CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS 13.1 INTRODUCTION ......................................................................................................... 13-1 13.2 METHODOLOGY ........................................................................................................ 13-1 13.2.1 Phase I: Industry Profile..................................................................................... 13-1 13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide............................13-2 13.2.2.1 Industry Cash-Flow Analysis...............................................................13-2 13.2.2.2 Interview Guide ................................................................................... 13-2 13.2.3 Phase III: Sub-Group Analysis .......................................................................... 13-3 13.2.3.1 Manufacturer Interviews...................................................................... 13-3 13.2.3.2 Revised Industry Cash-Flow Analysis................................................. 13-4 13.2.3.3 Manufacturer Sub-Group Analysis...................................................... 13-4 13.2.3.4 Small-Business Manufacturer Subgroup .............................................13-4 13.2.3.5 Manufacturing Capacity Impact ..........................................................13-5 13.2.3.6 Employment Impact............................................................................. 13-5 13.2.3.7 Cumulative Regulatory Burden ........................................................... 13-5 13.3 MANUFACTURER IMPACT ANA LYSIS KEY ISSUES.......................................... 13-5 13.3.1 General Service Fluorescent Lamps .................................................................. 13-6 13.3.1.1 Rare Earth Phosphor Availability and Price ........................................13-6 13.3.1.2 Reduction in Product Portfolio ............................................................13-6 13.3.1.3 Profit Margin Impact............................................................................13-6 13.3.2 Incandescent Reflector Lamps........................................................................... 13-6 13.3.2.1 Product Performance Issues................................................................. 13-6 13.3.2.2 Xenon Gas Availability and Price........................................................13-7 13.3.2.3 Elimination of Product Types in the Manufacturers’ Product Portfolio 13- 7 13.3.2.4 Elimination of Small Diameter Lamps ................................................ 13-7 13.3.2.5 Competition.......................................................................................... 13-7 13.3.2.6 Market Erosion..................................................................................... 13-8 13.4 GRIM INPUTS AND ASSUMPTIONS........................................................................ 13-8 13.4.1 Overview of the GRIM ...................................................................................... 13-8 13.4.2 Sources GRIM Inputs ........................................................................................ 13-9 13.4.2.1 Corporate Annual Reports ................................................................... 13-9 13.4.2.2 Standard and Poor Credit Ratings...................................................... 13-10 13.4.2.3 Dun & Bradstreet Reports..................................................................13-10 13.4.2.4 Shipment Model................................................................................. 13-10 13.4.2.5 Product Price Determination.............................................................. 13-10 13.4.2.6 Manufacturer Interviews.................................................................... 13-10 13.4.3 Financial Parameters........................................................................................ 13-11 13.4.4 Corporate Discount Rate.................................................................................. 13-11 13.4.5 Trial Standard Levels....................................................................................... 13-14 13.4.6 NIA Shipments Forecast.................................................................................. 13-15 13.4.6.1 GSFL Base-Case Shipment Scenarios............................................... 13-15 13.4.6.2 IRL Base-Case Shipment Scenarios .................................................. 13-16 13.4.6.3 GSFL Standards Shipment Scenarios ................................................ 13-17

13-i13.4.6.4 IRL Standards Shipment Scenarios ................................................... 13-17 13.4.7 Production Costs .............................................................................................. 13-17 13.4.8 Conversion Costs ............................................................................................. 13-21 13.4.8.1 Capital Conversion Costs...................................................................13-21 13.4.8.2 Product Conversion Costs..................................................................13-23 13.4.8.3 Conversion Costs Timing .................................................................. 13-25 13.4.9 Markups ........................................................................................................... 13-25 13.4.9.1 Flat Markup........................................................................................ 13-25 13.4.9.2 Four-Tier Markup .............................................................................. 13-26 13.5 GSFL INDUSTRY FINANCIAL IMPACTS.............................................................. 13-32 13.5.1 Impacts on Industry Net Present Value ........................................................... 13-33 13.5.2 Impacts on GSFL Annual Cash Flow .............................................................. 13-34 13.6 IRL INDUSTRY FINANCIAL IMPACTS................................................................. 13-36 13.6.1 Impacts on Industry Net Present Value ........................................................... 13-37 13.6.2 Impacts on Annual Cash Flow......................................................................... 13-39 13.7 OTHER IMPACTS...................................................................................................... 13-42 13.7.1 Employme nt.....................................................................................................13-42 13.7.1.1 GSFL Employment ............................................................................ 13-42 13.7.1.2 IRL Employment ............................................................................... 13-43 13.7.2 Manufacturing Capacity................................................................................... 13-49 13.7.3 Cumulative Regulatory Burden ....................................................................... 13-50 13.7.3.1 Federal DOE Regulations on Other Products Produced by the GSFL and IRL Manufacturers........................................................................................... 13-50 13.7.3.2 EISA 2007 Requirements .................................................................. 13-52 13.7.3.3 Restriction of Hazardous Substances Directive................................. 13-53 13.7.3.4 Reporting Requirements .................................................................... 13-53 13.7.4 Impacts on Small-Business Subgroup ............................................................. 13-54 13.8 CONCLUSIONS.......................................................................................................... 13-54 13.8.1 GSFL................................................................................................................ 13-5 4 13.8.2 IRL ................................................................................................................... 13 -57 REFERENCES ..................................................................................................................... ...13-61

LIST OF TABLES

Table 13.4.1 GRIM Financial Parameters Ba sed on 2002-2007 Weighted Company Financial Data

............................................................................................................................... ........... 13-11 Table 13.4.2 Cost of Equity Calculation .................................................................................. 13-13 Table 13.4.3 Cost of Debt Calculation ..................................................................................... 13-14 Table 13.4.4 GSFL Efficacy Levels by Product Class and TSL ............................................. 13-14 Table 13.4.5 IRL Efficacy Levels by TSL ............................................................................... 13-15 Table 13.4.6 Total GSFL NIA-Shipments Forecast in 2012 and 2042 for the Existing Technologies Base Case .......................................................................................................... 13-16 Table 13.4.7 Total GSFL NIA-Shipments Forecast in 2012 and 2042 for the Emerging Technologies Base Case .......................................................................................................... 13-16

13-iiTable 13.4.8 Total IRL NIA-Shipments Fore cast in 2012, 2020, and 2042 for the Existing Technologies Base Case .......................................................................................................... 13-16 Table 13.4.9 Total IRL NIA-Shipments Fore cast in 2012, 2020, and 2042 for the Emerging Technologies Base Case .......................................................................................................... 13-17 Table 13.4.10 Base-Case Production Co sts (2008$) used in the GRIM for 4-Foot Medium Bipin Product Classes ........................................................................................................................ 13-18 Table 13.4.11 Base-Case Production Costs (2008$) used in the GRIM for 8-Foot Single Pin Slim line Product Classes .......................................................................................................... 13-18 Table 13.4.12 Base-Case Production Costs (2008$) used in the GRIM for 8-Foot Recessed Double Contact High O utput Product Classes ......................................................................... 13-19 Table 13.4.13 Base-Case Production Co sts (2008$) used in the GRIM for 4-Foot T5 Standard Output Product Class ............................................................................................................... 13-19 Table 13.4.14 Base-Case Production Co sts (2008$) used in the GRIM for 4-Foot T5 High Output Product Class ........................................................................................................................... 13-19 Table 13.4.15 Base-Case Production Costs (2008$) used in the GRIM for IRL Covered Product Classes

............................................................................................................................... ....... 13-20 Table 13.4.16 Base-Case Production Costs (2008$) used in the GRIM for IRL Non-Covered Product Classes ........................................................................................................................ 13-20 Table 13.4.17 Capital Conversion Costs for GSFL by Product Class ..................................... 13-21 Table 13.4.18 Capital Conversion Costs for the IR L Industry (Existing Te chnologies Base Case)

............................................................................................................................... ................... 13-23 Table 13.4.19 Capital Conversion Costs for the IRL Industry (Em erging Technologies Base Case)

............................................................................................................................... ......... 13-23 Table 13.4.20 GSFL Product Conve rsion Costs by Product Class.......................................... 13-24 Table 13.4.21 Product Conversion Costs for the IRL Industry ............................................... 13-24 Table 13.4.22 Base Case Four-Tier Markup for G SFL: 4-Foot Medium Bipin Product – Existing Technologies Base Case .......................................................................................................... 13-29 Table 13.4.23 Base Case Four-Tier Markup for GSFL: 8-Foot Single P in Slimline Product – Existing Technologies Base Case ............................................................................................ 13-29 Table 13.4.24 Base Case Four-Tier Markup fo r GSFL: 8-Foot Rece ssed Double Contact – Existing Technologies B ase Case ............................................................................................ 13-30 Table 13.4.25 Base Case Four-Tier Markup for GSFL: 4-Foot T5 Product Class – E xisting Technologies Base Case .......................................................................................................... 13-30 Table 13.4.26 Base Case Four-Tier Markup for GSFL: 4-Foot T5 High Output Product – Existing Technologies B ase Case ............................................................................................ 13-30 Table 13.4.27 Base Case Four-Tier Markup fo r GSFL: 4-Foot Medium Bipin Product – Emerging Technologies Base Case .......................................................................................... 13-31 Table 13.4.28 Base Case Four-Tier Markup for GSFL: 8-Foot Single P in Slimline Product – Emerging Technologies Base Case .......................................................................................... 13-31 Table 13.4.29 Base Case Four-Tier Markup fo r GSFL: 8-Foot Rece ssed Double Contact – Em erging Technologies Base Case .......................................................................................... 13-32 Table 13.4.30 Base Case Four-Tier Markup for GSFL: 4-Foot T5 Product Class – E merging Technologies Base Case .......................................................................................................... 13-32 Table 13.4.31 Base Case Four-Tier Markup for GSFL: 4-Foot T5 High Output Product – Em erging Technologies Base Case .......................................................................................... 13-32 Table 13.5.1 Changes in Base-Case Industry Ne t Present Values for the GSFL Industry ......13-33

13-iiiTable 13.5.2 Changes in Industry Net Present Value for the GSFL Industry with a Flat Markup Scenario, Existing Technologies Base Case – High Lighting Expertise – Shift in Efficacy Distribution .............................................................................................................................. 1 3-34 Table 13.5.3 Changes in Industry Net Present Va lue for the GSFL Industry with a Four-Tier Markup Scenario, Em erging Techno logies Base Case – Market Segment Based – Roll-up in Efficacy Distribution ................................................................................................................ 13-34 Table 13.6.1 Changes in Base-Case Industry Net Present Values for the IRL Industry .........13-37 Table 13.6.2 Changes in Industry Net Present Value for IRL Industry Under the Existing Technologies Base Case - BR Substitution S cenario - Shift in Efficacy Distribution – Comm ercial Lamp Lifetimes ................................................................................................... 13-38 Table 13.6.3 Changes in Industry Net Present Value for IRL Industry Under the Em erging Technologies Base Case – CFL Substitution Scen ario – Roll-Up in Efficacy Distribution – Commercial Lamp Lifetimes ................................................................................................... 13-38 Table 13.7.1 Change in the Average Number of Do m estic Employees in the IRL Industry Under the Existing Technologies Base Case – BR Substitu tion Scenario - Shift in Efficacy Distribution – Commercial Lamp Lifetimes ................................................................................................ 13-44 Table 13.7.2 Change in the Average Number of Do m estic Employees in the IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Roll-Up in Efficacy Distribution – Commer cial Lamp Lifetimes ............................................................................ 13-45 Table 13.7.3 Change in the Average Number of Do m estic Employees in the IRL Industry Under the Existing Technologies Base Case – BR S ubstitution Scenario – Roll-Up in Efficacy Distribution – Baseline Lifetime Scenario ............................................................................... 13-45 Table 13.7.4 Change in the Average Number of Do m estic Employees in the IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Shift in Efficacy Distribution – Baseline Lifetime Scenario ............................................................................... 13-45 Table 13.7.5 Other DOE and Federal Actions Affecting the G SFL and IRL Industries .........13-51 Table 13.7.6 EISA 2007 GSIL Standards................................................................................ 13-52 Table 13.7.7 EISA 2007 Modified Spectrum GSIL Standards ................................................ 13-52

LIST OF F IGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow ............................................................ 13-9 Figure 13.4.2 Market Shares of 4-Foot T8 MP B 700, 800, and 800 Plus Series L amps Under the Emerging Technology Base Case ............................................................................................ 13-27 Figure 13.4.3 Base Case Markups for 4-Foot MP B T8 700, 800, and 800 Plus Series Lam ps Over Time Under the Emerging Technology Base Case .................................................................. 13-28 Figure 13.5.1 Annual Net Cash Flow for GSFL In dustry with a Flat Markup Scenario, Existing Technologies Base Case – Hi gh Lighting Expertise – Shift in Efficacy Distribution .............13-35 Figure 13.5.2 Annual Net Cash Flow for GSFL Industry with a Four-Tier Markup Scenario, Em erging Technologies Base Case – Market Segm ent Based – Roll-up in Efficacy Distribution

............................................................................................................................... ................... 13-35 Figure 13.6.1 Annual Net Cash Flow for IRL I ndustry Under the Existing Technologies Base Case - BR Substitu tion Scenario - Shift in Effi cacy Distribution – Commercial Lamp Lifetimes

............................................................................................................................... ................... 13-39

13-iv13-v Figure 13.6.2 Annual Net Cash Flow for IRL I ndustry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Roll-Up in Efficacy Distribution – Commercial Lamp Lifetimes

............................................................................................................................... ... 13-40 Figure 13.6.3 Annual Net Cash Flow for IRL I ndustry Under the Existing Technologies Base Case - BR Substitu tion Scenario – Roll-Up in Efficacy Distribution – Baseline Lifetime Scenario

............................................................................................................................... ................... 13-40 Figure 13.6.4 Annual Net Cash Flow for IRL I ndustry Under the Em erging Technologies Base Case – CFL Substitution Scenario – Shift in Efficacy Distribution – Baseline Lifetime Scenario

............................................................................................................................... ................... 13-41 Figure 13.7.1 Total IRL Industry Employment by Y ear Under the Existing Technologies Base Case - BR Substitu tion Scenario - Shift in Effi cacy Distribution – Commercial Lamp Lifetimes

............................................................................................................................... ................... 13-46 Figure 13.7.2 Total IRL Industry Employment by Y ear Under the Em erging Technologies Base Case – CFL Substitution Scenario – Roll-Up in Efficacy Distribution – Commercial Lamp Lifetimes

............................................................................................................................... ... 13-47 Figure 13.7.3 Total IRL Industry Employment by Y ear Under the Existing Technologies Base Case - BR Substitu tion Scenario - Shift in Efficacy Distribution – Baseline Lifetime Scenario 13- 47 Figure 13.7.4 Total IRL Industry Employment by Y ear Under the Em erging Technologies Base Case – CFL Substitution Scenario – Roll-Up in Efficacy Distribution – Baseline Lifetime Scenario

............................................................................................................................... ..... 13-48CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

13.1 INTRODUCTION

In determ ining whether a standard is econom ically justified, the U.S Department of Energy (DOE) is required to consider “the econo mic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id . DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of higher ener gy conservation standard s on manufacturers of general service fluorescent lamps (GSFL) and inca ndescent reflector lamps (IRL), and to assess the impact of such standards on employmen t and manufacturing capacity. The MIA has both quantitative and qualitative aspects.

The quantitative part of the MIA primarily relies on Government Regulatory Impact Models (GRIMs), industry-cash-flow models ad apted for this rulemaking. The GRIM inputs include information on industry co st 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 energy conservation standards by compari ng changes in INPV between a base case and the various trial standard levels (TSLs). The qualitative part of the MIA addresses factors such as product characteristics, characte ristics of particular manufact urers, and market and product trends. It also assesses the impact of st andards on subgroups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Phas e I, “Industry Profile,” consisted of the preparation of an industry charac terization for both the GSFL and IRL industries, including data

on m arket share, sales volumes and trends, pricin g, employment and financia l structure. Phase II, “Industry Cash Flow,” focused on the GSFL and IR L industries individually. In this phase, DOE used two separate GRIMs to prep are an industry cash flow analys is for GSFL and IRL. For the quantitative portion of the MIA analysis, DOE an alyzed the same product classes used in the national impact analysis (NIA) and the life-cycl e cost (LCC) analysis. Using publicly available information developed in Phase I, DOE adapted each GRIM’s generic structure to facilitate analysis of amended energy conservation standard s. In Phase III, “Sub-Group Impact Analysis,” DOE interviewed manufacturers representing over 90 percent of domestic GSFL and 85 percent of IRL sales. The companies interviewed in cluded both large and sm all manufacturers, and members and non-members of the National Electr ical Manufacturers Association (NEMA) to provide a representative cross-s ection of the industries. During these interviews, DOE discussed financial topics specific to each manufacturer and obtained each manufacturer’s view of the GSFL and IRL industries. The interviews provided valuable information that DOE used to evaluate the impacts of amended energy conserva tion standards on manufacturers’ cash flows, manufacturing capacities, and employment levels.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the GSLF and IRL industries that built upon the market and technology assessment prepared for this rulemaking (see chapter 3 of this

13-1TSD). Before initiating the detailed impact studi es, DOE collected qualitative and quantitative financial information and past and present market data. This included estimated market shares of GSFL and IRL manufacturers, corporate opera ting ratios, wages, employment, and production cost ratios. The industry prof ile included a topdown cost analysis of GSFL and IRL manufacturers that DOE used to derive cost a nd preliminary financial inputs for the GRIM (e.g., revenues; material; labor; overhea d; depreciation; selling, genera l and administrative expenses (SG&A); and research and development (R&D) expe nses). DOE also used public information to further calibrate its in itial characterization of the industry, including S ecurities and Exchange Commission (SEC) 10–K and 20-F reports, Stan dard & Poor’s (S&P) stock reports, and corporate annual reports. In a ddition, DOE relied on information fr om its engineering analysis, product price determination, LCC, and markups analysis to characterize the GSFL and IRL manufacturing industries.

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

In Phase II, DOE perfor med industry cash-flow analyses and prepared written guidelines for interviewing manufacturers. Phase II focused on the financial impacts of amended standards on the GSFL and IRL industries. Amended energy conservation standards can affect GSFL and IRL manufacturers in three dis tinct ways: (1) require additiona l investment, (2) raise production costs, and (3) impact revenues through highe r prices and, possibly, lower shipments. The analytical tool DOE uses for calculating the fi nancial impacts of amended energy conservation standards on manufacturers is th e GRIM. DOE performed a cash flow analysis using the GRIM for the GSFL and IRL industries to quantify these impacts.

13.2.2.1 Industry Cash-Flow Analysis

Both GRIMs use several factors to d etermine a series of annual cash flows for the year standards become effective and several years after implementation. These factors include annual shipments; expected revenues; costs of sales; SG&A expenses; taxes; and capital expenditures related to amended energy conservation standards. Inputs to the GRIMs included shipment and price forecasts developed in othe r analyses. DOE derived the manuf acturing costs using the retail prices from the product price determination, an estimated retail markup from public financial reports, and interviews with manufacturers. DOE developed alternative markup scenarios based on discussions with manufacturers and input from other interested par ties during the rulemaking. DOE’s shipments analysis, presented in chapter 10 of this TSD, provided the basis for the shipment projections under each TSLs in the GRIMs. Another input, financial parameters, was developed based on publicly available data and confidentially submitted manufacturer information. The results of the GRIM at each TS L are compared against two separate base-case projections, which represent the GSFL and IRL industry absent st andards. The financial impact of amended energy conservation standards is the difference between the two sets of discounted annual cash flows.

13.2.2.2 Interview Guide

During Phas e III of the MIA, DOE conduc ted interviews with GSFL and IRL manufacturers to gather inform ation on the effects of amended energy conservation standards on revenues and finances, direct employment, capita l assets, and on industry competitiveness. Prior

13-2to the interviews, DOE distributed an interview gu ide that provided a star ting point to identify relevant issues and help identify the impact s of amended energy conservation standards on individual manufacturers or sub- groups of manufacturer s. The interview gui de covered current organizational characteristics, indus try structure, inputs to the manu facturer cash-flow analysis, a competitive impacts assessment, an employment impacts assessment, and a manufacturing capacity impacts assessment. The interview guides used to conduct the manufacturer interviews are found in appendix 13A of this TSD.

13.2.3 Phase III: Sub-Group Analysis

During the course of the MIA, DOE intervie wed m anufacturers repr esenting close to 90 percent of domestic GSFL and 85 percent of domestic IRL lighting sales. These companies also participated in interviews for the engineering analysis. However, the MIA interviews broadened the discussion from primarily technology-related issues to include busin ess related topics. One objective was to obtain feedback from industry on the assumptions used in the GRIM and to isolate key issues and concerns. DOE defined two distinctive subgroups for both GSFL and IRL that could be impacted by the amended ener gy conservation standards: major or large manufacturers, and small business manufactur ers. The following sections summarize the methodology and findings of this assessment.

13.2.3.1 Manufacturer Interviews

The inform ation gathered in Phase I and the ca sh-flow analysis perfor med in Phase II are supplemented with information gathered during interviews with manufactur ers during Phase III. The interview process has a key role in the manuf acturer impact analyses, since it provides an opportunity for interested partie s to express their views privat ely on important issues, allowing confidential or sensitive info rmation to be considered in the rulemaking process.

DOE established two subgroups for the MI A corresponding to large manufacturers and small business manufacturers of GSFL and IRL found within the industries. Based on this decision, DOE prepared one interview guide wi th questions related to both GSFL and IRL manufacturing for large and small manufacturers. These interview gui des were used to tailor the GRIMs to incorporate unique financial characteristics for each product type. Within each of these subgroups, DOE contacted co mpanies from its database of manufacturers, which provided a representation of each subgroup. Small and large companies, subsidiaries and independent firms, and public and private corporations were interviewed. Interviews were scheduled well in advance in order to provide every opportunity fo r key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE preferred an interactive interview process because it helped clarify resp onses and provide the opportunity to identify additional issues.

DOE conducted detailed intervie ws with all GSFL and IRL ma nufacturers that agreed to participate to gain insight into the range of poten tial impacts and to how this range varies at each TSL. During the interviews, DOE solicited in formation on the possible impacts of energy conservation standards on sales, direct employment, capital assets , and industry competitiveness. Both qualitative and quantitative information are valuable to the interview process. Finally, a separate GRIM was developed for both the GSFL and IRL industries.

13-313.2.3.2 Revised Industry Cash-Flow Analysis

In Phase II of the MIA, DOE provided m a nufacturers with preliminary GRIM input financial figures for review and evaluation. Du ring the interviews, DOE requested comment and suggestions regarding the values selected for the parameters. U pon completion of the interviews, DOE revised its industry cash flow model based on the feedback provided through the interviews. More information on how DOE calcula ted the parameters for the industry GRIMs is found in section 13.4.3 of this chapter.

13.2.3.3 Manufacturer Sub-Group Analysis

Using average cost assumptions to develop an industry cash flow estim ate is not adequate for assessing differential impacts among sub-groups of manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs significantly from the industry average could be more negatively affect ed. Ideally, DOE would consider the impact on every manufacturer individually; however, it typically uses the results of the industry characterization to group manufact urers exhibiting similar characteristics. During the interview process, DOE discussed the potential sub-groups and sub-group members that have been identified for the analysis. DOE looked to the manufacturers and other st akeholders to suggest what sub-groups or characteristics are th e most appropriate for the analysis.

13.2.3.4 Small-Business Manufacturer Subgroup

DOE used the sm all business size standa rds published on August 22, 2008, as amended, by the Small Business Administration (SBA) to de termine whether any small entities would be required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The size standards are listed by North American Industr y Classification System (NAICS) code and industry description. Lighting ma nufacturing is classified und er NAICS 335110 “Electric Lamp Bulb and Part Manufacturer.” To be categorized as a small business, a manufacturer of lighting and its affiliates may employ a maximum of 1,000 employees.

During its market survey, DOE created a list of every company that manufactures both covered and non-covered GSFL and IRL for sa le in the United States. DOE also asked stakeholders and industry represen tatives if they were aware of any other small manufacturers. DOE then reviewed publicly available data and contacted companies on its list, when needed, to determine whether they meet the SBA’s definition of a small business manufacturer in the GSFL or IRL industries. In total, DOE identified 57 companies that could potentially be small businesses. During initial review of the 57 comp anies in its list, DOE either contacted or researched each company to determine if it ma nufactures covered GSFL and IRL. Based on its research, DOE screened out companies that di d not offer lamps covered by this rulemaking. Consequently, DOE estimated that only 12 companie s out of the 57 listed were potentially small business manufacturers of covered products. DOE contacted these potential small business manufacturers to request an interview a bout the possible impacts on small business manufacturers. Out of the 12 potential small business manufacturers, DOE interviewed four while the remaining companies declined or di d not respond to the request. However, through additional research and inquiring of the remaini ng companies, DOE determined that these other eight companies were not small business manufactu rers or did not manufac ture covered GSFL or

13-4IRL lamps. Based on its initial screening and subsequent interviews, DOE identified only one company as a small business manufacturer of cove red GSFL based on SBS’s definition of small business manufacturer.

13.2.3.5 Manufacturing Capacity Impact

One of the significant outcom es of amended energy conservation standards could be the consequential obsolescence of existing manufactur ing assets, including to oling and investment. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifica lly capacity utilization and pl ant location decisions in the United States and North America with and with out amending energy conservation standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements due to amended energy conservation standards; the nature and value of stranded assets, if any; and estimates for any one-time restructuring charges.

13.2.3.6 Employment Impact

The im pact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, the interview explored current employm ent trends in the lighting industry. In addition, the interviews solicited manufacture views on ch anges in employment patterns that may result from more stringent standard levels. The employment impacts section of the interview guide focused on current employment leve ls associated with manufacture rs at each of their production facilities, expected future empl oyment levels with and without an amended energy conservation standard, and differences in workforce skills an d issues related to the retraining of employees.

13.2.3.7 Cumulative Regulatory Burden

DOE recognizes and s eeks to mitigate the overlapping effects on manufacturers of amended energy conservation standards and other re gulatory actions affec ting the same products. DOE analyzed and considered the impact on manufacturers of multiple, product-specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified several regulations relevant to GSFL and IRL manufacturer s. These regulations include: (1) Federal energy cons ervation standards and minimu m performance requirements prescribed by the Energy Policy Act of 2005 (EPACT 2005) and the En ergy Security Act of 2007 (EISA 2007) for other products and equipm ent manufactured by these companies; (2) environmental regulations; a nd (3) reporting requirements.

13.3 MANUFACTURER IMPACT ANAL YSIS KEY ISSUES

The first question of each of the MIA interview guides asks: “What are the key issues for your company regarding the GSFL or IRL ener gy conservation standards rulemaking?” This open question initiated dialogue w ith the manufacturers, enabling th em to identify key points that DOE would explore and discuss du ring the interview. This sec tion describes the key issues manufacturers felt were of th e highest importance in relati on to the GSFL and IRL energy conservation standards rulemaking and that woul d have the most significant impact on the industries. The issues are overall concerns that many manufacturers expressed and in most cases, are dependent upon the type of product (GSFL or IRL).

13-513.3.1 General Service Fluorescent Lamps

13.3.1.1 Rare Earth Phosphor Availability and Price

All of the GSFL m anufacturer s DOE interviewed are concerne d about the availability and price of rare earth phosphors. Du e to the importation of rare earth phosphors, any increases in duties paid to producing countries, such as Ch ina, could have signi ficant impacts on lamp manufacturing costs. Any increa se in lamp material costs di rectly affects manufacturer profitability. According to manufacturers, m eeting higher energy conservation standards for GSFL would require an increase in rare ea rth phosphor content in lamp coatings. These manufacturers stated that highe r energy conservation standards would drive up demand for and prices of rare earth phosphors, which are alr eady in short supply. In addition, manufacturers stated that the continued growth in the CFL market will erode future supply, jeopardizing the cost-effectiveness of the standa rds. Depending on the lamp type, rare earth phosphors can be the highest input cost of a GSFL. So me manufacturers also noted th at higher standards could drive manufacturing processes to China, where the va st majority of rare earth phosphors are mined. Issues with rare earth phosphor s are specifically addressed in appendix 3C of the TSD.

13.3.1.2 Reduction in Product Portfolio

Som e manufacturers are concerned that energy conservation standards will force manufacturers to eliminate some product lines, shrinking their overall ma rketability. According to manufacturers, the ability to survive in the industry is related to the companies’ diverse product portfolios. Companies benefit from a wi de range of products an d efficacies. Depending on the characteristics of the pr oduct, manufacturers can up-sell to products that reap higher profits. Manufacturers are concer ned that reducing the product por tfolio will reduce options for customers and, ultimately, profitability.

13.3.1.3 Profit Margin Impact

All m anufacturers stated that energy conserva tion standards have the potential to greatly harm their profitability. Manufacturers enjoy a higher profit margin on higher efficacy or premium products than lower-end or baseline products. Since higher efficacy or premium products tend to incorporate design options th at increase efficacy, a high energy conservation standard would commoditize such products and subsequently lower th e overall manufacturer markup on shipments. Several manufacturers stat ed it is very difficult to pass along cost increases to customers because of the competitive nature of the industry. Therefore, they believe any cost increase due to standards set by DOE would automatically lower profit margins.

13.3.2 Incandescent Reflector Lamps

13.3.2.1 Product Performance Issues

All m anufacturers stated that implementati on of design options to meet the proposed energy conservation standards coul d cause a reduction in product li fetime. Manufacturers stated that all TSLs analyzed in the advanced notice of proposed rulemaking could be met by lamps that combine improved technology with shorter lif e. In addition to this broad possibility, manufacturers indicated that the product lifetime of infrared lamps that meet efficacy levels

13-6prescribed by TSL3, TSL4, and TSL5 c ould be lowered due to the “hot shock” a application problem. If infrared lamps are installed in a live fi xture, sections of the lamp’s filament can fuse together, possibly decreasing the lifetime by 25 to 30 percent. Manufacturers are concerned that both the performance issues of hot shock and shor ter life could impact consumers’ acceptance of covered IRL products. Any dissati sfaction resulting lower lifetimes of standards-compliant lamps could hasten the shift to competing tec hnologies, which have mu ch longer lifetimes.

13.3.2.2 Xenon Gas Availability and Price

According to several m anufacturers, most higher efficacy model lamps at each TSL use xenon to increase efficacy. While using a different fill gas does not require significant capital investments, manufacturers stated that xenon prices have increased as much as ten-fold in the past few years. In the short term, global s upplies of xenon are limited by existing production capacity, so the IRL industry has to compete with other industries, such as medical applications, that are better able to support higher prices. For more informa tion on DOE’s analysis of this issue, see appendix 3B of the TSD.

13.3.2.3 Elimination of Product Types in the Manufacturers’ Prod uct Portfolio

Manufacturers are concerned that at higher effi cacy levels, all lamps will need to switch to all infrared technology, signifi cantly reducing product offerings.

13.3.2.4 Elimination of Small Diameter Lamps

Manufacturers are concerned th at energy conservation standa rds could elim inate smaller diameter lamps. Because of the small size, a ll manufacturers use a single-ended quartz burner in lamps smaller than parabolic aluminized reflector (PAR)30, limiting potential efficacy improvements. Although DOE scales its standard to smaller diameter lamps and there are existing PAR20 lamps at all TSLs, manufacturers are concerned that the improvements for small diameter lamps at high TSLs could be impossible or cost prohibitive.

13.3.2.5 Competition

Manuf acturers stated that some TSLs could affect competition within the industry. For example, one manufacturer has a patent on silv erized reflectors. While DOE did not establish any TSL that would mandat e using this technology ( i.e. , there are alternate technology pathways to all TSLs that do not require the use of the s ilverized reflector), this manufacturer could meet TSL 2 with cheaper lamps than its competitors . One manufacturer has a cross license on the technology, but has not made silverized lamps r ecently and would incur s ubstantial capital and conversion costs to produce them. There are competitive concerns at TSL 4 and TSL 5 as well. Two manufacturers have a full line of products that currently meet TSL 4. The third

a Hot shock, as described by manufacturers, occurs when sections of the lamp’s filament fuse together due to installation of the lamp in a live fixture. Due to its stru cture, the filament is very sensitive to motion and can easily bend during installation. As current passes through the f ilament, the filament’s temperature increases significantly. If a lamp is installed while current is passing through the filament (i.e., the fixture is live), a bending of the filament can potentially cause the bended segmen t to fuse together permanently.

13-7manufacturer has some products at this level, but is concerned that it would have to incur significantly larger capital conve rsion costs at TSL 4 and TSL 5 to redesign and manufacture different burners, which could put it at a competitive disadvant age. Only one manufacturer currently has a full line of pr oducts at TSL 5. At TSL 5, simila r to TSL 2, standards-compliant lamps could combine halogen infrared (HIR) t echnology with an improved reflector, potentially putting the company that does not have access to silveriz ed reflectors or equivalent technology at a disadvantage.

13.3.2.6 Market Erosion

Manufacturers stated that em er ging technologies is already st arting to penetrate the IRL market. A standard on IRL would be unique because it would force investments in a market that would shrink over the entire lifetime of the i nvestment. Depending on market penetration of emerging technologies, these investments might never be recouped. Also, manufacturers are concerned that a standard on IRL could hasten the switch to emerging technologies by lowering the difference in their first cost price. If the st andard did increase the natural migration toward new technology, it would be less likely that ma nufacturers would make the substantial investments to modify IRL production equipment. Finally, manufacturers ar e concerned that the BR exemptions in EISA 2007 could also erode the market: The higher the IRL standard, the lower the relative cost of the exempted incandescen t lamps. If a lower relative cost causes a large shift to exempted incandescent lamps, it is le ss likely that investments in improved halogen lamps could be justified.

13.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the m ain tool for a ssessing the impact on industry due to the imposition of amended energy conservation standard s. DOE relied on several sources to obtain inputs for the GRIMs. Data and assumptions from these sources are then fed into an accounting model that calculates the base-case cash flows, as well as the impacts on manufacturers due to amended energy conservation standards. Two GRIM models were developed, one for GSFL and one for IRL.

13.4.1 Overview of the GRIM

The basic s tructure of the GRIM, illustrated in Figure 13.4.1 is a standard annual cash flow analysis that uses m anufact urer selling prices, shipments, and industry financial information as inputs, and accepts a set of regulatory conditions such as changes in costs, shipments, and associated margins. The GRIM spreadsheet uses a num ber of inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 2009, and continuing to 2042. The model calculates the INPV by summing the stream of annual discounted cash flows during this period. 1

13-8Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projected cash flows using sta ndard accounting principles and compared changes in INPV between the se lected base-case scenario and different TSLs for the amended energy conservation standard (the standard-case scenario). The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy conservation standard on manufacturers. Appendix 13A provides mo re technical details and user information for the GRIM.

13.4.2 Sources GRIM Inputs

The GRIM uses several different sources for da ta inputs in determ ini ng the cash flows for the industry, including corporat e annual reports, credit ratings, the shipments model, the engineering analysis, the produc t price determination, and th e manufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to the SEC provided many of the financial inputs to the GRIM. 2 These reports exist for publicly held companies and are freely availabl e to the general public. DOE developed average financial inputs to the GRIMs by examining the annual SEC 10-K and 20-F reports filed by pub licly-traded companies that manuf acture lighting products including GSFL and IRL. The SEC 10-Ks and 20-Fs provide c onsistent financial data for the consolidated corporation but do not provide de tailed financial information for the company’s lighting product lines. Because these companies are typically dive rsified, producing a range of different products, an industry average was assumed by DOE to be representative for the manufacture of both GSFL and IRL. Some SEC reports are th erefore more relevant than othe rs are to the analysis of the GSFL and IRL industries, depending on the pr ominence that business has in the company’s overall operations. In determining financial pa rameters for GSFL and IRL, DOE weighted corporate financial information contained in the SEC 10-Ks or 20-Fs by each company’s estimated share in the lighting industry to ar rive at industry-weight ed averages. DOE used corporate annual reports to deri ve the following GRIM inputs:

• Tax rate, • Working capital,

13-9• Sales, general, and admi nistration expenses (SG&A), • Research and devel opment (R&D) expenses, • Capital expenditures, and • Net property, plant, and equipment (PPE).

13.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, re search, and financial inform ation. S&P reports are available for a nominal fee. DOE re lied on S&P reports to determine the industry’s average cost of debt for th e cost of capital calculation.

13.4.2.3 Dun & Bradstreet Reports

Dun & Bradstreet (D&B ) provides independent research regarding company cash flows, revenues, employees, and credit-worthiness. Besides conducting manufacturer interviews, DOE used D&B reports to profile se veral manufacturers which could potentially be small businesses.

13.4.2.4 Shipment Model

The GRIM used shipm ent projections derive d from DOE’s shipments model in the NIA. The model relied on NEMA historical shipments data for GSFL and IRL for the final rule analysis. As described in the disc ussion of cash flows in sections 13.5.2 and 13.6.2 , DOE used two base-case shipm ent scenarios to characterize the GSFL and IRL industries absent standards. One scenario modeled the industry where emerging technologies does not erode the market (the Existing Technologies base case) and the other assumed new technologies increasingly erode the market (Emerging Technologies base case). In the standard cases, the GRIMs include all shipment scenarios from the NIA. Chapte r 10 of the TSD describes the methodology and analytical model DOE used to forecast shipments.

13.4.2.5 Product Price Determination

During the product price determ ination, DOE deve loped end-user prices (retail) for lamp and lamp-and-ballast designs analyzed by di scounting published list pr ices (i.e., “blue book pricing”). The product price determination (cha pter 7) discussed th e pricing methodology and results. By combining the results of the engineer ing analysis and the prod uct price determination, DOE derived the necessary product pr ice inputs for use in the GRIMs.

13.4.2.6 Manufacturer Interviews

During the course of the MIA, DOE c onducted interviews with m anufacturers representing over 90 percent of the GSFL and 85 percent of the IRL industry. During these discussions, DOE obtained information, which it used to determine and verify GRIM input assumptions. Key topics discussed during the in terviews and reflected in the GRIM include:

• Capital conversion costs (one-time investments in property, plant, and equipment.)

13-10• Product conversion costs (one-time investments in research, equipment development, testing, and marketing). • The portion of the capital conversion cost s that companies use to replace stranded
assets. • Product cost structure: • The portion of the manufacturer prod uction costs related to materials, labor, overhead, and depreciation. • Projected total shipment a nd shipment distribution mix.

13.4.3 Financial Parameters

Table 13.4.1 provides financial parameters for five public companies engaged in

m anufacturing and selling of lighting products. Th e values listed are aver ages over a five-year period (2002-2007).

Table 13.4.1 GRIM Financial Parameters Based on 2002-2007 Weighted Company Financial Data
Manufacturer Parameter IndustryWeighted Average A B C D E

Tax Rate (% of Taxable Income) 19.2 11.4 22.7 34.6 -12.0 41.3
Working Capital (% of Revenue) 13.7 18.9 7.3 12.4 1.5 27.2

SG&A (% of Revenue) 22.0 22.3 17.7 34.0 25.3 21.9

R&D (% of Revenues) 5.8 7.6 5.6 1.3 4.1 0.5
Capital Expenditures (% of Revenues) 3.2 2.8 4.3 1.6 4.7 3.4
Net Property, Plant, and Equipment (% of Revenues) 13.9 15.7 11.3 10.1 40.8 29.8

These companies constitute a significant por tion of the GSFL and IRL industries. For other companies in the industry, th e public data is not available or the lighting segment figures could not be adequately disaggreg ated from other businesses segments and were not used for the analysis. The values used in the GRIM, theref ore, represent the industry’s weighted average estimated with financial data from five pub licly traded manufacturers weighted by their respective market shares. During manufacturer inte rviews, manufacturers stat ed that the financial parameters listed in Table 13.4.1 would not be significantly di fferent between GSFL and IRL industries. T herefore, for the GRIM, DOE assume d the financial parameters would be the same for both GSFL and IRL industries.

13.4.4 Corporate Discount Rate

DOE used the weighted-average cost of capital (WACC) for the industry as the discount rate to calcu late the INPV. Becau se a company’s assets are financed by a combination of debt

13-11and equity, the industry WACC is the total cost of debt and equity weighted by the composite companies’ respective proportions of debt and e quity in the capital st ructure of the industry. 1 DOE made its initial estimate of the WACC for both the GSFL a nd IRL industries using publicly available information of the five companies used to derive the financial parameters. As described below, DOE revised its estimate of the discount ra te after independently researching the industry WACC.

DOE made its initial estimate of the IRL and GSFL WACC using the following formula:

WACC = After-Tax Cost of Debt x (Debt Ra tio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return th at equity investors (including, potentially, the company) expect to earn on a company’s stock. Th ese expectations are reflected in the market price of the company’s stock. Th e capital asset pricing model (C APM) provides one widely used means to estimate the cost of equity. Accordi ng to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “saf e” benchmark investment, typically considered the short-term Treasury Bill (T-Bill) yield.

Risk premium is the difference between the expected return on stocks and the riskless
rate.

Beta ( β ) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated with the S&P 500 market index. A Beta lower than one means the stock is less volatile than the market index.

DOE initially determined that the industry aver age cost of equity for the lighting industry is 22.1 percent, as calculated in Table 13.4.2

.

13-12Table 13.4.2 Cost of Equity Calculation Manufacturer Parameter IndustryWeighted Average (%) A B C D E (1) Average Beta (2002 – 2007 year) 1.78 2.00 1.59 1.78 1.00 1.00
(2) Yield on 10 Year TBill (1990-2007) 5.8 - - - - - (3) Market Risk Premium (1926-1999) 9.2 - - - - - Cost of Equity (2)+((1)*(3)) 22.1 - - - - -
Equity/Total Capital 90.9 94.7 98.1 64.4 1.1 78.7

Bond ratings are a tool to meas ure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. On e way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis point s) over the risk-free rate. DOE used this method to calculate the cost of debt for all five ma nufacturers. S&P had bond ratings for most manufacturers, so DOE used thes e ratings to estimate the manufact urers’ cost of debt by adding the relevant spread to the ri sk-free rate. There were two ma nufacturers with no S&P bond rating available. In this case, DOE used the company’s si ze and interest coverage ratio to arrive at the spread of corporate debt over risk-free securities. The intere st coverage ratio measures a company’s ability to service its debt-f inancing obligation through its earnings. 2

In practice, investors use a variety of diffe rent maturity Treasury bonds to estimate the risk-free rate. DOE used a long-term Treasur y bond return (10-year bond return) because it captures long-term inflation expectat ions and is less volatile than s hort-term rates. The risk free rate is estimated as approximate ly six percent, which is the av erage 10-year Trea sury bond return over the period of 1990 to 2007.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for four of the six public manufacturers over the period 2002-2007. To this, DOE added the industry-weighted average spread to the average T-Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DO E adjusted the gross cost of debt by the industry average tax rate to determine th e net cost of debt for the industry. Table 13.4.3 presents the derivation of the cost of debt. Also shown is the capital structure of th e industry, i.e. the debt ratio (debt/total capital).

13-13Table 13.4.3 Cost of Debt Calculation Manufacturer Parameter IndustryWeighted Average (%) A B C D E S&P Bond Rating -- A- AA- BBB- CCC A (1) Yield on 10 year T-Bill (1990-2007) 5.8 - - - - - (2) Gross Cost of Debt 7.5 7.8 6.8 8.1 15.8 7.6 (3) Tax Rate 19.2 11.4 22.7 34.6 -12.0 41.3 Net Cost of Debt (2)x((1)- (3)) 6.1 - - - - - Debt/Total Capital 9.1 5.3 1.9 35.6 98.9 21.3

Using the publicly available information above, DOE initially estimated the GSFL and IRL industries’ WACC to be approximately 20.7 percent. Subtracting an inflation rate of 2.9 percent between 1990 and 2007, the inflation adjust ed WACC, and the corporate discount rate used in the strawman GRIMs was 17.8 percent.

To verify the accuracy of its initial calcul ation, DOE used an independent report on the cost of capital. Morningstar, Inc. sells these reports broken down by Standard Industrial Classification (SIC) Code. GSFL and IRL manufacturing is classified under SIC code 3641 (Electric Lamp Bulbs and Tubes). Morningstar had a cost of capital report available for SIC code 364 (Electrical Lighting and Wiring Equipment) that DOE used to judge the accuracy of its initial WACC. The WACC shown in that report varied significantly from DOE’s calculation using publicly available data. B ecause of the large discrepancy between the independent report and the calculation using public data, DOE as ked manufacturers to comment on the industry WACC during interviews. DOE revised its number based on manufacturer comments. Using the weighted market share of manufacturers that commented on the initi al industry WACC, DOE used 10.01 percent as the discount ra te in the GSFL and IRL GRIM.

13.4.5 Trial Standard Levels

DOE developed five TSLs for both GSFL and IRL. Chapter 9 of the TSD describes the

m ethodology DOE used to determine each TSL. The lamp efficacies used in the GSFL and IRL GRIMs are presented in Table 13.4.4 and Table 13.4.5 , respectively.

Table 13.4.4 GSFL Efficacy Levels by Product Class and TSL Trial Standard Levels (lm/W) Product Class Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 4-Foot Medium Bipin (MBP) 75 78 81 85 89 93 8-Foot Single Pin (SP) Slimline 80 86 92 95 97 98 8-Foot Recessed Double Contact High Output (RDC HO) 80 83 86 88 92 95 4-Foot T5 Miniature Bipin Standard Output (MiniBP SO) 86 86 86 86 86 90 4-Foot T5 Miniature Bipin High Output (MiniBP HO) 76 76 76 76 76 76

13-14Table 13.4.5 IRL Efficacy Levels by TSL Trial Standard Levels (lm/W) (Technology Pathway)

Product

Class Baseline (Halogen) TSL 1 (Improved

Halogen (Xenon)) TSL 2 (Long Life HIR, Improved Halogen (Silver)) TSL 3 (HIR) TSL 4 (Improved HIR) TSL 5 (Improved HIR Plus)

IRL Standard Spectrum > 2.5 inches

< 125 V 10.5 (40–50 Watts) 11.0 (51–66 Watts) 12.5 (67–85 Watts) 14.0 (86–115 Watts) 14.5 (116–155 Watts) 15.0 (156–205 Watts) 4.6P 0.27 4.8P 0.27 5.4P 0.27 5.9P 0.27 6.4P 0.27

P = rated wattage

13.4.6 NIA Shipments Forecast

The GRIM estim ates manufacturer revenues ba sed on total-unit-shipment forecasts and the distribution of these values by product class and lamp efficacy. Changes in the efficacy mix at each standard level are a key driver of manuf acturer finances. For this analysis, the GRIM used the NIA shipments forecasts for both GSFL and IRL from 2009 to 2042. Further explanation of assumptions and calculations of total shipments can be found in the shipment analysis section of this TSD (chapter 10). Fo r the NIA, DOE forecasted several different of shipment scenarios that were affected by emer ging technologies in the market and consumer purchasing habits. These shipment scenarios ar e further explained in the following sections.

13.4.6.1 GSFL Base-Case Shipment Scenarios

For the GSFL GRIM, DOE incorporated th e tw o base-case shipment scenarios from the NIA (Existing Technologies and Emerging Technol ogies). In the Existing Technologies basecase shipment scenario, DOE assumed that in th e base case customers would not migrate to emerging technologies. In the Emerging Technologi es scenario, GSFL shipments are eroded in the base case as more customers purchase emergi ng technologies rather than covered GSFL. An extensive explanation of each shipment base-cas e scenario can be found in chapter 10 of the TSD. Table 13.4.6 and Table 13.4.7 show total industry shipments for each product class of GSFL in 2012 and 2042 Existing and Em ergi ng Technologies base-case shipments.

13-15Table 13.4.6 Total GSFL NIA-Shipments For ecast in 2012 and 2042 for the Existing Technologies Base Case
Product Class Total Industry Shipments In 2012* Total Industry Shipments In 2042*

4-Foot MBP 482,841,000 652,784,000 8-Foot SP Slimline 22,448,000 6,873,000

8-Foot RDC HO 17,654,000 2,320,000 4-Foot T5 MiniBP SO 23,528,000 103,352,000 4-Foot T5 MiniBP HO 24,243,000 69,689,000 * Estimates rounded to the nearest hundred
Table 13.4.7 Total GSFL NIA-Shipments Foreca st in 2012 and 2042 for the Emerging Technologies Base Case
Product Class Total Industry Shipments in 2012* Total Industry Shipments in 2042*

4-Foot MBP 482,841,000 478,900,000 8-Foot SP Slimline 22,448,000 6,873,000

8-Foot RDC HO 17,654,000 2,320,000 4-Foot T5 MiniBP SO 23,528,000 74,763,000 4-Foot T5 MiniBP HO 24,243,000 69,689,000 * Estimates rounded to the nearest hundred

13.4.6.2 IRL Base-Case Shipment Scenarios

For the IRL GRIM, DOE also inco rporated th e two base-case shipment scenarios from the NIA (Existing Technologies and Emerging Technologies) for the period of 2009 to 2042. An extensive explanation of each shipment base-cas e scenario can be found in chapter 10 of the TSD. Table 13.4.8 and Table 13.4.9 show total industry shipments for each product class of IRL in 2012 and 2042 Existing and Em erging Technologies base-case shipments. The tables include the base-case shipments in 2020 because the impacts under the Em erging Technologies base case are most apparent in the years after the standa rd becomes effective and the differences between the base cases are easily demonstrated in 2020.

Table 13.4.8 Total IRL NIA-Shipments Forecast in 2012, 2020, and 2042 for the Existing Technologies Base Case
Lumen Package Total Industry Shipments in 2012* Total Industry Shipments in 2020* Total Industry Shipments in 2042* PAR38 90W 57,249,000 64,068,000 91,550,000 PAR38 75W 44,682,000 50,004,000 71,454,000 PAR30 50W 31,123,000 36,330,000 52,562,000 * Estimates rounded to the nearest hundred

13-16Table 13.4.9 Total IRL NIA-Shipments Forecast in 2012, 2020, and 2042 for the Emerging Technologies Base Case
Lumen Package Total Industry Shipments in 2012* Total Industry Shipments in 2020* Total Industry Shipments in 2042* PAR38 90W 52,376,000 31,932,000 50,837,000 PAR38 75W 40,879,000 24,922,000 39,677,000 PAR30 50W 28,340,000 17,418,000 28,544,000 * Estimates rounded to the nearest hundred

13.4.6.3 GSFL Standards Shipment Scenarios

All shipm ent forecasts in the GSFL GRIM are obtained from the GSFL NIA. Consequently the GSFL GRIM included two effi cacy distribution scenarios (Shift and Roll-Up), and two lighting expertise scenar ios (High and Market Segment- Based Lighting Expertise). For additional details on the various ship ment scenarios, see TSD chapter 10.

13.4.6.4 IRL Standards Shipment Scenarios

To characterize consum er behavior in the IR L standards-case GRIM, DOE considered all the shipment scenarios found in the NIA. The IR L GRIM considered two efficacy distributions scenarios (shift and roll-up) and two product substitution scenarios (BR Substitution and R-CFL Substitution). The IRL GRIM also considered th e Baseline Lifetimes scenarios in which the lifetime of lamps in the standards case are similar to baseline lamp lifetimes. See chapter 10 of the TSD for additional details on the IR L standards-case shipment scenarios.

13.4.7 Production Costs

Changes in product costs im pact revenues a nd gross profits. As shown in the product price determination (chapter 7), products that are more efficacious cost more than baseline products for a given product class. For the MIA, DOE derived manuf acturing production costs by discounting the end user prices fo und in the product price determination b by typical markups along the retail distribution chain. To calculate manufacturer sell ing prices (MSP) from these end-user prices, DOE divided the medium end-us er prices from the product price determination by a typical markup for retail lo cations that sell the covered products. For both GSFL and IRL products, DOE estimates the markup for retail prices to MSP to be 1.50. DOE calculated the markup for retail locations using the revenues and cost of goods sold (COGS) from the annual reports of publicly traded companies. To dete rmine manufacturer produ ction costs (MPC) from MSP, DOE divided by the manuf acturer markup calculated with the other GRIM financial inputs. For both GSFL and IRL products, DOE es timates the manufacturer markup from MSP to MPC is 1.52.

b The retail prices used in the GRIM differ from those sh own in the product price determination. The retail prices used in the GRIM reflect scaled retail prices. To genera te shipments, DOE established an average lamp lifetime for each lamp type (e.g., 4-foot T8 MBP) . Because most lamps have lifetimes that differ from this average lifetime, DOE scaled the retail lamp prices found in the product price determination in order to accurate calculate industry

revenue.

13-17Table 13.4.10 through Table 13.4.14 provide the total MPCs and MSPs associated with each analyzed GSFL product class in the GRIM . Total annual COGS for the industry were calcu lated by multiplying the MPCs by the unit shipments for each product and summing the results. During manufacturing in terviews, manufacturers prov ided the breakdown of COGS, which DOE weighted by market share to de termine the industry-w ide breakdown of labor, materials, overhead, and depreciation.

Table 13.4.10 Base-Case Production Costs (2008$) used in the GRIM for 4-Foot Medium Bipin Product Classes
Product

Class TSL Lamp Efficacy Retail Prices MSP MPC

76.8 $2.29 $1.53 $1.01 78.0 $2.46 $1.64 $1.08 Baseline 77.9 $1.56 $1.04 $0.69 80.5 $4.63 $3.08 $2.03 82.4 $2.77 $1.84 $1.21 TSL 1 82.9 $5.12 $3.41 $2.25 85.3 $5.07 $3.38 $2.22 TSL 2 87.8 $5.20 $3.46 $2.28 4 – Foot

T12 MBP

TSL 3 91.2 $5.10 $3.40 $2.23 TSL 2 86.2 $1.87 $1.24 $0.82 TSL 3 90.8 $2.92 $1.94 $1.28 92.3 $2.55 $1.70 $1.12 93.8 $3.35 $2.23 $1.47 TSL 4 93.0 $3.08 $2.05 $1.35 95.4 $2.99 $1.99 $1.31 4 – Foot T8 MBP

TSL 5 96.0 $3.50 $2.33 $1.53
Table 13.4.11 Base-Case Production Costs (2008$) used in the GRIM for 8-Foot Single Pin Slimline Product Classes
Product

Class TSL Lamp Efficacy Retail Prices MSP MPC

Baseline 85.6 $5.79 $3.86 $2.54 87.3 $8.95 $5.96 $3.93 TSL 1 87.6 $3.40 $2.27 $1.49 92.0 $7.91 $5.27 $3.47 TSL 2 92.6 $5.72 $3.81 $2.51 8 – Foot T12 SP Slimline

TSL 3 97.5 $5.93 $3.95 $2.60 TSL 3 94.8 $4.26 $2.84 $1.87 TSL 4 98.2 $6.52 $4.34 $2.86 101.5 $6.16 $4.11 $2.70 101.8 $4.20 $2.80 $1.84 8 – Foot

T8 SP Slimline TSL 5 103.6 $5.25 $3.50 $2.30

13-18Table 13.4.12 Base-Case Production Costs (2008$) used in the GRIM for 8-Foot Recessed Double Contact High Output Product Classes
Product

Class TSL Lamp Efficacy Retail Prices MSP MPC

80.1 $6.69 $4.46 $2.93 Baseline 82.5 $3.86 $2.57 $1.69

TSL 1 83.2 $12.29 $8.19 $5.39 TSL 2 86.1 $6.84 $4.56 $3.00 87.6 $12.82 $8.55 $5.62 8 – Foot T

12 RDC

HO TSL 3 88.9 $13.13 $8.75 $5.76 91.9 $5.28 $3.52 $2.32 TSL 4 93.0 $7.21 $4.80 $3.16 8 – Foot T8

RDC HO TSL 5 95.3 $8.66 $5.77 $3.80

Table 13.4.13 Base-Case Production Costs (2008$) used in the GRIM for 4-Foot T5 Standard Output Product Class
Product

Class TSL Lamp Efficacy Retail Prices MSP MPC

Baseline 86.0 $1.53 $1.02 $0.67 TSL1, 2, 3, 4 104.3 $3.40 $2.26 $1.49

109.7 $4.49 $2.99 $1.97 4 – Foot T5 MiniBP SO TSL 5 111.5 $3.40 $2.26 $1.49
Table 13.4.14 Base-Case Production Costs (2008$) used in the GRIM for 4-Foot T5 High Output Product Class
Product

Class TSL Lamp Efficacy Retail Prices MSP MPC

Baseline 76.0 $2.08 $1.39 $0.91 92.9 $4.61 $3.07 $2.02 4 – Foot T5 MiniBP

HO TSL 1, 2, 3, 4, 5 98.0 $5.46 $3.64 $2.39

For the IRL GRIM, DOE included the proportion of costs devoted to labor, materials, overhead, and depreciation that make up the fu ll cost of each product. Using information obtained during manufacturer interviews wei ghted by market share, DOE estimated the proportion of product costs associ ated with each cost category. Table 13.4.15 and Table 13.4.16 provides the production cost assum pti ons used in the GRIM for IRL.

13-19Table 13.4.15 Base-Case Production Costs (2008$) used in the GRIM for IRL Covered Product Classes
MPC Breakdown Lumen Package TSL Lamp Efficacy Retail Price MSP Labor Materials Overhead Depreciation MPC

Baseline 14.6 $4.98 $3.32 $0.51 $1.02 $0.55 $0.11 $2.19

TSL 1 15.3 $5.90 $3.93 $0.60 $1.21 $0.65 $0.13 $2.59
15.9 $6.50 $4.33 $0.67 $1.33 $0.71 $0.14 $2.85 TSL 2 16.6 $6.33 $4.22 $0.65 $1.30 $0.69 $0.14 $2.78
TSL 3 18.0 $6.50 $4.33 $0.67 $1.33 $0.71 $0.14 $2.85
TSL 4 19.8 $7.78 $5.19 $0.80 $1.59 $0.85 $0.17 $3.41 PAR38

90W

TSL 5 21.0 $8.34 $5.56 $0.85 $1.71 $0.91 $0.18 $3.66
Baseline 14.0 $4.98 $3.32 $0.51 1.02 $0.55 $0.11 $2.19

TSL 1 14.6 $5.90 $3.93 $0.60 $1.21 $0.65 $0.13 $2.59
15.3 $6.50 $4.33 $0.67 $1.33 $0.71 $0.14 $2.85 TSL 2 15.9 $6.33 $4.22 $0.65 $1.30 $0.69 $0.14 $2.78
TSL 3 17.5 $6.50 $4.33 $0.67 $1.33 $0.71 $0.14 $2.85
TSL 4 19.1 $7.78 $5.19 $0.80 $1.59 $0.85 $0.17 $3.41 PAR38

75W

TSL 5 20.3 $8.34 $5.56 $0.85 $1.71 $0.91 $0.18 $3.66
Baseline 12.6 $4.40 $2.93 $0.45 $0.90 $0.48 $0.10 $1.93

TSL 1 13.2 $5.31 $3.54 $0.54 $1.09 $0.58 $0.12 $2.33
13.5 $5.92 $3.94 $0.61 $1.21 $0.65 $0.13 $2.59 TSL 2 14.0 $5.74 $3.83 $0.59 $1.18 $0.63 $0.13 $2.52
TSL 3 15.1 $5.92 $3.94 $0.61 $1.21 $0.65 $0.13 $2.59
TSL 4 17 $7.20 $4.79 $0.74 $1.47 $0.79 $0.16 $3.16 PAR30

50W

TSL 5 19.1 $7.75 $5.16 $0.79 $1.59 $0.85 $0.17 $3.40

Table 13.4.16 Base-Case Production Costs (2008$) used in the GRIM for IRL Non-Covered Product Classes
Lumen Package Lamp Type Lamp Efficacy Retail Price MSP MPC
Compact Fluorescent Lamps (CFL) 50.0 $7.47 $4.97 $3.27 PAR38

90W Bulged Reflector Lamps (BR) 10.8 $1.72 $1.15 $0.76

CFL 52.2 $7.47 $4.97 $3.27 PAR38

75W BR 12.2 $1.72 $1.15 $0.76 CFL 46.9 $6.15 $4.10 $2.70 PAR30

50W BR 9.5 $1.43 $0.95 $0.63

DOE also estimated MPCs for the IRL representative lamps for the Baseline Lifetime scenario. For the MPCs for baseline through TS L 4 under the Baseline Lifetime scenario, DOE used the same MPCs shown in Table 13.4.15 . For the MPCs at TSL 5 under the Baseline Lifetim e scenarios, DOE used the same MPCs as at TSL 4 because it is assumed that manufacturers will produce the TSL 4 representative lamps with shortened lifetime.

13-2013.4.8 Conversion Costs

New or a mended energy conservation standard s typically cause manufacturers to incur one-time conversion costs to bri ng their production f acilities and product designs in compliance with the new regulation. For the purpose of the MIA, DOE classified these one-time conversion costs into two major groups, capital conversi on costs and product conve rsion costs. Capital conversion costs are one-time investments in prope rty, 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 costs are one -time investments in research, development, testing, and marketing focused on making product designs comply with new or amended energy conservation standards. The follo wing sections describe in more detail DOE’s assumptions and inputs to the GSFL and IRL GRIMs related to amended energy conservation standards and conversion costs.

13.4.8.1 Capital Conversion Costs

For the GSFL industry, DOE based its capita l conversion cost estimates on discussions with manufacturers, weighted by market share of the companies responding. During interviews DOE learned that the majority of capital conversion costs would be for converting T12 lines to T8 lines. As required efficacies in crease at higher TSLs, T12 lamps that do not meet the standard are discontinued. To maintain capacity, manufactur ers must convert existing T12 lines to T8 lines and in some cases build additional T8 lines (i.e., the T8 lamps DOE modeled achieve higher efficacies than the T12 lamps). At TS L 1 through TSL 3, manufacturers can maintain a mix of T12 and T8 lines. The capit al conversion costs at these th ree TSLs involve retooling T12 lines to meet the larger volume of T8 lamps af ter the effective date of the energy conservation standards. At efficacy levels prescribed by TSL 4 and above, all lines would need to be converted from T12 to T8. Table 13.4.17 summarizes the estimated breakdown of capital conversion costs by TSL for the covered GSFL product classes.

Table 13.4.17 Capital Conversion Costs for GSFL by Product Class Total Industry Capital Conversion Cost s (2008$ million) by Product Class TSL 4-Foot MBP 8-Foot SP Slimline 8-Foot RDC HO 4-Foot T5 MiniBP SO 4-Foot T5 MiniBP HO Industry Total

Baseline $0 $0 $0 $0 $0 $0

TSL 1 $33.0 $5.5 $0.0 $0.0 $0.0 $38.50
TSL 2 $55.0 $5.5 $0.0 $0.0 $0.0 $60.50
TSL 3 $88.0 $5.5 $11.0 $0.0 $0.0 $104.50
TSL 4 $132.0 $36.3 $13.2 $0.0 $0.0 $181.50
TSL 5 $132.0 $36.3 $13.2 $0.0 $0.0 $181.50

Manufacturers indicated during in terviews that the GSFL market was shifting from a mix of T12 and T8 lamps to a mainly T8 lamp mark et. DOE learned that stan dards would accelerate this natural progression from T12 to T8 by limiting the available T12 lamps at TSL 1 through TSL 3 and completely eliminating T12s at TS L 4 and TSL 5. As a result, DOE estimated the capital costs for the natural market shift from T1 2 to T8 in the base ca ses. DOE estimated that during the analysis period the major manufactur ers would convert a total of four existing T12

13-21lines to T8 absent standards. During intervie ws, each of these manufacturers gave DOE an estimate of its cost to convert a T12 line to T8 production. To avoid further speculation DOE used the market share weighted average capital conversion cost of approximately $26 million as its cost of converting a T12 line to T8. DOE assumed that each major manufacturer would continue to produce a full line of T12 lamps if customers demanded them. DOE estimates that the total cost of the natural c onversion from T12 lines to T8 lines would be approximately $104 million. In the GRIM, the total natural line conve rsion cost is spread out evenly throughout 2009 to 2018. Estimating the plant changes that would occur absent standards lowers INPV of the GSFL industry by $70.4 million in both base cases.

For the IRL industry, DOE based its capital c onversion cost estimates on discussions with manufacturers, weighted by the market shar e of the companies responding. The capital conversion costs manufacturers provided dur ing interviews were based on converting manufacturing equipment to meet the curren t volume of shipments. Since the shipments projected in the NIA decrease in the base cas es, DOE scaled the capita l conversion costs to account for the decline in shipments from 2008 to th e year the standard becomes effective to be consistent with manufacturers’ expectations whenthey provided their cap ital conversion costs. DOE used the decline in shipments under both the Existing Technologies and Emerging Technologies base-case shipment scenarios to make this adjustment. Under the Existing Technologies case, total ship ments decrease by 20.0 percent from 2008 to 2012. Under the Emerging Technologies case, total shipment s decreased by 25.7 percent from 2008 to 2012. DOE lowered the capital conversion costs gi ven by manufacturers by these percentage effectively calculating two separa te sets of capital conversion cost s (one for each base case).

The capital conversion costs to meet most IRL TSLs are substantial. Approximately 90 percent of covered IRL shipments are at baseline levels (standard halogen lamps). All standards involve increasing the production of currently low volume produc ts. TSL 1 involves only minor capital conversion costs because manufacturers do not need to greatly alter production equipment to add xenon to existing lamps. The capital c onversion costs necessary at TSL 2 through TSL 5 increase substantially. At TSL 2, manufacturers must either expa nd production of long-life HIR lamps or lamps with improved reflectors. Both of these lamps are currently manufactured in low volume and in a manner that varies greatly fr om the existing high-volume, standard halogen lamps. Substantial plant changes must be made to increase the production volume of these types of lamps by many multiples over existing produ ction. TSL 3, TSL 4, and TSL 5 involve HIR technology. The manufacturing proce ss must be completely revamped in order to meet demand with these products, resulting in high capital conversion costs to retool the plant for exclusively infrared lamp production (inc luding new coating decks, expanding or creating capsule production, and assembly layout). Because lamp s at TSL 3 through TSL 5 are manufactured differently than standard halogen lamps, mu ch of the existing manufacturing equipment is stranded at these TSLs.

DOE consulted an independent supplier of IR L coaters to identify additional costs above TSL 4 needed for manufacturers to meet TSL 5. TSL 5 involves si milar plant changes as TSL 4. The most significant change is th at the coating process at TSL 5 is more involved and takes more time. Therefore, more coating machines woul d be required because the annual throughput of each coating machine is lower. DOE separated the capital conver sion costs manufacturers gave for TSL 4 into changes to the plant and costs for new HIR coaters. DOE then calculated the cost

13-22of the additional coaters that would be necessa ry to meet industry demand. DOE kept costs for plant changes the same as at TSL 4.

Table 13.4.18 and Table 13.4.19 summarize the breakdown of capital conversion costs by TSL for the covered IRL product class for each base case.

Table 13.4.18 Capital Conversion Costs for the IR L Industry (Existing Technologies Base Case)

TSL Capital Conversion Costs (2008$ million)
Baseline $0

TSL 1 $31.5 TSL 2 $83.5 TSL 3 $134.5 TSL 4 $166.9 TSL 5 $185.5

Table 13.4.19 Capital Conversion Costs for the IR L Industry (Emerging Technologies Base Case)

TSL Capital Conversion Costs (2008$ million)
Baseline $0

TSL 1 $29.3 TSL 2 $77.5 TSL 3 $124.8 TSL 4 $155.0 TSL 5 $172.2

DOE also estimated capital conversion costs for the IRL industry used for the Baseline Lifetime scenario. For TSL 4, DOE used the sa me capital conversion co sts under the Baseline Lifetime scenario for both the Existing and Em erging Technology base cases. For the capital conversion costs at TSL 5 under the Baseline Life time scenarios, DOE used the same capital conversion costs as at TSL 4 because it is a ssumed that manufacturers will produce the TSL 4 representative lamps with shortened lifetime.

13.4.8.2 Product Conversion Costs

DOE conducted interviews w ith m anufacturers to better understand the many steps that manufacturers have to take before they can re lease new or improved products. The magnitude of the required investments varies by manufacturer and the analyzed TSL. Multiple manufacturers estimate that the time and resources spent on res earch and development, testing, and certification of products would be significant depending on the de sign path chosen to ach ieve higher efficacy.

For the GSFL industry product conversion costs, DOE combined figures provided by each manufacturer using a corresponding market share at each TSL. For product conversion costs, DOE learned that manu facturers would not have to make significant additional R&D investments to achieve higher efficacy levels. To achieve higher efficacy levels, only the

13-23phosphor quality and content need to be cha nged. Because all manufact urers already offer products that achieve all efficacy levels prescr ibed by the TSLs, additional product conversion costs would be incurred only for marketing, sales, and some additional testing and certification. Table 13.4.20 summarizes the breakdown of product c onversion costs by TSL and product class in the GSFL industry.

Table 13.4.20 GSFL Product Conversion Costs by Product Class Total Industry Product Conversion Co sts (2008$ million) by Product Class TSL 4-Foot MBP 8-Foot SP Slimline 8-Foot RDC HO 4-Foot T5 MiniBP SO 4-Foot T5 MiniBP HO Industry Total Baseline $0 $0 $0 $0 $0 $0

TSL 1 $1.1 $1.1 $1.1 $0.0 $0.0 $ 3.35
TSL 2 $5.6 $1.1 $2.2 $0.0 $0.0 $ 8.95
TSL 3 $5.6 $1.1 $2.2 $0.0 $0.0 $ 8.95
TSL 4 $7.3 $2.2 $2.2 $0.0 $0.0 $ 11.7
TSL 5 $7.3 $2.2 $2.2 $9.1 $9.1 $ 30.0

For the IRL product conversion costs, DOE combined figures provided by each manufacturer using a corresponding market share at each TSL. The product conversion costs are relatively minor (compared to the capital convers ion costs) because most manufacturers have existing products that meet nearly all TSLs. However, at TSL 1 through TSL 4 there are some additional engineering costs. So me manufacturers indicated thei r existing lamps would require some design changes if they became large volume products due to standards. There would also be additional testing and certification expenses at each TSL. In addi tion, one manufacturer indicated their competitive concerns at TSL 4 and TSL 5 because these TSLs would require a redesign of all existing lamps to use a more ef ficient burner. For TSL 5, DOE assumed that the product conversion costs would be equal to the combination of the costs of the improved reflectors (the conversion costs of TSL 2) and improved HIR lamps (the conversion costs of TSL 4). Table 13.4.21 summarizes the breakdown of product conversion costs by TSL for the IRL industry.

Table 13.4.21 Product Conversion Costs for the IRL Industry

TSL Product Conversion Costs (2008$ million)
Baseline $0

TSL 1 $3.5 TSL 2 $3.5 TSL 3 $2.3 TSL 4 $3.5 TSL 5 $6.9

13-2413.4.8.3 Conversion Costs Timing

In the IRL GRIM, the capital conversion cost s are spread over th e three-year period between the announcem ent year (2009) and the effective date of th e energy conservation standard (2012). DOE assumes that some IRL manufacturers will begin to purchase additional advanced coaters or make other plant changes dur ing the announcement year in order to increase the capacity of currently low volume HIR lamps be fore the effective date of the standard. For IRL, the capital conversion cost s for TSL 3, TSL 4, and TSL 5 involve both the purchase and installation of additional HIR coaters in addition to significant plant changes.

In the GSFL GRIM, the capital conversion co sts are condensed to the two years before the effective date, 2010 and 2011. DOE estimates that manufacturers will wait until at least 2010 to begin to make the line changes required to me et the TSLs. The line ch anges required to meet the GSFL standard require manufacturers to fi rst ramp up production to meet industry wide shipments while the lines are being converted. DO E estimates that this ramp-up will occur in 2009 at the earliest before the lin es begin to be converted.

13.4.9 Markups

DOE applies different markup scenarios to convert MPC to MSP. DOE considered different m arkup scenarios base d on manufacturer input for G SFL and IRL products. For GSFL and IRL, DOE used the markup scenarios that best characterized the prevailing markup conditions and described the range of market responses as a resu lt of amended energy conservation standards.

After discussions with manufacturers, DOE estimates there are two distinct markup scenarios for the GSFL industry: A flat mar kup and a four-tier markup. For the IRL industry, DOE only incorporated the flat markup in its analysis. The following sections describe each markup scenario and their respective calculations.

13.4.9.1 Flat Markup

Under the Flat Markup scenario, DOE applie d a single uniform “fla t m arkup” across all efficacy levels for all products. A flat mar kup assumes no differentiation in gross margin percentage across product efficacy levels. DOE calculated the markup from industry data using the formula:

Markup = 1 / (1 - Gross Margin)

where:

Gross Margin = (Revenues - Cost of Goods Sold) / (Revenues)

DOE calculated the manufacturer markup—which includes SG&A expenses; research and development expenses; interest; and profit—to be approximately 1.52. This markup is consistent with the one DOE assumed in both base cases in the GSFL and IRL GRIMs. The Flat Markup scenario is the only markup scenario DOE mode led in the IRL GRIM because manufacturers’

13-25concerns about the pote ntial industry impacts are captured in the shipment scenarios and markups do not increase as a function of efficacy in the IRL industry. Since the absolute gross margin increases with increased production costs to maintain the same gross margin percentage markup (flat markup), in the GSFL GRIM DOE a ssumes that this scenario represents a high bound to MSPs under an energy conservation standard.

13.4.9.2 Four-Tier Markup

For GSFL, DOE also modeled a “four-tier markup” in which it assumed that the markup on lamps varies by efficacy in both the base ca se and the standards cas e. The Four-Tier Markup scenario was not modeled for IRL because markups do not increase as a function of efficacy as is the case for GSFL. For GSFL, DOE learned from manufacturers that pricing is determined on the basis of four product tiers, corresponding to different phosphor series (600, 700, 800, and 800 plus). During the MIA interviews, manufact urers provided information on the change in profitability for each level. DOE used this in formation, product pricing from its product price determination, and industry average gross margins to estimate markups for GSFL under the fourtier pricing strategy in the base case. In the standards case of the Four-Tier Markup scenario, DOE modeled the situation in wh ich portfolio reduction squeezes the margin of previously premium products. This scenario is in line with information submitted during manufacturing interviews confirming manufacturers concern th at DOE standards have the potential to significantly disrupt profitability by commoditizing products.

In the Four-Tier Markup scenario, DOE accounted for a natural commoditization of premium lamps over time. DOE assumed that any 800 or 800 plus series lamp that overtakes the market share of a 700 series lamp will be comm oditized over time. DOE also assumed that the markups on 600 and 700 series lamps would not change over time because they are already commodity products. To take into account a natural commoditization of higher-efficacy, premium lamps over time, DOE lowered the mar kups of 800 and 800 plus series lamps over the analysis period in both the base case and the standards case be ginning in 2013, the year after the effective date. As the natural commoditizati on continues through the analysis period, the markups on these premium lamps are gradually lowe red to the same markups as the 700 series lamps.

According to DOE’s analysis, 800 or 800 plus series lamps are only gaining market from 700 series lamps in certain product classes. 800 or 800 plus series lamps completely overtake the market share of 700 series lamps between 2035 and 2040, depending on the base-case scenario and product class. As an example, Figure 13.4.2 shows the market share of 4-foot T8 MBP 700, 800, and 800 plus series lam ps over the analysis period.

13-26Figure 13.4.2 Market Shares of 4-Foot T8 MPB 700, 800, and 800 Plus Series Lamps Under the Emerging Technology Base Case

To model how the markups of premium la mps decline over the analysis period, DOE used different sets of algorith ms that lowered the markup of th e premium lamps as they gained market share from 700 series lamps. For example, Figure 13.4.2 shows the increase in market shares of the 800 plus series lam ps as it reaches the same market share as the 700 series lamps. DOE converted the percent increase in market share for the 800 plus series lamp into a percent decrease in the 800 plus series’ markup. Simila rly, for this example DO E converted the percent decrease in market share for the 800 series lamp into a percent d ecrease in the 800 series’ markup. According to DOE’s analysis, depending on the product class, the market share of the 800 or 800 plus series does not always reach the same market share as the initial 700 series. In previous example, the markups for those 800 series converge to the 700 series markup at the year the 800 plus series lamp market share equals th e initial 700 series market share. As shown in Figure 13.4.3 for the above example, the original m arkups for 700 (1.42), 800 (1.53), and 800 plus (1.64) series lamps converge to a single, lower markup (1.42) over time.

13-27Figure 13.4.3 Base Case Markups for 4-Foot MPB T8 700, 800, and 800 Plus Series Lamps Over Time Under the Emerging Technology Base Case

Each shipment scenario can potentially have a separate set of markups in the Four-Tier Markup scenario due to the differe nt market share possibi lities between each lamp series for each shipment scenario. DOE examined when the more efficacious series overt ake the less efficacious series for each shipment scenario. Since the year the 800 and 800 plus series overtake the 700 series are similar and do not greatly change the results, DOE used the Existing and Emerging Technologies base case shipments with a shif t in efficacy distribution to determine the algorithms of how these premium products ar e commoditized overtime. This assumption simplifies the analysis, reduces variab ility, and reduces further speculation,

To calculate the initial markups in 2012 and to compare the INPV of the both markup scenarios, DOE first adjusted the markups in th e Four-Tier Markup scenar io to yield the same base-case INPV as in the Flat Markup scenario . This adjustment was made with a Four-Tier Markup scenario in which there was no deline in markups over premium products over time (i.e., a scenario where the four-tier markups remain c onstant over time). For both base cases (Existing and Emerging Technologies), DOE multiplied the four-tier markups at each efficacy level by multipliers that would result in equal base-case INPV for both markup scenarios. The difference in multipliers between Existing and Emerging T echnologies scenarios ex ists because total shipments for each scenario vary. Once calculate d, these adjusted markups were used as the starting markups in 2012 that were reduced ove r time using the previously described method.

Table 13.4.21 through Table 13.4.31 show each product analyzed with the corresponding phosphors series with its initial and converging m arkups.

13-28Table 13.4.22 Base Case Four-Tier Markup fo r GSFL: 4-Foot Medium Bipin Product – Existing Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 76.8 1.42 1.42 700 78.0 1.42 1.42 600 77.9 1.26 1.26 800 80.5 1.53 1.53 700 82.4 1.42 1.42 800+ 82.9 1.64 1.64 800 85.3 1.53 1.53 800+ 87.8 1.64 1.64 4 – Foot T12 MBP

800+ 91.2 1.64 1.64 700 86.2 1.42 1.42* 800 90.8 1.53 1.42* 800 92.3 1.53 1.42* 800+ 93.8 1.64 1.42* 800+ 93.0 1.64 1.42* 800+ 95.4 1.64 1.42* 4 – Foot T8 MBP

800+ 97.3 1.64 1.42* * Lamp series that have decreasing markups

Table 13.4.23 Base Case Four-Tier Markup for GS FL: 8-Foot Single Pin Slimline Product – Existing Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 85.6 1.42 1.42 800 87.3 1.53 1.53 600 87.6 1.26 1.26 800+ 92.0 1.64 1.64 700 92.6 1.42 1.42 8 – Foot T12 SP Slimline

700 97.5 1.42 1.42 700 94.8 1.42 1.42 800 98.2 1.53 1.42* 800+ 101.5 1.64 1.64 800+ 101.8 1.64 1.64 8 – Foot

T8 SP Slimline 800+ 103.6 1.64 1.64 * Lamp series that have decreasing markups

13-29Table 13.4.24 Base Case Four-Tier Markup for GSFL: 8-Foot Recessed Double Contact – Existing Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 80.1 1.42 1.42 600 82.5 1.26 1.26 800 83.2 1.53 1.42* 700 86.1 1.42 1.42 800 87.6 1.53 1.42* 8 – Foot

T 12 RDC HO

800+ 88.9 1.64 1.64 700 91.9 1.42 1.42 700 93.0 1.42 1.42 8 – Foot T8 RDC HO 800 95.3 1.53 1.53 * Lamp series that have decreasing markups

Table 13.4.25 Base Case Four-Tier Markup for GS FL: 4-Foot T5 Product Class – Existing Technologies Base Case Markup By Trial Standard

Level Product

Class Lamp Efficacy

Baseline

86.0 1.63 104.3 1.63 109.7 1.63 4 – Foot T5 MiniBP SO 111.5 1.63

Table 13.4.26 Base Case Four-Tier Markup for GS FL: 4-Foot T5 High Output Product – Existing Technologies Base Case Markup By Trial Standard

Level Product

Class Lamp Efficacy

Baseline

76.0 1.63 92.9 1.63 4 – Foot T5 MiniBP

HO 98.0 1.63

13-30Table 13.4.27 Base Case Four-Tier Markup fo r GSFL: 4-Foot Medium Bipin Product – Emerging Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 76.8 1.42 1.42 700 78.0 1.42 1.42 600 77.9 1.26 1.26 800 80.5 1.53 1.53 700 82.4 1.42 1.42 800+ 82.9 1.64 1.64 800 85.3 1.53 1.53 800+ 87.8 1.64 1.64 4 – Foot T12 MBP

800+ 91.2 1.64 1.64 700 86.2 1.42 1.42* 800 90.8 1.53 1.42* 800 92.3 1.53 1.42* 800+ 93.8 1.64 1.42* 800+ 93.0 1.64 1.42* 800+ 95.4 1.64 1.42* 4 – Foot T8 MBP

800+ 97.3 1.64 1.42* * Lamp series that have decreasing markups

Table 13.4.28 Base Case Four-Tier Markup for GS FL: 8-Foot Single Pin Slimline Product – Emerging Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 85.6 1.42 1.42 800 87.3 1.53 1.53 600 87.6 1.26 1.26 800+ 92.0 1.64 1.64 700 92.6 1.42 1.42 8 – Foot T12 SP Slimline

700 97.5 1.42 1.42 700 94.8 1.42 1.42 800 98.2 1.53 1.42* 800+ 101.5 1.64 1.64 800+ 101.8 1.64 1.64 8 – Foot

T8 SP Slimline 800+ 103.6 1.64 1.64 * Lamp series that have decreasing markups

13-31Table 13.4.29 Base Case Four-Tier Markup for GSFL: 8-Foot Recessed Double Contact – Emerging Technologies Base Case

Product

Class Lamp Series Lamp Efficacy Initial Markup in 2012 Markup by 2042

700 80.1 1.42 1.42 600 82.5 1.26 1.26 800 83.2 1.53 1.42* 700 86.1 1.42 1.42 800 87.6 1.53 1.42* 8 – Foot

T 12 RDC HO

800+ 88.9 1.64 1.64 700 91.9 1.42 1.42 700 93.0 1.42 1.42 8 – Foot T8 RDC HO 800 95.3 1.53 1.53 * Lamp series that have decreasing markups

Table 13.4.30 Base Case Four-Tier Markup for GSFL: 4-Foot T5 Product Class – Emerging Technologies Base Case

Product

Class Lamp Efficacy Initial Markup in 2012 Markup by 2042

86.0 1.64 1.64 104.3 1.64 1.64 109.7 1.64 1.64 4 – Foot T5 MiniBP SO 111.5 1.64 1.64

Table 13.4.31 Base Case Four-Tier Markup for GS FL: 4-Foot T5 High Output Product – Emerging Technologies Base Case

Product

Class Lamp Efficacy Initial Markup in 2012 Markup by 2042

76.0 1.64 1.64 92.9 1.64 1.64 4 – Foot T5 MiniBP

HO 98.0 1.64 1.64

13.5 GSFL INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estim ated the financial impacts on the GSFL industry due to amended energy conservation standards. The following sections detail additi onal inputs and assumptions rela ted to the GSFL industry. The main results of the MIA are also reported in this section and consist of tw o key financial metrics: INPV and annual cash flows.

13-3213.5.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs. The INPV is different from the DOE’s NPV applied to the whole U.S. economy. The INPV is the sum of all net cash fl ows discounted at the in dustry’s cost of capital or discount rate. The GRIM estimated cash fl ows between 2007 and 2042, consistent with the forecast period used in the NIA (chapter 11).

In the MIA, DOE compares the INPV of th e base case (no amended energy conservation standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts that implementing that particul ar TSL would have on the entire industry. For the GSFL industry, DOE examined two markup scenarios as desc ribed in the mark-up section above. DOE incorporated the two base-case shipment scenarios and all the standards-case shipment scenarios from the GSFL NIA.

For the following sections that review the fi nancial impacts on the GSFL industry due to amended energy conservation standards, the impacts in the standards cases are relative to one of the specific bases cases. In this analysis, DOE used both the Emerging Technologies and Existing Technologies base-case shipment scen arios to represent the GSFL industry. The Existing Technologies base case has a higher ba se-case INPV than the Emerging Technologies base case. The Emerging Technologies base case models shipments of covered products decreasing due to technologies such as light emitting diodes (LEDs) and ceramic metal-halide (CMH) lights taking GSFL market share. The ba se case in which GSFL shipments decrease over time has a lower INPV because the decreasing mark et share reduces cash flow from operations. When comparing these two base cases, the G SFL industry has a 6.0 percent lower value if emerging technologies take market share compar ed to the GSFL industry in which emerging technologies are not present. When comparing th e impacts between base cases, the percentage change in INPV is a better indi cator of how standards impact th e GSFL industry because of the base-case industry value depends on how base-cas e shipments change over the analysis period. Table 13.5.1 shows both base-case INPV values under the Emerging and Existing Technologies base-case sh ipment scenarios.

Table 13.5.1 Changes in Base-Case Industry Ne t Present Values for the GSFL Industry

Base Case Existing Technologies Emerging Technologies INPV (2008$ millions) 639 601 Difference in base-case INPV (2008$ millions) (38) Percentage difference in INPV -6.0 %

Table 13.5.2 and Table 13.5.3 provide the INPV estimates for the GSFL industry under the two different scenarios used to bound the MIA results. For INPV estimates for the GSFL industry under all possible s cenarios, see appendix 13A.

13-33Table 13.5.2 Changes in Industry Net Present Value for the GSFL Industry with a Flat Markup Scenario, Existing Technologies Base Case – High Lighting Expertise – Shift in Efficacy Distribution
Trial Standard Level Units Base Case 1 2 3 4 5

INPV 2008$ Millions 639 697 695 721 635 671

2008$ Millions - 58 56 82 -4 33 Change in INPV (%) - 9.11% 8.83% 12.82% -0.64% 5.09%

Table 13.5.3 Changes in Industry Net Present Value for the GSFL Industry with a FourTier Markup Scenario, Emerging Technologies Base Case – Market Segment Based – Rollup in Efficacy Distribution
Trial Standard Level Units Base Case 1 2 3 4 5

INPV 2008$ Millions 527 662 629 432 365 316

2008$ Millions - 134 102 -95 -162 -211 Change in INPV (%) - 25.47% 19.29% -18.08% -30.74% -40.04%

13.5.2 Impacts on GSFL Annual Cash Flow

While INPV is useful for evaluating th e long-term effects of am ended energy conservation standards, short-term changes in ca sh flow are also important indicators of the industry’s financial situation. For example, a large investment over a period of one or two years could strain the industry’s acce ss to capital. Consequently, the sharp drop in financial performance could cause investors to flee, even though recovery may be near. Thus, a short-term disturbance can have long-term effects that th e INPV cannot capture. To get an idea of the behavior of annual net cash flows, DOE repor ts the annual net or free cash flows from 2007 through 2042 for the different TSL levels. Fi gure 13.5.1 and Figure 13.5.2 present the annual net cash flows for the base case and each of the five TSLs for the GSFL industry for 2007 through 2020 for the two scenarios used to bound the MI A results. For annual net cash flows estimates for the GSFL industry under all possi ble scenarios, see appendix 13A.

13-34Figure 13.5.1 Annual Net Cash Flow for GSFL Industry with a Flat Markup Scenario, Existing Technologies Base Case – High Lighting Expertise – Shi ft in Efficacy Distribution

Figure 13.5.2 Annual Net Cash Flow for GSFL Industry with a Four-Tier Markup Scenario, Emerging Technologies Base Case – Market Segment Based – Roll-up in Efficacy Distribution

Prior to the effective date of the amended energy conservation sta ndards, cash flows are driven by the level of capital conversion costs and product co nversion costs and the proportion of these investments spent every year. With the natural transition from T12 to T8 in the base cases,

13-35the cash flows show an even decline from 2009 through 2018 as companies use their financial resources to convert their T12 lines to T8. With the accelerated conversion from T12 to T8 in the standard cases, after the amended standards a nnouncement date, industry cash flows begin to decline as companies use their financial re sources to redesign products and convert manufacturing equipment for more T8 producti on. The more stringent the energy conservation standards, the greater the imp act on net industry cash flows in the years running up to the effective date, as conversion cap ital costs and product developmen t costs use up cash flows from operations.

After standards bring higher priced products into the market in 2012, the industry free cash flows begin to increase. The magnitude of the increase depends on the ability of the industry to maintain margins on what are now premium products. In the years following the effective date of the amended standards, the impact on cash flow depends on the operating revenue. If manufacturers are ab le to fully pass along costs to consumers, higher TSLs have a positive impact on cash flows relative to the base case. If manufacturers’ margins on premium products are squeezed (the Four-Tier Markup sc enario), amended standards have a negative impact on cash flows relative to the base case. In general, as margins are increasingly squeezed, cash flows decrease relative to the base case. The impacts on cash flows for TSL 1 and TSL 2 in the Four-Tier Markup scenario are positive because manufacturers are left with a wide variety of lamps after standards, mitigating margin pressure even in the Four-T ier Markup scenario. For TSL 3, TSL 4, and TSL 5, margin squeezes are signi ficant and negatively impact cash flows. At these TSLs under the Four-Tier Markup scenario, manuf acturers are left with fewer and fewer premium products which leads to lower margins as more lamps are commoditized. The magnitude of the positive cash flow impact unde r the Flat Markup scenarios and the negative cash flow impact under the Four-Tier Markup s cenario depends on the incremental cost of standards compliant products. Th e higher the incremental cost, th e larger the impact on operating revenue and cash flow in the years following the effective date of the standards.

The base-case scenario chosen does not have a significant impact on net cash flow in the early years of the analysis. The impacts be tween the Existing Technologies and Emerging Technologies base cases are more prominent in the later years of the analysis (around years 2030 and above). However, in both base cases the ma rgin pressure due to the commoditization of premium products has the impact on free cash flow.

13.6 IRL INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estim ated financial impacts on the IRL industry due to amended energy conservation standards. The following sections detail additiona l inputs and assumptions related to the IRL industry. The main results of the MIA are also reported in this se ction and consist of two key financial metrics: INPV and annual cash flows.

13-3613.6.1 Impacts on Industry Net Present Value

The INPV m easures the industry value and is used in the MIA to compare the economic impacts of different TSLs. The INPV is different from the DOE’s NPV applied to the whole U.S. economy. The INPV is the sum of all net cash flow s discounted at the indus try’s cost of capital or discount rate. The GRIM estimated cash fl ows between 2006 and 2042, consistent with the forecast period used in the NIA (chapter 11).

In the MIA, DOE compares the INPV of th e base case (no amended energy conservation standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts implementing that particular TSL would have on the entire industry. For the IRL industry, DOE examined eight total shipment scenarios as de scribed in the shipments section above. DOE incorporated the two base-case shipment scen arios and all four standards-case shipment scenarios used in the IRL NIA.

For the following sections that review the fi nancial impacts on the IRL industry due to amended energy conservation standards, the impacts in the standards cases are relative to one of the specific base cases. In this analysis, DOE used INPV results from the GRIM for both the Emerging Technologies and Existing Technologies base cases to represent the IRL industry. The Existing Technologies base case has a higher ba se-case INPV than the Emerging Technologies base case. In the Emerging Technologies base ca se, shipments of covered products decrease over the analysis and cash flow from operations fo llow this decline in IRL shipments. When comparing these two base cases, the IRL indus try has a 26.8 percent lower value if emerging technologies take additional market share compared to the IRL industry in the Existing Technologies base case. When comparing the impact s between base cases, the percentage change in INPV is a better indicator of how standard s impact the IRL industr y because the base-case industry value depends on how base-case ship ments change over the analysis period. Table 13.6.1 shows both base-case INPV values unde r the Em erging and Existing Technologies shipment scenarios.

Table 13.6.1 Changes in Base-Case Industry Ne t Present Values for the IRL Industry

Base Case Existing Technologies Emerging Technologies INPV (2008$ millions) 301 221 Difference in base-case INPV (2008$ millions) (81)

Change in INPV (%) -26.8%

In the IRL GRIM, the product substitution sh ipment scenarios model the case in which standards induce some customers that currentl y purchase covered IRL lamps to purchase BR lamps exempted by EISA 2007 (the BR Substitution scenario) or reflector CFL lamps (the RCFL Substitution scenario). The GRIM allows the us er to select whether to include the revenue of these products as part of the standards-case INPV. For all the results presented below, DOE included the revenue for exempted BR lamps but excluded the revenue for R-CFL lamps. For INPV estimates for the IRL industry under all possible s cenarios, see appendix 13A.

13-37Table 13.6.2 Changes in Industry Net Present Value for IRL Industry Under the Existing Technologies Base Case - BR Substitution Scenario - Shift in Efficacy Distribution – Commercial Lamp Lifetimes
Trial Standard Level Units Base Case 1 2 3 4 5

INPV (2008$ millions) 301 293 233 221 199 190

(2008$ millions) - (8) (66) (81) (102) (111) Change in INPV (%) - -2.80% -22.71% -26.78% -34.02% -36.90%

Table 13.6.3 Changes in Industry Net Present Value for IRL Industry Under the Emerging Technologies Base Case – CFL Substitution S cenario – Roll-Up in Efficacy Distribution – Commercial Lamp Lifetimes
Trial Standard Level Units Base Case 1 2 3 4 5

INPV (2008$ millions) 221 205 158 139 123 117

(2008$ millions) - (15) (63) (81) (98) (104) Change in INPV (%) - -6.87% -28.58% -36.80% -44.36% -47.18%

Table 13.6.4 and Table 13.6.5 provide the INPV estimates for the IRL industry under the two different Baseline Lifetime scenarios that bou nd the MIA results. For INPV estimates for the IRL industry under all possible scenarios, see appendix 13A.

Table 13.6.4 Manufacturer Impact Analysis for IRL Under the Existing Technologies Base Case - BR Substitution Scenario – Roll-Up in Efficiency Distribution – Baseline Lifetime Scenario Trial Standard Level Units Base Case

4 5

INPV (2008$ millions) 301 281 258 (2008$ millions)

- (21) (43) Change in INPV (%)

- -6.81% -14.24%

Table 13.6.5 Manufacturer Impact Analysis for IRL Under the Emerging Technology Base Case – R-CFL Product Substitution – Shift in E fficiency Distributions – Baseline Lifetime Scenario Trial Standard Level Units Base Case 4 5 INPV (2008$ millions) 221 160 171 Change in INPV (2008$ millions)

- (61) (49) (%)

- -27.52% -22.35%

13-3813.6.2 Impacts on Annual Cash Flow

While INPV is useful for evaluating th e long-term effects of am ended energy conservation standards, short-term changes in ca sh flow are also important indicators of the industry’s financial situation. To get an idea of the behavior of annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.6.1 and Figure 13.6.2 present the annual net cash flows for the base case and each of the five TSLs for the IR L industry for 2007 th rough 2020 for the two scenarios used to bound the MIA results with commercial lamp lifetimes. Figure 13.6.3 and Figure 13.6.4 present the annual net cash flo ws for the base case and each of the five TSLs for the IRL industry for 2007 through 2020 for the two scenarios used to bound the MIA re sults under the Baseline Lifetime scenarios. For annual net cash flows estimates for the IR L industry under all possible scenarios, see appendix 13A.

Figure 13.6.1 Annual Net Cash Flow for IRL I ndustry Under the Existing Technologies Base Case - BR Substitution Scenario - Shift in Efficacy Distribution – Commercial Lamp Lifetimes

13-39Figure 13.6.2 Annual Net Cash Flow for IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Ro ll-Up in Efficacy Distribution – Commercial Lamp Lifetimes

Figure 13.6.3 Annual Net Cash Flow for IRL I ndustry Under the Existing Technologies Base Case - BR Substitution Scenario – Ro ll-Up in Efficacy Distribution – Baseline Lifetime Scenario

13-40Figure 13.6.4 Annual Net Cash Flow for IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Shift in Efficacy Distribution – Baseline Lifetime Scenario

Prior to the effective date of the amende d energy conservation st andard, the cash flows are driven by the level of capital conversi on costs and product conve rsion costs and the proportion of these investments spent every year . During these years, th e biggest driver of impacts on net cash flow is the TSL selected. Hi gher TSLs require greater outlays to redesign products and more costly plant changes to ac commodate a higher volume of more efficacious products. The large expenditure s on capital conversion and pr oduct conversion lower net cash flow for all TSLs and drive cash flow negative for TSLs 2 through TSL 5. During this time, the impacts on net cash flow are slightly worse unde r the Existing Technologies base case than under the Emerging Technologies base case, rega rdless of the shipment scenario chosen. Because the capital conversion co sts are scaled for each base case, the Emerging Technologies base case has lower capital conve rsion costs and therefore, due to the lower shipment volumes, the cash flow impacts are slightly less.

Cash flow increases for all TSLs in the year standards become effective due to stranded assets and higher cash flows from operations. In this year, manufactur ers receive a one time injection of cash from stranded assets for TSL 2 through TSL 5. TSL 1 does not strand existing assets because the manufacturing process is effectively unchanged from baseline products. However, all higher TSLs have more substantia l stranded assets becaus e standards obsolesce a greater portion of existin g manufacturing equipment. The large stranded assets make free cash flows positive for TSL 2 through TSL 5 in 2012 for all shipment scenarios.

In the years following the effective date of the standard, standards can have a positive or negative impact on free cash flow depending on the year and the shipment scenario selected. Manufacturers begin to receive th e higher prices of standards-compliant lamps in the year the

13-41standards become effective, which positively impacts cash flow from operations. However, shipments are highly variable past the effective da te of the standard because of the longer lamp lifetimes and potentially lower overall shipments. These factors can have a positive or negative impact on free cash flow relative to the base case, depending on the year.

13.7 OTHER IMPACTS

13.7.1 Employment

13.7.1.1 GSFL Employment

To quantitatively assess th e im pacts of energy conser vation standards on GSFL manufacturing employment, DOE used the G SFL GRIM to estimate the domestic labor expenditures and number of employees. Since st andards only require ch anges to the phosphor mixes and will not alter lamp assembly, higher TSLs should not alter employment at the plant level. During interviews with manufacturers, DOE learned that GSFL are produced on highspeed, fully automated lines. Production workers are not involved in the physical assembly of the final product (e.g., in inserting components, transf erring partly assembled lamps, soldering lamp bases, etc.). The production workers counted in DOE’s figure include plant workers involved in clearing glass, overseeing a porti on of the assembly line, monitoring quality control, mixing phosphors, and moving finished products to load ing. The employment levels required for these tasks are a function of the total volume of the fa cility, not the labor c ontent of the product mix produced by the plant. Since higher TSLs involve using more efficient phosphors, employment will not be impacted because standards will not change the overall scale of the facility.

DOE used statistical data from the U.S. Census Bureau’s 2006 Annual Survey of Manufacturers (2006 ASM), the results of the product pr ice determination, and interviews with manufacturers to estimate the inputs necessary to calculate industry-wide labor expenditures and employment levels. DOE multiplied the labor per centage of COGS by the total annual COGS for the industry to calculate the total labor expenditure. DOE estimates that approximately 81 percent of GSFL are manufactured and sold in the U.S. DOE multiplied the total annual labor expenditures in the GSFL GRIM by the percenta ge of U.S. production for domestic consumption to calculate domestic labor e xpenditures for GSFL production la bor. The domestic annual labor expenditures in the GSFL GRIM were converted to a domestic production employment level by dividing domestic production labor expenditures by the annual payment per production worker (production worker hours times the labor rate found in the 2006 ASM). The number of nonproduction employees was calculated by multiplyi ng the number of production workers by the ratio of non-production workers to production workers calculated us ing the employment data in the 2006 ASM.

The GSFL GRIM calculates that the GSFL industry’s domestic labor expenditure for production labor in 2012 is approximately $79 million. Domestic labor expenditures on production labor is calculated by multiplying to tal COGS in 2012 times the production labor percentage of COGS times the percentage of U.S production. Using the $24.90 wage rate and 2,040 production hours per year per employee found in the 2006 ASM, the GSFL GRIM

13-42estimates that there is approximately 1,552 U.S. production workers in the GSFL industry. In addition, DOE estimates that there are approxim ately 354 non-production employees in the U.S. support GSFL production. c As previously stated, employment levels are not expected to change because the overall scale of the facility and labor requirement does not change with higher efficacy levels.

The employment impacts calculated by DOE ar e independent of the employment impacts from the broader U.S. economy, which are documented in chapter 15 of the TSD. The employment impacts also do not account for the po ssible relocation of domestic jobs to lowerlabor-cost countries because the potential relocation of U.S. j obs is uncertain and highly speculative. .

13.7.1.2 IRL Employment

To quantitatively assess the im pacts of energy conservati on standards on employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL from 2007 through 2042 for the IRL industry. DOE used statistical data from the 2006 ASM, the results of the pr oduct price determination, and interviews with manufacturers to estimate the inputs necessary to calculate industry-wide labor expenditures and domestic employment levels. The total labor expenditures in each year are calculated by multiplying the COGS or MPCs by the labor pe rcentage of COGS. From interviews, DOE estimated that 65 percent of covered IRL are manufactured and sold in the U.S. DOE multiplied the total annual labor expend itures in the GRIM by the percentage of U.S. production for domestic sales to calculate domestic labor e xpenditures for IRL production labor. The domestic annual labor expenditures in the GRIMs were converted to domestic production employment levels by dividing production labor expenditures by the annual payment per production worker (production worker hours times the labor rate found in the 2006 ASM). The number of nonproduction employees was calculated by multiplyi ng the number of production workers by the ratio of non-production workers to production workers calculated us ing the employment data in the 2006 ASM. The total direct employment impact s calculated in the GRM are the sum of the production and non-production workers.

The domestic annual labor expenditures and em ployment levels were calculated for the base case and at each TSL. The impacts on dom estic employment due to standards can be

c As defined in the 2006 ASM, production workers number include “workers (up through the line-supervisor level) engaged in fabricating, proc essing, assembling, inspecting, receiving, storing, handling, p acking, warehousing, shipping (but not delivering), maintenance, repair, janito rial and guard services, product development, auxiliary production for plant's own use (e.g., power plant), recordkeeping, and other services closely associated with these production operations at the establishment covered by the report. Employees above the working-supervisor level are excluded from this item.” Non-production workers are de fined as “employees of the manufacturing establishmentincluding those engaged in factory supervision above the line-supervisor level. It includes sales (including driversalespersons), sales delivery (highway truck drivers and thei r helpers), advertising, credit, collection, installation and servicing of own products, clerical and routine office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), professional, and technical employees . Also included are employees on the payroll of the manufacturing establishment engaged in the co nstruction of major additions or alterations utilized as a separate work force.”

13-43assessed by comparing the employment results in th e base case to the results at each TSL. In the GRIM, the employment results represent direct U.S. production workers that are impacted by this rulemaking. U.S. workers involved in ma nufacturing or supporting products for exports would not be impacted and are not incl uded as part of the labor impacts.

The GRIM calculates that the IRL industry’ s domestic labor expe nditure for production labor in 2012 is approximately $44 million under the Existing Technologies base case and $40 million under the Emerging Technologies base case. Using the $24.90 wage rate and 2,040 production hours per year per employee found in the 2006 ASM, the GRIM estimates there are approximately 875 and 797 U.S. production em ployees manufacturing covered IRL in the Existing Technologies and Emerging Technologies base cases, respectively. In addition, DOE estimates that 200 and 182 non-production empl oyees in the U.S. support IRL production under the Existing Technologies and Emerging Technologies base cases, respecti vely. The employment spreadsheet of the IRL GRIM s hows the annual domestic employmen t impacts in further detail.

Because the employment impacts change from year to year, DOE reports the average employment impacts from the year the standard become effective to the end of the analysis period. The average employment for the analysis period gives a better representation of how domestic employment changes in response to st andards. The total employment figures include both domestic production and non-production workers. Table 13.7.1 and Table 13.7.2 illustrate the average impact of amended energ y conservation standards on domestic employment levels at each TSL for the IRL industry calculated by the GRIM for the two scenarios used to bound the MIA results with commercial lamp lifetimes. Table 13.7.3 and Table 13.7.4 illustrate the average im pact of amended energy conservation standard s on domestic employment levels at each TSL for the IRL industry calculated by the GRIM for the tw o scenarios used to bound the MIA results under the Baseline Lifetime scenarios. For domestic direct employment fi gures estimates for the IRL industry under all possible scenarios, see appendix 13A.

Table 13.7.1 Change in the Average Number of Domestic Employees in the IRL Industry Under the Existing Technologies Base Case – BR Substitution Scenario - Shift in Efficacy Distribution – Commercial Lamp Lifetimes

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Average Number of Domestic IRL Employees from 2012 – 2042 1,400 1,575 1,348 1,538 1,419 1,428

Change in the Average Number of Domestic IRL Employees from 2012 – 2042 - 175 -51 139 19 28

13-44Table 13.7.2 Change in the Average Number of Domestic Employees in the IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Roll-Up in Efficacy Distribution – Commercial Lamp Lifetimes

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Average Number of Domestic IRL Employees from 2012 – 2042 707 806 652 763 676 698

Change in the Average Number of Domestic IRL Employees from 2012 – 2042 - 100 -55 56 -30 -9

Table 13.7.3 Change in the Average Number of Domestic Employees in the IRL Industry Under the Existing Technologies Base Case – BR Substitution Scenario – Roll-Up in Efficacy Distribution – Baseline Lifetime Scenario

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Average Number of Domestic IRL Employees from 2012 – 2042 1,400 1,575 1,341 1,557 2,121 2,209

Change in the Average Number of Domestic IRL Employees from 2012 – 2042 - 175 -58 158 722 809

Table 13.7.4 Change in the Average Number of Domestic Employees in the IRL Industry Under the Emerging Technologies Base Case – CFL Substitution Scenario – Shift in Efficacy Distribution – Baseline Lifetime Scenario

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Average Number of Domestic IRL Employees from 2012 – 2042 707 806 652 760 988 1,069

Change in the Average Number of Domestic IRL Employees from 2012 – 2042 - 100 -55 53 281 363

13-45Figure 13.7.1 and Figure 13.7.2 show total annual domestic employm ent levels for each TSL calculated by the GRIM for the two scen arios used to bound the MIA results with commercial lamp lifetimes. Figure 13.7.3 and Figure 13.7.4 show total annual domestic

em ployment levels for each TSL calculated by th e GRIM for the two scenarios used to bound the MIA results under Baseline Lifetime scenarios. For domestic direct employment figures estimates for the IRL industry under all possible scenarios, see appendix 13A.

Figure 13.7.1 Total IRL Industry Employment by Year Under the Existing Technologies Base Case - BR Substitution Scenario - Shift in Efficacy Distribution – Commercial Lamp Lifetimes

13-46Figure 13.7.2 Total IRL Industry Employment by Year Under the Emerging Technologies Base Case – CFL Substitution Scenario – Ro ll-Up in Efficacy Distribution – Commercial Lamp Lifetimes

Figure 13.7.3 Total IRL Industry Employment by Year Under the Existing Technologies Base Case - BR Substitution Scenario - Shift in Efficacy Distributio n – Baseline Lifetime Scenario

13-47Figure 13.7.4 Total IRL Industry Employment by Year Under the Emerging Technologies Base Case – CFL Substitution Scenario – Ro ll-Up in Efficacy Distribution – Baseline Lifetime Scenario

The employment results show that energy c onservation standards will not significantly impact IRL direct employment. The impact th at amended energy conservation standards will have on employment is far less significant than the potential impact fr om emerging technologies. The difference in employment between th e Emerging Technologies and the Existing Technologies base cases is greater than the employment impacts due to amended efficacy standards, regardless of the shipment scenari o. For example, the Existing Technologies base case has an average of 693 more total U.S. employees than the Emerging Technologies base case. The difference in employment in these two base cases far exceeds the employment impacts due to proposed standards.

In the standards cases, the employment imp acts in the IRL industry vary depending on how shipments change over time. Because la bor expenditures are assumed to be a fixed percentage of COGS and the MPCs increase with more efficacious products, labor expenditures track the increased prices in the GRIM. Em ployment generally increases for both product substitution shipment scenarios, regardless of the base case and the efficacy shipment distribution scenario chosen. Under these scenar ios, labor expenditures increase with the higher prices of standards-compliant lamps. However, regardless of the scenar io selected, using the average employment over the analysis period show s relatively minor employment impacts in all scenarios with commercial lamp lifetimes. The higher shipments at TSL 4 and TSL 5 under the Baseline Lifetime scenario create relativ ely large positive employment impacts.

The employment impacts calculated by DOE ar e independent of the employment impacts from the broader U.S. economy, which are docum ented in chapter 15 of the TSD accompanying

13-48this notice. The employment conclusions also do not account for the possible relocation of domestic jobs to lower-labor-cos t countries because the potentia l relocation of U.S. jobs is uncertain and highly speculative. During interviews, manuf acturers did not emphasize the risk of shifting production facilities. Ho wever, some manufacturers did i ndicate that the IRL standards could lower employment in their existing facilitie s. Because manufactures assume shipments will decrease over the analysis peri od, manufactures indicated that it would be difficult to justify the investments necessary to expand the production of more efficacious IRL. If manufacturers do not invest to meet existing demand after the effectiv e date of the standard, employment levels would be adjusted based on the overall shipment volume of IRL.

13.7.2 Manufacturing Capacity

Am ended energy conservation standards will not significantly affect the production capacity of GSFL manufacturers. For GSFL manufacturers, any necessary redesign of GSFL will not change the fundamental assembly of the pr oducts because higher TSLs require the use of more efficient phosphor coatings. Therefore, in the long-term there should be no capacity constraints. However, higher stan dards also expedite a natural conversion of T12 shipments to T8 shipments. Because most production lines ar e specific to lamp diameter, shifting production from T12 to T8 requires shutting down the lin e and retooling. Based on the duration of line changes described by manufactures, DOE estimates that the conversion of machinery to T8 is possible between the announcement date and the e ffective date of the st andards. In addition, manufactures indicated it is possible to ramp up production be fore shutting down a line to maintain a constant supply of shipments during retooling.

Manufacturers are concerned th at IRL standards could cause capacity constraints if standards alter the assembly of standard haloge n burners. In particular, IRL manufacturers are concerned about the ability to convert their equipment in time to meet an exclusively HIR standard (TSL 3, TSL 4, and TSL 5). Alt hough all manufacturers DOE interviewed produce lamps with infrared burners, the current volume of these lamps is many times lower than the volume of standard halogen lamps. In addition, th e production of infrared capsules is much more time consuming, requiring additional time for the co ating process and quality control due to the precision necessary for the techno logy to increase efficacy. In general, the large manufacturers are concerned about their ability to increase the produc tion volume of HIR capsules in time to meet the standard. Interviews with suppliers of HIR capsules and coating decks suggest that the capacity could be met at an HIR standard. Base d on discussions with suppliers of infrared coaters, DOE also estimates that lamp manuf actures will have enough time in between the announcement date and the effective date of the standards to purchase and install the necessary coaters to meet an infrared st andard and produce all burners in their own facilitie s. Independent of manufacturers’ ability to in stall coaters to produce all infra red burners in-house, independent suppliers of infrared capsules suggested that th ey have the ability to supply a significant portion of the market. Because manufactur ers could install additional coater s, purchase infrared burners from a supplier, and use existing excess capacity, IRL manufacturers will be able to maintain production capacity levels and continue to meet market demand for all IRL standard levels.

13-4913.7.3 Cumulative Regulatory Burden

While any one regulation m ay not impose a si gnificant burden on manufacturers, the combined effects of several im pending regulations may have se rious consequences for some manufacturers, groups of manufact urers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regu latory burden. For the cumulative regulatory burden analysis, DOE describes other product-speci fic regulations that c ould affect GSFL and IRL manufacturers or their parent company that w ill take effect three years before or three years after the effective date of the amended en ergy conservation standards for GSFL and IRL. d DOE also describes additional state regulations and reporting requirements with which manufactures of GSFL and IRL must comply.

Companies that produce a wider range of re gulated products may be faced with more capital and product conversion costs than their competitors. This can prompt those companies to exit the market or reduce their product offe rings, potentially reducing competition. Smaller companies can be especially impacted since they have lower sales volumes over which to amortize the costs of meeting new regulations. DOE considers that a proposed standard is not economically justified if it contributes to an unacceptable level of cumulative regulatory burden.

13.7.3.1 Federal DOE Regulations on Other Products Produced by the GSFL and IRL Manufacturers

In addition to the energy conservation re gulations on GSFL a nd IRL products, several other Federal regulations and pending regulations apply to other products produced by the same manufacturers. DOE recognizes that each regulation can significantly impact manufacturers’ financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibl y cause an exit from the market. Table 13.7.5 lists the Federal regulations that could al so affect m anufacturers of GSFL and IRL in the three years leading up to and the three years after the effective date of the amended energy conservation standards for these products. It must be noted that while th e list of products is long, the amount of cumulative burden on any particular firm is extremely vari able since the product scope of each company is different.

d The effective date for GSFL and IRL is 3 years from the date of publication of the final rule (July 2012)

13-50Table 13.7.5 Other DOE and Federal Actions A ffecting the GSFL and IRL Industries Regulation Approximate Effective Date* Number of Impacted Companies from the MTA Estimated Industry Total Conversion Costs** (millions)

Residential Refrigerators and Freezers 2010* 2 N/A †

Commercial Distribution Transformers 2010 1 $13.5 (2006$) e

Dishwashers 2012 2 N/A †
Dehumidifiers 2012 1 N/A †
Cooking Products 2012 2 $22.6 (2006$) f

Commercial Clothes Washers 2012* 1 N/A † Packaged Terminal Air Conditioners and Heat Pumps 2012* 1 $17.3 (2007$) g

Residential Fluorescent and Incandescent Lamps 2012 3 See section 13.4.8

Residential Clothes Washers 2014* 2 N/A †
Room Air Conditioners 2014* 1 N/A †
Battery Chargers 2014* 2 N/A †

Residential Water Heaters 2015* 1 N/A † *The dates listed are an approximation. The exact dates are pending final DOE action. ** Total conversion costs include both capital and product conversion costs for the rulemaking specific industries. † For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not have finalized estimated total industry conversion costs. For minimum performance requirements prescribed by the Energy Policy Act of 2005 (EPACT 2005), DOE did not estimate total industry conversion costs because a MIA was not completed as part of a rulemaking. 42 U.S.C. 6291-6317. For minimum performance requirements prescribed by the Energy Independence and Security Act of 2007 (EISA 2007), DOE did not estimate total industry conversion costs because a MIA was not completed as part of a rulemaking . Pub. L. 110-140.

Additional investments necessary to meet these potential sta ndards could have significant impacts on manufacturers of GSFL and IRL. Ho wever, DOE has limited data on the importance of these other regulated products for manufactur ers of GSFL and IRL. Differences in market shares and manufacturing processes of other regulated products for each manufacturer could

e Estimated industry conversion expenses were published in the TSD for the October 2007 distribution transformers final rule. 72 FR 58190. The TSD for the 2007 distribution transformers final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/ commercial/distribution_transformers_finalrule.html
f Estimated industry conversion expenses were published in the TSD for the April 2009 residential cooking products final rule. 74 FR 16040. The TSD for the 2009 residential cooking products final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_ standards/residential/pdfs/74fr16040.pdf

g Estimated industry conversion expenses were published in the TSD for the September 2008 packaged terminal air conditioners and heat pumps final rule. 73 FR 58772. Th e TSD for the 2008 packaged terminal air conditioners and heat pumps final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_ standards/commercial/refrig_equip_nopr.html

13-51cause varying degrees of burdens on these manufact urers. Therefore, DOE did not estimate the costs of compliance for other regulations.

13.7.3.2 EISA 2007 Requirements

EISA 2007 contained minim um energy conser vation standards for general service incandescent lamps (GSIL), extended coverage of IRL standards, and contained reporting requirements for certain types of lamps (Pub. L. 110-140). The EISA 2007 requirements prescribe separate energy conservation standa rds and minimum rated lifetimes for GSIL and modified spectrum GSIL, with effective date s ranging from January 1, 2012 to January 1, 2014. The phased-in standards for these two types of lamps are shown in Table 13.7.6 and Table 13.7.7 below.

Table 13.7.6 EISA 2007 GSIL Standards Rated Lum en Ranges Maximum Rate Wattage Minimum Rate Lifetime Effective Date

1490 – 2600 72 1,000 hours 1/1/2012 1050 – 1489 53 1,000 hours 1/1/2013 750 – 1049 43 1,000 hours 1/1/2014 310 – 749 29 1,000 hours 1/1/2014

Table 13.7.7 EISA 2007 Modified Spectrum GSIL Standards Rated Lumen Ranges Maximum Rate Wattage Minimum Rate Lifetime Effective Date

1118 – 1950 72 1,000 hours 1/1/2012 788 – 1117 53 1,000 hours 1/1/2013 563 – 787 43 1,000 hours 1/1/2014 232 – 562 29 1,000 hours 1/1/2014

All three major manufacturers of GSFL and IRL also manufacture large volumes of GSIL. Consequently, these companies will also incur capital and product conversion investments to comply with the GSIL minimum energy conser vation standards. The GSIL investments could also compete with IRL and GSFL for company resources. For example, GSFL, IRL, and GSIL share many of the same limited engineering resour ces. In addition, the capital costs to comply with EISA 2007 could potentially limit the fund ing available for GSFL and IRL conversions because these investments will compete for the same sources of capital.

EISA 2007 also amended EPCA’s definiti on for incandescent reflector lamp and amended the standard in 42 U.S.C. 6295(i)(1). Prior to EISA 2007, the statutory definition for IRL excluded ellipsoidal reflector (ER) shaped and BR shaped lamps and lamps with a diameter less than 2.75 inches. However, EISA 2007 amended this definition to include ER and BR shaped lamps and lamps with diameter grea ter than 2.25 inches. EISA 2007 also amended 42 U.S.C. 6295(i)(1) to exempt the following lamp s from the minimum efficacy requirements: (1) lamps rated at 50 watts of less that are ER 30, BR30, BR40, and ER40; (2) lamps rated at 65 watts that are BR30, BR40, or ER40 lamps; and (3) R20 incandescent reflector lamps rated 45 watts or less.

13-52DOE does not have an estimate for the total co nversion costs that manufacturers of GSFL and IRL would incur to comply with the EISA 2007 requirements for GSIL and IRL because an MIA was not completed for the legislatively determined energy conservation standards.

Finally, EISA 2007 requires NEMA to report yearly sales volumes for rough service, vibration service, 2601 – 3300 lumen general servi ce, 3-way, and shatter-resistant lamps from 2010 to 2025. NEMA is also required to submit historical shipments for these five types of lamps for DOE to construct a shipment model. These fi ve types of lamps could be regulated by DOE if the actual sales volume of that type of lamp exceeds the volume predicted in DOE’s model by 100 percent or more in any give n year (42 U.S.C. 6295(l)(4)).

13.7.3.3 Restriction of Hazardous Substances Directive

According to m anufacturers, the Restri ction of Hazardous Substance Directive h (RoHS) has had some impact in the lighting industr y, specifically the G SFL industry. Under the directive, all manufacturers are banned from placing on the European Union market new electrical and electronic equipm ent containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether flame retardants. Although there is no Federal regulation on RoHS, California has passed SB 20: Electronic Waste Recycling Act of 2003. Under this law, Californi a limits the amount of hazards substances included in the RoHS directive that ca n be sold in California. Manufacturers of GSFL have said that RoHS impacts in the way GSFL are manufactured because some amount of mercury is used in lamp manufacturing. Howe ver, manufacturers do not anticipate RoHS will significantly impact the GSFL or IRL industries as a whole. According to manufacturers, the industry has already lowered mercury and lead levels to below Ro HS specifications.

13.7.3.4 Reporting Requirements

In Novem ber 2006, NRCan published a bulletin proposing to amend Canada's Energy Efficiency Regulations. NRCan proposed testing and labeling requirements for light output, input wattage, and rated life time for GSFL, medium base, integrally ballasted CFLs, and reflector and non-reflector GSIL. 3

In addition to the EPCA mandated product pe rformance reporting (42 U.S.C. 6295(i)(7)), California mandates that manufact urers report lamp type, rated lumens, nominal lamp wattage, rated color rendering index (for GSFL) and aver age lamp efficacy for all Federally-regulated general service fluorescent lamps, federally re gulated incandescent refl ector lamps, and state regulated incandescent reflector lamps. California also requires manufactures to report rated lumens, rated lamp wattage, bulb finish, averag e lamp efficacy, and ANSI-designated bulb shape for state-regulated GSIL. 4

The Interstate Mercury Education and Re duction Clearinghouse (IMERC) was launched in 2001 as single point of contact between industr y and member states an d to provide assistance

h Further information about RoHS can be found at http://eur-lex.europa.eu/LexUriServ/site/e n/oj/2003/l_037/l_03720030213en00190023.pdf

13-53regarding state regulations on mercury legisla tion. Currently Connecticut, Louisiana, Maine, Massachusetts, Minnesota, New York, Rhode Is land Vermont, and Washington State require labeling in order to sell of me rcury-added products. In addition, Connecticut, Louisiana, Maine, Massachusetts, New Hampshire, New York , Nort h Carolina, Rhode Islan d, and Vermont require a notification to be filed through IM ERC or with each individual state. 5

13.7.4 Impacts on Small-Business Subgroup

DOE found the sm all business manufacturer of covered GSFL shared some of the same concerns as large manufacturers regarding energy conservation standards. However, the small manufacturer was less concerned ab out the potential of standards to severely harm its business. Because the small manufacturer is more focu sed on specialty products not covered by this rulemaking, covered GSFL represents a smaller po rtion of its revenue and product portfolio. In addition, this manufacturer stated that it is possible to pass al ong cost increases to consumers, limiting margin impacts due to amended energy conservation standards.

DOE could not use the GRIM to model the impacts of ener gy conservation standards on the small business manufacturer. The GSFL GRIM models the impacts on GSFL manufacturers if concerns about margin pressure and signifi cant capital conversion investments necessitated by standards are realized. The small manufacturer did not share these concerns. While the small business manufacturer also stated that more effi cacious products earn a premium, unlike larger manufacturers, the small business manufacturer stat ed it can pass costs along to its customers. Because of its focus on specialized products, the small business manufacturer is more concerned about being able to offer the products to thei r customers than the impact on its bottom line.

13.8 CONCLUSIONS

The following sections s ummarize the differe nt impacts for the two scenarios that are most likely to capture the range of impacts on GSFL and IRL manufacturers as a result of amended energy conservation standards. DOE al so notes that while these two scenarios bound the range of most plausible impacts on manufactur ers, there potentially could be circumstances which cause manufacturers to experience impacts out side of this range an d more closely inline with the other scenarios analyzed.

13.8.1 GSFL

To assess the lower end of the range of potential impacts for the GSFL industry, DOE considered the Flat Markup scenario under the E xisting Technologies base-case shipments with High lighting expertise and a Shift in efficacy di stributions. Besides the impact of shipments on the INPV, this case assumed that manufacturers w ill be able to maintain gross margins as a percentage of revenues as production cost increases with efficacy. To assess the higher end of the range of potential impacts for the GSFL industry, DOE considered the sc enario reflecting the Four-Tier Markup scenario under the Emerging Technologies base-c ase shipments with Market Segment Based lighting expertise and a Rollup in efficacy distributions. Besides the impact of shipments on the INPV, this case pessim istically assumed standards would reduce manufacturers’ portfolio, theref ore squeezing the margin of highe r efficacy products as they are “demoted” to lower relati ve efficacy tier products.

13-54For the GSFL MIA, margin impacts are th e most significant driver of INPV. The potential margin impacts on manuf acturers are based on their ability to maintain higher margins as standards remove efficacy as a differentiator of premium products. The potential for standards to disrupt the premium margins for efficacy is captured in the high and low bound scenarios DOE presents. The lower bound scenario represents the situation where ma nufacturers maintain their current “good, better, best” marketing stra tegy by basing higher margins on features other than efficacy or coming up with more efficacious products. The large impacts on industry value in the upper bound scenario are caused by higher standards disrupting manufacturers’ current marketing strategy. In this scenar io, manufactures cannot maintain higher margins when efficacy is lost as a differentiator and higher standards lo wer profitability. Other dr ivers of INPV are less significant because: (1) the capital costs required at each TSL are relatively small compared to the industry revenue; and (2) shipments do not substantially ch ange regardless of the scenario.

DOE estimated the impacts on INPV at TS L 1 to range from $58 million to $134 million, equal to a 9.11 percent to 25.47 perc ent increase. At this level, the highest impact on cash flow in the year leading up to the standards occurs under the Emerging Technolog ies base case. Under this scenario, industry cash flow decreases by approximately 28 percent, to $27 million, compared to the base case value of $37.6 million inthe year leading up to the standards. Product conversion costs are low at TSL 1 because manuf acturers have existing products that meet the efficacy levels. Capital conversion costs are also low at this TSL because a minimal amount of T12 machinery needs to be converted to meet the growing volume of T8 production induced by standards. The necessary conversion costs to meet TSL 1 are low relative to the conversion costs for the natural market migration from T12 to T8 lamps in the base case, which helps to mitigate the impact of the standards-induced conversion co sts. The positive INPV predicted in the Flat Markup scenario is indicative that product conv ersion and capital conversion outlays are also low relative to the increase in variable producti on costs. Whereas GSFL production is capital intensive, the conversion capital requirements are a function primarily of the tube diameter. Energy conservation standards which do not require a change in diameter will typically require a change in phosphors which is not capital inte nsive. Under the Four-Tier Markup scenario manufacturers are left with a rang e of products after standards, so they still earn higher markups on a wide variety of premium pr oducts. In fact the products elim inated at TSL 1 are commodity products which have a lower than average profit margin. Thus, industry revenues and cash flows are not negatively affected and manufacturers actually benefit from the higher prices of remaining products.

At TSL 2, DOE estimated the impacts in INPV at TSL 2 to range from $56 million to $102 million, equal to a 8.83 percent to 19.29 percent in crease. At this level, the highest impact on cash flow in the year leading up to the sta ndards occurs under the Emerging Technologies base case. Under this scenario, industry cash flow decreases by approximately 65 percent, to $13 million, compared to the base-cas e value of $37.6 million in the year leading up to the standards. Product conversion costs are still relatively low at TSL 2 because few manufacturers will have to have to modify exiting products to meet this stan dard level. Capital conv ersion costs are also low at this TSL, but the investments required to meet TSL 2 are larger than TSL 1 because more T12 machinery needs to be converted to meet the growing volume of T8 production induced by standards. INPV is less positive at TSL 2 than at TSL 1 because the higher conversion costs necessary to meet TSL 2 lower the mitigating im pact of the conversion costs for the natural market migration from T12 to T8 lamps included in the base case. At TS L 2 more of the most

13-55efficacious, higher-priced T12 lamps are shifting to less expensive T8 lamps. INPV in the FourTier Markup scenario is also not as pos itive because manufacturers have fewer premium products and the profit margins on some more ef ficacious T12 products begin to shrink. While TSL 2 eliminates some of the premium T12 lamps, the T8 lamps to which consumers must migrate still earn a higher markup.

At TSL 3, the impact on INPV and cash flow depends heavily on the ability of manufacturers to differentiate products and maintain higher margins as standards move consumers to previously premium products. DOE estimated that the impacts on INPV at TSL 3 range from approximately $82 million to -$95 m illion, equal to a 12.82 percent to -18.08 percent change. At this level, the highe st impact on cash flow in the year leading up to the standards occurs under the Emerging Technologies base case . Under this scenari o, industry cash flow decreases by approximately 129 percent, to - $11 million, compared to th e base-case value of $37.6 million in the year leading up to the standa rds. At TSL 3, most manufacturers expressed concerns about the ability to maintain production volumes of T12 and T8 lamps because all but the most efficacious T12 lamps are eliminat ed. Because a large portion of existing T12 shipments migrate to T8, manufact urers have to convert or repl ace a significant portion of their T12 production lines to T8, making capital conversion costs higher at TSL 3 than at TSL 1 or TSL 2. Conversion costs are also higher at TSL 3 because manufacturers have to make more R&D expenditures to offer a full line of T12 and T8 products that meet the standard. Because TSL 3 greatly accelerates the migration of T12 to T8 products, the conversion costs in the base case have a minimal effect on offsetting INPV impacts from high standa rds-induced conversion costs at TSL 3 and all higher TSLs. If manufact urers can pass along th e increased production costs of more efficacious products by differentia ting the products with features such as low mercury content and longer life, they can recoup margins, mitigating some of the impacts. If manufacturers can fully differentia te their products and earn the same profit margins as in the base case (the lower range of impacts), they wi ll benefit from higher prices and INPV will be positive at this TSL. However, if manufacturer s cannot differentiate their products and the margins on previously premium products begin to erode with commoditiza tion, the higher end of the range of negative INPV will be reached.

At TSL 4, DOE estimated the impacts on INPV range from approximately -$4 million to -$162 million, equal to a -0.64 percent to -30.74 percen t change. At this level, the highest impact on cash flow in the year leading up to the sta ndards occurs under the Emerging Technologies base case. Under this scenario, industry cash flow decreases by approximately 243 percent, to - $54 million, compared to the base-case value of $37.6 million in the year leading up to the standards. At TSL 4, there are significant capita l conversion costs because all T12 production lines need to be converted to T8 lines; the ca pital requirement for this conversion is nearly double the amount needed at TSL 3. The large conversion capital costs make INPV negative even if manufacturers maintain the margin on all lamps, as in the base case. Also, manufacturers expressed concern that the highest grade phosphor mixtures would be necessary on most lamps to meet efficacies prescribed by TSL 4. The more efficient phosphor blends substantially increase lamp costs, decreasing profitability if the cost increases cannot be passed on to consumers. That is, at TSL 4, more T8 la mps that previously earned a premium are commoditized because the standard eliminates all T12 lamps from the market, squeezing margins on all lamps and causing more negative impacts in the Four-Tier Markup scenario.

13-56At TSL 5, DOE estimated that the impacts on INPV range from approximately $33 million to -$211 million, equal to a 5.09 percent to -40.04 percent change. At this level, the highest impact on cash flow in the year leading up to the st andards occurs under the Emerging Technologies base case. Under th is scenario, industry cash flow decreases by approximately 259 percent, to -$60 million, compared to the base -case value of $37.6 million in the year leading up to the standards. At TSL 5, the necessary capital conversion costs is identical to TSL 4 because this TSL also requires manufacturers to convert all existing T12 production to T8 production. These large costs make INPV negative even if manufacturers pass al ong all production cost increases to the consumer. At TSL 5, all products are commoditized because all lamps must use the most efficient phosphor coatings. There ar e few options available for manufacturers to differentiate lamps at TSL 5, making it more lik ely that manufacturers will be negatively affected.

13.8.2 IRL

At all TSLs, DOE used the commercial lamp lifetime scenarios to evaluate the potential impacts on manufacturers. To assess the lower end of the range of potential impacts for the IRL industry using commercial lamp lifetimes, DOE c onsidered the Existing Technologies base case reflecting the BR Substitution scenar io with a Shift in efficacy distributions. In this scenario: (1) manufacturers benefit from higher prices from consumers switching to more efficacious products on their own (the Shift scenario ); (2) IRL base-case shipments are not eroded due to emerging technologies; and (3) standards case IRL shipments are only d ecreased by substitutions to exempted BR lamps. To assess the higher end of the range of potential impacts for the IRL industry using commercial lamp lifetimes, DOE considered the Emerging Technologies base case reflecting the R-CFL Substituti on scenario with a Roll-Up in efficacy distributions. In this scenario, (1) IRL base-case shipments are er oded due to emerging technologies, and (2) standards-case shipments decrease due to substi tutions to R-CFL lamps. At TSL 4 and TSL 5, the Baseline Lifetime scenario has a significant impact on the INPV results. At TSL 4 and TSL 5 DOE also used the Baseline Lifetime scenarios that bound the impacts on manufacturers if lamp lifetime is reduced in response to energy conservation standards. DOE examined the BR Substitution scenario with a Roll-Up in efficacy distribution and the R-CFL Substitution scenario with a Shift in efficacy distribution wh ich bound the impacts on manufacturers under the Baseline Lifetime scenarios.

To meet TSL 1 (improved halogen (xenon)) manufacturers must replace less efficient fill gases in the capsule with xenon. At TSL 1, the scenarios that bound the INPV impacts are the commercial lifetime scenarios because the Baseline Lifetime scenarios do not impact the results at TSL 1. At TSL 1, DOE estimated the impact s on INPV to be between -$8 million and -$15 million, or a change in INPV of -2.80 percent and - 6.87 percent. At this level, the highest impact on cash flow in the year leading up to the sta ndards occurs under the Emerging Technologies base case. Under this scenario, the industry cash flow decreases by approximately 55 percent, to $10.7 million, compared to the base-case value of $23.6 million in the year leading up to the standards. All manufacturers have a full range of products that meet this TSL. Conversion costs are relatively low at this level because using xenon does not require substantial changes to the manufacturing process. The lifetimes of standa rds-compliant lamps does not change at TSL 1, thus shipments in the standards cases are not further impacted by lower shipments due to higher lamp lifetimes. In fact, at this TSL, manufactur ers benefit from the increa sed prices of standards13-57compliant lamps. However, this positive imp act on revenues is not enough to overcome the product and capital conversion costs, making overall INPV negative.

TSL 2 is based on a 6,000 hour HIR lamp (long life HIR), but this level may also be achieved using an improved reflector (improved ha logen (silver)). At TSL 2, the scenarios that bound the INPV impacts are the commercial lifetime scenarios because the Baseline Lifetime scenarios do not impact the results at TSL 2. At TSL 2, the impact on INPV and cash flow depends on manufacturers’ ability to recoup the conversion cap ital and product conversion costs and the extent to which shipment s are reduced in the base case due to emerging technologies and in the standards shipment case due to changes in the product mix (including lamp lifetime). DOE estimated the impacts in INPV at TSL 2 to be between -$68 million and -$63 million or a change in INPV of -22.71 percent and -28.58 percent. At this level, the highest impact on cash flow in the year leading up to the standards occurs under the Emerging Technolog ies base case. Under this scenario, the industry cash flow decrease s by approximately 136 percent, to -$8.5 million, compared to the base-case value of $23.6 million in the year leading up to the standards. At TSL 2, there are negative impacts on manufacturers due to decrease d shipments and significant product conversion costs. At this TSL, conversio n costs vary greatly am ong manufacturers but are significant in the aggregate due to the need to increase production of HIR lamps or invest in improved reflector technology. Two manufacturers have a complete line of standards-compliant lamps but must spend a considerable amount of resources to expand prod uction of a low-volume, premium product for mass productio n. Another manufacturer must spend a significant amount of capital to purchase the machiner y to meet demand with exclusiv ely higher technology (infrared) lamps in addition to replacing krypton with xenon as fill gas in the capsule. The shipment scenarios chosen account for the range in INPV. Shipments have a signifi cant impact on INPV at this TSL in all cases because the products that meet this standard have the longest lifetimes in the standards cases, further decreasing shipments relative to the base cases. Some manufacturers have expressed concerns about co mpetitive impacts at this TSL. One manufacturer has a patent on silverized reflectors. Anot her manufacturer is believed to have a cross license on the technology. Despite the large capital conversion cost s to expand this reflector technology for all baseline lamps to meet this TSL, both these ma nufacturers could capture market share by selling less expensive lamps based on improved reflector coating instead of HIR technology. The other manufacturer without access to the enhanced reflectors would incur large capital and product conversion costs to produce lamps with a co mparable efficacy, but at higher costs.

TSL 3 is based on 3,000 hour HIR technology. At TSL 3, the scenarios that bound the INPV impacts are the commercial lifetime scenarios because the Baseline Lifetime scenarios do not impact the results at TSL 3. DOE estimated the impacts on INPV at TSL 3 to be $81 million or a change in INPV of -26.78 percent and -36.80 percent. At this level, the highest impact on cash flow in the year leading up to the standa rds occurs under the Emerging Technologies base case. Under this scenar io, the industry cash flow decreases by approximately 215 percent, to - $27.1 million, compared to the base-case value of $23.6 million in the year leading up to the standards. There are significant capital conversio n costs at this TSL that make INPV negative. Manufacturers must purchase additional infrared coaters to increase the production of these lowvolume lamps. Since current HIR production is very small relative to standard halogen IRL, all manufacturers voiced their concerns about meeting demand at this level. Also, since all existing HIR capsules use xenon as the fill gas, manufactur es are concerned about the high material costs for this gas and the potential for the price to in crease over tim e. The high costs to convert all

13-58lamps to HIR technology drive INPV negative and strand existing equipment for standard halogen capsules. The range of INPV arises fr om the shipment scenarios that account for different market erosion due to emerging tec hnologies and standards inducing a switch to noncovered BR lamps and R-CFL.

TSL 4 requires the production of an improve d HIR lamp. At TSL 4, DOE analyzed the impacts on manufacturers using scenarios both with commercial lifetime lamps and using the Baseline Lifetime scenarios. At TSL 4 with commercial lamp lifetimes, DOE estimated the impacts in INPV to be between -$102 million and -$98 million, or a change in INPV of -34.02 percent and -44.36 percent. At TSL 4 under the Base line Lifetime scenarios, DOE estimated the impacts in INPV to be between -$21 million a nd -$61 million, or a change in INPV of -6.81 percent and -27.52 percent. At this level, the high est impact on cash flow in the year leading up to the standards occurs under the Emerging T echnologies base case with commercial lamp lifetimes. Under this scenario, th e industry cash flow decreases by approximately 267 percent, to -$39.5 million, compared to the base-case value of $23.6 million in the year leading up to the standards. There are significant ca pital and product conversion costs at this TSL. At this TSL, all manufacturers must expand production of the more efficacious HIR technology to meet demand of the entire market. Since curr ent HIR production is relatively lo w, these substantial costs make INPV negative. The capital conversion costs ar e large because, in addition to HIR technology, manufacturers must also use e nhanced reflectors or the most efficient burners and add xenon. The lifetimes of products that meet this TSL are longer than the baseline in the commercial lamp lifetime scenarios, creating a negative impact on INPV from lower shipments. However, manufacturers are less impacted if the lifetimes of the lamps at TS L 4 are lowered in response to the energy conservation standards. The industry revenues in the st andards case are greater due to higher total shipments at TSL 4 in the Baseline Li fetime scenarios. The higher revenues help to mitigate the impacts of the significant capital co nversion costs required to comply with the energy conservation standards in the Baseline Lifetime scenarios. Since all existing HIR capsules use xenon as the fill gas, manufactures are concer ned about the high material costs for this gas and the potential for the price to increase over time. Manufacturer s also voiced concerns about competition at TSL 4. Because lamps can use an enhanced reflector with HIR to meet TSL 4, manufacturers have the same competitive concer ns as at TSL 2. Finally, two manufacturers currently have a full line of lamps that meet TSL 4. A third manufacturer has some products, but would have to undertake a costly redesign of its burne rs in order to sell a fu ll line of those lamps.

TSL 5 requires the production of lamps with an improved HIR coating and an additional improvement (improved HIR plus). At TSL 5, DOE analyzed the impacts on manufacturers using scenarios both with commercial lifetime lamp s and using the Baseline Lifetime scenarios. At TSL 5 with commercial lamp lifetimes, DOE es timated the impacts in INPV to be between - $111 million and -$104 million, or a change in IN PV of -36.90 percent and – 47.18 percent. At TSL 5 under the Baseline Lifetime scenarios, DOE estimated the impacts in INPV to be between -$43 million and -$49 million, or a change in INPV of -14.24 percent and -22.35 percent. At this level, the highest impact on cash flow in the ye ar leading up to the standards occurs under the Emerging Technologies base case with commercial lamp lifetimes. Unde r this scenario, the industry cash flow decreases by approximately 301 percent, to -$47.5 million, compared to the base-case value of $23.6 million in the year leadin g up to the standards. In the worst case, the impacts at TSL 5 are the most severe fo r manufactures because the capital and product conversion costs are greatest at th is TSL. At this TSL, all ma nufacturers must expand production

13-59of a lamp with multiple improvements over stan dard HIR lamps. Manufacturers must use HIR technology with an improved coatin g and with either enhanced reflectors or more efficient burners. Since even standard HIR production is currently low compared to standard halogen, expanding the production of the most efficacious HIR technology to meet demand of the entire market is very costly. Due to the large conversion costs, INPV is greatly negative even if the industry value is not decreas ed by emerging technologies. Ho wever, manufacturers are less impacted if the lifetimes of the lamps at TSL 5 are lowe red in response to the energy conservation standards. The i ndustry revenues in the standards case are greater due to higher total shipments at TSL 5 in the Baseline Lifetim e scenarios. The higher revenues help to mitigate the impacts of the significant capital conversion costs required to comply with the energy conservation standards in the Baseline Lifetime scenarios.

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