12

- i CHAPTER 12 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

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

- 1
12.2 METHODOLOGY

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

- 1
12.2.1 Phase I: Industry Profile

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

- 2
12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

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

- 2
12.2.2.1 Industry Cash

- Flow Analysis

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

- 2
12.2.2.2 Interview Guide

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

- 2
12.2.3 Phase III: Subgroup Analysis

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

- 3
12.2.3.1 Manufacturer Interviews

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

- 3
12.2.3.2 Revised Industry Cash

- Flow Analysis

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

- 3
12.2.3.3 Manufacturer Subgroup Analysis

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

- 3
12.2.3.4 Competitive Impact Assessment

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

- 4
12.2.3.5 Manufacturing Capacity Impact

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

- 4
12.2.3.6 Employment Impact

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

- 4
12.2.3.7 Cumulative Regulatory Burden

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

- 4
12.3 INDUSTRY OVERVIEW

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

- 4
12.3.1 Industry Cost Structure

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

- 5
12.3.2 Inventory Levels

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

- 6
12.4 INTERVIEW TOPICS AND PRELIMINARY FINDINGS

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

- 7
12.4.1 Market S hares and Industry Consolidation

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

- 7
12.4.2 Production and Product Mix

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

- 8
12.4.2.1 Impact on Product Mix

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

- 9
12.4.2.1 Product Utility

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

- 9
12.4.3 Conversion Costs

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

- 9
12.4.4 Cumulative Regulatory Burden

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

- 10
12.5 OVERALL KEY ISSUES

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

- 10
12.5.1 System Approach

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

- 11
12.5.2 Absence of Electronic Ballast ANSI standards

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

- 11
12.5.3 Testing Burden

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

- 11
12.5.4 Technology Shift

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

- 11
12.5.5 Impacts on Profitability

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

- 11
12.5.6 Product Conversion Costs

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

- 12
12.5.7 Product Innovation

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

- 12

LIST OF TABLES

Table 12.3.1 Commercial Lighting Fixture Industry Employment and Earnings

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

- 5 Table 12.3.2 Power, Distribution, and Specialty Transformer Industry Employment and Earnings 12

- 5
Table 12.3.3 Commercial Lighting Fixture Industry Material and Payroll Costs

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

- 6 Table 12.3.4 Power, Distribution, and Specialty Transformer Industry Ma terial and Payroll
Costs 12

- 612

- ii Table 12.3.5 Commercial Lighting Fixture Industry End

- of

- Year Inventory

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

- 7
Table 12.3.6 Power, Distribution, and Specialty Transformer Industry End

- of

- Year Inventory
12

- 712

- 1 CHAPTER 12 PRELIMINARY MANUFACT URER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the likely impacts of amended energy conservation standards on manufacturers. The Process Rule a provides guidance for conducting this analysis with input from manufacturers and other interested parties. The U.S. Department of Energy (DOE) applies this methodology to its
evaluation of amended energy conservation standards for metal halide lamp fixtures to the extent that it is appropriate for this rulemaking. The P rocess R ule gives guidelines for consider ing financial impacts and a wide range of quantitative and qualitative industry imp acts that might

occur due to a n amended energy conservation standard. For example, a particular standard level could require changes in manufacturing practices for metal halide lamp fixtures and ballast s

. DOE identifies and analyze s these impacts through interviews with manufacturers and other interested parties during the n otice of p roposed r ul emaking ( NOPR ) stage of analysis.

DOE announced changes to the MIA format through a report issued to Congress on January 31, 2006 (as require d by section 141 of the Energy Policy Act of 2005 (EPACT 2005) )

, entitled “Energy Conservation Standards Activities.” b Previously, DOE did not report any MIA
results before the NOPR phase ; however, under this new format, DOE collects, evaluates, and
report s preliminary information and data in the P reliminary A nalysis

. Such information includes market data, key issues, product mixes, conversion costs, foreign competition, market shares, industry consolidation, and cumulative regulatory burden information. DO E solicits this information during the preliminary manufacturer interviews and reports the results in this chapter. A ppendix 12A includ es a copy of the interview guide that DOE distributed to
manufacturers.

12.2 METHODOLOGY

DOE conduct s the MIA in three phases. In Phase I , DOE creates an industry profile to characterize the industry and conduct s preliminary MIA interviews to identify important issues that require consideration. Section 12.3 of this chapter present s initial findings of the Phase I analysis. In Phase II, DOE prepares an industry cash flow model and an interview questionnaire to guide subsequent discussions with manufacturers

. In Phase III, D OE interviews manufacturers
and assesses the impacts of amended energy conservation standards both quantitatively and qualitatively. DOE assesses industry and subgroup cash flow impacts and the industry net present value (I NPV ) using the Government Regulat ory Impact Model (GRIM). DOE then

a On July 15, 1996, the Department of Energy published a Process Improvement Rule establishing procedures, interpretations and policies to guide the Department in the conside ration of new or revised appliance efficiency standards (Procedures for Consideration of New or Revised Energy Conservation Standards for Consumer Products). 61 FR 36974.

b This report is a vailable on the DOE website at www.eere.energy.gov/buildings/appliance_standards/2006_schedule_settin g.html

.12

- 2 assesses impacts on competition, manufacturing capacity, employment, and regulatory burden
based on manufacturer interviews and discussions. The Federal Register NOPR and technical support document ( TSD ) will both present results of the Phase II and III analys e s.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA , DOE collects pertinent qualitative and quantitative financial and
market information. This includes wages, employment, and industry costs for metal halide l amp fixtures and ballasts

. Sources of information include reports published by industry groups, trade journals, the U.S. Census Bureau, and Securities Exchange Commission (SEC) 10

- K filings. In addition, DOE relies on information from its market and techno logy assessment, engineering analysis, life

- cycle cost analysis, and consumer price analysis to characterize the metal halide lamp fixture and ballast manufacturing industry.

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

In Phase II, DOE perfo rm s a preliminary industry cash

- flow analysis and prepare s a questionnaire, or interview guide, for interviewing manufacturers.

12.2.2.1 Industry Cash

- Flow Analysis

DOE uses the GRIM to analyze the financial impacts of amended energy conservation
standards. Amended energy conservation s tandards may require additional investment, raise production costs, and/ or affect revenue through higher prices and possibly lower shipments

. The GRIM uses several factors to determine a series of annual cash flows for the year that amended energy conservation standards become effective and for several years after implementation. These factors include annual expected revenues, costs of sales, selling and general administration costs, taxes, and capital expenditures

. Inputs to th e GRIM include financial information, manufacturing costs, shipment forecasts, and price forecasts developed in other analyses.
Financial information is developed based on publicly available data and confidentially submitted
manufacturer information. DOE c ompares the GRIM results for standards case at each trial standard level against the results for the base case in which no amended energy conservation standards are in place. The financial impact of amended energy conservation standards is the
difference b etween the two sets of discounted annual cash flows.

12.2.2.2 Interview Guide

DOE conduct s interviews with manufacturers to gather information on the effects of amended energy conservation standards on revenues and finances, direct employment, capital assets, and i ndustry competitiveness. These interviews take place during Phase III of the MIA. Before the interviews, DOE distribute s an interview guide that will help identify the impacts of amended energy conservation standards on individual manufacturers or subgroup s of
manufacturers. The interview guide covers production costs; shipment projections and market share; product mix; conversion costs; markups and profitability ; assessment of the impact on competit ion, manufacturing capacity ; and other topics that are relevant to assessing the impacts of amended energy conservation standards on the metal halide lamp fixture and ballast industry

.12

- 3 12.2.3 Phase III: Subgroup Analysis

Phase III activities occur after publication of the preliminary a nalysi s . These activities include manufacturer interviews; revision of the industry cash

- flow analysis; a manufacturer subgroup analysis; an assessment of the impacts on industry competition , manufacturing capacity, direct employment

, and the cumulative regulato ry burden ; and other qualitative impacts

.

12.2.3.1 Manufacturer Interviews

DOE supplement s the information gathered in Phase I and the cash

- flow analysis performed in Phase II with information gathered through interviews with manufacturers during
Phase III. The in terview process has a key role in the MIA because it provides an opportunity for interested parties to express their views privately on important issues.

DOE conduct s detailed interviews with manufacturers to gain insight into the potential impacts of amen ded energy conservation standards on sales, direct employment, capital assets, and industry competitiveness. Interviews are scheduled well in advance to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire is acceptable, DOE prefers interactive interview s , which help clarify responses and provide the opportunity to identify additional issues.

A non

- disclosure agreement allow s DOE to consider confidential or s ensitive
information in the decision

- making process. However, confidential information is not made available in the public record

. At most, sensitive or confidential information may be aggregated
and presented in industry

- wide representation s

.

12.2.3.2 Revised Ind ustry Cash

- Flow Analysis

During the interviews, DOE request s information about profitability impacts, necessary plant changes, and other manufacturing impacts. Following the interviews, DOE revise s the preliminary GRIM prepared in Phase II based on the fee dback it receives

.

12.2.3.3 Manufacturer Subgroup Analysis

The use of average cost assumptions to develop an industry cash

- flow estimate does not adequate ly assess differential impacts among manufacturer subgroup s. Smaller manufacturers, niche players, and manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected. Ideally, DOE would consider the impact on every firm individually; however, it typically uses the results of the industry characteri zation to group
manufacturers with similar characteristics. During the interviews, DOE discuss es the potential subgroup s that have been identified for the analysis. DOE ask s manufacturers and other interested parties to suggest what subgroup s or characteri stics are most appropriate for the analysis.12

- 4 12.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to consider any lessening of competition likely to result from imposition of standards. EPCA
further dir ects the U.S. Attorney General to determine the impacts, if any, of any decrease in competition. DOE make s a determined effort to gather firm

- specific financial information and impacts and report the results in the competitive impact assessment

. The compet itive impact

assessment is based on manufactur er cost data and information collected from the manufacturer
interviews. The interviews focus on assessing asymmetrical cost increases to some manufacturers, the potential increase in business risks from an inc reased proportion of fixed costs, and potential barriers to market entry ( e.g. , proprietary technologies). The competitive impact analysis also focus es on assessing any differential impacts to smaller manufacturers.

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards can be the obsolescence of existing manufacturing assets, including tooling and other investment s

. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in North America with and
without a n amended energy conservation standard; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the n ew requirements; the nature and value of stranded assets, if any; and estimates for any one

- time restructuring or other charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important
considera tion in the rulemaking process. To assess how domestic employment patterns might be affected, the manufacturer interview s explore current employment trends in the metal halide lamp fixture and ballast industry and solicit s manufacturer views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide focus es on current employment levels at production facilities

, expected future employment levels with and without a n amended energy co nservation standard

, differences in
workforce skills

, and employee retraining.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of energy conservation standards and other regulatory actions affecting the same products or companies. DOE analyze s and consider s the impact on manufacturers of multiple, product

- specific regulatory actions.

12.3 INDUSTRY OVERVIEW

The following section summarize s publicly available industry data

.12

- 5 12.3.1 Industry Cost Structure

DOE developed th e metal halide lamp fixture and ballast industry cost structure from the U.S. Census Bureau, Annual Survey of Manufacturers : Statistics for Industry Groups and
Industries with data from 200 4 to 200 8

. Metal halide lamp fixture manufacturing is classified

un der the North American Industry Classification System (NAICS) code 33512 2 ( Commercial, Industrial, and I nstitutional Electric Lighting Fixture M anufacturing ). Metal halide ballast manufacturing is classified as a subset under the NAICS code 335311 ( Power, Distribution and Specialty Transformer Manufacturing ).

DOE is unaware of any publicly available industry

- wide cost data specific to only
manufacturers of metal halide lamp fixtures and metal halide ballast s . DOE presents the data
below as a broader industr y proxy for the metal halide ballast industr y.

Table 12.3

. 1 presents the lighting fixture employment levels and payroll from 200 4 to 200 8

. The statistics show a 6.5 percent decrease in the number of production workers from 2004
to 2008 with a corresponding 11.9 percent increase in the overall industry payroll.

Table 12.3

. 1 Commercial Ligh ting Fixture I ndustry Employment and Earnings

Year Production Workers All Employees Payroll for All Employees thousand current year dollars

2004 32,253 48,148 1,723,059

2005 31,525 47,544 1,806,284

2006 31,677 47,123 1,869,487

2007 31,117 49,079 1,931,564

2008 30,167 46,026 1,928,830

U.S. Census Bureau. 2004 Annual Survey of Manufacture r s : 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.

Table 12.3

. 2 presents the power, distribution and specialty transformer industry employme nt levels and payroll from 2004 to 2008. The statistics illustrate a 19.6 per cent increase
in the number of production workers from 2004 to 2008 and a 28.2 percent increase in the
industr y payroll

.

Table 12.3

. 2 Power, Distributio n, and Specialty Transformer Industry Employment and

E arnings

Year Production Workers All Employees Payroll for All Employees thousand current year dollars

2004 13,825 18,958 748,483

2005 14,529 19,509 781,440

200 6 15,438 20,642 863,266

2007 16,538 22,307 976,611

2008 16,529 22,096 959,372

U.S. Census Bureau. 2004 Annu al Survey of Manufacturers: 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.12

- 6 Table 12.3

. 3 presents the costs of lighting fixture materials and industry payroll as a
percent age of shipment value from 2004 to 200 8

. The cost of materials has slig htly increased by 1.7 percent from 2004 to 2008. Both t he cost of payroll for production workers and the cost of total payroll declined as a percentage of shipment value over that timeframe

.

Table 12.3

. 3 Commercial Lighting Fixture Industry Material and Payroll Costs

Year Cost of Materials percent of shipment value Cost of Payroll
for Production Workers percent of shipment value Cost of Payroll for All Employees percent of shipment value

2004 46

. 4 9 .5 18

. 0

2005 46

. 1 9.0 17 .5

200 6 45

. 9 8

. 6 17

. 1

2007 45

. 2 7

. 7 17.2

2008 47 .2 7 .8 16 .5

U.S. Census Bureau. 2004 Annu al Survey of Manufacturers: 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.

Table 12.3

. 4 presents the costs of metal halide lamp ballast materials and industry payroll
as a percent age of shipment value from 2004 to 200 8

. The cost of materials has decreased slightly by 0.8 percent from 2004 to 2008. As with the lighting fixture industry, both the cost of payroll for production workers and the cost of total payroll declined as a percentage of shipment
value over that timeframe.

Table 12.3

. 4 Power, Distributio n, and Specialty Transforme r Industry Material and Payroll
Costs

Year Cost of Materials percent of shipment value Cost of Payroll
for Production Workers percent of shipment value Cost of Payroll for All Employees percent of shipment value

2004 51

. 3 11 .6 19 .5

2005 51

. 2 11

. 2 18 .5

200 6 51 .9 10 .4 17

. 2

2007 52 .3 7

. 8 13

. 2

2008 50 .9 7

. 7 13

. 0

U.S. Census Bureau. 2004 Annu al Survey of Manufacturers: 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.

12.3.2 Inventory Levels

Table 12.3

. 5 shows the year

- end inventory for the commercial lighting fixture industry obtained from the U.S. Census Bureau, and Annual Survey of Manufacturers : Value of Manufacturers' Inventories by Stag e of Fabrication for Industry Groups and Industries and Annual Survey of Manufacturers : Statistics for Industry Groups and Industries

. The industry’s
end

- of

- year inventory from 2004 to 2008 increased 22.4 percent when expressed in dollars

, and grew slightl y when expressed as a percentage of shipment value

.12

- 7 Table 12.3

. 5 Commercial Lighting Fixture Industry End

- of

- Year Inventory

Year End

- of

- Year Inventory thousand current year dollars End

- of

- Year Inventory percent of shipment value

2004 1,252,574 12

. 8

2005 1,345,360 13

. 0

200 6 1,476,874 13

. 5

2007 1,532,345 13 .1

2008 1,532,823 13

. 1

U.S. Census Bureau. 2005 Annu al Survey of Manufacturers: Beginning and End of Year 2005 and Earlier

Years . November 2006

. , 2004 Annu al Survey of Manufacturers: 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.

Table 12.3

. 6 shows the year

- end inventory for the p ower, d istributio n, and specialty

t ransforme r i ndustry obtained from the U.S. Census Bureau, and Annual Survey of Manufacturers : Value of Manufacturers' Inventories by Stage of Fabrication for Industry Groups and Industries and Annual Survey of Manufacturers : Statistics for Industry Groups and
Industries

. T he industry’s end

- of

- year inventory from 2004 to 2008 experienced increase of 102.3 percent when expr essed in dollars , and remained roughly flat as a percentage of shipment
value.

Table 12.3

. 6 Power, Distributio n, and Specialty Transforme r Industry End

- of

- Year Inventory

Year End

- of

- Year Inventory
thousand current year dollars End

- of

- Year Inventory percent of shipment value

2004 427,802 11 .6
2005 520,976 12

. 3

2006 637,235 12

. 7

2007 799,074 10

. 8

2008 865,396 11

. 7

U.S. Census Bureau. 2005 Annu al Survey of Manufacturers: Beginning and End of Year 2005 and Earlier

Years . November 2006.

, 2004 Annu al Survey of Manufacturers: 2004 and Earlier Years . December 2005., 2006 Annual Survey of Manufacturers: 2006 and 2005 . November 2008., and 2008 Annual Survey of Manufacturers: 2008 and 2007 . March 2010.

12.4 INTER VIEW TOPICS AND PRELIMINARY FINDINGS

The following section summarize s information gathered during interviews held in August, September and October of 2010 for the preliminary MIA.

12.4.1 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the marketplace, prompting companies to enter the market, exit the market, or merge with other companies. The preliminary MIA interview questions ask ed manufacturers to share their perspectives on industry c onsolidation both in the absence of amended energy conservation12

- 8 standards and assuming amended standards at various efficiency levels. The interview questions
focus ed on gathering information that assess ed:

• disproportionate cost increases to some manufactu rers;

• increased proportion of fixed costs potentially increasing business risks; and

• potential barriers to market entry ( e.g. , proprietary technologies).

The need to assess anti

- competitive effects of proposed amended energy conservation
standards comes fr om the need to protect consumer interests. During the interviews, DOE solicited information to determine whether amended energy conservation standards could result in disproportionate economic or performance penalties for particular consumer or user subgro ups. Manufacturers were also asked if amended energy conservation standards could result in equipment that will be more or less desirable to consumers due to changes in equipment functionality, utility, or other features.

Market Shares : DOE inquired about the current market shares of manufacturers in the metal halide lamp fixture and ballast industr ies and how those shares might change after amended energy conservation standard s

. Most manufacturers expected their market share to remain the same upon the im position of amended energy standards. Some manufacturers stated that more stringent energy standards could positively impact their market share. According to these manufacturers, as lower wattage high intensity discharge ( HID ) products are pushed toward a more cost effective solution, manufacturers whose production lines are already built around electronic ballast production would be better positioned and therefore expected to maintain if not gain market share.

Industry Consolidation: Alt hough both the metal halide lamp fixture and ballast industries are composed of a large number of manufacturers, both industries present high levels
of concentration. As described in preliminary TSD chapter 3, eight manufacturers hold the majority of the d omestic market share of metal halide lamp fixtures and five manufacturers hold the majority of the domestic market shar e of metal halide lamp ballasts.

The lighting divisions of some of these companies manufacture products other than metal halide lamp fix tures and ballasts, such as fluorescent lighting, high intensity discharge (HID) lighting, and light emitting diode (LED) lighting.

Most interviewed manufacturers did not think there would be significant consolidation in their respective industry in the a bsence of standards. For the most part, t hey also agreed that new standards most likely would not lead to additional consolidation , although o ne manufacturer expected consolidation to occur. Another manufacturer commented on the possible expansion of
the market

.

12.4.2 Production and Product Mix

DOE requested manufacturers’ feedback on what they perceive d to be the possible impact of amended energy conservation standards on cash flow and profitability. For instance, the capital and equipment conversion outlays needed to upgrade or redesign equipment before they have reached the end of their useful life may create significant conversion costs, resulting in12

- 9 reduced cash flow and stranded investments. Higher energy conservation standards could a lso result in higher per

- unit costs that could cause consumers to shift to less expensive equipment

.

12.4.2.1 Impact on Product Mix

Manufacturers believe d that amended energy conservation standards would affect the product mix of metal halide lamp fixtures and ball asts. Manufacturers commented that changes in energy conservation standards could consolidate product offerings and lower profits.

M anufacturers also stated that if the rulemaking increases efficiency levels significantly, certain
models would incur e xpon ential cost increases, likely diminishing their presence in the current price sensitive market. Specifically , manufacturers speculated that lower wattage magnetic
ballasts could be eliminated because the price increase necessary to reach particular efficiency
levels would exceed the currently higher electronic ballast prices . Additionally, size and thermal
constraints of some fixtu re and ballast combinations make increasing efficiency of c ertain equipment impracticably expensive

. Certain manufacturer s commented that if the rulemaking increases efficiency l evels significantly, they might exit the metal halide lamp fixture or ballast
market altogether in favor of LED technology

.

12.4.2.1 Product Utility

Certain manufacturers expressed concern that amended energy conservation standards might require changes in equipment functionality, utility, and other features that would make equipment less desirable to consumers. The major area of concern related to ballasts used in
harsh environments and in applications where complete reliability is required. Specifically,

m anufacturers cited outdoor and temperature

- sensitive applications , which may be better served by magnetic ballasts due to their inherent higher tolerance for transient spikes and high

tem perature reliability.

12.4.3 Conversion Costs

In some instances, manufacturers may be able to meet proposed standard levels by modifying existing equipment

. In other cases, the necessary changes may entail a complete product

- line redesign. In either case

, more stringent energy conservation standard s would cause manufacturers to incur one

- time capital and equipment conversion costs

. C apital conversion

costs are one

- time investments in property, plant and equipment. Equipment conversion costs include one

- time inve stments in research, product development, testing and marketing.

All manufacturers stated that the conversion costs associated with amended standards would depend on the efficiency level established by those standards. However, based on past experience re lated to compliance with recently enacted regulation, i nterviewed manufacturers

, who are typically large producer s , provided estimated conversion cost figures. According to these manufacturers, potential conversion costs would rang e from one to twenty mill ion. The
wide range is due to the fact that some manufacturers assumed all product families , in some cases up to fifty products, will be affected to a similar degree.

The estimated conversion cost figures would include new production machinery purchases (welding, winding, dykes and tools) and equipment conversion cost such as testing

, product development and marketing.12

- 10 12.4.4 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the
combined effects of sever al impending regulations may have serious consequences for individual manufacturers, groups of manufacturers, or entire industries. Assessing the impact of a single regulation may overlook this cumulative regulatory burden.

Expenditures associated with mee ting other regulations are an important aspect of DOE’s consideration of the cumulative regulatory burden the industry faces. The manufacturer interviews help ed DOE identify the level and timing of investments manufacturers are expecting
to incur because o f these regulations. Manufacturers we re also asked under what circumstances they might be able to make expenditures related to regulations and energy conservation
standards.

Several Federal and international regulatory programs may affect the markets for metal
halide lamp fixtures and ballasts. The market and technology assessment discusses some of the notable initiatives that characterize recent developments in the lighting market. See c hapter 3 for a list and description of the regulatory requirements DO E identified.

In the interviews, some manufacturers expressed concern a bout the compliance date for the upcoming regulation on fluorescent lamp bal lasts being less than a year away from t his

r ulemaking ’s effective date . Manufacturers stated that adapting to two new regulations at the

sa me time would b e difficult and probably not possible given the strain on research and development

. Additionally, manufacturers spoke of compliance enforcement issues with the Energy Independence and Security Act o f 2007 (EISA 2007) (Pub. L. 110

- 140)

, California Title 20, California Title 24, and American Society of Heating, Refrigerating, and Air

- Conditioning Engineers ( ASHRAE ) standards. Manufacturers felt that adding an other regulation c ould punish compliant manu facturers while potentially driving others to noncompliance. Some manufacturers predicted they may have to reallocate resources to have staff dedicated to compliance matters

. Manufacturers also mentioned the impact of the pending Outdoor Lighting Efficienc y Act ( HR
1732 ) ; the legislation

, still under development

, would affect some applications of outdoor metal halide lamp fixtures, potentially creating conflicting standards. In addition , manufacturers
commented that if this rulemaking include d a sy stem appr oach involving lamp efficacy, it could possibly conflict with the July 1, 2010 HID lamp final determination

. 75 FR 37975

.

12.5 OVERALL KEY ISSUES

One important aspect of the preliminary MIA is the opportunity it creates for DOE to identify key manufacturer issues early in the development of amended energy conservation
standards. During preliminary interviews manufacturers identified seven major areas of concern: (1) system approach, (2) absence of electronic ballast American National Standards Institute ( ANSI ) standards, (3) testing burden, (4) technology shift, (5) impacts on profitability, ( 6 ) conversion costs, and ( 7 ) product innovation.12

- 11 12.5.1 System Approa ch

Many manufacturers were conflicted on the issue of whether a ballast or system efficiency metric would be superior when determining fixture efficiency

. While a few ballast manufacturers favored a system approach, fixture and ballast manufacturers generally preferred exclusively using ballast efficiency. Manufacturers were concerned that a metric considering the lamp and ballast together could possibly fa vor specific combinations and penalize companies that did not package lamps with their ballasts. Developing specific lamp and ballast combinations could also mean that the consumer would be forced to replace lamps exactly as prescribed, possibly requiring more effort to be spent on consumer education. Furthermore,
current fixture

- level metrics are complicated and ambiguous. Although several candidates (e.g.

, FTE, TER) have been discussed in past, the industry has yet to settle on a useful common
metric.

12.5.2 Ab sence of Electronic Ballast ANSI standards

Some manufacturers worried about setting efficiency standards for electronic ballasts when ANSI currently has no standards for such high frequency ballasts. ANSI has attempted to address the issue, but as yet has been unable to reach a consensus. Manufacturers observed that without a standard, efficiency measurement for these ballasts pose s challenges and requires special, expensive equipment.

12.5.3 Testing Burden

When mentioning regulatory burden, manufacturers spoke of the accompanying testing
burden. T here are already numerous testing requirements for certifications and compliance

, and many manufacturers asserted that there are major problems with labeling and enforcement.
Manufacture r s estimated another standard woul d require thousands of hours and dollars worth of testing for product development and re design. Manufacturers also expressed concerns over additional testing for further requirements, such as optics and thermal testing. If the rulemaking uses a lamp

- and

- ba llast efficiency approach, some manufacturers felt they would be pressured into additional lamp compatibility testing as well.

12.5.4 Technology Shift

M anufacturers also noted that there is already a market shift away from metal halide technology in general. According to manufacturers, LEDs and fluorescent technologies are capturing significant market share of new construction in both indoor and outdoor applications. Manufacturers are concerned that standards in general will accelerate this migrati on to alternative technologies due to price increases of standard compliant equipment.

12.5.5 Impacts on Profitability

Some manufacturers commented that profit margins would decrease with the implementation of amended energy conservation standards due to higher product costs and the inability to pass on those costs to their customers. This could be a particularly acute problem in
the original equipment manufactur er (OEM) distribution channel , which are typically very price12

- 12 sensitive and first

- cost focused

. In turn, a higher standard could cause business to shift to

overseas companies who c an compete on a cheaper level.

12.5.6 Product Conversion Costs

Certain manufacture r s commented that amended energy conservation standards would
force them to invest i n more expensive and energy efficient components , improve existing product line s, and design new product lines. The majority of th ese product conversion costs would be attributed to engineering and testing

, plant equipment, finer grade materials, productio n personnel and sales retraining, and consumer education. Those manufacturers that expected significant product conversion costs commented that the large investment s w ould ultimately result in more expensive products for consumers

.

12.5.7 Product Innovation

Manuf acturers also expressed concern over the impact of amended energy conservation standards on product innovation. E mployees may need to spend more time redesigning products to comply with standards rather than developing new products

. This concern especially involves

some manufacturers’ efforts in research ing and developing LED technology, to which the market is transitioning already in many applications. An amended standard may fo rce them to reallocate

resources away from LED to make expensive changes to the ir metal halide products that could
then drive consumers into the LED market.