### 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 ANA LYSIS KEY ISSUES.......................................... 13-6 13.3.1 Customer Impacts and Perf ormance 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 Employme nt.....................................................................................................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 Cons ervation 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 Foreca st in 2012 for Class A Equipment.................. 13-12 Table 13.4.5 Industry-Wide Shipments Foreca st 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 Cla ss 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 Cla ss B Equipment in 2012 at each Trial Standard Level ................................................................................................................ 13-15 Table 13.4.11 Distribution of Larg e-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 Brea kdown for Small-Sized Class A Equipment (2008$)............................................................................................................. 13-17 Table 13.4.13 Manufacturer Production Cost Brea kdown for Medium-Sized Class A Equipment (2008$)............................................................................................................. 13-17 Table 13.4.14 Manufacturer Production Cost Breakdown for Large-Sized Class A Equipment (2008$)............................................................................................................. 13-17 Table 13.4.15 Manufacturer Production Cost Brea kdown for Small-Sized Class B Equipment (2008$)............................................................................................................. 13-18 Table 13.4.16 Manufacturer Production Cost Brea kdown 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$)............................................................................................................. 13-18 Table 13.4.18 Capital Conversion Costs for Clas s A Equipment by Trial Standard Level (2008$ millions) ........................................................................................................... 13-19 Table 13.4.19 Capital Conversion Costs for Clas s B Equipment by Trial Standard Level (2008$ millions) ........................................................................................................... 13-20 Table 13.4.20 Equipment Conversion Costs for Cl ass A Equipment by Trial Standard Level (2008$ millions)............................................................................................... 13-20 Table 13.4.21 Equipment Conversion Costs for Cl ass B Equipment by Trial Standard Level (2008$ millions)............................................................................................... 13-20 Table 13.4.22 Preservation-of-Ope rating-Profit Markup Scenario for Small-Sized Class A Equipment........................................................................................................ 13-22 Table 13.4.23 Preservation-of-Ope rating-Profit Markup Scenario for Medium-Sized Class A Equipment........................................................................................................ 13-22 Table 13.4.24 Preservation-of-Ope rating-Profit Markup Scenario for Large-Sized Class A Equipment........................................................................................................ 13-23 Table 13.4.25 Preservation-of-Ope rating-Profit Markup Scenario for Small-Sized Class B Equipment........................................................................................................ 13-23 Table 13.4.26 Preservation-of-Ope rating-Profit Markup Scenario for Medium-Sized Class B Equipment........................................................................................................ 13-24 Table 13.4.27 Preservation-of-Ope rating-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-Per centage Markup Scenario..........................13-25 Table 13.5.2 Changes in Industry Net Present Value for All Equipment Sizes for Class A Preservation-of-Operating-P rofit 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-Per centage Markup Scenario..........................13-26 Table 13.5.4 Changes in Industry Net Present Value for All Equipment Sizes for Class B Preservation-of-Operating-P rofit 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 Esti mated Domestic Employment by Year ....13-32 Figure 13.6-2 Class B Equipment Production Esti mated 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 Industr y 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 Industr y 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

### CHAPTER 13 . MANUFACTURER IMPACT ANALYSIS

13.1 INTRODUCTION

In determining whether a standard is econom i cally 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 im pact of new energy c onservation standards on manufacturers of beverage vending machines (BVM ) and to assess the impact of such standards on employment and manufacturing capacity. Th e MIA has both quantitative and qualitative aspects.

The quantitative portion of the MIA primar ily relies on the Government Regulatory Impact Model (GRIM), an industry cash-flow m odel adapted for this rulemaking. GRIM inputs are industry cost structure, shipments, and pric ing 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 fa ctors such as equipment characteristics, characteristics of particular firms, and market and equipment trends. The MIA also includes an assessment of the impacts of standa rds on sub-groups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Ph ase I, Industry Profile, consisted of the preparation of an industry charac terization including data on ma rket share, sales volum es and trends, pricing, employment, and financial struct ure. 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 th is phase DOE also used publicly available information developed in Phase I to adapt the GRIM’s structure to f acilitate analysis of ne w BVM energy conservation standards. In Phase III, Sub-Group Impact An alysis, 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 additiona l insight of the BVM manufacturing industry. During these interviews, DOE discussed financia l 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 im pacts 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 co nducted 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 pr ofile 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 co llected information on the past and present structure and market characterist ics of the BVM industry. This included estimated market shares of BVM manufacturers, corporat e operating ratios, wages, em ployment, and production cost ratios. The industry profile included a top-dow n 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, ge neral, and administration expenses (SG&A); and research and development (R&D) expenses). DOE used additional sources of information to further calibrate its characteri zation 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 re ports. DOE also relied on info rmation 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 perform ed 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 conservati on standards can affect BVM m anufacturers in three distinct ways: (1) require additional investment, (2) raise pr oduction costs, and (3) affect revenues through variations in prices and ship ments. 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 us ing the GRIM on the BVM industry to quantify these impacts.

13.2.2.2 Interview Guide

During Phase III of th e MIA, DOE conducted in terviews with manufacturers to gather information on the effects of new energy conserva tion standards on revenues and finances, direct employment, capital assets, and industry competitiveness. Additionally, DOE conducted interviews with the largest pur chasers of BVM equipment to ga in additional information about the manufacturing industry. Before the interviews, DOE distributed an interview guide to help identify the impacts of new energy conservati on standards on individual manufacturers and subgroups of manufacturers. Manufact urers and the largest purchaser s of BVM equipment received the guide before the interviews to allow them to prepare their responses in advance. The interview guide led interviewe rs through a series of questi ons on current organizational characteristics, industry infrastructure, manu facturer 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. Howeve r, 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-gr oups that could be affected by the new energy conservation standards: major manufacturers and small busin esses. The following sections summarize the methodology and findings of this assessment.

13.2.3.1 Manufacturer Interviews

DOE supplemented the infor mation 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 intere sted parties to express thei r views privately on important issues, allowing confidential or sensitive informati on 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 pr ivate corporations, and members of the National Automatic Merchandising Associ ation (NAMA). DOE scheduled in terviews well in advance in order to provide every opportunity for key indi viduals to be available for comment. Although a written response to the questionnaire was acceptabl e, DOE prefers interac tive interviews because they help clarify responses and provide th e opportunity to identify additional issues.

DOE conducted detailed intervie ws with all manufacturers w ho agreed to participate to gain insight into the range of potential impact s and how these impacts vary with each TSL. During the interviews, DOE solicited informati on 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 intervie ws 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 po ssible 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 ma nu facturers with preliminary financial input figures from the GRIM for review and eval uation. During the interviews, DOE requested comments on the values DOE selected for the pa rameters. 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 estim ate is not adequate for assessing differential impacts among sub-groups of m anufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs significantly from the industry average could be more negatively affect ed. Ideally, DOE would consider the impact on every manufacturer individually; however, it typically uses the results of the industry characterization to group manufactur ers 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 ot her 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 standa rds published on August 22, 2008, as am ended, by the Small Business Administration (SBA) to de termine 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 standard s for various industries . BVM manufacturing is classified under NAICS 333311 (automatic vendi ng machine manufacturing). To be categorized as a small business, a BVM manufacturer a nd 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 stak eholders and NAMA representatives within the BVM industry if they were aware of other sm all business manufacturers. DOE then examined publicly available data and contac ted manufacturers, when needed, to determine if they meet the SBA’s definition of a small business manufactur er and if their manufacturing facilities are located in the United States. Based on this anal ysis, DOE estimates that there are six small BVM manufacturers. DOE contacted all six small busin ess manufacturers, through its contractor, to deliver an electronic questionnair e and request interviews. Out of the six possible small business manufacturers identified, less th an half responded and only one ag reed 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 manufactur er has a major market share in covered equipment while the remaining five have sm all market shares. For the small business manufacturer with a major market share, the im pacts of the proposed st andard 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 th at has a major market share in covered equipment will not be disproportionately disadvan taged by the proposed standard. It has a large shipment volume as a major supplier to the larg e bottlers and its access to capital is nearly identical to its larger competitors. Its large ship ment volume allows it to distribute the added cost of compliance across its products, similar to th e large manufacturers. Correspondingly, it echoed the large manufacturers’ concerns about ne w 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 co vered by the proposed sta ndard. The majority of equipment offered is specialty or niche equipment. As a result, the primary source of revenue for these small manufacturers comes from suppl ying a market underserved by the major manufacturers of covered equipment. Any co st 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 fo r 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 ne w en ergy conservation standards could be the consequential obsolescence of existing manufactur ing assets, including to oling and investment. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifica lly capacity utilization and pl ant location decisions in the United States and North America with and w ithout 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 en ergy 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 st andards on em ployment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, DOE used the GRIM to calculate empl oyment impacts at each TSL for each equipment class. During interviews, DOE explored curren t employment trends in the BVM industry. In addition, DOE solicited manufacture views on cha nges in employment pa tterns that may result from more stringent standard levels. The employment impacts section of the interview guide focused on current employment leve ls associated with manufacture rs at each of their production facilities, expected future employment leve ls 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 th e overlapping effects on manufacturers of new energy conservation standards and other re gulatory 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 conser vation standards rulemaking?” This open question initiated dialogue with the manufacturers, enabling th em to identify key points that DOE would explore and discuss du ring the interview. This sec tion describes the key issues manufacturers felt were of the highest importance in relation to the BVM energy conservation standards rulemaking and that would have th e most significant impact on the industry. Manufacturers indicated that, for th e most part, the risks associated with these issues increase with more stringent TSLs. The issues are overa ll concerns that many manufacturers expressed.

13.3.1 Customer Impacts and Performance Requirements

According to ma nufacturers, major cust omers 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 negativ ely impacted. In addition, their customers want improvement in energy effi ciency without significa nt 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 ma nufacturers, the industry ha s 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. Manufacturer s 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 simulta neously declining. Manufacturers estimate that without the saturation, the mark et 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 ma nufacturing 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 vol umes 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 with in the BVM operators’ industry.

13.3.3 ENERGY STAR

According to ma nufacturers, the ENERGY ST AR program has already led to great improvements in the efficiency of BVM equipment. However, manufacturers are concerned that the ENERGY STAR efficiency leve ls have become a de facto market requirement due to their

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### customers’ demand, not a voluntar y program. Therefore, meeting the ENERGY STAR efficiency level is a requirement to be co mpetitive. All manufacturers produce equipment that meets at least ENERGY STAR efficiency levels to survive in the industry but do not receive ta ngible 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 effi ciency level, manufactur ers are concerned that companies could be required to remove any lig hting or undertake costly redesigns (including light emitting diodes (LEDs). According to manuf acturers, LEDs have significant savings in energy but also significantly in crease 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 resp onsible for driving efficiency improvements are not those that benefit from the resulting re duction in energy consumption. Consequently, manufacturers can receive a premium for design cha nges that are cost eff ective for the servicing cost of the equipment and improving reliabilit y, costs for which end users are responsible. However, there are little opportunities to char ge premiums for equipment that exceeds the efficiency requirements of the major BVM purchas ers, costs for which bot tlers are responsible.

13.3.6 Third-Party Efficiency Kits

While this new energy conservation standard on ly applies to new equipment sold in the U.S., m anufacturers voiced thei r concern about third party e fficiency 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 thir d parties do not fully understand how their components interact with their machines. Ma nufacturers 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 ma rgins. Higher selling prices could harm profitability because manufacturers have experienced difficulty in passing cost in creases along to customer s. Manufactures noted that they are typically price takers, not price makers. Howeve r, 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 decreas e profitability because new vending machines are only one of the available options to their cu stomers. For example, instead of purchasing new BVMs, customers could choose to purchase rema nufactured equipment, extend the lifetime of

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### their installed equipment, or switch to reach-in coolers or f ountains. 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 us ed to assess the im pact 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 cons ervation standards. The model also calculates the impacts on manufacturers due to new en ergy conservation standards.

13.4.1 Overview of the GRIM

The basic st ructure of the GRIM, illustrated in Figure 13.4-1 , is a standard annual cashflow analysis that uses ma nu facturer prices, manufacturing co sts, shipments, and industry financial information as inputs. The GRIM estimat es the effects of regul atory conditions caused by changes in costs, investments, and associated margins. The GRIM sp readsheet uses several inputs to arrive at a series of annual cash flow s, 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 st andard accounting principles. The model compared changes in INPV between the baseline equipment information (the base-case scenario) and different TSLs (the standard s-case scenario). The difference in INPV between the base case and the standards case(s) represents the es timated financial impact of the new energy conservation standard on manufacturers. Appendi x 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, com pa ny profiles, credit ratings, Census data, the shipments model, the engi neering analysis, and ma nufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to th e SEC (SEC 10-Ks) provided m any of the financial inputs to the GRIM. 1 

### These reports exist for pub licly held companies and ar e freely available to the public. The SEC 10-Ks provide cons istent 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 BV M industry analysis, depending on the prominence the BVM business has in the company’s overall oper ations. In determining financial parameters for the industry, DOE weighted corporate financ ial 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 intere st and taxes (EBIT)

DOE also used information from company SEC 10-K reports to calibrate the GRIM’s earnings before interest and taxes ag ainst the industry-weighted average.

13.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial informa tion. DOE relied on S&P reports to determine the industry’s aver age cost of debt for the cost of capital calculation.

13.4.2.3 Dun and Bradstreet Reports

Dun and Bradstreet (D&B) provides indepe ndent research regarding company cash flows, revenues, em ployees, and credit-worthine ss. Besides conducting manufacturer interviews, DOE used D&B reports to profile several manuf acturers which had the po tential to be small businesses.

13.4.2.4 Shipments Model

The GRIM used shipme nt projections deri ved 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 de scribing 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 appro ach, which calculated the incremental costs of adding specific design op tions to a baseline m odel. For each equipment class, DOE analyzed three beverage vending machin es of different representative sizes to assess how energy use varies with size. The manufactur er 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 intervie ws and reflected in the GRIM include

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

 Equipment conversion costs (one-time investme nts in research, equipment development, testing, and marketing);

 The portion of the capital conve rsion costs that companies us e 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 estima tes 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 subsid iary of a more diversified pare nt company that manufactures equipment other than BVMs. Because the SE C 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 manufacturer s 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 thes e values, DOE calibrated its original estimates to develop financial parameters that it cons iders representative of the BVM industry. An aggregation of the MIA interv iew 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 rulema king (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-m an GRIM, DOE estimated the we ighted-average cost of capital (WACC) for the industry to use as the discount rate us ed to calculate INPV. DOE used SEC data to estimate the WACC of publicly traded comp anies 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 comp anies’ 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 ini tial 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 disc ount rate to be 7.0 percent.

13.4.5 Trial Standard Levels

DOE developed seven TS Ls for Class A equipm ent 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 m etric 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 Trial Standard Levels for Class A Equipment Analyzed (kWh/day) Equipment Class and 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 Trial Standard Levels for Class B Equipment Analyzed (kWh/day) Equipment Class and 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 rev enues using the shipment forecasts and average efficiency values produced by the national energy savings (N ES) shipment model (cha pter 10 of this TSD). The shipment analysis is a key driver of manufac turer finances because changes in the efficiency mix at the various trial standard levels are tied to shipments. Fu rther explanation of assumptions and calculations of total shipme nts 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-sh ipment 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 Cla ss 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 Cla ss 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 ma nufacturer produc t costs (the direct manufacturing costs), non-produc tion costs (indirect costs like SG&A), and profit. The components of MSP are shown in Figure 13.4-2 below.

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### Figure 13.4-2 Cost Components of MSP.

In order to calculate the MP Cs, DOE disaggregated the components of MSP using a cost structure for the BVM industry. The industry co st 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 us ing publicly available information from the Census Bureau’s 2006 Annual Survey of Manufactu rers (2006 ASM) and SEC 10-K reports filed by publicly traded manufacturers. For BVM, DOE us ed the industry cost structure constructed from 2006 ASM data classified under NAI CS 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 fi nancial 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 manuf acturing 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 co st assump tions 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 Mat erial 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 Mat erial 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 Mat erial 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 Mat erial 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 Mat erial 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 Mat erial 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 m anufacturers to incur one-time conversion costs to bring their production facilit ies and product designs in compliance with the new regulation. For the MIA, DOE classified th ese one-time conversion costs into two major groups. Equipment conversion costs are one-time investments in re search, development, testing, and marketing focused on making equipment desi gns comply with the new energy conservation standard. Capital conversion costs are one-time i nvestments in property, plant, and equipment to adapt or change existing production facilities so that new equipm ent designs can be fabricated and assembled under the new regulation.

During the MIA interviews, DOE asked manuf acturers to estimate the conversion costs they would incur due to new energy conservatio n standards. Capital c onversion costs include replacing foam fixtures for various models, re tooling machinery for redesigned components, and

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### possible changes to factory layou t. Equipment conversion costs include R&D, certification and testing, marketing, and other costs required to bri ng more efficient equipment onto the market. In general, manufacturers described th e efficiency levels that coul d be reached by changing existing equipment designs. For these efficiency levels , manufactures would incur mostly equipment conversion costs for engineering and testing expenses to increa se 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 w ould have to be completely redesigned. At these efficiency levels and higher, manufacturers would incur substantial equipment and capital conversion costs. The engineering resources woul d have to be employed to design and test new equipment and exiting production lines would ne ed substantial changes to manufacture the redesigned equipment.

DOE used the costs manufacturers provided, wei ghted 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 anal ysis to account for changes to the efficiency levels made for the NOPR. Finally, DOE dist ributed 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 Cl ass A Equipment by Trial Standard Level (2008$ millions)
Trial Standard Level Equipment Class and 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)
Trial Standard Level

Equipment Class and Size 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)
Trial Standard Level Equipment Class and 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)
Trial Standard Level Equipment Class Size 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 ma nufacturer markup is a multiplier th at converts MPC to MSP. As shown in

Figure 13.4-2 , the manufacturer markup is multiplied by the MP C (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 engi neering analysis. Although the MSPs in the base case are calculated in the engineering analysis, for the MIA DOE also examines how different manufacturer markups coul d impact MSPs and industry profitability.

To understand how baseline and more-effici ent equipment are differentiated, DOE reviewed manufacturer catalogs and utilized in formation 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 characteri zed the prevailing markup conditions and described the range of market responses as a result of ne w energy conservation standards.

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### 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-Marg in-Percentage Scenario

Under the preserva tion-of-gross-margin-p ercentage scenario, DOE applied a single uniform “gross margin percentage” markup across a ll efficiency levels and equipment classes. For this scenario, DOE used the manufacturer ma rkup that yielded the same MSPs found in the engineering analysis in both th e base case and the standards case . In this scenario, DOE assumed that as production costs increa se in response to energy conser vation standards, manufacturers would be able to maintain the same gross margin percentage markup. As production costs increase with efficiency, this scenario implie s that the absolute dolla r markup would increase. DOE assumed the manufacturer markup—which in cludes SG&A expenses, R&D expenses, and profit—to be approximately 1.26.

During interviews, most manufacturers indicat ed that, currently, it is difficult to pass along cost increases because of the competitiveness of the industry and th e ability of any large manufacturer to meet the demand of the entire in dustry. However, manufacturers indicated it is more difficult to pass along material cost increa ses 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 taxe s. The implicit assumption behind this markup scenario is that the industry can only maintain it s 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 th at 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

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### Table 13.4.20 Preservation-of-Operating-Profit Markup Scenario for Small-Sized Class A Equipment Markups by TSL Proposed 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 Markups by TSL Proposed 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

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### Table 13.4.22 Preservation-of-Operating-Profit Markup Scenario for Large-Sized Class A Equipment Markups by TSL Proposed 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 Markups by TSL Proposed 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

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### Table 13.4.24 Preservation-of-Operating-Profit Markup Scenario for Medium-Sized Class B Equipment Markups by TSL Proposed 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 Markups by TSL Proposed 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 pr evious 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 se ction and consist of two key financial metrics: INPV and annual cash flows.

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### 13.5.1 Impacts on Industry Net Present Value

In the MI A, 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 particul ar 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 th e Class A and Class B BVM equipm ent 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-P ercentage 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 2008$ millions - 0.0 (0.2) (1.9) (2.1) (8.8) (12.4) (8.3) Change in 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-P rofit 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 2008$ millions - (0.0) (0.4) (2.6) (3.1) (9.9) (13.7) (20.9) Change in 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

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### Table 13.5.3 Changes in Industry Net Present Value for All Equipment Sizes for Class B Preservation-of-Gross-Margin-P ercentage 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 2008$ millions - 0.0 0.0 (0.8) (1.3) (9.7) (11.2) Change in 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) 2008$ millions - (0.0) (0.0) (0.9) (1.3) (13.4) (23.4) Change in 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 l ong-term effects of new energy conservation standards, short-term changes in cash flow ar e also im portant 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 ma y be near. Thus, a short-term disturbance can have long-term effects that the INPV cannot capture. To get an id ea 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 ca ses assumi ng the different markups scenarios.

13-26$(10) $(8) $(6) $(4) $(2) $- $2

$4 $6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year2008$ 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 Indust ry 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
Year2008$ 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 Indu stry Net Cash Flows (Preservation-ofOperating-Profit Markup Scenario )

13-27$(12) $(10)

$(8) $(6) $(4) $(2) $- $2

$4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year2008$ 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 Indust ry 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
Year2008$ 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 Indu stry Net Cash Flows (Preservation-ofOperating-Profit Markup Scenario)

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### 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 c onservation 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 ener gy 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 equipmen t 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 equipmen t. However, more cash is also required this year to boost working capital. Higher working cap ital is required in this year to pay for higher costs associated with manufacturing more e xpensive equipment (more expensive purchased parts, inventory carrying costs, and higher standard R&D and cap ital expenditures). At most TSLs, the higher cash flow from operations offset s 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 th an 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 standar d, the impact on cash flow depends on operating revenue. Higher TSLs have a positive impact on cas h 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 operati ng cash flow increases with more expensive equipment. Under the preservation-of-operating- profit scenario, free cas h flow returns to a similar level as the base case in the years followi ng 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 th e impacts of energy co ns ervation 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 manufactur ers to estimate the inputs necessa ry to calculate industry-wide labor expenditures and domestic employment levels.

DOE calculated the labor perc entage of the industry cost structure by dividing total production worker wages in the 2006 ASM by the to tal value of shipment s. To calculate the annual labor expenditure on production labor, the valu e of production labor in the industry cost structure was converted to a percentage of th e cost of goods sold (COGS). In the GRIM, the labor expenditures for each year are calculate d by multiplying industry COGS by the production

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### labor percentage. As a result, high er TSLs have greater direct la bor costs because more efficient products have higher MPCs. Based on interviews w ith manufacturers, the vast majority of BVMs sold in the U.S. are fully manufactured or asse mbled domestically. Therefore, DOE assumed that the annual total labor expe nditure represented U.S. labor expenditures.

The domestic annual labor expenditures in the GRIM were converted to domestic production employment levels by dividing production labor expend itures by the annual payment per production worker (production worker hours tim es 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 empl oyment levels were calculated for the base case and at each TSL. The impacts on dom estic 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 re present the U.S. production workers that are impacted by this rulemaking. U.S. workers invol ved in manufacturing or supporting products for exports would not be impacted and are not included as pa rt of the labor impacts.

The GRIM calculates that the BVM industry’ s base case domestic la bor 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 rate b 

### 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 bot h 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 dome stic 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, pro cessing, assembling, inspecting, recei ving, 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, co llection, 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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### Table 13.6.1 Class A Equipment Esti mated 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 Esti mated 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 employme nt levels for each TS L calculated by the GRIM.

13-310 100 200 300 400 500 600 700 800Total 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 700Total 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

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### DOE expects that there would be positive di rect employment impacts among domestic BVM manufacturers for all TSLs if current industry market shar es are not altered by new energy conservation standards. These pos itive 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 eq uipment. The labor costs (and associated employment) at these TSLs increase much less dramatically than the material costs because material costs comprise a much larger percenta ge of COGS. Finally, thou gh there are capital and product conversion costs to desi gn and manufacturer standards-co mpliant 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 sh own 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 imp acts 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 increas e 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 re location 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 curre nt plans to relocate production facilities, at higher TSLs there would be increased pressure to cut costs, which could result in relocation. In addition, while ma nufacturers indicated that they did not expect new energy conservation standards to alter ex isting market shares, they agreed that standards could increase pressure for consolidation with in the industry. The lo w profitability and existing excess capacity in the industry could make it more likely that every manufacturer woul d not invest to make standards-compliant equipment if those investme nts were too costly. In addition, manufacturers indicated that consolidation coul d 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, th e labor impacts would be differe nt if manufacturers chose to relocate to lower cost countries or manufacturer s consolidated. However, the labor impacts due to relocation and consolidation are not calculate d 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 ma jority of BVM manuf acturers, new energy conservation standards will not affect manufacturers’ production capacit y. Within the last decade, annual shipments of refrigerated beverage vending mach ines have decreased almost three-fold. Due to the decline in shipments, it is likely that all of the major ma nufacturers have the capacity to meet and exceed

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### the recent market demand. Consequently, the indu stry 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 cont inue to meet market demand under new energy conservation standards.

13.6.3 Exports

During interviews, DOE learned that ma nuf acturers export a signi ficant number of BVMs. Depending on the manufactur er, exports can surpass 10 pe rcent of total shipments. Manufacturers stated that BVMs are shipped to almost every market except East Asia. Most manufacturers are not concerned about new en ergy conservation standards affecting exports. However, manufacturers did st ate that high energy conser vation standards could cause equipment prices to increase sign ificantly, which could affect e xports if foreign markets would not bear price increases. Manufact urers indicated a new U.S. ener gy conservation standard could increase the selling prices of exports because most equipment is typically manufactured on the same production line (i.e., manufacturers genera lly do not design separate platforms for each market (country) to minimize manufacturing comp lexity and per unit costs). Manufacturers also stated that their exports are not generally a ffected by energy conserva tion 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 ma y not impose a si gnificant burden on manufacturers, the combined effects of several im pending regulations may have se rious consequences for some manufacturers, groups of manufact urers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regu latory burden. For the cumulative regulatory burden analysis, DOE describes other significant e quipment-specific regulati ons 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 ener gy conservation standards for these products. d



### Companies that produce a wider range of regul ated equipment may be faced with more capital and equipment development expenditures than their competitors. Regulatory burdens can prompt companies to exit the market or re duce 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 propos ed 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 thr ee years from the date of publication of the final rule (approximately August 2012).

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### In general, manufacturers we re not greatly concerned abou t other Federal, state, and international regulations. Manufacturers indicated th at the requirements of their major customers have a much more substantial impact on their business than an y of these other regulations.

13.6.4.1 Other DOE regulations

DOE did not identify any other DOE regul ations that also apply to equipment

m anufactured by BVM manu facturers or their parent companie s in the three years leading up to and the three years after the eff ective 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 almo st all markets e xcept East Asia. In general, manufacturers are not greatly concerned with in ternational energy conservation standards. Currently, Canada has energy conserva tion standards for BVMs, enforcing efficiency levels that are equivalent to ENERGY STAR Ti er II. Other international energy conservation standards for BVMs do not reach such levels an d therefore manufacturer s in general already meet all energy conservation standards imposed by other nations.

13.6.4.3 Other Regulations

During interviews, ma nufacturers 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 sw itch 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 impos ed on BVM manufacturers include the various international testing requirements. Because some countries re quire 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 regulati ons 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 su mmarizes the diffe rent 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 standard s. DOE also notes that whil e these two scenarios bound the range of most plausible impacts on manufacturers, there potentially could be circumstances which cause manufacturers to experien ce impacts outside of this range.

To assess the lower end of the range of pot ential impacts for the refrigerated beverage vending machine industry, DOE considered th e 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 in creased production costs to their customers.

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### However, during interviews manufac turers indicated that market c onditions usually do not allow them to fully pass through costs to their customer s. To assess the higher end of the range of potential impacts for the refrig erated beverage vending machin e industry, DOE considered the preservation-of-operating-profit scenario. This scenario models manufacturer concerns about the overcapacity of the industry and in ability to set selling prices. In this scenario, manufacturers spend the necessary investments re quired to covert their facilities to produce standards-compliant equipment. Despite this effort, ope rating 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 equipmen t 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 signi ficantly 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 m illion in the year leading up to the standards. At TSL 2, manufacturers will have to make so me component switches to comply with the standard. However, most manufactur ers will not have to make si gnificant alterations to their production process and will only require minima l 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 m illion in the year leading up to the standards. At TSL 3, manufacturers will have to make additi onal 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 e nough 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 fl ow decreases by approximately 52.4 percent to $1.08 million, compared to the base case value of $2.27 m illion in the year leading up to the standards. At TSL 4, manufacturers will have to make additi onal component switches and changes to their existing production lines to comply with the standa rd. The most significant change that must be implemented at this TSL is replacing fluorescent lighting with LEDs. If pr ofitability remains at pre-standard levels, then the impact s 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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### $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 re design all their existing equipment and make costly changes to their producti on lines in order to comply wi th 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 re design all their existing equipment and make capital investments in their production lines in order to comply with th e standard. Manufacturers will have to make additional alterations to th e existing equipment cabinet designs. In addition, the equipment changes necessary to meet TS L 6 are more complex, which increases the engineering and capital re sources 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 profita bility 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 expenditu res 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 involve s 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 signifi cant driver of INPV. If profitability does not increase with the substantially higher manufact uring 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 equipmen t for sale today meets these TSLs. Therefore, DOE expects there will be no equipment or capita l 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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### million, compared to the base case value of $1.42 m illion in the year leading up to the standards. At TSL 2, manufacturers will have to make so me component switches to comply with the standard. However, most manufacturers will not have to significantly alter their production process. In addition, these minor design change s will not raise the pr oduction costs beyond the cost of most equipment sold today, resulti ng 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 fl ow decreases by approximately 46.3 percent to $0.76 million, compared to the base case value of $1.42 m illion in the year leading up to the standards. At TSL 4, manufacturers will have to make additi onal 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 sa me 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 re design all their existing equipment and make capital investments in their production lines in or der to comply with the standard. In addition, the equipment designs necessary to meet TSL 5 are more complex, which incr eases the engineering and capital resources that must be employed. Finally, the produc tion costs of equipment that meet TSL 5 are higher. The cost to manufacture sta ndards-compliant equipm ent has the potential to make the industry impacts greater if ope rating 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 ad ditional and more complex changes to existing cabinet designs. These additional changes increa se 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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### REFERENCES

1 

### Securities and Exchange Commission, Annual 10-K Reports , Various Years,

Washington D.C., www.sec.gov.