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Rule title:
Energy Conservation for Furnaces, Heat Pumps, and AC
1904-AC06                                                                           RIA Separate?       Yes
Stage                                                                               Publication Date
Proposed Rule                                                                       6/27/2011
Rule summary:
The Energy Policy and Conservation Act of 1975 (EPCA), as amended, prescribes energy conservation
standards for various consumer products and certain commercial and industrial equipment, including
residential furnaces and residential central air conditioners and heat pumps. EPCA also requires the U.S.
Department of Energy (DOE) to determine whether more stringent, amended standards for these products
would be technologically feasible and economically justified, and would save a significant amount of energy. In
this notice, DOE proposes energy conservation standards for residential furnaces and for residential central
air conditioners and heat pumps identical to those set forth in a direct final rule published elsewhere in today’s
Federal Register. If DOE receives adverse comment and determines that such comment may provide a
reasonable basis for withdrawing the direct final rule, DOE will publish a notice withdrawing the direct final rule
and will proceed with this proposed rule.

Openness                                                                          Score     Comments
1. How easily were the RIA, the proposed rule, and any supplementary
materials found online?                                                           4         1A
2. How verifiable are the data used in the analysis?                              4         1B
3. How verifiable are the models and assumptions used in the analysis?            4         1C
4. Was the Regulatory Impact Analysis comprehensible to an informed
layperson?                                                                        3         1D

Total Openness (Sum of 1-4)                                                       15

Analysis                                                                    Score           Comments
5. How well does the analysis identify the desired outcomes and demonstrate
that the regulation will achieve them?                                      4               2A

6. How well does the analysis identify and demonstrate the existence of a
market failure or other systemic problem the regulation is supposed to solve? 2             2B
7. How well does the analysis assess the effectiveness of alternative
approaches?                                                                   4             2C
8. How well does the analysis assess costs and benefits?                      4             2D

Total Analysis (Sum of 5-8)                                                       14

Use                                                                               Score     Comments
9. Does the proposed rule or the RIA present evidence that the agency used
the Regulatory Impact Analysis?                                                   3         3A
10. Did the agency maximize net benefits or explain why it chose another
alternative?                                                               4   3B
11. Does the proposed rule establish measures and goals that can be used
to track the regulation’s results in the future?                               1         3C

12. Did the agency indicate what data it will use to assess the regulation’s
performance in the future and establish provisions for doing so?               2         3D

Total Use (Sum of 9-12)                                                        10

Total Score                                                                         39
Criterion                        Score Com. No. Comment
                                                The NPRM turns up easily in
                                       with a RIN search, but
                                                a keyword search produces a large
                                                number of documents to wade
                                                through. The NPRM refers the reader
                                                to the direct final rule for more details
                                                on DOE's analysis. The direct final
                                                rule has an extensive discussion of
                                                the analysis and a link to a place on
                                                DOE's web page where one can find
                                                the technical support document. Could
                                                not find current regulation rule using
                                                the keyword search found on
                                                Department of Energy website, though
                                                the 2000 rule turned up. A keyword
                                                search on the Energy Efficiency and
                                                Renewable Energy Departments
                                                website was successful. The RIA
                                                (labeled as the Technical Support
1. How easily were the RIA,                     Document) is available online, though
the proposed rule, and any                      not easy to find. A Google search on
supplementary materials                         the RIN turns up the relevant
found online?                    4     1        documents.
                                                Data are extensive but well described.
                                                Hard to replicate in terms of work
                                                involved. Data are sourced,
                                                sometimes linked, and reproduced in
                                                appendices. Other sources were cited,
                                                such as the Residential Energy
                                                Consumption Survey: Quality Profile,
2. How verifiable are the data                  1996, that were not online but
used in the analysis?            4     2        verifiable.
                                    Many assumptions/models are based
                                    on academic or DOE research that is
                                    cited and often linked. The vast set of
                                    supporting documents give the reader
                                    full details of the surveys or research
                                    studies on which the assumptions or
                                    estimations are based. Moreover, it
                                    uses FUND, DICE, and PAGE models
                                    that are frequently used in the
                                    literature on climate change. Some
                                    assumptions, like "factory
                                    parameters," are based on "internal
                                    expertise and manufacturer feedback"
                                    without further documentation. They
                                    are listed. Some heuristic
                                    assumptions are not sourced but
                                    seem reasonable, e.g., rapid growth
                                    rate in adoption of efficient equipment
3. How verifiable are the           between 2006 and 2009 was due to
models and assumptions              tax credits. Spreadsheets used for
used in the analysis?       4   3   calculations are available online.
                               The results and summary are quite
                               clear. The analysis is extremely
                               detailed. Unfortunately, this results in
                               an excessive use of jargon and
                               acronyms, so much so that the
                               Technical Documents include a two-
                               page list of acronyms for the reader.
                               Therefore, a lay person may be
                               overwhelmed by the analysis. A table
4. Was the analysis            in the NPRM translates some of the
comprehensible to an           arcane analysis into benefit-cost
informed layperson?    3   4   results.
                                Score   Com. No. Comment

5. How well does the
analysis identify the desired
outcomes and demonstrate
that the regulation will
achieve them?                   4

                                                  Identified outcomes include net cost savings to
                                                  consumers and environmental benefits from
                                                  reduced emissions that result from reduced energy
                                                  use. Energy savings are considered an outcome in
Does the analysis clearly
                                                  their own right without much explanation why.
identify ultimate outcomes                        "Energy security" is also mentioned but not defined
that affect citizens’ quality of                  well. Reduced need for generating capacity
life?                            3      5A        sometimes seems to be counted as an outcome.
                                                  DOE is required to develop test procedures to
                                                  measure the energy efficiency, energy use, or
                                                  estimated annual operating cost of each covered
                                                  product. Analysis calculates life-cycle cost to
                                                  consumers - the net effect of energy cost savings
                                                  (based on marginal electricity prices) and higher
                                                  initial purchase costs. It also provides an estimate
Does the analysis identify                        that includes monetized benefits of emission
how these outcomes are to                         reductions. "Energy security" is not defined or
be measured?                    4       5B        measured.

                                                  Mandated efficiency levels will generate energy
Does the analysis provide a                       savings, consumer cost savings and environmental
                                                  benefits by removing the option of buying less
coherent and testable theory
                                                  efficient equipment. Explicitly assumes 100-percent
showing how the regulation                        compliance. No consideration of a "rebound effect"
will produce the desired                          because greater efficiency reduces the cost of
outcomes?                    3          5C        operating the equipment.

                                                  The analysis lists adoption rates of previous
                                                  improvement in energy standards for
                                                  heating/cooling systems. National energy savings
                                                  chapter presents graphs with data suggesting that
                                                  upward shifts in efficiency occurred following
                                                  previous efficiency standards in 1992 and 2006.
                                                  This is not explicitly cited as evidence that the
                                                  regulation will work. Efficiency appears to grow at a
                                                  faster rate prior to standards, but this may be an
Does the analysis present                         illusion because there are only a couple pre-1992
credible empirical support for                    data points. For the policy alternatives, results are
the theory?                    4        5D        estimated based on studies of similar policies.
                                 Probability distributions used for consumer
                                 discount rates. Analysis reflects variability of
                                 energy prices and consumption across
                                 households. Monte Carlo analysis used to calculate
                                 life-cycle cost savings. The analysis includes
                                 uncertainty based on climate, type of structure,
                                 discount rates, etc, when calculating the Life-Cycle
                                 Cost and the Pay Back Period. An appendix shows
                                 how different assumed learning rates affect energy
                                 savings results. Chapter that monetizes
Does the analysis
                                 environmental benefits acknowledges significant
adequately assess                uncertainty about the social costs of CO2 and NOX
uncertainty about the            and uses a range of values, including both
outcomes?               5   5E   domestic and global values.
6. How well does the
analysis identify and
demonstrate the existence of
a market failure or other
systemic problem the
regulation is supposed to
solve?                       2

                                        The NPRM for the direct final rule asserts in three
                                        paragraphs that consumers lack information about
                                        energy efficiency, there is asymmetric information
                                        and transaction costs, and there are external
                                        benefits from energy efficiency that the consumer
                                        does not capture. These are all recognized forms
                                        of market failure, but they are not really explained.
                                        The presentation gives the impression that these
                                        were just listed to satisfy a requirement in EO
                                        12866. The analysis assumes that customers are
Does the analysis identify a            not using a heating/cooling system that is optimal.
market failure or other                 Not clear why consumers are not already buying
systemic problem?              3   6A   equipment that apparently saves money.
                                        The first two market failures mentioned above
                                        under 6A are just asserted. The third explains that
                                        prices do not reflect the effects of pollutant
                                        emissions. Implicitly recognizes that emissions are
                                        social costs and therefore customers may not bear
Does the analysis outline a             these costs. However, electricity cost may or may
coherent and testable theory            not include the costs of emission now or in the
                                        future. It also assumes that other means of
that explains why the
                                        reducing CO2 emissions, such as at the power
problem (associated with the            plant, are not viable. There is also an assertion
outcome above) is systemic              about energy security not being incorporated into
rather than anecdotal?       2     6B   prices, which is not explained.
                                        The research cited on the social cost of carbon
                                        might be interpreted as evidence that there are
                                        environmental externalities, though this is not
                                        linked to definition of the systemic problem. The
                                        analysis uses integrated assessment models
                                        (IAMs) commonly used to estimate the SCC: the
                                        FUND, DICE, and PAGE models to determine the
                                        social cost of emissions. These models translate
                                        emissions into changes in atmospheric greenhouse
                                        concentrations, atmospheric concentrations into
                                        changes in temperature, and changes in
                                        temperature into economic damages. No evidence
Does the analysis present               is presented to support the claims about
credible empirical support for          information, transaction cost, or energy security
the theory?                    2   6C   problems.

Does the analysis                       The problem is assumed to exist with certainty.
                                        The analysis does address the uncertainty of the
adequately assess
                                        problem of emission costs by using five different
uncertainty about the                   social costs of CO2 emissions. The regulation also
existence or size of the                discusses whether the social costs should be
problem?                       2   6D   estimated globally or only domestically.
7. How well does the
analysis assess the
effectiveness of alternative
approaches?                    4

                                        Multiple alternative standard levels plus a variety of
                                        other policy options: No New Regulatory Action
                                        Consumer Rebates
                                        Consumer Tax Credits
                                        Manufacturer Tax Credits
Does the analysis enumerate             Voluntary Energy Efficiency Targets
other alternatives to address           Early Replacement
the problem?                  5    7A   Bulk Government Purchases

Is the range of alternatives
considered narrow (e.g.,
some exemptions to a
                                        The seven alternatives listed above are broad and
regulation) or broad (e.g.,
                                        include no new regulation as well as tax credits of
performance-based                       various types, and voluntary efficiency targets. It
regulation vs. command and              does not, however, address ways to ensure that
control, market mechanisms,             the price of electricity reflects the social cost. Nor
nonbinding guidance,                    does it mention other techniques that might also
                                        reduce energy consumption. All alternatives focus
information disclosure,
                                        on reducing energy use by inducing people to buy
addressing any government               more efficient furnaces and air conditioners, rather
failures that caused the                than some other means. On the plus side, these
original problem)?           4     7B   appliances are a major source of energy use.
                                         Energy savings, life cycle costs, and environmental
                                         benefits estimated for alternative standard levels.
                                         The analysis lists the rate of market penetration of
                                         the higher efficiency heating/cooling systems under
                                         alternative approaches and the net present value of
                                         each. Only energy savings are calculated for the
Does the analysis evaluate
                                         seven policy alternatives. Why the particular
how alternative approaches               amounts for rebates, tax credits, etc. are
would affect the amount of               appropriate isn't clear; one could generate larger
the outcome achieved?          4    7C   affects by assuming a larger amount.

Does the analysis                        Trial standard levels are a fair attempt in this area.
adequately address the                   Analysis projected base case market shares of
baseline? That is, what the              equipment of different efficiencies in 2016 using
                                         growth rates from recent past years. This is better
state of the world is likely to
                                         than assuming no growth but still assumes the
be in the absence of federal             future will be like the past with little justification.
intervention not just now but            Calculation of energy savings uses Energy
in the future?                  3   7D   Information Administration price projections.
8. How well does the
analysis assess costs and
benefits?                       4
Does the analysis identify
                                         The analysis does quantify costs for the seven
and quantify incremental                 main alternatives (trial standard levels). It does not
costs of all alternatives                list incremental costs, but they can be calculated.
considered?                     4   8A   For alternative policies, costs are not calculated.
                                        Additional expenditures appear to be pretty
                                        thoroughly documented -- both for consumers and
                                        for businesses. The analysis looks at the
                                        manufacturing costs of the new heat pumps and
                                        furnaces and includes the retail markup faced by
                                        customers. It also looks at the costs of installation,
                                        including the variation due to state costs and
                                        differences between new and replacement costs. It
                                        is not clear how the effects on consumers and on
                                        manufacturer cash flows are related, since the
                                        assumption that consumers bear the full cost of
Does the analysis identify all          high-efficiency equipment would presumably imply
expenditures likely to arise            that manufacturers pass all the cost on to
as a result of the regulation? 4   8B   consumers.

                                        The analysis includes the costs of the new more
                                        efficient furnace, AC, or heat pump as well as the
                                        cost of installation in both new and old structures.
                                        It is not clear if the crude accounting measures will
Does the analysis identify
                                        turn out to be accurate. Assumes the price of
how the regulation would                energy-efficient appliances will fall over time to
likely affect the prices of             reflect a "learning curve" and cites a DOE working
goods and services?           4    8C   paper that summarizes relevant literature.
                                        Shipments analysis allows price increases to affect
                                        consumer decision to repair old appliances rather
                                        than replace with new. The shipments model
                                        divides the population of appliance users into
                                        specific market segments and estimates the
                                        shipment of new equipment to each of these
                                        segments under each candidate standard level
                                        (CSL). The model starts from a historical base year
                                        and calculates, for each year of the analysis period,
                                        both shipments and retirements by market
                                        segment. This approach produces an estimate of
                                        the total equipment stock, broken down by age or
                                        vintage, in each year of the analysis period. The
                                        product stock distribution is calculated for the base
                                        case and for each efficiency level for each product
                                        class. The shipments model allows for the price
                                        increase associated with a CSL to influence the
                                        consumer decision to repair, rather than replace,
                                        broken equipment. The extended repair stock
Does the analysis examine               category represents equipment that has been
                                        repaired after failure. This component of the stock
costs that stem from
                                        is accounted for separately because it is further
changes in human behavior               assumed that equipment that has undergone one
as consumers and producers              extended repair will last another six years and then
respond to the regulation? 2       8D   be replaced. This category is referred to as
If costs are uncertain, does
the analysis present a range
of estimates and/or perform             Probability distribution used for purchase prices of
a sensitivity analysis?      4     8E   new equipment

                                        Technical support document calculates life-cycle
                                        cost to consumers for each proposed standard,
                                        which is sort of a net benefit to consumers, and
                                        adds monetized environmental benefits. It is not
                                        clear how the calculated effects on manufacturers
                                        are related, so this is not quite the same thing as
                                        calculating net benefits. A table in the NPRM
                                        translates this information into more standard
                                        benefit-cost terms, counting operating cost savings
Does the analysis identify              and emissions reductions as benefits and
the alternative that                    increased product costs as costs. But this is done
maximizes net benefits?       4    8F   only for the standard chosen.
                                        Chapter 17 assesses net effect on consumers,
                                        which could be interpreted as an attempt to opine
                                        on cost-effectiveness. Cost-effectiveness in terms
                                        of dollars spent per unit of energy savings was not
Does the analysis identify              calculated. Since the analysis estimates energy
the cost-effectiveness of               savings and costs, presumably this could have
each alternative considered? 3     8G   been done.

                                        The analysis does look at the impact on
                                        consumers, manufacturers, and employment of
                                        those in the industry and how they would be
                                        affected in terms of number of jobs and costs. The
                                        analysis also looks at the disparate impact on
                                        those living in the north versus the south, those
                                        living in hot-humid climates versus hot-dry climates
                                        versus those living in other parts of the country,
                                        elderly households, households who are living in
                                        poverty, as well as those with nine different types of
                                        heating/cooling systems. Also performs similar
                                        regional calculation for wholesalers and
                                        distributors. Tables show percentages of
                                        customers who experience net savings, net costs,
                                        or no impact, nationally and by region, for each
                                        alternative efficiency level. DOE identified several
                                        small AC manufacturers but determined they are
                                        unaffected because the standards for their
Does the analysis identify all
                                        products will not be raised. The department asserts
parties who would bear costs            that the effect on a small number of small oil
and assess the incidence of             furnace manufacturers would be small because the
costs?                         5   8H   majority of their sales meet the new standards.
                                        For each alternative efficiency level, life-cycle cost
                                        savings (or cost increases) are calculated
                                        nationally and for 3 climate regions. A separate
                                        chapter calculates this for senior-only households,
                                        low-income households, multi-family households,
                                        and new construction vs. replacement households.
Does the analysis identify all
                                        It also calculates the global benefit of lower CO2
parties who would receive               and Nox emissions. Recognizes reductions in other
benefits and assess the                 emissions, such as Hg, but does not calculate a
incidence of benefits?         5   8I   dollar value estimate.
Criterion                     Score Com. No. Comment

                                              The NPRM and RIA present much of the
                                              evidence the DOE used in the analysis -- from
                                              regional weather, to tear downs of various types
                                              of heating/cooling systems, to market penetration
                                              of various alternatives. Rule was issued pursuant
                                              to 2 court orders. Legislation also requires DOE
                                              to review these standards periodically. This
                                              proposed rule is identical to a direct final rule that
                                              reflects the result of stakeholder negotiations.
                                              Thus, it is likely that the analysis mostly assesses
                                              the results of decisions made by stakeholders
                                              when the rule was negotiated. But it appears
                                              some of the findings were necessary before DOE
                                              could sign off on the proposal: "DOE applies the
                                              same principles to any consensus
                                              recommendations it may receive to satisfy its
                                              statutory obligation to ensure that any energy
                                              conservation standard that it adopts achieves the
9. Does the proposed rule or
                                              maximum improvement in energy efficiency that
the RIA present evidence                      is technologically feasible and economically
that the agency used the                      justified and will result in significant conservation
analysis?                    3     9          of energy."

                                              Analysis calculates net cost or savings to
                                              consumers, environmental benefits, and cost to
                                              manufacturers, and the NPRM shows a table
                                              calculating net social benefit for the standard
                                              chosen. Legislation requires DOE to weigh these
                                              factors and several others that constitute
10. Did the agency maximize                   "benefits" and "burdens." The NPRM claims that
net benefits or explain why it                the decision on the standard level was driven by
chose another alternative? 4       10         these comparisons and maximizes net benefits.
11. Does the proposed rule
establish measures and
goals that can be used to                     No commitment to goals or measures, but the
track the regulation's results                predicted energy savings and cost savings in the
in the future?                 1   11         RIA could be used to set goals.
                                        No commitment to retrospective analysis, but
                                        some of the graphs showing energy efficiency
                                        trends suggest that DOE has access to data that
                                        could be used to measure results. Given the
                                        Energystar program, the department could track
                                        how many furnaces, AC, or heat pumps of each
                                        SEER efficiency are sold each year and thus
12. Did the agency indicate             could track the population of newly installed
what data it will use to                equipment to determine whether the number of
                                        new installations is similar to the estimated
assess the regulation's
                                        number. The regulatory analysis could be used
performance in the future               as a template. DOE does not appear to have
and establish provisions for            ways to measure the level of emission
doing so?                      2   12   reductions.
Rule Title RIN          Agency Pub Date RIA separate? Total (G+H+J) Openness
           1904-AC06         DOE 6/27/2011 Yes
Energy Conservation for Furnaces, Heat Pumps, and AC             39            15
Analysis        Quality (G+H) Use        1   2   3   45
           14                29     10   4   4   4   3    4
5A       5B       5C       5D       5E       6       6A       6B       6C
     3        4        3        4        5       2        3        2        2
6D       7       7A       7B       7C       7D       8       8A       8B
     2       4        5        4        4        3       4        4        4
8C       8D       8E       8F       8G       8H       8I       9       10
     4        2        4        4        3        5        5       3        4
11       12
     1        2

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