CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANLAYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION ......................................................................................................... 12-1 12.2 METHODOLOGY ........................................................................................................ 12-1 12.2.1 Pha se 1: Industry Profile .................................................................................... 12-2 12.2.2 Phase 2: Industry Cash -Flow Analysis and Interview Guide ............................ 12-2 12.2.2.1 Industry Cash-Flow Analysis ............................................................ 12-2 12.2.2.2 Interview Guide ................................................................................ 12-2 12.2.3 Phase 3: Sub -Group Analysis ............................................................................ 12-3 12.2.3.1 Manufacturer Interviews ................................................................... 12-3 12.2.3.2 Revised Industry Cash -Flow Analysis .............................................. 12-3 12.2.3.3 Manufacturer Sub-Group Analysis ................................................... 12-3 12.2.3.4 Competitive Impact Assessment ....................................................... 12-4 12.2.3.5 Manufacturing Capacity Impact ....................................................... 12-4 12.2.3.6 Employment Impact .......................................................................... 12-4 12.2.3.7 Cumulative Regulatory Burden ........................................................ 12-4 12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS ..................................... 12-5 12.3.1 General Interview Structure ............................................................................... 12-5 12.3.1.1 Key Issues ......................................................................................... 12-5 12.3.1.2 Shipment Projections ........................................................................ 12-5 12.3.1.3 Profitability ....................................................................................... 12-6 12.3.1.4 Product Mix ...................................................................................... 12-6 12.3.1.5 Conversion Costs, Manufacturing Capacity, and Employment Levels 12-6 12.3.1.6 Market Shares and Industry Consolidation ....................................... 12-7 12.3.1.7 Product Utility and Innovation .......................................................... 12-7 12.3.1.8 Impact on Small Manufacturers ........................................................ 12-7 12.3.1.9 Cumulative Burden ........................................................................... 12-8 12.3.1.10 State Energy Conservation Standards ... Error! Bookmark no t defined. 12.3.1.11 International Energy Conservation Standards Error! Bookmark not defined. 12.4 RESIDENTIAL DEHUMIDI FIERS PRELIMINARY MIA RESU LTS ....................... 12-8 12.4.1 Key Issues .......................................................................................................... 12-8 12.4.2 Profitability, Product Mix, and Shipments ........................................................ 12-9 12.4.3 Conversion Costs, Manufacturing Capacity, and Employment Levels ........... 12-10 12.4.3.1 Impact on U.S. Production and Jobs ..... Error! Bookmark not defined. 12.4.3.2 Foreign Labor........................................ Error! Bookmark not defined. 12.4.4 Industry Consolidation ........................................... Error! Bookmark not defined. 12.4.5 Impact on Innovation and Product Utility ....................................................... 12-11 12.4.6 Cumulative Burdens ......................................................................................... 12-11 12.4.6.1 Food Service Equipment Sanitation Certification Error! Bookmark not defined. 12.4.6.2 Potential Climate Change and Greenhouse Gas Legislation Error! Bookmark not defin 12.4.6.3 Standards for Other Products Made by Residential dehumidifiers Manufacturers .................................................................................................. 12-12 12.4.6.4 State and International Standards .......... Error! Bookmark not defined. 12.4.7 Impact on Small Manufacturers ....................................................................... 12-12

12 -iCHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify the likely impacts of amended energy conservation standards on manufacturers. The U.S. Department of Energy ( DOE ) will conduct this analysis with input from manufacturers and other interested parties and will apply this methodology to its evaluation of amended energy conservation standards for residential dehumidifiers

. DOE will also consider financial impacts and a wide range of quantitative and qualitative industry impacts that might occur following the amendment of a n energy conservation standard. For example, a particular energy conservation standard level, if adopted by DOE, could require changes to practices used in manufacturing residential dehumidifiers

. DOE will identify and come to understand these impacts through interviews with manufacturers and other interested parties during the notice of proposed rulemaking ( NOPR ) stage of its analysis.

DOE announced changes to the MIA format through a report issued to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 ( EPACT 2005 )), entitled “Energy Conservation Standards Activities.” a Previously, DOE did not report any MIA results until the NOPR phase; however, under this new format, DOE has collected, evaluate d , and report ed preliminary information and data during the preliminary phase (the phase preceding the NOPR) of this rulemaking . Such preliminary information includes the anticipated conversion capital expenditures by efficiency level and the corresponding anticipated impacts on jobs. DOE solicited this information during the engineering analysis manufacturer interviews and reported the results below.

12.2 METHODOLO GY

DOE conducts the MIA in three phases and further tailor s the analytical framework based on comments from interested parties

. In Phase 1, DOE creates an industry profile to characterize the industry and conducts preliminary manufacturer interviews to identify important issues that require consideration. The preliminary
t echnical support document (preliminary TSD ) presents the results of the Phase 1 analysis. In Phase 2, DOE prepares an industry cash -flow model and an interview questionnaire to guide subsequent discussions. In Phase 3, DOE interviews manufacturers, and assesses the impacts of amended energy conservation standards both quantitatively and qualitatively. Us ing the government regulatory i mpact m odel (GRIM)

, DOE assesses i ndustry and sub-group cash flow and NPV. Then, DOE assesses impacts on competition, manufacturing capacity, employment, and regulatory burden based on

a This report is a vailable on the DOE website at www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html

.

12 -1feedback received during manufacturer interview s and subsequent discussions. The NOPR TSD presents r esults of the Phase 2 and 3 analyses.

12.2.1 Phase 1: Industry Profile

In Phase 1 of the manufacturer impact analysis, DOE collect s pertinent qualitative and quantitative financial and market information. This includes residential dehumidifier manufacturer market share s, corporate operating ratios, wages, employment levels , and production cost ratios. Sources of information may include reports published by industry groups, trade journals, the U.S. Census Bureau, copies of Securities Exchange Commission (SEC) 10- K filings , and interv iews with manufacturers

. DOE also relies on information from its market and technology assessment, engineering analysis, life

- cycle cost analysis, and markup analysis.

12.2.2 Phase 2: Industry Cash

- Flow Analysis and Interview Guide

In Phase 2, DOE will perform a preliminary industry cash

- flow analysis and
prepare written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash -Flow Analysis

DOE uses the GRIM to analyze the financial impacts of amended energy conservation standards on the residential dehumidifierindustry. Standards will likely require additional investment, raise production costs, and affect revenue through higher prices and, possibly, lower sales. T he GRIM uses several factors to determine a series of annual cash flows for the year standard s become effective and for several years after implementation. These factors include annual e xpected revenues, costs of sales, selling and general administration costs, and taxes, a s well as capital expenditures, depreciation and maintenance related to new stand ards. Inputs to the GRIM include manufacturing costs, shipments forecasts, and price forecasts developed in other analyses. Another input, f inancial information , will be developed based on publicly available data and confidentially submitted manufacturer information. DOE compares t he results of the GRIM against baseline projections where no standards are in place

. The financial impact of amended energy conservation standards is the difference between the two sets o f discounted annual cash flows.

12.2.2.2 Interview Guide

DOE will conduct interviews with manufacturer s to gather information on the effects of standard s on revenues and finances, direct employment, capital assets, and industry competitiveness. Before the interviews, DOE will distribute an interview guide that will provide a starting point to identify relevant issues and help identify the impacts of standards on individual manufacturers or sub-groups of manufacturers. DOE anticipates t hat the interview guide will cover c urrent o rganizational c haracteristics

, industry i nfrastructure, manufacturer c ash

- flow analysis, a competitive impacts assessment, an employment impacts assessment, and a manufacturing capacity impacts
assessment.

12 -212.2.3 Phase 3: Sub -G roup Analysis

Phase 3 activities include manufacturer interviews, revision of the industry cashflow analysis, manufacturer sub -group cash- flow analysis, competitive impact assessment, manufacturing capacity impact, employment impact, and cumulative regulatory burden.

12.2.3.1 Manufacturer Interviews

The information gathered in Phase 1 and the cash -flow analysis performed in Phase 2 will be supplemented with information gathered during interviews with manufacturers during Phase 3. The interview process has a key role in the manufacturer impact analys is , since it provides an opportunity for interested parties to express their views privately on important issues, allowing confidential or sensitive information to be considered in the rulemaking decision.

DOE will conduct detailed interviews with as many ma nufacturers as necessary to gain insight into the range of potential impacts of standards. During the interviews, DOE will solicit information on the possible impacts of standards on sales, direct employment, capital assets, and industry competitiveness. B oth qualitative and quantitative information are valuable. Interviews will be scheduled well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire will be acceptab le, DOE prefers an interactive interview process because it helps clarify responses and provides the opportunity to identify additional issues.

All information transmitted will be considered, as appropriate, in DOE’s decision

making process. Interview part icipants will be asked to identify all confidential information provided in writing or orally ; no confidential information will be made available in the public record. Participants will also be asked to identify all information they wish included in the public record but do not want to have associated with their interview. This information will be incorporated into the public record but reported without attribution.

12.2.3.2 Revised Industry Cash

- Flow Analysis

In Phase 2 of the MIA, DOE will provide manufacturers with a preliminary GRIM for review and evaluation. During the interviews, DOE will seek comment and suggestions regarding the values selected for the parameters. Upon completion of the interviews, DOE will revise its industry cash -flow model based on manuf acturer feedback.

12.2.3.3 Manufacturer Sub

- Group Analysis

Using average cost assumptions to develop an industry cash- flow estimate is not adequate for assessing differential impacts among sub

- groups of manufacturers. Smaller manufacturers, niche players, or manuf acturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected . Ideally, DOE would

12 -3consider the impact on every firm individually; however, it typically uses the results of the industry characterizatio n to group manufacturers exhibiting similar characteristics. During the interview process, DOE will discuss the potential sub

- groups and sub -group members that have been identified for the analysis. DOE will look to the manufacturers and other stakeholders to suggest what sub

- groups or characteristics are most appropriate for the analysis.

12.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to consider any lessening of competition likely to result from standards. It further directs the U.S. Attorney General to determine the impacts, if any, of any decrease in competition. DOE will make a determined effort to gather and report firm

- specific financial information and impacts. The competitive analysis will focus on assessing the impacts on smaller, yet significant, manufacturers. The assessment will be based on manufacturing cost data and information collected from interviews with manufacturers. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some manufacturers, the potential increase in business risks from an increased proportion of fixed costs, and potential barriers to market entry ( e.g. , proprietary technologies).

12.2.3.5 Manufacturing Ca pacity Impact

One of the significant outcomes of standards could be the obsolescence of existing manufacturing assets, including tooling and investment. The manufacturer interview guide will have a series of questions to help identify impacts on manufactur ing capacity, specifically capacity utilization and plant location decisions in North America with and without a standard; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of s tranded assets, if any; and estimates for any one- time restructuring and other charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. T o assess how domestic employment patterns might be affected, the interview will explore current employment trends in the residential dehumidifierindustry. T he interview will also solicit manufacture r views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide will focus on current employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without a standard, and differences in workforce skills and issues related to the retraining of employees.

12.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of amended energy conservation standards and other regulatory actions affecting the same products. DOE will analyze and consider the impact on manufacturers of multiple,

12 -4product- specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified regulations relevant to reside ntial dehumidifier manufacturers including standards for other products made by residential dehumidifier manufacturers, and third -party certification programs. DOE will study the potential impacts of these cumulative burdens in greater detail during the MIA conducted during the NOPR phase.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

During the pre liminary rulemaking phase, DOE conducted a preliminary evaluation of the impact of potential amended energy conservation standards on manufacturer market share and financial performance, industry consolidation, manufacturing capacity, and product utility and innovation. The interviews also served as an opportunity to get feedback from manufacturers relating to other regulatory burdens they may face.

The primary sou rces of information for this analysis were on- site or telephone interviews with manufacturers of residential dehumidifiers conducted in September and October of 2013. To maintain confidentiality, DOE did not identify the individual manufacturers that discl osed information . The evaluation only reports aggregated information and does not disclose sensitive or company-specific information.

For the preliminary MIA, DOE conducted interviews with manufacturers primarily to identify key issues and gain insights into the qualitative impacts of amended energy conservation standards. For each product, DOE used an interview guide to gather responses from multiple manufacturers on many issues. Appendix 12A of this preliminary TSD contains a copy of the interview guide for residential dehumidifiers

.
12.3.1 General Interview Structure

The manufacturer interviews included questions relating to the following topics. DOE received responses to most, if not all, of these topics from various manufacturers.

12.3.1.1 Key Issues

Perhaps the most important aspect of the preliminary MIA is the opportunity to identify key manufacturer issues early in the development of amended energy conservation standards. During the interviews, DOE engages manufacturers in a discussion about what t hey perceive to be the key issues in the rulemaking. Key issues, once identified, are added to the list of topics explored during NOPR

- phase interviews. For example, key issues in previous rulemakings have included the ability to pass cost increases on to consumers.

12.3.1.2 Shipment Trends and Projections

Shipment projections can be a significant factor in de termining the impacts of amended energy conservation standards. The interviews provide an opportunity for

12 -5manufacturers to share information that can help DOE quantify the magnitude of any changes in shipments resulting from amended energy conservation standards. DOE is interested in information relating to the historical and current number of product shipments, broken down by product class, capacity rating , and efficiency level. DOE also seeks input on the forecast of future shipments absent amended energy conservation standards. Manufacturers are asked how they would expect shipments to change for the industry as a whole as a function of standard levels and why they expect these changes might occur. More specific questions aim to derive a price elasticity estimate for use in the national i mpact a nalysis (NIA) spreadsheet.

Another aspect of the shipments discussion is to understand the impacts of a reduction in s hipments on individual manufacturers of residential dehumidifiers

.
12.3.1.3 Profitability

DOE requests manufacturers’ views on what they perceive to be the possible impact of potential amended energy conservation standards on their future profitability. Amended energy conservation standards could affect financial performance in several different ways. Several of these impacts are captured in previous sections. For instance

, the outlays of capital to upgrade manufacturing equipment before it has reached the end of its useful life and the investment in product development to redesign products to comply with amended standards can engender significant conversion costs that otherwise would not be expend ed , resulting in reduced cash flow and stranded investments. H igher energy efficiency standards also can result in higher per -unit costs that may deter some consumers from purchasing the products, or cause some consumers to choose less efficient products , thereby reducing shipments. Alternatively, if manufacturers wish to maintain a cost competitive product offering on minimally compliant products , the inability to pass

- through increased per -unit costs to the consumer may decrease the manufacturers’ gross margin (as a percentage).

12.3.1.4 Product Mix

DOE is interested in understanding if amended energy conservation standards might change a manufacturer’s product mix and if this change affects profits. For example, higher energy efficiency standards might limit a manufacturer’s ability to differentiate and market premium products that command higher profit margins.

The interview guide also investigates how amended energy conservation standards might affect a manufacturer’s c onsumer mix and its distribution channe ls

, and how in turn this might change profitability.

12.3.1.5 Conversion Costs

During the interviews, DOE asks manufacturers to quantify and explain both the capital and product conversion costs necessary to raise the energy efficiency of their product lines to the proposed standard levels. In some instances, manufacture r s may be able to meet proposed standard levels by modifying existing products. In other cases, the necessary changes may entail a complete product

- line redesign. In these situations, an

12 -6increase in efficiency standards will cause manufacturers to incur one -time conversion capital expenditures and product conversion expenses. C apital c onversion c costs are one

time investments in property, plant, and equipment. Product conversion costs include

one- time investments in research, product development, testing , and marketing.

12.3.1.6 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the marketplace. This can include prompting companies to ent er the market, exit the market, or merge with other companies. The preliminary MIA interview questions ask manufacturers to share their perspectives on industry consolidation both in the absence of amended standards and assuming amended standards at various efficiency levels. The interview questions focus on gathering information that helps in assessing:

• disproportionate cost increases to some manufacturers;

• increased proportion of fixed costs potentially increasing business risks; and

• potential barriers to market entry ( e.g. , proprietary technologies).

12.3.1.7 Product Utility and Innovation

DOE conducts an assessment of anti -competitive effects of proposed standards in order to protect the interests of the consumer. During the interviews, DOE solicits information to understand if amended standards could result in disproportionate economic or performance penalties for particular consumer/user sub

- groups.
DOE also asks manufacturers if amended energy conservation standards could result in products that will be more or less desirable to consumers due to changes in product functionality, utility, or other features.

Amended energy conservation standards may require investment in conversion costs, including research and development (R&D). This required spending may force a manufacturer to reduce funding usually allocated to product innovation. Amended energy conservation standards may also force manufacturers to eliminate innovative energy

consuming features from their products. During the interview s, DOE request s informati on on the effect of proposed standards on innovation.

12.3.1.8 Impact on Small Manufacturers

DOE will consider the possibility of small businesses being affected by the promulgation of amended energy conservation standards for residential dehumidifiers

. Should any small business manufacturers be identified, DOE will study the potential impacts on these small businesses in greater detail during the MIA.

12 -712.3.1.9 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have serious consequences for some manufacturers, groups of manufacturers, or entire industries. Assessing the impact of a single regulation may overlook this cumulative regulatory burden.

Expenditures associated with meeting other regulations are an important aspect of DOE’s consideration of the “cumulative regulatory burden” the industry faces

. The interviews help DOE identify the level and timing of investments manufacturers are expecting to incur as a r esult of these regulations. Manufacturers are also asked under what circumstances they might be able to coordinate expenditures related to these regulations and efficiency standards.

In addition to the amended energy conservation standards for residential dehumidifiers, several other Federal regulations and pending regulations apply to t hese products. DOE will investigate these cumulative regulatory burdens in greater detail during the NOPR phase of the rulemaking.

12.4 RESIDENTIAL DEHUMIDIFIER PRELIMINARY MIA RESULTS

During the preliminary MIA interview, m anufacturers identified key issues surrounding DOE’s rulemaking for residential dehumidifiers and provided feedback regarding the potential impact of amended energy conservation standards

. DO E summarized the feedback below

.
12.4.1 Key Issues

One of the central questions of the preliminary analysis manufacturer interview guide is: “What are the key issues for your company regarding the residential dehumidifier energy conservation standard s rulemaking?” This open question initiated dialogue with manufacturers, enabling them to identify key points that DOE would explore and discuss during the interview. This section describes the key issues manufacturers felt were of the highest importance an d that would have the most significant impact on the industry. Manufacturers indicated that, for the most part, the risks associated with these issues increase with more stringent energy conservation standards. The issues are overall concerns that many manufacturers expressed and in some cases, are specific to a given product class.

Residential dehumidifier manufacturers cited concerns regarding a number of issues that are covered in greater detail elsewhere in this chapter

. Detailed descriptions of these manufacturer concerns are provided in the appropriate sections that follow; only brief descriptions are provided here.

• Impacts of higher selling prices – A number of manufacturers cited that the higher selling pr ices necessitated by increased manufacturing costs would be detrimental to the industry , and could effectively price -out a segment of the dehumidifier

12 -8consumers. Price increases could be particularly severe in the whole -home segment due to the two- tier dis tribution structure.

• Application constraints for whole -home manufacturers – A manufacturer of whole-home dehumidifiers noted that size constraints exist for certain whole

home dehumidifier applications, which limit the ability to make higher efficiency products.

• Impacts on consumer u tility – Manufacturers of residential dehumidifiers believe that increased product efficiency will come at a cost to product size, noise level, and performance at low temperatures.

The other issues of key importance to manufacturers are the conversion costs associated with new efficiency standards and disproportionate impacts on small businesses

.
12.4.2 Profitability , Product Mix, and Shipments

DOE asked manufacturers during the prelimina ry manufacturer interviews about trends in shipments absent amended energy conservation standards as well as about how amended energy conservation standards would affect their overall shipments, profitability

, and product mix.

One portable dehumidifier manufacturer stated that overall shipments of portable dehumidifiers have declined by at least 40 percent since 2007. Absent amended standards, two manufacturers believe that small regional climate changes ( i.e.
, rain and flooding) will have the greatest impact on the residential dehumidifier market , while another manufacturer believes that changing building practices, including increased emphasis on sensible load and HVAC system optimization, will increase the demand for dehumidifiers in the home . Another manufacturer expressed concerns that increased efficiency of residential cooling products could have negative impacts on the demand for dehumidifiers.

Nearly all manufacturers stated that amended energy conservation standards would have a nega tive impact on total industry shipments, although the magnitude of the decrease would depend on the efficiency levels chosen. Two manufacturers emphasized that the residential dehumidifier market, particularly the portable segment, is a highl y price -compet itive market in which pricing has a large impact on sales

. Three manufacturers affirmed that increased production c osts can only be passed through to a certain point, after which demand would decline. Relatedly, o ne of these manufacturers suggested that co nsumers may opt to rent units as

- needed , instead of buying one, as price increases. Another manufacturer noted that its margins decreased following the last standard, as it was not able to fully pass on cost increases to retailers.

Among portable manufacturers, it was generally felt that small increases in manufacturer production costs on the order of 5 percent to 10 percent are tolerable

. However, manufacturers affirmed that a cost increase of 25 percent would have major impacts on the portable d ehumidifier market . According to manufacturers interviewed, a

12 -9cost increase of 50 percent or more would cause the market to collapse entirely

. A whole

home dehumidifier manufacturer stated that a 10 -percent increase in cost would have significant impact on the whole- home market because any increases in manufacturer production costs are magnified due to the two-tiered distribution channel that is characteristic of the whole

- home market.

Additionally, in some homes , whole-home dehumidifiers must fit into a small attic space . If amended energy conservation standards for whole-home products cannot be met within the size constraint s associated with this type of application, part of the whole-home market segment may move to portable products, shifting the product mix of the industry at large and adversely impacting whole-home segment shipments and

revenues.

12.4.3 Market Share and Industry Consolidation

Portable dehumidifier manufacturers have differing views of the impact of conservation standards on manufacturer market share and industry consolidation. One manufacturer expects that the industry will consolidate in order to share the burden of costs associated with compliance. Another manufacturer believes market shares will remain relatively stable, but overall industry profits will declin e, as manufacturers are forced to internalize some of the increased production costs in order to maintain demand. Yet another manufacturer sees new energy conservation standards as an opportunity to develop new technology and ultimately improve its competitive position.

In the whole-home segment, absent energy conservation standards, one manufacturer commented that it does not expect consolidation between the whole- home and portable dehumidifier market segments because of the fact that t he two markets have entirely different distribution channels. However, with new standards, and because portable dehumidifier manufacturers are general ly larger, more diversified and better able to handle absorbing cost increases, this manufacturer fears th at a portion of the wholehome consumer base may switch to higher- capacity portable units . This would have a negative impact on whole- home manufacturer market share relative to the entire residential dehumidifier industry.

12.4.4 Conversion Costs, Manufacturing Capacity, and Employment Levels

DOE asked manufacturers what level of conversion costs they anticipate if amende d energy conservation standards were to take effect . M anufacturers said that conversion costs would be significant if amended standards require new product platforms , in the form of increased product envelope size

. One manufacturer estimated that total conversion costs associated with changes to product envelopes would be ten times the cost of adjustments that do not require changes to chassis size . The cost of such changes varies by manufacturer, depending on the volume of production and the mix of capi tal, tooling, and engineering investments required. The m agnitude of conversion costs also depends on whether the manufacturer produces its own products or imports them. One importer noted that it takes on a portion of the capital conversion costs of its OEM based on the portion of the OEM’s production that it imports . M anufacturers

12

- 10indicated potential per product conversion costs could range from 0.5 million dollars to 1 million dollars

.
12.4.5 Impact on Innovation and Product Utility

Several m anufacturers expressed concerns that s tringent energy efficiency standards could have a negative impact on product characteristics and performance from the consumer standpoint

. Manufacturers cited multiple points of impact brought about by stricter standards including price, size, noise level, and product performance at low temperatures. Manufacturers agree that amended standards would increase the cost s of residential dehumidifiers across the board . M anufacturers also believe that the price increases would force some lower income customers out of the market altogether , and may force some middle income customers to rent dehumidifiers, as needed, when mois ture issues arise

. Some manufacturers also raised concern over the need for residential dehumidifiers to become physically larger to deliver the same moisture removal capacity at the new efficiency standard

. As such, for customers with significant space co nstraints , amended standards may inhibit these customers from getting the product that best fits their needs. For example, relating to the market for whole-home dehumidifiers, a growing segment of the market (southern homes) has size constraints in the form of small attic spaces, so a new efficiency standard might prevent them from buying a whole-home dehumidifier and/or force them to accept a lower

- capacity unit

. Regarding product innovation, one manufacturer believes that stringent energy efficiency standards would decrease consumer -focused product innovation by diverting finite human and capital resources. In contrast, another manufacturer affirms non

efficiency innovation is purely market driven and , in the residential dehumidifier market, consumers are only concerned with price. This manufacturer cites the market rejection of liquid desiccant technology as an example. Finally, another manufacturer believes that new efficiency standards will cause manufacturers to produce better quality products overall.

12.4.6 Cumulative Burden s

Based on its own research and discussions with manufacturers, DOE identified the following regulations relevant to residential dehumidifiers , including:

• standards for other products made by residential dehumidifier manufacturers ; and

• third

- party certification requirements.

Complying with such regulations requires corporations to invest both human and capital resources. The following subsections discuss in greater detail regulations affec ting the residential dehumidifiers industry.

12

- 1112.4.6.1 Standards for Other Products Made by Residential D ehumidifier Manufacturers

In addition to the efficiency regulations for residential dehumidifiers

, several other Federal regulations and pending regulations apply to other products manufactured by the companies that manufacture residential dehumidifiers

. Several of these companies also manufacture residential air -conditioning and laundry equipment. In July of 2013, DOE published a notice of proposed determination regarding portable air conditioners. If DOE issues a final determination that portable air -conditioners are a covered product, DOE may prescribe test procedures and energy conserv ation standards for portable air

conditioner s. For residential clothes washers, DOE published a notice of effective date and compliance dates for the direct final rule in October 2012 . F or residential clothes washers, DOE published a new standard in 2011 and a new test procedure in 2013.

Other Federal conservation standards that may impact manufacturers of residential dehumidifiers include the standard for r esidential f urnaces , c entral a ir conditioners and h eat p umps , the standard for residential furnace f ans, and the standard for packaged terminal air conditioners and heat pumps.

12.4.6.2 Third -Party Certification Programs

Several manufacturers were concerned with the fact that changes in the DOE energy conservation standards, and the resulting re-design of their equipment, would require them to re

- certify all of their equipment with other organizations aside from DOE. This would include re- testing and certification by Underwriters Laboratories (UL).

Additionally, one manufacturer cited increasing requirements of “big box” retailers

, which are a crucial component in the portable dehumidifier distribution channel, as a cumulative burden. Retailers such as Walmart and Home Depot have adopted their own certification systems for suppliers in efforts relating to quality assurance and the fulfillment of “ethical sourcing” c ommitments. b

, c

12.4.7 Impact on Small Manufacturers

The Small Business Administration ( SBA ) defines small business manufacturing enterprises for North American Industry Classification System (NAICS) code 335210, Small Electrical Appliance Manufacturing as companies with 750 or less employees and code 333415, Air -Conditioning and Warm Air Heating Equipment and Commercial and

b For more information on Home Depot’s supplier requirements, please see: https://homedepotlink.homedepot.com/en

us/Related%20Documents/Import%20Supplier%20Handbook%20092811.pdf

c For more information on Walmart’ s supplier requirements, please see: http://cdn.corporate.walmart.com/0e/ca/52eda3d84f828f82da0e9a02f021/standards

- for

- suppliers

manual_129833075555266802.pdf

12

- 12Industrial Refrigeration Equipment Manufacturing , as companies with 750 or less employe es

. SBA lists small business size standards that are matched to industries as they are described in the NAICS. The size standard defines the maximum allowable size of a for -profit small business for Federal Government programs. S ize standards are generally based on the average annual receipts or the average number of employees at a firm.

Initial research and manufacturer in terviews indicated that the majority of whole

home manufacturers are small businesses, under the above definition. In general, due to the more limited product offerings of these manufacturers relative to larger, more diversified portable dehumidifier manufacturers and the low-volume nature of the wholehome dehumidifier market, it is believed that DOE efficiency standards will place a disproportionate burden on these businesses.

DOE will study the potential impacts to these small businesses in greater detail during the NOPR phase of this energy conservation standards rulemaking for residential dehumidifiers.

12

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