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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 .................................... 12-6

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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.

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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,

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(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 have

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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:

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• 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;

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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.

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