### CHAPTER 17. REGIONAL STANDARDS IMPACTS ON MARKET PARTICIPANTS

TABLE OF CONTENTS

17.1 Introduction

................................................................................................................... .. 17-1 17.1.1 Issues on Which DOE Seeks Comment

.............................................................. 17-1 17.1.2 Regional Standards Overview

............................................................................. 17-2 17.1.2.1 Regional Standards vs. National Standard

............................................. 17-5 17.1.3 Discussion of Non Enforcement vs. Enforcement Issues

.................................... 17-6 17.2 Market Participants

......................................................................................................... 17- 7 17.2.1 Definition of Terms

............................................................................................. 17-7 17.2.1.1Distributors

............................................................................................ 17-7 17.2.1.2 Contractors

............................................................................................. 17-7 17.2.1.3 Dealers

................................................................................................... 17-7 17.2.1.4Installers

................................................................................................. 17-8 17.2.1.5 Builders

.................................................................................................. 17-8 17.3 Distribution Chain

........................................................................................................... 17 -8 17.3.1 Overview

............................................................................................................. 17-8 17.3.2 Vertical Integration

.............................................................................................. 17-9 17.3.3 Distributors

........................................................................................................ 17-10 17.3.3.1 Market Overview

................................................................................. 17-10 17.3.3.2Distributor Business Model

................................................................. 17-10 17.3.4 Contractors

........................................................................................................ 17-13 17.3.4.1 Market Overview

................................................................................. 17-13 17.3.4.2Business Model

.................................................................................... 17-13 17.3.5 General Contractor

............................................................................................ 17-14 17.3.5.1 Market Overview

................................................................................. 17-14 17.3.5.2Business Model

.................................................................................... 17-14 17.3.6 Retailers

............................................................................................................. 17-15 17.4 Discussion of Regional Standard Impacts

.................................................................... 17-15 17.4.1 Distributor Impacts

............................................................................................ 17-15 Non-enforcement Issues for Distributors

.......................................................... 17-15 Enforcement Issues for Distributors

.................................................................. 17-17 17.4.2 Contractor Impacts

............................................................................................ 17-18 Non-enforcement Issues for Contractors

........................................................... 17-18 Enforcement Issues fo r Contractors

.................................................................. 17-18 17.4.3 General Contractor Impacts

............................................................................... 17-19 Non-enforcement Issues for General Contractors

............................................. 17-19 Enforcement Issues for Ge neral Contractors

..................................................... 17-19 17.5 Analysis of Regional Standard Impacts

........................................................................ 17-19 17.5.1 Profitability Analysis of Regi onal Standard Impacts

........................................ 17-20 17.5.1.1 Data Sources

........................................................................................ 17-20 17.5.1.2 Sample Inventory Calculation fo r Southeastern Border CACHP Wholesaler

......................................................................................................... 17-23 17.5.1.3 CACHP Profitability Calculation

........................................................ 17-25 17.5.1.4 Sample Furnace Inventory Calcula tion for Border Wholesalers

......... 17-26

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### 17.5.1.5 Furnace Profitability Calculation

......................................................... 17-27 17.5.2 Preliminary Analysis of the Impacts of Regional Standards on Furnace and CACHP markups

........................................................................................................... 17-28 17.5.2.1 Furnace Markups

................................................................................. 17-28 17.5.2.2 Firm Markups Far From the Border Region

........................................ 17-28 17.5.2.3 Border Region Markups

....................................................................... 17-30 17.5.2.4 Central Air Conditioners and Heat Pumps

........................................... 17-32 17.6 Additional Distributor Data

.......................................................................................... 17-32 17.7 Additional Contractor Data

........................................................................................... 17-47 17.8 Additional General Contractor s and Homebuilders Data

............................................. 17-57

LIST OF TABLES
Table 17.1.1. States and Regions for Re sidential CACHP Ru lemaking*

................................. 17-3

Table 17.6.13 Revenue and Cost Items, Typical CACHP Distributors, Hot-Humid Region and

Table 17.6.14 Revenue and Cost Items, Typical CACHP Distributors, Hot-Dry Region and Table 17.1.2 States and Regions for Resi dential Furnaces Rulemaking*

................................. 17-4 Table 17.1.3 Border States by Re gion for CACHP Rulemaking

............................................... 17-5 Table 17.1.4 Border States by Region for Furnaces Rulemaking

.............................................. 17-6 Table 17.5.1 Typical Southeastern Wholesaler Assets, Liabilitie s, and Profitability

.............. 17-22 Table 17.5.2 Border Wholesaler Required Inventory

.............................................................. 17-24 Table 17.5.3 Profitability Impacts of CA CHP Inventory Cost Increases

............................... 17-26 Table 17.5.4 Return on Net Worth Impacts of CACHP Inventory Cost Increases

................ 17-26 Table 17.5.5 Number of Units of Inventory of Furnaces in the Border Region

..................... 17-27 Table 17.5.6 Profitability Sensitivity Analysis for Furnaces in Border States

........................ 17-27 Table 17.5.7 Return on Net Worth Analysis for Furnaces in Bo rder States

............................ 17-28 Table 17.5.8 Northern Region Markups

.................................................................................. 17-29 Table 17.5.9 Southern Region Markups

.................................................................................. 17-29 Table 17.5.10 Saturation Rate of Condensing Furnaces in the Northern Border Region

........ 17-30 Table 17.5.11 Saturation Rate of Condensing Furnaces in the Southern Border Region

........ 17-31 Table 17.5.12 Border Region Markups

.................................................................................... 17-31 Table 17.5.13 Central Air Conditioner and Heat Pump Markups

........................................... 17-32 Table 17.6.1 Distributor Enterprise Sta tistics for Hot-Humid Region (2002)

........................ 17-33 Table 17.6.2 Distributor Enterprise St atistics for Hot-Dry Region (2002)

............................. 17-33 Table 17.6.3 Distributor Enterprise Statis tics for Rest of Country (2002)

............................. 17-34 Table 17.6.4 Establishments, Employment, and Payroll Trends in Hot-Humid Region

........ 17-35 Table 17.6.5 Establishments, Employment, and Payroll Trends in Hot-Dry Region

............. 17-35 Table 17.6.6 Establishments, Employment, and Payroll Trends in Rest of Country

............. 17-36 Table 17.6.7 Income Statement Items, Typical CACHP Distributors, Hot–Humid Region

.. 17-37 Table 17.6.8 Balance Sheet, Typical CACHP Distributors, Hot-Humid Region

................... 17-37 Table 17.6.9 Income Statement Items, Typical CACHP Distributors, Hot–Dry Region

....... 17-38 Table 17.6.10 Balance Sheet, Typical CACH P Distributors, Hot-Dry Region

...................... 17-38 Table 17.6.11 Income Statement Items, Typical CACHP Distributors, Rest of Country

...... 17-39 Table 17.6.12 Balance Sheet, Typical CACHP Distributors, Rest of Country

...................... 17-39

Border States

.................................................................................................................. .......... 17-40

Border States

.................................................................................................................. .......... 17-40

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### Table 17.6.15 Revenue and Cost Items, Typical CACHP Distributors, Rest of Country Region and Border States

.............................................................................................................. ....... 17-41

Table 17.6.17 Geographic Area Series, Hardware, Plumbing, and Heating Equipment Merchant

Table 17.7.1 Revenue and Cost Items, Typical CACHP Mechanical Contractors, Hot-Humid

Table 17.7.2 Revenue and Cost Items, Typical CACHP Mechanical Contractors, Hot-Dry

Table 17.7.3 Revenue and Cost Items, Typical CACHP Mechanical Contractors, Rest of

Table 17.7.8 Mechanical Contract or Establishments, Employment, and Payroll Trends, HotTable 17.7.9 Mechanical Contract or Establishments, Employment , and Payroll Trends, Hot-Dry

Table 17.7.10 Mechanical Contractor Establishments, Employment, and Payroll Trends, Rest of

Table 17.8.4 General Contractor Establishments , Employment, and Payroll Trends, Hot-Humid

Table 17.8.5 General Contractor Establishments , Employment, and Payroll Trends, Hot-Dry

Table 17.8.6 General Contractor Establishments , Employment, and Payroll Trends, Rest of Table 17.6.16 Distributor Financial Da ta by HARDI Region for 2009

.................................. 17-42

Wholesalers

.................................................................................................................... .......... 17-45

Region

......................................................................................................................... ............. 17-49

Region

......................................................................................................................... ............. 17-50

Country

........................................................................................................................ ............ 17-51 Table 17.7.4 Geographic Area Series, Pl umbing and HVAC Constructors

........................... 17-52 Table 17.7.5 Enterprise Statistics on Mechanical Contractors in the Hot-Humid Region

..... 17-54 Table 17.7.6 Enterprise Statistics on Mechanical Contractors in the Hot-Dry Region

.......... 17-54 Table 17.7.7 Enterprise Statistics on Mechanical Contractors in the Rest of Country

........... 17-55

Humid Region

................................................................................................................... ....... 17-56

Region

......................................................................................................................... ............. 17-56

Country Region

................................................................................................................. ....... 17-57 Table 17.8.1 Enterprise Statistics on General Contractors in the Hot-Humid Region

........... 17-58 Table 17.8.2 Enterprise Statistics on General Contractors in the Hot-Dry Region

................ 17-59 Table 17.8.3 Enterprise Statistics on General Contractors in the Rest of Country

................. 17-60

Region

......................................................................................................................... ............. 17-61

Region

......................................................................................................................... ............. 17-61

Country

........................................................................................................................ ............ 17-62 Table 17.8.7 Revenue and Cost Items, Typical General Contractors, Hot-Humid Region

............................................................................................................................... ................... 17-63 Table 17.8.8 Revenue and Cost Items, Typical General Contractors, Hot-Dry Region

........ 17-64 Table 17.8.9 Revenue and Cost Items, Typical General Contractors, Rest of Country

........ 17-65

LIST OF FIGURES
Figure 17.3.1 Distribution Chain in Replacement Market

........................................................ 17-9 Figure 17.3.2 Distribution Chain in New Construction Market

............................................... 17-9

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### CHAPTER 17. MARKET AND TECHNOLOGY ASSESSMENT

17.1 INTRODUCTION
The Energy Policy and Conservation Act (EPCA), as amended by the Energy Independence and Security Act of 2007 (EISA; Pub. L. 110-140), directs the U.S. Department of Energy (DOE) to “consider the impact of additional regional standards on consumers, manufacturers, and other market pa rticipants, including distributor s, dealers, contractors, and installers,” before establishing additional regional standards.” ( 42 U.S.C. 6295(o)(6)(D)(ii)) This technical support document (TSD) chapter represents an important step in DOE’s efforts toward fulfilling this statutory obligation. Specifically, the language of EPCA affects the current energy conservation standards rulemaki ngs for residential central ai r conditioners and heat pumps (CACHP) and furnaces. The substance of this chapter will also be included in the furnaces TSD because the analysis generally applies to both the CACHP and furnaces rulemakings and DOE is evaluating regional standards for each rulemaking. Where indicated, the analysis is specific to either CACHP or furnaces. The purpose of this chapter is to establish a common framework and understanding of the HVAC distribution chain and market dynamics to fa cilitate discussion of regional standards among DOE and interested par ties. This chapter also affords the early opportunity for stakeholders to comment on DOE’s understanding of key market factors as well as DOE’s initial analytical methodology and c onclusions regarding the impacts of regional standards.

This chapter is structured as follows: Fi rst, DOE provides an overview of the issues raised by regional standards as they relate to the market participants specified in EPCA. Second, DOE defines the market participants and the interaction of those participants the distribution chain. DOE examines the general business models of the key participants in the market independently. Next, DOE investigates how regi onal standards could affe ct those models based on industry research, initial discu ssions with manufacturers, distri butors and contractors, and the comments received in response to the centr al air conditioner and heat pump framework document and public meeting. Lastly, when possible given data availability, DOE quantitatively assesses the impacts of regional standards on the analyzed market participants, conducting two analyses: (1) an investigation of the impact of changes in inventory holdings on distributor profitability and (2) a presentation of preliminary estimates of the impact of regional standards on distributor and contractor (installer) markups for central air conditioners, heat pumps and furnaces. The markups for these products are es timated for different regions of the country, and based on limited available data about the current distributi on of equipment efficiency and projected changes to equipment efficiency. Th ese estimates will be updated as more information becomes available.

17.1.1 Issues on Which DOE Seeks Comment
DOE is particularly interested in receiving comments and views of interested parties concerning the following issues:

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### 1. The impacts of additional regional st andards on distributors, mechanical contractors, and general contractors 2. The impact of regional standards enforcement mechanisms on the HVAC distribution chain 3. How regional standard impacts are different from the impacts resulting from amended national energy conservation standards 4. How DOE can best capture incorporate the impacts identified above in its analysis 5. The conclusions drawn in this chapter

17.1.2 Regional Standards Overview
DOE is considering regional standards for residential air conditioners and heat pumps for two multi-state regions (Hot-Humid and Hot-Dry) in addition to a base national standard that would prevail in states throughout the rest of the country. For impact analysis purposes in the CACHP rulemaking, the rest of the country is considered a third region called Rest of Country (called the “North” in this chapter for simplicity). By statute, the regions must include whole, contiguous states. (42 U.S.C. 6295(o)(6)(C)) The st ates are grouped such that the populations of the two hot regions generally experience more than 1200 annual cooling hours (CLH), and the Hot-Humid region has high relative humidity while the Hot-Dry region does not
The boundary between Hot-Humid and Rest of Country is approximately at the 4500 annual heating degree-day (HDD) line. The states currently included in each region in the CACHP rulemakings are listed in Table 17.1.1. For reasons described belo w, DOE distinguishes between states that border other regions a nd those that do not. States that are on the border of two regions are italicized in the table. All states in the Hot-Dry region have at least one border with another region.

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### Table 17.1.1 States and Regions for Re sidential CACHP Rulemaking* Hot-Humid Hot-Dry Rest of Country

Alabama Arizona Alaska Arkansas California Colorado

Florida Nevada Connecticut Georgia New Mexico Delaware Hawaii Dist. of Col. Louisiana Idaho Mississippi Illinois North Carolina Indiana Oklahoma Iowa South Carolina Kansas Tennessee Kentucky Texas Maine Maryland Massachusetts Michigan Minnesota Missouri Montana Nebraska New Hampshire New Jersey New York North Dakota Ohio Oregon Pennsylvania Rhode Island South Dakota Utah Vermont Virginia Washington West Virginia

Wisconsin Wyoming

* Italics indicate border state

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### DOE is also considering regional standards for residential furnaces — which is a separate rulemaking from CACHP — that would have two regions (North and South) for impact assessment purposes.
The regional boundary for the states in the Furn aces rulemaking is approximately at the 5,000 HDD line. The states included in each furnace rulemaking regions are listed in Table 17.1.2.

Table 17.1.2 States and Regions for Resi dential Furnaces Rulemaking* Furnaces-North Furnaces-South

Alaska Alabama Colorado Arizona Connecticut Arkansas Idaho California Illinois Delaware Indiana Florida

Iowa Georgia Kansas Hawaii Maine Kentucky Massachusetts Louisiana Michigan Maryland Minnesota Mississippi Missouri Nevada Montana New Mexico Nebraska North Carolina New Hampshire Oklahoma New Jersey South Carolina New York Tennessee North Dakota Texas Ohio Virginia Oregon Pennsylvania Rhode Island South Dakota Utah Vermont Washington West Virginia

Wisconsin Wyoming * Italics indicate border state

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### 17.1.2.1 Regional Standards vs . National Standard It is important to differentiate between the impacts of an amended national standard and the impact of introducing regional standards. Th e following sections do not assess the impact on market participants of more stri ngent energy conservation standards. Rather, this chapter focuses on the impacts on market participants in the HVAC distribution chain of having different standards affecting different geographic markets. For example, the impacts of physically larger HVAC units on distributors (due to a more stringent standard) are not discussed in this chapter because such an impact would occur under an increase in the base national standard as well. This chapter considers only the impacts of additional regional standards on these market participants. For example, the imp act on a distributor of having to alter inventory systems to serve regions with differential efficiency leve ls is an impact that would be considered. Ultimately, DOE must determine whether regiona l standards are economically justified, after considering the impacts on market participants attributable to such standards.
For firms located farther from the borders delineating applicability of the regional standards and serving only small areas, the impact of regional standards is expected to be very similar to the impact of a national energy conservation standa rd. However, firms located near the border between regions and serving two (or three, in th e case of CACHP) regions are expected to be most strongly impacted because they may have to respond to different efficiency requirements for each region in which they operate. For exam ple, distributors located near the border between standards regions may sell equipment meeting diff erent standards in the different regions and need to carry more inventory or manage their inventory differently to meet the separate needs of customers in each region. Table 17.1.3 and Table 17.1.4 display the states on the borders of the CACHP and furnaces regions, respectively.

Table 17.1.3 Border States by Region for CACHP Rulemaking CAC-CHP Hot-Humid CAC-CHP Hot-Dry CAC-CHP Rest of Country

Arkansas Arizona Colorado

North Carolina California Idaho

Oklahoma Nevada Kansas

Tennessee New Mexico Kentucky

Texas Missouri Oregon

Utah Virginia

17-5

### Table 17.1.4 Border States by Region for Furnaces Rulemaking Furnaces North Furnaces South

Colorado Arizona

Idaho Arkansas

Illinois California

Indiana Delaware

Kansas Kentucky

Missouri Maryland New Jersey Nevada

Ohio New Mexico Oregon Oklahoma Pennsylvania Tennessee

Utah Virginia West Virginia



### 17.1.3 Discussion of Non Enforceme nt vs. Enforcement Issues
For the purposes of this chapter, DOE gr oups potential impacts of regional standards on market participants into two categories: (1 ) non-compliance issues and (2) compliance-related issues. Non-compliance issues are those that arise from regional standards regardless of the enforcement plan established by DOE. Complianc e-related issues are those impacts that would vary depending on the enforcement path proposed by DOE (e.g., certific ation, verification, and labeling costs).
At this stage, while DOE is considering va rious enforcement plans, no mechanisms or requirements are proposed here. As such, DOE do es not attempt to quan tify enforcement-related impacts in this chapter. EPCA requires DOE to begin an enforcement rulemaking not later than 90 days after the issuance of a final rule es tablishing regional standards and complete the rulemaking not later than 15 months followi ng the issuance of the rule. (42 U.S.C. 6295(o)(6)(G)(ii)).

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### 17.2 MARKET PARTICIPANTS

17.2.1 Definition of Terms
As discussed previously, EPCA directs DOE to consider the impacts of additional regional standards on market participants, includi ng “distributors, dealers, contractors, and installers.” (42 U.S.C. 6295(o)(6 )(D)(ii)) Based on DOE’s in itial research and comments from stakeholders, some of the market participants enumerated in EPCA have overlapping or identical functions in the HVAC marketplace. Industry of ten uses the various terms interchangeably to describe the same market participant. Therefore, it is important to clarify what market roles are associated with each term for the purposes of th is analysis. Below is a brief description of DOE’s understanding of each player in the dist ribution chain (for more detailed descriptions, refer to 17.3).

17.2.1.1 Distributors

Also known as ‘wholesalers,’ distributors purchase HVAC equi pment directly from the original equipment manufacturers (OEMs). Distributors absorb short-term imbalances in supply and demand and sell equipment to contractors at a markup to cover operating expenses and profit.

17.2.1.2 Contractors
There are two basic types of contract ors of relevance to the HVAC market:

General contractors. In the new construction market, general contractors manage and oversee reside ntial and commercial constr uction projects. General contractors often lack the necessary technical expertise to install and inspect HVAC systems. As a result, they hire HVAC trade specialists, or mechanical contractors, to install equipment. Genera l contractors usually have no significant role in the residential replacement market, except for cases of major retrofits.

Mechanical contractors. Mechanical contractors are specialized contractors that install and maintain HVAC systems, pl umbing, wiring, et c. Mechanical contractors purchase HVAC systems from di stributors and install them for their customers. Contractors often service ex isting HVAC systems as well. Again, in the new construction market, they are usuall y hired by general contractors. In the replacement market, they are hired by homeowners and are considered synonymous with dealers (below).

17.2.1.3 Dealers
Much like mechanical contractors, HVAC dealers purchase systems from distributors. Often they may have a more formal relationship with a manufacturer. Dealers resell the equipment to the end-user at a mark-up, nearly always installing the HVAC system as well. Dealers also inspect, maintain, and repair existing systems.

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### 17.2.1.4 Installers
The industry uses installers interchangeably with mechanical contractors and dealers. Because the HVAC market is very rarely a do-it-yourself market, DOE includes homeowners who install their own systems in this category. In general, the impact of regional standards on homeowners is assessed in the LCC analysis.

17.2.1.5 Builders
For the purposes of this chapter, builder s serve the same function in the HVAC marketplace as general contractors.

Given the above similarities and overlapping roles in the distribution chain, DOE believes that EPCA’s requirement to analyze the impacts on product distributors, dealers, contractors, and installers is sa tisfied by an analysis of the potential impact of regional standards on three categories of market participants:

• Distributors

• Mechanical contractors

• General contractors

The category of “mechanical contractors” includes dealers, mechanical contractors, and installers. The category of “general contractors” comprises builders and ge neral contractors. In accordance with comments received and consiste nt with the markups analysis, DOE believes such a grouping is appropriate for this analysis and allows DOE to consider the economic impact of regional standards on the relevant market pa rticipants as required by EPCA. Impacts on manufacturers are assessed in the manufacturer impact analysis, while impacts on consumers are assessed in the life-cycle cost analysis.

17.3 DISTRIBUTION CHAIN

17.3.1 Overview
A single distribution channel represents the vast majority of the HVAC market. Simply, the OEM assembles the system and sells it to a distributor; the distribut or warehouses and sells the unit to a contractor; and the contractor sells the unit to the final consumer and performs the installation. The final consumer varies in the re placement and in the new construction market. In the replacement market, the final consumer is usually the home or business owner, as illustrated in Figure 17.3.1. In the new construction market, a builder or general contractor is effectively the final end-user, as shown in Figure 17.3.2.

17-8

### Figure 17.3.1 Distribution Chain in Replacement Market

Figure 17.3.2 Distribution Chain in New Construction Market

After installation, mechanical contractors typically perform additional lifecycle service on the system, including inspecti on, maintenance, and repair.

17.3.2 Vertical Integration
In some cases, a single entity can perform one or more of the basic steps along the HVAC distribution channel. For example, most manuf acturers own at least so me distribution centers, which operate much like the independent distributi on companies. In fact, all major manufacturers maintain at least some distribution capability in-house. In this distribution model, the OEM ships units to its own subsidiaries, which ope rate distribution centers and sell product to contractor s . Manufacturers usually employ this strategy in areas where they have limited relationships with distributors for a given product line.
Historically, the degree of vertical integr ation has ebbed and flow ed with the economic well-being of the industry. In good times, OEMs ha ve historically been more likely to acquire a distribution presence. Conversely, in bad times, th ey have been more likely to seek to shed the costs and risks associated with the distribution function. According to the U.S. Census Bureau, in 2002, 74 percent of HVAC sales went through independent distributors. 1 

### Currently, the percentage of the dollar value of HVACR products that go through independent distributors is estimated to be around 80 percent. 2



### Lennox International Inc. (LII), a large e quipment manufacturer, has one of the largest distribution presences in the industry. It owns several subsidiaries whic h operate as distributors and even as contractors, as is the case with LII subsidiary, Service Experts. 3 

### While Service Experts is a wholly owned subsidiary, it ope rates independently fro m LII’s manufacturing

17-9

### operations. Service Experts carries heating and cooling equipment inventory and offers service for HVAC equipment from various manufacturers. 4



### Importantly, while some entities may have a controlling interest over multiple steps in the distribution chain, the costs, markups, and business processes in the distribution chain ultimately remain relativel y equivalent. That is, the distribut or and contractor markups (and the resulting pricing) for the manufacturer-owned distributor and contractor businesses are roughly equivalent to the markups that occur wh ere those businesses operate independently.

The business models of distributors, contractor s, and general contractors are described in greater detail below.

17.3.3 Distributors

17.3.3.1 Market Overview

The HVAC distribution market is a well-esta blished yet fragmented industry consisting of approximately 1,300 distribution companies. In dependent distributors ar e responsible for the majority of the business in the industry, but a ll major manufacturers have some type of factoryowned distribution. The vast majority of indepe ndent distributors are smal l, private companies. In 2002, there were 5,468 total distribution branches, 5,156 of which were independent distribution branches and 312 of wh ich were owned by manufacturers. 5



### 17.3.3.2 Distributor Business Model

Distributors link the handful of CACHP/furn ace manufacturers to the tens of thousands of contractors. Distributors receive shipment s from manufacturers and resell the equipment to contractors at a markup that cove rs distributor operating expenses and profit. Manufacturers rely on distributors to consolidate and forecast pr oduct demand at the regional and local levels. Contractors rely on distributors to hold enough in ventory and parts to meet their day-to-day business needs. As the only player along the di stribution chain that holds significant inventory, distributors add value by absorbing short-te rm imbalances in supply and demand while still satisfying the needs of the homeowner (and, by extension, the contractor) for fast deliveries. 6



### The distributor’s warehouse is usually the only stop for HVAC equipment on the way to the final installation site; however, in some markets distributors utilize regional distribution centers that supply secondary distribution warehouses. In either case, shipments are warehoused as distributor inventory until sold to customers. Although it can vary widely, typically sixty to seventy percent of revenue comes from unitary equipment, with the remainder coming from parts and other supplies.
Distribution is a highly competitive and low-margin business. The critical driver of profitability is the ability to manage inventory efficiently. Traditionally, distributors tended to receive large-volume pre-season shipments from original equipment manufacturers (OEMs). However, the market has migrated away from that model as industry lead times (the time it takes to receive an order from the OEM) have fallen. Most distributors now operate in somewhat of a

17-10

### blend between just-in-time supply and the traditional model. To streamline inventory management, distributors often conduct extensive demand forecas ting to estimate the timing and quantity of their orders. Key factors include historical demand, new construction, OEM lead times, new products and lines, and weather patterns. The typical lead time of an average residential HVAC system is 2-3 weeks, although different parts or components, as well as more intricate HVAC systems, may have different lead times. Some of the more advanced coils, for example, can have lead times of 6-8 weeks.
Financing and credit, closely related to inventory, play a critical role in the distribution business model. With the high working capital re quirements due to inventory needs, short-term credit availability is the lifeblood of many small wholesalers. Distributors typically purchase equipment from manufacturers on credit, with the ba lance being paid within 30 days, often with discounts for early payment. Historically, OEMs have offered financing to their distributor clients, but have generally exite d that business. Instead, mostdistributors now are financed through local banks. In turn, distributors often ex tend lines of credit to certain contractors based on the amount business volume, profitability of th e relationship, and previous experience with the contractor. As a result, distributors incur the carrying costs associated with the difference between the financing terms that they receive from their creditors and the terms they extend to their contractor customers. Effectively, the distributor incurs as a cost the difference between these two rates over the period of time after the distributor pays the OEM for the unit and until it receives payment from the contractor.
Because of this dynamic, a key financial metric driving profitability is days sales outstanding (DSOs), a measure of the number of da ys it takes a company to collect revenue after a sale has been made. DSOs in the industry av erage between 40-45 days; if they grow higher, the increased carrying costs can threaten the th in margins under which distributors operate. In extending credit to their customer s, distributors also assume the risks involved with floating the receivables (i.e., the contractor goes out of business or otherwise fails to pay).
Changes in market dynamics, which can lead to changes in the quantity and type of product demanded, may cause distri butors to incur one-time costs associated with temporary increases in inventory, inventory obsolescence, or the opportunity costs represented by the failure to meet customer needs. Increased market uncertainty forces distributors to hold greater

than-usual inventory to reduce the ri sk of not meeting customer needs. 7 

### Failure to do could mean losing customers to competition. 8 

### However, if certain products do not sell, distributors absorb the costs of unsold inventory. 9 

### Typically, following an initial learning curve associated with these market changes, distributors adjust to th eir customers’ demands and are able to adjust inventory levels accordingly. 10



### The increasing use of information technolog y in distribution has helped wholesalers adapt to market transitions. Sales and orders are usually made electronically at each step along the distribution chain. IT systems exist that allow distributors to forecast demand, source and purchase supplies, manage and track inventory, streamline the supply chain, and manage various sales channels. 11 

### Many distributors give contractors th e ability to place orders online after-hours so that the orders are ready for pickup the followi ng morning, while others give some customers a direct link into a computer system for automatic inventory replenishment. 12

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### At the distribution center, inventory is generally organized by model and SEER/HSPF/AFUE rating. Units are stacked vert ically and, depending on their size, may be transported with forklifts. The layout of wa rehouse and placement of product affect order processing and inventory efficiency. 13 

### It is important for distributors to organize inventory in a manner that minimizes the order cost and minimizes mistakes that lead to costly reprocessing. The average cost of processing an order, from receipt of the order until payment is received, is $ 35-$45. 14 

### Cycle counts are performed frequent ly to minimize and document inventory shrinkage.
Beyond the manufacturer selling price (cost of goods sold), the largest cost considerations are those that imp act inventory and transportation costs. The size of an HVAC system impacts both. Larger, more efficient units require more warehouse space to inventory. The switch from 10 SEER to 13 SEER in 2006, for example, required 35-40% more floor space for every condensing unit. 15 

### Fewer units can fit on trucks and forklifts, requiring more time per unit for transportation and handling, absent new and upgraded equipment. 16 

### The larger units can require two people to offload them instead of one. 17



### Manufacturer-to-Distributor Interactions
The relationships between ma nufacturers and distributors ar e generally well-established, long-term relationships. In most markets, di stributors are the exclusive carrier of a given manufacturer product. Distributors will often car ry a second brand from the same manufacturer, which has a different price point targeting a second market segment.

Most manufacturers will not allow distribut ors to carry products from a competitor, unless the manufacturer does not offer a product applicable to the market. In that case, distributors may partner with a second manufactur er. However, the terms of agreements can vary significantly depending on a wide range of factors, including sales volume, the extent of contractor relationships, strength of the brand in the area, and projected market growth. If a distributor carries a product line, it also has th e parts business associated with that line.
Manufacturers are generally responsible fo r getting the equipment to distributors’ warehouses and incur the associated costs, whic h they embed in their prices. Manufacturers usually hire a shipping company to transport the equipment and pass on these costs to the distributors in the sales price. Almost all inbound freight shipped to distributors is shipped FOB Origin Freight Prepaid, which means that once th e manufacturer ships the freight, the distributor owns it. 18 

### This can lead to problems when ite ms are damaged or broken upon arrival, representing another risk in the distributor business model. 19



### Distributor-to-Contractor Interactions
Because there is relatively low manufacturer brand loyalty among consumer end-users, distributors compete actively over contractor customers. While OEMs focus on general brand awareness and product demand, distributors are frequently involved in providing multifunctional support to their contractors. To in crease competitiveness and revenues, distributors are increasingly offering value-added services , such as business planning help, financial

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### management classes, and support for advertising, to their contractor customers beyond their supply function. This is also a strategy for increasing profitability—a contractor that is unprofitable cannot pay the distributor in a timely fash ion, if at all. Thus, successful distributors are heavily invested in their contractors’ success. 20



### In the vast majority of cases, contractor s purchase the unit over the counter at the distributor’s warehouse. Becaus e most contractors do not carry much or any inventory, thetransaction will include a specific unit needed for a single job. The contractor can generally callin, order online, or fax in an order and go pick up the needed unit on the same day. At the warehouse, the distributor loads the unit onto th e contractor’s truck (s ome distributors have “drive through” warehouses) and contractor can be on the way to the job site in minutes. While business is primarily done in this over-the-counter model, distributors also make onsite deliveries for their customers.

17.3.4 Contractors

17.3.4.1 Market Overview

The HVAC contractor market is even more fr agmented than the distribution industry. There are 36,345 HVAC branches that specialize 51 percent or more in HVAC, 25,496 of which specialize entirely in the industry. 21 

### The large majority of c ontractors operate as small businesses, as defined by the U.S. Small Business Association (see Section 17.7 for more information on small business contr actors). Partly due to the very low barriers to entry in the market, the industry has resisted consolidation. Approximately 60 percent of branches in the industry generate less than $500,000 in revenue annually and 76 percent generate less than $1,000,000 annually. 22 

### Comfort Systems USA is the larg er of two public HVAC contractor companies that DOE was able to find. Its 2008 revenues ($1,328,465,000 23 

### ) accounted for approximately 3 percent of the $49,425,445,000 24 

### HVAC contractor industry (although the company does provide ancillary services). 25 

### Most independent contractors work with a variety of HVAC brands, although some sp ecialize in one particular bra nd, or have a relationship as a licensed dealer of a specific manufacturer.

17.3.4.2 Business Model
HVAC contractors primarily install and serv ice HVAC systems. Contractors are the interface with the end-users, installing new HVAC systems to their specifications as well as inspecting, servicing, or repairing existing systems. Contractors must balance two very different aspects of their business to be successful. First, contractors must fulfill the technical role of installing and servicing the HVAC systems. This requires a staff that is knowledgeable about HVAC principles in general and adept at installa tion and service on many different HVAC units. Second, contractors must also opera te the commercial aspects of th eir business. Because of the high level of competition, advertising, customer service, and sales skills are integral aspects of the contractor’s business. Rarely do HVAC comp anies achieve sufficient scale to have staff specialize in a single business practice.

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### Contractors have the largest influence on which system a consumer will purchase. 26 

### For their part, contractors tend to gravitate to ward the products with which they are familiar. 27 

### Contractors often employ a good-better-best selling philosophy to up-sell consumers on premium products. 28 

### The minimum SEER model is a “good” syste m; there is a “better” system that is rated a few SEER points higher; and finally, ther e is a “best” system which has a very high SEER rating. 29 

### A sample good-better-best set of syst ems might be 13 SEER -16 SEER-20 SEER; however, this is dependent on minimum efficiency requirements. 30 

### Customers are more likely than they used to be to purchase energy-efficie nt and environmentally friendly products, in spite of the higher cost associated with them, because they have become more sensitive to the environment and the cost of energy. 31 

### Increasing tax credits and utility rebates can defray some of the higher incremental first cost as well.

While some contractor s have exclusive relationships w ith manufacturers, most compete by offering a large variety of product offerings an d by being trained to install, inspect, service, and repair those offerings. As with distributors, the size and weight of HVAC systems affect the business of contractors. While the vast majority of inventory is held by distributors, some contractors do carry a small amount of inventory and could be likewise affected by larger units. Larger systems are also more difficult to trans port from the distributor to the job site, possibly even requiring special precautions or equipment to load or unload the unit in extreme cases.
A contractor’s labor costs related to the installation and service of HVAC systems remain relatively constant regardless of the HVAC syst ems that the company installs and services. 32 

### Once the technicians are trained, the time spent installing an HVAC unit does not vary greatly from system to system. 33



### 17.3.5 General Contractor

17.3.5.1 Market Overview
As discussed above, for the purposes of th is chapter and consistent with comments received DOE considers general contractors and ho mebuilders to have essentially the same role in the distribution chain. Thus, DOE believes the two will have similar concerns and face similar potential impacts from regional standards. As with m echanical contractors, the general contractor and builder market is highly fragmented and local ized. According to the U.S. Census, there were more than 200,000 general contractor establishments in 2002. 34



### 17.3.5.2 Business Model
General contractors manage ne w construction and significant renovation projects. When supervising a project, the general contractor hi res a mechanical contractor to perform the installation. In this situation, the general contractor functions as th e final step in the distribution chain. The general contractor may purchase the H VAC system from the di stributor and hire the mechanical contractor to it or purchase the system from the installing mechanical contractor. When projects are larger—a townhouse developmen t, for example—a distributor may seek to establish a supplying relationship with the genera l contractor and deliver the units in bulk. The general contractor would then hire a mechanical contractor to perform the installation. For a

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### custom-built home or renovation, the mechanical contractor may purchase the unit to the specifications requested by the general contractor.

17.3.6 Retailers
Retailers such as Home Depot, Lowe’s and Sears can also be involved in the distribution process. However, DOE’s understanding of these re tailers is that they function mostly as a leadgenerating system for contractors, as the HVAC mark et is very rarely a do-it-yourself market. When the so-called “Big Box” retailers are involve d, customers go to a retailer and ask to be put into contact with a contractor. A distributor usually still supplie s a contractor, who still performs the installation. In the end, the costs and mar kups reflect those in the standard distribution model. Furthermore, DOE believe s this reflects a small portion of overall unit sales. Therefore, for the purposes of this analysis, DOE does not consider the role of retailers in this analysis.

17.4 DISCUSSION OF REGIONAL STANDARD IMPACTS Through public notices, public meetings, and interviews with industry trade groups, DOE has solicited comments on the impact of region al standards on CACHP and Furnace industry participants. This chapter discusses DOE’s understanding of the potential impacts on key players in the distribution chain.

As noted in Section 17.1.2.1, it is important to differentiate the difference between the impacts of a higher base national standard and of regional standards. The following sections do not assess the impact on market participants of an increase in the base national efficiency standard. Rather, this chapter focuses on the impacts of having different standards affecting different geographic markets.
The impacts of regional standards are se parated here into two categories: non

enforcement issues and enforcement issues. Non- enforcement issues are those issues that arise irrespective of the actions taken to enforce the re gional standards. Enforcement issues are those impacts and costs that are directly related to ensuring compliance or that arise from non

compliance. Because DOE has not established an enforcement plan for regional standards, DOE is not able to capture any enforcement impacts in this analysis.

17.4.1 Distributor Impacts

Non-enforcement Issues for Distributors

In written comments and at the CACHP fra mework public meeting, Heating Air conditioning & Refrigeration Distributors Intern ational (HARDI) raised several concerns regarding the implementation of regional standa rds and the potential impact of those standards on their businesses. Their concerns center largely on the premise that there will be differences between regional standard boundaries and existing distribution boundaries.

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### HARDI noted that EPCA requires regional boundaries to be drawn along state lines, which are usually different from the market bound aries for central air c onditioners, heat pumps, and furnaces. Existing market boundaries are determined by multiple factors, including utility service areas, composition of building types within an area, natural climatic regions, and localized microclimates. HARDI identified a range of negative impacts resulting from the incongruence of regional standards boundaries an d existing distribution boundaries (HARDI, No. 32 at pp. 5-6):

• Increased costs due to increased inventory complexity

• Increased costs due to lost economies of scale in purchasing

• Reduced sales where cooling or heating demands are modest

• Constraints on business growth near borders

Based on its analysis and research, DOE believes that distributors that serve multiple regions will be impacted by additional (i.e., differentiated) regional standards. Distributors serving markets entirely within a single re gion will not experience non-enforcement impacts distinguishable from a national amended energy conservation standard.
DOE understands there to be two types of di stributors that will serve multiple standard regions and could be affected by the differentia ted regional standards: (1) central distributors shipping to local distributors in multiple regions and (2) local distributors selling to contractors in multiple regions. In general, distributors located near borders are more likely to serve multiple standard regions
DOE agrees that distributors serving multiple standard regions may be compelled to manage more variation in dema nd. Under a national standard, di stributors could expect the bulk of demand to be at the base national level (e.g., 13 SEER for CACHP). Under regional standards, however, distributors near boundaries may experience bimodal demand, with the one large portion of shipments at th e national standard efficiency level (e.g., 13 SEER) and a second large portion at a different regional efficiency level (e.g., 14 SEER). DOE believes that this bimodal demand does not signify a doubling of nece ssary inventory, but rather a more diverse inventory. The resulting change in product mix for distributors serving multiple regions could increase inventory management costs and increase overall investment in i nventory, because more product models of equipment ar e required to meet demand.

In Section 17.5.1, DOE performs a sensitivity analysis that investigates the impact of regional standards on inventory holdings and profitability. The analysis estimates a reasonable range of inventory increases based on industry data and then calculates the impact of those inventory changes on distributor profitability based on sample distributor financials. In general, the analysis finds that only small inventories ch anges would be required fo r distributors to meet product demand for multiple regions . Additionally, the sensitivity analysis finds the potential changes in inventory to have only small impacts on distributor profitability. See Section 17.5.1.3 for more details.
Another concern for the industry is that, with a wider variation in product, the number of particular product models purchas ed will be smaller, leading to fewer volume discounts. Along

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### the same vein, national and regi onal distributors stated that th ey would face decreases in economies of scale due to the smaller size of regional markets. (HARDI, No. 2 at p. 2) Specifically, if certain products c ould not be sold throughout the entire country, then the cost of those products would be driven up. (HARDI, No. 2 at p. 2)
In response, DOE analyzes the impact of re gional standards in reducing economies of scale for manufacturers and leading to higher cost of goods sold for all distributors (including those not serving multiple regions) in its ma rkups and national impacts analyses for both CACHP and furnaces. The analysis assumes that those costs are passed on down the distribution chain to contractors and consumers. DOE will perform additional investigation on the cost impacts of smaller orders on distributors through interviews with manufacturers during the MIA process.

Distributors also noted that sales in areas where cooling demands are more modest would likely be depressed since high-efficiency coo ling equipment would not be as well justified. (HARDI, No. 32 at 4) These comments address the issues of elasticity of demand and the question of how customers “roll-up” or “shift” to different efficiency levels based on the economics they face, given a climate. In this re spect, greater uncertainty about prospective sales is a not a function of having different standards by region, but simply having higher standards. The fact that cooling and heating demand varies by location is not exacerbated by regional standards. The question over the new efficiency distribution for each CACHP and furnace distributor is the same under na tional and regional standards. Optimizing inventory for the new demand distribution will be part of the transition cost in either standards case.
In sum, DOE does expect the transition due to amended standards to inject uncertainty into the market, which could temporarily cause di stributors to incur higher costs. However, DOE believes these costs are associated with a chan ge in standards, not the advent of additional regional standards.

Enforcement Issues for Distributors DOE understands that many distributors do business in more than one region. Furthermore, the contractors to whom these dist ributors sell often do busin ess in more than one region. In light of these facts, it may be necessary for DOE to work with participants in the distribution chain to document the installation of CACHP and furnace units. If such reporting is used to support enforcement, it is possible that distributors will incur new compliance costs as a result additional record-keeping and reporting relate d to the regional standards. This would add some percentage to administrative labor costs of distribution channel partic ipants, some of which could vary with the number of units sold and some of which could be fixed. Any additional costs would be incorporated in this analysis of the impacts of regional standards.

At this time, however, DOE is not able to accurately assess impacts of compliance requirements on distributors. In the Preliminary Analysis for CACHP and in this chapter, DOE requests comment on appropriate measures for enforcement of regional standards for CACHP and furnaces.

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### 17.4.2 Contractor Impacts

Non-enforcement Issues for Contractors Air-Conditioning Contractors of America (ACCA) commented that larger units would cause higher transport and handling costs and, in many cases, would not fit in the residential space that housed the previous unit. (ACCA, Public Meeting Transcript, No. 23 at p. 252)
In response, DOE notes that this issue is a function of higher sta ndards, not differential regional standards. As such, probl ems with larger units are not considered in this chapter. To the extent that regional standards affect co st of goods sold, above and beyond a national standard, DOE expects incorporate that effect in its normal markups analysis. DOE is unaware of any other contractor concerns with regional st andards that do not involve enforcement issues.

Enforcement Issues for Contractors ACCA and HARDI stated that regional standards will increase non-compliance and would create a major competitive disadvantage for contractors that seek to comply. (ACCA, No. 23 at p. 2; HARDI, No. 32 at p. 5) HARDI argued th at this situation already exists in California after implementation of Title 24 requirements. Kent & O’Connor stated that splitting a metropolitan area with regional standards would have a significant competitive impact, particularly if a price difference exists between the higher regional efficiency and the national standard units. (Kent & O’Connor, No. 13 at p. 231)
As with distributors, in general DOE believes that contractors near regional borders could potentially be impacted by enforcement-relate d competitive issues surrounding differential regions. DOE acknowledges that non-compliance can be a problem for contractors following the codes and licensing requirements, as there is an incentive for non-compliance in the form of being able to offer unknowing homeowners a lower price point for HVAC service. DOE recognizes that along border regions, differentia l standards could exacer bate this disadvantage for complying contractors, particularly if the price difference between the regional-compliant products is significant.
DOE acknowledges that depending on the enforcement mechanisms put in place following a DOE rulemaking, contractors may incur additional administrative compliance costs associated with regional standards, including re cording keeping or verification costs. However, as noted above, at this point DOE cannot accurately assess any impacts of compliance due to regional standards because no enforcement mech anisms and compliance requirements have yet been established. DOE seeks comment on poten tial compliance and enforcement options for regional standards.

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### 17.4.3 General Contractor Impacts

Non-enforcement Issues for General Contractors DOE received no comments on any non-enforcement related regional standard impacts on builders and general contractors, and is not aware of any impacts. DOE seeks comment on any non-enforcement impacts these market player s may encounter under regional standards.

Enforcement Issues for General Contractors The National Association of Home Builders (NAHB) commented that a general contractor usually will not have any special HVAC expertise. Therefore, if regional standards are implemented, a builder is likely to use more time and effort double-checking that units are compliant. The extra cost of this effort s hould be included in the payback analysis, the cumulative regulatory burden, the employment impact analysis, and the regulatory impact analysis. NAHB also commented that regional st andards would affect home builders, most of which are small businesses; as such, a regulato ry flexibility analysis would be necessary. (NAHB, No. 21 at pp. 1, 2)
DOE recognizes that there may be impacts on general contractors operating in two different regions. For instance, DOE believes general contractors working on projects near regional standard borders may experience greater risk of mistakenly installing non-compliant systems—or hiring contractors who do so—and c onsequently incur greater cost under regional standards than they would under a single nationa l standard. Although DOE expects this impact to be short run in nature as contractors adjust to the new standards, DOE seeks comment on the likelihood of this and other impacts due to operating in multiple regions.

17.5 ANALYSIS OF REGIONAL STANDARD IMPACTS
The focus of this section is the impact of re gional standards on distri butors, particularly those operating near boundary regions. DOE attemp ts to quantify the financial implications of imposing different efficiency standards in multiple geographic regions. As previously noted, until DOE has further developed the enforcement plan for regional standards, it is not possible to provide detailed analysis of enforcement impacts. Two primary analyses are presented here:

• Analysis of inventory cost impacts under regional standards and the consequent impacts on profitability for CACHP and Furnaces Distributors

• Preliminary Markups Analysis on Distributors and Contractors

The inventory and profitability cost impact analysis provides a framework for understanding the magnitude of inventory change s that may result from regional standards and the impact of those cost changes on distributor profitability. As discussed in 17.3.3, DOE believes the key driver of distributor profitability is inventory. Therefore, this quantitative analysis only addresses changes in inventory costs.

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### The second analysis investigates the impact of regional standards on product markups. The analysis considers the impact of regional standards on product markups far from the border region and near the border region. For states wher e there will likely be a change in distributors’ product mix, the analysis anticipates what the new mix will be and analyzes markups in parts of the country that currently have that anticipated product mix.

17.5.1 Profitability Analysis of Regional Standard Impacts
The following analysis provides guidance on the potential impacts of regional standards on profitability for distributors serving more than one standard region. The analysis has two components. First, the change in inventory re sulting from regional standards is calculated for a distributor serving two regions. Second, the impact of changes in inventory holdings on distributor profitability is calculated. The analysis is based on an example firm’s financial data, which is modeled after actual distributor data from HARDI.
In general, DOE believes distributors operating in a single standard region will not see any inventory impacts that are different from the impacts resulting from a change in the national standard. However, distributors operating in multiple regions or that are near a border may have to adjust to business impacts that are unique to the introduction of multiple standard regions. This analysis finds that the inventory impacts resulting from regional standards are likely to be mild. A prototypical distributor that sells to two regions is modeled to have an increase in inventory of less than 2 percent. The resulting impact on distributor profitability is also mild at the expected levels of inventory change.

17.5.1.1 Data Sources
This analysis of the profitability impacts of distributors relies on three sources of information: Heating, Air conditioning a nd Refrigeration Distri butors International 2009 Profit Report (2008 Data), 2002 Economic Census, a nd 2007 County Business Patterns. The following information can be obtained from these sources:

• Number of firms; total and population-weig hted average sales; total and average employment; and firm size distribution by revenue (2002 Economic Census and 2007 County Business Patterns).

These values are reported for the Nation and by State. It is possible to calculate these values for each of the regions affected by th e standard (Hot-Humid, Hot-dry, and Rest of Country) and for each of the 17 stat es that borders these regions.

• Number of small businesses as defined by the Small Business Administration (SBA). The SBA maximum threshold to qualify as a “small business” for NAICS 42373 is one hundred employees. In 2002, out of 2,773 fi rms with 5,942 individual establishments nation-wide, only five firms (0.2%) had one hundred or more employees. The nationallevel data shows that the dist ributors are overwhelmingly sma ll businesses. Data is not available at the regional level, but regional an alysis would be unlikely to show a different result.

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### • Typical cost structure and profitability ( HARDI data, 2002 Census). Variation among firm sizes and types (HARDI data).

The annual HARDI reports have detailed cost structure data for typical firms, including pro-forma income statements and balanc e sheets (see sample data in Table 17.5.1and Table 17.1.1). Data related to costs a nd potential markups are available at the national level and for seven geographic regions. The HARDI geographi c regions do not match with the rule-making regions. However, it is possible to assign the typical income statements to firms in each state in the HARDI regions and then develop weighted-average balance sheets for each rule-making region.

Economic Census data is not as financially detailed but has greater geographic specificity. It is used to i ndicate variation of profitability around the regional averages, and whether border state establishments are significantly different than the regional average.
To see how the impact of additional standards is calculated with an estimate of additional inventories, consider the model of a “typical” di stributor in the Southeas tern United States shown in Table 17.5.1.

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### Table 17.5.1 Typical Southeastern Wholesaler A ssets, Liabilities, and Profitability Profit Margin Asset Turnover

Profit before Taxes $457,467 Total Assets $9,842,389

Net Sales $24,077,230 Net Sales $24,077,230

Ratio 1.9% 2.45

Income Statement Profit Before Taxes Assets Breakdown

Cash and Marketable Net Sales $24,077,230 Securities $125,202

Cost of Goods Sold $17,793,073 Accounts Receivable $2,783,329 Gross Margin $6,284,157 Inventory $5,287,361 Operating Expenses $5,874,844 Other $1,435,003 Operating Profit $409,313 Total $9,630,895 Other Income/Expenses $48,154

Profit Before Taxes $457,467

Financial Leverage Return on Net Worth

Total Assets

Total Net Worth $9,630,895 $5,065,851

Ratio 1.90 9.0%
Original % of Asset Value Original Liabilities Modified Liabilities $2,224,736.75 $587,485

$760,841 $3,573,062 $991,982 $4,565,044 $5,065,851 Accounts Payable

Notes Payable

Other Current Liabilities

Total Current Liabilities Long-Term Liabilities

Total Liabilities

Net Worth 23.1%
6.1%

7.9%
37.1%
10.3%
47.4%
52.6% $2,224,737 $587,485

$760,841 $3,573,062

$991,982 $4,565,044 $5,065,851
SOURCE: HARDI Profit Report 2009



### The values in the shaded cells in Table 17.5.1 can be changed in percentage terms to estimate the sensitivity of profitability, as defined by return on net worth. Data are not currently available to perform comparable calculations on the costs of record-keeping and reporting activities (changes in operating expenses).

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### 17.5.1.2 Sample Inventory Calculation for Southeastern Border CACHP Wholesaler
A simple illustrative example follows in which a Southeastern border wholesaler financially looks like the typical firm in Table 17.5.1. The wholesaler makes half of its sales in its home region (Hot-Humid Region) and half in a different region (Rest of Country). The example border wholesaler is assumed to have the following characteristics:

• Sales to dealers and contractors average 200 units a week, 100 in each region.

• Sales of different efficiency products have the same approximate distribution as the national sales of split-system air conditioners.

• Sales at each efficiency level follo w a Poisson statistical distribution.

• The wholesaler orders monthly from the manu facturer and keeps enough inventories on hand to meet quarterly sales forecasts.

Based on Table 17.5.1, known manufacturer costs, and wholesale markups for CAC and CHP equipment, the assumed 200 units per week is close to the sales of a “typical” HARDI wholesaler in the southeastern United States in 2008. Based on HARDI information, an average order cycle of 4 weeks and forecast period of 14 weeks are reasonable. The average lead time from placement of order to receiving units for inventory is about 5.1 weeks. Wholesale markup factors are 1.37 and estimated deliver ed cost of a unit of inventory is $1,200. These values are consistent with observations that complete units constitute 70% of sales, that average stock turnover is 3.6 times per year, and the values of sales and inventories in Table 17.5.1. Sales are distributed as follows by efficiency level based on approximate national sales of split-system air conditioners (numerical results are somewhat affected by the percentages, but the general takeaway does not change with a different efficiency mix):

• SEER 13: 81.0%

• SEER 14: 6.0%

• SEER 15: 5.0%

• SEER 16: 5.0%

• SEER 18 (above 16): 3.0%

Sales at each efficiency level follow a Poisson statistical distribution. This distribution is commonly used in applied statistics to characterize the probability and number of comparatively rare observed events (for example, purchase of ai r conditioning units by a household) that occur in repeated samples (for example, weekly totals of sales). It is used frequently in studies of inventory and other logistics probl ems. A convenient attribute of a Poisson distribution is that the variance of the distribution equals its mean and th erefore its standard devi ation equals the square root of the mean.
The wholesaler orders monthly from the ma nufacturer and keeps enough inventories on hand to meet quarterly sales forecasts. Because sales vary week to-week, the wholesaler’s “standard of service” is that it always carries enou gh inventory to meet a level of quarterly sales of any of its offered products at least two standa rd deviations above the mean, plus 1 unit. This gives the wholesaler a 98% chance of meeting any order.

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### Four cases showing different shifts in demand for CAC and CHP equipment are considered, driven by a SEER 14 minimum efficiency standard.

• Case 1: SEER 14 is imposed in both regions. The result is a “rollup” of demand, which shifts all SEER 13 demand to SEER 14 wit hout affecting weekly demand for SEER 15, 16, or 18. SEER 14 sales change from 5 percen t to 86 percent of sales in both regions after the shift. SEER 15, 16, and 18 sales are unaffected

• Case 2: SEER 14 is imposed only in the Hot-Humid Region, while SEER 13 remains the standard in the Rest of Country region. Th e impact on demand is a “rollup” but only in the Hot-Humid region.

• Case 3: Same as Ca se 1, but the percentages of sale s at levels above SEER 14 are significantly affected (efficiency distributi on shift). The average distribution in both regions after the SEER 14 standard is imposed are:

o SEER 13: 0.0%

o SEER 14: 49.0%

o SEER 15: 23.0%

o SEER 16: 15.0%

o SEER 18: 13.0%

• Case 4: Same as Case 3, but the new after-standard sale s percentage percentages apply only in the Hot-Humid region.

The results of this analysis for these four cases are shown in Table 17.5.2.

Table 17.5.2 Border Wholesaler Re quired Inventory Scenario No. Units in Inventory
Base Case 3380

Case 1 3355
Case 2 3400

Case 3 3400
Case 4 3425 Impact of Regional Standards on Value of Inventories Rollup (Case 2 / Case 1) 1.3 % Increase Shift (Case 4 / Case 3) 0.7 % Increase

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### The base case scenario shows the inventory holdings required if there are no changes in the efficiency standard. The wholesaler must hold 3380 units in inventory in order to meet the “standard of service” conditions of the model.
Case 1 shows the impact of a single national stan dard with a rollup scenario. In this case, SEER 13 units are no longer sold, and it is no l onger necessary to stock them. There is some compensating increase in inventory for SEER 14 units, but the overall inventory service is simpler and the inventory stock drops.
Case 2 corresponds to a regional standard with a rollup scenario. It is still necessary for the border wholesaler to stock slightly more than half as many SEER 13 units as before to serve the Rest of Country, although these units can no longer be sold in the Hot-Humid region. In addition, more SEER 14 inventory must be carried to serve both regions. The net difference of Case 1 from the Base Case is 0.7 percent less inventory in this example due to the savings of SEER 13 inventory; however, Case 2 (regional standard) requires about 1.3 percent more inventory than Case 1 (national standard).
Case 3 corresponds to a single national stan dard with a market shift scenario. The national standard in Case 3 spreads the increases in sales of efficien t equipment over several efficiency levels that previously had low sales, so the overall required inventories go up slightly compared with the Base Case (about 0.6 percent).
Case 4 corresponds to a regional standard with a market shift scenario. This case requires 0.7 percent more inventory than Case 3.

17.5.1.3 CACHP Profitability Calculation
The increases in required physical units of i nventory thus appear to be on the order of 1 to 2 percent higher for a regional standard than with a national standard for distributors serving two regions. Table 17.5.3 and Table 17.5.4 present the modeled impacts of these inventory changes on ‘profit as a percentage of total sales’ and on ‘return on net worth,’ respectively. The tables also present the impacts of changes in inventory changes that are twice as large (4 percent increase) and five times as large (10 percent increase) to demonstrate the sensitivity of profitability to such changes.

The values in Table 17.5.3 and Table 17.5.4 are derived from the model in Table 17.5.1 by assuming increases to inventory and the associated increase in interest expense necessary to finance that additional working capital. Additionally, for illustrative purposes, DOE applied a range of interest rates for the capital requi red to finance the additional inventory.

Table 17.5.3 indicates that the impacts of additi onal inventory on profitability are not observable at one percent and two percent inve ntory change, except at the highest modeled interest rates. Table 17.5.3 also indicates that an inventory in crease of 10 percent financed at 12 percent interest could reduce pretax margins by approximately 20 basis points, a decline of approximately 10 percent.

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### Table 17.5.3 Profitability Impacts of CACHP Inventory Cost Increases Profit before Taxes (% of Sales) % Change in Inventory Interest Rate for Inventory 0% 1% 2% 4% 10%
6% 1.9% 1.9% 1.9% 1.8% 1.8%
1.9% 1.9% 1.9% 1.8% 1.7% 8%
1.9% 1.9% 1.9% 1.8% 1.7% 10%
1.9% 1.9% 1.8% 1.8% 1.7% 12%

Table 17.5.4 shows the impact of inventory changes on distributor Return on Net Worth
, which is calculated as pretax profit divided by net worth, where net wo rth equals assets less liabilities. At the expected one to two percent inventory change, impacts on return on net worth are again small. However, the impacts could be significant for distributors with high borrowing costs and where there are significantly higher inventory requirements.

Table 17.5.4 Return on Net Worth Impacts of CACHP Inventory Cost Increases

Return on Net Worth % Change in Inventory Interest Rate for Inventory 0% 1% 2% 4% 10%
6% 9.0% 9.0% 8.9% 8.8% 8.4%
9.0% 8.9% 8.9% 8.7% 8.2% 8%
9.0% 8.9% 8.8% 8.6% 8.0% 10%
9.0% 8.9% 8.8% 8.5% 7.5% 12%

17.5.1.4 Sample Furnace Inventory Calcul ation for Border Wholesalers
Following the methodology above, it is possibl e to estimate changes in Furnace inventory in the border region resulting from both national and regional standards based on HARDI financial data. As shown in Table 17.5.5, this approach suggests that a regional standard will not significantly increase Furnace inventories.

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### Table 17.5.5 Number of Units of Inventory of Furnaces in th e Border Region Base Case National Standard Case Regional Standard Case Condensing 852 1667 1667 Non-Condensing 2476 1667 1667
Total 3328 3334 3334
Source: HARDI Profit Report 2009 , “Regional Analysis” distributors


### As the standard increases beyond 80% AFUE, ther e is a significant change in the inventory ratio of condensing to non-condensing furnace units. However, the introduction of regional standards does not require inve ntories that are different from a national standard.

17.5.1.5 Furnace Profitability Calculation
DOE conducted an additional sensitivity anal ysis of the impact of a change in distributors’ inventory needs. Based on Table 17.6.16 and Table 17.6.17, DOE estimated the financial expenditure and profit figures for furnace distributors operating in border states. Then, following the process outlined in Section 17.5.1.3 “CACHP Profitabilit y Calculation,” the impact of inventory changes on firm profitability (measured as pretax income/sales and return on net worth) are examined at a range of interest rates.

Table 17.5.6 and Table 17.5.7 provide detailed es timates of the dist ributor profitability impact of inventory cost changes. Generally, this analysis suggests that carrying a slightly larger inventory may slightly decrease firm pre-tax pr ofits and return on net worth in the short run.

Table 17.5.6 Profitability Sensitivity Analysis for Furnaces in Border States Pretax Income (% of Sales) % Change in Inventory Interest Rate for Inventory 0% 1% 2% 4% 10% 6% 1.7% 1.7% 1.7% 1.7% 1.6% 1.7% 1.7% 1.7% 1.7% 1.6% 8% 1.7% 1.7% 1.7% 1.6% 1.5% 10% 1.7% 1.7% 1.7% 1.6% 1.5% 12%

17-27

### Table 17.5.7 Return on Net Worth Analysis for Furna ces in Border States Return on Net Worth % Change in Inventory Interest Rate for Inventory 0% 1% 2% 4% 10% 6% 12.9% 12.8% 12.7% 12.6% 12.1% 12.9% 12.8% 12.7% 12.5% 11.8% 8% 12.9% 12.8% 12.6% 12.4% 11.5% 10% 12.9% 12.7% 12.6% 12.3% 11.3% 12%

17.5.2 Preliminary Analysis of the Impacts of Regional Standards on Furnace and CACHP markups

17.5.2.1 Furnace Markups
During the 2007 Furnace rulemaking, DOE pr oposed two regional standards for furnaces, divided between north and south. The Northern re gion represents those states with average HDD greater or equal to 5,000 and southern region repr esents those states with average HDD less than 5,000. In the preliminary analysis, distributors and contractors in the furnace industry are divided into north, south and border region subgroups. The imp act of regional standards is expected to be stronger on distributors and contractors located close to the border region than on firms located far from the border region. Thus, for the purpos e of addressing the imp act of differentiated regional standards, we focus on the change in markups to firms located (1) far from the border and (2) near the border.

17.5.2.2 Firm Markups Far From the Border Region
In the section, DOE analyzes how markups migh t change for firms located far from border regions. DOE first addresses such firms in the northern region and then looks at those in the southern region. According to a report published by Energy Center of Wisconsin in 1997, the percentage of high efficiency furnaces sold in Wisconsin was approxima tely 70% of all units 1996. a 

### The historical data from GAMA 2005 also supports this statement, indicating that Wisconsin has the highest average saturation ra te of condensing furnaces in the country. b 

### Since high efficiency furnaces currently dominate the Wisconsin market to a degree expected in the rest of the Northern Region following regional standards, markups in Wisconsin are used to predict markups in the rest of the Northern region. Table 17.5.8 below compares the weighted average baseline markup in the Northern region and in Wisconsin.

a For this report, high efficiency furnace has an AFUE of at least 90%.

b In GAMA report, condensing furnace is defined as those having an AFUE of at least 88%.

17-28

### Table 17.5.8 Northern Region Markups Region Distributor Markup Mechanical Contractor Markup General Contractor Markup Northern Region 1.38 1.36 1.21
Wisconsin 1.37 1.33 1.16
Source: HARDI Profit Report 1999, 2002, 2005, 2008, 2009, “Regional Analysis” distributors and 2002 US Economic Census



### The average baseline markup in Wisconsin is lower than the baseline markup in the Northern region for distributors, mechanical contractors and ge neral contractors. DOE assumes that Wisconsin has completed a transition from providing a mix of low and high efficiency furnaces in the past to providing primarily hi gh efficiency furnaces today. As a result, Wisconsin firms have lower markups than firms in other Northern states. Assuming a future regional standard that requires high-efficiency furnaces in the north like those that exist in Wisconsin, DOE expects that all firms in the Northern region will have inventories and markups similar to those currently in Wisconsin.
In Southern States, high efficiency furnaces are not as widely used as in Northern states. The condensing furnace saturation rate in the Sout h already reaches 14% a nd this saturation rate is not expected to change after regional standards take effect. 35 

### Thus, higher standards in the South are not expected to have a significant impac t on firm inventories or markups in that region. Here Oklahoma is used as a reference case; 15% of the furnaces sold in Oklahoma are condensing furnaces, similar to the expected satura tion of the South after regional standards take effect. Table 17.5.9 summarizes the results:

Table 17.5.9 Southern Region Markups Region Distributor Markup Mechanical Contractor Markup General Contractor Markup Southern Region 1.35 1.35 1.24
Oklahoma 1.35 1.35 1.24
Source: HARDI Profit Report 2008, “Regional Analysis” distributors and 2002 US Economic Census


### As shown above, there is currently no difference between markups in Oklahoma and the rest of the Southern region. This implies that regional standards are not likely to imposesignificant impacts on the Southern region because the existing mixture of condensing and noncondensing furnaces already sufficiently refl ects the steady state of long run impact.
We conclude that the regional standards will not greatly impact firms located in far from the border region. In both the Northern and Sout hern regions, this analysis indicates that standards will not require higher inventories and therefore are not likely to bring about changes in markups.

17-29

### 17.5.2.3 Border Region Markups
Under regional standards, distributors located near the border between standards regions may have to sell equipment meeting different st andards in the two regions and need to carry more inventories or manage their inventory differently to meet the separate needs of customers in each region. DOE highlights these impacts by assuming that firms located in the border region of each State have sales, inventor ies, and markup practices similar to those of firms in the rest of that State.

Based on the data below, DOE assumes most of the firms in the northern part of the border region already maintain a mix of more high e fficiency and less low efficiency furnaces, so regional standards are unlikely to impose any a dditional changes on inventory costs to these firms. Saturation rates of condensing furnaces in the Northern border region from GAMA Report 2005 (Table 17.5.10) show that the sale of condensin g furnaces in these States increased noticeably from 1997 to 2003. Therefore, the current markups in this region could be considered as the upper bound of the future markups because of the possible simplifi cation of inventories resulting from regional standards. Only firms in the southern part of the border region are likely to be significantly affected by the standards. These firms currently sell mostly low efficiency furnaces and new regional standards could force th em to carry a mix of more high efficiency (to serve their cross-border market) and fewer low efficiency furnaces, as shown in Table 17.5.11. As a result, they may incur higher inventory costs from storing more high efficiency furnaces.

Table 17.5.10 Saturation Rate of Condensing Furn aces in the Northe rn Border Region State 1997 1998 1999 2000 2001 2002 2003

PA 45.26% 46.79% 43.20% 45.54% 49.12% 50.45% 55.28%

IN 25.69% 28.60% 27.51% 29.61% 35.83% 35.29% 44.87%

IL 27.40% 26.91% 26.96% 23.71% 32.23% 32.50% 36.15%

UT 30.41% 27.57% 26.68% 25.99% 29.93% 27.43% 28.24%

KS 24.12% 23.64% 21.87% 23.86% 32.90% 26.11% 29.59%

NJ 23.15% 25.11% 26.91% 23.52% 28.42% 31.96% 40.68%

ID 22.14% 22.53% 23.90% 25.58% 30.18% 30.85% 35.58%

OR 21.95% 22.18% 21.11% 20.88% 26.96% 27.04% 28.45%

MO 27.63% 29.28% 29.11% 28.65% 4.11% 2.85% 2.46%

CO 9.74% 9.07% 9.96% 9.70% 14.43% 15.96% 21.77% Source: GAMA Report 2005

17-30

### Table 17.5.11 Saturation Rate of Condensing Furnaces in the South ern Border Region State 1997 1998 1999 2000 2001 2002 2003

KY 34.00% 32.73% 32.09% 34.17% 39.86% 39.05% 46.72%

AZ 8.73% 9.55% 8.33% 9.14% 10.71% 15.27% 15.67%

CA 9.27% 6.34% 6.08% 6.33% 11.14% 11.19% 12.04%

OK 4.55% 5.49% 6.91% 6.55% 10.09% 9.21% 10.39%

NV 7.36% 5.45% 6.09% 5.12% 6.57% 10.45% 12.32%

AR 5.21% 2.97% 2.77% 3.01% 4.86% 5.36% 6.27%

NM 4.82% 2.86% 3.13% 1.77% 2.61% 3.18% 5.14% Source: GAMA Report 2005



### Table 17.5.12 Border Region Markups Region Distributor Markup Mechanical Contractor Markup General Contractor Markup
Northern part of the border region 1.38 1.36 1.21

Southern part of the border region 1.35 1.35 1.24

Average border region 1.36 1.36 1.27
Source: HARDI Profit Report 1999, 2002, 2005, 2008, 2009, “Regional Analysis” distributors and 2002 US Economic Census


### The average border region markups shown in Table 17.5.12 are the weighted average markups using the fractions of distributors a nd contractors located in the metropolitan areas within the designed border region in each border state. The numbers shown here reflect existing markups instead of predicted markups; however, the differences with northern border region markups and southern border regional markups provide a sense of what the potential impact will be in these two sub-border regions respectively. Based on the analysis above, markups in the Northern part of the border region are expected to remain the same as the rest of the current Northern region markups in the short run. As for the Southern part of the border region, markups are expected to increase due to higher inventor y costs from having to serve a greater mix of product. In the long run, markups in both parts of the border are expected to converge to one single border markup. Markups in the Northern pa rt of the border may stay at the current upper bound level or slightly decrease to the level th at meets the long-term southern border region markups due to the possible produc t simplification in the North. Thus, the future border region markups are predicted to be bounded between cu rrent northern border markups and southern border markups.

17-31

### 17.5.2.4 Central Air Conditioners and Heat Pumps
In the CACHP rulemaking, DOE described potential regional standards for three climatic regions: Hot-Humid, Hot-Dry and Rest of the co untry. Theoretically, an analogical method similar to that used for furnaces above could be adopted for CACHP. However, DOE lacks the regional CACHP efficiency data needed to conduct that analysis. DOE calculated regional markups for distributors, mechanical contractors and general c ontractors in the CACHP market, and the results are summarized in Table 17.5.13. DOE requests comment on how these markets will change for regional standards.

Table 17.5.13 Central Air Conditioner and Heat Pump Markups

Region Distributor Markup Mechanical Contractor Markup General Contractor Markup

Hot-Humid 1.33 1.34 1.24 Hot-Dry 1.37 1.37 1.22 Rest of the country 1.37 1.36 1.23
Source: HARDI Profit Report 1999, 2002, 2005, 2008, 2009, “Regional Analysis” distributors and 2002 US Economic Census



### 17.6 ADDITIONAL DISTRIBUTOR DATA
Tables detailing the number of establishments, total and average sales, and total and average employment (2002 Economic Census) follow for each region. Sample distributors data are shown in Table 17.6.16. Please note that the basis for the count of establishments and all other associated data concepts is based on self -reporting for the Economic Census, while there is some reliance on administrative records for Count y Business patterns. Thus these two data sources may report different values for the same data concept in the same year. For example, the Census Bureau notes that: “some large companies report different activities at the same location as separate profit centers. Th e County Business Patterns program treats each profit center as a separate establishment. The 2002 Economic Census may combine the profit centers into one establishment. This results in establishment c ount differences.” Thus, data for the number of establishments, employment per establishment, and payroll in Table 17.6.4 do not necessarily match those in Table 17.6.13 for 2002. Similar comparability issues arise in other tables where Economic Census and County Bu siness Patterns data overlap.

17-32

### Table 17.6.1 Distributor Enterprise Statis tics for Hot-Humid Region (2002) Region Number of Establishments* Total Sales

($1,000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Hot-Humid

Region 1,608 8,727,826 5,428 17,284 10.7

Border States 916 6,528,439 7,127 11,762 12.8

Texas 472 3,503,698 7,423 5,144 10.9

Oklahoma 79 N/A N/A N/A N/A

Arkansas 61 821,723 13,471 610 10.0

Tennessee 152 1,422,277 9,357 4,042 26.6

North Carolina 231 780,741 3,380 1,966 8.5

* Because Alabama, Georgia and Oklahoma are incomplete data sets, they have been excluded from the total count of establishments. SOURCE: 2002 Economic Census



### Table 17.6.2 Distributor Enterprise Statis tics for Hot-Dry Region (2002)

Region Number of Establishments Total Sales

($1,000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Hot-Dry region 556 2,415,481 4,344 5,502 9.9

Border States 556 2,415,481 4,344 5,502 9.9

Arizona 94 475,254 5,056 1,168 12.4

California 391 1,707,447 4,367 3,777 9.7

Nevada 46 172,035 3,740 430 9.3

New Mexico 25 60,745 2,430 127 5.1

SOURCE: 2002 Economic Census

17-33

### Table 17.6.3 Distributor Enterprise Statisti cs for Rest of Country (2002) Region Number of Establishments* Total Sales

($1,000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Rest of Country 2,480 9,669,627 3,899 24,504 9.9

Border States 615 2,807,946 4,566 6,362 10.3

Colorado 75 466,041 6,214 804 10.7

Idaho 30 63,920 2,131 180 6.0

Kansas 47 163,282 3,474 541 11.5

Kentucky 87 364,016 4,184 1,045 12.0

Missouri 122 709,542 5,816 1,407 11.5

Oregon 50 354,704 7,094 562 11.2

Utah 48 170,744 3,557 492 10.3

Virginia 156 515,697 3,306 1,331 8.5

* Because Iowa, Massachusetts, New Jersey, New Hampshire, North Dakota, and Rhode Island are incomplete data sets, they have been excluded from the total count of establishments. SOURCE: 2002 Economic Census

17-34

### Table 17.6.4 Establishments, Employment, and Payroll Trends in Hot-Humid Region Region Number of Establishments* Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Hot-Humid Region 2,057 2,017 11 10 461 502

Border States 1,007 1,032 13 10 570 552

Texas 532 498 12 12 550 674

Oklahoma 94 77 7 6 277 266

Arkansas 55 78 N/A 7 N/A 307

Tennessee 145 166 27 11 1,177 575

North Carolina 236 213 9 8 361 443

* Because Arkansas is an incomplete data set, it has been excluded from the total count of establishments



### Table 17.6.5 Establishments, Employment, and P ayroll Trends in Hot-Dry Region Region Number of Establishments* Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Hot-Dry region 544 545 10.1 11.9 508 636

Border States 544 545 10.1 11.9 508 636

Arizona 88 93 13.2 12.8 603 701

California 415 387 9.5 10.9 493 608

Nevada 41 43 10.1 21.8 463 835

New Mexico 24 22 N/A 6.7 N/A 452

* Because New Mexico is an incomplete data set, it has been excluded from the total count of establishments

17-35

### Table 17.6.6 Establishments, Employment, and P ayroll Trends in Rest of Country

Region Number of Establishments* Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Rest of Country 2857 2851 10.1 10.2 499 574

Border States 657 606 10.1 10.8 470 577

Colorado 83 70 10.9 10.7 537 614

Idaho 31 24 6.6 8.8 237 164

Kansas 56 56 10.8 12.0 508 434

Kentucky 110 86 11.5 12.8 470 659

Missouri 121 129 11.1 10.2 603 616

Oregon 56 47 11.3 14.3 526 715

Utah 42 48 9.5 11.9 439 573

Virginia 158 146 8.1 8.7 352 432

*Because Iowa, Massachusetts, New Jersey, New Hampshire, North Dakota, and Rhode Island are incomplete data sets, they have been excluded from the total count of establishments.



### Cost structure and profitability for distributors vary among the regions as shown in Table 17.6.7 through Table 17.6.12 are derived from 2008 HARDI data. Variation also occurs within the regions among subareas, e.g. border stat es (2002 Census), as illustrated in Table 17.6.13 through Table 17.6.15.

17-36

### Table 17.6.7 Income Statement Items, Typical CACHP Distributors, Hot–Humid Region Income Statement

Net Sales $21,818,352

Cost of Goods Sold $16,094,671

Gross Margin $5,723,681

Operating Expenses $5,343,678

Operating Profit $380,003

Other Income/Expenses $109,092

Profit Before Taxes $378,185

Profit as a % of Sales 1.7%

SOURCE : HARDI Data



### Table 17.6.8 Balance Sheet, Typical CACHP Distributors, Hot-Humid Region Assets Liabilities

Cash $130,254 Accounts Payable $1,670,615

Accounts Receivable $2,423,599 Notes Payable $1,036,908

Inventory $4,854,516 Othe r Current Li abilities $633,707

Other $162,451 Total Current Liabilities $3,341,230

Total $8,781,157 Long- Term Liab ilities $717,860

Total Liabilities $4,059,090

Net Worth $4,722,067

Profit as a % of Net Worth 8.0%

SOURCE : HARDI Data

17-37

### Table 17.6.9 Income Statement Items, Typica l CACHP Distributors, Hot–Dry Region Income Statement

Net Sales $16,811,857

Cost of Goods Sold $12,085,323

Gross Margin $4,726,533

Operating Expenses $4,309,599

Operating Profit $466,529

Other Income/Expenses $109,757

Profit Before Taxes $416,093

Profit as a % of Sales 2.5%

SOURCE : HARDI Data



### Table 17.6.10 Balance Sheet, Typical CACHP Di stributors, Hot-Dry Region Assets Liabilities

Cash $219,485 Accounts Payable $835,161

Accounts Receivable $1,666,602 Notes Payable $1,225,771

Inventory $3,731,253 Othe r Current Li abilities $308,768

Other $182,285 Total Current Liabilities $2,369,699

Total $7,440,186 Long- Term Liab ilities $370,149

Total Liabilities $2,739,849

Net Worth $4,700,338

Profit as a % of Net Worth 8.9%

SOURCE : HARDI Data

17-38

### Table 17.6.11 Income Statement Items, Typical CACHP Distributors, Rest of Country Income Statement

Net Sales $28,362,901

Cost of Goods Sold $20,506,377

Gross Margin $7,856,524

Operating Expenses $7,005,637

Operating Profit $703,400

Other Income/Expenses $198,540

Profit Before Taxes $650,726

Profit as a % of Sales 2.29%

SOURCE : HARDI Data



### Table 17.6.12 Balance Sheet, Typical CACHP Di stributors, Rest of Country Assets Liabilities

Cash $208,790 Accounts Payable $1,391,081

Accounts Receivable $2,913,118 Notes Payable $1,153,316

Inventory $5,488,196 Othe r Current Li abilities $725,794

Other $208,790 Total Current Liabilities $3,121,908

Total $9,942,383 Long-Te rm Liabilitie s $60,648,537

Total Liabilities $3,728,394

Net Worth $6,213,989

Profit as a % of Net Worth 10.472%

SOURCE: HARDI Data

17-39

### Table 17.6.13 Revenue and Cost Items, Typical CACHP Distributors, Hot-Humid Region and Border States Region Average Sales per Establishment

($1,000) Average Payroll Costs

($1,000) Average Operating Costs

($1,000) Average Inventory

($1,000)

Hot-Humid Region 5,428 453 822 545

Border States 7,127 553 1,035 664

Texas 7,423 496 982 584

Oklahoma N/A N/A N/A N/A

Arkansas 13,471 396 663 300

Tennessee 9,357 1,112 2,077 1,528

North Carolina 3,380 342 557 352

*Because Alabama, Georgia and Oklahoma are incomplete data sets, they have been excluded from the total count of establishments. SOURCE: Economic Census Data



### Table 17.6.14 Revenue and Cost Items, Typical CACHP Distributors, Hot-Dry Region and Border States Region Average Sales per Establishment

($1,000) Average Payroll Costs

($1,000) Average Operating Costs

($1,000) Average Inventory

($1,000)

Hot-Dry region 4,344 483 810 520

Border States 4,344 483 810 520

Arizona 5,056 548 875 774

California 4,367 490 837 478

Nevada 3,740 409 687 467

New Mexico 2,430 252 365 307

SOURCE: Economic Census Data

17-40

### Table 17.6.15 Revenue and Cost Items, Typical CACHP Distributors, Rest of Country Region and Border States Region Average Sales per Establishment

($1,000) Average Payroll Costs

($1,000) Average Operating Costs

($1,000) Average Inventory

($1,000)

Rest of Country 3,899 450 755 437

Border States 4,566 456 781 460

Colorado 6,214 514 1,003 477

Idaho 2,131 225 428 259

Kansas 3,474 537 801 344

Kentucky 4,184 435 721 365

Missouri 5,816 614 1,018 640

Oregon 7,094 478 854 664

Utah 3,557 448 675 416

Virginia 3,306 330 591 437

* Because District of Columbia, Iowa, Massachusetts, Minnesota, New Jersey, New Hampshire, North Dakota, and Rhode Island are incomplete data sets, they have been excluded from the total count of establishments. SOURCE: Economic Census Data

17-41

### Table 17.6.16 Distributor Financial Data by HARDI Region for 2009
South South North Eastern Mid-Atlantic Eastern Great Lakes Central Western Western

Number of Firms Reporting 8 16 10 19 27 8 6

Typical Sales Volume $19,851,509 $42,068,508 $24,077,238 $20,107,850 $28,362,901 $17,946,312 $16,762,766

Sales Change (2007-2008) -0.60% -0.10% -2.60% 1.20% 0.50% 0.20% -3.70%

Strategic Profit Model Ratios

Profit Margin 1.00% 1.60% 1.90% 2.20% 3.10% 1.10% 3.10%

Asset Turnover 2.9 3 2.5 2.5 2.4 2.6 2.2

Return on Assets 2.90% 4.80% 4.70% 5.50% 7.40% 2.90% 6.80%

Financial Leverage 2.3 2.2 1.9 2.1 1.6 1.9 1.5

Return on Net Worth 6.70% 10.60% 8.00% 11.50% 11.80% 5.50% 10.20%

Income Statement

Net Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of Goods Sold 70.3 73.9 73.9 72.2 72.3 74.3 70.7

Gross Margin 29.7 26.1 26.1 27.8 27.7 25.7 29.3

Payroll Expenses

Executive Salaries & Bonuses 2.1 1.5 2.1 2.1 2.1 2.2 1.8

Branch Manager Salaries & Bonuses 1.3 1.1 1.2 1.3 1.3 1.8 1.4

Sales Executive Salaries & Commissions 0.8 0.5 0 0.3 0.3 0.9 0.5

Outside Sales Salaries & Commissions 2.7 2.1 2.3 2.3 2.3 1.8 1.7

Inside/Counter Sales Wages 2.1 2.5 2.9 2.8 2.6 2.2 2.9

Purchasing Salaries/Wages 0.5 0.4 0.5 0.4 0.5 0.5 0.6

Credit Salaries/Wages 0.3 0.2 0.1 0.1 0.2 0.2 0.2

IT Salaries/Wages 0 0.2 0 0.1 0.2 0.1 0.2

Warehouse Salaries/Wages 2.3 1.4 2.1 1.6 1.3 1.5 1.7

Accounting Salaries/Wages 0.6 0.4 0.6 0.4 0.6 0.4 0.7

Delivery Salaries/Wages 1.1 1.2 0.7 0.7 0.8 0.8 1

All Other Salaries/Wages & Bonuses 0.8 0.9 0.6 0.8 0.6 0.7 0.5

17-42Total Salaries, Wages, Bonuses 14.6 12.6 13.1 12.9 12.8 13.1 13.2

Payroll Taxes (FICA, unemp., workers' comp.) 1.5 1 1.2 1.1 1.1 1 1.1

Group Insurance (medical, hospitalization, etc.) 1.2 1.5 1.1 1.2 1.1 1 1.2

Benefit Plans (profit sharing, pension, etc.) 1 0.4 0.3 0.3 0.7 0.3 0.5

Total Payroll Expenses 18.3 15.3 15.7 15.5 15.7 15.4 16

Occupancy Expenses

Utilities (heat, light, power, water) 0.5 0.4 0.4 0.5 0.4 0.4 0.4

Telephone 0.3 0.3 0.4 0.4 0.3 0.3 0.5

Building Repairs & Maintenance 0.3 0.2 0.2 0.4 0.2 0.2 0.2

Rent or Ownership I Real Estate 2.6 2.6 2.3 2.6 2.6 2.4 3.1

Total Occupancy Expenses 3.7 3.5 3.3 3.9 3.5 3.3 4.2

Other Operating Expenses

Sales Expenses 1.1 0.4 0.5 1 1 0.5 1

Insurance 0.1 0.2 0.3 0.2 0.2 0.2 0.2

Depreciation 0.5 0.3 0.2 0.4 0.3 0.3 0.3

Vehicle Expenses 1.9 1.3 1.2 1.3 1.2 1.4 1.3

Personal Property Taxes/Licenses 0.1 0.1 0.1 0.1 0.1 0.4 0.2

Collection Expenses 0.2 0.2 0.2 0.3 0.2 0.3 0.6

Bad Debit Losses 0.8 0.5 0.5 0.3 0.4 0.5 0.6

Data Processing 0.1 0.1 0.2 0.3 0.1 0.2 0.3

Employee Training 0.1 0 0.1 0.1 0 0 0

All Other Operating Expenses 1.5 2.4 2.1 1.7 2 1.8 1.2

Total Other Operating Expenses 6.4 5.5 5.4 5.7 5.5 5.6 5.7

Total Operating Expenses 28.4 24.3 24.4 25.1 24.7 24.3 25.9

Operating Profit 1.3 1.8 1.7 2.7 3 1.4 3.4

Other Income 0.7 0.4 0.6 0.85 0.7 0.3 0.6

17-43Interest Expense 0.7 0.6 0.4 0.9 0.6 0.6 0.9

Other Non-operating Expenses 0 0 0 0.41 0 0 0

Profit Before Taxes & Discretionary Bonuses 1.3 1.6 1.9 2.2 3.1 1.1 3.1

Owners' & Officers' Discretionary Bonus 0.3 0 0 0 0 0 0

Profit Before Taxes 1.00% 1.60% 1.90% 2.20% 3.10% 1.10% 3.10%

Source: HARDI Profit Report 2009

17-44

### Table 17.6.17 Geographic Area Series, Hardware, Plumbing, and Heating Equipment Merchant Wholesalers

State Number of establishments Sales ($1,000) Annual payroll ($1,000) Operating expenses ($1,000) Beginning of Year Inventory

($1,000)

Alabama 306 1,223,718 126,231 219,926 163,992

Alaska 31 184,756 18,121 30,881 17,215

Arizona 344 1,555,529 144,201 262,373 207,328

Arkansas 169 1,577,287 68,528 112,045 91,665

California 2,093 9,770,865 1,035,007 1,859,068 1,255,661

Colorado 322 1,593,598 158,231 279,359 163,671

Connecticut 241 1,238,563 159,154 279,517 109,123

Florida 1,280 3,918,873 421,244 760,139 578,251

Hawaii 73 206,004 23,882 44,417 24,540

Idaho 102 219,215 23,060 45,551 29,404

Illinois 938 5,750,240 546,503 982,350 711,919

Indiana 414 3,396,118 208,166 357,442 230,198

Iowa 183 559,770 72,145 126,079 90,495

Kentucky 211 738,568 81,571 141,007 72,962

Louisiana 255 620,835 77,327 133,347 71,160

Maine 78 280,267 33,846 50,711 36,874

Maryland 343 1,440,771 175,311 300,946 157,414

Massachusetts 418 1,626,690 230,519 372,701 205,585

Michigan 624 2,455,784 307,000 554,638 346,760

Minnesota 353 1,730,533 188,264 320,040 206,794

Mississippi 142 290,404 32,238 53,345 33,450

Missouri 373 1,904,740 190,634 342,332 204,189

17-45Montana 60 188,933 22,151 37,160 25,178

Nebraska 135 476,152 55,311 91,961 62,781

Nevada 143 581,330 63,655 112,143 76,965

New Mexico 97 222,570 24,992 40,809 26,685

New York 1,150 3,890,419 477,194 827,149 490,905

North Carolina 653 2,529,035 275,455 519,139 339,490

North Dakota 51 246,502 19,359 33,087 29,214

Ohio 797 3,506,149 411,644 772,598 470,068

Oklahoma 259 1,811,538 114,841 163,518 89,065

Oregon 232 1,024,631 95,172 179,566 103,318

Pennsylvania 830 3,013,246 377,209 662,680 387,216

Rhode Island 65 553,057 39,277 119,343 71,139

South Carolina 275 1,469,195 105,672 218,044 150,214

South Dakota 62 187,376 22,113 37,867 31,395

Tennessee 379 2,315,179 275,360 482,817 285,502

Texas 1,470 6,923,744 627,464 1,151,278 729,352

Utah 172 659,361 75,092 122,588 56,829

Vermont 43 145,259 15,814 31,678 22,770

Virginia 444 1,696,293 173,599 334,708 184,142

Washington 443 1,630,891 181,491 306,265 199,740

West Virginia 90 216,126 23,579 42,842 30,321

Wisconsin 349 2,175,191 199,934 380,668 233,187

Wyoming 23 34,617 3,355 6,475 3,018

Source: 2002 U.S. Economic Census, Geographic Area Series, Hardware, Plumbing & Heating Equipment & Supply Merchant Wholesalers

17-46

### 17.7 ADDITIONAL CONTRACTOR DATA The analysis of general and mechanical c ontractors relies on the 2002 Economic Census and 2007 County Business Patterns as sources of in formation. As discussed previously, general contractors and mechanical contr actors have different roles in the distribution channels for CAC and CHP equipment. Data is reported separately for general contractors and for mechanical contractors so that the economic impact of regional efficiency standards and their enforcement can be better judged for each contractor type. The following information can be obtained from these sources:

• Total and average sales, total and averag e employment (2002 Census of Business and County Business Patterns).

No industry-published equivalent of th e HARDI data appears to exist for dealers/contractors/installers . These values are reported for the 2002 Economic Census and 2007 County Business Patterns for 2007 for the Nation, each region (Hot-Humid, Hot-dry, and Rest of Country), and for each of the 17 states that lie on the border of one region with another.

Data from the 2002 Economic Census incl udes all plumbing, heating, and airconditioning contractors. The total industry accounted for $118,740,885,000 of business in 2002, of which $49,425,445,000 was attributed to the HVAC contractor subsector. 36 

### Data from the entire plumbing, heating, a nd air-conditioning contractors industry was used, as the 2002 Economic Census provided stat e-level data for this industry but not for the HVAC contractor subsector. The 2002 Econo mic Census state-leve l data for all of the construction industry (NAICS 2-digit level) shows, among other things, which states’ construction industry sales are in other st ates as compared with the home state (construction in Kentucky by Oh io construction establishments). This data is used to indicate where cross-border sales are importa nt for the three CAC analysis regions.

• Number of small businesses (SBA definition and size distribution).

The SBA definition of small business de fines $33.5 million in annual sales as the maximum for building contractors (both residential and commercial, which together are the general contractors of interest fo r CAC and CHP rulema king) and $14 million in annual sales as the maximum for plumbing, heating, and A/C contractors. Among general contractors’ residen tial construction establishments counted nationally by the Census Bureau in 2002, only 3,648 establishmen ts out of the total of 171,652 (2.1%) had more than $10 million in sales, one-third of th e small business cutoff value. Residential builders are overwhelmingly small businesses. Among commercial builders, the figures are 4,415 out of 37,208 (11.9%) with sales mo re than $10 million. Clearly, commercial contractors also are predominantly small businesses, although not by as large a margin as residential construction firms. Mechanical contractors have a lowe r small business sales cutoff value, but nationally in 2002, only 1,832 out 87,501 mechanical contractors (2.1%) had sales of at least $10 million. As with general contractors, it is clear from the national-level data that the mechanical contractor sector is overwhelming composed of

17-47

### small businesses. Regional analysis of th is question is not possible, but it is also unnecessary, as DOE expects the same results.

• Cost structure and profitability (2002 Census).

The 2002 Economic Census provide s some detail on the cost structure of construction firms, although in less detail than that provided by the HARDI data for wholesale distributors. Air Conditioning C ontractors of America 2005 publication Financial Analysis for the HVACR Contracting Industry is another source for financial data for contractors that is less detaile d than the 2002 Economic Census. The Economic Census data includes sales (value of business, value of cons truction work, net value of construction work), employment, payroll, costs of materials, costs of subcontractors, total rental costs, capital expenditures excluding land, and total value of assets. This data allows a rough computation of the profitability of construction firms (general and mechanical contractors) at the regional level, which can be compared with the more detailed industry data at the national level (see U.S. Cens us Bureau, 2002: Plumbing, Heating, and Air-Conditioning Contr actors: 2002. Report EC02-231-238220, Table 4, Detailed Statistics for Esta blishments: 2002 and Commercia l and Institutional Building Construction: 2002. Repor t EC02-231-236220, Table 4, De tailed Statistics for Establishments: 2002). Geographic Series da ta on NAICS subsectors do not include costs of selected purchased services and do not include deprecia tion. Profits cannot be computed directly.

Selected basic supporting data is shown inTable 17.6.17. Selected data for General Contractors is shown in Table 17.7.4.

17-48

### Table 17.7.1 Revenue and Cost Items, Typica l CACHP Mechanical Contractors, HotHumid Region Region Average Value of Construction

Work per Establishment

($1,000) Average Payroll Costs

($1,000) Cost of materials, components and Fuels Operating Costs

($1,000) Cost of Work Subcontracted Out

($1,000) Rental Costs ($) End of Year Gross Value of Assets

($1,000)

Hot-Humid Region 1212 355 437 121 20 171

Border States 1253 373 452 122 20 174

Texas 1426 434 511 143 22 182

Oklahoma 783 222 295 67 12 117

Arkansas 765 201 292 63 13 137

Tennessee 1674 468 618 147 27 231

North

Carolina 1085 334 379 114 19 166

SOURCE: Economic Census Data

17-49

### Table 17.7.2 Revenue and Cost Items, Typical CACHP Mechanical Contractors, Hot-Dry Region Region Average Value of Construction

Work per Establishment

($1,000) Average Payroll Costs

($1,000) Cost of materials, components and Fuels Operating Costs

($1,000) Cost of Work Subcontracted Out

($1,000) Rental Costs ($) End of Year Gross Value of Assets

($1,000)

Hot-Dry region 1614 496 540 146 28 190

Border States 1614 496 540 146 28 190

Arizona 1297 387 514 94 23 180

California 1698 529 553 161 30 197

Nevada 2195 653 705 157 34 184

New Mexico 908 247 320 85 14 135

SOURCE: Economic Census Data

17-50

### Table 17.7.3 Revenue and Cost Items, Typical CACH P Mechanical Contractors, Rest of Country Region Average Value of Construction

Work per Establishment

($1,000) Average Payroll Costs

($1,000) Cost of materials, components and Fuels Operating Costs

($1,000) Cost of Work Subcontracted Out

($1,000) Rental Costs ($) End of Year Gross Value of Assets

($1,000)

Rest of Country 1367 421 439 152 22 168

Border States 1231 386 430 122 19 159

Colorado 1168 374 408 117 20 138

Idaho 920 287 356 80 15 116

Kansas 1269 380 447 160 18 163

Kentucky 1113 335 385 100 19 175

Missouri 1398 442 468 152 18 174

Oregon 1397 461 491 129 22 152

Utah 1133 304 397 128 19 143

Virginia 1192 393 422 100 19 157

SOURCE: Economic Census Data

17-51

### Table 17.7.4 Geographic Area Series, Plumbing and HVAC Constructors

State* Number of Establishments Value of Business

Done ($1,000) Cost of Materials ($1,000) Construction Work Subcontracted

Out ($1,000) Total Payroll ($1,000)

Alabama 1,425 1,517,258 547,075 151,240 430,252

Arizona 1,510 1,967,940 776,733 141,885 584,412

Arkansas 1,045 809,435 305,198 65,491 209,991

California 7,272 12,409,267 4,018,408 1,172,183 3,845,532

Colorado 2,015 2,382,111 821,432 235,012 753,883

Connecticut 1,321 1,593,622 505,340 156,607 466,149

Delaware 306 464,881 150,096 42,001 156,056

Florida 5,069 6,314,034 2,270,555 616,097 1,828,108

Georgia 2,534 3,459,031 1,226,368 380,819 944,212

Hawaii 280 363,486 129,870 36,053 96,844

Idaho 594 558,889 211,341 47,466 170,635

Illinois 3,848 6,135,124 1,770,254 605,868 2,054,379

Indiana 1,867 2,993,560 869,816 418,904 991,316

Iowa 1,066 1,216,575 428,842 133,934 371,492

Kansas 966 1,236,292 431,331 155,011 367,519

Kentucky 1,219 1,363,485 469,639 121,960 408,927

Louisiana 1,469 1,448,482 497,169 174,283 419,948

Maine 458 399,172 138,587 36,149 114,586

Maryland 2,024 3,925,032 1,251,986 583,237 1,130,739

Massachusetts 2,520 3,545,394 1,038,151 503,155 1,007,916

Michigan 3,051 4,369,139 1,338,229 492,957 1,319,863

Minnesota 1,635 2,893,239 958,849 280,556 838,879

Mississippi 655 757,148 283,993 70,985 184,163

17-52Missouri 1,816 2,559,173 849,770 276,621 802,027

Montana 432 362,598 135,009 44,987 92,496

Nebraska 683 825,160 321,124 90,582 236,196

Nevada 498 1,098,147 350,851 78,259 325,164

New Hampshire 531 540,005 179,259 52,209 179,570

New Jersey 3,551 4,229,237 1,230,617 466,668 1,321,095

New Mexico 599 546,210 191,757 51,116 148,012

New York 5,750 7,601,402 2,335,220 949,038 2,308,194

North Carolina 2,978 3,258,502 1,127,518 339,388 993,337

North Dakota 272 293,910 105,405 34,971 87,633

Ohio 3,514 4,646,807 1,470,907 502,061 1,442,425

Oklahoma 1,158 913,670 341,921 77,207 256,922

Oregon 1,031 1,459,251 506,559 132,523 475,266

Pennsylvania 3,653 5,971,127 1,766,004 639,074 1,639,278

Rhode Island 397 491,915 171,994 60,217 136,580

South Carolina 1,472 1,401,320 518,386 111,394 461,409

South Dakota 337 337,590 141,297 22,754 83,704

Tennessee 1,370 2,301,759 846,426 201,748 641,092

Texas 5,653 8,131,851 2,889,320 807,501 2,451,016

Utah 892 1,014,532 353,958 113,775 270,911

Vermont 282 210,388 77,251 19,987 62,090

Virginia 2,547 3,068,896 1,074,309 254,085 1,000,173

Washington 1,602 2,378,599 773,211 222,282 772,633

Wisconsin 1,839 2,643,604 941,806 193,399 855,624

Source: 2002 U.S. Economic Census, Geographic Area Series, NAICS: 2382 Plumbing and HVAC Constructors by State *Note: AK, DC, WV, WY are left out in this analysis because of limited data provided from Census

.

17-53

### Table 17.7.5 Enterprise Statistics on Mechanical Contractors in the Hot-Humid Region Region Number of Establishments Total Value of Construction Work Done ($1000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Hot-Humid Region 25,108 30,423,332 1,212 276,994 11.0

Border States 12,204 15,291,654 1,253 139,797 11.5

Texas 5,653 8,061,607 1,426 72,778 12.9

Oklahoma 1,158 906,621 783 8,403 7.3

Arkansas 1,045 799,157 765 7,757 7.4

Tennessee 1,370 2,292,875 1,674 19,547 14.3

North

Carolina 2,978 3,231,394 1,085 31,312 10.5

SOURCE: 2002 Economic Census Data



### Table 17.7.6 Enterprise Statistics on Mechanical Contractors in the Hot-Dry Region Region Number of Establishments Total Value of Construction Work Done ($1000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Hot-Humid Region 25,108 30,423,332 1,212 276,994 11.0

Border States 12,204 15,291,654 1,253 139,797 11.5

Texas 5,653 8,061,607 1,426 72,778 12.9

Oklahoma 1,158 906,621 783 8,403 7.3

Arkansas 1,045 799,157 765 7,757 7.4

Tennessee 1,370 2,292,875 1,674 19,547 14.3

North

Carolina 2,978 3,231,394 1,085 31,312 10.5

SOURCE: 2002 Economic Census Data

17-54

### Table 17.7.7 Enterprise Statistics on Mechanical Contractors in the Rest of Country Region Number of Establishments Total Value of Construction Work Done ($1000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Rest of Country 52,019 71,109,956 1,367 546,642 10.5

Border States 9,065 11,155,228 1,231 97,279 10.7

Colorado 2,015 2,354,183 1,168 20,146 10.0

Idaho 594 546,349 920 5,313 8.9

Kansas 966 1,225,986 1,269 10,036 10.4

Kentucky 1,219 1,357,063 1,113 12,557 10.3

Missouri 1,816 2,538,706 1,398 19,847 10.9

Oregon 1,031 1,440,390 1,397 11,598 11.2

Utah 892 1,010,317 1,133 8,374 9.4

Virginia 2,547 3,036,417 1,192 29,554 11.6

SOURCE: 2002 Economic Census Data

17-55

### Table 17.7.8 Mechanical Contractor Establishments, Employment, and Payroll Trends, Hot-Humid Region Region Number of Establishments Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Hot-Humid Region 26,017 29,671 10 11 333 425

Border States 12,922 13,981 11 11 349 449

Texas 5,866 6,384 12 12 400 510

Oklahoma 1,218 1,332 7 7 208 273

Arkansas 903 996 8 9 231 310

Tennessee 1,523 1,679 13 12 406 473

North Carolina 3,412 3,590 10 11 317 435



### Table 17.7.9 Mechanical Contractor Establishments, Employment, and Payroll Trends, Hot-Dry Region Region Number of Establishments Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Hot-Dry region 10,406 12,495 11.1 12.1 463.5 578.0

Border States 10,406 12,495 11.1 12.1 463.5 578.0

Arizona 1,610 2,062 11.0 12.7 363.2 489.1

California 7,641 9,001 11.1 11.6 490.9 584.4

Nevada 524 720 15.7 19.2 637.2 979.0

New Mexico 631 712 7.7 9.1 243.5 349.2

17-56

### Table 17.7.10 Mechanical Contractor Establishments, Employment, and Payroll Trends, Rest of Country Region Region Number of Establishments Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Rest of Country 53,918 58,640 9.2 9.2 395.6 465.9

Border States 11,470 12,923 9.3 11.9 392.9 486.3

Colorado 2,064 2,339 9.1 8.4 362.1 388.2

Idaho 606 831 7.5 8.0 245.3 286.0

Kansas 1,006 1,049 8.9 10.3 352.7 421.0

Kentucky 1,288 1,278 9.5 9.5 312.0 380.2

Missouri 1,884 2,014 9.7 9.4 428.0 476.3

Oregon 1,134 1,346 8.7 9.5 372.9 453.2

Utah 936 1,209 7.9 8.4 276.9 348.5

Virginia 2,552 2,857 10.6 11.3 375.1 490.3



### Cost structure and profitability vary among s ubareas (i.e., border states) for mechanical contractors. Selected data required to generate net operating profit estimates is not available on subsectors of construction at the regional le vel (specifically, Total Purchased Services, Depreciation), although the da ta is available nationally.

17.8 ADDITIONAL GENERAL CONTRACTORS AND HOMEBUILDERS DATA

Statistical tables follow for Ge neral Contractors in each region. Selected data for General Contractors are shown in Table 17.7.4.

17-57

### Table 17.8.1 Enterprise Statistics on General Contractors in the Hot-Humid Region Region Number of Establishments* Total Value of Construction Work Done

($1,000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

HotHumid Region 58,480 168,947,696 2,889 484,826 8.3

Border States 32,894 96,197,405 2,924 277,605 8.4

Texas 9,625 39,038,019 4,056 95,829 10.0

Oklahoma 1,942 1,454,942 749 12,445 6.4

Arkansas 10,716 36,945,606 3,448 90,624 8.5

Tennessee 2,982 3,173,248 1,064 27,440 9.2

North Carolina 7,629 15,585,590 2,043 51,267 6.7

* Because Mississippi is an incomplete data set, the state has been excluded from the total count of establishments SOURCE: 2002 Economic Census

17-58

### Table 17.8.2 Enterprise Statistics on General Contractor s in the Hot-Dry Region Region Number of Establishments Total Value of Construction Work Done

($1,000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Hot-Dry region 28,405 84,436,053 2,973 255,534 9.0

Border States 28,405 84,436,053 2,973 255,534 9.0

Arizona 3,574 13,737,839 3,844 33,276 9.3

California 21,671 63,504,624 2,930 193,975 9.0

Nevada 1,400 4,671,330 3,337 17,627 12.6

New Mexico 1,760 2,522,260 1,433 10,656 6.1

SOURCE: 2002 Economic Census

17-59

### Table 17.8.3 Enterprise Statistics on General Contractors in the Rest of Country Region Number of Establishments* Total Value of Construction Work Done ($1000) Sales per Establishment

($1,000) Total Employment Average Employment per Establishment

Rest of Country 127,558 221,929,611 1,740 883,611 6.9

Border States 27,031 45,794,848 1,694 197,421 7.3

Colorado 5,223 8,969,090 1,717 37,926 7.3

Idaho 1,638 N/A N/A 8,412 5.1

Kansas 2,185 3,792,200 1,736 13,467 6.2

Kentucky 2,336 4,985,602 2,134 17,810 7.6

Missouri 4,714 4,060,799 861 39,744 8.4

Oregon 4,098 5,980,885 1,459 23,426 5.7

Utah 2,200 2,251,069 1,023 15,178 6.9

Virginia 6,275 15,755,203 2,511 49,870 7.9

* Because Idaho and the District of Columbia are incomplete data sets, they have been excluded from the total count of establishments used in other calculations. SOURCE: 2002 Economic Census

17-60

### Table 17.8.4 General Contractor Establishments , Employment, and Payroll Trends, HotHumid Region Region Number of Establishments Employment per Establishment Payroll per Establishment

2002 2007 2002 2007 2002 2007

Hot-Humid Region 50,365 61,077 7.7 7.2 297 344

Border States 23,783 27,140 7.6 7.4 296 359

Texas 9,686 10,914 9.1 8.9 402 474

Oklahoma 1,829 2,075 6.3 5.8 188 221

Arkansas 1,488 1,740 6.9 6.2 203 229

Tennessee 3,124 3,524 7.4 7.9 275 374

North Carolina 7,656 8,887 6.2 6.0 213 270



### Table 17.8.5 General Contractor Establishments , Employment, and Payroll Trends, HotDry Region

Region Number of Establishments Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Hot-Dry region 28,374 34,143 7.9 8.4 343.7 443.8

Border States 28,374 34,143 7.9 8.4 343.7 443.8

Arizona 3,752 4,729 8.3 9.3 337.7 476.2

California 21,564 25,624 7.7 8.1 343.1 435.1

Nevada 1,350 1,647 12.0 12.8 571.5 757.7

New Mexico 1,708 2,143 6.3 6.4 183.9 234.8

17-61

### Table 17.8.6 General Contractor Establishments, Employment, and Payr oll Trends, Rest of Country

Region Number of Establishments Employment per Establishment Payroll per Establishment

($1,000)

2002 2007 2002 2007 2002 2007

Rest of Country 131,205 145,679 6.0 5.8 249.9 288.9

Border States 29,265 34,360 6.1 5.8 240.3 283.6

Colorado 5,121 5,598 6.4 6.2 290.3 327.5

Idaho 1,759 2,661 2.6 4.8 75.1 164.7

Kansas 2,153 2,288 6.4 5.7 218.1 232.4

Kentucky 2,348 2,421 7.4 7.4 242.6 287.2

Missouri 4,452 4,752 7.1 7.8 283.0 369.0

Oregon 4,186 5,174 4.3 4.8 157.9 206.3

Utah 2,633 3,224 5.4 6.2 183.7 247.2

Virginia 6,613 8,242 7.0 6.4 271.1 308.0



### Cost structure and profitability varies among subareas (e.g. border states) for General Contractors. Selected data required to generate net operating profit estimates are not available on subsectors of construction at the regional level (Total Purchased Servic es, Depreciation), but they are available nationally.

17-62

### Table 17.8.7 Revenue and Cost Items, Typical Ge neral Contractors, Hot-Humid Region Region Average Value of Construction Work per Establishment ($1,000)* Average Payroll Costs ($1000) Cost of materials, components and Fuels Operating Costs ($1,000) Cost of Work Subcontracted Out ($1,000) Rental Costs ($1,000) End of Year Gross Value of Assets ($1,000)

HotHumid Region 2889 306 720 1,327 19 153

Border States 2924 313 742 1,367 19 158

Texas 4056 398 951 1,750 24 167

Oklahoma 749 183 531 882 13 117

Arkansas 3448 321 762 1,512 19 174

Tennessee 1064 335 598 1,222 21 149

North Carolina 2043 216 558 859 14 137

* Because Mississippi is an incomplete data set, the state has been excluded from the total count of establishments used in other calculations. SOURCE: 2002 Economic Census

17-63

### Table 17.8.8 Revenue and Cost Items, Typical General Contractors, Hot-Dry Region Region Average Value of Construction Work per Establishment ($1,000) Average Payroll Costs ($1000) Cost of materials, components and Fuels Operating Costs ($1,000) Cost of Work Subcontracted Out ($1,000) Rental Costs ($1,000) End of Year Gross Value of Assets ($1,000)

Hot-Dry region 2973 357 473 1,429 21 120

Border States 2973 357 473 1,429 21 120

Arizona 3844 337 580 1,931 23 128

California 2930 364 465 1,417 22 122

Nevada 3337 534 493 1,350 16 121

New Mexico 1433 172 329 630 9 81

SOURCE: Economic Census

17-64

### Table 17.8.9 Revenue and Cost Items, Typical Ge neral Contractors, Rest of Country Region Average Value of Construction Work per Establishment ($1,000)* Average Payroll Costs ($1000) Cost of materials, components and Fuels Operating Costs ($1,000) Cost of Work Subcontracted Out ($1,000) Rental Costs ($1,000) End of Year Gross Value of Assets ($1,000)

Rest of Country 1740 255 447 899 15 114

Border States 1694 262 492 947 15 117

Colorado 1717 285 423 700 17 123

Idaho N/A 149 416 666 9 84

Kansas 1736 196 469 790 14 118

Kentucky 2134 245 577 945 14 149

Missouri 861 304 489 1,281 12 139

Oregon 1459 201 350 703 10 64

Utah 1023 232 576 1,057 17 112

Virginia 2511 292 592 1,080 20 121

* Because Idaho and the District of Columbia are incomplete data sets, they have been excluded from the total count of establishments used in other calculations. SOURCE: Economic Census

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### IBID 1

35 

### Sources from GAMA Report 2005

36 

### US Census Bureau, Plumbing, Heating, and Air-Conditioning Contractors: 2002

.

17-67