A recent Department of Energy (DOE) announcement could leave millions of dollars of HVAC inventory stranded in warehouses.
DATE OF INSTALL VS. DATE OF MANUFACTURE
The DOE announced on July 2 that residential HVAC appliances regulated under the pending regional efficiency standards (non-weatherized gas furnaces, mobile home gas furnaces, and non-weatherized oil furnaces) must be installed no later than May 1, 2013. Weatherized gas furnaces, central air conditioners, and heat pumps will follow the same rules, with a Jan. 1, 2015 compliance date.The announcement creates a law that all residential furnaces, central air conditioners, and heat pumps performing below 90-percent AFUE must be installed in the Northern region no later than May 1, 2013. Anything installed in the designated Northern region on May 2, 2013 or after will be in violation of the law.
The DOE previously utilized a "manufacture date" theory of enforcement when implementing new minimum-efficiency legislation. The manufacture date method allows equipment that was manufactured prior to an implementation date to be sold and installed after the compliance date.
For example, on Jan. 23, 2006, the DOE adopted a new minimum efficiency standard, requiring that all central air conditioners perform at 13 SEER levels. Equipment, including 10 SEER systems that met the previous minimum-efficiency standard, was legally allowed to be marketed, sold, and installed - as long as they weren't manufactured after the Jan. 23, 2006 deadline.
Lindsey Geisler, office of public affairs, DOE, shared that DOE was directed by Congress to follow the "install by" method of enforcement for its regional standards efficiency legislation.
"As directed by Congress in the EISA 2007 amendments of the Energy Policy and Conservation Act (EPCA), the compliance date for regional energy conservation standards for residential furnaces, central air conditioners, and heat pumps is specifically tied to the date of installation," she said. "The statute states that 'any additional and more restrictive regional standard... shall apply to any such product installed on or after the effective date of the standard...' "
The DOE released the July 2 guidance document in response to an industry question requesting clarification of the department's final rule, published June 27, 2011, which did not clearly state whether the DOE was opting for the "install by" or "manufacture by" method.
A SUDDEN IMPACT
Prior to the July 2 announcement, HVACR contractors, manufacturers, and distributors believed regional standards compliance would follow the typical "manufacture date" methodology, just as all previous efficiency rules had. The abruptness of the announcement has left numerous industry professionals questioning the DOE's motives."The DOE's direct final rule did not state that this regulation would include an installation ban," said Jonathan Melchi, director of government affairs, Heating, Air-conditioning, and Refrigeration Distributors International (HARDI). "The DOE has said that they meant for this to be enforced through an installation ban, but never put it in writing. I don't believe the DOE presented this rule to the Office and Management and Budget with the 'install by' line of thinking and, in a best case scenario, I believe the DOE acted inadvertently. It just baffles me that they've done this without thinking of the consequences."
Upon passage of a final rule, an entity is required to test the impact of its ruling through the Regulatory Fairness Act (RFA), which requires that agencies determine, to the extent feasible, the rule's economic impact on small entities, explore regulatory options for reducing any significant economic impact on a substantial number of such entities, and explain their ultimate choice of regulatory approach.
Melchi feels that the DOE did not follow the proper channels when issuing this guidance.
"When the DOE issued their direct final rule, HARDI maintained that they needed to perform a regulatory flexibility analysis, to determine if small businesses will be adversely harmed by this rule. To our knowledge, the DOE did not contact a single distributor regarding the issue of stranded inventory, and I'm willing to wager they never contacted any contractors or manufacturers either," he said. "Our members have told us that this rule would exceed the threshold at which an RFA would become mandatory. I question how the DOE was able to make a judgment that an RFA was not required without talking to a single contractor, distributor, or manufacturer.
"The fact that there is this installation ban, which we have no idea how it will be enforced, or how the entire enforcement procedures will occur, has really complicated things for distributors."
Charlie McCrudden, vice president of government relations, Air Conditioning Contractors of America (ACCA), believes the DOE's sudden about-face could leave a lasting impact.
"It is clear that DOE does not intend to allow for a sell through period for natural gas furnaces or mobile home furnaces," he said. "This determination has the potential to wreak havoc on hundreds of millions of dollars' worth of inventory and shorten supplies of residential heating equipment in the North region in the months before the new rule's compliance date."
STRANDED INVENTORY
Steve Porter, vice president of product development, Johnstone Supply, Portland, Ore., estimates that regional standards will cost the industry $137 million in stranded inventory, with an additional $100 million tacked on for enforcement costs."Everyone seems to believe that since the 80-percent AFUE units will no longer be allowed in the North, that distributors will easily be able to ship them south," said Porter. "That simply isn't true. The Northern 80-percent units don't match up with the energy demands of the South. The South doesn't require the same Btu levels, and the blowers don't match.
"Additionally, a distributor isn't going to buy inventory from another distributor without a large discount, therefore we're expecting to earn about 25 cents on the dollar for each of these units" he said. "It all looks nice on paper; however it simply isn't apples-to-apples. It's clear this rule was made using a total lack of business understanding."
Porter called DOE's sudden adoption of the "install by" philosophy unprecedented.
"This move by the DOE is very hard to manage. The only solution for a distributor is to be spot on with its inventory," he said. "This decision was not well thought out and I don't think there is a 'win' in this for anybody."
Dan Hinchman, president, Aireco Supply Inc., Laurel, Md., said they are diligently working to inform the general public about the pending changes so that homeowners don't inadvertently install a non-compliant system in a neighboring state.
"In essence, this will force many people to make the move to the higher efficiency equipment sooner, since firms will be trying to get rid of all non-compliant inventory lest they end up with stranded inventory," he said. "In addition, contractors that are in the middle of new construction projects that may not be finished by the deadlines will find themselves in the unenviable position of having to finish a job with higher efficiency equipment, which is much more expensive."
Jim Luce, CEO and owner, Luce, Schwab & Kase Inc., Fairfield, N.J., has not ordered any 80-percent AFUE furnaces in the last six months, and has begun discounting his current inventory of 80-pecenters, in hopes of moving them from the warehouse sooner than later.
"The fact that the DOE has set a hard deadline of May 2013 as an installation date is terribly unfair to wholesalers who have the equipment in stock and are now forced to liquidate the units at a loss," he said. "The closer we get to the deadline, the more difficult it will be to sell the furnaces, and ultimately, some will have to be sold at a loss, or unloaded to a Southern wholesaler at below cost pricing. Either way, it's a losing situation for HVAC distributors."
Richard Cook, president, Johnson Supply, Houston, encourages all citizens to exercise their right to vote.
"In our opinion, this is one of the worst ideas the DOE has ever formulated, and that is saying something," he said. "Concern for the independent business person, the effect this will have on the supply chain and consumer, and how this can possibly be enforced have not been considered - which is somewhat typical of this administration. If this policy holds up, it will definitely impact our stocking decisions as we approach 2015."
