D.C. Circuit Upholds Energy Department Ban on Non-Condensing Furnaces and Water Heaters

In American Gas Association v. U.S. Department of Energy, a divided panel of the U.S. Court of Appeals for the D.C. Circuit rejected a legal challenge to a regulation adopting energy efficiency standards for natural gas-powered consumer furnaces and commercial water heaters that effectively bans non-condensing units from the market. This regulation had been adopted in 2023, and the court heard oral argument in November 2024, but only released its opinion in November of this year.

According to the panel opinion, written by Judge Wilkins and joined by Judge Pillard, the regulation did not exceed DOE’s authority under the Energy Policy and Conservation Act (EPCA) and was not arbitrary and capricious. Judge Rao dissented (and, in my view, had the better of the argument).

Here is how Judge Rao describes the issues and why the DOE rule should have been held unlawful.

This case concerns Department of Energy regulations that effectively ban a class of common and affordable gas-powered appliances. Millions of homes and commercial buildings are equipped with traditional, “non-condensing” gas furnaces and water heaters. These reliable appliances vent their exhaust up a standard chimney. A more efficient “condensing” technology exists, but it is incompatible with traditional chimneys. Instead, it requires a different venting mechanism. In its quest for greater efficiency, the Department has issued new efficiency standards that effectively ban the sale of non-condensing appliances. As a result, any consumer seeking to replace a traditional gas furnace or commercial water heater will be forced to install a condensing model, a switch that often requires disruptive and expensive renovations to a building’s venting and plumbing systems.

These standards run afoul of the careful balance Congress struck in the Energy Policy and Conservation Act (“EPCA”) between improving energy efficiency and preserving consumer choice. While EPCA empowers the Department to set efficiency standards, the statute also imposes a critical limit on that authority. The agency is prohibited from imposing an efficiency standard that will result in the “unavailability” of a product with a “performance characteristic” that consumers value.

No one doubts that the challenged regulations make non-condensing appliances unavailable. The central question in this case is whether a non-condensing appliance’s venting mechanism is a protected “performance characteristic.” Because these appliances utilize a chimney common to many older homes and buildings, installing a condensing appliance will often require complex and costly renovations that may reduce a building’s useable space. The ability to vent through a traditional chimney is exactly the kind of real-world feature Congress protected from elimination in the marketplace. The Department’s efficiency standards, which make non-condensing appliances unavailable, are therefore contrary to law.

Independent of this legal error, the Department failed to demonstrate that the regulations are “economically justified,” as mandated by EPCA, by showing their “benefits … exceed [their] burdens.” 42 U.S.C. § 6295(o)(2)(B)(i); see also id. § 6313(a)(6)(B)(ii). The Department utilized an economic model that we have previously held to be irrational and inconsistent with EPCA’s requirements. The flawed model fares no better here. Because the regulations are contrary to law and predicated on an arbitrary economic analysis, I respectfully dissent.

As Judge Rao’s opinion indicates, it is difficult to square the majority’s approach to the statute with Loper Bright. The statutory question in the case is what counts as a “performance characteristic.” The majority thinks the statute is ambiguous on this point, and thus turns to legislative history and suggests the challengers face an evidentiary burden to prove that non-condensing appliances have such characteristics. Yet as Judge Rao notes, any such evidentiary burden “applies only to the factual question of whetehr a standard will cause a protected product to become available, not to the legal question of what qualifies as a ‘performance characteristic.'” As she explains:

The central disagreement turns on the legal question of what counts as a “performance characteristic” under EPCA. The majority largely ducks this question by declaring that EPCA is ambiguous as to the meaning of “performance characteristic” and “utility.” Majority Op. 16–18. The majority takes this ambiguity as a license to defer to the Department. But this Loper Bright avoidance is inconsistent with the Supreme Court’s directive that a court must “use every tool at [its] disposal to determine the best reading of the statute and resolve the ambiguity.” 144 S. Ct. at 2266.

Judge Rao further explains why the Department failed to provide an adequate justification for the rule, but this is a lesser concern that the question of statutory authority.

This rule would seem to have been a good candidate for quick rescission under the Trump Administration’s directive that agencies identify and rescind regulations that lack adequate statutory warrant under the best interpretation of the applicable statute. Judge Rao’s statutory arguments are more persuasive than those offered by the majority, particularly in a post-Chevron world in which the agency does not receive deference and the best reading of a given statute is supposed to govern. The problem now, however, is that the D.C. Circuit has upheld the regulation as consistent with the the statute.

Given this ruling, were the Department to rescind the rule on these grounds it would face a likely reversal (unless it were able to get further review in the Supreme Court). This means that we may be stuck with this rule. Failing to rescind the rule earlier, or even to ask the D.C. Circuit to delay issuing an opinion so the Administration could review the rule, seems to have been an oversight, and a costly one at that.