The DOE/APGA Furnace Rule Settlement: Avoiding Unintended Consequences

“In theory, higher furnace efficiency standards sound like a good thing …. However, the impact … would lead many consumers to switch from natural gas furnaces to heating alternatives that are less expensive on a first-cost basis, but are ultimately less energy efficient and result in higher consumer costs in the long term.”

Earlier this month, the American Public Gas Association (APGA) reached a mediated settlement agreement with the U.S. Department of Energy on APGA’s petition challenging regional furnace standards adopted by DOE in 2011 via a direct final rule (DFR). While some haved called the settlement a “setback” and “cave-in,” the revised increased efficiency standard promises to avoid the unintended consequences that otherwise would dilute or even reverse the efficiency program’s goals.

Background

The new standards mandate an increase in the minimum annual fuel utilization efficiency (AFUE) from 78% to 90% for natural gas furnaces installed in 30 northern states, and from 78% to 80% in the southern states (the “Furnace Rule”). As part of the settlement, DOE agreed to withdraw the gas furnace portion of the Furnace Rule and initiate a traditional notice and comment rulemaking for new gas furnace efficiency standards.

This settlement advances the shared goals of improved energy efficiency, decreased emissions, and reduced energy costs for consumers. What motivated our petition, and was set forth clearly in our briefs to the court, was a belief that this was a poorly crafted rule, enacted in a hasty manner, and without adequate public comment.

Our members, community-owned (i.e., consumer/customer-owned) not-for-profit gas utilities, readily recognized that for many American consumers the Furnace Rule, although intended to improve energy efficiency, would ultimately undermine energy efficiency, increase emissions, and increase the costs to heat their home.

Authentic Energy Efficiency Needed

While APGA supports authentic energy efficiency efforts, we will not support efficiency rules and rulemakings in name only. And, the Furnace Rule was just that— an efficiency rule in name only.

The Furnace Rule, as proposed for 30 northern states, failed to segregate the new market from the replacement market and thus subjected itself to unintended consequences. Rather than improving energy efficiency, especially those in the southern tier of those northern states, and for many consumers in the replacement market, the rule as originally proposed would have:

(1) Produced costs exceeding the benefits;

(2) Burdened consumers that are sensitive to up-front appliance purchase expense (“first-costs’), and;

(3) Driven some consumers to less costly alternatives that, on a full fuel cycle basis, are less efficient, generate higher emissions, and would be more expensive over the life of the heating unit.

In theory, higher furnace efficiency standards sound like a good thing for consumers and for the environment. However, the impact of this Furnace Rule on the replacement market would lead many consumers to switch from natural gas furnaces to heating alternatives that are less expensive on a first-cost basis, but are ultimately less energy efficient and result in higher consumer costs in the long term.

Full-Fuel Cycle

I remember living in a condominium in northern Virginia in the mid-1990s with a heat pump. From December through March, my red emergency heat light would be illuminated for days at a time. My power bill reflected those “red light” days. At the time, more than 50% of the power generated in our service territory came from coal.

Compare the electric heat pump to its natural-gas competition. On a full fuel cycle basis, the direct use of natural gas is one of the most efficient uses of energy (90% compared to 27% for electricity).

This is why APGA is a long-standing supporter of energy efficiency–and why comparative full-fuel analysis is so important, albeit an inconvenient truth for those who do not want to belief that consumers have alternatives with which gas must compete.

Fuel Switching

APGA members are concerned with fuel switching, especially in the replacement market. This switching would occur because only condensing furnaces would have met the proposed 90% AFUE standard.

Many installed furnaces in the northern region are non-condensing furnaces (which meet the current 80% AFUE standard). Extensive and expensive venting modifications must be made to accommodate a 90% AFUE condensing furnace. The Furnace Rule would have caused many consumers to incur an additional estimated $1,500-$2,200 per installation (not to mention the increased purchase price of the higher efficient furnace).

In row houses, townhouses, and multi-family dwellings (types of buildings very common in the northern region) a non-condensing furnace may not even be an option because the side venting required is either impossible due to physical limitations, illegal due to building code issues, and/or impractical due to prohibitively high cost. The rule offered no alternatives.

These higher first costs would also deter landlords from installing natural gas furnaces in investment properties, resulting in less efficiency and higher heating costs for tenants. Monthly heating costs are borne by the tenant, whereas the landlord only bears the burden of the upfront cost for the furnace.

Unlike a homeowner, a landlord may not see a return on their more expensive furnace and venting costs. Common sense would lead one to believe that a landlord would look to find lower-cost alternatives.

While the operating cost savings of a higher efficient gas furnace may benefit a consumer in the long run, many consumers, especially those in lower income brackets, do not have the luxury of calculating their operating lifecycle costs versus first costs. Their primary concern is whether they can afford the new appliance at all, even without the cost hurdle of new venting.

For these consumers, the higher up-front cost for the installation and purchase of a 90% condensing gas furnace will mean one of two things: either they defer replacing a furnace that is at the end of its useful life (thereby creating other issues) or they switch to an initially less expensive but less efficient alternative.

Failure of Waiver Negotiations

Early in the process, APGA tried to work with other stakeholders on a waiver that might ameliorate the hardship and burden on consumers in the replacement market. APGA entered into that waiver negotiation process in good faith, hoping to avoid the costs and time of a litigation battle. Ultimately, the waiver proposed by the petitioning stakeholders group proved unworkable to other parties in the proceeding.

Assuming an agreement could even be reached on what situations would merit a waiver, a waiver would require that the installers be trained to evaluate whether a building met those agreed-upon requirements. At a minimum, the waiver would create an additional level of training for contractors.

APGA’s suggestion to allow online training was dismissed. For those who do not live in a major metropolitan area, time and travel costs can be expensive. Thus, in many areas, many if not most installers would not be certified to provide the waiver.

Another issue is availability. Even if a consumer was able to find a certified installer and be granted a waiver, a non-condensing natural gas furnace may not be immediately available. If a customer finds himself without a furnace, he needs his contractor to immediately replace the unit. To ship one from the southern region would further increase costs and time delay to when the consumer has their restored. Unable to quickly install an 80% gas furnace, many consumers may simply install a cheaper, less efficient alternative.

One Size Does Not Fit All

In some cases, as with furnaces, efficiency is not a goal that can be attained with a one-size-fits-all regulation. The United States is a climate diverse country with heating and cooling needs that vary dramatically by region. What makes sense in Minnesota or upstate New York may not necessarily be the remedy in Missouri or Pennsylvania.

By withdrawing the rule, DOE affords the country and all stakeholders an opportunity to take the time necessary to approach this important rulemaking with a more reasoned, balanced look.

It is our sincere hope that we can work with DOE and all other interested stakeholders on a new set of furnace standards that will meaningfully increase energy efficiency, reduce emissions, and save consumers dollars.

We believe this can be done in a way that does not bring about fuel switching and turn customers away from natural gas. We can move towards a new furnace rule that respects regional differences, different technologies, and the cost pressures faced by U.S. consumers.

—————— 

Bert Kalisch is President & CEO of American Public Gas Association, a nonprofit trade organization representing America’s publicly owned natural gas local distribution companies.