6

- i CHAPTER 6

. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CO NTENTS

6.1 INTRODUCTION

................................ ................................ ................................ ........... 6

- 1

6.2 OVERVIEW OF MARKUP E QUATIONS

................................ ................................ .... 6

- 1

6.3 ESTIMATION OF INSTAL LED PRICE

................................ ................................ ........ 6

- 2

6.3.1 Estimation of Transformer Pole Costs

................................ ................................ ............. 6

- 3

6.3.2 Estimation of Markups

................................ ................................ ................................ ..... 6

- 3

6.3.3 Dry

- Type Transformer Installed Price Equation

................................ ............................. 6

- 4

6.3.4 Liquid

- Immersed Transformer Installed Price Equation

................................ ................. 6

- 56

- 1 CHAPTER 6. MARKUPS FOR EQUIPMEN T PRICE DETERMINATION

6.1 INTRODUCTION

This chapter of the technical support document (TSD) presents DOE's method for deriving transformer prices. The objective of the equipment price determination is to estimate the price paid by the customer or purchaser for an in stalled transformer. Purchase price and installation cost are necessary inputs to the life

- cycle cost (LCC) and payback period (PBP) analyses. Chapter 8 presents the LCC calculations; section 8.2.1 describes how the LCC uses purchase price and installati on cost as inputs.

Purchase prices for distribution transformers are not generally known. Transformers are specialty items, often custom

- built with unlisted prices. The engineering analysis (Chapter 5) provided the manufacturer selling prices for the un its included in the LCC analysis . DOE derived a set of prices for each transformer design produced by the engineering analysis by applying markups to the manufacturer selling price in the form of markup equations. These markups represent all the costs as sociated with bringing a manufactured transformer into service as an installed piece of electrical equipment at a customer’s site.

6.2 OVERVIEW OF MARKUP E QUATIONS

Depending on the purchasing environment, DOE used different markup equations to capture the var ious markups in the supply chain between the manufacturer and the customer. For example, electric utilities (except for the rural electric cooperatives) typically purchase liquid

immersed transformers through manufacturer representatives or distributors. The manufacturer selling price plus the distributor markup is generally the utilities’ price for transformers. Dry

type transformers go through several additional marketing or handling steps before they are installed by the end

- use purchaser.

Liquid

- typ e distribution transformers have a seven percent markup, accounting for distributor markup. 1 The manufacturer selling prices for dry

- type transformers include two price markups: a distributor markup of 15 percent and a contractor materials markup of 10 percent. DOE based these markups (expressed as average multipliers) on RS Means Electrical Cost Da ta
20 10

. 2 The distributor markup converts the manufacturer selling price to the distributor price

and t he price paid by the electrical contract or . This distributor markup covers the costs of the distribution business, including sales labor, warehousing, overhead, and profit. Then the contractor applies a markup to the distributor selling price to cover contractor overhead and profit.

For both liquid

- immersed and dry

- type transformers, DOE added sales tax, an installation labor and equipment markup, and installation costs. In the previous distribution transformer rulemaking DOE analyzed shipping costs as one of the markups used to determine installed equipment price. In this Preliminary Analysis the markups for shipping costs have been moved6

- 2 into the engineering analysis; th is is described in greater detail in chapter 5

. Using RS Means

Electrical Cost Data 20 10

, DOE estimated a contractor markup of 1.10

, which is used to convert the distributor selling price to a contractor price

. Then the installation cost is added as the c ost of labor, equipment, and materials (other than the transformer itself) needed to install a distribution transformer. Finally, b y weighting the sales tax for each individual State by its population, DOE

calculated a national weighted average sales tax o f 6.9 percent

. 3 DOE developed several empirical equations for estimating installation costs by following these steps mentioned above.

6.3 ESTIMATI ON OF INSTALLED PRIC E

In order to estimate the installed price for distributor transformers , DOE applied the following equation

, which describes the steps in the distribution channel of transformers:

Installed Price = M tax × { M L & E × L & E + M Mat × [ M Dist × ManPrice ] }

where:

Installed_Price = the final installed price of the transformer (2010$),

M tax = the factor that accounts for sales tax , estimated to be 1.069

, 3

M L&E = the factor that accounts for the markup on direct installation labor
and equipment costs,

L&E = the installation, direct labor, and equipment costs (2009$), adjusted
to 2010$ using the gross domestic product (GDP) price deflator

from the U.S. Bureau of Economic Analysis (BEA)

. 4

M Mat = the factor that accounts for the contractor markup on the purchase

of the transformer from the distributor,

M Dist = the average distributor markup factor, and

ManPrice = the manufacturer's selling price (2010$)

.

DOE estimated markups on transformers by fitting a linear cost function to the RS Means

electrical cost data (see section 6.3.2 ) . The RS Means data break down the total installed cost for transformers in terms of four cost components:

1. m aterials: the unit material cost

, which includ es mounting hardware

, but no t overhead or profit ;

2. l abor: labor cost required for installation, including unloading

, uncrating, hauling within 200 feet of the loading dock, setting in pl ace, connecting to the distribution network, and testing ;6

- 3 3. e quipment: equipment rentals necessary for completion of the installation ; and

4. o verhead and p rofit (O&P) : installati on overhead and profit expenses for the contractor (for dry

- type transformers only).

RS Means lists the first three cost components separately and then has a n additional column listing the total costs including O&P. As defined by RS Means , this figure is the sum of the bare material cost plus 10 percent for profit; the bare labor cost plus total overhead and profit ; and the bare equipment cost plus 10 percent for profit.

6.3.1 Estimation of Transformer Pole Costs

In evaluating design options and the impact of potential standard levels, DOE examined the potential for new standards for distribution transformers to lessen the utility or performance of these products. Stakeholders mentioned in their comments to DOE th at the more efficient

transformers that are heavier could have lessened utility due to impacts on utility pole requirements for overhead transformers. DOE estimated the additional installation costs, based on cost data provided by stakeholders, to mount th e single

- phase, pole

- mounted, liquid

immersed transformers whose designs would require an upgrade to the pole due to increased transformer weight

.

DOE included a pole

- replacement cost function as a part of the installation cost equation

for DL 2, which co vers pole

- mounted transformers. Because not all transformer installations require a change

- out of existing equipment even in the most extreme case, DOE assumed a maximum change

- out fraction. DOE selected 25 percent as the maximum change

- out fraction estimate based on stakeholder input. 5 This analysis assumed that a pole change

- out cost of $2,000 occurs for up to 25 percent of pole

- mounted t ransformers when the weight of the transformer exceeds 1,000 pounds. 1 DOE also included a transformer pole support cost of
$0.12/l b to account for the cost of a sturdier pole. The pole cost equation is included in the LCC spreadsheet tool for DL2 so that stakeholders can conduct sensitivity analyses regarding pole replacement costs.

6.3.2 Estimation of Markups

DOE performed a regression t o disaggregate the overhead and profit associated with installation labor and equipment rental from the overhead and profit associated with the transformer (material) cost. The regression equation is:

Total Costs Including O & P = α + β × Mat + γ × L & E

where:

Total Costs Including O&P = the sum of all bare costs plus overhead and profit expense ( 2009$),

Mat = the material cost (transformer and hardware) (2009$)

, and6

- 4 L&E = the direct labor and equipment costs of installation (2009$)

.

For use in the LCC analysis, DOE adjusted these 2009$ to 2010$ using the GDP price

deflator from the BEA

. 4

After running the regression above, DOE found that the estimated coefficient for the

constant term is not significantly different from zero; therefore DOE reran the regression without the constant term. The resulting equation is:

Total Costs In cluding O & P = 1

. 10 × Mat + 1

. 43 × L & E

The interpretation of the coefficient of material costs is that when material costs increase $1, then the total costs including O&P should be expected to increase $1.10 while holding the

other variable constant . Likewise, a $1 increase in the direct labor and equipment costs will lead to a $1.43 increase in the total costs including O&P while holding the other variable constant. These two figures were used to allocate ov erhead and profit expenses to a markup on the distribution price and a separate markup on the direct labor and equipment costs for the

installation.

6.3.3 Dry

- Type Transformer Installed Price Equation

For dry

- type transformers, the result of these analytical st eps is a total installed cost equation as a function of the manufacturer selling price , and direct labor and equipment costs

, using those markups estimated in section 6.3.2 :

Installed Price = M tax × { M L & E × L & E + M Mat × [ M Dist × ManPrice ] }

where:

Installed_Price = the final installed price of the transformer (20 10 $),

M tax = the factor that accounts for sales tax, estimated as 1.0 69

, M L&E = the factor that accounts for the markup on direct installation labor
and equipment costs, estimated as 1. 43

, L&E = the installation, direct labor, and equipment costs (200 9 $), adjusted

to 20 10 $ using the GDP price deflator from BEA

, M Mat = the factor that accounts for the contractor markup on the purchase

of the transformer from the distributor, estimated as 1.10,

M Dist = the average distributor markup factor, estimated as 1.15 1 , and

ManPrice = the manufacturer's selling price (20 10 $)

.

DOE applied the installed cost equation by using the manufacturer price and weight from the engineering analysis. For example, accordin g to the engineering analysis, a DL 8 ( low

voltage, three

- phase, 750 kVA) transformer model with $3,455 of L&E costs listed in RS Means6

- 5 has a minimum manufacturer price of $ 4

, 235.47

. For this particular transformer, DOE estimated

the lower bound of the installed cost to be $ 11,009.12 , where $ 5,281.56 is the installation cost
and $ 5,727.56 is the sum of the transformer retail price, sales tax, and markups.

6.3.4 Liquid

- Immersed Transformer Installed Price Equation

The installed price calculation for l iquid

- immersed transformers differ s from that for dry

type transformers in that the distributor markup used in the equation is 1.07 instead of 1.15 and DOE removed the contractor markup from the equation based on the previous rulemaking

, 1

Installed Price = M tax × { M L & E × L & E + [ M Dist × ManPrice ] }

where:

Installed_Price = the final installe d price of the transformer (20 10 $),

M tax = the factor that accounts for sales tax, estimated as 1.0 69

, M L&E = the factor that accounts for the markup on direct installation labor
and equipment costs, estimated as 1. 43

, L&E = the installation, direct labor, and equipment costs (200 9 $), adjusted

to 20 10 $ using the GDP price deflator from BEA

, M Dist = the average distributor markup factor, estimated as 1.07, and

ManPrice = the manufacturer's selling price (20 10 $).

As with the dry

- type transformers, DOE applied the installed cost equation by using the manufacturer price and weight from the engineering analysis. For example, according to the engineering analysis, a DL 4 (medium

- voltage, three

- phase, 225 kVA) transformer model with $2,001 of L&E costs li sted in RS Means has a minimum manufacturer price of $5,305.36. For this particular transformer, DOE estimated the lower bound of the installed cost to be $ 9,127.30

, where $ 3,058.87 is the installation cost and $ 6,068.43 is the sum of the transformer retail price, sales tax, and markups.6

- 6 REFERENCES

1. Department of Energy

- Office of Energy Efficiency and Renewable Energy Energy Conservation Program for Commercial Equipment: Distribution Transformers Energy Conservation Standards; Proposed Rule. Federal Register 71, No. 150 , 44373 (2006).

2. Electrical Cost Data: 33th Annual Edition . (RS Means Company Inc.: Kingston, MA, 2010).at <http://rsmeans.reedconstructiondata.com/60030.aspx>

3. The Sales Tax Clearinghouse State Sales Tax Rates. theSTC

- State Sales Tax Rates at <http://www.thestc.com/STrates.stm>

4. U.S. Department of Commerce. Bureau of Economic Analysis U.S. Department of Commerce. Bureau of Economic Analysis. at <http://www.bea.gov/national/nipaweb/DownSS2.asp>

5. ANOPR for Distribution Transformers, EE

- RM/STD

- 00

- 550, RIN #1904

- AB08, comment

No . 63. (2004).