Last year saw its fair share of HVAC-related legislative and regulatory issues. From the ongoing implementation of the Affordable Care Act to the yet unresolved regional standards lawsuit, industry leaders and advocates were kept on their toes as they fought for the industry’s best interests.

But 2014 could shape up to be an even busier year as a regional standards resolution inches closer, the delayed employer mandate for providing employee healthcare looms, and a variety of other issues come to a head in the next 12 months.

Regional Standards

While some legislative and regulatory issues affecting the HVAC industry may be resolved in 2014, others, including implementation of the Affordable Care Act, could prove challenging in 2014 and beyond. (Photo by Stephanie Clifford/Flickr)

On Dec. 9, 2013, the U.S. Court of Appeals for the D.C. Circuit adopted a briefing schedule in the ongoing regional standards lawsuit after a schedule was jointly submitted in September by the U.S. Department of Energy (DOE); the American Public Gas Association (APGA); Air Conditioning Contractors of America (ACCA); the Air-Conditioning, Heating, and Refrigeration Institute (AHRI); Heating, Air-conditioning, and Refrigeration Distributors International (HARDI); and other parties involved in the regional standards lawsuit.

Those involved in the lawsuit now have until April 15 to brief the court on three issues — the settlement agreement between the APGA and DOE, HARDI’s motion to continue the case, and the merits of the lawsuit itself. But the problem, according to industry leaders, is that the lawsuit now has the potential to linger through the end of 2014 and beyond, leaving manufacturers and distributors in the lurch as the Jan. 1, 2015, implementation date for air conditioner and heat pump energy-efficiency standards quickly approaches.

David Calabrese, AHRI’s general counsel and senior vice president, public policy, said the court has indicated it will schedule an oral hearing, likely this summer, which means the case “will not likely be resolved until late fall of 2014, at the earliest.”

Meanwhile, AHRI has indicated it will likely file a motion to stay the implementation date of the air conditioner standards, possibly in early 2014. Jon Melchi, HARDI’s director of government affairs, said HARDI would also make such a motion a top priority.

To view a timeline of events in the regional standards case, visit http://bit.ly/RegionalStandards.

HCFC-22 Phaseout

At the end of 2013, the U.S. Environmental Protection Agency (EPA) proposed the final step in the phaseout of virgin hydrochlorofluorocarbon- (HCFC) 22 by 2020. In 2012, the EPA allowed 55 million pounds of R-22 to be produced or imported. In 2013, production was bumped up to 62.8 million pounds, then brought back to 51 million pounds for 2014. Due to the surplus of R-22 in 2013, and the subsequent price drop, the industry has seen the demand for alternative refrigerants decrease.

Charlie McCrudden, senior vice president of government relations for ACCA, said the proposed linear allocation drawdown — which allows 30 million pounds in 2015, 24 million pounds in 2016, 18 million pounds in 2017, 12 million pounds in 2018, 6 million pounds in 2019, and zero in 2020 — helps industry leaders know exactly what to expect in the coming years.

“What we’ve seen with the allocation and the adjustments they’ve made to the allocation rule are price spikes and fluctuation in prices due to uncertainty about supply,” McCrudden explained. “It’s nice that this proposed rule is being released so far in advance. I’m hopeful that they can finalize this rule quickly so there is a smooth transition, and we can avoid the uncertainty we’ve seen in the last few years.”

Melchi said HARDI is also keeping a close eye on the rule, which may not be finalized until mid-2014. “The allocation rule will have an immediate impact on a lot of folks,” he said. “We’re certainly watching how the allocation rule goes and how it sets the plate for the phaseout of R-22.”

Tax Reform

In late 2013, Senate Finance Committee Chairman Max Baucus, D-Mont., released a series of staff discussion drafts detailing proposals to overhaul the nation’s tax code. While not a final plan by any means, the discussion drafts are intended to create a conversation on tax reform between Republicans and Democrats in hopes of initiating some kind of tax reform.

“This is the first serious conversation on tax reform we’ve had in a while,” McCrudden said. “Whether it goes anywhere or not has yet to be decided, but everybody is watching this one much more closely than I’ve seen in a long time.”

Guido Zucconi, assistant vice president of congressional affairs, AHRI, said Sen. Baucus’ tax reform proposal “might see the light of day in 2014,” though it may also just be an academic exercise — a starting point for discussions and positioning on the reforms.

“Tax reform may be one of the big issues this year, and it will be interesting to see where everybody falls,” Zucconi continued. “If they finally do some sort of regulatory relief, that’s a great starting point. We have heard rumors that Congress might pick up the pieces of the Shaheen-Portman bill and do an energy-efficiency and regulatory relief pared-down package.”

McCrudden said there is potential for industry businesses, including contractors, to benefit from tax reform this year.

“It would be great to see some relief for pass-through entities — those are the partnerships, LLCs, and S corporations. A lot of small businesses are organized as pass-through entities. They pay higher taxes than their C corporation counterparts because they pay taxes on a 1040 form, so revenue looks like income,” McCrudden explained. “When you tax income at a higher rate, it has the unintended effect of taxing many small businesses at that higher rate. Some of the tax reform proposals have talked about providing relief from this disparity — that would be great to see.”

Tax reform could also include industry-related tax provisions like sections 25C and 179, which were not renewed in 2013.

“Tax reform is also going to look at all of the tax provisions as part of tax reform, and we’d like to see many of those extended,” McCrudden said. “Expanded Section 179 expensing allowances and bonus depreciation are both incentives that small businesses use when they invest in their own businesses to buy new trucks, office furniture, new computers, etc. Those have been expanded and modified over the base law over the years annually in ways that help small businesses make capital investments, but every year we have to go through this dance where we try to get them extended. Eventually they are extended, but sometimes it’s late. It would be nice to have those made permanent so small business owners can rely on them and know they will be there.”

Expanding Section 25C from its current lifetime cap of $500 and making it permanent would also help the industry, McCrudden said. “It just doesn’t move the needle any more, especially with furnaces, and by the time it’s extended for 2014, it’s likely to be March or April, if at all. It’ll be retroactively applied, but you’ll have already missed winter, when people use it most.”

Zucconi said they are also watching to see what happens with the industry-related tax provisions. “I think we’ve all sort of moved on, but it’ll be interesting to see what happens,” he said.

When it comes to tax reform, Melchi said HARDI is particularly concerned with the possible repeal of the LIFO (last-in, first-out) accounting method, which uses the last inventory purchased as the first inventory sold in order to calculate taxes. If LIFO is repealed retroactively, the many distributors and wholesalers who use LIFO could end up owing a significant amount of money in taxes.

“Sen. Baucus has proposed re-
pealing LIFO, which is unacceptable to our members, and we need to do a good job on educating members about why it’s a bad proposal,” Melchi said. “We’ve heard some discouraging news for some things that might be in there, so we’re preparing to be very active, even in these hypothetical discussions.”

Melchi added that while Sen. Baucus’ tax reform proposals are meant to initiate a discussion, it may not go far beyond that in 2014, especially since Sen. Baucus was recently nominated to be the ambassador to China.

“Maybe this is just the first step in the dance where people try to figure out what’s really a sacred cow and what’s not a sacred cow, and that’s maybe what’s going on now — seeing what Democrats can do without and what Republicans can do without,” Melchi said.

Affordable Care Act

One of the most concerning issues for contractors and other small business owners in 2014 is the Affordable Care Act (ACA). Even though the employer mandate was delayed a year, many contractors and other small HVAC business owners are already experiencing increased costs.

“We’re watching health care to see what will happen,” McCrudden said. “A lot of contractors are finding out that even though they weren’t facing the employer requirement to provide health care because they’re under the [50-employee] threshold, the cost of their plans has gone up. Congress is looking at providing some relief for that. There are a lot of innocent bystanders.”

Melchi agreed that you “can’t help but continue to watch how the Affordable Care Act is implemented — that’s something you have to watch.”

Ken Misiewicz, CEO, Pleune Service Co., Grand Rapids, Mich., said he is keeping a close eye on the ACA.

“Our 2014 policy, plus the new taxes and fees of the ACA, increased our health care cost by 19.3 percent, and we are concerned about additional increases over the upcoming years as new phases of the legislation are implemented,” he said. “This is not sustainable for any contractor or business without some combination of increasing prices to customers and cutting plan benefits to employees. The ACA’s impact is currently causing significant disruption for us.”

Matt Bergstrom, president at Thornton & Grooms, Farmington Hills, Mich., said he plans on spending a great deal of time understanding the ACA in 2014, just as his team did in 2013.

“Our efforts will be focused in two areas,” Bergstrom said. “First, just wrapping our hands around the new administrative burdens of the program and what that looks like. We are seeing similar administrative burdens being requested from OSHA [Occupational Safety and Health Administration] and are just wrapping our heads around how to comply. Second, in terms of the ACA, we will be doing a tremendous amount of wellness and insurance cost-control savings training with our entire team to help control our overall group premium costs and help our team to be educated health care users.”

Russ Donnici, president of Mechanical Air Service Inc., San Jose, Calif., said he is very concerned about the ACA and the impact it will have not only on his business, but also on people’s lives.

“We avoided the initial impact of Obamacare by renewing our plan a month early, but next year we will have to deal with it — unless things change,” Donnici said. “We provide medical for our employees, even for part-timers.

“Another issue that few are talking about is the 40 percent excise tax coming in a few years on what they call ‘Cadillac’ medical plans. Our plan is considered a Cadillac plan, and we do this to attract good employees. The tax will penalize us for doing something good.”

Donnici went a step further, saying that members of Congress should be forced to use the government health care exchanges. He asked, “Why should they be exempted from Obamacare if it’s so great?”

Wait and See

Industry leaders agree that predicting what the current Congress will do in 2014 is nearly impossible, and that many things remain uncertain in 2014, just as they were in 2013. And with midterm elections coming up in the fall, Melchi added it is “very likely that, once we get to the summer, there won’t be any substantial pieces of legislation through Election Day.”

McCrudden added that many regulatory issues are also likely to come to a head this year, including regional standards. “We’re watching the courts, Congress, and the regulatory bodies,” he said. “It’s an interesting list.”

Ultimately, uncertainty is the word of choice when summing up 2014, Melchi said.

“Depending on how things shake up, you’re looking at a lame-duck session, and we don’t know what will get done in that session until after the elections take place. We could see a year where there’s not a whole lot that goes on until the end of the year, or maybe not. Nobody likes the end-of-the-year flurry of activity, but that’s kind of the way things have been working out lately.”

Publication date: 1/27/2014 

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