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4474 Federal Register / Vol. 66, No. 11 / Wednesday January 17, 2001 / Rules and Regulations

DEPARTMENT OF ENERGY

Office of Energy Efficiency andRenewable Energy

10 CFR Part 430

[Docket Number EE–RM–97–900]

RIN 1904–AA76

Energy Conservation Program forConsumer Products: EnergyConservation Standards for WaterHeaters

AGENCY: Office of Energy Efficiency andRenewable Energy, Department ofEnergy (DOE).ACTION: Final rule.

SUMMARY: The Department of Energy(DOE or Department) has determinedthat revised energy conservationstandards for water heaters will result insignificant conservation of energy, aretechnologically feasible, and areeconomically justified. On this basis,the Department is today amending theexisting energy conservation standardsfor water heaters.EFFECTIVE DATES: The effective date ofthis rule and standard is January 20,2004.

ADDRESSES: You may read copies of theTechnical Support Document (TSD) atthe DOE Freedom of InformationReading Room, U.S. Department ofEnergy, Forrestal Building, 1000Independence Avenue, S.W.,Washington, DC. 20585, (202) 586–3142,between the hours of 9:00 a.m. and 4:00p.m., Monday through Friday, exceptFederal holidays. You may obtaincopies of the TSD from the Codes andStandards Internet site at: http://www.eren.doe.gov/buildings/codes—standards/applbrf/waterheater.htm orfrom the U.S. Department of Energy,Office of Energy Efficiency andRenewable Energy, Forrestal Building,Mail Station EE–41, 1000 Independence

Avenue, S.W., Washington, D.C. 20585.(202) 586–9127.FOR FURTHER INFORMATION CONTACT:Terry Logee, U.S. Department of Energy,EE–41, 1000 Independence Avenue,S.W., Washington, DC 20585–0121,(202) 586–9127, email:[email protected] or FrancinePinto, Esq., U.S. Department of Energy,Office of General Counsel, GC–72, 1000Independence Avenue, S.W.,Washington, DC 20585, (202) 586–7432,email: [email protected] orEugene Margolis, Deputy AssistantGeneral Counsel, GC–72, at the sameaddress, (202) 586–9507, email:[email protected] INFORMATION:

Table of ContentsI. Introduction

A. Consumer OverviewB. AuthorityC. Background

II. General DiscussionA. Test ProceduresB. Technological FeasibilityC. Lessening of Utility or Performance of

ProductsD. Impact of Lessening of CompetitionE. Economic JustificationF. Other Factors

III. MethodologyA. EngineeringB. Life-Cycle Costs (LCC)C. Manufacturing ImpactD. Energy Savings and Net Present ValueIV. Discussion of CommentsA. Venting of Gas Water HeatersB. Electric Water Heater RatingsC. Measured vs. Rated VolumeD. Effective Date of StandardsE. Water Heater Models AffectedF. Instantaneous Water HeatersG. Fuel Switching

V. Analytical Results and ConclusionA. Economic Impacts on ConsumersB. Significance of Energy SavingsC. Lessening of Utility or Performance of

ProductsD. Impact of Lessening of CompetitionE. Need of the Nation to Save Energy and

Net National EmploymentF. Conclusion

VI. Procedural Issues and Regulatory Reviews

A. Review Under the NationalEnvironmental Policy Act

B. Review Under Executive Order 12866,‘‘Regulatory Planning and Review’’

C. Review Under the Regulatory FlexibilityAct

D. Review Under the Paperwork ReductionAct

E. Review Under Executive Order 12988,‘‘Civil Justice Reform’

F. ‘‘Takings’’ Assessment ReviewG. Review Under Executive Order 13132,

‘‘Federalism’H. Review Under the Unfunded Mandates

Reform Act of 1995I. Review Under the Treasury and General

Government Appropriations Act of 1999J. Review Under the Plain Language

DirectivesK. Congressional Notification

I. Introduction

The Energy Policy and ConservationAct, as amended (hereinafter referred toas EPCA or the Act), specifies that anynew or amended energy conservationstandard the Department of Energy(DOE) prescribes shall be designed to‘‘achieve the maximum improvement inenergy efficiency * * * which theSecretary determines is technologicallyfeasible and economically justified.’’Section 325(o)(2)(A), 42 U.S.C.6295(o)(2)(A). Furthermore, theamended standard must ‘‘result insignificant conservation of energy.’’Section 325(o)(3)(B), 42 U.S.C.6295(o)(3)(B).

In accordance with the statutorycriteria discussed in this notice, DOE isamending the water heater energyefficiency standards, to go into effect onJanuary 20, 2004.

A. Consumer Overview

The Table below summarizes the‘‘vital statistics’’ of today’s typical gasand electric water heater, as well aspresenting the cost implications for theaverage consumer of water heaters afterthe 2004 water heater standards takeeffect.

VITAL STATISTICS OF TODAY’S TYPICAL WATER HEATERS

Current statistics Gas Electric

Average Price ................................................................................................................ $383 ................................... $380Annual Utility Bill ............................................................................................................ $160 ................................... $256Life Expectance ............................................................................................................. 9 years ............................... 14 yearsEnergy Consumption ..................................................................................................... 234 Therms/year ................ 3,459 kWh/yearStatistics In Year 2004:Average New Water Heater Price* ................................................................................ $501 ................................... $486Estimated Price Increase (Efficiency Only) ................................................................... $58 ..................................... $101Annual Utility Bill Savings .............................................................................................. $12.74 ................................ $13.05Simple Payback Period ................................................................................................. 3.6 years ............................ 7.4 yearsAverage Net Saving Over Appliance Life ...................................................................... $30 ..................................... $23Energy Saving per Year ................................................................................................ 22 therms ........................... 188 kWh

*Includes expected price increases for non-energy efficiency regulations.

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4475Federal Register / Vol. 66, No. 11 / Wednesday January 17, 2001 / Rules and Regulations

1 Part B of Title III of the Energy Policy andConservation Act, as amended by the NationalEnergy Conservation Policy Act, the NationalAppliance Energy Conservation Act, the NationalApplicance Energy Conservation Amendments of1988, and the Energy Policy Act of 1992 is referredto in this notice as the ‘‘Act.’’ Part B of title III iscodified at 42 U.S.C. 6291 et seq. Part B of Title IIIof the Energy Polciy and Conservation Act, asamended by the National Energy ConservationPolicy Act only, is referred to in this notice as theNational Energy Conservation Policy Act.

Currently, the average typical waterheater costs, $380 for electric and $383for gas. The average annual utility billfor an electric water heater is $256,while a gas water heater costs $160 ayear to operate.

The water heater energy efficiencystandards we are adopting today willhave a positive impact on consumers.Consumers with electric water heaterswould save $13.05 per year while thosewith natural gas water heaters wouldsave about $12.74 per year on average.Of course these savings are not free,consumers will have to pay an averageincrease of $101 for electric and $58 forgas water heaters. Note that the totalaverage increased cost for electric andgas water heaters are $105 and $118,respectively, due to the phase out of thecurrent insulating foam blowing agentHCFC–141b and the compliance toresist ignition of flammable vapors ongas water heaters voluntarily agreed tobetween the manufacturers and theConsumer Product Safety Commission.The simple payback for cost increasesdue to efficiency standards is 7.4 yearsfor electric and 3.6 years for gas waterheaters. The lifetime owning cost or life-cycle costs are lower than life-cyclecosts on current water heaters by $23 forelectric and by $30 for gas water heaters.

The design improvements theDepartment considered are thickerinsulation and heat traps on both gasand electric water heaters and animproved heat exchanger (flue baffle) ongas water heaters. These improvementsresult in a four percent increase inenergy efficiency for electric and aneight percent increase in energyefficiency for gas water heaters. Thesekinds of improvements are alreadyavailable on 26 percent of all waterheater models. In energy terms,households with electric water heaterswill save on average 188 kWh per yearand households with gas water heaterswill save 22 therms per year of naturalgas or propane gas.

The benefits to the nation from thisrevised energy efficiency standard arealso significant with energy savings of4.6 quads of energy over 26 years. Thisis equivalent to the total energyconsumption of all U.S. homes over aperiod of 2.8 months. By 2020, thestandards will avoid the construction ofnine 400 megawatt electric generatingplants.

The amended standards in today’srule can be achieved by using HFC–134a, cyclopentane, or HFC–245fa as theblowing agent in the insulation. The 4.6quads of energy savings will result incumulative greenhouse gas emissionreductions of 152 million metric tons(Mt) of carbon dioxide (CO2) equivalent,

or an amount equal to that produced by3.9 million cars per year. Additionally,there will be a cumulative reduction of273 thousand metric tons of nitrogenoxides ( NOX). In total, we estimate thenational energy savings to have apositive net present value to Americanbusiness and industry of $2.02 billionover 26 years.

B. AuthorityPart B of Title III of the Energy Policy

and Conservation Act, Pub. L. 94–163,as amended by the National EnergyConservation Policy Act, Pub. L. 95–619, the National Appliance EnergyConservation Act, Pub. L. 100–12, theNational Appliance EnergyConservation Amendments of 1988,Pub. L. 100–357, and the Energy PolicyAct of 1992, Pub. L. 102–486,1 createdthe Energy Conservation Program forConsumer Products other thanAutomobiles. Water heaters are one ofthe consumer products subject to thisprogram. Section 322(a)(4), 42 U.S.C.6292(a)(4).

Under the Act, the program consistsessentially of three parts: testing,labeling, and Federal energyconservation standards. TheDepartment, with assistance from theNational Institute of Standards andTechnology (NIST), may amend orestablish test procedures for each of thecovered products. Section 323(b)(1)(A)–(B), 42 U.S.C. 6293(b)(1)(A)–(B). The testprocedures measure the energyefficiency, energy use, or estimatedannual operating cost of a coveredproduct during a representative averageuse cycle or period of use. They mustnot be unduly burdensome to conduct.Section 323(b)(3), 42 U.S.C. 6929(b)(3).The water heater test procedure appearsat Title 10 Code of Federal Regulations(CFR) Part 430, Subpart B, Appendix E.

The Federal Trade Commission (FTC)prescribes rules governing the labelingof covered products after DOE publishestest procedures. Section 324(a). At thepresent time, there are FTC rulesrequiring labels for water heaters.

The National Appliance EnergyConservation Act of 1987 prescribedFederal energy conservation standardsfor water heaters. Section 325(e). TheAct provides that the Department shall

determine whether amended standardsto the existing requirements in Section325(e) for water heaters are warranted,and issue a Final Rule. Suchamendment shall apply to productsmanufactured three years on or after thedate of this Final Rule. Section325(e)(4)(A).

Any new or amended standard mustbe designed to achieve the maximumimprovement in energy efficiency that istechnologically feasible andeconomically justified. Section325(o)(2)(A), 42 U.S.C. 6295(o)(2)(A).

Section 325(o)(2)(B)(i), 42 U.S.C.6295(o)(2)(B)(i) provides that beforeDOE determines whether a standard iseconomically justified, it must first askfor comments on a proposed standard.After reviewing comments on theproposal, DOE must determine that thebenefits of the standard exceed itsburdens, based, to the greatest extentpracticable, on a weighing of thefollowing seven factors:

(1) The economic impact of thestandard on the manufacturers and onthe consumers of the products subject tothe standard;

(2) The savings in operating coststhroughout the estimated average life ofthe covered product in the type (orclass) compared to any increase in theprice of, or in the initial charges for, ormaintenance expenses of, the coveredproducts which are likely to result fromthe imposition of the standard;

(3) The total projected amount ofenergy or water savings likely to resultdirectly from the imposition of thestandard;

(4) Any lessening of the utility or theperformance of the covered productslikely to result from the imposition ofthe standard;

(5) The impact of any lessening ofcompetition, as determined in writingby the Attorney General, that is likely toresult from the imposition of thestandard;

(6) The need for national energy andwater conservation; and

(7) Other factors the Secretaryconsiders relevant.

In addition, Section 325(o)(2)(B)(iii),42 U.S.C. 6295(o)(2)(b)(iii), establishes arebuttable presumption of economicjustification in instances where theSecretary determines that ‘‘theadditional cost to the consumer ofpurchasing a product complying withan energy conservation standard levelwill be less than three times the valueof the energy, and as applicable, water,savings during the first year that theconsumer will receive as a result of thestandard, as calculated under theapplicable test procedure. * * *’’ Therebuttable presumption test is an



2 In August and September 2000, DOE conducteda certification review of high efficiency electricwater heaters at five manufacturers. Based on thereview of these manufacturers’ laboratoryprocedures, we believe some clarifications to thewater heater test procedure may be needed. We areplanning to join GAMA and the manufacturers intheir water heater test program to determine whatneeds to be clarified in the water heater testprocedure.

alternative path to establishingeconomic justification.

Section 327 of the Act, 42 U.S.C.6297, addresses the effect of Federalrules on State laws or regulationsconcerning testing, labeling, andstandards. Generally, all such State lawsor regulations are superseded by theAct, unless specifically exempted inSection 327. The Department can granta waiver of preemption in accordancewith the procedures and otherprovisions of Section 327(d) of the Act.42 U.S.C. 6297(d).

C. Background1. Current Standards. The existing

water heater efficiency standards havebeen in effect since 1991. Energyefficiency is measured in terms of anenergy factor (EF), which measuresoverall water heater efficiency and isdetermined by the DOE test procedure.10 CFR, Part 430, Subpart B, AppendixE. The current water heater efficiencystandards are as follows:• Electric: EF = 0.93–(0.00132 x rated

volume)• Gas-fired: EF = 0.62–(0.0019 x rated

volume)• Oil-fired: EF = 0.59–(0.0019 x rated

volume)where rated volume is the water storagecapacity of a water heater in gallons, asspecified by the manufacturer.

2. History of Previous Rulemakings.On September 28, 1990, DOE publishedan Advance Notice of ProposedRulemaking announcing theDepartment’s intention to revise theexisting water heater efficiencystandard. 55 FR 39624 (September 28,1990). On March 4, 1994, DOE proposeda rule to revise the energy conservationstandards for water heaters, as well asa variety of other consumer products. 59FR 10464 (March 4, 1994). On January31, 1995, we published a determinationthat we would issue a revised notice ofproposed rulemaking (NOPR) for waterheaters. 60 FR 5880 (January 31, 1995).

The Department of Interior andRelated Agencies Appropriations Act forFiscal Year 1996 included a moratoriumon proposing or issuing Final Rules forappliance efficiency standards for theremainder of Fiscal Year 1996. See Pub.L. 104–134. During the moratorium, theDepartment examined the appliancestandards program and how it wasworking. Congress advised DOE tocorrect the standards-setting processand to bring together stakeholders (suchas manufacturers andenvironmentalists) for assistance.Therefore, we consulted with energyefficiency groups, manufacturers, tradeassociations, state agencies, utilities andother interested parties to provide input

to the process used to develop applianceefficiency standards. As a result, on July15, 1996, the Department published aFinal Rule: Procedures forConsideration of New or Revised EnergyConservation Standards for ConsumerProducts (referred to as the ProcessRule) 61 FR 36974 (July 15, 1996),codified at 10 CFR Part 430, Subpart C,Appendix A.

The Process Rule states that forproducts, such as water heaters, forwhich DOE issued a proposed rule priorto August 14, 1996, DOE will conducta review to decide whether any of theanalytical or procedural steps alreadycompleted should be repeated. 61 FR36974, 36982 (July 15, 1996). DOEcompleted this review and decided touse the Process Rule, to the extentpossible, in the development of therevised water heater standards.

We developed an analyticalframework for the water heaterstandards rulemaking for ourstakeholders, which we presentedduring a water heater workshop on June24, 1997. The analytical frameworkdescribed the different analyses (e.g.,life-cycle costs (LCC), payback, andmanufacturing impact analyses (MIA))to be conducted, the method forconducting them, the use of new LCCand national energy savings (NES)spreadsheets, and the relationshipbetween the various analyses.

We held a workshop on November 9and 10, 1998, to share the preliminaryanalysis results. We discussed ourmethodology for analyzing nationalenergy savings, environmental inputs,consumer sub-group impacts andimpacts on utilities including fuelswitching. There was also a presentationof the water heater insulation testing byNIST. On July 23, 1999 we held anotherworkshop to present the full results ofour engineering and economic analysis.We discussed the comments from theNovember 1998 workshop and changeswe made in our analysis as a result ofthese comments. On April 28, 2000 wepublished the notice of proposedrulemaking to amend water heaterenergy efficiency standards. 65 FR25042 (April 28, 2000). We held thehearing/workshop to discuss commentsto the proposed rule on June 20, 2000.

II. General Discussion

A. Test Procedures

The Act does not allow DOE to setenergy standards for a product unlessthere is a test procedure in place for thatproduct. The Department published atest procedure on May 11, 1998, thatrevised the first-hour rating of storage-type water heaters, added a new rating

for electric and gas-fired instantaneouswater heaters and amended thedefinition of a heat pump water heater.63 FR 25996 (May 11, 1998). Thisrevision did not change the test methodfor determining energy efficiencystandards.

No one has petitioned DOE indicatingthe Department’s test procedures areinadequate for testing water heaters.Accordingly the Department considersthe current Federal test proceduresapplicable and appropriate for today’sFinal Rule.2

B. Technological FeasibilityThe Act requires the Department, in

considering any new or amendedstandards, to consider those that ‘‘shallbe designed to achieve the maximumimprovement in energy efficiency * * *which the Secretary determines istechnologically feasible andeconomically justified.’’ (Section 325(o)(2)(A)). Accordingly, for each class ofproduct considered in this rulemaking,a maximum technologically feasible(max tech) design option was identifiedand considered as discussed in theProposed Rule. 65 FR 25042, 24045(April 28, 2000).

However, DOE eliminated the heatpump water heater due to issuesconcerning the practicability tomanufacture, install, and service on thescale necessary to serve the relevantmarket at the time of the effective dateof the standard and product utility ofthese units. We eliminated heat pumpwater heaters after careful considerationof the current electric resistance andheat pump water heater markets andmanufacturing technology, and afterapplying the factors to be considered inscreening design options contained inthe Process Rule. We also eliminated gascondensing water heaters because wedetermined they are not technologicallyfeasible. 10 CFR 430, Subpart C,Appendix A(4)(a)(4) and (5)(b). There isa complete discussion of theseconclusions in the proposed rule. 65 FR25042, 25047–49 (April 28, 2000).

The Department has determined thatthe electric and gas water heatersconsidered in today’s notice aretechnologically feasible as required bySection 325(o)(2)(A) of EPCA, asamended. There are some models ofthese water heaters in the market that



meet the new standard levels. Thus, thedesign options DOE considered aretechnologically feasible.

C. Lessening of Utility or Performance ofProducts

This factor is not easily quantified.However, DOE has considered the effectof thicker insulation which might resultin smaller capacity water heaters to beused in small existing spaces whichcould cause a reduction in first hourrating. A loss of first hour rating wouldreduce consumer utility. The discussionin the comments on size constraintsexplains how DOE dealt with this issue.Furthermore, if a certain type of waterheater would no longer fit in spaces thatit was designed for, we have considereda new class of products. We haveincluded a discussion on new productclasses to address this.

1. Size Constraints. We addressed sizeconstraints in the proposed rule byestimating approximately 32 percent ofelectric water heating households and27 percent of gas water heatinghouseholds would need to remove thecloset door for water heaters with 3 inchthick insulation. Then, we added a costadjustment of $160 to install new waterheaters in these households. Severalstakeholders have commented on ourestimates of costs and the number ofhouseholds affected.

The American Gas Association (AGA)requests that DOE address sizeconstraints consistently across electricand gas water heaters. It requested DOEto include the costs shown in theBattelle report that addresses spaceconstraints. (AGA, No. 150 at 5). TheGas Appliance ManufacturersAssociation (GAMA) supports theBattelle analysis. (GAMA, No. 160 at 4).Battelle provided detailed comments onspace constraints associated with largergas water heaters. Based on a survey of15 companies, covering areas within 24states, it determined a range of spaceimpacts on costs and the percentages ofhomes affected. (Battelle, No. 127 at C–1 to C–5).

Southern Gas Association stated thata survey of its members revealed that 18percent of single family homes would beunable to fit a 2 inch larger diameterwater heater into the existing space.(Southern Gas Association, No. 152 at4). Alagasco indicated that many of itscustomers are renters in mid to low-income brackets. The proposed gaswater heaters would cause spaceconstraints in many of these homes.(Alagasco, No. 152 at 2). The NationalPropane Gas Association and AtlantaGas Light Co. stated that an increase instorage tank size will cause significantand costly installation problems in

water heater replacements. (NationalPropane Gas Association, No. 165 at 2and Atlanta Gas Light Co., No. 178 at 1).The Oregon Office of Energy (OOE)claims that after installing tens ofthousands of high efficiency waterheaters in the Pacific Northwest,physically larger tanks do not imposehigher installation costs. Drip pans aresized for the larger tanks and waterconnections are almost universallymade with flexible copper tubing thateasily accommodates a wide range oftank heights and alignments. (OOE, No.174 at 3).

To account for size constraints in ourrevised analysis, we assume spaceconstraints would only apply in thosecases where the water heater is installedin a conditioned space, e.g., not in agarage or an unconditioned basement orattic. We also assume this will onlyapply to small houses or apartments.Therefore, we have excluded houses orapartments with a floor area of morethan 1000 square feet. Theseassumptions are not intended toaccurately identify every individualhousehold that would face spaceconstraints when replacing their waterheater. Rather this estimate shouldroughly identify the number ofhouseholds affected. Since this is basedon the Residential Energy ConsumptionSurvey (RECS) ’97 data, we have arepresentative national sample ofhouseholds. We believe using the RECS’97 database and the assumptions abovewill give us the best estimate of theimpacts of increased water heater size.

In its comments, Battelle alsoassumed a large fraction of closets aresmaller than 22 × 22 inches. Discussionswith installers report this is a rareoccurrence; they come upon thissituation approximately once permonth. We also checked the areasserved by the gas utilities in the Battellesurvey. We found that although 24states are represented, usually the areaserved by the utility covered only a verysmall part of the state. Therefore, we donot believe that this survey is reallyrepresentative of the entire UnitedStates. Consequently, we did not addany extra costs for small closets for gaswater heaters. We assumed extra costsfor removing and replacing closet doorsand door frames for 32 percent ofhouseholds with electric and 27 percentof households with gas water heaterswith 3 inch insulation. See Chapter 9 ofthe TSD.

In the proposed rule, DOE asked forcomments or suggestions to minimizethe effects of smaller tanks either byincreasing the electric element size from4.5 kW to 6 kW or by increasing thethermostat setpoint. Several

stakeholders opposed larger electricelements. There were no comments onincreasing the thermostat setpoint.

The Electric Power Research Institute(EPRI) claims using 6 kW elements isnot an option for smaller tanks toprovide the consumer utility of largertanks since these elements are only usedin commercial water heaters. They statethat it is generally not possible to use 6kW elements in ‘‘residential’’ waterheaters because standard householdwiring circuits usually used for waterheaters cannot carry a 6 kW continuousload with sufficient safety margin asrequired by the National ElectricalCode. (EPRI, No. 104 at 3). Dominionconcurs with EPRI, and states furtherthat there are currently only two modelslisted in the latest GAMA directory withelements above 4.5 kW, and nonegreater than 5.5 kW. (Dominion, No. 145at 4). The National Rural ElectricCooperative Association (NRECA) alsoopposes the use of larger heatingelements. (NRECA, No. 126 at 1–2).Southern Co. and Dominion claim thatincreased element size will increasepeak electric demand on electricutilities and could require new wiringand circuit breakers or electric panels inhomes. (Southern Co., No. 142 at 3 andDominion, No.145 at 3).

We are not including 6 kW elementsas a means of compensating fordownsized electric water heaters intoday’s Final Rule. Instead, we haveincreased the thermostat setpoint tomeet the load in those cases where thedownsized water heater would be toosmall to meet the particularrequirements of a RECS ’97 home. Inaddition to increasing the thermostatsetpoint, we added $106 for the costs oftempering valves and check valves forabout fifteen percent of electric andeight percent of the gas water heaterswhere we had to increase the thermostatsetpoint above 140°F. (Generally, watertemperatures above 140°F have thepotential to cause scalding.) Thedetailed computer algorithm we used todetermine when a tempering valve isneeded can be found in the TSD inChapter 9.

2. New Product Classes. During thehearing and in the comments, severalcomments claimed that tabletop andlowboy water heaters would be unableto fit into existing spaces if their sizeincreased substantially beyond currentdimensions. These comments suggestedDOE create separate product classes forthese water heaters.

GAMA requests DOE to establish aseparate product class for lowboy andtabletop water heaters and not toincrease the efficiency standards forthese products. GAMA states that



lowboy water heaters must be able to fitunder a 36 inch high counter. Therefore,they are 34 inches high or shorter andhave a jacket diameter less than 26inches. GAMA defines tabletop waterheaters as having typical dimensions of36 inches high, 25 inches deep and 24inches wide. Tabletop water heaters aredesigned to slide into a kitchencountertop space and provide additionalcountertop surface area. (GAMA, No.160 at 4–5). Bradford White supportsGAMA’s request stating that eliminationof these products will cost consumerssubstantial capital to convert and willimpact the replacement marketnegatively. Lowboy electric models arelimited to 34 inches in height and to 26inches in diameter. (Bradford White,No.175 at 2 and No. 138 at 3). A.O.Smith also recommends a new productclass for countertop-type (also known astabletop) electric water heaters. (A.O.Smith, No.179 at 1). The AmericanCouncil for an Energy-EfficientEconomy (ACEEE) commented that it isnot opposed to a new product class fortabletops and lowboys butrecommended limiting these classes to a30 gallon size. (ACEEE, No.170 at 7)

DOE has decided to establish aseparate product class for tabletop waterheaters due to strict size limitations forthese products. However, we haveconcluded that lowboy water heaters donot have as stringent limitations ongeometry as tabletop water heaters. Forexample, the diameter of the lowboyscan be increased. We addressed thesesize constrained lowboy water heatersby adding extra installation costs, seeSection II, General Discussion,Lessening of Utility or Performance ofProducts, ‘‘Size Constraints’’ in today’srule. GAMA data shows that lowboysmake up 18 percent of the electric waterheater market and that 38 percent oflowboy shipments are 30 gallon, 48percent are 40 gallon, and 14 percent are50 gallon tanks. (GAMA, No. 176 at 3).

In establishing classes of products andaccounting for cost increases for apercentage of products which willrequire space modification, theDepartment does not believe any modelof water heater will become unavailableas a result of thicker insulation.Therefore, DOE has eliminated anydegradation of utility or performance inthe products in today’s Final Rule. Inthe application for tabletop waterheaters, we established a new class withno change in standards because thesemodels cannot be made any larger. In allother applications, we have determinedfrom the GAMA directory, GAMA dataon shipments, and from the RECS ’97data that sufficient types and sizes of

water heaters exist in the market tosatisfy any size constraints encountered.

D. Impact of Lessening of CompetitionThis factor seeks the views of the

Attorney General to determine thepotential impacts on competitionresulting from the imposition of theproposed energy efficiency standards.

In order to assist the Attorney Generalin making such a determination, theDepartment provided the AttorneyGeneral with copies of the ProposedRule and the Technical SupportDocument for review. In a letterresponding to the Proposed Rule, theDepartment of Justice (DOJ) found onlyone area of concern regarding anylessening of competition. The area ofconcern involves the blowing agent forthe foam insulation and the possibilitythat only one chemical, HFC–245fa,could be used and that it is a patentedproduct with only one supplier. Thissituation led DOJ to conclude ‘‘that theproposed standards could have anadverse affect on competition becausewater heater manufacturers may have touse an input that will be produced byonly one source.’’ (DOJ, No. 143 at 1).The DOJ letter is printed at the end oftoday’s rule.

To reduce heat loss from the storedreservoir of hot water, water heatersmust have insulation. The choice ofinsulation is critical to achieving highwater heater efficiency at a reasonablecost and essentially all water heaters usefoam insulation. A blowing agent isneeded to produce the foam insulationand currently all manufacturers areusing the chemical HCFC–141b.Unfortunately, HCFC–141b is an ozonedepleting chemical and will be phasedout in January, 2003. Therefore, thewater heater industry, like all otherindustries that use this chemical, mustfind and use a replacement chemical.

Options for non-ozone depletingblowing agents include HFC–245fa,HFC–134a, carbon dioxide (CO2)/Water,pentane/cyclopentane and HFC 365mfc,as well as potential blends, orcombinations, of these blowing agents.The U.S. Environmental ProtectionAgency’s (EPA) Clean Air Act guides theU.S. appliance industry on replacementof HCFC/CFC blowing agents. TheEPA’s Significant New AlternativesProgram (SNAP) approves chemicalsand technologies that can be used toreplace ozone depleting chemicals. Ofthe options listed above, all exceptHFC–365mfc have been approved by theEPA/SNAP.

Initially, the appliance industry,including water heater manufacturers,had leaned toward adopting HFC–245fa,which performs similarly to HCFC–141b

but at a much higher material cost.HFC–245fa has a lower manufacturingconversion cost than some of the otheralternatives, such as pentane/cyclopentane. Given the likelihoodHFC–245fa would be adopted bymanufacturers, the Department used theperformance characteristics andincreased material and manufacturingcosts associated with HFC–245fa toestimate the impact the new blowingagent would have on consumers andmanufacturers. This was not to implyHFC–245fa was the only path to meetingthe standard and DOE believes that atleast three alternative blowing agentsare available to use in meeting thestandards adopted in today’s Final Rule.See the following section for theanalysis we used to support ourconclusion.

1. Increased Costs Due to a SingleSource of Supply for HFC–245fa. Inaddition to the Attorney General’s letteron the anti-competitive effects of theproposed rule, we received severalcomments from stakeholders. They wereconcerned about cost increases due to asingle source supplier for HFC–245faand about the unavailability of thematerial until July, 2002 or later.

The AGA position is that DOE shouldonly consider water blown foams for itsanalytical baseline and standard levelanalysis. AGA pointed out that theblowing agent HFC–245fa has not yetbeen demonstrated in manufacture ofwater heaters in the U.S. AGA claimedthat, due to uncertainty in availability tomanufacturers and a sole source U.S.supplier, DOE should consider onlythose blowing agents that are availableand proven for water heatermanufacture. (AGA, No. 150 at 5–7).

To address concerns about theperformance of alternative blowingagents, we tested three sets of fourelectric water heaters with differentfoam insulations. The purpose of thesetests was to compare the performance ofthe current foam insulation, HCFC–141b, with water blown and HFC–245fablown foam insulation. The results ofthe NIST tests showed that waterheaters insulated with HFC–245fa hadthe same energy factors as thoseinsulated with HCFC–141b. Waterheaters insulated with water blownfoam insulation had energy factorsabout two percent lower than tanksinsulated with HCFC–141b. We believethe results of these tests demonstratethat the blowing agents HFC–245fa andwater can be used to insulate waterheaters and that the insulationperformance is the same with HFC–245fa and only slightly reduced withwater blown foam. (Performance Testingof Alternative Blowing Agents for Foam



Insulation of Residential Water Heaters,Fanney et al., Proceedings of the AMC,1999).

The DOJ urges DOE to account for theimpact of a single source supplier oncompetition, and to consider alteringthe standard so manufacturers may meetthe standard for all affected modelsusing other blowing agents. DOJ furthernoted that some manufacturers havesuggested that DOE underestimated theperformance capabilities of alternativeblowing agents. If this is true,manufacturers may in fact be able tocomply with the proposed standardwhile using water-based blowing agents.(DOJ, No. 143 at 1–2).

Stepan is concerned that the proposedstandards would require foam suppliersto use HFC–245fa as the blowing agent.This raises an issue about relying on asole source supplier for an efficiencystandard, since Honeywell maintainsthe exclusive North American rights toits manufacture and sale. (Stepan, No.123 at 1–2). APGA claims the relianceon insulation technology licensed to asingle company raises new issues andantitrust concerns and may be contraryto the statute. (APGA, No. 167 at 2).

To address these comments, weconducted additional engineering costanalyses with HFC–245fa, HFC–134aand cyclopentane as the blowing agent

in the insulation. An April 7, 2000,Bayer press release states mostappliance manufacturers in NorthAmerica are considering either HFC–245fa or HFC–134a. Cyclopentane is notconsidered favorably because of thecapital investment required to handlecyclopentane safely (cyclopentane ishighly flammable). There are also highcosts because the factory cannotproduce water heaters while convertingfactory equipment to a cyclopentanesystem. However, appliancemanufacturers are independentlydeciding which blowing agent to select.Switching to either HFC–245fa or HFC–134a involves capital costs. Accordingto industry and Bayer research, HFC–245fa exhibits the best insulation valueof the two blowing agents—roughlyequal to HCFC–141b—though it is morecostly per pound. HFC–134ademonstrates an insulation valueapproximately ten percent lower thanHCFC–141b but has a lower per-poundcost than HFC–245fa.

We have examined, through theengineering analysis, the impact onproduct design and costs using two ofthe other blowing agent options, HFC–134a and cyclopentane, to achieve asimilar energy factor as the proposedlevels for HFC–245fa. See Table 1below. We included the ten percent

performance reduction for HFC–134aand an estimate of $7 per unit for thecapitalization costs of cyclopentane inour engineering analyses. Theseanalyses show that energy factors arethe same for the three blowing agents.Costs for all design options are withina few dollars for HFC–245fa, HFC–134aand cyclopentane. While we have notexamined every possible blowing agentoption, we conclude that at least twoadditional options to HFC–245fa can beused to achieve similar performance forsimilar costs. The blowing agentperformance characteristics and testresults using HFC–245fa, HFC–134a andcyclopentane blown foam to evaluatedesign options can be found in Chapter3.4.1 of the TSD.

Table 1 shows the trial standardlevels, design options, energy factor andinstalled costs for the three alternativeblowing agents, HFC–245fa, HFC–134aand cyclopentane. Note the energyfactors are the same for all trial standardlevels and all blowing agents. There aresmall differences in costs; HFC–245fa isthe cheapest blowing agent, HFC–134acosts about $2/unit more than HFC–245fa, while cyclopentane is the mostexpensive blowing agent costing about$9 more per installed electric and $11more per installed gas water heater.

TABLE 1.—ENGINEERING RESULTS FOR ALTERNATIVE BLOWING AGENTS

Trial standard level Design options Energy factor Installed costs

HFC–245fa:1 ......................... Electric: Heat Traps + Tank Bottom Insulation ............................................................... 0.88 367.52

Natural Gas: Heat Traps + Flue Baffles (78% RE) + 2 Inch Insulation .......................... 0.59 431.572 ......................... Electric: Heat Traps + Tank Bottom Insulation + 2 Inch Insulation ................................ 0.89 403.69

Gas: Heat Traps + Flue Baffles (78% RE) + 2.5 Inch Insulation ................................... 0.60 456.793 ......................... Electric: Heat Traps + Tank Bottom Insulation + 2.5 Inch Insulation ............................. 0.90 440.69

Gas: Heat Traps + Flue Baffles (78% RE) + 2 Inch Insulation ...................................... 0.59 431.574 ......................... Electric: Heat Traps + 3 Inch Insulation + Plastic Tank .................................................. 0.91 547.04

Gas: Heat Traps + Flue Baffles (80% RE) + 3 Inch Insulation + Side Arm Heater +Plastic Tank + IID.

0.71 751.31

HFC–134a:1 ......................... Electric: Heat Traps + Tank Bottom Insulation ............................................................... 0.87 363.06





0.71 749.41

Cyclopentane:1 ......................... Electric: Heat Traps + Tank Bottom Insulation ............................................................... 0.88 368.11





0.72 749.25



2. Availability of HFC–245fa. BradfordWhite said it has given carefulconsideration to all of the optionsavailable for blowing agents. However,since HCFC–141b may be in limitedsupply early in 2002 because of facilityphase-outs and with the uncertainty inavailability of HFC–245fa, BradfordWhite has no alternative but to pursuewater blown insulation. (BradfordWhite, No. 175 at 1–2). Stepan hasconcerns about the overall availabilityof HFC–245fa. (Stepan, No. 123 at 1–2).

Honeywell indicated that over sixyears and $30 million has been investedin the development of HFC–245a.Honeywell has received all thenecessary U.S. regulatory approvals andis constructing a commercialmanufacturing facility at its Geismar,Louisiana location. The facility isexpected to be online by July 1, 2002.Honeywell expects ample capacity to beavailable to water heater manufacturers.(Honeywell, No. 114 at 2).

The OOE claims adequate quantitiesof HFC–245fa are available now foroptimizing production processes. (OOE,No. 174 at 3). The ACEEE states DOEhas previously decided, in therefrigerator standard rulemaking, thatHFC–245fa will be available and can bean energy-efficient and cost effectiveblowing agent. DOE should make thesame decision here. ACEEE suggestsDOE provide for manufacturers topetition for relief if HFC–245fa does notbecome available. (ACEEE, No. 170 at8). Southern Company also asks whyDOE made no provisions for analternative if the blowing agent does notbecome available. (Southern Company,No. 142 at 3).

DOE has investigated the issue of theavailability of HFC–245fa.Announcements in The Advocate, aBaton Rouge, LA newspaper (May 11,2000 and October 6, 2000), indicate thatHoneywell is proceeding to secure thenecessary permits to build the HFC–245fa plant. Furthermore, VulcanChemicals is also planning to build aplant in Geismar, LA to makepentachloropropane, one of thechemicals used in the manufacture ofHFC–245fa. DOE concludes that HFC–245fa will be available as planned andtherefore does not believe it needs tomake any provision in today’s rule inthe event of HFC–245fa unavailability. IfHoneywell does not build its plant or ifthe plant is delayed, DOE believes thereare still three or more alternativeblowing agents for water heatermanufacturers to use, i.e., water,cyclopentane, HFC–134a or blends ofthese three.

E. Economic JustificationAs noted earlier, Section

325(o)(2)(B)(i) of the Act provides sevenfactors to be evaluated in determiningwhether an energy conservationstandard is economically justified. Sincethere were significant comments fromthe June 20, 2000, hearing, and new datafrom RECS ‘97 and AEO 2000, DOE hasdeveloped a revised water heateranalysis. Specific revisions to ouranalysis methods are discussed inSection III, Methodology.

F. Other FactorsThis provision allows the Secretary of

Energy, in determining whether astandard is economically justified, toconsider any other factors that theSecretary deems to be relevant. Section325(o)(2)(B)(i)(VI), 42 U.S.C.6295(o)(2)(B)(i)(VI). The Secretary hasdecided that no other factors need to beconsidered in this rulemaking.

III. MethodologyDOE has made some minor changes to

the engineering and LCC analysis forthis Final Rule. We discuss thesechanges below in response to thecomments on markup, the WATSIMcomputer model, blowing agents andblended fuel prices. Additionally, thehousehold characteristics data used inthe analysis were updated from the 1993RECS data to the 1997 RECS data(except for oil-fired water heaters). Weused the energy price projections fromthe AEO 2000 as well.

A. EngineeringDOE is continuing to use the

WATSIM and TANK computer modelsin its analysis to evaluate the energyfactor of water heaters with variousdesign options. These models werediscussed in the engineeringmethodology section of the proposedrule. 65 FR 25042, 25052–53 (April 28,2000). We adjusted the manufacturers’costs and the installation costs toaccount for comments to the proposedrule. These changes resulted in reducedmanufacturers’ costs for gas waterheaters and slightly higher retail costsfor electric water heaters.

Further testing at NIST and reverseengineering of a water heater at theLawrence Berkeley National Laboratory(LBNL) allowed DOE to fully validateWATSIM. These tests revealed thatWATSIM and NIST results for theenergy factor of a high efficiency electricwater heater were the same. See theTSD, Chapter 8.2.4

1. Water Heater Markup. DOE’scalculation of gas water heater markupwas a major concern to stakeholders.There was wide spread criticism that

the markup for gas water heaters wederived in the proposed rule was toolow to support any manufacturer’sproduction of that product.

The AGA claims DOE’s approach tocalculating markups has been roundlycriticized by stakeholders throughoutthe development of the TSD andsupporting analysis, and is unaware ofany comments supporting DOE’sanalysis. AGA claims that DOE hasprovided no consistency checks for thisand other markups to determine theirvalidity, in spite of criticism it hasreceived on its analytical results, andhas failed to postulate a marketmechanism or economic model tojustify its numbers. Furthermore, AGAcommented that manufactured cost andretail price are not independent randomvariables, and that DOE did notcorrelate its cost and price data. Thisresulted in 21 percent of the RECS ‘93households being constrained to 0markup. AGA believes DOE shouldadopt the Battelle markups. (AGA, No.150 at 8–9). Laclede Gas claims DOEshould not limit the markup algorithmto prevent negative markups. (LacledeGas, No. 148 at 9).

To address the comments aboutcorrelating prices and costs, DOE haschanged its LCC analysis to usecorrelated retail prices andmanufacturer costs, i.e., high pricescorrelate with high costs. This haseliminated the negative values ofmarkup which occurred in the analysisfor the proposed rule.

GAMA and Bradford White claim themarkup for gas water heaters combines4-inch flue model costs with 3-inch fluemodel prices. According to GAMA,using the DOE database and only 4-inchflue models, the markup increases from1.22 to 1.5. (GAMA, No. 117 at 2–3 andBradford White, No. 108 at 7). DominionVirginia Power states that the DOE gaswater heater base line assumes a 4 inchflue yet the typical 40 gallon gas waterheater uses a 3 inch flue. (DominionVirginia Power, No. 145 at 6).

We separated the retail prices for 3inch and 4-inch flues on gas waterheaters. We had our consultant estimatethe incremental cost difference betweenmanufacturing water heaters with 3 inchand 4 inch flues. We then subtractedthis cost from the manufacturer costsupplied by GAMA for water heaterswith 4 inch flues. Our analysis nowaccounts for these price and costdifferences as recommended. Since theretail prices were not changed, thisincreased the markup on the baselineunits in the LCC, as well as the markupapplied to the various design options.

Southern Company and the EnergyMarket and Policy Analysis group claim



the price database is too limited for thetype of analysis conducted by DOE.Specifically, Southern Company claimsthe database has a geographic bias,citing the high number of sample pointsfrom Washington and Oregon. It claimsthat over 23 percent of the samplepoints are from these two states, whichrepresent slightly more than threepercent of the U.S. population. SouthernCompany suggests using a combinedmarkup for gas and electric waterheaters. (Southern Company, No. 142 at1–2 and Energy Market and PolicyAnalysis, No.151, at 5–6).

DOE’s retail price database uses datapoints broadly distributed over the 10Census regions of the U.S., and DOEdoes not believe the database has ageographic bias. Only 10.9 percent ofthe water heaters in the database arefrom the Pacific Region (see Table 5.3 inthe TSD). The Department used aslightly higher proportion of waterheaters from the northwest to ensure anadequate representation of high-efficiency units. DOE will not be usinga combined markup, since each fueltype must be evaluated individually.The design option approach requiresdistinct costs for each fuel type.

Battelle estimated the cost ofmaterials and labor for the designoptions under consideration andapplied standard industry markupfactors to determine the cost to theconsumer. Battelle assumed standardindustry markup factors were 1.5 for themanufacturer, 1.2 for the distributor,and 1.4 for the retailer. Thus, the overallmarkup factor is 2.52 (1.5 x 1.2 x 1.4 =2.52). Therefore, to determine the cost tothe consumer, the manufacturer’smaterials and labor costs for a designoption are multiplied by 2.52.

To validate this standard approach forgas water heaters, Battelle conducted atear down analysis on six water heatersvarying in size among 30, 40, 50, and75-gallon capacities. BDI Design forManufacture software was used tocatalog the components and estimatematerials and labor costs for each waterheater. The materials and labor costs forthe 30, 40, 50, and 75-gallon baselinegas water heaters were $80.83, $86.06,$90.95, and $139.77, respectively. The40-gallon gas water heater cost of $86.06is in excellent agreement with the valueof $87.51 supplied by GAMA to DOE.(Battelle, No. 106 at 1–2).

DOE compared its manufacturermarkup to Battelle’s standard markupfactor. This is the total manufacturercost divided by the sum of the materialsand labor costs for 40 gallon gas-firedwater heaters.Battelle: $133.78/$86.06 = 1.55

DOE: $133.78/($75.07 + $10.74) = 1.56Therefore the manufacturing markup

is essentially identical.The ACEEE claims the Battelle

markups applied to the GAMAmanufacturing costs yield incrediblyhigh retail prices. ACEEE concludes themanufacturers’ costs are too high andthe markups may be too low on somewater heaters. (ACEEE, No. 170 at 9).The OOE and the Northwest PowerPlanning Council (NWPPC) do notaccept GAMA’s manufacturing costsbecause the typical margins in thePacific Northwest are $30–$40 for highefficiency water heaters. (OOE, No.174,at 2 and NWPPC, No.163, at 2).

In order to address the concerns aboutmanufacturers’ costs, DOE adjusted thehigher range of the manufacturer’s costdistribution, to match the average of thelow range of the manufacturers’ costdistribution. We also applied thiscorrection to the incrementalmanufacturer costs for heat traps andincreased insulation. We did this tobring manufacturers’ costs in line withknown appliance manufacturing costs,derived from publicly available SECreports. It also ensures consistencywithin the data. Since the overall retailprices remain constant, the changeeliminates the occurrences ofunreasonably low markups on thebaseline gas and electric water heaters.This reduced the average values ofbaseline costs for electric and gas waterheaters by $9.55 and $6.22 respectively.

Battelle claims that when its baselinematerials and labor costs were used inconjunction with the DOE database ofretail water heater prices, the averageoverall markup factor for gas waterheaters came out to be 2.44. This is inexcellent agreement with the assumedstandard markup factor of 2.52 statedpreviously. (Battelle, No. 106 at 1–2).Southern California Gas Co. agrees withBattelle’s markup factor of 2.52.(Southern California Gas, No. 181, at 2).The American Public Gas Association(APGA) claims there is an obviousproblem with the markup analysis. Itsuggests DOE approach this matter withreal-world prices and manufacturers’costs. (APGA, No. 167 at 2).

In the DOE analysis, the overallmarkup factor consists of manufacturermarkup and distributor/retailer markup.From the LCC analysis, we have anoverall markup of 1.59 for gas and 1.94for electric water heaters. Thesemarkups differ from the Battellemarkups in an important respect.Battelle assumes that the water heatermarket is characterized by largedistributors selling to retailers orplumbers. DOE has determined that less

than 50 percent of the water heatermarket operates that way. Many waterheaters are sold directly to retail bylarge cash and carry distributors or theyare sold to builders or large plumbingcompanies by large distributors.Therefore, the standard markup factorsare not correct for the residential waterheater market.

2. WATSIM Computer Model forElectric Water Heaters. DOE receivedseveral comments about the WATSIMcomputer model for electric waterheaters. Most comments stated thatWATSIM does not predict the energyfactor of electric water heatersaccurately. Other comments assertedthat DOE needed to test water heaters tocompare actual performance toWATSIM predictions.

GAMA claims it has no confidencethat WATSIM is properly predicting theenergy factors resulting from the variousinsulation options. (GAMA, No.160 at1–3). Dominion states that DOE shouldverify the accuracy of calculated energyfactors for design options with resultsfrom commercially available products.(Dominion, No. 145 at 3). EPRI claimsWATSIM can predict energyconsumption of electric water heaterstypically within 3–6 percent accuracy.For the type of analysis represented byDOE energy factor tests, the accuracywould typically be around the 3–4percent range. (EPRI, No.104 at 1).Southern Company supports EPRI’sremarks. (Southern Company, No. 142 at2).

At the June 2, 1997, Water HeaterWorkshop, the Department soughtcomments on the selection ofappropriate engineering models such asWATSIM and TANK to use in theEngineering Analysis. Most of thestakeholders’ comments indicated noobjections related to the use of thesimulation models for the analysis. Thefollowing participants supported the useof WATSIM and TANK: C. Hiller (EPRI),J. Ranfone (AGA), J. Langmead (WaterHeater Consortium), S. Nadel (ACEEE),R. Hemphill (Gas Technology Institute(GTI)). There were no comments thatindicated WATSIM and TANK wereincorrect to use.

Bradford White says DOE must testproducts to understand the actualperformance of cavity increases andnew blowing agents. (Bradford White,No.108 at 2–6). GAMA concurs, sayingDOE has relied too heavily on computermodeling to establish insulationperformance when actual testing ofwater heaters would have providedmore precise results. GAMA furtherstates that, ‘‘DOE is expected to testwater heaters to exclude the energy-saving benefits of design options when



the agency can do so at reasonable cost,rather then rely on computer modeling,’’998 F. 2d 1041 (D.C. Cir. 1993).Bradford White further comments thatDOE must test at least three storagecapacities affected by the standard.(Bradford White, No.138 at 1).

We reviewed the court case thatGAMA cited in its comments. The Courtacknowledges that computer modelingis ‘‘a useful and often essential tool forperforming the ‘Herculean labors’’’imposed by Congress. Gas ApplianceManufacturers Association v.Department of Energy, 998 F. 2d 1041,1045 (D.C. Cir. 1993). The Court alsostated that when computer modeling isused, an agency must sufficientlyexplain the assumptions andmethodology so that there is a rationalconnection between the factual inputs,modeling assumptions, modeling resultsand conclusions drawn from theseresults. Id. at 1046. (GAMA, No. 160 at1)

DOE provided a detailed explanationof the model, its assumptions, and itsresults in the proposed rule andaccompanying Technical Supportdocument. In the proposed rule, westated that comparisons of the WATSIMprediction to the NIST test result for anelectric water heater with an efficiencyat the level proposed was within 0.002EF. 65 FR 25042, 25053 (April 28, 2000).The detailed description of theWATSIM model and the assumptionsDOE used to model electric waterheaters are provided in the TSD for theproposed rule in Chapter 8.2.4.1.

In response to these comments on theproposed rule, LBNL tore down (reverseengineered) one of the American WaterHeater Company’s (American) 0.93 EFproducts to assess what design optionswere used. In addition, NIST tested thetwo units of the American model thatLBNL tore down. Using the reverseengineering data in the WATSIM modeland comparing to the NIST test results,we obtained results from WATSIM thatwere within 0.006 EF of the NISTresults. Therefore, WATSIM has beenvalidated at the efficiency levels andwith the types of design options that ouranalysis is using. See Chapter 8.2.4.1 inthe TSD. Consequently, we believeWATSIM correctly predicts theefficiency of electric water heaters.

DOE did not rely on computermodeling alone to demonstrate theperformance of higher efficiency electricwater heaters. In the fall of 1999, NISTtested five higher efficiency electricwater heaters, one model from eachmanufacturer. In the fall of 2000, NISTtested six tanks, a sample of two tanksof three models of electric water heaters.None of these models achieved their

rated efficiency as shown in the GAMAdirectory. However, several of thesemodels performed at or above thestandard level adopted in today’s rule.Therefore, at this time, and while we arestill examining this issue, we haveconcluded that the WATSIM modelcorrectly accounts for the maximumtechnically feasible design options forelectric resistance water heaters andcontinue to use it, without modificationfor this rulemaking. Furthermore, webelieve we have performed sufficienttesting to demonstrate that theminimum efficiency levels can be met.

3. Pipe Insulation. In our proposedrule, the Department did not considerinsulation on water heater inlet andoutlet pipes. In recent visits to the fivewater heater manufacturers, wediscovered that four manufacturers shipthe tanks with pipe insulation for theirhigh efficiency water heaters. The DOEwater heater test procedure allows waterheaters to be tested with pipe insulationif the manufacturer ships the tank withpipe insulation. To determine theimpact of pipe insulation on ouranalysis, we modeled water heaters withand without pipe insulation inWATSIM. These results showed thatpipe insulation in combination withheat traps improves the energy factor by0.005 EF. We performed tests at NISTwith and without pipe insulation onthree different models of electric waterheaters equipped with heat traps, andthe average increase in the energy factorwith pipe insulation was 0.007. Sinceboth the WATSIM computer model andNIST testing indicate the effects of pipeinsulation combined with heat traps issmall, we have not included the effectsof pipe insulation in our analysis.Furthermore, since pipe insulation mustbe applied during water heaterinstallation, we are not sure how oftenit is used. Information from a smallsurvey of installers indicated that about50 percent do not install the pipeinsulation.

4. Blowing Agent Conductivity. Stepanbelieves HFC–245fa may not achieve theenergy performance results predicted inthe proposed rule, and that water blownfoams may actually exceed modeledpredictions. Stepan claims it measuredinitial k-factors for water blown foam aslow as 0.175 BTU/hr-°F-in. (Stepan, No.123 at 2–3). The NWPPC suggests DOErecalculate the LCC using the waterblown foam k-factors given at theworkshop. (NWPPC, No. 163 at 3–4).

For cost information, Honeywell, thelicensee to manufacture HFC–245fa inthe U.S., provided estimates of HFC–245fa costs. For efficiency data, we usedpublished laboratory measurements ofphysical parameters but we derated

these conductivities by eleven percentto account for losses of insulationeffectiveness due to the foaming processand modeling assumptions. In order tokeep the baseline efficiency (those withHCFC–141b insulation) and the energyuse characteristics of water heaters withHFC–245fa insulation the same, wemodeled them with appropriatelythicker insulation. We also increasedthe amount and cost of steel used for thewater heater jacket in addition to addingthe extra volume and cost of insulation.

5. Analytic Baseline. The currentbaseline is for water heaters insulatedwith HCFC–141b and without anydesign to prevent the ignition offlammable vapors on gas water heaters.In order to analyze separately the effectsof energy efficiency standards from theeffects of EPA actions to phase out theHCFC–141b blowing agent or of theCPSC actions to make gas water heatersmore resistant to ignition of flammablevapors, DOE has developed an ‘‘analyticbaseline’’ concept. This conceptassumes that by 2003 and before theenergy efficiency standards becomeeffective, the actions of these otherFederal agencies will have taken effect.To meet these other agency’srequirements, manufacturers will havecreated new designs and made otherchanges to the production of waterheaters. The cost estimates of theseproduction and design changes areincluded in the analytic baseline.Several comments state that DOE shouldhave included different designs orproduction changes in its analyticbaseline. The analytic baseline is usedin the engineering and LCC analyses.

APGA claims manufacturers woulduse heat traps to meet the baselinestandards in 2003. Furthermore, theDOE analytic baseline overstates thevalue of raising the standard. (APGA,No. 21 at 2 and No. 167 at 2). AGAsuggests DOE should only considerwater blown foam for its analyticalbaseline. AGA suggests thatmanufacturers will use heat traps to addthe 0.01 EF needed to meet the currentstandards with water blown insulationafter 2003. (AGA, No. 150 at 5). GTIclaims DOE has defined a virtualbaseline water heater that makes iteasier to justify added insulation. (GTI,No. 141 at 4). The Southern GasAssociation’s experience with noisyheat traps led them to discontinue usingheat traps when installers beganremoving the heat traps during waterheater installation. (Southern GasAssociation, No. 152 at 3).

DOE does not believe heat trapswould be the only design optionmanufacturers might use to meet thecurrent standard when the HCFC



3 For more information on NEMS, please refer tothe National Energy Modeling System: AnOverview 1998. DOE/EIA–0581 (98), February,1998. DOE/EIA approves use of the name NEMS todescribe only an official version of the modelwithout any modification to code or data. Becauseour analysis entails some minor code modificationsand the model is run under various policy scenariosthat are variations on DOE/EIA assumptions, thename NEMS–BRS refers to the model as used here.BRs is DOE’s Building Research and Standardsoffice.

blowing agent is phased out. Whenasked, during the manufacturerinterviews, none of the manufacturersindicated they were limited to heat trapsas the only design option.

DOE also does not know whatblowing agent any particularmanufacturer would use. We believethat manufacturers will likely choosedifferent blowing agents or use mixturesof blowing agents based on what theybelieve to be the best business decisionsfor them.

B. Life-Cycle Costs

As discussed in the proposed rule,DOE used new analytical tools in thisrulemaking. We used a spreadsheetmodel to calculate LCC and payback. 65FR 25042, 25059–64 (April 28, 2000). Inthe LCC spreadsheet model, we useMicrosoft Excel for Windows 95,combined with Crystal Ball (acommercially available softwareprogram) so we can use actualdistributions of input variables. TheLCC outputs from this program are arange of LCCs and the fraction of thepopulation that will benefit from energyefficiency standards.

1. Blended Natural Gas and PropaneFuel Costs. In the LCC analysis for theproposed rule, DOE used a gas pricecomposed of approximately ten percentpropane and 90 percent natural gas.Many gas utilities and a gas utilityassociation objected to this approach.

AGA and GTI insist that we usenatural gas costs when evaluating gaswater heaters, not the blended fuelcosts, because our blended fuel costsmake natural gas prices ten percenthigher. (AGA, No. 150 at 7 and GTI, No.141 at 4). ACEEE claims a blended priceis appropriate if the standard appliesequally to both fuels. (ACEEE, No. 170at 10). Dominion stated that a blendedpropane and natural gas price willartificially increase savings for naturalgas equipment because propane has ahigher price. (Dominion, No. 145 at 7).

DOE agrees that use of blended fuelcosts is inappropriate when calculatinggas water heater life-cycle-costs andnational net present value, therefore,DOE has separated natural gas andpropane water heaters and hasconsidered each of these fuelsseparately in the LCC. To do this, DOEasked its consultant to develop amanufacturing cost for propane waterheaters from the GAMA manufacturingcost data for natural gas water heaters.We estimated the retail pricedistribution for liquid petroleum gaswater heaters from the manufacturers’costs and the markup for natural gassince there were not enough propane

gas water heater prices in the pricedatabase.

During the time from the water heaterhearing/workshop on the proposed ruleuntil publication of this Final Rule,natural gas prices have risendramatically for many consumers. DOEhas investigated this increase todetermine if these price increases mightcontinue into the near future becauseincreased gas prices would mean largerLCC savings and earlier paybacks formore energy efficient water heaters. TheEIA has determined natural gas demandhas increased in 2000 due to severalfactors including new gas-fired electricgenerators and new home construction.Natural gas prices will continue athigher levels than recent years but willreturn to more normal levels after thewinter of 2000–2001 because the newgas wells should be in production bythen. The AEO 2000 does not forecastany long term increase in gas prices.

2. Percent of Consumers Benefittingfrom Standards. EEI and Dominionclaim the fraction of consumersbenefitting from the standard level (74percent for electric, 87 percent fornatural gas) is too low for minimumefficiency standards. EEI and Dominionrecommend DOE accept only thosestandard levels that will providebenefits to at least 90 percent of thepopulation. (EEI, No.124 at 2 andDominion, No. 145 at 2). Energy Marketand Policy Analysis states that DOEoverestimates the percentage of winnersand underestimates the losers because itignores some costs, uses high estimatesof future electricity prices, and uses lowdiscount rates. (Energy Market andPolicy Analysis, No. 151 at 2).

Although ACEEE admits the twopercent band of insignificance isarbitrary, it claims this is a very usefulconcept. ACEEE claims that life cyclecosts probably must differ by $100 or$10/year before they are significant.(ACEEE, No. 170 at 11).

The Act requires the Department toconsider life-cycle-cost as one of theseven factors in determining economicjustification. In determining economicjustification, the Secretary shalldetermine whether the benefits of astandard exceed the burdens. Life-cycle-cost is just one of the factors to beconsidered and there is no mathematicalformula for weighing the benefits andburdens of the various factors. There arealso no mathematical thresholds for lifecycle cost as implied by EEI and theEnergy Market and Policy Analysis.Furthermore, it can be argued that theAct, in requiring DOE to set nationalstandards that maximize energy savingsfor appliances where there willobviously be regional differences in

usage and energy costs, expected therewould be some consumers with higherlife cycle costs. Based on thesearguments, the Department stronglydisagrees with EEI and the EnergyMarket and Policy Analysis comments.

The Department has used the twopercent band of insignificance as anindicator of the levels of LCC savings orcosts where consumers could appreciatesavings or suffer real loss. DOE uses thepercent of households benefitting andthe band of insignificance to help itweigh the LCC effects and in itsconsideration of the benefits andburdens of these amended standards.

C. Manufacturing Impact

We use the Government RegulatoryImpact Model (GRIM) to determine themanufacturing impacts. The analysismethodology is discussed in theproposed rule and the TSD. 65 FR25045, 25069–71 (April 28, 2000). Themanufacturing impact analysisestimates the financial impact ofstandards on manufacturers, as well asthe impacts on competition,employment, and manufacturingcapacity. We used the GRIMspreadsheet model to perform anindustry cash flow analysis.

D. Energy Savings and Net PresentValue

DOE uses a variant of the EnergyInformation Administration (EIA)’sNational Energy Modeling System, theNational Energy Modeling System-Building Research and Standards, calledNEMS-BRS, for the utility andenvironmental analyses, together withsome scaling and interpolationcalculations.3 The NEMS-BRS permitsthe modeling of interactions among thevarious energy supply and demandsectors and the economy as a whole, soit produces a sophisticated picture ofthe effects of appliance standards. EEIclaimed that DOE does not account forthe effects of electricity deregulation inits analysis. (EEI, No. 124 at 2). Theeffects of deregulation are built into theNEMS-BRS 2000 model.

IV. Discussion of CommentsWe received numerous comments

from gas utilities and other gas



consumers, supporting the AGAposition and the Battelle analyses. Weappreciate these comments and webelieve we have covered their concernsin our responses to the comments fromthe Gas Technology Institute (GTI;formerly GRI), AGA, Battelle, and othersin our responses to comments onmarkups, venting, and size constraints.

A. Venting of Gas Water HeatersVenting of gas water heaters has been

an issue throughout the water heaterrulemaking. In our proposed rule, weadvocated a standard level that includedan increase in the recovery efficiency(RE) to 78 percent from the current 76percent. Most gas utilities andmanufacturers are concerned about thereduction in the margin of safetyregarding venting system corrosion withthis two percent increase in RE. Tomake this discussion about ventingeasier to follow, we have separated theissue into the following subtopics:safety, the National Fuel Gas Code(NFGC) venting tables, Type B ventconnectors, costs, and direct ventapplications.

1. Safety. AGA believes DOE isincorrect in its analysis concerningventing systems for water heaters withRE above 76 percent. AGA states DOEcan resolve this issue of vent systemmodification by one of the following:

• By fully accounting for the ventsystem costs as reflected in the Battelleanalysis;

• By determining that the commentsconcerning venting integrity and safetybeyond its current analysis approach arewithout merit; and

• By determining that safety concernsare insignificant or the expected benefitsof the standard outweigh this safetyconsideration as required under theprocess rule.

AGA further requests DOE toexplicitly state its determination and itsunderlying rationale if the second orthird option is chosen. AGA reiteratesits position that DOE should notpromulgate a standard that subjectsconsumers to a potential increase insafety risk. (AGA, No. 150 at 3–5). AGAand the Atlanta Gas Light Co. believethat DOE has not considered the retailcash and carry market where neededvent system upgrades are unlikely tooccur. (AGA, No 150 at 4 and AtlantaGas Light Co., No. 178 at 2).

Alagasco stated that the ability of gaswater heaters to deliver outstandingeconomy, performance andenvironmental benefits is dependent onadequate margins of error in criticalsubsystems like venting, gas piping,combustion air and clearances. Theoverall utility of gas water heating is a

function of proper installation.(Alagasco, No. 162 at 1). The NewEngland Gas Association and AtlantaGas Light Co. believe increased gaswater heater efficiency from improvedflue loss efficiency can lead to increasedcondensation and chimney degradation.(New England Gas Association, No. 139at 2–3 and Atlanta Gas Light Co., No.178 at 2). The NYSEB, National PropaneGas Association, Atlanta Gas Light Co,and Southern California Gas Co. statethat DOE’s proposal reduces the marginof error for installations of gas waterheaters in retrofits. The NationalPropane Gas Association adds thatexisting vent systems are more likely todevelop condensate problems and ventfailures. (NYSEB, No. 164 at 1, NationalPropane Gas Association, No. 165 at 2,Atlanta Gas Light Co., No. 178 at 1; andSouthern California Gas Co., No. 181 at2).

ACEEE and OOE claim that thereshould be no safety concern at 78percent RE because the Talbert study forGTI found that a single walled ventconnector is acceptable at flue-lossefficiencies (FLE) up to 80 percent and78 percent RE is equivalent to 79.75percent FLE. (ACEEE, No. 170 at 3 andOOE, No. 174 at 2).

DOE did not raise the RE enough tocreate a safety concern if the ventingsystem is correctly installed. DOE usedthe data from the GTI reports to estimatethe impacts of 78 percent RE gas waterheaters on venting systems. At 78percent RE the flue loss efficiency isstill below 80 percent, the level atwhich condensation begins. Since theincreased RE may reduce the margin oferror, DOE’s analysis accounts for thecost of Type B vent connectors in elevenpercent of households and for chimneyrelining in eight percent of households.Type B vent connector is a doublewalled vent connector that reducescooling of the flue gasses and is morecorrosion resistant than steel vent pipe.

Additionally, the California EnergyCommission (CEC) in its comments,provided data about the number ofmodels of gas water heaters that haveenergy factors at 76 percent RE andabove that would comply with the gaswater heater standards in the proposedrule. (The CEC maintains its owndatabase of gas water heaters.) There are170 distinct models of gas water heatersin the CEC database. A distinct modelis a ‘‘discreet combination ofmanufacturer, input, volume, energyfactor and recovery efficiency.’’ Ofthese, 51 models or 30 percent of alldistinct models have a RE of 76 or 77percent. Furthermore, there are nearlyan equal number of natural gas andpropane gas water heaters in this

category. (CEC, No. 171 at 3 andAttachment A). Since gas water heaterswith a RE below 78 percent do not poseany safety threat and 30 percent of themodels that can meet the standard arein this group, installers will havechoices among lower RE models inthose applications where there may besafety concerns. Therefore, DOE doesnot believe there is any application thatwill have a safety problem if the correcttype of water heater and the properinstallation procedures are followed.

2. NFGC Venting Tables. BradfordWhite claims the venting tables weredeveloped around water heaters with aRE of approximately 75 percent.(Bradford White, No. 108 at 1–2).Southern Gas Association believesincreasing RE to 78 percent wouldrequire retesting water heaters andrewriting the current venting tablesbecause it claims the tables were basedon 76 percent RE. (Southern GasAssociation, No. 152 at 4). Battelleclaims increasing RE to 78 percent willrequire a revision to the current ventingtables. (Battelle, No. 127 at 26–27). GTIand Southern California Gas Companybelieve that DOE cannot make accuratecost estimates until venting codes arerevised. (GTI, No. 141 at 3 and SouthernCalifornia Gas Company, No. 181 at 2).

The NFGC does not limit its ventingtables to any specific gas water heaterrecovery efficiency. The NFGC ventingtables are based on specific conditionsfor each application such as waterheater location and common ventingwith a furnace. We do agree withBattelle that the NFGC should revisit itsventing tables and make whateverrevisions are necessary to account forpotential increases in recoveryefficiencies. We also note that there are37 models of gas water heaters with arecovery efficiency of 76 percent listedin the GAMA directory which can meetthe standard levels adopted in today’srule. On that basis, we conclude therewill be designs which can meet the newstandard with 76 percent RE.

3. Type B Vent Connectors. GAMAand Bradford White claim each waterheater manufacturer will change theinstallation instructions to require TypeB vent connectors for all installations.Bradford White claims manufacturerswill design to 80 percent RE in order tosatisfy a 78 percent RE level. (GAMA,No. 117 at 2 and Bradford White, No.108 at 1–2). Dominion claims DOE doesnot completely incorporate theadditional cost for Type B ventconnectors. (Dominion, No. 145 at 6).GTI states that DOE relied too heavilyon data from an area of the country withatypical weather conditions. (GTI, No.141 at 3) Battelle claims that increasing



RE to 78 percent will require Type Bvent connectors in the 75 percent ofinstallations that currently do not havethem, which will add to the installedcost. (Battelle, No. 127 at 26–27) TheNew England Gas Association claims amajority of homes in New England areolder with masonry chimneys whichcould require Type B vent connectorsand chimney relining costing as muchas $800. (New England Gas Association,No. 139 at 2–3).

ACEEE claims DOE overestimated thenumber of homes needing Type B ventsat 78 percent RE because the AVISTAdata applies to climates with 7000heating degree days (HDDs) and theNFGC requires Type B vents inunconditioned spaces. (ACEEE, No. 170at 2). The CEC summarizes its databaseof gas water heaters to show the numberof models of gas water heaters withrecovery efficiencies from 76 percent to85 percent. There are 170 models whichcurrently meet the standards. CEC alsoshows whether a vent connectionmodification or masonry chimneyrelining is needed. This data summaryshows that a Type B vent connector isnot needed until RE gets above 83percent, and chimney relining issometimes needed when RE gets above78 percent. It is interesting to note thereare 66 models or 39 percent of gas waterheaters with recovery efficiencies at orbelow 78 percent which currently meetthe standard and which do not needType B vent connectors or chimneyrelining. (CEC, No. 171 at 3).

DOE does not agree manufacturerswill specify that all installations with 78percent RE gas water heaters willrequire Type B vent connectors. This isnot current practice with gas waterheaters with RE greater than 76 percent.Manufacturers have relied on the NFGCventing tables, and we believe they willcontinue to do so. We believemanufacturers should advise installersto use Type B vent connectors inclimates where there are more than5,000 HDD or some reasonablyconservative level of heating degreedays, and otherwise follow local codesand the NFGC requirements.

DOE uses HDD as an indicator fordetermining where venting systems maybe subject to damage from the amountof time vent connectors may havecondensate on their inside surfaces.This indicator considers both the effectof time and temperature. We use 5,000HDD as a conservative approach sinceno incidence of vent system failures isassociated with the installation of highefficiency gas water heaters in theNorthwest, even in climates as cold asor colder than 7,000 HDD.

Given that there are 66 models of gaswater heaters with RE at or below 78percent, DOE believes a consumer has achoice between a lower RE and a higherRE with a Type B vent connector. At thelower RE, the consumer can continue touse a single wall vent connectorwhereas, at the higher RE levels, aconsumer would be advised to use aType B vent connector and/or chimneyrelining in those climate areas wherecondensation in the venting system is aconcern.

4. Vent System Costs. AGAcommented that DOE hasunderestimated the frequency of neededventing system upgrades. (AGA, No. 150at 3). APGA claims DOE hasunderestimated venting costs. (APGA,No. 167 at 2). ACEEE claims DOE’s costfor vent installations should not includea factor for the fraction of homes withgas water heaters. (ACEEE, No. 170 at 2).

DOE believes we have accounted forthe installation costs associated withhigher RE gas water heaters. We usedinstallers’ estimates to calculate the costof installing Type-B vent connectors andto determine the cost to reline masonrychimneys. These estimates are slightlyhigher than the GTI estimates. Usinginformation from comments and froman AGA survey in a GTI report, weestimated that eleven percent ofhouseholds with gas-fired water heatersin regions with over 5,000 HDDs wouldneed Type-B vent connectors for 78percent RE gas-fired water heaters.(GRI–91/0298). DOE determined a costof $134 for Type-B vent connectorsbased on the replacement market andinstallers’ cost estimates for a typicalinstallation. We also estimated thatmasonry chimney relining would cost$795 for eight percent of thehouseholds. This is nearly the same cost($800) for chimney relining given by theNew England Gas Association in itscomments. See Appendix D–3 in theTSD.

DOE did not include a factor for thefraction of homes with gas water heatersin the vent installation cost calculation.The factor used in the vent installationcost calculation included the fraction ofall homes with gas water heaters in theU.S. that are in the Northeast orMidwest. DOE was not double countingthe number of gas water heaters asACEEE states.

5. Direct Vent Applications. Dominionclaims DOE does not account for thedecreased vent length a 78 percent REgas water heater will have for directvent equipment. (Dominion, No. 145 at6).

Dominion is correct; however, DOEnotes this equipment accounts for lessthan two percent of the market. Only a

small fraction of this market would beinstalled at the maximum length of ventallowed. This tiny fraction of the marketcould be served by a product that hasnot used the improved flue baffle tomeet the standard or by a power ventedunit.

B. Electric Water Heater RatingsIssues concerning the efficiency

ratings of electric water heaters withenergy factors greater than 0.91 wereraised in the workshops that theDepartment conducted prior to theproposed rule. Based on theDepartment’s review of the GAMAcertification test program, theDepartment noted the possibility thathigh efficiency electric water heaters,i.e., with manufacturer rated energyfactors greater than 0.91 EF, wereoverrated. Several stakeholders haverequested that DOE take specific actionsto avoid any future overrating.

ACEEE is concerned thatmanufacturers may be overratingelectric water heaters and if this practicecontinues, some of the energy savings ofthe new standard will be lost. ACEEEstated that the apparent overratingaffects not only the standards program,but also the efficacy of utility demandside management programs. (ACEEE,No. 170 at 1).

DOE has conducted a certificationreview of the five major water heatermanufacturers and has found that thereare incorrect energy factor ratingsreported in the GAMA directory. Allfive major manufacturers use GAMA astheir third party representative.Therefore, the GAMA directory containsmanufacturers’ certified ratings. We alsofound violations of DOE’s recordkeeping requirements at severalmanufacturers. The Department hasrequested these manufacturers correcttheir ratings on these high efficiencyelectric water heaters, and themanufacturers have agreed. Thecorrected ratings will be published inthe December, 2000 GAMA directory.

Some manufacturers’ testing appearsto show that some 50 gallon electricwater heaters reach a 0.93 EF level. DOEacknowledges that recent tests of highefficiency electric water heaters atIntertek Testing Services (ITS) haveshown several models with 0.92 or 0.93EF. This testing was ordered by GAMAon a sample of four electric waterheaters for each model. However, NISThas tested several of these models andhas not been able to replicate the ITStest results.

Testing of 11 high efficiency electricwater heaters at NIST has notdemonstrated that electric water heaterscan achieve a 0.93 EF. The difference



between efficiency ratings listed in theGAMA Directory and NIST measuredefficiencies ranged from 0.012 EF to0.052 EF for an average difference of0.029 EF. In other words, the average ofthe 11 tanks NIST tested was nearly 0.03EF below the rated values from themanufacturer. We are continuing toevaluate additional units and the testingperformed to understand why the NISTand ITS test results do not agree.

There may be numerous reasons whywe cannot confirm the higher ratings.There could be an improper applicationof the DOE test procedure due todifferences in interpretation of therequirements or due to selection of adifferent option for making some of themeasurements. There could be problemsin the sampling procedures used byGAMA or the manufacturers to obtaintheir sample tanks for testing. (The testprocedure requires tanks for testing berepresentative of production.) Therecould be some design improvements insome of these high efficiency modelsthat DOE did not consider in itsanalysis. Therefore, at this time wecannot determine if the difference in ourtesting and the manufacturers’ rating isreal or not.

C. Measured vs. Rated VolumeCEC, NWPPC, and ACEEE commented

that DOE should use the measuredvolume of water heaters becausemanufacturers, by using the ratedvolume, can gain a 0.01 EFimprovement by maximizing thetolerances allowed by UL (+/¥10percent for electric) or by ANSI Z21.10.1(+/¥5 percent for gas). (CEC, No. 171 at4–5; NWPPC, No. 163 at 3; and ACEEE,No. 170 at 16–17). GAMA referred to itsJuly 18, 1994, comments on the 1994proposed rule, where it addressed thissame issue, and suggested that DOEshould continue to use rated volumebecause that is the basis of the extantstandards set by NAECA. (GAMA, No.160 at 5).

EPCA, as amended, by the 1987NAECA amendment, uses the ratedvolume as the coefficient in thestandard levels. Our analysis uses therated tank volume to determine theperformance of the design options.Therefore, DOE will continue to use therated volume in its water heaterstandards.

D. Effective Date of StandardsSeveral stakeholders have taken the

position that the effective date of today’srule should be five years from itspublication. EPCA prescribes efficiencystandards for water heatersmanufactured on or after January 1,1990, and requires two subsequent

rulemakings to consider amendments tothe water heater efficiency standards.The statute provides in effect that anyamendment to the standards that resultsfrom the first rulemaking shall beeffective three years after publication.For the second rulemaking cycle, toamend the standards then in effect, thestatute provides an effective date fiveyears after publication.

GAMA claims today’s Final Ruleshould be effective 5 years afterpublication. GAMA believes the threeyear lead-time for the effective dateapplies only to a Final Rule publishedby January 1, 1992. (GAMA, No.113 at2). Southern Co. and Dominion statethat NAECA requires a 5 yearimplementation time. Southern Co. alsosuggests that refrigerant availability willbecome more manageable with twoadditional years. (Southern Co., No. 142at 3 and Dominion, No. 145 at 3). On theother hand, ACEEE asserts the firstrevision has a three year effective dateand since today’s rule is the firstamended standard, the three yeareffective date applies. ACEEE states thisis the way the NAECA revisions havebeen interpreted. (ACEEE, No. 170 at10–11).

DOE interprets the language in EPCAat 42 U.S.C. 6295(e)(4)(A) to mean that,where the schedule specified in thestatute for the two required rulemakingshas not been met, the first amendmentto the standards should be effectivethree years after publication, and thesecond amendment to the standards,five years after publication. We believethat this interpretation is the one mostconsistent with the statutory scheme.DOE has the authority andresponsibility to complete the twocycles of rulemakings mandated byCongress in the statute. We recognizethat DOE has failed to implement therulemaking schedule in EPCA, but wesee no reason why such failure wouldjustify a departure from the time periodsthe statute contemplates for anamendment to the standards to becomeeffective. We believe we are adhering tothe statutory scheme by making theeffective date of today’s rule, the firstamended standard, conform to theamount of time the statute designates forthe effective date after publication of thefinal rule. As ACEEE pointed out at thepublic hearing on June 20, 2000, in allthe rulemakings where DOE has misseddates, it has used such an approach.(Transcript, No. 120FF at 295–296).

Moreover, the statute contemplatedthat the original efficiency standardsspecified in EPCA could be in effect foronly five years before an amendedstandard would take effect. To date, theoriginal standards have been in effect

for 11 years. By making today’s newstandards effective in three years, it willbe 14 years, not 5 years, before amendedstandards become effective. A five-yeareffective date would lengthen thisperiod to 16 years, further delaying thebenefits new standards will provide toconsumers and the nation. Furthermore,the water heater industry never had anexpectation that the original standardswould be in effect so long. The originalstandards will have been in place 9years longer than envisioned by thestatute. For these reasons as well, athree-year effective date for today’s ruleis more consistent with the statutoryscheme than the five-year periodadvocated by some commenters.

Accordingly, today’s rule will becomeeffective three years after the date ofpublication as originally proposed.

E. Water Heater Models AffectedGAMA commented that if the

proposed standard levels were adopted,few current models listed in the GAMAdirectory would survive, and only asmall percentage of current residentialwater heater shipments meet theproposed levels. (GAMA, No. 160 at 5).GAMA stated that 26 percent of thecurrent models of gas and electric waterheaters can meet the proposed standard.This number drops to 18 percent if only30, 40 and 50 gallon models areconsidered. (GAMA, No. 176 at 1).Dominion suggests DOE should identifyexisting equipment that will meet therevised standards and designs it uses.Additionally, Dominion claims DOEshould evaluate these models andprovide data verifying the achievabilityof the proposed minimum efficiencystandards using design optionsidentified for the recommendedstandard level. (Dominion, No.145 at 3).The CEC claims that, based on itsdirectory of certified water heaters, ofthe 170 models of gas water heaterslisted, 51 meet the proposed standard.(CEC, No. 171 at 2). DOE’s review of theApril, 2000 GAMA Directory shows 37gas-fired water heater models that couldmeet the proposed standards.

DOE recognizes that standards willeliminate current manufacturers’offerings which would affect theindividual firms and industry’s netpresent value. These effects are capturedin the Manufacturer Impact Analysis.Furthermore, DOE rejects Dominion’scomment that the Department shouldidentify technologies that can be used tomeet the standard. The standard is aperformance standard, not a designstandard. DOE’s analysis identified apath, with different insulation blowingagents, which could be used to meet thestandard. However, DOE believes there



are a number of approaches individualmanufacturers may elect to pursue tomeet the standard. It is not up to theDepartment to mandate any oneapproach.

F. Instantaneous Water HeatersControlled Energy Corporation

(Controlled Energy) claimsinstantaneous water heaters should notbe included in the Final Rule withoutfurther analysis. (Controlled Energy, No.125 at 1). The CEC claims NAECAclearly includes both storage andinstantaneous water heaters, and DOEdoes not have any option to exempt thistype of water heater since that would beequivalent to a reduction of energyefficiency. (CEC, No. 171 at 4). GAMAclaims DOE should clearly state theproposed standards do not apply toinstantaneous water heaters. GAMAclaims the minimum energy factor forinstantaneous water heaters has beeninadvertently raised without anydiscussion or any analysis. Currently,instantaneous water heaters must meeta minimum of 0.62 EF. (GAMA,Transcript, No. 120 at 38 and 177–178.).

Since instantaneous water heatersmake up a very small fraction of onepercent of the water heater shipments,DOE did not include them in itsanalysis. Although the statutorydefinition includes instantaneous waterheaters within the general definition ofwater heater, the statute doesdistinguish between storage andinstantaneous water heaters based oninput rate. The DOE regulations at 10CFR 430 Subpart B, Appendix E(1.7),distinguish between the definition ofstorage water heaters and instantaneousgas water heaters by BTU input ratesand storage capacity. However, EPCA,as amended, provides the samestandards for instantaneous and storagewater heaters. There is, moreover, aprovision in EPCA, as amended, inSection 325(q), 42 U.S.C. 6295(q) forestablishing a new class if the capacityor performance related features of aproduct justifies it. The volume rangesof storage water heaters are much largerand do not include the volumes ofinstantaneous water heaters as definedin DOE’s regulation. Since DOE’scurrent regulations use the capacity andinput rate to define instantaneous waterheaters, DOE is establishing a new classfor instantaneous gas and electric waterheaters and we will leave the standardsat the current levels.

G. Fuel SwitchingThe New England Gas Association

(NEGA) and Laclede Gas claim higherfirst costs for gas water heaters willencourage builders in new homes and

consumers replacing gas water heatersto switch to electric water heaters.Laclede claims this is especially truewhen a consumer faces a $433 chimneyrelining cost. (NEGA, No. 139 at 3 andLaclede Gas, No. 148 at 3). AGA claimsDOE needs to include a detailedanalysis of fuel switching among gasand electric utilities in theenvironmental impacts analysis. (AGA,No. 150 at 10). OOE claims that theincremental costs for a 0.62 EF gas waterheater are trivial compared to the costsof acquiring natural gas service where itdoes not exist, to buy a gas furnace, andin some cases to install a duct systemwhere one does not exist. (OOE, No. 174at 2).

The LCC analysis is one of the sevenfactors DOE is required by statute toconsider when it makes its decision onstandard levels. Included in the LCCanalysis are the installed costs ofelectric and gas water heaters. Thesecosts provide an indication of whethera particular standard level would causefuel switching. Furthermore, in the NES,DOE estimates the shipments of eachfuel type. These results are shown inChapter 11 of the TSD. For example,DOE estimates that the standardsadopted today will increase the totalshipments of gas water heaters by 8million and decrease the totalshipments of electric water heaters by 7million over the next 26 years. DOE hastaken fuel switching into account inreaching its final decision. No furtheranalysis is required.

V. Analytical Results and Conclusion

The choice of insulation blowingagent is critical to achieving high waterheater efficiency at a reasonable cost. Inthe proposed rule, DOE based itsanalysis on HFC–245fa and water blowninsulation. There were many commentsfrom manufacturers, utilities and theDOJ that a standard based on HFC–245faalone could be anti-competitive due toits single source of supply. There werealso issues about venting system marginof error, size constraints for waterheaters with thicker insulation, and theenergy factor overrating of highefficiency electric water heaters. Todetermine whether there are alternativeapproaches to meet the standard leveladopted by today’s Final Rule, weevaluated two other blowing agents,HFC–134a and cyclopentane, that theproposed rule identified as potentialalternatives for the HCFC–141.65 FR25042, 25049–50 (April 28, 2000). Thisissue is briefly described in Section II,General Discussion, ‘‘Impact ofLessening of Competition’’ in today’srule.

We performed an engineering analysison both of these alternative insulationblowing agents to determine if thestandard could be met with theseblowing agents and to estimate therelative manufacturer and consumercost impacts. HFC–134a is a blowingagent that is less expensive per poundthan HFC–245fa, but it also is tenpercent less effective as an insulationmaterial. Cyclopentane is a veryinexpensive blowing agent, has similarinsulation effectiveness to HFC–245fa,but it is flammable and would requireexpensive modifications to productionfacilities to meet the OSHA safetyregulations. The engineering analysesfor HFC–134a and cyclopentane showthat water heater cost and performanceis within two percent of the results forHFC–245fa. See Table 1 in Section II,General Discussion, ‘‘Impact ofLessening of Competition.’’ Therefore,DOE believes that manufacturers have achoice among at least three blowingagents, water, HFC–134a andcyclopentane. When designing productsto meet the new standard,manufacturers will be faced with arange of choices to consider. Forexample, water heaters withcyclopentane-blown foam insulationhave lower material costs, as comparedto HFC–245fa, however, the capitalinvestment is significantly greater. Inthis scenario, they may weigh theinvestment costs and material costs todetermine the approach that is cost-effective for them. Similarly, they mayweigh either HFC–245fa and HFC–134awith water-blown foam. The HFC-blownfoams have higher material costs,compared to water, but better insulationperformance. Alternatively, at thestandard levels adopted today, somemanufacturers may find a design usingother blowing agents or blends of thesematerials to be more cost effective. Insummary, DOE believes there are anumber of insulation blowing agents tomeet today’s standards. Manufacturerswill, DOE believes, weigh the cost andefficiency trade-offs, as well as otherfactors, in selecting the insulationblowing material to use.

A. Economic Impacts on Consumers1. Life-Cycle-Cost. To evaluate the

economic impact on consumers, weconducted an LCC analysis for gas andelectric water heaters. We included dataand information from commentspertaining to installation costs for sizeconstraints on fourteen percent ofelectric water heaters. This accounts forextra costs that consumers in smallapartments and homes may have to payfor water heaters with thickerinsulation. We also included



information and costs for drip pans fromthe comments on gas water heaters.Table 2 shows the average LCC savingsand percent of households benefittingfor each of the trial standard levels foreach fuel class. The average LCC savingsfor trial standard levels one, two and

three are positive for gas-fired andelectric water heaters with the HFC–245fa blowing agent. We do not showoil-fired water heaters because we arenot making any revisions to thestandards for that class.

Where LCC savings are positive forelectric and gas-fired water heaters, the

percent of households benefitting rangesfrom 59 percent to 90 percent for thetrial standard levels analyzed. At trialstandard level four, where the LCCsavings are negative, 18–26 percent ofhouseholds with electric or gas-firedwater heaters will benefit.

TABLE 2.—LIFE-CYCLE-COST SAVINGS AND PERCENT BENEFITTING

[HFC–245fa blown insulation]

Trial standard level Design options Percent ben-efitting

Life-cyclecost savings

($)

1 ............................. Electric: Heat Traps + Tank Bottom Insulation ....................................................................... 90 36Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ................................ 78 30LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ....................................... 89 97

2 ............................. Electric: Heat Traps + Tank Bottom Insulation + 2 Inch Insulation ....................................... 68 32Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2.5 Inch Insulation ............................. 64 11LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2.5 Inch Insulation .................................... 78 77

3 ............................. Electric: Heat Traps + Tank Bottom Insulation + 2.5 Inch Insulation .................................... 59 23Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ................................ 78 30LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ....................................... 89 97

4 ............................. Electric: Heat Traps + 3 Inch Insulation + Plastic Tank ......................................................... 26 ¥82Natural Gas: Heat Traps + Flue Baffles (80 % RE) + 3 Inch Insulation + Side Arm Heater

+ Plastic Tank + IID.18 ¥244

LP Gas: Heat Traps + Flue Baffles (80 % RE) + 3 Inch Insulation + Side Arm Heater +Plastic Tank + IID.

37 ¥122

Another LCC analysis we conductedis the Consumer Subgroup analysis.This analysis examines the economicimpacts on different groups ofconsumers by estimating the average

change in LCC and by calculating thefraction of households that wouldbenefit. We analyzed the potential effectof standards for households with lowincome levels and for senior-only

households, two consumer subgroups ofinterest identified by DOE andsupported by stakeholders. We presentthe results of the analysis in Table 3.

TABLE 3.—CONSUMER SUBGROUP LCC SAVINGS AND PERCENT OF HOUSEHOLDS BENEFITTING

Product classTrial

standardlevel

Total sample Delta LCC Low-income Delta LCC Senior-only Delta LCC

Ave. (1998$)

Fraction ofpopulationbenefitting

(%)

Ave. (1998$)


(%)

Ave. (1998$)


(%)

Electric ....................................... 1 36 90 35 90 39 922 32 68 28 67 39 723 23 59 7 54 33 644 ¥82 26 ¥105 22 ¥60 31

Natural Gas ................................ 1 30 78 30 78 34 822 11 64 ¥1 55 17 683 30 78 30 78 34 824 ¥244 18 ¥268 15 ¥194 20

LPG ............................................ 1 97 89 110 93 108 922 77 78 88 80 87 803 97 89 110 93 108 924 ¥122 37 ¥53 37 ¥34 38

The two consumer subgroups show asimilar trend in average LCC savingsand percent of sample householdsbenefitting as the total sample ofhouseholds. In the case of electric waterheaters, the low income consumer grouphas less benefit at all trial standardlevels than the total sample ofhouseholds while the senior-onlyconsumer group has greater benefit at alltrial standard levels than the total

sample of households. In householdswith natural gas-fired water heaters, lowincome households have the samebenefit for trial standard levels 1 and 3and less benefit for trial standard levels2 and 4 than the total sample ofhouseholds. The senior-only householdswith natural gas water heaters havegreater benefits at all trial standardlevels than the total sample ofhouseholds. Both low income and

senior-only households have greaterbenefits at all trial standard levels withpropane gas.

We have noted the LCC savings forthe senior-only subgroup are similar tothose of the general population. Sincethe elderly use 30 percent less hot wateron average than the general population,one would expect their costs to belower, and as a result, the LCC effect tobe different. However, the standby



losses of water heaters, which are notaffected by hot water usage, are thesame for the elderly and the generalpopulation. Therefore, since most of thedesign options considered affectstandby losses and not water heatingefficiency, we expect the distribution of

LCC impacts for the elderly to be similarto the general population, which theywere.

2. Median Payback. A part of the LCCanalysis is the payback analysis. TheLCC payback analysis considers all ofthe design option combinations for eachfuel type and calculates a payback for

each RECS household. We report themedian payback from the distribution ofpaybacks for each trial standard level inTable 4. The median payback is themedian number of years required torecover, in energy savings, the increasedcosts of the efficiency improvements.

TABLE 4.—MEDIAN AND TEST PROCEDURE PAYBACK (YEARS)[HFC–245fa blown insulation]

Trial stand-ard level Design options Median

payback

Test pro-cedure

payback 1

1 ............... Electric: Heat Traps + Tank Bottom Insulation ................................................................................................... 2.9 1.5Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ............................................................ 3.6 3.4LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ................................................................... 2.8

2 ............... Electric: Heat Traps + Tank Bottom Insulation + 2 Inch Insulation .................................................................... 6.5 3.7Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2.5 Inch Insulation ......................................................... 5.0 4.9LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2.5 Inch Insulation ................................................................ 4.0

3 ............... Electric: Heat Traps + Tank Bottom Insulation + 2.5 Inch Insulation ................................................................. 7.4 5.2Natural Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ............................................................ 3.6 3.4

.LP Gas: Heat Traps + Flue Baffles (78 % RE) + 2 Inch Insulation ................................................................... 2.8

4 ............... Electric: Heat Traps + 3 Inch Insulation + Plastic Tank ..................................................................................... 14.4 9.8Natural Gas: Heat Traps + Flue Baffles (80 % RE) + 3 Inch Insulation + Side Arm Heater + Plastic Tank +

IID.12.1 10.5

LP Gas: Heat Traps + Flue Baffles (80 % RE) + 3 Inch Insulation + Side Arm Heater + Plastic Tank + IID .. 8.3

1Electric—50 gallon; Gas—40 gallon

3. Rebuttable Presumption. The Actstates that if the Department determinesthat the payback period is less thanthree years, as calculated with the DOEtest procedure, there shall be arebuttable presumption that such trialstandard level is economically justified.In Table 4, we list the payback periodsby fuel type (product class) and trialstandard levels. The Act further statesthat if this three year payback is notmet, this determination shall not betaken into consideration in decidingwhether a standard is economicallyjustified. Section 325(o)(2)(B)(iii), 42U.S.C. 6295(o)(2)(B)(iii).

Only electric water heaters at trialstandard level one satisfy the rebuttablepresumption. Electric water heaterswith heat traps and insulated tankbottoms have a 1.9 year paybackcalculated under the test procedure.There are no trial standard levels fornatural gas water heaters that have apayback of three years or less.

4. Economic Impact onManufacturers. We performed an MIAto determine the impact of standards onmanufacturers. The complete analysis isin Chapter 13 of the TSD. In general,manufacturers stated they would be ableto manufacture any of the designoptions with heat traps, thicker

insulation, tank bottom insulation onelectric and improved flue baffles ongas-fired water heaters. None of themanufacturers indicated they wouldleave the industry or go out of businessas a result of standard levels that wouldrequire energy factors below plastictanks or side-arm heaters (i.e., trialstandard levels one through three).

We conducted detailed interviewswith four of the five major water heatermanufacturers. (The fifth manufacturerdeclined to participate in our secondinterviews.) The five together supplymore than 99 percent of the U.S.residential water heater market. Theinterviews provided valuableinformation used to evaluate theimpacts of an amended standard onmanufacturers’ cash flows,manufacturing capacities andemployment levels.

We analyzed the water heaterindustry using two business scenarios.The standards scenario represents theinvestments needed to meet the energyefficiency level of a trial standard level.The cumulative scenario includes theinvestments required for energyefficiency improvement, changes to anew blowing agent and the developmentand manufacture of a gas-fired waterheater resistant to ignition of flammable

vapors. Additionally, we examined theability of manufacturers to recover theinvestments required for each of thescenarios and trial standard levels.

The potential value of the waterheater industry, represented by theIndustry Net Present Value (INPV) ($325million in 1998 dollars), is directlyrelated to the manufacturers’ price tothe dealer/distributor. Since all five ofthe major manufacturers produce bothgas-fired and electric water heaters, theindustry is highly competitive in termsof manufacturer’s pricing. Manufacturerprices are expected to increase from thecurrent average cost to the dealer/distributor of $157 to a range of $187–292 for trial standard levels one throughfour. Based on comments from theinterviews, we assume manufacturerswill raise prices enough to recover thecosts of materials, labor andtransportation and 75 percent of theirinvestment. If manufacturers increasedwater heater distributor prices slightlymore, from $0.13 for trial standard levelone to $2.00 for trial standard level four,they would recover all of theirinvestment. Table 5 shows the results ofthe cash flow analysis with theseassumptions.



TABLE 5.—MANUFACTURER IMPACT ANALYSIS

Trial std level INPV ($ mil-lions)

Change in INPV Investment re-quired ($ mil-

lions)(%) ($ millions)

Standard Scenario, HFC–245fa blown insulation

Base Case ................................................................................................................... 325 0 0 01 ................................................................................................................................... 317 ¥3 ¥8 332 ................................................................................................................................... 310 ¥5 ¥15 603 ................................................................................................................................... 310 ¥5 ¥15 594 ................................................................................................................................... 268 ¥18 ¥57 229

Cumulative Scenario, HFC–245fa blown insulation

Base Case ................................................................................................................... 325 0 0 01 ................................................................................................................................... 288 ¥12 ¥37 1492 ................................................................................................................................... 281 ¥14 ¥44 1763 ................................................................................................................................... 281 ¥14 ¥44 1764 ................................................................................................................................... 239 ¥27 ¥86 345

From Table 5, we note energyefficiency standards could result inlosses of industry net present value fromabout $8 million to $57 million (3–18%), while requiring investments of$33 million to $229 million. However,even if DOE did not revise energyefficiency standards, other Federalregulatory actions that will take effecton or before January 1, 2003, will resultin a $29 million loss (9%) in industryNPV. This loss exceeds any of DOE’strial standard levels except level four.As required by the Process Rule, 10 CFRPart 430, Subpart C, Appendix A10(g)(1), DOE considered the cumulativeimpacts of other Federal regulatoryactions on the trial standard levels,including the phase out of HCFC–141band the CPSC initiative to prevent theignition of flammable vapors on gas-fired water heaters. These cumulativelosses range from $37 million to 86million. The investments to preventignition of flammable vapors and fornew blowing agents are $116 million.The investments for cumulativeregulations are potentially large giventhe current after tax profitability of thewater heater industry, estimated to be$45 million (1998) on revenues of $1.5billion.

Based on DOE’s interviews,manufacturers expect little impact onmanufacturing capacity and expect tomeet future demand since the revisedstandards are not based on side-arm gas-fired water heaters and plastic tank

electric units. Currently, the U.S.industry has far more manufacturingcapacity than the domestic market canabsorb. Manufacturers estimated theindustry is operating at approximately80 percent of total capacity. Due to thephase-out of HCFC–141b insulationblowing agent and a requirement for agas-fired water heater resistant toignition of flammable vapors, it is likelythat nearly every product line wouldhave to be redesigned, retested and re-certified. Several manufacturersindicated a preference to retool for newblowing agents, energy-efficiencystandards and flammable vapor-resistantdesigns at the same time, to avoidredundant efforts and limit costs.

We also used the manufacturers’interviews to assess employmentimpacts due to an amended energyefficiency standard. Manufacturersexpected the impact of new blowingagents and flammable vapor resistantdesigns on labor to be minimal, neitherincreasing nor reducing employmentlevels by more than a few employees.Since the revised efficiency levels donot require the adoption of side armheaters or plastic tanks, manufacturersdo not anticipate significant changes inemployment levels or trainingrequirements. Additionally, we believemarket growth of 2.5 percent per yearfor new homes and modest productivitygains ensure current employment levelsfor the foreseeable future. In ouranalysis, yearly water heater shipments

range from 9.7 million in 2000 to 19.2in 2030. Furthermore, a replacementmarket that increases by about 1/10th ofthe new home market each year ensuresfuture demand.

B. Significance of Energy Savings

The Act prohibits the Departmentfrom adopting a standard for a productif that standard would not result in‘‘significant’’ energy savings. Section325(o)(3)(B), 42 U.S.C. 6295(o)(3)(B).While the term ‘‘significant’’ is notdefined in the Act, the U.S. Court ofAppeals, in Natural Resources DefenseCouncil v. Herrington, 768 F.2d 1355,1373 (D.C. Cir. 1985), concluded thatCongressional intent in using the word‘‘significant’’ was to mean ‘‘non-trivial.’’The energy savings for all of the trialstandard levels considered in thisrulemaking are non-trivial and thereforewe consider them ‘‘significant’’ withinthe meaning of Section 325 of the Act.

1. National Energy Savings. Toestimate the energy savings through theyear 2030 due to amended standards,we compared the energy consumptionof water heaters in the 2004 base caseto the energy consumption of waterheaters complying with the trialstandard levels. DOE calculates theseenergy savings at the source using theNEMS–BRS distribution and generationlosses. Table 6 shows these results forwater heaters with HFC–245fa blowninsulation.

TABLE 6.—SOURCE ENERGY SAVINGS WITH HFC–245FA BLOWN INSULATION (QUADS)

Trial std 1 Trial std 2 Trial std 3 Trial std 4

Total quads saved ........................................................................................... 3.33 4.47 4.61 11.46Total exajoules saved ...................................................................................... 3.51 4.72 4.86 12.09



All of the trial standard levelsconsidered in this rulemaking havesignificant energy savings, ranging from3.3 quads (3.5 Exajoules (EJ)) to 11.5quads (12.1 EJ), depending on the trialstandard level.

2. National Net Present Value (NPV).Additionally, we analyzed the economicimpact on the nation to the year 2030.This is an NPV analysis using the AEO2000 reference energy prices. Table 7lists the NPV for HFC–245fa blowninsulation. The NPV considers the

combined discounted energy savingsminus increased consumer costs of thefour fuel types of equipment at aparticular trial standard level. We basethis calculation on all expenses andsavings occurring between 2004 and2030.

TABLE 7.—NATIONAL NET PRESENT VALUE

Trial standard level NPV—HFC–245fa($ billions)

1 ....................................................................................................................................................................... 1.202 ....................................................................................................................................................................... ¥0.133 ....................................................................................................................................................................... 2.024 ....................................................................................................................................................................... ¥24.94

The national NPV is positive for trialstandard levels one and three andessentially 0 for trial standard level 2. Inthis analysis, a positive NPV means thatthe estimated energy savings are greaterthan the increased costs due tostandards. Among the trial standardlevels analyzed, trial standard levelthree has the highest NPV.

C. Lessening of Utility or Performance ofProducts

None of the trial standard levelsreduces the performance of waterheaters. Generally, the trial standardlevels reduce heat losses and improveheat exchanger effectiveness. Thesechanges improve energy and waterheating performance and may increasethe amount of water available in onehour, i.e., the first hour rating.

However, to reduce heat losses, it maybe necessary to use thicker insulation.At the trial standard level adopted intoday’s rule, DOE contemplatesinsulation thicknesses of 2–2.5 inchesversus the 1–2 inches in common usetoday. This extra thickness of insulationwill make water heaters larger and moredifficult to squeeze into tight spaceswhen replacing a water heater. DOEadded costs for tempering valves for anumber of gas and electric water heaterswhere we believed there could be someloss of utility due to the need todownsize a water heater. Temperingvalves allow the consumer to increasethe setpoint, thus increasing the amountof cold water used to provide acomfortable and safe usable watertemperature. The addition of cold waterincreases the first hour rating.

Therefore, the consumer will not loseany utility or performance.

To eliminate the possibility of anywater heater models becomingunavailable as a result of thickerinsulation, we created a new class fortabletop water heaters based on thecriteria in Section 325(q), 42 U.S.C.6295(q) in the Act. These issues arediscussed in Section II. GeneralDiscussion, ‘‘Lessening of Utility orPerformance of Products.’’

D. Impact of Lessening of Competition

The Act directs the Department toconsider any lessening of competitionthat is likely to result from standards. Itfurther directs the Attorney General todetermine the impact, if any, oncompetition likely to result from suchstandard and transmit suchdetermination, not later than 60 daysafter the publication of a proposed ruleto the Secretary, together with ananalysis of the nature and extent of suchimpact. Section 325(o)(2)(B)(i)(V), 42U.S.C. 6295(o)(2)(B)(i)(V).

In order to assist the Attorney Generalin making such a determination, theDepartment provided the AttorneyGeneral with copies of the ProposedRule and the Technical SupportDocument for review. In a letterresponding to the Proposed Rule, theDepartment of Justice (DOJ) found onlyone area of concern regarding anylessening of competition. The area ofconcern involves the blowing agent forthe foam insulation and the possibilitythat only one blowing agent, HFC–245fa, could be used and that it is apatented product with only onesupplier. This situation led DOJ to

conclude ‘‘that the proposed standardscould have an adverse affect oncompetition because water heatermanufacturers may have to use an inputthat will be produced by only onesource.’’ (DOJ, No. 143 at 1).

DOE examined other possible blowingagents and concluded that at least fourblowing agents are available to use inmeeting the standards adopted intoday’s Final Rule. Therefore, theDepartment concludes there will belittle to no impact on competition. SeeSection II, General Discussion, ‘‘Impactof Lessening of Competition’’ for thecomplete discussion of this topic.

E. Need of the Nation to Save Energyand Net National Employment

1. Environmental Impacts. Enhancedenergy efficiency improves the Nation’senergy security, strengthens theeconomy and reduces theenvironmental impacts of energyproduction. The energy savings fromwater heater standards result in reducedemissions of CO2 and NOX and aids inaddressing global climate change andreducing air pollution. At the standardlevels analyzed, the actual cumulativeemission reductions to 2030 range from149–354 Mt for carbon equivalent, 175–459 thousand metric tons (kt) for NOX,and ¥3 to ¥64 kt for SO2. The largereductions in CO2 and NOX at allstandard levels are a positive benefit tothe nation. The small increases(negative reductions) in SO2 are due tosmall increases in the number of oil-fired water heaters from our shipmentforecasts. We show actual cumulativeemissions savings from 2004–2030 inTable 8.

TABLE 8.—ACTUAL CUMULATIVE EMISSIONS REDUCTIONS THROUGH 2030

Emission Trial std level1

Trial std level2

Trial std level3

Trial std level4

Carbon (Mt) ...................................................................................................... 149 139 152 354



TABLE 8.—ACTUAL CUMULATIVE EMISSIONS REDUCTIONS THROUGH 2030—Continued

Emission Trial std level1

Trial std level2

Trial std level3

Trial std level4

NOX (kt) ........................................................................................................... 175 215 273 459SO2 (kt) ............................................................................................................ **¥3 **¥11 **¥13 **¥64

** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by clean air legislation.Thus, SO2 emissions will only be negligibly affected by water heater standards.

The Department makes no effort tomonetize the benefits of the actualemission reductions, but there may betime-related differences in the perceivedvalue of the emissions depending onwhen they occur, as with monetizedbenefits that accumulate over time.Emission reductions that occur soonerare often more desirable than equivalentreductions that occur later. Likemonetary benefits, the health,recreational and ecosystem benefits thatresult from emission reductions are

often perceived to have a greater valueif they occur sooner, rather than later.To the extent that the different trialstandard levels have slightly differentshipment distributions over time, sometrial standard levels might have aslightly higher proportion of earlieremission reductions than another trialstandard level.

To show the possible effect of thedifferent timing patterns of theemissions, the Department is alsopresenting discounted emissions. We

used the same seven percent discountrate for these calculations that we usedfor discounting monetized benefits.Since the discounted emissionreductions in carbon shift slightly fromtrial standard level 3 to trial standardlevel 1, this indicates trial standardlevel 1 has a slight timing improvementin emission reductions. There is nosimilar shift in either the NOX or SO2

levels. We show the discountedcumulative emission savings from2004–2030 in Table 9.

TABLE 9.—DISCOUNTED CUMULATIVE EMISSIONS REDUCTIONS THROUGH 2030

Emission Trial stdlevel 1

Trial stdlevel 2

Trial stdlevel 3

Trial stdlevel 4

Carbon (Mt) ...................................................................................................... 51 46 50 118NOX (kt) ........................................................................................................... 53 67 90 131SO2 (kt) ............................................................................................................ **¥1 **¥3 **¥4 **¥17

** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by clean air legislation.Thus, SO2 emissions will only be negligibly affected by water heater standards.

2. Net National Employment. In theProcess Rule, DOE committed todevelop estimates of the employmentimpacts of revised standards in theeconomy in general. The standardadopted in today’s rule will have apositive impact on employment. Theresults of the Department’s analysis areshown in Chapter 15 of the TSD.

While both this input/output modeland the direct use of Bureau of LaborStatistics (BLS) employment datasuggest the revised water heaterstandards could increase the netdemand for labor in the economy, thegains would most likely be very smallrelative to total national employment.For several reasons, however, even thesemodest benefits for nationalemployment are in doubt:

• Unemployment is now at the lowestrate in 30 years. If unemploymentremains very low during the periodwhen the revised standards are put intoeffect, it is unlikely that the standardscould result in any net increase innational employment levels.

• Neither the BLS data nor the input-output model used by DOE include thequality or wage level of the jobs. Onereason that the demand for laborincreases in the model may be that thejobs expected to be created pay less than

the jobs being lost. The benefits fromany potential employment gains wouldbe reduced if job quality and pay arereduced.

• The net benefits from potentialemployment changes are a result of theestimated net present value of benefitsor losses likely to result from the revisedstandards; it may not be appropriate toseparately identify and consider anyemployment impacts beyond thecalculation of net present value.

Taking into consideration theselegitimate concerns regarding theinterpretation and use of theemployment impacts analysis, theDepartment concludes only that theproposed water heater standards arelikely to produce employment benefitsthat are sufficient to offset fully anyadverse impacts on employment in thewater heater or energy industries.

F. Conclusion

1. Comments on Standard Levels.Several stakeholders made specificrecommendations for standard levelsduring the workshops held prior topublication of the proposed rule or afterpublication of the proposed rule. We listthese below to show the range ofstandard levels stakeholders believe areeconomically justified and technically

feasible. In the formula for water heaterstandards, the letter ‘‘V’’ stands for ratedvolume as given in the statute.

The American Gas Associationrecommended EF =0.64—0.0019V forgas water heaters. (AGA, No. 110 at 2)ACEEE recommended EF =0.98—0.00132V for electric and EF =0.69—0.0019V for gas water heaters. (ACEEE,No. 71 at 9). The water heatermanufacturer Bradford Whiterecommended EF =0.94—0.0013V forelectric, EF =0.65—0.0019V for gas andno change for oil-fired water heaters.(Bradford White, No. 108 at 7) The Cityof Palo Alto recommended EF =0.64—0.0019V for gas water heaters. (City ofPalo Alto, No. 136 at 2) The EdisonElectric Institute recommended EF=0.66—0.0019V for gas water heaters.(EEI, No. 105 at 3). The Electric PowerResearch Institute recommended EF=0.95—0.00132V for electric waterheaters. (EPRI, No. 104 at 3). GAMArecommended EF =0.95—0.00132V forelectric and EF =0.65—0.0019V for gaswater heaters. (GAMA, No. 71 at 3 & 4).The Northwest Power Planning Councilrecommended EF =0.97—0.00132V forelectric and EF =0.68—0.0019V for gaswater heaters. (NWPPC, No. 163 at 4).The efficiency standards recommendedin these comments are based on the



analysis for the proposed rule and otherinformation available to theseorganizations making recommendations.

2. Proposed Revised Standard.Section 325(o)(2)(A), 42 U.S.C.6295(o)(2)(A), of the Act specifies thatany new or amended energyconservation standard for any type (orclass) of covered product shall bedesigned to achieve the maximumimprovement in energy efficiency whichthe Secretary determines istechnologically feasible andeconomically justified. In determiningwhether a standard is economicallyjustified, the Secretary must determinewhether the benefits of the standardexceed its burdens. Section325(o)(2)(B)(i), 42 U.S.C.6295(o)(2)(B)(i). The amended standardmust ‘‘result in significant conservation

of energy.’’ Section 325(o)(2(B)(iii)(3)(B),42 U.S.C. 6295(o)(B)(iii)(3)(B). TheSecretary has eliminated the maximumtechnologically feasible levels forelectric and gas-fired water heaters andhas eliminated any revised standardlevels for oil-fired water heaters basedon the analysis in the proposed rule. Allof the design options included in ouranalysis are technologically feasiblesince they are commercially available.

We consider the impacts of standardson gas and electric water heaters at eachof four standard levels, beginning withthe most efficient level, i.e., standardlevel four. We then consider lessefficient levels. Standard levels two andthree are different combinations ofefficiency levels for electric and gaswater heater classes. For gas-fired waterheaters, standard levels one and three

are the same, though at lower efficiencythan that found in standard level two.For electric water heaters, no standardlevels are repeated and the efficiency ofeach succeeding standard level ishigher. For oil fired water heaters, thereare no changes from the current levelsso this class is not shown but they wereincluded in the analysis. By combiningefficiency levels in this way, theDepartment is able to evaluate theimpacts of different combinations ofstandard levels to make an informeddecision on the merits of differentefficiency combinations.

To aid the reader as we discuss thebenefits or burdens of the trial standardlevels we have included a summary ofthe analysis results in Table 10.

TABLE 10.—SUMMARY ANALYSIS RESULTS BASED ON HFC–245FA BLOWN INSULATION

Trial Std1

Trial Std2

Trial Std3

Trial Std4

Total Quads Saved .......................................................................................... 3. 4.5 4.6 11.5NPV ($Billion) .................................................................................................. 1.2 ¥0.1 2.0 ¥24.9Emissions:

Carbon Equivalent (Mt) ............................................................................ 149 139 152 354NOX (kt) .................................................................................................... 175 215 273 459SO2 (kt) ..................................................................................................... **¥3 **¥11 **¥13 **¥64Cumulative Change in INPV ($ Million) .................................................... ¥8 ¥15 ¥15 ¥57

Life Cycle Cost ($):Electric ...................................................................................................... 36 32 23 ¥82Natural Gas .............................................................................................. 30 11 30 ¥244Propane Gas ............................................................................................ 97 77 97 ¥122

** Results only include household SO2 emissions reductions because SO2 emissions from power plants are capped by clean air legislation.Thus, SO2 emissions will only be negligibly affected by possible water heater standards.

We first considered trial standardlevel four, the most efficient level forthe two classes. Trial standard level foursaves about 11.5 quads of energy, asignificant amount. The emissionsreductions of 354 Mt of carbonequivalent and 459 kt of NOX aresignificant. There is a 64 kt increase inhousehold emissions of SO2 due toincreased shipments of oil-fired waterheaters. However, at this level,consumers experience negative LCCimpacts. They would lose $82 withelectric water heaters, $244 with naturalgas water heaters and $122 withpropane gas water heaters. Furthermore,the water heater industry would lose 27percent of its value and the nationwould have a loss in NPV of nearly $25billion. The Department concludes theresulting energy savings and emissionreductions at this level are outweighedby the negative economic impacts onthe nation, consumers andmanufacturers. Consequently, theDepartment concludes trial standardlevel four is not economically justified.

Next, we considered trial standardlevel three. This trial standard levelsaves about 4.6 quads of energy, asignificant amount. The emissionsreductions are significant: 152 Mt ofcarbon equivalent and 273 kt of NOX.There is a 13 kt increase in householdemissions of SO2 due to a slight increasein shipments of oil-fired water heaters.The national NPV of trial standard levelthree is $2.0 billion from 2004–2030.

The economic benefits to consumersare significant. The average LCC savingsfor consumers with electric, natural gasand propane gas water heaters are $23,$30 and $97, respectively. In trialstandard level three, 78 percent ofhouseholds with natural gas-fired waterheaters have LCC savings, for an averagesavings of $55, while 22 percentexperience LCC losses, for an averageloss of $54. In households with propanegas water heaters, the average LCCsavings are $117 for 89 percent of thehouseholds while only eleven percentexperience an average loss of $61. Forhouseholds with electric water heaters,59 percent have average LCC savings of

$80, while 41 percent experience anaverage LCC loss of $59.

For electric water heaters, the analysispredicts that 41 percent of allconsumers would experience no changeor some net cost with more efficientelectric water heaters. However, webelieve that there are costs or savingsnear the point of zero change in LCCthat consumers would be unable todistinguish in their yearly expenses. Wehave chosen ±2 percent of averagebaseline LCC as the band of noconsumer impact. We believe this smallpercentage, regardless of the actual totalLCC, is insignificant to the consumerbecause these LCC costs or savings arespread over monthly utility bills for thelife of the water heater. By applying atwo percent band of average LCC, wecan clearly show the significant netsavings and net costs associated with atrial standard level. This permits a moreinformed decision based on weighingthe significant benefits and burdens interms of consumer impact. The resultingranges are shown in Figure 9.6.2 in theTSD.



4 As DOE has determined, the benefits of today’sfinal rule outweigh the $15 million loss to theindustry. To review the support for thisdetermination, see the TSD at Chapters 12.5 andTable 12.1, 13.3.3.5 and Table 13.8, 13.3.4, and13.3.5.

5 The final standard is based on insulation blownwith HFC–245fa. We also compared the engineeringcost and performance for two alternative blowingagents, HFC–134a and cyclopentane. All threeblowing agents are EPA–SNAP approved but thereare concerns about availability and a single sourcesupplier with HFC–245fa. However, sinceengineering results are within two percent of HFC–245fa, we conclude that the use of either of thesealternative blowing agents would not change ourdecision.

We will use ±2 percent of baselineLCC to indicate no impact, positively ornegatively, on consumers. Therefore,only fifteen percent of consumers withelectric water heaters or twelve percentof consumers with natural gas waterheaters or five percent of consumerswith propane gas water heaters sustainany significant net costs under standardlevel 3. Similarly, 30 percent ofconsumers with electric water heaters or52 percent of consumers with naturalgas water heaters or 69 percent ofconsumers with propane gas waterheaters have significant net savings.

Two percent of average baseline LCCequals $56 for electric water heaters.Over the average life of 14 years for anelectric water heater, this is less than $4per year. For consumers with naturalgas and propane gas water heaters, twopercent of average baseline LCC is $31and $47, respectively. Over the averagelife of 9 years for gas water heaters, thisis less than $4 per year for natural gasand less than $6 per year for propanegas. We believe this is a small amountin terms of yearly expenditures and willnot adversely impact consumers’purchase decisions about water heaters,or their financial positions.Additionally, low-income and senior-only consumer subgroups exhibitsimilar distributions of costs andsavings. A similar small percentage oflow-income or senior only consumersare affected by higher costs.

The industry will lose about fivepercent ($15 million) of its INPV due toenergy efficiency standards. Theselosses are more than balanced by NPVgains to the nation of $2.0 billion, or 135times the industry losses. Industrylosses for trial standard level three dueto all Federal actions (CPSC, EPA andDOE) are fourteen percent of its INP, or$44 million. Even this level of losses isoffset by gains to the nation that are 46times the industry losses.4 Based on themanufacturer interviews, DOE believesthere will not be any plant closures oremployee layoffs.

In determining the economicjustification of trial standard level three,the Department has weighed thebenefits of energy savings, reducedaverage consumer LCC, significant andpositive NPV, and emissions reductionsand the burdens of a loss inmanufacturer net present value, andconsumer LCC increases for somehouseholds. After carefully consideringthe results of the analysis, DOE has

determined the benefits of trial standardlevel three outweigh its burdens and iseconomically justified. The Departmentalso concludes trial standard level threesaves a significant amount of energy andis technologically feasible.5 Therefore,the Department today adopts amendedenergy conservation standards for waterheaters at trial standard level three.

VI.Procedural Issues and RegulatoryReviews

A. Review Under the NationalEnvironmental Policy Act

In issuing the March 4, 1994,Proposed Rule for energy efficiencystandards for eight products, one ofwhich was water heaters, theDepartment prepared an EnvironmentalAssessment (DOE/EA–0819) that waspublished within the TSD for thatProposed Rule. (DOE/EE–0009,November 1993). We found theenvironmental effects associated withvarious standard levels for waterheaters, as well as the other sevenproducts, to be not significant, and wepublished a Finding of No SignificantImpact (FONSI). 59 FR 15868 (April 5,1994).

In conducting the analysis for theProposed Rule upon which today’sFinal Rule is based, the DOE evaluatedseveral design options suggested incomments to the screening document.As a result, the energy savings estimatesand resulting environmental effectsfrom revised energy efficiency standardsfor water heaters in that analysis differsomewhat from those presented forwater heaters in the 1994 ProposedRule. Nevertheless, the environmentaleffects expected from today’s Final Rulefall within the ranges of environmentalimpacts from the revised energyefficiency standards for water heatersthat DOE found in the 1994 FONSI notto be significant.

B. Review Under Executive Order 12866,‘‘Regulatory Planning and Review’s

The Department has determinedtoday’s regulatory action is an‘‘economically significant regulatoryaction’’ under Executive Order 12866,‘‘Regulatory Planning and Review.’’ 58FR 51735 (October 4, 1993).Accordingly, today’s action was subject

to review under the Executive Order bythe Office of Information and RegulatoryAffairs (OIRA) of the Office ofManagement and Budget.

There were no substantive changesbetween the draft we submitted to OIRAand today’s action. The draft and otherdocuments we submitted to OIRA forreview are a part of the rulemakingrecord and are available for publicreview in the Department’s Freedom ofInformation Reading Room, 1000Independence Avenue, SW,Washington, DC 20585, between thehours of 9:00 a.m. and 4:00 p.m.,Monday through Friday, except Federalholidays, telephone (202) 586–3142.

The proposed rule contained asummary of the Regulatory ImpactAnalysis (RIA), which focused on themajor alternatives considered in arrivingat the approach to improving the energyefficiency of consumer products. Thereader is referred to the complete RIA,which is contained in the TSD, availableas indicated at the beginning of thisnotice. It consists of: (1) a statement ofthe problem addressed by thisregulation, and the mandate forgovernment action; (2) a description andanalysis of the feasible policyalternatives to this regulation; (3) aquantitative comparison of the impactsof the alternatives; and (4) the economicimpact of the proposed standard.

The RIA calculates the effects offeasible policy alternatives to waterheater energy efficiency standards, andprovides a quantitative comparison ofthe impacts of the alternatives. Weevaluate each alternative in terms of itsability to achieve significant energysavings at reasonable costs, and wecompare it to the effectiveness of trialstandard level 3 adopted by today’sFinal Rule.

We created the RIA using a series ofregulatory scenarios (with variousassumptions), which we used as inputto the shipments model for waterheaters. We used the results from theshipments model as inputs to the NESspreadsheet calculations.

DOE identified the following sevenmajor policy alternatives for achievingconsumer product energy efficiency.These alternatives include:

• No New Regulatory Action.• Informational Action.• Product Labeling.• Consumer Education.• Prescriptive Standards.• Financial Incentives.

—Tax credits—Rebates—Low income and seniors subsidy

• Voluntary Energy Efficiency Targets(5 Years, 10 Years).

• Mass Government Purchases.



• The Proposed Approach(Performance Standards).

We have evaluated each alternative interms of its ability to achieve significantenergy savings at reasonable costs

(Table 11), and have compared it to theeffectiveness of this Final Rule.

TABLE 11.—ALTERNATIVES CONSIDERED

Policy alternatives NPV$ in billions

Energy savingsquads

Consumer Product Labeling ............................................................................................................................ ¥$0.003 0.08Consumer Education ....................................................................................................................................... 0.40 0.49Prescriptive Standards ..................................................................................................................................... 0.99 0.74Consumer Tax Credits ..................................................................................................................................... 0.18 0.14Consumer Rebates High Efficiency ................................................................................................................. 0.18 0.14Consumer Rebates Heat Pump ...................................................................................................................... 0.85 0.50Low Income and Seniors Subsidy ................................................................................................................... 0.05 0.37Manufacturer Tax Credits ................................................................................................................................ 0.04 0.03Voluntary Efficiency Target (5 year delay) ...................................................................................................... 0.92 2.8Voluntary Efficiency Target (10 year delay) .................................................................................................... 0.47 2.1Mass Government Purchases ......................................................................................................................... 0.01 0.06Performance Standards ................................................................................................................................... 2.0 4.6

NPV = Net Present Value (2003–2030, in billion 1998 $) (does not include government expenses)Savings = Energy Savings (Source Quads)

For a complete discussion of theassumptions used to develop thealternative regulatory impacts, see theproposed rule. 65 FR 25042, 25080–25081 (April 28, 2000). All of thesealternatives must be gauged against theperformance standards in this FinalRule. The results in Table 11 aboveshow that none of the alternativeregulatory approaches meet or exceedthe estimated national cost and energysavings from revised energy efficiencystandards. Additionally, several of thealternatives would require new enablinglegislation, since authority to carry outthose alternatives does not existpresently.

C. Review Under the RegulatoryFlexibility Act

The Regulatory Flexibility Act of1980, 5 U.S.C. 601–612 requires anassessment of the impact of regulationson small businesses. The SmallBusiness Administration’s definition fora small business in the water heaterindustry is one that employs 500 orfewer employees.

The water heater industry ischaracterized by five firms accountingfor nearly 99 percent of sales. Smallerbusinesses and firms, which makespecialty water heaters and supplyniche markets, share one percent of themarket. We are aware of three smallfirms: Bock Water Heaters, HeatTransfer Products, and Vaughn.

Of the three small firms, Bockmanufactures oil-fired water heaters thathave not been affected by this rule.Therefore, Bock will not suffer anyadverse impacts due to the rule. Theother two firms, Heat Transfer andVaughn, both make electric waterheaters that are affected by this rule. In

the GAMA directory, these firms onlylist electric water heaters that meet orexceed the standard level in this rule.Although the rule raises the standardlevel enough to impact their nichemarket for high efficiency electric waterheaters, these manufacturers alsomanufacture very long life products thatincorporate other features which willhelp them preserve their niche market.The Department has taken this intoconsideration in this rulemaking.

The Department prepared amanufacturing impact analysis that itshared with all the water heatermanufacturers. The smallermanufacturers did not choose to discussthe impacts of the trial standard levelson their firms.

In view of the information discussedabove, the Department has determinedand hereby certifies pursuant to Section605(b) of the Regulatory Flexibility Actthat, for this particular industry, thestandard levels in today’s Final Rulewill not ‘‘have a significant economicimpact on a substantial number of smallentities,’’ and it is not necessary toprepare a regulatory flexibility analysis.

D. Review Under the PaperworkReduction Act

No new information or record keepingrequirements are imposed by thisrulemaking that would require Office ofManagement and Budget clearanceunder the Paperwork Reduction Act. 44U.S.C. 3501 et seq.

E. Review Under Executive Order 12988,‘‘Civil Justice Reform’’

With respect to the review of existingregulations and the promulgation ofnew regulations, Section 3(a) ofExecutive Order 12988, ‘‘Civil Justice

Reform,’’ 61 FR 4729 (February 7, 1996),imposes on Executive agencies thegeneral duty to adhere to the followingrequirements: (1) Eliminate draftingerrors and ambiguity; (2) writeregulations to minimize litigation; (3)provide a clear legal standard foraffected conduct rather than a generalstandard; and (4) promote simplificationand burden reduction.

With regard to the review required bySection 3(a), Section 3(b) of ExecutiveOrder 12988 specifically requires thatExecutive agencies make everyreasonable effort to ensure that theregulation: (1) Clearly specifies thepreemptive effect, if any; (2) clearlyspecifies any effect on existing Federallaw or regulation; (3) provides a clearlegal standard for affected conductwhile promoting simplification andburden reduction; (4) specifies theretroactive effect, if any; (5) adequatelydefines key terms; and (6) addressesother important issues affecting clarityand general draftsmanship under anyguidelines issued by the AttorneyGeneral. Section 3(c) of Executive Order12988 requires Executive agencies toreview regulations in light of applicablestandards in Section 3(a) and Section3(b) to determine whether they are metor it is unreasonable to meet one ormore of them. DOE reviewed today’sFinal Rule under the standards ofSection 3 of the Executive Order anddetermined that, to the extent permittedby law, the final regulations meet therelevant standards.

F. ‘‘Takings’’ Assessment Review

The Department has determinedpursuant to Executive Order 12630,‘‘Governmental Actions and Interferencewith Constitutionally Protected Property



Rights,’’ 53 FR 8859 (March 18, 1988)that this regulation would not result inany takings that might requirecompensation under the FifthAmendment to the United StatesConstitution.

G. Review Under Executive Order13132, ‘‘ Federalism’’

Executive Order 13132, 64 FR 43255(August 4, 1999) requires agencies todevelop an accountable process toensure meaningful and timely input byState and local officials in thedevelopment of regulatory policies thathave ‘‘federalism implications.’’ Policiesthat have federalism implications aredefined in the Executive Order toinclude regulations that have‘‘substantial direct effects on the States,on the relationship between the nationalgovernment and the States, or on thedistribution of power andresponsibilities among the variouslevels of government.’’ Under ExecutiveOrder 13132, DOE may not issue aregulation that has federalismimplications, that imposes substantialdirect costs, and that is not required bystatute, unless the Federal governmentprovides the funds necessary to pay thedirect compliance costs incurred by theState and local governments, or DOEconsults with State and local officialsearly in the process of developing theproposed regulation. DOE also may notissue a regulation that has federalismimplications and that preempts Statelaw unless it consults with State andlocal officials early in the process ofdeveloping the proposed regulations.

The statutory authority under whichthis Final Rule is being promulgatedspecifically addresses the effect ofFederal rules on State laws orregulations concerning testing, labelingand standards. Section 327 of EPCA, asamended, 42 U.S.C. 6297. Generally allsuch State laws or regulations aresuperceded by EPCA, unless specificallyexempted in Section 327. TheDepartment can grant a waiver ofpreemption in accordance with theprocedures and other provisions ofSection 327(d) of the Act, as amended.42 U.S.C. 6297(d). States can filepetitions for exemption frompreemption with the Secretary and havetheir request reviewed on a case-by-casebasis.

DOE has examined today’s Final Ruleand has determined that althoughrevised water heater standards wouldpreempt State laws in this area, theywould not have a substantial directeffect on the States, on the relationshipbetween the national government andthe States, or on the distribution ofpower and responsibilities among the

various levels of government. No furtheraction is required by Executive Order13132.

H. Review Under the UnfundedMandates Reform Act of 1995

With respect to a proposed regulatoryaction that may result in theexpenditure by State, local, and tribalgovernments, in the aggregate, or by theprivate sector, of $100 million or more(adjusted annually for inflation) in anyone year, Section 202(a) of theUnfunded Mandates Reform Act of 1995(UMRA), 2 U.S.C. 1531 et seq., requiresa Federal agency to publish a writtenstatement concerning estimates of theresulting costs, benefits and other effectson the national economy. 2 U.S.C.1532(a), (b). UMRA also requires eachFederal agency to develop an effectiveprocess to permit timely input by state,local, and tribal governments on aproposed significant intergovernmentalmandate. The Department’s consultationprocess is described in a noticepublished in the Federal Register. 62 FR12820 (March 18, 1997). Today’s FinalRule may impose expenditures of $100million or more in a year in the privatesector. It does not contain a Federalintergovernmental mandate.

Section 202 of UMRA authorizes anagency to respond to the contentrequirements of UMRA in any otherstatement or analysis that accompaniesthis Final Rule. 2 U.S.C. 1532(c). Thecontent requirements of Section 202(b)of UMRA relevant to the private sectormandate substantially overlap theeconomic analysis requirements thatapply under Section 325(o) of EPCA, asamended, and Executive Order 12866.The Supplementary Information sectionof the Notice of Final Rulemaking andthe analysis contained in the‘‘Regulatory Impact Analysis’’ section ofthe TSD for this Final Rule respond tothose requirements.

DOE is obligated by Section 205 ofUMRA, 2 U.S.C. 1535, to identify andconsider a reasonable number ofregulatory alternatives beforepromulgating a rule for which a writtenstatement under Section 202 is required.From those alternatives, DOE mustselect the least costly, most cost-effective or least burdensome alternativethat achieves the objectives of the rule,unless DOE publishes an explanation ofwhy a different alternative is selected orthe selection of such an alternative isinconsistent with law. As required bySection 325(o) of EPCA, as amended, 42U.S.C. 6295(o), today’s Final Ruleestablishes energy conservationstandards for water heaters that aredesigned to achieve the maximumimprovement in energy efficiency that

DOE has determined is bothtechnologically feasible andeconomically justified. A full discussionof the alternatives considered by DOE ispresented in the ‘‘Regulatory ImpactAnalysis’’ section of the TSD for thisFinal Rule.

I. Review Under the Treasury andGeneral Government AppropriationsAct of 1999

Section 654 of the Treasury andGeneral Government AppropriationsAct, 1999 (Pub. L. No. 105–277) requiresFederal agencies to issue a FamilyPolicymaking Assessment for anyproposed rule or policy that may affectfamily well-being. Today’s Final Rulewould not have any impact on theautonomy or integrity of the family asan institution. Accordingly, DOE hasconcluded that it is not necessary toprepare a Family PolicymakingAssessment.

J. Review Under the Plain LanguageDirectives

Section 1(b)(12) of Executive Order12866 requires that each agency draft itsregulations so that they are simple andeasy to understand, with the goal ofminimizing the potential for uncertaintyand litigation arising from suchuncertainty. Similarly, the Presidentialmemorandum directs the heads ofexecutive departments and agencies touse plain language in all proposed andFinal Rulemaking documents publishedin the Federal Register.63 FR 31883(June 1, 1998).

Today’s rule uses the followinggeneral techniques to abide by Section1(b)(12) of Executive Order 12866 andthe Presidential memorandum. 63 FR31883 (June 1, 1998):

• Organization of the material toserve the needs of the readers(stakeholders).

• Use of common, everyday words.• Shorter sentences and sections.

K. Congressional Notification

As required by 5 U.S.C. 801, DOE willsubmit to Congress a report regardingthe issuance of today’s Final Rule priorto the effective date set forth at theoutset of this notice. DOE also willsubmit the supporting analyses to theComptroller General (GAO) and makethem available to each House ofCongress. The report will state that ithas been determined that the rule is a‘‘major rule’’ as defined by 5 U.S.C.804(2).

List of Subjects in 10 CFR Part 430

Administrative practice andprocedure, Energy conservation,Household appliances.



1 We note that some manufacturers havesuggested that DOE underestimated theperformance capabilities of alternative blowingagents. If these suggestions prove correct, waterheater manufacturers may in fact be able to complywith the proposed standard for more models, whileusing water-based blowing agents. We also note thatit’s possible that manufacturers may in fact be ableto engineer design options using water-basedblowing agents with a greater performancecapability or lower cost than they now anticipate.

Issued in Washington, DC, on December26, 2000.Dan Reicher,Assistant Secretary, Energy Efficiency andRenewable Energy.

For the reasons set forth in thepreamble, Part 430 of Title 10, Code ofFederal Regulations, is amended as setforth below.

PART 430—ENERGY CONSERVATIONPROGRAM FOR CONSUMERPRODUCTS

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

Authority: 42 U.S.C. 6291–6309, 28 U.S.C.2461 note.

2. Section 430, Appendix E to SubpartB of Part 430 is amended in Section 1by adding paragraph 1.16 to read asfollows:

Appendix E to subpart B of Part 430—Uniform Test Method for Measuring theEnergy Consumption of Water Heaters

1. Definitions* * * * *

1.16 Tabletop water heater means awater heater in a rectangular boxenclosure designed to slide into akitchen countertop space with typical

dimensions of 36 inches high, 25 inchesdeep and 24 inches wide.* * * * *

3. Section 430.32(d) of subpart C isamended by revising paragraph (d) toread as follows:

§ 430.32 Energy and waterconservation standards and effectivedates.* * * * *

(d) Water heaters.The energy factor of water heaters

shall not be less than the following forproducts manufactured on or after theindicated dates.

Product class Energy factor as of January 1,1990

Energy factor as of of April 15,1991

Energy factor as of January 20,2004

1. Gas-fired Water Heater ............. 0.62 ¥ (.0019 × Rated StorageVolume in gallons).

0.62 ¥ (.0019 × Rated StorageVolume in gallons).

0.67 ¥ (0.0019 × Rated StorageVolume in gallons).

2. Oil-fired Water Heater ................ 0.59 ¥ (.0019 × Rated StorageVolume in gallons).

0.59 ¥ (.0019 × rated StorageVolume in gallons).

0.59¥(0.0019 × Rated StorageVolume in gallons).

3. Electric Water Heater ................ 0.95 ¥ (0.00132 × Rated StorageVolume in gallons).

0.93 ¥ (0.00132 × Rated StorageVolume in gallons.

0.97¥(0.00132 × Rated StorageVolume in gallons).

4. Tabletop Water Heater .............. 0.95 ¥ (0.00132 × Rated StorageVolume in gallons).



5. Instantaneous Gas-fire WaterHeater.




6. Instantaneous Electric WaterHeater.




Note: The Rated Storage Volume equals the water storage capacity of a water heater, in gallons, as specified by the manufacturer.

* * * * *

Appendix

[The following letter from the Department ofJustice will not appear in the Code of FederalRegulations.]Department of Justice,Antitrust Division, Joel I. Klein Assistant

Attorney GeneralMain Justice Building, 950 Pennsylvania

Avenue, NW, Washington, DC 20530–0001, (202) 514–2401/(202) 616–2645 (f),[email protected]

July 10, 2000.Mary Anne Sullivan,General Counsel, Department of Energy,

Washington, DC 20585Dear General Counsel Sullivan: I am

responding to your May 10, 2000 letterseeking the views of the Attorney Generalabout the potential impact on competition ofthe proposed energy efficiency standards forwater heaters, Docket No. EE–RM–97–900.Your request was submitted pursuant toSection 325(o)(2)(B)(i) of the Energy Policyand Conservation Act, 42 U.S.C. 6291, 6295,which requires the Attorney General to makea determination of the impact of anylessening of competition that is likely toresult from the imposition of proposedenergy efficiency standards. The AttorneyGeneral’s responsibility for responding torequests from other departments about theeffect of a program on competition has been

delegated to the Assistant Attorney Generalfor the Antitrust Division in 28 CFR 0.40 (g).

We have reviewed the proposed standards,the supplementary information published inthe Federal Register notice, the TechnicalSupport Document, and information fromwater heater manufacturers, their suppliers,and other interested parties. The AntitrustDivision has concluded that the proposedstandards could have an adverse effect oncompetition because water heatermanufacturers may have to use an input thatwill be produced by only one source. We donot anticipate that the proposed standardwill affect competition among water heatermanufacturers. Rather, competition toprovide heater manufacturers with blowingagents could be adversely affected, withresulting cost increases to consumers.

In the analysis of the proposed standardthat the Department of Energy published inthe Federal Register, the only design optionsfor affected electric water heaters that meetthe DOE’s proposed standard require use ofHFC–245fa as a blowing agent for insulation.Insulation is an essential part of a waterheater, and HFC–245fa is a patented productthat has only one supplier. DOE’s publishedanalysis further concludes that gas-firedwater heaters have design options that wouldeliminate the need for HFC–245fa, but atsignificant added costs.

Water heater manufacturers have objectedto the proposed standard on the grounds thattheir need to rely on a sole source will make

them vulnerable to supply disruptions andmonopoly pricing. Based on the analysis thatDOE published, the concerns of water heatermanufacturers regarding HFC–245fa, and ourinterviews with industry participants, theAntitrust Division has concluded thatcompetition could be adversely affected bythe adoption of the proposed standard.1 TheDepartment urges the Department of Energyto take into account this impact oncompetition in determining its final energyefficiency standard for water heaters and toconsider altering the standard so thatmanufacturers may meet the standard for allaffected models using blowing agents forinsulation other than HFC–245fa withoutadding significantly to the costs ofmanufacturing water heaters.

Sincerely,Joel I. Klein[FR Doc. 01–1081 Filed 1–16–01; 8:45 am]BILLING CODE 6450–01–P


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