that DOE's cost estimate for modulating furnaces is
about 30 percent too low because of faulty assumptions regarding the
cost of upgrading the controls. (GAMA, No. 67 at p. 2) The Department
reviewed its cost estimate for modulating furnaces. Based on market
data, it determined that the cost of the components for the evaluated
design (two-stage modulation) is slightly higher than the cost used in
the ANOPR analysis. Consequently, the Department implemented this small
change in price for the NOPR analysis.
Carrier stated that improving efficiency with modulation assumes
maintaining constant excess air when switching from high fire to low
fire. Carrier further stated that a brushless, direct-current (DC)
draft inducer motor is required to maintain constant excess air, so DOE
should include the cost of brushless, DC draft inducers in its
analysis. (Carrier, Public Meeting Transcript, No. 59.8 at p. 181) To
some extent, DOE did this in the analysis for the 2004 ANOPR. Current
modulating furnaces have a two-stage motor for the draft inducer, and
DOE included the cost of this motor in analyzing the cost of achieving
that level of efficiency. The Department has revised its analysis for
the proposed rule to account for the cost of the two-stage modulation
design option components, including the cost of the draft inducer as
advocated by Carrier, for all products that achieve higher efficiencies
using modulation.
2. Markups
Using the cost data, DOE developed estimates of the consumer price
of furnaces and boilers. To estimate prices, DOE determined typical
markups at each stage of the distribution chain, from the manufacturer
to the consumer. In addition to estimating average markups, the
Department characterized the markups with probability distributions
through a statistical analysis of U.S. Census data and used these
distributions in the LCC analysis. (See TSD, Chapter 5.)
The Department estimated the manufacturer markup based on analysis
of corporate financial records. It included the following expenses in
the determination of the manufacturer markup: research and development
(R&D), net profit, general and administrative costs, warranty expenses,
taxes, and sales and marketing costs. It excluded shipping expenses
(out-bound) because these expenses were included in the manufacturing
cost. The Department determined R&D expenses by assuming that
engineering budgets would be reallocated from value engineering and
new-feature development to product development and redesign.
The Department based the wholesale and contractor markups on firm
balance sheet data. It estimated builder markup (applied to new
construction installations only) from U.S. Census data for the
residential and commercial building construction industry and from
heating, ventilating, and air-conditioning (HVAC) industry data. The
Department used recent State and local sales tax data to estimate sales
taxes (applied to replacement installations only).
For mobile home furnaces, the distribution chain is shorter than
the distribution chains for other product classes. The heating
equipment manufacturer sells to the manufactured housing maker, who
installs the furnace at the factory. In this case, the Department
estimated markups using information from MHI.
The overall markups are lower for new construction installations
than for replacement installations. For wholesalers and contractors,
the markup on incremental costs (i.e., the costs over and above the
costs for a baseline model) is lower than the markup on the baseline
model cost. The reason is that only wholesalers' and contractors'
profits and other operating costs
[[Page 59217]]
typically scale with the price they pay for the products they sell.
Trane questioned the assumption that incremental markups should be
lower than baseline markups. (Trane, Public Meeting Transcript, No.
59.8 at p. 147) AGA said that wholesalers, contractors, and builders
will base markups not on incremental costs of the technology, but on
the economic value of the product in the supply chain. (AGA, No. 78 at
p. 4) The Department evaluated the markup chain and found that the
markup on incremental costs is lower than the baseline markup for
wholesalers and contractors, so the Department did not change its
application of markups. (See TSD, Chapter 5.)
3. Installation Costs
The Department defines the installation cost as the expense to the
consumer for professional installation of a furnace or a boiler. The
installation cost is not part of the equipment's retail price. The cost
of installation covers all labor and material costs associated with the
installation of a new unit or the replacement of an existing one,
excluding the cost of the unit itself. For furnaces and boilers, the
installation cost is typically the largest single component of the
total cost to the consumer and is greater than the equipment price.
The predominant part of the installation cost is the venting
system. The American National Standards Institute (ANSI) standard
Z21.47-1993 defines four furnace and boiler categories (I-IV) with
respect to the venting system. The categories are defined based on the
operating pressure and temperature of the combustion gases inside the
vent. Most non-condensing equipment falls into Category I (high
temperature, negative pressure). Most condensing equipment falls into
Category IV (low temperature, positive pressure), but some non-
condensing boilers are in Category III (high temperature, positive
pressure). Category III venting requires stainless steel material
(AL29-4C) and sealed joints.
The Department devoted considerable effort to identifying
appropriate cost figures to use in its analysis. In the process, DOE
found that there is no complete, up-to-date data source for
installation costs for the product classes under consideration.
Therefore, DOE developed its own Installation Model to determine
installation costs for non-weatherized gas furnaces. The Department
used RS Means, a well-known construction-cost-estimation method, to
develop labor costs, and obtained quotes from national distributors to
develop material costs. The Installation Model weight-averages the
detailed costs for a large variety of typical installations in the
field, including both new construction and retrofit installations;
single and multifamily housing; plastic, metal, and masonry chimney
vents; single- and double-wall vent connectors; and common venting with
other appliances. Chimney relining practices and orphaned water heaters
are explicitly modeled. The Department modified certain assumptions to
apply the Installation Model to oil-fired furnaces and gas- and oil-
fired boilers.
In their comments, Carrier, Lennox, Alagasco, and York addressed
space constraints and other issues related to the cost of installing
furnaces and boilers. Carrier stated that, in southern and western
markets, many furnaces are installed in attics, and if the furnace is
more than 21 inches wide, it will not fit into the attic through the
attic access. (Carrier, Public Meeting Transcript, No. 59.8 at p. 51)
Lennox asked that the installation analysis account for non-
conventional installations of very large units. (Lennox, Public Meeting
Transcript, No. 59.8 at p. 75) Lennox commented that, with regard to
oil-fired furnaces, because of the larger heat exchangers, the physical
size of the furnace cabinet can cause space constraint problems.
(Lennox, No. 79 at p. 2) Alagasco stated that DOE's installation model
underestimates costs associated with the installation of gas furnaces,
especially for replacement markets. (Alagasco, No. 82 at pp. 1-2)
Finally, York stated that, due to the large size of residences in some
areas of the country, more than one furnace system may be installed in
a dwelling, and installing or changing multiple systems has a different
cost impact than changing or installing a single system. (York, Public
Meeting Transcript, No. 59.8 at p. 74) The Department's Installation
Model includes a wide variety of installation situations, as mentioned
above, and accounts for most situations where space constraints may be
an issue.
a. Non-Weatherized Gas Furnaces. In the 2004 ANOPR, DOE estimated
that eight percent of all installations of non-weatherized gas furnaces
at 81-percent AFUE will require Category III venting. It based this
estimate on the fact that if the steady-state efficiency of a non-
condensing furnace exceeds 83 percent, it must be vented with a
Category III venting system to prevent condensation problems. The
Department arrived at the eight-percent value by considering the
difference between the steady-state efficiency and the AFUE for actual
models, based on the model information listed in the GAMA directory.
Carrier and Lennox commented that the Department did not appropriately
account for the fraction of 81-percent-AFUE furnaces that would require
Category III venting and recommended that the eight-percent number be
raised considerably. (Lennox, Public Meeting Transcript, No. 59.8 at p.
89 and No. 79 at p. 2; and Carrier, Public Meeting Transcript, No. 59.8
at p. 89) GAMA and Carrier stated that DOE's approach underestimates
the fraction of Category III models because there is at least 0.5-
percent difference between the steady-state efficiency as measured by
the DOE test procedure and as measured in the ANSI Z21.47
categorization test. (The ANSI Z21.47 test is applied by manufacturers
to identify venting categories to develop information for the
manufacturers' installation manuals.) (GAMA, Public Meeting Transcript,
No. 59.8 at p. 85 and No. 67 at p. 5; and Carrier, Public Meeting
Transcript, No. 59.8 at p. 93 and No. 68 at p. 1)
In the analysis for this proposed rule, DOE did not directly
estimate the fraction of Category III models by considering the
difference between the steady-state efficiency and the AFUE for actual
models. For this analysis, DOE investigated existing models and
manufacturers' installation manuals. It determined that non-weatherized
gas furnaces at 80- and 81-percent AFUE, when applied in vertical
venting installations, fall into Category I. When 81-percent-AFUE
furnaces replace 80-percent-AFUE furnaces, a significant fraction of
installations requires an update from a single-wall to a Type-B,
double-wall vent connector. In the case of replacement installations,
the Department added the cost of a Type-B, double-wall vent connector
to 40-percent of the installations. When applied in horizontal venting
installations, furnaces at 80 and 81-percent AFUE are either in
Category III or are in Category I using a power venter. The cost for
these two venting methods is similar. Since horizontal installations
account for a negligible fraction of all non-condensing furnace
installations (estimated at less than 0.1-percent), DOE did not include
this type of installation in its analysis.
Carrier, NPGA, and Lennox commented that lack of knowledge on the
part of installers regarding proper installation practices for 81-
percent-AFUE furnaces could result in incorrect installation and unsafe
conditions for the consumer. (Carrier, Public Meeting Transcript, No.
59.8 at p. 83; NPGA, No. 72 at p. 4; and Lennox, No. 79 at p. 2) York
and Alagasco stated that there are
[[Page 59218]]
issues regarding long-term safety, reliability, and performance of the
Category III venting materials or systems available on the market
today, and this is a major concern if thousands of installations across
the country will require such systems. (York, No. 65 at p. 3; Alagasco,
No. 82 at p. 2) Carrier, Rheem, and York commented that they do not
offer Category III appliances, and stated that Category III venting is
not used for 81-percent-AFUE models. (Carrier, Public Meeting
Transcript, No. 59.8 at p. 115; Rheem, Public Meeting Transcript, No.
59.8 at p. 117; and York, No. 65 at p. 3) The Department recognizes the
stakeholders' concerns. As discussed above, however, analysis for this
proposed rule indicated that Category III venting would be required for
a negligible fraction of installations of 81-percent-AFUE gas furnaces.
Furthermore, based on the existing use of Category III venting,
particularly for high-efficiency boilers, the Department believes that
the relevant stainless steel materials (AL29-4C) would perform with an
acceptable degree of safety and reliability for Category III furnaces.
The ODOE commented that the assumed overall cost for condensing
furnace installation is too high, as it fails to account for the
expected growth in the share of condensing furnaces that are for the
replacement market, and the relatively small installation cost for
replacing a condensing furnace. (ODOE, No. 61 at pp. 7-8) NRDC noted
that installation costs will decline when replacement of 90-percent-
AFUE furnaces becomes widespread. (NRDC, No. 528 at p. 4) The
Department adjusted its estimate of installation costs for condensing
furnaces to account for a higher share of replacements in total
installations of condensing furnaces in 2015. With regard to the cost
for replacing a condensing furnace, the Department did not find any new
data to justify a change to the cost used in the 2004 ANOPR analysis.
AGA stated that installation costs for condensing furnaces are
incompletely represented in the 2004 ANOPR, since installation codes
require that condensing appliances be provided with an auxiliary drain
pan to prevent damage to building components in the event of a blockage
in the condensate drain piping system, and an estimated 40-percent of
all condensing furnace installations need drain pans. (AGA, No. 78 at
p. 5) The Department adjusted its Installation Model to account for the
use of drain pans in 40 percent of condensing furnace installations.
In addition, the Department recognizes that some consumers may
experience additional costs that exceed those used in the Department's
analysis to address necessary structural changes for installing a
condensing furnace, primarily for the vent systems associated with non-
weatherized gas furnaces and for mobile home gas furnaces at or above
90-percent-AFUE. The Department understands that, for some dwellings,
it may be necessary to make ``structural'' changes, such as the removal
or penetration of an interior wall, exterior wall, or roof, to
accommodate new vent systems (and combustion air intakes). While the
Department has no data to quantify the number of consumers that may be
affected in this manner and the cost magnitude, it believes the
possible cost impacts may be significant enough to warrant
consideration in evaluating the adoption of a standard level that would
require condensing technology. The Department invites comments on the
number of consumers that may be affected by structural changes for
installing a condensing furnace and the cost magnitude of any
structural changes.
b. Other Product Classes. For weatherized gas furnaces, the
Department estimated the installation cost for the baseline model using
data from Section 400 of the 2002 RS Means Mechanical Cost Data. The
assumption that installation costs remain mostly constant as efficiency
increases seems reasonable for single-package systems. The increases in
size and weight for more-efficient systems are small relative to the
large size and weight of the baseline model unit.
For mobile home gas furnaces in new homes, installation costs are
part of the equipment cost because mobile home gas furnaces are
assembled in the factory rather than in the field. The Department
included these factory assembly costs in the manufacturer markup. With
respect to mobile home gas furnaces for replacement, the Department did
not find any new data to estimate an installation cost, so it used the
same approach as for new-home furnaces.
York, GAMA, and MHI commented on venting issues related to mobile
home furnaces. GAMA and York suggested that DOE did not sufficiently
explore vent corrosion issues related to mobile home furnaces and
weatherized furnaces in the 2004 ANOPR analysis. (GAMA, Public Meeting
Transcript, No. 59.8 at p. 228; and York, No. 65 at p. 5) York, GAMA,
and MHI noted that approved venting materials for Category III venting
are not available for mobile home furnace installations. (York, No. 65
at p. 5; GAMA, No. 67 at p. 6; and MHI, No. 89 at p. 3) York also
stated that condensation and resulting corrosion must be considered for
weatherized furnaces, along with the cost impact of materials having
more corrosion-resistant properties. (York, No. 65 at p. 8) GAMA agreed
with DOE that it is appropriate not to include venting costs for
weatherized products, but stated that there is a need to capture the
increased likelihood of heat exchanger and flue corrosion resulting in
premature failure. (GAMA, No. 67 at p. 6) In conducting its analysis
for this notice, DOE reviewed the issue of vent corrosion for mobile
home furnace installations and included a cost to account for proper
venting system installation. For weatherized furnaces, the Department
reviewed corrosion issues and found that current models having an AFUE
of up to 82 percent do not have special requirements to address
corrosion issues. Therefore, the Department did not change its cost
estimates for this product class for this proposed rule.
For gas hot water boilers, the 2004 ANOPR analysis used a uniform
assumption that 20-percent of installations would require Category III
venting at 80-84-percent-AFUE levels. GAMA, ACEEE, and AGA commented
that the analysis should include a gradually increasing share of
Category III venting as the AFUE rises. (GAMA, Public Meeting
Transcript, No. 59.8 at p. 111; ACEEE, Public Meeting Transcript, No.
59.8 at p. 113; and AGA, No. 78 at p. 5) GAMA asked that DOE's analysis
use GAMA's data showing the fraction of gas hot water boiler models
vented with Category III by efficiency level. (GAMA, Public Meeting
Transcript, No. 59.8 at p. 107) AGA stated that manufacturers'
installation instructions for a number of gas hot water boilers in the
range of 83-84-percent AFUE do require Category III venting, and
recommended that DOE consider these requirements. (AGA, No. 78 at p. 5)
In the analysis for today's proposed rule, DOE used data provided
by GAMA on the fraction of installations at each efficiency level that
would require Category III venting. The Department also conducted a
sensitivity analysis using similar assumptions as in the 2004 ANOPR.
This analysis reflected current construction practices, which use
Category III venting for horizontal venting installations at all
efficiency levels.
GAMA and ACEEE commented that DOE should further investigate
installation practices for oil-fired equipment at various efficiency
levels. (GAMA, Public Meeting Transcript, No. 59.8 at pp. 112 and No.
67 at p. 4; and ACEEE, No. 53 at p. 6) ACEEE stated
[[Page 59219]]
that DOE's analysis for oil systems does not fully account for the fact
that exhaust from oil systems is generally at a higher temperature and
has lower moisture content than exhaust from gas systems. (ACEEE, No.
84 at p. 11) Carrier urged DOE to perform vent condensation analyses on
higher-efficiency oil furnace designs. (Carrier, No. 68 at p. 4)
The 2004 ANOPR analytical approach for oil-fired furnaces assumed
that all installations of 83-percent-AFUE, or lower efficiency,
equipment would be vented using Type L vents, and all installations of
84-percent-AFUE, or higher efficiency, equipment would be vented using
316-grade stainless steel vent systems. For this notice, the Department
consulted Brookhaven National Laboratory and other experts, and also
reviewed the National Fire Protection Association (NFPA) standards
NFPA-31 Standard for the Installation of Oil-Burning Equipment and
NFPA-11 Standard for Chimneys, Fireplaces, Vents, and Solid Fuel-
Burning Appliances. The analysis for today's proposed rule has taken
into consideration the NFPA-31 standard, which provides that Type L
vents can be used safely with products of up to 88 percent, steady-
state efficiency (or 87-percent AFUE), depending on the vent
configurations and equipment size. The Department used a gradual
increase in the number of 316-grade stainless steel vent installations
from zero percent at 80-82-percent AFUE to 100-percent at 86-percent
AFUE. The mid-point of the range is 50 percent at 84-percent AFUE. This
assumption accounts for the NFPA-31 recommendations at the upper end of
the range. The Department used a similar approach for oil-fired
boilers, but shifted the above AFUE values upward by one AFUE
efficiency point, in accordance with the NFPA-31 standard. The approach
DOE used in this proposed rule accounts for the fact that exhaust from
oil systems is generally at a higher temperature and has lower moisture
content than exhaust from gas systems. It also addresses vent
condensation on higher-efficiency, oil-fired furnace designs.
4. Maintenance Costs
Maintenance costs are the costs of regular maintenance of a furnace
or boiler when it fails, including all associated labor and material
costs. For non-weatherized and weatherized gas furnaces and gas
boilers, in the 2004 ANOPR analysis, DOE used data on the cost and
frequency of maintenance that were provided in the Gas Research
Institute (GRI)-94/0175 topical report Assessment of Technology for
Improving the Efficiency of Residential Gas Furnaces and Boilers. The
Department used this information to estimate required minimum
maintenance frequencies of once every five years for all equipment
without modulation, and once every four years for all equipment with
modulation, to account for the greater complexity of the modulation
feature. For oil-fired furnaces and oil-fired boilers, DOE applied the
results of a survey performed for its previous water heater rulemaking.
For mobile home furnaces, DOE used data from the Technical Support
Document: Energy Efficiency Standards for Consumer Products, DOE/EE-
0009, published in November 1993. (See TSD, Chapter 6.)
The ODOE and York stated that the GRI data DOE used are outdated.
(ODOE, No. 61 at p. 9; and York, No. 65 at p. 6) GAMA stated that
maintenance costs should at least scale with the cost of the product,
if not meet some other more rigorous assumption. (GAMA, Public Meeting
Transcript, No. 59.8 at p. 165) ODOE commented that, unless DOE can
provide data that support its contention that the maintenance costs
vary proportionally to the efficiency of the furnace, using the same
maintenance costs would be appropriate for all furnaces. (ODOE, No. 61
at p. 9) In its review of these comments, DOE confirmed that
maintenance frequency, and therefore cost, does not necessarily vary
with AFUE. Rather, the greater complexity of the modulation feature
causes furnaces with this feature to require more frequent maintenance
and thus incur higher maintenance costs.
The ODOE disagreed with how the 2004 ANOPR analysis represented
maintenance costs for condensing equipment in terms of maintenance
contracts. (ODOE, No. 61 at p. 9) In the 2004 ANOPR, DOE used a value
for condensing equipment from the GRI report that represented the cost
of a service contract that includes a specified set of routine repairs.
In the analysis for this notice, the Department compared maintenance
instructions for non-condensing and condensing gas furnaces from
manufacturers' manuals, researched RS Means literature for maintenance
differences between non-condensing and condensing gas furnaces, and
collected opinions from several furnace installation and maintenance
experts. It found, as asserted by ODOE, that annual maintenance
contracts are not commonly applicable to condensing gas furnaces, and
it did not find evidence of differences in maintenance requirements
between condensing and non-condensing designs. Thus, in accordance with
ODOE's comment, the Department used the same maintenance cost data for
condensing and non-condensing furnaces, and it applied the same
considerations to gas boilers.
5. Rebuttable-Presumption Payback Period
Section 325(o)(2)(B)(iii) of the Act establishes a rebuttable-
presumption that a standard is economically justified if the Secretary
finds that ``the additional cost to the consumer of purchasing a
product complying with an energy conservation standard level will be
less than three times the value of the energy * * * savings during the
first year that the consumer will receive as a result of the standard,
as calculated under the applicable test procedure * * *.'' (42 U.S.C.
6295(o)(2)(B)(iii))
The Department defines the rebuttable-presumption payback period as
the length of time it takes the consumer to recover the higher
installed cost of more-energy-efficient equipment through lowering
operating costs. Numerically, the rebuttable-presumption payback period
is the ratio of the increase in total installed cost (including the
purchase price and installation cost) to the decrease in operating
expenses (including maintenance). Energy expenses are the primary
component of operating expenses. The Department determines the changes
in total installed cost and operating expenses relative to the baseline
for each product class (i.e., the current standard level). Energy-
expense savings are the first year's energy savings multiplied by the
average energy prices forecast for the year in which a new standard is
expected to take effect--in this case, the year 2015. The Department
used energy price forecasts from the AEO2005 to estimate the energy
price in the year 2015.\12\ To calculate energy-expense savings at each
efficiency level, the Department uses the DOE test procedure for
calculating annual energy consumption. (See TSD, Chapter 6.)
---------------------------------------------------------------------------
\12\ Although the Department conducted an energy price
sensitivity analysis using EIA's AEO2006, it did not perform a
sensitivity analysis to determine the effect of AEO2006 energy
prices on the rebuttable-presumption payback period.
---------------------------------------------------------------------------
C. Life-Cycle Cost and Payback Period Analysis
In response to the requirements of section 325(o)(2)(B)(i) of the
Act, the Department conducted an LCC and payback period analysis to
evaluate the economic impacts of possible new furnace and boiler energy
conservation standards on individual consumers. This section of this
notice describes the
[[Page 59220]]
LCC and payback period analysis. The Department conducted the analysis
using a spreadsheet model developed in Microsoft (MS) Excel for Windows
2000 or XP. (See TSD, Chapter 8.)
The LCC is the total consumer expense over the life of the furnace
or boiler, including purchase and installation expense and operating
costs (energy expenditures and maintenance costs). To compute LCCs, the
Department discounted future operating costs to the time of purchase
and summed them over the lifetime of the furnace or boiler. The payback
period is the change in purchase expense due to an increased efficiency
standard, divided by the change in annual operating cost that results
from the standard. Otherwise stated, the payback period is the number
of years it would take for the consumer to recover the increased costs
of a higher-efficiency product through energy savings.
The Department measures the change in LCC and the change in payback
period associated with a given efficiency level relative to a base case
forecast of equipment efficiency. The base case forecast reflects the
market in the absence of amended mandatory energy conservation
standards. It depicts the current status of the market, including the
existing demand for products that exceed the current energy
conservation standards.
The Department calculated the LCC and payback periods for a
nationally representative set of housing units. It selected the
representative sample of households from EIA's Residential Energy
Consumption Survey (RECS). Whereas the 2004 ANOPR used the 1997 RECS,
the analysis for today's proposed rule used the 2001 survey (RECS
2001), which are the most recent data available. For each sampled
household, DOE determined the energy consumption and energy price for
either a furnace or a boiler. Thus, by using a representative sample of
households, the analysis allowed for the capture of the wide
variability in energy consumption and energy prices associated with
furnace and boiler use. The Department determined the LCCs and payback
periods for each sampled household using the furnace or boiler energy
consumption and energy price unique to each household, as well as other
input variables. As discussed below, DOE characterized the other input
variables with probability distributions. The Department calculated the
LCC associated with the baseline furnace or boiler in each household.
To calculate the LCC savings and payback period associated with more-
efficient equipment (i.e., equipment meeting higher efficiency
standards), DOE substituted the baseline unit with a more efficient
design.
Inputs for determining the total installed cost include equipment
prices--which account for manufacturer costs, manufacturer markups,
distributor and wholesaler markups, builder or contractor markups, and
sales taxes--and installation costs. Inputs for determining operating
expenses include annual household energy consumption, marginal natural
gas and electricity prices, natural gas and electricity price
projections, maintenance costs, equipment lifetime, discount rates, and
the year standards take effect.
To account for uncertainty and variability in certain inputs, the
Department created distributions of values with probabilities attached
to each value. Of the listed installed cost inputs, DOE characterized
the manufacturer, dealer, distributor, and builder markups, as well as
the sales tax and installation price, with distributions. Of the
operating cost inputs, it characterized the discount rate and the
equipment lifetime with distributions. For each housing unit, DOE
sampled and randomly selected the values of these inputs from the
distributions, according to their probability. With regard to energy
consumption and energy price, as noted earlier, DOE determined unique
values for each sampled household. Although DOE did not characterize
energy consumption and energy price with probability distributions, it
captured the variability of these inputs by using a representative set
of households in the LCC and payback period analysis. The LCC and
Payback Period Model uses a Monte Carlo simulation to incorporate
uncertainty and variability into the analysis when combined with
Crystal Ball (a commercially available software program). The Monte
Carlo simulations sampled input values randomly from the probability
distributions. The model calculated the LCC and payback period for each
design option for 10,000 housing units per simulation run.
AGA commented that it appeared DOE was using Monte Carlo analysis
for variables that are independent and for which DOE did not account
for the correlation. (AGA, No. 54 at p. 3) For those variables that it
characterized with probability distributions, DOE had no evidence to
suggest that any of the variables--for example, discount rates and
equipment lifetime--were correlated with each other. Thus, DOE assigned
the discount rate associated with any given household based on its
probability of occurrence, without consideration of the assumed
lifetime for the furnace or boiler in that household. In the case of
energy consumption and energy price, because DOE determined unique
values for each sampled household rather than assigning them using
probability distributions, it in effect correlated energy consumption
and energy price for each household.
AGA also said that probability distributions for a number of
variables used in the uncertainty analysis appear to be unjustified by
data. (AGA, No. 54 at p. 2) In constructing probability distributions
for the variables, the Department used the most recent data from
multiple sources (See TSD, Chapters 7 and 8). The Department reviewed
the data used to develop the probability distributions for all of the
variables. The Department believes that the distributions are supported
by the available data.
GAMA commented that the LCC analysis should include financing
costs, since many consumers use some form of credit to purchase a
furnace or boiler. (GAMA, Public Meeting Transcript, No. 59.8 at p.
153) The Department implicitly accounts for financing costs in its
application of discount rates. As discussed in section IV.C.7, the
discount rate for equipment purchased as part of a new home is based on
mortgage rates, and the discount rate for replacement equipment
considers interest rates for a number of loan and credit types. Using
these rates, the discounted sum of annual payments on a loan or credit
amount would be equal to the total installed cost if it were paid in
full at the time of purchase. Therefore, the Department believes it is
not necessary to separately account for financing costs.
Table IV.3 summarizes the approach and data DOE used to derive the
inputs to the LCC and payback period calculations for the 2004 ANOPR,
and the changes it made for today's proposed rule. Discussion of the
inputs and the changes follows in the sections below.
[[Page 59221]]
Table IV.3.--Summary of Inputs and Key Assumptions Used in the LCC and
Payback Period Analyses
------------------------------------------------------------------------
2004 ANOPR Changes for proposed
Inputs description rule
------------------------------------------------------------------------
Affecting Installed Costs
------------------------------------------------------------------------
Equipment Price............. Derived by No change.
multiplying
manufacturer cost
by manufacturer,
distributor,
contractor, and
builder markups and
sales tax, as
appropriate.
Installation Cost........... Used a distribution No change.
of weighted-average
installation costs
from the
Installation Model.
Weight-averaged
installation
configuration by
frequency of
occurrence in the
field.
------------------------------------------------------------------------
Affecting Operating Costs
------------------------------------------------------------------------
Maintenance Costs........... Used GRI data for Same sources,
gas furnaces and supplemented with
boilers, water new information
heater rulemaking that indicates
survey results for higher maintenance
oil-fired frequency for
equipment, and data modulating
from the 1993 equipment, and
rulemaking for identical
mobile home maintenance costs
furnaces. for condensing and
non-condensing
equipment (See TSD,
Chapter 5).
Annual Heating Load......... Calculated heating Calculated heating
and cooling loads loads using 2001
using 1997 RECS RECS data (cooling
data. Assumed the loads not
furnace input considered).
capacity versus Incorporated
airflow capacity adjustment to
based on the account for change
vintage of the in new home size
equipment and and shell
characteristics of performance between
each house. 2001 and 2015 (See
TSD, Chapter 7).
Annual Energy Use........... Used 26 virtual Same method, using
models that RECS 2001 data.
captured the range
of common furnace
sizes. Energy
calculations used
annual heating load
for each housing
unit.
Energy Prices *............. Calculated 1998 Calculated 2001
average and average and
marginal energy marginal energy
prices for each prices for each
sample house. Used sample house. Used
AEO2003 forecasts AEO2005 forecasts
to estimate future to estimate future
average and average and
marginal energy marginal energy
prices. prices.
------------------------------------------------------------------------
Affecting Present Value of Annual Operating Cost Savings
------------------------------------------------------------------------
Lifetime.................... Used 2001.58(9) Same, except for
Appliance Magazine boilers, for which
survey results. DOE developed new
estimates based on
a literature review
(See TSD, Chapter
8).
Discount Rate............... Applied data from Same sources; used
1998 Survey of more recent data
Consumer Finances (See TSD, Chapter
and other sources 8).
to estimate a
discount rate for
each house. (See
ANOPR TSD, Chapter
8).
------------------------------------------------------------------------
* The Department used the AEO2006 forecasts to estimate future average
and marginal energy prices for the energy price sensitivity analysis.
Section IV.C.4. provides further explanation of the rationale and
methodology for the energy price sensitivity analysis.
1. Equipment Prices
As described in section IV.B.1 above, the Department determined
manufacturing costs reflecting different efficiency levels using a
reverse-engineering cost analysis for one size of equipment
representative of each product class. To derive the manufacturing costs
for other sizes of furnaces and boilers, DOE scaled the costs from the
sizes used in the engineering analysis.
To develop a range of equipment sizes for non-weatherized gas
furnaces that represent the majority of combinations of input capacity
and nominal maximum airflow, the Department developed generic models to
represent 26 different combinations of those two variables. The
Department derived the models from baseline models with the most
commonly occurring input capacities and corresponding maximum nominal
airflow rates. To develop the manufacturing cost for each model, DOE
took the cost from the engineering analysis for a model with a typical
capacity, scaled the cost for other input capacities, and adjusted
costs for furnaces with different-size blowers.
For the analysis of weatherized gas furnaces, DOE used the same
generic models as in the analysis of non-weatherized gas furnaces. For
the analysis of mobile home furnaces, the Department used a subset of
those models. For the analysis of oil-fired furnaces and gas- and oil-
fired boilers, the Department used a number of different sizes derived
from the distribution of models in the GAMA March 2005 directory. For
all of these product classes, DOE scaled the cost for each input size
from the cost identified for a typical model for the specific product
class in the engineering analysis.
The Department applied markups to the manufacturer cost of each
virtual model to arrive at the equipment price paid by the purchaser.
It determined markups on each stage of the distribution chain from the
manufacturer to the consumer. (See TSD, Chapter 5.) In addition to
estimating average markups, the Department characterized the markups
with probability distributions through a statistical analysis of U.S.
Census data. The markups assigned to units in the new construction
subsample include a builder markup. The markups assigned to units in
the replacement equipment subsample include sales taxes. The Department
determined that the markup
[[Page 59222]]
for wholesalers and contractors on incremental costs for higher
efficiency equipment is lower than the markup on the cost of a baseline
model. Thus, for calculating the equipment cost of baseline equipment,
the Department used the distribution of baseline markups. For the
incremental cost of equipment at efficiency levels above the baseline,
the Department applied incremental markups.
2. Installation Costs
The LCC and payback period analysis drew on the engineering
analysis for installation costs at various efficiency levels. The
Department assigned each household an installation cost from a
distribution of weight-averaged values. For non-weatherized gas
furnaces, oil-fired furnaces, and gas- and oil-fired boilers, DOE
calculated the distribution using its Installation Model. For
weatherized gas furnaces, DOE used calculations based on the RS Means
approach to determine a mean value and assigned a triangular
distribution of 15-percent around the mean. For mobile home
furnaces, it included the installation cost in the manufacturer markup.
3. Household Annual Energy Consumption
The Department calculated furnace fuel and electricity use by
considering how furnaces operate in the sample housing units. (See TSD,
Chapter 7.) While the AFUE measure does not consider electricity use,
it is necessary to include it in the LCC analysis because both fuel and
electricity consumption change with AFUE and these changes together
determine the overall energy savings. The Department recognizes that
the heat from a furnace blower contributes to heating the conditioned
space. It included this effect in its LCC analysis to capture all
operating expenses and completely evaluate the impact of new furnace
standards on consumers.
The LCC and payback period analysis calculated furnace and boiler
energy consumption under field conditions for a representative sample
of housing units. These conditions included the climate conditions
during the heating season and the size of the house, which influence
the number of hours the equipment operates.
The calculation of furnace or boiler energy consumption required an
estimate of the annual heating load for each housing unit (the amount
of heat needed to keep it comfortable over an entire year). Determining
the annual heating load for a housing unit required making assumptions
about its size and construction, thermal efficiency, and geographical
location. In the 2004 ANOPR analysis, DOE used data associated with the
sample houses from the 1997 RECS. North Star Energy Group (NSEG) and
Lennox commented that DOE's estimation of heating loads should account
for improvement in thermal shells and changes in home size that are
likely by the effective date of new standards. (NSEG, Public Meeting
Transcript, No. 59.8 at p. 195; Lennox, Public Meeting Transcript, No.
59.8 at p. 166) In the analysis for today's proposed rule, the
Department adjusted heating loads calculated for new construction
housing units using data from AEO2005 that projected changes in the
thermal efficiency and the floor area of new houses. While thermal
efficiency is projected to improve somewhat, the impact on heating load
is roughly balanced by an expected increase in floor area. The
Department applied these adjustment factors to the calculated heating
loads for those RECS houses designated as representative of new houses.
Determination of the energy consumption of the equipment installed
in each sampled housing unit also required estimating the input
capacity and efficiency of the existing furnace. The Department then
calculated how much energy furnaces with various improved designs would
need to meet the heating load of the sampled housing unit.
The Department received several comments suggesting that it re-
examine its 2004 ANOPR calculation of the energy consumption impacts of
two-stage modulation. (GAMA, Public Meeting Transcript, No. 59.8 at p.
177; Individual, Public Meeting Transcript, No. 59.8 at p. 183; Lennox,
Public Meeting Transcript, No. 59.8 at p. 152; York, No. 65 at p. 3;
Carrier, No. 68 at p. 68; AGA, No. 78 at p. 4; and Alagasco, No. 82 at
p. 2) For today's proposed rule, DOE took into account these comments
and revised the energy consumption calculation. It used the 2004 public
review draft of the proposed update of the American Society of Heating,
Refrigerating and Air-Conditioning Engineers (ASHRAE) SPC 103 test
procedure, ``Method of Testing for Annual Fuel Utilization Efficiency
of Residential Central Furnaces and Boilers,'' which accounts for the
effects of two-stage modulation. The results now show that this design
option does not provide efficiency benefits unless an electronically
commutated blower motor is used.
ACEEE and ODOE commented that DOE's electricity consumption results
in the 2004 ANOPR LCC analysis appear to be inconsistent with the data
on average annual auxiliary electricity consumption (Eae) as
reported in the GAMA directory of models. (ACEEE, No. 53 at p. 3; and
ODOE, No. 61 at p. 4) For this proposed rule, DOE revised its approach
for calculating electricity consumption for the LCC analysis. It based
the revised calculations on data on the most current manufacturer
product literature. (See TSD, Chapter 7) The resulting electricity
consumption values are consistent with the data in the GAMA directory.
4. Energy Prices
The Department used average energy prices to calculate the energy
costs of the base-case equipment and marginal energy prices for the
cost of saved energy associated with higher-efficiency equipment.
Marginal energy prices reflect a change in a consumer's bill associated
with a change in energy consumed, and thus such prices capture the
value of the increment of energy saved as a result of standards.
Consumer gas bills typically have multiple rates--a base rate for the
first block of gas used and different rates for further increments.
Increased efficiency will impact the gas use at the rate applied to the
last incremental consumption. For oil-fired furnaces and boilers, as
well as gas furnaces using liquefied petroleum gas (LPG), the
Department used average fuel prices for both base-case and higher-
efficiency equipment, since consumers typically purchase fuel oil and
LPG in bulk amounts, and the energy saved is based on the price paid
for the bulk amount.
For each household sampled from the RECS database, DOE identified
the average gas and electricity prices either from that household's
data, if available, or from another household in the same Census
division for which both prices were available. The Department estimated
marginal energy prices from the RECS monthly billing data. The
estimated marginal prices are very close to average prices. The
Department invites comments on the methodology and data it used to
determine marginal energy prices.
As in past rulemakings, the Department used price forecasts by the
EIA to estimate the future trend in energy prices. It multiplied the
average or marginal prices by the forecasted annual price changes in
the Reference Case forecast in AEO2005.
EIA published its Annual Energy Outlook for 2006, AEO2006, after
DOE had completed much of the analysis for this proposed rule. While
the energy price forecast in AEO2006 did not change substantially for
electricity after
[[Page 59223]]
2015, the effective date of this rulemaking, the natural gas price
forecasts were significantly different when compared to the energy
price forecast in AEO2005. The natural gas price forecasts in the
AEO2005 are consistently lower by an average of $1.40 after 2015 than
the natural gas price forecasts in the AEO2006. The oil price forecasts
in the AEO2005 are consistently lower by an average of $4.60 after 2015
than the oil price forecasts in the AEO2006 by an average of $4.60
after 2015. On average, the AEO2006 forecasts show approximately a 20-
percent increase in energy prices over those in AEO2005. Since most of
the energy used by furnaces is natural gas (and oil), this change could
impact the analysis results. To account and assess the possible impact
of these increases in projected energy prices, the Department conducted
an energy price sensitivity analysis using the AEO2006 scenario. The
energy price sensitivity analysis uses recently published energy
prices, housing starts, and site-to-source conversion factors based on
the AEO2006. It examines the impact of these changes on the LCC and
Payback Period, Consumer Subgroup, and National Impact analyses. The
results of each analysis are shown in sections V.B.1.a., V.B.1.b.,
V.B.3.a., and V.B.3.b., respectively. For the AEO2006 energy price
sensitivity analysis, the Department determined that the consumers'
purchasing decisions in the base case (i.e., in the case where no
change in standards is assumed to occur) would be similar to those as
in the energy price trajectory using AEO2005. The Department welcomes
comment on the determination of the forecast of the gas furnace
shipments as a function of the energy prices. Furthermore, the
Department intends to use the most recent energy price forecasts from
the EIA in its revised analyses for the final rule.
5. Maintenance Costs
For the LCC analysis, DOE used the maintenance cost data derived in
the engineering analysis. Based on a sensitivity analysis in a 1994 GRI
report and on engineering judgment, the Department assumed a triangular
distribution for maintenance costs to capture the variability of these
costs among homes, with a minimum at 80 percent of the average cost and
a maximum at 120 percent of the average cost. The Department is not
aware of any recent data that provide a distribution of maintenance
costs.
6. Equipment Lifetime
The Department defines the equipment lifetime as the age at which a
furnace or boiler is retired from service. Because none of the
available data on equipment lifetime show a clear relationship between
efficiency and lifetime, DOE assumed that equipment lifetime is
independent of efficiency. The Department used a triangular probability
distribution from the range for each product class to assign a lifetime
to individual furnaces and boilers in the sample housing units.
In the 2004 ANOPR, DOE used an average lifetime of 20 years for gas
furnaces, 15 years for oil-fired furnaces and boilers, and 17 years for
gas boilers. ACEEE commented that DOE's equipment lifetime estimates
appeared to be somewhat short, and were a significant change from
values used in the last DOE rulemaking on these products. ACEEE
recommended that DOE look for field data on actual average equipment
lifetime. (ACEEE, No. 84 at p. 11) The Department conducted a
literature review to obtain estimates of boiler lifetime. Based on the
information found, it increased the lifetimes used for gas- and oil-
fired boilers to 25 years.
7. Discount Rates
The Department derived the discount rates for the LCC analysis from
estimates of the finance cost to purchase a furnace or boiler. New-
housing equipment is purchased as part of the home, which is almost
always financed with a mortgage loan. Therefore, the Department
estimated discount rates for new-housing equipment using the effective
mortgage rate for home buyers, not simply the nominal rate. For the
consumer life-cycle-cost calculation, the effective rate corresponds to
the interest rate after deduction of mortgage interest for income tax
purposes. Such adjustment is not appropriate for the NPV calculations.
As described in section IV.D.7., for the NPV calculations the
Department used discount rates of both seven percent and three percent,
in accordance with the Office of Management and Budget (OMB)'s
guidelines contained in Circular A-4, Regulatory Analysis, September
17, 2003. (OMB Circular A-4, Sec. E (September 17, 2003)).
Households use a variety of methods, the prevalence of which may
change over time, to finance a replacement furnace or boiler. The
shares of different financing vehicles in total replacement equipment
purchases are unknown, so the Department identified all possible
customary sources of acquiring funds for purchase of replacement
furnaces, including household assets that might be sold to raise funds.
The Department then estimated the shares of the various debt and equity
classes in the average U.S. household equity and debt portfolios using
data from the 1998 and 2001 Federal Reserve Board's Survey of Consumer
Finances (SCF) (See TSD, Chapter 8.) The Department estimated a
distribution of interest or return rates associated with each type of
equity and debt from the SCF and other sources, and then developed a
distribution of weighted-average finance costs for replacement
equipment.
NRDC commented that DOE's approach for deriving discount rates in
the 2004 ANOPR analysis had shortcomings that resulted in the use of
rates that were too high. (NRDC, No. 63 at p. 12) The Department
acknowledges there are diverse views on selecting discount rates for
household purchase of appliances, but the approach DOE used for
furnaces and boilers is consistent with the method it used for its
rulemaking for residential air-conditioning equipment. For this notice,
DOE incorporated more recent data on consumer finances, mortgage rates,
other debt interest rates, and rates of return on equity classes. The
resulting discount rates are lower than those used in the 2004 ANOPR
analysis for new-home furnace and boiler purchases (See TSD, Chapter
8.)
GAMA commented that using a different discount rate for each
household is questionable. (GAMA, No. 67 at p. 7) The Department
disagrees. Since the finance cost for purchasing a furnace or boiler
varies among households depending on their financial situation, the
Department found that using different discount rates was appropriate.
8. Effective Date of the New Standards
Generally all covered products to which a new or amended energy
conservation standard applies must comply with the standard if they are
manufactured or imported on or after a specified date. (42 U.S.C.
6291(10), 6295 (b)-(k)) Section 325(f)(3)(B) of EPCA directs that DOE
is to publish a final rule for furnaces and boilers by January 1, 1994,
and that any amendment shall apply to products manufactured on or after
January 1, 2002. The Department has applied this eight-year
implementation period to determine the effective date of any standard
prescribed by this rulemaking. Since DOE expects to issue a final rule
in 2007, the effective date for this rulemaking will be 8 years from
the date of publication of the final rule, that is, in 2015. Thus, the
[[Page 59224]]
Department calculated the LCC and payback period for all consumers as
if each one purchased a new residential furnace or boiler in 2015.
9. Inputs to Payback Period Analysis
The payback period is the length of time it takes the consumer to
recover the higher installed cost of more-energy-efficient equipment
through lower operating costs. Numerically, the payback period is the
ratio of the increase in total installed cost (including the purchase
price and installation cost) to the decrease in operating expenses
(including maintenance). Thus, similar to the LCC, the payback period
is based on the total installed cost and the operating expenses.
However, unlike for the LCC, DOE considers only the first year's
operating expenses in the calculation of the payback period. Because
DOE considers only the first year's operating expenses, the payback
period does not take into account changes in operating expense over
time or the time value of money; that is, electricity price trends and
discount rates are not required inputs. Energy expenses are the primary
component of operating expenditures. The Department determines the
energy-expense savings for the payback period as the first year's
energy savings multiplied by the energy prices for the year in which a
new standard is expected to take effect, in this case the year 2015.
The energy consumption DOE used to calculate the payback period for
the LCC analysis reflects current field conditions for a representative
sample of housing units. This approach to determining energy
consumption and savings is in contrast to the rebuttable-payback-period
calculations in the engineering analysis, which use the DOE test
procedure's method for calculating annual energy consumption. The
change in the annual energy consumption (otherwise called the energy
savings) between the base-case furnace or boiler and a more efficient
unit, as calculated in the LCC analysis, is smaller than the change in
the energy consumption calculated from the DOE test procedure. Because
smaller energy savings result in smaller decreases in operating
expenses, the payback periods calculated for the LCC analysis are
longer than the rebuttable-payback periods.
10. Base-Case Equipment
The base-case forecasts equipment that consumers are expected to
purchase in the absence of new standards. In the 2004 ANOPR analysis,
DOE developed the base-case forecast for each product class using the
available data on shipments of furnaces and boilers by efficiency
levels. For non-weatherized gas furnaces, the Department forecasted the
base-case share of condensing furnaces based on the average growth rate
for the period 1991-2000. The projected condensing furnace market share
increased from 24 percent in the late 1990s to 27 percent in 2015. The
Gas Technology Institute (GTI), ACEEE, NSEG, AGA, GAMA, York, and
Lennox commented that DOE should account for recent market trends that
are leading to greater sales of condensing gas furnaces. (GTI, No. 74
at p. 2; ACEEE, No. 84 at p. 13; NSEG, Public Meeting Transcript, No.
59.8 at p. 23; AGA, No. 59.8 at p. 42; GAMA, Public Meeting Transcript,
No. 59.8 at p. 158; York, No. 65 at p. 2; and Lennox, 79 at p. 3) The
Department agrees that use of the most recent data is important. In its
analysis for this notice, the Department revised its assignment of gas
furnaces to sampled housing units in the base case to reflect the
recent trend toward a higher market share for condensing furnaces, as
shown in shipments data through 2003 provided by GAMA. There is a
strong correlation between condensing furnace market share and the
natural gas price for the 1990-2003 period. The Department based the
projected market share of condensing furnaces in 2015 on an evaluation
of this correlation, projected natural gas prices from AEO2005, and
market factors that could sustain the condensing furnace market share
even with a lower gas price. The projected condensing furnace market
share for 2015 is 35 percent. Therefore, for the LCC analysis base
case, the Department assigned condensing furnaces to 35 percent of the
sampled housing units with non-weatherized gas furnaces.\13\
---------------------------------------------------------------------------
\13\ The Department assumed the same disbursement of condensing
furnaces, 35 percent, within the sampled housing units for non-
weatherized gas furnaces in the energy price sensitivity analysis,
which it based on AEO2006.
---------------------------------------------------------------------------
GAMA commented that the 2004 ANOPR analysis does not draw a
correlation between an individual household's characteristics and the
furnace it would have bought under the base case. (GAMA, Public Meeting
Transcript, No. 59.8 at p. 158) The Department's analysis does
correlate the type of furnace assigned as base-case equipment with
certain household characteristics. Specifically, in assigning
condensing furnaces as base-case equipment, the Department used a
ranking of the RECS sample housing units by heating degree days to
assign condensing furnaces to households in colder climates.
For other product classes, the Department assigned base-case
equipment to the sampled housing units from a distribution of AFUEs
that is representative of current shipments for each product class. The
assignment of equipment efficiency took climate into account.
D. National Impact Analysis--National Energy Savings and Net Present
Value Analysis
1. Shipments, National Energy Savings, and Net Present Value
The Department calculated the NES and the NPV of total customer
costs and savings expected to result from new standards at specific
efficiency levels, defined as a difference between a base-case forecast
(without new standards) and the standards case (with new standards).
The NES refers to cumulative energy savings from 2015 through 2038. The
Department calculated net monetary savings in each year relative to the
base-case as the difference between total operating-cost savings and
increases in total installed cost. Cumulative savings are the sum of
the annual NPV over the specified time period. The Department accounted
for operating-cost savings until all the equipment installed through
2038 is retired.
An important element in the estimate of the future impact of a
standard is product shipments. The shipments portion of the NES
Spreadsheet uses historical data as a basis for projecting furnace and
boiler shipments. Furnace and boiler shipments comprise units used to
replace retired units of the same type or of another fuel type, as well
as units installed in new homes. (See TSD, Chapter 9.)
In the 2004 ANOPR analysis, the Department estimated retirements
based solely on past shipments and the assumed equipment lifetimes. For
gas furnaces (all three product classes together), the resulting total
shipments in the 1993-2001 period were less than those reported by
GAMA. (GAMA, No. 24) For today's proposed rule, the Department added
two additional components of gas furnace shipments in this period,
early retirement and fuel switching, which brought the shipments
estimated by the model into closer agreement with the GAMA data. (GAMA,
No. 94)
The first added component of gas furnace shipments is the early
retirement of non-condensing furnaces and their replacement with more-
efficient condensing furnaces. Evidence for this trend can be seen in
the GAMA data, which show a large increase in
[[Page 59225]]
condensing furnace shipments in this period in response to rising
natural gas prices. The second added component is conversion from non-
central gas heating to central heating with a gas furnace. There is
evidence for this conversion in the RECS data, which show a large
increase between 1993 and 2001 in homes with central gas heating that
were built before 1990, as well as in the trade literature. The
shipments from these additional components are most likely to be non-
weatherized gas furnaces, because they account for about 90 percent of
all gas furnace shipments. The Department assumed that shipments from
these additional components follow a normal distribution, rising
gradually from 1993, reaching a maximum value, and then decreasing
again. It assumed that shipments from these additional components
gradually taper off due to a decline in the number of homes for which
conversion from non-central gas heating or early retirement of non-
condensing furnaces is possible or economically attractive. The
Department corrected replacements in subsequent years to avoid double-
counting due to furnaces being removed from the stock before the end of
their lifetime. The Department also estimated the annual number of
replacements based on past shipments, projected shipments to new
housing construction over the next decade, and equipment retirement
rates.
York stated that the 2004 ANOPR analysis neglected the market for
replacement of furnaces in mobile homes. (York, No. 65 at p. 5) In the
NES calculations for the proposed rule, the Department included
estimated shipments for replacement of furnaces in mobile homes.
To estimate future conversions to natural gas, DOE used data from
utility surveys conducted by the AGA that report the numbers of
households that converted to natural gas space heating. ACC commented
that DOE should consider expected relative prices of natural gas and
electricity in estimating future conversions. (ACC, No. 62 at p. 3) The
Department estimated the annual conversions to natural gas as a
constant percentage of projected replacements using data from the 1985-
1995 period. The trend in relative energy prices in this period is
similar to the trend of projected energy prices.
EEI commented that DOE should address the impact of DOE's new
energy conservation standard for heat pumps on heating system
conversions after January 2006. (EEI, No. 69 at p. 2) The Department
believes few existing houses with a heat pump that is due to be
replaced would be likely to convert to a combination of a gas furnace
and central air conditioner, even if the price of a new heat pump is
several hundred dollars more after the new central air conditioner/heat
pump standard goes into effect. Houses with a heat pump typically lack
venting systems, and/or access to a source of natural gas, which are
necessary to convert to gas heating. Therefore, the Department did not
include conversions from heat pumps to natural gas equipment in its
analysis.
The Department also estimated the number of annual shipments of
each product class going to new housing units as a function of the
market share estimated for each product class. For non-weatherized and
mobile home gas furnaces, the Department estimated market-shift effects
from changes in relative fuel prices and from equipment price increases
expected from higher efficiency standards. In forecasting gas furnace
market shares, the Department assumed an impact of higher installed
costs due to standards would be a decrease in market share held by gas
furnaces in new construction, in favor of electric heating. The
Department accounted for these market shift effects in the calculation
of NES and NPV by considering the differential in energy consumption,
utility bills and equipment cost between households with gas heating
and those with electric heating. The Department based its estimates on
the current market share of heat pumps and electric furnaces in
households with electric space heating, as provided by RECS 2001. For
non-weatherized gas furnaces, DOE assumed that heat pumps account for
54 percent of the additional electric heating equipment purchased due
to market shift, and electric resistance furnaces account for 46
percent. It based these values on equipment shares in homes built in
1999-2003. For mobile home gas furnaces, the assumed shares of
additional electric heating equipment purchased due to market shift are
41 percent for heat pumps and 59 percent for electric resistance
furnaces. In determining market shift effects, the Department assumed
the above shares of heat pumps and electric resistance furnaces
remained constant over the analysis period. The Department invites
comments on its assumption of constant heat pump and electric
resistance furnace market shares in order to calculate the market shift
effects on NES and NPV.
NPGA, Laclede, and NSEG recommended that DOE analyze the potential
for a market shift from gas furnaces to electric heating equipment
resulting from new gas furnace standards. (NPGA, No. 72 at p. 4;
Laclede, No. 76 at p. 3; and NSEG, Public Meeting Transcript, No. 59.8
at p. 24) Similarly, EEI commented that DOE should consider how the
increased energy-efficiency standards for heat pumps in 2006 will shift
market shares in new construction from electric to gas space-heating
systems. (EEI, No. 69 at p. 2) In the analysis for this notice, the
Department used the same approach to evaluate market shifts as in the
2004 ANOPR analysis, but it used more recent data on heating equipment
prices. (See TSD, Chapter 9.) The Department also included the impact
of projected higher heat pump prices after 2006. (See TSD, Chapter 9.)
Projected market share shifts are reflected in the MIA.
Southern and Carrier commented that standards for gas furnaces
could induce switching to combination space- and water-heating
appliances. (Southern, Public Meeting Transcript, No. 59.8 at p. 200;
and Carrier, Public Meeting Transcript, No. 59.8 at p. 198) The
Department believes that the historical market data necessary for
estimating the potential for consumers to switch to combination space-
and water-heating appliances do not exist. Therefore, DOE was not able
to include this potential market effect in the shipments projection.
The Department estimated the future market shares of oil-fired
furnaces and gas- and oil-fired boilers in total new housing
completions based on their average shares in homes built in the 1999-
2003 period. For new homes that use oil-fired equipment, gas is
generally not available, so the Department considered the market shares
to be independent of changes in equipment price due to the
implementation of standards. Gas boilers in new homes are associated
with specific types of heating systems, such as hydronic radiators or
radiant floors, so substitution of alternative equipment is unlikely.
Therefore, the Department assumed that the market share would not be
affected by changes in equipment price due to standards.
Table IV.4 summarizes the approach and data DOE used to derive the
inputs to the shipments analysis for today's proposed rule, and the
changes made in the analysis for this proposed rule. (See TSD, Chapter
9.)
[[Page 59226]]
Table IV.4.--Approach and Data Used To Derive the Inputs to the
Shipments Analysis
------------------------------------------------------------------------
2004 ANOPR Changes for proposed
Input description rule
------------------------------------------------------------------------
Shipments*.................. Calculated total Same approach as
shipments for ANOPR, with updated
replacements based shipments data from
on past shipments GAMA. Included
and retirement shipments for
function, and for mobile home furnace
new homes based on replacement.
projection of new Projection of new
housing from housing updated to
AEO2003. The AEO2005. Market
projected market share projection
shares in new homes used re-estimated
were a function of parameters. Model
relative heating used two additional
equipment prices. shipment categories
Based conversions- to calibrate with
upon-replacement on GAMA data.
historic survey
data.
Replacements in kind........ Replacement of worn- No change.
out heating
equipment with unit
of same equipment
type (i.e., furnace
versus boiler) and
same fuel (natural
gas or oil).
Applies a
replacement
probability
distribution based
on equipment
lifetime.
Conversions................. Replacement of worn- No change.
out heating
equipment with
equipment utilizing
a different fuel.
Based on utility
surveys conducted
by AGA that report
the numbers of
households that
converted from oil
or electricity to
natural gas space
heating. Source:
AGA House Heating
Survey 1985-1995.
Installations in new housing Installation of No change.
heating equipment
into new single-
family, multi-
family or mobile
homes according to
construction rates
and equipment type
market shares. Used
housing completions
according to DOE
forecast and
modeled market
shares according to
energy and
equipment price
trends.
Gas furnace early Not applied......... Early replacement of
replacement. non-condensing
furnaces with more
efficient
condensing
furnaces. Model
calibrated to GAMA
data, which show a
large increase in
condensing furnace
shipments in
response to rising
natural gas prices.
Conversion from non-central Not applied......... Conversion from non-
gas heating to central central gas heating
heating with a gas furnace. to central heating
with a gas furnace.
Model used RECS
data, which show a
large increase
between 1993 and
2001 in homes with
central gas heating
that were built
before 1990.
------------------------------------------------------------------------
*For the energy price sensitivity analysis, the Department based its new
housing projections on forecasts from the AEO2006. Section V.B.3.a
presents the results of the energy price sensitivity analysis.
To make the analysis more accessible and transparent to
stakeholders, the Department used an MS Excel spreadsheet model to
calculate the NES and NPV. MS Excel is the most widely used spreadsheet
calculation tool in the U.S. and there is general familiarity with its
basic features. Thus, the Department's use of MS Excel for the
spreadsheet models provides stakeholders access to the models within a
familiar context. In addition, the TSD and other documentation that DOE
provides during the rulemaking explain the models and how to use them,
and stakeholders can review DOE's analyses by changing various input
quantities within the spreadsheet. Unlike the LCC analysis, the NES
Spreadsheet does not use distributions for inputs. The Department
examined the sensitivity of monetary savings by applying different
scenarios of energy prices and societal discount rates. (See TSD,
Chapter 10.)
In addition to analyzing national impacts, the Department analyzed
the NES and NPV for the Southern and Northern regions. The Department
defined the Southern region as including those States that have an
average of less than 5,000 heating degree-days. The Department defined
the Northern region as including those States that have an average of
more than 5,000 heating degree-days.\14\ See section III.A.4 for a list
of States that fall under the Northern or Southern regions.
---------------------------------------------------------------------------
\14\ The following States average 5000 or more HDDs: Alaska,
Colorado, Connecticut, Idaho, Illinois, Indiana, Iowa, Kansas,
Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana,
Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio,
Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont,
Washington, West Virginia, Wisconsin, and Wyoming.
---------------------------------------------------------------------------
Table IV.5 summarizes the approach and data DOE used to derive the
inputs to the NES and NPV analyses for the 2004 ANOPR, and the changes
made in the analyses of the proposed rule. (See TSD, Chapter 10.)
[[Page 59227]]
Table IV.5.--Approach and Data Used To Derive the Inputs to the National
Energy Savings and Net Present Value Analyses
------------------------------------------------------------------------
2004 ANOPR Changes for proposed
Input description rule
------------------------------------------------------------------------
Shipments................... Annual Shipments See Table IV.4.
form shipments
model.
Date Products Must Meet 2012................ 2015.
Standard.
Annual UEC (Unit Energy Annual weighted- No change. Projected
Consumption). average values were share of condensing
a function of furnaces reflected
efficiency level. recent shipments
Base case UEC for data.
non-weatherized gas
furnaces accounted
for projected share
of condensing
furnaces.
Installed Cost per Unit..... Annual weighted- No change.
average values were
a function of
efficiency level
(established from
the LCC analysis).
Maintenance Cost per Unit... Annual weighted- No change.
average values were
a function of
efficiency level
(established from
the LCC analysis).
Energy Prices *............. AEO2003 forecasts to AEO2005 forecasts to
2025 and 2025 and
extrapolation extrapolation
beyond 2025. beyond 2025.
Energy Site-to-Source Generated by DOE/ No change.
Conversion. EIA's National
Energy Modeling
System (includes
electric
generation,
transmission, and
distribution
losses).
Discount Rate............... 7-percent and 3- No change.
percent real.
Present Year................ Future expenses Future expenses
discounted to year discounted to year
2001. 2004.
------------------------------------------------------------------------
* For the energy price sensitivity analysis, the Department used AEO2006
forecasts to derive its energy prices up to 2025 and extrapolated
beyond 2025. The rationale and methodology for the energy price
sensitivity analysis is further explained in Section V.B.3.a.
2. Annual Unit Energy Consumption
The annual unit energy consumption (UEC) values for the base-case
forecast and each higher efficiency level come from the LCC analysis.
Each UEC includes a value for gas (or oil) consumption. The base-case
forecast reflects the expected pattern of equipment purchases in the
absence of any new standards. Since there is little evidence of change
in recent years in the average AFUE for each product class, DOE used
the average values from recent GAMA shipments data for each year of the
base-case forecast. In particular, for non-weatherized gas furnaces,
DOE took into account the considerable rise in the market share of
condensing furnaces in 2001-2003 shown in data provided by GAMA. This
increase (to 31 percent) corresponds to the sharp rise in the average
residential gas price in this period. Given that the price forecast in
the AEO2005 shows a residential gas price in future years that is
considerably lower than in 2003, one might expect the condensing
furnace market share to be lower in the future than in 2003. However,
other factors could potentially sustain the condensing furnace market
share even with a lower gas price (such as the greater acceptance of
condensing furnaces among homebuilders). Therefore, the Department
projected that the share remains at slightly above the 2003 level (35
percent) throughout the considered period.\15\ The Department also
evaluated alternative scenarios of the future condensing furnace market
share. Appendix R of the TSD describes these scenarios and presents the
NES and NPV results for non-weatherized gas furnaces using the
alternative scenarios. The Department invites comments on its
assumption of constant condensing furnace market share in its default
scenario for calculating annual unit energy consumption.
---------------------------------------------------------------------------
\15\ The Department assumed the same disbursement of condensing
furnaces, 35 percent, within the sampled housing units for non-
weatherized gas furnaces in the energy price sensitivity analysis.
In other words, the Department did not update this percentage based
on AEO2006 for the energy price sensitivity analysis.
---------------------------------------------------------------------------
3. Site-to-Source Conversion Factors
Primary energy consumption includes energy used and lost in the
production and transmission of the energy consumed at the site. The
Department derived annual site-to-source conversion factors using the
NEMS AEO2005 Reference Case and estimated energy savings and system
load impacts as a result of possible standards for each year.\16\ The
factors the Department used are marginal values, which represent the
response of the system to an incremental decrease in consumption
associated with energy conservation standards. Natural gas losses
include pipeline leakage, pumping energy, and transportation fuel.
---------------------------------------------------------------------------
\16\ For the energy price sensitivity analysis, the Department
derived the annual site-to-source conversion factors using the NEMS
AEO2006 Reference Case.
---------------------------------------------------------------------------
4. Installed Equipment Costs
Average installed equipment costs for the base-case forecast and
each efficiency level came from the LCC analysis. Total equipment costs
for each efficiency level equal the average cost multiplied by
shipments in each year. The Department assumed no change in real
equipment costs at each level after 2015. In cases where a market shift
away from gas furnaces is projected, DOE accounted for the equipment
costs of the electric heating equipment purchased instead.
5. Maintenance Costs
The Department took average annualized maintenance costs for the
base-case forecast and each efficiency level from the LCC analysis. It
considers the annualized maintenance cost to be an operating cost that
is applied for each year that the equipment remains in the stock. The
Department assumed no change in real maintenance costs after 2015.
6. Energy Prices
The NPV calculation used energy prices to value energy savings for
natural gas and electricity. It used average energy prices for fuel oil
and LPG, since consumers typically purchase fuel oil and LPG in bulk
amounts, and the energy saved is based on the price paid for the bulk
amount. The Department used 2001 energy prices for the RECS housing
sample in the LCC analysis. To project prices out to 2025, DOE used
energy price projections from AEO2005. In the energy price sensitivity
analysis, DOE calculated the NES and NPV using the recently-published
energy price projections from AEO2006. For the years after 2025, DOE
applied the
[[Page 59228]]
average annual growth rate in 2010-2025 for gas and heating oil prices
and the average annual growth rate in 2015-2025 for electricity prices
in both cases.
The Northwest Power and Conservation Council (NPCC) asked if NEMS
(used for the AEO2005 projections) has a feedback loop between gas
consumption and the forecast of future prices for natural gas. (NPCC,
Public Meeting Transcript, No. 59.8 at p. 245) NEMS does incorporate
such feedback.
Southern, ACEEE, and ODOE commented that DOE should conduct a
sensitivity analysis using a greater range of fuel prices, and
independent forecasts, such as forecasts prepared by Energy and
Environmental Analysis, Inc. (Southern, No. 71 at p. 3; ACEEE, Public
Meeting Transcript, No. 59.8 at p. 163; and ODOE, No. 61 at p. 10) The
Department used for today's analysis price forecasts from the AEO2005,
including the High and Low Economic Growth Cases. For the energy price
sensitivity analysis, the Department used the price forecasts from
AEO2006, including the High and Low Economic Growth Cases. The range of
prices in these forecasts, especially for natural gas, is quite wide
and encompasses the scenarios in the AGA's ``Natural Gas Outlook to
2020'' (February 2005), which were prepared by the Energy and
Environmental Analysis, Inc. Therefore, the Department concludes that
its analysis encompasses a reasonable range of future energy prices.
GTI commented that the analysis should consider reallocation of gas
utility distribution costs in the case where furnace standards result
in lower natural gas demand. (GTI, No. 51 at p. 2) Historically, DOE
has used the same energy price forecasts for standards cases as for the
base case. Lower natural gas demand due to furnace standards could lead
to higher fixed-cost charges for natural gas consumers, but such
charges are subject to State regulation and the Department is not aware
of a reliable method for estimating the magnitude of the impact on
average retail prices. Since developing a reliable method for
evaluating such costs is outside the scope of the rulemaking, DOE has
not included this factor in its analysis.
7. Discount Rates
To discount future impacts, the Department used discount rates of
both seven percent and three percent, in accordance with the Office of
Management and Budget (OMB)'s guidelines contained in Circular A-4,
Regulatory Analysis, September 17, 2003. (OMB Circular A-4, Sec. E
(September 17, 2003)). For the purpose of this analysis, the Department
used 2005 as the reference year for discounting because it concluded
the analysis in this year.
E. Consumer Subgroup Analysis
In analyzing the potential consumer impact of new or amended
standards, the Department evaluated the impact on identifiable groups
of consumers (i.e., subgroups) that may be disproportionately affected
by a national standard level. The Department analyzed the potential
effect of standards on households with low income levels and households
occupied by seniors, two consumer subgroups of interest. The Department
defined seniors as those households having a head of household over age
65, and defined low income as those households at or below 100 percent
of the poverty level. (See TSD, Chapter 11.)
The Department also analyzed the potential effect of standards on
Southern and Northern households. For this analysis, the Department
defined Southern households as those households located in States that
have an average of less than 5,000 heating degree-days. The Department
defined Northern households as those households located in States that
have an average of more than 5,000 heating degree-days. See section
III.A.4 for a list of States that fall under the Northern or Southern
regions.
EEI commented that DOE should examine the same subgroups that it
analyzed for the residential air conditioner and heat pump rulemaking.
(EEI, No. 69 at p. 5) The Department analyzed households with low
income levels and households occupied by seniors in the furnace and
boiler analysis, as it did in the residential air conditioner and heat
pump rulemaking. NSEG suggested that DOE use discount rates specific to
each subgroup. (NSEG, No. 51 at p. 6) The Department's analysis uses a
distribution of discount rates that accounts for all consumer
subgroups.
F. Manufacturer Impact Analysis
1. General Description
In determining whether a standard for a covered product is
economically justified, the Secretary of Energy is required to consider
``the economic impact of the standard on the manufacturers and on the
consumers of the products subject to such standard.'' (42 U.S.C.
6295(o)(2)(B)(i)(I)) The statute also calls for an assessment of the
impact of any lessening of competition as determined by the Attorney
General. (42 U.S.C. 6295(o)(2)(B)(i)(V)) The Department conducted the
MIA to estimate the financial impact of efficiency standards on the
residential furnace and boiler industry and to assess the impact of
such standards on employment and manufacturing capacity.
The MIA has both quantitative and qualitative components. The
quantitative part of the MIA primarily relies on the GRIM, an industry-
cash-flow model adapted for this rulemaking. The key GRIM inputs relate
to industry cost structure, shipments, and pricing strategies. The
GRIM's key output is the INPV. The model estimates the financial impact
of higher efficiency standards by comparing changes in INPV between the
baseline and the various trial standard levels. The qualitative part of
the MIA addresses factors such as product characteristics,
characteristics of particular firms, and market and product trends, and
includes an assessment of the impacts of standards on subgroups of
manufacturers. (See TSD, Chapter 12.)
On July 17, 2001, the Department prepared a Framework Document
entitled Framework Document for Residential Furnaces and Boilers Energy
Conservation Standards Rulemaking.\17\ This document outlined the
procedural and analytical approaches to be used in the MIA. Later in
the rulemaking, the 2004 ANOPR further discussed the three-step process
involved in determining the impact of new residential furnace and
boiler standards on manufacturers. 69 FR 45451. This process is
detailed below. In response to the 2004 ANOPR documentation and public
meeting, the Department received specific comments on the MIA, which
are addressed in this section.
---------------------------------------------------------------------------
\17\ U.S. Department of Energy, Framework Document for
Residential Furnaces and Boilers Energy Conservation Standards
Rulemaking, July 17, 2001. This document is available at http://www.eere.energy.gov/buildings/applicance_standards/residential/furnace_boiler_framework_mtg.html
.
---------------------------------------------------------------------------
As outlined, the Department conducted the MIA in three phases.
Phase 1, Industry Profile, consisted of preparing an industry
characterization, including data on market share, sales volumes and
trends, pricing, employment, and financial structure. Phase 2, Industry
Cash Flow, focused on the industry as a whole. In this phase, DOE used
the GRIM to prepare an industry-cash-flow analysis. Using publicly
available information developed in Phase 1, the Department adapted the
GRIM's generic structure to perform an analysis of residential furnace
and boiler energy conservation
[[Page 59229]]
standards. In Phase 3, Subgroup Impact Analysis, DOE conducted
interviews with manufacturers representing over 80 percent of domestic
furnace and boiler sales. This group included large and small
manufacturers of furnaces and boilers, providing a representative
cross-section of the industry. During these interviews, the Department
discussed engineering, manufacturing, procurement, and financial topics
specific to each company and also obtained each manufacturer's view of
the industry as a whole. The interviews provided valuable information
that the Department used to evaluate the impacts of a standard on
manufacturers' cash flows, manufacturing capacities, and employment
levels.
2. Industry Profile
In Phase 1 of the MIA, the Department prepared a profile of the
residential furnace and boiler industry that built on the market and
technology assessments originally prepared for the 2004 ANOPR analysis
and subsequently updated for today's proposed rule. Before initiating
the detailed impact studies, DOE collected information on the present
and past structure and market characteristics of residential furnace
and boiler manufacturing. The information DOE collected at that time
included market share, product shipments, markups, and cost structure
for various manufacturers. The industry profile includes further detail
on product characteristics, estimated manufacturer market shares, the
financial situation of manufacturers, trends in the number of firms,
the market, and product characteristics of the residential furnace and
boiler industry.
The industry profile included a topdown cost analysis of
residential furnace and boiler manufacturers that DOE used to derive
cost and preliminary financial inputs for the GRIM (e.g., revenues;
material; labor; overhead; depreciation; selling, general, and
administrative expenses; and R&D expenses). The Department also used
public sources of information to expand its initial characterization of
the industry, including 10-K reports from the Securities and Exchange
Commission, Moody's company data reports, Standard & Poor's stock
reports, Value Line industry composites, corporate annual reports, the
U.S. Census Bureau's Economic Census, Dun & Bradstreet reports, and
industry analysis from Ibbotson Associates and Dow Jones Financial
Services.
3. Industry Cash Flow Analysis
Phase 2 of the MIA focused on the financial impacts of new
standards on the industry as a whole. Energy conservation standards can
affect furnace and boiler manufacturers in three distinct ways,
including: (1) Increased investment; (2) higher production costs per
unit; and (3) altered revenue by virtue of higher per-unit prices and
changes in sales volumes. The analytical tool DOE uses for calculating
the financial impacts of standards on manufacturers is the GRIM. To
quantify these impacts in Phase 2 of the MIA, the Department performed
a cash flow analysis of the residential furnace and boiler industry
using the GRIM.
4. Subgroup Impact Analysis
Using average cost assumptions to develop an industry-cash-flow
estimate is not adequate for assessing differential impacts among
subgroups of manufacturers. Small manufacturers, niche players, or
manufacturers exhibiting a cost structure that largely differs from the
industry average could be more negatively affected. The Department used
the results of the industry characterization to group manufacturers
exhibiting similar characteristics. In the Framework Document and at
the 2004 ANOPR public meeting, the Department invited stakeholders to
comment on the manufacturing subgroups that should be analyzed for the
MIA. The Department had established six subgroups corresponding to each
of the product classes in the 2004 ANOPR. It did not receive comments
at the public meeting or in response to either the Framework Document
or the 2004 ANOPR. Consequently, the Department decided to use the six
subgroups that correspond to each of the product classes in the MIA,
based on the market assessment.
Based on this decision, the Department prepared two different
interview guides--one for furnace manufacturers and one for boiler
manufacturers. The Department used these interview guides to tailor the
GRIM to incorporate unique financial characteristics from both
industries. Within each of these industries, the Department contacted
companies from its database of manufacturers, which provided a
representation of each subgroup. It interviewed small and large
companies, subsidiaries and independent firms, and public and private
corporations. The Department also made an effort to interview companies
that had previously participated in the Department's rulemaking process
for residential furnaces and boilers. The purpose of the meetings was
to enhance the Department's understanding of how manufacturer impacts
vary with the trial standard levels. During the course of the MIA, the
Department held nine interviews with furnace manufacturers and five
interviews with boiler manufacturers, together representing over 80
percent of domestic furnace and boiler sales. Finally, DOE developed a
GRIM for each of the six subgroups.
The Department also evaluated the impact of the energy conservation
standards on small businesses. Small businesses, as defined by the
Small Business Administration (SBA) for the furnace and boiler
manufacturing industry, are manufacturing enterprises with 750 or fewer
employees. The Department created a version of the interview guide
tailored for small furnace and boiler manufacturers, and contacted 11
small businesses to determine if they were interested in discussing
differential impacts standards would have on their companies. (See TSD,
Chapter 12.)
5. Government Regulatory Impact Model Analysis
A higher energy conservation standard can affect a manufacturer's
cash flow in three distinct ways, resulting in: (1) Increased
investment; (2) higher production costs per unit; and (3) altered
revenue by virtue of higher per-unit prices and changes in sales
volumes. As mentioned, the Department uses the GRIM to quantify changes
in cash flow that result in a higher or lower industry value. The GRIM
analysis uses a standard, annual-cash-flow analysis that incorporates
manufacturer prices, manufacturing costs, shipments, and industry
financial information as inputs and models changes in costs,
distribution of shipments, investments, and associated margins that
would result from new regulatory conditions (in this case, standard
levels). The GRIM spreadsheet uses a number of inputs to arrive at a
series of annual cash flows, beginning with the base year of the
analysis, 2004, and continuing to 2038. The Department calculated INPVs
by summing the stream of annual discounted cash flows during this
period.
The Department used the GRIM to calculate cash flows using standard
accounting principles and to compare changes in INPV between a baseline
and different trial standard levels for energy conservation standards
(the standards case). Essentially, the difference in INPV between the
baseline and the standards case represents the financial impact of the
new standard on manufacturers. The Department collected this
information from a number of sources, including publicly available data
and interviews
[[Page 59230]]
with several manufacturers. (See TSD, Chapter 12.)
GAMA asked if the MIA included consideration of cumulative
regulatory burden. (GAMA, Public Meeting Transcript, No. 59.8 at p.
241) The Department considered the impacts of cumulative regulations in
the MIA. Section V.B.2.d of this notice and Chapter 12 of the TSD
summarize these impacts.
6. Manufacturer Interviews
As part of the MIA, DOE discussed potential impacts of standards
with manufacturers responsible for a majority of residential furnace
and boiler sales. The manufacturers interviewed comprise 82 percent of
the gas furnace market, close to 100 percent of the mobile home furnace
market, 61 percent of the oil-fired furnace market, and 79 percent of
the boiler market. These interviews were in addition to those the
Department conducted during the 2004 ANOPR as part of the engineering
analysis. The interviews provided valuable information that DOE used to
evaluate the impacts of new standards on manufacturers' cash flows,
manufacturing capacities, and employment levels.
a. Issues. Venting was the most common concern discussed by
manufacturers, both at the 2004 ANOPR public meeting and during the
manufacturer interviews. Proper venting is necessary because of the
safety and reliability issues associated with corrosion that is caused
from condensation within the venting systems at certain efficiency
levels. Due to this concern, many manufacturers commented that
residential furnaces and boilers cannot be properly or safely vented at
certain AFUE levels. Instead, some manufacturers stated that they would
choose not to manufacturer an entire line of products at those
efficiency levels for which the safety concerns exceed the benefits. To
address these concerns, the Department requested additional information
from manufacturers. For example, for non-weatherized gas furnaces, the
Department requested information from manufacturers on the costs for
designing, manufacturing, and selling an entire furnace family at an
81-percent-AFUE efficiency level. The Department used manufacturer
responses to update product costs in the engineering analysis and
investment figures in the MIA. However, this still does not fully
address manufacturer concerns with venting because some manufacturers
stated they are not willing to bear the increased risk at any cost.
(See TSD, Chapter 12.)
Manufacturers of furnaces and boilers stated that the development,
manufacture, sale, and use of the products at near-condensing levels
would increase the risk of warranty and product liability claims, and
that such claims could be substantial and have a significant adverse
effect on their future profitability. During the interviews,
manufacturers indicated that their warranty costs could double or even
triple. Considering that earnings before interest and taxes are
typically about seven percent for manufactures of furnaces and boilers,
this level of increase in warranted costs could reduce profits by
twenty percent or more. Although DOE attempted to quantify the
financial impacts resulting from warranty cost increases, it did not
consider these costs in its assessment of INPV due to insufficient
information relating to changes in equipment failure rates and their
associated costs. The Department seeks comment and information which
would help to monetize these impacts. (See TSD, Chapter 12.)
Another concern expressed by the manufacturers during the
interviews centered on the shipments forecasted by the NES model. The
NES model forecasts the total number of products sold and the
efficiency distribution of these products for the base case and all
trial standard levels. During the course of the interviews, DOE asked
manufacturers to comment on the NES forecasts. For many product
classes, manufacturers generally agreed with the projected impacts of
standards on total shipments and the distribution mix of efficiencies.
However, most manufacturers stated that DOE overestimated the shipment
levels predicted at higher efficiency levels (trial standard levels 4
and 5). In some cases, they maintained that consumers would stop buying
furnaces and boilers and would choose heat pumps and/or combination
systems instead. The manufacturers expressed a common view that new
construction markets and southern States are most susceptible to
product switching. They also noted that higher efficiency standards
will affect replacement market sales, where consumers may be more
inclined to repair their existing system than to purchase a new system
with a costly installation. Finally, manufacturers commented on the
predicted distribution of products by efficiency level for the year
2015. In several instances, they provided revised estimates, which the
Department used to revise the shipment forecasts in the GRIM. The next
section provides further details on the manufacturers' shipments
forecast and the NES shipments forecast.
b. GRIM Scenarios and Key Inputs.
1. Shipments Forecast. The GRIM estimates manufacturer revenues
based on total-unit-shipment forecasts and the distribution of these
values by AFUE levels. Changes in the efficiency mix by standard level
are a key driver of manufacturer finances. For this analysis, the GRIM
used both NES and manufacturers' shipments forecasts for each product
from 2004 to 2038. Total shipments forecasted by the NES for all trial
standard levels in 2015 are shown in Table IV.6 and are further
detailed in this section of this proposed rule.
Table IV.6.--Total NES-Forecasted Shipments in 2015
[Millions]
----------------------------------------------------------------------------------------------------------------
Base
Product class case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces.............................. 2.77 2.77 2.77 2.76 2.74 2.67
Weatherized gas furnaces.................................. 0.424
Mobile home gas furnaces.................................. 0.196 0.195 0.195 0.192 0.182 0.182
Oil-fired furnaces........................................ 0.0879
Gas boilers............................................... 0.279
Oil-fired boilers......................................... 0.12
----------------------------------------------------------------------------------------------------------------
As described above, manufacturers stated during interviews that the
NES understated the decline in shipments at increased efficiency
levels. In particular, some manufacturers commented that at trial
standard level 4 and above, for non-
[[Page 59231]]
weatherized gas furnaces, they expect consumers to switch to heat pumps
or repair their existing equipment due to the increased cost of
condensing non-weatherized gas furnaces. Manufacturers also suggested
that there will be a market shift away from non-weatherized gas
furnaces at 90-percent AFUE and above in the southern climates, where
heat pumps are more feasible. One manufacturer expects on the order of
a 50-percent drop in shipments at trial standard level 5 and a 25-
percent drop in shipments at trial standard level 4 for non-weatherized
gas furnaces. Manufacturers also expressed their concern that, at trial
standard levels 1, 2, and 3, equipment switching alone would cause
shipment drops that did not seem to be characterized by the NES.
For weatherized gas furnaces, some manufacturers stated that there
would be a decline in shipments for all efficiency levels above the
current standard, with more significant declines at 83-percent AFUE.
One manufacturer commented that consumers would be more likely to
purchase heat pumps because of their reliability, and because of the
increased risk of condensation with 83-percent-AFUE furnaces. However,
some manufacturers acknowledged that consumers usually buy weatherized
gas furnaces with an air-conditioning unit, and the air-conditioning
unit is the key driver in consumers' decision.
Manufacturers expressed similar concerns for mobile home furnaces
as they did for non-weatherized gas furnaces at and above 90-percent
AFUE. They commented that consumers will switch to heat pumps or
combination systems rather than make an increased investment in more-
efficient mobile home furnaces. For oil-fired furnaces, manufacturers
suggested that the industry for this equipment will begin to shrink at
trial standard levels 4 and 5. In addition, they foresee a drop in
shipments at higher efficiency levels because consumers will either
change to alternative heating sources like heat pumps or use propane.
Finally, manufacturers of boilers expressed concern that the NES
analysis did not forecast any decline in shipments at any of the trial
standard levels. They stated that, because of increased first cost,
consumers are more likely to choose radiant or electric furnaces than
more-efficient boiler systems. One manufacturer recognized that there
had already been consolidation within the boiler industry and predicted
that increased efficiency standards would cause further consolidation
within the boiler industry. Furthermore, other manufacturers stated
that they believe that the industry would continue to move toward
consolidation even in the absence of increased energy efficiency
standards.
The Department took into consideration all of the manufacturers'
concerns with the NES shipments forecast and derived an alternative
shipments forecast (referred to as ``manufacturers forecast'') for each
product class, based on information received during the manufacturer
interviews. Table IV.7 shows the alternative shipments forecast for all
trial standard levels in 2015 by product class.
Table IV.7.--Total Manufacturers' Forecasted Shipments in 2015
[Millions]
----------------------------------------------------------------------------------------------------------------
Product class NAECA TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces.............................. 2.77 2.77 2.77 2.76 2.33 1.49
Weatherized gas furnaces.................................. 0.424
Mobile home gas furnaces.................................. 0.196 0.195 0.195 0.192 0.182 0.182
Oil-fired furnaces........................................ 0.0879 0.088 0.088 0.088 0.086 0.082
Gas boilers............................................... 0.279 0.279 0.251 0.251 0.251 0.223
Oil-fired boilers......................................... 0.12 0.12 0.12 0.12 0.12 0.096
----------------------------------------------------------------------------------------------------------------
The manufacturers' shipments forecast shows increased declines over
the declines forecasted by the NES model for most product classes at
increased efficiency levels. Trial standard level 5 shows a more
significant decline for all product classes except weatherized gas
furnaces. For non-weatherized gas furnaces, the difference between the
decline forecasted by the manufacturers' shipments and the decline
forecasted by the NES shipments for trial standard levels 4 and 5 is
approximately -14 percent and -44 percent, respectively. For
weatherized gas furnaces, the Department used the NES shipments
forecast because the prices of the products did not largely vary across
trial standard levels and, thus, the Department would not expect a
decline in the total shipments. Finally, based on its analysis of the
furnace and boiler industry, DOE assumed that shipments at lower
efficiencies were most likely to be rolled up into higher efficiency
levels in response to increases in the efficiency standard. In other
words, at an increased minimum standard level, the shipments at
efficiencies below the new minimum standard level will be added to the
shipments at the new minimum standard level. The Department took both
the NES shipments forecast and the manufacturers' shipments forecast
into consideration when assessing impacts on the industry.
2. Markups. During the interviews, manufacturers commented on the
differentiation between basic and premium products. Manufacturers
generally stated that they differentiate between basic and premium
products and include both in their mix of product offerings. To
accomplish this differentiation, manufacturers usually offer higher
efficiency levels and more features for premium products, which
increases their profitability for these types of products. To estimate
the manufacturer price of the equipment sold, DOE applied different
markups to the production costs estimated in the engineering analysis.
For the MIA analysis, DOE considered up to four distinct markup
scenarios to bound the range of expected product prices following
standards. For each product class, the Department used the markup
scenarios that best characterize the markup conditions described by
manufacturers, and that reflect the type of market responses
manufacturers expect as a result of standards. Table IV.8 summarizes
the markup scenario DOE used for each product class and the markup
applied for the flat markup scenario. (See TSD, Chapter 12.)
[[Page 59232]]
Table IV.8.--Summary of Markup Scenario by Product Class
----------------------------------------------------------------------------------------------------------------
Flat markup
Product class (Markup Two-tier markup Three-tier Constant price
applied) markup markup
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces................. 1.4 x
Weatherized gas furnaces..................... 1.4 x
Mobile home gas furnaces*.................... 1.29
Oil-fired furnaces........................... 1.4 x
Gas boilers.................................. 1.44 x
Oil-fired boilers............................ 1.44 x
----------------------------------------------------------------------------------------------------------------
* For mobile home gas furnaces, the Department used flat markup scenario only.
For the flat markup scenario, the Department applied a uniform
``flat markup'' across all products, which it calculated from industry
data. A flat markup assumes no differentiation in gross-margin
percentage across product efficiency levels. The Department based the
two-tier markup on the assumption that manufacturers differentiate
between baseline and premium products--giving a baseline product one
markup and a premium product another, higher markup. The Department
used the three-tier markup assumption for boilers, based on the
information the manufacturers provided during the interviews regarding
the change in profitability for different efficiency levels. Finally,
since some manufacturers commented that they will not be able to
recover any of the incremental product cost resulting from new
standards for some product classes, the Department used a constant
price markup and modeled this situation by assuming manufacturers'
baseline prices remain unchanged even if the baseline efficiency level
is increased.
3. Product and Capital Conversion Costs. Energy conservation
standards typically cause manufacturers to incur one-time conversion
costs to bring their production facilities and product designs into
compliance with the new regulation. For the purpose of the MIA, DOE
classified these one-time conversion costs into two major groups.
Product conversion expenses are one-time investments in research,
development, testing, and marketing, focused on making product designs
comply with the new efficiency standard. Conversion-capital
expenditures are one-time investments in property, plant, and equipment
to adapt or change existing production facilities so that new product
designs can be fabricated and assembled.
The Department assessed the R&D expenditures manufacturers would be
required to invest at each trial standard level. It obtained financial
information through manufacturer interviews and compiled the results in
an aggregated form to mask any proprietary or confidential information
from any one manufacturer. For each product class and trial standard
level, DOE considered a number of manufacturer responses. The
Department estimated the total product conversion expenditures by
gathering the responses received during the manufacturer interviews,
then weighed these data by market share for each industry and, finally,
extrapolated each manufacturer's R&D expenditures for each product.
The Department also evaluated the level of conversion-capital
expenditures needed to comply with new energy conservation standards.
It prepared preliminary estimates of the capital investments required
using the manufacturing cost model. The Department then used the
manufacturer interviews to gather additional data on the level of
capital investment required at the various efficiency levels.
Manufacturers explained how different trial standard levels impacted
their ability to use existing plants, warehouses, tooling, and
equipment. From the interviews, the Department was able to estimate
what portion of existing manufacturing assets needed to be replaced
and/or reconfigured, and what additional manufacturing assets were
required to manufacture the higher efficiency equipment. In most cases,
higher standards required the replacement of a larger proportion of
existing assets.
G. Employment Impact Analysis
The Process Rule includes employment impacts among the factors that
DOE considers in selecting a proposed standard. Employment impacts
include direct and indirect impacts. Direct employment impacts are any
changes in the number of employees for furnace and boiler
manufacturers. Indirect impacts are those changes of employment in the
larger economy that occur due to the shift in expenditures and capital
investment that is caused by the purchase and operation of more-
efficient furnace and boiler equipment. The MIA addresses direct
employment impacts; this section describes indirect impacts.
Indirect employment impacts from furnace and boiler standards
consist of the net jobs created or eliminated in the national economy,
other than in the manufacturing sector being regulated, as a
consequence of: (1) Reduced spending by end users on energy
(electricity, gas--including LPG--and oil); (2) reduced spending on new
energy supply by the utility industry; (3) increased spending on the
purchase price of new furnaces and boilers; and (4) the effects of
those three factors throughout the economy. The Department expects the
net monetary savings from standards to be redirected to other forms of
economic activity. The Department also expects these shifts in spending
and economic activity to affect the demand for labor in the short term.
In developing this proposed rule, the Department estimated indirect
national employment impacts using an input/output model of the U.S.
economy, called IMBUILD (impact of building energy efficiency
programs). The Department's Office of Building Technology, State, and
Community Programs (now the Building Technologies Program) developed
the model. IMBUILD is a personal-computer-based, economic-analysis
model that characterizes the interconnections among 35 sectors of the
economy as national input/output structural matrices, using data from
the U.S. Bureau of Labor Statistics (BLS). The IMBUILD model estimates
changes in employment, industry output, and wage income in the overall
economy of the United States resulting from changes in expenditures in
the various sectors of the economy. The Department estimated changes in
expenditures using the NES Spreadsheet. Using IMBUILD, it then
estimated the net national, indirect-employment impacts of potential
furnace and boiler efficiency standards on employment by sector.
[[Page 59233]]
While both the IMBUILD input/output model and the direct use of BLS
employment data suggest the proposed furnace and boiler standards could
increase the net demand for labor in the economy, the gains would most
likely be very small relative to total national employment. The
Department therefore concludes only that the proposed furnace and
boiler standards are likely to produce employment benefits that are
sufficient to offset fully any adverse impacts on employment in the
furnace and boiler or energy industries. (See TSD, Chapter 14.)
The Department did not receive stakeholder comments on these
indirect employment impact methods, which it proposed in the 2004 ANOPR
for use in the today's analysis.
H. Utility Impact Analysis
The utility impact analysis estimates the change in the forecasted
power generation capacity for the Nation. This analysis separately
determines the changes to supply and demand as a result of natural gas,
fuel oil, LPG or electricity residential consumption savings due to the
standard. The Department calculated this change using the NEMS-BT
computer model. The NEMS-BT models certain policy scenarios such as the
effect of reduced energy consumption per trial standard level by fuel
type. The analysis output provides a forecast for the needed generation
capacities at each trial standard level. The estimated net benefit of
the standard is the difference between the forecasted generation
capacities by NEMS-BT and the AEO2005 Reference Case.
The Department obtained the energy savings inputs associated with
electricity and natural gas consumption savings from the NES analysis.
These inputs reflect the effects of efficiency improvement on furnace
energy consumption, both fuel (natural gas, fuel oil, and LPG) and
electricity. The inputs also reflect the impacts associated with the
market shift from natural gas heating to electric heating projected to
occur at trial standard levels that have an increased installed cost
for gas furnaces. At trial standard levels 4 and 5, the electricity
consumption due to the market shift more than offsets the electricity
savings through more-efficient furnace designs. This effect results in
an overall increase in projected generating capacity. The results
represent the corresponding changes to utility sector supply and demand
as a result of natural gas, fuel oil, LPG, or electricity residential
consumption savings (or in some cases increases). Chapter 13 of the TSD
presents results of the utility impact analysis.
AGA stated that the impact of market shifts from natural gas
heating to electric heating on natural gas utilities should be
developed in the utility impact analysis. (AGA, Public Meeting
Transcript, No. 59.8 at p. 41) Historically, the Department's approach
for the utility impact analysis has only evaluated the impact of market
shifts associated with standards on energy consumption, which is
related to utility sales. The evaluation of other types of utility
impacts that result from declines in the sales of natural gas or other
forms of energy is not part of the analysis methodology; thus, DOE did
not perform this type of evaluation in the utility impact analysis for
the furnace and boiler standards rulemaking.
EEI commented that DOE should evaluate the direct impact of new
standards on the peak loads of the natural gas grid and oil supply
chain in the United States, in addition to any analysis on the indirect
impacts on the electric system. (EEI, No. 69 at p. 5) The utility
impact analysis used NEMS to account for electricity peak load impacts.
It did not consider peak load impacts on the natural gas grid and oil
supply chain because these systems have sufficient storage to avoid
peak demand impacts.
I. Environmental Analysis
Under 42 U.S.C. 6295(o)(2)(B)(i)(VI), the Department determined the
environmental impacts of the proposed standard. The Department
estimated direct emissions impacts at the household level as well as
impacts on power plant emissions. While the Department is not proposing
to regulate furnace and boiler electricity use, the electricity use of
these appliances affects power plant emissions.
The Department calculated the reduction in power plant emissions of
CO2 and NOX using the NEMS-BT computer model. The
NEMS-BT is similar to the AEO2005 NEMS, except that furnace and boiler
energy usage is reduced by the amount of energy (by fuel type) saved
due to the trial standard levels. The Department obtained the input of
energy savings from the NES Spreadsheet. For the environmental
analysis, the output is the forecasted physical emissions. The net
impact of the standard is the difference between emissions estimated by
NEMS-BT and the AEO2005 Reference Case. NEMS-BT tracks CO2
emissions using a detailed module that provides robust results because
of its broad coverage of all sectors and inclusion of interactive
effects. The Department also generated alternative price forecasts for
use by NEMS-BT, corresponding to the High and Low Economic Growth
sensitivity cases found in AEO2005, and used them as alternative
scenarios. The Department presents these forecasts in the environmental
assessment in the TSD.
The Department does not report an estimated reduction in power
plant emissions of SO2 because any such reduction resulting
from an efficiency standard would not affect the overall level of
SO2 emissions in the U.S. The Clean Air Act Amendments of
1990 set an SO2 emissions cap on all power generation. The
attainment of this target is flexible among generators and is enforced
through the use of emissions allowances and tradable permits. Accurate
simulation of SO2 trading implies that the effect of
efficiency standards on physical emissions will be near zero because
emissions will always be at or near the allowed ceiling. Thus, there
may not be an actual reduction in SO2 emissions from
electricity savings as long as emission ceilings are binding. However,
although there may not be an environmental benefit from reduced
SO2 emissions from electricity savings, there still may be
an economic benefit. Electricity savings can decrease the need to
purchase or produce SO2 emissions allowance credits, which
decreases the costs of complying with regulatory caps on emissions. The
Department reports household SO2 emissions savings, because
the SO2 emissions caps do not apply to household emissions.
Power sector NOX emissions impacts will be affected by
the Clean Air Interstate Rule (CAIR), which the U.S. Environmental
Protection Agency (EPA) issued on March 10, 2005. CAIR will permanently
cap emissions of NOX in 28 eastern states and the District
of Columbia. 70 FR 25162 (May 12, 2005). As with SO2
emissions, a cap on NOX emissions means that equipment
efficiency standards may result in no physical effects on these
emissions. When NOX emissions are subject to emissions caps,
the Department's emissions reduction estimate corresponds to
incremental changes in emissions allowance credits in cap-and-trade
emissions markets rather than physical emissions reductions. Therefore,
while the emissions cap may not result in physical emissions reduction
from the proposed standards, it does produce an environmental-related
economic benefit in the form of emissions allowance credits.
In addition to electricity, the operation of furnaces and boilers
requires use of fossil fuels, and results in household emissions of
CO2, NOX,
[[Page 59234]]
and SO2 at the sites where appliances are used. NEMS-BT
provides no means for estimating such household emissions. Therefore,
DOE calculated separate estimates of the effect of the proposed
standard on household emissions of CO2, NOX, and
SO2, based on emissions factors derived from the literature.
The Department invites comments on the environmental assessment
that is published with the TSD.
V. Analytical Results
A. Trial Standard Levels
The Department analyzed the benefits and burdens of the five trial
standard levels considered in today's proposed rule. Table V.1 presents
the five trial standard levels and the corresponding product class
efficiencies.
Table V.1.--Trial Standard Levels for Furnaces and Boilers
----------------------------------------------------------------------------------------------------------------
Trial standard levels (AFUE, %)
Product classes --------------------------------------------
TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized gas furnaces....................................... 80 80 81 90 96
Weatherized gas furnaces........................................... 80 83 83 83 83
Mobile home gas furnaces........................................... 80 80 81 90 90
Oil-fired furnaces................................................. 80 82 82 84 85
Gas boilers........................................................ 82 84 84 84 99
Oil-fired boilers.................................................. 83 83 83 84 95
----------------------------------------------------------------------------------------------------------------
Trial standard level 1 represents the most common product
efficiencies of the current market, based on the NES shipments
forecast. (See TSD, Chapter 9.) For example, for non-weatherized, gas-
fired furnaces, trial standard level 1 is 80-percent AFUE. The
Department also examined the 2005 GAMA directory and compared the
number of models listed in the directory to the NES shipments forecast.
For non-weatherized gas furnaces, 80-percent AFUE also represents the
highest number of models listed in the 2005 GAMA directory.
Furthermore, trial standard level 1, 80-percent AFUE, for non-
weatherized gas furnaces represents a two-percent increase in AFUE
compared to the current base-case standard level for these products.
Trial standard level 2 is the set of efficiencies for all product
classes that yields the maximum NPV as calculated in the NES analysis,
assuming a seven-percent discount rate and only considering non-
condensing technologies.\18\ (See TSD, Chapter 10.) For example, for
weatherized gas furnaces, 83-percent AFUE represents the efficiency
level that corresponds to the maximum NPV calculated in the NES. Trial
standard level 2, 83-percent AFUE, also corresponds to the maximum
technologically feasible level for weatherized gas furnaces.
---------------------------------------------------------------------------
\18\ The Department established the efficiency levels in each
TSL based on the analysis using AEO2005 energy price forecasts.
---------------------------------------------------------------------------
Trial standard level 3 consists of the efficiency ratings that
correspond to the maximum NPV as defined by the selection criteria for
trial standard level 2, except that the efficiency levels for non-
weatherized gas furnaces and mobile home furnaces are adjusted to 81-
percent AFUE. The Department recognizes there is a potential for
increased safety risk to consumers at 81-percent AFUE for non-
weatherized gas furnaces and mobile home furnaces because of a higher
potential for vent system and heat exchanger corrosion failure. In its
2004 ANOPR analysis, the Department found that as many as eight percent
of the installations could pose increased risk of vent and heat
exchanger failure. 69 FR 45419. The Department believes the increased
safety risk can likely be resolved through the use of venting materials
that are impervious to the corrosive effects of condensate and improved
heat exchanger designs. It included the cost of implementing such
techniques in its analysis for trial standard level 3. In addition, DOE
recognizes that, in some instances, consumers could instead elect to
install a more efficient, condensing gas-fired furnace. The
Department's analysis did not capture that possibility.
Trial standard level 4 consists of efficiency ratings that
correspond to the maximum efficiency level that has positive NPV
calculated by the NES, assuming a three-percent discount rate. For
example, oil-fired boilers at trial standard level 4, or 84-percent
AFUE, represent the maximum efficiency level for which there would
still be positive savings between the standards case and the base case.
At efficiency levels above trial standard level 4, there are negative
consumer impacts as shown by the negative NPVs.
Trial standard level 5 is the maximum technologically feasible
level. It represents condensing technologies for all classes, except
weatherized gas-fired furnaces and oil-fired boilers.
B. Economic Justification and Energy Savings
1. Economic Impacts on Consumers
a. Life-Cycle Cost and Payback Period. To evaluate the net economic
impact of the standards on consumers, the Department conducted an LCC
and payback period analysis for each of the trial standard levels.
Higher-efficiency furnaces and boilers would affect consumers in two
ways: Annual operating expense would decrease and purchase price and
payback period would increase. The payback period is an economic
benefit-cost measure that uses benefits and costs without discounting.
Section IV.C discusses the inputs used for calculating the LCC and
payback period.
For each trial standard level and for all product classes, the LCC
analysis estimates the fraction of households for which the LCC will
either decrease (net benefit), or increase (net cost), or exhibit no
change (no impact) relative to the base case equipment forecast. No
impacts occur when the equipment efficiencies of the base case forecast
already equal or exceed the considered trial standard level efficiency.
Tables V.2 through V.7 show the mean LCC savings and the percent of
households with a net cost, no impact, and a net benefit (i.e.,
positive savings) at each trial standard level for each of the product
classes, using the AEO2005 energy prices forecast. (Values in
parentheses in the columns for LCC savings represent an increase in
LCC.) The tables also show the mean payback period at each trial
standard level.
[[Page 59235]]
The annual energy consumption calculated from the test procedure is
greater than the annual energy consumption used in the LCC analysis.
Therefore, the mean payback periods calculated for the LCC analysis are
longer than the rebuttable payback periods, which use the test
procedure energy consumption results.
Table V.2.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ------------------------------------------------------------------ period
Trial standard level level LCC LCC savings Net cost No impact Net benefit -------------
(AFUE) (%) ------------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit.............................................. 78 9,985 ............ ........... ........... ........... ............
1.......................................................... 80 9,834 2 0 98 2 1.5
2.......................................................... 80 9,834 2 0 98 2 1.5
3.......................................................... 81 9,826 2 32 36 32 26
4.......................................................... 90 9,753 5 39 35 25 23
5.......................................................... 96 10,521 (731) 88 4 8 88
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.3.--Summary of LCC and Payback Period Results for Weatherized Gas Furnaces
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net ------------
Trial standard level level ------------- savings -------------------------- benefits
(AFUE) (%) ------------- ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 8,256 ........... ........... ........... ........... ...........
1............................................................ 80 8,179 2 0 98 2 1.6
2............................................................ 83 8,085 73 6 0 94 4.6
3............................................................ 83 8,085 73 6 0 94 4.6
4............................................................ 83 8,085 73 6 0 94 4.6
5............................................................ 83 8,085 73 6 0 94 4.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.4.--Summary of LCC and Payback Period Results for Mobile Home Gas Furnaces
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 75 7,930 ........... ........... ........... ........... ...........
1............................................................ 80 7,600 51 1 85 14 5
2............................................................ 80 7,600 51 1 85 14 5
3............................................................ 81 7,635 18 71 5 24 31
4............................................................ 90 7,524 124 42 5 53 25
5............................................................ 90 7,524 124 42 5 53 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.5.--Summary of LCC and Payback Period Results for Oil-Fired Furnaces
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 11,593 ........... ........... ........... ........... ...........
1............................................................ 80 11,418 7 0 96 4 0.3
2............................................................ 82 11,257 113 0 30 70 0.8
3............................................................ 82 11,257 113 0 30 70 0.8
4............................................................ 84 11,425 (23) 54 15 31 18
5............................................................ 85 11,518 (109) 67 7 25 22
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 59236]]
Table V.6.--Summary of LCC and Payback Period Results for Gas Boilers
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 80 15,847 ........... ........... ........... ........... ...........
1............................................................ 82 15,416 158 11 44 46 12
2............................................................ 84 15,334 232 18 15 67 12
3............................................................ 84 15,344 232 18 15 67 12
4............................................................ 84 15,344 232 18 15 67 12
5............................................................ 99 16,412 (795) 77 3 20 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.7.--Summary of LCC and Payback Period Results for Oil-Fired Boilers
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 80 16,896 ........... ........... ........... ........... ...........
1............................................................ 83 16,506 40 0 84 16 1.2
2............................................................ 83 16,506 40 0 84 16 1.2
3............................................................ 83 16,506 40 0 84 16 1.2
4............................................................ 84 16,606 1 24 61 15 27
5............................................................ 95 17,775 (1070) 90 0 10 36
--------------------------------------------------------------------------------------------------------------------------------------------------------
Similarly, Tables V.8 through V.13 show LCC results for the energy
price sensitivity analysis. They list the mean LCC savings and the
percent of households with a net cost, no impact, and a net benefit
(i.e., positive savings) at each trial standard level for each of the
product classes, based on energy price forecast from AEO2006. (Values
in parentheses in the columns for LCC savings represent an increase in
LCC.) The tables also show the mean payback period at each trial
standard level.
Table V.8.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ------------------------------------------------------------------ period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) ------------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit............................................... 78 11,214 ............ ........... ........... ........... ...........
1........................................................... 80 11,038 2 0 98 2 1.6
2........................................................... 80 11,038 2 0 98 2 1.6
3........................................................... 81 11,018 8 30 36 34 22
4........................................................... 90 10,850 63 35 35 29 20
5........................................................... 96 11,564 (626) 85 4 12 75
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.9.--Summary of LCC and Payback Period Results for Weatherized Gas Furnaces in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 8,898 ........... ........... ........... ........... ...........
1............................................................ 80 8,809 2 0 98 2 1.4
2............................................................ 83 8,698 86 5 0 95 4.0
[[Page 59237]]
3............................................................ 83 8,698 86 5 0 95 4.0
4............................................................ 83 8,698 86 5 0 95 4.0
5............................................................ 83 8,698 86 5 0 95 4.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.10.--Summary of LCC and Payback Period Results for Mobile Home Gas Furnaces in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 75 9,399 ........... ........... ........... ........... ...........
1............................................................ 80 8,940 $71 1 85 14 3.6
2............................................................ 80 8,940 71 1 85 14 3.6
3............................................................ 81 8,964 49 64 5 31 28
4............................................................ 90 8,764 240 32 5 63 21
5............................................................ 90 8,764 240 32 5 63 21
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.11.--Summary of LCC and Payback Period Results for Oil-Fired Furnaces in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 14,946 ........... ........... ........... ........... ...........
1............................................................ 80 14,690 10 0 96 4 0.2
2............................................................ 82 14,453 167 0 30 70 0.6
3............................................................ 82 14,453 167 0 30 70 0.6
4............................................................ 84 14,548 90 39 15 46 13
5............................................................ 85 14,606 37 52 7 41 15
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.12.--Summary of LCC and Payback Period Results for Gas Boilers in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 80 17,772 ........... ........... ........... ........... ...........
1............................................................ 82 17,193 196 9 44 47 10
2............................................................ 84 17,074 299 15 15 70 10
3............................................................ 84 17,074 299 15 15 70 10
4............................................................ 84 17,074 299 15 15 70 10
5............................................................ 99 17,922 (508) 70 3 27 35
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 59238]]
Table V.13.-- Summary of LCC and Payback Period Results for Oil-Fired Boilers in the Energy Price Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ------------------------------------------------------------------ period
Trial standard level level LCC LCC savings Net cost No impact Net benefit -------------
(AFUE) (%) ------------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit.............................................. 80 22,527 ............ ........... ........... ........... ............
1.......................................................... 83 21,937 61 0 84 16 0.8
2.......................................................... 83 21,937 61 0 84 16 0.8
3.......................................................... 83 21,937 61 0 84 16 0.8
4.......................................................... 84 21,973 47 17 61 22 19
5.......................................................... 95 22,542 (471) 72 0 28 26
--------------------------------------------------------------------------------------------------------------------------------------------------------
b. Consumer Subgroup Analysis. Using the LCC Spreadsheet Model, the
Department determined the impact of the standards for non-weatherized
gas furnaces on the following consumer subgroups: Low-income
households, senior-only households, and Southern and Northern
households. The results for low-income and senior-only households
indicate that the LCC impacts on these subgroups and the payback
periods are similar to the LCC impacts and payback periods on the full
sample of residential consumers. Thus, the proposed furnace and boiler
standards would have an impact on low-income households and senior-only
households that would be similar to their impact on the general
population of residential consumers. (See TSD, Chapter 11.)
The Department also determined the impact of the standards for non-
weatherized gas furnaces on Southern and Northern households. Tables
V.14 and V.15 show the mean LCC savings and the percent of households
with a net cost, no impact, and a net benefit (i.e., positive savings)
at each trial standard level for non-weatherized gas furnaces, using
the AEO2005 energy prices forecast. (Values in parentheses in the
columns for LCC savings represent an increase in LCC.) The tables also
show the mean payback period at each trial standard level.
Table V.14.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Northern Region
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 11,383 ........... ........... ........... ........... ...........
1............................................................ 80 11,202 2 0 99 1 0.6
2............................................................ 80 11,202 2 0 99 1 0.6
3............................................................ 81 11,179 10 23 48 30 17
4............................................................ 90 10,990 79 24 48 28 15
5............................................................ 96 11,695 (582) 85 6 9 65
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.15.--Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Southern Region
[AEO2005 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
----------------------------------------------------------------- period
Efficiency LCC LCC Net cost No impact Net benefit ------------
Trial standard level level ------------- savings ---------------------------------------
(AFUE) (%) ------------- years
2004$ 2004$ % % %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78% 8,359 ........... ........... ........... ........... ...........
1............................................................ 80 8,242 1 0 98 2 2.1
2............................................................ 80 8,242 1 0 98 2 2.1
3............................................................ 81 8,250 (9) 44 20 35 32
4............................................................ 90 8,305 (79) 57 19 23 29
5............................................................ 96 9,140 (894) 91 1 7 110
--------------------------------------------------------------------------------------------------------------------------------------------------------
Similarly, Tables V.16 and V.17 show the LCC subgroup results by
region for the energy price sensitivity analysis. The tables indicate
the impact of the standards for non-weatherized gas furnaces on
Southern and Northern
[[Page 59239]]
households, based on the AEO2006 energy price forecast, in terms of the
mean LCC savings and the percent of households with a net cost, no
impact, and a net benefit (i.e., positive savings) at each trial
standard level. (Values in parentheses in the columns for LCC savings
represent an increase in LCC.) The tables also show the mean payback
period at each trial standard level.
Table V.16.-- Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Northern Region Evaluated as part of the Energy Price
Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 12,835 ........... ........... ........... ........... ...........
1............................................................ 80 12,625 2 0 99 1 0.5
2............................................................ 80 12,625 2 0 99 1 0.5
3............................................................ 81 12,588 17 21 48 32 15
4............................................................ 90 12,286 138 20 48 32 13
5............................................................ 96 12,926 (471) 81 6 13 55
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table V.17.-- Summary of LCC and Payback Period Results for Non-Weatherized Gas Furnaces in the Southern Region Evaluated as part of the Energy Price
Sensitivity Analysis
[AEO2006 energy price forecast]
--------------------------------------------------------------------------------------------------------------------------------------------------------
LCC Payback
Efficiency ----------------------------------------------------------------- period
Trial standard level level LCC LCC savings Net cost No impact Net benefit ------------
(AFUE) (%) -----------------------------------------------------------------
2004$ 2004$ % % % years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Unit................................................ 78 9,274 ........... ........... ........... ........... ...........
1............................................................ 80 9,139 1 0 98 2 1.9
2............................................................ 80 9,139 1 0 98 2 1.9
3............................................................ 81 9,137 (2) 42 20 38 28
4............................................................ 90 9,122 (20) 53 19 27 25
5............................................................ 96 9,916 (796) 89 1 10 95
--------------------------------------------------------------------------------------------------------------------------------------------------------
c. Rebuttable-Presumption Payback. As set forth in section
325(o)(2)(B)(iii) of EPCA, 42 U.S.C. 6295(o)(2)(B)(iii), there is a
rebuttable presumption that an energy conservation standard is
economically justified if the increased installed 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. However, while
the Department examined the rebuttable-presumption criteria, it
determined economic justification for the proposed standard levels
through a weighting of the benefits and burdens of increased efficiency
in accordance with section 325(o)(2)(B)(i) of EPCA. (42 U.S.C.
6295(o)(2)(B)(i))
The Department calculated a rebuttable-presumption payback period
for each trial standard level to determine if DOE could presume that a
standard at that level is economically justified. Table V.18 shows the
rebuttable-presumption payback periods. Rather than using distributions
for input values, DOE used discrete values and, as required by EPCA,
based the calculation on the DOE furnace and boiler test procedure
assumptions. As a result, the Department calculated a single
rebuttable-presumption payback value, and not a distribution of payback
periods, for each standard level.
Table V.18.--Rebuttable-Presumption Payback Period Using DOE Test Procedure
----------------------------------------------------------------------------------------------------------------
Payback period (years)
Product class --------------------------------------------
TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
Non-weatherized Gas Furnaces....................................... 0.9 0.9 na na na
Weatherized Gas Furnaces........................................... 0.8 na na na na
Mobile Home Gas Furnaces........................................... 2.5 2.5 na na na
Oil-fired Furnaces................................................. 0.1 0.2 0.2 na na
Gas Boilers........................................................ na na na na na
Oil-fired Boilers.................................................. 0.4 0.4 0.4 na na
----------------------------------------------------------------------------------------------------------------
[[Page 59240]]
2. Economic Impacts on Manufacturers
The Department performed an MIA to estimate the impact of higher
efficiency standards on furnace and boiler manufacturers. (See TSD,
Chapter 12.)
a. Industry Cash Flow Analysis Results. The Department used the
INPV in the MIA to compare the financial impacts of different trial
standard levels on furnace and boiler manufacturers. The INPV is the
sum of all net cash flows discounted at the industry's cost of capital,
or discount rate. Because the INPV applies only to the furnace and
boiler manufacturing industry, the INPV is different from the NPV that
the Department used to assess the cumulative benefit or cost of
standards to consumers on a national basis. The GRIM estimated cash
flows between 2004 and 2038 and found them to be consistent with the
forecast period used in the national impact analysis.
The Department compared the INPV of the base case (no new
efficiency standard) to that of each trial standard level. The
difference in INPV is an estimate of the economic impacts that
implementing that particular standard would have on the entire
industry. To evaluate the range of cash flow impacts on the industry,
the Department constructed up to four different GRIM scenarios for each
product class that used different assumptions for markups and
shipments, as described above.
i. Non-Weatherized Gas Furnaces. For non-weatherized gas furnaces,
the Department considered four cash flow scenarios:
The flat markup and two-tier markup scenarios are each combined
with NES shipment forecasts and manufacturers' shipment forecasts. To
assess the lower end of the range of potential impacts, the Department
used the flat markup and NES shipments scenario, which represents an
optimistic situation where shipments are not greatly affected by even a
large increase in cost to the consumer. In addition, this scenario
assumes that manufacturers do not differentiate their baseline products
from their premium products, either in the base case or the standards
case--thus, the scenario assumes a constant markup across all
efficiencies. The Department did not reduce this profit margin to
offset some of the price burden passed on to the consumer in the
standards case. Consequently, some of the manufacturer impacts on INPV
are positive.
To assess the higher end of the range of potential impacts, the
Department used the manufacturers' shipments forecast and modeled a
two-tiered markup structure. The two-tier scenario assumes that the
proportion of premium-margin sales will be reduced by the ``roll-up''
of lower efficiency products to the new standard level. The
manufacturers' shipments forecast assumes an increased drop in
shipments for trial standard levels 4 and 5 due to equipment switching
and an increase in repairs of current systems. As can be observed from
the cash flow results, both the shipment scenario and the markup
scenario have a significant impact on the results. Table V.19 shows the
manufacturer impacts for each of the four scenarios.
Table V.19. Changes in Industry Net Present Value, Non-Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
NES shipments
-------------------------------------------------------
Flat markup Two-tier markup
-------------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------- INPV ------------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case............................................... 1,044 ........ ....... 1,010 ........ .......
1....................................................... 1,044 0 0 1,010 0 0
2....................................................... 1,044 0 0 1,010 0 0
3....................................................... 974 (69) -7 938 (72) -7
4....................................................... 1,056 13 1 801 (209) -21
5....................................................... 1,258 214 21 824 (186) -18
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Manufacturers' shipments
-------------------------------------------------------
Flat markup Two-tier markup
-------------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------- INPV ------------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case............................................... 1,068 ........ ....... 1,073 ........ .......
1....................................................... 1,068 0 0 1,073 0 0
2....................................................... 1,068 0 0 1,073 0 0
3....................................................... 998 (71) -7 1,000 (73) -7
4....................................................... 980 (88) -8 777 (295) -28
5....................................................... 807 (261) -24 575 (498) -46
----------------------------------------------------------------------------------------------------------------
At trial standard levels 1 and 2 (80-percent AFUE), the impact on
INPV and cash flow would be slight, since the bulk of the product being
sold is already at the 80-percent AFUE level; thus, industry revenues
and costs are not significantly negatively impacted. Furthermore,
little investment is required to meet the standard.
At trial standard level 3 (81-percent AFUE), concern over safety
and reliability associated with corrosion due to condensation is the
dominant issue for manufacturers of non-weatherized gas furnaces. Based
on information submitted by industry, to mitigate theses concerns a
standard at trial standard level 3 would require a
[[Page 59241]]
complete redesign of furnace heat exchangers, entailing $60 million in
product conversion expenses and a $121-million investment in new
tooling and equipment. Furthermore, manufacturers maintain that this
capital outlay does not fully address their safety, reliability, and
equipment longevity concerns. Finally, manufacturers stated that, at
trial standard level 3, they must address additional liability impacts
that are not illustrated by the quantitative results presented here.
The impact on INPV at trial standard level 3 is -7 percent and cash
flow in the year leading to the effective date would be reduced to
approximately zero from a base case value of $67 million.
Trial standard level 4 requires the production of 90-percent-AFUE
condensing, non-weatherized gas furnaces. If manufacturers lose the
ability to market and sell premium products, such as high AFUE
condensing products, then DOE expects the impact on INPV to be larger.
Another key uncertainty in future profitability is the market response
to the higher price and corresponding energy savings of the condensing
product. Manufacturers predict a much greater drop in unit sales than
the NES analysis forecasted. The INPV impacts range from +1-percent to
-28 percent. The required product and capital conversion costs are
significant and estimated to be $82 million and $174.3 million,
respectively, because of the need for a secondary heat exchanger. At
this level, the industry cash flow becomes slightly negative, -$1
million, compared to the base case value of $67 million in the year
leading up to the standards.
At trial standard level 5 (96-percent-AFUE), the impact on INPV
would range between +21 percent and -46 percent, depending on markup
and shipment assumptions. The industry would experience an increase in
value if it were able to fully pass through to consumers the
incremental production costs and associated markups, and the shipments
were reduced according to the forecasts in the NES shipments model.
However, there is a risk of very large negative impacts if shipments
were reduced according to manufacturers' expectations and in the very
likely situation that manufacturers were no longer able to offer
premium products at higher margins. During the interviews,
manufacturers expressed disbelief at the possibility of manufacturing
an entire product line at 96-percent AFUE, since there is only one
model currently being manufactured at this efficiency level. Most
manufacturers did not provide DOE with projected product conversion
costs or capital conversion costs at this level, since they could not
conceive of what designs might reach this efficiency level. The
Department estimated the required product and capital conversion costs,
based on limited input, to be $144 million and $705 million,
respectively for TSL 5. The impact on annual cash flow from product
conversion and capital expenditures prior to the standard would be
severe. The peak negative cash flow would be approximately four times
the magnitude of the base-case positive cash flow.
ii. Weatherized Gas Furnaces. For weatherized gas furnaces, the
Department considered two cash flow scenarios, which include the flat-
markup and the constant-price scenario--both using NES shipments
forecasts. The flat-markup and NES-shipments scenario represents a
situation where shipments are not greatly affected, even by a large
increase in cost to the consumer. In the second scenario, the constant-
price aspect assumes that manufacturers of weatherized gas furnaces
will not be able to recover the incremental product costs resulting
from increased standards. The Department used these two markup
scenarios because manufacturers currently do not differentiate between
baseline and premium products, since condensing technologies are not
used in weatherized gas furnaces and therefore are not a
differentiating feature that requires a premium markup. Consequently,
the Department did not consider a two-tier markup scenario. Table V.20
shows the weatherized gas furnace industry impacts using the two
scenarios.
Table V.20.--Changes in Industry Net Present Value, Weatherized Gas Furnaces
----------------------------------------------------------------------------------------------------------------
NES shipments
-----------------------------------------------------
Flat markup Constant price markup
-----------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------ INPV -----------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case................................................. 246 ....... ....... 246 ....... .......
1......................................................... 220 (27) -11 215 (31) -13
2......................................................... 199 (47) -19 167 (79) -32
3......................................................... 199 (47) -19 167 (79) -32
4......................................................... 199 (47) -19 167 (79) -32
5......................................................... 199 (47) -19 167 (79) -32
----------------------------------------------------------------------------------------------------------------
The impact on INPV for weatherized gas furnaces at trial standard
level 1 (81-percent AFUE) ranges between -11 percent and -13 percent.
Even with the flat-markup assumption and accepting the NES-shipments
forecast unaltered, the industry value drops because of the large
conversion costs relative to industry revenues. To achieve 81-percent
AFUE, manufacturers estimate product conversion costs of $49 million
and capital conversion expenses of $28 million. Negative cash flows
peak at approximately $5 million from a base-case value of $17 million
in 2014.
At 83-percent AFUE, trial standard levels 2-5, DOE forecasts that
the INPV will drop between 19 percent and 32 percent. At 83-percent
AFUE, investment in corrosion-resistant materials must be made. The
Department estimates the required product-conversion and capital-
conversion costs at $70 million and $61 million, respectively.
Manufacturers stated that this is primarily due to the need for
stainless steel heat exchangers. Net cash flow would drop to
approximately -$25 million, a drop of $40 million from the base case.
iii. Mobile Home Gas Furnaces. For mobile home furnaces, the
Department considered two cash flow scenarios: the
[[Page 59242]]
flat-markup and NES-shipments scenario, and the flat-markup and
manufacturers' shipments scenario. The flat-markup and NES-shipments
scenario represents a situation where shipments are not greatly
affected by a large increase in cost to the consumer. The Department
used the flat-markup because it does not believe there is a large
variation in gross margin across all available efficiency levels. To
represent the higher range of potential impacts, the Department used
the flat-markup and manufacturers' shipments scenario. The
manufacturers' shipments forecast shows a decline in mobile home
furnace shipments at trial standard levels 4 and 5. Manufacturers
stated that consumers are more likely to choose heat pumps, combination
systems, electric furnaces, or electric strip heaters, instead of
buying the more efficient, more costly mobile home furnaces at trial
standard levels 4 and 5. Table V.21 shows the manufacturer impacts for
mobile home gas furnaces.
Table V.21.--Changes in Industry Net Present Value, Mobile Home Gas Furnaces
----------------------------------------------------------------------------------------------------------------
Flat markup
-----------------------------------------------------
NES shipments Manufacturers' shipments
-----------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------ INPV -----------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case................................................. 21 ....... ....... 21 ....... .......
1......................................................... 21 0 0 21 0 0
2......................................................... 21 0 0 21 0 0
3......................................................... 18 (3) -14 18 (3) -14
4......................................................... 12 (9) -42 11 (10) -49
5......................................................... 12 (9) -42 11 (10) -49
----------------------------------------------------------------------------------------------------------------
At 80-percent AFUE, trial standard levels 1 and 2, the INPV and
cash flow impacts are negligible, and little investment is required to
meet the standard.
At trial standard level 3, DOE estimates that the INPV will drop by
14 percent. It estimates product-conversion and capital-conversion
costs at $1.7 million and $6 million, respectively. Net cash flow drops
precipitously from +$1 million to slightly negative values in the year
2014.
At 90-percent AFUE, trial standard levels 4 and 5, product-
conversion costs of $6.7 million and capital expenditures of $12
million contribute to lowering INPV by 42-49 percent. Net cash flow
becomes negative by a factor of more than seven times the base-case
value.
iv. Oil-Fired Furnaces. For oil-fired furnaces, the Department
considered two cash flow scenarios: The flat-markup and NES-shipments
scenario, and the constant-price and NES-shipments scenario. The flat-
markup and NES-shipments scenario represents a situation where
shipments are not greatly affected by increased cost to the consumer.
For the second scenario, the Department also used the NES-shipments
forecast and applied a constant-margin assumption. While the Department
realizes that there will be a drop in shipments at trial standard
levels 4 and 5 due to equipment switching, the Department used the NES-
shipments forecast because the difference between the NES shipments and
the manufacturers' shipments was small and some manufacturers stated
that they expected a small drop in shipments at higher proposed
standard levels. Furthermore, the Department does not expect a change
in shipments when applying a constant-price assumption, because there
will be no change in the product costs as a result of new efficiency
standards. Table V.22 displays the impacts on INPV for the oil-fired
furnace industry for both scenarios.
Table V.22.--Changes in Industry Net Present Value, Oil-Fired Furnaces
----------------------------------------------------------------------------------------------------------------
NES shipments
-----------------------------------------------------
Flat markup Constant price markup
-----------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------ INPV -----------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case................................................. 36 ....... ....... 36 ....... .......
1......................................................... 34 (2) -5 34 (2) -5
2......................................................... 33 (3) -8 31 (4) -12
3......................................................... 33 (3) -8 31 (4) -12
4......................................................... 29 (7) -19 26 (10) -27
5......................................................... 28 (8) -21 23 (12) -35
----------------------------------------------------------------------------------------------------------------
At trial standard level 1 (80-percent AFUE), DOE estimates the INPV
impacts to be -5 percent for oil-fired furnaces. Cash flow is cut
approximately in half, from approximately $2 million to $1 million in
2014. The Department estimates product-conversion costs to be $3
million and capital requirements to total $1 million.
At 82-percent AFUE, trial standard levels 2 and 3, DOE estimates
the INPV
[[Page 59243]]
impacts to range from -8 percent to -12 percent for oil-fired furnaces.
Cash flow would be slightly positive in 2014, a drop of $2 million from
the base case. The Department estimates product-conversion costs to be
$4.5 million and capital requirements to total $3.6 million. At 82-
percent AFUE, one manufacturer indicated the firm would not invest the
necessary capital, since it could not justify the investment.
At trial standard level 4 (84-percent AFUE), the INPV impacts range
from -19 percent to -27 percent, and at trial standard level 5 (85-
percent AFUE) the impacts range from -21 percent to -35 percent.
Achieving these efficiency levels would require new heat exchanger
designs, which raises the product conversion costs to $8.5 million at
both trial standard level 4 and trial standard level 5. Total capital
requirements rise to $7 million at trial standard level 4 and $8
million at trial standard level 5. Net cash flow is reduced by nearly
200 percent to -$3.4 million at TSL 4.
Other considerations from the standpoint of manufacturers of oil-
fired furnaces include the possibility of implementing a de-rating
strategy at trial standard levels 1, 2, and 3 to reduce capital costs.
A de-rating strategy aims to achieve higher efficiency levels by using
a larger capacity furnace compensated with a downsized burner. This
would reduce the span of the product line through elimination of some
higher capacity models. In addition, for oil-fired furnaces at 82-
percent AFUE, some manufacturers expressed concerns about increased
maintenance costs due to sulfur in the fuel and exhaust gas. This
sulfur can form a residue that potentially would increase maintenance
costs as efficiency rises.
v. Gas Boilers. For gas boilers, the Department considered two cash
flow scenarios: the flat markup and the three-tier markup, both using
manufacturer-supplied shipment estimates. The Department did not use
NES shipments in the GRIM, since they did not demonstrate any price
responses by shipments--even at very high efficiency levels.
Manufacturers stated that shipments would decrease with increases in
efficiency, particularly at the higher levels where consumers would
repair existing systems rather than replace them.
The Department therefore defines the two scenarios by the assumed
markup strategy--a flat markup or a three-tiered markup. The Department
learned from manufacturers that the pricing of boilers is determined on
the basis of three product tiers. During the MIA interview,
manufacturers provided information on the range of typical AFUE levels
for each of the three tiers and the change in profitability associated
with each level for gas boilers. Table V.23 displays the manufacturer
impacts on the gas boiler industry for both scenarios.
Table V.23.--Changes in Industry Net Present Value, Gas Boilers
----------------------------------------------------------------------------------------------------------------
Manufacturers' shipments
-----------------------------------------------------
Flat markup Three-tier markup
-----------------------------------------------------
TSL Change in INPV Change in INPV
from base from base
INPV ------------------ INPV -----------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case................................................. 167 ....... ....... 167 ....... .......
1......................................................... 166 (1) -1 163 (4) -3
2......................................................... 155 (12) -7 148 (20) -12
3......................................................... 155 (12) -7 148 (20) -12
4......................................................... 155 (12) -7 148 (20) -12
5......................................................... 140 (27) -16 83 (84) -50
----------------------------------------------------------------------------------------------------------------
At trial standard level 1 (82-percent AFUE), the impact on INPV
ranges from -0.9 percent to -3 percent for gas boilers. The Department
estimates the product-conversion costs and capital-conversion costs at
$7.5 and $9.5 million, respectively. Net cash flow is reduced from $10
million to $9 million in 2014.
At 84-percent AFUE, trial standard levels 2, 3, and 4, the impact
on INPV for gas boilers ranges from -7 percent to -12 percent. The
Department estimates product-conversion costs to be $8.7 million and
capital requirements to total $12.5 million. Cash flow is reduced from
$10 million to $8 million in 2014. Several manufacturers stated that,
at this efficiency level, there is a high risk of safety and
reliability issues. There is also a great likelihood that standing-
pilot versions of these products would be eliminated.
At trial standard level 5 (99-percent AFUE), the impact on INPV for
gas boilers ranges between -16 percent and -50 percent. During the
interviews, manufacturers stated that this level is simply not
achievable with current technologies and is beyond the maximum
technologically feasible level. Instead, some manufacturers recommended
that the max tech level would more reasonably be 96-percent or 97-
percent AFUE. In addition, some manufacturers would not provide
product-conversion cost or capital-conversion costs at this level,
since they could not conceive what designs might reach this efficiency
level. Consequently, with limited responses from manufacturers, DOE
estimated the required product and capital conversion costs to be $20
million and $150 million, respectively. The net cash flow is reduced to
nearly -$45 million.
vi. Oil-Fired Boilers. For oil-fired boilers, the Department
considered two cash flow scenarios: The flat markup and the three-
tiered markup, both using manufacturer-supplied shipment estimates. The
Department considered only manufacturer-supplied shipment estimates for
the same reasons given for gas boilers. Manufacturers stated that
shipments would decrease for oil-fired boilers at higher efficiency
levels, because the market would move toward radiant or electric
furnaces and consumers would repair rather than replace their existing
boilers.
Thus, similarly to the markups defined for gas boilers, DOE defines
the two scenarios by the assumed markup strategy--a flat markup or a
three-tiered markup. The Department learned from manufacturers that the
pricing of boilers is determined on the basis of three product tiers.
During the MIA interviews, manufacturers provided
[[Page 59244]]
information on the range of typical AFUE levels for each of the three
tiers and the change in profitability associated with each level for
oil-fired boilers. Table V.24 shows the changes in INPV as compared to
the base case for each trial standard level for oil-fired boiler
manufacturers.
Table V.24.--Changes in Industry Net Present Value, Oil-Fired Boilers
----------------------------------------------------------------------------------------------------------------
Manufacturers' shipments
-----------------------------------------------------
Flat markup Three-tier markup
-----------------------------------------------------
TSL Change in INPV Change in INPV
from base base
INPV ------------------ INPV -----------------
$MM % $MM %
$MM change $MM change
----------------------------------------------------------------------------------------------------------------
Base case................................................. 84 ....... ....... 84 ....... .......
1......................................................... 82 (3) -3 73 (11) -13
2......................................................... 82 (3) -3 73 (11) -13
3......................................................... 82 (3) -3 73 (11) -13
4......................................................... 82 (2) -2.5 72 (12) -14
5......................................................... 69 (16) -19 46 (38) -45
----------------------------------------------------------------------------------------------------------------
--At 83-percent AFUE, trial standard levels 1, 2, and 3, the impact
on INPV ranges from -3 percent to -13 percent for oil-fired boilers. At
trial standard level 4 (84-percent AFUE), the impact on INPV ranges
from between -2.5 percent to -14 percent. The Department estimates
product-conversion costs and capital-conversion costs to be $4 million
and $3.2 million, respectively, for trial standard levels 1, 2, and 3.
For trial standard level 4, DOE estimates product-conversion costs and
capital-conversion costs to be $4.1 million and $3.4 million,
respectively. At these levels, manufacturers would likely use a de-
rating strategy to reduce capital costs. This would reduce the span of
the product line through elimination of some higher capacity models.
Cash flow is reduced from $5 million to $4 million in 2014 for trial
standard levels 1 through 4.
At trial standard level 5 (95-percent AFUE), the impact on INPV
ranges from -19 percent to -45 percent. Net cash flow would be reduced
to approximately -$22 million. The Department estimates product-
conversion and capital-conversion costs to be $10.3 and $70.4 million,
respectively. At this level, manufacturers expect complete loss of
sales to competing products.
b. Impacts on Manufacturing Capacity. To the extent that more
stringent energy conservation standards increase the size of the heat
exchanger, they could reduce plant throughput, particularly for those
plants that are constrained in their heat exchanger fabrication area.
The standards thus could necessitate that manufacturers add floor space
to their existing plants and warehouses. In addition, assembly and
fabrication times could increase for the larger equipment. In an
attempt to recoup capacity, manufacturers might need to invest in
productivity, or equipment, or consider outsourcing some heat exchanger
production.
It is not clear that all new capacity would be added in the United
States. During the MIA interviews, several manufacturers stated that
there has been a trend in the industry to move production facilities to
overseas locations where labor markets offer cost savings. Some of
these companies commented that new standards could speed up this trend.
For condensing gas boilers, in particular, the European market is
as large as the non-weatherized gas furnace market in the United
States, with attendant high-volume pricing and large company suppliers.
If standards were to require condensing technology, it is likely that
manufacturers would out-source heat exchangers to European countries.
c. Impacts on Subgroups of Manufacturers. Using average cost
assumptions to develop an industry-cash-flow estimate is not adequate
for assessing differential impacts among subgroups of manufacturers.
Small manufacturers, niche players, or manufacturers exhibiting a cost
structure that differs largely from the industry average could be
affected differently. The Department used the results of the industry
characterization to group manufacturers exhibiting similar
characteristics.
The Department evaluated the impact of new energy conservation
standards on small businesses, as defined by the SBA for the furnace
and boiler manufacturing industry as manufacturing enterprises with 750
or fewer employees. The Department created a more tailored version of
the interview guide for small furnace and boiler manufacturers, and
contacted small businesses to determine if they were interested in
discussing differential impacts that standards would have on their
companies. The Department received feedback from five manufacturers,
which suggested that impacts on them would not differ from impacts on
larger companies within the industry. (See TSD, Chapter 12.)
During the manufacturer interviews, the Department also identified
several types of residential furnaces and boilers that are used in
particular or unusual applications, have features that differ from
those of the vast majority of products available on the marketplace,
and have some unique utility. The Department refers to these as ``niche
products.'' In the TSD, DOE presents niche product classes that the
Department identified and further considered. During the manufacturer
interviews, several manufacturers claimed that certain niche products
would not be viable if required to meet higher efficiency standards.
All of these products serve relatively small niche markets and, as
such, the efficiency standards established for these products will have
little effect on national energy savings. Some of the niche products
have very similar characteristics to the product class they belong to,
and will not be disproportionately affected or threatened by new
standards. (See TSD, Chapter 12.)
d. Cumulative Regulatory Burden. One aspect of the assessment of
manufacturer burden is the cumulative impact of multiple DOE standards
and the regulatory actions of other Federal agencies and States that
affect the manufacture of a covered product. The Department believes
that a standard level is not economically justified if it contributes
to an unacceptable
[[Page 59245]]
cumulative regulatory burden. While any one regulation may not impose a
significant burden on manufacturers, the combined effects of several
impending regulations may have serious consequences for some
manufacturers, groups of manufacturers, or an entire industry.
Assessing the impact of a single regulation may overlook this
cumulative regulatory burden.
Companies that produce a wider range of regulated products may be
faced with more capital and product development expenditures than their
competitors. This can prompt those companies to exit the market or
reduce their product offerings, potentially reducing competition.
Smaller companies can be especially affected, since they have lower
sales volumes over which to amortize the costs of meeting new
regulations.
The most significant regulatory actions affecting the furnace and
boiler industries are compliance with more stringent Federal energy
conservation standards for residential and commercial air conditioners,
and the EPA-mandated phase out of hydrofluorocarbon (HFC) and
hydrochlorofluorocarbon (HCFC) refrigerants. Manufacturers of
residential furnaces and boilers also manufacturer approximately 82
percent of the residential central air conditioners and heat pumps and
many of these manufacturers also manufacture commercial unitary air
conditioners and heat pumps. The effective date for the residential AC
rulemaking was January 23, 2006. Manufacturers were working to redesign
all of the product lines and have allocated most of their capital
resources for redesigning and retooling of their production lines to
meet the new minimum efficiency standard. The effective date for the
new commercial unitary air conditioner and heat pump standards is
January 1, 2010, as specified in EPACT 2005. Manufacturers are now re-
designing their product offerings and will need to retool to meet those
standards. In addition, the EPA-mandated refrigerant phase out comes
into effect on January 1, 2010, and is expected to have the biggest
cumulative impact on residential furnace and boiler manufacturers.
Chapter 12 of the TSD quantifies the anticipated level of investments
needed to meet each of these regulatory burdens.
3. National Impact Analysis
a. Significance of Energy Savings. To estimate the energy savings
through 2038 due to amended energy conservation standards, the
Department compared the energy consumption of furnaces and boilers
under the base case to energy consumption of furnaces and boilers under
the five trial standard levels. As discussed in section III.D.1, the
results account for a rebound effect of 15 percent (i.e., 15 percent of
the total savings from higher equipment efficiency are ``taken back''
by consumers to provide more heating service). Table V.25 shows the
forecasted national energy savings at each of the trial standard levels
calculated using the AEO2005 energy price forecast. The table also
shows the magnitude of the energy savings if the savings are discounted
at rates of seven and three percent. Each trial standard level
considered in this rulemaking would result in significant energy
savings, and the amount of savings increases with higher efficiency
standards. (See TSD, Chapter 10.)
Table V.25.--Summary of Cumulative National Energy Savings for
Residential Furnaces and Boilers (Energy Savings for Units Sold From
2015 to 2038)
[AEO2005 energy price forecast]
------------------------------------------------------------------------
National energy savings (quads)
--------------------------------------
Trial standard level 3% 7%
Primary discounted discounted
------------------------------------------------------------------------
1................................ 0.18 0.09 0.03
2................................ 0.41 0.19 0.08
3................................ 0.69 0.33 0.13
4................................ 3.19 1.52 0.61
5................................ 6.22 2.95 1.18
------------------------------------------------------------------------
For the energy price sensitivity analysis, the Department also
estimated the energy savings through 2038 due to amended energy
conservation standards based on the AEO2006 energy price forecasts.
Table V.26 shows the results for the national energy savings in the
energy price sensitivity analysis, which are slightly different for
trial standard levels 3, 4, and 5.
Table V.26.--Summary of Cumulative National Energy Savings for
Residential Furnaces and Boilers (Energy Savings for Units Sold From
2015 to 2038)
[AEO2006 energy price forecast]
------------------------------------------------------------------------
National energy savings (quads)
--------------------------------------
Trial standard level 3% 7%
Primary discounted discounted
------------------------------------------------------------------------
1................................ 0.18 0.09 0.03
2................................ 0.41 0.2 0.08
3................................ 0.7 0.33 0.13
4................................ 3.2 1.52 0.61
5................................ 6.31 3 1.2
------------------------------------------------------------------------
[[Page 59246]]
In addition to examining cumulative energy savings as a nation for
residential furnaces and boilers, the Department looked at the
cumulative energy savings by region. The Department defined the same
two regions for the regional energy savings analysis as it used in the
Consumer Subgroup analysis. Table V.27 shows the forecasted energy
savings at each of the trial standard levels for the Northern and
Southern regions based on the AEO2005. In addition, the Department also
examined the cumulative energy savings by region in the energy price
sensitivity analysis. Table V.28 shows the forecasted energy savings at
each of the trial standard levels for the Northern and Southern regions
based on the AEO2006.
Table V.27.--Summary of Cumulative Energy Savings by Region for
Residential Non-Weatherized Gas Furnaces (Energy Savings for Units Sold
From 2015 to 2038)
[AEO2005 energy price forecast]
------------------------------------------------------------------------
Primary energy savings
(quads)
Trial standard level -------------------------
Northern Southern
region region
------------------------------------------------------------------------
1............................................. 0.01 0.004
2............................................. 0.01 0.004
3............................................. 0.2 0.12
4............................................. 1.72 1.04
5............................................. 3.16 1.71
------------------------------------------------------------------------
Table V.28.--Summary of Cumulative Energy Savings by Region for
Residential Non-Weatherized Gas Furnaces in the Energy Price Sensitivity
Analysis (Energy Savings for Units Sold From 2015 to 2038)
[AEO2006 energy price forecast]
------------------------------------------------------------------------
Primary energy savings
(quads)
Trial standard level -------------------------
Northern Southern
region region
------------------------------------------------------------------------
1............................................. 0.01 0.004
2............................................. 0.01 0.004
3............................................. 0.19 0.13
4............................................. 1.64 1.12
5............................................. 3 1.78
------------------------------------------------------------------------
b. Net Present Value. The NPV analysis is a measure of the
cumulative benefit or cost of standards to the Nation. In accordance
with OMB's guidelines on regulatory analysis (OMB Circular A-4, section
E, September 17, 2003), DOE calculated NPV using both a seven-percent
and a three-percent real discount rate. The seven-percent rate is an
estimate of the average before-tax rate of return to private capital in
the U.S. economy, and reflects the returns to real estate and small
business capital as well as corporate capital. The Department used this
discount rate to approximate the opportunity cost of capital in the
private sector, since recent OMB analysis has found the average rate of
return to capital to be near this rate. In addition, DOE used the
three-percent rate to capture the potential effects of standards on
private consumption (e.g., through higher prices for equipment and the
purchase of reduced amounts of energy). This rate represents the rate
at which ``society'' discounts future consumption flows to their
present value. This rate can be approximated by the real rate of return
on long-term government debt (i.e., yield on Treasury notes minus
annual rate of change in the Consumer Price Index), which has averaged
about three-percent on a pre-tax basis for the last 30 years.
Table V.29 shows the forecasted NPV at each of the trial standard
levels, based on the AEO2005 energy price forecasts. Use of a three-
percent discount rate increases the present value of future equipment-
purchase costs and operating-cost savings. However, because annual
operating-cost savings in later years grow at a faster rate than annual
equipment-purchase costs, use of a three-percent discount rate
increases the NPV at most trial standard levels. (See TSD, Chapter 10.)
Similarly, the Department also calculated the forecasted NPV in the
energy price sensitivity analysis based on the AEO2006. Table V.30
exhibits the forecasted NPV at each trial standard level, based on the
AEO2006 energy price forecasts.
Table V.29.--Summary of Cumulative Net Present Value for Residential
Furnaces and Boilers (Impacts for Units Sold From 2015 to 2038)
[AEO2005 energy price forecast]
------------------------------------------------------------------------
NPV (billion 2004$)
-------------------------
Trial standard level 7% 3%
discount discount
rate rate
------------------------------------------------------------------------
1............................................. 0.33 1.24
2............................................. 0.65 2.48
3............................................. 0.53 3.00
4............................................. 0.06 8.37
5............................................. -17.53 -22.42
------------------------------------------------------------------------
Table V.30.--Summary of Cumulative Net Present Value for Residential
Furnaces and Boilers in the Energy Price Sensitivity Analysis (Impacts
for Units Sold From 2015 to 2038)
[AEO2006 energy price forecast]
------------------------------------------------------------------------
NPV (billion 2004$)
-------------------------
Trial standard level 7% 3%
discount discount
rate rate
------------------------------------------------------------------------
1............................................. 0.43 1.53
2............................................. 0.82 3.02
3............................................. 0.90 4.12
4............................................. 1.83 13.64
5............................................. -13.49 -10.34
------------------------------------------------------------------------
In addition to national net present value, the Department examined
the regional effects of standards on the net present value. Table V.31
shows the forecasted NPV at each of the trial standard levels for the
Northern and Southern regions based on the AEO2005 energy price
forecasts. In addition, the Department examined the NPV by region in
the energy price sensitivity analysis. Table V.32 shows the NPV at each
of the trial standard levels for the Northern and Southern regions
based on the AEO2006 energy price forecasts.
[[Page 59247]]
Table V.31.--Summary of Cumulative Net Present Value by Region for Residential Non-Weatherized Gas Furnaces
(Impacts for Units Sold From 2015 to 2038)
[AEO2005 energy price forecast]
----------------------------------------------------------------------------------------------------------------
NPV (billion 2004$)
---------------------------------------------------
Northern region Southern region
Trial standard level ---------------------------------------------------
7% 3% 7% 3%
discount discount discount discount
rate rate rate rate
----------------------------------------------------------------------------------------------------------------
1........................................................... 0.02 0.07 0.01 0.03
2........................................................... 0.02 0.07 0.01 0.03
3........................................................... 0.11 0.72 -0.1 0.11
4........................................................... 0.79 5.99 -0.82 1.10
5........................................................... -6.85 -7.77 -8.29 -13.90
----------------------------------------------------------------------------------------------------------------
Table V.32.--Summary of Cumulative Net Present Value by Region for Residential Non-Weatherized Gas Furnaces in
the Energy Price Sensitivity Analysis (Impacts for Units Sold From 2015 to 2038)
[AEO2006 energy price forecast]
----------------------------------------------------------------------------------------------------------------
NPV (billion 2004$)
---------------------------------------------------
Northern region Southern region
Trial standard level ---------------------------------------------------
7% 3% 7% 3%
discount discount discount discount
rate rate rate rate
----------------------------------------------------------------------------------------------------------------
1........................................................... 0.02 0.07 0.01 0.04
2........................................................... 0.02 0.07 0.01 0.04
3........................................................... 0.18 0.92 -0.01 0.38
4........................................................... 1.41 7.70 -0.08 3.51
5........................................................... -5.07 -3.00 -7.74 -11.8
----------------------------------------------------------------------------------------------------------------
c. Impacts on Employment. In accordance with the Process Rule,
section 4(d)(7)(vi), the Department estimated the employment impacts of
the proposed standard on the economy in general. 61 FR 36983. As
discussed above, the Department expects energy conservation standards
for residential furnaces and boilers to reduce energy bills for
consumers, and the resulting net savings to be redirected to other
forms of economic activity. The Department also realizes that these
shifts in spending and economic activity could affect the demand for
labor. To estimate these effects, the Department used an input/output
model of the U.S. economy using BLS data (as described in section
IV.G). (See TSD, Chapter 14.)
This input/output model suggests the proposed furnace and boiler
standards are likely to slightly increase the net demand for labor in
the economy. Neither the BLS data nor the input/output model used by
DOE includes the quality or wage level of the jobs. As shown in Table
V.33, the Department estimates that net indirect employment impacts
from a proposed furnace and boiler energy-efficiency standard are
positive.
Table V.33.--Net National Change in Indirect Employment, Thousands of
Jobs in 2038
------------------------------------------------------------------------
Trial standard level (thousands of jobs)
-------------------------------------------------------------------------
TSL1 TSL2 TSL3 TSL4 TSL5
------------------------------------------------------------------------
1.3 2.9 9.7 18 20.1
------------------------------------------------------------------------
4. Impact on Utility or Performance of Products
As presented in section III.E.1.d, of this notice, DOE concluded
that none of the efficiency levels considered in this notice reduce the
utility or performance of residential furnaces and boilers.
Furthermore, furnace and boiler manufacturers currently offer products
that meet or exceed the proposed standards. (42 U.S.C.
6295(o)(2)(B)(i)(IV))
5. Impact of Any Lessening of Competition
The Department considers any lessening of competition that is
likely to result from 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 to the Secretary
together with an analysis of the nature and extent of such impact. (See
42 U.S.C. 6295(o)(2)(B)(i)(V) and (B)(ii))
To assist the Attorney General in making such a determination, the
Department has provided the Department of Justice (DOJ) with copies of
this notice and the TSD for review. The Department will consider DOJ's
comments on the proposed rule in preparing the final rule.
[[Page 59248]]
6. Need of the Nation To Conserve Energy
Enhanced energy efficiency also produces environmental benefits.
The expected energy savings from higher furnace and boiler standards
will reduce the emissions of air pollutants and greenhouse gases
associated with energy production and household use of fossil fuels.
Table V.34 shows cumulative CO2, SO2, and
NOX emissions reductions over the analysis period. As
discussed in section III.D.1, the results account for a rebound effect
of 15 percent. The cumulative CO2, NOX, and
SO2 emissions reductions range up to 341.0 Mt, 203.4 kt, and
69.0 t, respectively. The Department reports annual CO2,
SO2, and NOX emissions reductions for each trial
standard level in the environmental assessment, a separate report in
the TSD.
As discussed in section IV.I, DOE reports SO2 emissions
reductions at the household level instead of reporting these emissions
from power plants. The reported NOX emissions reductions do
include the impacts of each trial standard level at power plants. If
NOX emissions are subject to emissions caps in the
evaluation period, the Department assumes that the reported emissions
reductions correspond to the production of emissions allowance credits.
Table V.34.--Summary of Emissions Reductions for Residential Furnaces and Boilers
[Cumulative reductions for units sold from 2015 to 2038]
----------------------------------------------------------------------------------------------------------------
Emissions TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
CO2 (Mt)...................................................... 9 19.6 37 171.1 341
NOX (kt)...................................................... 6 13 24.5 113 203.4
SO2 (kt)...................................................... 0.7 1.5 2.7 12.7 69
----------------------------------------------------------------------------------------------------------------
The Department also presents its results for discounted emissions
of CO2, NOX, and SO2. The Department
used the same discount rates that it used in calculating the NPV (seven
percent and three percent real) to calculate discounted cumulative
emission reductions. Table V.35 shows the discounted cumulative
emissions impacts for residential furnaces and boilers. The Department
intends the seven-percent and three-percent real discount rate values
to capture the present value of costs and benefits associated with
projects facing an average degree of risk. Other discount rates may be
more applicable to discount costs and benefits associated with projects
facing different risks and uncertainties. The Department seeks input
from interested parties on the appropriateness of using other discount
rates in addition to seven percent and three percent real to discount
future emissions reductions.
Table V.35.--Summary of Discounted Emissions Reductions for Residential Furnaces and Boilers
[Cumulative reductions for units sold from 2015 to 2038]
----------------------------------------------------------------------------------------------------------------
Emissions TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
7% Discount Rate:
CO2 (Mt)..................................................... 1.7 3.6 6.9 31.8 63.2
NOX (kt)..................................................... 1 2.2 4.1 18.9 33.5
SO2 (kt)..................................................... 0.1 0.3 0.5 2.4 12.5
3% Discount Rate:
CO2 (Mt)..................................................... 4.1 8.9 16.9 78.1 155.3
NOX (kt)..................................................... 2.6 5.6 10.6 49 87.2
SO2 (kt)..................................................... 0.3 0.7 1.3 5.8 31.2
----------------------------------------------------------------------------------------------------------------
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. 6295(o)(2)(B)(i)(VII)) The
Department recognizes the importance of incorporating safe venting
systems with the use of residential furnace and boilers. Consequently,
safety was one of the factors DOE identified for consideration in
weighing the benefits and burdens of the trial standards.
C. Proposed Standard
The Act, at 42 U.S.C. 6295(o)(2)(A), specifies that any new or
amended energy conservation standard for any type (or class) of covered
product shall be designed to achieve the maximum improvement in energy
efficiency that the Secretary determines is technologically feasible
and economically justified. In determining whether a standard is
economically justified, the Secretary must determine whether the
benefits of the standard exceed its burdens. (42 U.S.C.
6295(o)(2)(B)(i)) The new or amended standard also must ``result in
significant conservation of energy.'' (42 U.S.C. 6295(o)(3)(B))
The Department considers the impacts of standards beginning with
the maximum technologically feasible level, i.e., trial standard level
5, to determine whether that level was economically justified. The
Department then considers less efficient levels until it reaches the
level which is technologically feasible and economically justified and
saves a significant amount of energy.
To aid the reader as the Department discusses the benefits and/or
burdens of each trial standard level, Table V.36 presents a summary of
quantitative analysis results for each trial standard level based on
the assumptions and methodology discussed above. These include
manufacturing cost estimates, equipment lifetimes, and energy prices
based on the reference case from the AEO2005 energy price forecast.
Additional quantitative results, including regional impacts and the
results of the energy price sensitivity analysis, including the life-
cycle-cost, national energy savings, and regional analyses based on the
AEO2006 energy price forecast, are provided in sections
[[Page 59249]]
V.B.1.a., V.B.1.b., V.B.3.a., and V.B.3.b., above.
In addition to the quantitative results, the Department also
considers other burdens and benefits that affect economic
justification. This includes the potential impacts on safety,
reliability and consumers' utility (i.e., the ability to replace a
furnace or boiler with a new, more efficient product, without having to
make any significant modifications to the existing dwelling).
Table V.36.--Summary of Results Based Upon the AEO2005 Energy Price Forecast*
--------------------------------------------------------------------------------------------------------------------------------------------------------
TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Primary energy saved (quads)...... 0.18 0.41 0.69 3.19 6.22
7% Discount rate.................. 0.03 0.08 0.13 0.61 1.18
3% Discount rate.................. 0.09 0.19 0.33 1.52 2.95
Generation capacity change (GW)**. 0 0 0 0.1 4
NPV (2004$billion):
7% Discount rate.............. 0.33 0.65 0.53 0.06 -17.5
3% Discount rate.............. 1.24 2.48 3 8.37 -22.4
Industry impacts:
Industry NPV (2004$million)... (33) to (48) (65) to (114) (137) to (190) (64) to (425) 107 to (720)
Industry NPV (% Change)....... (2%) to (3%) (4%) to (7%) (9%) to (12%) (4%) to (26%) 7% to (44%)
Cumulative emissions impacts***:
CO2 (Mt)...................... 9 19.6 37 171 341
NOX (kt)...................... 6 13 24.5 113 203
SO2 (kt)...................... 0.7 1.5 2.7 12.7 69
Mean life-cycle cost savings
(2004$):
Non-Weatherized Gas Furnaces.. 2 2 2 5 -731
Weatherized Gas Furnaces...... 2 73 73 73 73
Oil-Fired Furnaces............ 7 113 113 -23 -109
Gas Boilers................... 158 232 232 232 -795
Oil-Fired Boilers............. 40 40 40 1 -1070
Mobile Home Gas Furnaces...... 51 51 18 124 124
Mean Payback Period (years):
Non-Weatherized Gas Furnaces.. 1.5 1.5 26 23 88
Weatherized Gas Furnaces...... 1.6 4.6 4.6 4.6 4.6
Oil-Fired Furnaces............ 0.3 0.8 0.8 18 22
Gas Boilers................... 12 12 12 12 40
Oil-Fired Boilers............. 1.2 1.2 1.2 27 36
Mobile Home Gas Furnaces...... 5 5 31 25 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative (-) values.
** Reductions in installed generation capacity by the year 2030 based on AEO2005 Reference Case.
*** CO2 emissions impacts include physical reductions at power plants and households. NOX emissions impacts include physical reductions at power plants
and households as well as production of emissions allowance credits where NOX emissions are subject to emissions caps. SO2 emissions impacts include
physical reductions at households only.
First, the Department considered trial standard level 5, the
maximum technologically feasible level, for each product class. Trial
standard level 5 will likely save 6.22 quads of energy through 2038, an
amount the Department considers significant. Discounted at 7 percent,
the energy savings through 2038 would be 1.18 quads. For the Nation as
a whole, trial standard level 5 would result in a net cost of $17.5
billion in NPV. The emissions impacts are 341 Mt of CO2,\19\
203 kt of NOX,\20\ and 69.0 kt of SO2.\21\ Total
generating capacity in 2030 increases by 4.0 gigawatts (GW) under trial
standard level 5, due to projected switching from gas furnaces to
electric heating equipment.
---------------------------------------------------------------------------
\19\ For all of the TSLs, CO2 emissions impacts
include physical reductions at power plants and households.
\20\ For all of the TSLs, NOX emissions impacts
include physical reductions at power plants and households as well
as production of emissions allowance credits where NOX
emissions are subject to emissions caps.
\21\ For all of the TSLs, SO2 emissions impacts
include physical reductions at households only.
---------------------------------------------------------------------------
At trial standard level 5, the average consumer would experience a
significant increase in life-cycle costs for most product classes.
Purchasers of non-weatherized gas furnaces would lose on average $731
over the life of the product in present value terms and purchasers of
gas-fired boilers would lose on average $795 in present value
terms.\22\ The Department found at trial standard level 5 that 91
percent of households in the South have a life-cycle net cost. The
Department's life-cycle cost analysis shows that over 80 percent of all
non-weatherized gas furnace consumers in the southern region
(approximately 16 million households) would experience net increases in
their life-cycle costs of more than $500 and a small (four-percent),
but significant percentage of these households might experience net
increases in life-cycle costs of over $1700. Furthermore, the life-
cycle cost analysis indicates that on average, the mean LCC savings
would be negative for 88 percent of households in the Nation with non-
weatherized gas furnaces at TSL 5. Reinforcing the primary LCC result,
the Department estimates that the mean payback period of all product
classes except for weatherized gas furnaces would be substantially
longer than the mean lifetime of these furnaces.
---------------------------------------------------------------------------
\22\ Non-weatherized gas furnaces are the most prominent class
of residential furnaces and boilers accounting for approximately 72
percent of the total industry sales and approximately 81 percent of
residential furnace sales. Gas-fired boilers are the most prominent
class of residential boilers accounting for 6 percent of the total
industry sales and 61 percent of residential boiler sales.
---------------------------------------------------------------------------
The change in industry value (INPV) ranges from an increase of $107
million to a decrease of $720 million. The magnitude of the impacts is
largely determined by the cashflow results for the non-weatherized gas
furnaces. For this product class, the impacts are driven primarily by
the assumptions regarding future product shipments and the ability to
offer differentiated products that command a premium mark-up. The
Department recognizes the significant difference between the
[[Page 59250]]
shipments forecasted by the NES and those anticipated by manufacturers.
The Department is concerned with an increase in total installed cost of
$1519 for non-weatherized gas furnaces, or 82 percent. With an increase
of that size, there is a significant risk of consumers switching to
other heating systems, including heat pumps and electric resistance
heating. The Department also recognizes that the ability to maintain a
full product line is more difficult at higher standard levels.
Therefore, the Department places more weight on the two-tiered markup
scenario for non-weatherized gas furnaces at trial standard level 5. In
particular, if the high range of impacts is reached as DOE expects,
trial standard level 5 could result in a net loss of $498 million to
the non-weatherized gas furnace industry.
After carefully considering the analysis, comments on the ANOPR,
and the benefits versus burdens, the Secretary concludes that at trial
standard level 5 the benefits of energy savings and emissions impacts
would be outweighed by the potential multi-billion dollar negative net
economic cost to the Nation, the economic burden on consumers, and the
large capital-conversion costs that could result in the large reduction
in INPV for manufacturers. Consequently, the Secretary has concluded
that trial standard level 5, the maximum technologically feasible
level, is not economically justified.
Next, the Department considered trial standard level 4, which
specifies a 90-percent AFUE for non-weatherized gas furnaces and 85-
percent AFUE for gas-fired boilers. Primary energy savings would likely
be 3.19 quads of energy through 2038, which the Department considers
significant. Discounted at 7 percent, the energy savings through 2038
would be 0.61 quad. For the Nation as a whole, trial standard level 4
would result in a net savings of $0.06 billion in NPV. The emissions
impacts are 171 Mt of CO2, 113 kt of NOX, and
12.7 kt of SO2. Total generating capacity in 2030 under
trial standard level 4 would increase by 0.1 GW. This would be due to
the projected switching from gas furnaces to electric heating
equipment.
At trial standard level 4, consumers would experience an increase
in life-cycle costs for oil-fired furnaces and a decrease in life-cycle
costs for the other five product classes. Purchasers of non-weatherized
gas furnaces would save, on average, $5 over the life of the product in
present value terms, and purchasers of gas-fired boilers would save, on
average, $232 over the life of the boiler in present value terms. The
Department found that 39 percent of households with non-weatherized gas
furnaces would experience a net cost, and 25 percent of households with
non-weatherized gas furnaces would experience a net gain.
The Department also examined the regional impacts to consumers of
non-weatherized gas furnaces in Northern and Southern climates
separately. Because TSL 4 requires the use of condensing technology for
non-weatherized gas furnaces, a majority of the affected consumers in
the South would experience a significant increase in total installed
cost. Sixty-three percent of consumers in the South with non-
weatherized gas furnaces would experience an increase in total
installed cost greater than $500, while a small, but significant
(approximately 2 percent) of these consumers would experience an
increase in total installed cost of more than $900. In the Southern
region, where the operating cost savings of condensing technology are
less important, these substantial increases in total installed costs
lead to increased life-cycle costs. The Department found that the
majority, 57 percent, of households in the South with a non-weatherized
gas furnace would experience a life-cycle net cost, while 23 percent
would experience a net gain. At trial standard level 4, the average net
LCC increase to the Southern consumer with a non-weatherized gas
furnace is $79, while the average net decrease to the Northern consumer
with a non-weatherized gas furnace is $79. Almost half of the consumers
in the northern region with a non-weatherized gas furnace would not be
affected by the standard because the equipment the household currently
uses already meets or exceeds the trial standard level 4 efficiency
level (i.e., 90-percent AFUE). However, 81 percent of Southern
consumers with a non-weatherized gas furnace would be impacted by the
standard. Seventy percent of those Southern consumers with non-
weatherized gas furnace impacted by the standard would experience an
increase in life-cycle cost. The Department's life-cycle cost analysis
shows that ten percent of all non-weatherized gas furnace consumers in
the southern region (approximately 2 million households) would
experience net increases in their life-cycle costs of more than $500
and a small (seven percent), but significant percentage of these
households would experience net increases in life-cycle costs of over
$700. Reinforcing this primary LCC result, the Department estimates
that the mean payback period of non-weatherized gas furnaces in the
Southern climate would be substantially longer than the mean lifetime
of these furnaces.
The Department also considers the impact of proposed standard level
TSL 4 on industry. The change in industry value ranges from a loss of
$64 million to a loss of $425 million, which could potentially cause up
to a 26 percent drop in total industry value. The magnitude of impacts
is still largely determined by the cashflow results for the non-
weatherized gas furnaces. For this product class, the impacts continue
to be driven primarily by the assumptions regarding future product
shipments and the ability to offer differentiated products. Although
the impacts will not be as severe as expected for TSL 5 for the non-
weatherized gas furnace industry, the magnitude of the impacts would
still be determined primarily by the assumptions regarding future
product shipments and the ability to offer differentiated products that
command a premium markup. Although the range of possible impacts is not
as large as TSL 5, the Department still recognizes the significant
differences between the shipments forecast by the NES analysis and
those anticipated by manufacturers. Furthermore, the Department
believes that with an increase in total installed cost of $571 for non-
weatherized gas furnaces, or 31 percent, for example, there is a
significant risk of consumers switching to other heating systems,
including heat pumps and electric resistance heating. Additionally,
some product classes would require large, product-conversion costs
because the products would require new heat-exchanger designs to meet
the efficiency requirements established in trial standard level 4. Even
though the ability for manufacturers to differentiate products is
greater at TSL 4 than at TSL 5, it will still be harder for
manufacturers to differentiate products because all of the products
offered in TSL 4 for non-weatherized gas furnaces use condensing
technology. In particular, if the high range of impacts is reached as
DOE expects, trial standard level 4 could result in a net loss of $295
million to the non-weatherized gas furnace industry.
After carefully considering the results of the analysis, comments
on the ANOPR, and the benefits versus burdens, the Secretary concludes
that at trial standard level 4, the benefits of energy savings and
emissions impacts would still be outweighed by the economic burden on
consumers as indicated by large increase in total installed cost, the
high percentage of,
[[Page 59251]]
and disproportionate negative life-cycle cost impacts to Southern
households, and the large capital conversion costs that could result in
the large reduction in INPV for manufacturers. Consequently, the
Secretary has concluded that trial standard level 4 is not economically
justified.\23\
---------------------------------------------------------------------------
\23\ The Department further examined its decision to reject TSL
4 in the energy price sensitivity analysis using AEO2006. A
discussion of the results for the energy price sensitivity analysis
and the rationale for rejection based on these results are presented
at the end of this section.
---------------------------------------------------------------------------
Next, the Department considered trial standard level 3. Trial
standard level 3 will likely save 0.69 quad of energy through 2038, an
amount the Department considers significant. Discounted at 7 percent,
the energy savings through 2038 would be 0.13 quads. For the Nation as
a whole, trial standard level 3 would result in a net benefit in NPV of
$0.53 billion. The emissions impacts are 37.0 Mt of CO2,
24.5 kt of NOX, and 2.7 kt of SO2. Total
generating capacity in 2030 under trial standard level 3 is unchanged
compared to the base case.
At trial standard level 3, purchasers of non-weatherized gas
furnaces would save, on average, $2 over the life of the product and
purchasers of gas-fired boilers would save, on average, $232. At trial
standard level 3, the Department found that 44 percent of households in
the South with a non-weatherized gas furnace would experience a net
life-cycle cost. Nationwide, the Department estimates that 32 percent
of households with non-weatherized gas furnaces would experience a net
cost. Of these affected households, the increase in net cost is a
result of the increased unit installation costs, which account for
equipment redesign to adequately address the safety of these products
at 81-percent AFUE for non-weatherized gas furnaces and mobile home
furnaces. Reinforcing the primary LCC result, the Department estimates
that the mean payback period for two of the product classes to be
substantially longer than the mean lifetime of these products.
Additionally, trial standard level 3 includes a standard for non-
weatherized gas furnaces and for mobile home gas furnaces at 81-percent
AFUE. The Department is concerned that at this level, there may be an
increased risk of safety concerns with this equipment due to venting
issues. Some manufacturers believe that the margin of safety is
diminished in many instances at 81-percent AFUE, and some manufacturers
commented that they would not be willing to accept the risk and/or cost
involved in producing a full line or family of products at 81-percent
AFUE. This potential safety concern is a factor that the Secretary
considers relevant. Based on the Department's evaluation of all the
information considered during the rulemaking, the Department believes
that a standard at 81-percent AFUE could pose a potential for safety
problems for some consumers as discussed in section IV.B.3.
The change in INPV ranges between a loss of $190 million and a loss
of $137 million. Furthermore, some manufacturers stated they would
likely use a de-rating strategy to reduce the increased capital costs
associated with trial standard level 3. Consequently, the variety of
products offered by the manufacturers would be reduced by eliminating
some of the higher-capacity models to reduce the negative impacts.
Consumers would experience an increase in total installed cost of $77
for non-weatherized gas furnaces, or 4 percent, as provided in Chapter
8 of the TSD. Consequently, based on the information provided by
manufacturers, there could be a risk of consumers switching to other
heating systems, including heat pumps and electric resistance heating,
as further detailed in the shipments forecast discussion in section
IV.F.6. For the furnace industry alone, the industry value would
decrease from 9.1 percent to 11.6 percent.
After carefully considering the analysis, comments on the ANOPR,
and the benefits versus burdens, the Secretary concludes that, at trial
standard level 3, the benefits of energy savings and emissions impacts
would be outweighed by the burdens of negative economic impacts to some
consumers and to the manufacturers, and in particular, the potential
for safety problems for some consumers. Consequently, the Secretary has
concluded that trial standard level 3 is not economically justified.
Next, DOE considered trial standard level 2. Primary energy savings
at this level would likely be 0.41 quad of energy through 2038, which
the Department considers significant. Discounted at 7 percent, the
energy savings through 2038 would be 0.08 quad. For the Nation as a
whole, trial standard level 2 would result in a net savings of $0.65
billion in NPV. The emissions impacts are 19.6 Mt of CO2,
13.0 kt of NOX, and 1.5 kt of SO2. Total
generating capacity in 2030 under trial standard level 2 is unchanged
compared to the base case.
At trial standard level 2, purchasers of non-weatherized gas
furnaces would save, on average, $2 over the life of the product and
purchasers of gas-fired boilers would save, on average, $232. The
Department's analysis indicates that no households with non-weatherized
gas furnaces would experience a net life-cycle cost at TSL 2, including
Southern households. The mean payback periods are less than the average
equipment lifetime for all product classes at trial standard level 2.
For example, the mean payback period for non-weatherized gas furnaces
at trial standard level 2 is 1.5 years.
The change in industry value ranges from a loss of INPV of $114 to
a loss of $65 million. Trial standard level 2 could cause up to a 6-
percent loss in INPV for the furnace industry and up to a 12-percent
loss in INPV for the boiler industry. Furthermore, the Department
believes manufacturers of non-weatherized gas furnaces would still be
able to differentiate their premium products and retain profitability
margins.
Trial standard level 2 includes a standard for non-weatherized gas
furnaces and for mobile home gas furnaces at 80-percent AFUE. Based on
its evaluation of all the information considered during the rulemaking,
the Department believes that a standard at 80-percent AFUE would not
result in safety problems for consumers. However, trial standard level
2 also includes a standard for weatherized gas furnaces at 83-percent
AFUE. The Department is concerned with the safety and cost of ensuring
the safety of weatherized gas furnaces at this level, due to possible
condensation in the heat exchanger, and is seeking comment on this
issue.
After carefully considering the analysis, comments on the ANOPR,
and the benefits and burdens, the Secretary concludes that this
standard saves a significant amount of energy and is technologically
feasible and economically justified. Therefore, the Department today
proposes to adopt the energy conservation standards for residential
furnaces and boilers at trial standard level 2.
[[Page 59252]]
Table V.37.--Summary of Results Based on the AEO2006 Energy Price Forecast *
----------------------------------------------------------------------------------------------------------------
TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
----------------------------------------------------------------------------------------------------------------
Primary energy saved (quads)................................. 0.18 0.41 0.7 3.2 6.31
7% Discount rate............................................. 0.03 0.08 0.13 0.61 1.2
3% Discount rate............................................. 0.09 0.2 0.33 1.52 3
NPV (2004$billion):
7% Discount rate......................................... 0.43 0.82 0.9 1.83 -13.5
3% Discount rate......................................... 1.53 3.02 4.12 13.6 -10.3
Mean life-cycle cost savings (2004$):
Non-Weatherized Gas Furnaces............................. 2 2 8 63 -626
Weatherized Gas Furnaces................................. 2 86 86 86 86
Oil-Fired Furnaces....................................... 10 167 167 90 37
Gas Boilers.............................................. 196 299 299 299 -508
Oil-Fired Boilers........................................ 61 61 61 47 -471
Mobile Home Gas Furnaces................................. 71 71 49 240 240
Mean Payback Period (years):
Non-Weatherized Gas Furnaces............................. 1.6 1.6 22 20 75
Weatherized Gas Furnaces................................. 1.4 4 4 4 4
Oil-Fired Furnaces....................................... 0.2 0.6 0.6 13 15
Gas Boilers.............................................. 10 10 10 10 35
Oil-Fired Boilers........................................ 0.8 0.8 0.8 19 26
Mobile Home Gas Furnaces................................. 3.6 3.6 28 21 21
----------------------------------------------------------------------------------------------------------------
* Parentheses indicate negative (-) values.
** Reductions in installed generation capacity by the year 2030 based on AEO2005 Reference Case.
In addition to the Department's NOPR analyses based on the AEO2005
energy price forecast, the Department analyzed the impact of the
AEO2006 energy price forecasts on the LCC and PBP analysis and the
national impact analysis. Table V.37 presents a summary of the results
using AEO2006. As explained in section IV.C.4., AEO2006 provides a
significantly higher price forecast for natural gas and fuel oil over
the analysis period. The Department took into consideration the effect
that these increased energy prices would have on the analysis at each
trial standard level through an energy price sensitivity analysis and
presented the results in sections V.B.1.a., V.B.1.b., V.B.3.a., and
V.B.3.b. In particular, the Department was interested in seeing whether
the results from the energy price sensitivity analysis would change the
Department's proposed standard level (TSL 2) as presented above. The
Department believes that the results from the energy price sensitivity
analysis warrant the most discussion in its rejection of TSL 4. Based
on the AEO2006 energy price forecast, the consumer economics at TSL 5
are still unattractive, especially for non-weatherized gas furnaces and
gas boilers (the prominent product classes). At TSL 3, although the
consumer economics are attractive based on the energy price sensitivity
analysis using the AEO2006 energy price forecast, the Department is
unwilling to impose the associated safety risk on consumers as
explained above.
At TSL 4, the Department found that the nation as a whole would
experience a net savings of $1.83 billion in NPV using the energy price
sensitivity analysis (compared to $0.06 billion in NPV based on
AEO2005). This is a significant increase in national savings as a
result of increased energy prices. In addition, the consumer, on
average, would save $58 more in life-cycle savings as compared to the
AEO2005 analysis. Purchasers of non-weatherized gas furnaces would
save, on average, $63 over the life of the product and purchasers of
gas-fired boilers would save, on average, $299 over the life of the
boiler. However, the Department found that 35 percent of households
with non-weatherized gas furnaces across the nation would still
experience a net cost.
The Department also examined the regional impacts to consumers of
non-weatherized gas furnaces in the Northern and Southern climate zones
separately for the energy price sensitivity analysis using the AEO2006
energy price forecast. Just as the AEO2005 regional analysis showed,
the Department found differential impacts between Northern and Southern
consumers using non-weatherized gas furnaces in the energy price
sensitivity analysis. While only 20 percent of households with non-
weatherized gas furnaces in the Northern region would be negatively
impacted by TSL 4, a majority of households in the Southern region with
non-weatherized gas furnaces (53 percent) would be negatively impacted
by a condensing standard. The consumer in the South with a non-
weatherized gas furnace, on average, would experience an increase in
LCC of $20, while the Northern consumer with a non-weatherized gas
furnace, on average, would experience a decrease in LCC of $138. Almost
half of the consumers in the North with a non-weatherized gas furnace
(48 percent) would not be affected by the standard because the
equipment that the household currently uses already meets or exceeds
the trial standard level 4 efficiency level (i.e., 90-percent AFUE),
just as the AEO2005 analysis showed. In contrast, 81 percent of
Southern consumers with a non-weatherized gas furnace would be impacted
by the standard. Of those 81 percent impacted consumers with a non-
weatherized gas furnace in the Southern region, 65 percent would
experience an increase in LCC and 33 percent would experience a
decrease in LCC. This is only a five percentage point decrease in the
number of adversely impacted Southern consumers as compared to the
AEO2005 analysis results. Most consumers in the South with a non-
weatherized gas furnace would experience an increase in total installed
cost of at least $500, as the AEO2005 and AEO2006 analysis results
showed. Even though DOE forecasts the price of energy to increase
significantly in the energy price sensitivity analysis using AEO2006,
many consumers in the South will still experience an increase in life-
cycle-cost. Consequently, the Department's life-cycle cost analysis
shows that 8 percent of all non-weatherized gas furnace consumers in
the southern climate zone (approximately 1.6 million consumers) would
experience net increases in their life-cycle costs of more than $500
and
[[Page 59253]]
7 percent of these consumers (approximately 100,000 households) would
experience a significant net increase in life-cycle-costs over $700.
Reinforcing its primary LCC result and the AEO2005 analysis, the
Department estimates, using the AEO2006 energy price forecast, that the
mean payback period of non-weatherized gas furnaces in the Southern
climate would still exceed the mean lifetime of these furnaces.
While the Secretary recognizes the increased economic benefits to
the nation as a result of TSL 4 under the increased energy price
forecast, AEO2006, as captured by the energy price sensitivity
analysis, the Secretary still concludes that the benefits of a federal
standard at TSL 4 would still be outweighed by the economic burden that
would be placed upon consumers in the South. Consequently, the
Secretary has concluded that the energy price sensitivity analysis
which addresses the effects of the AEO2006 energy price forecast does
not change the Department's rejection of TSL 4, and its choice of TSL 2
as the proposed standard level.
VI. Procedural Issues and Regulatory Review
A. Review Under Executive Order 12866
The Department has determined today's regulatory action is an
``economically significant'' action'' under section 3(f)(1) of
Executive Order 12866, ``Regulatory Planning and Review.'' 58 FR 51735
(October 4, 1993). Accordingly, today's action required a regulatory
impact analysis (RIA) and, under the Executive Order, was subject to
review by the Office of Information and Regulatory Affairs (OIRA) in
the OMB. The Department presented to OIRA for review the draft proposed
rule and other documents prepared for this rulemaking, including the
RIA, and has included these documents in the rulemaking record. They
are available for public review in the Resource Room of DOE's Building
Technologies Program, Room 1J-018, 1000 Independence Avenue, SW.,
Washington, DC, (202) 586-9127, between 9 a.m and 4 p.m., Monday
through Friday, except Federal holidays.
The RIA is contained in the TSD prepared for the rulemaking. The
RIA consists of: (1) A statement of the problem addressed by this
regulation, and the mandate for government action; (2) a description
and analysis of the feasible policy alternatives to this regulation;
(3) a quantitative comparison of the impacts of the alternatives; and
(4) the national economic impacts of the proposed standard.
The RIA calculates the effects of feasible policy alternatives to
residential furnace and boiler standards, and provides a quantitative
comparison of the impacts of the alternatives. The Department evaluated
each alternative in terms of its ability to achieve significant energy
savings at reasonable costs, and compared it to the effectiveness of
the proposed rule. The Department analyzed these alternatives using a
series of regulatory scenarios as input to the NES/Shipments Model for
furnaces and boilers, which it modified to allow inputs for these
measures.
The Department identified the following major policy alternatives
for achieving increased furnace and boiler energy efficiency:
No new regulatory action;
Consumer rebates;
Consumer tax credits;
Manufacturer tax credits;
Voluntary energy-efficiency targets;
Bulk government purchases;
Early replacement incentives; and
Regional performance standards (climates >=5000 heating
degree days and climates >=6000 heating degree days).
The Department evaluated each alternative in terms of its ability
to achieve significant energy savings at reasonable costs, and compared
it to the effectiveness of the proposed rule.
Table VI.1.--Non-Regulatory Alternatives to Standards
------------------------------------------------------------------------
Net present value**
Energy (billion $)
Policy alternatives savings* -------------------------
(quads) 7% discount 3% discount
rate rate
------------------------------------------------------------------------
No new regulatory action.......... 0 0 0
Consumer Rebates.................. 0.078 0.086 0.37
Consumer Tax Credits.............. 0.047 0.052 0.22
Manufacturer Tax Credits.......... 0.023 0.026 0.11
Voluntary Energy-Efficiency 0.046 0.074 0.3
Targets..........................
Early Replacement Incentives...... 0.025 0.059 0.16
Bulk Government Purchases......... 0.005 0.006 0.026
Regional Performance Standards for
NWGF***:
Cold States (>=5000 HDD) (TSL 1.72 0.79 5.99
4)...........................
Warm States (< 5000 HDD) (TSL 0.004 0.01 0.03
2)...........................
Regional Performance Standards for
NWGF***:
Cold States (>=6000 HDD) (TSL 0.2 0.04 0.59
4)...........................
Warm States (< 6000 HDD) (TSL 0.01 0.02 0.07
2)...........................
------------------------------------------------------------------------
* Energy savings are in source quads.
** Net present value is the value in the present of a time series of
costs and savings. The Department determined the net present value
from 2015 to 2038 in billions of 2004 dollars.
*** For non-weatherized gas furnaces (NWGF) only with national
performance standard set at TSL 2, the energy savings is 0.01 quads.
The net present value is $0.03 billion with a 7-percent discount rate
and $0.10 billion with a 3-percent discount rate. The Department
analyzed two scenarios, the first with cold states having 5000 heating
degree days (HDD) or more and the second with 6000 HDD or more.
The net present value amounts shown in Table VI.1 refer to the NPV
for residential consumers. The costs to the government of each policy
(such as rebates or tax credits) are not included in the costs for the
NPV since, on balance, consumers are both paying for (through taxes)
and receiving the benefits of the payments. The following paragraphs
discuss each of the policy alternatives listed in Table VI.1. (See TSD,
RIA.)
[[Page 59254]]
No new regulatory action. The case in which no regulatory action is
taken with regard to furnaces and boilers constitutes the ``base case''
(or ``No Action'') scenario. In this case, between the years 2015 and
2038, furnaces and boilers are expected to use 101 quads of primary
energy. Since this is the base case, energy savings and NPV are zero by
definition.
Rebates. If consumers were offered a rebate that covered a portion
of the incremental price difference between products meeting baseline
efficiency levels and those meeting the energy efficiency levels in
trial standard level 2, the Department estimates that the percentage of
consumers purchasing the more-efficient products would increase by 2
percent to 34 percent, depending on the product class. The Department
assumed the impact of this policy would be to permanently transform the
market so that the shipment-weighted efficiency gain seen in the first
year of the program would be maintained throughout the forecast period.
At the estimated participation rates, the rebates would provide 0.078
quads of national energy savings and an NPV of $0.086 billion (at a
seven-percent discount rate). Although DOE estimates that rebates will
provide national benefits, they are much smaller than the benefits
resulting from national performance standards. Thus, the Department
rejected rebates as a policy alternative to national performance
standards.
Consumer Tax Credits. If consumers were offered a tax credit
equivalent to the amount mentioned above for rebates, the Department's
research suggests that the number of consumers buying a furnace or
boiler that would take advantage of the tax credit would be
approximately 60 percent of the number that would take advantage of
rebates. Thus, as a result of the tax credit, the percentage of
consumers purchasing the more-efficient products would increase by 1
percent to 20 percent, depending on the product class. The Department
assumed the impact of this policy would be to permanently transform the
market so that the shipment-weighted efficiency gain seen in the first
year of the program would be maintained throughout the forecast period.
The Department estimated that tax credits would yield a fraction of the
benefits that rebates would provide. The Department rejected rebates,
as a policy alternative to national performance standards, because the
benefits that rebates provide are much smaller than those resulting
from performance standards. Thus, because consumer tax credits provide
even smaller benefits than rebates, the Department also rejected
consumer tax credits as a policy alternative to national performance
standards.
The Energy Policy Act of 2005 includes tax credits for very high
efficiency furnaces and boilers with AFUE of 95 percent or higher.
Although the Department recognizes this requirement, this RIA focuses
only on non-regulatory approaches to promoting the proposed standard,
which is well below 95-percent AFUE. Thus, the Department's action to
promote 95-percent-AFUE products does not affect this RIA.
Manufacturer Tax Credits. The Department believes even smaller
benefits would result from availability of a manufacturer tax credit
program that would effectively result in a lower price to the consumer
by an amount that covers part of the incremental price difference
between products meeting baseline efficiency levels and those meeting
trial standard level 2. Because these tax credits would go to
manufacturers instead of consumers, the Department believes that fewer
consumers would be aware of this program relative to a consumer tax
credit program. The Department assumes that 50 percent of the consumers
who would take advantage of consumer tax credits would buy more-
efficient products offered through a manufacturer tax credit program.
Thus, as a result of the manufacturer tax credit, the percentage of
consumers purchasing the more-efficient products would increase by 0.6
percent to 10 percent (i.e., 50 percent of the impact of consumer tax
credits), depending on the product class.
The Department assumed the impact of this policy would be to
permanently transform the market so that the shipment-weighted
efficiency gain seen in the first year of the program will be
maintained throughout the forecast period. The Department estimated
that manufacturer tax credits would yield a fraction of the benefits
that consumer tax credits would provide. The Department rejected
consumer tax credits as a policy alternative to national performance
standards because the benefits that consumer tax credits provide are
much smaller than those resulting from performance standards. Thus,
because manufacturer tax credits provide even smaller benefits than
consumer tax credits, the Department also rejected manufacturer tax
credits as a policy alternative to national performance standards.
Voluntary Energy-Efficiency Targets. The Federal government's
Energy Star program currently has voluntary energy-efficiency targets
for non-weatherized gas furnaces and gas boilers. Equipment purchases
that result from the Energy Star program, and hence the impact of that
program, already are reflected in the Department's ``base case''
scenario. The Department evaluated the potential impacts of increased
marketing efforts within the Energy Star program that would encourage
purchase of products meeting the trial standard level 2 efficiency
levels. The Department modeled the voluntary efficiency program based
on this scenario and assumed that the resulting shipment-weighted
efficiency gain would be maintained throughout the forecast period. The
Department estimated that the enhanced effectiveness of voluntary
energy-efficiency targets would provide 0.046 quads of national energy
savings and an NPV of $0.074 billion (at a seven-percent discount
rate). Although this would provide national benefits, they are much
smaller than the benefits resulting from national performance
standards. Thus, the Department rejected use of voluntary energy-
efficiency targets as a policy alternative to national performance
standards.
GAMA commented that, when DOE considers voluntary programs, it
should survey the types of the programs used in various States, and
extrapolate those results to other States and regions that do not avail
themselves of voluntary programs or whose programs are less successful.
(GAMA, No. 67 at p. 8) The Department considered State voluntary
programs in the RIA.
Early Replacement Incentives. This policy alternative envisions a
program to replace old, inefficient furnaces and boilers with models
meeting the efficiency levels in trial standard level 2. The Department
modeled this policy by projecting an increase in the number of such
replacements equal to 20 percent of the number of replacements for
failed equipment. It assumed the program would last as long as it takes
to completely replace all of the eligible existing stock in the year
that the program begins (2015). The Department estimated that such an
early replacement program would provide 0.025 quads of national energy
savings and an NPV of $0.059 billion (at a seven-percent discount
rate). Although DOE estimates that this early replacement program will
provide national benefits, they are much smaller than the benefits
resulting from national performance standards. Thus, the Department
rejected early replacement incentives as a policy alternative to
national performance standards.
Bulk Government Purchases. Under this policy alternative, the
government sector would be encouraged to purchase
[[Page 59255]]
increased amounts of equipment that meet the efficiency levels in trial
standard level 2. Federal, State, and local government agencies could
administer such a program. At the Federal level, this would be an
enhancement to the existing Federal Energy Management Program (FEMP).
The Department modeled this program by assuming an increase in
installation of equipment meeting the efficiency levels of trial
standard level 2 among those households for whom government agencies
purchase or influence the purchase of furnaces and boilers. The
Department estimated that bulk government purchases would provide 0.005
quads of national energy savings and an NPV of $0.006 billion (at a
seven-percent discount rate), benefits which are much smaller than
those estimated for national performance standards. The Department
rejected bulk government purchases as a policy alternative to national
performance standards.
Regional Performance Standards. The Department considered two
alternatives based on heating degree days. These alternatives
contemplate efficiency standards for non-weatherized gas furnaces only,
depending on the region of the country. The Department modeled the
policy of regional performance standards by aggregating States into two
broad geographic regions based on climate (i.e., based on heating
degree days). In the first alternative, DOE defines the cold climate as
having 5,000 or more heating degree days and would include the cold-
climate States, including the New England, Middle Atlantic, East North
Central, West North Central, Mountain (northern part only including
Colorado, Idaho, Montana, Utah, Wyoming), and Pacific Census divisions
(northern part only including Alaska, Oregon and Washington), and West
Virginia; and warm-climate States would include the South Atlantic
(with the exception of West Virginia), East South Central, Mountain
(southern part only including Arizona, Nevada and New Mexico), West
South Central, and Pacific (southern part only including California and
Hawaii) Census divisions. For the second alternative, greater than 6000
heating degree days, the cold-climate States do not align closely with
the Census divisions and include the states of Alaska, Colorado,
Connecticut, Idaho, Illinois, Iowa, Maine, Massachusetts, Michigan,
Minnesota, Montana, Nebraska, New Hampshire, New York, North Dakota,
South Dakota, Utah, Vermont, Wisconsin, Wyoming; the warm-climate
States would include the rest of U.S. States.
The Department selected the efficiency level for this alternative
based on maximizing consumer NPV. The standard that yields the maximum
consumer NPV at a seven-percent discount rate for the cold-climates
(i.e., >=5,000 heating degree days and >=6,000 heating degree days) is
trial standard level 4, with trial standard level 2 for the warm
climates. Both alternatives yield greater energy savings and national
NPVs than the standards proposed today. However, as discussed above,
the Department lacks authority to adopt regional standards, so it must
reject these alternatives. (42 U.S.C. 6291(6)(A))
However, DOE does have authority to grant State petitions for an
exemption from Federal preemption of higher State standards, if the
State filing the petition demonstrates that its higher standards are
needed to meet State or local energy interests that (1) are
substantially different from those in the U.S. generally and (2) are
such that the costs, benefits, burdens, and energy savings resulting
from the State's standards, considered in light of the State's energy
plan, would outweigh the costs, benefits, burdens, and energy savings
of alternative approaches. (42 U.S.C. 6297(d)) In addition, the
Department must reject the petition if ``interested persons'' establish
that the State regulation would ``significantly burden manufacturing,
marketing, distribution, sale or servicing'' of the covered equipment
on a national basis. (42 U.S.C. 6297(d)) Each of the regional standards
alternatives evaluated, DOE believes, is representative of the energy
and national NPV impacts that would occur if States in the cold-climate
regions were to make a case that unusual and compelling State or local
energy interests exist and DOE were to grant State petitions for
exemption from Federal standards. In the first case--cold climate
greater or equal to 5,000 heating degree days--the regional standards
would save 1.72 quads of energy for non-weatherized gas furnaces only,
which compares to 0.01 quads forecasted to be saved by today's proposed
rule. In the second case--cold climate greater or equal to 6,000
heating degree days--DOE found that the regional standards would save
0.20 quads of energy.
National Performance Standards (TSL 2). The Department proposes to
adopt the efficiency levels listed in section V.C. As indicated in the
paragraphs above, with the exception of regional performance standards
which the Department has determined it cannot promulgate, none of the
alternatives DOE examined would save as much energy as the proposed
standards. Also, several of the alternatives would require new enabling
legislation, such as consumer or manufacturer tax credits, since
authority to carry out those alternatives does not presently exist.
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 for any rule
that by law must be proposed for public comment, unless the agency
certifies that the rule, if promulgated, will not have a significant
economic impact on a substantial number of small entities. As required
by Executive Order 13272, Proper Consideration of Small Entities in
Agency Rulemaking, 67 FR 53461 (August 16, 2002), DOE published
procedures and policies on February 19, 2003 to ensure that the
potential impacts of its rules on small entities are properly
considered during the rulemaking process. 68 FR 7990. The Department
has made its procedures and policies available on the Office of General
Counsel's Web site: http://www.gc.doe.gov.
The Department reviewed today's proposed rule under the provisions
of the Regulatory Flexibility Act and the procedures and policies
published on February 19, 2003. 68 FR 7990. A regulatory flexibility
analysis examines the impact of the rule on small entities and
considers alternative ways of reducing negative impacts.
The Department used the small business size standards published on
January 31, 1996, as amended, by the Small Business Administration to
determine whether any small entities would be required to comply with
the rule. 61 FR 3286 and codified at 13 CFR part 121. The size
standards are listed by North American Industry Classification System
(NAICS) code and industry description. Residential furnace
manufacturing is classified under NAICS 333415 and residential boiler
manufacturing is classified under NAICS 333414. To be categorized as a
small business, a manufacturer of residential furnaces and/or boilers
and its affiliates may employ a maximum of 750 employees. The
residential furnace and boiler industry is characterized by many
different domestic manufacturers. However, consolidation within the
industry has reduced the number of parent companies that manufacture
similar equipment under different affiliates and labels.
[[Page 59256]]
The Department surveyed GAMA's Consumers' Directory of Certified
Efficiency Ratings for Heating and Water Heating Equipment (2005) and
created a list of every manufacturer that had certified product ratings
in the directory. The Department also asked stakeholders and GAMA
representatives within the residential furnace and boiler industry if
they were aware of any other small manufacturers. The Department then
looked at publicly available data and contacted manufacturers, where
needed, to determine if they meet the SBA's definition of a small
manufacturing facility and have their manufacturing facilities located
within the U.S. Based on this analysis, the Department estimates that
there are 11 small manufacturers of residential furnaces and boilers.
The Department then contacted all 11 small manufacturers. It
subsequently conducted two on-site interviews and three phone
interviews with small manufacturers to determine if there are
differential impacts on these companies that may result from the
standard.
The Department found that, in general, small manufacturers have the
same concerns as large manufacturers regarding energy conservation
standards. In addition, the Department found no significant differences
in the R&D emphasis or marketing strategies between small business
manufacturers and large manufacturers. Therefore, for the classes
comprised primarily of small businesses, the Department believes the
GRIM analysis, which models each product class separately, is
representative of the small businesses affected by standards.
On the basis of the foregoing, DOE certifies that this proposed
rule, if promulgated, will have no significant economic impact on a
substantial number of small entities. Accordingly, DOE has not prepared
a regulatory flexibility analysis for this rulemaking. The Department
will transmit the certification and supporting statement of factual
basis to the Chief Counsel for Advocacy of the Small Business
Administration for review under 5 U.S.C. 605(b).
C. Review Under the Paperwork Reduction Act
This rulemaking will impose no new information or record keeping
requirements. Accordingly, Office of Management and Budget clearance is
not required under the Paperwork Reduction Act. (44 U.S.C. 3501 et
seq.)
D. Review Under the National Environmental Policy Act
The Department is preparing an environmental assessment of the
impacts of the proposed rule and DOE anticipates completing a Finding
of No Significant Impact (FONSI) before publishing the final rule on
residential furnaces and boilers, pursuant to the National
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.), the
regulations of the Council on Environmental Quality (40 CFR parts 1500-
1508), and the Department's regulations for compliance with the
National Environmental Policy Act (10 CFR part 1021).
E. Review Under Executive Order 13132
Executive Order 13132, ``Federalism,'' 64 FR 43255 (August 4,
1999), imposes certain requirements on agencies formulating and
implementing policies or regulations that preempt State law or that
have federalism implications. The Executive Order requires agencies to
examine the constitutional and statutory authority supporting any
action that would limit the policymaking discretion of the States and
to carefully assess the necessity for such actions. The Executive Order
also requires agencies to have an accountable process to ensure
meaningful and timely input by State and local officials in the
development of regulatory policies that have federalism implications.
On March 14, 2000, DOE published a statement of policy describing the
intergovernmental consultation process it will follow in the
development of such regulations. 65 FR 13735. The Department has
examined today's proposed rule and has determined that it would not
have a substantial direct effect on the States, on the relationship
between the national government and the States, or on the distribution
of power and responsibilities among the various levels of government.
EPCA governs and prescribes Federal preemption of State regulations as
to energy conservation for the products that are the subject of today's
proposed rule. States can petition the Department for exemption from
such preemption to the extent, and based on criteria, set forth in
EPCA. (42 U.S.C. 6297) No further action is required by Executive Order
13132.
F. Review Under Executive Order 12988
With respect to the review of existing regulations and the
promulgation of new regulations, section 3(a) of Executive Order 12988,
``Civil Justice Reform'' (61 FR 4729, February 7, 1996) imposes on
Federal agencies the general duty to adhere to the following
requirements: (1) Eliminate drafting errors and ambiguity; (2) write
regulations to minimize litigation; and (3) provide a clear legal
standard for affected conduct rather than a general standard and
promote simplification and burden reduction. Section 3(b) of Executive
Order 12988 specifically requires that Executive agencies make every
reasonable effort to ensure that the regulation: (1) Clearly specifies
the preemptive effect, if any; (2) clearly specifies any effect on
existing Federal law or regulation; (3) provides a clear legal standard
for affected conduct while promoting simplification and burden
reduction; (4) specifies the retroactive effect, if any; (5) adequately
defines key terms; and (6) addresses other important issues affecting
clarity and general draftsmanship under any guidelines issued by the
Attorney General. Section 3(c) of Executive Order 12988 requires
Executive agencies to review regulations in light of applicable
standards in section 3(a) and section 3(b) to determine whether they
are met or it is unreasonable to meet one or more of them. The
Department has completed the required review and determined that, to
the extent permitted by law, this proposed rule meets the relevant
standards of Executive Order 12988.
G. Review Under the Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) (UMRA) requires each Federal agency to assess the effects of Federal
regulatory actions on State, local, and Tribal governments and the
private sector. For a proposed regulatory action likely to result in a
rule that may cause the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector of $100 million
or more in any one year (adjusted annually for inflation), section 202
of UMRA requires a Federal agency to publish a written statement that
estimates the resulting costs, benefits, and other effects on the
national economy. (2 U.S.C. 1532(a),(b)) The UMRA also requires a
Federal agency to develop an effective process to permit timely input
by elected officers of State, local, and Tribal governments on a
proposed ``significant intergovernmental mandate,'' and requires an
agency plan for giving notice and opportunity for timely input to
potentially affected small governments before establishing any
requirements that might significantly or uniquely affect small
governments. On March 18, 1997, DOE published a statement of policy on
its process for intergovernmental consultation under
[[Page 59257]]
UMRA. 62 FR 12820. (Also available at http://www.gc.doe.gov.)
Today's proposed rule will not likely result in a final rule that
could impose expenditures of $100 million or more in a given year in
the furnace and boiler manufacturing industry before or after the
effective date of the proposed standard. The proposed rule also does
not contain a Federal intergovernmental mandate. Thus, DOE is not
required by UMRA to prepare a written statement assessing the costs,
benefits and other effects of the proposed rule on the national
economy.
Although not required by UMRA, DOE has estimated the costs,
benefits, and other effects of the proposed standards on manufacturers,
consumers, and the nation, and it has considered regulatory
alternatives (see section VI.A.). As required by section 325(o) of EPCA
(42 U.S.C. 6295(o)), today's proposed energy conservation standards for
residential furnaces and boilers would achieve the maximum improvement
in energy efficiency that DOE has determined to be both technologically
feasible and economically justified. DOE may not select a regulatory
alternative that does not meet this statutory standard.
H. Review Under the Treasury and General Government Appropriations Act
of 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
The Department has determined, under Executive Order 12630,
``Governmental Actions and Interference with Constitutionally Protected
Property Rights,'' 53 FR 8859 (March 18, 1988), that this regulation
would not result in any takings which might require compensation under
the Fifth Amendment to the United States Constitution.
J. Review Under the Treasury and General Government Appropriations Act
of 2001
Section 515 of the Treasury and General Government Appropriations
Act, 2001 (44 U.S.C. 3516, note) provides for agencies to review most
disseminations of information to the public under guidelines
established by each agency pursuant to general guidelines issued by
OMB. The OMB's guidelines were published at 67 FR 8452 (February 22,
2002), and DOE's guidelines were published at 67 FR 62446 (October 7,
2002). The Department has reviewed this notice under the OMB and DOE
guidelines and has concluded that it is consistent with applicable
policies in those guidelines.
K. Review Under Executive Order 13211
Executive Order 13211, ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use,'' 66 FR 28355
(May 22, 2001), requires Federal agencies to prepare and submit to the
Office of Information and Regulatory Affairs (OIRA), Office of
Management and Budget, a Statement of Energy Effects for any proposed
significant energy action. A ``significant energy action'' is defined
as any action by an agency that promulgated 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.
Today's regulatory action would not have a significant adverse
effect on the supply, distribution, or use of energy and, therefore, is
not a significant energy action. Accordingly, DOE has not prepared a
Statement of Energy Effects.
L. Review Under the Information Quality Bulletin for Peer Review
On December 16, 2004, the Office of Management and Budget (OMB), in
consultation with the Office of Science and Technology (OSTP), issued
its Final Information Quality Bulletin for Peer Review (the Bulletin).
(70 FR 2664, January 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.
The Department's Office of Energy Efficiency and Renewable Energy,
Building Technologies Program, held formal in-progress peer reviews
covering the analyses (e.g., screening/engineering analysis, life-cycle
cost analysis, manufacturing impact analysis, and utility impact
analysis) used in conducting the energy efficiency standards
development process on June 28-29, 2005. The in-progress review is a
rigorous, formal and documented evaluation process using objective
criteria and qualified and independent reviewers to make a judgment of
the technical/scientific/business merit, the actual or anticipated
results, and the productivity and management effectiveness of programs
and/or projects. The Building Technologies Program staff is preparing a
peer review report which, upon completion, will be disseminated on the
Office of Energy Efficiency and Renewable Energy's Web site and
included in the administrative record for this rulemaking.
M. Review Under Executive Order 12898
The Department considers environmental justice under Executive
Order 12898, ``Federal Actions to Address Environmental Justice in
Minority Populations and Low-Income Populations,'' 59 FR 7629 (February
16, 1994). The Executive Order requires Federal agencies to assess
whether a proposed Federal action causes any disproportionately high
and adverse human health or environmental effects on low-income or
minority populations. The Department evaluated the socioeconomic
effects of standards on low-income households.
VII. Public Participation
A. Attendance at Public Meeting
The time and date of the public meeting are listed in the DATES
section at the beginning of this notice of proposed rulemaking. The
public meeting will be held at the U.S. Department of Energy, Forrestal
Building, Room E-245, 1000 Independence Avenue, SW., Washington, DC
20585-0121. To attend the public meeting, please notify Ms. Brenda
Edwards-Jones at (202) 586-2945. Foreign nationals visiting DOE
Headquarters are subject to advance security screening procedures,
requiring a 30-day advance notice. Any foreign national wishing to
participate in the meeting should advise DOE of this fact as soon as
possible by contacting Ms. Brenda Edwards-Jones to initiate the
necessary procedures.
[[Page 59258]]
B. Procedure for Submitting Requests To Speak
Any person who has an interest in this notice, or who is a
representative of a group or class of persons that has an interest in
these issues, may request an opportunity to make an oral presentation.
Such persons may hand-deliver requests to speak, along with a compact
disc (CD) in WordPerfect, Microsoft Word, PDF, or text (ASCII) file
format to the address shown in the ADDRESSES section at the beginning
of this notice of proposed rulemaking between the hours of 9 a.m. and 4
p.m., Monday through Friday, except Federal holidays. Requests may also
be sent by mail or e-mail to: Brenda.Edwards-Jones@ee.doe.gov.
Persons requesting to speak should briefly describe the nature of
their interest in this rulemaking and provide a telephone number for
contact. The Department requests persons selected to be heard to submit
an advance copy of their statements at least two weeks before the
public meeting. At its discretion, DOE may permit any person who cannot
supply an advance copy of their statement to participate, if that
person has made advance alternative arrangements with the Building
Technologies Program. The request to give an oral presentation should
ask for such alternative arrangements.
C. Conduct of Public Meeting
The Department will designate a DOE official to preside at the
public meeting and may also use a professional facilitator to aid
discussion. The meeting will not be a judicial or evidentiary-type
public hearing, but DOE will conduct it in accordance with 5 U.S.C. 553
and section 336 of EPCA, 42 U.S.C. 6306. A court reporter will be
present to record the proceedings and prepare a transcript. The
Department reserves the right to schedule the order of presentations
and to establish the procedures governing the conduct of the public
meeting. After the public meeting, interested parties may submit
further comments on the proceedings as well as on any aspect of the
rulemaking until the end of the comment period.
The public meeting will be conducted in an informal, conference
style. The Department will present summaries of comments received
before the public meeting, allow time for presentations by
participants, and encourage all interested parties to share their views
on issues affecting this rulemaking. Each participant will be allowed
to make a prepared general statement (within time limits determined by
DOE), before the discussion of specific topics. The Department will
permit other participants to comment briefly on any general statements.
At the end of all prepared statements on a topic, DOE will permit
participants to clarify their statements briefly and comment on
statements made by others. Participants should be prepared to answer
questions by DOE and by other participants concerning these issues.
Department representatives also may 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.
The Department will make the entire record of this proposed
rulemaking, including the transcript from the public meeting, available
for inspection at the U.S. Department of Energy, Forrestal Building,
Room 1J-018 (Resource Room of the Building Technologies Program), 1000
Independence Avenue, SW., Washington, DC, (202) 586-9127, between 9
a.m. and 4 p.m., Monday through Friday, except Federal holidays. Any
person may buy a copy of the transcript from the transcribing reporter.
D. Submission of Comments
The Department will accept comments, data, and information
regarding the proposed rule before or after the public meeting, but no
later than the date provided at the beginning of this notice of
proposed rulemaking. Please submit comments, data, and information
electronically. Send them to the following e-mail address:
ResidentialFBNOPR[fxsp0]Comments@ee.doe.gov. Submit electronic comments
in WordPerfect, Microsoft Word, PDF, or text (ASCII) file format and
avoid the use of special characters or any form of encryption. Comments
in electronic format should be identified by the docket number EE-RM/
STD-01-350 and/or RIN number 1904-AA78, and wherever possible carry the
electronic signature of the author. Absent an electronic signature,
comments submitted electronically must be followed and authenticated by
submitting the signed original paper document. No telefacsimiles
(faxes) will be accepted.
According to 10 CFR 1004.11, any person submitting information that
he or she believes to be confidential and exempt by law from public
disclosure should submit two copies: One copy of the document including
all the information believed to be confidential, and one copy of the
document with the information believed to be confidential deleted. The
Department of Energy will make its own determination about the
confidential status of the information and treat it according to its
determination.
Factors of interest to the Department when evaluating requests to
treat submitted information as confidential include: (1) A description
of the items; (2) whether and why such items are customarily treated as
confidential within the industry; (3) whether the information is
generally known by or available from other sources; (4) whether the
information has previously been made available to others without
obligation concerning its confidentiality; (5) an explanation of the
competitive injury to the submitting person which would result from
public disclosure; (6) when such information might lose its
confidential character due to the passage of time; and (7) why
disclosure of the information would be contrary to the public interest.
E. Issues on Which DOE Seeks Comment
The Department is particularly interested in receiving comments and
views of interested parties concerning:
(1) The number of consumers that may be affected by structural
changes for installing a condensing furnace and the cost magnitude of
any structural changes;
(2) The assumption of constant heat pump and electric resistance
furnace market shares over the analysis period in order to calculate
the possible market shift effects of non-weatherized gas furnace energy
conservation standards on NES and NPV;
(3) The assumption of constant condensing furnace market share over
the analysis period in the base case forecast in order to calculate the
annual unit energy consumption of non-weatherized gas furnaces;
(4) The feasibility and safety of weatherized gas furnaces at trial
standard level 2 (83-percent AFUE), due to possible condensation in the
heat exchanger; and
(5) Information that would allow the Department to monetize changes
in warranty costs resulting from the installation of products at near-
condensing levels.
VIII. Approval of the Office of the Secretary
The Secretary of Energy has approved publication of this proposed
rule.
[[Page 59259]]
List of Subjects in 10 CFR Part 430
Administrative practice and procedure, Energy conservation,
Household appliances.
Issued in Washington, DC, on September 25, 2006.
Alexander A. Karsner,
Assistant Secretary, Energy Efficiency and Renewable Energy.
For the reasons set forth in the preamble, Part 430 of Title 10,
Code of Federal Regulations, is proposed to be amended as set forth
below.
PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS
1. The authority citation for Part 430 continues to read as
follows:
Authority: 42 U.S.C. 6291-6309, 28 U.S.C. 2461 note.
2. Section 430.32(e) of subpart C is amended by adding new
paragraphs (e)(1) and (2) and revising the table to read as follows:
Sec. 430.32 Energy conservation standards and effective dates.
* * * * *
(e) * * *
(1) The annual fuel utilization efficiency of furnaces and boilers
shall not be less than the following for products manufactured on or
after the indicated dates.
(2) The annual fuel utilization efficiency of furnaces and boilers,
except mobile home oil-fired furnaces, weatherized oil-fired furnaces,
and gas steam boilers, and oil-fired steam boilers, shall not be less
than the following for products manufactured on or after the indicated
dates. Standards for mobile home oil-fired furnaces, weatherized oil-
fired furnaces, gas steam boilers, and oil-fired steam boilers, remain
as in paragraph (e)(1) of this section.
------------------------------------------------------------------------
AFUE1 Effective
Product class (percent) date
------------------------------------------------------------------------
1. Non-weatherized gas furnaces............... 80 XX/XX/2015
2. Weatherized gas furnaces................... 83 XX/XX/2015
3. Mobile home gas furnaces................... 80 XX/XX/2015
4. Oil-fired furnaces......................... 82 XX/XX/2015
5. Gas hot-water boilers...................... 84 XX/XX/2015
6. Oil-fired hot-water boilers................ 83 XX/XX/2015
------------------------------------------------------------------------
\1\ Annual Fuel Utilization Efficiency, as determined in section
430.22(n)(2) of this part.
* * * * *
[FR Doc. 06-8431 Filed 10-5-06; 8:45 am]
BILLING CODE 6450-01-P