12-i CHAPTER 12: MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS 12.1 INTRODUCTION
.................................................... 12-1 12.2 METHODOLOGY
................................................... 12-1 12.2.1 Phase 1: Industry Profile
......................................... 12-1 12.2.2 Phase 2: Industry Cash Flow Analysis and Interview Guide
............. 12-1

12.2.2.1 Industry Cash Flow Analysis
.......................... 12-2 12.2.2.2 Interview Guide
.................................... 12-2 12.2.3 Phase 3: Sub-Group Analysis
..................................... 12-3

12.2.3.1 Manufacturer Interviews
............................. 12-3 12.2.3.2 Revised Industry Cash Flow Analysis
................... 12-4 12.2.3.3 Manufacturer Sub-Group Analysis
..................... 12-4 12.2.3.4 Competitive Impact Assessment
....................... 12-4 12.2.3.5 Manufacturing Capacity Impact
....................... 12-4 12.2.3.6 Employment Impacts
................................ 12-5 12.2.3.7 Cumulative Regulatory Burden
........................ 12-5 12.3 RESULTS
.......................................................... 12-5 12.3.1 Phase 1 – Industry Profile
........................................ 12-5 12.3.2 Phase 2 – Industry Cash Flow
..................................... 12-6 12.3.3 Phase 3 – Sub-Group Analysis
.................................... 12-612-1 CHAPTER 12: MANUFACTURER IMPACT ANALYSIS
12.1 INTRODUCTION The Department intends the analysis of impacts on manufacturers to provide an assessment of the impacts that may occur on distribution transformer manufacturers. In addition to financial impacts, a wide range of quantitative and qualitative effects may occur following adoption of a standard that may require changes to the manufacturing practices for these products. The Department will identify these effects through interviews with manufacturers and other stakeholders.
12.2 METHODOLOGY The Department will conduct the manufacturer impact analysis (MIA) in three phases. Phase 1 consists of two activities: preparation of an industry characterization and identification of issues. Phase 2 focuses on the larger industry and, in this phase, DOE will use the Government Regulatory Impact Model (GRIM) to perform an industry cash flow analysis. In addition, Phase 2 involves developing an interview guideline and questionnaire for use in Phase 3. At the beginning of Phase 3, the Department will interview manufacturers and adjust the industry cash flow analysis as appropriate. Phase 3 also entails performing additional cash flow analyses for the different sub-groups that may be affected by the rulemaking. Furthermore, in Phase 3, DOE will study the additional impacts on competition, manufacturing capacity, employment and the cumulative burden of other regulations impacting manufacturers. 12.2.1 Phase 1: Industry Profile Phase 1 of the MIA consists of collecting pertinent financial and market information. This activity involves both quantitative and qualitative efforts. Data gathered include market share, corporate operating ratios, wages, employment, and production cost ratios. Sources of information include reports published by industry groups, trade journals, and the U.S. Bureau of Census, and copies of Securities and Exchange Commission (SEC) 10-K filings. The Department relies on the information gathered for the market assessment, engineering analysis, and life-cycle cost analysis. This includes manufacturer market shares, markups along the distribution chain, and typical ratios for labor, materials, and overhead. 12.2.2 Phase 2: Industry Cash Flow Analysis and Interview Guide In Phase 2, the Department performs a preliminary industry cash flow analysis and prepares a manufacturer interview guide.12-2

12.2.2.1 Industry Cash Flow Analysis The industry cash flow analysis relies primarily on the GRIM. The Department uses the GRIM to analyze the financial impacts of more stringent energy efficiency standards on the industry that produces the products covered by the standard. A change in standards affects the analysis in three distinct ways. Standards at higher levels will require additional investment, will raise production costs, and will affect revenue through higher prices and, possibly, lower quantities sold. The Department quantifies these changes through the use of the GRIM. The GRIM analysis uses a number of factors to determine annual cash flows from a new standard: annual expected revenues; manufacturer costs (including cost of goods, capital depreciation, R&D, selling, and general administrative costs); taxes; and conversion expenditures. The Department compares the results against baseline projections that involve no new standards. The financial impact of new standards is then the difference between the two sets of discounted annual cash flows. Other performance metrics, such as return on invested capital, are also available from the GRIM. This analysis will use manufacturing costs, shipments forecasts, and price forecasts developed for the other analyses. The Department will develop financial information, also required as an input to the GRIM, based on publicly available data and confidentially submitted manufacturer information. The Department will prepare and distribute to the manufacturers estimates of the financial parameters used in the industry cash flow analysis. It will prepare a “strawman” GRIM for the manufacturers to review and, if desired, input their own values and develop their own cash flow analysis in preparation for the interviews conducted in Phase 3 of the MIA. 12.2.2.2 Interview Guide The Department will conduct interviews with manufacturer representatives to gather key information on the effects that higher efficiency standard levels might have on their company's revenues and finances, direct employment, and capital assets, and on industry competitiveness. These interviews will take place during Phase 3 of the MIA. Prior to the interviews, the Department will distribute an interview guide that provides a starting point to identify relevant issues and that will help identify, both qualitatively and quantitatively, the impacts of possible candidate standard levels on individual manufacturers or sub-groups of manufacturers. The Department plans to structure the interview guide as follows: (1)Current Organizational Characteristics, (2)Industry Infrastructure, (3)Manufacturer Cash Flow Analysis,12-3

(4)Competitive Impacts Assessment, (5) Employment Impacts Assessment, and (6)Manufacturing Capacity Impacts Assessment.
12.2.3 Phase 3: Sub-Group Analysis The Phase 3 activities will take place after the publication of the Advanced Notice of Proposed Rulemaking (ANOPR) and will include:

C Manufacturer Interviews,
C Revising the Industry Cash Flow Analysis,
C Manufacturer Sub-Group Cash Flow Analysis,
C Competitive Impact Assessment,
C Manufacturing Capacity Impact,
C Employment Impact, and
C Cumulative Regulatory Burden. 12.2.3.1 Manufacturer Interviews The information gathered in Phase 1 and the cash flow analysis performed in Phase 2 will be supplemented with information gathered during interviews with manufacturers during Phase 3. The interview process has a key role in the manufacturer impact analyses, since it provides an opportunity for interested parties to privately express their views on important issues, allowing DOE to consider confidential or sensitive information in the rulemaking decision. The Department and/or contractors will conduct detailed interviews with as many manufacturers as is necessary to gain insight into the range of potential impacts of standards. During the interviews, the Department will solicit information on the possible impacts of potential efficiency levels on sales, direct employment, capital assets, and industry competitiveness. Both qualitative and quantitative information are valuable. The Department will schedule interviews well in advance to provide every opportunity for key individuals to be available. Although a written response to the questionnaire is acceptable, DOE prefers an interactive interview process because it helps clarify responses and provides the opportunity to identify additional issues. The Department will request interview participants to identify all confidential information provided in writing or orally. The Department will consider all information transmitted, as appropriate, in its decision-making process. However, it will not make confidential information available in the public record. Participants also will be asked to identify all information they wish to be included in the public record but that they do not want to have12-4

associated with their interview. The Department will incorporate this information into the public record but will report it without attribution. 12.2.3.2 Revised Industry Cash Flow Analysis In Phase 2 of the MIA DOE will provide manufacturers will be provided with a “strawman” GRIM model for their review and evaluation. During the interviews, the Department will seek comment and suggestions regarding the values selected for the parameters. Upon completion of the interviews, the Department will revise its industry cash flow model based on the feedback provided through the interviews. 12.2.3.3 Manufacturer Sub-Group Analysis Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among sub-groups of manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively impacted. Ideally, the Department would consider the impact on every firm individually; however, it typically uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview process, the Department will discuss the potential sub-groups and sub-group members that it has identified for the analysis. The Department will look to the manufacturers and other stakeholders to suggest what sub-groups or characteristics are the most appropriate for the analysis. 12.2.3.4 Competitive Impact Assessment Section 325(o)(2)(B)(i)(V) directs the Department to consider any lessening of competition that is likely to result from imposition of standards. It further directs the Attorney General to determine the impacts, if any, of any lessening of competition. The Department will make a determined effort to gather and report firm-specific financial information and impacts. The competitive analysis will focus on assessing the impacts to smaller, yet significant, manufacturers. The Department will base the assessment on manufacturing cost data and on information collected from interviews with manufacturers. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some manufacturers, increased proportion of fixed costs potentially increasing business risks, and potential barriers to market entry (e.g., proprietary technologies). 12.2.3.5 Manufacturing Capacity Impact One of the significant outcomes of new standards could be the consequential obsolescence of existing manufacturing assets, including tooling and investment. The manufacturer interview guide will address a series of issues to help identify impacts on manufacturing capacity, specifically:12-5

• capacity utilization and plant location decisions in the U.S. and North America with and without a standard level; • the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; • the nature and value of stranded assets, if any; and

• estimates for any one-time restructuring and other charges, where applicable.
12.2.3.6 Employment Impacts The impact of new energy-efficiency standards on employment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, the interview guide will explore current employment trends in the distribution transformer industry. In addition, the interview will solicit manufacturer views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide will focus on:

C current employment levels associated with distribution transformer manufacturers at each of their distribution transformer production facilities;
C expected future employment levels with and without a standard; and
C differences in workforce skills and issues related to the retraining of employees. 12.2.3.7 Cumulative Regulatory Burden The Department recognizes and seeks to mitigate the overlapping effects on manufacturers of amended DOE standards and other regulatory actions affecting the same equipment or companies.
12.3 RESULTS 12.3.1 Phase 1 – Industry Profile The Department completed some aspects of Phase 1 as part of the ANOPR Engineering Analysis, including:

C conducting interviews with manufacturers, component suppliers, and other industry participants;
C collecting pertinent financial information from SEC 10-K reports;12-6

C estimating production costs and markups; and
C gathering market share information from industry publications. Phase 1 will continue after the publication of the ANOPR. First, the Department will collect or estimate the remaining financial information required for the Phase 2 GRIM analysis, including tax rates, working capital, capital expenditures, and cost of capital. The Department also will develop product mix and markup scenarios to represent possible industry futures. Industry participants also have identified several issues associated with new standards that DOE will pursue further during Phase 1. These issues include:

C commoditization of high-efficiency products, and
C international competition and export sales. The Department will present remaining Phase 1 results as part of the GRIM analysis report in the Notice of Proposed Rulemaking (NOPR) and the accompanying Technical Support Document (TSD). Preliminary results may be available prior to publication of the NOPR. 12.3.2 Phase 2 – Industry Cash Flow The preliminary industry cash flow using the GRIM is currently under development, so Phase 2 results are not yet available. The Department will present the results in the NOPR and the accompanying TSD. Preliminary results may be available prior to publication of the NOPR. The results will include:

C projections of industry cash flows,
C projections of industry net present value,
C “strawman” GRIM, and
C manufacturer interview guide 12.3.3 Phase 3 – Sub-Group Analysis The Department has not yet begun to gather information that would allow it to convert the industry GRIM into a sub-group GRIM. Phase 3 results will be presented in the NOPR and the accompanying TSD. Preliminary results may be available prior to publication of the NOPR. The results will include, but are not limited to:

C projections of sub-group cash flows,
C projection of sub-group net present values,
C employment impacts,
C cumulative regulatory burdens, and
C manufacturing capacity impacts.