12

- i 

### CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

................................ ................................ ............................. 12

- 6

12.2 METHODOLOGY

................................ ................................ ............................ 12

- 6

12.2.1 Phase I: Industry Profile

................................ ................................ ............. 12

- 7

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

.................... 12

- 8

12.2.2.1 Industry Cash

- Flow Analysi s

................................ ....................... 12

- 8

12.2.2.2 Interview Guides

................................ ................................ ........... 12

- 9

12.2.3 Phase III: Subgroup Analysis

................................ ................................ ..... 12

- 9

12.2.3.1 Manufacturing Interviews

................................ ............................. 12

- 9

12.2.3.2 Revised Industry Cash

- Flow Analysis

................................ ........ 12

- 10

12.2.3.3 Manufacturer Subgroup Analysis

................................ ............... 12

- 10

12.2.3.3.1 Small

- Business Manufacturer Subgroup

..................... 12

- 10

12.2.3.3.2 SDHV Subgroup

................................ .......................... 12

- 11

12.2.3.4 Manufacturing Capacity Impact

................................ ................. 12

- 11

12.2.3.5 Employment Impact

................................ ................................ .... 12

- 12

12.2.3.6 Cumulative Regulatory Burden

................................ .................. 12

- 12

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

............................ 12

- 12

12.3.1 Adoption of Consensus Agreement

................................ .......................... 12

- 12

12.3.2 Potential for Significant Changes to Manufactu ring Facilities

................. 12

- 13

12.3.3 Increase in Product Repair and Migration to Alternative Products

.......... 12

- 13

12.3.4 HFC Phase Out Legislation

................................ ................................ ...... 12

- 13

12.3.5 Physical Constraints

................................ ................................ .................. 12

- 14

12.3.6 Supply Chain Constraints

................................ ................................ ......... 12

- 14

12.4 GRIM INPUTS AND ASSU MPTIONS

................................ .......................... 12

- 14

12.4.1 Overview of the GRIM

................................ ................................ ............. 12

- 15

12.4.2 Sources for GRIM Inputs

................................ ................................ .......... 12

- 15

12.4.2.1 Corporate Annual Reports

................................ .......................... 12

- 15

12.4.2.2 Standard and Poor Credit Ratings

................................ ............... 12

- 16

12.4.2.3 Dunn and Bradstreet Reports

................................ ...................... 12

- 16

12.4.2.4 Shipment Model

................................ ................................ .......... 12

- 16

12.4.2.5 Engineering Analysis

................................ ................................ .. 12

- 16

12.4.2.6 Manufacturer Interviews

................................ ............................. 12

- 17

12.4.3 Financial Parameters

................................ ................................ ................. 12

- 17

12.4.4 Corporate Discount Rate

................................ ................................ ........... 12

- 18

12.4.5 Trial Standard Levels

................................ ................................ ................ 1 2

- 21

12.4.6 NIA Shipments

................................ ................................ ......................... 12

- 22

12.4.6.1 Shipments Forecast

................................ ................................ ..... 12

- 24

12.4.7 Production Costs

................................ ................................ ....................... 12

- 24

12.4.8 Incremental Manufacturer Production Costs for Standby Mode and Off Mode 12

- 27

12.4.9 Conversion Costs

................................ ................................ ...................... 12

- 29

12.4.9.1 Capital Conversion Costs

................................ ........................... 12

- 29

12.4.9.2 Product Conversion Costs

................................ ........................... 12

- 31

12.4.10 Markup Scenarios

................................ ................................ ......... 12

- 32

12.4.10.1 Preservation of Operating Profit Scenario

................................ 12

- 3312

- ii 

### 12.4.10.1 Tiered Markup Scenario

................................ ........................... 12

- 36

12.4.10.1 Preservation of Gross Margin Percentage Scenario

................. 12

- 40

12.4.11 Experience Curve Rates

................................ ................................ 12

- 40

12.5 IN DUSTRY FINANCIAL IMP ACTS

................................ ............................ 12

- 40

12.5.1 Introduction

................................ ................................ ............................... 12

- 41

12.5.2 Conventional Products Industry Financial Impacts

................................ .. 12

- 42

12.5.3 Niche Products Industry Financial Impacts

................................ .............. 12

- 44

12.6 IMPACTS ON SMALL BUS INESS MANUFACTURER S

........................... 12

- 46

12.6.1 Impacts on Small Central Air Conditioning and Heat Pump Manufacturers 12

- 47

12.6.2 Impacts on Small Residential Furnace Manufacturers

............................. 12

- 48

12.7 OTHER IMPACTS

................................ ................................ .......................... 12

- 49

12.7.1 Employment

................................ ................................ .............................. 12

- 50

12.7.1.1 Methodology

................................ ................................ ............... 12

- 50

12.7.1.2 Employment Impacts

................................ ................................ .. 12

- 51

12.7.2 Production Capacity

................................ ................................ .................. 12

- 52

12.7.2.1 Central Air Conditioner and Heat Pump Capacity Impacts

........ 12

- 52

12.7.2.2 Residential Furnace Capacity Impacts

................................ ........ 12

- 53

12.7.3 Cumulative R egulatory Burden

................................ ................................ 12

- 53

12.7.3.1 DOE Regulations for Other Products Produced by Affected

Manufacturers

................................ ................................ ............... 12

- 54

12.7.3.2 Other Federal Regulations

................................ .......................... 12

- 55

Unites States Clean Air Act

................................ ..................... 12

- 55 Potential Climate Change and Greenhouse Gas Legislation

... 12

- 55

12.7.3.3 Other Regulations That Cou ld Impact Residential Refrigeration

Manufacturers

................................ ................................ ............... 12

- 56

Low and Ultra

- low NOx Standards

................................ ......... 12

- 56 Canadian Energy Conservation Standards

............................... 12

- 57

12.8 CONCLUSION

................................ ................................ ................................ 12

- 58

12.8.1 Energy Efficiency Standards

................................ ................................ .... 12

- 60

12.8.1.1 Conventional Products

................................ ................................ 12

- 60

12.8.1.2 Niche Furnace Products

................................ .............................. 12

- 63

12.8.1.1 SDHV Products

................................ ................................ .......... 12

- 65

12.8.2 Standby Mode & Off Mode Standards

................................ ..................... 12

- 67

LIST OF TABLES

Table 12.4.1 GRIM Financial Parameters Based on 2004

– 2008 Weighted Company

Financial Data

................................ ................................ ................................ .............. 12

- 17 Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking

................................ ................................ ................................ .......... 12

- 11

Table 12.4.2 GRIM Revised Furnace And Central Air Conditioning And Heat Pump

Financial Parameters

................................ ................................ ................................ .... 12

- 18 Table 12.4.3 Cost of Equity Calculation

................................ ................................ ...... 12

- 19

Table 12.4.4 Cost of Debt Calculation

................................ ................................ ......... 12

- 2012

- iii 

### Table 12.4.5 Energy Efficiency Levels For Central Air Conditioning and Heat Pump Products (SEER) and Furnace Products (AFUE)

................................ ........................ 12

- 21 Table 12.4.6 Trial Standard Levels for Energy Efficiency Analysis of Central Air

Conditioner and Heat Pump (SEER) and Furnace (AFUE) Products

.......................... 12

- 22 Table 12.4.7 Trial Standard Levels for Standby Mode and Off Mode Analysis of Central

A ir Conditioner and Heat Pump and Furnace Products (Watts)

................................ .. 12

- 22 Table 12.4.8 Total Base Case NIA Shipments (in Millions of Units)

......................... 12

- 23 Table 12.4.9 Manufacturer Production Cost Breakdown for Split AC

– Coil Only Systems (2009$)

................................ ................................ ................................ ........... 12

- 25 Table 12.4.10 Manufacturer Production Cost Breakdown for Split AC

– Coil & Blower Systems (2009$)

................................ ................................ ................................ ........... 12

- 25 Table 12.4.11 Manufacturer Production Cost Breakdown for Split System HP (2009$) 12

- 26 Table 12.4.12 Manufacturer Production Cost Breakdown for Single Package AC Systems (2009$)

................................ ................................ ................................ ......................... 12

- 26

Table 12.4.13 Manufacturer Production Cost Breakdown for Single Package HP Systems (2009$)

................................ ................................ ................................ ......................... 12

- 26

Table 12.4.14 Manufacturer Production Co st Breakdown for Non

- Weatherized Gas Furnace Systems (2009$)

................................ ................................ ............................. 12

- 27

Table 12.4.15 Manufacturer Production Cost Breakdown for Mobile Home Furnaces Systems (2009$)

................................ ................................ ................................ ........... 12

- 27 Table 12.4.16 Manufacturer Production Cost Breakdown for Oil Furnace Systems (2009$)

................................ ................................ ................................ ......................... 12

- 27 Table 12.4.17 Split System Blower Coil and Packaged Air Conditioner Off Mode Power Consumption and Cost

................................ ................................ ................................ . 12

- 28 Table 12.4.18 Coil Only Split System Air Conditioner Off Mode Power Consumption

and Cost

................................ ................................ ................................ ....................... 12

- 28 Table 12.4.19 Split System and Packaged Heat Pump Off Mode Power Consumption and

Cost

................................ ................................ ................................ .............................. 12

- 28

Table 12.4.20 Non

- weatherized Gas, Mobile Home Gas, and Eletric Furnace Standby Mode and Off Mode Power Consumption and Cost

................................ .................... 12

- 28

Table 12.4.21 Oil

- fired Furnace Standby Mode and Off Mode Power Consumption and

Cost

................................ ................................ ................................ .............................. 12

- 29 Table 12.4.22 Capital Conversion Costs by Product Class and Efficiency Level (2009$ Millions)

................................ ................................ ................................ ....................... 12

- 30 Table 12.4.23 Capital Conversion Costs by Product Class and Trial Standard Level (2009$ Millions)

................................ ................................ ................................ .......... 12

- 30

Tabl e 12.4.24 Product Conversion Costs by Product Class and Efficiency Level (2009$ Millions)

................................ ................................ ................................ ....................... 12

- 31

Table 12.4.25 Product Conversion Costs by Product Class and Trial Standard Level (2009$ Millions)

................................ ................................ ................................ .......... 12

- 32 Table 12.4.26 Preservation of EBIT Markups for Split

- System Air Conditioners (Coil Only)

................................ ................................ ................................ ............................ 12

- 34 Table 12.4.27 Preservation of EBIT Markups for Split

- System Air Conditioners (Blower Coil)

................................ ................................ ................................ ............................. 12

- 34 Table 12.4.28 Preservation of EBIT Markups for Split

- System Heat Pumps

............. 12

- 3412

- iv 

### Table 12.4.29 Preservation of EBIT Markups for Single Package Air Conditioners

.. 12

- 35 Table 12.4.30 Preservation of EBIT Markups for Single Package Heat Pumps

......... 12

- 35

Table 12.4.31 Preserva tion of EBIT Markups for Non

- Weatherized Gas Furnaces

... 12

- 35 Table 12.4.32 Preservation of EBIT Markups for Mobile Home Furnaces

................. 12

- 36 Table 12.4.33 Preservation of EBIT Markups for Oil Furnaces

................................ .. 12

- 36 Table 12.4.34 Tiered Markups for Split

- System Air Conditioners (Coil Only)

.......... 12

- 37 Table 12.4.35 Tiered Markups for Split

- System Air Conditioners (Blower Coil)

...... 12

- 37

Table 12.4.36 Tiered Markups for Split

- System Heat Pumps

................................ ..... 12

- 38 Table 12.4.37 Tiered Markups for Single Package Air Conditioners

.......................... 12

- 38 Table 12.4.38 Tiered Markups for Single Package Heat Pumps

................................ . 12

- 39 Table 12.4.39 Tiered Markups for Non

- Weatherized Gas Furnaces

........................... 12

- 39

Table 12.4.40 Tiered Markups for Mobile Home Furnaces

................................ ........ 12

- 39 Table 12.4.41 Tiered Markups for Oil Furnaces

................................ .......................... 12

- 40 Table 12.5.1 Changes in Industry Net Present Value for Conventional Products (Preservation of EBIT Markup Scenario)*

................................ ................................ .. 12

- 42 Table 12.5.2 Changes in Industry Net Present Value for Conventional Products (Tiered Markup Scenario) *

................................ ................................ ................................ ...... 12

- 42 Table 12.5.3 Changes in Industry Net Present Value for Niche Products

................... 12

- 44 Table 12.5.4 Changes in Industry Net Present Value for Niche Products

................... 12

- 44 Table 12.7.1 Potential Changes in the Total Number of Residential Furnace and Central Air Conditioners and Heat Pumps Production Workers in 2016

................................ . 12

- 51 Table 12.7.2 Other DOE and Federal Actions Affecting the Furnace And Central Air Conditioning And Heat Pump Industry

................................ ................................ ....... 12

- 55 Table 12.7.3 Furnace NOx Limits and Compliance Schedule for SCAQMD Rule 111

. 12

- 56 Table 12.7.4 NRCan Standards for Residential Boiler Efficiency

.............................. 12

- 58 Table 12.8.1 Summary of Active Mode TSLs*

................................ ........................... 12

- 59 Table 12.8.2 Summary of Off Mode TSLs (in Watts)

................................ ................. 12

- 59 Table 12.8.3 Changes in Industry Net Present Value for Conventio nal Products (Preservation of EBIT Markup Scenario) *



### ................................ ................................ ... 12

- 60 Table 12.8.4 Changes in Industry Net Present Value for Conventional Prod ucts (Tiered Markup Scenario) *



### ................................ ................................ ................................ ....... 12

- 60 Table 12.8.5 Changes in Industry Net Present Value for Niche Products

................... 12

- 63 Table 12.8.6 Changes in Industry Net Present Value for Niche Products

................... 12

- 64 Table 12.8.7 Changes in Industry Net Present Value for Niche Products

................... 12

- 67 Table 12.8.8 Changes in Industry Net Present Value for Niche Products

................... 12

- 68

LIST OF FIGURES

Figure 12.5.1 Annual Industry Net Cash Flows for Conventional Products (Preservation of EBIT Markup Scenario)

................................ ................................ .......................... 12

- 43 Figure 12.4.1 Using the GRIM to Calculate Cash Flow

................................ .............. 12

- 15

Figure 12.5.2 Annual Industry Net Cash Flows for Conventional Products (Tiered Markup Scenario)

................................ ................................ ................................ ......... 12

- 43 Figure 12.5.3 Annual Industry Net Cash Flows for Niche Products

........................... 12

- 4512

- v 

### Figure 12.5.4 Annual Industry Net Cash Flows for Niche Products

........................... 12

- 4612

- 6 

### CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S. Department of Energy (DOE) is required to consider “the economic impact of the standard on th e manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id

.

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an industry cash

- flow model adapted for each product in this rulemaking. The GRIM inputs include information on industry cost structure, shipments, and pricing strategies. The GRIM’s key output is the industry net present value (INPV). The model estimates the financial impact of more stringent energy conservat ion standards for each product by comparing changes in INPV between a base case and the various trial standard levels (TSLs) in the standards case . The qualitative part of the MIA addresses product characteristics, manufacturer characteristics , market and product trends, as well as the impact of standards on subgroups of manufacturers. DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of

amended energy conservation standards on manufacturers of residential refrigerators, freezers, and refrigerator

- freezers , and assessed the impact of such standards on d irect employment and manufacturing capacity.

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of preparing an industry characterization for the furnace and central air condition er and heat

pump industr y , including data on market share, sales volumes and trends, pricing, employment, and financial structure. In Phase II, “Industry Cash Flow,” DOE used the GRIM to assess the impacts of amended energy conservation standards on manufa cturers. Additionally, DOE developed an interview guide to gather information on the potential impacts on manufacturers. In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers representing a broad cross

- section of the HVAC industry. Using information from phase II and from the interviews, DOE refined its analysis in the GRIM, developed additional analyses for sub

- groups that required special consideration, and incorporated qualitative data from interviews into its analysis.12

- 7 

### In Phase II, DOE used the GRIM to analyze seven major product types for this rulemaking:

1) Split System Air Conditioner 2) Split System Heat Pump 3) Single Package Air Conditioner 4) Single Package Heat Pump 5) Non

- Weatherized Gas Furnace 6) Mobile Home Furnace 7) Oil Furnace 8) Electric Furnaces

No GRIM is provided for weatherized gas furnaces or space constrained air

conditioner s and heat pumps because the current energy conservation standard was determined to be equal to the max

- tech efficiency level in the engineering analysis. Based

o n DOE’s screening analysis, teardown analysis, and market research, DOE determined it would be unable to raise the energy conservation standards on these products due to the state of technology and the design constraints inherent to these products. Therefo re, DOE concluded that there is no need to perform a manufacturer impact analysis for these products given that the current standard already meets the max

- tech efficiency. Also, no GRIM is provided for the small

- duct, high

- velocity product class. Due to th e small size of the SDHV industry and the limited amount of published information, DOE had insufficient content to perform a quantitative analysis using the GRIM.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the furnace and central air conditioning and heat pump industry that built upon the market and technology

assessment prep ared for this rulemaking ( refer to c hapter 3 of the Technical Support

Document )

. Before initiating the detailed impact studies, DOE collected informati on on the present and past structure and market characteristics of the HVAC industry. This information included market share data, product shipments, manufacturer markups, and the cost structure for various manufacturers. The industry profile includes: (1) further detail on the overall market and product characteristics; (2) estimated manufacturer market shares; (3) financial parameters such as net plant, property, and equipment; selling, general and administrative (SG&A) expenses; cost of goods sold, etc.; and (4) trends in the number of firms, market, and product characteristics. The industry profile included a top

- down cost analysis of furnace and central air conditioning and heat pump

manufacturers that DOE used to derive the preliminary financial inputs for the GRIM ( e.g.

DOE also used public information to further calibrate its initial characterization of

the furnace and central air conditioner and heat pump industries, includ ing Securities and Exchange Commission (SEC) 10

– K reports, , revenues, depreciation, SG&A, and research and development (R&D) expenses).

1 

### Standard & Poor’s (S&P) stock reports, 2


### Dun and Bradstreet (D&B) company profiles, 3 

### corporate annual reports, and the U.S. Census Bureau’s 2006 Annual Survey of Manufacturers (2006 ASM). 4 

### DOE also12

- 8 

### characterized these industries using information from its engineering analysis and the

life

- cycle cost analysis.

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

Phase II focused on the financial impacts of potential amended energy

conservation s tandards on manufacturers of furnace and central air conditioning and heat pump products

. More stringent energy conservation standards can affect manufacturer cash flows in three distinct ways: (1) create a need for increased investment, (2) raise production costs per unit, and (3) alter revenue due to higher per

- unit prices and/or possible changes in sales volumes. To quantify these impacts, DOE used the GRIM to perform a cash

- flow analysis for furnace and central air conditioning and heat pump

man ufacturers . In performing these analyses, DOE used the financial values derived during Phase I and the shipment scenarios used in the NIA. In Phase II, DOE performed

these preliminary industry cash

- flow analyses and prepared written guides for

manufacturer interviews.

I n Phase II, DOE grouped the cash flow results for product classes made by the same manufacturers to allow DOE to better assess the impacts of amended energy conservation standards on manufacturers. DOE presented the MIA cash flow results for this rulemaking in two groupings: conventional products and niche products. Conventional products consisted of the split

- system air conditioning, split

- system heat pump, single package air conditioning, single package heat pump, and non

- weatherized gas fur nace product classes. Niche product classes include oil

- fired furnaces and mobile

home furnaces. Each of the two groups of product classes and results were based on a unique set of considered TSLs. These TSLs are described in section 12.4.5 below

. As discussed earlier, DOE performed a qualitative analysis of the remaining small

- duct, high

- velocity product class

.

12.2.2.1 Industry Cash

- Flow Analysis

The GRIM us es several factors to determine a series of annual cash flows from the announcement year of amended energy conservation standards until thirty years after

the standards’ compliance date. These factors include annual expected revenues, costs of goods sold

, SG&A, taxes, and capital expenditures related to the amended standards. Inputs to the GRIM include manufacturing production costs

, markup assumptions

, and shipments forecasts developed in other analyses. DOE derived the manufacturing costs

from the engineering analysis and information provided by the industry and estimated typical manufacturer markups from public financial reports and interviews with manufacturers. DOE developed alternative markup scenarios for each GRIM based on

discussions with man ufacturers. DOE’s shipments a nalysis, presented in c hapter 9 of th e TSD, provided the basis for the shipment projections in the GRIM. The financial parameters were developed using publicly available manufacturer data and were revised

with information submi tted confidentially during manufacturer interviews. The GRIM results are compared to base case projections for the industry. The financial impact of amended energy conservation standards is the difference between the discounted annual

cash flows in the bas e case and standards case at each TSL

.12

- 9 

### 12.2.2.2 Interview Guides

During Phase III of the MIA, DOE interviewed manufacturers to gather information on the effects of amended energy conservation on revenues and finances, direct employment, capital assets, and industr y competitiveness. Before the interviews, DOE distributed an interview guide to interviewees . The interview guide provided a starting point for identify ing relevant issues and impacts of amended energy conservation

standards on individual manufacturers or subgroups of manufacturers. Most of the information received from these meetings is protected by non

- disclosure agreements and resides with DOE’s contractors. The MIA interview topics included (1) key issues to this rulemaking; (2) a company overview and o rganizational characteristics; (3) engineering and life cycle cost analysis follow

- up; (4 ) manufactur er markups and profitability; (5 ) shipment projections and market shares; (6 ) financial parameters; (7) conversion costs; (8 ) cumulative regulatory burden; ( 9 ) direct employment impact assessment; (1 0 ) exports, foreign competition, and outsourcing; (1 1 ) consolidation; and (12) impacts on

small business es

.

12.2.3 Phase III: Subgroup Analysis

In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers

rep resenting approximately 75 percent of furnace and central air conditioning sales. Small and large companies, subsidiaries and independent firms, and public and private corporations were interviewed to provide a representative cross

- section of the HVAC

indu stry. The interviews provided DOE with valuable information for evaluating the impacts of amended energy conservation standards on manufacturer cash flows, investment requirements, and employment. Using information from phase II and from the interviews, DO E refined its analysis for the product classes included in the GRIM. Additionally, DOE performed qualitative analyses on niche products that were not incorporated into the GRIM and on sub

- groups that required special consideration.

12.2.3.1 Manufacturing Interviews

The information gathered in Phase I and the cash

- flow analysis performed in Phase II are supplemented with information gathered from manufacturer interviews in Phase III. The interview process provides an opportunity for interested parties to express

thei r views on important issues privately, allowing confidential or sensitive information to be considered in the rulemaking process. DOE sought to obtain feedback from industry on the approaches used in the GRIMs and to isolate key issues and concerns.

DOE used these interviews to tailor the GRIM to reflect unique financial characteristics of each product group. Within each product group, DOE contacted companies from its database of manufacturers. Interviews were scheduled well in advance to provide ever y opportunity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE sought interactive interviews, which help clarify responses and identify additional issues. The resulting information provid es valuable inputs to the GRIM developed for the product classes.12

- 10 

### During interviews, DOE defined two manufacturer subgroups (small businesses and SDHV manufacturers) that could be disproportionately impacted by amended energy

conservation standards. These subgroups are described in detail in section 12.2.3.3 below.

12.2.3.2 Revised Industry Cash

- Flow Analysis

In Phase II of the MIA, DOE provided manufacturer s with preliminary GRIM input financial figures for review and evaluation. During the interviews, DOE requested comments on the values it selected for the parameters. DOE revised its industry cash

flow model based on this feedback. Section 12.4.3 provides more information on how DOE calculated the parameters.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to develop an industry

- cash

- fl ow estimate may not adequately assess differential impacts of amended energy conservation standards among manufacturer subgroups. For example, small m anufacturers, niche players, or manufacturers exhibiting a cost structure that largely differs from the in dustry average could be more negatively affected. To address this possible impact, DOE used the results of the industry characterization analysis in Phase I to group manufacturers that exhibit

similar characteristics. As described in section 12.2.3 , DOE presents the industry impacts by grouping conventional and niche products separately

. These product groupings represent markets that are served by the same manufacturers. By segmenting the results into these product types, DOE is able to discuss how these subgroups of manufacturers will be impacted by amended energy conservation standards. Grouping these product categories reduced the need for a subgrou p analysis because the impacts of each group are characterized by the MIA separately.

12.2.3.3.1 Small

- Business Manufacturer Subgroup

DOE investigated whether small business manufacturers should be analyzed as a manufacturer subgroup. DOE used the Small Business Adm inistration (SBA) small business size standards published on August 22, 2008, as amended, and the North American Industry Classification System (NAICS) code, presented in Table 12.2

. 1 , to determine whether any small entities would be affected by the rulemaking. 5 

### For the product classes under review, the SBA bases its small business definition on the total number of employe es for a business, its subsidiaries, and its parent companies. An aggregated business entity with fewer employees than the listed limit is considered a

small business.12

- 11 

### Table 12.2

. 1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS

Air

- conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing N/A 750 333415



### DOE used publicly available and proprietary information to identify potential small manufacturers. DOE’s research involved industry trade association membership directories (including AHRI), product databases (e.g., AHRI Directory, the SBA Database), individua l company websites, and market research tools ( e.g.

Based on this analysis DOE identified five furnace companies and four companies

that manufacture central air conditioning and heat pump products as small businesses under SBA guidelines. DOE attempted to contact the small business es to solic it feedback on the potential impacts of energy conservation standards. The businesses replied with varying amounts of information in written responses and/or interviews. In addition to posing a subset of modified MIA interview questions, DOE solicited data on differential impacts these companies might experience from amended energy conservation standards. Based on these interviews and industry research, DOE reports the potential impacts of this rulemaking on small manufacturers in section 12.6. , Dunn and Bradstreet reports) to create a list of every company that manufactures or sells products covered by this rulemaking. DOE also asked stakeholders and industry representatives if they were aware of any other small manufacturers during manufacturer interviews and at previous DOE public meetings. DOE screened out companies that did not offer products covered by this rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated.

12.2.3.3.2 SDHV Subgrou p

DOE had insufficient information on the small duct, high velocity industry to build a shipments forecast model. As a result, it was not possible to perform a quantitative analysis using the GRIM for this product class. However, DOE did investigate the in dustry and interview manufacturers of this product class. As part of this rulemaking, DOE has performed a qualitative analysis to understand the potential impacts of an amended energy conservation standard on manufacturers of SDHV products.

12.2.3.4 Manufacturing C apacity Impact

One significant outcome of amended energy conservation standards could be the obsolescence of existing manufacturing assets, including tooling and investment. The manufacturer interview guides have a series of questions to help identify impa cts of amended standards on manufacturing capacity, specifically capacity utilization and plant location decisions in the United States and North America, with and without amended standards; the ability of manufacturers to upgrade or remodel existing facil ities to accommodate the new requirements; the nature and value of any stranded assets; and estimates for any one

- time changes to existing plant, property, and equipment (PPE).

DOE’s estimates of the one

- time capital changes and stranded assets affect the cash flow12

- 12 

### estimates in the GRIM. These estimates can be found in section Error! Reference

source not found. ; DOE’s discussion of the capacity impact can be found in section

12.7.2

.

12.2.3.5 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic direct employment patterns might be affected, the interviews explored current employment

trends in the residential HVAC industry . The interviews also solicited manu facturer views on changes in employment patterns that may result from more stringent standards. The employment impacts section of the interview guide focused on current employment levels associated with manufacturers at each production facility, expected f uture employment levels with and without amended energy conservation standards, and differences in workforce skills and issues related to the retraining of employees. The employment impacts are reported in section 12.7.1

.

12.2.3.6 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy conservation standards and other regulatory actions affecting the s ame products. DOE analyzed the impact on manufacturers of multiple, product

- specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified regulations relevant to furnace and central air conditioning and heat pump products , such as State regulations and other Federal regulations that impact other products made by the

same manufacturers . Discussion of the cumulative regulatory burden can be found in

section 12.7.3

.

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA interview starts by asking: “What are the key issues for your company regarding the energy conservation standard rulemaking?” This question prompts manufacturers to identify the issues they feel DOE should explore and discuss further during the interview. The follow ing sections describe the most significant issues identified by manufacturers. These summaries are provided in aggregate to protect manufacturer confidentiality.

12.3.1 Adoption of Consensus Agreement

All manufacturers interviewed either strongly supported or we re amenable to the consensus agreement that was proposed and signed by a number of manufacturers, advocacy organizations, and trade groups. Most interviewees were signatories and urged the Department to act as quickly as possible to adopt the consensus agr eement. Manufacturers indicated that the consensus agreement provides regulatory certainty, manageable conversion costs, and accelerated compliance dates that provide energy savings earlier than would otherwise be achieved. Due to the tight timelines outli ned in the agreement, manufacturers stated their desire for DOE to adopt the agreement as soon12

- 13 

### as possible in order to have sufficient time to meet the agreement’s energy conservation standards and associated compliance dates.

12.3.2 Potential for Significant Cha nges to Manufacturing Facilities

During interviews, several manufacturers indicated that central air conditioning and heat pump conversion costs are not linear, but would step up dramatically at various efficiency levels. In general, manufacturers were con cerned that a national baseline energy conservation standard above 14 SEER for split

- system air conditioning and split

system heat pumps would require extensive and costly product line redesigns. At various higher efficiency levels, system designs would ha ve to incorporate additional or more complex technologies, including two

- stage compressors, ECM fan motors, and larger heater exchangers. Therefore, to reach higher levels, units would have to increase in size, necessitating larger cabinet sizes and the pu rchase of new equipment and tooling. Several large manufacturers indicated that offshore production or completely new production facilities would be considered above 14 SEER due to the scope of changes required to

meet an amended standard. Manufacturer est imates for the total investment required to meet national standards in the 14.5 to 16 SEER range varied widely, often depending on the current state of each manufacturer’s production lines and whether a completely new production facility was required

.

12.3.3 Increase in Product Repair and Migration to Alternative Products

Several manufacturers noted that the higher cost of more

- efficient systems resulting from amended energy conservation standards would need to be passed on to consumers, absorbed by manufactu rers, or some combination of both. If manufacturers were to attempt to pass on higher costs, the industry is concerned higher prices would result in consumers pursing lower

- cost, less

- efficient alternatives. Manufacturers believe that consumers, facing hig her first costs, would be more likely to repair older, less

efficient heating and cooling systems rather than replace those units with new, more

efficient models. Similarly, manufacturers expressed concern that consumers would be more likely to switch to l ower up

- front cost, lower

- efficiency technologies such as room air conditioners and electric space heaters. Manufacturers agreed that these alternatives would reduce energy savings and reduce energy conserved.

As evidence, manufacturers cited market trends following the 2006 compliance date of the 2001 central air conditioners and heat pump energy conservation rulemaking. Since 2006, manufacturers have noted a decline in central air conditioner and heat pump sales coupled with an increase in room air condit ioner sales and an increase in orders for repair components. In general, the manufacturers are concerned that the decline in shipments from 2006 to 2010 will continue, and that a revised energy conservation standard will exacerbate the decline in unitary a ir conditioner shipments

.

12.3.4 HFC Phase Out Legislation

Manufacturers expressed strong concerns about legislation proposed in Congress that would phase out HFC refrigerants, including R

- 410A and R

- 134a. Any phase

- out12

- 14 

### would require extensive redesign of all c entral air conditioners and heat pump products to make use of an alternative refrigerant. Manufacturers asserted that there is no clear replacement for HFC refrigerants today. Without a clear replacement, the manufacturers stated that any phase

- out would c reate a period of uncertainty as the industry identifies suitable alternatives and then redesigns products around the replacement. It is unclear what efficiency levels could be achieved at reasonable cost without HFC refrigerants.

Manufacturers observed th at past phase

- outs generally have led to more

- expensive and

less

- efficient refrigerant replacements. Additionally, manufacturers stated that alternative refrigerants may require substantially larger systems to achieve the same levels of performance

.

12.3.5 Physi cal Constraints

Multiple manufacturers expressed concern that an increase in appliance efficiency standards would leave older homes, and multi

- family homes in particular, with few cost

effective options for replacing their cooling systems. As the efficien cy of air conditioning increases, the physical sizes of the units also increase. Manufacturers are concerned because central air conditioner and heat pump units are already so large that they can be

difficult to fit into some end

- user homes. Attic entry wa ys, basement doors, and condensing unit pads all present physical constraints when replacing an air conditioner with a larger, more

- efficient system. Multifamily homes are particularly restricted due to the limited space in utility closets and due to the l imited options for renovation. These physical constraints lead to higher installation costs, which may encourage customers to repair existing systems rather than replace them

.

12.3.6 Supply Chain Constraints

Some manufacturers expressed concern about the impact o f more

- stringent standards on their supply chain. Changes in energy conservation standards could affect the competitive positioning and dominance of component suppliers. One manufacturer cited the example of the 2001 central air conditioner rulemaking, aft er which one of two critical compressor suppliers nearly went bankrupt (because the change in standards led

most manufacturers to ch o ose design options that favored the technology of one supplier over the other). According to the manufacturer, having the i ndustry rely on a single supplier for critical components, even just a few, puts the entire industry at risk.

Additionally, manufacturers stated that more

- stringent energy conservation standards would increase the demand for some key components over curren t levels. Given that most manufacturers rely on the same set of suppliers, the amended standards could lead to long lead times for critical components, such as high

- efficiency compressors, ECM motors, modulating gas valves, advanced control systems and new production tooling.

12.4 GRIM INPUTS AND ASSU MPTIONS

The GRIM serves as the main tool for assessing the impact s on industry due to amended energy conservation standards. DOE relies on several sources to obtain inputs12

- 15 

### for the GRIM. Data and assumptions from the se sources are then fed into an accounting

model that calculates the industry cash flow both with and without amended energy

conservation standards

.

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4

. 1 , is an annual cash flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry

financial information as i nputs, and accepts a set of regulatory conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 2010, an d continuing to 2043 . The model calculates the INPV by summing the stream of annual discounted cash flows during this period and adding a discounted

terminal value

. 6



### Figure 12.4

. 1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares changes in INPV between the base case and the standard

- case scenario induced by amended energy conservation standards. The difference in INPV between the bas e case and the standard case(s) represents the estimated financial impact of the amended energy conservation standard on manufacturers. Appendix 12

- A provides more technical details

and user information for the GRIM.

12.4.2 Sources for GRIM Inputs

The GRIM uses s everal different sources for data inputs in determining industry cash flow. These sources include corporate annual reports, company profiles, Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer

interviews.

12.4.2.1 Corpo rate Annual Reports

Corporate annual reports to the SEC (SEC 10

- Ks) provided many of the initial financial inputs to the GRIM. These reports exist for publicly held companies and are12

- 16 

### freely available to the general public. DOE developed initial financial i nputs to the GRIM by examining the annual SEC 10

- K reports filed by publicly

- traded manufacturers that

manufactur e residential HVAC products and whose combined product range includes furnace and central air conditioning and heat pump products

. Since these companies do not provide detailed information about their individual product lines, DOE used the financial information for the entire companies as its initial estimates of the financial parameters in the GRIM analys i s . These figures were later revised usin g feedback from interviews to be representative of manufacturing for each product grouping . D OE used corporate annual reports to derive the following initial inputs to the GRIM:

• Tax rate • Working capital

• SG&A

• R&D • Depreciation • Capital expenditures

• Net PPE

12.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial information. DOE relied on S&P reports to determine the industry’s average cost of debt when calculating the cost of capital.

12.4.2.3 Dunn and Bradstreet Reports

D&B provides independent research on company cash flows, revenues, employees, and credit

- worthiness. Besides conducting manufacturer interviews, DOE used D&B reports to profile several manufacturers with the potential to be small

busines ses.

12.4.2.4 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the national impact analysis (NIA). The model relied on historical shipments data for

residential HVAC products . Chapter 9 of the TSD describes the methodology and analytical model DOE used to forecast shipments.

12.4.2.5 Engineering Analysis

During the engineering analysis, DOE used a manufacturing cost model to develop MPC estimates for furnace and central air conditioning and heat pump products. The analysis provided the labor, materials, overhead, and total production costs for products at each efficiency level. The engineering analysis also estimated a manufacturer markup and a shipping cost to provide the manufacturer selling pr ice (MSP) for each product at every efficiency level.12

- 17 

### 12.4.2.6 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative

cross

- section of manufacturers. DOE also interviewed manufacturers representing a significant portio n of sales in every product class . During these discussions, DOE obtained information to determine and verify GRIM input assumptions in each industry. Key topics discussed during the interviews and reflected in the GRIM include:

• capital conversion costs (one

- time investments in PPE);

• product conversion costs (one

- time investments in research, product development, testing, and marketing);

• product cost structure, or the portion of the MPCs related to materials, labor, overhead, and depreciation costs ;

• MPCs estimated in the engineering analysis; and

• possible profitability impacts.

12.4.3 Financial Parameters

Table 12.4

. 1 provides financial parameters for six large companies engaged in manufacturing and selling furnace and central air conditioning and heat pump products. The values listed are averages over a 5

- year period (2004 to 2008).

Table 12.4

. 1 GRIM Financial Parameters Based on 2004

– 200 8 Weighted Company

Financial Data

Parameter Industry

Weighted Average Manufacturers

A B C D E F

Tax Rate (% of Taxable Income) 28.3% 27.2% 33.6% 33.3% 18.8% 20.9% 37.5%

Working Capital (% of Revenue) 10.2% 7.2% 19.5% 10.2% 12.5% 3.5% 4.4%

SG&A (% of Revenue) 14.7% 11.7% 11.1% 23.3% 17.9% 10.0% 18.8%

R&D (% of Revenues) 1.9% 3.2% 0.5% 1.2% 1.1% 2.0% N/A

Depreciation (% of Revenues) 2.1% 2.3% 2.2% 1.3% 1.6% 2.0% 5%

Capital Expenditures (% of Revenues) 1.9% 2.1% 1.6% 1.8% 2.2% 2.2% 1.5%

Net Property, Plant, and Equipment (% of Revenues) 10.5% 12.1% 9.3% 8.2% 14.8% 12.0% N/A



### While most of these companies also manufacturer products not covered by this rulemaking, DOE used these parameters as initial estimates. During interviews, manufacturers were asked to provide their own figures for the parameters listed in Table

12.4

. 2 . Where applicable, DOE ad justed the parameters in the GRIM using manufacturer

feedback and market share information. Table 12.4

. 2 presents the revised financial12

- 18 

### parameters . DO E used one set of financial parameters to characterize all produc t

group ings

.

Table 12.4

. 2 GRIM Revised Furnace And Central Air Conditioning And Heat Pump Financial Parameters

Parameter Revised Estimate

Tax Rate (% of Taxable Income) 32.6%

Working Capital (% of Revenue) 9.3%

SG&A (% of Revenue) 13.8%

R&D (% of Revenues) 2.3%

Depreciation (% of Revenues) 1.8%

Capital Expenditures (% of Revenues) 2.2%

Net Property, Plant, and Equipment (% of Revenues) 20.0%



### 12.4.4 Corporate Discount Rate

DOE used the weighted

- average cost of capital (WACC) as the discount rate to calculate the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is the total cost of debt and equity weighted by their respective proportions in the capital structure of the industry. DOE estimated the WACC for the

residential HVAC industry based on several representative companies, using the following formula:

WACC = After

- Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors (including, potentially, the company) expect to earn on a company’s stock. These expectations are reflected in the market price of the company’s stock. The capital asset pricing model (CAPM) provides o ne widely used means to estimate the cost of equity. According to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “safe” benchmark inv estment, typically considered the short

- term Treasury Bill (T

- Bill) yield.

Risk premium is the difference between the expected return on stocks and the

riskless rate.

Beta (β) is the correlation between the movement in the price of the stock and that

of th e broader market. In this case, Beta equals one if the stock is perfectly correlated12

- 19 

### with the S&P 500 market index. A Beta lower than one means the stock is less volatile

than the market index.

DOE determined that the industry average cost of equity for th e furnace and central air conditioning and heat pump industry is 15.9 percent ( Table 12.4

. 3 ).

Table 12.4

. 3 Cost of Equity Calculation

Parameter Industry

- Weighted Average (%) A C D E

(1) Average Beta 1.3 1.0 0.9 2.0 1.9
(2) Yield on 10

- Year

4.23

- - -

- T

- Bill (1990

- 2008)

(3) Market Risk Premium (1926

- 1999) 9.2

- - - - Cost of Equity (2)+[(1)*(3)] 15.9

- - - - Equity/Total Capital 60.5 63.0 52.6 70.6 74.6



### Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. One way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis points) over the ri sk

- free

rate. DOE used this method to calculate the cost of debt for four public manufacturers by using S&P ratings and adding the relevant spread to the risk

- free rate.

In practice, investors use a variety of different maturity Treasury bonds to

estimate the risk

- free rate. DOE used the 10

- year Treasury bond return because it captures long

- term inflation expectations and is less volatile than short

- term rates. The

risk fr ee rate is estimated to be approximately 4.2 percent, which is the average 10

- year Treasury bond return between 1990 and 200 8.

For the cost of debt, S&P’s Credit Services provided the average sp read of corporate bonds for the five manufacturers for which d ata was available between 2004

and 2008 . DOE added the industry

- weighted average spread to the average T

- Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry average tax rate to determine the net cost of debt for the industry. Table 12.4

. 4 presents the derivation of the cost of debt and the capital structure of the industry ( i.e. the debt ratio (debt/total capital) )

.12

- 20 

### Table 12.4

. 4 C ost of Debt Calculation

Parameter Industry

- Weighted Average (%) A B C D E

S&P Bond Rating

-- A B+ BB+ BBB BBB
(1) Yield on 10

- Year

4.2

- - - - - T

- Bill (1990

- 2008 )

(2) Gross Cost of Debt 6.5 5.8 8.8 7.5 6.8 6.8

(3) Tax Rate 28.3 27.2 33.6 33.3 13.8 20.9

Net Cost of Debt

4.6

- - - - - (2) x ((1)

- (3))

Debt/Total Capital 39.5 37 51.6 47.4 29.4 25.4



### Using public information for these five companies, the initial estimate for the industry’s WACC was approximately 11

. 4 percent. Subtracting an inflation rate of 2.9

percent over the analysis period used in the initial estimate , the inflation

- adjusted WACC

and the initial estimate of the discount rate used in the straw

- man GRIM is 8.5 percent.
DOE also asked for feedback o n the discount rate during manufacturer interviews and

used thi s feedback to determine that 8.0 percent was an appropriate discount rate for use

in the GRIM.

All major manufacturers in the industry produce central air conditioners and heat pumps as well a s furnaces, so DOE considers the use of one discount rate appropriate for both the heating and cooling products.12

- 21 

### 12.4.5 Trial Standard Levels

DOE developed a number of efficiency levels for each type of equipment. TSLs were then developed by selecting likely groupings of efficiency levels for all equipment types. Each TSL includes combinations of efficiency levels representing comparable stringency between furnace product classes and central air conditioner and heat pump product classes

. Table 12.4

. 5 presents the efficiency levels DOE used in the GRIM for energy efficiency standards analysis . The metric used for furnace equipment is annu al fuel utilization efficiency (AFUE) and the metric used for central air conditioner and heat pump equipment is seasonal energy efficiency rating (SEER). Table 12.4

. 6 presents the trial standard levels (TSL) used for energy efficiency analysis in the GRIM. Table

12.4

. 7 presents the TSLs used for the standby mode and off mode analysis in the GRIM.

Table 12.4

. 5 Energy Efficiency Levels For Central Air Conditioning and Heat Pump Products (SEER) and Furnace Products (AFUE)

Equipment Class Baseline EL1 EL2 EL3 EL4 EL5 EL6 EL7 EL8 EL9 EL10 EL11 EL12 EL13 EL14 EL15

Split System AC

- Coil Only 13 13.5 14 14.5 15 15.5 16 16.5 17

Split System AC

- Blower Coil 13 13.5 14 14.5 15 15.5 16 16.5 17 18 19 20 21 22 23 24.5

Split System HP

- Blower Coil 13 13.5 14 14.5 15 15.5 16 16.5 17 18 19 20 21 22

Single Package AC 13 13.5 14 14.5 15 15.5 16 16.5

Single Package HP 13 13.5 14 14.5 15 15.5 16 16.5

Non

- Weatherized Gas

Furnace 80 90 92 95 98

Mobile Home Furnace 80 90 92 96

Oil Furnace 82 83 84 85 9712

- 22 

### Table 12.4

. 6 Trial Standard Levels for Energy Efficiency Analysis of Central Air

Conditioner a nd Heat Pump (SEER) and Furnace (AFUE) Products

Equipment Class Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL6 TSL7
Split System AC

- Coil Only 13 13.5 13.5 13/14 13/14 13/14 14/15 17

Split System AC

- Blower Coil 13 13.5 13.5 13/14 13/14 13/14 14/15 22

Split System HP

- Blower Coil 13 13.5 13.5 14 14 14 15 21

Single Package AC 13 13 13 14 14 14 15 16.5

Single Package HP 13 13 13 14 14 14 15 16.5

Non

- Weatherized Gas

Furnace 80 80 92/80 90/80 90/80 95/80 95/80 98/98

Mobile Home Furnace 80 80 80/80 90/80 90/80 96/80 96/80 96/96

Oil Furnace 82 82 82 83 83 85 85 97



### Table 12.4

. 7 Trial Standard Levels for Standby Mode and Off Mode Analysis of Central Air Conditioner and Heat Pump and Furnace Products (Watts)
Equipment Class TSL 1 TSL 2 TSL 3
Split System AC 36 30 29
Split System HP 33 33 32
Single Package AC 36 30 29
Single Package HP 33 33 32

SDHV 36 30 29
Space Constrained AC 36 30 29
Space Constrained HP 33 33 32

Non

- Weatherized Gas Furnace 10 10 9

Oil Furnace 11 11 10

Mobile Home Furnace 10 10 9

Electric Furnace 10 10 9



### 12.4.6 NIA Shipment s

The GRIM estimates manufacturer revenues based on total

- unit

- shipment forecasts and the distribution of these values by efficiency level. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this analysis, the GRIM used the NIA shipments forecasts. However, only the shipments in

2010 and beyond have an impact on INPV because 2010 is the base year to which future cash flows are summed. Chapter 9 of the TSD explains DOE’s calculations of total12

- 23 

### shipments in detail

. Table 12.4

. 8 shows base case shipments forecasted in the shipment analysis for furnace and central air conditioning and heat pump products

.

Table 12.4

. 8 Total Base Case NIA Shipments (in Millions of Units)

Year Split System AC

- Coil Only Split System AC

- Blower

Coil Split System

HP

- Blower

Coil Single Package

AC Single Package

HP Non

- Weatherized

Gas Furnace Mobile

Home

Furnace Oil

Furnace Electric

Furnace*

2010 3.74 0.42 1.67 0.42 0.22 2.55 0.12 0.08 0.66

2011 3.67 0.41 1.72 0.41 0.22 2.48 0.12 0.07 0.67

2012 3.84 0.43 1.82 0.42 0.23 2.60 0.12 0.07 0.72

2013 3.93 0.44 1.88 0.43 0.24 2.72 0.12 0.07 0.74

2014 4.00 0.44 1.92 0.43 0.24 2.78 0.13 0.07 0.75

2015 4.09 0.45 1.98 0.44 0.25 2.85 0.13 0.07 0.77

2016 4.18 0.46 2.04 0.44 0.26 2.93 0.14 0.07 0.79

2017 4.24 0.47 2.09 0.45 0.26 2.99 0.14 0.07 0.80

2018 4.30 0.48 2.13 0.45 0.27 3.05 0.15 0.07 0.82

2019 4.37 0.49 2.18 0.46 0.27 3.11 0.15 0.07 0.83

2020 4.41 0.49 2.22 0.46 0.28 3.15 0.15 0.07 0.84

2021 4.43 0.49 2.24 0.46 0.28 3.17 0.14 0.07 0.84

2022 4.46 0.50 2.26 0.46 0.28 3.19 0.14 0.07 0.84

2023 4.49 0.50 2.30 0.46 0.28 3.22 0.14 0.07 0.85

2024 4.53 0.50 2.33 0.47 0.29 3.25 0.14 0.07 0.86

2025 4.58 0.51 2.38 0.47 0.29 3.29 0.14 0.06 0.87

2026 4.63 0.51 2.42 0.47 0.30 3.33 0.14 0.06 0.88

2027 4.66 0.52 2.45 0.48 0.30 3.35 0.14 0.06 0.89

2028 4.68 0.52 2.47 0.48 0.30 3.36 0.14 0.06 0.90

2029 4.71 0.52 2.50 0.48 0.31 3.38 0.14 0.06 0.90

2030 4.75 0.53 2.54 0.48 0.31 3.41 0.13 0.06 0.92

2031 4.79 0.53 2.57 0.49 0.31 3.43 0.13 0.05 0.93

2032 4.81 0.53 2.59 0.49 0.32 3.44 0.13 0.05 0.93

2033 4.85 0.54 2.63 0.49 0.32 3.46 0.13 0.05 0.94

2034 4.89 0.54 2.66 0.50 0.33 3.49 0.13 0.05 0.95

2035 4.93 0.55 2.70 0.50 0.33 3.52 0.13 0.05 0.96

2036 4.97 0.55 2.73 0.50 0.33 3.55 0.13 0.05 0.98

2037 5.01 0.56 2.77 0.51 0.34 3.58 0.13 0.05 0.99

2038 5.05 0.56 2.80 0.51 0.34 3.61 0.13 0.05 1.00

2039 5.09 0.57 2.84 0.51 0.35 3.64 0.13 0.04 1.01

2040 5.13 0.57 2.87 0.52 0.35 3.67 0.13 0.04 1.02

2041 5.17 0.57 2.91 0.52 0.35 3.70 0.13 0.04 1.03

2042 5.21 0.58 2.94 0.52 0.36 3.73 0.13 0.04 1.04

2043 5.25 0.58 2.97 0.53 0.36 3.76 0.13 0.04 1.05

2044 5.29 0.59 3.01 0.53 0.37 3.79 0.13 0.04 1.0612

- 24 2045 5.33 0.59 3.04 0.53 0.37 3.82 0.13 0.04 1.08 *Electric furnace shipments were used for standby mode and off mode analysis



### 12.4.6.1 Shipments Forecast

As part of the shipments analysis, DOE estimated the base

- case shipment distribution by efficiency level for furnace and central air conditioning and heat pump products. In the standards case, DOE determined efficiency distributions for cases in which a poten tial standard applies for the effective year and beyond.

For the energy efficiency analysis, DOE assumed that product efficiencies in the base case that did not meet the standard under consideration would roll up to meet the new standard in the year of the effective date . DOE further assumed that the ENERGY STAR program will continue to promote high

- efficiency appliances after revised

standards are introduced , and that product market shares above a given standard level may shift. The shipment forecasts a lso account for possible product switching that may occur between split

- system air conditioning, split

- system heat pumps, non

- weatherized gas furnaces, and electric furnaces. The product switching calculations incorporate

considerations of consumer climate zones, existing equipment, equipment costs, and

installation costs.

For the standby mode and off mode analysis, DOE assumed that standby features and off mode features along would not alter shipments from the base case. As described

in section 12.4.7 , the changes required by standby mode and off mode standards were assumed to have very mild pricing impacts. As a result, DOE anticipates shipment

dist ributions in the standards case to be similar to the base case when considering standby mode and off mode impacts separately from energy efficiency standard impacts.

12.4.7 Production Costs

Changes in production costs affect revenues and gross profits. Products that are more efficient typically cost more to produce than baseline products (as shown in chapter 5 of the TSD). For the MIA, DOE used the manufacturer production costs ( MPCs ) derived in the engineering analysis

. While the engineering analysis included MP Cs for varying capacity units, DOE primarily relied on the producti on costs for three ton units for central air conditioner and heat pump product s , for 80,000 BTU capacity units for gas furnaces, and 105,000 BTU capacity units for oil furnaces.

The GRIM al so relie d on the engineering analysis to determine labor, materials, overhead, and depreciation (depreciation and factory overhead) percentages that make up the full MPC. For the MPC breakdown in the MIA, DOE developed different depreciation values for eac h product type by using a deprecation value that is consistent

with historical information in SEC 10

- Ks. The remainder of total overhead was allocated to factory overhead.

To calculate baseline manufacturer selling prices (MSP) , DOE followed a three

step process. First, DOE derived MPCs from the engineering and tear down analyses.12

- 25 

### Second, DOE applied a manufacturer markup , which varies with the markup scenario (which is discussed in detail in section 12.4.10 ). Finally , an estimate shipping cost is added to the marked up costs to arrive at the MSP.

Table 12.4

. 10 through Table 12.4

. 13 show the production cost estimates used in

the GRIM for each analyzed product class

. A flat markup of 1.3 is used in these tables.

Table 12.4

. 9 Manufacturer Production Cost Breakdown for Split AC

– Coil Only Systems (2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping MSP

Baseline 13 $63.77 $535.78 $23.77 $18.67 $642.00 1.30 $20.51 $855.11

EL 1 13.5 $66.55 $559.15 $24.81 $19.48 $670.00 1.30 $22.62 $893.62

EL 2 14 $70.13 $589.19 $26.14 $20.53 $706.00 1.30 $24.83 $942.63

EL 3 14.5 $74.40 $625.08 $27.74 $21.78 $749.00 1.30 $24.16 $997.86

EL 4 15 $79.47 $667.64 $29.62 $23.26 $800.00 1.30 $25.40 $1,065.40

EL 5 15.5 $85.33 $716.88 $31.81 $24.98 $859.00 1.30 $26.73 $1,143.43

EL 6 16 $91.98 $772.80 $34.29 $26.93 $926.00 1.30 $28.10 $1,231.90

EL 7 16.5 $99.43 $835.39 $37.07 $29.11 $1,001.00 1.30 $28.90 $1,330.20

EL 8 17 $107.68 $904.65 $40.14 $31.52 $1,084.00 1.30 $30.74 $1,439.94



### Table 12.4

. 10 Manufacturer Production Cost Breakdown for Split AC

– Coil & Blower Systems (2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $81.85 $687.69 $30.51 $23.96 $824.03 1.30 $24.89 $1,096.12

EL 1 13.5 $85.22 $715.97 $31.77 $24.95 $857.91 1.30 $26.95 $1,142.23

EL 2 14 $88.66 $744.85 $33.05 $25.96 $892.52 1.30 $29.11 $1,189.38

EL 3 14.5 $92.17 $774.37 $34.36 $26.98 $927.89 1.30 $29.55 $1,235.80

EL 4 15 $95.76 $804.55 $35.70 $28.04 $964.05 1.30 $28.81 $1,282.08

EL 5 15.5 $99.44 $835.43 $37.07 $29.11 $1,001.05 1.30 $29.76 $1,331.13

EL 6 16 $103.20 $867.04 $38.47 $30.21 $1,038.93 1.30 $30.75 $1,381.35

EL 7 16.5 $107.05 $899.41 $39.91 $31.34 $1,077.71 1.30 $32.02 $1,433.05

EL 8 17 $111.00 $932.57 $41.38 $32.50 $1,117.45 1.30 $33.35 $1,486.03

EL 9 18 $119.20 $1,001.41 $44.43 $34.90 $1,199.93 1.30 $35.23 $1,595.14

EL 10 19 $127.82 $1,073.83 $47.65 $37.42 $1,286.71 1.30 $37.03 $1,709.75

EL 11 20 $136.90 $1,150.13 $51.03 $40.08 $1,378.14 1.30 $38.91 $1,830.50

EL 12 21 $146.48 $1,230.62 $54.61 $42.88 $1,474.59 1.30 $42.26 $1,959.22

EL 13 22 $156.60 $1,315.63 $58.38 $45.84 $1,576.45 1.30 $44.71 $2,094.09

EL 14 23 $169.12 $1,420.88 $63.05 $49.51 $1,702.56 1.30 $46.36 $2,259.69

EL 15 24.5 $182.65 $1,534.55 $68.09 $53.47 $1,838.77 1.30 $46.75 $2,437.1512

- 26 

### Table 12.4

. 11 Manufacturer Production Cost Breakdown for Split System HP (2009$)

SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $97.77 $821.44 $36.45 $28.62 $984.28 1.30 $28.64 $1,308.21

EL 1 13.5 $102.32 $859.66 $38.15 $29.96 $1,030.09 1.30 $29.58 $1,368.69

EL 2 14 $106.84 $897.61 $39.83 $31.28 $1,075.56 1.30 $30.54 $1,428.77

EL 3 14.5 $111.33 $935.34 $41.50 $32.59 $1,120.77 1.30 $33.50 $1,490.50

EL 4 15 $115.80 $972.91 $43.17 $33.90 $1,165.78 1.30 $35.40 $1,550.91

EL 5 15.5 $120.26 $1,010.37 $44.83 $35.21 $1,210.67 1.30 $34.70 $1,608.57

EL 6 16 $126.71 $1,064.52 $47.24 $37.09 $1,275.56 1.30 $34.09 $1,692.32

EL 7 16.5 $131.21 $1,102.36 $48.91 $38.41 $1,320.90 1.30 $35.40 $1,752.57

EL 8 17 $135.72 $1,140.20 $50.59 $39.73 $1,366.24 1.30 $36.72 $1,812.83

EL 9 18 $144.77 $1,216.27 $53.97 $42.38 $1,457.39 1.30 $39.52 $1,934.12

EL 10 19 $153.91 $1,293.05 $57.38 $45.06 $1,549.39 1.30 $41.64 $2,055.84

EL 11 20 $158.54 $1,331.95 $59.10 $46.41 $1,657.88 1.30 $42.14 $2,197.38

EL 12 21 $171.22 $1,438.50 $63.83 $50.13 $1,764.08 1.30 $42.39 $2,335.69

EL 13 22 $184.92 $1,553.58 $68.94 $54.14 $1,870.00 1.30 $42.39 $2,473.39



### Table 12.4

. 12 Manufacturer Production Cost Breakdown for Single Package AC Systems (2009$)

Single Package

AC SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $95.50 $802.37 $35.60 $27.96 $961.44 1.30 $30.43 $1,280.30

EL 1 13.5 $101.62 $853.77 $37.88 $29.75 $1,023.03 1.30 $32.13 $1,362.08

EL 2 14 $106.32 $893.20 $39.63 $31.12 $1,070.27 1.30 $33.89 $1,425.24

EL 3 14.5 $114.31 $960.35 $42.61 $33.46 $1,150.74 1.30 $35.69 $1,531.66

EL 4 15 $122.28 $1,027.28 $45.58 $35.80 $1,230.94 1.30 $37.55 $1,637.77

EL 5 15.5 $131.29 $1,103.01 $48.94 $38.44 $1,321.68 1.30 $39.47 $1,757.65

EL 6 16 $140.52 $1,180.55 $52.38 $41.14 $1,414.59 1.30 $41.44 $1,880.41

EL 7 16.5 $156.48 $1,314.61 $58.33 $45.81 $1,575.22 1.30 $43.88 $2,091.67



### Table 12.4

. 13 Manufacturer Production Cost Breakdown for Single Package HP Systems (2009$)

Single Package

HP SEER Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 13 $117.68 $988.70 $43.87 $34.45 $1,184.71 1.30 $31.88 $1,572.01

EL 1 13.5 $121.88 $1,023.95 $45.43 $35.68 $1,226.94 1.30 $33.38 $1,628.40

EL 2 14 $129.52 $1,088.12 $48.28 $37.92 $1,303.84 1.30 $34.91 $1,729.9012

- 27 EL 3 14.5 $139.30 $1,170.34 $51.93 $40.78 $1,402.36 1.30 $36.48 $1,859.55

EL 4 15 $149.05 $1,252.20 $55.56 $43.63 $1,500.44 1.30 $38.08 $1,988.66

EL 5 15.5 $160.11 $1,345.17 $59.69 $46.87 $1,611.84 1.30 $39.72 $2,135.11

EL 6 16 $175.01 $1,470.32 $65.24 $51.24 $1,761.80 1.30 $41.39 $2,331.74

EL 7 16.5 $190.20 $1,597.98 $70.91 $55.68 $1,914.77 1.30 $42.75 $2,531.96



### Table 12.4

. 14 Manufacturer Production Cost Breakdown for Non

- Weatherized Gas Furnace Systems (2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 80 $22.33 $225.87 $11.13 $7.07 $266.40 1.30 $10.06 $356.38

EL 1 90 $29.70 $300.92 $14.62 $10.42 $355.65 1.30 $10.06 $472.41

EL 2 92 $34.03 $323.97 $15.90 $11.33 $385.24 1.30 $10.06 $510.87

EL 3 95 $35.83 $371.78 $18.22 $11.11 $436.94 1.30 $10.06 $578.09

EL 4 98 $35.71 $425.49 $19.53 $10.28 $491.01 1.30 $10.06 $648.37



### Table 12.4

. 15 Manufacturer Production Cost Breakdown for Mobile Home Furnaces Systems (2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 80 $28.05 $243.89 $12.66 $12.68 $297.27 1.30 $18.68 $405.13

EL 1 90 $32.35 $330.91 $15.95 $11.59 $390.79 1.30 $10.06 $518.09

EL 2 92 $33.87 $357.62 $17.72 $12.02 $421.23 1.30 $10.06 $557.66

EL 3 96 $41.23 $401.65 $19.26 $12.29 $474.44 1.30 $10.06 $626.83



### Table 12.4

. 16 Manufacturer Production Cost Breakdown for Oil Furnace Systems (2009$)

AFUE Labor Material Overhead Depreciation Total Markup Shipping Price

Baseline 82 $68.73 $646.18 $47.73 $46.73 $809.36 1.30 $19.69 $1,071.86

EL 1 83 $69.40 $652.48 $48.19 $47.18 $817.25 1.30 $19.69 $1,082.12

EL 2 84 $70.13 $659.35 $48.70 $47.68 $825.85 1.30 $19.69 $1,093.29

EL 3 85 $70.92 $666.78 $49.25 $48.21 $835.16 1.30 $19.69 $1,105.39

EL 4 97 $71.17 $832.09 $54.57 $44.47 $1,002.30 1.30 $19.69 $1,322.68



### 12.4.8 Incremental Manufacturer Production Costs for Standby Mode and Off

Mode

To analyze the impact of standby mode and off mode standards, DOE considered the incremental MPC of standby mode and off mode design options in the standards case. The design options were derived from the engineering analysis, as enumerated in section12

- 28 

### IV.C.7 of the Direct Final Ru le notice and chapter 5 of the TSD. The cost of these design options are listed below in Table 12.4

. 17 through Table 12.4

. 21

.

Table 12.4

. 17 Split System Blower Coil and Packaged Air Conditioner Off Mode Power Consumption and Cost

MPC with an

ECM Motor and

Crankcase Heater ($) Power Consumption

with an ECM Motor

and Crankcase Heater (W) MPC with an ECM

Motor and No

Crankcase Heater ($) Power Consumption

with an ECM Motor

and No Crankcase

Heater (W)

Baseline 8.06 48.0 6.56 11.0

EL 1 11.82 35.5 17.58 10.2

EL 2 46.20 30.3

EL 3 57.22 29.5



### Table 12.4

. 18 Coil Only Split System Air Conditioner Off Mode Power Consumption and Cost

MPC with a

Crankcase Heater ($) Power Consumption

with a Crankcase

Heater (W) MPC with No Crankcase

Heater ($) Power Consumption

with No Crankcase

Heater (W)

Baseline 3.64 37.0 0 0

EL1 7.40 24.5

EL 2 24.24 19.3



### Table 12.4

. 19 Split System and Packaged Heat Pump Off Mode Power Consumption

and Cost

MPC with an ECM Motor and

Crankcase Heater ($) Power Consumption

with an ECM Motor

and Crankcase Heater (W) MPC with an ECM

Motor and No Crankcase

Heater ($) Power Consumption

with an ECM Motor

and No Crankcase

Heater (W)

Baseline 8.06 51.0 6.56 14.0

EL1 11.82 32.5 17.58 13.2

EL 2 22.84 31.7



### Table 12.4

. 20 Non

- weatherized Gas

, Mobile Home Gas , and Eletric Furnace Standby Mode and Off Mode Power Consumption and Cost

Description Standby Mode and Off Mode Power Consumption (W) MPC ($)

Baseline 11.0 0

EL1 Switching Mode Power Supply 9.8 7.25

EL 2 Switching Mode Power Supply and

Toroidal Transformer 9.0 18.2012

- 29 

### Table 12.4

. 21 Oil

- fired Furnace Standby Mode and Off Mode Power Consumption

and Cost

Description Standby Mode and Off Mode Power Consumption (W) MPC ($)

Baseline 12.0

EL1 Switching Mode Power Supply 10.8 7.25

EL 2 Switching Mode Power Supply and

Toroidal Transformer 10.0 18.20



### 12.4.9 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur

one

- time conversion costs to bring their production facilities and product designs into compliance with new regulations. For the MIA, DOE classified these one

- time conversion costs into two major groups: capital conversion costs and product conversion costs. Capital conversion costs are one

- time investments in plant, property, a nd equipment to adapt or change existing production facilities in order to fabricate and assemble new product design that comply with amended energy conservation standards

. Product conversion costs are one

- time investments in research, development, testing

, marketing and other costs to make product designs comply with amended energy

conservation standards.

12.4.9.1 Capital Conversion Costs

DOE based its estimates of the capital conversion costs that would be required to

meet each TSL on information obtained from ma nufacturer interviews, the design pathways analyzed in the engineering analysis, and market information about the number of platform and product families for each manufacturer. Table 12.4

. 22 and Table 12.4

. 23

show DOE’s estimates of the capital conversion costs necessary for each product class at
each EL for energy efficiency standards . The methodology DOE used to calculate the capital conversion costs is described below

.

During the MIA interviews, DOE asked manufacturers to estimate the capital conversion costs required to expand the producti on of higher

- efficiency products that may be required by standards. M any manufacturers provided conversion estimates and descriptions of the required tooling and plant changes that would be necessary to upgrade product lines to meet various potential effic iency level s. DOE based its capital

conversion cost estimates on the information gathered in these interviews

. The numbers were validated against estimation s of production line tooling, conveyor change, and line equipment cost s from the engineering analysi s cost model

. The numbers were also reconciled with market information about product platforms and product efficiencies.

DOE assumed the major capital conversion costs would occur when manufacturers would have to redesign their existing product lines. For split

- system air conditioning and split

- system heat pump, manufacturers indicated that major redesigns of product families would be necessary between 14 and 16 SEER , depending on the product family, and at 21 SEER. For furnaces, manufacturers indicated the possibility of redesign at 90 percent AFUE, due to the addition of a secondary heat exchanger, and at 98 percen t12

- 30 

### AFUE. At efficiencies where no products are redesigned, incremental production changes may be necessary to comply with energy co nservation standards and meet market requirements.

For regional standards, conversion costs were based on the standard in each region. DOE used shipment weighted conversion costs to determine the investment required by industry based on the assumption that a higher r egional standard would not require the same level of incremental capital as a higher national standard. For example, a

nationwide 90 % AFUE standard for non

- weatherized gas furnaces requires much greater capital conversion expenditures than a 90% AFUE in on ly the North.

For the standby and o ff mode analysis, manufacturers indicated in interviews that capital conversion costs would be negli gi ble compared to the capital conversion costs for the SEER, HSPF, and AFUE standards. Based on these comments, DOE did not incorporate capital conversion costs into its calculation of the economic impacts of standby a nd off mode on manufacturers in the GRIM model.

Table 12.4

. 22 Capital Conversion Costs by Product Class and Eff iciency Level (2009$ Millions)

Equipment

Class Split System

AC

- Coil Only Split System

AC

- Blower

Coil Split System

HP

- Blower

Coil Single Package

AC Single Package

HP Non

Weatherized

Gas Furnace Mobile

Home

Furnace Oil

Furnace

Baseline 0 0 0 0 0 0 0 0

EL1 0 0 0 0 0 116 23 1

EL2 0 0 0 0 0 121 26 2

EL3 8 1 4 3 1 131 31 3

EL4 23 3 10 10 5 228 4

EL5 87 10 39 17 9

EL6 145 16 64 17 9

EL7 146 16 65 19 10

EL8 160 18 71

EL9 19 77

EL10 21 83

EL11 23 90

EL12 26 103

EL13 26 103

EL14 26

EL15 26



### Table 12.4

. 23 Capital Conversion Costs by Product Class and Trial Standard Level (2009$ Millions)

Equipment

Class Split System

AC

- Coil Only Split System

AC

- Blower

Coil Split System

HP

- Blower

Coil Single Package

AC Single Package

HP Non

Weatherized

Gas Furnace Mobile

Home

Furnace Oil

Furnace12

- 31 Baseline 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL2 0.0 0.0 0.0 0.0 0.0 15.2 0.0 0.0

TSL3 4.3 0.5 3.7 2.7 1.4 3.0 9.9 1.0

TSL4 4.4 0.5 3.7 2.7 1.4 3.0 9.9 1.0

TSL5 4.3 0.5 3.7 2.7 1.4 39.6 13.7 3.0

TSL6 48.4 5.4 38.5 17.1 8.6 39.6 13.7 3.0

TSL7 159.7 25.8 90.0 18.9 9.5 228.0 31.1 4.0



### 12.4.9.2 Product Conversion Costs

To calculate industry cash flow impacts

, DOE evaluated the level of product conversion costs manufacturers would incur to comply with amended energy

conservation standards. DOE relied substantially on information obtained from

manufacturer interviews and on market information about the number of platform and product families for each manufacturer.

DOE assumed the major product conversion costs would occur when

manufacturers would have to completely redesign their existing product line platforms

. For split

- system air conditioners and split

- system heat pump s , manufacturers indicated that redesigns of product families would be necessary between 14 and 16 SEER and at 21

SEER. For furnaces, manufacturers indicated the possibility of redesign at 90 percent AFUE, due to the addition of a secondary heat exchanger, and at 98 percent AFUE. At efficiencies where products are not completely redesigned, DOE incorporated a lower level of engineering costs associate d with less significant design changes that would be

necessary to comply with energy conservation standards.

As opposed to its approach with capital conversion costs, DOE did not scale product conversion costs based on shipments for regional standards

. DOE expects that redesign ing product lines to meet a higher regional standard would r equire similar effort as redesigning a product to meet a higher national standard. DOE expects b oth to incur similar R&D, testing, and compliance costs. As a result, the product conversion costs
used in the GRIM do not vary between re gional and national standards of the same efficiency

.

For standby mode and off mode, DOE estimated product conversion costs based on product testing cost quotations and on ma rket information about the number of platform and product families for each manufacturer

. DOE estimated total product conversion costs for the industry at $ 2

. 77 million.

Table 12.4

. 24 Product Conversion Costs by Product Class and Efficiency Level (2009$ Millions)

Equipment

Class Split System

AC

- Coil Only Split System

AC

- Blower

Coil Split System

HP

- Blower

Coil Single Package

AC Single Package

HP Non

Weatherized

Gas Furnace Mobile

Home

Furnace Oil

Furnace12

- 32 Baseline 0 0 0 0 0 0 0 0

EL1 0 0 0 0 0 39 8 1

EL2 0 0 0 0 0 40 9 3

EL3 6 1 2 2 1 44 10 3

EL4 15 2 7 7 3 76 6

EL5 58 6 26 11 6

EL6 96 11 43 12 6

EL7 97 11 43 13 6

EL8 106 12 47

EL9 13 52

EL10 14 56

EL11 15 60

EL12 17 68

EL13 17 68

EL14 17

EL15 17



### Table 12.4

. 25 Product Conversion Costs by Product Class and Trial Standard Level (2009$ Millions)

Equipment

Class Split System

AC

- Coil Only Split System

AC

- Blower

Coil Split System

HP

- Blower

Coil Single Package

AC Single Package

HP Non

Weatherized

Gas Furnace Mobile

Home

Furnace Oil

Furnace

Baseline 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TSL2 0.0 0.0 0.0 0.0 0.0 5.1 0.0 0.0

TSL3 5.6 0.6 2.5 1.8 0.9 1.0 3.3 1.0

TSL4 5.6 0.6 2.5 1.8 0.9 1.0 3.3 1.0

TSL5 5.6 0.6 2.5 1.8 0.9 13.2 4.6 3.0

TSL6 63.6 7.1 25.7 11.4 5.8 13.2 4.6 3.0

TSL7 106.5 17.2 60.0 12.6 6.4 76.0 10.4 6.0



### 12.4.10 Markup Scenarios

DOE used several standards case markup scenarios to represent the uncertainty about the impacts of amended energy conservation standards on prices and profitability. In the base case, DOE used an average markup of 1.3 . In the standards case for the active mode analysis

, DOE modeled two markup scenarios to represent the uncertainty about the potential impacts on prices and profitability following the implementation of amended energy conservation standards: (1) a preservation of earnings before interest and

t ax (EBIT) scenario , and (2) a tiered markup scenario. These scenarios lead to different markups values, which, when applied to the inputted MPCs, result in varying revenue and cash flow impacts.12

- 33 

### For regional standards, DOE assumed that products of the same efficiency maintain the same markup regardless of region. Because manufacturers are not able to determine the final installation site of a product, manufacturers would not likely be able to selectively price products based on regional standards. For example, in the case of the consensus agreement, a 14 SEER air conditioning unit sold in the South would have the same markup as an identical 14 SEER split

- system air conditioning sold in the North even though the South has a higher minimum standard.

DOE modeled two different markup scenarios to represent the potential impacts on prices and profitability of standby mode and off mode standards: (1) a preservation of gross margin percentage scenario and (2) a preservation of earnings before interest and tax (EBIT) scenario. DOE did not model the tiered scenario because it is unlikely that standby mode and off mode changes will affect product pricing tiers or cause commoditization of premium products.

12.4.10.1 Preservation of Operating Profit Scenario

During interv iews, multiple manufacturers stated that the higher production costs could harm profitability. Because of the highly competitive market, several manufacturers suggested that the additional costs of higher minimum efficiency products could not be fully pass ed through to customers. Incorporating this feedback, DOE modeled the preservation of earnings before interest and taxes (EBIT) scenario.

As the cost of production goes up for minimum efficiency products in the standards case, the preservation of EBIT scen ario models manufacturers reducing their markups to a level that maintains base case operating profit. DOE assumes that low efficiency products in the base case that roll

- up to the higher minimum efficiency in the standards case will produce the same opera ting profit in both the base case and standards

case. In other words, the industry can only maintain its operating profit in absolute dollars and cannot maintain a steady markup percenta ge as production costs increase for products affected by the roll

- up.

DOE implemented this scenario by calibrating a markup that yielded the same per unit EBIT in the standards case as in the base case for each product class. DOE only calibrated a lower markup for the minimum efficiency level in the standards case since prod ucts that exceed the standard would not be impacted by the standards. EBIT for the base case was calculated by applying a flat markup to the MPC determined in the engineering analysis to get a sales price, and then subtracting the per unit SG&A and the

per unit R&D expenses from the sales price. For the standards case, DOE used the MPC for a more efficient product and then calibrated the markup such that:

(MPC standards 

### x Markup standards 

### )

– SG&A standards



### – R&D standards 

### = EBIT base12

- 34 

### Table 12 .4

. 26 Preservation of EBIT Markups for Split

- System Air Conditioners (Coil Only)

Trial

Standard

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

Baseline 1.30 1.30 1.29 1.28 1.26

EL1 1.30 1.30 1.29 1.28 1.26

EL2 1.30 1.30 1.29 1.28 1.26

EL3 1.30 1.30 1.30 1.28 1.26

EL4 1.30 1.30 1.30 1.28 1.26

EL5 1.30 1.30 1.30 1.30 1.26

EL6 1.30 1.30 1.30 1.30 1.26

EL7 1.30 1.30 1.30 1.30 1.26

EL8 1.30 1.30 1.30 1.30 1.26



### Table 12.4

. 27 Preservation of EBIT Markups for Split

- System Air Conditioners (Blower Coil)

Trial

Standard

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

Baseline 1.30 1.30 1.29 1.28 1.25

EL1 1.30 1.30 1.29 1.28 1.25

EL2 1.30 1.30 1.29 1.28 1.25

EL3 1.30 1.30 1.30 1.28 1.25

EL4 1.30 1.30 1.30 1.28 1.25

EL5 1.30 1.30 1.30 1.30 1.25

EL6 1.30 1.30 1.30 1.30 1.25

EL7 1.30 1.30 1.30 1.30 1.25

EL8 1.30 1.30 1.30 1.30 1.25

EL9 1.30 1.30 1.30 1.30 1.25

EL10 1.30 1.30 1.30 1.30 1.25

EL11 1.30 1.30 1.30 1.30 1.25

EL12 1.30 1.30 1.30 1.30 1.25

EL13 1.30 1.30 1.30 1.30 1.25

EL14 1.30 1.30 1.30 1.30 1.30

EL15 1.30 1.30 1.30 1.30 1.30



### Table 12.4

. 28 Preservation of EBIT Markups for Split

- System Heat Pump s

Trial

Standard

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

Baseline 1.30 1.30 1.29 1.28 1.25

EL1 1.30 1.30 1.29 1.28 1.2512

- 35 EL2 1.30 1.30 1.29 1.28 1.25

EL3 1.30 1.30 1.30 1.28 1.25

EL4 1.30 1.30 1.30 1.28 1.25

EL5 1.30 1.30 1.30 1.30 1.25

EL6 1.30 1.30 1.30 1.30 1.25

EL7 1.30 1.30 1.30 1.30 1.25

EL8 1.30 1.30 1.30 1.30 1.25

EL9 1.30 1.30 1.30 1.30 1.25

EL10 1.30 1.30 1.30 1.30 1.25

EL11 1.30 1.30 1.30 1.30 1.25

EL12 1.30 1.30 1.30 1.30 1.25

EL13 1.30 1.30 1.30 1.30 1.30



### Table 12.4

. 29 Preservation of EBIT Markups for Single Package Air Conditioners

Trial

Standard

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

Baseline 1.28 1.28 1.27 1.26 1.25

EL1 1.28 1.28 1.27 1.26 1.25

EL2 1.28 1.28 1.27 1.26 1.25

EL3 1.28 1.28 1.30 1.26 1.25

EL4 1.28 1.28 1.30 1.26 1.25

EL5 1.28 1.28 1.30 1.30 1.25

EL6 1.28 1.28 1.30 1.30 1.25

EL7 1.28 1.28 1.30 1.30 1.25



### Table 12.4

. 30 Preservation of EBIT Markups for Single Package Heat Pumps

Trial

Standard

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

Baseline 1.28 1.28 1.27 1.26 1.25

EL1 1.28 1.28 1.27 1.26 1.25

EL2 1.28 1.28 1.27 1.26 1.25

EL3 1.28 1.28 1.30 1.26 1.25

EL4 1.28 1.28 1.30 1.26 1.25

EL5 1.28 1.28 1.30 1.30 1.25

EL6 1.28 1.28 1.30 1.30 1.25

EL7 1.28 1.28 1.30 1.30 1.25



### Table 12.4

. 31 Preservation of EBIT Markups for Non

- Weatherized Gas Furnace s

Trial

Standard

Level Baseline TSL 1 TSL 2 TSL 3, TSL 4 TSL 5, TSL 6 TSL 712

- 36 Baseline 1.35 1.35 1.29 1.30 1.28 1.26

EL1 1.35 1.35 1.29 1.30 1.28 1.26

EL2 1.35 1.35 1.29 1.30 1.28 1.26

EL3 1.35 1.35 1.30 1.30 1.28 1.26

EL4 1.35 1.35 1.30 1.30 1.30 1.26



### Table 12.4

. 32 Preservation of EBIT Markups for Mobile Home Furnaces

Trial

Standard

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

Baseline 1.30 1.30 1.27 1.27

EL1 1.30 1.30 1.27 1.27

EL2 1.30 1.30 1.30 1.27

EL3 1.30 1.30 1.30 1.27



### Table 12.4

. 33 Preservation of EBIT Markups for Oil Furnaces

Trial

Standard

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

Baseline 1.35 1.35 1.35 1.35 1.31

EL1 1.35 1.35 1.35 1.35 1.31

EL2 1.35 1.35 1.30 1.35 1.31

EL3 1.35 1.35 1.30 1.35 1.31

EL4 1.35 1.35 1.30 1.30 1.31



### 12.4.10.1 Tiered Markup Scenario

During interviews, multiple manufacturers noted concern s about the commoditization of prod ucts due to amended standards. As the energy conservation standards increase, the range of efficiencies between the minimum efficiency and the max tech efficiency decreases. One outcome of this change, accord ing to manufacture r s, would be less differentiation between premium products and entry

- level products base d on efficiency. Though comfort features, such as air flow and humid i ty control, often impact premium pricing, efficiency is still an important factor in setting pricing tiers.

In the tiered markup scenario, DOE models the situation in which manufacturers set markups based on three tiers of products. The tiers described by manufacturers in MIA interviews were defined as “good, better, best”, or “value, stand ard, premium.” The high

- volume “ value” product lines typically have fewer features, lower efficiency, and lower markups while premium product lines have more features, higher efficiency, and higher markups. In the standards case, the tiered markups sc enario considers the situation in which the breadth of a manufacturer’s portfolio of products shrinks and amended standards “demote” higher

- tier products to lower tiers. As a result, higher efficiency products that previously commanded standard and premium mark

- ups are assigned value and standard markups, respectively. As the standards case minimum efficiency increased,12

- 37 

### DOE incorporated the change from a three tier to a two tier markup. This represents the situation where the efficiency standard begins to l imited manufacturer d esign options for differentiating premium and value products.

Table 12.4

. 34 Tiered Markups for Split

- System Air Conditioners (Coil Only)

Trial

Standard

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

Baseline 1.22 1.22 1.22 1.22 1.22

EL1 1.22 1.22 1.22 1.22 1.22

EL2 1.32 1.32 1.22 1.22 1.22

EL3 1.32 1.32 1.32 1.22 1.22

EL4 1.32 1.32 1.32 1.22 1.22

EL5 1.32 1.32 1.32 1.32 1.22

EL6 1.32 1.32 1.32 1.32 1.22

EL7 1.32 1.32 1.32 1.32 1.22

EL8 1.43 1.43 1.32 1.32 1.22



### Table 12.4

. 35 Tiered Markups for Split

- System Air Conditioners (Blower Coil)

Trial

Standard

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

Baseline 1.19 1.19 1.19 1.19 1.19

EL1 1.19 1.19 1.19 1.19 1.19

EL2 1.26 1.26 1.19 1.19 1.19

EL3 1.26 1.26 1.26 1.19 1.19

EL4 1.26 1.26 1.26 1.19 1.19

EL5 1.26 1.26 1.26 1.26 1.19

EL6 1.26 1.26 1.26 1.26 1.19

EL7 1.26 1.26 1.26 1.26 1.19

EL8 1.37 1.37 1.26 1.26 1.19

EL9 1.37 1.37 1.37 1.26 1.19

EL10 1.37 1.37 1.37 1.37 1.19

EL11 1.37 1.37 1.37 1.37 1.19

EL12 1.37 1.37 1.37 1.37 1.19

EL13 1.37 1.37 1.37 1.37 1.19

EL14 1.37 1.37 1.37 1.37 1.26

EL15 1.37 1.37 1.37 1.37 1.2612

- 38 

### Table 12.4

. 36 Tiered Markups for Split

- System Heat Pump s

Trial

Standard

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

Baseline 1.20 1.20 1.20 1.20 1.20

EL1 1.30 1.20 1.20 1.20 1.20

EL2 1.30 1.30 1.20 1.20 1.20

EL3 1.30 1.30 1.30 1.20 1.20

EL4 1.30 1.30 1.30 1.20 1.20

EL5 1.30 1.30 1.30 1.30 1.20

EL6 1.30 1.30 1.30 1.30 1.20

EL7 1.30 1.30 1.30 1.30 1.20

EL8 1.41 1.41 1.30 1.30 1.20

EL9 1.41 1.41 1.41 1.30 1.20

EL10 1.41 1.41 1.41 1.41 1.20

EL11 1.41 1.41 1.41 1.41 1.20

EL12 1.41 1.41 1.41 1.41 1.20

EL13 1.41 1.41 1.41 1.41 1.30



### Table 12.4

. 37 Tiered Markups for Single Package Air Conditioners

Trial

Standard

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

Baseline 1.17 1.17 1.17 1.17 1.17

EL1 1.17 1.17 1.17 1.17 1.17

EL2 1.27 1.27 1.17 1.17 1.17

EL3 1.27 1.27 1.17 1.17 1.17

EL4 1.37 1.37 1.27 1.17 1.17

EL5 1.37 1.37 1.27 1.17 1.17

EL6 1.37 1.37 1.37 1.27 1.17

EL7 1.37 1.37 1.37 1.27 1.1712

- 39 

### Table 12.4

. 38 Tiered Markups for Single Package Heat Pumps

Trial

Standard

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

Baseline 1.19 1.19 1.19 1.19 1.19

EL1 1.19 1.19 1.19 1.19 1.19

EL2 1.19 1.19 1.19 1.19 1.19

EL3 1.29 1.29 1.19 1.19 1.19

EL4 1.29 1.29 1.19 1.19 1.19

EL5 1.39 1.39 1.29 1.19 1.19

EL6 1.39 1.39 1.29 1.19 1.19

EL7 1.39 1.39 1.39 1.29 1.19

EL8 1.39 1.39 1.39 1.29 1.19

EL9 1.39 1.39 1.39 1.39 1.19



### Table 12.4

. 39 Tiered Markups for Non

- Weatherized Gas Furnace s

Trial

Standard

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

Baseline 1.23 1.23 1.23 1.23 1.23 1.23

EL1 1.39 1.39 1.23 1.23 1.23 1.23

EL2 1.39 1.39 1.23 1.23 1.23 1.23

EL3 1.39 1.39 1.39 1.39 1.23 1.23

EL4 1.49 1.49 1.39 1.49 1.39 1.23



### Table 12.4

. 40 Tiered Markups for Mobile Home Furnaces

Trial

Standard

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

Baseline 1.28 1.28 1.28 1.28

EL1 1.39 1.39 1.28 1.28

EL2 1.39 1.39 1.39 1.28

EL3 1.39 1.39 1.39 1.28

EL4 1.50 1.50 1.39 1.39

EL5 1.39 1.39 1.39 1.39

EL6 1.39 1.39 1.39 1.39

EL7 1.39 1.39 1.39 1.39

EL8 1.39 1.39 1.39 1.39

EL9 1.39 1.39 1.39 1.3912

- 40 

### Table 12.4

. 41 Tiered Markups for Oil Furnaces

Trial

Standard

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

Baseline 1.25 1.25 1.25 1.25 1.25

EL1 1.34 1.34 1.25 1.25 1.25

EL2 1.34 1.34 1.34 1.25 1.25

EL3 1.45 1.45 1.34 1.25 1.25

EL4 1.45 1.45 1.45 1.34 1.25

EL5 1.45 1.45 1.45 1.34 1.34

EL6 1.45 1.45 1.45 1.34 1.34

EL7 1.45 1.45 1.45 1.34 1.34

EL8 1.45 1.45 1.45 1.34 1.34

EL9 1.45 1.45 1.45 1.34 1.34



### 12.4.10.1 Preservation of Gross Margin Percentage Scenario

For the analysis of standby mode and off mode standard, DOE included the “preservation of gross margin percentage” scenario to help establish a range of potential impacts on manufacturer profitability. The scenario assumes that manufacturers will not alter markups as production costs increase due to the standby mode and off mode

standards. The GRIM applied the baseline markup across all proposed standard levels. As production costs increase with efficiency, this scenario imp lies that the absolute dollar markup will increase as well. M anufacturers believe it is optimistic to assume they would

be able to maintain the same increase in gross margin percentage markup production costs in response to the standby mode and off mode st andard. Therefore, DOE assumes that this scenario represents a high bound to industry profitability under an energy

conservation standard.

12.4.11 Experience Curve Rates

For this rulemaking, DOE applied experience curve multipliers to both the base

case and stand ards case MSP forecasts in the GRIM. The multipliers reflect a long

- term price decline over the analysis period that is consistent with the historical price trend for unitary air conditioners and warm air furnace equipment . The experience curve applied to the GRIM is identical to the experience curve applied to the NIA for this rule

. Refer to section IV.F.1 for a description of how DOE derived the experience curve multipliers

. A

detailed discussion of the experience curve modeling is provided in Appendix 8

- J of the

TSD.

12.5 INDUSTRY FINANCIAL I MPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated indicators of financial impacts on the residential HVAC industr y . The following sections detail addit ional inputs and assumptions for the analysis of active12

- 41 

### mode standards for conventional products (split

- system air conditioning, split

- system heat pump, single package air conditioning, single package heat pump, and non

weatherized gas furnace) and niche p roducts (mobile home furnace and oil furnace). It also details the additional inputs and assumption for the analysis of standby mode and off mode for the product classes being considered.

The main results of the MIA are also reported in this section. The MIA consists of two key financial metrics: INPV and annual cash flows.

12.5.1 Introduction

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs in the standards case. The INPV is different from DOE’s NPV, w hich is applied to the U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost of capital or discount rate. The GRIM for this rulemaking estimates cash flows from 2010 to 2045, the same analysis period used in the NIA (cha pter 11).

In the MIA, DOE compares the INPV of the base case (no amended energy conservation standards) to that of each TSL in the standards case. The difference between the base case and a standards case INPV is an estimate of the economic impacts that

im plementing that particular TSL would have on the industry. For both conventional and niche products, DOE examined the two markup scenarios: the preservation of EBIT and the tiered markup scenario. The markup scenarios are described in greater detail in

sec tion 12.4.9 above.

While INPV is useful for evaluating the long

- term effects of amended energy conservation standards, short

- term changes in cash flow are also important indicators of the industry’s financial situation. For example, a large investment over 1 or 2 years could strain the industry’s access to capital. Consequently, the sharp drop in financial performance could cause investors to flee, even though recovery may be possible. Thus, a

short

- term disturbance can have long

- term effects that the INPV cannot capture. To get an idea of the behavior of annual net cash flows, Figure 12.5

. 1 through Figure 12.5

. 4 below present the annual net or free cash flows from 2010 through 2023.

Because the same markup scenarios are used for the two product categories described above, each of the figures below h as a similar shape. Annual cash flows are discounted to the base year, 2010. After the standards announcement date ( i.e. , the publication date of the final rule), industry cash flows begin to decline as companies use their financial resources to prepare fo r the amended energy conservation standard. Cash flows between the announcement date and the compliance date are driven by the level of conversion costs and the proportion of these investments spent every year. The more stringent the amended energy conserv ation standard, the greater the impact on industry cash flows in the years leading up to the compliance date, as product conversion costs lower cash inflows from operations and capital conversion costs increase cash outflows for capital expenditures.12

- 42 

### Free cash flow in the year the amended energy conservation standards take effect is driven by two competing factors. In addition to capital and product conversion costs, amended energy conservation standards could create stranded assets, i.e.

12.5.2 Conventional Products Industry Financial Impacts tooling and equip ment that would have enjoyed longer use if the energy conservation standard had not made them obsolete. In this year, manufacturers write down the remaining book value of existing tooling and equipment whose value is affected by the amended energy

conserva tion standard. This one time write down acts as a tax shield that alleviates decreases in cash flow from operations in the year of the write

- down. In this year, there is also an increase in working capital that reduces cash flow from operations. A large

in crease in working capital is needed due to more costly production components and materials, higher inventory carrying to sell more expensive products, and higher accounts receivable for more expensive products. Depending on these two competing factors, cas h flow can either be positively or negatively affected in the year the standard takes effect.

Table 12.5

. 1 and Table 12.5

. 2 provide the INPV estimates for conventional products. Figure 12.5

. 1 and Figure 12.5

. 2 present the annual net cash flows for conventional products for each of the different markup scenarios.

Table 12.5

. 1 Changes in Industry Net Present Value for Conventional Products (Preservation of EBIT Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 8,347 8,354 7,847 7,936 7,893 7,857 7,685 6,855

Change in

INPV (2009$ millions) n/a 8 (500) (411) (454) (490) (662) (1,492)

(%) n/a 0.1 (6.0) (4.9) (5.4) (5.9) (7.9) (17.9)

* V alues in parenthesis indicate negative numbers



### Table 12.5

. 2 Changes in Industry Net Present Value for Conventional Products
(Tiered Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 8,347 8,379 8,021 7,638 7,475 7,467 6,509 4,578

Change in

INPV (2009$ millions) n/a 33 (326) (709) (871) (879) (1,837) (3,768)

(%) n/a 0.4 (3.9) (8.5) (10.4) (10.5) (22.0) (45.1)
*Values in parenthesis indicate negative numbers12

- 43 

### Figure 12.5

. 1 Annual Industry Net Cash Flows for Conventional Products (Preservation of EBIT Markup Scenario)

Figure 12.5

. 2 Annual Industry Net Cash Flows for Conventional Products (Tiered Markup Scenario)12

- 44 

### 12.5.3 Niche Products Industry Financial Impacts

Table 12.5

. 3 and Table 12.4

. 5 provide the INPV estimates for the niche products. Figure 12.5

. 3 and Figure 12.5

. 4 present the annual net cash flows for niche products for each markup scenario.

Table 12.5

. 3 Changes in Industry Net Present Value for Niche Pro ducts
(Preservation of EBIT Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 149 149 151 132 125 131 131 109

Change in

INPV (2009$ millions) n/a 0 2 (17) (24) (18) (18) (40)

(%) n/a 0.0 % 1.2 % (11.6)% (16.4)% (12.1)% (12.1)% (26.7)% *Values in parenthesis indicate negative numbers



### Table 12.5

. 4 Changes in Industry Net Present Value for Niche Products
(Tiered Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 149 149 151 129 120 114 114 94

Change in

INPV (2009$ millions) n/a (0) 2 (20) (29) (36) (36) (55)

(%) n/a (0.0)% 1.4 % (13.5)% (19.6)% (23.8)% (23.8)% (36.7)%
*Values in parenthesis indicate negative numbers12

- 45 

### Figure 12.5

. 3 Annual Industry Net Cash Flows for Niche Products (Preservation of EBIT Markup Scenario)12

- 46 

### Figure 12.5

. 4 Annual Industry Net Cash Flows for Niche Products (Tiered Markup Scenario)

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS

DOE conducted a more focused inquiry of the companies that could be small business manufacturers of products covered by this rulemaking. F or the manufacturers of central air conditioners, heat pumps, and residential furnaces, the Small Business Administration (SBA) has set a size threshold of 750 employees or less for an entity to be considered as a small business for this category. During i ts market survey, DOE used all available public information to identify potential small manufacturers. DOE’s research involved industry trade association membership directories (including AHRI), product databases (e.g., AHRI Directory, the SBA Database), i ndividual company websites, and market research tools ( e.g. , Dunn and Bradstreet reports) to create a comprehensive list of

compan ies that manufacture or sell products covered by this rulemaking. DOE also asked stakeholders and industry representatives if they were aware of any other small manufacturers during manufacturer interviews and at previous DOE public meetings. DOE reviewed publicly

- available data and contacted select companies on its list, as necessary, to determine whether they met the SBA’s defi nition of a small business manufacturer of covered central air conditioners, heat pumps, and residential furnaces. DOE screened out companies that did not offer products covered by this rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated.

For central air conditioners, DOE initially identified 89 distinct brands sold in the U.S. Out of these 89 brands, DOE determined that 18 brands are managed by small - 15.00 - 10.00 - 5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20232008$ Millions

Year Net Cash Flow Totals for Niche Products

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 Markup Scenario: Tiered Markups12

- 47 

### businesses. While identifying the parent companies of the 18 brands, DOE determined that only four companies are domestic small business manufacturers of central air conditioning products. Three of these small businesses produce space

- constrained products and one produces small

- duct, high

- velocity products. None of the small businesses produced split system air conditioning, split system heat pumps, single package air conditioning, or single package heat pump products, which make up 99 percent of industry air conditioner and heat pump shipments.

For residential fu rnaces, DOE initially identified at least 90 distinct brands sold in the U.S. Out of these 90 brands, DOE determined that 14 were managed by small businesses. DOE determined that only five companies are domestic small business manufacturers of furnace prod ucts. All five small businesses manufacture oil furnaces as their primary product line. One of the small businesses also produces mobile home furnaces as a secondary product offering. DOE did not identify any small manufacturers producing non

- weatherized g as furnaces or weatherized gas furnaces, which together make up over 95 percent of residential furnace shipments.

Next, DOE contacted all of the identified small business manufacturers listed in the AHRI directory to request an interview about the possible impacts of amended energy conservation standards on small manufacturers. Not all manufacturers responded to

inter view requests; however, DOE did interview three small furnace manufacturers and two small central air conditioning and heat pump manufacturers. From these discussions, DOE determined the expected impacts of the rule on affected small entities.

12.6.1 Impacts on Small Central Air Conditioning and Heat Pump Manufacturers

As discussed above, no small manufacturers for split system air conditioning, split system heat pump, single package air conditioning, or single package heat pump products

were identified. DOE ide ntified four domestic small business manufacturers of central air conditioner and heat pump products. All four small business es manufacture niche products: three produce space constrained products and one produces SDHV products.

With regard to the space

- constrained market, the three small business manufacturers identified by DOE make up the vast majority of shipments of these products in the United States. DOE did not identify any competing large manufacturers in

this niche market . Supporting this finding, no large manufacturers listed through

- the

wall, or space

- constrained, products in the AHRI directory. According to manufacturer interviews, no manufacturers have entered or exited the space

- constrained market in the past decade. Furthermore, based on the screening analysis, teardown analysis, and market research, DOE has determined that the current energy conservation standard applicable to these products is equal to the max

- tech efficiency level. In other words, DOE has

determine d it is unable to raise the energy conservation standards applicable to space

constrained products due to the state of technology and the design constraints inherent to these products. Therefore, because the efficiency level to which these three small

manu facturers are subject will not change, DOE does not anticipate that the adopted rule12

- 48 

### would adversely affect the small businesses manufacturing space

- constrained air conditioning products.

With respect to SDHV products, DOE identified one company as a smal l domestic manufacturer. The company’s primary competitors are a small manufacturer based in Canada and a domestic manufacturer that does not qualify as a small business due to its parent company’s size. These three manufacturers account for the vast major ity of the SDHV market in the U.S., which makes up less than 1 percent of the overall domestic central air conditioning and heat pumps market.

The current energy conservation standard for SDHV is 13 SEER. In today’s notice, DOE is not proposing to amend that level. Therefore, because the efficiency level to which the manufacturers are subject will not change, DOE does not anticipate that the adopted rule would adversely affect the manufacturers of SDHV products. The ruling would not change the competitive environment for the single small manufacturer.

12.6.2 Impacts on Small Residential Furnace Manufacturers

DOE identified five domestic small business manufacturers of residential furnace products. All five produce oil furnaces as their primary product line. Oil furnaces make up less than 3 percent of residential furnace shipments. One of the small businesses also produces mobile home furnaces as a secondary product line. No additional small

manufacturers of mobile home furnaces were identified.

The five small b usiness manufacturers of residential furnace products account for 22 percent of the 1,207 active oil furnace product listings in the AHRI Directory (based on information available from the AHRI Directory in September 2010). Ninety

- nine percent of the small oil manufacturer product listings were above the base standard of 78 percent AFUE. Seventy

- seven percent of the small oil furnace manufacturer product listings had efficiencies equal to or above 83 percent AFUE, the efficiency level for oil

furnaces adopt ed in today’s notice. All small business manufacturers of residential furnace products have product lines that meet the efficiency level adopted in today’s

notice.

In interviews, several small manufacturers noted that the majority of their

businesses’ sal es are above 83

- percent AFUE today. According to interviews, the small manufacturers focus on marketing their brands as premium products in the replacement market, while the major manufacturers tend to sell their products at lower cost and lower efficiency . For this reason, a move to a higher standard is unlikely to require investments in research and development by small manufacturers to catch up to larger manufacturers in terms of technology development. However, in interviews, small oil furnace

manufactu rers did indicate some concern if the energy conservation standard were to be raised to 85 percent, which is the efficiency level just below max

- tech, or above. At these efficiency levels, according to manufacturers, the installation costs for oil furnaces could significantly increase due to the need for chimney liners, which are necessary to manage the acidic condensate that results from the high sulfur content of domestic heating oil.12

- 49 

### Small oil furnace manufacturers expressed concern that the additional i nstallation costs of a chimney liner would deter home owners from purchasing new oil furnaces and accelerate the contraction of an already

- shrinking oil furnace market. Additionally, small manufacturers were concerned that a high standard would leave littl e opportunity to differentiate their oil furnaces as premium products through higher efficiencies. If the amended standards were sufficiently stringent as to leave little room for small manufacturers to offer higher

- efficiency products, it would become mor e difficult for them to justify their premium positioning in the marketplace. However, manufacturers indicated that the change in the efficiency level adopted by today’s notice would not significantly alter that premium pricing dynamic.

For oil furnaces, the majority of both small business product lines and sales are at efficiencies equal to or above 83

- percent AFUE. Oil furnace manufacturers do not expect to face significant conversion costs to reach the adopted level. Based on manufacturer feedback, DOE estimated that a typical small oil furnace manufacturer would need to invest $250,000 to cover conversion costs, including both capital and product conversion costs such as investments in production lines, R&D and engineering resources, and product testing , to meet the adopted standard. However, any relatively fixed costs associated with research and development, marketing, and testing necessitated by today’s adopted rule would have to be spread over lower volumes, on average, as compared to larger manufact urers. DOE believes this disproportionate adverse impact on small manufacturers is somewhat mitigated by an industry trend toward large manufacturers outsourcing their oil furnace production to small manufacturers. Interviewed small

manufacturers indicated that larger manufacturers are becoming less willing to allocate resources to the shrinking oil furnace market, yet still want to maintain a presence in this portion of the market in order to offer a full product line. In turn, market share in oil

furnace production is shifting to small manufacturers. For all of the foregoing reasons, DOE does not believe today’s adopted rule jeopardizes the viability of the small oil

furnace manufacturers.

As noted above, DOE identified one small manufacturer of mobile h ome furnaces. This manufacturer primarily produces and sells oil furnaces, but it also produces mobile home furnaces as a secondary product offering. The standard adopted in today’s notice would require 90

- percent AFUE in the North and 80

- percent AFUE in t he

South. DOE believes the adopted level would be unlikely to cause the small manufacturer to incur significant conversion costs because their current pr oduct offering already meets

the adopted level , as illustrated by the listings in the AHRI directory.

In summary, DOE recognizes that amended energy conservation standards can potentially disproportionately impact small businesses. Larger manufacturers could have a competitive advantage due to their size and ability to access capital that may not be

avail able to small businesses. Additionally, in some market segments, larger businesses have larger production volumes over which to spread costs. However, DOE has found

that these risks to be limited for the reasons noted above.

12.7 OTHER IMPACTS12

- 50 

### 12.7.1 Employment

12.7.1.1 Methodology
To quantitatively assess the impacts of energy conservation standards on employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL from 2010 through 2045

. DOE

used statist ical data from the U.S. Census Bureau’s 2008 Economic Census, the results of the engineering analysis, and interviews with manufacturers to determine the inputs necessary to calculate industry

- wide labor expenditures and domestic employment levels.

Labor e xpenditures related to manufacturing of the product are a function of the labor intensity of the product, the sales volume, and an assumption that wages remain fixed in

real terms over time. In evaluating energy efficiency standard and standby and off mode standard impacts on employment, DOE found that energy efficiency standards drove employment changes to a much greater degree than standby mode and off mode

standards

. T he design options for standby mode and off mode amount to component swaps, which, while requiring some product development effort, would not meaningfully affect the product labor content. Therefore, the standby and off mode TSLs do not result in significant changes to employment

. The change in employment is driven by energy efficiency TSLs.

The production worker estimates in this section only cover employment up to the

line

- supervisor level who are directly involved in fabricating and assembling a product within an Original Equipment Manufacturer (OEM) facility. Workers performing

services t hat are closely associated with production operations, such as material hand l ing with a forklift, are also included as production labor. DOE’s estimates only account for production workers who manufacture the specific products covered by this rulemaking.

F or example, even though a manufacturer may also produce hearth products, a worker on a hearth product line would not be included with the estimate of the number of residential

furnace workers.

In the GRIM, DOE used the labor content of each product and t he manufacturing production costs from the engineering analysis to estimate the annual labor expenditures in the industry. DOE used Census data and interviews with manufacturers to estimate the portion of the total labor expenditures that is attributable t o U.S. ( i.e. The total labor expenditures in each year are calculated by multiplying the MPCs by the labor percentage of MPCs . From interviews, DOE estimated that 89 percent of covered residential furnace, air conditioner and heat pump pr oducts are manufactured and sold in the U.S. DOE multiplied the total annual labor expenditures in the GRIM by the percentage of U.S. production to calculate domestic labor expenditures for residential furnace, air conditioner and heat pump production labo r. The domestic annual labor expenditures in the GRIMs were converted to domestic production employment levels by dividing production labor expenditures by the annual payment per production worker (production worker hours times the labor rate found in the U.S. Census Bureau’s 2008 Economic Census). 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 from the U.S . Census Bureau’s , domestic) labor.12

- 51 

### 2008 Economic Census. The total direct employment impacts calculated in the GRM are the sum of the production and non

- production workers.

The domestic annual labor expenditures and employment levels were calculated

for the base case and at each TSL. The impacts on domestic employment due to standards can be assessed by comparing the employment results in the base case to the results at each TSL. In the GRIM, the employment results represent direct U.S. production workers that are impacte d by this rulemaking. U.S. workers involved in manufacturing or supporting products for exports would not be impacted and are not included as part of the labor impacts.

12.7.1.2 Employment Impacts

The GRIM forecast the residential furnace and central air condition ing and heat pump domestic labor expenditure for production labor in 2016 will be approximately
$ 605.55 million. Using the $17.38 wage rate and 1,963 production hours per year per employee found in the U.S. Census Bureau’s 2008 Economic Census, the GRIM

es timates there would be approximately 17,746 U.S. production employees involved in the production of residential furnaces and central air conditioners and heat pumps covered in this rulemaking. In addition, DOE estimates that 6,452 non

- production employees in the United States will support residential furnace and central air conditioner and heat pump production.

Table 12.7

. 1 shows the range of the impa cts of potential amended energy conservation standards on U.S. production workers in the residential furnace and central air conditioner and heat pump market. The table accounts for both conventional products and niche furnace products.

Table 12.7

. 1 Potential Changes in the Total Number of Residential Furnace and Central Air Conditioners and Heat Pumps Production Workers in 2016

Trial Standard

Level Total Number of Domestic Production Workers in 2016 (without changes in production locations) Potential Changes in Domestic

Production Workers in 2016*

Base Case 16,902

-
1 16,998 96

- (16,902)

2 17,242 340

- (16,902)

3 17,485 583

- (16,902)

4 17,746 844

- (16,902)

5 17,940 1038

- (16,902)

6 17,998 1096

- (16,902)

7 18,102 1200

- (16,902) * Numbers in parentheses indicate negative numbers.



### The employment impacts shown in Table 12.7

. 1 r epresent the potential production employment that could result following the compliance date of amended energy conservation standards. The upper end of the results in the table estimates the maximum change in the number of production workers after amended energy12

- 52 

### conservation standards must be met. The upper end of the results assumes manufacturers would continue to produce the same scope of covered products in the same production

facilities o r in new or expanded facilities still located in the United States. The upper end of the range also assumes that domestic production does not shift to lower

- labor

- cost countries. Because there is a real risk of manufacturers evaluating sourcing decisions i n response to amended energy conservation standards, the lower end of the range of employment results includes the estimated total number of U.S. production workers in the industry who could lose their jobs if all existing production were moved outside of the U.S. Finally, the employment impacts shown are independent of the employment impacts from the broader U.S. economy, which are documented in chapter 1 4 , Employment Impact Analysis, of the TSD.

Based on the GRIM analysis, DOE estimates that there would be positive employment impacts among residential furnace and central air conditioner and heat pump manufacturers at the upper bound. This effect occurs because the absolute amount of

labor content increases per product at higher efficiency levels and the analysis assumes manufacturers do not alter the current mix of domestic and international production. DOE believes the assumption implied by this scenario becomes less realistic at the most stringen t TSLs when complete technology changes would likely require new production

facilities

.

12.7.2 Production Capacity

Most manufacturers currently have excess production capacity, reflected in part by the substantial decline in shipments since the height of the housing boom in 2005. Manufacturers did not express major capacity

- related concerns at the efficiency levels included at TSL 1, 2, and 3. Additionally, manufacturers did not express concerns about the production capacity at TSL 4, which includes accelerate d compliance dates arising out of the consensus agreement. All major manufacturers that were interviewed agreed that the timelines in TSL 4 could be met and that no capacity shortages were likely to

occur.

12.7.2.1 Central Air Conditioner and Heat Pump Capacity Imp acts

The selection of higher TSLs could create capacity constraints in the central air conditioner and heat pump industry

. A t the efficiency levels included in TSL 6 and TSL 7, manufacturers were concerned that the changes in technology could impose capac ity

constraints in the near to medium term.

At TSL 6, the higher energy conservation standard would increase industry demand for some key components and tooling over current levels. All major manufacturers would seek to increase their purchasing volumes of high efficiency compressors, ECM motors, and production tooling in the same timeframe. Given that the industry relies on a limited number of suppliers for these parts, some manufacturers expressed concern that a bottleneck in the supply chain could crea te production

constraints.12

- 53 

### At TSL 7, the major domestic manufacturers of split

- system air conditioners and heat pumps would likely need to redesign all of their existing products to incorporate

more

- efficient technologies for residential applications. If manufacturers chose not to or could not afford to develop new technologies, they would likely need to significantly enlarge the products’ heat exchangers, which in turn would require a redesign of their production lines to accommodate significantly larger units or to add a second compressor. This increased demand for components and production tooling could lead to short

- term constraints on production.

12.7.2.2 Residential Furnace Capacity Impacts

For non

- weatherized gas furnaces, which make up the majority of indu stry furnace shipments, manufacturers would need to expand or redesign production lines for secondary heat exchangers at TSL 2 through TSL 6. One manufacturer indicated that a

90

- percent AFUE non

- weatherized gas furnace could take as much as thirty percent more time to build than an 80

- percent AFUE furnace. However, given current capacity in the industry and available resources, no manufacturer expressed concern about meeting the

accelerated deadlines in the adopted standard as long as the consensus agreeme nt is adopted quickly.

However, manufacturers did express concern about capacity a t max

- tech

. At TSL
7, non

- weatherized gas furnace manufacturers would need to redesign all product lines to incorporate burner modulation technology, which includes adding m odulating gas valves, variable speed inducer fans, and more sophisticated controls. The coinciding demand for modulating gas valves and variable speed inducer fans from seven major manufacturers could potentially create supply chain constraints.

Similar max tech concerns were expressed by oil furnace manufacturers. Manufacturers interviewed highlighted concerns about the technical feasibility of increasing oil furnace efficiency to condensing levels. Most manufacturers have not found a design that reliabl y delivers performance at or above 95 percent AFUE, the max tech level. Some manufacturers indicated that they would not be able to produce products at the condensing level until the sulfur content of heating oil was regulated and substantially lowered in key markets. The development of a cost

- effective, reliable and

durable 95 percent AFUE oil furnace would require conversion expenditures by a majority of the industry. It is unclear how many manufacturers would make the conversion investment to compete in a ma rket that is below 80,000 units per year in size and, according to most manufacturers, is shrinking. Given the limited size of the oil furnace market and the market’s declining shipments, it could be expected that a number

of manufacturers would choose to leave the market rather than compete at this efficiency

level. This could result in a shortage of production capacity to meet market demand.

12.7.3 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have serious consequences12

- 54 

### for some manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. For the cumulative regulatory burden analysis, DOE looks at other significant product

- specific regulations that could affect furnace and central air conditioning and heat pump

manufactu rers that will take effect 3 years before or after the compliance date of amended energy conservation standards for these products. a



### Companies that produce a wide range of regulated products may be faced with more capital and product development expenditures than competitors with a narrower scope of products. Regulat ory burdens can prompt companies to exit the market or reduce their product offerings, potentially reducing competition. Smaller companies in particular can be affected by regulatory costs since these companies have lower sales volumes over which they can amortize the costs of meeting new regulations. A standard is not economically justified if it contributes to an unacceptable level of cumulative regulatory

burden. In addition to the amended energy conservation regulations, several other Federal regulations apply to these products and

o ther equipment produced by the same manufacturers. While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, DOE also has described a number of regulations from entities other than the Federal government that may impact manufacturers of products covered by this rulemaking.

12.7.3.1 DOE Regulations for Other Products Produced by Affected

Manufacturers

In addition to the am ended energy conservation standards on residential HVAC products, several other Federal regulations and pending regulations apply to other products produced by the same manufacturers. DOE recognizes that each regulation can significantly affect a manufactu rer’s financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an

exit from the market. Table 12.7

. 2 lists the other DOE energy conservation standards that could also affect manufacturers of residential refrigeration products in the 3 years leading up to and after the compliance date of amended energy conservation standards fo r these products.

a The compliance date for furnace and central air conditioning and heat pump products is 3 years from the date of publication of the final rule (approximately summer 2011).12

- 55 

### Table 12.7

. 2 Other DOE and Federal Actions Affecting the Furnace And Central Air Conditioning And Heat Pump Industry
Regulations Approximate Compliance Date Estimated Total Industry Conversion Expense

Residential Boilers 2012 $4M (2007$)

Packaged Terminal Air Conditioners / Packaged Terminal Heat Pumps 2012 $17.3M (2007$)

Furnace Fan 2013 n/a

Room Air Conditioners 2014 n/a Gas Fired and Electric Storage Water

Heaters 2015 $95.4M (2009$)



### 12.7.3.2 Other Federal Regulations

Unites States Clean Air Act

The Cle an Air Act defines the EPA's responsibilities for protecting and improving the nation's air quality and the stratospheric ozone layer. The most significant of these

additional regulations are the EPA mandated phase

- out of hydro chlorofluorocarbons (HCFCs). The Act demands on a quarterly basis that any person who produced, imported, or exported certain substances, including HCFC refrigerants, must report the amount produced, impo rted and exported. Additionally, effective January 1, 2015, selling, manufacturing, and using any such substance is banned unless such substance has been used, recovered, and recycled; is used and entirely consumed in the production of other chemicals; or is used as a refrigerant in appliances manufactured prior to January 1, 2020. Finally, production phase

- outs will continue until January 1, 2030 when such production will be illegal. These bans could trigger design changes to natural or low global warming potential refrigerants and could impact the insulation used in products covered by this rulemaking.

Potential Climate Change and Greenhouse Gas Legislation
Many manufacturers expressed concern about potential climate change legislation

that would exacerbat e the manufacturer burden caused by more stringent energy conservation standards on air conditioning products. An example is the language in H.R. 2454, the American Clean Energy and Security Act of 2009. The legislation included a phase

- down of hydrofluoro carbons (HFCs) and would make the amended energy conservation standard levels considered in this rulemaking more difficult to achieve

because few of the likely replacements for HFCs achieve comparable levels of efficiency, all other things being equal. Add itionally, converting facilities to use HFC replacements would likely be disruptive to manufacturing facilities because of plant changes. Furthermore, several of the potential replacements for HFCs are flammable, requiring new materials handling processes and plant design considerations.12

- 56 

### 12.7.3.3 Other Regulations That Could Impact Resident i al Refrigeration

Manufacturers

While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, in this section DOE has described a n umber of other regulations below that could also impact products covered by this rulemaking

Low and Ultra

- low NOx Standards
The South Coast Air Quality Management District (SCAQMD) is the air pollution control agency for all of Orange County and the urban portions of Los Angeles, Riverside and San Bernardino counties in California. The SCAQMD covers about half of the population of the state of California.

In November 2009, the SCAQMD amended Rule 1111

- Reduction of NOx

Emissions from Natural

- Gas

- Fired, Fan

- Type Central Furnaces. The rule sets nitrogen oxide (NOx) emissions limits for the majority of new residential condensing, non

condensing and weatherized heating furnaces. The amended rule establishes for the first

time a NOx limit on new furnaces inst alled in mobile homes. The new emissions limit will be phased in over six years, beginning in 2012.

The rul ing applies to “residential and commercial fan

- type central furnaces, requiring either single

- phase or three

- phase electric supply, used for comfort heating with a rated heat input capacity of less than 175,000 BTU per hour, or, for combination heating and cooling units, a cooling rate of less than 65,000 BTU per hour.” b 

### The ruling prohibits the manufacture, supply, sale, offer for sell, or installation of non

- compliant products. The effective dates for the SCAQMD Rule 1111 NOx limit are as follows:

Table 12.7

. 3 Furnace NOx L imits and Compliance Schedule for SCAQMD Rule 111

Compliance Date Equipment Category NOx Emission Limit (nanograms/Joule)

10/1/2012 Mobile Home Furnace 40

10/1/2014 Condensing Furnace 14

10/2/2015 Non

- condensing Furnace 14

10/3/2018 Weatherized Furnace 14

10/4/2016 Mobile Home Furnace 14



### Furthermore, the SCAQMD has implemented Rule 1121

- Control Of Nitrogen Oxides From Residential Type, Natural Gas

- Fired Water Heaters. These ultra

- low NO

x 

### regulations for residential water heaters limit NO

x

b California Air Resources Board, South Coast AQMD List of Current Rules (2010) (Av ailable at: 

### emissions for 

### all direct

- vent, power vent

, and power direct

- vent water heaters. Since January 2008, the regulation has prohibited the sale, distribute, sell, offer for sale, or install within the South Coast Air Quality

http://www.arb.ca.gov/drdb/sc/cur.htm ) (last accessed September 2010)12

- 57 

### Management District any gas

- fired water heaters unless the water heater is certified to a

NO

x 

### emission level of less than or equal to 10 nanograms of NO

x 

### (23 lb per billion Btu of heat output), or 15 ppmv at 3% O2, dry (17.5 lb per billion Btu of heat inpu t) c



### . This regulation has forced manufacturers of water heaters and oilers to develop new product lines that comply with these NO

x 

### standards for sale in Southern California.

Additionally, other air quality management districts in California and other sta tes are considering or have adopted NO

x



### Canadian Energy Conservation Standards regulations modeled on SCAQMD Rule 1111 and Rule

1121.



### Manufacturers indicated that Canada has several programs in place that affect their regulatory burden. They indicated con cern about Canadian energy efficiency regulat ion covering residential furnace, central air conditioner and heat pump , furnace fan, and residential boiler products.

NRCan enacted revised standards for residential furnaces in 2009. The standard applies to gas

- fired central forced

- air furnaces that use propane or natural gas and have an input of not more than 117.23 kW (400 000 Btu/h), but excluding mobile home furnaces.

The NRCan standard is more stringent than the U.S. energy efficiency standards effective 2006, 10 C.F.R. 430.32(e). NRCan requires a minimum AFUE of 90 percent , which is higher than the U.S. 78 percent AFUE standard effective 1992 and the 81 percent AFUE

standard effective 2015 d



### .

NRCan enacted revised standards for central air conditioning i n 2006. These standard align closely with the U.S. regulations for unitary systems and are not more stringent than the U.S. energy efficiency standards effective 2006, 10 C.F.R. 430.32(c).

NRCan added reporting requirements for residential air handlers u sed with central space conditioning (heating and cooling) in 2010. Though no minimum efficiency standard is set, the Regulations contain reporting requirements for electricity consumption of the furnace blower motor and standby power for gas

- fired furnaces

.

NRCan recently had new residential boiler efficiency standards go into effect. Additionally, NRCan has proposed additional prescriptive standards for 2012. These

standards are listed in the table below.

c California Air Resources Board, South Coast AQMD List of Current Rules (2010) (Available at: http://www.arb.ca.gov/drdb/sc/cur.htm ) (last accessed September 2010)

d Natural Resources Canada, Canada's Energy Efficiency Regulations (2009) (Available at: http://oee .nrcan.gc.ca/regulations/guide.cfm ) ( last accessed October 2010).12

- 58 

### Table 12.7

. 4 NRCan Standards for Residential Boiler Efficiency

Boiler Type Effective Date September 1, 2010 Effective Date September 1, 2012

Gas Hot Water 82% AFUE; No constant burning pilot Automatic means for adjusting water temperature

Gas Hot Water equipped

with tankless domestic water heating coils 82% AFUE; No constant burning pilot

Gas Steam 80% AFUE; No constant burning pilot

Oil Hot Water 84% AFUE Automatic means for adjusting water temperature

Oil Hot Water equipped with

tankless domestic water heating coils 84% AFUE

Oil Steam 82% AFUE

Electric Hot Water n/a Automatic means for adjusting water temperature



### NRCAn has attempted to harmonize with regulations coming into effect in the US September 1, 2012 as outlined in the US DOE’s Final Rule

– Technical Amendment published July, 28, 2008. Canada’s minimum energy performance standard and prescriptive requirement for no constant burning pilot comes into effect 2 years earlier than in the U.S. The prescriptive requirement for an automatic means of adjusting water temperature comes into effect at the same time as in the U.S. e



### 12.8 CONCLUSION
The following sections summarize the impacts for the scenarios DOE believes are most likely to capture the range of impacts on residential furnace and central air conditioning and heat pump product manufacturers as a result of amended energy

conservation standards. Table 12.8

. 1 summarizes the energy efficiency trial standard levels for which different markup scenarios were evaluated. Table 12.8

. 2 summarizes the standby mode and off mode trial standard levels for which different markup scenarios

were evaluated.

Table 12.8

. 3 though Table 12.8

. 6 summarize the GRIM’s INPV results for each energy efficiency TS L. Table 12.8

. 7 and Table 12.8

. 8 summarize the GRIM’s INPV results for each standby mode and off mode TSL. DOE notes that while these scenarios

e NRCan’s boiler regulations and harmonization information can be found on Canada’s Office of Energy Efficiency’s Residential Gas, Oil

- fired and Electric Boilers Energy Efficiency page at: http://oee.nrcan.gc.ca/regulations/bulleti n/boilers

- june

- 2010.cfm12

- 59 

### bound the range of most plausible impacts on manufacturers, there potentially co uld be circumstances which cause manufacturers to experience impacts outside of this range

.

Table 12.8

. 1 Summary of Active Mode TSLs*

Equipment Class Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL6 TSL7 

### Split System Air Conditioners (SEER) 13 13.5 13.5 13/14 13/14 13/14 14/15 17


### Split System Heat Pumps (SEER) 13 13.5 13.5 13/14 13/14 13/14 14/15 22



### Single Package Air Conditioners (SEER) 13 13.5 13.5 14 14 14 15 21



### Single Package Heat Pumps (SEER) 13 13 13 14 14 14 15 16.5



### Non

- Weatherized Gas Furnace (% AFUE) 80 13 13 14 14 14 15 16.5

Mobile Home Furnace (% AFUE) 80 80 92/80 90/80 90/80 95/80 95/80 98/98

Oil Furnace (% AFUE) 82 80 80/80 90/80 90/80 96/80 96/80 96/96



### * two values in a cell indicate the North/South regional standards

Table 12.8

. 2 Summary of Off Mode TSLs (in Watts)

Equipment Class TSL 1 TSL 2 TSL 3

Split System Air Conditioning 36 30 29

Split System Heat Pumps 33 33 32

Single Package Air Conditioning 36 30 29

Single Package Heat Pumps 33 33 32

Non

- Weatherized Gas Furnace 10 10 9

Mobile Home Furnace 10 10 9

Oil Furnace 11 11 1012

- 60 

### 12.8.1 Energy Efficiency Standard s

12.8.1.1 Conventional Products

Table 12.8

. 3 Changes in Industry Net Present Value for Conventional Products 

### (Preservation of EBIT Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 8,347 8,354 7,847 7,936 7,893 7,857 7,685 6,855

Change in

INPV (2009$ millions) n/a 8 (500) (411) (454) (490) (662) (1,492)

(%) n/a 0.1 (6.0) (4.9) (5.4) (5.9) (7.9) (17.9)
*Values in parenthesis indicate negative numbers



### Table 12.8

. 4 Changes in Industry Net Present Value for Conventional Products (Tiered Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 8,347 8,379 8,021 7,638 7,475 7,467 6,509 4,578

Change in

INPV (2009$ millions) n/a 33 (326) (709) (871) (879) (1,837) (3,768)

(%) n/a 0.4 (3.9) (8.5) (10.4) (10.5) (22.0) (45.1)
*Values in parenthesis indicate negative numbers



### Sales of split

- system air conditioners make up more than 60 percent of residential central cooling shipments, and non

- weatherized gas furnaces make up more than 80 percent of the residential furnace shipments, respectively. These two product classes are the largest drivers of INPV in the conventional product grouping. In t he base case, the conventional products industry is estimated to have an INPV value of $ 8,347 million (2009$).

TSL 1 represents the efficiency levels for the conventional product classes that have the largest market share today. At TSL 1, DOE estimates impacts on INPV to be small, but positive

. INPV impacts range from $ 33 million to $8 million, or a change in

INPV of 0. 4 percent to 0.1 percent. At this considered level, industry free cash flow is

estimated to remain steady at $511 million for both the base case and standards case in the year before the TSL 1 compliance date (2015).

At TSL 1, the impacts on the industry are minor because manufacturers already ship products at TSL 1 efficiencies in high volumes. Eighty

- one percent of all

conventional HVAC products shipped today meet or exceed the TSL 1 standards. Additionally, an increase in standard s from 13 SEER to 13.5 SEER for split

- system air conditioning and heat pumps is expected to require no significant conversion costs. As a result, INPV remains mostly stable at this considered standard level.12

- 61 

### TSL 2 has a higher standard for non

- weatherized gas furnaces than TSL 1. This results in a greater negative impact on INPV. TSL requires non

- weatherized gas furnaces

to meet a 92

- percent AFUE minimum efficiency in the North. DOE estimates TSL 2 impacts on INPV to range from

- $326 million to

- $500 million, or a change in INPV of

- 3.9 percent to

- 6.0 percent. At this level, industry free cash flow is estimated to decrease by approximately 5.3 percent to $484 million, compared to the base

- case value of $511 million, in the year 2015.

At TSL 2 , for the non

- weatherized gas furnace standard, manufacturers may incur elevated conversion costs as they redesign a 92

- percent AFUE furnace product to meet the requirements of the builder market and adjust their product families accordingly in

the North. At 92

- percent AFUE, these furnaces would require a secondary heat exchanger

, and, when compared to a 90

- percent AFUE design, the heat exchangers would need to be sized up. DOE estimates that at this level, non

- weatherized gas furnace

conversion costs tota l approximately $20 million for the industry. These conversion

costs

, along with changes in shipments due to standards

, account for much of the drop in

INPV from TSL 1 to TSL 2.

TSL 3 incorporates regional standards for split

- system air conditioning

and furnace products. Compared to the baseline, TSL 3 proposes a higher air conditioning and heat pump standard in the South (14 SEER minimum) and a higher furnace standard in the North (90

- percent AFUE minimum). At TSL 3 , DOE estimates impacts on INPV to ran ge from

- $411 million to

- $709 million, or a change in INPV of

- 4.9 percent to

- 8. 5 percent. At this considered level, industry free cash flow is estimated to decrease by approximately 5.8 percent to $481 million, compared to the base

- case value of $ 511 m illion, in the year leading up to the year in which compliance with considered energy conservation standards would be required (2015)

.

Both markup scenarios in the GRIM for the energy efficiency standards at

TSL 3 assume that a commoditization of 14 SEER air conditioning units in the South would put downward pressure on margins for 14 SEER units sold in all regions. Similarly, the 90

- percent AFUE standard for non

- weatherized gas furnaces in the North would negatively affect margins for non

- weatherized gas furnace units sold in all regions. This impact on markups is more severe in the tiered scenario, because the change in the standard also compresses markups on higher

- AFUE products, which are effectively demoted in the “good, better, best” sales model. As a result, INPV decreases by 8. 5 percent in the tiered markup scenario, compared to 4.9 percent in the preservation of

EBIT scenario.

TSL 4 represents the consensus agreement level and incorporates accelerated compliance dates. The standards are set at t he same level as TSL 3 , except
that TSL 4 also includes EER standards for central air conditioners in the hot

- dry region. In addition, the furnace standards are modeled to take effect in 2013, and the air conditioning and heat pump standards are modeled to take effect in 2015, instead of the 2016 compliance date s used in TSL 3 . At TSL 4, DOE estimates impacts on INPV to12

- 62 

### range

- $454 million to

- $871 million, or a change in INPV of

- 5.4 percent to

- 10.4 percent. At this level, industry free cash flow is est imated to decrease by approximately 9.6 percent to $462 million, compared to the base

- case value of $ 511 million, in the year

2015.

To comply with the earlier compliance dates, manufacture r s must make earlier investments in product conversions, which nega tively affect INPV because of discounting effects. Additionally, the accelerated schedule for amended standards leads to earlier commoditization of residential furnace, central air conditioner, and heat pump products. As a result, the INPV value is slightly more negative in TSL 4 than in TSL 3 for both the preservation of EBIT scenario and the tiered markups scenario.

TSL 5 includes higher furnace standards than TSL 4. N on

- weatherized gas

furnace standards would increase to 95

- percent AFUE. Additio nally, TSL 5 lacks the accelerated compliance dates associated with TSL 4. All HVAC standards in TSL 5

would require compliance in 2016. At TSL 5, DOE estimates impacts on INPV to range

from

- $490 million to

- $879 million, or a change in INPV of

- 5.9 perce nt to

- 10.5 percent. At this considered level, industry free cash flow is estimated to decrease by approximately 9.7 percent to $461 million, compared to the base

- case value of $511 million, in the year 2015.

At 95

- percent AFUE, non

- weatherized gas furnac e efficiency would be one efficiency level below max

- tech. To comply with such a standard, manufacturers would need to increase heat exchanger size up to the physical constraints of the furnace cabinets. Furnace manufacturers would need to upgrade their 95

- percent AFUE production lines to meet demand. Additionally, manufacturers expect this efficiency level would require significant R&D costs to redesign and convert a premium, feature

- loaded product into a basic value

- line product, which would be demanded b y the builder market. As a result, industry conversion costs could grow from $28 million at TSL 4 to $77 million at TSL 5. INPV becomes slightly more negative from TSL 4 to TSL 5.

TSL 6 elevates the standard for air conditioning and heat pumps over TSL 5 while maintaining the same standards for all furnace product classes. TSL 6 is the most aggressive regional standard considered in this rulemaking (although TSL 7 has more stringent standards, the standards in TSL 7 are national rather than regional). A t TSL 6, DOE estimates impacts on INPV to range from

- $662 million to

- $1837 million, or a change in INPV of

- 7.9 percent to

- 22.0 percent. At this considered level, industry free cash flow is estimated to decrease by approximately 24.7 percent to $385 mil lion, compared to the base

- case value of $511 million, in the year 2015.

In the base case, 73 percent of split

- system air conditioning shipments in the North are below 14 SEER, and 84 percent of split

- system air conditioning shipments in

the South are be low 15 SEER. Increasing the minimum efficiency to 14 SEER in the North and 15 SEER in the South requires significantly more capital expenditure from manufacturers. At TSL 6, manufacturers would need to redesign their highest

- volume12

- 63 

### product lines in both th e South and the North. There are multiple design paths that manufacturer could take; however, the changes will likely involve the addition of two

stage compressors, the enlargement of heat exchangers, the application of more

sophisticated controls, the inc orporation of microchannel technology, or some combination of these options. Some manufacturers indicated that new production facilities would be necessary at this potential standard level.

TSL 7 represents the max

- tech efficiency level for all product classes. At TSL 7, DOE estimates impacts on INPV to range from

- $1,492 million to

- $3,768 million, or a change in INPV of

- 17.9 percent to

- 45.1 percent. At this considered level, industry free cash flow is estimated to decrease by approximately 65.9 perc ent to $174 million, compared to the base

- case value of $511 million, in the year 2015.

At TSL 7, the industry incurs significant R&D costs and loses the ability to differentiate products based on efficiency. For central air conditioning systems, manufacturers would likely have to move to add a second compressor, incorporate inverter technology, or make their product significantly larger. For furnaces, manufacturers would likely have to incorporate burner modulation technology, which

would include adding modulating gas valves, variable speed inducer fans, and more

sophisticated controls. These potential standard levels would require much higher R&D and product design expenditures by manufacturers. It could be difficult for all major

manufacture r s to justify the investments necessary to reach max

- tech. A few manufacturers indicated that building a new facility would create less business disruption risk than attempting to completely redesign and upgrade existing facilities. Additionally,

some manufactu rers noted that lower labor rates in Mexico and other countries abroad may entice them to move their production facilities outside of the U.S. There was general agreement that the high conversion costs and more expensive components required in

TSL 7 could also make foreign

- based technologies, which have traditionally been more expensive, more attractive in the domestic market.

12.8.1.2 Niche Furnace Products

Table 12.8

. 5 Changes in Industry Net Present Value for Nich e Products (Preservation of EBIT Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 149 149 151 132 125 131 131 109

Change in

INPV (2009$ millions) n/a 0 2 (17) (24) (18) (18) (40)

(%) n/a 0.0 1.2 (11.6) (16.4) (12.1) (12.1) (26.7) *Values in parenthesis indicate negative numbers12

- 64 

### Table 12.8

. 6 Changes in Industry Net Present Value for Niche Products (Tiered Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3 4 5 6 7

INPV (2009$ millions) 149 149 151 129 120 114 114 94

Change in

INPV (2009$ millions) n/a (0) 2 (20) (29) (36) (36) (55)

(%) n/a (0.0) 1.4 (13.5) (19.6) (23.8) (23.8) (36.7)
*Values in parenthesis indicate negative numbers



### At TSL 1 and TSL 2, the standards

- case efficiency remains at the baseline level for both mobile home furnaces and oil furnaces. There are no conversion costs, and the INPV varies very little from the baseline value.

At TSL 3, the oil furnace standard increases to 83

- percent AFUE, while the

mobile home furnace standard increases to 90

- percent AFUE in the North. At TSL 3, DOE estimates impacts on INPV to range from

- $17 million to

- $20 million, or a change

in INPV of

- 1 1.6 percent to

- 13.5 percent. At this level, industry free cash flow is estimated to decrease by approximately 54.0 percent to $5.1 million, compared to the

base

- case value of $11.0 million, in the year 2015.

TSL 3 would require the addition of a secon dary heat exchanger for mobile home furnace products sold in the North. As a result, mobile home furnace manufacturers could incur conversion costs for redesigns and tooling. Oil furnace manufacturers would likely

need to increase the surface area of heat exchangers. DOE estimates conversion costs for the entire industry to meet the TSL 3 to be $ 15 million.

TSL 4 represents the consensus agreement level and incorporates accelerated compliance dates. The mobile home furnace standard and the oil furnace stan dard do not vary from TSL 3. DOE estimates impacts on INPV to range from

- $24 million to

- $29 million, or a change in INPV of

- 16.4 percent to

- 19.6 percent. At this level, industry free cash flow is estimated to decrease by approximately 11.5 percent to $ 9.8 million, compared to the base

- case value of $11.0 million, in the year 2015.

The accelerated compliance dates of TSL 4 lead to earlier investments by manufacturers. The production line changes necessary to produce secondary heat exchangers for mobil e home furnace products and larger heat exchanges for oil furnaces would need to occur before the standards year 2013. Manufacturers could incur conversion costs for redesigns and additional tooling totaling $ 15 million. There is a

decrease in INPV in TSL 4, as compared to TSL 3, due to the earlier commoditization impacts of the accelerated compliance dates. In TSL 4, INPV decreases 4.8 percent to 6.3 percent lower than in TSL 3.

TSL 5 and TSL 6 represent an increase in standards for mobile home furnaces and oil furnaces above the level set in TSL 1 through TSL 4. The standard in the North for

mobile home furnaces increases to 96

- percent AFUE, and the national standard for oil12

- 65 

### furnaces increases to 85

- percent AFUE. TSL 5 and TSL 6 require compliance in 20 16. DOE estimates impacts on INPV to range from

- $18 million to

- $36 million, or a change

in INPV of

- 12.1 percent to

- 23.8 percent. At this level, industry free cash flow is estimated to decrease by approximately 86.0 percent to $1.6 million, compared to the

base

- case value of $11 million, in the year 2015.

TSL 5 and TSL 6 would raise the standard in the North for mobile home furnaces

to the max

- tech level (i.e., 96

- percent AFUE). At this level, all mobile home furnaces in the North would be required to be condensing. This change would drive the increase in conversion cost, as manufacturers work on condensing furnace designs that function within the physical dimension and price constraints of the mobile home market. Mobile

home furnace manufacturers woul d no longer be able to differentiate products based on efficiency. In interviews, manufacturers noted that the loss of product differentiation would lead to increased focus on cost competitiveness. Given the size of the mobile home furnace market (approxi mately 120,000 units per year) and manufacturer feedback that the mobile home market is highly price sensitive, a number of manufacturers could choose to exit the market rather than compete at this efficiency level. Additionally, TSL 5

and TSL 6 would incr ease the standard for oil furnaces to 85

- percent AFUE. To reach this level, manufacturers would continue to increase the surface area of heat exchangers, incurring additional production costs and higher raw material costs. Conversion costs for

TSL 5 and TS L 6 are $24 million. At this cost, it is possible that some oil furnace

manufacturers would exit the business.

TSL 7 raises the standard for oil furnaces and mobile home furnaces to max

- tech. DOE estimates impacts on INPV to range

- $40 million to

- $55 mi llion, or a change in

INPV of

- 26.7 percent to

- 36.7 percent. At this considered level, industry free cash flow is estimated to decrease by approximately 193 percent to

- $9.2 million, compared to the

base

- case value of $11 million, in the year 2015.

TSL 7 sets a national standard for oil furnaces at the max

- tech level (i.e., 97

- percent AFUE). This efficiency level would require the development of condensing oil furnaces as the baseline product. DOE was only able to identify one domestic

manufacturer offe ring a condensing oil furnace. The development of cost

- effective, reliable, and durable oil furnace products would require significant capital expenditures by a majority of the industry. It is unclear how many manufacturers would make the product conversio n investment to compete in a market that supplies fewer than 80,000 units/year and, according to most manufacturers, is shrinking. However, given the limited size of the oil furnace market and the market’s declining shipments, it could be expected

that a n umber of manufacturers would choose to leave the market rather than compete at this efficiency level. DOE expects a similar effect in the mobile home furnace market.

12.8.1.1 SDHV Products

Small

- duct, high

- velocity systems serve a niche within the residential air conditioning market. A SDHV system consists of a non

- conventional indoor unit and air distribution system (produced by the SDHV manufacturer) mated to a conventional outdoor unit (produced by split system manufacturers). These SDHV systems typically12

- 66 

### make use of flexible ducting and operate at a higher static pressure than conventional air conditioning systems. This product class makes up less than 0.5 percent of central air conditioning shipments. DOE estimates the total market size to be less than 30,000 units per year. Given the small size of the SDHV industry and the limited about of public data, DOE had insufficient information to perform an analysis using the GRIM. However, DOE has prepared a qualitative assessment of the impacts of an amended energy

c onservation standard.

SDHV systems are primarily installed in existing structures that do not have air conditioning duct work. In this application, SDHV systems are often a more cost

effective solution for centralized cooling because conventional systems may require substantial installation and retrofit costs to install ducting. The SDHV system delivers conditioned air via small diameter flexible tubing, which requires less space than conventional ductwork. SDHV systems are often paired with hydronic heat , radiant heat, and ground temperature heat pump systems. Historically, approximately 80 percent of shipments have been for the retrofit market, and 20 percent of shipments have been for

the new construction market.

DOE identified three manufacturers of SDHV systems that serve the U.S. market. The two domestic manufacturers, Unico Systems and SpacePak , serve the majority of the market. SpacePak is a subsidiary of MesTek Inc., a U.S. holding company with over 30 specialty manufacturing brands. Unico is a small business, as defined by the SBA.

DOE’s analysis of AHRI Directory product listings indicates that the primary difference between SDHV products rated at 11 SEER and SDHV products rated above 11 SEER is the paired condensing unit. The indoor unit, whi ch is the component designed and manufactured by SpacePak and Unico, does not change as the AHRI

- certified efficiency increases. SpacePak and Unico are reaching higher efficiencies by pairing their products with larger condensing units, which are produced by conventional air conditioning and heat pump manufacturers.

According to SDHV manufacturers, the small size of the SDHV industry limits influence on key suppliers. As a result, SDHV manufacturers must choose from stock fan motors, compressors, and prod ucts that are optimized for other applications and industries. The selection of available components limits the technology options available to SDHV manufacturers, thereby constraining the manufacturers’ ability to achieve efficiencies above 11 SEER throug h improved product design. Interviewed SDHV manufacturers indicated that they are near max

- tech for the SDHV indoor unit with today’s standards and available components.

In 2004, both Unico and SpacePak petitioned DOE’s Office of Hearings and Appeals (OHA) for exception relief from the 13 SEER energy efficiency standard found at 10 CFR 430.32(c)(2), with which compliance was required for products manufactured on or after January 23, 2006. OHA granted both petitions on October 14, 2004. Accordingly, the manufacturers were authorized to produce equipment that performed at 11 SEER / 6.8 HSPF and above. In their 2004 application for exemption, SpacePak and12

- 67 

### Unico both indicated that a 13 SEER standard would create significant hardships for the SDHV industry. SpacePak wrote in its application for exception relief that an absence of

relief would lead to “the loss of all sa les within the Unites States.” As part of the 2004 OHA Decision and Order (case #TEE

- 0010), Lennox International filed comments stating that “it agrees these [SDHV] products would be unfairly burdened by...the 13

SEER/7.7 HSPF minimum level.”

Since 2004, SDHV manufacturers have been able to reach efficiencies of 13 SEER, but the vast majority of products listed in the AHRI Directory are below 13 SEER (see chapter 3 of the DFR TSD for a distribution of SDHV systems by efficiency level). This improved efficiency is primarily the result of pairing their products with higher

efficiency outdoor units produced by other manufacturers. One manufacturer has incorporated variable

- speed technology to improve product efficiency. However, overall,

SDHV manufacturer s still face many of the same challenges they faced in 2004 and have limited options for further improving the efficiency of the air handling unit , which is the only component designed and produced by SDHV manufacturers. As a result, higher standards would force SDHV manufactures to pair their products with more expensive, higher

- efficiency outdoor units. TSL 1 through TSL 5 would require only the b aseline efficiency level (13 SEER), while TSL 6 and TSL 7 would increase the level to 14 SEER and 14.5 SEER, respectively. DOE believes the increases represented by TSL 6 and TSL 7 would significantly adversely impact the financial standing of SDHV manufac turers. As discussed in 2004 application for exemption, such an increase would likely significantly depress shipments because it would require additional controls and a much more expensive outdoor unit. As a result of the higher costs, manufacturers would be forced to spread fixed costs over decreasing shipment volume s. They would face increasingly difficult decisions to invest resources toward what would likely be a contracting market.

12.8.2 Standby Mode & Off Mode Standard s

Table 12.8

. 7 Changes in Industry Net Present Value for Niche Products (Preservation of Gross Margin Percentage Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3

INPV (2009$ millions) 8,711 8,715 8,716 8,734

Change in

INPV (2009$ millions) n/a 4 5 23

(%) n/a 0.05 0.06 0.26 *Values in parenthesis indicate negative numbers12

- 68 

### Table 12.8

. 8 Changes in Industry Net Present Value for Niche Products (Preservation of EBIT Markup Scenario) *

Units Base

Case Trial Standard Level

1 2 3

INPV (2009$ millions) 8,711 8,458 8,457 8,456

Change in

INPV (2009$ millions) n/a (253) (253) (255)

(%) n/a ( 2.91 ) ( 2.91 ) ( 2.93 )
*Values in parenthesis indicate negative numbers



### The preservation of gross margin percentage and preservation of EBIT markup scenarios for the standby mode and off mode analysis provide similar results. DOE estimates impacts on INPV to range from $ 23 million to

- $ 255 million, or a change in INPV of 0.26 percent to

- 2.93 percent.

These results include the impacts of conversion costs, estimated at $2.8 million for the industry. DOE estimated total conversion costs to be similar at all three standby

mode and off mode T SLs, because the levels of R&D, testing, and compliance expenditures do not vary dramatically. Furthermore, DOE did not identify significant changes to manufacturer production processes that would result from standby mode and off mode standards. In general , the range of potential impacts resulting from the standby mode and off mode standards is small when compared to the range of potential impacts resulting from the energy efficiency standards.12

- 69 1 

### Securities and Exchange Commission, Annual 10

- K Reports, Various Years,

Washington DC. <www.sec.gov>.

2 

### Standard and Poors Financial Services LLC, Company Credit Ratings, Various

C ompanies, New York, NY. < www2.standardandpoors.com >.

3 

### Dun & Bradstreet, Inc., Company Profiles, Various Companies.

< www.dnb.com/US/index.asp >

4 

### Annual Survey of Manufacturing: 2006. American FactFinder. 2008. Bureau of

the Census. < http://factfinder.census.gov/servlet/IBQTable?_bm=y&

-
ds_name=AM0631GS101 >.

5 

### The size standards are available on the SBA’s website at www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.

6 

### McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Companies , 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons,

2000.