CHAPTER 13. MANUFACTURER IMPACT ANALYSIS 

TABLE OF CONTENTS 

CHAPTER 13. MANUFACTURER IMPACT ANALYSIS .....................................................13-i

13.1 INTRODUCTION ......................................................................................................... 13-1

13.2 METHODOLOGY ........................................................................................................ 13-1

13.2.1 Phase I: Industry Profile..................................................................................... 13-2

13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide............................13-2

13.2.2.1 Industry Cash-Flow Analysis...............................................................13-2

13.2.2.2 Interview Guide ................................................................................... 13-2

13.2.3 Phase III: Sub-Group Impact Analysis .............................................................. 13-3

13.2.3.1 Manufacturer Interviews...................................................................... 13-3

13.2.3.2 Bottler Interviews.................................................................................13-3

13.2.3.3 Revised Industry Cash-Flow Analysis................................................. 13-3

13.2.3.4 Manufacturer Sub-Group Analysis...................................................... 13-4

13.2.3.5 Small-Business Manufacturer Sub-Group ........................................... 13-4

13.2.3.6 Manufacturing Capacity Impact ..........................................................13-5

13.2.3.7 Employment Impact............................................................................. 13-5

13.2.3.8 Cumulative Regulatory Burden ........................................................... 13-5

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES.......................................... 13-6

13.3.1 Customer Impacts and Performance Requirements........................................... 13-6

13.3.2 Current Market Conditions ................................................................................ 13-6

13.3.3 ENERGY STAR ................................................................................................ 13-6

13.3.4 Lighting Equipment for Max-Tech.................................................................... 13-7

13.3.5 Split Incentive Problem...................................................................................... 13-7

13.3.6 Third-Party Efficiency Kits................................................................................13-7

13.3.7 Profitability ........................................................................................................13-7

13.4 GRIM INPUTS AND ASSUMPTIONS........................................................................ 13-8

13.4.1 Overview of the GRIM ......................................................................................13-8

13.4.2 Sources of GRIM Inputs .................................................................................... 13-9

13.4.2.1 Corporate Annual Reports ................................................................... 13-9

13.4.2.2 Standard and Poor Credit Ratings........................................................ 13-9

13.4.2.3 Dun and Bradstreet Reports.................................................................13-9

13.4.2.4 Shipments Model ................................................................................. 13-9

13.4.2.5 Engineering Analysis.........................................................................13-10

13.4.2.6 Manufacturer Interviews.................................................................... 13-10

13.4.3 Financial Parameters........................................................................................ 13-10

13.4.4 Corporate Discount Rate.................................................................................. 13-11

13.4.5 Trial Standard Levels....................................................................................... 13-11

13.4.6 Shipments......................................................................................................... 13-12

13.4.7 Manufacturer Production Costs ....................................................................... 13-15

13.4.8 Conversion Costs .............................................................................................13-18

13.4.9 Markup Scenarios ............................................................................................13-20

13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario ......................... 13-21

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13.4.9.2 Preservation-of-Operating-Profit ....................................................... 13-21

13.5 INDUSTRY FINANCIAL IMPACTS ........................................................................ 13-24

13.5.1 Impacts on Industry Net Present Value ........................................................... 13-25

13.5.2 Impacts on Annual Cash Flow......................................................................... 13-26

13.6 OTHER IMPACTS...................................................................................................... 13-29

13.6.1 Employment.....................................................................................................13-29

13.6.2 Production Capacity.........................................................................................13-33

13.6.3 Exports .............................................................................................................13-34

13.6.4 Cumulative Regulatory Burden ....................................................................... 13-34

13.6.4.1 Other DOE regulations ......................................................................13-35

13.6.4.2 International Energy Conservation Standards ................................... 13-35

13.6.4.3 Other Regulations .............................................................................. 13-35

13.7 CONCLUSIONS.......................................................................................................... 13-35

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

LIST OF TABLES 

Table 13.4.1 GRIM Financial Parameters ...............................................................................13-11

Table 13.4.2 Baseline Efficiency Levels and Trial Standard Levels for Class A.................... 13-11

Table 13.4.3 Baseline Efficiency Levels and Trial Standard Levels for Class B.................... 13-12

Table 13.4.4 Industry-Wide Shipments Forecast in 2012 for Class A Equipment.................. 13-12

Table 13.4.5 Industry-Wide Shipments Forecast in 2012 for Class B Equipment .................. 13-12

Table 13.4.6 Distribution of Small-Sized Class A Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-13

Table 13.4.7 Distribution of Medium-Sized Class A Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-13

Table 13.4.8 Distribution of Large-Sized Class A Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-14

Table 13.4.9 Distribution of Small-Sized Class B Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-14

Table 13.4.10 Distribution of Medium-Sized Class B Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-15

Table 13.4.11 Distribution of Large-Sized Class B Equipment in 2012 at each Trial Standard 

Level ................................................................................................................ 13-15

Figure 13.4-2 Cost Components of MSP................................................................................. 13-16

Table 13.4.12 Manufacturer Production Cost Breakdown for Small-Sized Class A Equipment 

(2008$)............................................................................................................. 13-17

Table 13.4.13 Manufacturer Production Cost Breakdown for Medium-Sized Class A Equipment 

(2008$)............................................................................................................. 13-17

Table 13.4.14 Manufacturer Production Cost Breakdown for Large-Sized Class A Equipment 

(2008$)............................................................................................................. 13-17

Table 13.4.15 Manufacturer Production Cost Breakdown for Small-Sized Class B Equipment 

(2008$)............................................................................................................. 13-18

Table 13.4.16 Manufacturer Production Cost Breakdown for Medium-Sized Class B Equipment 

(2008$)............................................................................................................. 13-18

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Table 13.4.17 Manufacturer Production Cost Breakdown for Large-Sized Class B Equipment 

(2008$)............................................................................................................. 13-18

Table 13.4.18 Capital Conversion Costs for Class A Equipment by Trial Standard Level (2008$ 

millions) ........................................................................................................... 13-19

Table 13.4.19 Capital Conversion Costs for Class B Equipment by Trial Standard Level (2008$ 

millions) ........................................................................................................... 13-20

Table 13.4.20 Equipment Conversion Costs for Class A Equipment by Trial Standard Level 

(2008$ millions)............................................................................................... 13-20

Table 13.4.21 Equipment Conversion Costs for Class B Equipment by Trial Standard Level 

(2008$ millions)............................................................................................... 13-20

Table 13.4.22 Preservation-of-Operating-Profit Markup Scenario for Small-Sized Class A 

Equipment........................................................................................................ 13-22

Table 13.4.23 Preservation-of-Operating-Profit Markup Scenario for Medium-Sized Class A 

Equipment........................................................................................................ 13-22

Table 13.4.24 Preservation-of-Operating-Profit Markup Scenario for Large-Sized Class A 

Equipment........................................................................................................ 13-23

Table 13.4.25 Preservation-of-Operating-Profit Markup Scenario for Small-Sized Class B 

Equipment........................................................................................................ 13-23

Table 13.4.26 Preservation-of-Operating-Profit Markup Scenario for Medium-Sized Class B 

Equipment........................................................................................................ 13-24

Table 13.4.27 Preservation-of-Operating-Profit Markup Scenario for Large-Sized Class B 

Equipment........................................................................................................ 13-24

Table 13.5.1 Changes in Industry Net Present Value for All Equipment Sizes for Class A 

Preservation-of-Gross-Margin-Percentage Markup Scenario..........................13-25

Table 13.5.2 Changes in Industry Net Present Value for All Equipment Sizes for Class A 

Preservation-of-Operating-Profit Markup Scenario ........................................ 13-25

Table 13.5.3 Changes in Industry Net Present Value for All Equipment Sizes for Class B 

Preservation-of-Gross-Margin-Percentage Markup Scenario..........................13-26

Table 13.5.4 Changes in Industry Net Present Value for All Equipment Sizes for Class B 

Preservation-of-Operating-Profit Markup Scenario ........................................ 13-26

Table 13.6.1 Class A Equipment Estimated Employment Impacts in 2012............................13-31

Table 13.6.2 Class B Equipment Estimated Employment Impacts in 2012 ............................13-31

Figure 13.6-1 Class A Equipment Production Estimated Domestic Employment by Year ....13-32

Figure 13.6-2 Class B Equipment Production Estimated Domestic Employment by Year.....13-32

LIST OF FIGURES 

Figure 13.4-1 Using the GRIM to Calculate Cash Flow ........................................................... 13-8

Figure 13.4-3. 13-16

Figure 13.5-1 Class A Equipment Annual Industry Net Cash Flows (Preservation-of-GrossMargin-Percentage Markup Scenario).............................................................13-27

Figure 13.5-2 Class A Equipment Annual Industry Net Cash Flows (Preservation-of-OperatingProfit Markup Scenario....................................................................................13-27

Figure 13.5-3 Class B Equipment Annual Industry Net Cash Flows (Preservation-of-GrossMargin-Percentage Markup Scenario).............................................................13-28

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Figure 13.5-4 Class B Equipment Annual Industry Net Cash Flows (Preservation-of-OperatingProfit Markup Scenario) ..................................................................................13-28

EERE-2006-STD-0125 COMMENT 46
CHAPTER 13. MANUFACTURER IMPACT ANALYSIS 

13.1 INTRODUCTION 

In determining whether a standard is economically justified, the Secretary of Energy is 

required to consider "the economic impact of the standard on the manufacturers and on the 

consumers of the equipment subject to such a standard.”a The legislation also calls for an 

assessment of the impact of any lessening of competition as determined in writing by the 

Attorney General. The U.S. Department of Energy (DOE) conducted a manufacturer impact 

analysis (MIA) to estimate the financial impact of new energy conservation standards on 

manufacturers of beverage vending machines (BVM) and to assess the impact of such standards 

on employment and manufacturing capacity. The MIA has both quantitative and qualitative 

aspects. 

The quantitative portion of the MIA primarily relies on the Government Regulatory 

Impact Model (GRIM), an industry cash-flow model adapted for this rulemaking. GRIM inputs 

are industry cost structure, shipments, and pricing strategies. The GRIM’s key output is industry 

net present value (INPV). The model estimates the financial impact of new energy conservation 

standards by comparing changes in INPV between a base case and various trial standard levels 

(TSLs). 

The qualitative portion of the MIA addresses factors such as equipment characteristics, 

characteristics of particular firms, and market and equipment trends. The MIA also includes an 

assessment of the impacts of standards on sub-groups of manufacturers. 

13.2 METHODOLOGY 

DOE conducted the MIA in three phases. Phase I, Industry Profile, consisted of the 

preparation of an industry characterization including data on market share, sales volumes and 

trends, pricing, employment, and financial structure. Phase II, Industry Cash-Flow Analysis and 

Interview Guide, focused on the industry as a whole. In this phase, DOE used the GRIM to 

prepare an industry cash-flow analysis. For the quantitative portion of the MIA analysis, DOE 

analyzed the same two equipment classes used in the national impact analysis (NIA) and the lifecycle cost (LCC) analysis. In this phase DOE also used publicly available information developed 

in Phase I to adapt the GRIM’s structure to facilitate analysis of new BVM energy conservation 

standards. In Phase III, Sub-Group Impact Analysis, DOE conducted interviews with several 

manufacturers comprising over 65 percent of the BVM industry. In addition, DOE interviewed 

the major purchasers of BVM to gain additional insight of the BVM manufacturing industry. 

During these interviews, DOE discussed financial topics specific to each company and obtained 

each manufacturer’s view of the industry as a whole. The interviews provided valuable 

information that DOE used to evaluate the impacts of a new standard on manufacturer cash 

flows, manufacturing capacities, and employment levels. The following subsections describe 

more specifically the steps DOE took in developing information for the MIA. 

 

a

 DOE’s standards program for commercial equipment is conducted under Title III, Part C of the Energy Policy and 

Conservation Act (EPCA), 42 U.S.C. 6311-6317. 

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13.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE prepared a profile of the BVM industry that built on the 

market and technology assessment prepared for this rulemaking (chapter 3 of this TSD). Before 

initiating the detailed impact studies, DOE collected information on the past and present 

structure and market characteristics of the BVM industry. This included estimated market shares 

of BVM manufacturers, corporate operating ratios, wages, employment, and production cost 

ratios. The industry profile included a top-down cost analysis of the BVM manufacturing 

industry that DOE used to derive cost and financial inputs for the GRIM (e.g., revenues; 

material; labor; overhead; depreciation; sales, general, and administration expenses (SG&A); and 

research and development (R&D) expenses). DOE used additional sources of information to 

further calibrate its characterization of the industry, including company Securities and Exchange 

Commission (SEC) 10–K reports, Standard & Poor’s (S&P) stock reports, Dun and Bradstreet 

reports, and corporate annual reports. DOE also relied on information from its engineering 

analysis, LCC analysis, NIA, and analysis of markups to characterize the BVM manufacturing 

industry. 

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

In Phase II, DOE performed a preliminary industry cash-flow analysis and prepared 

written guidelines for interviewing manufacturers. 

13.2.2.1 Industry Cash-Flow Analysis 

The industry cash-flow analysis focused on the financial impacts of new standards on the 

BVM industry as a whole. New energy conservation standards can affect BVM manufacturers in 

three distinct ways: (1) require additional investment, (2) raise production costs, and (3) affect 

revenues through variations in prices and shipments. The analytical tool DOE uses for 

calculating the financial impacts of new energy conservation standards on manufacturers is the 

GRIM. DOE performed a cash-flow analysis using the GRIM on the BVM industry to quantify 

these impacts. 

13.2.2.2 Interview Guide 

During Phase III of the MIA, DOE conducted interviews with manufacturers to gather 

information on the effects of new energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Additionally, DOE conducted 

interviews with the largest purchasers of BVM equipment to gain additional information about 

the manufacturing industry. Before the interviews, DOE distributed an interview guide to help 

identify the impacts of new energy conservation standards on individual manufacturers and subgroups of manufacturers. Manufacturers and the largest purchasers of BVM equipment received 

the guide before the interviews to allow them to prepare their responses in advance. The 

interview guide led interviewers through a series of questions on current organizational 

characteristics, industry infrastructure, manufacturer cash flow, competitive impacts, 

employment impacts, and manufacturing capacity impacts. The interview guides used to conduct 

the manufacturer and customer interviews are found in appendix J of this TSD. 

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13.2.3 Phase III: Sub-Group Impact Analysis 

Many of the same companies that participated in the MIA interviews also participated in 

interviews for the engineering analysis. However, the MIA interviews broadened the discussion 

from primarily technology-related issues to business-related topics. The objectives were to obtain 

feedback from industry on the GRIM’s assumptions and to isolate key issues and concerns. DOE 

defined two distinctive sub-groups that could be affected by the new energy conservation 

standards: major manufacturers and small businesses. The following sections summarize the 

methodology and findings of this assessment. 

13.2.3.1 Manufacturer Interviews 

DOE supplemented the information gathered in Phase I and the cash-flow analysis 

performed in Phase II with information gathered during interviews with manufacturers during 

Phase III. The interview process has a key role in the manufacturer impact analysis since it 

provides an opportunity for interested parties to express their views privately on important 

issues, allowing confidential or sensitive information to be considered in the rulemaking process. 

DOE contacted companies from its database of manufacturers, which provided names of 

manufacturers across the BVM industry. DOE interviewed small and large companies, 

subsidiaries and independent firms, public and private corporations, and members of the National 

Automatic Merchandising Association (NAMA). DOE scheduled interviews well in advance in 

order to provide every opportunity for key individuals to be available for comment. Although a 

written response to the questionnaire was acceptable, DOE prefers interactive interviews because 

they help clarify responses and provide the opportunity to identify additional issues. 

DOE conducted detailed interviews with all manufacturers who agreed to participate to 

gain insight into the range of potential impacts and how these impacts vary with each TSL. 

During the interviews, DOE solicited information on the possible impacts of energy conservation 

standards on sales, direct employment, capital assets, and industry competitiveness. Both 

qualitative and quantitative information are valuable to the interview process. DOE then used the 

information gathered during manufacturer interviews to tailor the GRIM to incorporate unique 

financial characteristics for each equipment class. 

13.2.3.2 Bottler Interviews 

To supplement the information gathered from BVM manufacturers, DOE also 

interviewed bottlers (the primary purchasers of BVM equipment) during Phase III. During the 

interviews, DOE solicited information on the possible impacts of energy conservation standards 

on BVM manufacturing sales, direct employment, capital assets, and industry competitiveness. 

13.2.3.3 Revised Industry Cash-Flow Analysis 

In Phase II of the MIA, DOE provided manufacturers with preliminary financial input 

figures from the GRIM for review and evaluation. During the interviews, DOE requested 

comments on the values DOE selected for the parameters. Upon completion of the interviews, 

DOE revised its industry cash-flow model where applicable.

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13.2.3.4 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 significantly from the 

industry average could be more negatively affected. Ideally, DOE would consider the impact on 

every manufacturer individually; however, it typically uses the results of the industry 

characterization to group manufacturers exhibiting similar characteristics. During the interviews, 

DOE discussed the potential sub-groups and sub-group members identified for the analysis. DOE 

looked to the manufacturers and other stakeholders to suggest what sub-groups or characteristics 

are most appropriate for the analysis. 

13.2.3.5 Small-Business Manufacturer Sub-Group 

DOE used the small business size standards published on August 22, 2008, as amended, 

by the Small Business Administration (SBA) to determine whether any small entities would be 

required to comply with the rule. 13 CFR Part 121. The North American Industry Classification 

System (NAICS) code lists the size standards for various industries. BVM manufacturing is 

classified under NAICS 333311 (automatic vending machine manufacturing). To be categorized 

as a small business, a BVM manufacturer and its affiliates may employ a maximum of 500 

employees. 

DOE reviewed NAMA’s listing of BVM members and surveyed the industry to develop a 

list of every manufacturer. DOE also asked stakeholders and NAMA representatives within the 

BVM industry if they were aware of other small business manufacturers. DOE then examined 

publicly available data and contacted manufacturers, when needed, to determine if they meet the 

SBA’s definition of a small business manufacturer and if their manufacturing facilities are 

located in the United States. Based on this analysis, DOE estimates that there are six small BVM 

manufacturers. DOE contacted all six small business manufacturers, through its contractor, to 

deliver an electronic questionnaire and request interviews. Out of the six possible small business 

manufacturers identified, less than half responded and only one agreed to be interviewed. DOE 

conducted an interview with the one manufacturer to determine if the standards could result in 

differential impacts on small manufacturers. 

DOE found that one small business manufacturer has a major market share in covered 

equipment while the remaining five have small market shares. For the small business 

manufacturer with a major market share, the impacts of the proposed standard would not differ 

greatly from those of its larger competitors, and, for the remaining small business manufacturers, 

the impacts would not be significant. 

DOE believes the small business manufacturer that has a major market share in covered 

equipment will not be disproportionately disadvantaged by the proposed standard. It has a large 

shipment volume as a major supplier to the large bottlers and its access to capital is nearly 

identical to its larger competitors. Its large shipment volume allows it to distribute the added cost 

of compliance across its products, similar to the large manufacturers. Correspondingly, it echoed 

the large manufacturers’ concerns about new energy conservation standards, including 

conversion costs needed to meet standards, meeting customer needs, and current market 

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conditions. DOE found no significant differences in the R&D emphasis or marketing strategies 

between this small business manufacturer with a major market share and large manufacturers. As 

a result, DOE does not believe the impacts of the proposed standard will be significantly 

different for the small business manufacturer with a large market share when compared to those 

expected for the large business manufacturers. 

DOE does not expect the small businesses with small market shares to be compromised 

by the proposed energy conservation standard. DOE estimates that only approximately 40 

percent of their offered vending equipment is covered by the proposed standard. The majority of 

equipment offered is specialty or niche equipment. As a result, the primary source of revenue for 

these small manufacturers comes from supplying a market underserved by the major 

manufacturers of covered equipment. Any cost disadvantage experienced by these small 

manufacturers as a result of the proposed standard can be balanced by the relatively larger profit 

margins achievable by charging premium prices for niche equipment. As a result, DOE believes 

the proposed standard will not affect the competitive position of the small business 

manufacturers with small market shares in covered equipment. 

13.2.3.6 Manufacturing Capacity Impact 

One of the significant outcomes of new energy conservation standards could be the 

consequential obsolescence of existing manufacturing assets, including tooling and investment. 

The manufacturer interview guide has a series of questions to help identify impacts on 

manufacturing capacity, specifically capacity utilization and plant location decisions in the 

United States and North America with and without new energy conservation standard. These 

impacts include: the ability of manufacturers to upgrade or remodel existing facilities to 

accommodate the new requirements due to new energy conservation standards; the nature and 

value of stranded assets, if any; and estimates for any one-time restructuring and other charges, 

where applicable.

13.2.3.7 Employment Impact 

The impact of new energy conservation standards on employment is an important 

consideration in the rulemaking process. To assess how domestic employment patterns might be 

affected, DOE used the GRIM to calculate employment impacts at each TSL for each equipment 

class. During interviews, DOE explored current employment trends in the BVM industry. In 

addition, DOE solicited manufacture views on changes in employment patterns that may result 

from more stringent standard levels. The employment impacts section of the interview guide 

focused on current employment levels associated with manufacturers at each of their production 

facilities, expected future employment levels with and without new energy conservation 

standards, and differences in workforce skills and issues related to employee retraining.

13.2.3.8 Cumulative Regulatory Burden 

DOE seeks to mitigate the overlapping effects on manufacturers of new energy 

conservation standards and other regulatory actions affecting the same equipment. DOE analyzed 

and considered the impact on manufacturers of multiple equipment-specific regulatory actions. 

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13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES 

The first question of each of the MIA interview guides asks: “What are the key issues for 

your company regarding the BVM energy conservation standards rulemaking?” This open 

question initiated dialogue with the manufacturers, enabling them to identify key points that 

DOE would explore and discuss during the interview. This section describes the key issues 

manufacturers felt were of the highest importance in relation to the BVM energy conservation 

standards rulemaking and that would have the most significant impact on the industry. 

Manufacturers indicated that, for the most part, the risks associated with these issues increase 

with more stringent TSLs. The issues are overall concerns that many manufacturers expressed. 

13.3.1 Customer Impacts and Performance Requirements 

According to manufacturers, major customers require their own performance 

specifications. Manufacturers stated that if their major customers do not accept equipment 

changes due to standards, it is likely that the market would be negatively impacted. In addition, 

their customers want improvement in energy efficiency without significant changes to purchase 

price. Because manufacturers ideally pass on cost increases to the customer, many manufacturers 

said that the customer could be harmed from a new energy conservation standard. 

13.3.2 Current Market Conditions 

According to manufacturers, the industry has only two main customers that make the 

majority of all BVM purchases. All manufacturers stated that the combined capacity of each 

major manufacturer is many times larger than the current market demand. The overcapacity has 

been a result of a significant decline in shipments. Manufacturers estimated that total industry 

shipments typically ranged from 250,000 to 300,000 per year in the late 1990s and early 2000s. 

Current total annual shipments have dropped significantly to under 100,000 due to the saturated 

market. Currently, shipments are also declining because not all retiring machines are replaced, 

and the existing stock of equipment is simultaneously declining. Manufacturers estimate that 

without the saturation, the market would have a steady state production level ranging between 

130,000 to 150,000 total industry units a year. 

According to manufacturers, the combination of these factors is causing vending to be 

unprofitable and that minimum increases in manufacturing prices could cause shipments to 

decline further. Manufacturers are concerned that higher selling prices could lead to lower 

shipments because the limited capital budgets of the major BVM buyers makes purchases 

sensitive to first costs. Lower production volumes could increase per unit overhead and 

depreciation, leading to higher prices and in turn lower shipments. In addition, several 

manufacturers predicted that the increased cost of BVMs could squeeze smaller BVM operators 

and could cause consolidation within the BVM operators’ industry. 

13.3.3 ENERGY STAR 

According to manufacturers, the ENERGY STAR program has already led to great 

improvements in the efficiency of BVM equipment. However, manufacturers are concerned that 

the ENERGY STAR efficiency levels have become a de facto market requirement due to their 

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customers’ demand, not a voluntary program. Therefore, meeting the ENERGY STAR efficiency 

level is a requirement to be competitive. All manufacturers produce equipment that meets at least 

ENERGY STAR efficiency levels to survive in the industry but do not receive tangible benefits 

for selling equipment that exceeds these levels. 

13.3.4 Lighting Equipment for Max-Tech 

According to some manufacturers, the max-tech levels studied in the analysis are difficult 

or unrealistic targets. To reach max-tech efficiency level, manufacturers are concerned that 

companies could be required to remove any lighting or undertake costly redesigns (including 

light emitting diodes (LEDs). According to manufacturers, LEDs have significant savings in 

energy but also significantly increase the equipment’s price. 

13.3.5 Split Incentive Problem 

Manufacturers cited the split incentive problem as a major hindrance to improving 

efficiency. Bottlers own the vast majority of all BVMs, but typically do not pay the electric bills 

to operate the equipment. Bottlers also set the requirements that drive improvements in the 

energy efficiency of BVM. Therefore, those responsible for driving efficiency improvements are 

not those that benefit from the resulting reduction in energy consumption. Consequently, 

manufacturers can receive a premium for design changes that are cost effective for the servicing 

cost of the equipment and improving reliability, costs for which end users are responsible. 

However, there are little opportunities to charge premiums for equipment that exceeds the 

efficiency requirements of the major BVM purchasers, costs for which bottlers are responsible. 

13.3.6 Third-Party Efficiency Kits 

While this new energy conservation standard only applies to new equipment sold in the 

U.S., manufacturers voiced their concern about third party efficiency kits. According to 

manufacturers, third parties manufacture energy efficiency kits that can be applied to equipment 

during refurbishment to improve efficiency to meet ENERGY STAR efficiency levels. 

Manufacturers are concerned that these third parties do not fully understand how their 

components interact with their machines. Manufacturers are concerned that they would be 

blamed for any operating problems that arose from poor interactions between their parts and the 

third-party efficiency kits. 

13.3.7 Profitability 

Manufacturers in general are concerned that energy conservation standards could lead to 

decreased profit margins. Higher selling prices could harm profitability because manufacturers 

have experienced difficulty in passing cost increases along to customers. Manufactures noted 

that they are typically price takers, not price makers. However, manufacturers stated that, 

because all manufacturers would be required to make similar equipment changes, there is a 

chance that these higher production costs could be passed through. Manufacturers also stated that 

new energy conservation standards could decrease profitability because new vending machines 

are only one of the available options to their customers. For example, instead of purchasing new 

BVMs, customers could choose to purchase remanufactured equipment, extend the lifetime of 

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their installed equipment, or switch to reach-in coolers or fountains. Additionally, manufacturers 

are concerned that the existing overcapacity and limited number of high-volume purchasers 

could harm profits if their manufacturing costs increase. 

13.4 GRIM INPUTS AND ASSUMPTIONS 

The GRIM serves as the primary tool used to assess the impact of new energy 

conservation standards on the BVM industry. DOE relied on several sources to obtain inputs for 

the GRIM. Data and assumptions from these sources are then fed into an accounting model that 

details the cash flow of a base case absent of new energy conservation standards. The model 

also calculates the impacts on manufacturers due to new energy conservation standards. 

13.4.1 Overview of the GRIM 

The basic structure of the GRIM, illustrated in Figure 13.4-1, is a standard annual cashflow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry 

financial information as inputs. The GRIM estimates the effects of regulatory conditions caused 

by changes in costs, investments, and associated margins. The GRIM spreadsheet uses several 

inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 

2008, and continuing to 2042. The model calculates the INPV by summing the stream of annual 

discounted cash flows during this period. 

Figure 13.4-1 Using the GRIM to Calculate Cash Flow 

The GRIM projected cash flows using standard accounting principles. The model 

compared changes in INPV between the baseline equipment information (the base-case scenario) 

and different TSLs (the standards-case scenario). The difference in INPV between the base case 

and the standards case(s) represents the estimated financial impact of the new energy 

conservation standard on manufacturers. Appendix J provides more technical details and user 

information for the GRIM. 

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13.4.2 Sources of GRIM Inputs 

The GRIM used several different sources for data inputs to determine cash flows for the 

industry, including corporate annual reports, company profiles, credit ratings, Census data, the 

shipments model, the engineering analysis, and manufacturer interviews. 

13.4.2.1 Corporate Annual Reports 

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the financial inputs 

to the GRIM.1 These reports exist for publicly held companies and are freely available to the 

public. The SEC 10-Ks provide consistent financial data for the consolidated corporation but do 

not provide detailed financial information for the company’s BVM lines. Some SEC 10-Ks are 

therefore more relevant than others to the BVM industry analysis, depending on the prominence 

the BVM business has in the company’s overall operations. In determining financial parameters 

for the industry, DOE weighted corporate financial information contained in the SEC 10-Ks by 

each company’s market share in the BVM industry to arrive at industry-weighted averages. DOE 

used corporate annual reports to derive the following GRIM inputs: 

 tax rate 

 working capital 

 SG&A expenses 

 R&D expenses 

 depreciation 

 capital expenditures 

 net property, plant, and equipment (PPE) 

 earnings before interest and taxes (EBIT) 

DOE also used information from company SEC 10-K reports to calibrate the GRIM’s 

earnings before interest and taxes against the industry-weighted average. 

13.4.2.2 Standard and Poor Credit Ratings 

S&P provides independent credit ratings, research, and financial information. DOE relied 

on S&P reports to determine the industry’s average cost of debt for the cost of capital 

calculation. 

13.4.2.3 Dun and Bradstreet Reports 

Dun and Bradstreet (D&B) provides independent research regarding company cash 

flows, revenues, employees, and credit-worthiness. Besides conducting manufacturer interviews, 

DOE used D&B reports to profile several manufacturers which had the potential to be small 

businesses. 

13.4.2.4 Shipments Model 

The GRIM used shipment projections derived from DOE's shipments model in the 

national impact analysis (NIA). The model relied on historical shipments data for BVM. Chapter 

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10 of the TSD is exclusively dedicated to describing the methodology and analytical model DOE 

used to forecast shipments. 

13.4.2.5 Engineering Analysis 

For the engineering analysis DOE adopted a design-option approach, which calculated 

the incremental costs of adding specific design options to a baseline model. For each equipment 

class, DOE analyzed three beverage vending machines of different representative sizes to assess 

how energy use varies with size. The manufacturer production costs (MPCs) used in the GRIM 

are derived from the manufacturer selling prices (MSPs) developed in the engineering analysis. 

13.4.2.6 Manufacturer Interviews 

Key topics discussed during the interviews and reflected in the GRIM include 

 Capital conversion costs(one-time investments in property, plant, and equipment); 

 Equipment conversion costs (one-time investments in research, equipment development, 

testing, and marketing); 

 The portion of the capital conversion costs that companies use to replace stranded assets; 

 Equipment cost structure (the portion of MPC related to materials, labor, overhead, and 

depreciation costs); 

 Projected total shipment and shipment distribution mix; 

 Estimated profit margins characteristic of the industry; and 

 Engineering analysis information. 

13.4.3 Financial Parameters 

DOE developed financial estimates of the BVM industry by examining several major 

BVM manufacturers’ financial information from annual reports and SEC 10-K reports. Each 

company DOE analyzed is a subsidiary of a more diversified parent company that manufactures 

equipment other than BVMs. Because the SEC 10-K reports did not provide financial 

information at the subsidiary level, the financial parameters DOE calculated represented 

averages of the parent companies applied over the entire range of their equipment offerings; 

these parameters did not necessarily represent the BVM industry alone. 

DOE presented these values to manufacturers during the interviews for comment. While 

most manufacturers were unable to provide estimates for the BVM industry, they were able to 

provide their own financial parameters. Using these values, DOE calibrated its original estimates 

to develop financial parameters that it considers representative of the BVM industry. An 

aggregation of the MIA interview responses yielded the market-share-weighted financial 

parameters shown in Table 13.4.1. These aggregated values were the financial parameter inputs 

DOE used in the GRIM analysis for this notice of proposed rulemaking (NOPR). 

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Table 13.4.1 GRIM Financial Parameters 

Parameter Industry Weighted 

Average 

Tax Rate 

(% of Taxable Income) 35.0 

Working Capital 

(% of Revenues) 18.9 

SG&A 

(% of Revenues) 12.5 

R&D 

(% of Revenues) 5.1 

Capital Expenditures 

(% of Revenues) 3.8 

Net Property, Plant, and Equipment 

(% of Revenues) 24.8 

Earnings Before Interest and Taxes 

(% of Revenues) 3.1 

13.4.4 Corporate Discount Rate 

For the straw-man GRIM, DOE estimated the weighted-average cost of capital (WACC) 

for the industry to use as the discount rate used to calculate INPV. DOE used SEC data to 

estimate the WACC of publicly traded companies that manufacturer BVMs. Because a 

company’s assets are financed by a combination of debt and equity, the industry WACC is the 

total cost of debt and equity weighted by the composite companies’ respective proportions of 

debt and equity in the capital structure of the industry. DOE revised its discount rate based on 

interviews with manufacturers because its initial estimate of the discount rate was based on 

aggregated information of public companies, not specifically for BVM manufacturing. For the 

BVM industry, DOE estimates the discount rate to be 7.0 percent. 

13.4.5 Trial Standard Levels 

DOE developed seven TSLs for Class A equipment and six TSLs for Class B equipment. 

Each TSL includes combinations of efficiency levels representing comparable stringency for 

BVM equipment classes. Table 13.4.2 and Table 13.4.2 present the efficiency levels DOE used 

in the GRIM. The metric used for the standard is daily energy consumption in kWh per day. 

Table 13.4.2 Baseline Efficiency Levels and Trial Standard Levels for Class A 

Equipment Class and Trial Standard Levels for Class A Equipment Analyzed (kWh/day)

Size Designation Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Small-Sized Class A 6.10 5.27 4.75 4.25 3.95 3.73 3.58 3.25 

Medium-Sized Class A 6.53 5.51 5.25 4.75 4.19 3.95 3.79 3.43 

Large-Sized Class A 6.75 6.21 5.75 5.25 4.89 4.60 4.41 3.94 

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Table 13.4.2 Baseline Efficiency Levels and Trial Standard Levels for Class B 

Equipment Class and Trial Standard Levels for Class B Equipment Analyzed (kWh/day)

Size Designation Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Small-Sized Class B 4.96 4.62 4.31 4.31 4.28 3.78 3.69 

Medium-Sized Class B 5.56 5.20 4.99 4.76 4.72 4.22 4.12 

Large-Sized Class B 5.85 5.48 5.33 5.07 5.03 4.52 4.41 

13.4.6 Shipments 

The GRIM estimates yearly revenues using the shipment forecasts and average efficiency 

values produced by the national energy savings (NES) shipment model (chapter 10 of this TSD). 

The shipment analysis is a key driver of manufacturer finances because changes in the efficiency 

mix at the various trial standard levels are tied to shipments. Further explanation of assumptions 

and calculations of total shipments can be found in chapter 10 of this TSD. Total shipments 

forecasted in the shipment analysis for all efficiency levels in 2012 are shown in Table 13.4.4 

and Table 13.4.5 and discussed below. 

Table 13.4.4 Industry-Wide Shipments Forecast in 2012 for Class A Equipment 

Equipment Class and 

Size Designation 

Total Industry Shipments 

(Number of Units) 

Small-Sized Class A 0 

Medium-Sized Class A 37,125 

Large-Sized Class A 12,375 

Table 13.4.3 Industry-Wide Shipments Forecast in 2012 for Class B Equipment 

Equipment Class and 

Size Designation 

Total Industry Shipments 

(Number of Units) 

Small-Sized Class B 0 

Medium-Sized Class B 30,375 

Large-Sized Class B 10,125 

 

For the standards case utilizing the NES-shipment forecast base case shipments, DOE 

assumed shipments at lower efficiencies were most likely to roll up into higher efficiency levels 

in response to an increase in energy conservation standards. This scenario assumes that demand 

for high efficiency equipment is a function of its price regardles of the standard level. Table 

13.4.4 through Table 13.4.9 show the distributions of shipments by TSL estimated in the NES 

for various equipment classes in 2012. 

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Table 13.4.4 Distribution of Small-Sized Class A Equipment in 2012 at each Trial Standard 

Level 

TSL (kWh/day) TSL 

(kWh/day) Baseline 

6.10 

TSL 1

5.27 

TSL 2

4.75 

TSL 3

4.25 

TSL 4

3.95 

TSL 5

3.73

TSL 6 

3.58

TSL 7 

3.25

Baseline 

6.10 10.0% 90% 0% 0% 0% 0% 0% 0% 

TSL 1 

5.27 100% 0% 0% 0% 0% 0% 0% 

TSL 2 

4.75 100% 0% 0% 0% 0% 0% 

TSL 3 

4.25 100% 0% 0% 0% 0% 

TSL 4 

3.95 100% 0% 0% 0% 

TSL 5 

3.73 100% 0% 0% 

TSL 6 

3.58 100% 0% 

TSL 7 

3.25 100% 

Table 13.4.5 Distribution of Medium-Sized Class A Equipment in 2012 at each Trial 

Standard Level 

TSL (kWh/day) 

TSL 

(kWh/day) Baseline 

6.53 

TSL 1

5.51 

TSL 2

5.25 

TSL 3

4.75 

TSL 4

4.19 

TSL 5

3.95

TSL 6 

3.79

TSL 7 

3.43

Baseline 

6.53 10.0% 90% 0% 0% 0% 0% 0% 0% 

TSL 1 

5.51 100% 0% 0% 0% 0% 0% 0% 

TSL 2 

5.25 100% 0% 0% 0% 0% 0% 

TSL 3 

4.75 100% 0% 0% 0% 0% 

TSL 4 

4.19 100% 0% 0% 0% 

TSL 5 

3.95 100% 0% 0% 

TSL 6 

3.79 100% 0% 

TSL 7 

3.43 100% 

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Table 13.4.6 Distribution of Large-Sized Class A Equipment in 2012 at each Trial Standard 

Level 

TSL (kWh/day) 

TSL 

(kWh/day) Baseline 

6.75 

TSL 1

6.21 

TSL 2

5.75 

TSL 3

5.25 

TSL 4

4.89 

TSL 5

4.60

TSL 6 

4.41

TSL 7 

3.94

Baseline 

6.75 10.0% 90% 0% 0% 0% 0% 0% 0% 

TSL 1 

6.21 100% 0% 0% 0% 0% 0% 0% 

TSL 2 

5.75 100% 0% 0% 0% 0% 0% 

TSL 3 

5.25 100% 0% 0% 0% 0% 

TSL 4 

4.89 100% 0% 0% 0% 

TSL 5 

4.60 100% 0% 0% 

TSL 6 

4.41 100% 0% 

TSL 7 

3.94 100% 

Table 13.4.7 Distribution of Small-Sized Class B Equipment in 2012 at each Trial Standard 

Level 

TSL (kWh/day) 

TSL 

(kWh/day) Baseline 

4.96 

TSL 1

4.62 

TSL 2

4.31 

TSL 3

4.31 

TSL 4

4.28 

TSL 5

3.78

TSL 6 

3.69

Baseline 

4.96 10.0% 0% 90% 0% 0% 0% 0% 

TSL 1 

4.62 10% 90% 0% 0% 0% 0% 

TSL 2 

4.31 100% 0% 0% 0% 0% 

TSL 3 

4.31 100% 0% 0% 0% 

TSL 4 

4.28 100% 0% 0% 

TSL 5 

3.78 100% 0% 

TSL 6 

3.69 100% 

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Table 13.4.8 Distribution of Medium-Sized Class B Equipment in 2012 at each Trial 

Standard Level 

TSL (kWh/day) 

TSL 

(kWh/day) Baseline 

5.56 

TSL 1

5.20 

TSL 2

4.99 

TSL 3

4.76 

TSL 4

4.72 

TSL 5

4.22

TSL 6 

4.12

Baseline 

5.56 10.0% 0% 90% 0% 0% 0% 0% 

TSL 1 

5.20 10% 90% 0% 0% 0% 0% 

TSL 2 

4.99 100% 0% 0% 0% 0% 

TSL 3 

4.76 100% 0% 0% 0% 

TSL 4 

4.72 100% 0% 0% 

TSL 5 

4.22 100% 0% 

TSL 6 

4.12 100% 

Table 13.4.9 Distribution of Large-Sized Class B Equipment in 2012 at each Trial Standard 

Level 

TSL (kWh/day) 

TSL 

(kWh/day) Baseline 

5.58 

TSL 1

5.48 

TSL 2

5.33 

TSL 3

5.07 

TSL 4

5.03 

TSL 5

4.52

TSL 6 

4.41

Baseline 

5.58 10.0% 0% 90% 0% 0% 0% 0% 

TSL 1 

5.48 10% 90% 0% 0% 0% 0% 

TSL 2 

5.33 100% 0% 0% 0% 0% 

TSL 3 

5.07 100% 0% 0% 0% 

TSL 4 

5.03 100% 0% 0% 

TSL 5 

4.52 100% 0% 

TSL 6 

4.41 100% 

13.4.7 Manufacturer Production Costs 

DOE derived MPCs from the MSPs found in the engineering analysis. As discussed in the 

engineering analysis, the MSP is comprised of manufacturer product costs (the direct 

manufacturing costs), non-production costs (indirect costs like SG&A), and profit. The 

components of MSP are shown in Figure 13.4-2 below. 

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EERE-2006-STD-0125 COMMENT 46
Figure 13.4-2 Cost Components of MSP. 

In order to calculate the MPCs, DOE disaggregated the components of MSP using a cost 

structure for the BVM industry. The industry cost structure derived by DOE is shown in Figure 

13.4-3 

BVM Industry Cost Structure as % of Revenue

Materials, 47.0%

SG&A, 12.5%

R&D, 5.1%

Labor (production workers), 

7.8%

Overhead, 20.8%

Depreciation, 3.8%

Income from Operations, 

3.1%

Figure 13.4-3. BVM Industry Cost Structure as a Percentage of Revenue. 

DOE constructed the industry cost structure using publicly available information from the 

Census Bureau’s 2006 Annual Survey of Manufacturers (2006 ASM) and SEC 10-K reports filed 

by publicly traded manufacturers. For BVM, DOE used the industry cost structure constructed 

from 2006 ASM data classified under NAICS 33331 (commercial and service industry 

machinery manufacturing). The 2006 ASM did not have data disaggregated to NAICS 333311 

(automatic vending machine manufacturing). 

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Using the cost structure shown in Figure 13.4-3, DOE disaggregated the financial 

components that comprise MSP (MPC, SG&A, R&D, and profit). By summing the labor, 

overhead, materials, and depreciation portions of the MSP, DOE estimated the MPCs for the 

analyzed equipment. Separating the direct manufacturing costs and the indirect costs allows 

DOE to implement different pricing scenarios that impact manufacturer profitability. 

Table 13.4.10 through Table 13.4.15 provide the production cost assumptions at the 

various TSLs used in the GRIM for the equipment classes analyzed in the engineering analysis. 

Table 13.4.10 Manufacturer Production Cost Breakdown for Small-Sized Class A 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $144.39 $872.19 $385.55 $70.66 $1,472.79 $1,856.20 

TSL 1 $147.28 $889.64 $393.26 $72.07 $1,502.26 $1,893.33 

TSL 2 $150.64 $909.95 $402.24 $73.72 $1,536.55 $1,936.55 

TSL 3 $153.87 $929.47 $410.87 $75.30 $1,569.52 $1,978.10 

TSL 4 $155.81 $941.19 $416.05 $76.25 $1,589.30 $2,003.03 

TSL 5 $157.74 $952.85 $421.20 $77.19 $1,608.99 $2,027.85 

TSL 6 $159.86 $965.64 $426.86 $78.23 $1,630.59 $2,055.07 

TSL 7 $231.17 $1,396.37 $617.26 $113.12 $2,357.93 $2,971.76 

Table 13.4.11 Manufacturer Production Cost Breakdown for Medium-Sized Class A 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $172.85 $1,044.11 $461.55 $84.59 $1,763.09 $2,222.07 

TSL 1 $176.50 $1,066.16 $471.29 $86.37 $1,800.32 $2,268.99 

TSL 2 $177.22 $1,070.50 $473.21 $86.72 $1,807.65 $2,278.23 

TSL 3 $181.61 $1,097.01 $484.93 $88.87 $1,852.43 $2,334.66 

TSL 4 $185.04 $1,117.70 $494.08 $90.55 $1,887.36 $2,378.69 

TSL 5 $187.37 $1,131.79 $500.31 $91.69 $1,911.16 $2,408.68 

TSL 6 $189.75 $1,146.15 $506.65 $92.85 $1,935.40 $2,439.23 

TSL 7 $268.86 $1,624.01 $717.89 $131.56 $2,742.32 $3,456.21 

Table 13.4.12 Manufacturer Production Cost Breakdown for Large-Sized Class A 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $188.79 $1,140.38 $504.10 $92.38 $1,925.65 $2,426.95 

TSL 1 $190.86 $1,152.91 $509.64 $93.40 $1,946.82 $2,453.62 

TSL 2 $193.84 $1,170.87 $517.58 $94.85 $1,977.15 $2,491.85 

TSL 3 $197.07 $1,190.40 $526.21 $96.44 $2,010.12 $2,533.40 

TSL 4 $199.40 $1,204.46 $532.43 $97.57 $2,033.86 $2,563.32 

TSL 5 $201.73 $1,218.55 $538.66 $98.72 $2,057.65 $2,593.31 

TSL 6 $204.19 $1,233.43 $545.23 $99.92 $2,082.78 $2,624.98 

TSL 7 $299.19 $1,807.22 $798.88 $146.41 $3,051.68 $3,846.11 

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Table 13.4.13 Manufacturer Production Cost Breakdown for Small-Sized Class B 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $118.34 $714.84 $316.00 $57.91 $1,207.09 $1,521.33 

TSL 1 $120.12 $725.56 $320.73 $58.78 $1,225.18 $1,544.13 

TSL 2 $123.81 $747.90 $330.61 $60.59 $1,262.90 $1,591.67 

TSL 3 $123.81 $747.90 $330.61 $60.59 $1,262.90 $1,591.67 

TSL 4 $124.70 $753.25 $332.97 $61.02 $1,271.95 $1,603.07 

TSL 5 $157.42 $950.91 $420.35 $77.03 $1,605.71 $2,023.72 

TSL 6 $226.33 $1,367.11 $604.33 $110.75 $2,308.51 $2,909.47 

Table 13.4.14 Manufacturer Production Cost Breakdown for Medium-Sized Class B 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $133.55 $806.71 $356.60 $65.35 $1,362.22 $1,716.84 

TSL 1 $135.32 $817.42 $361.34 $66.22 $1,380.30 $1,739.63 

TSL 2 $136.95 $827.27 $365.69 $67.02 $1,396.93 $1,760.59 

TSL 3 $139.71 $843.91 $373.05 $68.37 $1,425.04 $1,796.01 

TSL 4 $140.60 $849.27 $375.42 $68.80 $1,434.08 $1,807.41 

TSL 5 $173.32 $1,046.92 $462.79 $84.81 $1,767.85 $2,228.06 

TSL 6 $252.58 $1,525.71 $674.44 $123.60 $2,576.34 $3,247.02 

Table 13.4.15 Manufacturer Production Cost Breakdown for Large-Sized Class B 

Equipment (2008$) 

TSL Labor Cost Material Cost Overhead 

Cost 

Depreciation 

Cost 

MPC MSP 

Baseline $138.45 $836.29 $369.68 $67.75 $1,412.18 $1,779.80 

TSL 1 $140.22 $847.01 $374.42 $68.62 $1,430.27 $1,802.60 

TSL 2 $141.54 $854.96 $377.93 $69.26 $1,443.70 $1,819.53 

TSL 3 $144.29 $871.61 $385.29 $70.61 $1,471.80 $1,854.95 

TSL 4 $145.18 $876.96 $387.66 $71.04 $1,480.85 $1,866.35 

TSL 5 $177.90 $1,074.62 $475.03 $87.06 $1,814.61 $2,287.00 

TSL 6 $267.59 $1,616.38 $714.52 $130.95 $2,729.43 $3,439.97 

13.4.8 Conversion Costs 

New energy conservation standards typically cause manufacturers to incur one-time 

conversion costs to bring their production facilities and product designs in compliance with the 

new regulation. For the MIA, DOE classified these one-time conversion costs into two major 

groups. Equipment conversion costs are one-time investments in research, development, testing, 

and marketing focused on making equipment designs comply with the new energy conservation 

standard. Capital conversion costs are one-time investments in property, plant, and equipment to 

adapt or change existing production facilities so that new equipment designs can be fabricated 

and assembled under the new regulation. 

During the MIA interviews, DOE asked manufacturers to estimate the conversion costs 

they would incur due to new energy conservation standards. Capital conversion costs include 

replacing foam fixtures for various models, retooling machinery for redesigned components, and 

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possible changes to factory layout. Equipment conversion costs include R&D, certification and 

testing, marketing, and other costs required to bring more efficient equipment onto the market. In 

general, manufacturers described the efficiency levels that could be reached by changing existing 

equipment designs. For these efficiency levels, manufactures would incur mostly equipment 

conversion costs for engineering and testing expenses to increase the efficiency of existing 

equipment. Manufacturers would also incur minor capital conversion costs to make 

modifications to their existing production lines. Manufacturers also described the efficiency 

levels at which their existing production lines would have to be completely redesigned. At these 

efficiency levels and higher, manufacturers would incur substantial equipment and capital 

conversion costs. The engineering resources would have to be employed to design and test new 

equipment and exiting production lines would need substantial changes to manufacture the 

redesigned equipment. 

DOE used the costs manufacturers provided, weighted by their respective market shares, 

to develop estimates for the industry wide conversion costs for all Class A and Class B 

equipment. DOE also made adjustments to the analysis to account for changes to the efficiency 

levels made for the NOPR. Finally, DOE distributed the total conversion costs for each 

equipment class using the equipment distributions found in the NIA. Table 13.4.16 through 

Table 13.4.19 summarize these estimates. 

Table 13.4.16 Capital Conversion Costs for Class A Equipment by Trial Standard Level 

(2008$ millions) 

Equipment Class and Trial Standard Level 

Size Designation TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Small-Sized Class A $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 

Medium-Sized Class A $0.0 $0.0 $1.7 $1.7 $6.8 $9.7 $10.6 

Large-Sized Class A $0.0 $0.0 $0.6 $0.6 $2.3 $3.2 $3.5 

TOTAL $0.0 $0.0 $2.2 $2.2 $9.1 $13.0 $14.1 

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Table 13.4.17 Capital Conversion Costs for Class B Equipment by Trial Standard Level 

(2008$ millions) 

Equipment Class and Size Trial Standard Level 

Designation TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Small-Sized Class B $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 

Medium-Sized Class B $0.0 $0.0 $0.0 $0.0 $8.3 $11.0 

Large-Sized Class B $0.0 $0.0 $0.0 $0.0 $2.8 $3.7 

TOTAL $0.0 $0.0 $0.0 $0.0 $11.0 $14.7 

Table 13.4.18 Equipment Conversion Costs for Class A Equipment by Trial Standard 

Level (2008$ millions) 

Equipment Class and Trial Standard Level 

Size Designation TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Small-Sized Class A $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 

Medium-Sized Class A $0.0 $0.4 $0.4 $0.9 $2.2 $2.6 $2.6 

Large-Sized Class A $0.0 $0.1 $0.1 $0.3 $0.7 $0.9 $0.9 

TOTAL $0.0 $0.6 $0.6 $1.2 $2.9 $3.5 $3.5 

Table 13.4.19 Equipment Conversion Costs for Class B Equipment by Trial Standard 

Level (2008$ millions) 

Equipment Class Size Trial Standard Level 

Designation TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Small-Sized Class B $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 

Medium-Sized Class B $0.0 $0.0 $1.3 $1.9 $2.6 $5.2 

Large-Sized Class B $0.0 $0.0 $0.4 $0.6 $0.9 $1.7 

TOTAL $0.0 $0.0 $1.7 $2.6 $3.5 $6.9 

13.4.9 Markup Scenarios 

The manufacturer markup is a multiplier that converts MPC to MSP. As shown in 

Figure 13.4-2, the manufacturer markup is multiplied by the MPC (direct material, labor, 

and overhead) to account for the SG&A, R&D, and profit. For the base case, DOE used a 

manufacturer markup that yields the MSPs found in the engineering analysis. Although the 

MSPs in the base case are calculated in the engineering analysis, for the MIA DOE also 

examines how different manufacturer markups could impact MSPs and industry profitability. 

To understand how baseline and more-efficient equipment are differentiated, DOE 

reviewed manufacturer catalogs and utilized information gathered from manufacturers. To 

estimate how the MSP of the equipment sold varies, DOE applied markup scenarios to the 

production costs based on manufacturer input. Scenarios were used to bound the range of 

expected equipment prices following new energy conservation standards. DOE used the markup 

scenarios that best characterized the prevailing markup conditions and described the range of 

market responses as a result of new energy conservation standards. 

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EERE-2006-STD-0125 COMMENT 46
DOE modeled two markup scenarios: The preservation-of-gross-margin-percentage 

scenario and the preservation-of-operating-profit scenario. 

13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario 

 Under the preservation-of-gross-margin-percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels and equipment classes. 

For this scenario, DOE used the manufacturer markup that yielded the same MSPs found in the 

engineering analysis in both the base case and the standards case. In this scenario, DOE assumed 

that as production costs increase in response to energy conservation standards, manufacturers 

would be able to maintain the same gross margin percentage markup. As production costs 

increase with efficiency, this scenario implies that the absolute dollar markup would increase. 

DOE assumed the manufacturer markup—which includes SG&A expenses, R&D expenses, and 

profit—to be approximately 1.26. 

During interviews, most manufacturers indicated that, currently, it is difficult to pass 

along cost increases because of the competitiveness of the industry and the ability of any large 

manufacturer to meet the demand of the entire industry. However, manufacturers indicated it is 

more difficult to pass along material cost increases because the equipment purchase prices are set 

by their major customers ahead of time. For a market disruption like a new energy conservation 

standard, it is more uncertain how the buyers would respond to the higher production costs. Due 

to the uncertainty in how market prices will response to standards, DOE assumes that this 

scenario represents a high bound to industry profitability after a new energy conservation 

standard. 

13.4.9.2 Preservation-of-Operating-Profit 

Operating profit is defined as earnings before interest and taxes. The implicit assumption 

behind this markup scenario is that the industry can only maintain its operating profit in absolute 

dollars after the standard. The industry would do so by passing through its increased costs to 

customers without being rewarded with higher operating profit in absolute dollars. DOE 

implemented this scenario in the GRIM by setting the manufacturer markups for each TSL to 

yield approximately the same operating profit in the standards cases in the year standards are 

implemented (2012) as is yielded in the base case. DOE assumes that this scenario represents a 

low bound to industry profitability after a new energy conservation standard. The manufacturer 

markups under this scenario are summarized in Table 13.4.20 through Table 13.4.25 

13-21

EERE-2006-STD-0125 COMMENT 46
Table 13.4.20 Preservation-of-Operating-Profit Markup Scenario for Small-Sized Class A 

Equipment

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

6.10 

TSL 1

5.27 

TSL 2

4.75 

TSL 3

4.25 

TSL 4

3.95 

TSL 5

3.73 

TSL 6 

3.58 

TSL 7 

3.25 

Baseline 

6.10 1.260 - - - - - - - 

TSL 1 

5.27 1.260 1.260 - - - - - - 

TSL 2 

4.75 1.260 1.260 1.260 - - - - - 

TSL 3 

4.25 1.260 1.260 1.260 1.260 - - - - 

TSL 4 

3.95 1.260 1.260 1.260 1.260 1.260 - - - 

TSL 5 

3.73 1.260 1.260 1.260 1.260 1.260 1.260 - - 

TSL 6 

3.58 1.260 1.260 1.260 1.260 1.260 1.260 1.260 - 

TSL 7 

3.25 1.260 1.260 1.260 1.260 1.260 1.260 1.260 1.260 

Table 13.4.21 Preservation-of-Operating-Profit Markup Scenario for Medium-Sized Class 

A Equipment

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

6.53 

TSL 1

5.51 

TSL 2

5.25 

TSL 3

4.75 

TSL 4

4.19 

TSL 5

3.95 

TSL 6 

3.79 

TSL 7 

3.43 

Baseline 

6.53 1.260 - - - - - - - 

TSL 1 

5.51 1.260 1.260 - - - - - - 

TSL 2 

5.25 1.260 1.260 1.260 - - - - - 

TSL 3 

4.75 1.260 1.260 1.260 1.259 - - - - 

TSL 4 

4.19 1.260 1.260 1.260 1.260 1.258 - - - 

TSL 5 

3.95 1.260 1.260 1.260 1.260 1.260 1.258 - - 

TSL 6 

3.79 1.260 1.260 1.260 1.260 1.260 1.260 1.258 - 

TSL 7 

3.43 1.260 1.260 1.260 1.260 1.260 1.260 1.260 1.245 

13-22

EERE-2006-STD-0125 COMMENT 46
Table 13.4.22 Preservation-of-Operating-Profit Markup Scenario for Large-Sized Class A 

Equipment 

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

6.75 

TSL 1

6.21 

TSL 2

5.75 

TSL 3

5.25 

TSL 4

4.89 

TSL 5

4.60 

TSL 6 

4.41 

TSL 7 

3.94 

Baseline 

6.75 1.260 - - - - - - - 

TSL 1 

6.21 1.260 1.260 - - - - - - 

TSL 2 

5.75 1.260 1.260 1.260 - - - - - 

TSL 3 

5.25 1.260 1.260 1.260 1.259 - - - - 

TSL 4 

4.89 1.260 1.260 1.260 1.260 1.259 - - - 

TSL 5 

4.60 1.260 1.260 1.260 1.260 1.260 1.258 - - 

TSL 6 

4.41 1.260 1.260 1.260 1.260 1.260 1.260 1.258 - 

TSL 7 

3.94 1.260 1.260 1.260 1.260 1.260 1.260 1.260 1.244 

Table 13.4.23 Preservation-of-Operating-Profit Markup Scenario for Small-Sized Class B 

Equipment 

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

4.96 

TSL 1

4.62 

TSL 2

4.31 

TSL 3

4.31 

TSL 4

4.28 

TSL 5

3.78 

TSL 6 

3.69 

Baseline 

4.96 1.260 - - - - - - 

TSL 1 

4.62 1.260 1.260 - - - - - 

TSL 2 

4.31 1.260 1.260 1.260 - - - - 

TSL 3 

4.31 1.260 1.260 1.260 1.260 - - - 

TSL 4 

4.28 1.260 1.260 1.260 1.260 1.260 - - 

TSL 5 

3.78 1.260 1.260 1.260 1.260 1.260 1.260 - 

TSL 6 

3.69 1.260 1.260 1.260 1.260 1.260 1.260 1.260 

13-23

EERE-2006-STD-0125 COMMENT 46
Table 13.4.24 Preservation-of-Operating-Profit Markup Scenario for Medium-Sized Class 

B Equipment

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

5.56 

TSL 1

5.20 

TSL 2

4.99 

TSL 3

4.76 

TSL 4

4.72 

TSL 5

4.22 

TSL 6 

4.12 

Baseline 

5.56 1.260 - - - - - - 

TSL 1 

5.20 1.260 1.260 - - - - - 

TSL 2 

4.99 1.260 1.260 1.260 - - - - 

TSL 3 

4.76 1.260 1.260 1.260 1.260 - - - 

TSL 4 

4.72 1.260 1.260 1.260 1.260 1.260 - - 

TSL 5 

4.22 1.260 1.260 1.260 1.260 1.260 1.252 - 

TSL 6 

4.12 1.260 1.260 1.260 1.260 1.260 1.260 1.240 

Table 13.4.25 Preservation-of-Operating-Profit Markup Scenario for Large-Sized Class B 

Equipment 

Proposed Markups by TSL 

TSL 

(kWh/day) 

Baseline 

5.58 

TSL 1

5.48 

TSL 2

5.33 

TSL 3

5.07 

TSL 4

5.03 

TSL 5

4.52 

TSL 6 

4.41 

Baseline 

5.58 1.260 - - - - - - 

TSL 1 

5.48 1.260 1.260 - - - - - 

TSL 2 

5.33 1.260 1.260 1.260 - - - - 

TSL 3 

5.07 1.260 1.260 1.260 1.260 - - - 

TSL 4 

5.03 1.260 1.260 1.260 1.260 1.260 - - 

TSL 5 

4.52 1.260 1.260 1.260 1.260 1.260 1.252 - 

TSL 6 

4.41 1.260 1.260 1.260 1.260 1.260 1.260 1.240 

13.5 INDUSTRY FINANCIAL IMPACTS 

Using the inputs and scenarios described in the previous sections, the GRIM estimated 

financial impacts on the BVM industry due to new energy conservation standards. The main 

results of the MIA are also reported in this section and consist of two key financial metrics: 

INPV and annual cash flows. 

13-24

EERE-2006-STD-0125 COMMENT 46
13.5.1 Impacts on Industry Net Present Value 

In the MIA, DOE compared the INPV of the base case (no energy conservation 

standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts 

that implementing that particular TSL would have on the entire industry. For the BVM industry, 

DOE examined two markup scenarios as described in the markup section above. Table 13.5.1

through Table 13.5.4 provide the INPV estimates for the Class A and Class B BVM equipment 

under the different scenarios.

Table 13.5.1 Changes in Industry Net Present Value for All Equipment Sizes for Class A 

Preservation-of-Gross-Margin-Percentage Markup Scenario 

TSL 

 Units Base 

Case 1 2 3 4 5 6 7 

INPV 2008$ millions 35.3 35.3 35.1 33.4 33.2 26.5 22.9 26.8 

Change in 2008$ millions - 0.0 (0.2) (1.9) (2.1) (8.8) (12.4) (8.3) 

INPV % - 0.08% -0.65% -5.47% -5.86% -24.95% -35.09% -23.67% 

Equipment 

Conversion 

Costs 

2008$ millions - 0.0 0.6 0.6 1.2 2.9 3.5 3.5 

Capital 

Conversion 

Costs 

2008$ millions - 0.0 0.0 2.2 2.2 9.1 13.0 14.1 

Total 

Investment 

Required 

2008$ millions - 0.0 0.6 2.8 3.4 11.9 16.4 17.6 

 

Table 13.5.2 Changes in Industry Net Present Value for All Equipment Sizes for Class A 

Preservation-of-Operating-Profit Markup Scenario 

TSL 

 Units Base 

Case 1 2 3 4 5 6 7 

INPV 2008$ millions 35.3 35.3 34.9 32.7 32.2 25.4 21.6 14.1 

Change in 2008$ millions - (0.0) (0.4) (2.6) (3.1) (9.9) (13.7) (20.9) 

INPV % - -0.04% -1.04% -7.45% -8.83% -28.14% -38.89% -59.74% 

Equipment 

Conversion 

Costs 

2008$ millions - 0.0 0.6 0.6 1.2 2.9 3.5 3.5 

Capital 

Conversion 

Costs 

2008$ millions - 0.0 0.0 2.2 2.2 9.1 13.0 14.1 

Total 

Investment 

Required 

2008$ millions - 0.0 0.6 2.8 3.4 11.9 16.4 17.6 

13-25

EERE-2006-STD-0125 COMMENT 46
Table 13.5.3 Changes in Industry Net Present Value for All Equipment Sizes for Class B 

Preservation-of-Gross-Margin-Percentage Markup Scenario 

TSL 

 Units Base 

Case 1 2 3 4 5 6 

INPV 2008$ millions 22.1 22.1 22.1 21.3 20.9 12.4 11.0 

Change in 2008$ millions - 0.0 0.0 (0.8) (1.3) (9.7) (11.2) 

INPV % - 0.04% 0.07% -3.71% -5.71% -44.01% -50.38% 

Equipment 

Conversion 

Costs 

2008$ millions - 0.0 0.0 1.7 2.6 3.5 6.9 

Capital 

Conversion 

Costs 

2008$ millions - 0.0 0.0 0.0 0.0 11.0 14.7 

Total 

Investment 

Required 

2008$ millions - 0.0 0.0 1.7 2.6 14.5 21.6 

Table 13.5.4 Changes in Industry Net Present Value for All Equipment Sizes for Class B 

Preservation-of-Operating-Profit Markup Scenario 

TSL 

 Units Base 

Case 1 2 3 4 5 6 

INPV 2008$ millions 22.1 22.1 22.1 21.2 20.8 8.8 (1.3) 

Change in 2008$ millions - (0.0) (0.0) (0.9) (1.3) (13.4) (23.4) 

INPV % - -0.05% -0.10% -4.17% -6.07% -60.33% -105.79% 

Equipment 

Conversion 

Costs 

2008$ millions - 0.0 0.0 1.7 2.6 3.5 6.9 

Capital 

Conversion 

Costs 

2008$ millions - 0.0 0.0 0.0 0.0 11.0 14.7 

Total 

Investment 

Required 

2008$ millions - 0.0 0.0 1.7 2.6 14.5 21.6 

13.5.2 Impacts on Annual Cash Flow 

While INPV is useful for evaluating the long-term effects of new energy conservation 

standards, short-term changes in cash flow are also important indicators of the industry’s 

financial situation. For example, a large investment over a period of one or two years could strain 

the industry’s access to capital. Consequently, the sharp drop in financial performance could 

cause investors to flee, even though recovery may be near. Thus, a short-term disturbance can 

have long-term effects that the INPV cannot capture. To get an idea of the behavior of annual net 

cash flows, DOE presents the annual net or free cash flows from 2006 through 2020 for the 

various TSL levels. Figure 13.5-1 through Figure 13.5-4 present the annual net cash flows for the 

base case and Class A and Class B standards cases assuming the different markups scenarios. 

13-26

EERE-2006-STD-0125 COMMENT 46
$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

$6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

2008$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation Standards 

Effective Date

August 2012

Figure 13.5-1 Class A Equipment Annual Industry Net Cash Flows (Preservation-of-GrossMargin-Percentage Markup Scenario) 

$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

$6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

2008$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation Standards 

Effective Date

August 2012

Figure 13.5-2 Class A Equipment Annual Industry Net Cash Flows (Preservation-ofOperating-Profit Markup Scenario) 

13-27

EERE-2006-STD-0125 COMMENT 46
$(12)

$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

2008$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Effective Date

August 2012

Figure 13.5-3 Class B Equipment Annual Industry Net Cash Flows (Preservation-of-GrossMargin-Percentage Markup Scenario) 

$(12)

$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

2008$ Millions

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Effective Date

August 2012

Figure 13.5-4 Class B Equipment Annual Industry Net Cash Flows (Preservation-ofOperating-Profit Markup Scenario) 

13-28

EERE-2006-STD-0125 COMMENT 46
The cash flow impacts are similar for Class A and Class B equipment from 2006 to 2020. 

Prior to the effective date of the new energy conservation standard, cash flows are driven by the 

level of capital conversion and equipment conversion costs and how much of these investments 

are spent every year to convert existing facilities and redesign equipment. After the standard 

announcement date, industry cash flows begin to decline as companies use their financial 

resources to prepare for the new standard. The more stringent the energy conservation standard, 

the greater the impact on industry cash flows in the years leading up to the effective date, as 

higher capital conversion costs and equipment conversion costs depress cash flows from 

operations at higher TSLs. For most TSLs, free cash flow begins to improve in the year the new 

energy conservation standard becomes effective. In the year the energy conservation standard 

becomes effective, manufacturers have completed all one-time design and capital changes 

necessary to produce standards-compliant equipment. However, more cash is also required this 

year to boost working capital. Higher working capital is required in this year to pay for higher 

costs associated with manufacturing more expensive equipment (more expensive purchased 

parts, inventory carrying costs, and higher standard R&D and capital expenditures). At most 

TSLs, the higher cash flow from operations offsets the necessary increase in working capital and 

free cash flow improves in the year the standard becomes effective. However, cash flow worsens 

this year at the max-tech TSL for Class A and Class B equipment. The additional cash required 

to increase working capital is much greater than the additional cash flow from operations 

because the costs to manufacture equipment at these TSLs are much larger than existing 

equipment. In the years following the standard, the impact on cash flow depends on operating 

revenue. Higher TSLs have a positive impact on cash flows relative to the base case under the 

preservation-of-gross-margin-percentage markup scenario because manufacturers pass along 

higher production costs to customers and operating cash flow increases with more expensive 

equipment. Under the preservation-of-operating-profit scenario, free cash flow returns to a 

similar level as the base case in the years following the effective date of the standard. Under this 

scenario, the higher operating revenue is offset by higher costs to build more efficient equipment 

and manufacturers’ cash flow does not significantly change. 

13.6 OTHER IMPACTS 

13.6.1 Employment 

To quantitatively assess the impacts of energy conservation standards on BVM 

manufacturing employment, DOE used the GRIM to estimate the domestic labor expenditures 

and number of employees in the base case and at each TSL from 2008 through 2042. DOE used 

statistical data from the U.S. Census Bureau’s 2006 ASM the results of the engineering analysis, 

and interviews with manufacturers to estimate the inputs necessary to calculate industry-wide 

labor expenditures and domestic employment levels. 

DOE calculated the labor percentage of the industry cost structure by dividing total 

production worker wages in the 2006 ASM by the total value of shipments. To calculate the 

annual labor expenditure on production labor, the value of production labor in the industry cost 

structure was converted to a percentage of the cost of goods sold (COGS). In the GRIM, the 

labor expenditures for each year are calculated by multiplying industry COGS by the production 

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EERE-2006-STD-0125 COMMENT 46
labor percentage. As a result, higher TSLs have greater direct labor costs because more efficient 

products have higher MPCs. Based on interviews with manufacturers, the vast majority of BVMs 

sold in the U.S. are fully manufactured or assembled domestically. Therefore, DOE assumed that 

the annual total labor expenditure represented U.S. labor expenditures. 

The domestic annual labor expenditures in the GRIM were converted to domestic 

production employment levels by dividing production labor expenditures by the annual payment 

per production worker (production worker hours times the labor rate found in the 2006 ASM). 

The number of non-production employees was calculated by multiplying the number of 

production workers by the ratio of non-production workers to production workers calculated 

using the employment data in the 2006 ASM. 

The domestic annual labor expenditures and employment levels were calculated for the 

base case and at each TSL. The impacts on domestic employment due to standards can be 

assessed by comparing the employment results in the base case to the results at each TSL. The 

employment results presented in the GRIM represent the U.S. production workers that are 

impacted by this rulemaking. U.S. workers involved in manufacturing or supporting products for 

exports would not be impacted and are not included as part of the labor impacts. 

The GRIM calculates that the BVM industry’s base case domestic labor expenditure for 

production labor in 2012 is approximately $14.5 million (total COGS in 2012 times the 

production labor percentage of COGS) for both Class A and Class B equipment. Using the 

$17.45 wage rateb

 and 2,059 production hours per year per employee found in the 2006 ASM, 

the GRIM estimates there are approximately 704 total BVM employees involved in equipment 

covered by this rulemaking (including both production and non-production employees).c See the 

employment spreadsheet of the BVM GRIM for further details on the annual domestic 

employment impacts. 

Table 13.6.1 and Table 13.6.2 illustrate the impact of new energy conservation standards 

on domestic employment levels at each TSL for Class A and Class B equipment calculated by 

the GRIM. 

 

b

 2006 ASM labor rates and production hours per year per employee are very similar to figures reported in the 

engineering analysis. DOE used 2006 ASM figures to ensure a consistent set of publicly available data is used for 

the manufacturing employment analysis. 

c As defined in the 2006 ASM, production workers number include “workers (up through the line-supervisor 

level) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, 

warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product 

development, auxiliary production for plant's own use (e.g., power plant), recordkeeping, and other services 

closely associated with these production operations at the establishment covered by the report. Employees 

above the working-supervisor level are excluded from this item.” Non-production workers are defined as 

“employees of the manufacturing establishment including those engaged in factory supervision above the linesupervisor level. It includes sales (including driver-salespersons), sales delivery (highway truck drivers and 

their helpers), advertising, credit, collection, installation and servicing of own products, clerical and routine 

office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), 

professional, and technical employees. Also included are employees on the payroll of the manufacturing 

establishment engaged in the construction of major additions or alterations utilized as a separate work force.” 

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EERE-2006-STD-0125 COMMENT 46
Table 13.6.1 Class A Equipment Estimated Employment Impacts in 2012

Trial Standard Level Base 

Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Total Number of Domestic BVM 

Production Employees in 2012 248 248 250 256 260 263 266 381 

Change in Total Number of Domestic 

BVM Production Employees in 2012 

Due to Standards 

- 0 2 8 12 15 19 133 

Total Number of Domestic BVM NonProduction Employees in 2012 185 185 186 191 194 196 199 284 

Total Number of Domestic BVM 

Employees in 2012 432 433 436 446 454 459 465 665 

Table 13.6.2 Class B Equipment Estimated Employment Impacts in 2012

Trial Standard Level Base 

Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Total Number of Domestic BVM 

Production Employees in 2012 155 155 156 159 160 197 289 

Change in Total Number of Domestic 

BVM Production Employees in 2012 

Due to Standards 

- 0 0 3 4 41 134 

Total Number of Domestic BVM NonProduction Employees in 2012 116 116 116 118 119 147 216 

Total Number of Domestic BVM 

Employees in 2012 271 271 272 277 279 343 504 

Figure 13.6-1 shows total annual domestic employment levels for each TSL calculated by 

the GRIM. 

13-31

EERE-2006-STD-0125 COMMENT 46
0 

100 

200 

300 

400 

500 

600 

700 

800 

Total Employment Class A (Number of Workers)

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Effective Date

August 2012

Figure 13.6-1 Class A Equipment Production Estimated Domestic Employment by Year

0 

100 

200 

300 

400 

500 

600 

700 

Total Employment Class B (Number of Workers)

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation 

Standards Effective Date

August 2012

Figure 13.6-2 Class B Equipment Production Estimated Domestic Employment by Year

13-32

EERE-2006-STD-0125 COMMENT 46
DOE expects that there would be positive direct employment impacts among domestic 

BVM manufacturers for all TSLs if current industry market shares are not altered by new energy 

conservation standards. These positive employment impacts estimated in the GRIM are minor 

for TSL 1 through TSL 6 for Class A equipment and TSL 1 through TSL 5 for Class B 

equipment. Because industry shipments are constant over the analysis period, the slight increases 

in employment for these TSLs track the increased production costs. The MPCs of all standardscompliant equipment increase for these TSLs, but the increase is not large enough to greatly 

change the labor costs to manufacture the equipment. The labor costs (and associated 

employment) at these TSLs increase much less dramatically than the material costs because 

material costs comprise a much larger percentage of COGS. Finally, though there are capital and 

product conversion costs to design and manufacturer standards-compliant equipment at these 

TSLs, these changes would not greatly impact labor costs because most of the changes are 

switches to costlier components. Because switching components does not necessarily require 

more labor, the minor employment impacts shown in the GRIM are consistent with the 

equipment redesigns. 

At TSL 7 for Class A equipment and TSL 6 for Class B equipment, the GRIM shows 

large increases in employment. It is likely that the large, positive impacts in employment due to 

the incremental cost increase overstate the impacts that would result from using the most 

efficient components. At TSL 7 for Class A and TSL 6 for Class B, the design options involve 

component substitution which substantially increase the cost of purchase parts but should not 

result in a proportionate increase in labor costs. 

The results calculated in the GRIM do not account for the possible relocation of domestic 

jobs to lower-labor-cost countries which may occur independently of new energy conservation 

standards or may be influenced by the level of investments required by new energy conservation 

standards. Manufactures stated that, although there are no current plans to relocate production 

facilities, at higher TSLs there would be increased pressure to cut costs, which could result in 

relocation. In addition, while manufacturers indicated that they did not expect new energy 

conservation standards to alter existing market shares, they agreed that standards could increase 

pressure for consolidation within the industry. The low profitability and existing excess capacity 

in the industry could make it more likely that every manufacturer would not invest to make 

standards-compliant equipment if those investments were too costly. In addition, manufacturers 

indicated that consolidation could occur after the effective date of the standard if there was no 

return on the required investment. Because the labor impacts in the GRIM do not take relocation 

or consolidation into account, the labor impacts would be different if manufacturers chose to 

relocate to lower cost countries or manufacturers consolidated. However, the labor impacts due 

to relocation and consolidation are not calculated in the GRIM because potential relocation of 

jobs and industry consolidation is uncertain and highly speculative. Most manufacturers stated 

that they would likely modify existing facilities to manufacturer standards-compliant BVMs. 

13.6.2 Production Capacity 

According to the majority of BVM manufacturers, new energy conservation standards 

will not affect manufacturers’ production capacity. Within the last decade, annual shipments of 

refrigerated beverage vending machines have decreased almost three-fold. Due to the decline in 

shipments, it is likely that all of the major manufacturers have the capacity to meet and exceed 

13-33

EERE-2006-STD-0125 COMMENT 46
the recent market demand. Consequently, the industry has the capacity to make many times more 

units than are currently sold each year. Thus, DOE estimates manufacturers will be able to 

maintain manufacturing capacity levels and continue to meet market demand under new energy 

conservation standards. 

13.6.3 Exports 

During interviews, DOE learned that manufacturers export a significant number of 

BVMs. Depending on the manufacturer, exports can surpass 10 percent of total shipments. 

Manufacturers stated that BVMs are shipped to almost every market except East Asia. Most 

manufacturers are not concerned about new energy conservation standards affecting exports. 

However, manufacturers did state that high energy conservation standards could cause 

equipment prices to increase significantly, which could affect exports if foreign markets would 

not bear price increases. Manufacturers indicated a new U.S. energy conservation standard could 

increase the selling prices of exports because most equipment is typically manufactured on the 

same production line (i.e., manufacturers generally do not design separate platforms for each 

market (country) to minimize manufacturing complexity and per unit costs). Manufacturers also 

stated that their exports are not generally affected by energy conservation standards in other 

countries, except for Canada. 

Manufacturers also estimated that foreign competition has captured an extremely small 

portion of the domestic BVM market. Manufacturers only identified two foreign companies that 

have any imports to the U.S. Manufacturers estimate that imports represent less than 3 percent of 

total shipments in the U.S. 

13.6.4 Cumulative Regulatory Burden 

While any one regulation may not impose a significant burden on manufacturers, the 

combined effects of several impending regulations may have serious consequences for some 

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory 

burden analysis, DOE describes other significant equipment-specific regulations that could affect 

BVM manufactures or their parent company that will take effect three years before or three years 

after the effective date of the new energy conservation standards for these products.d

Companies that produce a wider range of regulated equipment may be faced with more 

capital and equipment development expenditures than their competitors. Regulatory burdens can 

prompt companies to exit the market or reduce their equipment offerings, possibly reducing 

competition. Smaller companies may be especially affected since they have lower sales volumes 

over which to amortize the costs of meeting new regulations. A proposed standard is not 

economically justified if it contributes to an unacceptable level of cumulative regulatory burden. 

 

d

 The effective date for beverage vending machines is three years from the date of publication of the final rule 

(approximately August 2012). 

13-34

EERE-2006-STD-0125 COMMENT 46
In general, manufacturers were not greatly concerned about other Federal, state, and 

international regulations. Manufacturers indicated that the requirements of their major customers 

have a much more substantial impact on their business than any of these other regulations. 

13.6.4.1 Other DOE regulations 

DOE did not identify any other DOE regulations that also apply to equipment 

manufactured by BVM manufacturers or their parent companies in the three years leading up to 

and the three years after the effective date of the new energy conservation standards for BVM. 

13.6.4.2 International Energy Conservation Standards 

As outlined in 13.6.3, BVM manufacturers export to almost all markets except East Asia. 

In general, manufacturers are not greatly concerned with international energy conservation 

standards. Currently, Canada has energy conservation standards for BVMs, enforcing efficiency 

levels that are equivalent to ENERGY STAR Tier II. Other international energy conservation 

standards for BVMs do not reach such levels and therefore manufacturers in general already 

meet all energy conservation standards imposed by other nations. 

13.6.4.3 Other Regulations 

During interviews, manufacturers reported several other regulations that affect the BVM 

industry. Manufacturers indicated that they were already compliant with RoHS and the 

Environmental Protection Agency’s mandated switch to non-hydrochlorofluorocarbon (HCFC) 

refrigerants. Finally, manufacturers indicated that they face multiple reporting requirements (i.e., 

ANSI testing and labeling requirements from the Federal Trade Commission). One of the most 

significant testing burdens imposed on BVM manufacturers include the various international 

testing requirements. Because some countries require BVMs to be tested by a native laboratory, 

this can impose a high per unit cost if a limited number of units are sold to that country. 

According to manufacturers, these other regulations would be the same with or without new 

energy conservation standard and would not impact the capital and equipment conversion costs 

to comply with the new energy conservation standard. 

13.7 CONCLUSIONS 

The following section summarizes the different impacts for the two scenarios DOE 

believes are most likely to capture the range of impacts on BVM manufacturers as a result of 

new energy conservation standards. DOE also notes that while these two scenarios bound the 

range of most plausible impacts on manufacturers, there potentially could be circumstances 

which cause manufacturers to experience impacts outside of this range. 

To assess the lower end of the range of potential impacts for the refrigerated beverage 

vending machine industry, DOE considered the preservation-of-gross-margin-percentage 

scenario. This scenario represents the low bound to industry profitability because it assumes that 

manufacturers are fully able to pass through increased production costs to their customers. 

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However, during interviews manufacturers indicated that market conditions usually do not allow 

them to fully pass through costs to their customers. To assess the higher end of the range of 

potential impacts for the refrigerated beverage vending machine industry, DOE considered the 

preservation-of-operating-profit scenario. This scenario models manufacturer concerns about the 

overcapacity of the industry and inability to set selling prices. In this scenario, manufacturers 

spend the necessary investments required to covert their facilities to produce standards-compliant 

equipment. Despite this effort, operating profit does not change in absolute dollars and decreases 

as a percentage of revenue. 

Class A Equipment 

DOE estimates that there are no significant impacts on INPV for Class A equipment to 

meet TSL 1. The vast majority of equipment for sale today meets TSL 1. Therefore, DOE 

expects there will be no equipment or capital conversion costs and that industry revenue and 

production costs will not be significantly negatively affected. 

At TSL 2, DOE estimated the impacts in INPV for Class A equipment to range from 

approximately -$0.2 million to -$0.4 million, which is a change in INPV of -0.65 percent to -1.04 

percent. At this level, the industry cash flow decreases by approximately 6.5 percent, to $2.12 

million, compared to the base case value of $2.27 million in the year leading up to the standards. 

At TSL 2, manufacturers will have to make some component switches to comply with the 

standard. However, most manufacturers will not have to make significant alterations to their 

production process and will only require minimal conversion costs. Alhough standards will 

increase the MPCs, the incremental cost is not substantially larger than most equipment sold 

today, resulting in minimal impacts on industry value. 

At TSL 3, DOE estimated the impacts on INPV for Class A equipment to range from 

approximately -$1.9 million to -$2.6 million, which is a change in INPV of -5.47 percent to -7.45 

percent. At this level, the industry cash flow decreases by approximately 46.0 percent, to $1.23 

million, compared to the base case value of $2.27 million in the year leading up to the standards. 

At TSL 3, manufacturers will have to make additional component switches and minor changes to 

their production lines, resulting in minimal equipment and capital conversion costs. Standards 

increase production costs, but these additional costs are not enough to severely impact INPV 

even if the dollar value of operating profit remains unchanged. 

At TSL 4, DOE estimated the impacts on INPV for Class A equipment to range from -

$2.1 million to -$3.1 million, which is a change in INPV of approximately -5.86 percent to -8.83 

percent. At this level, the industry cash flow decreases by approximately 52.4 percent to $1.08 

million, compared to the base case value of $2.27 million in the year leading up to the standards. 

At TSL 4, manufacturers will have to make additional component switches and changes to their 

existing production lines to comply with the standard. The most significant change that must be 

implemented at this TSL is replacing fluorescent lighting with LEDs. If profitability remains at 

pre-standard levels, then the impacts on INPV at TSL 4 are worsened. 

At TSL 5, DOE estimated the impacts on INPV for Class A equipment to range from -

$8.8 million to -$9.9 million, which is a change in INPV of approximately -24.95 percent to -

28.14 percent. At this level, the industry cash flow decreases by approximately 191.9 percent to -

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EERE-2006-STD-0125 COMMENT 46
$2.09 million, compared to the base case value of $2.27 million in the year leading up to the 

standards. At TSL 5, manufacturers have to redesign all their existing equipment and make 

costly changes to their production lines in order to comply with the standard. Depending on the 

pathway to meet TSL 5, manufacturers may have to alter to the existing equipment cabinet 

designs, which greatly increase the conversion costs. These costly equipment and capital 

conversion costs are the most significant driver of INPV. In addition, the higher manufacturing 

costs of standards-compliant equipment have the potential to harm profitability. 

At TSL 6, DOE estimated the impacts on INPV for Class A equipment to range from -

$12.4 million to -$13.7 million, which is a change in INPV of approximately -35.09 percent to -

38.89 percent. At this level, the industry cash flow decreases by approximately 267.0 percent to -

$3.79 million, compared to the base case value of $2.27 million in the year leading up to the 

standards. At TSL 6, manufacturers have to redesign all their existing equipment and make 

capital investments in their production lines in order to comply with the standard. Manufacturers 

will have to make additional alterations to the existing equipment cabinet designs. In addition, 

the equipment changes necessary to meet TSL 6 are more complex, which increases the 

engineering and capital resources that must be employed. The production costs of equipment that 

meets TSL 6 are higher than at TSL 5. The cost to manufacture standards-compliant equipment 

has the potential to make the impacts on profitability greater if the dollar value of operating 

profit remains unchanged. However, at TSL 5 the costly equipment and capital conversion costs 

are a more significant driver of INPV because the revenues from the higher incremental prices 

do not offset the greater conversion expenditures even if operating profit increases under 

standards. 

At TSL 7 (max-tech), DOE estimated the impacts on INPV for Class A to range from -

$8.3 million to -$20.9 million, which is a change in INPV of approximately -23.67 percent to -

59.74 percent. At this level, the industry cash flow decreases by approximately 287.9 percent to -

$4.27 million, compared to the base case value of $2.27 million in the year leading up to the 

standards. Similarly to TSL 6, TSL 7 involves additional and more complex changes to 

equipment cabinet designs. These additional changes increase the equipment and capital 

conversion costs. However, the substantial increases in production costs to manufacture 

standards-compliant equipment is also a significant driver of INPV. If profitability does not 

increase with the substantially higher manufacturing costs, then the impact on INPV is much 

larger. 

Class B Equipment 

DOE estimates that there are no significant impacts on INPV for Class B equipment at 

TSL 1 or TSL 2. The vast majority of equipment for sale today meets these TSLs. Therefore, 

DOE expects there will be no equipment or capital conversion costs and that industry revenues 

and production costs will not be significantly negatively affected at TSL 1 or TSL 2. 

At TSL 3, DOE estimated the impacts in INPV for Class B equipment to range from 

approximately -$0.8 million to -$0.9 million, which is a change in INPV of -3.71 percent to -4.17 

percent. At this level, the industry cash flow decreases by approximately 30.9 percent, to $0.98 

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EERE-2006-STD-0125 COMMENT 46
million, compared to the base case value of $1.42 million in the year leading up to the standards. 

At TSL 2, manufacturers will have to make some component switches to comply with the 

standard. However, most manufacturers will not have to significantly alter their production 

process. In addition, these minor design changes will not raise the production costs beyond the 

cost of most equipment sold today, resulting in minimal impacts on industry value. 

At TSL 4, DOE estimated the impacts on INPV for Class B equipment to range from -

$1.3 million to -$1.3 million, which is a change in INPV of approximately -5.71 percent to -6.07 

percent. At this level, the industry cash flow decreases by approximately 46.3 percent to $0.76 

million, compared to the base case value of $1.42 million in the year leading up to the standards. 

At TSL 4, manufacturers will have to make additional component switches, resulting in minimal 

equipment conversion costs. Standards increase production costs, but the cost increases are not 

enough to severely affect INPV if profitability remains the same as prior to standards. 

At TSL 5, DOE estimated the impacts on INPV for Class B equipment to range from -

$9.7 million to -$13.4 million, which is a change in INPV of approximately -44.01 percent to -

60.33 percent. At this level, the industry cash flow decreases by approximately 371.9 percent to -

$3.87 million, compared to the base case value of $1.42 million in the year leading up to the 

standards. At TSL 5, manufacturers have to redesign all their existing equipment and make 

capital investments in their production lines in order to comply with the standard. In addition, the 

equipment designs necessary to meet TSL 5 are more complex, which increases the engineering 

and capital resources that must be employed. Finally, the production costs of equipment that 

meet TSL 5 are higher. The cost to manufacture standards-compliant equipment has the potential 

to make the industry impacts greater if operating profit does not increase with the higher 

production costs. 

At TSL 6 (max-tech), DOE estimated the impacts on INPV for Class B to range from -

$11.2 million to -$23.4 million, which is a change in INPV of approximately -50.38 percent to -

105.79 percent. At this level, the industry cash flow decreases by approximately 549.7 percent to 

-$6.40 million, compared to the base case value of $1.42 million in the year leading up to the 

standards. Similarly to TSL 5, TSL 6 involves additional and more complex changes to existing 

cabinet designs. These additional changes increase the equipment and capital conversion costs. 

However, the substantial increase in the cost to manufacture standards-compliant equipment at 

this TSL is a significant driver of INPV. If profitability does not increase with the substantially 

higher manufacturing costs, then the impact on INPV is much greater. 

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13-39

REFERENCES 

1

 Securities and Exchange Commission, Annual 10-K Reports, Various Years, 

Washington D.C., www.sec.gov. 

EERE-2006-STD-0125 COMMENT 46