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CHAPTER 13. MANUFACTURER IMPACT ANALYSIS 

TABLE OF CONTENTS 

13.1 INTRODUCTION ......................................................................................................... 13-1 

13.2 METHODOLOGY ........................................................................................................ 13-1 

13.2.1 Phase I: Industry Profile..................................................................................... 13-1 

13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide............................ 13-2 

13.2.2.1 Industry Cash-Flow Analysis............................................................... 13-2 

13.2.2.2 Interview Guide ................................................................................... 13-2 

13.2.3 Phase III: Sub-Group Impact Analysis .............................................................. 13-2 

13.2.3.1 Manufacturer Interviews...................................................................... 13-3 

13.2.3.2 Revised Industry Cash-Flow Analysis................................................. 13-3 

13.2.3.3 Manufacturer Sub-Group Analysis...................................................... 13-3 

13.2.3.4 Small-Business Manufacturer Sub-Group ........................................... 13-4 

13.2.3.5 Competitive Impact Assessment.......................................................... 13-4 

13.2.3.6 Manufacturing Capacity Impact .......................................................... 13-4 

13.2.3.7 Employment Impact............................................................................. 13-5 

13.2.3.8 Cumulative Regulatory Burden ........................................................... 13-5 

13.3 MANUFACTURING IMPACT ANALYSIS KEY ISSUES ........................................ 13-5 

13.4 GRIM INPUTS AND ASSUMPTIONS........................................................................ 13-7 

13.4.1 Overview of the GRIM ...................................................................................... 13-7 

13.4.2 Sources of GRIM Inputs .................................................................................... 13-8 

13.4.2.1 Corporate Annual Reports ................................................................... 13-8 

13.4.2.2 Standard and Poor Credit Ratings........................................................ 13-9 

13.4.2.3 Shipments Model ................................................................................. 13-9 

13.4.2.4 Engineering Analysis........................................................................... 13-9 

13.4.2.5 Manufacturer Interviews...................................................................... 13-9 

13.4.3 Financial Parameters........................................................................................ 13-10 

13.4.4 Corporate Discount Rate.................................................................................. 13-10 

13.4.5 Trial Standard Levels....................................................................................... 13-12 

13.4.6 Shipments......................................................................................................... 13-12 

13.4.7 Production Costs .............................................................................................. 13-16 

13.4.8 Conversion Costs ............................................................................................. 13-17 

13.4.9 Markup Scenarios ............................................................................................ 13-19 

13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario ......................... 13-19 

13.4.9.2 Preservation-of-Gross-Margin (Absolute Dollars) Scenario ............. 13-20 

13.5 INDUSTRY FINANCIAL IMPACTS ........................................................................ 13-23 

13.5.1 Impacts on Industry Net Present Value ........................................................... 13-23 

13.5.2 Impacts on Annual Cash Flow......................................................................... 13-24 

13.6 OTHER IMPACTS...................................................................................................... 13-26 

13.6.1 Employment..................................................................................................... 13-26 

13.6.2 Production Capacity......................................................................................... 13-29 

13.6.3 Exports ............................................................................................................. 13-29 

13.6.4 Cumulative Regulatory Burden ....................................................................... 13-30 

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13.6.4.1 Federal Regulations on Commercial Refrigeration Equipment and Other 

Equipment Produced by the Same Manufacturers............................ 13-30 

13.6.4.2 Restriction of Hazardous Substances Directive................................. 13-31 

13.6.4.3 Other Regulations on Commercial Refrigeration Equipment............ 13-31 

13.7 CONCLUSIONS.......................................................................................................... 13-31 

REFERENCES ........................................................................................................................ 13-34 

LIST OF TABLES 

Table 13-1 GRIM Financial Parameters................................................................................ 13-10 

Table 13-2 Baseline Efficiency Levels and Trial Standard Levels........................................ 13-12 

Table 13-3 Industry-Wide Shipments Forecast in 2012 ........................................................ 13-13 

Table 13-4 Distribution of VOP.RC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-13 

Table 13-5 Distribution of VOP.RC.L by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-13 

Table 13-6 Distribution of VOP.SC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-14 

Table 13-7 Distribution of VCT.RC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-14 

Table 13-8 Distribution of VCT.RC.L by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-14 

Table 13-9 Distribution of VCT.SC.I by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-14 

Table 13-10 Distribution of VCS.SC.I by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-14 

Table 13-11 Distribution of SVO.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels................................................................................................ 13-15 

Table 13-12 Distribution of SVO.SC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-15 

Table 13-13 Distribution of SOC.RC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-15 

Table 13-14 Distribution of HZO.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels................................................................................................ 13-15 

Table 13-15 Distribution of HZO.RC.L by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-16 

Table 13-16 Distribution of HZO.SC.M by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-16 

Table 13-17 Distribution of HZO.SC.L by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-16 

Table 13-18 Distribution of HCT.SC.I by Efficiency Level in 2012 for Different Trial Standard 

Levels............................................................................................................... 13-16 

Table 13-19 Capital Conversion Expenditures by Trial Standard Level (2007$ millions) .... 13-18 

Table 13-20 Equipment Conversion Expenditures by Trial Standard Level (2007$ millions) .. 13-

18 

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Table 13-21 Stranded Assets by Trial Standard Level (2007$ millions)................................ 13-19 

Table 13-22 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.M...... 13-20 

Table 13-23 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.L....... 13-20 

Table 13-24 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.SC.M...... 13-20 

Table 13-25 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.M...... 13-21 

Table 13-26 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.L....... 13-21 

Table 13-27 Preservation-of-Gross-Margin (Absolute Dollars)Markup for VCT.SC.I ......... 13-21 

Table 13-28 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCS.SC.I ........ 13-21 

Table 13-29 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.RC.M...... 13-21 

Table 13-30 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.SC.M...... 13-22 

Table 13-31 Preservation-of-Gross-Margin (Absolute Dollars)Markup for SOC.RC.M....... 13-22 

Table 13-32 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.M ..... 13-22 

Table 13-33 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.L ...... 13-22 

Table 13-34 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.M...... 13-23 

Table 13-35 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.L....... 13-23 

Table 13-36 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HCT.SC.I ........ 13-23 

Table 13-37 Changes in Industry Net Present Value (Preservation-of-Gross-Margin-Percentage 

Markup Scenario)............................................................................................. 13-24 

Table 13-38 Changes in Industry Net Present Value (Preservation-of-Gross-Margin (Absolute 

Dollars) Markup Scenario) .............................................................................. 13-24 

Table 13-39 Commercial Refrigeration Equipment Industry Estimated Employment Impacts in 

2012.................................................................................................................. 13-28 

Table 13-40 Federal Regulation Timetables............................................................................ 13-30 

LIST OF FIGURES 

Figure 13-1 Using the GRIM to Calculate Cash Flow ............................................................. 13-8 

Figure 13-2 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin-Percentage 

Markup Scenario)............................................................................................. 13-25 

Figure 13-3 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin (Absolute Dollars) 

Markup Scenario)............................................................................................. 13-26 

Figure 13-4 Commercial Refrigeration Equipment Industry Cost Structure.......................... 13-27 

Figure 13-5 Total Commercial Refrigeration Equipment Industry Employment by Year..... 13-28 

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CHAPTER 13. MANUFACTURER IMPACT ANALYSIS 

13.1 INTRODUCTION 

In determining whether a standard is economically justified, the Secretary of Energy is 

required to consider "the economic impact of the standard on the manufacturers and on the 

consumers of the equipment subject to such a standard.”a The legislation also calls for an 

assessment of the impact of any lessening of competition as determined in writing by the 

Attorney General. The U.S. Department of Energy (DOE) conducted a manufacturer impact 

analysis (MIA) to estimate the financial impact of higher efficiency standards on manufacturers 

of commercial refrigeration equipment (CRE) and to assess the impact of such standards on 

employment and manufacturing capacity. The MIA has both quantitative and qualitative aspects. 

The quantitative portion of the MIA primarily relies on the Government Regulatory 

Impact Model (GRIM), an industry cash-flow model adapted for this rulemaking. GRIM inputs 

are industry cost structure, shipments, and pricing strategies. The GRIM’s key output is industry 

net present value (INPV). The model estimates the financial impact of higher efficiency 

standards by comparing changes in INPV between a baseline case and various trial standard 

levels (TSLs). 

The qualitative portion of the MIA addresses factors such as equipment characteristics, 

characteristics of particular firms, and market and equipment trends, and includes an assessment 

of the impacts of standards on sub-groups of manufacturers. 

13.2 METHODOLOGY 

DOE conducted the MIA in three phases. Phase I, Industry Profile, consisted of the 

preparation of an industry characterization including data on market share, sales volumes and 

trends, pricing, employment, and financial structure. Phase II, Industry Cash-Flow Analysis and 

Interview Guide, focused on the industry as a whole. In this phase, DOE used the GRIM to 

prepare an industry cash-flow analysis. Using publicly available information developed in Phase 

I, DOE adapted the GRIM’s structure to facilitate analysis of new CRE standards. In Phase III, 

Sub-Group Impact Analysis, DOE conducted interviews with several manufacturers comprising 

over 90 percent of the CRE industry. During these interviews, DOE discussed financial topics 

specific to each company and obtained each manufacturer’s view of the industry as a whole. The 

interviews provided valuable information that DOE used to evaluate the impacts of a new 

standard on manufacturer cash flows, manufacturing capacities, and employment levels. The 

following subsections describe more specifically the steps DOE took in developing information 

for the MIA. 

13.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE prepared a profile of the CRE industry that built on the 

market and technology assessments prepared for this rulemaking (Chapter 3 of this TSD). 

 

a

 DOE’s standards program for commercial equipment is conducted under Title III, Part C of the Energy Policy and 

Conservation Act (EPCA), 42 U.S.C. 6311-6317. 

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Before initiating the detailed impact studies, DOE collected information on the past and present 

structure and market characteristics of the CRE industry. This included estimated market shares 

of CRE manufacturers, corporate operating ratios, wages, employment, and production cost 

ratios. The industry profile included a top-down cost analysis of the CRE manufacturing 

industry that DOE used to derive cost and financial inputs for the GRIM (e.g., revenues; 

material; labor; overhead; depreciation; sales, general, and administration expenses (SG&A); and 

research and development (R&D) expenses). DOE used additional sources of information to 

further calibrate its characterization of the industry, including company Securities and Exchange 

Commission (SEC) 10–K reports, Standard & Poor’s (S&P) stock reports, and corporate annual 

reports. DOE also relied on information from its engineering analysis, life-cycle cost analysis, 

and analysis of markups to determine equipment price to characterize the CRE manufacturing 

industry. 

13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide 

In Phase II, DOE performed a preliminary industry cash-flow analysis and prepared 

written guidelines for interviewing manufacturers. 

13.2.2.1 Industry Cash-Flow Analysis 

The industry cash-flow analysis focused on the financial impacts of new standards on the 

CRE industry as a whole. New energy conservation standards can affect CRE manufacturers in 

three distinct ways: (1) require additional investment, (2) raise production costs, and (3) affect 

revenues through higher prices, and possibly, lower shipments. The analytical tool DOE uses for 

calculating the financial impacts of new energy conservation standards on manufacturers is the 

GRIM. DOE performed a cash-flow analysis using the GRIM on the CRE industry to quantify 

these impacts. 

13.2.2.2 Interview Guide 

During Phase III of the MIA, DOE conducted interviews with manufacturers to gather 

information on the effects of new energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Before the interviews, DOE 

distributed an interview guide to help identify the impacts of new energy conservation standards 

on individual manufacturers or sub-groups of manufacturers. Manufacturers received the guide 

before the interviews to allow them to prepare their responses in advance. The interview guide 

led interviewers through a series of questions on current organizational characteristics, industry 

infrastructure, manufacturer cash flow, competitive impacts, employment impacts, and 

manufacturing capacity impacts. 

13.2.3 Phase III: Sub-Group Impact Analysis 

Many of the same companies that participated in the MIA interviews also participated in 

interviews for the engineering analysis. However, the MIA interviews broadened the discussion 

from primarily technology-related issues to business-related topics. The objectives were to 

obtain feedback from industry on the GRIM’s assumptions and to isolate key issues and 

concerns. DOE defined three distinctive sub-groups that could be affected by the new energy 

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conservation standards: major manufacturers, small businesses, and manufacturers of niche 

equipment. The following sections summarize the methodology and findings of this assessment. 

13.2.3.1 Manufacturer Interviews 

DOE supplemented the information gathered in Phase I and the cash-flow analysis 

performed in Phase II with information gathered during interviews with manufacturers during 

Phase III. The interview process has a key role in the manufacturer impact analyses 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 process. 

DOE contacted companies from its database of manufacturers, which provided names of 

manufacturers across the CRE industry. DOE interviewed small and large companies, 

subsidiaries and independent firms, public and private corporations, and Air-Conditioning and 

Refrigeration Institute (ARI) and non-ARI members. DOE scheduled interviews well in advance 

in order to provide every opportunity for key individuals to be available for comment. Although 

a written response to the questionnaire was acceptable, DOE prefers interactive interviews 

because they help clarify responses and provide the opportunity to identify additional issues. 

DOE conducted detailed interviews with all manufacturers, who agreed to participate to 

gain insight into the range of potential impacts and how these impacts vary with each TSL. 

During the interviews, DOE solicited information on the possible impacts of energy conservation 

standards on sales, direct employment, capital assets, and industry competitiveness. Both 

qualitative and quantitative information are valuable to the interview process. DOE then used 

the information gathered during manufacturer interviews to tailor the GRIM to incorporate 

unique financial characteristics from each equipment class. 

13.2.3.2 Revised Industry Cash-Flow Analysis 

In Phase II of the MIA, DOE provided manufacturers with preliminary financial input 

figures from the GRIM for review and evaluation. During the interviews, DOE requested 

comments on the values DOE selected for the parameters. Upon completion of the interviews, 

DOE revised its industry cash-flow model based on manufacturer feedback.

13.2.3.3 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 manufacturers exhibiting a cost structure that differs significantly from the 

industry average could be more negatively affected. Ideally, DOE would consider the impact on 

every manufacturer individually; however, it typically uses the results of the industry 

characterization to group manufacturers exhibiting similar characteristics. During the interviews, 

DOE discussed the potential sub-groups and sub-group members identified for the analysis. 

DOE looked to the manufacturers and other stakeholders to suggest what sub-groups or 

characteristics are most appropriate for the analysis. 

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13.2.3.4 Small-Business Manufacturer Sub-Group 

DOE used the small business size standards published on January 31, 1996, as amended, 

by the Small Business Administration (SBA) to determine whether any small entities would be 

required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The North 

American Industry Classification System (NAICS) code lists the size standards for various 

industries. CRE manufacturing is classified under NAICS 333415. To be categorized as a small 

business, a CRE manufacturer and its affiliates may employ a maximum of 750 employees. 

DOE reviewed ARI’s listing of CRE members and surveyed the industry to develop a list 

of every manufacturer. DOE also asked stakeholders and ARI representatives within the CRE 

industry if they were aware of other small business manufacturers. DOE then examined publicly 

available data and contacted manufacturers, when needed, to determine if they meet the SBA’s 

definition of a small business manufacturing facility and if their manufacturing facilities are 

located in the United States. Based on this analysis, DOE estimates that there are nine small, but 

significant, CRE manufacturers. DOE then contacted three small manufacturers to request 

interviews. DOE conducted on-site interviews with two of these three manufacturers to 

determine if the standards could result in differential impacts on these companies. 

DOE found that small business manufacturers generally have the same concerns as large 

manufacturers regarding energy conservation standards. DOE also found no significant 

differences in the R&D emphasis or marketing strategies between small and large manufacturers. 

Therefore, DOE believes the GRIM analysis, which models each equipment class separately and 

aggregates the results to produce an industry-wide impact, is representative of the small business 

manufacturers that would be affected by standards. 

13.2.3.5 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 imposition of standards. It further 

directs the U.S. Attorney General to determine the impacts, if any, of any decrease in 

competition. DOE made a determined effort to gather and report firm-specific financial 

information and impacts. The competitive analysis focused on assessing the impacts on smaller 

manufacturers. The assessment was based on manufacturing cost data and information collected 

from the manufacturer interviews. The interviews focused on gathering information that would 

help assess asymmetrical cost increases to some manufacturers, the potential increase in business 

risks from an increased proportion of fixed costs, and possible barriers to market entry (e.g.,

proprietary technologies).

13.2.3.6 Manufacturing Capacity Impact 

One of the significant outcomes of new energy conservation standards could be the 

obsolescence of existing manufacturing assets, including tooling and investment. The 

manufacturer interview guide helped identify impacts on manufacturing capacity, specifically 

capacity utilization and plant location decisions in the United States and North America with and 

without an energy conservation standard; the ability of manufacturers to upgrade or remodel 

existing facilities to accommodate the new requirements due to new energy conservation 

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standards; the nature and value of stranded assets, if any; and estimates for any one-time 

restructuring and other charges, where applicable.

13.2.3.7 Employment Impact 

The impact of new energy conservation standards on employment is an important 

consideration in the rulemaking process. To assess how domestic employment patterns might be 

affected, DOE explored current employment trends in the air-conditioning industry. In addition, 

DOE solicited manufacture views on changes in employment patterns that may result from more 

stringent standard levels. The employment impacts section of the interview guide focused on 

current employment levels associated with manufacturers at each of their production facilities, 

expected future employment levels with and without new energy conservation standards, and 

differences in workforce skills and issues related to employee retraining.

13.2.3.8 Cumulative Regulatory Burden 

DOE seeks to mitigate the overlapping effects on manufacturers of new energy 

conservation standards and other regulatory actions affecting the same equipment. DOE 

analyzed and considered the impact on manufacturers of multiple equipment-specific regulatory 

actions. 

Based on its own research and discussions with manufacturers, DOE identified several 

regulations relevant to commercial refrigeration equipment, including existing or new standards 

for commercial refrigeration equipment, hydrochlorofluorocarbon (HCFC) phaseout and foam 

insulation blowing agent phaseout, standards for other equipment made by CRE manufacturers, 

State energy conservation standards, and international energy conservation standards. 

13.3 MANUFACTURING IMPACT ANALYSIS KEY ISSUES 

The first question each of the MIA interview guides asks is the following: “What are the 

key issues for your company regarding energy conservation standards for commercial 

refrigeration equipment and this rulemaking?” This open question initiated dialogue with 

manufacturers, prompting them to identify key points that DOE could explore during the 

interview. This section describes the issues that the manufacturers raised most oftenb. 

• Meeting StandardsManufacturers expressed concern that they would have difficulty 

meeting certain efficiency levels for certain equipment classes. First, some 

manufacturers stated that they could not meet or would have extreme difficulty meeting 

the efficiency levels for self-contained equipment (e.g., horizontal open units). One 

manufacturer stated that due to the small number of parts in self-contained equipment, 

efficiency improvements are constrained to these parts and are therefore limited. The 

same manufacturer stated that it already uses the most efficient options available on the 

market that are available within the company’s price range. For some manufacturers, 

self-contained equipment represents only a small portion of their business. They 

 

b

 Manufacturers indicated that the risks associated with these issues generally increase with increasing TSL. 

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manufacture more remote condensing equipment and simply convert the design of remote 

condensing units into self-contained units. Second, some manufacturers stated that they 

could not meet efficiency levels 3 and 4 for medium-temperature equipment (e.g.,

SOC.RC.M, VCT.RC.M, VOP.RC.M), and that they would need technological 

innovation to achieve these levels by 2012. One manufacturer stated that no equipment it 

manufactures in the VOP.RC.M equipment class meets DOE’s baseline level. 

• Customer NeedsManufacturers are concerned that increased equipment efficiency will 

come at the expense of equipment functionality, utility, and customizability. The CRE 

industry focuses on customer needs to merchandise products, and customers place a 

higher priority on marketing and displaying their goods than on energy efficiency. 

Customers demand high levels of customization to differentiate themselves from other 

retail stores. They do not want to lose any functionality or utility in their equipment, such 

as display area, because this affects their ability to merchandise products. Often, the 

customer’s desire for easy consumer access requires equipment that is less energy 

efficient. They also do not want to lose any flexibility in design choices, such as lighting 

options. For example, some customers specify certain lighting configurations (e.g., color 

rendering, color temperature, light distribution) to maximize the sale of products like 

fresh meat, produce, or dairy items. Manufacturers believe that setting standards at the 

maximum level will affect their customers’ ability to merchandise products by limiting 

the flexibility in choosing design options, which they expect would commoditize the 

industry and reduce profit margins. Having some allowance in the efficiency thresholds 

would allow tradeoffs in design options, which would ease the reconciliation of energy 

savings with the ability to merchandise products. 

• Customer AwarenessManufacturers expressed concern that their customers are not 

sufficiently aware of pending energy conservation standards and the impacts these 

standards may have on their purchasing decisions. The supermarket industry is a lowmargin industry, where much emphasis is placed on low first cost. Manufacturers believe 

that many customers may not be able to afford an increase in equipment price due to 

higher efficiency since they operate within a fixed budget. Manufacturers stated that 

customers with a fixed capital budget would tend to extend refurbishment periods and cut 

back on equipment growth to deal with an increase in equipment prices, both of which 

will reduce annual CRE sales. Manufacturers expect that smaller stores and even small 

regional chains will feel significant financial pressure when faced with an increase in 

prices for higher efficiency equipment. In fact, single family-owned stores and local 

stores in large cities may have no capital budget to replace existing cases with cases that 

are 30-50 percent higher in price. Manufacturers stated that a reduction in sales would 

then lead to employee layoffs since labor is proportional to units sold, not equipment 

price. Manufacturers also stated that customers have usually been unwilling to adopt 

energy efficiency improvements unless there is a 12-month payback period or less. 

• Equipment ClassesManufacturers expressed concern about how their equipment would 

be classified according to the equipment classes DOE established. Manufacturers stated 

that certain low-volume equipment does not easily fit into DOE’s equipment classes, and 

other equipment is excluded from coverage. For example, custom pieces of equipment, 

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especially hybrid or combination units, do not easily fall within the DOE equipment 

classes since they could be classified in more than one category. A self-contained case 

with a service-over-counter upper portion and an open lower portion could be classified 

as a self-contained service-over-counter unit as well as a self-contained open unit. 

Wedges, transition pieces at the corners of a case lineup, have a disproportionate 

relationship between TDA and energy consumption, and therefore do not have 

meaningful energy consumption levels when normalized to TDA. Some manufacturers 

stated that low-volume equipment that cannot meet energy conservation standards may 

be discontinued, because the cost to increase efficiency will not be worth the benefit 

gained. Manufacturers also expressed concern about secondary coolant systems, which 

could provide a loop hole. Manufacturers estimate that secondary coolant systems 

represent about 10 percent of the market currently and consume about 5 percent more 

energy than their direct expansion equivalent. Some manufacturers stated that customers 

might purchase these less-efficient secondary coolant systems instead of the direct 

expansion equipment that is subject to standards. This concerns manufacturers since it 

defeats the purpose of regulatory action. 

• Component ManufacturersManufacturers expressed concern that they have little 

control over the options available to them and the price they pay for components used to 

manufacture commercial refrigeration equipment. CRE manufacturers purchase many of 

the components needed to build the equipment and therefore rely heavily on component 

manufacturers to deliver parts such as compressors, coils, doors, motors, fans, and lights. 

However, CRE manufacturers state that more-efficient components may not be readily 

available to meet standards. For self-contained equipment, for example, high-efficiency 

compressors may not be readily available. Manufacturers said that the compressors they 

purchase for commercial refrigeration are left over from the white goods industry, which 

has a much higher sales volume. According to manufacturers, the compressor industry 

has little or no incentive to invest in improving efficiency of compressors due to the 

lower volume of shipments to the CRE industry. Manufacturers also stated that 

component suppliers set their own pricing and manufacturers have no control over this. 

Manufacturers are concerned about what prices they would have to pay for more-efficient 

components in the future. 

13.4 GRIM INPUTS AND ASSUMPTIONS 

The GRIM serves as the main tool for assessing the impact on industry due to the 

imposition of new efficiency standards. DOE relied on several sources to obtain inputs for the 

GRIM in the form of data and assumptions. The GRIM’s accounting methods then produce the 

results DOE uses to describe impacts on manufacturers. 

13.4.1 Overview of the GRIM 

The basic structure of the GRIM, illustrated in Figure 13-1, is a standard annual cashflow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry 

financial information as inputs. The GRIM estimates the effects of regulatory conditions caused 

by changes in costs, investments, and associated margins. The GRIM spreadsheet uses several 

inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 

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2007, and continuing to 2042. The model calculates the INPV by summing the stream of annual 

discounted cash flows during this period. 

Figure 13-1 Using the GRIM to Calculate Cash Flow 

The GRIM projected cash flows using standard accounting principles. The model 

compared changes in INPV between the baseline equipment information (the base-case scenario) 

and different TSLs (the standards-case scenario). The difference in INPV between the base case 

and the standards case(s) represents the estimated financial impact of the new energy 

conservation standard on manufacturers. Appendix J provides more technical details and user 

information for the GRIM. 

13.4.2 Sources of GRIM Inputs 

The GRIM used several different sources for data inputs in determining cash flows for 

the industry, including corporate annual reports, credit ratings, the shipments model, the 

engineering analysis, and manufacturer interviews. 

13.4.2.1 Corporate Annual Reports 

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the financial inputs 

to the GRIM.1 These reports exist for publicly held companies and are freely available to the 

public. The SEC 10-Ks provide consistent financial data for the consolidated corporation but do 

not provide detailed financial information for the company’s CRE lines. Some SEC 10-Ks are 

therefore more relevant than others to the CRE industry analysis, depending on the prominence 

that business has in the company’s overall operations. In determining financial parameters for 

the industry, DOE weighted corporate financial information contained in the SEC 10-Ks by each 

company’s market share in the CRE industry to arrive at industry-weighted averages. DOE used 

corporate annual reports to derive the following GRIM inputs: 

• tax rate 

• working capital 

• SG&A expenses 

• research and development (R&D) expenses 

• depreciation 

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• capital expenditures 

• net property, plant, and equipment (PPE) 

DOE also used information from company SEC 10-K reports to calibrate the GRIM’s 

operating profit margin against the industry-weighted average. 

13.4.2.2 Standard and Poor Credit Ratings 

S&P provides independent credit ratings, research, and financial information. DOE 

relied on S&P reports to determine the industry’s average cost of debt for the cost of capital 

calculation. 

13.4.2.3 Shipments Model 

The GRIM used shipment projections derived from DOE's shipments model in the 

national impact analysis. The model relied on historical shipments data for commercial 

refrigeration equipment from a study by Freedonia Inc. for the Advanced Notice of Proposed 

Rulemaking (ANOPR) analysis2. However, DOE updated the shipments analysis using ARI 

aggregated shipments data for the final analysis. Chapter 10 of the TSD is exclusively dedicated 

to describing the methodology and analytical model DOE used to forecast shipments. 

13.4.2.4 Engineering Analysis 

During the engineering analysis, DOE used a reverse-engineering methodology 

supplemented by a design-option approach to develop manufacturing cost estimates for 

commercial refrigeration equipment. The analysis provided labor, materials, and overhead 

production costs that are representative of the CRE industry. DOE calibrated the reverseengineering cost model with individual manufacturers’ cost data, and aggregated the costs for 

individual manufacturers to create cost-efficiency curves for the industry. The GRIM 

manufacturing costs are derived from the engineering analysis curves. 

13.4.2.5 Manufacturer Interviews 

Key topics discussed during the interviews and reflected in the GRIM include 

• capital conversion expenditures (one-time investments in property, plant, and 

equipment); 

• equipment conversion expenses (one-time investments in research, equipment 

development, testing, and marketing); 

• the portion of the conversion capital expenditures that companies use to replace stranded 

assets; 

• equipment cost structure (the portion of manufacturer production costs related to 

materials, labor, overhead, and depreciation costs); 

• projected total shipment and shipment distribution mix; 

• estimated profit margins characteristic to the industry; and 

• engineering analysis information. 

 EE-2006-STD-0126 COMMENT 23.2
13-10

13.4.3 Financial Parameters 

For the ANOPR, DOE developed financial estimates of the CRE industry by examining 

several major CRE manufacturers’ financial information from annual reports and SEC 10-K 

reports. Each company DOE analyzed is a subsidiary of a more diversified parent company that 

manufactures equipment other than commercial refrigeration equipment. Because the SEC 10-K 

reports did not provide financial information at the subsidiary level, the financial parameters 

DOE calculated represented averages of the parent companies applied over the entire range of 

their equipment offerings; these parameters did not necessarily represent the CRE industry alone. 

DOE presented these values to manufacturers during the interviews for comment. While 

most manufacturers were unable to provide estimates for the CRE industry, they were able to 

provide their own financial parameters. Using these values, DOE calibrated its original 

estimates to develop financial parameters that it considers representative of the CRE industry. 

An aggregation of the MIA interview responses yielded the market-share-weighted financial 

parameters shown in Table 13-1. These aggregated values were the financial parameter inputs 

DOE used in the GRIM analysis. 

Table 13-1 GRIM Financial Parameters 

Parameter 

Industry Weighted 

Average 

Tax Rate 

(% of Taxable Income)

22.1 

Working Capital 

(% of Revenues) 

8.6 

SG&A 

(% of Revenues)

13.5 

R&D 

(% of Revenues) 

1.9 

Depreciation 

(% of Revenues) 

1.1 

Capital Expenditures 

(% of Revenues) 

1.2 

Net Property, Plant, and Equipment 

(% of Revenues) 

12.1 

13.4.4 Corporate Discount Rate 

DOE used the weighted average cost of capital (WACC) for the industry as the discount 

rate to calculate the INPV. A company’s assets are financed by a combination of debt and 

equity. The WACC is the total cost of debt and equity weighted by their respective proportions 

in the capital structure of the industry. DOE estimated the WACC for the CRE industry based on 

several representative companies using the following formula: 

WACC = after-tax cost of debt x (debt ratio) + cost of equity x (equity ratio) 

 EE-2006-STD-0126 COMMENT 23.2
13-11

The cost of equity is the rate of return that equity investors (including, potentially, the 

company) expect to earn on a company’s stock. These expectations are reflected in the market 

price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used 

means to estimate the cost of equity. According to the CAPM, the cost of equity (expected 

return) is: 

Cost of equity = risk-free rate of return + β x risk premium 

where: 

Risk-free rate of return is the rate of return on a “safe” benchmark investment, typically 

considered the short-term Treasury Bill (T-Bill) yield. 

Risk premium is the difference between the expected return on stocks and the risk-free 

rate. 

Beta (β) is the correlation between the movement in the price of the stock and that of the 

broader market. In this case, Beta equals one if the stock is perfectly correlated with the 

S&P 500 market index. A Beta lower than one means the stock is less volatile than the 

market index. 

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond 

rating is associated with a particular spread. One way of estimating a company’s cost of debt is 

to treat it as a spread (usually expressed in basis points) over the risk-free rate. DOE used this 

method to calculate the cost of debt for all the manufacturers with public financial information. 

S&P had bond ratings for most manufacturers, so DOE used these ratings to estimate the 

manufacturers’ cost of debt by adding the relevant spread to the risk-free rate. An S&P bond 

rating was not available for one manufacturer. In this case, DOE used the company’s size and 

interest coverage ratio to arrive at the spread of corporate debt over risk-free securities. The 

interest coverage ratio measures a company’s ability to service its debt-financing obligation 

through its earnings. 

In practice, investors use a variety of different maturity Treasury Bonds to estimate the 

risk-free rate. DOE used a long-term Treasury Bond return (10-year bond return) because it 

captures long-term inflation expectations and is less volatile than short-term rates in the GRIM. 

The risk-free rate is estimated as approximately six percent, which is the average 10-year 

Treasury Bond return over the period of 1990 to 2006. 

For the cost of debt, S&P’s Credit Services provided the average spread of corporate 

bonds for manufacturers from 2002 to 2006. DOE added the industry-weighted average spread 

to the average T-Bill yield over the same period. Since proceeds from debt issuance are tax 

deductible, DOE adjusted the gross cost of debt by the industry average tax rate to determine the 

net cost of debt for the industry. 

 EE-2006-STD-0126 COMMENT 23.2
13-12

13.4.5 Trial Standard Levels 

DOE developed four TSLs that include combinations of energy efficiency levels 

representing comparable stringency for CRE equipment classes. Table 13-2 presents the 

efficiency levels DOE used in the GRIM. 

Table 13-2 Baseline Efficiency Levels and Trial Standard Levels 

Equipment Trial Standard Levels for Primary Equipment Classes Analyzed

Class 

Test 

Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

VOP.RC.M CDEC 

kWh/day 1.01 x TDA + 4.07 0.9 x TDA + 4.07 0.87 x TDA + 4.07 0.82 x TDA + 4.07 0.68 x TDA + 4.07 0.82 x TDA + 4.07 

VOP.RC.L CDEC 

kWh/day 2.84 x TDA + 6.85 2.5 x TDA + 6.85 2.38 x TDA + 6.85 2.35 x TDA + 6.85 2.28 x TDA + 6.85 2.28 x TDA + 6.85 

VOP.SC.M TDEC 

kWh/day 2.34 x TDA + 4.71 2.09 x TDA + 4.71 1.92 x TDA + 4.71 1.74 x TDA + 4.71 1.57 x TDA + 4.71 1.74 x TDA + 4.71 

VCT.RC.M CDEC 

kWh/day 0.48 x TDA + 1.95 0.46 x TDA + 1.95 0.43 x TDA + 1.95 0.31 x TDA + 1.95 0.25 x TDA + 1.95 0.25 x TDA + 1.95 

VCT.RC.L CDEC 

kWh/day 1.03 x TDA + 2.61 0.97 x TDA + 2.61 0.68 x TDA + 2.61 0.67 x TDA + 2.61 0.6 x TDA + 2.61 0.6 x TDA + 2.61 

VCT.SC.I TDEC 

kWh/day 1.63 x TDA + 3.29 1.2 x TDA + 3.29 0.85 x TDA + 3.29 0.75 x TDA + 3.29 0.73 x TDA + 3.29 0.73 x TDA + 3.29 

VCS.SC.I TDEC 

kWh/day 0.55 x V + 0.88 0.49 x V + 0.88 0.43 x V + 0.88 0.38 x V + 0.88 0.38 x V + 0.88 0.38 x V + 0.88 

SVO.RC.M CDEC 

kWh/day 1.01 x TDA + 3.18 0.91 x TDA + 3.18 0.89 x TDA + 3.18 0.83 x TDA + 3.18 0.69 x TDA + 3.18 0.83 x TDA + 3.18 

SVO.SC.M TDEC 

kWh/day 2.23 x TDA + 4.59 2.04 x TDA + 4.59 1.9 x TDA + 4.59 1.73 x TDA + 4.59 1.58 x TDA + 4.59 1.73 x TDA + 4.59 

SOC.RC.M CDEC 

kWh/day 0.62 x TDA + 0.11 0.59 x TDA + 0.11 0.55 x TDA + 0.11 0.51 x TDA + 0.11 0.39 x TDA + 0.11 0.51 x TDA + 0.11 

HZO.RC.M CDEC 

kWh/day 0.51 x TDA + 2.88 0.45 x TDA + 2.88 0.39 x TDA + 2.88 0.36 x TDA + 2.88 0.35 x TDA + 2.88 0.35 x TDA + 2.88 

HZO.RC.L CDEC 

kWh/day 0.68 x TDA + 6.88 0.62 x TDA + 6.88 0.58 x TDA + 6.88 0.57 x TDA + 6.88 0.57 x TDA + 6.88 0.57 x TDA + 6.88 

HZO.SC.M TDEC 

kWh/day 1.14 x TDA + 5.55 1.02 x TDA + 5.55 0.91 x TDA + 5.55 0.78 x TDA + 5.55 0.77 x TDA + 5.55 0.77 x TDA + 5.55 

HZO.SC.L TDEC 

kWh/day 2.63 x TDA + 7.08 2.41 x TDA + 7.08 2.2 x TDA + 7.08 1.94 x TDA + 7.08 1.92 x TDA + 7.08 1.92 x TDA + 7.08 

HCT.SC.I TDEC 

kWh/day 1.33 x TDA + 0.43 1.16 x TDA + 0.43 0.64 x TDA + 0.43 0.61 x TDA + 0.43 0.56 x TDA + 0.43 0.56 x TDA + 0.43 

13.4.6 Shipments 

The GRIM estimated revenues using yearly shipment forecasts and average efficiency 

values produced by the NES model (Chapter 10 of this TSD). Changes in efficiency mix by trial 

standard level are a key driver of manufacturer finances since costs and revenues are both tied to 

shipments. Further explanation of assumptions and calculations of total shipments can be found 

in Chapter 10 of this TSD. Total shipments forecasted in the shipment analysis for all efficiency 

levels in 2012 are shown in Table 13-3 and discussed below. 

 EE-2006-STD-0126 COMMENT 23.2
13-13

Table 13-3 Industry-Wide Shipments Forecast in 2012 

Equipment Class Total Industry Shipments 

(Number of Units) 

VOP.RC.M 37,607 

VOP.RC.L 1,880 

VOP.SC.M 7,585 

VCT.RC.M 2,533 

VCT.RC.L 35,184 

VCT.SC.I 2,571 

VCS.SC.I 637 

SVO.RC.M 28,685 

SVO.SC.M 11,357 

SOC.RC.M 7,231 

HZO.RC.M 4,408 

HZO.RC.L 13,859 

HZO.SC.M 976 

HZO.SC.L 2,024 

HCT.SC.I 10,487 

 DOE assumed a roll-up of efficiency distribution in the standards year followed by a 

gradual improvement in efficiency, which mimics the growth in efficiency observed in historical 

data (parallel growth trend). Under the parallel growth trend, the equipment mix moves to 

higher efficiency levels until the maximum efficiency level is reached. Table 13-4 through Table 

13-18 show the distributions of shipments by TSL estimated in the NES for various equipment 

classes in 2012. 

Table 13-4 Distribution of VOP.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2

)

1.09 0.98 0.95 0.89 0.76 

Baseline (1.09) 17.6% 36.3% 16.6% 14.0% 15.6% 

TSL 1 (0.98) 53.9% 16.6% 14.0% 15.6% 

TSL 2 (0.95) 70.4% 14.0% 15.6% 

TSL 3 and TSL 4 (0.89)* 84.4% 15.6% 

TSL 5 (0.76) 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 3. 

Table 13-5 Distribution of VOP.RC.L by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2)

2.99 2.65 2.54 2.51 2.44 

Baseline (2.99) 15.8% 32.9% 14.8% 28.5% 8.0% 

TSL 1 (2.65) 48.7% 14.8% 28.5% 8.0% 

TSL 2 (2.54) 63.5% 28.5% 8.0% 

TSL 3 (2.51) 92.0% 8.0% 

TSL 4 and TSL 5 (2.44)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

 EE-2006-STD-0126 COMMENT 23.2
13-14

Table 13-6 Distribution of VOP.SC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA - kWh/day/ft2

)

2.65 2.41 2.24 2.06 1.89 

Baseline (2.65) 17.3% 35.7% 30.3% 10.0% 6.7% 

TSL 1 (2.41) 53.0% 30.3% 10.0% 6.7% 

TSL 2 (2.24) 83.3% 10.0% 6.7% 

TSL 3 and TSL 4 (2.06)* 93.3% 6.7% 

TSL 5 (1.89) 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 3. 

Table 13-7 Distribution of VCT.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2)

0.51 0.49 0.46 0.34 0.28 

Baseline (0.51) 21.6% 21.7% 21.3% 22.4% 13.0% 

TSL 1 (0.49) 43.3% 21.3% 22.4% 13.0% 

TSL 2 (0.46) 64.6% 22.4% 13.0% 

TSL 3 (0.34) 87.0% 13.0% 

TSL 4 and TSL 5 (0.28)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

Table 13-8 Distribution of VCT.RC.L by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2

)

1.07 1.01 0.72 0.71 0.64 

Baseline (1.07) 20.3% 40.3% 12.2% 11.9% 15.3% 

TSL 1 (1.01) 60.6% 12.2% 11.9% 15.3% 

TSL 2 (0.72) 72.8% 11.9% 15.3% 

TSL 3 (0.71) 84.7% 15.3% 

TSL 4 and TSL 5 (0.64)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

Table 13-9 Distribution of VCT.SC.I by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA – kWh/day/ft2)

1.75 1.32 0.97 0.87 0.86 

Baseline (1.75) 15.7% 48.2% 10.9% 18.2% 6.9% 

TSL 1 (1.32) 64.0% 10.9% 18.2% 6.9% 

TSL 2 (0.97) 74.9% 18.2% 6.9% 

TSL 3 (0.87) 93.1% 6.9% 

TSL 4 and TSL 5 (0.86)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

Table 13-10 Distribution of VCS.SC.I by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/V - kWh/day/ft3

)

0.57 0.51 0.45 0.40 

Baseline (0.57) 12.2% 25.8% 27.0% 35.0% 

TSL 1 (0.51) 38.0% 27.0% 35.0% 

TSL 2 (0.45) 65.0% 35.0% 

TSL 3, TSL 4, and TSL 5 (0.40)* 100.0% 

 * For this equipment class, TSL 4 and TSL 5 are at the same efficiency level as TSL 3. 

 EE-2006-STD-0126 COMMENT 23.2
13-15

Table 13-11 Distribution of SVO.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2)

1.09 0.99 0.96 0.91 0.77 

Baseline (1.09) 19.1% 39.4% 18.4% 16.2% 6.9% 

TSL 1 (0.99) 58.5% 18.4% 16.2% 6.9% 

TSL 2 (0.96) 76.9% 16.2% 6.9% 

TSL 3 and TSL 4 (0.91)* 93.1% 6.9% 

TSL 5 (0.77) 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 3. 

Table 13-12 Distribution of SVO.SC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA - kWh/day/ft2

)

2.59 2.40 2.26 2.09 1.94 

Baseline (2.59) 16.5% 34.5% 30.5% 10.6% 8.0% 

TSL 1 (2.40) 51.0% 30.5% 10.6% 8.0% 

TSL 2 (2.26) 81.4% 10.6% 8.0% 

TSL 3 and TSL 4 (2.09)* 92.0% 8.0% 

TSL 5 (1.94) 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 3. 

Table 13-13 Distribution of SOC.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2

)

0.62 0.59 0.55 0.51 0.40 

Baseline (0.62) 17.0% 17.3% 17.4% 32.7% 15.5% 

TSL 1 (0.59) 34.3% 17.4% 32.7% 15.5% 

TSL 2 (0.55) 51.7% 32.7% 15.5% 

TSL 3 and TSL 4(0.51)* 84.5% 15.5% 

TSL 5 (0.40) 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 3. 

Table 13-14 Distribution of HZO.RC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2

)

0.59 0.54 0.48 0.45 0.44 

Baseline (0.59) 20.0% 20.7% 20.9% 19.8% 18.7% 

TSL 1 (0.54) 40.7% 20.9% 19.8% 18.7% 

TSL 2 (0.48) 61.6% 19.8% 18.7% 

TSL 3 (0.45) 81.3% 18.7% 

TSL 4 and TSL 5 (0.44)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

 EE-2006-STD-0126 COMMENT 23.2
13-16

Table 13-15 Distribution of HZO.RC.L by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(CDEC/TDA - kWh/day/ft2

)

0.83 0.77 0.73 0.72 

Baseline (0.83) 20.4% 41.2% 19.6% 18.8% 

TSL 1 (0.77) 61.6% 19.6% 18.8% 

TSL 2 (0.73) 81.2% 18.8% 

TSL 3 , TSL 4, and TSL 5 (0.72)* 100.0% 

 * For this equipment class, TSL 4 and TSL 5 are at the same efficiency level as TSL 3. 

Table 13-16 Distribution of HZO.SC.M by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA - kWh/day/ft2)

1.60 1.49 1.38 1.24 1.23 

Baseline (1.60) 13.4% 28.2% 27.2% 21.8% 9.5% 

TSL 1 (1.49) 41.5% 27.2% 21.8% 9.5% 

TSL 2 (1.38) 68.8% 21.8% 9.5% 

TSL 3 (1.24) 90.5% 9.5% 

TSL 4 and TSL 5 (1.23)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

Table 13-17 Distribution of HZO.SC.L by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA - kWh/day/ft2)

3.22 3.00 2.79 2.53 2.51 

Baseline (3.22) 13.2% 28.5% 27.3% 21.4% 9.6% 

TSL 1 (3.00) 41.7% 27.3% 21.4% 9.6% 

TSL 2 (2.79) 69.0% 21.4% 9.6% 

TSL 3 (2.53) 90.4% 9.6% 

TSL 4 and TSL 5 (2.51)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

Table 13-18 Distribution of HCT.SC.I by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency Level 

(TDEC/TDA - kWh/day/ft2)

1.42 1.24 0.72 0.69 0.65 

Baseline (1.42) 17.9% 36.8% 16.3% 15.8% 13.3% 

TSL 1 (1.24) 54.6% 16.3% 15.8% 13.3% 

TSL 2 (0.72) 70.9% 15.8% 13.3% 

TSL 3 (0.69) 86.7% 13.3% 

TSL 4 and TSL 5 (0.65)* 100.0% 

* For this equipment class, TSL 4 is at the same efficiency level as TSL 5. 

13.4.7 Production Costs 

DOE developed estimates of manufacturer production costs (MPCs) in the engineering 

analysis and used appropriate manufacturer markups to determine the manufacturer selling price 

(MSP) for each equipment class (Chapter 5 of the TSD). The MPCs, manufacturer markups and 

MSPs used in the MIA are consistent with the life-cycle cost (LCC) analysis, on which DOE 

based the LCC pricing. 

 EE-2006-STD-0126 COMMENT 23.2
13-17

Changes in equipment costs affect revenues and gross profits. As the engineering analysis 

(Chapter 5) shows, equipment that is more efficient costs more to produce than baseline 

equipment. For the MIA, DOE used the production costs derived in the engineering analysis, 

with appropriate production volume assumptions. For instance, more-efficient equipment is 

manufactured at lower production volumes than standard efficiency equipment. Enacting energy 

conservation standards will increase production volumes for more-efficient units.

As the engineering analysis explains, DOE calculated the manufacturer markup as the 

market-share-weighted average value for the industry. DOE developed this manufacturer 

markup for the ANOPR by examining several major CRE manufacturers’ gross margin 

information from annual reports and SEC 10-K reports. Because the 10-K reports do not provide 

gross margin information at the subsidiary level, the estimated markups represent the average 

markups that the parent company applies over its entire range of equipment offerings and does 

not necessarily represent the manufacturer markup of the subsidiary. The result of the ANOPR 

analysis shows that the average manufacturer markup is 1.39. Following the interviews with 

manufacturers, DOE adjusted the markups to be more representative of the industry. An 

aggregation of the MIA interview responses gives a market-share-weighted average 

manufacturer markup value of 1.32. DOE used this updated manufacturer markup with the MPC 

values from the engineering analysis to arrive at the MSP values used in the GRIM. 

13.4.8 Conversion Costs 

New efficiency standards typically cause manufacturers to incur one-time conversion 

costs to bring their production facilities and product designs in compliance with the new 

regulation. For the MIA, DOE classified these one-time conversion costs into three major 

groups. Equipment conversion expenditures are one-time investments in research, development, 

testing, and marketing focused on making equipment designs comply with the new efficiency 

standard. Capital conversion expenditures are one-time investments in property, plant, and 

equipment to adapt or change existing production facilities so that new equipment designs can be 

fabricated and assembled under the new regulation. Stranded assets are equipment or tooling 

that become obsolete as a result of new regulation. 

During the MIA interviews, DOE asked manufacturers to estimate the conversion costs 

they would incur due to new energy conservation standards. DOE then used the costs 

manufacturers provided and their respective market shares to develop estimates for the 

conversion costs of the entire CRE industry at varying TSLs. Table 13-19 through Table 13-21 

summarize these estimates. 

 EE-2006-STD-0126 COMMENT 23.2
13-18

Table 13-19 Capital Conversion Expenditures by Trial Standard Level (2007$ millions) 

Equipment Trial Standard Level 

Class TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

VOP.RC.M 0.06 0.39 2.85 2.85 7.13 

VOP.RC.L 0.06 0.39 2.85 7.13 7.13 

VOP.SC.M 0.07 0.42 3.11 3.11 7.78 

VCT.RC.M 0.06 0.39 2.85 7.13 7.13 

VCT.RC.L 0.06 0.39 2.85 7.13 7.13 

VCT.SC.I 0.03 0.16 1.18 2.96 2.96 

VCS.SC.I 0.03 0.16 1.18 2.96 2.96 

SVO.RC.M 0.06 0.34 2.47 2.47 6.17 

SVO.SC.M 0.06 0.37 2.73 2.73 6.81 

SOC.RC.M 0.04 0.26 1.93 1.93 4.83 

HZO.RC.M 0.06 0.39 2.85 7.13 7.13 

HZO.RC.L 0.06 0.39 2.85 7.13 7.13 

HZO.SC.M 0.06 0.39 2.85 7.13 7.13 

HZO.SC.L 0.06 0.39 2.85 7.13 7.13 

HCT.SC.I 0.02 0.13 0.92 2.31 2.31 

TOTAL 0.83 4.95 36.33 71.21 90.82 

Table 13-20 Equipment Conversion Expenditures by Trial Standard Level (2007$ 

millions) 

Equipment Trial Standard Level 

Class TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

VOP.RC.M 0.04 0.22 1.62 1.62 4.05 

VOP.RC.L 0.04 0.22 1.62 4.05 4.05 

VOP.SC.M 0.04 0.24 1.77 1.77 4.42 

VCT.RC.M 0.04 0.22 1.62 4.05 4.05 

VCT.RC.L 0.04 0.22 1.62 4.05 4.05 

VCT.SC.I 0.02 0.09 0.67 1.68 1.68 

VCS.SC.I 0.02 0.09 0.67 1.68 1.68 

SVO.RC.M 0.03 0.19 1.40 1.40 3.50 

SVO.SC.M 0.04 0.21 1.55 1.55 3.87 

SOC.RC.M 0.02 0.15 1.10 1.10 2.74 

HZO.RC.M 0.04 0.22 1.62 4.05 4.05 

HZO.RC.L 0.04 0.22 1.62 4.05 4.05 

HZO.SC.M 0.04 0.22 1.62 4.05 4.05 

HZO.SC.L 0.04 0.22 1.62 4.05 4.05 

HCT.SC.I 0.01 0.07 0.52 1.31 1.31 

TOTAL 0.47 2.81 20.64 40.44 51.59 

 EE-2006-STD-0126 COMMENT 23.2
13-19

Table 13-21 Stranded Assets by Trial Standard Level (2007$ millions) 

13.4.9 Markup Scenarios 

To understand how baseline and more-efficient equipment are differentiated, DOE 

reviewed manufacturer catalogs and utilized information gathered by manufacturers. To 

estimate the manufacturer price of the equipment sold, DOE applied markups to the production 

costs. For the analysis, DOE considered different markup scenarios based on manufacturer input 

for commercial refrigeration equipment. Scenarios were used to bound the range of expected 

equipment prices following new energy conservation standards. For each equipment class, DOE 

used the markup scenarios that best characterized the prevailing markup conditions and 

described the range of market responses manufacturers expect as a result of new energy 

conservation standards. DOE learned from interviews with manufacturers that the majority of 

manufactures only offer one equipment line. A single equipment line means that there is no 

markup used to differentiate baseline equipment from premium equipment. 

After discussions with manufacturers, DOE believes there are two distinct markup 

scenarios including a preservation-of-gross-margin-percentage scenario and a preservation-ofgross-margin (in absolute dollars) scenario. 

13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario 

 Under the preservation-of-gross-margin-percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels. As production cost 

increases with efficiency, this scenario implies that the absolute dollar markup will increase. 

DOE assumed the non-production cost markup—which includes SG&A expenses; research and 

development expenses; interest; and profit—to be 1.32. This markup is consistent with the one 

DOE assumed in the base case for the GRIM. Manufacturers believe it is optimistic to assume 

that as their production costs increase in response to an energy conservation standard, they would 

Equipment Trial Standard Level 

Class TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

VOP.RC.M 0.04 0.24 1.73 1.73 4.32 

VOP.RC.L 0.04 0.24 1.73 4.32 4.32 

VOP.SC.M 0.04 0.26 1.88 1.88 4.71 

VCT.RC.M 0.04 0.24 1.73 4.32 4.32 

VCT.RC.L 0.04 0.24 1.73 4.32 4.32 

VCT.SC.I 0.02 0.10 0.72 1.79 1.79 

VCS.SC.I 0.02 0.10 0.72 1.79 1.79 

SVO.RC.M 0.03 0.20 1.49 1.49 3.73 

SVO.SC.M 0.04 0.23 1.65 1.65 4.13 

SOC.RC.M 0.03 0.16 1.17 1.17 2.92 

HZO.RC.M 0.04 0.24 1.73 4.32 4.32 

HZO.RC.L 0.04 0.24 1.73 4.32 4.32 

HZO.SC.M 0.04 0.24 1.73 4.32 4.32 

HZO.SC.L 0.04 0.24 1.73 4.32 4.32 

HCT.SC.I 0.01 0.08 0.56 1.40 1.40 

TOTAL 0.50 3.00 22.00 43.14 55.00 

 EE-2006-STD-0126 COMMENT 23.2
13-20

be able to maintain the same gross margin percentage markup. Therefore, DOE assumes that 

this scenario represents a high bound to industry profitability under an energy conservation 

standard. 

13.4.9.2 Preservation-of-Gross-Margin (Absolute Dollars) Scenario 

Gross margin is defined as revenues less cost of goods sold. The implicit assumption 

behind this markup scenario is that the industry can maintain its gross margin from the baseline 

(in absolute dollars) after the standard. The industry would do so by passing through its 

increased production costs to customers without passing through its increased R&D and selling, 

general, and administrative expenses so the gross profit per unit is the same in absolute dollars. 

DOE implemented this scenario in the GRIM by setting the production cost markups for each 

TSL to yield approximately the same gross margin in the standards cases in the year standard are 

effective (2012) as is yielded in the base case. This scenario is less optimistic than the 

preservation-of-gross-margin-percentage scenario. The production cost markups under this 

scenario are show in Table 13-22 through Table 13-36. 

Table 13-22 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.M 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (1.09) 1.32 

TSL 1 (0.98) 1.31 

TSL 2 (0.95) 1.31 

TSL 3 (0.89) 1.29 

TSL 4 (0.89) 1.29 

TSL 5 (0.76) 1.20 

Table 13-23 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.L 

TSL 

 (CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (2.99) 1.32 

TSL 1 (2.65) 1.31 

TSL 2 (2.54) 1.29 

TSL 3 (2.51) 1.29 

TSL 4 (2.44) 1.26 

TSL 5 (2.44) 1.26 

Table 13-24 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.SC.M 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (2.65) 1.32 

TSL 1 (2.41) 1.31 

TSL 2 (2.24) 1.29 

TSL 3 (2.06) 1.26 

TSL 4 (2.06) 1.26 

TSL 5 (1.89) 1.20 

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Table 13-25 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.M 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (0.51) 1.32 

TSL 1 (0.49) 1.32 

TSL 2 (0.46) 1.32 

TSL 3 (0.34) 1.27 

TSL 4 (0.28) 1.25 

TSL 5 (0.28) 1.25 

Table 13-26 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.L 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (1.07) 1.32 

TSL 1 (1.01) 1.32 

TSL 2 (0.72) 1.27 

TSL 3 (0.71) 1.27 

TSL 4 (0.64) 1.24 

TSL 5 (0.64) 1.24 

Table 13-27 Preservation-of-Gross-Margin (Absolute Dollars)Markup for VCT.SC.I 

TSL 

 (CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (1.75) 1.32 

TSL 1 (1.32) 1.30 

TSL 2 (0.97) 1.26 

TSL 3 (0.87) 1.24 

TSL 4 (0.86) 1.23 

TSL 5 (0.86) 1.23 

Table 13-28 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCS.SC.I 

TSL 

 (CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (0.57) 1.32 

TSL 1 (0.51) 1.32 

TSL 2 (0.45) 1.31 

TSL 3 (0.40) 1.28 

TSL 4 (0.40) 1.28 

TSL 5 (0.40) 1.28 

Table 13-29 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.RC.M 

TSL 

 (CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (1.09) 1.32 

TSL 1 (0.99) 1.31 

TSL 2 (0.96) 1.31 

TSL 3 (0.91) 1.30 

TSL 4 (0.91) 1.30 

TSL 5 (0.77) 1.21 

 EE-2006-STD-0126 COMMENT 23.2
13-22

Table 13-30 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.SC.M 

TSL 

 (CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (2.59) 1.32 

TSL 1 (2.40) 1.31 

TSL 2 (2.26) 1.30 

TSL 3 (2.09) 1.27 

TSL 4 (2.09) 1.27 

TSL 5 (1.94) 1.21 

Table 13-31 Preservation-of-Gross-Margin (Absolute Dollars)Markup for SOC.RC.M 

TSL 

 (CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (0.62) 1.32 

TSL 1 (0.59) 1.32 

TSL 2 (0.55) 1.32 

TSL 3 (0.51) 1.31 

TSL 4 (0.51) 1.31 

TSL 5 (0.40) 1.25 

Table 13-32 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.M 

TSL 

(CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (0.59) 1.32 

TSL 1 (0.54) 1.32 

TSL 2 (0.48) 1.31 

TSL 3 (0.45) 1.31 

TSL 4 (0.44) 1.31 

TSL 5 (0.44) 1.31 

Table 13-33 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.L 

TSL 

(CDEC/TDA - kWh/day/ft2) 

Markup 

Baseline (0.83) 1.32 

TSL 1 (0.77) 1.31 

TSL 2 (0.73) 1.31 

TSL 3 (0.72) 1.30 

TSL 4 (0.72) 1.30 

TSL 5 (0.72) 1.30 

 EE-2006-STD-0126 COMMENT 23.2
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Table 13-34 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.M 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (1.60) 1.32 

TSL 1 (1.49) 1.32 

TSL 2 (1.38) 1.31 

TSL 3 (1.24) 1.29 

TSL 4 (1.23) 1.28 

TSL 5 (1.23) 1.28 

Table 13-35 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.L 

TSL 

 (CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (3.22) 1.32 

TSL 1 (3.00) 1.32 

TSL 2 (2.79) 1.30 

TSL 3 (2.53) 1.27 

TSL 4 (2.51) 1.27 

TSL 5 (2.51) 1.27 

Table 13-36 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HCT.SC.I 

TSL 

(CDEC/TDA - kWh/day/ft2

) 

Markup 

Baseline (1.43) 1.32 

TSL 1 (1.24) 1.32 

TSL 2 (0.72) 1.29 

TSL 3 (0.69) 1.28 

TSL 4 (0.65) 1.27 

TSL 5 (0.65) 1.27 

13.5 INDUSTRY FINANCIAL IMPACTS 

Using the inputs and scenarios described in the previous sections, the GRIM estimated 

indicators of financial impacts on the CRE industry. The main results of the MIA also reported 

in this section are for two key financial metrics: INPV and annual cash flows. 

13.5.1 Impacts on Industry Net Present Value 

In the MIA, DOE compared the INPV of the base case (no energy conservation 

standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts 

that implementing that particular TSL would have on the entire industry. For the CRE industry, 

DOE examined two markup scenarios as described in the markup section above. Table 13-37 

and Table 13-38 provide the INPV estimates for the CRE industry under the different scenarios.

 EE-2006-STD-0126 COMMENT 23.2
13-24

Table 13-37 Changes in Industry Net Present Value (Preservation-of-Gross-MarginPercentage Markup Scenario) 

Preservation-of-Gross-Margin-Percentage Markup Scenario with a Rollup Shipment Scenario 

Efficiency Level 

 

Units Base Case 

1 2 3 4 5 

INPV 2007$ millions 510 510 517 493 471 493 

2007$ millions - 0 6 (17) (40) (18) Change in INPV % - 0.00 1.22 (3.30) (7.76) (3.49) 

Energy Conservation 

Standards Equipment 

Conversion Expenses 

2007$ millions - 0.5 2.8 20.6 40.4 51.6 

Energy Conservation 

Standards Capital 

Investments 

2007$ millions - 0.8 5.0 36.3 71.2 90.8 

Total Investment 

Required 2007$ millions - 1.3 7.8 57.0 111.6 142.4 

 

Table 13-38 Changes in Industry Net Present Value (Preservation-of-Gross-Margin 

(Absolute Dollars) Markup Scenario) 

Preservation-of-Gross-Margin (Absolute Dollars) Markup Scenario with a Rollup Shipment Scenario 

Efficiency Level 

 

Units Base Case 

1 2 3 4 5 

INPV 2007$ millions 510 447 423 382 330 226 

2007$ millions - (63) (88) (129) (180) (285) Change in INPV % - (12.34) (17.16) (25.20) (35.32) (55.77) 

Energy Conservation 

Standards Equipment 

Conversion Expenses 

2007$ millions - 0.5 2.8 20.6 40.4 51.6 

Energy Conservation 

Standards Capital 

Investments 

2007$ millions - 0.8 5.0 36.3 71.2 90.8 

Total Investment 

Required 2007$ millions - 1.3 7.8 57.0 111.6 142.4 

13.5.2 Impacts on Annual Cash Flow 

While INPV is useful for evaluating the long-term effects of new energy conservation 

standards, short-term changes in cash flow are also important indicators of the industry’s 

financial situation. For example, a large investment over a period of one or two years could strain 

the industry’s access to capital. Consequently, the sharp drop in financial performance could 

cause investors to flee, even though recovery may be possible. Thus, a short-term disturbance 

can have long-term effects that the INPV cannot capture. To get an idea of the behavior of 

annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for 

the different TSL levels. Figure 13-2 and Figure 13-3 present the annual net cash flows for the 

base case and each of the four TSLs for the CRE industry assuming the different markups 

scenarios. 

 EE-2006-STD-0126 COMMENT 23.2
13-25

$(20)

$-

$20

$40

$60

$80

$100

2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042

Year

2007$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation Standards 

Effective Date

January 2012

Markup Scenario: Preservation of Gross Margin Percentage Shipment Scenario: Rollup

Figure 13-2 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin-Percentage 

Markup Scenario) 

 EE-2006-STD-0126 COMMENT 23.2
13-26

$(20)

$(10)

$-

$10

$20

$30

$40

$50

$60

$70

$80

2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042

Year

2007$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation Standards 

Effective Date

January 2012

Markup Scenario: Preservation of Gross-Margin (Absolute Dollars) Shipment Scenario:Rollup

Figure 13-3 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin (Absolute 

Dollars) Markup Scenario) 

13.6 OTHER IMPACTS 

13.6.1 Employment 

To quantitatively assess the impacts of energy conservation standards on commercial 

refrigeration equipment employment, DOE used the GRIM to estimate the labor expenditures 

and number of employees in the base case and at each TSL from 2007 through 2042. DOE used 

statistical data from the U.S. Census Bureau’s 2006 Annual Survey of Manufactures (2006 

ASM), the results of the engineering analysis, and interviews with manufacturers to estimate the 

inputs necessary to calculate industry-wide labor expenditures and employment levels. 

DOE constructed the industry cost structure using publicly available information from the 

2006 ASM and the SEC 10-K reports filed by publicly owned manufacturers. The labor 

percentage of the industry cost structure is calculated by dividing total worker wages by total 

value of shipments. The labor percentage and other components of the industry cost structure are 

shown in Figure 13-4 below. 

 EE-2006-STD-0126 COMMENT 23.2
13-27

Materials, 53.2%

SG&A, 13.5%

R&D, 1.9%

Overhead, 12.8%

Income from 

Operations, 8.8%

Depreciation, 1.1%

Labor (production 

workers), 8.9%

 Figure 13-4 Commercial Refrigeration Equipment Industry Cost Structure 

To calculate the annual labor expenditures, the value of production labor was converted 

to a percentage of the cost of goods sold (COGS). In the GRIM, the labor expenditures in each 

year are calculated by multiplying the COGS or MPCs by the production labor percentage. As a 

result, higher TSLs have greater labor costs because more efficient products have higher MPCs. 

The annual labor expenditures in the GRIM were converted to employment levels by dividing by 

the annual payment per production worker (production worker hours times the labor rate found 

in the 2006 ASM).c The annual labor expenditures and employment levels were calculated for 

the base case and at each TSL. The impacts on employment due to standards can be assessed by 

comparing the employment results in the base case to the results at each TSL. 

The GRIM calculates that the commercial refrigeration equipment industry labor 

expenditure for production workers in 2012 is approximately $73 million. Using the $17.16 

wage rate and 2,009 production hours per year per employee found in the 2006 ASM, the GRIM 

estimates there are approximately 2,105 total commercial refrigeration equipment production 

employees involved in manufacturing products covered by this rulemaking. The employment 

section of the GRIM spreadsheets shows the annual employment impacts in further detail. 

Table 13-39 illustrates the impact of new energy conservation standards on employment 

levels at each TSL for the commercial refrigeration equipment industry calculated by the GRIM. 

 

c

 2006 ASM labor rates and production hours per year per employee are very similar to figures reported in the 

engineering analysis. DOE used 2006 ASM figures to ensure a consistent set of publicly available data is used for 

the manufacturing employment analysis. 

 EE-2006-STD-0126 COMMENT 23.2
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Table 13-39 Commercial Refrigeration Equipment Industry Estimated Employment 

Impacts in 2012

Trial Standard Level Base 

Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

Total Number of CRE Production 

Employees in 2012 2,105 2,112 2,201 2,253 2,336 2,692* 

Change in Total Number of CRE 

Production Employees in 2012 Due to 

Standards 

- 7 96 148 231 587* 

* Employment levels at TSL 5 could be lower if any manufacturer relocates production outside the U.S. 

Figure 13-5 shows annual employment levels for each TSL calculated by the GRIM. 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006200820102012201420162018202020222024202620282030203220342036203820402042

Year

Total Employment (# of production workers)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation 

Standards Effective Date

January 2012

Figure 13-5 Total Commercial Refrigeration Equipment Industry Employment by Year 

Because employment expenditures are assumed to be a fixed percentage of COGS and 

the MPCs increase with more efficient equipment, the GRIM predicts a gradual increase in 

employment after standards. As discussed in manufacturing interviews, there are a variety of 

manufacturers with different capabilities. Larger, more vertically integrated companies typically 

manufacture more of the final product. Hence, an increase in the complexity of the products 

shipped would result in higher employment, as predicted in the GRIM. Smaller manufacturers 

are more typically assemblers. In response to standards, these manufacturers would most likely 

not alter employment levels because inserting a more efficient component does not necessarily 

require more labor (e.g., purchasing a more efficiency door assembly only increases material 

costs). For assemblers, the greater labor expenditures for more efficient components are born by 

their suppliers. For smaller manufacturers that assemble final products, labor is more a function 

of units shipped, not production costs. As a result, the changes in labor in the GRIM tend to be 

 EE-2006-STD-0126 COMMENT 23.2
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slightly higher. However, since the GRIM also predicts an increase in shipments, it is unlikely 

that assemblers will lower employment in response to standards. 

Currently the vast majority of commercial refrigeration equipment is manufactured in the 

U.S. DOE expects that there would be positive direct employment impacts among domestic 

commercial refrigeration equipment manufacturers for TSL 1 through TSL 5. This conclusion 

ignores the possible relocation of domestic jobs to lower-labor-cost countries which may occur 

independently of new standards or may be influenced by the level of investments required by 

new standards. Because the labor impacts in the GRIM do not take relocation into account, the 

labor impacts would be different if manufacturers chose to relocate to lower cost countries. 

Manufactures stated that, although there are not current plans to relocate production facilities, at 

higher TSLs there would be increasing pressure to cut costs, which could result in relocation. 

13.6.2 Production Capacity 

According to the majority of CRE manufacturers, new energy conservation standards will 

not significantly affect production capacity. Any necessary CRE redesign will not change the 

fundamental assembly of the equipment. However, manufacturers anticipate some minor 

changes to tooling. Thus, DOE believes manufacturers will be able to maintain manufacturing 

capacity levels and continue to meet market demand under new energy conservation standards. 

13.6.3 Exports 

CRE exports comprise a small fraction of CRE sales. Manufacturers interviewed 

estimate that exports account for 10 to15 percent of total sales. Approximately one-third of this 

amount would go to Canada, approximately two-thirds would go to Mexico, and a very small 

percentage would go to some Caribbean and a few South American countries. Exports to Europe 

and Asia are rare because of the high cost of transporting commercial refrigeration equipment by 

ocean freight. Manufacturers also stated that their foreign exports are not generally affected by 

energy efficiency standards in other countries, except for Canada. The Canadian requirements 

are similar to California’s requirements so this is not a concern for manufacturers. 

Most manufacturers interviewed stated that they do not expect much change to their 

export strategies following standards. Once the U.S. standard takes effect, commercial 

refrigeration equipment manufacturers would still be able to produce and export units that do not 

meet DOE’s efficiency standard, since the standard only applies to equipment for use in the 

United States. 

Some manufacturers stated that in the absence of standards, production facilities are 

being relocated to other countries, particularly Mexico, due to lower labor rates. This activity is 

associated with internal operational and economic decisions and is not expected to accelerate due 

to energy conservation standards. Other manufacturers stated that they have no future plans to 

move production facilities outside the United States. 

 EE-2006-STD-0126 COMMENT 23.2
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Manufacturers also estimated that foreign competition has captured only a small portion 

of the CRE market. However, because of the high cost of transportation by ocean freighter, 

foreign manufacturers have begun transitioning from importing equipment to establishing 

production facilities in the United States. 

13.6.4 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 an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. 

Companies that produce a wider range of regulated equipment may be faced with more 

capital and equipment development expenditures than their competitors. Such expenditures can 

prompt those companies to exit the market or reduce their equipment offerings, possibly 

reducing competition. Smaller companies may be especially affected since they have lower sales 

volumes over which to amortize the costs of meeting new regulations. A proposed standard is 

not economically justified if it contributes to an unacceptable level of cumulative regulatory 

burden. 

13.6.4.1 Federal Regulations on Commercial Refrigeration Equipment and Other 

Equipment Produced by the Same Manufacturers 

In addition to energy conservation regulations, several other existing and pending Federal 

regulations apply to commercial refrigeration equipment, as well as other equipment produced 

by the same manufacturers. Each regulation can significantly affect manufacturers’ financial 

operations. Multiple regulations affecting the same manufacturer can quickly strain 

manufacturers’ profits and possibly cause an exit from the market. The most significant of these 

additional regulations are the U.S. Environmental Protection Agency’s (EPA) mandated 

phaseout of HCFCs and the proposed Federal energy conservation standard for residential central 

air conditioners and heat pumps. Table 13-40 provides the timetables for these regulations. 

Table 13-40 Federal Regulation Timetables 

Regulation Key Affected Appliance Effective Date 

Proposed DOE energy 

conservation standards 

Central air conditioners and heat 

pumps (residential) 06/2011 

Potential DOE energy 

conservation standards Room air conditioners 06/2011 

EPA phaseout of HCFC 

refrigerant on new equipment 

Room and residential central air 

conditioners and commercial air 

conditioners 

01/2010 

EPA phaseout of HCFC blowing 

agents on new equipment 

Commercial refrigeration 

equipment 01/2010 

Production of foam insulation uses a blowing agent. The EPA strategy for meeting U.S. 

obligations under the Montreal Protocol requires the United States to phase out the production 

and use of HCFC blowing agents. HCFC-22 and HCFC-142b will be phased out on January 1, 

 EE-2006-STD-0126 COMMENT 23.2
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2010, when manufacturers will have to switch to blowing agents with zero ozone depletion 

potential. 

DOE recognizes that CRE manufacturers could also be affected by the energy 

conservation standards for central air conditioners and heat pumps and for room air conditioners. 

Additional investments necessary to meet these standards could have significant impacts on CRE 

manufacturers. However, DOE cannot assess the magnitude of the impacts at this time because 

it is undertaking a rulemaking to possibly amend the energy conservation standards for this 

equipment. Details of these rulemakings and the potential effective date of any amended energy 

conservation standards for central air conditioners and heat pumps, and room air conditioners are 

unknown. 

13.6.4.2 Restriction of Hazardous Substances Directive 

According to manufacturers, the Restriction of Hazardous Substance Directive3 (RoHS) 

will have some global impact on manufacturing of electrical and electronic equipment. Under 

the directive, all manufacturers are banned from placing on the European Union market new 

electrical and electronic equipment containing more than agreed levels of lead, cadmium, 

mercury, hexavalent chromium, polybrominated biphenyl, and polybrominated diphenyl ether 

flame retardants. Although there is no Federal regulation on RoHS, California has passed SB 20: 

Electronic Waste Recycling Act of 2003. Under this law, California limits the amount of 

hazardous substances included in the RoHS directive that can be sold in California. CRE 

manufacturers said that RoHS could affect the way electronic components in commercial 

refrigeration equipment are incorporated into the design. However, manufacturers do not 

anticipate RoHS will significantly affect the CRE industry as a whole. 

13.6.4.3 Other Regulations on Commercial Refrigeration Equipment 

In addition to Federal energy conservation standards, manufacturers also must comply 

with regulations imposed on equipment shipped to States and foreign countries. Certain types of 

commercial refrigeration equipment are regulated by Title 20 of the California Energy 

Commission (CEC) and the Energy Efficiency Regulations of Natural Resources Canada 

(NRCan). Also, a European Union Eco-Design study to establish an Energy Using Products 

(EuP) directive for a standard on commercial refrigerators and freezers is in its final stages. 

13.7 CONCLUSIONS 

The following section summarizes the different impacts for the two scenarios DOE 

believes are most likely to capture the range of impacts on CRE manufacturers as a result of new 

energy conservation standards. DOE also notes that while these two scenarios bound the range 

of most plausible impacts on manufacturers, there potentially could be circumstances which 

cause manufacturers to experience impacts outside of this range. 

To assess the lower end of the range of potential impacts for the CRE industry, DOE 

considered the scenario reflecting the preservation of gross margin percentage. Under this 

scenario, DOE applied a single uniform “gross margin percentage” markup across all efficiency 

 EE-2006-STD-0126 COMMENT 23.2
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levels. As production cost increases with efficiency, this scenario implies that the absolute dollar 

markup will increase. 

To assess the higher end of the range of potential impacts for the CRE industry, DOE 

considered the scenario reflecting preservation of gross margin (in absolute dollars). Gross 

margin is defined as revenues less cost of good sold. Under this scenario, DOE assumed that the 

industry can maintain its gross margin (in absolute dollars) after the standard effective date. The 

industry would do so by passing through its increased production costs to customers without 

passing through its increased R&D and selling, general, and administrative expenses, so the 

gross profit per unit is the same in absolute dollars. 

At TSL 1, the impact on INPV and cash flow varies greatly depending on the 

manufacturers and their ability to pass on MPC increases to the customer. DOE estimated the 

impacts in INPV at TSL 1 to range from approximately no impact to -$63 million, or a change in 

INPV of zero percent to -12.34 percent. At this level, the industry cash flow is $50.9 million, or 

nearly the same as the base-case value of $51.4 million in the year leading up to the standards. 

Since DOE estimates that more than 80 percent of the equipment being sold is already at or 

above this level, those manufacturers that do not fall below TSL 1 will not have to make 

additional modifications to their equipment lines to conform to the energy conservation 

standards. DOE expects the lower end of the impacts to be reached, which indicates that 

industry revenues and costs are not significantly negatively affected as long as manufacturers 

fully recover the increase in manufacturer production cost from customers. 

At TSL 2, the impact on INPV and cash flow continues to vary depending on the 

manufacturers and their ability to pass on MPC increases to the customer. DOE estimated the 

impacts in INPV at TSL 2 to range from approximately $6 million to -$88 million, or a change in 

INPV of 1.22 percent to -17.16 percent. At this level, the industry cash flow decreases by 

approximately 6 percent, to $48.2 million, compared to the base-case value of $51.4 million in 

the year leading up to the standards. DOE estimates that roughly 45 percent of the equipment 

being sold is already at or above this level. The required higher level of efficiency will cause 

some manufactures to modify their equipment lines to conform to the energy conservation 

standards. DOE does not expect industry revenues and costs to be affected significantly as long 

as manufacturers fully recover the increase in manufacturer production cost from customers. 

The positive INPV value is explained by the assumption that MSP increases due to higher costs 

of the equipment, so that manufacturers fully recover and even surpass the investments needed to 

achieve this level 

. 

At TSL 3, DOE estimated the impacts in INPV to range from approximately -$17 million 

to -$129 million, or a change in INPV of -3.3 percent to -25.2 percent. At this level, the industry 

cash flow decreases by approximately 45.5 percent, to $28 million, compared to the base-case 

value of $51.4 million in the year leading up to the standards. Based on information submitted 

by industry, the majority of manufacturers would require a complete redesign of their equipment, 

and therefore DOE expects that commercial refrigeration equipment manufacturers will have 

some difficulty fully passing on larger MPC increases to customers. Manufacturers expect that 

the actual impacts will be closer to the higher end of the range of impacts (i.e., a drop of 25.2 

percent in INPV). 

 EE-2006-STD-0126 COMMENT 23.2
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At TSL 4, DOE estimated the impacts on INPV to range from -$40 million to -$180 

million, or a change in INPV of approximately -7.76 percent to -35.32 percent. At this level, the 

industry cash flow decreases by approximately 89.3 percent to $5.5 million, compared to the 

base-case value of $51.4 million in the year leading up to the standards. TSL 4 was created as a 

combination of TSL 3 (minimum LCC) and TSL 5 (max-tech). Manufacturers were not directly 

asked about this combination TSL during interviews. However, DOE estimated the range of 

impacts at TSL 4 based on the expected impacts manufacturers reported for TSL 3 and TSL 5. 

Since manufacturers expect that the actual impacts will be closer to the higher range of impacts 

at TSL 3 and TSL 5, DOE expects that the actual impacts for TSL 4 will also be at the higher 

range (i.e., a drop of 35.32 percent in INPV). 

At TSL 5 (max-tech), DOE estimated the impacts in INPV to range from -$18 million to 

-$285 million, or a change in INPV of approximately -3.49 percent to -55.77 percent. At this 

level, the industry cash flow decreases by approximately 114 percent to -$7.2 million, compared 

to the base-case value of $51.4 million in the year leading up to the standards. At higher TSLs, 

manufacturers have more difficulty fully passing on larger MPC increases to customers, and 

therefore manufacturers expect that the actual impacts will be closer to the higher end of the 

range of impacts (i.e., a drop of 55.77 percent in INPV). Currently, there is only one model 

being manufactured at these efficiency levels for most equipment classes, and some equipment 

classes have no equipment at these levels. At TSL 5, DOE recognizes that there is a risk of very 

large negative impacts if manufacturers’ expectations are are accurate about reduced profit 

margins. During the interviews, manufacturers expressed great concern at the possibility of 

requiring an entire equipment line to be manufactured at the max- tech levels. 

 EE-2006-STD-0126 COMMENT 23.2
13-34

REFERENCES 

1

 Securities and Exchange Commission, Annual 10-K Reports, Various Years, 

Washington D.C., www.sec.gov. 

2

 Freedonia. 2004. Commercial Refrigeration Equipment to 2008. Study 1849. Freedonia 

Group, Inc, Cleveland, Ohio, October 2004, 204 pp. available at 

http://www.freedoniagroup.com/Commercial-Refrigeration-Equipment.html 

3

 Further information about RoHS can be found at 

http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf. 

 EE-2006-STD-0126 COMMENT 23.2