APPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) SUPPORTING DOCUMENTATION

TABLE OF CONTENTS 12C.1 INTRODUCTION AND PURPOSE

................................... 12C-1 12C.2 MODEL DESCRIPTION

............................................ 12C-1 12C.3 DETAILED CASH FLOW EXAMPLE

................................. 12C-4 12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS

....... 12C-5

12C-iAPPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL (GRIM) SUPPORTING DOCUMENTATION

12C .1 INTRODUCTION AND PURPOSE The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the im pacts of energy conservation standards and other regulations on manufacturers. The basic mode of analysis is to estimate the change in value of the industry or manufacturers(s) following a regulation or a series of regulations. The model structure also allows an analysis of multiple products with regulations taking effect over a period of time, and of multiple regulations on the same product. Industry net present value is defined, for the purpose of this analysis, as the discounted sum of industry free cash flows plus a discounted terminal value. The model calculates the actual cash flows by year and then determines the present value of those cash flows both without an energy conservation standard (i.e., the base case) and under different trial standard levels (TSLs). Output from the model consists of summary financial metrics, graphs of major variables, and, when appropriate, the complete cash flow calculation.

12C .2 MODEL DE SCRIPTION The basic structure of the GRIM is a standard annual cash flow analysis that uses ma nufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters as inputs and accepts a set of regulatory conditions as changes in costs and investments. The cash flow analysis is separated into two major blocks: income and cash flow. The income calculation determines net operating profit after taxes. The cash flow calculation converts net operating profit after taxes into an annual cash flow by including investment and non-cash items. Below are definitions of listed items on the printout of the output sheet (see Section 12.C.3). (1) Unit Sales: Tot al annual shipments for the industry were obtained from the National Impact Analysis Spreadsheet; (2) Revenues:An nual revenues; computed by multiplying manufacturer selling price at each kilovolt-ampere (kVA) rating by the annual shipments at the same kVA rating, summed over all kVA ratings; (3) Labor: The portion of cost of goods sold (COGS) that includes direct labor, commissions, dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and assembly labor up-time; (4) Material: The p ortion of COGS that includes materials;

12C-1(5) Overhead: The portion of COGS that i ncludes indirect labor, indirect material, energy use, maintenance, depreciation, property taxes, and insurance related to assets. While included in overhead, the depreciation is shown as a separate line item; (6) Depreciation: Annu al depreciation computed as a percentage of Revenues (2) . While included in overhead, the depreciation is shown as a separate line item; (7)Standard SG&A:Sel ling, general, and administrative costs are computed as a percentage of Revenues (2) ; (8) R&D: GRIM separat ely accounts for ordinary research and development (R&D) as a percentage of Revenues (2); (9) Product Conversion Expense: Pr oduct conversion expenses are one-time investments in research, development, testing, and marketing focused on making product designs comply with the new efficiency standard. GRIM allocates these costs over the period between the standard’s announcement and effective dates; (10) Stranded Asset Writeoff: In the year the standard becomes effective, a one time write-off of stranded assets is accounted for; (11) Earnings Before Interest and Taxes (EBIT): Includes profi ts before deductions for interest paid and taxes; (12) EBIT as a Percentage of Sales: GRIM calculates EBIT as a percentage of sales to compare with the industry’s average reported in financial statements; (13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Ma jor Assumptionsby EBIT (11)

. (14) Net Operating Profits After Taxes (NOPAT):Computed by subtracting Cost of Goods Sold ((3) to (6)) , SG&A (7) , R&D (8) , Product Conversion Expense (9), Stranded Asset Writeoff (10), and Taxes (13) from Revenues (2)

. (15) NOPAT repeated: NOPAT is repeated in the Stat ement of Cash Flows; (16) Depreciation repeated:Depreciation is added back in the Statement of Cash Flows because it is a non-cash expense; (17) Change in Working Capital: Chang e in cash tied up in accounts receivable, inventory, and other cash investments necessary to support operations is calculated by multiplying working capital (as a percentage of revenues) by the change in annual revenues. (18) Cash Flow From Operations: Calculated by taking NOPAT (15) , adding back non-cash

12C-2items such as a Depreciation (16), and subtracting out Change in Working Capital (17) ; (19) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to maintain and replace existing production assets, computed as a percentage of Revenues (2) ; (20)Conversion Capital Expenditures:Co nversion capital expenditures are one-time investments in property, plant, and equipment to adapt or change existing production facilities so that new product designs can be fabricated and assembled under the new regulation; (21) Cash Used in Investment:Total i nvestments in property, plant, and equipment are computed by adding Ordinary Capital Expenditures (19) and Conversion Capital Expenditures (20); (22)Free Cash Flow: Annual ca sh flow from operations and investments; computed by subtracting Cash Used in Investment (21) from Cash Flow from Operations (18) ; (23) Terminal Value: Est imate of the continuing value of the industry after 2038. Computed by growing the Free Cash Flow in year 2038 at a constant rate in perpetuity; (24) Present Value Factor: Factor used to calculate an estimate of the present value of an amount to be received in the future; (25) Discounted Cash Flow: Free Cash Flows (22) mul tiplied by the Present Value Factor (24). For 2038 the discounted cash flow includes the discounted Terminal Value (23) ; and (26) Industry Net Present Value: Th e sum of Discounted Cash Flows (25).

12C-312C .3 DETAILED CASH FLOW EXAMPLE

12C-412C .4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS
The following user-instructions are contained on the “Welcome” sheet of the distribution transf ormer GRIM: 1. The red-tabbed sheets pertain to overview information. The pink-tabbed sheets refer to i nput information. The green-tabbed sheets represent calculations. The blue-tabbed sheets contain numerical and graphical output. 2. Pink cells designate input information. Green cells designate intermediate calculations. 3. By clicking on sheet names in column B of the "Index" sheet, the workbook can be quic kly navigated. 4. Use the "Major Assumptions" sheet to choose the desired scenario. Cell B3 is used to choose t he superclass. Cell B6 is used to choose the trial standard level (TSL). Cell B7 allows toggling between TSLs 1 through 5 and TSLs D, C, B, A, and 6. Row 33 is used to select the markup scenarios. Within each superclass (LV dry-type, MV dry-type, and Liquid-Immersed), the markup scenario should be chosen consistently. Markup Scenario 1 is the "Preservation of Gross Margin Percentage Scenario." Markup Scenario 2 is the "Preservation of Operating Profit Scenario." See Chapter 12 of the Technical Support Document for more information. 5. After selecting the desired scenario, go to the blue-tabbed sheet entitled "Summary Report." Rows 16-18 summarize the impact on Industry Net Present Value (INPV). 6. Other blue-tabbed sheets provide graphical information summarizing the scenario. Note, on some computers, the workbook may need to be closed and re-opened before the graphical information will completely update.

12C-5