May 21, 2008

Green Warranties, Part Two:

While product warranties are focused on repairs at the beginning of a product's life, anti-pollution efforts aim to reduce energy usage over the full life of a product while recycling efforts are focused on waste disposal at the end of a product's useful life.

Warranty can have an indirect but meaningful effect on energy usage. And as end of life recycling options turn into requirements in more states and countries, the price of what is essentially an end of life extended warranty will be automatically added to the price of a product.

Like the bit of money collected to encourage the recycling of beverage bottles and cans, the recycling fees being imposed on computer sales in places such as California are designed to change consumer habits. But rather than returning the money as a reward for recycling, these funds are meant to finance the actual recycling operation.

Meanwhile, in the name of energy efficiency, products such as light bulbs -- which are usually considered consumables and are therefore not typically covered by written warranties -- are coming to market with multi-year warranties as a requirement of their energy-efficient branding. For instance, the compact fluorescent bulbs that can take the place of an incandescent bulb are commonly sold with a two-year warranty. This guarantee, as well as the promise of lower energy usage, are intended to encourage purchases.

Going Where Warranties Have Never Gone Before

In last week's newsletter on the greening of automotive warranties, we wrote about a similar phenomenon taking place with new fuels made from wood, waste, corn, or sugar cane. While plain old gasoline and diesel fuel have no written warranties, some of the new biofuels do. It's all done in the name of reassuring the customer that these new environmentally-friendly fuels won't ruin their engines -- a fear virtually unknown with gasoline and diesel customers thanks to long-used quality standards.

In a way, the new energy-efficient branding is a kind of warranty in and of itself. To qualify an appliance for the Energy Star logo, for instance, the product must meet certain criteria, including energy usage. In the aerospace industry, these performance warranties are common, guaranteeing X units of fuel usage per Y units of distance traveled. If those criteria are not met, the buyer can make a warranty claim for the difference.

In the consumer world, we're not sure how real these warranties really are. Would a refrigerator manufacturer be liable if a unit used more than the specified kilowatt-hours per year? Do consumers really expect to collect on a two-year warranty if their fluorescent bulb fails after 18 months? Do the manufacturers even set aside reserves at the time of sale to cover these future costs?

Meanwhile, a few U.S. states and numerous European countries have already begun collecting a recycling fee every time certain types of new products are sold. The fee is meant to cover the cost of recycling a product at the end of its life. Are these also warranties? Or because of the fee collected, perhaps they're extended warranties?

Look at it this way. An extended warranty contract is priced and sold separately from the product, and typically guarantees a free repair for the first few years of that product's life. A recycling contract is "sold" (really, it's imposed) at the time of sale, to finance and guarantee the collection of a waste product once the owner has determined that repairs are no longer desirable. So they're both guarantees of a response by a manufacturer and/or retailer, but one is sold for repairs at the beginning of life while the other is "sold" for the disposal at the end of life.

Energy usage calculations and energy-efficiency branding are nothing new, but in this era of high energy costs and dire predictions about global warming, they've taken on more important meanings. And in different cases, warranties can work with or work against those ratings.

The 13 SEER Standard

In the U.S., for instance, the federal Department of Energy assigns an efficiency rating known as a "seasonal energy efficiency ratio," or SEER, to each central air conditioning unit. The SEER rating is calculated by dividing total energy input (measured in watt-hours) into the total cooling output (measured in British thermal units or BTU).

The 10 SEER standard became the U.S minimum for central air conditioning units in 1987, meaning that each unit produced 10,000 BTUs per kilowatt-hour of energy usage. In January 2006, the 13 SEER standard became the new benchmark, resulting in units that are 30% more efficient than 10 SEER. However, the cost of the units themselves was a bit more than before as well.

The Environmental and Energy Study Institute estimated increases of three to eight percent in equipment costs between 10 SEER and 13 SEER, which because of the projected 30% savings in electricity would pay for itself in about 3.5 years of lower running costs. More importantly, the electricity not generated and the power plants not built would reduce nitrous oxide emissions by up to 85,000 metric tons and would reduce carbon emissions by up to 33 million metric tons, the EESI estimated.

So where do you send the bill if the unit uses only 20% less electricity per year? It should be sent, one would guess, to the same federal office that pays consumers when their new vehicles don't live up to the advertised spec. That is to say, 13 SEER is merely a laboratory calculation, and not a real world guarantee. And nobody is going to pay a warranty claim for higher-than-expected electricity bills.

There's also been a problem with repairs and upgrades, caused primarily by the gradual unavailability of SEER 10 spare parts. It's now been two-and-a-half years since the last 10 SEER units were manufactured, so the availability of spare parts for aging but still functional 10 SEER units is an increasing concern. Furthermore, with so-called "split system" central air heating and cooling units, there are frequently both indoor and outdoor components. And an indoor 10 SEER unit may not be compatible with an outdoor 13 SEER unit. So if the outdoor unit cannot be repaired with 10 SEER spare parts and is instead replaced with a 13 SEER unit, that may require modifications or even a full replacement of the perfectly good indoor unit to ensure compatibility.

The complicating factor could be the existence of a home warranty policy, which will cover repairs and replacements of defective items, but may not pay for the replacement of perfectly good components that need to be replaced solely for the sake of compatibility. Yes, we will pay for the defective outdoor unit, but no we will not pay for the replacement of the perfectly good evaporator coil indoors. The only thing wrong with it is it won't work with the new outdoor unit.

There also may be a space issue, in that the replacement unit may be larger than the 10 SEER unit it replaces. And of course, a 10 SEER replacement unit would not be an option. No new 10 SEER units can be manufactured, though existing inventory can still be sold off. Home warranty policies are being amended to make sure the customer understands that the administrator won't always cover the total cost of a complete replacement of a central air conditioning unit, even if the reason for the replacement is an inability to repair.

The Energy Star Logo

In 1992, the U.S. Environmental Protection Agency and the U.S. Department of Energy created the Energy Star program, which helps consumers to spotlight energy-efficient appliances and electronics while they're shopping. The EPA estimates that over 2,000 manufacturers have voluntarily qualified some 40,000 products since the program's inception. And in the past 16 years the Energy Star designation has spread to numerous countries in North America, Europe and Asia/Pacific.

By purchasing appliances and electronics that carry the Energy Star logo, consumers are told they will save money on electricity, which in turn reduces the need for power plants to burn fossil fuels. The EPA estimates that in 2007, consumers' use of Energy Star appliances reduced their utility bills by some $16 billion, which in turn prevented the release of some 40 billion metric tons of greenhouse gas emissions by power plants. It was the equivalent of taking 27 million cars off the road, the EPA estimated.

It's easy to find comparably-priced Energy Star products, in the sense that the designation does not always mean a higher price. And of course, 13 SEER products, while they might have been initially priced higher than 10 SEER units, might not always cost more. New technologies may cost more when they're new to the market, but it may not always be so.

And while one would expect Energy Star units to carry longer warranties, this does not always seem to be the case. For instance, Whirlpool sells 11 washing machines that are Energy Star qualified. List prices range from $700 for the HW0050P to $1,500 for the WFW9600T, but all 11 models are covered by a one-year limited warranty in the U.S. and Canada. Non-Energy Star units carry the same warranty.

Whirlpool also sells 30 refrigerators with the Energy Star qualification and 10 Energy Star dishwashers. All are covered by a one-year limited warranty in the U.S. and Canada. Non-Energy Star units have the same warranty.

It was only with room air conditioners that we found a difference in warranty durations. Whirlpool sells four room air conditioner models that are Energy Star qualified: the ACU088PR, ACU108PR, ACU109PR, and the ACU129PR. All four have an output of between 8,000 and 11,600 BTUs, and all four carry a five-year full warranty in the U.S. and Canada.

Some of Whirlpool's non-Energy Star models carry five-year warranties on the compressor, evaporator and condenser, but the rest of the unit is covered by only a one-year warranty. So in that sense, the buyer of an Energy Star air conditioner would save money on electricity and get a longer warranty. But all four models are designed for through-the-wall installations. And none of the portable or window-sized units are Energy Star compliant.

Energy Star Requirements

What does it mean to be Energy Star qualified? Within each product category, appliances and electronics that beat the average energy usage rating by a certain percentage can qualify for the Energy Star designation. For dishwashers, an Energy Star unit must beat the average by at least 25%. For refrigerators, the minimum needed to qualify is 15% below the average. For televisions, the minimum energy savings needed to quality is 30%. For central air conditioning units to gain Energy Star certification, they must be rated at least 14 SEER (or 10% more efficient than the 13 SEER minimum).

An Energy Star low slope roof must be made of materials that initially reflect more than 65% of solar energy (measured in watts per square meter), and must still reflect more than 50% of the sunlight after three years. An Energy Star high slope roof must reflect 25% initially and at least 15% after three years.

As far as warranty, an Energy Star roof needs to have a product warranty that is comparable to one given with a company's non-Energy Star products. In other words, it can't be shorter, but it can be the same. There is no requirement that it be longer, and as far as we can tell, the loss of reflectivity after three years would not be grounds for a warranty claim.

However, there are some instances where warranties are mandated where none have been before, or long warranties are required. In addition to other requirements, Energy Star-qualified compact fluorescent light bulbs must carry a two-year written warranty to be eligible. Incandescent bulbs usually last only half a year, so this warranty is promising a product life at least four times as long.

GE Consumer & Industrial sells a 20-watt compact fluorescent bulb backed by a five-year warranty. So it's guaranteed to last perhaps ten times longer than its non-warranted incandescent equivalent, which by the way would use 3.75 times as much electricity to create as much light. Other compact fluorescent bulbs tout lifespans up to seven years, but without the written warranty for any but the first two years.

To collect on a replacement of a prematurely failed bulb, the consumer must send GE a copy of the packaging's bar code and a dated register receipt. Pack rats may rejoice, but how many typical consumers will save both of these required items for five years? For a pack of bulbs? The point is, these guarantees of longer life and lower electric bills may have more impact on the store shelf -- convincing skeptical consumers to give the weirdly-shaped bulbs a chance -- but they may have as much impact in a financial sense on a manufacturer as, say, software warranties.

There are other instances where Energy Star certifications include mandatory warranties. For instance, the motor in Energy Star ceiling fans must be warranted for at least 30 years, and any included lighting fixtures must be warranted for at least two years, but the warranties on other components can be as short as one year.

Furnace Makers Opposed to Minimum Warranties

But then there are also cases where the Energy Star standards-makers first specified warranties and later backed away. For furnaces, the current requirement for Energy Star certification is simply that the product must be sold with a manufacturer's warranty. Its duration and exact terms and conditions are left to the manufacturer to decide.

Initially, the U. S. Department of Energy planned to include a minimum warranty duration requirement that ranged from six to fifteen years for different types of furnaces, heat exchangers and water heaters, but lately they seem to have dropped the plan in the face of industry opposition.

In comments filed with the U. S. Department of Energy last year, A.O. Smith president Ajita Rajendra wrote:

"A.O. Smith understands the intent of the minimum warranty to be to insure quality and reliability to the consumer. Unfortunately, warranty does little to insure quality or performance and may jeopardize the Energy Star reputation. If an unreliable product is certified under the Energy Star program and the manufacturer subsequently goes out of business or refuses to honor the warranty, the reputation of the Energy Star brand will be severely damaged.

"Many in the energy efficiency community have complained that water heaters are sold at retail on the basis of length of warranty and not energy efficiency or features. The use of a minimum warranty in Energy Star will just promulgate the competition on the basis of warranty rather than performance or value.

"In reality, a warranty is just insurance which adds to the price a consumer must pay for the product. Warranty features are best determined by competition in the free market and should not be dictated by regulation or standards.

"A. O. Smith believes the minimum warranty requirement should be dropped from the Energy Star criteria for residential water heaters."

Ervin Cash, executive vice president of Rinnai Corp., made similar assertions in his comments regarding Energy Star criteria for whole-house gas tankless water heaters:

"Warranty language should be excluded. Energy Star is designed to encourage more Americans to adopt more energy efficient products. It is an ill-conceived notion to think that attaching warranty language will instill consumer confidence. Consumer confidence is earned by the manufacturer developing the trust of the consumer based on actual product performance and actual product reliability. The DOE cannot develop consumer confidence with a warranty term, but the DOE will drive the cost up by mandating a commercial term. This will make energy efficient products less affordable, not more affordable. Let market forces, product performance, and manufacturers earn consumer confidence and determine their own commercial terms. Keep Energy Star focused on energy efficiency.

"If warranty is to be included, it must state that it is a limited warranty, and it must state that the limited warranty is on the heat exchanger only. Warranties throughout the gas whole-house tankless water heater industry are always limited warranties and limited to the heat exchanger only."

Officially, the Energy Star furnace criteria have been "under revision," for more than a year. But considering that the initial documents specified minimum warranty durations while the latest drafts did not, it seems unlikely that they'll creep back into the final documents.

No Enforcement Mechanism

Other industry comments spotted an enforcement problem. While the initially-proposed Energy Star standard would require warranties of minimum duration, the government would not step in to make sure those warranty obligations were honored, and it would not step in to manage the warranties of companies that go out of business. This, according to comments made at an EPA forum by Earl Jones of GE Consumer & Industrial, made the proposed minimum warranty requirement "a meaningless gesture."

Of course, that's the case with most any consumer product. If the manufacturer denies a claim, or if a manufacturer goes out of business and is therefore unavailable to honor a claim, there's no government-run warranty fund of last resort to which customers can turn, as there may be with certain pensions or insurance policies. Failing companies usually take their warranties with them to the bottom, giving some so-called "lifetime warranties" a more finite term. In fact, in one case a retailer claimed that a change in ownership had voided all the "lifetime warranties" it once issued for replacement automotive batteries and other products.

With computers and peripherals, as well as with many other types of office equipment, much of the power-saving effort boils down to the creation of systems that shut themselves off when not in use. One estimate suggests that 95% of the time, the typical computer printer is not in use. Yet it might be left on simply so it won't return an error message when a page to print is sent its way.

Screensavers on PCs save screens, but they don't save electricity. However, a group based in California's Silicon Valley, the Video Electronics Standards Association, has created a Display Power Management Standard, which creates a common definition of low power states for the computer display industry. Any monitors that are said to be VESA DPMS-compliant will go into a standby mode after a user-specified period of inactivity. But there's the catch: the user needs to turn on this feature, and needs to learn to tolerate the slight delay while waiting for the screen to warm back up.

European Standards

In Europe, the situation is quite different. There are numerous standards bodies, and there are numerous standards. TCO Development, a unit of the Swedish Confederation of Professional Employees (the TCO, or Tjänstemännens Centralorganisation), has set ergonomic and environmental standards for PC monitors, printers, office equipment, mobile phones, and office chairs. To qualify for TCO labeling, products must meet requirements for low energy consumption, low emissions of dust and ozone, low noise levels, low electric and magnetic fields and strict requirements concerning the dispersal of environmentally hazardous substances from manufacturing and recycling processes.

TCO Development strives to set standards for ergonomics and ecology in addition to emissions and energy usage. The group's labeling overview for IT and office equipment is online at: Specifications for printers and monitors also set standards for electrical and magnetic radiation. Approximately 50 percent of all display models manufactured in the world are TCO-labeled, the group estimates.

Display manufacturer Planar Systems, which covers its LCD monitors with a three-year warranty, has met TCO standards for more than a decade, meeting TCO '95, TCO '99, and TCO '03 labeling requirements in successive product generations. In a 2003 news release Planar said the then-new "TCO '03 ergonomics guidelines for LCD monitors call for products to meet a minimum height adjustment range of 4.3 inches to adapt to users of different statures and eliminate eye and neck strain often caused by an improperly positioned monitor."

The European Union has itself been much more aggressive than the U.S. government when it comes to setting mandatory minimum warranties. While in the U.S. the Magnuson-Moss Warranty Act governs the format, definitions, and disclosures of product warranties where they exist, it doesn't actually require that warranties must be offered in the first place.

In contrast, Article 5 of the EU Directive 1999/44/EC on certain aspects of the sale of consumer goods and associated guarantees mandates a minimum guarantee of two years' time from the delivery of the goods, and that directive applies to both energy-efficient as well as inefficient consumer products (although some member states have taken their time to actually implement it). The directive goes as far as to say that poorly-written user manuals are themselves a product defect which can result in a warranty claim.

WEEE Is Not Child's Play

The existence of Directive 1999/44/EC makes it less necessary for energy-saving efforts such as Energy Star to even think about mandatory minimum warranty durations. But of course, in Europe as well as in the U.S., manufacturers are free to offer five-year or even ten-year warranties on their products, if that is what it takes to convince skeptical consumers (e.g. hybrid car batteries) or to satisfy anti-pollution regulators (e.g. exhaust emissions equipment).

The EU's WEEE directive on waste electrical and electronic equipment (Directive 2002/96/EC) mandates that member states must create separate collections for scrap electronics and/or encourage the opening of public collection points where consumers can drop off their scrap electronics free of charge.

The WEEE directive covers appliances, computers, telecom equipment, consumer electronics, lighting equipment, electrical and electronic tools, toys, leisure and sports equipment, medical devices, and monitoring and control instruments. Member states were directed to begin separate collections and manufacturers were directed to begin paying for collections or drop-offs in 2005, and by 2006 these efforts were supposed to result in the recycling of at least 4 kg per EU inhabitant per year.

The governments of the 27 EU member states are required to encourage consumers not to dispose of WEEE as unsorted municipal waste, and manufacturers are required to properly mark electrical and electronic equipment which could otherwise end up in rubbish bins. And governments must publish statistics on the weight or unit count of WEEE products sold and collected each year, so the EU can monitor compliance.

WEEE Financing Requirements

To comply with WEEE, manufacturers will also have to reserve funds for the end of life processing, similar to what they now do for product warranties. According to an EU summary of the WEEE legislation, "When a producer places a product on the market, he must furnish a guarantee concerning the financing of the management of his waste. Such a guarantee may take the form of participation by the producer in financing schemes, a recycling insurance or a blocked bank account."

Reuse, recycling, and recovery programs are also encouraged for parts and components. More specifically, manufacturers will be required to produce "electrical and electronic equipment which take into full account and facilitate their repair, possible upgrading, reuse, disassembly and recycling." Also, the directive mandates that each manufacturer "should be responsible for financing the management of the waste from his own products," and "should be able to choose to fulfill this obligation either individually or by joining a collective scheme."

The EU had earlier passed Directive 2000/53/EC on end-of-life vehicles, which mandates a similar collection scheme on automakers. And then there are other directives governing the use and disposal of batteries and specific pollutants and hazardous materials such as lead, mercury, cadmium, and chromium.

In February 2003, the EU issued Directive 2002/95/EC on the "Restriction on the use of certain Hazardous Substances in electrical and electronic equipment," also known as the RoHS Directive. We're not sure how this relates to warranty, except in cases where there was a very good reason to use one of the banned substances to prolong life or improve performance. And, in fact, the RoHS statutes include a very long list of exceptions for cases where the use of substances such as mercury are permissible.

In addition to the EU, other countries planning implementation of RoHS restrictions include China (last year's Clean Production Promotion Law and Solid Waste Prevention and Control Law), Japan (Green Procurement), and South Korea. Several U.S. states including California have implemented their own RoHS rules, though there's still no federal law.

Other Recycling Laws

In the U.S., mandatory recycling and fund collection schemes are widespread for beverage bottles, but remain relatively rare for most other consumer products. But there are at least two states that have mandated the recycling of computers and TVs. In the state of Maine, under an e-waste law that went into effect in 2006, all computer central processing units, monitors, and televisions generated by households must be recycled. But as of yet, there's no money collected at the time of sale to make this happen.

In 2003, California established an electronic waste recycling program for TVs, monitors, computers, portable DVD players, and other video displays that collects a fee at the time of sale. Since January 1, 2005, California retailers have collected an Electronic Waste Recycling Fee of $6.00 for new units with monitors under 15 inches diagonally, $10.00 for screens over 35 inches, and $8.00 for screens in between 15 and 35 inches.

The funds go into an Electronic Waste Recovery and Recycling Account managed by the California's Board of Equalization,and will be used to pay authorized collectors and recyclers. Sales of used equipment, as well as video displays installed within medical equipment, vehicles, or household appliances (washers, ovens, etc.), are not subject to the fee.

In other states and some cities, separate garbage collections are common for bottles, paper waste and large items such as furniture and appliances, but mandatory recycling laws are uncommon, and the imposition of mandatory fees collected at the time of sale are rare. However, private industry is beginning to fill the void, with retailers, manufacturers and in some cases the extended warranty companies that already work with them at the beginning of a product's life stepping in to offer a bounty or at least a store discount for each recycled item brought back to them. We'll have more to say about this new trend in a separate article next week.

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