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 

### CHAPTER 12. MANUFACTURERIMPACT 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 ofthe GRIM

.......................................... 12-9 12.3.2 Sources ofGRIM 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 FlatMarkups

........................................ 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 IndustryNet 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 bythe 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-i12.6 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 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 ofEquity Calculation

....................................... 12-14 Table 12.3.3 Cost ofDebt 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 EfficiencyLevel in 2015 (Shipments in Millions)

....... 12-17 Table 12.3.6 NES Distribution and Total Shipments for Weatherized Gas Furnaces by EfficiencyLevel in 2015 (Shipments inMillions)

. . . . . .. 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 byEfficiency Level in 2015 (Shipments in Millions)

............................. 12-18 Table 12.3.9 NES Distribution and Total Shipments for Gas Boilers byEfficiency Level in 2015 (Shipments in Millions)

............................. 12-19 Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers byEfficiency 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 byEfficiencyLevel in 2015 (Shipments in Millions)

.......... 12-23 Table 12.3.13 Manufacturer Distribution and Total Shipments for Weatherized Gas Furnaces byEfficiencyLevel in 2015 (Shipments in Millions)

.......... 12-23 Table 12.3.14 Manufacturer Distribution and Total Shipments for Mobile Home Furnaces byEfficiency 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 inthe GRIM for Weatherized Gas Furnaces (Cost in 2006$)

.................................... 12-27

12-iiTable 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 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 ofMarkups 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-TierManufacturer Markups for Oil Boilers

.................... 12-34 Table 12.3.31 Summary ofProduct Conversion Costs Used in the GRIM (Cost in Millions ofDollars)

..................................... 12-35 Table 12.3.32 Summary ofConversion 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 IndustryNet Present Value, Weatherized Gas Furnaces

....... 12-39 Table 12.4.4 Changes in IndustryNet 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 IndustryNet Present Value, Oil Boilers

................... 12-41 Table 12.5.1 Projected Change in Cumulative Labor Expenditures byProduct Class using the Scenario with the Greatest Impact (2015-2038)

...................... 12-49 Table 12.5.2 Summary ofMajor Regulations on Residential Furnace and BoilerManufacturers

........................................... 12-52 Table 12.5.3 Market Shares ofMajorFurnace and BoilerManufacturers 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-iiiForecast, 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 Forecast, and a Flat-Markup Scenario

............................. 12-44 Figure 12.4.6 IndustryNet Cashflow for Mobile Home Furnaces, Manufacturers'-Shipments Forecast, and a Flat-Markup Scenario

....... , 12-45 Figure 12.4.7 IndustryNet 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 IndustryNet 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 IndustryNet Cashflow for 

### Oil Boilers, Manufacturers'-Shipments Forecast, and a Flat-Markup Scenario

............................ 12-47 Figure 12.4.12 IndustryNet Cashflow for 

### Oil Boilers, Manufacturers'-Shipments Forecast, and a Three-Tier-Markup Scenario

....................... 12-48

12-ivCHAPTER 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 

### CHAPTER 12. MANUFACTURERIMPACT ANALYSIS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY In determining whether a standard is economicallyjustified, the Secretary ofEnergy is required to consider "the economic impact ofthe standard on the manufacturers and on the consumers ofthe products subject to such a standard." (42 U.S.c. 6295(O)(2)(B)(i)(I))a The legislation also calls for an assessment ofthe impact ofany lessening ofcompetition as determined in writing bythe Attorney General. The Department ofEnergy (DOE) conducted the manufacturer impact analysis (MIA) to estimate the financial impact ofefficiency standards on the residential furnace and boiler industry and to assess the impact ofsuch standards on employment and manufacturing capacity. The MIA has both quantitative and qualitative components. The quantitative part ofthe MIA primarilyrelies 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 industrynet present value (INPV). The model estimates the financial impact of higher efficiency standards by comparing changes in INPVbetween the base case and the various trial standard levels (TSLs). The qualitative part ofthe MIA addresses factors such as product characteristics, characteristics ofparticular firms, and market and producttrends, and includes an assessment ofthe impacts ofstandards on subgroups ofmanufacturers. In its Framework Documentpublished 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 ofthe preparation ofan 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 ofresidential furnace andboiler energy conservation standards. In Phase 3, the "Subgroup Impact Analysis," DOE conducted interviews with manufacturers representing over 80 percent ofdomestic furnace andboiler sales. This group included large and small manufacturers offurnaces and boilers providing a representative cross-section ofthe industry. During these interviews, DOE discussed engineering, manufacturing, procurement, and financial topics specific to each company and also obtained each manufacturer's view ofthe industry as a whole. The interviews provided valuable information that DOE used to evaluate the impacts ofa 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 itbased the MIA.

a DOE's standards program for residential products is conducted under Title III, Part B ofthe Energy Policy and Conservation Act (EPCA), 42 U.S.C. 6291-6309. 12-112.1.1 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 

### 12.1.1 Phase 1: IndustryProfile InPhase 1 ofthe MIA, DOE prepared aprofile ofthe residential furnace and boiler industrythatbuilt on the market and technology assessment originallyprepared for the advance notice ofproposedrulemaking (ANOPR) analysis and subsequently updated for the notice of proposedrulemaking (NOPR) analysis. For the market and technology assessment, DOE collected information on the present and past structure and market characteristics ofresidential furnace and boilermanufacturing, including information on market share, product shipments, markups, and cost structure for various manufacturers. The industryprofile includes further detail on product characteristics, estimated manufacturer market shares, the financial situation of manufacturers, trends in the number offirms, the market, and product characteristics ofthe residential furnaces and boilers industry. The industryprofile includes a topdown cost analysis ofresidential furnace and boiler manufacturers that DOE used to derive costs andpreliminary 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 ofthe industry, including Securities and Exchange Commission (SEC) 10-Kreports, Moody's company data reports, Standard & Poor's (S&P) stockreports, Value Line industry composites, corporate annual reports, the U.S. Census Bureau's Economic Census, Dun & Bradstreetreports, and industry analyses from Ibbotson Associates and Dow Jones Financial Services. 

### 12.1.2 Phase 2: 

### Industry Cashflow Analysis Phase 2 ofthe MIA focused on the financial impacts ofnew 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) impactrevenues through higher prices and, possibly, lower shipments. The analytical tool DOE uses for calculating the financial impacts ofstandards on manufacturers is the GRIM. To quantifythese impacts in Phase 2 ofthe MIA, DOE used the GRIM to perform a cashflow analysis for the residential furnace and boiler industry. Forthe industry cashflow analysis, DOE prepared a set offinancial parameters based on public sources ofinformation for use in the GRIM. DOE derivedprices from the engineering analysis cost-efficiency curves and estimated typical manufacturer markups from public financial reports and interviews with manufacturers. Itdeveloped alternative markup scenarios based on discussions with manufacturers during the NOPRphase ofthe rulemaking. DOE's shipments analysis, as presented in Chapter 9 ofthe technical support document (TSD), provided the basis for the shipments projection under each ofthe TSLs in the GRIM. During interviews with manufacturers in Phase 3 ofthe 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.

12-212.1.3 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 

### 12.1.3 Phase 3: Subgroup ImpactAnalysis Using average cost assumptions to develop an industry cashflow estimate is not adequate for assessing differential impacts among subgroups ofmanufacturers. 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 ofthe industry characterization to group manufacturers exhibiting similar characteristics. Inthe Framework Document, in the ANOPR, and at the ANOPRpublic meeting, DOE invited stakeholders to comment on the manufacturing subgroups that it should analyze for the MIA. DOE established six subgroups ofmanufacturers, corresponding to each ofthe 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 ofthe 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 ofthese 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 previouslyparticipated in DOE's rulemaking process for residential furnaces and boilers. The purpose ofthe meetings was to enhance DOE's understanding ofhow manufacturer impacts vary with the TSLs. During the course ofthe MIA, DOE interviewed manufacturers representing over 80 percent ofdomestic furnace and boiler sales, carrying out nine interviews with furnace manufacturers and five interviews with boiler manufacturers. Finally, DOE developed a tailored version ofthe GRIM for each ofthe six subgroups. The industry-wide cashflow analysis is an aggregation ofthese six subgroups. DOE also evaluated the impact ofthe energy conservation standards on small businesses. DOE created a tailored version ofthe interview guide for small furnace and boilermanufacturers, and contacted 11 small businesses to determine iftheywere 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 ofsmall businesses within the furnace andboiler industry and understand how the impacts ofenergy 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 12-3identify 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 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 CertifiedEfficiency RatingsforHeating and WaterHeatingEquipment (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 ofa small manufacturing facility and had U.S.-based manufacturing facilities. Itcontacted these manufacturers to assess their interest in participating in an interview. Ifa small business was interested, DOE sent them a short questionnaire and scheduled a date for discussion. DOE's database includes 11 smallbusinesses. In addition to the two small businesses with which DOE held structured, face-to-face interviews, DOE interviewed three small businesses bytelephone. Upon reviewing the material providedbythe 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-ProductManufacturer Subgroup DOE identified several types ofresidential furnaces and boilers that are used inparticular or unusual applications and have features that differ from those ofthe vast majority ofproducts available in the marketplace. DOE refers to these types ofproducts as "niche products." During the manufacturer interviews, several manufacturers claimedthat certain niche products would not be viable ifrequired to meet higher efficiency standards, and suggested that DOE maintain efficiency standards at current levels. The manufacturers suggested that since all ofthese products serve relatively small niche markets, the efficiency standards established for them will have little effect on national energy savings. Further, each ofthe 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 bymanufacturers.

a http://www.gamanet.org/gama/inforesources.nsf/vAttachmentLaunch/C2AAFB8D41D003F485256E9000607F661 $FILE/0505_gas _fr.pdf 12-4Table 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 thetop 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 T bi 12 1 1 N° h Pdt Id oft d D

a e ° ° IC e ro uc s ent! Ie urmg 

### M f I anu acturer ntervlews Product Class PotentialNiche 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-firedboilers Oil-firedboilers 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 ofheat distribution system. The fan is located above the heat exchanger. The return-air plenum is connected to the top ofthe unit. The manufacturer believed that manufacturers ofdown-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 ofthe 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 commentedthat 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 difficultymaking products within the condensing range due to these size constraints. However, this manufacturer also stated that these products could be manufactured within the range of78-percent to 83-percent annual fuel utilization efficiency (AFUE).

• Convertible andcompact furnaces

- Convertible and compact furnaces are categories of mobile home furnaces that manufacturers identified as presenting unique challenges. During the interviews, one manufacturer identifiednumerous ("convertible") mobile home furnaces that allow the consumer to switch the type offuel. The manufacturer also suggested that ifmobile home oil-fired furnaces must comply with a more stringent energy conservation standard than mobile home gas furnaces, these convertible products mayno longerbe viable due to the increased cost and a electric options. In addition, this manufacturer stated that customers maybe forced to enlarge their existing furnace closet for compact mobile home furnaces to account for the increase in size ofa more efficient furnace, which would onlybe possible at a considerable expense. DOE's analysis considered the effects ofincreased energy conservation standards on all mobile home products regardless offuel 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.
12-5Horizontal 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 Horizontal configuration

- Horizontal oil-fired furnaces are used in attic spaces or crawl spaces and other locations where the height ofthe furnace is the constrained dimension. Air enters at one end ofthe unit through the fan compartment, is forced horizontally over the heat exchanger, and then exits at the opposite end. These types ofoil-fired furnaces are typically serviced annually to maintain the rated efficiency ofthe 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 ofthe 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 ofthe 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 soldprimarilyinto 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 andhot water, oil-fired boilers. Manufacturers stated during the interviews that theybelieve the differential established byNAECA is appropriate for steam boilers. 

### In addition, manufacturers commentedthat increased efficiency standards for these products have the potential to eliminate steam products from the market. Ifthe standard level DOE chooses eliminates steam, gas boilers and steam, oil-firedboilers from the market, manufacturers believe consumers would experience significant impacts because they would be forced to convert their homes to use a hot water boilerrather than steam through re-piping and the replacement ofthe existing radiator.

• Outdoor boilers

- One manufacturer urged DOE to consider outdoor weatherized gas boilers as a niche product with very low shipments. The manufacturerbelieves that as DOE increases efficiency standards for these products, the conversion costs exceed the revenues generated bythis product. 12.2 MANUFACTURING KEY ISSUES The first question ofeach MIA interview guide is: "What are the key issues for your companyregarding the furnace and boiler energy conservation standard rulemaking?" This open question initiated dialogue with the manufacturers, enabling them to identify keypoints 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 expressedregardless ofproduct class. Venting

- Venting was the most common concern discussed bymanufacturers, both at the 12-62004 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 2004 ANOPRpublic meeting and during the manufacturer interviews. Properventing is necessarybecause ofthe 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 ofproducts at those efficiency levels for which the safety concerns exceed the benefits. (See discussions ofmanufacturer concerns about venting for particularproduct 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 bearthe increased risk at any cost. Warranty andliability costs
- Liability under warranties is based on future product performance and durability. The costs associated with productperformance warranties require estimates over the full term ofa product's life and require management to consider factors such as the extent offuture repair needs and the future cost ofmaterial and labor to perform the services. Generally, estimated warranty costs are calculated as the ratio ofhistorical warranty costs to historical sales. When no warrantyhistory is available for new orreengineered products, estimated warranty costs are based on the warrantyhistory ofsimilar products. Warranty costs include the cost oflabor and parts to repair equipment under warranty and they are usually a component ofcost ofgoods sold (COGS), as are parts costs, raw materials, and factory overhead. Manufacturers generally estimate their future warranty costs for each product line. The number ofunits expected to be repaired orreplaced is determined by applying the estimated failure rate, which is generally based on historical experience, to the number ofunits that have been sold and are still under warranty. The estimatedunits to be repaired under warranty are multiplied bythe average cost to repair or replace such products to determine the company's estimated future warranty cost. Warranty costs as a percentage ofsales for heating equipmentmanufacturers are generally in the range ofone to two percent. Manufacturers offurnaces and boilers stated that the development, manufacture, sale, anduse of products at near-condensing levels would increase the risk ofwarranty andproduct liability claims, and that such claims couldbe 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 offurnaces and boilers, this level ofincrease 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 12-7products 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 products sold and the efficiency distribution ofthese products for the base case and all TSLs. During the interviews, DOE asked manufacturers to comment on the NES forecasts. For manyproduct classes, manufacturers generally agreed with the projected impacts ofstandards on total shipments and the distribution mix ofefficiencies. 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 maybe more inclined to repair their existing system than to purchase a new system with a costly installation. Finally, manufacturers commented on the predicted distribution ofproducts by efficiency level for the year 2015. In several instances, theyprovidedrevised 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-weatherizedgas furnaces

- Many manufacturers believe that non-weatherized gas furnaces at 8I-percent AFUE cannotbe safelyvented. Manufacturers are not willing to accept the risk and/or cost involved in producing a full line ofproducts at 81-percent AFUE. Manufacturers stated there are variations and constraints that must be addressed, which require a margin ofsafety. The safetymargin is needed to account for variations due to manufacturing tolerances, gas quality, vent length and number ofbends, altitude, gas fuel pump performance, makeup air conditions, installation location, and installer experience. With increasing minimum efficiency requirements, this margin ofsafety is diminished and a standard at 81-percent AFUE does not provide an adequate safety margm.

• Weatherizedgas furnaces

- Some manufacturers ofweatherized gas furnaces believe that efficiency levels at or above 81-percent AFUE cannotbe made safely and reliably due to vent and heat exchanger condensation. Corrosion in the heat exchanger itselfcan significantly shorten heat exchanger and appliance lifetime. Furthermore, units with economizers also have an increased probability ofcondensation in the vent system. Mobile home furnaces

- Manufacturers ofmobile home furnaces expressed concern over a standard of81-percent AFUE due to a lack oftraining and experience among installers. Intheir view, vents are installed improperly more often in mobile homes than in on-site built homes and are much more likelyto have corrosion problems. Oil furnaces

- Manufacturers ofoil-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 ofvent dampers in oilfired furnaces to increase AFUE. Vent dampers trap exhaust gases during standby mode 12-8and 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 and may cause an undesirable oil-fuel smell in residential homes. Gas andoil-firedboilers

- Boilermanufacturers have concerns regarding condensation at efficiency levels of84-percent AFUE or greater for gas boilers and 85-percent AFUE or greater for oil-fired boilers. Manufacturers stated that condensation offlue 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 watertemperature to the boiler, which in tum has a direct impact on the probability ofcondensation. 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 ofthe otherkey 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 ofraw materials. Raw materials costs have increased from 68-70percent ofmanufacturer costs to 75-78 percent ofmanufacturer 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 equipmentreliability and longevity at higher standard levels. • Possible loss ofaffordability and utility offurnaces and boilers to the consumer such as the elimination ofstanding pilot lights. • Preservation ofconsumer options. • Gas quality

- The market has seen an increase in fluctuations in gas quality (i.e., the energy content ofnatural gas). Fluctuations in gas quality directly affect the performance and efficiency ofthe gas furnace. Manufacturers expressed concern that a variation in gas quality will cause variations in efficiency, which could increase theirrisk ofcondensing problems.



### 12.3 GRIMINPUTS AND ASSUMPTIONS 12.3.1 Overview of

### the GRIM The GRIM is DOE's main tool for assessing the impact on industry ofimplementing new efficiency standards. The GRIM is a financial model ofthe industrythat captures the impact of efficiency standards on industryvalue. The basic structure ofthe GRIM, illustrated in Figure 12.3.1, is a standard annual cashflow analysis thatuses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set ofregulatory conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet for this rulemaking calculates a series ofannual cashflows, beginning with the base year ofthe analysis, 2006, and continuing explicitly to 2038. The model calculates the INPV by summing the stream ofannual discounted cashflows during this period. I

12-9Price 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 Price

Quantity

Cash Manufacturing III

Financial



### Figure 12.3.1 Using the GRIMto 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 primarymeasure offinancial impact ofthe standard on manufacturers. Appendix Y ofthe TSD provides more technical detail and user information for the GRIM. 

### 12.3.2 Sources ofGRIM 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 ofthe 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 • Netproperty, plant, and equipment DOE then revised its own estimates offinancial parameters through interviews with manufacturers during both the ANOPR and NOPRphases ofthe rulemaking. Itrelied on manufacturer input for these revisions for two reasons. First, many furnace andboiler manufacturers, both large and small, are not public corporations, so industry-wide financial data are not readily available. Second, manymanufacturers offurnaces and boilers are diverse businesses that participate in markets that are substantially different from furnace and boiler 12-10markets; 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 individualmanufacturers' 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 markets; therefore, the available financial information is not clearly representative ofthe 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-Kreports to calibrate the GRIM's base case operating profit margin to be representative ofthe industry. Operating margin is defined as earnings before interest and taxes, as a percentage ofnetrevenue. 

### 12.3.2.2 Standard and Poor and Moody's CreditRatings 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 ofdebt for the cost ofcapital 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 onhistorical shipments data provided primarilyby GAMA and supplementedby other sources. Weatherized gas furnace shipments were estimated from 1990-1997 shipments ofpackaged 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 ofthe TSD describes the methodology and analytical model DOE used to forecast shipments. DOE developed additional shipmentprojections, not included in the shipments model, for the MIA based onmanufacturer 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 ofthe efficiency levels and design options available for residential furnaces and boilers impactedby 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 ManufacturerInterviews During the course ofthe MIA, DOE conducted interviews with manufacturers representing over 80 percent ofthe industry. During these discussions, DOE obtained information which it used to determine and verifythe input assumptions for the GRIM.

a The GRIM does not include installation costs, since these costs are incurred after the sale ofthe furnace orboiler.
12-11Key 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. 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 ofthe conversion capital expenditures that companies use to replace stranded assets; Premium products; Attributes ofpremiumproducts;

o The current manufacturer and industryratio ofbaseline to premiumproduct shipments; Thepredicted change to premium productratios at each trial standard level;

o The profitability ofbaseline and premiumproducts; and Venting concerns. Forthe final MIA, DOE took into consideration all ofthe information gathered during the manufacturer interviews. Copies ofthe 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 thatrepresent 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 ofthe public companies bytheirmarket shares in each ofthe product classes.

12-12Table 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 Table 12.3.1 GRIMFinancialParameters Industry Weighted Average byProduct Class Parameter Gas Mobile Oil Furnaces Home Furnaces Boilers Furnaces Tax Rate 38% 38% 42% 37% (% ofTaxable Income) Working Capital (% ofSales) 9% 22% 23% 23% SG&A (% ofSales) 18% 17% 21% 21% R&D (% ofSales) 1.3% 1.0% 1.2% 0.9% Depreciation (% ofSales) 1.7% 1.8% 2.0% 1.8% CapitalExpenditures (% ofSales) 2.0% 1.8% 1.7% 2.2% Net Property, Plant, and Equipment 14% 15% 12% 25% (% ofSales) Source: SEC, 10K Reports, FIscal Years 1990-2003. DOE used information from SEC 10-Kreports 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 ofnetrevenue. 12.3.4 Corporate DiscountRate DOE used the weighted average cost ofcapital (WACC) for each product class within the industry as the discount rate to calculate INPV. A company's assets are financed bya combination ofdebt and equity. The WACC is the total cost ofdebt and equity weighted bytheir respective proportions in the capital structure ofthe industry.5 DOE estimated the WACC for the industrybased on a few representative companies, as described byEquation 1. WACC 

## = (AfterTaxCostofDebt 

### x DebtRatio)

### + (CostofEquity

### x EquityRatio) Eq.1 The cost ofequity is the rate ofreturn that equity investors (including, potentially, the company) expect to earn on a company's stock. These expectations are reflected in the market price ofthe company's stock. The capital asset pricing model (CAPM) provides one widelyused means to estimate the cost ofequity. According to the CAPM, the cost ofequity (expected return) is: CostofEquity

## = RiskFreeRateofReturn

### +Beta x RiskPremium Eq.2 where:
12-13Risk free rate of return is the rate of return on a "safe" benchmark investment. Inpractice, 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 Risk free rate of return is the rate ofreturn on a "safe" benchmark investment. In practice, investors use a variety ofdifferent-maturity Treasury notes to estimate the riskfree rate. DOE used a long-term Treasury note return (lO-year bondreturn) 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. Riskpremium is the difference between the expectedreturn on stocks and the riskless rate. Beta is the covariance ofa stock with the market as a fraction ofthe market's variance. The Beta equals one ifthe 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 ofequity is 12.1 percent and 10.3 percent, respectively, for residential furnaces andboilers, as calculated in Table 12.3.2. 

### T bi 12 3 2 C t f E °t C 1 I f



### a e o 0 

### os 0**~qmry** 

### a cu a 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-KReports, Fiscal Years 1990-2003. Bond ratings are a tool to measure default risk and arrive at a cost ofdebt. Each bond rating is associated with a particular spread. One way ofestimating a company's cost ofdebt 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 ofdebt for seven manufacturers. Moody's and S&P had bond ratings for six ofthe seven manufacturers, so DOEused these ratings to estimate the
12-14manufacturers' 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 corporatebonds 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 manufacturers' cost ofdebt byadding the relevant spread to the risk-free rate. There was one manufacturer with no Moody's or S&P bondrating available. Inthis case, DOE used the company's size and interest coverage ratio to arrive at the spread ofcorporate debt over risk-free securities. The interest coverage ratio measures a company's abilityto service its debt-financing obligation through its earnings.6 Forthe cost ofdebt, S&P's Credit Services provided the average spread ofcorporate bonds for public manufacturers over the period 1990-2003. To this, DOE added the industryweighted average spread to the average Treasurynote yield over the same period. 7 Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost ofdebt bythe industry average tax rate to determine the net cost ofdebt for the industry. Table 12.3.3 presents the derivation ofthe cost ofdebt. Also shown is the capital structure ofthe industry, i.e., the debt ratio (debt/total capital): 

### Table 12.3.3 Cost ofDebt 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) TaxRate 37.5 37.3 42 26 7 2 9 39 27 [%] Net CostofDebt 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 debtratio for short-termdebt onmarketvalue ofequity. However, itusedthebookvalue estimatethe debtratio oflong-tenn debt. 12-15DOE 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, IbbotsonAssociates8 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 DOE estimated the furnace industry's WACC to be approximately 10 percent, and the boiler industry's WACC to be approximatelynine percent. Subtracting an inflation rate of2.9 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. Forvalidation, Ibbotson Associates8 also provides a weighted average cost ofcapital 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 ofapproximately eight percent. 12.3.5 NES-Shipment Forecasts The GRIM estimated manufacturerrevenues based on total-unit-shipment forecasts and the distribution ofthese values byAFUE levels. Changes in the efficiencymix by standard level are a key driver ofmanufacturer finances. Forthis analysis, the GRIM used both the NES- and the manufacturers'-shipments forecasts for each product from 2006 to 2038. Total shipments forecasted bythe NES for all TSLs in 2015 are shown in Table 12.3.4 and are further detailed below. T bi 12 3 4 TtlNES F t d Sh o t 0 2015 (MOll" )

a e o 0 oa - orecas e lpmen s m 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
Forthis analysis, the GRIM used shipment forecasts ofeach product class for different efficiencies for the years 2006 to 2038. Based on its analysis ofthe furnace and boiler industry, DOE assumed that shipments at lower efficiencies were most likelyto 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 byefficiency level. Also included is a forecast ofthe reduction in total shipments at each TSL compared to the base case.

12-16Table 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) 

### Table 12.3.5 NES Distribution and Total Shipments for Non-Weatherized Gas Furnaces b Efr . L I' 

### 2015 (Sh' t' M'll" )

IY 

### IClenc' eve III 

### lpmen Sill 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% 

### TotalUnit Shipments 2.93 2.93 2.92 2.85 2.65 

### PercentDifference 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 . L I' 

### 2015 (Sh'

. M"lr ) 

### IClency eve III 

### lpments III 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 

### PercentDifference in



### - 0% 0% 0% 0% 

### Shipments Relative to Base Case

12-17Table 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 

### 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 PercentDifference 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 BaseCase TSL1 TSLA/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 PercentDifference in



### - 0% 0% 0% 0% 0% Shipments Relative to Base Case

12-18Table 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% 

### Table 12.309 NES Distribution and Total Shipments for Gas Boilers byEfficiency Level in 2015 (ShOt 0 MOll" ) lpmen Sill 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 

### PercentDifference in



### - 0% 0% 0% 

### Shipments Relative to Base Case

12-19Table 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 gasfurnaces. 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 

### Table 12.3.10 NES Distribution and Total Shipments for Oil Boilers by Efficiency Level in 2015 (Sh·

. M·n· ) lpments m 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 PercentDifference in



### - 0% 0% 0% Shipments Relative to Base Case 12.3.6 Manufacturers'-Shipments Forecast The NES forecasts the total number ofproducts sold and the efficiency distribution of these products for the base case and all TSLs. During the course ofthe interviews, DOE asked the manufacturers to comment on the NES-shipment forecasts. For manyproduct classes, manufacturers were in general agreement with the NES results. For otherproduct classes, however, there were different views concerning the impacts ofstandards on total shipments and distribution mix ofefficiencies. 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 ofcondensing 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 ofa 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.
12-20For 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 acknowledgedthat 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 willswitch 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 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 commentedthat consumers wouldbe more likely to purchase heat pumps because oftheir reliability, and because ofthe 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 commentedthat consumers will switch to heat pumps or combination systems ratherthan 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 oruse propane. Finally, manufacturers ofboilers expressed concern that the NES analysis did not forecast any decline in shipments at any ofthe TSLs. They stated that, because ofincreased first cost, consumers are more likely to choose radiant or electric furnaces than more-efficient boiler systems. One manufacturer recognized that there had alreadybeen 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 industrywould continue to move toward consolidation even in the absence ofincreased energy efficiency standards. DOE took into consideration all ofthe 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 bi 12311 M

a e 

# .. f t 

### 'F anu ac urers - t d Sh· t . 2015 (M·ll· ) orecas e lpmen SIll 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 bythe NES model for most product classes at increased efficiency levels. TSL 5
12-21 5

1.48

.159 .082 .227 .098shows 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. shows a more significant decline for all product classes except weatherized gas furnaces. For non-weatherized gas furnaces, the difference between the decline forecasted bythe manufacturers' shipments and the decline forecasted bythe NES shipments for TSLs 4 and 5 is approximately -17 percent and -44percent, respectively. Forweatherized gas furnaces, DOE used the NES-shipments forecast because the prices ofthe products did not largely vary across TSLs and, thus, DOE would not expect a decline in the total shipments. Finally, based on its analysis ofthe furnace and boiler industry, DOE assumed that shipments at lower efficiencies were most likelyto 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 ofproduct sales by efficiency level for the year 2015. 

### In several instances, theyprovided 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 ofcondensing units will occurby 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 ofair-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 byhigher future heating costs. Manufacturers ofgas boilers believe that the condensing market for gas boilers will increase dramaticallyby 2015. Unlike gas boiler manufacturers, oil-fired boiler manufacturers stated that theybelieved efficiencies ofthe products on the market will be more sharply distributed at a slightly lower efficiency.

12-22Table 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 

### Table 12.3.12 ManufacturerDistribution and Total Shipments for Non-Weatherized Gas Furnaces byEfficiency 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 PercentDifference



### - 0% 0% -0.4% -17.4% -49.5% 

### in Shipments Relative to Base Case Table 12.3.13 ManufacturerDistribution and Total Shipments for Weatherized Gas F b Effi . L I' 2015 (Sh'

. M'll' )

urnaces ,y IClency eve In 

### lpments In 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% 

### TotalUnit .425 

### Shipments PercentDifference



### - 0% 0% 0% 0% 0% 

### in Shipments Relative to Base Case

12-23Table 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) 

### Table 12.3.14 ManufacturerDistribution and Total Shipments for Mobile Home Furnaces byEfficiency 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 

### PercentDifference in


### - -0.5% -0.5% -7.1% -7.1% 

### Shipments Relative to Base Case

Table 12.3.15 ManufacturerDistribution and Total Shipments for Oil Furnaces by Efr . L I· 

### 2015 (Sh· t· M"lr ) IClency eve III 

### lpmen Sill 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% 

### TotalUnit 0.0880 0.0860 0.0820 

### Shipments PercentDifference



### - 0% 0% 0% -2.3% -6.8% 

### in Shipments Relative to Base Case

12-24Table 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% 

### 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 

### PercentDifference in



### - 0% 0% -10.0% -20.1% 

### Shipments Relative to Base Case

12-25Table 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 

### 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 PercentDifference



### - 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-efficiencyproducts sold under existing efficiency standards are manufactured at lowerproduction volumes than standard-efficiencyproducts. The enactment of higher energy conservation standards will increase production volumes for units with higher efficiencies. The GRIM included the proportion ofcosts devoted to labor, materials, freight, depreciation, and non-depreciation overhead that make up the full production cost ofthese products. DOE estimated the proportion ofcosts associated with each cost categorybyderiving 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 boilerproduct class analyzed. Costs are presented for
12-26baseline 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 

### 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

12-27Table 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 

### 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

12-28Table 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. Thedata 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 

### 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 premiumproducts and include both in their mix ofproduct offerings. Manymanufacturers interviewed stated that, for premium products above mandatory standard levels, profitability levels (and corresponding markups) were higher. DOE learned that premiumproducts are usually differentiated from baseline equipment byhaving higher efficiency levels and additional features. For example, for non-weatherized gas furnaces, attributes ofpremiumproducts include two-stage heating, variable speed blowers, thermostatic controls, and other additional feature sets. To understand howbaseline and premiumproducts 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 ofan undesirable, near-condensing, efficiencyregion. The data on model availability for the remaining product classes-weatherizedgas furnaces, nonweatherized oil-fired furnaces, andboilers-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 ofbaseline and premiumproducts. To estimate the manufacturer price ofthe equipment sold, DOE applied markups to the production costs. Forthe analysis, DOE considered four distinct markup scenarios based on manufacturer input for each furnace and boiler product class. Itused scenarios to bound the range ofexpected productprices following standards. For each product class, DOE used the markup scenarios that best characterized the prevailing markup conditions and described the range ofmarket responses manufacturers expect as a result ofstandards.

12-2912.3.8.1 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 

### 12.3.8.1 FlatMarkups Under a flat markup strategy, DOE applied a single uniform "flatmarkup" 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 waypublic manufacturers report the costs ofgoods sold. Specifically, product warranty and shipping expenses are treated differently; some companies include both ofthese costs as part ofCOGS, others only include one ofthem, and some do not include these items as part ofCOGS 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 presentedbelow in Table 12.3.24. 

### T 

### hI 12 3 24

a e 

# .. f k 

### FlatManu acturer Mar ups U d· GRI se III 

### 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-TierMarkups DOE'sresearch on the residential furnaces andboilers 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. Inother words, baseline or commodityproducts receive one markup and premium orhigher-end equipmentreceive another, higher markup. DOE determined the commodity and premium product markups by aggregating marketshare, shipment-weighted manufacturer information obtained during the interviews. The markups DOEused are described in section 12.3.8.5. 

### 12.3.8.3 Three-Tier Price Markup Forboilers, 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 oftypical 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-tierpricing strategy. These values
12-30are 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 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 ofthe market). 

### In other words, as efficiency improves and production costs increase, constant prices translate into reducedprofit 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 ofexpected profitability levels following standards. Tables 12.3.25 through 12.3.30 present the markup scenarios DOE used for each product class. Forthe flat markup scenario, DOE used the values indicated in Table 12.3.25 for all efficiency levels. T bi 12 3 25 S

a e 

# .. ummaryofM k ar ups 

### Scenanos b PdtCI )y ro uc ass Product FlatMarkup Two-Tier Three-Tier ConstantPrice

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 bi 12 3 26 T T" M f

a e 

# .. wo- ler anu acturer M k ar f 

### N W h . dG F ups or on- eat enze as urnaces 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 IA 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

12-31Table 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 1.37 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 

### T hI 12 3 27 C t t P" M k f 

### W th " d G F

a e " " 

### 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 hI 12 3 28 C P" M k f 0"1 

### F

a e " " 

### 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 hI 12 3 29 

### Th T" 

### M f 

### t

a e " " 

### ree- ler anu ac urerM k f G B"I 

### ar ups or as 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

12-32Table 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 T bi 12330 Th

a e 

# .. ree-T M ler f t anu ac urer M k ar 

### £ 0'1 B '1 ups or I 01 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 TSL21A 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 theirproduction facilities and product designs into compliance with the new regulation. Forthe purpose ofthe 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 inproperty, plant, and equipment to adapt or change existing production facilities so that newproduct 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 ofthe various TSLs. DOE obtained financial information through manufacturer interviews andpresented 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 ofmanufacturer replies, and estimated the total class market share. It divided the sum ofreplies bythe estimated total product class market share to estimate a figure for the total product class. Table 12.3.31 summarizes the resultingproduct 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 ofapproximately 1to1.3 percent ofrevenues. From a development and testing standpoint, most manufacturers employ engineers and testing personnel on staffand 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 staffand testing facilities almost exclusively to comply with the new standard, leaving few resources available to conduct their ordinaryproduct development and testing efforts.

12-33Table 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 Table 12.3.31 Summary ofProduct Conversion Costs Used in the GRIM (Cost in Millions ofDollars) 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-CapitalExpenditures. DOE evaluatedthe level ofcapital investments needed to comply with energy conservation standards. The size ofthe products and the time required to fabricate and assemble them increase as efficiency increases. Larger equipment implies not onlyreduced 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 primarilybased on manufacturer interview responses, including the percentage of assets stranded at each TSL. Manufacturers explained howthe different TSLs impacted their abilityto use existing plants, warehousing, tooling, and equipment. Fromthe interviews, DOE was able to estimate whatproportion ofexisting manufacturing assets needed to be replaced and/orreconfigured, and what additional manufacturing assets were required to manufacture the higher efficiency equipment. Higher standards usuallyresulted in a largerproportion ofexisting 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 modelprovides only a lowerbound for the capital expenditures because there is no replacement capital. Second, DOE estimatedthe capital requirements assuming the industry would maintain its historical capital structure. DOE estimatedplant, property, and equipment requirements as a function ofrevenue for each TSL. It then comparedboth ofthese estimates to the numbers derived from the manufacturer interviews. Anydiscrepancies were the subject offollow-on discussions, and DOE adjusted the values accordingly. Table 

### 12.3.32 summarizes the resulting capital conversion costs for all product classes. It shouldbe noted that these capital conversion costs are above andbeyond the normal capital expenses modeled inthe GRIM. The GRIM separately accounts for ordinary capital expenditures ofapproximately 1.8 to 

### 2.5 percent ofrevenues. These funds are used for capital

12-34improvement 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. improvementprojects, cost reduction efforts, and replacement ofworn out equipment. 

### Table 12.3.32 Summary ofConversion CapitalExpenses 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 offinancial impacts on the residential furnace and boiler manufacturing industries. This document reports the results ofthe MIA on two key financial metrics: net present value and annual cashflows. 

### 12.4.1 Trial StandardLevels DOE developed six TSLs that include combinations ofenergy 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.

12-35Table 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. 

### 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 IndustryNet PresentValue DOE used the INPV in the MIA to compare the financial impacts ofdifferent TSLs on furnace and boiler manufacturers. The INPV is the sum ofall net cashflows discounted at the industry's cost ofcapital, 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 ofstandards 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 ofthe base case (no new efficiency standard) to that ofeach TSL. The difference in INPV is an estimate ofthe economic impact that implementing that particular standard would have on the entire industry. To evaluate the range ofcashflow 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 industryunder the different scenanos.

12-36Table 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. T bi 1242 Ch . I d t N tP tV 1 N W th

. dG F 

### *

a e 

## .. anges m n us ry e resen a ue, on- ea enze as urnaces FlatMarkup, Two-TierMarkup, 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% FlatMarkup, 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.

12-37Table 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 

### 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 FlatMarkup, 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 FlatMarkup, NES Shipments FlatMarkup, 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 maynot add up due to roundmg.

12-38Table 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 

### T hI 1245 Ch 'Id t NtP tV I 0'1F 

### *

a e , ,**an~es** III 

### n us ry e resen a ue, I 

### urnaces FlatMarkup, Constant-PriceMarkup, 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 maynot add up due to roundmg. 

### T hI 12 4 6 Ch

a e , , 

### 'Id t NtP**an~es** III 

### n us ry e resentV 1GB.. 

### * a ue, as 01 

### ers FlatMarkup, Three-Tier Markup, Manufacturers'Shipments Manufacturers'Shipments TSL Changein 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 addup due to roundmg.

12-39Table 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 

### T bi 12 4 7 Ch

a e 

# .. . I d anges In 

### n ustryNtP e resent 

### V I 0·1 B·I 

### * a ue, I 01 

### ers FlatMarkup, Three-Tier Markup, Manufacturers' Shipments Manufacturers'Shipments TSL Change in INPV from Change in INPVfrom 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 addup due to rounding. 

### 12.4.3 Impacts on Annual Cashflow While INPV is useful for evaluating the long-term effects ofstandards, short-term changes in net cashflow are also important and indicative ofthe impacts on industry during the years between final rule publication andthe standard effective date. For example, a large investment over a period ofone ortwo 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 bondratings; andpossiblyincreased concern among investors. Thus, a short-term disturbance can have long-term effects that the INPV cannot capture. To get an idea ofthe behavior ofannual 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 ofthe TSLs evaluated for the two different markup and shipment scenarios byproduct class. Several observations applyto all the industry net cashflow figures. Priorto the effective date, the cashflows are nearly identical for all scenarios after final rule publication. Cashflows are driven bythe level ofcapital investments and product conversion expenses and the proportion ofthese investments spent everyyear. In addition, in the year the standards take effect, a relatively large investment in working capital mayberequired iftotal revenues increase. Also, where applicable, a one-time write-down on stranded assets yields a positive increase in cashflows due to lower taxes paidthat year. Priorto 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. 12-40For 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

5 2007 2009 2011 \\2OT3 5 2017 3 019 2021 2023 20 200 2

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 For greater insight into the behavior ofcashflows, consider Figure 12.4.1 for non-weatherized gas furnaces. Inthis 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 ofcashflows 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 diff erences both in terms ofthe degree and rate ofchange. For example, TSL 3 shows a more gradual decline in net cashflows starting in 2012, approaching zero by2014 and quicklyrecovering to pre-standard levels thereafter. By contrast, the more stringent standards considered for TSL4 would force industry to make additional investments in capital and product conversion expenses. 

### In addition, it is worth noting that, under TSL4, cashflows cross into negative values in 2013 and then quickly go backto positive cashflows that are even slightlyhigher than the base-case cashflows because all standards-induced product costs markup at the same baseline flat markup. Finally, TSL 5 shows the most dramatic changes, crossing over into negative cashflows by2011 and peaking at over $200 million in negative cashflows 

### in 2013. Again, the degree and rate ofthe change in cashflows is tied to the capital investments and production conversion expenses required to conform to the new standard

. The recoveryunder TSL 5 is dramatic, since positive cashflows after implementation ofthe standard are significantlyhigher than those for all other TSLs. However, four years ofsignificant 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 IndustryNet Cashflow for Non-Weatherized Gas Furnaces, NES- Shipments Forecast, and a Flat-Markup Scenario

12-41$150 Jan 1, 2015 Effective Date $100 k - n^ t

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 $0 o 2 03 2006 2009 202 r'2Q15 2018 2021 2024 IJ:i 1 ^

m LL X10

-$20 - 1Lam-

-$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 I 5150

## r--- --- - . -.---------------------- - - - - -: - . J.n 1, 2015 Effective Date 5100

- -- -- - -**-- --** **---** .......**it:E:~** .---'N I**~""" ,...--.--....-** 

, ........" :I---,,I--

_ u_. •

## --**--(I ">.~** **_l ~~** **.~~~** "

## ~**~** $50

### ~**\~J ;j** **7** 

# - ..-- ---- 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

^ `tea .t• :c--^ - i $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 .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 -+- TSL51 Figure 12.4.4 Industry Net Cashflow for Weatherized Gas Furnaces, NESShipments Forecast, and a Flat-Markup Scenario

$4 r-------------------------------- Jan 1, 2015 Effeetlv9 Date

# ,,**~~L 'lf~**  

# J l /**~ ~'<-** **"'<!'** <I 

### l' 

# I**$0 t-** **-- ---~-** **20 ----~** **-- 00** **-- ~~~~** **2~ --** **--~ 01** **-- ----** **02 ----~** **0~24-**

# i·,t-**-- ----------** **-------- ----** **~Jt___---- --** **-- --** **-- --------** **----**

e !

... -

$4 +---- 

# T- ft

-$6**t-- --** **---- ------** **-- -~l** **j-- --!-** **-- --** **----**

.0 " :

_ $8 L-

-----------------------------------+-
------------------------------ Years [-+--BO.8 -4-TSL 1 TSL A

....... rSL 2 -<t:-TSL B**TSL** 4 -i-TSL51 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 $4 ,---- - - ----- ---- .. 

### , 

### , 

## -,"

$2 Jan 1. 2015 Effective Date

cN,,- ' /**--i {"** **~/ :.....,**  - -' :,**~**........**~**

.....**{~~ -.** **~** $0**~-~ ~--~**  -**~~-,** .c: "**~~** -**~ ~-~-** **-~---~-** -, • 

# L"'**u'"~** _ '""'

_ \ " 

# i:'

... '""

___

# =

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# i:

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# t-Ii-**~~ \:j** **a--- !** **~.**

# __ _

.•**~** I ·$6+----



### ,**.$8L-----------------------------------~'~-------** Year I

- .....Base '--II- TSL 1 TSL A --"<--- TSL 2 -:;rTSL B --+-- TSL 4 -+- TSL51 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 201 1**~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

`"tea[

^

11 1 1
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

# =-~

# -. .

___**~_':y:_:_le~~~_~~**

# ..**_~**

# ..**~_.~.~_**

# ._-_.
$3

# ~ ---

# ~ - - __

# ~~~..__

# .~__ • __ _**-=-""""" .li** **-'-_ ",** **~**___ -",........**~** :**~~~~i ~~** **~~ ~~~~~** **~~ ~**  $2 q;**~ ~**  'E $1**~ ~**  $0 0 u: "" 2018 2006 2009 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 20 15 2018 2021 0 4 1 2 2

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 

# =

\
-**/~~ '=** **~=-' 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 -,.- TSL4-'

-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

__**~~ :**  2018 2021 2024 

# i**$~0~3** 2006 2009 \ 2012 2+5

# !**~** -$5t--------------

- \ \-----r-/

-------------
L$10 \ 

# -Lr-/

------------- ! \ 

# il

-$15

-----.\-**---Ti' l~** **--------------** -$20**t--------------~ ---,** **f__ -------------**  -$25

# t---------------**~** -$30**~------------------+_-------------** Year I**ase** TSL 1 TSL ATSL 2 TSL B TSL 4 T$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 -- __- _---.___. ____ --'-_..._. __----------------- ------------_.

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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. $20

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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 orboilerunit theyproduce, the amount oflabor, and hence direct labor costs, are proportional to the amount ofmaterials costs. Therefore, assuming constant wages and disregarding fluctuations in the market prices of materials, they would expect employment levels to scale with the cost ofmaterials for the industry. DOE incorporated this into the GRIM, which projects labor expenditures annually. Labor expenditures are a function ofthe labor intensity ofthe product, the sales volume, and an implicit wage assumption that remains fixed over time. DOE analyzed employment impacts byestimating the cumulative labor expenses as a percentage ofindustryrevenues for each product class. Table 12.5.1 presents those scenarios with the largest negative employment impacts for eachproduct class.

12-47Table 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 Table 12.5.1 Projected Change in CumulativeLaborExpenditures by Product Class using h S . h h G ttl t (2015 2038) t e cenano wit t e rea es mpac - 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, ConstantPrice Markup, NES -.02% -.02% 0.2% -1.7% -1.7% -22% Shipments Mobile Home Furnaces FlatMarkup, Manufacturers' 0% 0% -.4% -14% -14% -32% Shipments Oil-Fired Furnaces ConstantTwo-Tier Markup, 0% 0% -.2% -.2% -.3% -.3% NES Shipments Gas Boilers Three-TierMarkup, 0% 0% -10% 0% -10% 18% Manufacturers' NES Oil Boilers Three-TierMarkup, 1% 1% 1% 3% 3% 36% Manufacturers' NES DOE's analysis shows significant employment impacts for manufacturers ofnonweatherized gas furnaces at TSLs 4 and 5, manufacturers ofmobile home furnaces at TSLs 4 and 5, and manufacturers ofgas boilers at TSLs 2, 4, and 5. Reductions in labor expenditures are driven primarilyby a reduction in unit shipments. Inversely, increases in employment expenditures result from raising industryproduct costs. 12.5.2 Manufacturing Capacity To the extent that more stringent energy conservation standards increase the size ofthe heat exchanger, they couldreduce 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 exchangerproduction. Itis 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 12-48production 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 production facilities to overseas locations where labor markets offer cost savings. Some ofthese 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. Ifstandards 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 oftotal furnace and boiler sales, and about one-quarter ofthese 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. Ifsales ofresidential furnaces and boilers to foreign markets decrease as a result ofhigher 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 ofthe assessment ofmanufacturerburden is the cumulative impact of multiple DOE standards and the regulatory actions ofother Federal agencies and States that affect the manufacture ofa coveredproduct. DOE believes that a standard level is not economicallyjustified ifit contributes to an unacceptable cumulative regulatoryburden. While anyone regulation may not impose a significantburden on manufacturers, the combined effects ofseveral impending regulations mayhave serious consequences for some manufacturers, groups ofmanufacturers, or an entire industry. Assessing the impact ofa single regulation may overlook this cumulative regulatoryburden. Companies thatproduce a wider range ofregulated products maybe faced with more capital and product development expenditures than their competitors. This can promptthose companies to exit the market orreduce their product offerings, potentiallyreducing competition. Smaller companies can be especially affected, since theyhave lower sales volumes over which to amortize the costs ofmeeting new regulations. 

### 12.5.4.1 Federal Regulations on Residential Furnaces and Boilers and Other Products Produced bythe Same Manufacturers In addition to the efficiencyregulations 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 producedbythe 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 12-49hydrofluorocarbon (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. hydrofluorocarbon (HFC) and hydrochlorofluorocarbon (HCFC) refrigerants. Manufacturers of residential furnaces and boilers also manufacture approximately 82 percent ofthe residential central air conditioners and heat pumps, and many ofthese 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 ofthe product lines and have allocated most oftheir capital resources for redesigning and retooling of theirproduction 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 EnergyPolicy Act of2005 (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 ofresidential furnaces and boilers.

12-50Table 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 Table 12.5.2 Summary ofMajor Regulations on Residential Furnace and Boiler Manufacturers Regulation DOE energy efficiency standards

EPA phaseout ofHCFC 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 oflarge appliances (NESHAPIMACT standards, Clean AirAct Section 112(d)) DOE adoption ofASHRAE 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 AirPollutants Maximum Achievable Control Technology ASHRAE = American Society ofHeating, 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, offurnaces, boilers, and other large appliances. These rules establish a standard for the emission ofhazardous atmospheric pollutants for a facility based on the maximum achievable control technology as displayed by the facility's peers. According to EPA estimates,
12-51the 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. the impacts on the entire industry from this rule are approximately $1.63 million, including activities such as the reformulation ofcoatings. Table 12.5.3 lists market shares ofmajor heating, ventilating, and air-conditioning (HVAC) manufacturers subject to the regulations listed in Table 12.5.2. High market shares implythat the companies will bear a significant portion ofthe burden ofthe regulation. 

### Table 12.5.3 Market Shares ofMajor Furnace and Boiler Manufacturers in Regulated Products Residential Furnace and Others All Manufacturers BoilerManufacturers

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 ofimpacts that the furnace and boiler industrymay face due to other Federal regulations that will become effective overthe next 10 years. The estimated investment for the residential furnace andboiler industry in each category is the product ofthe total industrial expenditures in the category and the total market share ofresidential 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 maybe able to incorporate regulatory-driven expenditures into other product development orprocess improvement efforts.

12-52Table 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 Table 12.5.4 Estimated Investments Required to Meet Impending Federal Regulations (million $) Regulation Total Estimated Source ofEstimate 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 EPACT 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 Waterheater consortium Ignition estimate NESHAP/MACT 2 N/A EPA rulemaking estimate

12.5.4.2 Other PendingRegulations 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 ofthe potential impacts from these standards are not available and cannotbe 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 ofsome ofthese regulations and standards. 

### Ventilation Rates andIndoorAir Quality. American Society ofHeating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 62 specifies levels for ventilation rates and other indoor air qualityparameters, 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
12-53building 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 building codes. In addition, the International Mechanical Code, which is referenced in many localjurisdictions, has adopted a rigid interpretation ofthe Ventilation Rate Procedure ofthe 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 ofASHRAE 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 perhour (Btu/h)-to State building codes. Adoption ofstandards at the State level could translate into additional burdens ifthese standards are not uniform. Industrymembers initiated ajoint 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 RAE90.1-1989 and 1999. ASHRAE 90.1-1989 is a set ofrequirements to design energy-efficient buildings. DOE named the American National Standards Institute (ANS!)/ ASHRAE/ Illuminating Engineering Society ofNorth America (IESNA) Standard 

### 90.1-1999, Energy Standard/orBuildings ExceptLow-Rise ResidentialBuildings, 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 theyhave State energy codes in place that are at least as stringent as 90.1-1999, orjustifywhythey cannot comply with this. DOE determined that Standard 90.1-1999 saves more energythan Standard 90.1- 1989, which was the previouslyreferenced standard in ECPA. Acceptance ofthese standards varies widely across States, creating a regulatorypatchwork that imposes additional burdens on manufacturers. 

### MaterialRecycling. In recentyears, 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. Someparts ofEurope 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 PendingRegulations atthe 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 safetyregulations 3. State-level equipmentrecycling requirements

12-544. 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 FurnacesFor 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 4. Furnace fan electrical efficiency (currentlyunder 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 warrantyrequirements (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 ofCalifornia Law

- Administrative burdens**(~15** items to report). Manufacturers agreed that ISO testing procedures and safetyregulations will have little incremental impact on the industry, as ISO qualityprograms and health and safetyprotocols are now a routine, integral part ofthe manufacture ofmanyproducts, including furnaces and boilers. 

### 12.5.4.4 OtherRegulations Manufacturers also identifiedproposed orimplemented regulations for international, local, orvoluntary organizations. Some furnace and boilermanufacturers sell a small portion of their total production to countries besides the U.S., such as Canada. Inthose cases, the products must meetthe 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 SafetyAuthority, public safetyregulation (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 Fornon-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 ofthe range ofpotential 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 costto the consumer. In addition, this scenario assumes that manufacturers do not differentiate their baseline products from their premiumproducts, in either the base case orthe standards case-thus, the scenario assumes a constant markup across all efficiencies. DOE did notreduce this profit margin to offset some ofthe price burden passed on to the consumer inthe standards case. Consequently, some ofthe manufacturer impacts on INPV are positive. 12-55To 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 To assess the higher end ofthe range ofpotential impacts, DOE used the manufacturers'- shipments forecast and modeled a two-tiered-markup structure. The two-tier scenario assumes that the proportion ofpremium-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 canbe observed from the cashflow results, both the shipment scenario and the markup scenario have a significant impact on the results. At TSL 1 and TSLA (80-percent AFUE), the impact on INPV and cashflow would be slight, since the bulk ofthe productbeing 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 ofnon-weatherized gas furnaces. Based on information submittedbyindustry, to mitigate theses concerns a standard at TSL 2 would require a complete redesign offurnace 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 illustratedbythe quantitative results presentedhere. 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 commentedthat 81-percent AFUE equipment cannot be safely vented. Some manufacturers stated that there are variations and constraints that require a margin ofsafety. 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 ofbends within the vent, altitude, location ofthe 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 ofexperience ofthe vent installer. Manufacturers stated that, with increasing minimum efficiencyrequirements for non-weatherized gas furnaces, this margin ofsafety 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 ofproducts at 81-percent AFUE. Those manufacturers that would not be willing to bearthe liabilityrisk 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 of90-percent-AFUE condensing, non-weatherized gas furnaces. Ifmanufacturers 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 higherprice and corresponding energy savings ofthe condensing product. Manufacturers predict a much greater drop in unit sales than the NES analysis forecasted. The INPV impacts range from +2 12-56percent 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
12-57 percent to

- 24 percent. The required product and capital conversion costs are significant and estimated to be $87 million and $189 million, respectively, because ofthe 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 ifit 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 ofvery large negative impacts ifshipments were reduced according to manufacturers' expectations and in the very likely situation that manufacturers were no longer able to offer premiumproducts at higher margins. During the interviews, manufacturers expressed disbeliefat the possibility ofmanufacturing an entire product line at 96-percent AFUE, since there is only one model currentlybeing manufactured at this efficiency level. Most manufacturers did notprovide DOE with projectedproduct conversion costs or capital conversion costs at this level, since they could not conceive ofwhat 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 peaknegative cashflow would be approximately four times the magnitude ofthe base-case positive cashflow. 

### 12.6.2 Weatherized Gas Furnaces Forweatherized gas furnaces, DOE considered two cashflow scenarios, the flat-markup and the constant-price scenario-bothusingNES-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. Inthe second scenario, the constant-price aspect assumes that manufacturers ofweatherized 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 TSL4 (81-percent AFUE) ranges between -15 percent and -20 percent. Even with the flat-markup assumption and accepting the NES-shipments forecast unaltered, the industryvalue drops because ofthe large conversion costs relative to industryrevenues. 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 12-57to 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 andNES-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 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 ofweatherized gas furnaces. First, some manufacturers believe that furnaces with efficiency levels at or above 8I-percent AFUE cannot be made safely and reliably due to vent and heat exchanger condensation. This type offurnace 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 ofcausing condensation and corrosion in the heat exchanger and draft inducers. While shorter vents mitigate vent corrosion somewhat, corrosion in the heat exchanger itselfcan significantly shorten heat exchanger lifetime and, therefore, appliance lifetime. 

### In addition, units with economizers have an increased probability ofcondensation in the vent system. Second, buyers ofthese units value heating efficiency less than they value the cooling efficiency ofthe air-conditioning unit, making it difficult for manufacturers to recover cost increases ofthe heating equipment. 12.6.3 Mobile HomeFurnaces 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 ofshipments ofcondensing mobile horne furnaces, this implies manufacturers will have little ability to market premium efficiencyproducts at a premium markup. To represent the higher range ofpotential 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 heatpumps, combination systems, electric furnaces, or electric strip heaters, instead ofbuying 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 by48-50 percent. Net cashflow becomes negative bya factor ofmore than eight times the base-case value. Additional factors to be considered from the standpoint ofmanufacturers ofmobile 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 At levels above 75-percent AFUE, standing pilot models will no longerbe 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 outerring while exhaust gases are vented from the interior core. Mobile home installations face space constraints from both footprint and height dimensions. Shipments ofmobile 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. Forthe 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 higherproposed 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 ofnew 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 -14percent 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 notjustifythe 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 wouldrequire newheat exchanger designs, which raises the product conversion costs to $9 million at both TSL4 and TSL 5. Total capital requirements rise to $7 million at TSL 4 and $9 million at TSL 5. Net cashflow is reduced bynearly 200 percent to -$4 million at TSL 4.

12-59Other 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 BoilersFor 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 Other considerations from the standpoint ofmanufacturers ofoil-fired furnaces include the possibility ofimplementing 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 ofthe product line through elimination ofsome 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 efficiencyrises. 

### 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 anyprice 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 bythe assumed markup strategy-aflat markup or a three-tiered markup. DOE learned from manufacturers that the pricing ofboilers is determined on the basis ofthree product tiers. During the MIA interview, manufacturers provided information on the range oftypical AFUE levels for each ofthe 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 bymore than 50 percent from the base case. Several manufacturers stated that, at this efficiency level, there is a high risk ofsafety and reliability issues. There is also a great likelihood that standing-pilot versions ofthese products wouldbe 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 reasonablybe 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
12-60from 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 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 expressedbynonweatherized gas furnace manufacturers surrounding the increased possibility ofcorrosion within the heat exchangers as the efficiency level increases. Additional factors to be considered from the standpoint ofmanufacturers ofgas 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 ofboilers stated that they have concerns regarding condensation at efficiency levels of84-percent AFUE or greater for gas boilers and 85-percent AFUE or greater for oil-fired boilers. Boilermanufacturers stated that condensation offlue 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 onthe probability ofcondensation. 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, bothusing manufacturer-supplied shipment estimates. DOE considered onlymanufacturer-supplied shipment estimates for the same reasons given for gas boilers. Manufacturers stated that shipments would decrease for oil-firedboilers 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 bythe assumed markup strategy-a flat markup or a three-tiered markup. DOE learned from manufacturers that the pricing ofboilers is determined on the basis ofthree product tiers. During the MIA interviews, manufacturers provided information on the range oftypical AFUE levels for each ofthe three tiers and the change in profitability associated with each level for oil-fired boilers.
12-61At 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 INPVranges 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-percentAFUE 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. 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 TSLBandTSL4 (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 likelyuse a de-rating strategyto reduce capital costs. This would reduce the span ofthe product line through elimination ofsome higher capacity models. Cashflow is reduced from $5 million to $2.6 million in 2014 for TSL BandTSL 4. The most severe cashflow impacts are in the year 2013 when net cashflow is reduced byapproximately 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 ofsales 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 ofoilfired boilers expressed concern that an increased AFUE standard would cause consolidation within the industry and further reduce total shipments.

12-62REFERENCES 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>. 

### REFERENCES 1. McKinsey & 

### Company, Inc. Valuation: Measuring andManaging thee Value of Companies, 3rdEdition, Copeland, Koller, Murrin. 

### New York: John Wiley & 

### Sons, 2000. 2. SecurityExchange Commission. SEC 1O-KReports. 

### Various dates, 1997-2001. Security Exchange Commission. <http://www.sec.gov/> 3. Standard and Poor's. StandardandPoorBondRatings Services Desk. 

### For more information, ca11212-438-7280. 4. Moody's Investors Service, Inc. Moody's BondRatings 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, 2ndEdition. 

### 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 ofthe Treasury. SelectedInterestRates, Series H-15. 

### Data available at <www.federalreserve.gov/releases/H15/data/a/tcmp.1Op.txt>. 8. Ibbotson Associates. Ibbotson BetaBook. 

### 2003, Chicago, IL. <http://www.ibbotson.com>

.

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