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Dec 29

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DOE’s dishwasher regulation should not have used payback analysis

In October 2012, the Department of Energy (DOE) published its final rule establishing both a maximum per-year energy consumption standard and a per-cycle water use standard. The new rule requires all “standard” residential dishwashers sold in the United States after May, 2013 to use (i) fewer than 307 kilowatt hours of energy per year and (ii) not more five gallons per use, from the current water limit of 6.5 gallons per cycle. “compact” dishwashers have lower water and energy usage allowances.

The DOE acknowledged that the regulation could only occur if economically justified, using a cost/benefit analysis. But the DOE’s calculations were fatally flawed because (i) the analysis considered compared worldwide benefits, compared to the cost that just Americans will pay, and (ii) the analysis failed to consider the time value of money. Even though the DOE acknowledged in the final rule that these failures were bought to their attention, the DOE made no changes in their calculations or justification.

A September 14, 2012 Public Comment prepared by the Regulatory Studies Center of the George Washington University is one such critique. The George Washington University public comment nicely summarizes the DOE’s claimed costs and benefits, as follows:

… benefits are monetized using the global value of reducing domestic emissions, further complicating the analysis. While the costs will be borne by the American consumers and businesses that are directly affected by the rule, the reduction in carbon emissions resulting from this rule is monetized based on its global, rather than localized, value. That is, the Department weighs not only domestic but international benefits from this rule against entirely domestic costs, which swings the analysis in favor of stricter efficiency standards.

This appears to violate the directive in OMB Circular A-4, reinforced in the Regulatory Impact Analysis Primer, that states: ‘The analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where the agency chooses to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.’…

Instead of focusing on domestic benefits and separately reporting any international effects, the Department focused on global benefits in the text of the direct final rule and separately reported the (much smaller) domestic effects in a final chapter of the technical support document. …

The Department estimates that dishwasher prices for consumers will increase by 13 percent, or $44 dollars, as a result of these standards. Of course, it will be difficult for some consumers to make this expenditure, especially for low-income Americans and for Americans on a fixed income, such as the elderly. DOE believes that the higher expense will be justified by reduced energy bills throughout the lifetime of the product; however, the Department’s analysis shows that consumers will only reach a breakeven point for their dishwashers after 11.8 years of steady use.

This being the case, many consumers will not see these benefits come to fruition: separate external estimates put the average lifespan of a dishwasher at between 9 and 12 years, meaning many American households will pay the higher appliance cost without gaining the benefit of lower long-term energy bills. In fact, for 18.7 percent of consumer households, this rule will impose a net cost, while an additional 64.1 percent of consumer households will not see any benefit. Only 17.2 percent of consumers will see their dishwashers last long enough to reap the energy efficiency benefits of this rule.”

All of the above accepts the DOE’s calculations as provided. But, the analysis described above is based on payback time, which compares the up-front cost to the ultimate savings, which occur over the hoped-for life of the dishwasher. Even if everything occurs as the DOE estimates, payback analysis fails to address (i) the time value of money, and (ii) compensation for the risks of future events (which the DOE estimates spans over 11.8 years) not occurring as estimated. For an investment that has a payback anywhere near as long as what the DOE is calculating, the proper analysis should instead use a net present value calculation. For anyone trained in this basic economic concept and related calculations, it is painfully obvious that the net present value is negative; stated otherwise, the proposed consumer investment that the DOE is requiring should not be made.

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/12/does-dishwasher-regulation-should-not-have-used-payback-analysis/

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