APPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

TABLE OF CONTENTS

13B.1 INTRODUCTION AND PURPOSE .......................................................................... 13B-1 13B.2 MODEL DESCRIPTION ........................................................................................... 13B-1 13B.3 DETAILED CASH FL OW EXAMPLE..................................................................... 13B-4

13B-iAPPENDIX 13B. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

13B.1 INTRODUCTION AND PURPOSE The purpose of the Government Regulatory Imp act Model (GRIM) is to help quantify the impacts 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 manufacturer(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 pe riod of time, and of multiple regulations on the same products. 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 valu e. 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 diffe rent trial standard levels (TSLs). Output from the model consists of summary fi nancial metrics, graphs of major variables, and, when appropriate, access to th e complete cash flow calculation.

13B.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standa rd annual cash flow analysis that uses manufacturer selling prices, manu facturing 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 majo r blocks: income and cash flow. The income calculation determines net operating profit after ta xes. The cash flow ca lculation converts net operating profit after taxes into an annual cash fl ow by including investment and non-cash items. Below are definitions of listed items on the printout of the output sheet (see section 13B.3). (1) Unit Sales: Total annual shipments for the indus try were obtained from the National Energy Savings Spreadsheet; (2) Revenues: Annual revenues - computed by multip lying products unit prices at each efficiency level by the appropr iate manufacturer markup; (3) Labor: The portion of cost of goods sold (COGS) that includes direct labor, commissions, dismissal pay, bonuses, vacation, sick leave, so cial security contributions, fringe, and assembly labor up-time; (4) Material: The portion of COGS that includes materials; (5) Overhead: The portion of COGS that includes indirect labor, indi rect 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;

13B-1(6) Depreciation: The portion of overhead that includes an allowance for the total amount of fixed assets used to produce that one unit. Annual depreciation com puted as a percentage of COGS. While included in overhead, the deprecia tion is shown as a separate line item; (7) Stranded Assets: In the year the standard become s effective, a one time write-off of stranded assets is accounted for; (8) Standard SG&A: Selling, general, and administrative costs are computed as a percentage of Revenues (2) ; (9) R&D: GRIM separately accounts for ordinary research and development (R&D) as a percentage of Revenues (2) ; (10) Product Conversion Costs: Product conversion costs are on e-time investments in research, development, testing, and marketing focused on making products designs comply with the new energy conservation standard. GRIM allo cates these costs over the period between the standard’s announcement and effective dates; (11) Earnings Before Interest and Taxes (EBIT): Includes profits before deductions for interest paid and taxes; (12) EBIT as a Percentage of Sales (EBIT/Revenues): GRIM calculates EBIT as a percentage of sales to compare with the industry’s av erage reported in financial statements; (13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major Assumptions by EBIT (11)

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

. (15) NOPAT repeated : NOPAT is repeated in the Statement of Cash Flows; (16) Depreciation repeated : Depreciation and Stra nded Assets are added back in the Statement of Cash Flows because they are non-cash expenses; (17) Change in Working Capital : Change in cash tied up in accounts receivable, inventory, and other cash investments necessary to suppor t operations is calculated by multiplying working capital (as a percenta ge of revenues) by the cha nge in annual revenues. (18) Cash Flow From Operations : Calculated by taking NOPAT (15) , adding back non-cash items such as a Depreciation (16) , and subtracting out Change in Working Capital (17) ; (19) Ordinary Capital Expenditures: Ordinary investments in pr operty, plant, and equipment to maintain and replace existing production assets, computed as a percentage of Revenues (2) ;

13B-2(20) Capital Conversion Costs: Capital conversion costs are one-time investments in property, plant, and equipment to adapt or change exis ting production facilities so that new product designs can be fabricated and a ssembled under the new regulation; (21) Capital Investment: Total investm ents in property, plant, and equipment are computed by adding Ordinary Capital Expenditures (19) and Capital Conversion Costs (20) ; (22) Free Cash Flow: Annual cash flow from operations and investments; computed by subtracting Capital Investment (21) from Cash Flow from Operations (18) ; (23) Terminal Value: Estimate of the continuing value of the industry after 2042. Com puted by growing the Free Cash Flow in year 2042 at a constant rate in perpetuity; (24) Present Value Factor: Factor used to calculate an es timate of the present value of an amount to be received in the future; (25) Discounted Cash Flow: Free Cash Flows (22) multiplied by the Present Value Factor (24) . For 2042 the discounted cas h flow includes the discounted Terminal Value (23) ; and (26) Industry Value thru 2042: The sum of Discounted Cash Flows (25)

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13B-313B.3DETAILED CASH FLOW EXAMPLE13B-4