CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY ................ 12-1

12.1.1 Phase 1: Industry Profile ........................................ 12-2

12.1.2 Phase 2: Industry Cashflow Analysis ............................... 12-2

12.1.3 Phase 3: Subgroup Impact Analysis ................................ 12-3

12.1.3.1 Small-Business Manufacturer Subgroup .................... 12-3

12.1.3.2 Niche-Product Manufacturer Subgroup ..................... 12-4

12.2 MANUFACTURING KEY ISSUES ...................................... 12-6

12.3 GRIM INPUTS AND ASSUMPTIONS ................................... 12-9

12.3.1 Overview of the GRIM .......................................... 12-9

12.3.2 Sources of GRIM Inputs ........................................ 12-10

12.3.2.1 Corporate Annual Reports ............................. 12-10

12.3.2.2 Standard and Poor and Moody's Credit Ratings ............. 12-11

12.3.2.3 Shipments Model ..................................... 12-11

12.3.2.4 Engineering Analysis .................................. 12-11

12.3.2.5 Manufacturer Interviews ............................... 12-11

12.3.3 Financial Parameters ........................................... 12-12

12.3.4 Corporate Discount Rate ........................................ 12-13

12.3.5 NES-Shipment Forecasts ........................................ 12-16

12.3.6 Manufacturers'-Shipments Forecast ............................... 12-20

12.3.7 Production Costs .............................................. 12-26

12.3.8 Markups ..................................................... 12-30

12.3.8.1 Flat Markups ........................................ 12-30

12.3.8.2 Two-Tier Markups .................................... 12-31

12.3.8.3 Three-Tier Price Markup ............................... 12-31

12.3.8.4 Constant-Price Markup ................................ 12-31

12.3.8.5 Markup Scenarios .................................... 12-32

12.3.8.6 Conversion Costs .................................... 12-34

12.4 INDUSTRY FINANCIAL IMPACTS .................................... 12-36

12.4.1 Trial Standard Levels ........................................... 12-36

12.4.2 Impacts on Industry Net Present Value ............................. 12-37

12.4.3 Impacts on Annual Cashflow ..................................... 12-41

12.5 OTHER IMPACTS .................................................. 12-48

12.5.1 Employment .................................................. 12-48

12.5.2 Manufacturing Capacity ......................................... 12-49

12.5.3 Exports ...................................................... 12-50

12.5.4 Cumulative Regulatory Burden ................................... 12-50

12.5.4.1 Federal Regulations on Residential Furnaces and Boilers and Other

Products Produced by the Same Manufacturers .............. 12-50

12.5.4.2 Other Pending Regulations and Standards ................. 12-54

12.5.4.3 Regulations and Pending Regulations at the State Level ...... 12-55

12.5.4.4 Other Regulations .................................... 12-56

12-i

 EE-RM/STD-01-350 COMMENT 164

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

TABLE OF CONTENTS 

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGy ................ 12-1 

12.1.1 Phase 1: IndustryProfile ........................................ 12-2 

12.1.2 Phase 2: Industry Cashflow Analysis ............................... 12-2 

12.1.3 Phase 3: Subgroup Impact Analysis ................................ 12-3 

12.1.3.1 Small-Business Manufacturer Subgroup .................... 12-3 

12.1.3.2 Niche-Product Manufacturer Subgroup ..................... 12-4 

12.2 MANUFACTURING KEY ISSUES ...................................... 12-6 

12.3 GRIM INPUTS AND ASSUMPTIONS ................................... 12-9 

12.3.1 Overview of the GRIM .......................................... 12-9 

12.3.2 Sources of GRIM Inputs ........................................ 12-10 

12.3.2.1 Corporate Annual Reports ............................. 12-10 

12.3.2.2 Standard and Poor and Moody's Credit Ratings ............. 12-11 

12.3.2.3 Shipments Model .................................... , 12-11 

12.3.2.4 Engineering Analysis ................................. , 12-11 

12.3.2.5 Manufacturer Interviews ............................... 12-11 

12.3.3 Financial Parameters ........................................... 12-12 

12.3.4 Corporate Discount Rate ........................................ 12-13 

12.3.5 NES-Shipment Forecasts ....................................... , 12-16 

12.3.6 Manufacturers' -Shipments Forecast ............................... 12-20 

12.3.7 Production Costs .............................................. 12-26 

12.3.8 Markups .................................................... , 12-30 

12.3.8.1 Flat Markups ........................................ 12-30 

12.3.8.2 Two-Tier Markups ................................... , 12-31 

12.3.8.3 Three-Tier Price Markup ............................... 12-31 

12.3.8.4 Constant-Price Markup ................................ 12-31 

12.3.8.5 Markup Scenarios .................................... 12-32 

12.3.8.6 Conversion Costs .................................... 12-34 

12.4 INDUSTRY FINANCIAL IMPACTS ................................... , 12-36 

12.4.1 Trial Standard Levels ........................................... 12-36 

12.4.2 Impacts on Industry Net Present Value ............................. 12-37 

12.4.3 Impacts on Annual Cashflow .................................... , 12-41 

12.5 OTHER IMPACTS .................................................. 12-48 

12.5.1 Employment .................................................. 12-48 

12.5.2 Manufacturing Capacity ......................................... 12-49 

12.5.3 Exports ..................................................... , 12-50 

12.5.4 Cumulative Regulatory Burden .................................. , 12-50 

12.5.4.1 Federal Regulations on Residential Furnaces and Boilers and Other 

Products Produced by the Same Manufacturers ............. , 12-50 

12.5.4.2 Other Pending Regulations and Standards ................. 12-54 

12.5.4.3 Regulations and Pending Regulations at the State Level ...... 12-55 

12.5.4.4 Other Regulations .................................... 12-56 

12-i 
12.6 CONCLUSIONS .................................................... 12-56

12.6.1 Non-Weatherized Gas Furnaces ................................... 12-56

12.6.2 Weatherized Gas Furnaces ....................................... 12-58

12.6.3 Mobile Home Furnaces ......................................... 12-59

12.6.4 Oil-Fired Furnaces ............................................. 12-60

12.6.5 Gas Boilers ................................................... 12-61

12.6.6 Oil-Fired Boilers .............................................. 12-62

Table 12.1.1

LIST OF TABLES

Niche Products Identified During Manufacturer Interviews .............. 12-5

Table 12.3.1 GRIM Financial Parameters ...................................... 12-13

Table 12.3.2 Cost of Equity Calculation ....................................... 12-14

Table 12.3.3 Cost of Debt Calculation ........................................ 12-15

Table 12.3.4 Total NES-Forecasted Shipments in 2015 (Millions) .................. 12-16

Table 12.3.5 NES Distribution and Total Shipments for Non-Weatherized

Gas Furnaces by Efficiency Level in 2015 (Shipments in Millions) ....... 12-17

Table 12.3.6 NES Distribution and Total Shipments for Weatherized

Gas Furnaces by Efficiency Level in 2015 (Shipments in Millions) ....... 12-17

Table 12.3.7 NES Distribution and Total Shipments for Mobile Home Furnaces by

Efficiency Level in 2015 (Shipments in Millions) ..................... 12-18

Table 12.3.8 NES Distribution and Total Shipments for Oil Furnaces by Efficiency

Table 12.3.9

Level in 2015 (Shipments in Millions) ............................. 12-18

NES Distribution and Total Shipments for Gas Boilers by Efficiency

Level in 2015 (Shipments in Millions) ............................. 12-19

Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers by Efficiency

Level in 2015 (Shipments in Millions) ............................. 12-20

Table 12.3.11 Manufacturers'-Forecasted Shipments in 2015 (Millions) .............. 12-21

Table 12.3.12 Manufacturer Distribution and Total Shipments for Non-Weatherized Gas

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-23

Table 12.3.13 Manufacturer Distribution and Total Shipments for Weatherized Gas

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-23

Table 12.3.14 Manufacturer Distribution and Total Shipments for Mobile Home

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-24

Table 12.3.15 Manufacturer Distribution and Total Shipments for Oil Furnaces by

Efficiency Level in 2015 (Shipments in Millions) .................... 12-24

Table 12.3.16 Manufacturer Distribution and Total Shipments for Gas Boilers by

Efficiency Level in 2015 (Shipments in Millions) .................... 12-25

Table 12.3.17 Manufacturers Distribution and Total Shipments for Oil Boilers by

Efficiency Level in 2015 (Shipments in Millions) ..................... 12-26

Table 12.3.18 Unit Production Costs used in the GRIM for Non-Weatherized

Gas Furnaces (Cost in 2006$) .................................... 12-27

Table 12.3.19 Unit Production Costs used in the GRIM for Weatherized

Gas Furnaces (Cost in 2006$) .................................... 12-27

12-ii

 EE-RM/STD-01-350 COMMENT 164

12.6 CONCLUSIONS .................................................... 12-56 

12.6.1 Non-Weatherized Gas Furnaces ................................... 12-56 

12.6.2 Weatherized Gas Furnaces ....................................... 12-58 

12.6.3 Mobile Home Furnaces ......................................... 12-59 

12.6.4 Oil-Fired Furnaces ............................................. 12-60 

12.6.5 Gas Boilers ................................................... 12-61 

12.6.6 Oil-Fired Boilers .............................................. 12-62 

LIST OF TABLES 

Table 12.1.1 Niche Products Identified During Manufacturer Interviews .............. 12-5 

Table 12.3.1 GRIM Financial Parameters ...................................... 12-13 

Table 12.3.2 Cost of Equity Calculation ....................................... 12-14 

Table 12.3.3 Cost of Debt Calculation ........................................ 12-15 

Table 12.3.4 Total NES-Forecasted Shipments in 2015 (Millions) .................. 12-16 

Table 12.3.5 NES Distribution and Total Shipments for Non-Weatherized 

Gas Furnaces by Efficiency Level in 2015 (Shipments in Millions) ....... 12-17 

Table 12.3.6 NES Distribution and Total Shipments for Weatherized 

Gas Furnaces by Efficiency Level in 2015 (Shipments in Millions) . . . . . .. 12-17 

Table 12.3.7 NES Distribution and Total Shipments for Mobile Home Furnaces by 

Efficiency Level in 2015 (Shipments in Millions) ..................... 12-18 

Table 12.3.8 NES Distribution and Total Shipments for Oil Furnaces by Efficiency 

Level in 2015 (Shipments in Millions) ............................. 12-18 

Table 12.3.9 NES Distribution and Total Shipments for Gas Boilers by Efficiency 

Level in 2015 (Shipments in Millions) ............................. 12-19 

Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers by Efficiency 

Level in 2015 (Shipments in Millions) ............................. 12-20 

Table 12.3.11 Manufacturers'-Forecasted Shipments in 2015 (Millions) .............. 12-21 

Table 12.3.12 Manufacturer Distribution and Total Shipments for Non-Weatherized Gas 

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-23 

Table 12.3.13 Manufacturer Distribution and Total Shipments for Weatherized Gas 

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-23 

Table 12.3.14 Manufacturer Distribution and Total Shipments for Mobile Home 

Furnaces by Efficiency Level in 2015 (Shipments in Millions) .......... 12-24 

Table 12.3.15 Manufacturer Distribution and Total Shipments for Oil Furnaces by 

Efficiency Level in 2015 (Shipments in Millions) .................... 12-24 

Table 12.3.16 Manufacturer Distribution and Total Shipments for Gas Boilers by 

Efficiency Level in 2015 (Shipments in Millions) .................... 12-25 

Table 12.3.17 Manufacturers Distribution and Total Shipments for Oil Boilers by 

Efficiency Level in 2015 (Shipments in Millions) ..................... 12-26 

Table 12.3.18 Unit Production Costs used in the GRIM for Non-Weatherized 

Gas Furnaces (Cost in 2006$) .................................... 12-27 

Table 12.3.19 Unit Production Costs used in the GRIM for Weatherized 

Gas Furnaces (Cost in 2006$) .................................... 12-27 

12-ii 
Table 12.3.20 Unit Production Costs used in the GRIM for Mobile Home Furnaces

(Cost in 2006$) ............................................... 12-27

Table 12.3.21 Unit Production Costs used in the GRIM for Oil Furnaces (Cost in 2006$) . 12-28

Table 12.3.22 Unit Production Costs used in the GRIM for Gas Boilers (Cost in 2006$) . . 12-28

Table 12.3.23 Unit Production Costs used in the GRIM for Oil Boilers (Cost in 2006$) . . 12-28

Table 12.3.24 Flat Manufacturer Markups Used in GRIM .......................... 12-31

Table 12.3.25 Summary of Markups Scenarios by Product Class .................... 12-32

Table 12.3.26 Two-Tier Manufacturer Markups for Non-Weatherized Gas Furnaces ..... 12-32

Table 12.3.27 Constant-Price Markups for Weatherized Gas Furnaces ................ 12-33

Table 12.3.28 Constant-Price Markups for Oil Furnaces ........................... 12-33

Table 12.3.29 Three-Tier Manufacturer Markups for Gas Boilers .................... 12-33

Table 12.3.30 Three-Tier Manufacturer Markups for Oil Boilers .................... 12-34

Table 12.3.31 Summary of Product Conversion Costs Used in the GRIM

(Cost in Millions of Dollars) ..................................... 12-35

Table 12.3.32 Summary of Conversion Capital Expenses Used in the GRIM

(Cost in Million Dollars) ........................................ 12-36

Table 12.4.1 Trial Standard Levels Evaluated in the MIA for Residential

Furnaces and Boilers ........................................... 12-36

Table 12.4.2 Changes in Industry Net Present Value, Non-Weatherized Gas Furnaces ... 12-38

Table 12.4.3 Changes in Industry Net Present Value, Weatherized Gas Furnaces ....... 12-39

Table 12.4.4 Changes in Industry Net Present Value, Mobile Home Gas Furnaces ...... 12-39

Table 12.4.5 Changes in Industry Net Present Value, Oil Furnaces .................. 12-40

Table 12.4.6 Changes in Industry Net Present Value, Gas Boilers ................... 12-40

Table 12.4.7 Changes in Industry Net Present Value, Oil Boilers ................... 12-41

Table 12.5.1 Projected Change in Cumulative Labor Expenditures by Product Class using the

Table 12.5.2

Scenario with the Greatest Impact (2015-2038) ...................... 12-49

Summary of Major Regulations on Residential Furnace and

Table 12.5.3

Boiler Manufacturers ........................................... 12-52

Market Shares of Major Furnace and Boiler Manufacturers in

Table 12.5.4

Regulated Products ............................................ 12-53

Estimated Investments Required to Meet Impending Federal

Regulations (million $) ......................................... 12-54

LIST OF FIGURES

Figure 12.3.1 Using the GRIM to Calculate Cashflow ............................ 12-10

Figure 12.4.1 Industry Net Cashflow for Non-Weatherized Gas Furnaces,

NES- Shipments Forecast, and a Flat-Markup Scenario ................ 12-42

Figure 12.4.2 Industry Net Cashflow for Non-Weatherized Gas Furnaces,

Manufacturers'-Shipments Forecast, and a Two-Tier-Markup Scenario .... 12-43

Figure 12.4.3 Industry Net Cashflow for Weatherized Gas Furnaces, NES-Shipments

Forecast, and a Constant-Price-Markup Scenario ..................... 12-43

Figure 12.4.4 Industry Net Cashflow for Weatherized Gas Furnaces, NES- Shipments

Forecast, and a Flat-Markup Scenario .............................. 12-44

Figure 12.4.5 Industry Net Cashflow for Mobile Home Furnaces, NES-Shipments

12-iii

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.20 Unit Production Costs used in the GRIM for Mobile Home Furnaces 

(Cost in 2006$) ............................................... 12-27 

Table 12.3.21 Unit Production Costs used in the GRIM for Oil Furnaces (Cost in 2006$) . 12-28 

Table 12.3.22 Unit Production Costs used in the GRIM for Gas Boilers (Cost in 2006$) .. 12-28 

Table 12.3.23 Unit Production Costs used in the GRIM for Oil Boilers (Cost in 2006$) .. 12-28 

Table 12.3.24 Flat Manufacturer Markups Used in GRIM .......................... 12-31 

Table 12.3.25 Summary of Markups Scenarios by Product Class .................... 12-32 

Table 12.3.26 Two-Tier Manufacturer Markups for Non-Weatherized Gas Furnaces ..... 12-32 

Table 12.3.27 Constant-Price Markups for Weatherized Gas Furnaces ................ 12-33 

Table 12.3.28 Constant-Price Markups for Oil Furnaces ........................... 12-33 

Table 12.3.29 Three-Tier Manufacturer Markups for Gas Boilers .................... 12-33 

Table 12.3.30 Three-Tier Manufacturer Markups for Oil Boilers .................... 12-34 

Table 12.3.31 Summary of Product Conversion Costs Used in the GRIM 

(Cost in Millions of Dollars) ..................................... 12-35 

Table 12.3.32 Summary of Conversion Capital Expenses Used in the GRIM 

(Cost in Million Dollars) ........................................ 12-36 

Table 12.4.1 Trial Standard Levels Evaluated in the MIA for Residential 

Furnaces and Boilers ........................................... 12-36 

Table 12.4.2 Changes in Industry Net Present Value, Non-Weatherized Gas Furnaces ... 12-38 

Table 12.4.3 Changes in Industry Net Present Value, Weatherized Gas Furnaces ....... 12-39 

Table 12.4.4 Changes in Industry Net Present Value, Mobile Home Gas Furnaces ...... 12-39 

Table 12.4.5 Changes in Industry Net Present Value, Oil Furnaces .................. 12-40 

Table 12.4.6 Changes in Industry Net Present Value, Gas Boilers ................... 12-40 

Table 12.4.7 Changes in Industry Net Present Value, Oil Boilers ................... 12-41 

Table 12.5.1 Projected Change in Cumulative Labor Expenditures by Product Class using the 

Scenario with the Greatest Impact (2015-2038) ...................... 12-49 

Table 12.5.2 Summary of Major Regulations on Residential Furnace and 

Boiler Manufacturers ........................................... 12-52 

Table 12.5.3 Market Shares of Major Furnace and Boiler Manufacturers in 

Regulated Products ............................................ 12-53 

Table 12.5.4 Estimated Investments Required to Meet Impending Federal 

Regulations (million $) ......................................... 12-54 

LIST OF FIGURES 

Figure 12.3.1 Using the GRIM to Calculate Cashflow ............................ 12-10 

Figure 12.4.1 Industry Net Cashflow for Non-Weatherized Gas Furnaces, 

NES- Shipments Forecast, and a Flat-Markup Scenario ................ 12-42 

Figure 12.4.2 Industry Net Cashflow for Non-Weatherized Gas Furnaces, 

Manufacturers'-Shipments Forecast, and a Two-Tier-Markup Scenario .... 12-43 

Figure 12.4.3 Industry Net Cashflow for Weatherized Gas Furnaces, NES-Shipments 

Forecast, and a Constant-Price-Markup Scenario ..................... 12-43 

Figure 12.4.4 Industry Net Cashflow for Weatherized Gas Furnaces, NES- Shipments 

Forecast, and a Flat-Markup Scenario .............................. 12-44 

Figure 12.4.5 Industry Net Cashflow for Mobile Home Furnaces, NES-Shipments 

12-iii 
Forecast, and a Flat-Markup Scenario ............................. 12-44

Figure 12.4.6 Industry Net Cashflow for Mobile Home Furnaces,

Manufacturers'-Shipments Forecast, and a Flat-Markup Scenario ........ 12-45

Figure 12.4.7 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments Forecast,

and a Constant-Price-Markup Scenario ............................. 12-45

Figure 12.4.8 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments Forecast,

and a Flat-Markup Scenario ...................................... 12-46

Figure 12.4.9 Industry Net Cashflow for Gas Boilers, Manufacturers'-Shipments

Forecast, and a Flat-Markup Scenario .............................. 12-46

Figure 12.4.10 Industry Net Cashflow for Gas Boilers, Manufacturers'-Shipments

Forecast, and a Three-Tier-Markup Scenario ....................... 12-47

Figure 12.4.11 Industry Net Cashflow for Oil Boilers, Manufacturers'-Shipments

Forecast, and a Flat-Markup Scenario ............................ 12-47

Figure 12.4.12 Industry Net Cashflow for Oil Boilers, Manufacturers'-Shipments

Forecast, and a Three-Tier-Markup Scenario ....................... 12-48

 EE-RM/STD-01-350 COMMENT 164

Forecast, and a Flat-Markup Scenario ............................. 12-44 

Figure 12.4.6 Industry Net Cash flow for Mobile Home Furnaces, 

Manufacturers'-Shipments Forecast, and a Flat-Markup Scenario ....... , 12-45 

Figure 12.4.7 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments Forecast, 

and a Constant-Price-Markup Scenario ............................ , 12-45 

Figure 12.4.8 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments Forecast, 

and a Flat-Markup Scenario ..................................... , 12-46 

Figure 12.4.9 Industry Net Cashflow for Gas Boilers, Manufacturers' -Shipments 

Forecast, and a Flat-Markup Scenario ............................. , 12-46 

Figure 12.4.10 Industry Net Cashflow for Gas Boilers, Manufacturers' -Shipments 

Forecast, and a Three-Tier-Markup Scenario ....................... 12-47 

Figure 12.4.11 Industry Net Cashflow for Oil Boilers, Manufacturers' -Shipments 

Forecast, and a Flat-Markup Scenario ............................ 12-47 

Figure 12.4.12 Industry Net Cashflow for Oil Boilers, Manufacturers'-Shipments 

Forecast, and a Three-Tier-Markup Scenario ....................... 12-48 

12-iv 
CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 MANUFACTURER IMPACT ANAL YSIS METHODOLOGY

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 products subject to such a standard." (42 U.S.C. 6295(O)(2)(B)(i)(I))a The

legislation also calls for an assessment of the impact of any lessening of competition as

determined in writing by the Attorney General. The Department of Energy (DOE) conducted the

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

the residential furnace and boiler industry and to assess the impact of such standards on

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

components. The quantitative part of the MIA primarily relies on the Government Regulatory

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

GRIM inputs relate to industry cost structure, shipments, and pricing strategies. The GRIM's key

output is the industry net present value (INPV). The model estimates the financial impact of

higher efficiency standards by comparing changes in INPV between the base case and the various

trial standard levels (TSLs). The qualitative part of the MIA addresses factors such as product

characteristics, characteristics of particular firms, and market and product trends, and includes an

assessment of the impacts of standards on subgroups of manufacturers.

In its Framework Document published on July 17, 2001, DOE outlined the procedural

and analytical approaches for the MIA. As outlined, DOE conducted the MIA in three phases.

Phase 1, "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 2, "Industry Cashflow," focused on the industry as a whole. In this phase, DOE used the

GRIM to prepare an industry cashflow analysis. Using publicly available information developed

in Phase 1, DOE adapted the GRIM's generic structure to perform an analysis of residential

furnace and boiler energy conservation standards. In Phase 3, the "Subgroup Impact Analysis,"

DOE conducted interviews with manufacturers representing over 80 percent of domestic furnace

and boiler sales. This group included large and small manufacturers of furnaces and boilers

providing a representative cross-section of the industry. During these interviews, DOE discussed

engineering, manufacturing, procurement, and financial topics specific to each company and also

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 standard on manufacturers' cashflows,

manufacturing capacities, and employment levels.

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

the information on which it based the MIA.

a DOE's standards program for residential products is conducted under Title III, Part B of the Energy Policy and

Conservation Act (EPCA), 42 U.S.C. 6291-6309.

12-1

 EE-RM/STD-01-350 COMMENT 164

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY 

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 products subject to such a standard." (42 U.S.c. 6295(O)(2)(B)(i)(I))a The 

legislation also calls for an assessment of the impact of any lessening of competition as 

determined in writing by the Attorney General. The Department of Energy (DOE) conducted the 

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

the residential furnace and boiler industry and to assess the impact of such standards on 

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

components. The quantitative part of the MIA primarily relies on the Government Regulatory 

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

GRIM inputs relate to industry cost structure, shipments, and pricing strategies. The GRIM's key 

output is the industry net present value (INPV). The model estimates the financial impact of 

higher efficiency standards by comparing changes in INPV between the base case and the various 

trial standard levels (TSLs). The qualitative part of the MIA addresses factors such as product 

characteristics, characteristics of particular firms, and market and product trends, and includes an 

assessment of the impacts of standards on subgroups of manufacturers. 

In its Framework Document published on July 17, 2001, DOE outlined the procedural 

and analytical approaches for the MIA. As outlined, DOE conducted the MIA in three phases. 

Phase 1, "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 2, "Industry Cashflow," 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 1, DOE adapted the GRIM's generic structure to perform an analysis of residential 

furnace and boiler energy conservation standards. In Phase 3, the "Subgroup Impact Analysis," 

DOE conducted interviews with manufacturers representing over 80 percent of domestic furnace 

and boiler sales. This group included large and small manufacturers of furnaces and boilers 

providing a representative cross-section of the industry. During these interviews, DOE discussed 

engineering, manufacturing, procurement, and financial topics specific to each company and also 

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 standard on manufacturers' cashflows, 

manufacturing capacities, and employment levels. 

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

the information on which it based the MIA. 

a DOE's standards program for residential products is conducted under Title III, Part B of the Energy Policy and 

Conservation Act (EPCA), 42 U.S.C. 6291-6309. 

12-1 
12.1.1 Phase 1: Industry Profile

In Phase 1 ofthe MIA, DOE prepared a profile of the residential furnace and boiler

industry that built on the market and technology assessment originally prepared for the advance

notice of proposed rulemaking (ANOPR) analysis and subsequently updated for the notice of

proposed rulemaking (NOPR) analysis. For the market and technology assessment, DOE

collected information on the present and past structure and market characteristics of residential

furnace and boiler manufacturing , including information on market share, product shipments,

markups, and cost structure for various manufacturers . The industry profile includes further

detail on product characteristics , estimated manufacturer market shares, the financial situation of

manufacturers, trends in the number of firms, the market, and product characteristics of the

residential furnaces and boilers industry.

The industry profile includes a topdown cost analysis of residential furnace and boiler

manufacturers that DOE used to derive costs and preliminary financial inputs for the GRIM (e.g.,

revenues; material ; labor; overhead ; depreciation; selling, general, and administrative expenses

(SG&A); and research and development (R&D) expenses). DOE also used public sources of

information to further calibrate its initial characterization of the industry , including Securities and

Exchange Commission (SEC) 10-K reports, Moody's company data reports , Standard & Poor's

(S&P) stock reports, Value Line industry composites , corporate annual reports, the U.S. Census

Bureau's Economic Census, Dun & Bradstreet reports, and industry analyses from Ibbotson

Associates and Dow Jones Financial Services.

12.1.2 Phase 2: Industry Cashflow Analysis

Phase 2 of the MIA focused on the financial impacts of new standards on the industry as a

whole. Energy conservation standards can affect furnace and boiler manufacturers in three

distinct ways: ( 1) require additional investment, (2) raise production costs, (3) impact revenues

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

calculating the financial impacts of standards on manufacturers is the GRIM. To quantify these

impacts in Phase 2 of the MIA, DOE used the GRIM to perform a cashflow analysis for the

residential furnace and boiler industry.

For the industry cashflow analysis, DOE prepared a set of financial parameters based on

public sources of information for use in the GRIM. DOE derived prices from the engineering

analysis cost-efficiency curves and estimated typical manufacturer markups from public financial

reports and interviews with manufacturers. It developed alternative markup scenarios based on

discussions with manufacturers during the NOPR phase of the rulemaking . DOE's shipments

analysis, as presented in Chapter 9 of the technical support document (TSD), provided the basis

for the shipments projection under each of the TSLs in the GRIM. During interviews with

manufacturers in Phase 3 of the MIA (see below), DOE reviewed the national energy savings

(NES)-shipment forecasts with the manufacturers and, in some cases, developed revised

shipment scenarios, referred to as manufacturers '-shipments forecasts, to reflect manufacturer

data and comments.

12-2

 EE-RM/STD-01-350 COMMENT 164

12.1.1 Phase 1: Industry Profile 

In Phase 1 of the MIA, DOE prepared a profile of the residential furnace and boiler 

industry that built on the market and technology assessment originally prepared for the advance 

notice of proposed rulemaking (ANOPR) analysis and subsequently updated for the notice of 

proposed rulemaking (NOPR) analysis. For the market and technology assessment, DOE 

collected information on the present and past structure and market characteristics of residential 

furnace and boiler manufacturing, including information on market share, product shipments, 

markups, and cost structure for various manufacturers. The industry profile includes further 

detail on product characteristics, estimated manufacturer market shares, the financial situation of 

manufacturers, trends in the number of firms, the market, and product characteristics of the 

residential furnaces and boilers industry. 

The industry profile includes a top down cost analysis of residential furnace and boiler 

manufacturers that DOE used to derive costs and preliminary financial inputs for the GRIM (e.g., 

revenues; material; labor; overhead; depreciation; selling, general, and administrative expenses 

(SG&A); and research and development (R&D) expenses). DOE also used public sources of 

information to further calibrate its initial characterization of the industry, including Securities and 

Exchange Commission (SEC) 10-K reports, Moody's company data reports, Standard & Poor's 

(S&P) stock reports, Value Line industry composites, corporate annual reports, the U.S. Census 

Bureau's Economic Census, Dun & Bradstreet reports, and industry analyses from Ibbotson 

Associates and Dow Jones Financial Services. 

12.1.2 Phase 2: Industry Cashflow Analysis 

Phase 2 of the MIA focused on the financial impacts of new standards on the industry as a 

whole. Energy conservation standards can affect furnace and boiler manufacturers in three 

distinct ways: (1) require additional investment, (2) raise production costs, (3) impact revenues 

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

calculating the financial impacts of standards on manufacturers is the GRIM. To quantify these 

impacts in Phase 2 of the MIA, DOE used the GRIM to perform a cashflow analysis for the 

residential furnace and boiler industry. 

For the industry cashflow analysis, DOE prepared a set of financial parameters based on 

public sources of information for use in the GRIM. DOE derived prices from the engineering 

analysis cost-efficiency curves and estimated typical manufacturer markups from public financial 

reports and interviews with manufacturers. It developed alternative markup scenarios based on 

discussions with manufacturers during the NOPR phase of the rulemaking. DOE's shipments 

analysis, as presented in Chapter 9 of the technical support document (TSD), provided the basis 

for the shipments projection under each of the TSLs in the GRIM. During interviews with 

manufacturers in Phase 3 of the MIA (see below), DOE reviewed the national energy savings 

(NES)-shipment forecasts with the manufacturers and, in some cases, developed revised 

shipment scenarios, referred to as manufacturers' -shipments forecasts, to reflect manufacturer 

data and comments. 

12-2 
12.1.3 Phase 3: Subgroup Impact Analysis

Using average cost assumptions to develop an industry cashflow estimate is not adequate

for assessing differential impacts among subgroups of manufacturers. Small manufacturers,

niche players, or manufacturers exhibiting a cost structure that differs largely from the industry

average could be more negatively impacted. DOE used the results of the industry

characterization to group manufacturers exhibiting similar characteristics.

In the Framework Document, in the ANOPR, and at the ANOPR public meeting, DOE

invited stakeholders to comment on the manufacturing subgroups that it should analyze for the

MIA. DOE established six subgroups of manufacturers, corresponding to each of the product

classes in the ANOPR document. It did not receive public comments on these subgroups at the

public meeting or in response to either document. Consequently, DOE decided to use the six

subgroups that correspond to each of the product classes in the MIA, based on the market

assessment.

Based on this decision, DOE prepared two different interview guides-one for furnaces

and one for boilers. DOE used these interview guides to obtain information from manufacturers

that enabled it to tailor the GRIM to incorporate unique financial characteristics from both

industries. Within each of these industries, DOE contacted companies from its database of

manufacturers, which represented each subgroup. DOE interviewed small and large companies,

subsidiaries and independent firms, and public and private corporations. DOE also made an

effort to interview companies who had previously participated in DOE's rulemaking process for

residential furnaces and boilers. The purpose of the meetings was to enhance DOE's

understanding of how manufacturer impacts vary with the TSLs. During the course of the MIA,

DOE interviewed manufacturers representing over 80 percent of domestic furnace and boiler

sales, carrying out nine interviews with furnace manufacturers and five interviews with boiler

manufacturers. Finally, DOE developed a tailored version of the GRIM for each of the six

subgroups. The industry-wide cashflow analysis is an aggregation of these six subgroups.

DOE also evaluated the impact of the energy conservation standards on small businesses.

DOE created a tailored version of the interview guide for small furnace and boiler manufacturers,

and contacted 11 small businesses to determine if they were interested in discussing differential

impacts standards would have on their companies. The small business impact analysis is

discussed further in section 12.1.3.1.

12.1.3.1 Small-Business Manufacturer Subgroup

DOE undertook a small-business subgroup analysis to assess the importance of small

businesses within the furnace and boiler industry and understand how the impacts of energy

conservation standards on small businesses might differ from the impacts on large manufacturers.

Small businesses, as defined by the Small Business Administration (SBA) for the furnace and

boiler manufacturing industry, are manufacturing enterprises with 750 or fewer employees.a To

Small Business Administration - www.sba.gov/size/indextableofsize.html

12-3

 EE-RM/STD-01-350 COMMENT 164

12.1.3 Phase 3: Subgroup Impact Analysis 

Using average cost assumptions to develop an industry cashflow estimate is not adequate 

for assessing differential impacts among subgroups of manufacturers. Small manufacturers, 

niche players, or manufacturers exhibiting a cost structure that differs largely from the industry 

average could be more negatively impacted. DOE used the results of the industry 

characterization to group manufacturers exhibiting similar characteristics. 

In the Framework Document, in the ANOPR, and at the ANOPR public meeting, DOE 

invited stakeholders to comment on the manufacturing subgroups that it should analyze for the 

MIA. DOE established six subgroups of manufacturers, corresponding to each of the product 

classes in the ANOPR document. It did not receive public comments on these subgroups at the 

public meeting or in response to either document. Consequently, DOE decided to use the six 

subgroups that correspond to each of the product classes in the MIA, based on the market 

assessment. 

Based on this decision, DOE prepared two different interview guides-one for furnaces 

and one for boilers. DOE used these interview guides to obtain information from manufacturers 

that enabled it to tailor the GRIM to incorporate unique financial characteristics from both 

industries. Within each of these industries, DOE contacted companies from its database of 

manufacturers, which represented each subgroup. DOE interviewed small and large companies, 

subsidiaries and independent firms, and public and private corporations. DOE also made an 

effort to interview companies who had previously participated in DOE's rulemaking process for 

residential furnaces and boilers. The purpose of the meetings was to enhance DOE's 

understanding of how manufacturer impacts vary with the TSLs. During the course of the MIA, 

DOE interviewed manufacturers representing over 80 percent of domestic furnace and boiler 

sales, carrying out nine interviews with furnace manufacturers and five interviews with boiler 

manufacturers. Finally, DOE developed a tailored version of the GRIM for each of the six 

subgroups. The industry-wide cashflow analysis is an aggregation of these six subgroups. 

DOE also evaluated the impact of the energy conservation standards on small businesses. 

DOE created a tailored version of the interview guide for small furnace and boiler manufacturers, 

and contacted 11 small businesses to determine if they were interested in discussing differential 

impacts standards would have on their companies. The small business impact analysis is 

discussed further in section 12.1.3.1. 

12.1.3.1 Small-Business Manufacturer Subgroup 

DOE undertook a small-business subgroup analysis to assess the importance of small 

businesses within the furnace and boiler industry and understand how the impacts of energy 

conservation standards on small businesses might differ from the impacts on large manufacturers. 

Small businesses, as defined by the Small Business Administration (SBA) for the furnace and 

boiler manufacturing industry, are manufacturing enterprises with 750 or fewer employees.a To 

a Small Business Administration - www.sba.gov/sizelindextab1eofsize.htm1 

12-3 
identify eligible companies, DOE constructed a furnace and boiler manufacturers database

containing available data from multiple sources, including the Gas Appliance Manufacturers

Association (GAMA)'s Consumers ' Directory of Certified Efficiency Ratings for Heating and

Water Heating Equipment (2005) and DOE's stakeholder contact list for this rulemaking.' DOE

also asked GAMA representatives and other stakeholders for information regarding small

businesses within the residential furnace and boiler industry. DOE then selected businesses if

they met the SBA's definition of a small manufacturing facility and had U.S.-based

manufacturing facilities. It contacted these manufacturers to assess their interest in participating

in an interview. If a small business was interested, DOE sent them a short questionnaire and

scheduled a date for discussion.

DOE's database includes 11 small businesses. In addition to the two small businesses

with which DOE held structured, face-to-face interviews, DOE interviewed three small

businesses by telephone. Upon reviewing the material provided by the small businesses

interviewed, DOE found that, in general, small manufacturers have the same concerns regarding

energy conservation standards as large manufacturers within the furnace and boiler industry. In

addition, DOE found no significant differences in the R&D and marketing strategies between

small businesses and large businesses. Therefore, DOE believes that the GRIM analysis, which

models each product class separately, captures and represents the differential impacts on small

businesses within the furnace and boiler industry.

12.1.3.2 Niche-Product Manufacturer Subgroup

DOE identified several types of residential furnaces and boilers that are used in particular

or unusual applications and have features that differ from those of the vast majority of products

available in the marketplace. DOE refers to these types of products as "niche products." During

the manufacturer interviews, several manufacturers claimed that certain niche products would not

be viable if required to meet higher efficiency standards, and suggested that DOE maintain

efficiency standards at current levels. The manufacturers suggested that since all of these

products serve relatively small niche markets, the efficiency standards established for them will

have little effect on national energy savings. Further, each of the identified niche products serves

some unique utility.

DOE identified the potential niche products during the manufacturer interview process.

Table 12.1.1 presents the niche product classes identified by manufacturers.

" http://www.gamanet. org/gama/inforesources.nsf/vAttachmentLaunch/C2AAFB8D41D003F485256E9000607F66/

$FILE/05 05_gas_fr.pdf

12-4

 EE-RM/STD-01-350 COMMENT 164

identify eligible companies, DOE constructed a furnace and boiler manufacturers database 

containing available data from multiple sources, including the Gas Appliance Manufacturers 

Association (GAMA)'s Consumers' Directory of Certified Efficiency Ratingsfor Heating and 

Water Heating Equipment (2005) and DOE's stakeholder contact list for this rulemaking. a DOE 

also asked GAMA representatives and other stakeholders for information regarding small 

businesses within the residential furnace and boiler industry. DOE then selected businesses if 

they met the SBA's definition of a small manufacturing facility and had U.S.-based 

manufacturing facilities. It contacted these manufacturers to assess their interest in participating 

in an interview. If a small business was interested, DOE sent them a short questionnaire and 

scheduled a date for discussion. 

DOE's database includes 11 small businesses. In addition to the two small businesses 

with which DOE held structured, face-to-face interviews, DOE interviewed three small 

businesses by telephone. Upon reviewing the material provided by the small businesses 

interviewed, DOE found that, in general, small manufacturers have the same concerns regarding 

energy conservation standards as large manufacturers within the furnace and boiler industry. In 

addition, DOE found no significant differences in the R&D and marketing strategies between 

small businesses and large businesses. Therefore, DOE believes that the GRIM analysis, which 

models each product class separately, captures and represents the differential impacts on small 

businesses within the furnace and boiler industry. 

12.1.3.2 Niche-Product Manufacturer Subgroup 

DOE identified several types of residential furnaces and boilers that are used in particular 

or unusual applications and have features that differ from those of the vast majority of products 

available in the marketplace. DOE refers to these types of products as "niche products." During 

the manufacturer interviews, several manufacturers claimed that certain niche products would not 

be viable if required to meet higher efficiency standards, and suggested that DOE maintain 

efficiency standards at current levels. The manufacturers suggested that since all of these 

products serve relatively small niche markets, the efficiency standards established for them will 

have little effect on national energy savings. Further, each of the identified niche products serves 

some unique utility. 

DOE identified the potential niche products during the manufacturer interview process. 

Table 12.1.1 presents the niche product classes identified by manufacturers. 

a http://www.gamanet.org/gama/inforesources.nsf/vAttachmentLaunch/C2AAFB8D41D003F485256E9000607F661 

$FILE/0505 _gas _ fr.pdf 

12-4 
Table 12.1.1 Niche Products Identified During Manufacturer Interviews

Product Class Potential Niche Products

Non-weatherized gas furnaces Down-flow, non-weatherized gas furnaces

Weatherized gas furnaces Thru-the-wall, weatherized gas furnaces

Mobile home furnaces Convertible and compact design mobile home furnaces

Oil-fired furnaces Horizontal oil furnaces

Gas boilers Steam gas-fired boilers

Outdoor gas-fired boilers

Oil-fired boilers Steam oil boilers

® Down flow configuration - One manufacturer identified non-weatherized gas furnaces

with a down-flow configuration as a niche product. The down-flow, or counter-flow,

design is used in houses that have an under-the-floor type of heat distribution system.

The fan is located above the heat exchanger. The return-air plenum is connected to the

top of the unit. The manufacturer believed that manufacturers of down-flow, nonweatherized gas furnaces could experience higher conversion expenditures than other

non-weatherized gas furnace manufacturers to manufacturer products with higher

efficiencies, due to the location of the heat exchanger. Down-flow, non-weatherized gas

furnaces are very similar in design, size, cost, and efficiency to non-weatherized gas

furnaces and may not warrant special consideration in this rulemaking.

Thru-the-wall configuration - One manufacturer commented that thru-the-wall

weatherized gas furnaces used in replacement applications are tightly space-constrained

in two dimensions and identified them as a niche product. Furthermore, manufacturers of

these products would have difficulty making products within the condensing range due to

these size constraints. However, this manufacturer also stated that these products could

be manufactured within the range of 78-percent to 83-percent annual fuel utilization

efficiency (AFUE).

® Convertible and compact furnaces - Convertible and compact furnaces are categories of

mobile home furnaces that manufacturers identified as presenting unique challenges.

During the interviews, one manufacturer identified numerous ("convertible") mobile

home furnaces that allow the consumer to switch the type of fuel. The manufacturer also

suggested that if mobile home oil-fired furnaces must comply with a more stringent

energy conservation standard than mobile home gas furnaces, these convertible products

may no longer be viable due to the increased cost and a electric options. In addition, this

manufacturer stated that customers may be forced to enlarge their existing furnace closet

for compact mobile home furnaces to account for the increase in size of a more efficient

furnace, which would only be possible at a considerable expense. DOE's analysis

considered the effects of increased energy conservation standards on all mobile home

products regardless of fuel type. Therefore, DOE considered a single, uniform efficiency

level for the entire mobile home furnace product class. Since all mobile home furnaces

are space constrained products, the impacts on the entire product class as a result of

increased energy conservation standards encompass the impacts to convertible and

compact furnaces.

12-5

 EE-RM/STD-01-350 COMMENT 164

T a e bi 12 1 1 N° h Pdt Id oft d D ° ° IC e ro uc s ent! Ie urmg M anu f I acturer ntervlews 

Product Class Potential Niche Products 

Non-weatherized gas furnaces Down-flow, non-weatherized gas furnaces 

Weatherized gas furnaces Thru-the-wall, weatherized gas furnaces 

Mobile home furnaces Convertible and compact design mobile home furnaces 

Oil-fired furnaces Horizontal oil furnaces 

Gas boilers Steam gas-fired boilers 

Outdoor gas-fired boilers 

Oil-fired boilers Steam oil boilers 

Down-jlow configuration - One manufacturer identified non-weatherized gas furnaces 

with a down-flow configuration as a niche product. The down-flow, or counter-flow, 

design is used in houses that have an under-the-floor type of heat distribution system. 

The fan is located above the heat exchanger. The return-air plenum is connected to the 

top of the unit. The manufacturer believed that manufacturers of down-flow, nonweatherized gas furnaces could experience higher conversion expenditures than other 

non-weatherized gas furnace manufacturers to manufacturer products with higher 

efficiencies, due to the location of the heat exchanger. Down-flow, non-weatherized gas 

furnaces are very similar in design, size, cost, and efficiency to non-weatherized gas 

furnaces and may not warrant special consideration in this rulemaking. 

Thru-the-wall corifiguration - One manufacturer commented that thru-the-wall 

weatherized gas furnaces used in replacement applications are tightly space-constrained 

in two dimensions and identified them as a niche product. Furthermore, manufacturers of 

these products would have difficulty making products within the condensing range due to 

these size constraints. However, this manufacturer also stated that these products could 

be manufactured within the range of 78-percent to 83-percent annual fuel utilization 

efficiency (AFUE). 

• Convertible and compact furnaces - Convertible and compact furnaces are categories of 

mobile home furnaces that manufacturers identified as presenting unique challenges. 

During the interviews, one manufacturer identified numerous ("convertible") mobile 

home furnaces that allow the consumer to switch the type of fuel. The manufacturer also 

suggested that if mobile home oil-fired furnaces must comply with a more stringent 

energy conservation standard than mobile home gas furnaces, these convertible products 

may no longer be viable due to the increased cost and a electric options. In addition, this 

manufacturer stated that customers may be forced to enlarge their existing furnace closet 

for compact mobile home furnaces to account for the increase in size of a more efficient 

furnace, which would only be possible at a considerable expense. DOE's analysis 

considered the effects of increased energy conservation standards on all mobile home 

products regardless of fuel type. Therefore, DOE considered a single, uniform efficiency 

level for the entire mobile home furnace product class. Since all mobile home furnaces 

are space constrained products, the impacts on the entire product class as a result of 

increased energy conservation standards encompass the impacts to convertible and 

compact furnaces. 

12-5 
Horizontal configuration - Horizontal oil-fired furnaces are used in attic spaces or crawl

spaces and other locations where the height of the furnace is the constrained dimension.

Air enters at one end of the unit through the fan compartment, is forced horizontally over

the heat exchanger, and then exits at the opposite end. These types of oil-fired furnaces

are typically serviced annually to maintain the rated efficiency of the unit. To design a

product that will meet an increased minimum energy conservation standard,

manufacturers usually expand the heat exchanger, which in turn increases the physical

size of the unit. Larger, more-efficient units would reduce the crawl or attic space

available for maintenance purposes, which could cause an increase in maintenance cost to

the consumer. Since maintenance cost is only one of the factors in the life-cycle cost

(LCC) analysis, a small increase in maintenance cost would not likely cause horizontal

oil-fired furnace manufacturers to be disproportionately affected by standards.

Steam boilers - Manufacturers identified steam, gas boilers and steam, oil -fired boilers as

a niche product class because they are sold primarily into the replacement market in the

northeast. Currently, the National Appliance Energy Conservation Act (NAECA) sets the

Federal minimum AFUE standards for steam , gas boilers and steam , oil-fired boilers two

percentage points lower than the AFUE standards for hot water, gas boilers and hot water,

oil-fired boilers. Manufacturers stated during the interviews that they believe the

differential established by NAECA is appropriate for steam boilers. In addition,

manufacturers commented that increased efficiency standards for these products have the

potential to eliminate steam products from the market. If the standard level DOE chooses

eliminates steam, gas boilers and steam, oil-fired boilers from the market, manufacturers

believe consumers would experience significant impacts because they would be forced to

convert their homes to use a hot water boiler rather than steam through re-piping and the

replacement of the existing radiator.

® Outdoor boilers - One manufacturer urged DOE to consider outdoor weatherized gas

boilers as a niche product with very low shipments. The manufacturer believes that as

DOE increases efficiency standards for these products, the conversion costs exceed the

revenues generated by this product.

12.2 MANUFACTURING KEY ISSUES

The first question of each MIA interview guide is: "What are the key issues for your

company regarding the furnace and boiler energy conservation standard rulemaking?" This open

question initiated dialogue with the manufacturers, enabling them to identify key points for DOE

to explore and discuss during the interview. This section describes the issues that the

manufacturers raised most often during the interviews.

Manufacturers indicated that, for the most part, the risks associated with these issues

increase with increasing TSL. The first three issues are overall concerns that many

manufacturers expressed regardless of product class.

Venting - Venting was the most common concern discussed by manufacturers, both at the

12-6

 EE-RM/STD-01-350 COMMENT 164

Horizontal configuration - Horizontal oil-fired furnaces are used in attic spaces or crawl 

spaces and other locations where the height of the furnace is the constrained dimension. 

Air enters at one end of the unit through the fan compartment, is forced horizontally over 

the heat exchanger, and then exits at the opposite end. These types of oil-fired furnaces 

are typically serviced annually to maintain the rated efficiency of the unit. To design a 

product that will meet an increased minimum energy conservation standard, 

manufacturers usually expand the heat exchanger, which in turn increases the physical 

size of the unit. Larger, more-efficient units would reduce the crawl or attic space 

available for maintenance purposes, which could cause an increase in maintenance cost to 

the consumer. Since maintenance cost is only one of the factors in the life-cycle cost 

(LCC) analysis, a small increase in maintenance cost would not likely cause horizontal 

oil-fired furnace manufacturers to be disproportionately affected by standards. 

Steam boilers - Manufacturers identified steam, gas boilers and steam, oil-fired boilers as 

a niche product class because they are sold primarily into the replacement market in the 

northeast. Currently, the National Appliance Energy Conservation Act (NAECA) sets the 

Federal minimum AFUE standards for steam, gas boilers and steam, oil-fired boilers two 

percentage points lower than the AFUE standards for hot water, gas boilers and hot water, 

oil-fired boilers. Manufacturers stated during the interviews that they believe the 

differential established by NAECA is appropriate for steam boilers. In addition, 

manufacturers commented that increased efficiency standards for these products have the 

potential to eliminate steam products from the market. If the standard level DOE chooses 

eliminates steam, gas boilers and steam, oil-fired boilers from the market, manufacturers 

believe consumers would experience significant impacts because they would be forced to 

convert their homes to use a hot water boiler rather than steam through re-piping and the 

replacement of the existing radiator. 

• Outdoor boilers - One manufacturer urged DOE to consider outdoor weatherized gas 

boilers as a niche product with very low shipments. The manufacturer believes that as 

DOE increases efficiency standards for these products, the conversion costs exceed the 

revenues generated by this product. 

12.2 MANUFACTURING KEY ISSUES 

The first question of each MIA interview guide is: "What are the key issues for your 

company regarding the furnace and boiler energy conservation standard rulemaking?" This open 

question initiated dialogue with the manufacturers, enabling them to identify key points for DOE 

to explore and discuss during the interview. This section describes the issues that the 

manufacturers raised most often during the interviews. 

Manufacturers indicated that, for the most part, the risks associated with these issues 

increase with increasing TSL. The first three issues are overall concerns that many 

manufacturers expressed regardless of product class. 

Venting - Venting was the most common concern discussed by manufacturers, both at the 

12-6 
2004 ANOPR public meeting and during the manufacturer interviews. Proper venting is

necessary because of the safety and reliability issues associated with corrosion that is

caused from condensation within the venting systems at certain efficiency levels. Due to

this concern, many manufacturers commented that residential furnaces and boilers cannot

be properly or safely vented at certain AFUE levels. Instead, some manufacturers stated

that they would choose not to manufacture an entire line of products at those efficiency

levels for which the safety concerns exceed the benefits. (See discussions of manufacturer

concerns about venting for particular product classes at specific AFUE levels, below.) To

address these concerns, DOE requested additional information from manufacturers. For

example, for non-weatherized gas furnaces, DOE requested information on the costs for

designing, manufacturing, and selling an entire furnace family at an 81-percent-AFUE

efficiency level. DOE used manufacturer responses to update product costs in the

engineering analysis and investment figures in the MIA. However, this still does not fully

address manufacturer concerns with venting because some manufacturers stated they are

not willing to bear the increased risk at any cost.

® Warranty and liability costs - Liability under warranties is based on future product

performance and durability. The costs associated with product performance warranties

require estimates over the full term of a product 's life and require management to

consider factors such as the extent of future repair needs and the future cost of material

and labor to perform the services. Generally, estimated warranty costs are calculated as

the ratio of historical warranty costs to historical sales. When no warranty history is

available for new or reengineered products, estimated warranty costs are based on the

warranty history of similar products. Warranty costs include the cost of labor and parts to

repair equipment under warranty and they are usually a component of cost of goods sold

(COGS), as are parts costs, raw materials, and factory overhead . Manufacturers generally

estimate their future warranty costs for each product line. The number of units expected

to be repaired or replaced is determined by applying the estimated failure rate , which is

generally based on historical experience , to the number of units that have been sold and

are still under warranty. The estimated units to be repaired under warranty are multiplied

by the average cost to repair or replace such products to determine the company's

estimated future warranty cost. Warranty costs as a percentage of sales for heating

equipment manufacturers are generally in the range of one to two percent. Manufacturers

of furnaces and boilers stated that the development, manufacture , sale, and use of

products at near-condensing levels would increase the risk of warranty and product

liability claims, and that such claims could be substantial and have a significant adverse

effect on their future profitability. During the interviews, manufacturers indicated that

their warranty costs could double or even triple. Considering that earnings before interest

and taxes are typically about seven percent for manufactures of furnaces and boilers, this

level of increase in warranty costs could reduce profits by 20 percent or more. Although

DOE attempted to quantify the estimated impacts for warranty cost increases in a side

analysis, it did not consider the increased warranty costs in its assessment of INPV.

® Shipments - Many manufacturers expressed concern during the interviews regarding the

shipments forecasted by the NES model. The NES model forecasts the total number of

12-7

 EE-RM/STD-01-350 COMMENT 164

2004 ANOPR public meeting and during the manufacturer interviews. Proper venting is 

necessary because of the safety and reliability issues associated with corrosion that is 

caused from condensation within the venting systems at certain efficiency levels. Due to 

this concern, many manufacturers commented that residential furnaces and boilers cannot 

be properly or safely vented at certain AFUE levels. Instead, some manufacturers stated 

that they would choose not to manufacture an entire line of products at those efficiency 

levels for which the safety concerns exceed the benefits. (See discussions of manufacturer 

concerns about venting for particular product classes at specific AFUE levels, below.) To 

address these concerns, DOE requested additional information from manufacturers. For 

example, for non-weatherized gas furnaces, DOE requested information on the costs for 

designing, manufacturing, and selling an entire furnace family at an 81-percent-AFUE 

efficiency level. DOE used manufacturer responses to update product costs in the 

engineering analysis and investment figures in the MIA. However, this still does not fully 

address manufacturer concerns with venting because some manufacturers stated they are 

not willing to bear the increased risk at any cost. 

Warranty and liability costs - Liability under warranties is based on future product 

performance and durability. The costs associated with product performance warranties 

require estimates over the full term of a product's life and require management to 

consider factors such as the extent of future repair needs and the future cost of material 

and labor to perform the services. Generally, estimated warranty costs are calculated as 

the ratio of historical warranty costs to historical sales. When no warranty history is 

available for new or reengineered products, estimated warranty costs are based on the 

warranty history of similar products. Warranty costs include the cost of labor and parts to 

repair equipment under warranty and they are usually a component of cost of goods sold 

(COGS), as are parts costs, raw materials, and factory overhead. Manufacturers generally 

estimate their future warranty costs for each product line. The number of units expected 

to be repaired or replaced is determined by applying the estimated failure rate, which is 

generally based on historical experience, to the number of units that have been sold and 

are still under warranty. The estimated units to be repaired under warranty are multiplied 

by the average cost to repair or replace such products to determine the company's 

estimated future warranty cost. Warranty costs as a percentage of sales for heating 

equipment manufacturers are generally in the range of one to two percent. Manufacturers 

of furnaces and boilers stated that the development, manufacture, sale, and use of 

products at near-condensing levels would increase the risk of warranty and product 

liability claims, and that such claims could be substantial and have a significant adverse 

effect on their future profitability. During the interviews, manufacturers indicated that 

their warranty costs could double or even triple. Considering that earnings before interest 

and taxes are typically about seven percent for manufactures of furnaces and boilers, this 

level of increase in warranty costs could reduce profits by 20 percent or more. Although 

DOE attempted to quantify the estimated impacts for warranty cost increases in a side 

analysis, it did not consider the increased warranty costs in its assessment ofINPV. 

Shipments - Many manufacturers expressed concern during the interviews regarding the 

shipments forecasted by the NES model. The NES model forecasts the total number of 

12-7 
products sold and the efficiency distribution of these products for the base case and all

TSLs. During the interviews, DOE asked manufacturers to comment on the NES

forecasts. For many product classes, manufacturers generally agreed with the projected

impacts of standards on total shipments and the distribution mix of efficiencies.

However, most manufacturers stated that the shipment levels predicted at higher

efficiency levels (TSL 4 and TL 5) were overestimated. In some cases, they maintained

that consumers would stop buying furnaces and boilers and would choose heat pumps

and/or combination systems instead. The manufacturers expressed a common view that

new construction markets and southern States are most susceptible to product switching.

They also noted that higher efficiency standards will affect replacement market sales,

since consumers may be more inclined to repair their existing system than to purchase a

new system with a costly installation. Finally, manufacturers commented on the

predicted distribution of products by efficiency level for the year 2015. In several

instances, they provided revised estimates, which DOE used to revise the shipment

forecasts in the GRIM. The NES-shipments forecast and the manufacturers'-shipments

forecast are further detailed in sections 12.3.5 and 12.3.6, respectively.

The issues below are concerns that many manufacturers expressed regarding specific

AFUE levels associated with a particular product class.

• Non-weatherized gas furnaces - Many manufacturers believe that non-weatherized gas

furnaces at 81-percent AFUE cannot be safely vented. Manufacturers are not willing to

accept the risk and/or cost involved in producing a full line of products at 81-percent

AFUE. Manufacturers stated there are variations and constraints that must be addressed,

which require a margin of safety. The safety margin is needed to account for variations

due to manufacturing tolerances, gas quality, vent length and number of bends, altitude,

gas fuel pump performance, makeup air conditions, installation location, and installer

experience. With increasing minimum efficiency requirements, this margin of safety is

diminished and a standard at 81-percent AFUE does not provide an adequate safety

margin.

• Weatherized gas furnaces - Some manufacturers of weatherized gas furnaces believe that

efficiency levels at or above 81-percent AFUE cannot be made safely and reliably due to

vent and heat exchanger condensation. Corrosion in the heat exchanger itself can

significantly shorten heat exchanger and appliance lifetime. Furthermore, units with

economizers also have an increased probability of condensation in the vent system.

• Mobile home furnaces - Manufacturers of mobile home furnaces expressed concern over

a standard of 81-percent AFUE due to a lack of training and experience among installers.

In their view, vents are installed improperly more often in mobile homes than in on-site

built homes and are much more likely to have corrosion problems.

• Oil furnaces - Manufacturers of oil-fired furnaces expressed concerns about increased

maintenance costs due to sulfur in the fuel and exhaust gas at or above 83-percent AFUE.

In addition, one manufacturer expressed concerns over the use of vent dampers in oilfired furnaces to increase AFUE. Vent dampers trap exhaust gases during standby mode

12-8

 EE-RM/STD-01-350 COMMENT 164

products sold and the efficiency distribution of these products for the base case and all 

TSLs. During the interviews, DOE asked manufacturers to comment on the NES 

forecasts. For many product classes, manufacturers generally agreed with the projected 

impacts of standards on total shipments and the distribution mix of efficiencies. 

However, most manufacturers stated that the shipment levels predicted at higher 

efficiency levels (TSL 4 and TL 5) were overestimated. In some cases, they maintained 

that consumers would stop buying furnaces and boilers and would choose heat pumps 

and/or combination systems instead. The manufacturers expressed a common view that 

new construction markets and southern States are most susceptible to product switching. 

They also noted that higher efficiency standards will affect replacement market sales, 

since consumers may be more inclined to repair their existing system than to purchase a 

new system with a costly installation. Finally, manufacturers commented on the 

predicted distribution of products by efficiency level for the year 2015. In several 

instances, they provided revised estimates, which DOE used to revise the shipment 

forecasts in the GRIM. The NES-shipments forecast and the manufacturers'-shipments 

forecast are further detailed in sections 12.3.5 and 12.3.6, respectively. 

The issues below are concerns that many manufacturers expressed regarding specific 

AFUE levels associated with a particular product class. 

• Non-weatherized gas furnaces - Many manufacturers believe that non-weatherized gas 

furnaces at 8 I-percent AFUE cannot be safely vented. Manufacturers are not willing to 

accept the risk and/or cost involved in producing a full line of products at 81-percent 

AFUE. Manufacturers stated there are variations and constraints that must be addressed, 

which require a margin of safety. The safety margin is needed to account for variations 

due to manufacturing tolerances, gas quality, vent length and number of bends, altitude, 

gas fuel pump performance, makeup air conditions, installation location, and installer 

experience. With increasing minimum efficiency requirements, this margin of safety is 

diminished and a standard at 81-percent AFUE does not provide an adequate safety 

margm. 

• Weatherized gas furnaces - Some manufacturers of weatherized gas furnaces believe that 

efficiency levels at or above 81-percent AFUE cannot be made safely and reliably due to 

vent and heat exchanger condensation. Corrosion in the heat exchanger itself can 

significantly shorten heat exchanger and appliance lifetime. Furthermore, units with 

economizers also have an increased probability of condensation in the vent system. 

Mobile home furnaces - Manufacturers of mobile home furnaces expressed concern over 

a standard of 81-percent AFUE due to a lack of training and experience among installers. 

In their view, vents are installed improperly more often in mobile homes than in on-site 

built homes and are much more likely to have corrosion problems. 

Oil furnaces - Manufacturers of oil-fired furnaces expressed concerns about increased 

maintenance costs due to sulfur in the fuel and exhaust gas at or above 83-percent AFUE. 

In addition, one manufacturer expressed concerns over the use of vent dampers in oilfired furnaces to increase AFUE. Vent dampers trap exhaust gases during standby mode 

12-8 
and may cause an undesirable oil-fuel smell in residential homes.

• Gas and oil-fired boilers - Boiler manufacturers have concerns regarding condensation at

efficiency levels of 84-percent AFUE or greater for gas boilers and 85-percent AFUE or

greater for oil-fired boilers. Manufacturers stated that condensation of flue gases for

boilers is more variable than for furnaces because there is greater variability in flue

temperature . For example, the heat distribution system and the heating load directly

impact return water temperature to the boiler, which in turn has a direct impact on the

probability of condensation. In addition, other factors affect condensation in a boiler

system, including system thermal mass, boiler input rate and efficiency , radiator heat

transfer area, and the season in which the boiler operates.

Some of the other key concerns that manufacturers expressed to DOE during the

interviews are listed below:

• Material use - Several manufacturers are concerned about increasing material prices and

the availability of raw materials. Raw materials costs have increased from 68-70 percent

of manufacturer costs to 75-78 percent of manufacturer costs in recent years. In addition,

there has been a 300-percent to 400-percent increase in demand for AL29-4C and 409

stainless steel.

• Potential reduction in equipment reliability and longevity at higher standard levels.

• Possible loss of affordability and utility of furnaces and boilers to the consumer such as

the elimination of standing pilot lights.

• Preservation of consumer options.

• Gas quality - The market has seen an increase in fluctuations in gas quality (i.e., the

energy content of natural gas). Fluctuations in gas quality directly affect the performance

and efficiency of the gas furnace. Manufacturers expressed concern that a variation in gas

quality will cause variations in efficiency, which could increase their risk of condensing

problems.

12.3 GRIM INPUTS AND ASSUMPTIONS

12.3.1 Overview of the GRIM

The GRIM is DOE's main tool for assessing the impact on industry of implementing new

efficiency standards. The GRIM is a financial model of the industry that captures the impact of

efficiency standards on industry value. The basic structure of the GRIM , illustrated in Figure

12.3.1, is a standard annual cashflow analysis that uses manufacturer prices, manufacturing costs,

shipments, and industry financial information as inputs, and accepts a set of regulatory conditions

such as changes in costs, investments, and associated margins. The GRIM spreadsheet for this

rulemaking calculates a series of annual cashflows, beginning with the base year of the analysis,

2006, and continuing explicitly to 2038. The model calculates the INPV by summing the stream

of annual discounted cashflows during this period.'

12-9

 EE-RM/STD-01-350 COMMENT 164

and may cause an undesirable oil-fuel smell in residential homes. 

Gas and oil-fired boilers - Boiler manufacturers have concerns regarding condensation at 

efficiency levels of 84-percent AFUE or greater for gas boilers and 85-percent AFUE or 

greater for oil-fired boilers. Manufacturers stated that condensation of flue gases for 

boilers is more variable than for furnaces because there is greater variability in flue 

temperature. For example, the heat distribution system and the heating load directly 

impact return water temperature to the boiler, which in tum has a direct impact on the 

probability of condensation. In addition, other factors affect condensation in a boiler 

system, including system thermal mass, boiler input rate and efficiency, radiator heat 

transfer area, and the season in which the boiler operates. 

Some of the other key concerns that manufacturers expressed to DOE during the 

interviews are listed below: 

Material use - Several manufacturers are concerned about increasing material prices and 

the availability of raw materials. Raw materials costs have increased from 68-70 percent 

of manufacturer costs to 75-78 percent of manufacturer costs in recent years. In addition, 

there has been a 300-percent to 400-percent increase in demand for AL29-4C and 409 

stainless steel. 

Potential reduction in equipment reliability and longevity at higher standard levels. 

• Possible loss of affordability and utility of furnaces and boilers to the consumer such as 

the elimination of standing pilot lights. 

• Preservation of consumer options. 

• Gas quality - The market has seen an increase in fluctuations in gas quality (i.e., the 

energy content of natural gas). Fluctuations in gas quality directly affect the performance 

and efficiency of the gas furnace. Manufacturers expressed concern that a variation in gas 

quality will cause variations in efficiency, which could increase their risk of condensing 

problems. 

12.3 GRIM INPUTS AND ASSUMPTIONS 

12.3.1 Overview of the GRIM 

The GRIM is DOE's main tool for assessing the impact on industry of implementing new 

efficiency standards. The GRIM is a financial model of the industry that captures the impact of 

efficiency standards on industry value. The basic structure of the GRIM, illustrated in Figure 

12.3.1, is a standard annual cashflow analysis that uses manufacturer prices, manufacturing costs, 

shipments, and industry financial information as inputs, and accepts a set of regulatory conditions 

such as changes in costs, investments, and associated margins. The GRIM spreadsheet for this 

rulemaking calculates a series of annual cashflows, beginning with the base year of the analysis, 

2006, and continuing explicitly to 2038. The model calculates the INPV by summing the stream 

of annual discounted cashflows during this period. I 

12-9 
Price

GRIM

Quantity

I

Manufacturing

Financial

Figure 12.3.1 Using the GRIM to Calculate Cashflow

DOE used the GRIM to project cashflows based on standard accounting principles and

compared changes in INPV between a base case (no change in standard level) and different TSLs

for the energy conservation standard (the standards case). The difference in INPV between the

base case and each standards case represents the primary measure of financial impact of the

standard on manufacturers. Appendix Y of the TSD provides more technical detail and user

information for the GRIM.

12.3.2 Sources of GRIM Inputs

The GRIM used several different sources for data inputs in determining the cashflows for

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

engineering analysis, and the manufacturer interviews.

12.3.2.1 Corporate Annual Reports

Corporate annual reports to the Securities and Exchange Commission (SEC 10-Ks)

provided many of the financial inputs to the GRIM.2 These reports exist for publicly held

companies, and are freely available to the general public.

DOE used these annual reports to derive the following draft GRIM inputs:

Tax rate

Working capital

Selling, general, and administrative expenses

Research and development expenses

Depreciation

Capital expenditures

Net property, plant, and equipment

DOE then revised its own estimates of financial parameters through interviews with

manufacturers during both the ANOPR and NOPR phases of the rulemaking. It relied on

manufacturer input for these revisions for two reasons. First, many furnace and boiler

manufacturers, both large and small, are not public corporations, so industry-wide financial data

are not readily available. Second, many manufacturers of furnaces and boilers are diverse

businesses that participate in markets that are substantially different from furnace and boiler

12-10

 EE-RM/STD-01-350 COMMENT 164

Price 

Quantity 

Cash 

Manufacturing III 

Financial 

Figure 12.3.1 Using the GRIM to Calculate Cashflow 

DOE used the GRIM to project cashflows based on standard accounting principles and 

compared changes in INPV between a base case (no change in standard level) and different TSLs 

for the energy conservation standard (the standards case). The difference in INPV between the 

base case and each standards case represents the primary measure of financial impact of the 

standard on manufacturers. Appendix Y of the TSD provides more technical detail and user 

information for the GRIM. 

12.3.2 Sources of GRIM Inputs 

The GRIM used several different sources for data inputs in determining the cashflows for 

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

engineering analysis, and the manufacturer interviews. 

12.3.2.1 Corporate Annual Reports 

Corporate annual reports to the Securities and Exchange Commission (SEC lO-Ks) 

provided many of the financial inputs to the GRIM.2 These reports exist for publicly held 

companies, and are freely available to the general public. 

DOE used these annual reports to derive the following draft GRIM inputs: 

• Tax rate 

Working capital 

• Selling, general, and administrative expenses 

Research and development expenses 

Depreciation 

• Capital expenditures 

• Net property, plant, and equipment 

DOE then revised its own estimates of financial parameters through interviews with 

manufacturers during both the ANOPR and NOPR phases of the rulemaking. It relied on 

manufacturer input for these revisions for two reasons. First, many furnace and boiler 

manufacturers, both large and small, are not public corporations, so industry-wide financial data 

are not readily available. Second, many manufacturers of furnaces and boilers are diverse 

businesses that participate in markets that are substantially different from furnace and boiler 

12-10 
markets; therefore, the available financial information is not clearly representative of the furnace

and boiler market. Table 12.3.1 provides the representative financial parameters that DOE used

for each product class.

DOE also used information from the SEC 10-K reports to calibrate the GRIM's base case

operating profit margin to be representative of the industry. Operating margin is defined as

earnings before interest and taxes, as a percentage of net revenue.

12.3.2.2 Standard and Poor and Moody's Credit Ratings

Standard and Poor3 and Moody's4 provide independent credit ratings, research, and

financial information for a nominal fee. DOE relied on S&P and Moody's reports to determine

the industry's average cost of debt for the cost of capital calculation.

12.3.2.3 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 provided primarily by

GAMA and supplemented by other sources. Weatherized gas furnace shipments were estimated

from 1990-1997 shipments of packaged air conditioning equipment. Mobile home gas furnace

shipments were estimated from Census Bureau total mobile home placements, and from the

American Housing Survey. Chapter 9 of the TSD describes the methodology and analytical

model DOE used to forecast shipments. DOE developed additional shipment projections, not

included in the shipments model, for the MIA based on manufacturer information obtained

during the interviews.

12.3.2.4 Engineering Analysis

During the engineering analysis, DOE developed reverse-engineering manufacturing cost

estimates for furnaces and boilers. DOE's teardown analysis included models that are

representative of the efficiency levels and design options available for residential furnaces and

boilers impacted by today's rulemaking. The analysis provided labor, materials, and overhead

production costs.' DOE calibrated the reverse-engineering cost model with individual

manufacturers' cost data, and aggregated the costs for individual manufacturers to create costefficiency curves for the industry. DOE then used the cost-efficiency curves from the

engineering analysis as manufacturing cost inputs to the GRIM.

12.3.2.5 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with manufacturers

representing over 80 percent of the industry. During these discussions, DOE obtained

information which it used to determine and verify the input assumptions for the GRIM.

a The GRIM does not include installation costs, since these costs are incurred after the sale of the furnace or boiler.

12-11

 EE-RM/STD-01-350 COMMENT 164

markets; therefore, the available financial information is not clearly representative of the furnace 

and boiler market. Table 12.3.1 provides the representative financial parameters that DOE used 

for each product class. 

DOE also used information from the SEC 10-K reports to calibrate the GRIM's base case 

operating profit margin to be representative of the industry. Operating margin is defined as 

earnings before interest and taxes, as a percentage of net revenue. 

12.3.2.2 Standard and Poor and Moody's Credit Ratings 

Standard and Poor3 and Moody's4 provide independent credit ratings, research, and 

financial information for a nominal fee. DOE relied on S&P and Moody's reports to determine 

the industry's average cost of debt for the cost of capital calculation. 

12.3.2.3 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 provided primarily by 

GAMA and supplemented by other sources. Weatherized gas furnace shipments were estimated 

from 1990-1997 shipments of packaged air conditioning equipment. Mobile home gas furnace 

shipments were estimated from Census Bureau total mobile home placements, and from the 

American Housing Survey. Chapter 9 of the TSD describes the methodology and analytical 

model DOE used to forecast shipments. DOE developed additional shipment projections, not 

included in the shipments model, for the MIA based on manufacturer information obtained 

during the interviews. 

12.3.2.4 Engineering Analysis 

During the engineering analysis, DOE developed reverse-engineering manufacturing cost 

estimates for furnaces and boilers. DOE's teardown analysis included models that are 

representative of the efficiency levels and design options available for residential furnaces and 

boilers impacted by today's rulemaking. The analysis provided labor, materials, and overhead 

production costs.a DOE calibrated the reverse-engineering cost model with individual 

manufacturers' cost data, and aggregated the costs for individual manufacturers to create costefficiency curves for the industry. DOE then used the cost-efficiency curves from the 

engineering analysis as manufacturing cost inputs to the GRIM. 

12.3.2.5 Manufacturer Interviews 

During the course of the MIA, DOE conducted interviews with manufacturers 

representing over 80 percent of the industry. During these discussions, DOE obtained 

information which it used to determine and verify the input assumptions for the GRIM. 

a The GRIM does not include installation costs, since these costs are incurred after the sale of the furnace or boiler. 

12-11 
Key topics discussed during the interviews and reflected in the GRIM include:

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

equipment);

• Product conversion expenses (one-time investments in research, product development,

testing, and marketing);

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

assets;

• Premium products;

• Attributes of premium products;

• The current manufacturer and industry ratio of baseline to premium product shipments;

• The predicted change to premium product ratios at each trial standard level;

• The profitability of baseline and premium products; and

• Venting concerns.

For the final MIA, DOE took into consideration all of the information gathered during the

manufacturer interviews. Copies of the interview guides for residential furnaces and boilers are

contained in Appendix Y.

12.3.3 Financial Parameters

Table 12.3.1 provides financial parameters used in the GRIM that represent industry

averages based on financial data for public companies that manufacture and sell residential

furnaces and boilers. The values listed are averages, over an eight-year period ( 1996-2003).

DOE weighted the values for each of the public companies by their market shares in each of the

product classes.

 EE-RM/STD-01-350 COMMENT 164

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

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

equipment); 

• Product conversion expenses (one-time investments in research, product development, 

testing, and marketing); 

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

assets; 

Premium products; 

Attributes of premium products; 

o The current manufacturer and industry ratio of baseline to premium product shipments; 

The predicted change to premium product ratios at each trial standard level; 

o The profitability of baseline and premium products; and 

Venting concerns. 

For the final MIA, DOE took into consideration all of the information gathered during the 

manufacturer interviews. Copies of the interview guides for residential furnaces and boilers are 

contained in Appendix Y. 

12.3.3 Financial Parameters 

Table 12.3.1 provides financial parameters used in the GRIM that represent industry 

averages based on financial data for public companies that manufacture and sell residential 

furnaces and boilers. The values listed are averages, over an eight-year period (1996-2003). 

DOE weighted the values for each of the public companies by their market shares in each of the 

product classes. 

12-12 
Table 12.3.1 GRIM Financial Parameters

Industry Weighted Average by Product Class

Parameter Gas

Furnaces

Mobile

Home

Furnaces

Oil

Furnaces Boilers

Tax Rate

(% of Taxable Income) 38% 38% 42% 37%

Working Capital (% of Sales) 9% 22% 23% 23%

SG&A (% of Sales) 18% 17% 21% 21%

R&D (% of Sales) 1.3% 1.0% 1.2% 0.9%

Depreciation (% of Sales) 1.7% 1.8% 2.0% 1.8%

Capital Expenditures (% of Sales) 2.0% 1.8% 1.7% 2.2%

Net Property, Plant, and

Equipment

(% of Sales)

14% 15% 12% 25%

Source: SEC, 10K Reports, Fiscal Years 1990-2003.

DOE used information from SEC 10-K reports to calibrate the GRIM's operating profit

margin against the valued that is representative for the industry in the base case. Operating

margin is defined as earnings before interest and taxes, as a percentage of net revenue.

12.3.4 Corporate Discount Rate

DOE used the weighted average cost of capital (WACC) for each product class within the

industry as the discount rate to calculate 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

industry based on a few representative companies, as described by Equation 1.

WACC = (AfterTaxCostofDebt x DebtRatio) + (CostofEquity x EquityRatio) Eq.1

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

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

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

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

return) is:

CostofEquity = RiskFreeRateofReturn + Beta x RiskPremium Eq. 2

where:

12-13

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.1 GRIM Financial Parameters 

Industry Weighted Average by Product Class 

Parameter Gas Mobile Oil 

Furnaces Home Furnaces Boilers 

Furnaces 

Tax Rate 38% 38% 42% 37% (% of Taxable Income) 

Working Capital (% of Sales) 9% 22% 23% 23% 

SG&A (% of Sales) 18% 17% 21% 21% 

R&D (% of Sales) 1.3% 1.0% 1.2% 0.9% 

Depreciation (% of Sales) 1.7% 1.8% 2.0% 1.8% 

Capital Expenditures (% of Sales) 2.0% 1.8% 1.7% 2.2% 

Net Property, Plant, and 

Equipment 14% 15% 12% 25% 

(% of Sales) 

Source: SEC, 10K Reports, FIscal Years 1990-2003. 

DOE used information from SEC 10-K reports to calibrate the GRIM's operating profit 

margin against the valued that is representative for the industry in the base case. Operating 

margin is defined as earnings before interest and taxes, as a percentage of net revenue. 

12.3.4 Corporate Discount Rate 

DOE used the weighted average cost of capital (W ACC) for each product class within the 

industry as the discount rate to calculate INPV. A company's assets are financed by a 

combination of debt and equity. The W ACC is the total cost of debt and equity weighted by their 

respective proportions in the capital structure of the industry.5 DOE estimated the WACC for the 

industry based on a few representative companies, as described by Equation 1. 

WACC = (AfterTaxCostofDebt x DebtRatio) + (CostofEquity x EquityRatio) Eq.1 

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

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

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

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

return) is: 

CostofEquity = RiskFreeRateofReturn + Beta x RiskPremium Eq.2 

where: 

12-13 
Risk free rate of return is the rate of return on a "safe" benchmark investment. In

practice, investors use a variety of different-maturity Treasury notes to estimate the riskfree rate. DOE used a long-term Treasury note return (10-year bond return) in the GRIM

because it captures long-term inflation expectations and is less volatile than short-term

rates. DOE estimated the risk-free rate as six percent, which is the average 10-year

Treasury note return from 1990 to 2004.

Risk premium is the difference between the expected return on stocks and the riskless

rate.

Beta is the covariance of a stock with the market as a fraction of the market's variance.

The 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.

DOE determined that the industry average cost of equity is 12.1 percent and 10.3 percent,

respectively, for residential furnaces and boilers, as calculated in Table 12.3.2.

Table 12.3.2 Cost of Equity Calculation

IndustryWeighted Average Manufacturer

Parameter

Furnaces Boilers A B C D E F G

(1) Average

Beta 0.65 0.44 0.60 0.93 0.80 0.40 1.26 0.42 0.53

(1990-2002)

(2) Yield on

10 Year

Treasury 6% 6% 6% 6% 6% 6% 6% 6% 6%

note (1990-

2002)

Cost of

Equity 12% 10% 12% 15% 13% 10% 18% 10% 11% (2+1 *Risk

Premium)

Equity/Tot 68% 78% 34% 68% 78% 74% -- 75% 97% al Capital

Source: SEC 10-K Reports, Fiscal Years 1990-2003.

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 seven manufacturers. Moody's and S&P had bond

ratings for six of the seven manufacturers, so DOE used these ratings to estimate the

12-14

 EE-RM/STD-01-350 COMMENT 164

Risk free rate of return is the rate of return on a "safe" benchmark investment. In 

practice, investors use a variety of different-maturity Treasury notes to estimate the riskfree rate. DOE used a long-term Treasury note return (lO-year bond return) in the GRIM 

because it captures long-term inflation expectations and is less volatile than short-term 

rates. DOE estimated the risk-free rate as six percent, which is the average lO-year 

Treasury note return from 1990 to 2004. 

Risk premium is the difference between the expected return on stocks and the riskless 

rate. 

Beta is the covariance of a stock with the market as a fraction of the market's variance. 

The 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. 

DOE determined that the industry average cost of equity is 12.1 percent and 10.3 percent, 

respectively, for residential furnaces and boilers, as calculated in Table 12.3.2. 

T a e bi 12 o 3 2 C t f E 0 os 0 ~qmry °t C a 1 I cu a f IOn 

Industry- Manufacturer Weighted Average 

Parameter 

Furnaces Boilers A B C D E F G 

(1) Average 

Beta 0.65 0.44 0.60 0.93 0.80 0.40 1.26 0.42 0.53 

(1990-2002) 

(2) Yield on 

10 Year 

Treasury 6% 6% 6% 6% 6% 6% 6% 6% 6% 

note (1990-

2002) 

Cost of 

Equity 12% 10% 12% 15% 13% 10% 18% 10% 11% (2+1*Risk 

Premium) 

Equity/Tot 68% 78% 34% 68% 78% 74% -- 75% 97% al Capital 

Source: SEC 10-K Reports, Fiscal Years 1990-2003. 

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 seven manufacturers. Moody's and S&P had bond 

ratings for six of the seven manufacturers, so DOE used these ratings to estimate the 

12-14 
manufacturers' cost of debt by adding the relevant spread to the risk-free rate. There was one

manufacturer with no Moody's or S&P bond rating available. 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.'

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

bonds for public manufacturers over the period 1990-2003. To this, DOE added the industryweighted average spread to the average Treasury note 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. Table 12.3.3 presents

the derivation of the cost of debt. Also shown is the capital structure of the industry, i.e., the debt

ratio (debt/total capital).a

Table 12.3.3 Cost of Debt Calculation

Industry-Weighted Manufacturers Average

Furnaces Boilers A B C D E F G

Moody/

BI/ BAA1/B BA2 A2 S&P Bond A BB /BB+ /13- /A+ A+ CC

Rating

(1) Spread over

10 year 5 3 1 2 3 9 1 2 12

Treasury note

[%]

(2) Yield on 10

year Treasury 6 6 6 6 6 6 6 6 6

note [%] (1990-

2002)

(3) Gross cost of

debt [%] 11 9 7 8 9 15 8 18

(1)+(2)

(4) Tax Rate 37.5 37.3 42 26 7 2 9 39 27

[%]

Net Cost of Debt 6 9 4 6 6 9 5 5 13 (3)*(1- (4))

Debt/Total 32 22 66 2 2 6 -- 25 3

Capital [%]

Source: SEC 10-K Reports, Fiscal Years 1990-2003.

a In previous rulemakings, DOE based the debt ratio on book value. In this rulemaking, DOE based a slightly more

accurate debt ratio for short-term debt on market value of equity. However, it used the book value estimate the debt ratio

of long-term debt.

12-15

 EE-RM/STD-01-350 COMMENT 164

manufacturers' cost of debt by adding the relevant spread to the risk-free rate. There was one 

manufacturer with no Moody's or S&P bond rating available. 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. 6 

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

bonds for public manufacturers over the period 1990-2003. To this, DOE added the industryweighted average spread to the average Treasury note yield over the same period.7 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. Table 12.3.3 presents 

the derivation of the cost of debt. Also shown is the capital structure of the industry, i.e., the debt 

ratio (debt/total capital): 

Table 12.3.3 Cost of Debt Calculation 

Industry-Weighted Manufacturers Average 

Furnaces Boilers A B C D E F G 

Moody/ Bli BAAIIB BA2 A2 S&P Bond - - - - A BB IBB+ IB- /A+ A+ CC 

Rating 

(1) Spread over 

10 year 5 3 1 2 3 9 1 2 12 Treasury note 

[%] 

(2) Yield on 10 

year Treasury 6 6 6 6 6 6 6 6 6 note [%] (1990-

2002) 

(3) Gross cost of 

debt [%] 11 9 7 8 9 15 8 18 

(1)+(2) 

(4) Tax Rate 37.5 37.3 42 26 7 2 9 39 27 [%] 

Net Cost of Debt 6 9 4 6 6 9 5 5 13 (3)*( 1 - (4» 

Debt/Total 32 22 66 2 2 6 25 3 Capital [%] --

Source: SEC 10-K Reports, Fiscal Years 1990-2003. 

a In previous rulemakings, DOE based the debt ratio on book value. In this ru1emaking, DOE based a slightly more 

accurate debt ratio for short-term debt on market value of equity. However, it used the book value estimate the debt ratio 

of long-tenn debt. 

12-15 
DOE estimated the furnace industry's WACC to be approximately 10 percent, and the

boiler industry's WACC to be approximately nine percent. Subtracting an inflation rate of 2.9

percent between 1990 and 2003, the inflation-adjusted WACC and the corporate discount rate

used in the GRIM are 7.4 percent and 6.2 percent, respectively. For validation, Ibbotson

Associates8 also provides a weighted average cost of capital for the air-conditioning, warm airheating, and commercial refrigeration equipment industry, under Standard Industrial

Classification (SIC) Code 3585. The Ibbotson nominal WACC is approximately 11 percent,

which gives an inflation-adjusted WACC of approximately eight percent.

12.3.5 NES-Shipment Forecasts

The GRIM estimated manufacturer revenues based on total-unit-shipment forecasts and

the distribution of these values by AFUE levels. Changes in the efficiency mix by standard level

are a key driver of manufacturer finances. For this analysis, the GRIM used both the NES- and

the manufacturers'-shipments forecasts for each product from 2006 to 2038. Total shipments

forecasted by the NES for all TSLs in 2015 are shown in Table 12.3.4 and are further detailed

below.

Table 12.3.4 Total NES-Forecasted Shipments in 2015 (Millions)

Product Class Base

Case

TSL 1 TSL A / 2 TSL B / 4 TSL

5

Non-weatherized gas furnaces 2.93 2.93 2.92 2.85 2.65

Weatherized gas furnaces .425

Mobile home gas furnaces .192 L .192 .192 .159 .159

Oil-fired furnaces .088

Gas boilers .284

Oil-fired boilers .122

For this analysis, the GRIM used shipment forecasts of each product class for different

efficiencies for the years 2006 to 2038. Based on its analysis of the furnace and boiler industry,

DOE assumed that shipments at lower efficiencies were most likely to roll up into higher

efficiency levels in response to increases in the efficiency standard. In other words, at an

increased minimum standard level, the shipments at efficiencies below the new minimum

standard level will be added to the shipments at the new minimum standard level. Tables 12.3.5

through 12.3.10 provide a summary of NES shipments for each product class. Each table

includes total unit shipments at each TSL for the year 2015 and includes a distribution of

shipments by efficiency level. Also included is a forecast of the reduction in total shipments at

each TSL compared to the base case.

12-16

 EE-RM/STD-01-350 COMMENT 164

DOE estimated the furnace industry's WACC to be approximately 10 percent, and the 

boiler industry's W ACC to be approximately nine percent. Subtracting an inflation rate of 2.9 

percent between 1990 and 2003, the inflation-adjusted W ACC and the corporate discount rate 

used in the GRIM are 7.4 percent and 6.2 percent, respectively. For validation, Ibbotson 

Associates8 also provides a weighted average cost of capital for the air-conditioning, warm airheating, and commercial refrigeration equipment industry, under Standard Industrial 

Classification (SIC) Code 3585. The Ibbotson nominal WACC is approximately 11 percent, 

which gives an inflation-adjusted W ACC of approximately eight percent. 

12.3.5 NES-Shipment Forecasts 

The GRIM estimated manufacturer revenues based on total-unit-shipment forecasts and 

the distribution of these values by AFUE levels. Changes in the efficiency mix by standard level 

are a key driver of manufacturer finances. For this analysis, the GRIM used both the NES- and 

the manufacturers '-shipments forecasts for each product from 2006 to 2038. Total shipments 

forecasted by the NES for all TSLs in 2015 are shown in Table 12.3.4 and are further detailed 

below. 

T bi 12 3 4 Ttl NES F t d Sho a e o 0 oa - orecas e lpmen t s m 0 2015 (MOll" ) I IOns 

Product Class Base TSL 1 TSLA/2 TSL B 14 TSL 

Case 5 

Non-weatherized gas furnaces 2.93 2.93 2.92 2.85 2.65 

Weatherized gas furnaces .425 

Mobile home gas furnaces .192 .192 .192 .159 .159 

Oil-fired furnaces .088 

Gas boilers .284 

Oil-fired boilers .122 

For this analysis, the GRIM used shipment forecasts of each product class for different 

efficiencies for the years 2006 to 2038. Based on its analysis of the furnace and boiler industry, 

DOE assumed that shipments at lower efficiencies were most likely to roll up into higher 

efficiency levels in response to increases in the efficiency standard. In other words, at an 

increased minimum standard level, the shipments at efficiencies below the new minimum 

standard level will be added to the shipments at the new minimum standard level. Tables 12.3.5 

through 12.3.10 provide a summary ofNES shipments for each product class. Each table 

includes total unit shipments at each TSL for the year 2015 and includes a distribution of 

shipments by efficiency level. Also included is a forecast of the reduction in total shipments at 

each TSL compared to the base case. 

12-16 
Table 12.3.5 NES Distribution and Total Shipments for Non-Weatherized Gas Furnaces

Shipments Efficiency

Level (AFUE)

Base Case

(78%)

TSL 1/A

(80%)

TSL 2

(81%)

TSL B/4

(90%)

TSL 5

(96%)

78% 2%

80% 62% 64% 0%

81% 0% 0% 64%

90% 9% 9% 9% 73%

92% 23% 23% 23% 23%

96% 4% 4% 4% 4% 100%

Total Unit Shipments 2.93 2.93 2.92 2.85 2.65

Percent Difference in

Shipments Relative to

Base Case

- 0% 0% -2.7% -13.6%

Table 12.3.6 NES Distribution and Total Shipments for Weatherized Gas Furnaces by

Shipments Efficiency

Level (AFUE)

Base Case

(78%)

TSL 1

(80%)

TSL A / 2

(81%)

TSL B / 4

(81 %)

TSL 5

(83%)

78% 2%

80% 52% 54%

81% 26% 26%

82% 20% 20%

83% 0% 0% 100% 100% 100%

Total Unit Shipments 0.425

Percent Difference in

Shipments Relative to

Base Case

- 0% 0% 0% 0%

by Efficient Level in 2015 ( Shipments in Millions)

Efficiency Level in 2015 (Shipments in Millions)

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.5 NES Distribution and Total Shipments for Non-Weatherized Gas Furnaces 

b IY Efr IClenc' . L eve I' III 2015 (Sh' lpmen t' Sill M'll" I IOns ) 

Shipments Efficiency Base Case TSL VA TSL2 TSL B/4 TSL5 

Level (AFUE) (78%) (80%) (81%) (90%) (96%) 

78% 2% 

80% 62% 64% 0% 

81% 0% 0% 64% 

90% 9% 9% 9% 73% 

92% 23% 23% 23% 23% 

96% 4% 4% 4% 4% 100% 

Total Unit Shipments 2.93 2.93 2.92 2.85 2.65 

Percent Difference in - 0% 0% -2.7% -13.6% 

Shipments Relative to 

Base Case 

Table 12.3.6 NES Distribution and Total Shipments for Weatherized Gas Furnaces by 

Effi IClency . L eve I' III 2015 (Sh' lpments III . M"lr I IOns ) 

Shipments Efficiency Base Case TSLI TSLA/2 TSL B / 4 TSL5 

Level (AFUE) (78%) (80%) (81%) (81%) (83%) 

78% 2% 

80% 52% 54% 

81% 26% 26% 

82% 20% 20% 

83% 0% 0% 100% 100% 100% 

Total Unit Shipments 0.425 

Percent Difference in - 0% 0% 0% 0% 

Shipments Relative to 

Base Case 

12-17 
Table 12.3.7 NES Distribution and Total Shipments for Mobile Home Furnaces by

Efficiency Level in 2015 (Shipments in Millions)

Shipments Efficiency

Level (AFUE)

Base Case

(75%)

TSL 1

(80%)

TSLA/2

(80%)

TSLB/4

(90%)

TSL 5

(90%)

75% 15%

80% 80% 95% 95%

90% 5% 5% 5% 100% 100%

Total Unit Shipments 0.192 0.192 0.192 0.159 0.159

Percent Difference in

Shipments Relative to

Base Case

-0% -0% -17.2% -17.2%

Table 12.3.8 NES Distribution and Total Shipments for Oil Furnaces by Efficiency Level

Shipments Efficiency

Level (AFUE)

Base Case

(78%)

TSL 1

(80%)

TSL A/2

(82%)

TSL B

(82%)

TSL 4

(84%)

TSL 5

(85%)

78% 4%

80% 57% 61%

81% 9% 9%

82% 8% 8% 77% 77%

83% 8% 8% 8% 8%

84% 8% 8% 8% 8% 92%

85% 8% 8% 8% 8% 8% 100%

Total Unit Shipments 0.0880

Percent Difference in

Shipments Relative to

Base Case

- 0% 0% 0% 0% 0%

in 2015 Shi ments in Millions

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.7 NES Distribution and Total Shipments for Mobile Home Furnaces by 

Efficiency Level in 2015 (Shipments in Millions) 

Shipments Efficiency Base Case TSL 1 TSLA/2 TSL B I 4 TSL5 

Level (AFUE) (75%) (80%) (80%) (90%) (90%) 

75% 15% 

80% 80% 95% 95% 

90% 5% 5% 5% 100% 100% 

Total Unit Shipments 0.192 0.192 0.192 0.159 0.159 

Percent Difference in - -0% -0% -17.2% -17.2% 

Shipments Relative to 

Base Case 

Table 12.3.8 NES Distribution and Total Shipments for Oil Furnaces by Efficiency Level 

in 2015 (Shipments in Millions) 

Shipments Efficiency Base Case TSL1 TSL A/2 TSLB TSL4 TSL5 

Level (AFUE) (78%) (80%) (82%) (82%) (84%) (85%) 

78% 4% 

80% 57% 61% 

81% 9% 9% 

82% 8% 8% 77% 77% 

83% 8% 8% 8% 8% 

84% 8% 8% 8% 8% 92% 

85% 8% 8% 8% 8% 8% 100% 

Total Unit Shipments 0.0880 

Percent Difference in - 0% 0% 0% 0% 0% 

Shipments Relative to 

Base Case 

12-18 
Table 12.3.9 ICES Distribution and Total Shipments for Gas Boilers by Efficiency Level in

2015 (Shipments in Millions)

Shipments Efficiency

Level (AFUE)

Base Case

(80%)

TSL 1/A /B

(82%)

TSL 4

(84%)

TSL 5

(99%)

80% 35%

81% 22%

82% 14% 71%

83% 15% 15%

84% 9% 9% 95%

91% 3% 3% 3%

99% 3% 3% 3% 100%

Total Unit Shipments .284

Percent Difference in

Shipments Relative to

Base Case

0% 0% 0%

 EE-RM/STD-01-350 COMMENT 164

Table 12.309 NES Distribution and Total Shipments for Gas Boilers by Efficiency Level in 

2015 (ShOt lpmen Sill 0 MOll" I IOns ) 

Shipments Efficiency Base Case TSL lIA/B TSL4 TSL5 

Level (AFUE) (80%) (82%) (84%) (99%) 

80% 35% 

81% 22% 

82% 14% 71% 

83% 15% 15% 

84% 9% 9% 95% 

91% 3% 3% 3% 

99% 3% 3% 3% 100% 

Total Unit Shipments .284 

Percent Difference in - 0% 0% 0% 

Shipments Relative to 

Base Case 

12-19 
Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers by Efficiency Level in

2015 (Shipments in Millions)

Shipments Efficiency

Level (AFUE)

Base Case

(80%)

TSL 1/A/2

(83%)

TSL B/4

(84%)

TSL 5

(95%)

80%

81%

82%

83%

84%

85%

86%

90%

95%

Total Unit Shipments

Percent Difference in

Shipments Relative to

Base Case

5%

5%

5%

23%

23%

23%

7%

7%

0%

12.3.6 Manufacturers'-Shipments Forecast

38%

23%

23%

7%

7%

0%

61%

23%

7%

7%

0% 100%

.122

0% 0% 0%

The NES forecasts the total number of products sold and the efficiency distribution of

these products for the base case and all TSLs. During the course of the interviews, DOE asked

the manufacturers to comment on the NES-shipment forecasts. For many product classes,

manufacturers were in general agreement with the NES results. For other product classes,

however, there were different views concerning the impacts of standards on total shipments and

distribution mix of efficiencies.

Manufacturers stated during interviews that the NES understated the decline in shipments

at increased efficiency levels. In particular, some manufacturers commented that at TSL 4 and

above, for non-weatherized gas furnaces, they expect consumers to switch to heat pumps or

repair their existing equipment due to the increased cost of condensing non-weatherized gas

furnaces. Manufacturers also suggested that there will be a market shift away from nonweatherized gas furnaces at 90-percent AFUE and above in the southern climates, where heat

pumps are more feasible. One manufacturer expects on the order of a 50-percent drop in

shipments at TSL 5 and a 25-percent drop in shipments at TSL 4 for the non-weatherized gas

furnace industry. Manufacturers also expressed their concern that, at TSLs 1, 2, and 3,

equipment switching alone would cause shipment drops that did not seem to be characterized by

the NES.

12-20

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers by Efficiency Level in 

2015 (Sh· lpments m . M·n· I IOns ) 

Shipments Efficiency Base Case TSL VA/2 TSL B/4 TSL5 

Level (AFUE) (80%) (83%) (84%) (95%) 

80% 5% 

81% 5% 

82% 5% 

83% 23% 38% 

84% 23% 23% 61% 

85% 23% 23% 23% 

86% 7% 7% 7% 

90% 7% 7% 7% 

95% 0% 0% 0% 100% 

Total Unit Shipments .122 

Percent Difference in - 0% 0% 0% 

Shipments Relative to 

Base Case 

12.3.6 Manufacturers'-Shipments Forecast 

The NES forecasts the total number of products sold and the efficiency distribution of 

these products for the base case and all TSLs. During the course of the interviews, DOE asked 

the manufacturers to comment on the NES-shipment forecasts. For many product classes, 

manufacturers were in general agreement with the NES results. For other product classes, 

however, there were different views concerning the impacts of standards on total shipments and 

distribution mix of efficiencies. 

Manufacturers stated during interviews that the NES understated the decline in shipments 

at increased efficiency levels. In particular, some manufacturers commented that at TSL 4 and 

above, for non-weatherized gas furnaces, they expect consumers to switch to heat pumps or 

repair their existing equipment due to the increased cost of condensing non-weatherized gas 

furnaces. Manufacturers also suggested that there will be a market shift away from nonweatherized gas furnaces at 90-percent AFUE and above in the southern climates, where heat 

pumps are more feasible. One manufacturer expects on the order of a 50-percent drop in 

shipments at TSL 5 and a 25-percent drop in shipments at TSL 4 for the non-weatherized gas 

furnace industry. Manufacturers also expressed their concern that, at TSLs 1,2, and 3, 

equipment switching alone would cause shipment drops that did not seem to be characterized by 

the NES. 

12-20 
For weatherized gas furnaces, some manufacturers stated that there would be a decline in

shipments for all efficiency levels above the current standard, with more significant declines at

83-percent AFUE. One manufacturer commented that consumers would be more likely to

purchase heat pumps because of their reliability, and because of the increased risk of

condensation with 83-percent-AFUE furnaces. However, some manufacturers acknowledged

that consumers usually buy weatherized gas furnaces with an air-conditioning unit, and the airconditioning unit is the key driver in consumers' decisions.

Manufacturers expressed similar concerns for mobile home furnaces as they did for nonweatherized gas furnaces at and above 90-percent AFUE. They commented that consumers will

switch to heat pumps or combination systems rather than make an increased investment in moreefficient mobile home furnaces. For oil-fired furnaces, manufacturers suggested that the industry

for this equipment will begin to shrink at TSLs 4 and 5. In addition, they foresee a drop in

shipments at higher efficiency levels because consumers will either change to alternative heating

sources like heat pumps or use propane. Finally, manufacturers of boilers expressed concern that

the NES analysis did not forecast any decline in shipments at any of the TSLs. They stated that,

because of increased first cost, consumers are more likely to choose radiant or electric furnaces

than more-efficient boiler systems. One manufacturer recognized that there had already been

consolidation within the boiler industry and predicted that increased efficiency standards would

cause further consolidation within this industry. Other manufacturers stated that they believe that

the industry would continue to move toward consolidation even in the absence of increased

energy efficiency standards.

DOE took into consideration all of the manufacturers' concerns with the NES-shipments

forecast and derived an alternative shipments forecast (referred to as "manufacturers'-shipments

forecast") for each product class, based on information received during the manufacturer

interviews. Table 12.3.11 shows the manufacturers'-shipments forecast for all TSLs in 2015 by

product class.

Table 12.3.11 Manufacturers'-Forecasted Shi ments in 2015 (Millions)

Product Class Base

Case

TSL

1

TSL

A

TSL

2

TSL

B

TSL

4

TSL

5

Non-weatherized gas furnaces 2.93 2.93 2.93 2.92 2.42 2.42 1.48

Weatherized gas furnaces .425

Mobile home gas furnaces .192 .192 .192 .192 .159 .159 .159

Oil-fired furnaces .088 .088 .088 .088 .088 .086 .082

Gas boilers .284 .284 .284 .256 .284 .256 .227

Oil-fired boilers .122 .122 .122 .122 .122 .122 .098

The manufacturers'-shipments forecast shows increased declines over the declines

forecasted by the NES model for most product classes at increased efficiency levels. TSL 5

12-21

 EE-RM/STD-01-350 COMMENT 164

F or weatherized gas furnaces, some manufacturers stated that there would be a decline in 

shipments for all efficiency levels above the current standard, with more significant declines at 

83-percent AFUE. One manufacturer commented that consumers would be more likely to 

purchase heat pumps because of their reliability, and because of the increased risk of 

condensation with 83-percent-AFUE furnaces. However, some manufacturers acknowledged 

that consumers usually buy weatherized gas furnaces with an air-conditioning unit, and the airconditioning unit is the key driver in consumers' decisions. 

Manufacturers expressed similar concerns for mobile home furnaces as they did for nonweatherized gas furnaces at and above 90-percent AFUE. They commented that consumers will 

switch to heat pumps or combination systems rather than make an increased investment in moreefficient mobile home furnaces. For oil-fired furnaces, manufacturers suggested that the industry 

for this equipment will begin to shrink at TSLs 4 and 5. In addition, they foresee a drop in 

shipments at higher efficiency levels because consumers will either change to alternative heating 

sources like heat pumps or use propane. Finally, manufacturers of boilers expressed concern that 

the NES analysis did not forecast any decline in shipments at any of the TSLs. They stated that, 

because of increased first cost, consumers are more likely to choose radiant or electric furnaces 

than more-efficient boiler systems. One manufacturer recognized that there had already been 

consolidation within the boiler industry and predicted that increased efficiency standards would 

cause further consolidation within this industry. Other manufacturers stated that they believe that 

the industry would continue to move toward consolidation even in the absence of increased 

energy efficiency standards. 

DOE took into consideration all of the manufacturers' concerns with the NES-shipments 

forecast and derived an alternative shipments forecast (referred to as "manufacturers'-shipments 

forecast") for each product class, based on information received during the manufacturer 

interviews. Table 12.3.11 shows the manufacturers' -shipments forecast for all TSLs in 2015 by 

product class. 

T a e bi 12311 .. M anu f ac t urers 'F - orecas t e d Sh· lpmen t . SIll 2015 (M·ll· I IOns ) 

Product Class Base TSL TSL TSL TSL TSL TSL 

Case 1 A 2 B 4 

Non-weatherized gas furnaces 2.93 2.93 2.93 2.92 2.42 2.42 

Weatherized gas furnaces .425 

Mobile home gas furnaces .192 .192 .192 .192 .159 .159 

Oil-fired furnaces .088 .088 .088 .088 .088 .086 

Gas boilers .284 .284 .284 .256 .284 .256 

Oil-fired boilers .122 .122 .122 .122 .122 .122 

The manufacturers' -shipments forecast shows increased declines over the declines 

forecasted by the NES model for most product classes at increased efficiency levels. TSL 5 

12-21 

5 

1.48 

.159 

.082 

.227 

.098 
shows a more significant decline for all product classes except weatherized gas furnaces. For

non-weatherized gas furnaces, the difference between the decline forecasted by the

manufacturers' shipments and the decline forecasted by the NES shipments for TSLs 4 and 5 is

approximately - 17 percent and -44 percent, respectively. For weatherized gas furnaces, DOE

used the NES-shipments forecast because the prices of the products did not largely vary across

TSLs and, thus, DOE would not expect a decline in the total shipments. Finally, based on its

analysis of the furnace and boiler industry, DOE assumed that shipments at lower efficiencies

were most likely to be rolled up into higher efficiency levels in response to increases in the

efficiency standard. In other words, at an increased minimum standard level, the shipments at

efficiencies below the new minimum standard level will be added to the shipments at the new

minimum standard level. DOE took both the NES-shipments forecast and the manufacturers'-

shipments forecast into consideration when assessing impacts on the industry.

Manufacturers also commented on the predicted distribution of product sales by

efficiency level for the year 2015. In several instances, they provided revised estimates which

DOE used to revise the shipment forecasts in the GRIM. The revised shipment scenarios are

described in Tables 12.3.12 to 12.3.17. Manufacturers of non-weatherized gas furnaces stated

that they assume a slightly higher proportion of condensing units will occur by 2015, driven by

higher future heating costs. Weatherized gas furnace manufacturers believe that the efficiency

mix will not shift from current distributions because consumers purchase these appliances on the

basis of air-conditioning efficiency, not heating. Just like non-weatherized gas furnace

manufacturers, oil-fired furnace manufacturers assume a slight increase in efficiency, which will

be driven by higher future heating costs. Manufacturers of gas boilers believe that the

condensing market for gas boilers will increase dramatically by 2015. Unlike gas boiler

manufacturers, oil-fired boiler manufacturers stated that they believed efficiencies of the products

on the market will be more sharply distributed at a slightly lower efficiency.

 EE-RM/STD-01-350 COMMENT 164

shows a more significant decline for all product classes except weatherized gas furnaces. For 

non-weatherized gas furnaces, the difference between the decline forecasted by the 

manufacturers' shipments and the decline forecasted by the NES shipments for TSLs 4 and 5 is 

approximately -17 percent and -44 percent, respectively. For weatherized gas furnaces, DOE 

used the NES-shipments forecast because the prices of the products did not largely vary across 

TSLs and, thus, DOE would not expect a decline in the total shipments. Finally, based on its 

analysis of the furnace and boiler industry, DOE assumed that shipments at lower efficiencies 

were most likely to be rolled up into higher efficiency levels in response to increases in the 

efficiency standard. In other words, at an increased minimum standard level, the shipments at 

efficiencies below the new minimum standard level will be added to the shipments at the new 

minimum standard level. DOE took both the NES-shipments forecast and the manufacturers' -

shipments forecast into consideration when assessing impacts on the industry. 

Manufacturers also commented on the predicted distribution of product sales by 

efficiency level for the year 2015. In several instances, they provided revised estimates which 

DOE used to revise the shipment forecasts in the GRIM. The revised shipment scenarios are 

described in Tables 12.3.12 to 12.3.17. Manufacturers of non-weatherized gas furnaces stated 

that they assume a slightly higher proportion of condensing units will occur by 2015, driven by 

higher future heating costs. Weatherized gas furnace manufacturers believe that the efficiency 

mix will not shift from current distributions because consumers purchase these appliances on the 

basis of air-conditioning efficiency, not heating. Just like non-weatherized gas furnace 

manufacturers, oil-fired furnace manufacturers assume a slight increase in efficiency, which will 

be driven by higher future heating costs. Manufacturers of gas boilers believe that the 

condensing market for gas boilers will increase dramatically by 2015. Unlike gas boiler 

manufacturers, oil-fired boiler manufacturers stated that they believed efficiencies of the products 

on the market will be more sharply distributed at a slightly lower efficiency. 

12-22 
Table 12.3.12 Manufacturer Distribution and Total Shipments for Non-Weatherized Gas

Shipments Base TSL 1 TSL A TSL 2 TSL B / TSL 5

Efficiency Level Case (80%) (80%) (81%) 4 (96%)

(AFUE) (78%) (90%)

78% 0%

80% 59% 59% 59%

81% 0.3% 0.3% 0.3% 59%

90% 12% 12% 12% 12% 71%

92% 26% 26% 26% 26% 26%

96% 4% 4% 4% 4% 4% 100%

Total Unit 2.93 2.93 2.93 2.92 2.42 1.48

Shipments

Percent Difference - 0% 0% -0.4% -17.4% -49.5%

in Shipments

Relative to Base

Case

Table 12.3.13 Manufacturer Distribution and Total Shipments for Weatherized Gas

Shipments Base TSL 1 TSL A / TSL B TSL 4 TSL 5

Efficiency Level Case (80%) 2 (81%) (81%) (83%)

(AFUE) (78%) (81%)

78% 20%

80% 50% 70%

81% 30% 30% 100% 100% 100%

82% 0% 0% 0% 0% 0%

83% 0% 0% 0% 0% 0% 100%

Total Unit .425

Shipments

Percent Difference - 0% 0% 0% 0% 0%

in Shipments

Relative to Base

Case

Furnaces by Efficient Level in 2015 ( Shi ments in Millions)

Furnaces by Efficient Level in 2015 (Shi ments in Millions)

12-23

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.12 Manufacturer Distribution and Total Shipments for Non-Weatherized Gas 

Furnaces by Efficiency Level in 2015 (Shipments in Millions) 

Shipments Base TSL 1 TSLA TSL2 TSLBI TSL5 

Efficiency Level Case (80%) (80%) (81%) 4 (96%) 

(AFUE) (78%) (90%) 

78% 0% 

80% 59% 59% 59% 

81% 0.3% 0.3% 0.3% 59% 

90% 12% 12% 12% 12% 71% 

92% 26% 26% 26% 26% 26% 

96% 4% 4% 4% 4% 4% 100% 

Total Unit 2.93 2.93 2.93 2.92 2.42 1.48 

Shipments 

Percent Difference - 0% 0% -0.4% -17.4% -49.5% 

in Shipments 

Relative to Base 

Case 

Table 12.3.13 Manufacturer Distribution and Total Shipments for Weatherized Gas 

F b urnaces ,y Effi IClency . L eve I' In 2015 (Sh' lpments In . M'll' I IOns ) 

Shipments Base TSL 1 TSLAI TSLB TSL4 TSL5 

Efficiency Level Case (80%) 2 (81%) (81%) (83%) 

(AFUE) (78%) (81%) 

78% 20% 

80% 50% 70% 

81% 30% 30% 100% 100% 100% 

82% 0% 0% 0% 0% 0% 

83% 0% 0% 0% 0% 0% 100% 

Total Unit .425 

Shipments 

Percent Difference - 0% 0% 0% 0% 0% 

in Shipments 

Relative to Base 

Case 

12-23 
Table 12.3.14 Manufacturer Distribution and Total Shipments for Mobile Home Furnaces

by Efficiency Level in 2015 (Shipments in Millions

Shipments Efficiency

Level (AFUE)

Base Case

(75%)

TSL 1

(80%)

TSLA/2

(80%)

TSLB/4

(90%)

TSL 5

(90%)

75% 15%

80% 80% 95% 95%

90% 5% 5% 5% 100% 100%

Total Unit Shipments 0.192 0.192 0.192 0.159 0.159

Percent Difference in

Shipments Relative to

Base Case

-0.5% -0.5% -7.1% -7.1%

Table 12.3.15 Manufacturer Distribution and Total Shipments for Oil Furnaces by

Shipments

Efficiency Level

(AFUE)

Base

Case

(78%)

TSL 1

(80%)

TSL

A/2

(82%)

TSL B

(82%)

TSL 4

(84%)

TSL 5

(85%)

78% 0%

80% 0% 0%

81% 82% 82%

82% 5% 5% 87% 87%

83% 5% 5% 5% 5%

84% 5% 5% 5% 5% 96%

85% 5% 5% 5% 5% 5% 100%

Total Unit

Shipments

0.0880 0.0860 0.0820

Percent Difference

in Shipments

Relative to Base

Case

- 0% 0% 0% -2.3% -6.8%

Efficiency Level in 2015 (Shipments in Millions)

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.14 Manufacturer Distribution and Total Shipments for Mobile Home Furnaces 

by Efficiency Level in 2015 (Shipments in Millions 

Shipments Efficiency Base Case TSL 1 TSLA/2 TSL B I 4 TSL5 

Level (AFUE) (75%) (80%) (80%) (90%) (90%) 

75% 15% 

80% 80% 95% 95% 

90% 5% 5% 5% 100% 100% 

Total Unit Shipments 0.192 0.192 0.192 0.159 0.159 

Percent Difference in - -0.5% -0.5% -7.1% -7.1% 

Shipments Relative to 

Base Case 

Table 12.3.15 Manufacturer Distribution and Total Shipments for Oil Furnaces by 

Efr IClency . L eve I· III 2015 (Sh· lpmen t· Sill M"lr I IOns ) 

Shipments Base TSL 1 TSL TSLB TSL4 TSL5 

Efficiency Level Case (80%) A/2 (82%) (84%) (85%) 

(AFUE) (78%) (82%) 

78% 0% 

80% 0% 0% 

81% 82% 82% 

82% 5% 5% 87% 87% 

83% 5% 5% 5% 5% 

84% 5% 5% 5% 5% 96% 

85% 5% 5% 5% 5% 5% 100% 

Total Unit 0.0880 0.0860 0.0820 

Shipments 

Percent Difference - 0% 0% 0% -2.3% -6.8% 

in Shipments 

Relative to Base 

Case 

12-24 
Table 12.3.16 Manufacturer Distribution and Total Shipments for Gas Boilers by

Efficiency Level in 2015 (Shipments in Millions

Shipments Efficiency

Level (AFUE)

Base Case

(80%)

TSL 1

(82%)

TSL

A/B

(82%)

TSL

2/4

(84%)

TSL 5

(99%)

80% 22%

81% 4%

82% 22% 48% 48%

83% 20% 20% 20%

84% 4% 4% 4% 72%

86% 8% 8% 8% 8%

91% 20% 20% 20% 20%

99% 0% 0% 0% 0% 100%

Total Unit Shipments 0.284 0.284 0.284 0.256 0.227

Percent Difference in

Shipments Relative to

Base Case

0% 0% -10.0% -20.1%

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.16 Manufacturer Distribution and Total Shipments for Gas Boilers by 

Efficiency Level in 2015 (Shipments in Millions) 

Shipments Efficiency Base Case TSL1 TSL TSL TSL5 

Level (AFUE) (80%) (82%) AlB 2/4 (99%) 

(82%) (84%) 

80% 22% 

81% 4% 

82% 22% 48% 48% 

83% 20% 20% 20% 

84% 4% 4% 4% 72% 

86% 8% 8% 8% 8% 

91% 20% 20% 20% 20% 

99% 0% 0% 0% 0% 100% 

Total Unit Shipments 0.284 0.284 0.284 0.256 0.227 

Percent Difference in - 0% 0% -10.0% -20.1% 

Shipments Relative to 

Base Case 

12-25 
Table 12.3.17 Manufacturers Distribution and Total Shipments for Oil Boilers by

Shipments

Efficiency Level

(AFUE)

Base

Case

(80%)

TSL 1

(83%)

TSL 2

(83%)

TSL 3

(83%)

TSL 4

(84%)

TSL 5

(95%)

80% 5%

81% 5%

82% 5%

83% 23% 38% 38% 38%

84% 23% 23% 23% 23% 61%

85% 23% 23% 23% 23% 23%

86% 7% 7% 7% 7% 7%

90% 7% 7% 7% 7% 7%

95% 0% 0% 0% 0% 0% 100%

Total Unit

Shipments

0.122 0.122 0.122 0.122 0.122 0.098

Percent Difference

in Shipments

Relative to Base

Case

- 0% 0% 0% 0% -19.7%

12.3.7 Production Costs

Changes in production costs impact revenues and gross profits. As shown in the

engineering analysis, more-efficient products cost more to produce. For the MIA, DOE adopted

the production costs derived in the engineering analysis, with appropriate production volume

assumptions. For instance, high-efficiency products sold under existing efficiency standards are

manufactured at lower production volumes than standard-efficiency products. The enactment of

higher energy conservation standards will increase production volumes for units with higher

efficiencies.

The GRIM included the proportion of costs devoted to labor, materials, freight,

depreciation, and non-depreciation overhead that make up the full production cost of these

products. DOE estimated the proportion of costs associated with each cost category by deriving

sub-curves to the manufacturer cost-efficiency curves developed in the engineering analysis.

Tables 12.3.18 through 12.3.23 provide the production cost assumptions used in the

GRIM for each residential furnace and boiler product class analyzed. Costs are presented for

Efficiency Level in 2015 (Ship ments in Millions

12-26

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.17 Manufacturers Distribution and Total Shipments for Oil Boilers by 

Efficiency Level in 2015 (Shipments in Millions) 

Shipments Base TSL 1 TSL2 TSL3 TSL4 TSL5 

Efficiency Level Case (83%) (83%) (83%) (84%) (95%) 

(AFUE) (80%) 

80% 5% 

81% 5% 

82% 5% 

83% 23% 38% 38% 38% 

84% 23% 23% 23% 23% 61% 

85% 23% 23% 23% 23% 23% 

86% 7% 7% 7% 7% 7% 

90% 7% 7% 7% 7% 7% 

95% 0% 0% 0% 0% 0% 100% 

Total Unit 0.122 0.122 0.122 0.122 0.122 0.098 

Shipments 

Percent Difference - 0% 0% 0% 0% -19.7% 

in Shipments 

Relative to Base 

Case 

12.3.7 Production Costs 

Changes in production costs impact revenues and gross profits. As shown in the 

engineering analysis, more-efficient products cost more to produce. For the MIA, DOE adopted 

the production costs derived in the engineering analysis, with appropriate production volume 

assumptions. For instance, high-efficiency products sold under existing efficiency standards are 

manufactured at lower production volumes than standard-efficiency products. The enactment of 

higher energy conservation standards will increase production volumes for units with higher 

efficiencies. 

The GRIM included the proportion of costs devoted to labor, materials, freight, 

depreciation, and non-depreciation overhead that make up the full production cost of these 

products. DOE estimated the proportion of costs associated with each cost category by deriving 

sub-curves to the manufacturer cost-efficiency curves developed in the engineering analysis. 

Tables 12.3.18 through 12.3.23 provide the production cost assumptions used in the 

GRIM for each residential furnace and boiler product class analyzed. Costs are presented for 

12-26 
baseline model equipment capacities based on the most commonly sold size, as shown in TSD

Chapter 6 on the engineering analysis. Overhead excludes depreciation but includes shipping

costs.

Table 12.3.18 Unit Production Costs used in the GRIM for Non-Weatherized Gas Furnaces

(Cost in 2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

78% 264 61 54 379

80% 267 62 55 384

81% 282 62 55 399

90% 423 67 77 567

92% 488 82 80 650

96% 910 92 105 1107

Table 12.3.19 Unit Production Costs used in the GRIM for Weatherized Gas Furnaces

(Cost in 2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

78% 589 86 143 818

80% 592 86 144 822

81% 597 86 144 827

82% 650 86 145 881

83% 667 86 145 898

Table 12.3.20 Unit Production Costs used in the GRIM for Mobile Home Furnaces (Cost in

2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

75% 208 42 64 279

80% 237 46 66 349

90% 327 58 79 464

12-27

 EE-RM/STD-01-350 COMMENT 164

baseline model equipment capacities based on the most commonly sold size, as shown in TSD 

Chapter 6 on the engineering analysis. Overhead excludes depreciation but includes shipping 

costs. 

Table 12.3.18 Unit Production Costs used in the GRIM for Non-Weatherized Gas Furnaces 

(Cost in 2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

78% 264 61 54 379 

80% 267 62 55 384 

81% 282 62 55 399 

90% 423 67 77 567 

92% 488 82 80 650 

96% 910 92 105 1107 

Table 12.3.19 Unit Production Costs used in the GRIM for Weatherized Gas Furnaces 

(Cost in 2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

78% 589 86 143 818 

80% 592 86 144 822 

81% 597 86 144 827 

82% 650 86 145 881 

83% 667 86 145 898 

Table 12.3.20 Unit Production Costs used in the GRIM for Mobile Home Furnaces (Cost in 

2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

75% 208 42 64 279 

80% 237 46 66 349 

90% 327 58 79 464 

12-27 
Table 12.3.21 Unit Production Costs used in the GRIM for Oil Furnaces (Cost in 2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

78% 415 140 114 669

80% 417 140 114 671

81% 421 141 115 594

82% 423 141 115 596

83% 425 141 116 682

84% 427 141 116 684

85% 433 141 116 690

Table 12.3.22 Unit Production Costs used in the GRIM for Gas Boilers (Cost in 2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

80% 423 68 76 567

81% 457 68 76 601

82% 473 68 80 621

83% 500 68 80 648

84% 505 68 80 653

86% 558 78 85 721

91% 845 68 76 989

99% 1225 101 180 1506

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.21 Unit Production Costs used in the GRIM for Oil Furnaces (Cost in 2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

78% 415 140 114 669 

80% 417 140 114 671 

81% 421 141 115 594 

82% 423 141 115 596 

83% 425 141 116 682 

84% 427 141 116 684 

85% 433 141 116 690 

Table 12.3.22 Unit Production Costs used in the GRIM for Gas Boilers (Cost in 2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

80% 423 68 76 567 

81% 457 68 76 601 

82% 473 68 80 621 

83% 500 68 80 648 

84% 505 68 80 653 

86% 558 78 85 721 

91% 845 68 76 989 

99% 1225 101 180 1506 

12-28 
Table 12.3.23 Unit Production Costs used in the GRIM for Oil Boilers (Cost in 2006$)

Efficiency

Level (AFUE)

Material Labor Overhead Total

80% 551 53 88 692

81% 553 56 89 698

82% 554 58 90 702

83% 555 60 90 705

84% 557 63 91 711

85% 559 67 93 719

86% 562 67 93 722

90% 869 87 133 1089

95% 1379 87 134 1600

12.3.8 Markups

Manufacturers generally differentiate between baseline and premium products and

include both in their mix of product offerings. Many manufacturers interviewed stated that, for

premium products above mandatory standard levels, profitability levels (and corresponding

markups) were higher. DOE learned that premium products are usually differentiated from

baseline equipment by having higher efficiency levels and additional features. For example, for

non-weatherized gas furnaces, attributes of premium products include two-stage heating, variable

speed blowers, thermostatic controls, and other additional feature sets.

To understand how baseline and premium products are differentiated, DOE reviewed

manufacturer catalogs. The data show that, for non-weatherized gas furnaces and mobile home

furnaces, available products cluster around two distinct groups, consistent with differentiation

based on venting and the presence of an undesirable, near-condensing, efficiency region. The

data on model availability for the remaining product classes-weatherized gas furnaces, nonweatherized oil-fired furnaces, and boilers-do not exhibit any particular clustering. However,

manufacturers gave strong indications during interviews that, while product availability is

relatively diffuse for some classes, actual product sales correspond to the existence of baseline

and premium products.

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

production costs. For the analysis, DOE considered four distinct markup scenarios based on

manufacturer input for each furnace and boiler product class. It used scenarios to bound the

range of expected product prices following standards. For each product 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 standards.

12-29

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.23 Unit Production Costs used in the GRIM for Oil Boilers (Cost in 2006$) 

Efficiency Material Labor Overhead Total 

Level (AFUE) 

80% 551 53 88 692 

81% 553 56 89 698 

82% 554 58 90 702 

83% 555 60 90 705 

84% 557 63 91 711 

85% 559 67 93 719 

86% 562 67 93 722 

90% 869 87 133 1089 

95% 1379 87 134 1600 

12.3.8 Markups 

Manufacturers generally differentiate between baseline and premium products and 

include both in their mix of product offerings. Many manufacturers interviewed stated that, for 

premium products above mandatory standard levels, profitability levels (and corresponding 

markups) were higher. DOE learned that premium products are usually differentiated from 

baseline equipment by having higher efficiency levels and additional features. For example, for 

non-weatherized gas furnaces, attributes of premium products include two-stage heating, variable 

speed blowers, thermostatic controls, and other additional feature sets. 

To understand how baseline and premium products are differentiated, DOE reviewed 

manufacturer catalogs. The data show that, for non-weatherized gas furnaces and mobile home 

furnaces, available products cluster around two distinct groups, consistent with differentiation 

based on venting and the presence of an undesirable, near-condensing, efficiency region. The 

data on model availability for the remaining product classes-weatherized gas furnaces, nonweatherized oil-fired furnaces, and boilers-do not exhibit any particular clustering. However, 

manufacturers gave strong indications during interviews that, while product availability is 

relatively diffuse for some classes, actual product sales correspond to the existence of baseline 

and premium products. 

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

production costs. For the analysis, DOE considered four distinct markup scenarios based on 

manufacturer input for each furnace and boiler product class. It used scenarios to bound the 

range of expected product prices following standards. For each product 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 standards. 

12-29 
12.3.8.1 Flat Markups

Under a flat markup strategy, DOE applied a single uniform "flat markup" across all

products. A flat markup assumes no differentiation in gross-margin percentage across product

efficiency levels. DOE calculated the markup from industry data using the formula:

Markup = 1

(1- GrossMargin)

where:

Gross Margin = (Revenues- Cost of Goods Sold)

Revenues

Eq. 3

Eq. 4

DOE found differences in the way public manufacturers report the costs of goods sold.

Specifically, product warranty and shipping expenses are treated differently; some companies

include both of these costs as part of COGS, others only include one of them, and some do not

include these items as part of COGS at all. To develop comparable markups across

manufacturers, DOE removed warranty, shipping expenses, and depreciation from COGS to

arrive at industry-average markups for each product class. The results are presented below in

Table 12.3.24.

Table 12.3.24 Flat Manufacturer Markups Used in GRIM

Product Class Average

NWGF WGF MHF OF GB OB

Adjusted Markup 1.40 1.40 1.29 1.40 1.44 1.44

12.3.8.2 Two-Tier Markups

DOE's research on the residential furnaces and boilers industry and feedback from

manufacturers indicated that some companies use a two-tier markup strategy on certain product

classes. Based on this finding, DOE developed estimates for a two-tier markup strategy. In other

words, baseline or commodity products receive one markup and premium or higher-end

equipment receive another, higher markup.

DOE determined the commodity and premium product markups by aggregating marketshare, shipment-weighted manufacturer information obtained during the interviews. The

markups DOE used are described in section 12.3.8.5.

12.3.8.3 Three-Tier Price Markup

For boilers, DOE learned from manufacturers that pricing is determined on the basis of

the three product tiers. During the MIA interviews, manufacturers provided information on the

range of typical AFUE levels in these three tiers and the change in profitability for each level.

DOE used this information, product costs from its engineering analysis, and industry average

gross margins to estimate markups for boilers under a three-tier pricing strategy. These values

12-30

 EE-RM/STD-01-350 COMMENT 164

12.3.8.1 Flat Markups 

Under a flat markup strategy, DOE applied a single uniform "flat markup" across all 

products. A flat markup assumes no differentiation in gross-margin percentage across product 

efficiency levels. DOE calculated the markup from industry data using the formula: 

1 Markup Eq.3 (1- GrossMargin) 

where: 

G M . (Revenues- Cost of Goods Sold) 

ross argln = Revenues Eq.4 

DOE found differences in the way public manufacturers report the costs of goods sold. 

Specifically, product warranty and shipping expenses are treated differently; some companies 

include both of these costs as part of COGS, others only include one of them, and some do not 

include these items as part of COGS at all. To develop comparable markups across 

manufacturers, DOE removed warranty, shipping expenses, and depreciation from COGS to 

arrive at industry-average markups for each product class. The results are presented below in 

Table 12.3.24. 

T a e hI 12 .. 3 24 Flat Manu f acturer Mar k ups U se d· III GRI M 

Product Class Average 

NWGF WGF MHF OF GB OB 

Adjusted Markup 1.40 1.40 1.29 1.40 1.44 1.44 

12.3.8.2 Two-Tier Markups 

DOE's research on the residential furnaces and boilers industry and feedback from 

manufacturers indicated that some companies use a two-tier markup strategy on certain product 

classes. Based on this finding, DOE developed estimates for a two-tier markup strategy. In other 

words, baseline or commodity products receive one markup and premium or higher-end 

equipment receive another, higher markup. 

DOE determined the commodity and premium product markups by aggregating marketshare, shipment-weighted manufacturer information obtained during the interviews. The 

markups DOE used are described in section 12.3.8.5. 

12.3.8.3 Three-Tier Price Markup 

For boilers, DOE learned from manufacturers that pricing is determined on the basis of 

the three product tiers. During the MIA interviews, manufacturers provided information on the 

range of typical AFUE levels in these three tiers and the change in profitability for each level. 

DOE used this information, product costs from its engineering analysis, and industry average 

gross margins to estimate markups for boilers under a three-tier pricing strategy. These values 

12-30 
are described in section 12.3.8.5.

12.3.8.4 Constant-Price Markup

For some products, manufacturers believe that they will not be able to recover any

incremental product costs resulting from new standards. DOE modeled this situation by

assuming that manufacturers would maintain constant prices for baseline units (those units that

currently represent the majority of the market). In other words, as efficiency improves and

production costs increase, constant prices translate into reduced profit margins for manufacturers.

12.3.8.5 Markup Scenarios

DOE used findings from its various analyses and feedback from manufacturers to

determine the appropriate markup scenarios for each product class. These scenarios bound the

range of expected profitability levels following standards. Tables 12.3.25 through 12.3.30

present the markup scenarios DOE used for each product class. For the flat markup scenario,

DOE used the values indicated in Table 12.3.25 for all efficiency levels.

Table 12.3.25 Summary of Markups Scenarios by Product Class

Product

Class

Flat Markup Two-Tier

Markup

Three-Tier

Markup

Constant Price

Markup

NWGF x (1.40) x

WGF x (1.40) x

MHF x (1.29)

OF x (1.40) x

GB x (1.44) x

OB x (1.44) x

Table 12.3.26 Two-Tier Manufacturer Markups for Non-Weatherized Gas Furnaces

Trial Standard AFUE Level

Level

78% 80% 81% 90% 92% 96%

Baseline Unit 1.35 1.35 1.35 1.43 1.43 1.43

TSL 1 / A 1.35 1.35 1.43 1.43 1.43

TSL 2 1.35 1.35 1.43 1.43 1.43

TSL4/B 1.35 1.35 1.35

TSL 5 1.35

12-31

 EE-RM/STD-01-350 COMMENT 164

are described in section 12.3.8.5. 

12.3.8.4 Constant-Price Markup 

For some products, manufacturers believe that they will not be able to recover any 

incremental product costs resulting from new standards. DOE modeled this situation by 

assuming that manufacturers would maintain constant prices for baseline units (those units that 

currently represent the majority of the market). In other words, as efficiency improves and 

production costs increase, constant prices translate into reduced profit margins for manufacturers. 

12.3.8.5 Markup Scenarios 

DOE used findings from its various analyses and feedback from manufacturers to 

determine the appropriate markup scenarios for each product class. These scenarios bound the 

range of expected profitability levels following standards. Tables 12.3.25 through 12.3.30 

present the markup scenarios DOE used for each product class. For the flat markup scenario, 

DOE used the values indicated in Table 12.3.25 for all efficiency levels. 

T a e bi 12 .. 3 25 S ummaryo fM ar k ups S cenanos b )y Pdt ro uc CI ass 

Product Flat Markup Two-Tier Three-Tier Constant Price 

Class Markup Markup Markup 

NWGF x (1.40) x 

WGF x (1.40) x 

MHF x (1.29) 

OF x (1.40) x 

GB x (1.44) x 

OB x (1.44) x 

T a bi e 12 .. 3 26 T wo-T" ler M anu f acturer M k ar ups f or N W h . on- eat enze dG as F urn aces 

Trial Standard AFUE Level 

Level 

78% 80% 81% 90% 92% 96% 

Baseline Unit 1.35 1.35 1.35 1.43 1.43 1.43 

TSL 1 I A 1.35 1.35 1.43 1.43 1.43 

TSL2 1.35 1.35 1.43 1.43 1.43 

TSL4/B 1.35 1.35 1.35 

TSL5 1.35 

12-31 
Table 12.3.27 Constant-Price Markups for Weatherized Gas Furnaces

Trial Standard AFUE Level

Level

78% 80% 81% 82% 83%

Baseline Unit 1.40 1.40 1.40 1.40 1.40

TSL 1 1.39 1.40 1.40 1.40

TSL2/A 1.38 1.40 1.40

TSL4/B 1.38 1.40 1.40

TSL 5 1.37

Table 12.3.28 Constant-Price Markups for Oil Furnaces

Trial Standard AFUE Level

Level

78% 80% 81% 82% 83% 84% 85%

Baseline Unit 1.40 1 .40 1.40 1.40 1.40 1.40 1.40

TSL 1 1 .40 1.40 1.40 1.40 1.40 1.40

TSL2/A/B 1.38 1.40 1.40 1.40

TSL 4 1.3 7 1.38

TSL 5 1.36

Table 12.3.29 Three-Tier Manufacturer Marku ps for Gas Boilers

Trial Standard AFUE Level

Level

80% 81 % 82% 83% 84% 86% 91% 99%

Baseline Unit 1.40 1.40 1.40 1.40 1.47 1.47 1.50 1.50

TSL 1 / A / B 1.40 1.40 1.40 1.47 1.50 1.50

TSL 2 1.40 1.40 1.50 1.50

TSL 4 1.40 1.40 1.50 1.50

TSL 5 1.40

 EE-RM/STD-01-350 COMMENT 164

T a e hI 12 3 27 C t t P" M k f W th " d G F " " ons an - nee ar ups or ea enze as urnaces 

Trial Standard AFUE Level 

Level 

78% 80% 81% 82% 83% 

Baseline Unit 1.40 1.40 1.40 1.40 1.40 

TSL 1 1.39 1.40 1.40 1.40 

TSL 2 I A 1.38 1.40 1.40 

TSL 4 IB 1.38 1.40 1.40 

TSL5 1.37 

T a e hI 12 3 28 C P" M k f 0"1 F " " onstant- nee ar ups or I urnaces 

Trial Standard AFUE Level 

Level 

78% 80% 81% 82% 83% 84% 85% 

Baseline Unit 1.40 1.40 1.40 1.40 1.40 1.40 1.40 

TSL 1 1.40 1.40 1.40 1.40 1.40 1.40 

TSL 2 I AlB 1.38 1.40 1.40 1.40 

TSL4 1.37 1.38 

TSL5 1.36 

T a e hI 12 3 29 Th T" M f t " " ree- ler anu ac urer M k ar ups f or G as B"I 01 ers 

Trial Standard AFUE Level 

Level 

80% 81% 82% 83% 84% 86% 91% 99% 

Baseline Unit 1.40 1.40 1.40 1.40 1.47 1.47 1.50 1.50 

TSL 1 I AlB 1.40 1.40 1.40 1.47 1.50 1.50 

TSL2 1.40 1.40 1.5 1.50 

TSL4 1.40 1.40 1.50 1.50 

TSL5 1.40 

12-32 
Table 12.3.30 Three-Tier Manufacturer Markups for Oil Boilers

Trial Standard AFUE Level

Level

80% 81% 82% 83% 84% 85% 86% 90% 95%

Baseline Unit 1.40 1.40 1.40 1.40 1.46 1.46 1.46 1.49 1.49

TSL 1 1.40 1.40 1.40 1.46 1.49 1.49

TSL2/A 1.40 1.40 1.40 1.46 1.49 1.49

TSL4/B 1.40 1.40 1.40 1.49 1.49

TSL 5 1.40

12.3.8.6 Conversion Costs

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

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

regulation. For the purpose of the MIA, DOE classified these one-time conversion costs into two

major groups. Product conversion expenses are one-time investments in research, development,

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

standard. Conversion-capital expenditures are one-time investments in property, plant, and

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

fabricated and assembled under the new regulation.

Product Conversion Expenses. DOE assessed the R&D expenditures manufacturers

would be required to invest as a result of the various TSLs. DOE obtained financial information

through manufacturer interviews and presented results in an aggregated form to mask any

proprietary or confidential information from any one specific manufacturer. For each class and

TSL, DOE summed a number of manufacturer replies, and estimated the total class market share.

It divided the sum of replies by the estimated total product class market share to estimate a figure

for the total product class.

Table 12.3.31 summarizes the resulting product conversion costs for all product classes

modeled in the GRIM. It should be noted that these conversion costs are above and beyond the

normal R&D expenses considered in the GRIM. The GRIM separately accounts for ordinary

R&D of approximately 1 to 1.3 percent of revenues. From a development and testing standpoint,

most manufacturers employ engineers and testing personnel on staff and maintain their own

testing facilities. However, insufficient testing facilities represent a bottleneck in the product

development cycle for many firms. Manufacturers will have to dedicate their design staff and

testing facilities almost exclusively to comply with the new standard, leaving few resources

available to conduct their ordinary product development and testing efforts.

12-33

 EE-RM/STD-01-350 COMMENT 164

T a e bi 12330 .. Th ree-T M ler anu f ac t urer M k ar ups £ or 0'1 I B 01 '1 ers 

Trial Standard AFUE Level 

Level 

80% 81% 82% 83% 84% 85% 86% 90% 95% 

Baseline Unit 1.40 1.40 1.40 1.40 1.46 1.46 1.46 1.49 1.49 

TSL 1 1.40 1.40 1.40 1.46 1.49 1.49 

TSL21 A 1.40 1.40 1.40 1.46 1.49 1.49 

TSL 4 I B 1.40 1.40 1.40 1.49 1.49 

TSL5 1.40 

12.3.8.6 Conversion Costs 

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

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

regulation. For the purpose of the MIA, DOE classified these one-time conversion costs into two 

major groups. Product conversion expenses are one-time investments in research, development, 

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

standard. Conversion-capital expenditures are one-time investments in property, plant, and 

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

fabricated and assembled under the new regulation. 

Product Conversion Expenses. DOE assessed the R&D expenditures manufacturers 

would be required to invest as a result of the various TSLs. DOE obtained financial information 

through manufacturer interviews and presented results in an aggregated form to mask any 

proprietary or confidential information from anyone specific manufacturer. For each class and 

TSL, DOE summed a number of manufacturer replies, and estimated the total class market share. 

It divided the sum of replies by the estimated total product class market share to estimate a figure 

for the total product class. 

Table 12.3.31 summarizes the resulting product conversion costs for all product classes 

modeled in the GRIM. It should be noted that these conversion costs are above and beyond the 

normal R&D expenses considered in the GRIM. The GRIM separately accounts for ordinary 

R&D of approximately 1 to 1.3 percent of revenues. From a development and testing standpoint, 

most manufacturers employ engineers and testing personnel on staff and maintain their own 

testing facilities. However, insufficient testing facilities represent a bottleneck in the product 

development cycle for many firms. Manufacturers will have to dedicate their design staff and 

testing facilities almost exclusively to comply with the new standard, leaving few resources 

available to conduct their ordinary product development and testing efforts. 

12-33 
Table 12.3.31 Summary of Product Conversion Costs Used in the GRIM (Cost in Millions

of Dollars

NWGF WGF MHF OF GB OB

TSL 1 0 52 0 4 8 4

TSL A 0 58 0 5 8 4

TSL 2 64 58 0 5 9 4

TSLB 87 58 7 5 8 4

TSL 4 87 58 7 9 9 4

TSL 5 153 73 7 9 21 11

Conversion-Capital Expenditures. DOE evaluated the level of capital investments

needed to comply with energy conservation standards. The size of the products and the time

required to fabricate and assemble them increase as efficiency increases. Larger equipment

implies not only reduced production capacity , but also reduced warehouse capacity. Therefore,

manufacturers must increase plant and warehouse capacity to compensate for larger equipment

size resulting from higher standards.

As with product conversion expenditures , DOE developed estimates for capital

investments primarily based on manufacturer interview responses , including the percentage of

assets stranded at each TSL. Manufacturers explained how the different TSLs impacted their

ability to use existing plants, warehousing , tooling, and equipment. From the interviews, DOE

was able to estimate what proportion of existing manufacturing assets needed to be replaced

and/or reconfigured , and what additional manufacturing assets were required to manufacture the

higher efficiency equipment. Higher standards usually resulted in a larger proportion of existing

assets needing to be replaced.

DOE verified the capital equipment expenditures using two other approaches . First, it

prepared estimates using the manufacturing cost model developed for the engineering analysis.

The model assumes an optimized green field plant for a single baseline capacity . As a result, it

does not take into account stranded assets. Therefore, the model provides only a lower bound for

the capital expenditures because there is no replacement capital. Second, DOE estimated the

capital requirements assuming the industry would maintain its historical capital structure. DOE

estimated plant, property, and equipment requirements as a function of revenue for each TSL. It

then compared both of these estimates to the numbers derived from the manufacturer interviews.

Any discrepancies were the subject of follow-on discussions , and DOE adjusted the values

accordingly.

Table 12.3.32 summarizes the resulting capital conversion costs for all product classes. It

should be noted that these capital conversion costs are above and beyond the normal capital

expenses modeled in the GRIM. The GRIM separately accounts for ordinary capital

expenditures of approximately 1.8 to 2.5 percent of revenues. These funds are used for capital

12-34

 EE-RM/STD-01-350 COMMENT 164

Table 12.3.31 Summary of Product Conversion Costs Used in the GRIM (Cost in Millions 

of Dollars) 

NWGF WGF MHF OF GB OB 

TSL 1 0 52 0 4 8 4 

TSLA 0 58 0 5 8 4 

TSL2 64 58 0 5 9 4 

TSLB 87 58 7 5 8 4 

TSL4 87 58 7 9 9 4 

TSL5 153 73 7 9 21 11 

Conversion-Capital Expenditures. DOE evaluated the level of capital investments 

needed to comply with energy conservation standards. The size of the products and the time 

required to fabricate and assemble them increase as efficiency increases. Larger equipment 

implies not only reduced production capacity, but also reduced warehouse capacity. Therefore, 

manufacturers must increase plant and warehouse capacity to compensate for larger equipment 

size resulting from higher standards. 

As with product conversion expenditures, DOE developed estimates for capital 

investments primarily based on manufacturer interview responses, including the percentage of 

assets stranded at each TSL. Manufacturers explained how the different TSLs impacted their 

ability to use existing plants, warehousing, tooling, and equipment. From the interviews, DOE 

was able to estimate what proportion of existing manufacturing assets needed to be replaced 

and/or reconfigured, and what additional manufacturing assets were required to manufacture the 

higher efficiency equipment. Higher standards usually resulted in a larger proportion of existing 

assets needing to be replaced. 

DOE verified the capital equipment expenditures using two other approaches. First, it 

prepared estimates using the manufacturing cost model developed for the engineering analysis. 

The model assumes an optimized green field plant for a single baseline capacity. As a result, it 

does not take into account stranded assets. Therefore, the model provides only a lower bound for 

the capital expenditures because there is no replacement capital. Second, DOE estimated the 

capital requirements assuming the industry would maintain its historical capital structure. DOE 

estimated plant, property, and equipment requirements as a function of revenue for each TSL. It 

then compared both of these estimates to the numbers derived from the manufacturer interviews. 

Any discrepancies were the subject of follow-on discussions, and DOE adjusted the values 

accordingly. 

Table 12.3.32 summarizes the resulting capital conversion costs for all product classes. It 

should be noted that these capital conversion costs are above and beyond the normal capital 

expenses modeled in the GRIM. The GRIM separately accounts for ordinary capital 

expenditures of approximately 1.8 to 2.5 percent of revenues. These funds are used for capital 

12-34 
improvement projects, cost reduction efforts, and replacement of worn out equipment.

Table 12.3.32 Summary of Conversion Capital Expenses Used in the GRIM (Cost in

Million Dollars

NWGF WGF MHF OF GB OB

TSL 1 0 30 0 1 0 4

TSL A 0 30 4 0 4

TSL 2 129 30 0 4 0 4

TSLB 185 41 13 4 13 4

TSL4 185 41 13 7 0 4

TSL 5 750 73 13 9 159 75

12.4 INDUSTRY FINANCIAL IMPACTS

Using the inputs and assumptions described in the previous sections, the GRIM produced

indicators of financial impacts on the residential furnace and boiler manufacturing industries.

This document reports the results of the MIA on two key financial metrics: net present value and

annual cashflows.

12.4.1 Trial Standard Levels

DOE developed six TSLs that include combinations of energy conservation standards for

non-weatherized gas furnaces, weatherized gas furnaces, mobile home furnaces, oil-fired

furnaces, gas boilers, and oil-fired boilers. The AFUE levels used in the GRIM are presented in

Table 12.4.1.

 EE-RM/STD-01-350 COMMENT 164

improvement projects, cost reduction efforts, and replacement of worn out equipment. 

Table 12.3.32 Summary of Conversion Capital Expenses Used in the GRIM (Cost in 

Million Dollars 

NWGF WGF MHF OF GB OB 

TSL 1 0 30 0 1 0 4 

TSLA 0 30 0 4 0 4 

TSL2 129 30 0 4 0 4 

TSLB 185 41 13 4 13 4 

TSL4 185 41 13 7 0 4 

TSL5 750 73 13 9 159 75 

12.4 INDUSTRY FINANCIAL IMPACTS 

Using the inputs and assumptions described in the previous sections, the GRIM produced 

indicators of financial impacts on the residential furnace and boiler manufacturing industries. 

This document reports the results of the MIA on two key financial metrics: net present value and 

annual cashflows. 

12.4.1 Trial Standard Levels 

DOE developed six TSLs that include combinations of energy conservation standards for 

non-weatherized gas furnaces, weatherized gas furnaces, mobile home furnaces, oil-fired 

furnaces, gas boilers, and oil-fired boilers. The AFUE levels used in the GRIM are presented in 

Table 12.4.1. 

12-35 
Table 12.4.1 Trial Standard Levels Evaluated in the MIA for Residential Furnaces and

Boilers

Trial Standard Level NWGF WGF MHF OF GB OB

NAECA Efficiency 78% 78% 75% 78% 80% 80%

TSL 1 80% 80% 80% 80% 82% 83%

TSL A 80% 81% 80% 82% 82% 83%

TSL 2 81% 81% 80% 82% 84% 83%

TSL B 90% 81% 90% 82% 82% 84%

TSL 4 90% 81% 90% 84% 84% 84%

TSL 5 96% 83% 90% 85% 99% 95%

12.4.2 Impacts on Industry Net Present Value

DOE used the INPV in the MIA to compare the financial impacts of different TSLs on

furnace and boiler manufacturers. The INPV is the sum of all net cashflows discounted at the

industry's cost of capital, or discount rate. Because the INPV applies only to the furnace and

boiler manufacturing industry, the INPV is different from the NPV that DOE used to assess the

cumulative benefit or cost of standards to consumers on a national basis. The GRIM estimated

cashflows between 2004 and 2038, which is consistent with the forecasted period used in the

national impact analysis.

DOE compared the INPV of the base case (no new efficiency standard) to that of each

TSL. The difference in INPV is an estimate of the economic impact that implementing that

particular standard would have on the entire industry. To evaluate the range of cashflow impacts

on the industry, DOE constructed up to four different GRIM scenarios for each product class that

used different assumptions for markups and shipments, as described above. Tables 12.4.2

through 12.4.7 provide the net present value estimates for the industry under the different

scenarios.

 EE-RM/STD-01-350 COMMENT 164

Table 12.4.1 Trial Standard Levels Evaluated in the MIA for Residential Furnaces and 

Boilers 

Trial Standard Level NWGF WGF MHF OF GB OB 

NAECA Efficiency 78% 78% 75% 78% 80% 80% 

TSL1 80% 80% 80% 80% 82% 83% 

TSLA 80% 81% 80% 82% 82% 83% 

TSL2 81% 81% 80% 82% 84% 83% 

TSLB 90% 81% 90% 82% 82% 84% 

TSL4 90% 81% 90% 84% 84% 84% 

TSL5 96% 83% 90% 85% 99% 95% 

12.4.2 Impacts on Industry Net Present Value 

DOE used the INPV in the MIA to compare the financial impacts of different TSLs on 

furnace and boiler manufacturers. The INPV is the sum of all net cashflows discounted at the 

industry's cost of capital, or discount rate. Because the INPV applies only to the furnace and 

boiler manufacturing industry, the INPV is different from the NPV that DOE used to assess the 

cumulative benefit or cost of standards to consumers on a national basis. The GRIM estimated 

cashflows between 2004 and 2038, which is consistent with the forecasted period used in the 

national impact analysis. 

DOE compared the INPV of the base case (no new efficiency standard) to that of each 

TSL. The difference in INPV is an estimate of the economic impact that implementing that 

particular standard would have on the entire industry. To evaluate the range of cashflow impacts 

on the industry, DOE constructed up to four different GRIM scenarios for each product class that 

used different assumptions for markups and shipments, as described above. Tables 12.4.2 

through 12.4.7 provide the net present value estimates for the industry under the different 

scenanos. 

12-36 
Table 12.4.2 Changes in Industry Net Present Value, Non-Weatherized Gas Furnaces*

Flat Markup,

NES Shipments

Two-Tier Markup,

NES Shipments

TSL

INPV

Change in INPV from

Base INPV

Change in INPV from

Base

$MM

$MM %

Change

$MM

$MM %

Change

Base case $1,197 $1,161

1 $1,197 $0 0% $1,161 $0 0%

A $1,197 $0 0% $1,161 $0 0%

2 $1,125 ($72) -6% $1,084 ($78) -7%

B $1,217 $20 2% $881 ($280) -24%

4 $1,217 $20 2% $881 ($280) -24%

5 $1,505 $307 26% $937 ($224) -19%

Flat Markup,

Manufacturers' Shipments

Two-Tier Markup,

Manufacturers' Shipments

TSL

INPV

Change in INPV from

Base INPV

Change in

B

INPV from

ase

$MM

$MM %

Change

$MM

$MM %

Change

Base case $1,227 $1,235

1 $1,227 $0 0% $1,235 $0 0%

A $1,227 $0 0% $1,235 $0 0%

2 $1,152 ($74) -6% $1,155 ($79) -6%

B $1,110 ($117) -10% $839 ($396) -32%

4 $1,110 ($117) -10% $839 ($396) -32%

5 $902 ($324) -26% $595 ($640) -52%

* The numbers in each column may not add up due to rounding.

 EE-RM/STD-01-350 COMMENT 164

T a e bi 1242 .. Ch anges m n . I d t N us ry e tP tV 1 N W th . dG F * resen a ue, on- ea enze as urnaces 

Flat Markup, Two-Tier Markup, 

NES Shipments NES Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM 0/0 $MM % $MM Change $MM Change 

Base case $1,197 - - $1,161 - -

1 $1,197 $0 0% $1,161 $0 0% 

A $1,197 $0 0% $1,161 $0 0% 

2 $1,125 ($72) -6% $1,084 ($78) -7% 

B $1,217 $20 2% $881 ($280) -24% 

4 $1,217 $20 2% $881 ($280) -24% 

5 $1,505 $307 26% $937 ($224) -19% 

Flat Markup, Two-Tier Markup, 

Manufacturers' Shipments Manufacturers' Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM 0/0 $MM 0/0 

$MM Change $MM Change 

Base case $1,227 - - $1,235 - -

1 $1,227 $0 0% $1,235 $0 0% 

A $1,227 $0 0% $1,235 $0 0% 

2 $1,152 ($74) -6% $1,155 ($79) -6% 

B $1,110 ($117) -10% $839 ($396) -32% 

4 $1,110 ($117) -10% $839 ($396) -32% 

5 $902 ($324) -26% $595 ($640) -52% 

* The numbers in each column may not add up due to roundmg. 

12-37 
Table 12.4.3 Changes in Industry Net Present Value, Weatherized Gas Furnaces*

Flat Markup, NES Shipments Constant-Price Markup,

NES Shipments

TSL

INPV

Change in INPV from

Base INPV

Change in

B

INPV from

ase

$MM $MM

$MM Change $MM

Change

Base case $272 $272

1 $239 ($32) -12% $235 ($37) -13%

A $232 ($40) -15% $218 ($54) -20%

2 $232 ($40) -15% $218 ($54) -20%

B $232 ($40) -15% $218 ($54) -20%

4 $232 ($40) -15% $218 ($54) -20%

5 $223 ($48) -18% $181 ($91) -33%

* The numbers in each column may not add up due to rounding.

Table 12.4.4 Changes in Industry Net Present Value, Mobile Home Gas Furnaces*

Flat Markup, NES Shipments Flat Markup,

Manufacturers' Shipments

TSL Change in INPV from Change in INPV from

INPV Base INPV Base

$MM % $MM %

$MM Change $MM Change

Base case $23 - - $23 - -

1 $23 $0 0% $23 $0 0%

A $23 $0 0% $23 $0 0%

2 $23 $0 0% $23 $0 0%

B $11 ($11) -50% $11 ($12) -52%

4 $11 ($11) -50% $11 ($12) -52%

5 $11 ($11) -50% $11 ($12) -52%

* The numbers in each column may not add up due to rounding.

12-38

 EE-RM/STD-01-350 COMMENT 164

T bi 1243 Ch Old t N tP tV I W th 0 dG F * a e o 0 anges In n us ry e resen a ue, ea enze as urnaces 

Flat Markup, NES Shipments Constant-Price Markup, 

NES Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM % $MM % $MM Change $MM Change 

Base case $272 - - $272 - -

1 $239 ($32) -12% $235 ($37) -13% 

A $232 ($40) -15% $218 ($54) -20% 

2 $232 ($40) -15% $218 ($54) -20% 

B $232 ($40) -15% $218 ($54) -20% 

4 $232 ($40) -15% $218 ($54) -20% 

5 $223 ($48) -18% $181 ($91) -33% 

* The numbers m each column may not add up due to roundmg. 

T bi 12 4 4 Ch Old t NtP tV I M bOl H G F * a e o 0 anges In n us ry e resen a ue, Ole orne as urnaces 

Flat Markup, NES Shipments Flat Markup, 

Manufacturers' Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM % $MM 0/0 $MM Change $MM Change 

Base case $23 - - $23 - -

1 $23 $0 0% $23 $0 0% 

A $23 $0 0% $23 $0 0% 

2 $23 $0 0% $23 $0 0% 

B $11 ($11) -50% $11 ($12) -52% 

4 $11 ($11) -50% $11 ($12) -52% 

5 $11 ($11) -50% $11 ($12) -52% 

* The numbers m each column may not add up due to roundmg. 

12-38 
Table 12.4.5 Changes in Industry Net Present Value, Oil Furnaces*

Flat Markup,

NES Shipments

Constant-Price Markup,

NES Shipments

TSL.

INPV

Change in INPV from

Base INPV

Change in

B

INPV from

ase

$MM $MM

$MM Change $MM Change

Base case $36 $36

$35 ($2) -5% $35 ($1) -3%

A $33 ($4) -10% $31 ($5) -14%

2 $33 ($4) -10% $31 ($5) -14%

B $33 ($4) -10% $31 ($5) -14%

4 $29 ($7) -21% $25 ($12) -32%

5 $28 ($8) -23% $22 ($15) -40%

* The numbers in each column may not add up due to rounding.

Table 12.4.6 Changes in Industry Net Present Value, Gas Boilers*

Flat Markup,

Manufacturers' Shipments

Three-Tier Markup,

Manufacturers' Shipments

TSL,

INPV

Change in INPV from

Base INPV

Change in INPV from

Base

$MM

$MM ou

Change

$MM

$MM

%

Change

Base case $201 - - $201 - -

1 $200 ($1) -1% $196 ($5) -3%

A $200 ($1) -1% $196 ($5) -3%

2 $184 ($17) -8% $174 ($27) -13%

B $200 ($1) -1% $196 ($5) -3%

4 $184 ($17) -8% $174 ($27) -13%

5 $171 ($30) -15% $100 ($101) -50%

* The numbers in each column may not add up due to rounding.

12-39

 EE-RM/STD-01-350 COMMENT 164

T hI 1245 Ch 'Id t NtP tV I 0'1 F * a e , , an~es III n us ry e resen a ue, I urnaces 

Flat Markup, Constant-Price Markup, 

NES Shipments NES Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM % $MM % $MM Change $MM Change 

Base case $36 - - $36 - -

1 $35 ($2) -5% $35 ($1) -3% 

A $33 ($4) -10% $31 ($5) -14% 

2 $33 ($4) -10% $31 ($5) -14% 

B $33 ($4) -10% $31 ($5) -14% 

4 $29 ($7) -21% $25 ($12) -32% 

5 $28 ($8) -23% $22 ($15) -40% 

* The numbers m each column may not add up due to roundmg. 

T a hI e 12 , , 4 6 Ch an~es III 'Id n us t ry NtP e resen tV a 1GB.. ue, as 01 ers * 

Flat Markup, Three-Tier Markup, 

Manufacturers'Shipments Manufacturers'Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base INPV Base 

$MM 0/0 $MM 0/0 $MM Change $MM Change 

Base case $201 - - $201 - -

1 $200 ($1) -1% $196 ($5) -3% 

A $200 ($1) -1% $196 ($5) -3% 

2 $184 ($17) -8% $174 ($27) -13% 

B $200 ($1) -1% $196 ($5) -3% 

4 $184 ($17) -8% $174 ($27) -13% 

5 $171 ($30) -15% $100 ($101) -50% 

* The numbers m each column may not add up due to roundmg. 

12-39 
Table 12.4.7 Changes in Industry Net Present Value, Oil Boilers*

Flat Markup,

Manufacturers' Shipments

Three-Tier Markup,

Manufacturers' Shipments

TSL

INPV

Change in

B

INPV from

ase

Change in

B

INPV from

ase

$MM INPV $MM

$MM Change $MM

Change

Base case $78 $78

1 $74 ($4) -5% $64 ($14) -18%

A $74 ($4) -5% $64 ($14) -18%

2 $74 ($4) -5% $64 ($14) -18%

B $74 ($4) -5% $62 ($15) -20%

4 $74 ($4) -5% $62 ($15) -20%

5 $59 ($18) -24% $32 ($45) -58%

* The numbers in each column may not add up due to rounding.

12.4.3 Impacts on Annual Cashflow

While INPV is useful for evaluating the long-term effects of standards, short-term

changes in net cashflow are also important and indicative of the impacts on industry during the

years between final rule publication and the standard effective date. 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 net cashflow might lead to additional borrowing; changes in

leverage, interest coverage ratios, and/or bond ratings; and possibly increased concern among

investors. 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 cashflows, DOE reports the annual net or

free cashflows from 2003 through 2025 for the different TSL levels. Figures 12.4.1 through

12.4.12 present the annual net cashflows for the base case and each of the TSLs evaluated for the

two different markup and shipment scenarios by product class.

Several observations apply to all the industry net cashflow figures. Prior to the effective

date, the cashflows are nearly identical for all scenarios after final rule publication. Cashflows

are driven by the level of capital investments and product conversion expenses and the

proportion of these investments spent every year. In addition, in the year the standards take

effect, a relatively large investment in working capital may be required if total revenues increase.

Also, where applicable, a one-time write-down on stranded assets yields a positive increase in

cashflows due to lower taxes paid that year. Prior to the standard announcement date, industry

cashflows begin to decline as companies use their financial resources to prepare for the new

standard. As expected, the more stringent the energy conservation standard, the bigger the

impact on industry cashflows.

12-40

 EE-RM/STD-01-350 COMMENT 164

T a e bi 12 .. 4 7 Ch anges . I d In n ustry NtP e resen t V I a ue, 0·1 I B·I 01 ers * 

Flat Markup, Three-Tier Markup, 

Manufacturers' Shipments Manufacturers'Shipments 

TSL Change in INPV from Change in INPV from 

INPV Base Base 

$MM INPV$MM 

% % $MM Change $MM Change 

Base case $78 - - $78 - -

1 $74 ($4) -5% $64 ($14) -18% 

A $74 ($4) -5% $64 ($14) -18% 

2 $74 ($4) -5% $64 ($14) -18% 

B $74 ($4) -5% $62 ($15) -20% 

4 $74 ($4) -5% $62 ($15) -20% 

5 $59 ($18) -24% $32 ($45) -58% 

* The numbers in each column may not add up due to rounding. 

12.4.3 Impacts on Annual Cashflow 

While INPV is useful for evaluating the long-term effects of standards, short-term 

changes in net cashflow are also important and indicative of the impacts on industry during the 

years between final rule publication and the standard effective date. 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 net cashflow might lead to additional borrowing; changes in 

leverage, interest coverage ratios, andlor bond ratings; and possibly increased concern among 

investors. 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 cashflows, DOE reports the annual net or 

free cashflows from 2003 through 2025 for the different TSL levels. Figures 12.4.1 through 

12.4.12 present the annual net cash flows for the base case and each of the TSLs evaluated for the 

two different markup and shipment scenarios by product class. 

Several observations apply to all the industry net cash flow figures. Prior to the effective 

date, the cashflows are nearly identical for all scenarios after final rule publication. Cashflows 

are driven by the level of capital investments and product conversion expenses and the 

proportion of these investments spent every year. In addition, in the year the standards take 

effect, a relatively large investment in working capital may be required if total revenues increase. 

Also, where applicable, a one-time write-down on stranded assets yields a positive increase in 

cashflows due to lower taxes paid that year. Prior to the standard announcement date, industry 

cashflows begin to decline as companies use their financial resources to prepare for the new 

standard. As expected, the more stringent the energy conservation standard, the bigger the 

impact on industry cashflows. 

12-40 
For greater insight into the behavior of cashflows, consider Figure 12.4.1 for

non-weatherized gas furnaces. In this particular case, cashflows for all five TSLs show a slight

increase around 2004 as unit shipments decline, thus freeing cash tied in working capital. By

2010, the behavior of cashflows for different TSLs starts to diverge. For instance, the base case,

TSL 1, and TSL 2 have the same slight upward trend. Also starting in 2010, cashflows for TSL 3

through TSL 5 show significant differences both in terms of the degree and rate of change. For

example, TSL 3 shows a more gradual decline in net cashflows starting in 2012, approaching

zero by 2014 and quickly recovering to pre-standard levels thereafter. By contrast, the more

stringent standards considered for TSL 4 would force industry to make additional investments in

capital and product conversion expenses. In addition, it is worth noting that, under TSL 4,

cashflows cross into negative values in 2013 and then quickly go back to positive cashflows that

are even slightly higher than the base-case cashflows because all standards-induced product costs

mark up at the same baseline flat markup. Finally, TSL 5 shows the most dramatic changes,

crossing over into negative cashflows by 2011 and peaking at over $200 million in negative

cashflows in 2013. Again, the degree and rate of the change in cashflows is tied to the capital

investments and production conversion expenses required to conform to the new standard. The

recovery under TSL 5 is dramatic, since positive cashflows after implementation of the standard

are significantly higher than those for all other TSLs. However, four years of significant negative

cashflows could have a devastating effect on the industry.

$250

$200

$150

$100

-$150

-$200

-$250

-$300

Jan 1, 2015

Effective Date --^

j

l^ a-^ __

fL

3 2005 2007 2009 2011 \\2OT3 5 2017 2019 2021 2023 20

1

I ^

^- r

Year

Be.* -'-TSL 1 TSL A a TSL 2--TSL B -+-TSL 4 -°TSL 5

Figure 12.4.1 Industry Net Cashflow for Non -Weatherized Gas Furnaces,

NES- Shipments Forecast, and a Flat-Markup Scenario

 EE-RM/STD-01-350 COMMENT 164

For greater insight into the behavior of cashflows, consider Figure 12.4.1 for 

non-weatherized gas furnaces. In this particular case, cashflows for all five TSLs show a slight 

increase around 2004 as unit shipments decline, thus freeing cash tied in working capital. By 

2010, the behavior of cash flows for different TSLs starts to diverge. For instance, the base case, 

TSL 1, and TSL 2 have the same slight upward trend. Also starting in 2010, cashflows for TSL 3 

through TSL 5 show significant differences both in terms of the degree and rate of change. For 

example, TSL 3 shows a more gradual decline in net cashflows starting in 2012, approaching 

zero by 2014 and quickly recovering to pre-standard levels thereafter. By contrast, the more 

stringent standards considered for TSL 4 would force industry to make additional investments in 

capital and product conversion expenses. In addition, it is worth noting that, under TSL 4, 

cashflows cross into negative values in 2013 and then quickly go back to positive cashflows that 

are even slightly higher than the base-case cashflows because all standards-induced product costs 

mark up at the same baseline flat markup. Finally, TSL 5 shows the most dramatic changes, 

crossing over into negative cashflows by 2011 and peaking at over $200 million in negative 

cashflows in 2013. Again, the degree and rate of the change in cashflows is tied to the capital 

investments and production conversion expenses required to conform to the new standard. The 

recovery under TSL 5 is dramatic, since positive cash flows after implementation of the standard 

are significantly higher than those for all other TSLs. However, four years of significant negative 

cashflows could have a devastatin effect on the indust . 

$250,---- - ------ --- - - --'- - - - - - -----

$200 +-----------

$150 

e -$100 t---- - - --- --\-- u. 

·$150 +--- --- ----- - -

-$200+----

·$250 +----

-$300 "---- - ----- - -

Year 

1-+-60.. ---TSL 1 TSL A ' TSL 2 SL 6 --TSL 4 - TSL 51 

Figure 12.4.1 Industry Net Cashflow for Non-Weatherized Gas Furnaces, 

NES- Shipments Forecast, and a Flat-Markup Scenario 

12-41 
$150

Jan 1, 2015

Effective Date

$100 t k - n^

I r

2003 2006 2009 '0012 2645 2018 2021 2024

rl

fffl U

-$100

U.

f

-$150 _i_ _

-$200

-$250

Year

-Base - TSL 1 TSL A -N-TSL 2 -5'-TSL B - -TSL 4 -TSL 5

Figure 12.4.2 Industry Net Cashflow for Non-Weatherized Gas Furnaces,

Manufacturers'-Shipments Forecast, and a Two-Tier-Markup

Scenario

$30

Jan 1, 2015

Effective Date

F

$20

_

$10

I

o $0

2 03 2006 2009 202 r'2Q15 2018 2021 2024

^ IJ:i 1

m

LL X10

-$20 -

1

Lam-

-$30

Year

-1- Base TSL1 TSLA ^TSL2 TSLB +""TSL4 --^ TSLS

Figure 12.4.3 Industry Net Cashflow for Weatherized Gas Furnaces, NESShipments Forecast, and a Constant-Price-Markup Scenario

12-42

 EE-RM/STD-01-350 COMMENT 164

I 

5150 r--- ----.-. ------ -------------------- -:- . J.n 1, 2015 

Effective Date 

5100 - ---- - - -- ----- ....... it:E:~ .---'N I ~""",...--.--....-

, ........":I---,,I--_u_ .• -- --(I">.~ _l ~~ .~~~ " ~ ~ $50 ~ \~J;j7 -.. -- ---- i \ . $0 ~~~~ -~ --~ ~~ -~--

~ 20 3 2006 2009 01Z ~5 2018 ZOZl 20Z4 ! \ Ii ~ ·$50 t--- - - ------ -- \ /T----------------- 5 \ 1 : ~ ·$100 -.- - - ------- -----

u. .$150 -- -- ---- --- -- -- ·$ZOO +-- - - - ----------b ? ~ --- - --

I 

·$250 -'- --------- ---~I - _ _ ___ _ _ ___ _ _ __ _ 

Year 

I-+-Bas. -....rSL 1 TSL A TSL 2 TSL B --TSL 4 TSL il 

Figure 12.4.2 Industry Net Cashflow for Non-Weatherized Gas Furnaces, 

Manufacturers'-Shipments Forecast, and a Two-Tier-Markup 

Scenario 

I 

J.n 1, 2015 

Effective Date 

" $10 +- ------- \,\-

c 

~ -s 

.c 

= (J 

~ 

E 

2 3 2006 2009 2018 2021 Z024 

u. ~10 +--- -- --------t- w-__ ~+- -- --- --

~20 +- -------------r- 1~T_- ------ --

·$30 -'-- - ---------- - - - ----i--- - --- - - - - - - --

Year 

I........,B ••• --TSL 1 TSL A --l<-TSL 2 ""- TSL B ""'-TSL 4 TSL 51 

Figure 12.4.3 Industry Net Cashflow for Weatherized Gas Furnaces, NESShipments Forecast, and a Constant-Price-Markup Scenario 

12-42 
$30

$20

-$20

-$30

2006 2009 2012

Jan 1, 2015

Effective Date

Year

2018 2021

Base -c-TSL 1 TSLA -*-TSL 2 -A - TSL B -*-TSL 4 -TSL 5

2024

Figure 12.4.4 Industry Net Cashflow for Weatherized Gas Furnaces, NESShipments Forecast, and a Flat-Markup Scenario

Jan 1, 2015

$4 Effective Date

Y,'s

$2

^:c--^ - i `tea .t•

$0

0

2006 2009 2012 2115 2018 2021 2024

E 1

U- $2

k

1

L)m

w -$4

I1

1

-$6 -- --- ';,^ i

1

•

-$8 -

Years

-Base -TSL1 TSLA TSL2 ---TSLB ---TSL4 --TSL5

Figure 12.4.5 Industry Net Cashflow for Mobile Home Furnaces, NESShipments Forecast, and a Flat-Markup Scenario

12-43

 EE-RM/STD-01-350 COMMENT 164

.c 

~ lJ 

~ 

! 

520 '~ -----.-._ -

, ~~--~t,-.-{>:-..~ ~ 

2009 

I ___ : __________ 0. ___ . __ _ • ___ _ 

Jan 1, 2015 

Effective Date 

._---------

2018 2021 2024 

... -$10 

-$20 

_$30 L- -------------- ----~ ----- -----

Year 

I -+-Bo.e -<I- TSL 1 TSL A - It-TSL 2 -iof-TSL B - .... TSL 4 -+-TSL 51 

Figure 12.4.4 Industry Net Cashflow for Weatherized Gas Furnaces, NESShipments Forecast, and a Flat-Markup Scenario 

$4 r-------------------------------- Jan 1, 2015 

Effeetlv 9 Date 

I $0

,, t-~~L 

-----~-20

'lf~ ----~~'<-

-- 00 --"'<!' ~~~~ <I J 2~

ll' / 

----~ 01 ------ 02 ----~

~ 0~24-

i·,t-------------------------~Jt___------------------------ e 

! 

... -$4 +---- T-ft 

-$6 t-----------------~lj----!--- ------

.0" : 

_$8 L------------------------------------+-------------------------------

Years 

[ -+--BO.8 -4-TSL 1 TSL A ....... rSL 2 -<t:-TSL B TSL 4 -i-TSL 51 

Figure 12.4.5 Industry Net Cashflow for Mobile Home Furnaces, NESShipments Forecast, and a Flat-Markup Scenario 

12-43 
-$6

-$8

-^ Base "-TSL 1

Year

TSLA TSL2 -" TSLB -TSL4 =TSL5

Figure 12.4.6 Industry Net Cashflow for Mobile Home Furnaces,

Manufacturers'-Shipments Forecast, and a Flat-Markup

Scenario

$5

Jan 1, 2015

$4 Effective Date

$3

$1

1

11-+Ji:

$0

2

-$1

03 2006 2009 201 Or l5 2018 2021 2024

LL

42

.$3

-$4

•

-$5

Year

Base M- TSL 1 TSL A -v-TSL 2 -- TSL B TSL 4 TSL 5

Figure 12.4.7 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments

Forecast, and a Constant-Price-Markup Scenario

12-44

 EE-RM/STD-01-350 COMMENT 164

$4 ,---- - ------ ----.. 

, 

, -," 

$2 

Jan 1. 2015 

Effective Date 

c

N

--i{" ~/ ,,- :....., - -' ':, / 

~ ........ ~ ..... {~~ -.~ 

$0 ~-~ ~--~ - ~~-, .c:" ~~ - ~ ~-~- -~---~- -, • L"' u'"~ _ '""' _ \ " i:' ... '"" 

___ = _____ 2:~ .. ~ J i : 

i~ --- t-I i- ~~\:ja--- ! ~. __ _ .• ~ I 

·$6+----

, .$8L-----------------------------------~'~-------

Year 

I- ..... Base '--II-TSL 1 TSL A --"<---TSL 2 -:;r TSL B --+--TSL 4 -+- TSL 51 

Figure 12.4.6 Industry Net Cashflow for Mobile Home Furnaces, 

Manufacturers'-Shipments Forecast, and a Flat-Markup 

Scenario 

$5 

$4 

$3 

$2 

" 

~ $1 

'1: 

~ 

~ $0 

~ 2 

~ -$1 

e 

.... 

·$2 

·$3 

·$4 

·$5 

"i , __ . .:, 

(03 2006 

, 

, Jan 1. 2015 

Effective Date 

, 

, 

, 

, ~ , 

~ ' : • , +

.~.= - ; . . . <-, 

2009 2011 ~5 2018 2021 2024 

\\ r+-

\ ~ 

11 

Year 

I""""Base - - TSL 1 TSL A --7<--TSL 2 TSL B ----TSL 4 ~ 

Figure 12.4.7 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments 

Forecast, and a Constant-Price-Markup Scenario 

12-44 
$5 ---- -- - _

Jan 1, 2015

Effective Date

$4

$3 -,- -.------=.-- _ -- --- _---------4------

vr ._

E

o $0 r

2006 2009 2012. Oj15 2018 2021 2024

L) -$1

j(

Year

Base -n- TSL 1 TSL A ->a• TSL 2 4(-TSL B -4 TSL 4 -TSL 5

Figure 12.4.8 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments

$30

$20

$10

0

2

-$10

-$20

-$30

-$40

-$50

-$60

Effective Date

1 1

`"tea[

^

11

3 2006 2009 .2012 20151 2018 2021 2024

{

1^1

11

Year

Base -- TSL 1 TSL A --x-TSL 2 !&,-TSL B - TSL 4 - 1 -TSL 5

Figure 12.4.9 Industry Net Cashflow for Gas Boilers, Manufacturers'-

Shipments Forecast, and a Flat-Markup Scenario

Forecast, and a Flat-Markup Scenario

Jan 1,2015

12-45

 EE-RM/STD-01-350 COMMENT 164

=-~ -.. ___ ~_':y:_:_le~~~_~~ .. _~ .. ~_.~.~_ ._-_. 

$3 ~ --- ~ - - __ ~~~ .. __ .~ __ • __ _ 

-=-""""" .li-'-_",~ ___ -",........ ~ : 

$2 ~~~~i~~~~~~~~~ ~~~ 

q; 

~ 

~ 'E $1 

~ 

~ 

0 $0 u: 

"" 2006 2009 2018 2021 2024 0 

~ 

'; -$1 

~ 

u. 

-$2 ~--~----~.----~-

-$3 

-$4 

-$5 

Year 

I--B35e -- TSL 1 TSL A ->li-TSL 2 ...... APTSL B -'-TSL 4 -+-TSL 51 

Figure 12.4.8 Industry Net Cashflow for Oil-fired Furnaces, NES-Shipments 

Forecast, and a Flat-Markup Scenario 

$30 .. ~------~---~~-

$20 

$10 , 

$0 q; 

c 2006 2009 0 

~ -$10 ~ 

~ ii: 

.c -$20 0 

0 '" 

" Ii! 

IL -$30 

-$40 

-$50 

Jan 1,2015 

Effective Date 

2018 2021 

J 

2024 

-$60 -'--~-----~~~~----~~~~~---~~~~~~~-.----~ 

Year 

[ Base _ - TSL 1 TSL A ,--*-TSL 2 ----><---'l'SL B SL 4 '-1-TSL 5 I 

Figure 12.4.9 Industry Net Cashflow for Gas Boilers, Manufacturers'-

Shipments Forecast, and a Flat-Markup Scenario 

12-45 
$20

Jan 1, 2015

Effective Date

$0

20

__...-

3 2006 2009 2012 20115 2018 2021 20 24

E

-$20

LL

N

1^

11

I

I A

U

$30

f

I''

- --- -----J^ __------- I

-

li

iS 1.

/I

-$50

-$60

Year

H-Base --TSL 1 TSL A ---TSL 2 --TSL B -' TSL 4 °+--TSL 5

Figure 12.4.10

$20

Jan 1,2015

Effective Date

$15

t

$10

r

20 03 2006 2009 2012 2015 2018 2021 2024

o

-$5

ti r

-$10

-$15

-$20

-$25

-$30

Year

-ease TSL 1 TSL A TSL 2 TSL B TSL 4 TSL 5-9- Series2 Series3 --1- Series4 - 0- Series5 - -Series6 ^Series7

Figure 12.4.11

Industry Net Cashflow for Gas Boilers,

Manufacturers'-Shipments Forecast, and a Three-TierMarkup Scenario

Industry Net Cashflow for Oil Boilers,

Manufacturers'-Shipments Forecast, and a FlatMarkup Scenario

12-46

 EE-RM/STD-01-350 COMMENT 164

=\-/~~'=~=-' H rL~ 2P 2006 2009 2012 2~5 2018 2021 2024 I 

I 

$01\\i_"_ " _~ __ ,-_ ~ __ ~_~+ _~_~.~ 

J -$10 ----~----- I 

] \ i -$20 ... .... --.- ..... - .. . --.-- ----\~----+i_-- ----- u. 

"'" ~ t) 

~ -$30 i-------.-------.----

u. 

-$40 -------.---.-.--.--

-$50 t-----------------.l7""---+----

-$60 -'------

Year 

I -+-Base ---TSL 1 TSL A - M-TSL 2 -iIO-TSL B -,.-TSL 4-' -TSL ~ 

Figure 12.4.10 Industry Net Cashflow for Gas Boilers, 

Manufacturers'-Shipments Forecast, and a Three-TierMarku Scenario 

I 

$20 --~Ie---------. 

V 

Jan1.2015 

_ /\ Effective Date 

::: I \ i -----~ $5 ' \..,;; --c~ , ~[' ~IL=" • . ;--.-----

- . ..o=::;;::;::p'"" i" ~ -'--'N __ ~~ : 

i $~0~3 2006 2009 \ 2012 2+5 ! 2018 2021 2024 

~ -$5t---------------\\-----r-/-------------

L$10 \ -Lr-/------------- ! \ il 

-$15 -----.\----Ti'l~--------------

-$20 t--------------~ ---,f__-------------

-$25 t---------------~ -$30 ~------------------+_-------------

Year 

I ase TSL 1 TSL A TSL 2 TSL B TSL 4 T$l 5....-Series2 Series3 -?f-Series4 Series5 '-""'-'Series6 ---+-series71 

Figure 12.4.11 Industry Net Cashflow for Oil Boilers, 

Manufacturers'-Shipments Forecast, and a FlatMarkup Scenario 

12-46 
$20

I

^_--

Jan 1, 2015

Effective Date

$15 -- __-_---.___. ____ --'-_..._. __----------------- ------------_.

$0 -T

2 3 2006 2009 , 2012 20,45 1 T 2018 2021 2024

3

i

L

LL

-$15

1

--__ 1I J

, 1

-$25

-$30

Year

- Base x TSL 1 TSLA x-TSL 2 n TSL B • TSL 4--E -TSL 5

Figure 12.4.12

12.5 OTHER IMPACTS

12.5.1 Employment

Industry Net Cashflow for Oil Boilers, Manufacturers'-

Shipments Forecast, and a Three-Tier-Markup

Scenario

Manufacturers generally indicated that, for each furnace or boiler unit they produce, the

amount of labor, and hence direct labor costs, are proportional to the amount of materials costs.

Therefore, assuming constant wages and disregarding fluctuations in the market prices of

materials, they would expect employment levels to scale with the cost of materials for the

industry. DOE incorporated this into the GRIM, which projects labor expenditures annually.

Labor expenditures are a function of the labor intensity of the product, the sales volume, and an

implicit wage assumption that remains fixed over time.

DOE analyzed employment impacts by estimating the cumulative labor expenses as a

percentage of industry revenues for each product class. Table 12.5.1 presents those scenarios

with the largest negative employment impacts for each product class.

 EE-RM/STD-01-350 COMMENT 164

$20 -----------------

I 

I -··~---------I 

Jan 1. 2015 

Effective Date --,-------- --- - -- ---------- - -- --- $15 .1\ --

$10 --- -~ - i --=-:~ -·- ---:~~ ;;;;;: :~' :::: ::;:~:::6 

$5 ---!~. --- -.- ,....... 'e'C ·.f A e;;;F ~ " ~ 1F= 1if--ll~ III -! '---. -l "----~ : 

c 1 I J ~ $0 -,.- -----rr -T -- -, ---.--r r----T 

~ 2 3 2006 2009 \ 2012 2~5 / 2018 

~ -$5 t-------- ---"\-Ti -/.

r

--

';; -$10 ----- --.- ' ,If-----

£ ' I r 

-$15 t-----------.---- \ i I 

-$20 ---------- --- l-JI---- -$25 t-------

-$30 -'------

~~~ j! 

Year 

I 

I 

I 

I 

2021 

I ......... Base - ..... TSL 1 TSL A ->f-TSL 2 - OI- TSL B --TSL 4 -+ "TSL 51 

2024 

Figure 12.4.12 Industry Net Cashflow for Oil Boilers, Manufacturers'-

Shipments Forecast, and a Three-Tier-Markup 

Scenario 

12.5 OTHER IMPACTS 

12.5.1 Employment 

Manufacturers generally indicated that, for each furnace or boiler unit they produce, the 

amount oflabor, and hence direct labor costs, are proportional to the amount of materials costs. 

Therefore, assuming constant wages and disregarding fluctuations in the market prices of 

materials, they would expect employment levels to scale with the cost of materials for the 

industry. DOE incorporated this into the GRIM, which projects labor expenditures annually. 

Labor expenditures are a function of the labor intensity of the product, the sales volume, and an 

implicit wage assumption that remains fixed over time. 

DOE analyzed employment impacts by estimating the cumulative labor expenses as a 

percentage of industry revenues for each product class. Table 12.5.1 presents those scenarios 

with the largest negative employment impacts for each product class. 

12-47 
Table 12.5.1 Projected Change in Cumulative Labor Expenditures by Product Class using

the Scenario with the Greatest Impact (2015-2038)

Trial Standard Level

Scenario TSL 1 TSL A TSL 2 TSL B TSL 4 TSL 5

Non-Weatherized Gas Furnaces,

Two-Tier Markup,

Manufacturers' Shipments

0% 0% 0.0% -14% -14% -32%

Weatherized Gas Furnaces,

Constant Price Markup, NES

Shipments

-.02% -.02% 0.2% -1.7% -1.7% -22%

Mobile Home Furnaces

Flat Markup, Manufacturers'

Shipments

0% 0% -.4% -14% -14% -32%

Oil-Fired Furnaces

Constant Two-Tier Markup,

NES Shipments

0% 0% -.2% -.2% -.3% -.3%

Gas Boilers

Three-Tier Markup,

Manufacturers' NES

0% 0% -10% 0% -10% 18%

Oil Boilers

Three-Tier Markup,

Manufacturers' NES

1% 1% 1% 3% 3% 36%

DOE's analysis shows significant employment impacts for manufacturers of nonweatherized gas furnaces at TSLs 4 and 5, manufacturers of mobile home furnaces at TSLs 4 and

5, and manufacturers of gas boilers at TSLs 2, 4, and 5. Reductions in labor expenditures are

driven primarily by a reduction in unit shipments. Inversely, increases in employment

expenditures result from raising industry product costs.

12.5.2 Manufacturing Capacity

To the extent that more stringent energy conservation standards increase the size of the

heat exchanger, they could reduce plant throughput, particularly for those plants that are

constrained in their heat exchanger fabrication area. The standards thus could necessitate that

manufacturers add floor space to their existing plants and warehouses. In addition, assembly and

fabrication times could increase for the larger equipment. In an attempt to recoup capacity,

manufacturers might need to invest in productivity, or equipment, or consider outsourcing some

heat exchanger production.

It is not clear that all new capacity would be added in the United States. During the MIA

interviews, several manufacturers stated that there has been a trend in the industry to move

12-48

 EE-RM/STD-01-350 COMMENT 164

Table 12.5.1 Projected Change in Cumulative Labor Expenditures by Product Class using 

t e h S . h h G cenano wit t e rea ttl es mpac t (2015 - 2038) 

Trial Standard Level 

Scenario TSL 1 TSLA TSL2 TSLB TSL4 TSL5 

Non-Weatherized Gas Furnaces, 0% 0% 0.0% -14% -14% -32% 

Two-Tier Markup, 

Manufacturers' Shipments 

Weatherized Gas Furnaces, 

Constant Price Markup, NES -.02% -.02% 0.2% -1.7% -1.7% -22% 

Shipments 

Mobile Home Furnaces 

Flat Markup, Manufacturers' 0% 0% -.4% -14% -14% -32% 

Shipments 

Oil-Fired Furnaces 

Constant Two-Tier Markup, 0% 0% -.2% -.2% -.3% -.3% 

NES Shipments 

Gas Boilers 

Three-Tier Markup, 0% 0% -10% 0% -10% 18% 

Manufacturers' NES 

Oil Boilers 

Three-Tier Markup, 1% 1% 1% 3% 3% 36% 

Manufacturers' NES 

DOE's analysis shows significant employment impacts for manufacturers of nonweatherized gas furnaces at TSLs 4 and 5, manufacturers of mobile home furnaces at TSLs 4 and 

5, and manufacturers of gas boilers at TSLs 2, 4, and 5. Reductions in labor expenditures are 

driven primarily by a reduction in unit shipments. Inversely, increases in employment 

expenditures result from raising industry product costs. 

12.5.2 Manufacturing Capacity 

To the extent that more stringent energy conservation standards increase the size of the 

heat exchanger, they could reduce plant throughput, particularly for those plants that are 

constrained in their heat exchanger fabrication area. The standards thus could necessitate that 

manufacturers add floor space to their existing plants and warehouses. In addition, assembly and 

fabrication times could increase for the larger equipment. In an attempt to recoup capacity, 

manufacturers might need to invest in productivity, or equipment, or consider outsourcing some 

heat exchanger production. 

It is not clear that all new capacity would be added in the United States. During the MIA 

interviews, several manufacturers stated that there has been a trend in the industry to move 

12-48 
production facilities to overseas locations where labor markets offer cost savings. Some of these

companies commented that new standards could speed up this trend.

For condensing gas boilers, in particular, the European market is as large as the nonweatherized gas furnace market in the United States, with attendant high-volume pricing and

large company suppliers. If standards were to require condensing technology, it is likely that

manufacturers would out-source heat exchangers to European countries.

12.5.3 Exports

Residential furnace and boiler exports comprise about two percent of total furnace and

boiler sales, and about one-quarter of these exports flow to Canada. A few major manufacturers

look to foreign markets, particularly in Latin America and the Middle East, as a source of

revenue growth. Efficiency standards in these markets lag those in the United States and

therefore, as the U.S. efficiency standard increases, baseline domestic furnaces and boilers

become less attractive for the export markets. If sales of residential furnaces and boilers to

foreign markets decrease as a result of higher standards, there will be a negative effect, albeit

small, on company revenues that the GRIM does not capture since it only considers domestic

shipments.

12.5.4 Cumulative Regulatory Burden

One aspect of the assessment of manufacturer burden is the cumulative impact of

multiple DOE standards and the regulatory actions of other Federal agencies and States that

affect the manufacture of a covered product. DOE believes that a standard level is not

economically justified if it contributes to an unacceptable 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 products may be faced with more

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, potentially reducing competition.

Smaller companies can be especially affected, since they have lower sales volumes over which to

amortize the costs of meeting new regulations.

12.5.4.1 Federal Regulations on Residential Furnaces and Boilers and Other

Products Produced by the Same Manufacturers

In addition to the efficiency regulations on residential furnaces and boilers, several other

current Federal, State, and international regulations, as well as pending regulations, apply to

residential furnaces and boilers and other products produced by the same manufacturers. The

most significant regulatory actions affecting the furnace and boiler industries are compliance

with more stringent Federal energy conservation standards for residential and commercial air

conditioners, and the U.S. Environmental Protection Agency (EPA)-mandated phaseout of

12-49

 EE-RM/STD-01-350 COMMENT 164

production facilities to overseas locations where labor markets offer cost savings. Some of these 

companies commented that new standards could speed up this trend. 

For condensing gas boilers, in particular, the European market is as large as the nonweatherized gas furnace market in the United States, with attendant high-volume pricing and 

large company suppliers. If standards were to require condensing technology, it is likely that 

manufacturers would out-source heat exchangers to European countries. 

12.5.3 Exports 

Residential furnace and boiler exports comprise about two percent of total furnace and 

boiler sales, and about one-quarter of these exports flow to Canada. A few major manufacturers 

look to foreign markets, particularly in Latin America and the Middle East, as a source of 

revenue growth. Efficiency standards in these markets lag those in the United States and 

therefore, as the U.S. efficiency standard increases, baseline domestic furnaces and boilers 

become less attractive for the export markets. If sales of residential furnaces and boilers to 

foreign markets decrease as a result of higher standards, there will be a negative effect, albeit 

small, on company revenues that the GRIM does not capture since it only considers domestic 

shipments. 

12.5.4 Cumulative Regulatory Burden 

One aspect of the assessment of manufacturer burden is the cumulative impact of 

multiple DOE standards and the regulatory actions of other Federal agencies and States that 

affect the manufacture of a covered product. DOE believes that a standard level is not 

economically justified if it contributes to an unacceptable cumulative regulatory burden. While 

anyone 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 products may be faced with more 

capital and product development expenditures than their competitors. This can prompt those 

companies to exit the market or reduce their product offerings, potentially reducing competition. 

Smaller companies can be especially affected, since they have lower sales volumes over which to 

amortize the costs of meeting new regulations. 

12.5.4.1 Federal Regulations on Residential Furnaces and Boilers and Other 

Products Produced by the Same Manufacturers 

In addition to the efficiency regulations on residential furnaces and boilers, several other 

current Federal, State, and international regulations, as well as pending regulations, apply to 

residential furnaces and boilers and other products produced by the same manufacturers. The 

most significant regulatory actions affecting the furnace and boiler industries are compliance 

with more stringent Federal energy conservation standards for residential and commercial air 

conditioners, and the U.S. Environmental Protection Agency (EPA)-mandated phaseout of 

12-49 
hydrofluorocarbon (HFC) and hydrochlorofluorocarbon (HCFC) refrigerants. Manufacturers of

residential furnaces and boilers also manufacture approximately 82 percent of the residential

central air conditioners and heat pumps, and many of these manufacturers also manufacture

commercial unitary air conditioners and heat pumps. The effective date for DOE's residential air

conditioner rulemaking was January 23, 2006. Manufacturers worked to redesign all of the

product lines and have allocated most of their capital resources for redesigning and retooling of

their production lines to meet the new minimum efficiency standard. The effective date for the

new commercial unitary air conditioner and heat pump standards is January 1, 2010, as specified

in the Energy Policy Act of 2005 (EPACT 2005). Manufacturers are now re-designing their

product offerings and will need to retool to meet those standards. In addition, the EPA-mandated

refrigerant phaseout comes into effect on January 1, 2010, and is expected to have the biggest

cumulative impact on residential furnace and boiler manufacturers. Table 12.5.2 lists the major

regulations affecting manufacturers of residential furnaces and boilers.

 EE-RM/STD-01-350 COMMENT 164

hydrofluorocarbon (HFC) and hydro chlorofluorocarbon (HCFC) refrigerants. Manufacturers of 

residential furnaces and boilers also manufacture approximately 82 percent of the residential 

central air conditioners and heat pumps, and many of these manufacturers also manufacture 

commercial unitary air conditioners and heat pumps. The effective date for DOE's residential air 

conditioner rulemaking was January 23,2006. Manufacturers worked to redesign all of the 

product lines and have allocated most of their capital resources for redesigning and retooling of 

their production lines to meet the new minimum efficiency standard. The effective date for the 

new commercial unitary air conditioner and heat pump standards is January 1, 2010, as specified 

in the Energy Policy Act of 2005 (EPACT 2005). Manufacturers are now re-designing their 

product offerings and will need to retool to meet those standards. In addition, the EPA-mandated 

refrigerant phaseout comes into effect on January 1,2010, and is expected to have the biggest 

cumulative impact on residential furnace and boiler manufacturers. Table 12.5.2 lists the major 

regulations affecting manufacturers of residential furnaces and boilers. 

12-50 
Table 12.5.2 Summary of Major Regulations on Residential Furnace and Boiler

Manufacturers

Regulation Key Affected Appliances Effective Date

DOE energy efficiency standards Residential central air January 23, 2006

conditioners (13 SEER*)

Room air conditioners October 1, 2000

Water heaters January 20, 2004

Commercial unitary air September 2008**

conditioners and heat pumps

EPA phaseout of HCFC refrigerants Room and residential central January 1, 2010

for new equipment air conditioners, and

commercial air conditioners

Consumer Product Safety Residential water heaters July 1, 2003

Commission-prompted voluntary

standards for flammable vapor

ignition

EPA standards on emissions of Central air conditioners, July 23, 2002

allowable hazardous air pollutants commercial air conditioners,

from the coating of large appliances and furnaces

(NESHAP/MACT standards, Clean

Air Act Section 112(d))

DOE adoption of ASHRAE 90.1- Unitary and applied air 2003-2005

1999 energy efficiency standards for conditioners, furnaces, (January 1, 2010**

commercial buildings boilers, PTACs, and PTHPs for PTACs and

PTHPs)

* SEER = seasonal energy efficiency ratio

** Anticipated effective date

NESHAP/MACT = National Emission Standards for Hazardous Air Pollutants Maximum Achievable Control

Technology

ASHRAE = American Society of Heating, Refrigerating and Air-Conditioning Engineers

PTAC = packaged terminal air conditioner

PTHP = packaged terminal heat pump

The EPA's National Emission Standards for Hazardous Air Pollutants Maximum

Achievable Control Technology (NESHAP/MACT) regulations impact primarily the painting, or

surface coating, of furnaces, boilers, and other large appliances. These rules establish a standard

for the emission of hazardous atmospheric pollutants for a facility based on the maximum

achievable control technology as displayed by the facility's peers. According to EPA estimates,

12-51

 EE-RM/STD-01-350 COMMENT 164

Table 12.5.2 Summary of Major Regulations on Residential Furnace and Boiler 

Manufacturers 

Regulation 

DOE energy efficiency standards 

EP A phaseout of HCFC refrigerants 

for new equipment 

Consumer Product Safety 

Commission-prompted voluntary 

standards for flammable vapor 

ignition 

EPA standards on emissions of 

allowable hazardous air pollutants 

from the coating of large appliances 

(NESHAPIMACT standards, Clean 

Air Act Section 112( d)) 

DOE adoption of ASHRAE 90.1-

1999 energy efficiency standards for 

commercial buildings 

* SEER = seasonal energy efficIency ratIO 

** Anticipated effective date 

Key Affected Appliances Effective Date 

Residential central air January 23, 2006 

conditioners (13 SEER *) 

Room air conditioners October 1, 2000 

Water heaters January 20,2004 

Commercial unitary air September 2008** 

conditioners and heat pumps 

Room and residential central January 1, 2010 

air conditioners, and 

commercial air conditioners 

Residential water heaters July 1, 2003 

Central air conditioners, July 23,2002 

commercial air conditioners, 

and furnaces 

Unitary and applied air 2003-2005 

conditioners, furnaces, (January 1, 2010** 

boilers, PTACs, and PTHPs for PTACs and 

PTHPs) 

NESHAPIMACT = National Emission Standards for Hazardous Air Pollutants Maximum Achievable Control 

Technology 

ASHRAE = American Society of Heating, Refrigerating and Air-Conditioning Engineers 

PT AC = packaged tenninal air conditioner 

PTHP = packaged tenninal heat pump 

The EPA's National Emission Standards for Hazardous Air Pollutants Maximum 

Achievable Control Technology (NESHAP/MACT) regulations impact primarily the painting, or 

surface coating, of furnaces, boilers, and other large appliances. These rules establish a standard 

for the emission of hazardous atmospheric pollutants for a facility based on the maximum 

achievable control technology as displayed by the facility's peers. According to EPA estimates, 

12-51 
the impacts on the entire industry from this rule are approximately $ 1.63 million, including

activities such as the reformulation of coatings.

Table 12.5.3 lists market shares of major heating, ventilating, and air-conditioning

(HVAC) manufacturers subject to the regulations listed in Table 12.5.2. High market shares

imply that the companies will bear a significant portion of the burden of the regulation.

Table 12.5.3 Market Shares of Major Furnace and Boiler Manufacturers in Regulated

Products

Residential Furnace and

Boiler Manufacturers

Others All Manufacturers

Residential Central Air

Conditioners

82% 18% 100%

Room Air Conditioners 2% 98% 100%

Residential Water Heaters 38% 62% 100%

Source: Appliance Magazine , September 2003, and DOE estimates.

Table 12.5.4 indicates the level of impacts that the furnace and boiler industry may face

due to other Federal regulations that will become effective over the next 10 years. The estimated

investment for the residential furnace and boiler industry in each category is the product of the

total industrial expenditures in the category and the total market share of residential furnace and

boiler manufacturing companies presented in Table 12.5.3.

However, it is important to note that the uncertainty surrounding these values is high for

several reasons. First, manufacturer impacts depend largely on the company's ability to pass

conversion costs through to consumers. Second, information on capital expenditures , R&D, and

other conversion costs and project plans are usually considered to be confidential; thus, DOE's

calculations are based largely on industry estimates. Third, companies may be able to

incorporate regulatory-driven expenditures into other product development or process

improvement efforts.

 EE-RM/STD-01-350 COMMENT 164

the impacts on the entire industry from this rule are approximately $1.63 million, including 

activities such as the reformulation of coatings. 

Table 12.5.3 lists market shares of major heating, ventilating, and air-conditioning 

(HVAC) manufacturers subject to the regulations listed in Table 12.5.2. High market shares 

imply that the companies will bear a significant portion of the burden of the regulation. 

Table 12.5.3 Market Shares of Major Furnace and Boiler Manufacturers in Regulated 

Products 

Residential Furnace and Others All Manufacturers 

Boiler Manufacturers 

Residential Central Air 82% 18% 100% 

Conditioners 

Room Air Conditioners 2% 98% 100% 

Residential Water Heaters 38% 62% 100% 

Source: ApplIance Magazme, September 2003, and DOE estimates. 

Table 12.5.4 indicates the level of impacts that the furnace and boiler industry may face 

due to other Federal regulations that will become effective over the next 10 years. The estimated 

investment for the residential furnace and boiler industry in each category is the product of the 

total industrial expenditures in the category and the total market share of residential furnace and 

boiler manufacturing companies presented in Table 12.5.3. 

However, it is important to note that the uncertainty surrounding these values is high for 

several reasons. First, manufacturer impacts depend largely on the company's ability to pass 

conversion costs through to consumers. Second, information on capital expenditures, R&D, and 

other conversion costs and project plans are usually considered to be confidential; thus, DOE's 

calculations are based largely on industry estimates. Third, companies may be able to 

incorporate regulatory-driven expenditures into other product development or process 

improvement efforts. 

12-52 
Table 12.5.4 Estimated Investments Required to Meet Impending Federal Regulations

(million $)

Regulation Total Estimated Source of Estimate

Investment Investment

Incurred by All Incurred by

Manufacturers Furnace and Boiler

Manufacturers

Residential Central 232 190 Investment estimated in

AC efficiency DOE rulemaking

Residential Room 8 0.16 Investment estimated in

AC efficiency DOE rulemaking

Water Heater 61 23 Investment estimated in

Efficiency DOE rulemaking

Commercial Unitary n/a n/a Estimates not available,

Air Conditioners and

Heat Pumps

EPACT 2005 standards

HCFC-22 ban 350 287 Investment estimated in

(residential) DOE rulemaking

HCFC-22 ban 144 118 Investment estimated in

(commercial) DOE rulemaking

Flammable Vapor 95 36 Water heater consortium

Ignition estimate

NESHAP/MACT 2 N/A EPA rulemaking estimate

12.5.4.2 Other Pending Regulations and Standards

During the MIA interviews, some manufacturers expressed concerns regarding other

voluntary or mandatory standards that might cause additional economic impacts. Estimates of

the magnitude of the potential impacts from these standards are not available and cannot be

quantified without separate analyses. While these impacts cannot be quantified with reasonable

certainty, it is worth noting that they could cause additional cumulative burdens on this industry.

The following paragraphs provide a qualitative discussion of some of these regulations and

standards.

Ventilation Rates and Indoor Air Quality. American Society of Heating, Refrigerating

and Air-Conditioning Engineers (ASHRAE) Standard 62 specifies levels for ventilation rates and

other indoor air quality parameters, such as [emissions/levels of] formaldehyde, lead, and carbon

monoxide. ASHRAE's Standard 62.2-2004 provides updates to the procedures for achieving

acceptable indoor air quality. Standard 62 has been incorporated into many State and local

12-53

 EE-RM/STD-01-350 COMMENT 164

Table 12.5.4 Estimated Investments Required to Meet Impending Federal Regulations 

(million $) 

Regulation Total Estimated Source of Estimate 

Investment Investment 

Incurred by All Incurred by 

Man ufacturers Furnace and Boiler 

Manufacturers 

Residential Central 232 190 Investment estimated in 

AC efficiency DOE rulemaking 

Residential Room 8 0.16 Investment estimated in 

AC efficiency DOE rulemaking 

Water Heater 61 23 Investment estimated in 

Efficiency DOE rulemaking 

Commercial Unitary n/a n/a Estimates not available, 

Air Conditioners and EP ACT 2005 standards 

Heat Pumps 

HCFC-22 ban 350 287 Investment estimated in 

(residential) DOE rulemaking 

HCFC-22 ban 144 118 Investment estimated in 

(commercial) DOE rulemaking 

Flammable Vapor 95 36 Water heater consortium 

Ignition estimate 

NESHAP/MACT 2 N/A EP A rulemaking estimate 

12.5.4.2 Other Pending Regulations and Standards 

During the MIA interviews, some manufacturers expressed concerns regarding other 

voluntary or mandatory standards that might cause additional economic impacts. Estimates of 

the magnitude of the potential impacts from these standards are not available and cannot be 

quantified without separate analyses. While these impacts cannot be quantified with reasonable 

certainty, it is worth noting that they could cause additional cumulative burdens on this industry. 

The following paragraphs provide a qualitative discussion of some of these regulations and 

standards. 

Ventilation Rates and Indoor Air Quality. American Society of Heating, Refrigerating 

and Air-Conditioning Engineers (ASHRAE) Standard 62 specifies levels for ventilation rates and 

other indoor air quality parameters, such as [emissions/levels of] formaldehyde, lead, and carbon 

monoxide. ASHRAE's Standard 62.2-2004 provides updates to the procedures for achieving 

acceptable indoor air quality. Standard 62 has been incorporated into many State and local 

12-53 
building codes. In addition, the International Mechanical Code, which is referenced in many

local jurisdictions, has adopted a rigid interpretation of the Ventilation Rate Procedure of the

standard and requires devices and controls to maintain per-person ventilation requirements at all

load conditions. During the MIA interviews, manufacturers indicated that the increasing

adoption of ASHRAE 62.2 could translate into additional costs to research, develop, and

manufacture products that perform according to this standard.

Large unitary air conditioners (>240,000 Btu/h). Additionally, manufacturers expressed

concerns regarding existing efforts to add energy conservation standards for large commercial

unitary equipment-units with capacities larger than 240,000 British thermal units per hour

(Btu/h)-to State building codes. Adoption of standards at the State level could translate into

additional burdens if these standards are not uniform. Industry members initiated a joint effort to

petition Congress for a uniform Federal standard that would mitigate the financial impacts of

complying with different State standards. In either case, whether under a Federal standard or

State building codes, manufacturers will face additional financial impacts once large unitary air

conditioners are regulated.

ASHRAE 90.1-1989 and 1999. ASHRAE 90.1-1989 is a set of requirements to design

energy-efficient buildings. DOE named the American National Standards Institute

(ANSI)/ASHRAE/ Illuminating Engineering Society of North America (IESNA) Standard

90.1-1999, Energy Standard for Buildings Except Low-Rise Residential Buildings, as the

commercial building reference standard for State building energy codes under the Federal Energy

Conservation and Production Act (ECPA). This Act requires all States to certify that they have

State energy codes in place that are at least as stringent as 90.1-1999, or justify why they cannot

comply with this. DOE determined that Standard 90.1-1999 saves more energy than Standard

90.1- 1989, which was the previously referenced standard in ECPA. Acceptance of these

standards varies widely across States, creating a regulatory patchwork that imposes additional

burdens on manufacturers.

Material Recycling. In recent years, efforts to regulate the disposal and treatment of

waste from manufacturing processes have regained momentum. During the MIA interviews,

some manufacturers mentioned concerns regarding further requirements for recycling waste and

producing with recovered materials. Some parts of Europe have up-front regulations to pay

recycling fees when manufacturers ship the units. Some U.S. States are considering similar

requirements.

12.5.4.3 Regulations and Pending Regulations at the State Level

Manufacturers also identified several regulations that either are being imposed or are under

consideration at the State level, which include:

1. Compliance with the International Standards Organization (ISO) testing procedures,

which will likely require duplicate testing and certification for products

2. State-level safety regulations

3. State-level equipment recycling requirements

12-54

 EE-RM/STD-01-350 COMMENT 164

building codes. In addition, the International Mechanical Code, which is referenced in many 

local jurisdictions, has adopted a rigid interpretation of the Ventilation Rate Procedure of the 

standard and requires devices and controls to maintain per-person ventilation requirements at all 

load conditions. During the MIA interviews, manufacturers indicated that the increasing 

adoption of ASHRAE 62.2 could translate into additional costs to research, develop, and 

manufacture products that perform according to this standard. 

Large unitary air conditioners (>240,000 Btu/h). Additionally, manufacturers expressed 

concerns regarding existing efforts to add energy conservation standards for large commercial 

unitary equipment-units with capacities larger than 240,000 British thermal units per hour 

(Btu/h)-to State building codes. Adoption of standards at the State level could translate into 

additional burdens if these standards are not uniform. Industry members initiated a joint effort to 

petition Congress for a uniform Federal standard that would mitigate the financial impacts of 

complying with different State standards. In either case, whether under a Federal standard or 

State building codes, manufacturers will face additional financial impacts once large unitary air 

conditioners are regulated. 

ASH RAE 90.1-1989 and 1999. ASHRAE 90.1-1989 is a set of requirements to design 

energy-efficient buildings. DOE named the American National Standards Institute 

(ANS!)/ ASHRAE/ Illuminating Engineering Society of North America (IESNA) Standard 

90.1-1999, Energy Standard/or Buildings Except Low-Rise Residential Buildings, as the 

commercial building reference standard for State building energy codes under the Federal Energy 

Conservation and Production Act (ECPA). This Act requires all States to certify that they have 

State energy codes in place that are at least as stringent as 90.1-1999, or justify why they cannot 

comply with this. DOE determined that Standard 90.1-1999 saves more energy than Standard 

90.1- 1989, which was the previously referenced standard in ECPA. Acceptance of these 

standards varies widely across States, creating a regulatory patchwork that imposes additional 

burdens on manufacturers. 

Material Recycling. In recent years, efforts to regulate the disposal and treatment of 

waste from manufacturing processes have regained momentum. During the MIA interviews, 

some manufacturers mentioned concerns regarding further requirements for recycling waste and 

producing with recovered materials. Some parts of Europe have up-front regulations to pay 

recycling fees when manufacturers ship the units. Some U.S. States are considering similar 

requirements. 

12.5.4.3 Regulations and Pending Regulations at the State Level 

Manufacturers also identified several regulations that either are being imposed or are under 

consideration at the State level, which include: 

1. Compliance with the International Standards Organization (ISO) testing procedures, 

which will likely require duplicate testing and certification for products 

2. State-level safety regulations 

3. State-level equipment recycling requirements 

12-54 
4. Furnace fan electrical efficiency (currently under discussion in MN, MA, MD, VT, and

CA)

5. Nitrogen oxide (NOx) emissions requirements (CA, TX, MN, NV).

6. Carbon monoxide emissions requirements (MA)

7. Minimum consumer warranty requirements (FL only, MA and MD pending)

8. California Title 24 building code requirements such as duct tightness and air-conditioner

charging

9. California Title 20 appliance standards, 9th Circuit Court in CA on Title 20, reporting

requirements and marketing requirements

- Marketing and data submittal, Title 20 of California Law

- Administrative burdens (-15 items to report).

Manufacturers agreed that ISO testing procedures and safety regulations will have little

incremental impact on the industry, as ISO quality programs and health and safety protocols are

now a routine, integral part of the manufacture of many products, including furnaces and boilers.

12.5.4.4 Other Regulations

Manufacturers also identified proposed or implemented regulations for international,

local, or voluntary organizations. Some furnace and boiler manufacturers sell a small portion of

their total production to countries besides the U.S., such as Canada. In those cases, the products

must meet the energy efficiency standards for that country. Based on manufacturer interviews,

companies may design some units to meet even more stringent standards than the U.S. Other

regulations include:

1. Technical Standards and Safety Authority, public safety regulation (Ontario, Canada)

2. Natural Resources Canada, emissions and efficiency (Canada)

3. Energy Star, voluntary standards

12.6 CONCLUSIONS

12.6.1 Non-Weatherized Gas Furnaces

For non-weatherized gas furnaces, DOE considered four cashflow scenarios: The flatmarkup and two-tier-markup scenarios are each combined with NES-shipment forecasts and

manufacturers'-shipment forecasts. To assess the lower end of the range of potential impacts,

DOE used the flat-markup and NES-shipments scenario, which represents an optimistic situation

where shipments are not greatly affected by even a large increase in cost to the consumer. In

addition, this scenario assumes that manufacturers do not differentiate their baseline products

from their premium products, in either the base case or the standards case-thus, the scenario

assumes a constant markup across all efficiencies. DOE did not reduce this profit margin to

offset some of the price burden passed on to the consumer in the standards case. Consequently,

some of the manufacturer impacts on INPV are positive.

12-55

 EE-RM/STD-01-350 COMMENT 164

4. Furnace fan electrical efficiency (currently under discussion in MN, MA, MD, VT, and 

CA) 

5. Nitrogen oxide (NOx) emissions requirements (CA, TX, MN, NV). 

6. Carbon monoxide emissions requirements (MA) 

7. Minimum consumer warranty requirements (FL only, MA and MD pending) 

8. California Title 24 building code requirements such as duct tightness and air-conditioner 

charging 

9. California Title 20 appliance standards, 9th Circuit Court in CA on Title 20, reporting 

requirements and marketing requirements 

- Marketing and data submittal, Title 20 of California Law 

- Administrative burdens (~15 items to report). 

Manufacturers agreed that ISO testing procedures and safety regulations will have little 

incremental impact on the industry, as ISO quality programs and health and safety protocols are 

now a routine, integral part of the manufacture of many products, including furnaces and boilers. 

12.5.4.4 Other Regulations 

Manufacturers also identified proposed or implemented regulations for international, 

local, or voluntary organizations. Some furnace and boiler manufacturers sell a small portion of 

their total production to countries besides the U.S., such as Canada. In those cases, the products 

must meet the energy efficiency standards for that country. Based on manufacturer interviews, 

companies may design some units to meet even more stringent standards than the U.S. Other 

regulations include: 

1. Technical Standards and Safety Authority, public safety regulation (Ontario, Canada) 

2. Natural Resources Canada, emissions and efficiency (Canada) 

3. Energy Star, voluntary standards 

12.6 CONCLUSIONS 

12.6.1 Non-Weatherized Gas Furnaces 

For non-weatherized gas furnaces, DOE considered four cashflow scenarios: The flatmarkup and two-tier-markup scenarios are each combined with NES-shipment forecasts and 

manufacturers'-shipment forecasts. To assess the lower end of the range of potential impacts, 

DOE used the flat-markup and NES-shipments scenario, which represents an optimistic situation 

where shipments are not greatly affected by even a large increase in cost to the consumer. In 

addition, this scenario assumes that manufacturers do not differentiate their baseline products 

from their premium products, in either the base case or the standards case-thus, the scenario 

assumes a constant markup across all efficiencies. DOE did not reduce this profit margin to 

offset some of the price burden passed on to the consumer in the standards case. Consequently, 

some of the manufacturer impacts on INPV are positive. 

12-55 
To assess the higher end of the range of potential impacts, DOE used the manufacturers'-

shipments forecast and modeled a two-tiered-markup structure. The two-tier scenario assumes

that the proportion of premium-margin sales will be reduced by the "roll-up" of lower efficiency

products to the new standard level. The manufacturers'-shipments forecast assumes an increased

drop in shipments for TSLs 4 and 5 due to equipment switching and an increase in repairs of

current systems. As can be observed from the cashflow results, both the shipment scenario and

the markup scenario have a significant impact on the results.

At TSL 1 and TSL A (80-percent AFUE), the impact on INPV and cashflow would be

slight, since the bulk of the product being sold is already at the 80-percent AFUE level; thus,

industry revenues and costs are not significantly negatively impacted. Furthermore, little

investment is required to meet the standard.

At TSL 2 (81-percent AFUE), concern over safety and reliability associated with

corrosion due to condensation is the dominant issue for manufacturers of non-weatherized gas

furnaces. Based on information submitted by industry, to mitigate theses concerns a standard at

TSL 2 would require a complete redesign of furnace heat exchangers, entailing $60 million in

product conversion expenses and a $121-million investment in new tooling and equipment.

Furthermore, manufacturers maintain that this capital outlay does not fully address their safety,

reliability, and equipment longevity concerns. Finally, manufacturers stated that, at TSL 2, they

must address additional liability impacts that are not illustrated by the quantitative results

presented here. The impact on INPV at TSL 3 is -6 percent and cashflow in the year leading to

the effective date would be reduced to approximately $17 million from a base case value of $76

million.

Many manufacturers commented that 81-percent AFUE equipment cannot be safely

vented. Some manufacturers stated that there are variations and constraints that require a margin

of safety. These safety margins need to account for the many factors that contribute to faulty

venting in residential furnace systems, which include variations in gas quality, vent length,

number of bends within the vent, altitude, location of the furnace within the house, quantity of

the ventilated air (ASHRAE 62.2 requires more outside ventilation air, which in turn reduces the

flue temperatures), and the amount of experience of the vent installer. Manufacturers stated that,

with increasing minimum efficiency requirements for non-weatherized gas furnaces, this margin

of safety is diminished and a standard at 81-percent AFUE does not provide an adequate safety

margin. Most manufacturers stated that they are not willing to accept the risk and/or cost

involved in producing a full line of products at 81-percent AFUE. Those manufacturers that

would not be willing to bear the liability risk associated with an 81-percent AFUE efficiency

level, and thus chose not to sell non-condensing models, would be at a competitive disadvantage

to those willing to bear the risk.

TSL B and TSL 4 requires the production of 90-percent-AFUE condensing,

non-weatherized gas furnaces. If manufacturers lose the ability to market and sell premium

products, such as high-AFUE condensing products, then the impact on INPV is expected to be

larger. Another key uncertainty in future profitability is the market response to the higher price

and corresponding energy savings of the condensing product. Manufacturers predict a much

greater drop in unit sales than the NES analysis forecasted. The INPV impacts range from +2

12-56

 EE-RM/STD-01-350 COMMENT 164

To assess the higher end of the range of potential impacts, DOE used the manufacturers'-

shipments forecast and modeled a two-tiered-markup structure. The two-tier scenario assumes 

that the proportion of premium-margin sales will be reduced by the "roll-up" oflower efficiency 

products to the new standard level. The manufacturers'-shipments forecast assumes an increased 

drop in shipments for TSLs 4 and 5 due to equipment switching and an increase in repairs of 

current systems. As can be observed from the cashflow results, both the shipment scenario and 

the markup scenario have a significant impact on the results. 

At TSL 1 and TSL A (80-percent AFUE), the impact on INPV and cashflow would be 

slight, since the bulk of the product being sold is already at the 80-percent AFUE level; thus, 

industry revenues and costs are not significantly negatively impacted. Furthermore, little 

investment is required to meet the standard. 

At TSL 2 (81-percent AFUE), concern over safety and reliability associated with 

corrosion due to condensation is the dominant issue for manufacturers of non-weatherized gas 

furnaces. Based on information submitted by industry, to mitigate theses concerns a standard at 

TSL 2 would require a complete redesign of furnace heat exchangers, entailing $60 million in 

product conversion expenses and a $ 121-million investment in new tooling and equipment. 

Furthermore, manufacturers maintain that this capital outlay does not fully address their safety, 

reliability, and equipment longevity concerns. Finally, manufacturers stated that, at TSL 2, they 

must address additional liability impacts that are not illustrated by the quantitative results 

presented here. The impact on INPV at TSL 3 is -6 percent and cashflow in the year leading to 

the effective date would be reduced to approximately $17 million from a base case value of $76 

million. 

Many manufacturers commented that 81-percent AFUE equipment cannot be safely 

vented. Some manufacturers stated that there are variations and constraints that require a margin 

of safety. These safety margins need to account for the many factors that contribute to faulty 

venting in residential furnace systems, which include variations in gas quality, vent length, 

number of bends within the vent, altitude, location of the furnace within the house, quantity of 

the ventilated air (ASHRAE 62.2 requires more outside ventilation air, which in tum reduces the 

flue temperatures), and the amount of experience of the vent installer. Manufacturers stated that, 

with increasing minimum efficiency requirements for non-weatherized gas furnaces, this margin 

of safety is diminished and a standard at 81-percent AFUE does not provide an adequate safety 

margin. Most manufacturers stated that they are not willing to accept the risk and/or cost 

involved in producing a full line of products at 81-percent AFUE. Those manufacturers that 

would not be willing to bear the liability risk associated with an 81-percent AFUE efficiency 

level, and thus chose not to sell non-condensing models, would be at a competitive disadvantage 

to those willing to bear the risk. 

TSL B and TSL 4 requires the production of 90-percent-AFUE condensing, 

non-weatherized gas furnaces. If manufacturers lose the ability to market and sell premium 

products, such as high-AFUE condensing products, then the impact on INPV is expected to be 

larger. Another key uncertainty in future profitability is the market response to the higher price 

and corresponding energy savings of the condensing product. Manufacturers predict a much 

greater drop in unit sales than the NES analysis forecasted. The INPV impacts range from +2 

12-56 
percent to - 24 percent. The required product and capital conversion costs are significant and

estimated to be $87 million and $189 million, respectively, because of the need for a secondary

heat exchanger. At this level, the industry cashflow becomes slightly negative, -$7 million,

compared to the base case value of $76 million in the year leading up to the standards.

At TSL 5 (96-percent AFUE), the impact on INPV would range between +26 percent and

-52 percent, depending on markup and shipment assumptions . The industry would experience

an increase in value if it were able to fully pass through to consumers the incremental production

costs and associated markups, and the shipments were reduced according to the forecasts in the

NES-shipments model. However, there is a risk of very large negative impacts if shipments were

reduced according to manufacturers' expectations and in the very likely situation that

manufacturers were no longer able to offer premium products at higher margins. During the

interviews, manufacturers expressed disbelief at the possibility of manufacturing an entire

product line at 96-percent AFUE, since there is only one model currently being manufactured at

this efficiency level. Most manufacturers did not provide DOE with projected product

conversion costs or capital conversion costs at this level, since they could not conceive of what

designs might reach this efficiency level. DOE estimated the required product and capital

conversion costs, based on limited input, to be $153 million and $750 million, respectively, for

TSL 5. The impact on annual cashflow from product conversion and capital expenditures prior

to the standard would be severe. The peak negative cashflow would be approximately four times

the magnitude of the base-case positive cashflow.

12.6.2 Weatherized Gas Furnaces

For weatherized gas furnaces, DOE considered two cashflow scenarios, the flat-markup

and the constant-price scenario-both using NES -shipments forecasts. The flat-markup and

NES-shipments scenario represents a situation where shipments are not greatly affected , even by

a large increase in cost to the consumer. In the second scenario , the constant-price aspect

assumes that manufacturers of weatherized gas furnaces will not be able to recover the

incremental product costs resulting from increased standards . DOE used these two markup

scenarios because manufacturers currently do not differentiate between baseline and premium

products, since condensing technologies are not used in weatherized gas furnaces and therefore

are not a differentiating feature that requires a premium markup. Consequently, DOE did not

consider a two-tier markup scenario.

The impact on INPV for weatherized gas furnaces at TSL A, TSL 2, TSL B, and TSL 4

(81-percent AFUE) ranges between - 15 percent and -20 percent . Even with the flat-markup

assumption and accepting the NES-shipments forecast unaltered , the industry value drops

because of the large conversion costs relative to industry revenues. To achieve 81-percent

AFUE, manufacturers estimate product conversion costs of $58 million and capital conversion

expenses of $41 million . Negative cashflows peak at approximately $ 10 million from a basecase value of $18 million in 2014.

Manufacturers expressed concern over condensation in the furnace heat exchanger, in

furnaces above 81-percent AFUE, which can lead to corrosion and reliability issues. The

minimum standard for TSL 5 is 83-percent AFUE. At 83-percent AFUE, the INPV is forecasted

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 EE-RM/STD-01-350 COMMENT 164

percent to - 24 percent. The required product and capital conversion costs are significant and 

estimated to be $87 million and $189 million, respectively, because of the need for a secondary 

heat exchanger. At this level, the industry cash flow becomes slightly negative, - $7 million, 

compared to the base case value of$76 million in the year leading up to the standards. 

At TSL 5 (96-percent AFUE), the impact on INPV would range between +26 percent and 

- 52 percent, depending on markup and shipment assumptions. The industry would experience 

an increase in value if it were able to fully pass through to consumers the incremental production 

costs and associated markups, and the shipments were reduced according to the forecasts in the 

NES-shipments model. However, there is a risk of very large negative impacts if shipments were 

reduced according to manufacturers' expectations and in the very likely situation that 

manufacturers were no longer able to offer premium products at higher margins. During the 

interviews, manufacturers expressed disbelief at the possibility of manufacturing an entire 

product line at 96-percent AFUE, since there is only one model currently being manufactured at 

this efficiency level. Most manufacturers did not provide DOE with projected product 

conversion costs or capital conversion costs at this level, since they could not conceive of what 

designs might reach this efficiency level. DOE estimated the required product and capital 

conversion costs, based on limited input, to be $153 million and $750 million, respectively, for 

TSL 5. The impact on annual cash flow from product conversion and capital expenditures prior 

to the standard would be severe. The peak negative cashflow would be approximately four times 

the magnitude of the base-case positive cashflow. 

12.6.2 Weatherized Gas Furnaces 

For weatherized gas furnaces, DOE considered two cashflow scenarios, the flat-markup 

and the constant-price scenario-both using NES-shipments forecasts. The flat-markup and 

NES-shipments scenario represents a situation where shipments are not greatly affected, even by 

a large increase in cost to the consumer. In the second scenario, the constant-price aspect 

assumes that manufacturers of weatherized gas furnaces will not be able to recover the 

incremental product costs resulting from increased standards. DOE used these two markup 

scenarios because manufacturers currently do not differentiate between baseline and premium 

products, since condensing technologies are not used in weatherized gas furnaces and therefore 

are not a differentiating feature that requires a premium markup. Consequently, DOE did not 

consider a two-tier markup scenario. 

The impact on INPV for weatherized gas furnaces at TSL A, TSL 2, TSL B, and TSL 4 

(81-percent AFUE) ranges between -15 percent and -20 percent. Even with the flat-markup 

assumption and accepting the NES-shipments forecast unaltered, the industry value drops 

because of the large conversion costs relative to industry revenues. To achieve 81-percent 

AFUE, manufacturers estimate product conversion costs of $58 million and capital conversion 

expenses of$41 million. Negative cashflows peak at approximately $10 million from a basecase value of$18 million in 2014. 

Manufacturers expressed concern over condensation in the furnace heat exchanger, in 

furnaces above 81-percent AFUE, which can lead to corrosion and reliability issues. The 

minimum standard for TSL 5 is 83-percent AFUE. At 83-percent AFUE, the INPV is forecasted 

12-57 
to drop between 18 percent and 33 percent. Manufacturers must make an investment in

corrosion-resistant materials. The required product-conversion and capital-conversion costs are

estimated at $73 million. Manufacturers stated that this is primarily due to the need for stainless

steel heat exchangers. Net cashflow would drop to approximately - $23 million, a drop of $41

million from the base case.

Finally, there are two additional factors to be considered from the standpoint of

manufacturers of weatherized gas furnaces. First, some manufacturers believe that furnaces with

efficiency levels at or above 81-percent AFUE cannot be made safely and reliably due to vent

and heat exchanger condensation. This type of furnace uses cold, outside air for combustion and

economizer operation introduces cold air to the heat exchanger. Both these factors lower the flue

temperature at the risk of causing condensation and corrosion in the heat exchanger and draft

inducers. While shorter vents mitigate vent corrosion somewhat, corrosion in the heat exchanger

itself can significantly shorten heat exchanger lifetime and, therefore, appliance lifetime. In

addition, units with economizers have an increased probability of condensation in the vent

system. Second, buyers of these units value heating efficiency less than they value the cooling

efficiency of the air-conditioning unit, making it difficult for manufacturers to recover cost

increases of the heating equipment.

12.6.3 Mobile Home Furnaces

For mobile home furnaces, DOE considered two cashflow scenarios: the flat-markup and

NES-shipments scenario, and the flat-markup and manufacturers'-shipments scenario. The flatmarkup and NES-shipments scenario represents a situation where shipments are not greatly

affected by a large increase in cost to the consumer. DOE used the flat markup because it does

not believe there is a large variation in gross margin across all available efficiency levels. Since

there are currently only a small number of shipments of condensing mobile home furnaces, this

implies manufacturers will have little ability to market premium efficiency products at a

premium markup. To represent the higher range of potential impacts, DOE used the flat-markup

and manufacturers'-shipments scenario. The manufacturers'-shipments forecast shows a decline

in mobile home furnace shipments at TSLs B, 4, and 5. Manufacturers stated that consumers are

more likely to choose heat pumps, combination systems, electric furnaces, or electric strip

heaters, instead of buying the more efficient, more costly mobile home furnaces at TSLs B, 4,

and 5.

TSL 1, TSL A, and TSL 2 require that mobile home gas furnaces achieve 80-percent

AFUE. At these levels, the INPV and cashflow impacts are negligible, and little investment is

required to meet the standard.

At 90-percent AFUE, TSLs B, 4, and 5, product-conversion costs of $7 million and

capital expenditures of $13 million contribute to lowering the INPV by 48-50 percent. Net

cashflow becomes negative by a factor of more than eight times the base-case value.

Additional factors to be considered from the standpoint of manufacturers of mobile home

furnaces include the following:

12-58

 EE-RM/STD-01-350 COMMENT 164

to drop between 18 percent and 33 percent. Manufacturers must make an investment in 

corrosion-resistant materials. The required product-conversion and capital-conversion costs are 

estimated at $73 million. Manufacturers stated that this is primarily due to the need for stainless 

steel heat exchangers. Net cashflow would drop to approximately - $23 million, a drop of $41 

million from the base case. 

Finally, there are two additional factors to be considered from the standpoint of 

manufacturers of weatherized gas furnaces. First, some manufacturers believe that furnaces with 

efficiency levels at or above 8 I-percent AFUE cannot be made safely and reliably due to vent 

and heat exchanger condensation. This type of furnace uses cold, outside air for combustion and 

economizer operation introduces cold air to the heat exchanger. Both these factors lower the flue 

temperature at the risk of causing condensation and corrosion in the heat exchanger and draft 

inducers. While shorter vents mitigate vent corrosion somewhat, corrosion in the heat exchanger 

itself can significantly shorten heat exchanger lifetime and, therefore, appliance lifetime. In 

addition, units with economizers have an increased probability of condensation in the vent 

system. Second, buyers of these units value heating efficiency less than they value the cooling 

efficiency of the air-conditioning unit, making it difficult for manufacturers to recover cost 

increases of the heating equipment. 

12.6.3 Mobile Home Furnaces 

For mobile horne furnaces, DOE considered two cashflow scenarios: the flat-markup and 

NES-shipments scenario, and the flat-markup and manufacturers' -shipments scenario. The flatmarkup and NES-shipments scenario represents a situation where shipments are not greatly 

affected by a large increase in cost to the consumer. DOE used the flat markup because it does 

not believe there is a large variation in gross margin across all available efficiency levels. Since 

there are currently only a small number of shipments of condensing mobile horne furnaces, this 

implies manufacturers will have little ability to market premium efficiency products at a 

premium markup. To represent the higher range of potential impacts, DOE used the flat-markup 

and manufacturers' -shipments scenario. The manufacturers' -shipments forecast shows a decline 

in mobile horne furnace shipments at TSLs B, 4, and 5. Manufacturers stated that consumers are 

more likely to choose heat pumps, combination systems, electric furnaces, or electric strip 

heaters, instead of buying the more efficient, more costly mobile horne furnaces at TSLs B, 4, 

and 5. 

TSL 1, TSL A, and TSL 2 require that mobile horne gas furnaces achieve 80-percent 

AFUE. At these levels, the INPV and cashflow impacts are negligible, and little investment is 

required to meet the standard. 

At 90-percent AFUE, TSLs B, 4, and 5, product-conversion costs of $7 million and 

capital expenditures of $13 million contribute to lowering the INPV by 48-50 percent. Net 

cashflow becomes negative by a factor of more than eight times the base-case value. 

Additional factors to be considered from the standpoint of manufacturers of mobile horne 

furnaces include the following: 

12-58 
® At levels above 75-percent AFUE, standing pilot models will no longer be available to

customers.

® Mobile home furnaces are susceptible to condensation at AFUE levels above 80 percent

due to their concentric vent, which introduces cold outside air through the outer ring

while exhaust gases are vented from the interior core.

® Mobile home installations face space constraints from both footprint and height

dimensions.

Shipments of mobile home furnaces have been declining and are forecasted to continue

on this trend. It is risky to invest in design and tooling for a product with a declining

revenue base.

12.6.4 Oil-Fired Furnaces

For oil-fired furnaces, DOE considered two cashflow scenarios: the flat-markup and

NES-shipments scenario , and the constant-price and NES-shipments scenario. The flat-markup

and NES-shipments scenario represents a situation where shipments are not greatly affected by

increased cost to the consumer . For the second scenario , DOE also used the NES-shipments

forecast and applied a constant-margin assumption. While DOE realizes that there will be a drop

in shipments at TSLs 4 and 5 due to equipment switching, DOE used the NES -shipments forecast

because the difference between the NES shipments and the manufacturers' shipments was small

and some manufacturers stated that they expected a small drop in shipments at higher proposed

standard levels. Furthermore , DOE does not expect a change in shipments when applying a

constant-price assumption, because there will be no change in the product costs as a result of new

efficiency standards.

At TSL 1 (80-percent AFUE), the INPV impacts are estimated to be -5 percent for oilfired furnaces. Cashflow is cut approximately in half, from approximately $2 million to $1

million in 2014 . Product-conversion costs are estimated at $4 million and capital requirements

total $ 1 million.

At 82-percent AFUE, TSL A, TSL 2, and TSL B, the INPV impacts are estimated to

range from -10 percent to -14 percent for oil-fired furnaces . Cashflow would be slightly

positive in 2014, a drop of $2 million from the base case. Product -conversion costs are estimated

at $5 million and capital requirements total $4 million. At 82-percent AFUE, one manufacturer

indicated the firm would not invest the necessary capital, since it could not justify the investment.

At TSL 4 (84-percent AFUE), the INPV impacts range from -21 percent to -32 percent,

and at TSL 5 (85-percent AFUE) the impacts range from -23 percent to -40-percent. Achieving

these efficiency levels would require new heat exchanger designs, which raises the product

conversion costs to $9 million at both TSL 4 and TSL 5. Total capital requirements rise to $7

million at TSL 4 and $9 million at TSL 5. Net cashflow is reduced by nearly 200 percent to -$4

million at TSL 4.

12-59

 EE-RM/STD-01-350 COMMENT 164

At levels above 75-percent AFUE, standing pilot models will no longer be available to 

customers. 

Mobile home furnaces are susceptible to condensation at AFUE levels above 80 percent 

due to their concentric vent, which introduces cold outside air through the outer ring 

while exhaust gases are vented from the interior core. 

Mobile home installations face space constraints from both footprint and height 

dimensions. 

Shipments of mobile home furnaces have been declining and are forecasted to continue 

on this trend. It is risky to invest in design and tooling for a product with a declining 

revenue base. 

12.6.4 Oil-Fired Furnaces 

For oil-fired furnaces, DOE considered two cashflow scenarios: the flat-markup and 

NES-shipments scenario, and the constant-price and NES-shipments scenario. The flat-markup 

and NES-shipments scenario represents a situation where shipments are not greatly affected by 

increased cost to the consumer. For the second scenario, DOE also used the NES-shipments 

forecast and applied a constant-margin assumption. While DOE realizes that there will be a drop 

in shipments at TSLs 4 and 5 due to equipment switching, DOE used the NES-shipments forecast 

because the difference between the NES shipments and the manufacturers' shipments was small 

and some manufacturers stated that they expected a small drop in shipments at higher proposed 

standard levels. Furthermore, DOE does not expect a change in shipments when applying a 

constant-price assumption, because there will be no change in the product costs as a result of new 

efficiency standards. 

At TSL 1 (80-percent AFUE), the INPV impacts are estimated to be - 5 percent for oilfired furnaces. Cashflow is cut approximately in half, from approximately $2 million to $1 

million in 2014. Product-conversion costs are estimated at $4 million and capital requirements 

total $1 million. 

At 82-percent AFUE, TSL A, TSL 2, and TSL B, the INPV impacts are estimated to 

range from -10 percent to -14 percent for oil-fired furnaces. Cashflow would be slightly 

positive in 2014, a drop of$2 million from the base case. Product-conversion costs are estimated 

at $5 million and capital requirements total $4 million. At 82-percent AFUE, one manufacturer 

indicated the firm would not invest the necessary capital, since it could not justify the investment. 

At TSL 4 (84-percent AFUE), the INPV impacts range from - 21 percent to - 32 percent, 

and at TSL 5 (85-percent AFUE) the impacts range from -23 percent to -40-percent. Achieving 

these efficiency levels would require new heat exchanger designs, which raises the product 

conversion costs to $9 million at both TSL 4 and TSL 5. Total capital requirements rise to $7 

million at TSL 4 and $9 million at TSL 5. Net cashflow is reduced by nearly 200 percent to -$4 

million at TSL 4. 

12-59 
Other considerations from the standpoint of manufacturers of oil-fired furnaces include

the possibility of implementing a de-rating strategy at TSLs 1, 2, and 3 to reduce capital costs. A

de-rating strategy aims to achieve higher efficiency levels by using a larger capacity furnace

compensated with a downsized burner. This would reduce the span of the product line through

elimination of some higher capacity models. In addition, for oil-fired furnaces at 82-percent

AFUE, some manufacturers expressed concerns about increased maintenance costs due to sulfur

in the fuel and exhaust gas. This sulfur can form a residue that potentially would increase

maintenance costs as efficiency rises.

12.6.5 Gas Boilers

For gas boilers, DOE considered two cashflow scenarios: the flat markup and the threetier markup, both using manufacturer-supplied shipment estimates. DOE did not use NES

shipments in the GRIM, since they did not demonstrate any price responses by shipments-even

at very high efficiency levels. Manufacturers stated that shipments would decrease with

increases in efficiency, particularly at the higher levels where consumers would repair existing

systems rather than replace them.

The two scenarios are therefore defined by the assumed markup strategy-a flat markup

or a three-tiered markup. DOE learned from manufacturers that the pricing of boilers is

determined on the basis of three product tiers . During the MIA interview, manufacturers

provided information on the range of typical AFUE levels for each of the three tiers and the

change in profitability associated with each level for gas boilers.

At TSL 1, TSL A, and TSL B ( 82-percent AFUE), the impact on INPV ranges from -1

percent to - 3 percent for gas boilers. Product-conversion costs and capital -conversion costs are

estimated at $7.5 and $ 9.5 million, respectively. Net cashflow is reduced from $11 million to $9

million in 2014.

At 84-percent AFUE, TSLs 2 and 4, the impact on INPV for gas boilers ranges from - 8

percent to - 13 percent. Product-conversion costs are estimated at $9 million and capital

requirements total $ 13 million. Cashflow is reduced from $11 million to $4 million in 2014.

The most severe impacts are in 2013 when cashflow is reduced by more than 50 percent from the

base case . Several manufacturers stated that, at this efficiency level, there is a high risk of safety

and reliability issues. There is also a great likelihood that standing -pilot versions of these

products would be eliminated.

At TSL 5 (99-percent AFUE), the impact on INPV for gas boilers ranges between -15

percent and -50 percent. During the interviews, manufacturers stated that this level is simply not

achievable with current technologies and is beyond the maximum technologically feasible (max

tech) level. Instead, some manufacturers recommended that the max tech level would more

reasonably be 96-percent or 97-percent AFUE. In addition, some manufacturers would not

provide product-conversion cost or capital-conversion costs at this level, since they could not

conceive what designs might reach this efficiency level. Consequently, with limited responses

12-60

 EE-RM/STD-01-350 COMMENT 164

Other considerations from the standpoint of manufacturers of oil-fired furnaces include 

the possibility of implementing a de-rating strategy at TSLs 1, 2, and 3 to reduce capital costs. A 

de-rating strategy aims to achieve higher efficiency levels by using a larger capacity furnace 

compensated with a downsized burner. This would reduce the span of the product line through 

elimination of some higher capacity models. In addition, for oil-fired furnaces at 82-percent 

AFUE, some manufacturers expressed concerns about increased maintenance costs due to sulfur 

in the fuel and exhaust gas. This sulfur can form a residue that potentially would increase 

maintenance costs as efficiency rises. 

12.6.5 Gas Boilers 

For gas boilers, DOE considered two cashflow scenarios: the flat markup and the threetier markup, both using manufacturer-supplied shipment estimates. DOE did not use NES 

shipments in the GRIM, since they did not demonstrate any price responses by shipments-even 

at very high efficiency levels. Manufacturers stated that shipments would decrease with 

increases in efficiency, particularly at the higher levels where consumers would repair existing 

systems rather than replace them. 

The two scenarios are therefore defined by the assumed markup strategy-a flat markup 

or a three-tiered markup. DOE learned from manufacturers that the pricing of boilers is 

determined on the basis of three product tiers. During the MIA interview, manufacturers 

provided information on the range of typical AFUE levels for each of the three tiers and the 

change in profitability associated with each level for gas boilers. 

At TSL 1, TSL A, and TSL B (82-percent AFUE), the impact on INPV ranges from -1 

percent to - 3 percent for gas boilers. Product-conversion costs and capital-conversion costs are 

estimated at $7.5 and $9.5 million, respectively. Net cashflow is reduced from $11 million to $9 

million in 2014. 

At 84-percent AFUE, TSLs 2 and 4, the impact on INPV for gas boilers ranges from - 8 

percent to - 13 percent. Product-conversion costs are estimated at $9 million and capital 

requirements total $13 million. Cashflow is reduced from $11 million to $4 million in 2014. 

The most severe impacts are in 2013 when cashflow is reduced by more than 50 percent from the 

base case. Several manufacturers stated that, at this efficiency level, there is a high risk of safety 

and reliability issues. There is also a great likelihood that standing-pilot versions of these 

products would be eliminated. 

At TSL 5 (99-percent AFUE), the impact on INPV for gas boilers ranges between -15 

percent and - 50 percent. During the interviews, manufacturers stated that this level is simply not 

achievable with current technologies and is beyond the maximum technologically feasible (max 

tech) level. Instead, some manufacturers recommended that the max tech level would more 

reasonably be 96-percent or 97 -percent AFUE. In addition, some manufacturers would not 

provide product-conversion cost or capital-conversion costs at this level, since they could not 

conceive what designs might reach this efficiency level. Consequently, with limited responses 

12-60 
from manufacturers, DOE estimated the required product and capital conversion costs to be $21

million and $159 million, respectively. The net cashflow is reduced to nearly -$48 million.

Gas boiler manufacturers mentioned similar concerns as those expressed by nonweatherized gas furnace manufacturers surrounding the increased possibility of corrosion within

the heat exchangers as the efficiency level increases. Additional factors to be considered from

the standpoint of manufacturers of gas boilers include the following:

• At levels at or above 84-percent AFUE, standing pilot models will no longer be available

to customers.

With increasing efficiency requirements in the non-condensing region, some

manufacturers would consider switching their designs to condensing, considering that

there has been a recent increase in condensing sales over the past few years and that

venting requirements are not as expensive to the consumer.

® Radiant floor-heating systems installed with boilers create condensation concerns at 84-

percent AFUE, due to lower return water temperature to the boiler.

Some manufacturers of boilers stated that they have concerns regarding condensation at

efficiency levels of 84-percent AFUE or greater for gas boilers and 85-percent AFUE or greater

for oil-fired boilers. Boiler manufacturers stated that condensation of flue gases for boilers is

more variable than for furnaces because there is greater variability in flue temperature. For

example, the heat distribution system and the heating load directly affect return water

temperature to the boiler, which in turn has a direct impact on the probability of condensation. In

addition, other factors-including system thermal mass, boiler input rate and efficiency, radiator

heat transfer area, and the season in which the boiler operates-affect condensation in a boiler

system.

12.6.6 Oil-Fired Boilers

For oil-fired boilers, DOE considered two cashflow scenarios: the flat markup and the

three-tiered markup, both using manufacturer-supplied shipment estimates. DOE considered

only manufacturer-supplied shipment estimates for the same reasons given for gas boilers.

Manufacturers stated that shipments would decrease for oil-fired boilers at higher efficiency

levels, because the market would move toward radiant or electric furnaces and consumers would

repair rather than replace their existing boilers.

Thus, similar to the markups defined for gas-fired boilers, the two scenarios are defined

by the assumed markup strategy-a flat markup or a three-tiered markup. DOE learned from

manufacturers that the pricing of boilers is determined on the basis of three product tiers. During

the MIA interviews, manufacturers provided information on the range of typical AFUE levels for

each of the three tiers and the change in profitability associated with each level for oil-fired

boilers.

12-61

 EE-RM/STD-01-350 COMMENT 164

from manufacturers, DOE estimated the required product and capital conversion costs to be $21 

million and $159 million, respectively. The net cashflow is reduced to nearly -$48 million. 

Gas boiler manufacturers mentioned similar concerns as those expressed by nonweatherized gas furnace manufacturers surrounding the increased possibility of corrosion within 

the heat exchangers as the efficiency level increases. Additional factors to be considered from 

the standpoint of manufacturers of gas boilers include the following: 

• At levels at or above 84-percent AFUE, standing pilot models will no longer be available 

to customers. 

With increasing efficiency requirements in the non-condensing region, some 

manufacturers would consider switching their designs to condensing, considering that 

there has been a recent increase in condensing sales over the past few years and that 

venting requirements are not as expensive to the consumer. 

Radiant floor-heating systems installed with boilers create condensation concerns at 84-

percent AFUE, due to lower return water temperature to the boiler. 

Some manufacturers of boilers stated that they have concerns regarding condensation at 

efficiency levels of 84-percent AFUE or greater for gas boilers and 85-percent AFUE or greater 

for oil-fired boilers. Boiler manufacturers stated that condensation of flue gases for boilers is 

more variable than for furnaces because there is greater variability in flue temperature. For 

example, the heat distribution system and the heating load directly affect return water 

temperature to the boiler, which in tum has a direct impact on the probability of condensation. In 

addition, other factors-including system thermal mass, boiler input rate and efficiency, radiator 

heat transfer area, and the season in which the boiler operates-affect condensation in a boiler 

system. 

12.6.6 Oil-Fired Boilers 

For oil-fired boilers, DOE considered two cashflow scenarios: the flat markup and the 

three-tiered markup, both using manufacturer-supplied shipment estimates. DOE considered 

only manufacturer-supplied shipment estimates for the same reasons given for gas boilers. 

Manufacturers stated that shipments would decrease for oil-fired boilers at higher efficiency 

levels, because the market would move toward radiant or electric furnaces and consumers would 

repair rather than replace their existing boilers. 

Thus, similar to the markups defined for gas-fired boilers, the two scenarios are defined 

by the assumed markup strategy-a flat markup or a three-tiered markup. DOE learned from 

manufacturers that the pricing of boilers is determined on the basis of three product tiers. During 

the MIA interviews, manufacturers provided information on the range of typical AFUE levels for 

each of the three tiers and the change in profitability associated with each level for oil-fired 

boilers. 

12-61 
At 83-percent AFUE, TSLs 1, A, and 2, the impact on INPV ranges from -5 percent to

-18 percent for oil-fired boilers. At TSL B and TSL 4 (84-percent AFUE), the impact on INPV

ranges from between -5 percent to -20 percent. Product-conversion costs and capitalconversion costs are estimated at $4.3 million and $3.6 million, respectively, for TSLs 1, A, and

2. At TSL 4, manufacturers would likely use a de-rating strategy to reduce capital costs. This

would reduce the span of the product line through elimination of some higher capacity models.

Cashflow is reduced from $5 million to $2.6 million in 2014 for TSL B and TSL 4. The most

severe cashflow impacts are in the year 2013 when net cashflow is reduced by approximately 50

percent.

At TSL 5 (95-percent AFUE), the impact on INPV ranges from -24 percent to -58

percent. Net cashflow would be reduced to approximately -$23 million. Product-conversion and

capital-conversion costs are estimated at $11 and $75 million, respectively . At this level,

manufacturers expect complete loss of sales to competing products.

The same safety concerns expressed by manufacturers for gas boilers above 84-percent

AFUE also apply to oil-fired boilers above 84-percent AFUE. In particular, manufacturers of oilfired boilers expressed concern that an increased AFUE standard would cause consolidation

within the industry and further reduce total shipments.

 EE-RM/STD-01-350 COMMENT 164

At 83-percent AFUE, TSLs 1, A, and 2, the impact on INPY ranges from - 5 percent to 

-18 percent for oil-fired boilers. At TSL Band TSL 4 (84-percent AFUE), the impact on INPY 

ranges from between - 5 percent to - 20 percent. Product-conversion costs and capitalconversion costs are estimated at $4.3 million and $3.6 million, respectively, for TSLs 1, A, and 

2. At TSL 4, manufacturers would likely use a de-rating strategy to reduce capital costs. This 

would reduce the span of the product line through elimination of some higher capacity models. 

Cashflow is reduced from $5 million to $2.6 million in 2014 for TSL Band TSL 4. The most 

severe cashflow impacts are in the year 2013 when net cashflow is reduced by approximately 50 

percent. 

At TSL 5 (95-percent AFUE), the impact on INPY ranges from - 24 percent to - 58 

percent. Net cashflow would be reduced to approximately -$23 million. Product-conversion and 

capital-conversion costs are estimated at $11 and $75 million, respectively. At this level, 

manufacturers expect complete loss of sales to competing products. 

The same safety concerns expressed by manufacturers for gas boilers above 84-percent 

AFUE also apply to oil-fired boilers above 84-percent AFUE. In particular, manufacturers of oilfired boilers expressed concern that an increased AFUE standard would cause consolidation 

within the industry and further reduce total shipments. 

12-62 
REFERENCES

McKinsey & Company, Inc. Valuation: Measuring and Managing thee Value of

Companies, 3'd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons,

2000.

2. Security Exchange Commission. SEC 10-K Reports. Various dates, 1997-2001. Security

Exchange Commission. <http://www.sec.gov/>

3. Standard and Poor's. Standard and Poor Bond Ratings Services Desk. For more

information, call 212-438-7280.

4. Moody's Investors Service, Inc. Moody's Bond Ratings Services Desk.

<www.moodys.com>.

5. Ross A. S., Westerflied R.W., Jaffe, J.F. Corporate Finance 6" Edition. Boston:

McGraw-Hill, 2002.

6. Damodaran, A. Investment Valuation, 2"d Edition. New York: John Wiley and Sons,

2002. A spreadsheet is available at

<http://pages. stern.nyu. edu/-adamodar/pc/ratings.xls>.

7. U.S. Department of the Treasury. Selected Interest Rates, Series H-15. Data available at

<www.federalreserve.gov/releases/H15/data/a/temp.10p.txt>.

8. Ibbotson Associates. Ibbotson Beta Book. 2003, Chicago, IL.

<http://www.ibbotson.com>.

 EE-RM/STD-01-350 COMMENT 164

REFERENCES 

1. McKinsey & Company, Inc. Valuation: Measuring and Managing thee Value of 

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 

2000. 

2. Security Exchange Commission. SEC 1 O-K Reports. Various dates, 1997-2001. Security 

Exchange Commission. <http://www.sec.gov/> 

3. Standard and Poor's. Standard and Poor Bond Ratings Services Desk. For more 

information, ca11212-438-7280. 

4. Moody's Investors Service, Inc. Moody's Bond Ratings Services Desk. 

<www.moodys.com>. 

5. Ross A. S., Westerflied R.W., Jaffe, J.F. Corporate Finance 6th Edition. Boston: 

McGraw-Hill, 2002. 

6. Damodaran, A. Investment Valuation, 2nd Edition. New York: John Wiley and Sons, 

2002. A spreadsheet is available at 

<http://pages .stem.nyu.edu/~adamodar/pc/ratings .xls>. 

7. U.S. Department of the Treasury. Selected Interest Rates, Series H-15. Data available at 

<www.federalreserve.gov/releases/H15/data/a/tcmp.1 Op. txt>. 

8. Ibbotson Associates. Ibbotson Beta Book. 2003, Chicago, IL. 

<http://www.ibbotson.com> . 

12-63