6-i CHAPTER 6. MARKUPS AND INSTALLATION COST ANALYSIS

TABLE OF CO NTENTS

6.1 INTRODUCTION ............................................................................................................6-1
6.2 OVERVIEW OF MARKUP EQUATIONS .....................................................................6-1
6.3 ESTIMATION OF INSTAL LED PRICE ........................................................................6-2
6.3.1 Estimation of Pole Replacement Costs .............................................................................6-3
6.3.2 Impact of Increased Distribution Transformer Weight on Installation Costs ..................6-4
6.3.3 Estimation of Markups .....................................................................................................6-5
6.3.4 Dry

- Type Distribution Transformer Installed Pr ice Equation ..........................................6-6
6.3.5 Liquid- Immersed Distribution Transformer Installed Price Equation .............................6-76

- 1 CHAPTER 6. MARKUPS AND INSTALLATION COST ANALYSIS

6.1 INTRODUCTION

This chapter of the technical support document (TSD) presents the U.S. Department of Energy’s ( DOE's ) method for deriving distribution transformer prices. The objective of the equipment price determination is to estimate the price paid by the customer or purchaser for an
installed distribution transformer. Purchase price an d installation cost are necessary inputs to the
life

- cycle cost (LCC) and payback period (PBP) analyses. Chapter 8 presents the LCC
calculations , and section 8.2.1 describes how the LCC uses purchase price and installation cost as inputs.

Purchase prices for distribution transformers are not generally known. Distribution

t ransformers are specialty items, often custom -built with unlisted prices. The engineering analysis (Chapter 5) provided the manufacturer selling prices for the units included in the LC C analysis. DOE derived a set of prices for each distribution transformer design produced by the engineering analysis by applying markups to the manufacturer selling price in the form of markup equations. These markups represent all the costs associated with bringing a
manufactured distribution transformer into service as an installed piece of electrical equipment at
a customer’s site.

6.2 OVERVIEW OF MARKUP E QUATIONS

Depending on the purchasing environment, DOE used different markup equations to capture the various markups in the supply chain between the manufacturer and the customer. For example, electric utilities (except for the rural electric cooperatives) typically purchase liquid

immersed distribution transformers through manufacturer representatives or distributors. The manufacturer selling price plus the distributor markup is generally the utilities’ price for transformers. Dry

- type distribution transformers go through several additional marketing or handling steps before they are installed by the end

- use purchaser.

In general, liquid- immersed distribution transformers have a seven percent markup, accounting for distributor markup. 1 This markup is eliminated for a fraction of cases to account for liquid- immersed distribution transformer sales that are from manufacturers directly to
utilities. The fraction of cases , as determined by the amount of electricity reportedly sold by
investor owned utilities IOUs in the U.S. Energy Information Administration ( EIA ) Form 861, is
82 percent

.

The manufacturer selling prices for dry- type distribution transformers generally includetwo price markups: a distributor markup of 15 percent and 26 percent for low- and mediumvoltage dry

- type distribution transformers respectively, and a contractor mate rials markup of 10
percent and 16 percent for low- and medium-voltage dry- type transformers respectively . DOE based these markups (expressed as average multipliers) on RS Means Electrical Cost Data6

- 2 Online 2011 2 and input from interested parties respectively for low - and medium-voltage drytype distribution transformers. The distributor markup converts the manufacturer selling price to the distributor price and t he price paid by the electrical contractor . This distributor markup
covers the costs of the distribution business, including sales labor, warehousing, overhead, and profit. Then the contractor applies a markup to the distributor selling price to cover contractor overhead and profit.

For both liquid-immersed and dry- type distribution transformers, DOE added sales tax, an installation labor and equipment markup, and installation costs. In the previous distribution transformer rulemaking DOE analyzed shipping costs as one of the markups used to determine installed equipment price. In this Preliminary Analysis the markups for shipping costs have been moved into the engineering analysis and are described in greater detail in chapter 5

. Using RS
Means Electrical Cost Data Online 2011

6.3 ESTIMATION OF INSTAL LED PRICE 2 (RS Means) DOE estimated a contractor markup of 1.10, which is used to convert the distributor selling price to a contractor price

. Then the installation cost is added as the cost of labor, equipment, and materials (other than the transformer itself) needed to install a distribution transformer. Finally, b y weighting the sales tax for each individual State by its population, DOE calculated a national weighted average sales tax
of 6.9 percent

. 3 DOE developed several empirical equations for estimating installation costs by following these steps mentioned above.

In order to estimate the installed price for distribut ion transformers , DOE applied the following equation that describes the steps in the distribution channel for transformers:

Installed Price = M tax × { M L & E × L & E + M Mat × [ M Dist × ManPrice ]}

W here:

Installed_Price = the final installed price of the transformer ( 2011$ ),

M tax = the factor that accounts for sales tax , estimated to be 1.069, 3

M L&E = the factor that accounts for the markup on direct installation labor and equipment costs,

L&E = the installation, direct labor, and equipment costs (2011$), adjusted to 2011$ using the gross domestic product (GDP) price deflator

from the U.S. Bureau of Economic Analysis (BEA). 4

M Mat = the factor that accounts for the contractor markup on the purchase
of the transformer from the distributor,

M Dist = the average distributor markup factor, and

ManPrice = the manufacturer's selling price ( 2011$).6

- 3 DOE estim ated markups for distribution transformers by fitting a linear cost function to
the RS Means electrical cost data (see section 6.3.3 ). The RS Means data break down the total installed cost for transformers in terms of four cost components:

1. m aterials: the unit material cost , which includ es mounting hardware, but not overhead or profit ;

2. labor: labor cost required for installation, including unloading, uncrating, hauling within 200 feet of the loading dock, setting in place, connecting to the distribution network, and testing ;

3. equipment: equipment rentals necessary f or completion of the installation ; and

4. o verhead and p rofit (O&P) : installation overhead and profit expenses for the contractor (for dry

- type transformers only).

RS Means lists the first three cost components separately and then has an additional column listing the total costs including O&P. As defined by RS Means

6.3.1 Estimation of Pole Replacement Costs , this figure is the sum of
the (1) bare material cost plus 10 percent for profit

, (2) bare labor cost plus total overhead and profit , and (3) bare equipment cost plus 10 percent for profi t.

DOE evaluated various design options and efficiency levels for distribution transformers,
and the potential impact of each on the utility or performance of th is equipment. Interested parties commented to DOE that a more efficient pole-mounted transformer may weigh more as a
result of its additional core and winding materials and, consequently, be too heavy for mounting on an existing pole, hence less utility. In view of cost data provided by interested parties, DOE
estimated the additional cost to install a heavier single

- phase, liquid

- immersed transformer on an upgraded pole that would bear the increased weight of the more efficient transformer

.

In view of the above, DOE included a pole-replacement cost function as a part of the installation cost equation for design line 2 ( DL 2), and DL3, which cover pole-mounted
distribution transformers. In general, as transformers are redesigned to reach higher efficiency levels, the weight and size also increase. The degree of weight increase depends on how the design is modified to improve efficiency. For pole-mounted transformers, represented by DLs 2 and 3, the increased weight may lead to situations where the pole needs to be replaced to support the additional weight of the transformer. This in turn leads to an increase in the installation cost. To account for this effect in the analysis, two steps are needed:

The first step is to determine whether the pole needs to be changed. This depends on the weight of the transformer in the base case compared to the weight of the transformer under a proposed efficiency level, and on assumptions about the load-bearing capacity of the pole. In the LCC calculation, it is assumed that a pole change -out will only be necessary if the weight increase is larger than 15 percent of the base case and is also 150 pounds heavier of the weight of
the baseline unit for a DL 2 (25 kVA) unit; to determine the weight-change threshold for DL 36

- 4 (500kVA) units the 150 pounds was scaled using the 0.75 scali ng rule to 1,418 pounds. DOE understands that most utility poles are made of wood. Both the American National Standards Institute ( ANSI ) and National Electrical Safety Code ( NESC ) provide guidelines on how to estimate the strength of a utility pole based on the tree species, pole circumference , and other factors, such as climatic region . Natural variability in wood growth leads to a high degree of variability in strength values across a given pole class. Thus, NESC also provides guidelines on reliability, which result in an acceptable probability that a given pole will exceed the minimal required design strength. Because poles are sized to cope with large wind stresses and potential accumulation of snow and ice, this results in “over-sizing” of the pole relative to the load by a factor of two to four. In some marginal cases utilities also have the option to reinforce pole or structures with guy wires instead of outright pole replacement. Because of this over- sizing and the availability of other supporting options, DOE limited the total fraction of pole replacements to 25 percent of the total population.

The second step is to determine the cost of a pole replacement

. This typically involves removal of the old pole and its disposal , erection of the replacement pole, and the transferring of all attached equipment and concessions. DOE used labor and equipment cost estimates from the
RS Means

6.3.2 Impact of Increased D istribution Transformer Weight on Installation Costs , to construct a range of possible costs that would be seen by a utility when performing a pole replacement . Based on this information, a triangular distribution was used to estimate pole chan ge -out costs. F or DL 2, DOE used a lower limit at $2,025 and an upper limit at $5,999 to estimate the range of pole replacement costs . F or DL 3 , DOE used a lower limit of $5,877 and

an u pper limit of $13,274 for pole replacement . For multi- pole (platform) replacement, DOE
used a lower limit of $5,877 and an upper limit of $16,899 . In all, 70 percent of DL 3 replacements were estimated mu l ti -pole or platforms. DOE understands that a u til ity pole has a finite lifetime, so pole change-out due to increased transformer weight should be counted as an early replacement of the pole , i.e., it is not necessarily correct to attribute the full cost of pole replacement to the transformer purchase. Eq uivalently, if a pole is changed-out when a transformer is replaced, it will have a longer lifetime relative to the pole it replaces, which offsets some of the cost of the pole installation. To account for this e ffect, pole installation costs are multiplie d by a factor n/pole- lifetime , which approximately represents the value of the additional years of life for the pole . The parameter n is chosen from a flat distribution between 1 and the pole lifetime, which is assumed to be 30 years.

DOE derived the weight-versus-c apacity r elationship for a typical distribution
transfo r mer from the desig n d at a pro d uce d by th e en g ineeri ng anal y sis in the TSD . It use d th e weigh t-versus- capa c it y r elations h ip to estimate the transformer weight corr esponding to the transformer costs reported in RS Means . DOE estimated a scaling relationship between

tr a nsformer weight

, and direct installation labor and equipment costs by fitting the correlation between weight and installation costs to a power-law equation.

The method for deriving the weight-versus- capacity relationship uses a typical transformer weight from the engineering analysis. DOE defined the typical weight as the minimum weight plus 20 pe rcent times the weight range, where the weight range is the6

- 5 difference between the minimum and maximum transformer weight for the selected design.

From these data, DOE obtained the following power-law relationship for transformer weight as a function of capacity and basic impulse insulation level (BI L)
rati n g:

Weight = 17

. 31 × kVA 0

. 52 × BIL 0

. 44

W here:

Weight = the weight of the transformer ( pounds ), kVA = the capacity of the transformer (kVA), and
BIL = the BIL rating of the transformer (kV).

Alth oug h RS Means does not provide transformer weights, it does provide

trans f ormer capacity and primary voltag e. DOE estimated weight from capa city and BI L, which it estimated using primary voltage. DOE then compared the weight to the direct installation costs from the labor and equipment to obtain a power- law relationship.

Th e following reg r essio n pe rforme d wa s th e in stallati on direct labor and equipment

cost s as a function of transformer weight. Data analyzed included all 67 distribution
transformer k VA ratings spanning the three RS Means

L & E = 38

. 69 × Weight 0

. 53 electrical equipment categori e s: “dry -type transformer”, “oil- filled transformer”, and “transformer, liquid- filled”. Th e

res u ltin g co rrelat ion equat ion is:

W here:

L & E = the installation, direct labor, and equipment costs (2011$ ), Weight = the weight of the transformer ( pounds ).

6.3.3 Estimation of Markups

DOE performed a linear regression analysis to disaggregate the overhead and profit associated with installation labor and equipment rental from the overhead and profit associated with the transformer (material) cost. The regression equation is:

Total Costs Including O & P = α + β × Mat + γ × L & E

W here:

Total Costs Including O&P = the sum of all bare costs plus overhead and profit expense (2011 $),

Mat = the material cost (transformer and hardware) (2011$), and6

- 6 L&E = the direct labor and equipment costs of installation (2011 $).

In this linear regression, α is the constant; β and γ are the variable slopes for material costs and direct labor and equipment costs respectively. After running the regression above,
DOE found that the estimated coefficient for the constant term is not significantly different from

zero . T herefore , DOE reran the regression without the constant term. The resulting equation is:

Total Costs Including O & P = 1. 10 × Mat + 1. 47 × L & E

The interpretation of the coefficient of material costs is that when material costs increase $1, then the total costs including O&P should be expected to increase $1.10 while holding the other variables constant. Likewise, a $1 increase in the direct labor and equipment costs will lead to a $1.47 increase in the total costs including O&P while holding the other variable constant. These two figures were used to allocate overhead and profit expenses to a markup on the price of
the distribution transformer and a separate markup on the direct labor and equipment costs for
the installation.

6.3.4 Dry

- Type Distribution Transformer Installed Price Equation

For dry- type distribution transformers, the result of these analytical steps is a total installed cost equation as a function of the manufacturer selling price, and direct labor and equipment costs, using those markups estimated in section 6.3.3 :

Installed Price = M tax × { M L & E × L & E + M Mat × [ M Dist × ManPrice ]}

W here:

Installed_Price = the final installed price of the transformer ( 2011$ ),

M tax = the factor that accounts for sales tax, estimated as 1.069,

M L&E = the factor that accounts for the markup on direct installation labor and equipment costs, estimated as 1.47,

L&E = the installation, direct labor, and equipment costs (2011$), adjusted to 2011$ using the GDP price deflator from BEA

, M Mat = the factor that accounts for the contractor markup on the purchase
of the transformer from the distributor, estimated as 1.10 for low

voltage dry -type and 1.16 for medium-voltage dry- type

, M Dist = the average distributor markup factor, estimated as 1.15 1 for low

voltage dry -type, and 1.26 for medium-voltage dry-type, and

ManP rice = the ma nufacturer's selling price ( 2011$ ).

DOE applied the installed cost equation by using the manufacturer selling price and weight (in pounds) from the engineering analysis. For example, according to the engineering6

- 7 analysis, a DL8 (low -voltage, three-phase, 750 kVA) transformer model with $1,698.55 of L&E
costs listed in RS Means has a minimum manufacturer selling price of $4,235.47. For this particular transformer, DOE estimated the lower bound of the installed cost to be $8,396.72, where $ 2,669.15 is the installation cost and $ 5,727.57 is the sum of the transformer retail price, sales tax, and markups.

6.3.5 Liquid

- Immersed Distribution Transformer Installed Price Equation

The installed price calculation for liquid

- immersed distribution transformers differs from that for dry- type distribution transformers in that the distributor markup used in the equation is 1.07 instead of 1.15, and DOE removed the contractor markup from the equation based on the previous rulemaking. 1 DOE a dded a new distribution channel to represent the direct sale ofdistribution transformers to utilities, which account for approximately 81 percent of liquidimmersed transformer shipments. The fraction of utilities that purchase directly from
manufacturer s is based on the percent of electricity sales by independently owned utilities in the
EIA’s Form 861 [2] database. This sales channel removes a distributor markup. The inclusion of this channel reduces the overall markup for liquid- immersed transformers.

I nstalled Price = M tax × { M L & E × L & E + [ M Dist × ManPrice ]}

W here:

Installed_Price = the final installed price of the transformer (2011 $),

M tax = the factor that accounts for sales tax, estimated as 1.069,

M L&E = the factor that accounts for the markup on direct installation labor and equipment costs, estimated as 1.47,

L&E = the installation, direct labor, and equipment costs (2011$), adjusted to 2011$ using the GDP price deflator from BEA

, M Dist = the average distributor markup factor, estimated as 1.07, and

ManPrice = the manufacturer's selling price (201 1 $).

As with the dry- type distribution transformers, DOE applied the installed cost equation by using the manufacturer selling price and weight from the engineering analysis. For example, according to the engineering analysis, a DL4 (medium -voltage, three-phase, 225 kVA) transformer model with $ 2,309.64 of L&E costs listed in RS Means has a minimum manufacturer price of $5,305.36. For this particular transformer, DOE estimated the lower bound of the installed cost to be $ 9,697.87 , where $ 3,629.44 is the installation cost and $ 6,068.43 is the sum of the transformer retail price, sales tax, and markups.6

- 8 REFERENCES

1. Department of Energy
- Office of Energy Efficiency and Renewable Energy Energy Conservation Program for Commercial Equipment: Distribution Transformers Energy Conservation Standards; Proposed Rule. Federal Register 71, No. 150 , 44373 (2006).

2. RSMeans Ele ctrical Cost Data Online. Electrical Cost Data Online (2011).at <http://rsmeans.reedconstructiondata.com/66003.aspx>

3. The Sales Tax Clearinghouse State Sales Tax Rates. theSTC - State Sales Tax Rates at <http://www.thestc.com/STrates.stm>

4. U.S. Departm ent of Commerce -Bureau of Economic Analysis National Economic Accounts: National Income and Product Accounts Tables (1969- Present). at <http://www.bea.gov/national/nipaweb/DownSS2.asp>

5. ANOPR for Distribution Transformers, EE- RM/STD -00-550, RIN #1904- AB 08, comment No. 63. (2004).