1 3 -i 

### 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 ....................................................................... 13-301 3 -ii 

### 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-

181 3 -iii



### 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..... 13-281 3 -1 

### CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

1 3 .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

as sessment 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 Co nservation Act (EPCA), 42 U.S.C. 6311-6317.1 3 -2



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

s t ructure 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 energy1 3 -3



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

e q uipment. 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 M anufacturer Sub-Group Analysis

U sing 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.1 3 -4



### 13.2.3.4 S mall-Business Manufacturer Sub-Group

D OE 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 M anufacturing Capacity Impact

O ne 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 conservation1 3 -5



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

r e structuring and other charges, where applicable.

13.2.3.7 Employment Impact

Th e 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 C umulative Regulatory Burden

D OE 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 often b



### .

• M e eting 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.1 3 -6



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

c o ndensing 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 thesestandards 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,1 3 -7



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

c l asses 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,1 3 -8



### 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
p ub lic. 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

• depreciation1 3 -9



### • c apital expenditures

• n et 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) analysis 2 

### . However, DOE updated the shipments analysis using ARI

a g gregated 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 overheadproduction 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.1 3 -10



### 13.4.3 F inancial Parameters

F or 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)1 3 -11



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

c o mpany) 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 b o nds 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.1 3 -12



### 13.4.5 T rial Standard Levels

D OE 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
Trial Standard Levels for Primary Equipment Classes Analyzed Equipment 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.1 3 -13



### Table 13-3 Industry-Wide Shipments Forecast in 2012 Equipment Class T o tal 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 ( C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-5 Distribution of VOP.RC.L by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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 5.1 3 -14



### Table 13-6 Distribution of VOP.SC.M by Efficiency Level in 2012 for Different Trial S t andard Levels Shipments Efficiency Level (T DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-7 Distribution of VCT.RC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-8 Distribution of VCT.RC.L by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-9 Distribution of VCT.SC.I by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (T DEC/TDA – kWh/day/ft 2 ) 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 St andard Levels

Shipments Efficiency Level (T DEC/V - kWh/day/ft 3 ) 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 3.1 3 -15



### T a ble 13-11 Distribution of SVO.RC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-12 Distribution of SVO.SC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (T DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-13 Distribution of SOC.RC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-14 Distribution of HZO.RC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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 5.1 3 -16



### Table 13-15 Distribution of HZO.RC.L by Efficiency Level in 2012 for Different Trial S t andard Levels

Shipments Efficiency Level (C DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-16 Distribution of HZO.SC.M by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (T DEC/TDA - kWh/day/ft 2 ) 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 St andard Levels Shipments Efficiency Level (T DEC/TDA - kWh/day/ft 2 ) 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.



### Ta ble 13-18 Distribution of HCT.SC.I by Efficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency Level (T DEC/TDA - kWh/day/ft 2 ) 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.1 3 -17



### Changes in equipment costs affect revenues and gross profits. As the engineering analysis ( C hapter 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

m a rket-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.1 3 -18



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

T r ial Standard Level Equipment 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 51.591 3 -19



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

1 3 .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 markupscenarios 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 Trial Standard Level Equipment 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 55.001 3 -20



### be able to maintain the same gross margin percentage markup. Therefore, DOE assumes that
t h is 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 ( C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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 (C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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) 1.201 3 -21



### Table 13-25 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.M
TSL ( CDEC/TDA - kWh/day/ft 2 ) Ma rkup

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 (C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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) 1.211 3 -22



### T a ble 13-30 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.SC.M
TSL ( CDEC/TDA - kWh/day/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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 (C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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 (C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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) 1.301 3 -23



### Table 13-34 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.M
TSL ( CDEC/TDA - kWh/day/ft 2 ) Ma rkup

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/ft 2 ) Ma rkup

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 (C DEC/TDA - kWh/day/ft 2 ) Ma rkup

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.1 3 -24



### Table 13-37 Changes in Industry Net Present Value (Preservation-of-Gross-MarginP e rcentage 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.1 3 -25 $(20) $- $20 $40 $60 $80 $100

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

Year2007$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Energy Conservation Standards Effective Date January 2012 Shipment Scenario: Rollup Markup Scenario: Preservation of Gross Margin Percentage



### Figure 13-2 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin-Percentage Markup Scenario)1 3 -26 $(20) $(10) $- $10 $20 $30 $40 $50 $60 $70 $80

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

Year2007$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Energy Conservation Standards Effective Date January 2012 Shipment Scenario: Rollup Markup Scenario: Preservation of Gross-Margin (Absolute Dollars)



### 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.1 3 -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
t h e 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

en gineering analysis. DOE used 2006 ASM figures to ensure a consistent set of publicly available data is used for the manufacturing employment analysis.1 3 -28



### Table 13-39 Commercial Refrigeration Equipment Industry Estimated Employment I m pacts in 2012
Tr ial 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.



### F i gure 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

20 0 6 2008 2

0 10 20 1 2 2014 20

16 20 18 20 2 0 2 0 22 20 24 20 2 6 2 0 28 20 30 20 3 2 2034 2

0 36 20 3 8 2040 2

0 42

YearTotal 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 be1 3 -29



### slightly higher. However, since the GRIM also predicts an increase in shipments, it is unlikely
t h at 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.1 3 -30



### Manufacturers also estimated that foreign competition has captured only a small portion

o f 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 K e y 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



### Pr oduction 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 1,1 3 -31



### 2010, when manufacturers will have to switch to blowing agents with zero ozone depletion
p o tential.

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 Directive 3 

### (RoHS)

w i ll 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 efficiency1 3 -32



### levels. As production cost increases with efficiency, this scenario implies that the absolute dollar

m a rkup 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).1 3 -33



### A t 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.1 3 -34 

### REFERENCES

1 

### Securities and Exchange Commission, A n nual 10-K Reports , Various Years, Washington D.C., www.sec.gov.

2 

### Freedonia. 2004. Commercial Refrigeration Equipment to 2008. Study 1849. Freedonia G r oup, 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 ht tp://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf.