12-i 

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

TABLE OF CONTENTS 

12.1 INTRODUCTION ............................................................................................. 12-1

12.2 METHODOLOGY ............................................................................................ 12-1

12.2.1 Phase I: Industry Profile ............................................................................. 12-1

12.2.1.1 Manufacturer Interviews ............................................................... 12-2

12.2.2 Phase II: Industry Cash-Flow Analysis ...................................................... 12-2

12.2.3 Phase III: Manufacturer Subgroup Analysis ............................................... 12-3

12.2.3.1 Manufacturers with Production Assets Subgroup ........................ 12-4

12.2.3.2 Small Business Manufacturer Subgroup ...................................... 12-4

12.2.4 Manufacturing Capacity Impact ................................................................. 12-5

12.2.5 Employment Impact .................................................................................... 12-5

12.2.6 Cumulative Regulatory Burden .................................................................. 12-5

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES .............................. 12-5

12.3.1 Size Constraints .......................................................................................... 12-6

12.3.2 Impact on Manufacturer Profitability ......................................................... 12-6

12.3.3 Impacts on Customer Utility ....................................................................... 12-7

12.4 GRIM INPUTS AND ASSUMPTIONS ............................................................ 12-7

12.4.1 Overview of the Government Regulatory Impact Model (GRIM) ............. 12-7

12.4.2 Sources for GRIM Inputs ............................................................................ 12-8

12.4.2.1 2008 Final Rule for PTACs and PTHPs ....................................... 12-9

12.4.2.2 Shipment Model............................................................................ 12-9

12.4.2.3 Engineering Analysis .................................................................... 12-9

12.4.2.4 Manufacturer Interviews ............................................................... 12-9

12.4.3 Trial Standard Levels (TSLs) ................................................................... 12-10

12.4.4 NIA Shipments ......................................................................................... 12-11

12.4.5 Production Costs ....................................................................................... 12-11

12.4.6 Conversion Costs ...................................................................................... 12-12

12.4.6.1 Capital Conversion Costs ........................................................... 12-13

12.4.6.2 Product Conversion Costs ........................................................... 12-14

12.4.7 Markup Scenarios ..................................................................................... 12-14

12.4.7.1 Preservation of Gross Margin Percentage Scenario ................... 12-15

12.4.7.2 Preservation of Operating Profit Scenario .................................. 12-15

12.5 INDUSTRY FINANCIAL IMPACTS ............................................................ 12-15

12.5.1 Introduction ............................................................................................... 12-15

12.5.2 PTAC and PTHP Industry Financial Impacts ........................................... 12-17

12.6 IMPACTS ON SUBGROUPS OF MANUFACTURERS .............................. 12-21

12.6.1 Impacts on Manufacturers with Production Assets .................................. 12-21

12.6.2 Impacts on Small Business Manufacturers ............................................... 12-23

12.7 OTHER IMPACTS .......................................................................................... 12-25

12.7.1 Employment .............................................................................................. 12-25

12.7.1.1 Methodology ............................................................................... 12-25

12.7.1.2 Direct Employment Impacts ....................................................... 12-26
12-ii 

12.7.2 Production Capacity .................................................................................. 12-27

12.7.3 Cumulative Regulatory Burden ................................................................ 12-27

12.8 CONCLUSION ................................................................................................ 12-30

12.8.1 Conclusions for PTACs and PTHPs MIA ................................................ 12-30

LIST OF TABLES 

Table 12.2.2 SBA and NAICS Classification of Small Businesses Potentially 

Affected by This Rulemaking .................................................... 12-4

Table 12.4.1 GRIM Financial Parameters for PTACs and PTHPs .......................... 12-9

Table 12.4.2 Trial Standard Levels for Analysis of PTACs and PTHPs ............... 12-10

Table 12.4.3 Manufacturer Production Cost Breakdown (2013$) for PTACs, < 7,000 

Btu/h Capacity ......................................................................... 12-12

Table 12.4.4 Manufacturer Production Cost Breakdown (2013$) for PTACs, ≥ 7,000 

Btu/h and ≤ 15,000 Btu/h Capacity .......................................... 12-12

Table 12.4.5 Manufacturer Production Cost Breakdown (2013$) for PTACs, > 15,000 

Btu/h Capacity ......................................................................... 12-12

Table 12.4.6 Industry Cumulative Capital Conversion Costs (2013$ Millions) ... 12-13

Table 12.4.7 Industry Cumulative Product Conversion Costs (2013$ Millions)... 12-14

Table 12.5.1 ASHRAE Baseline: Preservation of Gross Margin Percentage Scenario 

Changes in INPV for PTACs and PTHPs ................................ 12-17

Table 12.5.2 ASHRAE Baseline: Preservation of Operating Profit Scenario Changes 

in INPV for PTACs and PTHPs............................................... 12-17

Table 12.5.3 EPCA Baseline: Preservation of Gross Margin Percentage Scenario 

Changes in INPV for PTACs and PTHPs ................................ 12-19

Table 12.5.4 EPCA Baseline: Preservation of Operating Profit Scenario Changes in 

INPV for PTACs and PTHPs ................................................... 12-19

Table 12.6.1 Manufacturer Impact Analysis Results for the Subgroup of PTAC and 

PTHP Manufacturers with Production Assets* ....................... 12-23

Table 12.6.2 Magnitude of Conversion Costs Facing an Average Small Manufacturer 

versus an Average Large Manufacturer ................................... 12-25

Table 12.7.1 Potential Changes in the Total Number of Production Workers in the 

PTAC and PTHP Industry in 2019 .......................................... 12-26

Table 12.7.2 Compliance Dates and Expected Conversion Expenses of Federal 

Energy Conservation Standards Affecting PTAC and PTHP 

Manufacturers .......................................................................... 12-29

Table 12.8.1 Manufacturer Impact Analysis Results for PTACs and PTHPs* ..... 12-31

LIST OF FIGURES 

Figure 12.4.1 Using the GRIM to Calculate Cash Flow ........................................... 12-8

Figure 12.5.1 ASHRAE Baseline: Annual Industry Net Cash Flows under Preservation 

of Gross Margin Percentage Markup Scenario (in 2013$M) ... 12-18
12-iii 

Figure 12.5.2 ASHRAE Baseline: Annual Industry Net Cash Flows under Preservation 

of Operating Profit Markup Scenario (in 2013$M) ................. 12-19

Figure 12.5.3 EPCA Baseline: Annual Industry Net Cash Flows under Preservation of 

Gross Margin Percentage Markup Scenario (in 2013$M) ....... 12-20

Figure 12.5.4 EPCA Baseline: Annual Industry Net Cash Flows under Preservation of 

Operating Profit Markup Scenario (in 2013$M) ..................... 12-21
12-1 

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 the 

manufacturers and on the customers 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. DOE 

conducted a manufacturer impact analysis (MIA) to estimate the financial impact of 

amended energy conservation standards on manufacturers of packaged terminal air 

conditioners (PTACs) and packaged terminal heat pumps (PTHPs), and assessed the 

impact of such standards on direct employment and manufacturing capacity. 

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 equipment type 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 conservation standards for each equipment 

type 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 equipment 

characteristics, manufacturer characteristics, market and equipment trends, as well as the 

impact of standards on subgroups of manufacturers. 

12.2 METHODOLOGY 

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of 

preparing a characterization of the PTAC and PTHP industry, including data on sales 

volumes, pricing, employment, and financial structure. As part of this phase, DOE 

conducted interviews with a broad cross-section of PTAC and PTHP manufacturers to 

gather information on the industry as well as the potential impacts of amended energy 

conservation standards. In Phase II, “Industry Cash Flow Analysis,” DOE used the 

Government Regulatory Impact Model (GRIM) to assess the potential impacts of 

amended energy conservation standards on manufacturers. DOE used financial inputs 

derived from a combination of sources including manufacturer interviews conducted in 

Phase I as well as public sources of information. In Phase III, “Subgroup Impact 

Analysis,” DOE developed additional analyses for subgroups that required special 

consideration and incorporated qualitative data from interviews into its analysis. 

12.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE prepared a profile of the PTAC and PTHP industry. 

DOE developed its industry profile using a combination of sources, including: public 

information, such as Securities and Exchange Commission (SEC) 10-K reports,1

 Standard 
12-2 

& Poor’s (S&P) stock reports,2 market research tools (e.g., Hoovers3), corporate annual 

reports, and the U.S. Census Bureau’s 2011 Annual Survey of Manufacturers (ASM)4; 

information obtained through DOE’s engineering analysis, life-cycle cost analysis, and 

market and technology assessment prepared for this rulemaking; financial analysis 

performed as part of the 2008 energy conservation standards final rule for PTACs and 

PTHPs; and information obtained directly from manufacturers through interviews. 

The industry profile includes: (1) further detail on the overall market and 

equipment 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; and (4) trends in the number of firms, market, and 

equipment characteristics. 

12.2.1.1 Manufacturer Interviews 

During Phase I of the MIA, DOE interviewed manufacturers to gather information 

on the effects of amended energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Before the interviews, DOE 

distributed an interview guide to interviewees. The interview guide provided a starting 

point for identifying 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) engineering analysis; (3) company overview and organizational 

characteristics; (4) manufacturer markups and profitability; (5) shipping costs; (6) 

industry projections; (7) financial parameters; (8) conversion costs; (9) cumulative 

regulatory burden; (10) direct employment impact assessment; (11) capacity, exports, 

foreign competition, and outsourcing; (12) consolidation; and (13) impacts on small 

businesses. 

The interview process provides an opportunity for manufacturers to express their 

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 GRIM and to isolate key issues and concerns. DOE used these 

interviews to tailor the GRIM to reflect financial characteristics unique to the PTAC and 

PTHP industry. Interviews were scheduled well in advance to provide every 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 provides valuable 

inputs to the GRIM. 

12.2.2 Phase II: Industry Cash-Flow Analysis 

Phase II focused on the financial impacts of potential amended energy 

conservation standards on manufacturers of PTAC and PTHP equipment. In general, 

energy conservation standards can affect manufacturer cash flow in three distinct ways: 

(1) create a need for increased investment; (2) raise production costs per unit; and (3) 
12-3 

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 the 

PTAC and PTHP industry. In performing these analyses, DOE used the financial values 

derived during Phase I and the shipment scenarios used in the national impact analysis 

(NIA). 

The GRIM uses several factors to determine a series of annual cash flows from 

the announcement year of amended energy conservation standards until 30 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 manufacturer 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. It estimated 

typical manufacturer markups from public financial reports and interviews with 

manufacturers. DOE developed alternative markup scenarios based on discussions with 

manufacturers. DOE’s shipments analysis, presented in Chapter 9 of the technical support 

document (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 submitted 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 base case and standards case at each TSL. 

The results of the industry cash-flow analysis are presented in section 12.5. 

12.2.3 Phase III: Manufacturer Subgroup Analysis 

For its GRIM analysis, DOE presented impacts on the PTAC and PTHP industry 

as a whole. However, using average cost assumptions to develop an industry cash-flow 

estimate may not adequately assess differential impacts of amended energy conservation 

standards among manufacturer subgroups. For example, small manufacturers, niche 

players, or manufacturers exhibiting a cost structure that largely differs from the industry 

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. 

During the interviews, DOE discussed the potential subgroups and subgroup 

members it identified for the analysis. DOE asked manufacturers and other interested 

parties to suggest what subgroups or characteristics are the most appropriate to analyze. 

As described in section 12.5, DOE analyzes the industry impacts on PTAC and PTHP 

equipment manufacturers as a whole because most of the equipment classes represent the 

same market served by the same manufacturers. However, as discussed below, DOE 

identified two manufacturer subgroups that could be disproportionately impacted by 

amended energy conservation standards and therefore warranted a separate impact 

analysis: (1) manufacturers with production assets; and (2) small businesses. 
12-4 

12.2.3.1 Manufacturers with Production Assets Subgroup 

DOE initially identified 22 companies that sell PTAC and PTHP equipment in the 

U.S. Among U.S. companies, however, few own production assets; rather, they import 

and distribute PTACs and PTHPs manufactured overseas, primarily in China. DOE 

identified a subgroup of three U.S. manufacturers that own production assets. These 

companies own tooling and manufacturing asset in the US or in foreign countries. 

Together, these three manufacturers account for approximately 80 percent of the 

domestic PTAC and PTHP market. Because manufacturers with production assets will 

incur different costs to comply with amended energy conservation standards compared to 

their competitors who do not own production assets, DOE conducted a separate subgroup 

analysis to evaluate the potential impacts of amended energy conservation standards on 

manufacturers with production assets. DOE reports the potential impact of this 

rulemaking on the subgroup of manufacturers with production assets in section 12.6.1. 

12.2.3.2 Small Business Manufacturer Subgroup 

DOE investigated whether small business manufacturers should be analyzed as a 

manufacturer subgroup. DOE used the Small Business Administration (SBA) small 

business size standards effective on January 1, 2012, 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 

equipment classes under review, the SBA bases its small business definition on the total 

number of employees 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. 

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 businesses. DOE’s research involved industry trade association membership 

directories, product databases (e.g., AHRI Directory), individual company websites, and

market research tools (e.g., Hoovers.com) to create a list of companies that manufacture 

or sell equipment covered by this rulemaking. DOE also asked stakeholders and industry 

representatives if they were aware of any other small manufacturers during manufacturer 

interviews. DOE screened out companies that did not offer equipment covered by this 

rulemaking, did not meet the definition of a “small business,” or are foreign owned and 

operated. 
12-5 

Based on this analysis DOE identified 12 small businesses that sell PTAC and 

PTHP equipment affected by this rulemaking. DOE reports the potential impact of this 

rulemaking on small businesses in section 12.6.2.

12.2.4 Manufacturing Capacity 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 impacts of 

amended standards on manufacturing capacity, specifically capacity utilization and plant 

location decisions in the United States, with and without amended standards; the ability 

of manufacturers to upgrade or remodel existing facilities 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 onetime capital changes and stranded assets affect the cash flow estimates in the GRIM. 

These estimates can be found in section 12.4.6. DOE’s discussion of the capacity impact 

can be found in section 12.7.2. 

12.2.5 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 PTAC and PTHP industry. The interviews also solicited manufacturer 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 future 

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. 

12.2.6 Cumulative Regulatory Burden 

DOE seeks to mitigate the overlapping effects on manufacturers due to amended 

energy conservation standards and other regulatory actions affecting the same products. 

DOE analyzed the impact on manufacturers of multiple, product-specific regulatory 

actions. Based on research and discussions with manufacturers, DOE identified 

regulations that impact other products made by manufacturers of PTACs and PTHPs. 

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 following sections describe the most significant issues 
12-6 

identified by manufacturers. These summaries are provided in aggregate to protect 

manufacturer confidentiality. 

12.3.1 Size Constraints 

Manufacturers expressed concern regarding their ability to maintain the physical 

dimensions of PTACs and PTHPs while meeting amended energy conservation 

standards. PTACs and PTHPs are inherently space-constrained products. Their value 

proposition rests in large part on the ability of units to fit into existing wall openings of 

fixed dimensions: in the case of standard-size products impacted by this rulemaking, this 

means a wall opening of 16” x 42.” Manufacturers indicated that increasing the efficiency 

of units given these size constraints poses a significant technical challenge. Specifically, 

as units become more efficient, they tend to grow in size. Efficiency gains are often 

achieved by incorporating more efficient system components, including compressors and 

heat exchangers. Manufacturers noted that as these components become more efficient, 

they tend to become larger. Yet expanding the size of PTACs and PTHPs to 

accommodate larger, more efficient components is not an option, as manufacturers must 

continue to deliver products built to pre-existing dimensions. 

Manufacturers also indicated that increasing efficiency without altering 

equipment dimensions poses a greater technical challenge for higher-capacity models 

than for lower-capacity models. For example, redesigning a 15,000 Btu/hour PTAC – the 

highest capacity offered by many manufacturers – would be more difficult than 

redesigning a 7,000 Btu/hour model. Some manufacturers stated this could lead them to 

stop offering their highest-capacity PTAC and PTHP models under an amended standard. 

12.3.2 Impact on Manufacturer Profitability 

Manufacturers also stated that amended energy conservation standards could 

place downward pressure on profits. Manufacturers noted that customers typically are 

unwilling to pay a premium for efficiency and instead purchase PTACs and PTHPs 

largely on a first-cost basis. Accordingly, manufacturers do not anticipate being able to 

pass all additional costs of manufacturing more efficient products onto customers and 

would expect to see some decline in profitability as a result. 

Additionally, manufacturers indicated that higher production and purchase costs 

could impact profitability by reducing demand for PTACs and PTHPs. Specifically, 

manufacturers anticipate that higher purchase costs could lead greater numbers of 

customers to repair rather than replace existing units. In addition, manufacturers stated 

higher costs could lead to equipment switching, as customers turn to alternative HVAC 

systems. Presently, the market for PTACs and PTHPs is predominantly a replacement 

market: approximately 80 percent of sales go toward replacement compared to 20 percent 

for new construction. Manufacturers indicated that higher costs could drive the new 

construction market to seek alternatives. The potential for market contraction in this 

manner could further impact profitability. 

 
12-7 

12.3.3 Impacts on Customer Utility 

Manufacturers stated that amended energy conservation standards could make it 

difficult to meet customer needs effectively. Three primary concerns arose in this regard: 

concerns surrounding noise; concerns surrounding humidity control; and concerns 

surrounding loss of specific equipment lines. 

Noise 

Several manufacturers stated that there is a tradeoff between higher efficiency in 

PTACs and PTHPs and noise levels. Design changes that improve the efficiency of 

airflow systems (e.g., by increasing fan speed) tend to make units noisier. This is 

especially true among higher capacity models. Because PTACs and PTHPs are widely 

used in the lodging sector, where noise is a significant consideration, manufacturers noted 

that design changes that result in noisier products are not a desirable option to increase 

system efficiency. 

Humidity Control 

Several manufacturers also indicated that as units become more efficient, they 

tend to raise concerns surrounding humidity control and mold growth. One manufacturer 

indicated it has received more customer complaints about humidity levels since 2012, 

when the 2008 energy conservation standard for PTACs and PTHPs took effect. Another 

manufacturer noted it has designed a PTAC model with a built-in dehumidification 

function to better control humidity and prevent mold growth, but this reduces the overall 

system EER, making it more difficult to comply with amended standards. 

Loss of Equipment Lines 

In addition, multiple manufacturers stated that certain models may become 

unavailable in the face of amended energy conservation standards. Within the standardsize market, the difficulty of redesigning higher capacity models (e.g., 15,000 Btu/hour) 

while maintaining the existing package size could drive manufacturers to discontinue 

those models, leaving lower-capacity models (e.g., 12,000 Btu/hour) as the maximum 

capacity offered. 

12.4 GRIM INPUTS AND ASSUMPTIONS 

The Government Regulatory Impact Model (GRIM) serves as the main tool for 

assessing the impacts on industry due to amended energy conservation standards. DOE 

relies on several sources to obtain inputs for the GRIM. Data and assumptions from these 

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 Government Regulatory Impact Model (GRIM) 

 The basic structure of the GRIM, illustrated in Figure 12.4.1, is an annual cash 

flow analysis that uses manufacturer production costs, manufacturer selling prices, 

shipments, and industry financial information as inputs, and accepts a set of regulatory 

conditions such as changes in costs, investments, and associated margins. The GRIM 
12-8 

spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning 

with the base year of the analysis, 2014, and continuing to 2048. 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 base case 

and the standard case(s) represents the estimated financial impact of the amended energy 

conservation standard on manufacturers. Appendix 12A provides more technical details 

and user information for the GRIM. 

DOE presents MIA results relative to a base case that uses efficiency levels 

specified by ASHRAE Standard 90.1-2013 as the baseline efficiencies for PTACs and 

PTHPs. Consequently, when comparing the INPV impacts of the GRIM model, the 

baseline efficiency is greater than the current federal minimum efficiency requirements. 

For this TSD, DOE also repeats the INPV and cash flow calculations relative to 

an alternative base case, where the baseline efficiency levels are equal to the current 

federal minimums, which were set in 2008. (73 FR 58772). This alternative scenario is 

referred to as the “EPCA Baseline”. 

12.4.2 Sources for GRIM Inputs 

The GRIM uses several different sources for data inputs in determining industry 

cash flow. These sources include corporate annual reports, company profiles, census data, 
12-9 

credit ratings, the shipments model, the engineering analysis, and manufacturer 

interviews. 

12.4.2.1 2008 Final Rule for PTACs and PTHPs 

The 2008 Final Rule for PTACs and PTHPs (73 FR 58772) provided many of the 

initial financial inputs to the GRIM. As part of the 2008 Final Rule, DOE derived a series 

of financial parameters for the industry based on a review of corporate annual reports, 

company profiles, credit ratings, and manufacturer interviews. DOE used these 

parameters as a starting point for analysis under the current rulemaking. Drawing on 

feedback obtained during manufacturer interviews conducted in Phase I of this 

rulemaking, DOE then revised its estimated financial parameters to better reflect the 

current PTAC and PTHP industry. Table 12.4.1 presents the revised financial parameters 

used as inputs to the GRIM. The values indicated have been weighted to reflect 

manufacturers’ respective market shares. 

Table 12.4.1 GRIM Financial Parameters for PTACs and PTHPs 

Parameter Revised Estimate 

Tax Rate (% of Taxable Income) 34% 

Discount Rate 8.5% 

Working Capital (% of Revenue) 7% 

Net Property, Plant, and Equipment (% of Revenues) 15% 

SG&A (% of Revenue) 15% 

R&D (% of Revenues) 3% 

Depreciation (% of Revenues) 5% 

Capital Expenditures (% of Revenues) 5% 

12.4.2.2 Shipment Model 

The GRIM used shipment projections derived from DOE’s shipments model in 

the national impact analysis (NIA). Chapter 9 of the TSD describes the methodology and 

analytical model DOE used to forecast shipments. 

12.4.2.3 Engineering Analysis 

During the engineering analysis, DOE used a manufacturing cost model to 

develop manufacturing production cost (MPC) estimates. The analysis provided the 

labor, materials, overhead, and total production costs for different design options for 

PTACs and PTHPs. The engineering analysis also estimated a manufacturer markup and 

a shipping cost to provide the manufacturer selling price (MSP) for design options. 

12.4.2.4 Manufacturer Interviews 

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

cross-section of manufacturers. During these discussions, DOE obtained information to 

determine and verify GRIM input assumptions. Key topics discussed during the 

interviews and reflected in the GRIM include: 
12-10 

• Capital conversion costs (one-time investments in PPE); 

• Product conversion costs (one-time investments in research, product 

development, testing, and marketing); 

• Equipment cost structure; 

• Industry financial parameters; 

• Possible profitability impacts. 

12.4.3 Trial Standard Levels (TSLs) 

DOE developed a number of efficiency levels (ELs) for each equipment class. 

Trial Standard Levels (TSLs) were then developed by selecting likely groupings of 

efficiency levels for all equipment classes. Each TSL includes combinations of efficiency 

levels for PTACs and PTHPs of different cooling capacity. 

In this rulemaking, each TSL represents a percentage increase in efficiency 

relative to the current federal minimum efficiency standard, or baseline. For both PTACs 

and PTHPs, TSLs 1, 2, 3, 4, and 5 represent respective increases of 4 percent, 8 percent, 

12 percent, 16 percent, and 18 percent above the current federal minimum efficiency 

standard for PTACs of a specified cooling capacity. Whereas the current federal standard 

specifies different minimum efficiencies for PTACs and PTHPs of equivalent cooling 

capacity, DOE has structured TSLs in the present rulemaking to align efficiency 

standards for PTACs and PTHPs of the same cooling capacity. Table 12.4.2 presents the 

TSLs used for energy efficiency analysis in the GRIM. 

Table 12.4.2 Trial Standard Levels for Analysis of PTACs and PTHPs 

Equipment 

Type 

Cooling Capacity 

(Btu/h) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

PTAC 

<7,000 Btu/h EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 

≥7,000 Btu/h and 

≤15,000 Btu/h EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 

>15,000 Btu/h EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 

PTHP 

<7,000 Btu/h 

Current 

Federal 

Minimum 

EL 1 EL 2 EL 3 EL 4 EL 5 

≥7,000 Btu/h and 

≤15,000 Btu/h 

Current 

Federal 

Minimum 

EL 1 EL 2 EL 3 EL 4 EL 5 

>15,000 Btu/h 

Current 

Federal 

Minimum 

EL 1 EL 2 EL 3 EL 4 EL 5 

The PTAC baseline efficiency level varies from the current federal minimum in 

order to align with efficiency standards established by the American Society of Heating, 

Refrigerating, and Air-Conditioning Engineers (ASHRAE). In October 2013, ASHRAE 

published ANSI/ASHRAE/IES Standard 90.1-2013, which amended efficiency standards 

for PTACs, increasing them to 1.8 percent above the current federal minimum. This 
12-11 

rulemaking is considered an ASHRAE trigger. As such, the baseline for the PTACs 

analysis is the minimum efficiency level established under the ASHRAE amendment. 

The baseline analyzed for PTHPs remains the current federal minimum, as PTHP 

standards were not modified under the ASHRAE amendment. Beyond baseline, as 

described above, each TSL represents a percentage increase in efficiency for both PTACs 

and PTHPs relative to the current federal minimum. 

12.4.4 NIA Shipments 

 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 applied the NIA shipments forecasts. 

As part of the shipments forecasts, DOE estimated the base-case shipment 

distribution by efficiency level for each of the six PTAC and PTHP equipment classes. In 

the standards case, the shipments analysis assumes a roll-up scenario, where all 

shipments in the base case that do not meet the standard would instead ship at the new 

standard level. The key assumptions and methodology used to forecast shipments can be 

found in Chapter 9 of the TSD. 

12.4.5 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 MPCs derived in the engineering analysis. 

The engineering analysis developed MPCs for representative PTAC units at each 

of the three capacity categories used to define equipment classes: <7,000 Btu/h; ≥7,000 

Btu/h and ≤ 15,000 Btu/h; and >15,000 Btu/h. The NIA shipments estimated the number 

of PTAC and PTHP units shipped at each equipment class. The GRIM, in turn, used the 

MPCs from the engineering analysis and the NIA shipments to calculate shipmentweighted average MPCs for each equipment class. Additionally, the GRIM relied on the 

engineering analysis to determine labor, materials, overhead, and depreciation 

percentages that constitute the full MPC. 

To calculate baseline MSP, DOE followed a two-step process. First, DOE derived 

MPCs from the engineering and tear down analyses. Second, DOE applied a 

manufacturer markup, which varies with the markup scenario (discussed in detail in 

section 12.4.7). 

Table 12.4.3 through Table 12.4.5 show the production cost estimates used in the 

GRIM for each analyzed equipment class. A flat markup of 1.27 was applied to all 

equipment classes. 
12-12 

Table 12.4.3 Manufacturer Production Cost Breakdown (2013$) for PTACs, < 7,000 

Btu/h Capacity 

 Materials Labor Depreciation Overhead MPC Markup MSP 

Baseline $277.23 $22.27 $19.33 $24.01 $342.85 1.27 $435.42 

EL 1 $278.62 $23.01 $20.35 $24.36 $346.34 1.27 $439.85 

EL 2 $281.12 $23.68 $21.29 $24.69 $350.78 1.27 $445.49 

EL 3 $286.34 $24.84 $22.92 $25.32 $359.42 1.27 $456.46 

EL 4 $293.30 $25.75 $24.22 $25.89 $369.15 1.27 $468.83 

EL 5 $301.18 $26.40 $25.20 $26.41 $379.19 1.27 $481.57 

EL 6 $305.62 $26.64 $25.56 $26.66 $384.47 1.27 $488.28 

Table 12.4.4 Manufacturer Production Cost Breakdown (2013$) for PTACs, ≥ 7,000 

Btu/h and ≤ 15,000 Btu/h Capacity 

 Materials Labor Depreciation Overhead MPC Markup MSP 

Baseline $294.00 $22.27 $19.33 $24.01 $359.62 1.27 $456.72 

EL 1 $295.78 $23.01 $20.35 $24.36 $363.50 1.27 $461.64 

EL 2 $297.89 $23.68 $21.29 $24.69 $367.55 1.27 $466.79 

EL 3 $303.11 $24.84 $22.92 $25.32 $376.19 1.27 $477.76 

EL 4 $309.67 $25.75 $24.22 $25.89 $385.52 1.27 $489.62 

EL 5 $317.55 $26.40 $25.20 $26.41 $395.56 1.27 $502.36 

EL 6 $321.99 $26.64 $25.56 $26.66 $400.84 1.27 $509.07 

Table 12.4.5 Manufacturer Production Cost Breakdown (2013$) for PTACs, > 

15,000 Btu/h Capacity 

 Materials Labor Depreciation Overhead MPC Markup MSP 

Baseline $326.51 $19.50 $20.39 $25.38 $391.78 1.27 $497.57 

EL 1 $327.33 $20.98 $20.92 $26.28 $395.51 1.27 $502.30 

EL 2 $329.13 $22.38 $21.49 $27.08 $400.08 1.27 $508.10 

EL 3 $335.66 $24.93 $22.82 $28.34 $411.75 1.27 $522.92 

EL 4 $346.10 $27.13 $24.39 $29.17 $426.79 1.27 $542.02 

EL 5 $360.45 $28.99 $26.18 $29.57 $445.20 1.27 $565.41 

EL 6 $369.10 $29.80 $27.17 $29.61 $455.68 1.27 $578.71 

12.4.6 Conversion Costs 

Amended energy conservation standards typically cause manufacturers to incur 

one-time conversion costs to bring their production facilities and equipment 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, and 

equipment to adapt or change existing production facilities in order to fabricate and 
12-13 

assemble new equipment designs that comply with amended energy conservation 

standards. Product conversion costs are one-time investments in research, development, 

testing, marketing and other costs to make equipment designs comply with amended 

energy conservation standards. DOE based its estimates of the conversion costs for each 

efficiency level on information obtained from manufacturer interviews and the design 

pathways analyzed in the engineering analysis. 

12.4.6.1 Capital Conversion Costs 

To estimate the level of capital conversion costs manufacturers would likely incur 

to comply with amended energy conservation standards, DOE relied on information 

obtained through manufacturer interviews as well as the engineering analysis. Table 

12.4.6 presents estimated capital conversion costs at each TSL. The estimates are 

cumulative and reflect capital conversion costs anticipated across equipment classes and 

manufacturers in order to achieve compliance with each TSL analyzed. 

Table 12.4.6 Industry Cumulative Capital Conversion Costs (2013$ Millions) 

TSL Capital Conversion Costs 

(2013$ Millions) 

TSL 1 $2.3 

TSL 2 $2.9 

TSL 3 $7.1 

TSL 4 $7.1 

TSL 5 $7.4 

 At TSL 1, manufacturers indicated that converting PTAC equipment lines to 

comply with amended standards would require minimal capital conversion costs whereas 

converting PTHPs would require more substantial investment. In particular, converting 

PTHP lines to meet TSL 1 would require some manufacturers to implement new coil 

fabrication systems. This accounts for the majority of expected capital conversion costs at 

TSL 1, which DOE estimates at $2.3 million for all equipment classes. 

 At TSL 2, manufacturers stated they would need to implement motor and control 

changes across PTAC and PTHP equipment classes. The additional investment would 

increase capital conversion costs for the industry to an estimated $2.9 million. 

 At TSL 3, DOE expects manufacturers to require new tooling and to redesign 

products to incorporate additional coils and/or formed coils. DOE estimates capital 

conversion costs at this level to increase to $7.1 million. 

 At TSL 4, DOE does not expect capital conversion costs beyond those required at 

TSL 3. Accordingly, capital conversion costs remain level at $7.1 million. 

 At TSL 5, the engineering analysis suggests manufacturers would have to increase 

the fin density of the heat exchanger, requiring investment in new jigs to position the fins. 

Industry capital conversion costs increase to $7.4 million. 
12-14 

12.4.6.2 Product Conversion Costs 

As with capital conversion costs, DOE relied on manufacturer interviews as well 

as the engineering analysis to evaluate product conversion costs. For manufacturers with 

production assets, DOE estimated costs related to R&D (including design engineering, 

technician salaries, and laboratory costs) as well as costs of testing, certification, etc. 

DOE assumed R&D costs ranging from $50,000 to $200,000 per model based on the 

complexity of the redesign anticipated at each TSL. For all manufacturers (i.e.,

manufacturers with production assets as well as manufacturers that import and distribute 

PTACs and PTHPs manufactured overseas) DOE assumed a flat fee per model required 

for testing and certification. DOE multiplied this fee by the number of models identified 

for each manufacturer in order to estimate total product conversion costs facing the 

industry. 

Table 12.4.7 presents industry-wide product conversion costs at each TSL. The 

estimates are cumulative and reflect product conversion costs anticipated across 

equipment classes and manufacturers in order to achieve compliance with each TSL 

analyzed. 

Table 12.4.7 Industry Cumulative Product Conversion Costs (2013$ Millions) 

TSL Product Conversion Costs 

(2013$ Millions) 

TSL 1 $2.2 

TSL 2 $4.7 

TSL 3 $7.2 

TSL 4 $8.5 

TSL 5 $13.5 

The increase in product conversion costs across TSLs, from a low of $2.2 million 

at TSL 1 to a high of $13.5 million at TSL 5, reflects a rise in R&D effort required to 

meet increasingly stringent efficiency standards. As noted, R&D costs will fall 

disproportionately on manufacturers with production assets. See section 12.6.1 for further 

analysis of financial impacts facing the subgroup of manufacturers with production 

assets. 

12.4.7 Markup Scenarios 

DOE modeled multiple standards-case markup scenarios to represent uncertainty 

surrounding the potential impacts of energy conservation standards on prices and 

profitability. In the base case, DOE used the same markups applied in the engineering 

analysis. In the standards case, DOE modeled two markup scenarios to capture a range of 

potential impacts on manufacturers following implementation of amended energy 

conservation standards: (1) a preservation of gross margin percentage scenario; and (2) a 

preservation of operating profit scenario. These scenarios lead to different markup values, 

which, when applied to the inputted MPCs, result in varying revenue and cash flow 

impacts. 
12-15 

12.4.7.1 Preservation of Gross Margin Percentage Scenario 

Under the preservation of gross margin percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels, which assumes 

that manufacturers would be able to maintain the same amount of profit as a percentage 

of revenues at all efficiency levels within an equipment class. As production costs 

increase with efficiency, this scenario implies that the absolute dollar markup will 

increase as well. Based on publicly available financial information for manufacturers of 

PTACs and PTHPs as well as comments from manufacturer interviews, DOE assumed 

the average markup—which includes SG&A expenses, R&D expenses, interest, and 

profit—to be 1.27 for all PTAC and PTHP equipment classes. Because this markup 

scenario assumes that manufacturers would be able to maintain their gross margin 

percentage markups as production costs increase in response to an amended energy 

conservation standard, it represents a high bound to industry profitability. 

12.4.7.2 Preservation of Operating Profit Scenario 

In the preservation of per unit operating profit scenario, manufacturer markups are 

set so that operating profit one year after the compliance date of the amended energy 

conservation standard is the same as in the base case on a per unit basis. Under this 

scenario, as the costs of production increase under a standards case, manufacturers are 

generally required to reduce their markups to a level that maintains base-case operating 

profit per unit. The implicit assumption behind this markup scenario is that the industry 

can only maintain its operating profit in absolute dollars per unit after compliance with 

the new standard is required. Therefore, operating margin in percentage terms is reduced 

between the base case and standards case. DOE adjusted the manufacturer markups in the 

GRIM at each TSL to yield approximately the same earnings before interest and taxes in 

the standards case as in the base case. This markup scenario represents a low bound to 

industry profitability under an amended energy conservation standard. 

12.5 INDUSTRY FINANCIAL IMPACTS 

Using the inputs and scenarios described in the previous sections, the GRIM 

estimated indicators of financial impacts on the PTAC and PTHP industry. The following 

sections detail additional inputs and assumptions for the analysis of industry financial 

impacts. The main results of the MIA are also reported in this section. The MIA consists 

of two key financial metrics: industry net present value (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, which applies to the U.S. economy. The INPV is the sum of annual net cash 

flows over the 30-year analysis period discounted at the industry’s cost of capital or 

discount rate. The GRIM for this rulemaking estimates cash flows from 2014 to 2048, the 

same analysis period used in the NIA (Chapter 10 of the TSD). This timeframe models 

both the short-term impacts on the industry from the announcement of the standard until 
12-16 

the compliance date (2014 to 2019) and a long-term assessment over the 30-year analysis 

period used in the NIA (2019 to 2048). 

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 

implementing that particular TSL would have on the industry. In the NOPR, DOE 

presents MIA results relative to a base case that uses efficiency levels specified by 

ASHRAE Standard 90.1-2013 as the baseline efficiencies for PTACs and PTHPs. 

Consequently, when comparing the INPV impacts of the GRIM model, the baseline 

efficiency is greater than the current federal minimum efficiency requirements. 

In analyzing the financial impacts in this TSD, DOE also presents the INPV and 

cash flow calculations relative to an alternative base case, where the baseline efficiency 

levels are equal to the current federal minimums, which were set in 2008. (73 FR 58772). 

This alternative scenario is referred to as the “EPCA Baseline”. 

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 one or two 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 and Figure 12.5.2 below 

present the annual net cash flows over the analysis period. 

Annual cash flows are discounted to the base year, 2014. 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 for 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 conservation 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. 

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., tooling and 

equipment 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 

conservation 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 

increase in working capital is needed due to more costly production components and 

materials, higher inventory carrying to sell more expensive products, and higher accounts 
12-17 

receivable for more expensive products. Depending on these two competing factors, cash 

flow can either be positively or negatively affected in the year the standard takes effect. 

12.5.2 PTAC and PTHP Industry Financial Impacts 

Table 12.5.1 and Table 12.5.2 provide INPV estimates for PTACs and PTHPs 

under the two markup scenarios analyzed. Figure 12.5.1 and Figure 12.5.2 present annual 

industry net cash flows under the two markup scenarios. As described in section 12.4.7, 

the preservation of gross margin percentage scenario presents an upper bound to industry 

profitability under amended energy conservation standards while the preservation of 

operating profit scenario presents a lower bound to industry profitability. These results 

are based on an ASHRAE baseline and are consistent with results presented in the 

NOPR. 

Table 12.5.1 ASHRAE Baseline: Preservation of Gross Margin Percentage Scenario 

Changes in INPV for PTACs and PTHPs 

 Units Base Case 

Trial Standard Level 

1 2 3 4 5 

INPV 2013$M 58.47 57.37 58.76 57.53 58.46 55.90

Change in 

INPV* 

2013$M - (1.11) 0.29 (0.94) (0.01) (2.57)

% Change - (1.89) 0.49 (1.61) (0.02) (4.40)

* Parentheses indicate negative values. 

Table 12.5.2 ASHRAE Baseline: Preservation of Operating Profit Scenario Changes 

in INPV for PTACs and PTHPs 

 Units Base Case 

Trial Standard Level 

1 2 3 4 5 

INPV 2013$M 58.47 57.08 57.73 55.35 55.02 51.81

Change in 

INPV* 

2013$M - (1.39) (0.74) (3.12) (3.45) (6.67)

% Change - (2.38) (1.26) (5.34) (5.90) (11.40)

* Parentheses indicate negative values. 

At TSL 1, DOE estimates impacts on INPV to range from -$1.4 million to -$1.1 

million, or a change of -2.4 percent to -1.9 percent. At TSL 2, DOE estimates impacts on 

INPV to range from -$0.7 million to $0.3 million, or a change in INPV of -1.3 percent to 

0.5 percent. At TSL 3, DOE estimates impacts on INPV to range from -$3.1 million to -

$0.9 million, or a change in INPV of -5.3 percent to -1.6 percent. At TSL 4, DOE 

estimates impacts on INPV to range from -$3.5 million to $0.0 million, or a change in 

INPV of -5.9 percent to 0.0 percent. At TSL 5, DOE estimates impacts on INPV to range 

from -$6.7 million to -$2.6 million, or a change in INPV of -11.4 percent to -4.4 percent. 

See section 12.8 for a more detailed discussion of results. 
12-18 

Figure 12.5.1 ASHRAE Baseline: Annual Industry Net Cash Flows under 

Preservation of Gross Margin Percentage Markup Scenario (in 2013$M) 
12-19 

Figure 12.5.2 ASHRAE Baseline: Annual Industry Net Cash Flows under 

Preservation of Operating Profit Markup Scenario (in 2013$M) 

The following tables present alternative results based on the EPCA Baseline. 

Table 12.5.3 and Table 12.5.4 present the INPV estimates for the two markup scenarios 

relative that EPCA Baseline. Figure 12.5.3 and Figure 12.5.4 present the net annual cash 

flows for the two markup scenarios under the alternative baseline. 

Table 12.5.3 EPCA Baseline: Preservation of Gross Margin Percentage Scenario 

Changes in INPV for PTACs and PTHPs 

 Units Base Case 

Trial Standard Level 

1 2 3 4 5 

INPV 2013$M 58.46 57.23 58.75 57.52 58.45 55.89

Change in 

INPV* 

2013$M - (1.23) 0.29 (0.94) (0.01) (2.57)

% Change - (2.10) 0.50 (1.61) (0.01) (4.40)

* Parentheses indicate negative values. 

Table 12.5.4 EPCA Baseline: Preservation of Operating Profit Scenario Changes in 

INPV for PTACs and PTHPs 

 Units Base Case Trial Standard Level 
12-20 

1 2 3 4 5 

INPV 2013$M 58.46 56.90 57.68 55.29 54.94 51.80

Change in 

INPV* 

2013$M - (1.56) (0.78) (3.17) (3.52) (6.66)

% Change - (2.66) (1.34) (5.42) (6.02) (11.39)

* Parentheses indicate negative values. 

Figure 12.5.3 EPCA Baseline: Annual Industry Net Cash Flows under Preservation 

of Gross Margin Percentage Markup Scenario (in 2013$M) 
12-21 

Figure 12.5.4 EPCA Baseline: Annual Industry Net Cash Flows under Preservation 

of Operating Profit Markup Scenario (in 2013$M) 

12.6 IMPACTS ON SUBGROUPS OF MANUFACTURERS 

As discussed above, using average cost assumptions to develop an industry cash 

flow estimate is not adequate for assessing differential impacts among subgroups of 

manufacturers. Small manufacturers, niche players, or manufacturers exhibiting a cost 

structure that differs largely from the industry average could be affected differently. DOE 

used the results of the industry characterization to group manufacturers exhibiting similar 

characteristics. Specifically, DOE identified two subgroups of manufacturers for separate 

impact analyses: (1) manufacturers with production assets; and (2) small business 

manufacturers. 

12.6.1 Impacts on Manufacturers with Production Assets 

As discussed above, DOE initially identified 22 companies that sell PTAC and 

PTHP equipment. Most U.S. companies, however, do not own production assets; rather, 

they import and distribute PTACs and PTHPs manufactured overseas, primarily in China. 

DOE identified a subgroup of three U.S. manufacturers that own production assets. These 
12-22 

companies own tooling and manufacturing assets in the U.S. or in foreign countries. 

Together, these three manufacturers account for approximately 80 percent of the 

domestic PTAC and PTHP market. Because manufacturers with production assets will 

incur different costs to comply with an amended energy conservation standard compared 

to their competitors who do not own production assets, DOE conducted a separate 

analysis to evaluate the impact of an amended energy conservation standard on the 

subgroup of manufacturers with production assets. 

As with the overall industry analysis, DOE modeled two different markup 

scenarios to evaluate the range of cash flow impacts on manufacturers with production 

assets: (1) the preservation of gross margin percentage markup scenario; and (2) the 

preservation of operating profit markup scenario. See section 12.4.7 for a complete 

description of markup scenarios. 

Each of the modeled scenarios results in a unique set of cash flows and 

corresponding INPV values at each TSL. In the following discussion, the INPV results 

refer to the difference in value of manufacturers with production assets between the base 

case and each TSL in the standards case. As with the overall industry analysis, the INPV 

for manufacturers with production assets is calculated as the sum of annual net cash flows 

over the 30-year analysis period, discounted at the industry’s cost of capital. 

To provide perspective on the short-run cash flow impact, DOE includes in the 

discussion of results a comparison of free cash flow between the base case and the 

standards case at each TSL in the year before amended standards would take effect. This 

figure provides an understanding of the magnitude of required conversion costs relative 

to the cash flow generated by manufacturers with production assets in the base case. 

Table 12.6.1 below presents a range of results reflecting both the preservation of 

gross margin percentage markup scenario and the preservation of operating profit markup 

scenario. As discussed in section 12.4.7, the preservation of operating profit scenario 

accounts for the more severe impacts presented. Estimated conversion costs and free cash 

flow in the year prior to the effective date of amended standards do not vary with markup 

scenario. 
12-23 

Table 12.6.1 Manufacturer Impact Analysis Results for the Subgroup of PTAC and 

PTHP Manufacturers with Production Assets* 

 Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 

INPV 2013$M 46.8 45.5 to 

45.8 

45.7 to 

46.5 

43.0 to 

44.7 

42.6 to 

45.3 

39.4 to 

42.7 

Change in 

INPV 

2013$M - (1.3) to 

(1.0) 

(1.1) to 

(0.3) 

(3.8) to 

(2.1) 

(4.2) to 

(1.5) 

(7.3) to 

(4.1) 

% Change - (2.7) to 

(2.2) 

(2.3) to 

(0.5) 

(8.2) to 

(4.5) 

(9.0) to 

(3.1) 

(15.7) to 

(8.7) 

Product 

Conversion 

Costs 

2013$M - 1.4 3.9 6.4 7.7 12.7 

Capital 

Conversion 

Costs 

2013$M - 2.3 2.9 7.1 7.1 7.4 

Total 

Conversion 

Costs 

2013$M - 3.7 6.8 13.5 14.7 20.1 

Free Cash 

Flow 

2013$M 3.1 1.6 0.6 (2.0) (2.4) (4.0) 

% Change - (46.7) (79.7) (165.5) (177.5) (230.1) 

* Parentheses indicate negative values.

As the results above demonstrate, manufacturers with production assets will likely 

experience financial impacts more negative than those facing the industry as a whole (see 

section 12.5 for industry-wide financial impacts). These differential impacts derive 

primarily from the conversion costs manufacturers with production assets will incur in 

order to comply with an amended standard. In particular, manufacturers with production 

assets will face capital conversion costs not shared by their competitors who import and 

distribute PTACs and PTHPs and do not require tooling investments. In interviews, 

manufacturers with production assets indicated that higher standards could require 

significant investment in new tooling to support new coil designs. In addition, 

manufacturers with production assets would face product conversion costs in the form of 

design engineering, product development, testing, certification, marketing, and related 

costs. See section 12.4.6 for further discussion of conversion costs. 

At the standard proposed in today’s notice, DOE estimates that the PTAC and 

PTHP industry as a whole would face $7.6 million in conversion costs; of this, the 

subgroup of manufacturers with production assets would incur $6.8 million in conversion 

costs, or 89 percent of the industry total. At this level, manufacturers with production 

assets would also face an estimated loss in INPV of up to 2.3 percent compared to 1.3 

percent for the industry as a whole. 

12.6.2 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. For “Air-Conditioning 

and Warm Air Heating Equipment and Commercial and Industrial Refrigeration 
12-24 

Equipment Manufacturing,” the Small Business Administration (SBA) has set a size 

threshold of 750 employees or less for an entity to be considered a small business for this 

category. During its market survey, DOE used all available public information to identify 

potential small manufacturers. DOE’s research involved industry trade association 

membership directories (e.g., AHRI), product databases, individual company websites, 

and market research tools (e.g., Hoovers.com) to create a comprehensive list of 

companies 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 companies on its list, as necessary, 

to determine whether they met the SBA’s definition of a small business manufacturer of 

covered PTAC and PTHP products. DOE screened out companies that did not offer 

products affected by this rulemaking, did not meet the definition of a “small business,” or 

are foreign owned and operated. 

DOE initially identified 22 companies that sell PTAC and PTHP equipment that 

would be affected by today’s proposal. Of these 22 companies, DOE identified 12 as 

small businesses. DOE contacted the identified small businesses to invite them to take 

part in a manufacturer impact analysis interview. Of the 12 small businesses contacted, 

DOE was able to reach and discuss potential standards with two. DOE also obtained 

information about small businesses and potential impacts on small businesses while 

interviewing large manufacturers. 

Within the PTAC and PTHP industry, no small business identified is an original 

equipment manufacturer of products covered under this rulemaking. Rather, small 

businesses tend to import, rebrand, and distribute PTACs and PTHPs manufactured 

overseas, primarily in China. Some small businesses identified are original equipment 

manufacturers of non-standard size PTACs and PTHPs; however, non-standard products 

are not impacted by this rulemaking and therefore are not considered in this small 

business subgroup analysis. 

Because small businesses import and distribute, rather than directly manufacture, 

covered products, they are not expected to incur capital conversion costs in order to 

comply with an amended energy conservation standard nor are they expected to incur 

product conversion costs related to engineering and redesign of equipment. Instead, the 

primary conversion costs facing small businesses in the PTAC and PTHP industry center 

on testing and certification. Specifically, small businesses may incur costs to test and 

certify products that undergo redesign by original equipment manufacturers in order to 

comply with amended standards. Typically, testing and certification costs are 

proportional to the number of models offered by a company and not to the volume of 

sales. Because the volume of sales of a small business is often lower than that of a larger 

manufacturer, a small business’s testing and certification costs may be spread over fewer 

units and lower revenue per model relative to a larger manufacturer. This could result in a 

disproportionate cost burden on small manufacturers. 
12-25 

Table 12.6.2 below presents estimated conversion costs as a percentage of annual 

financial metrics for an average small business compared to an average large 

manufacturer. 

Table 12.6.2 Magnitude of Conversion Costs Facing an Average Small 

Manufacturer versus an Average Large Manufacturer 

Capital Conversion 

Costs as a 

Percentage of 

Annual Capital 

Expenditures 

Product 

Conversion Costs 

as a Percentage of 

Annual R&D 

Expense 

Total Conversion 

Costs as a 

Percentage of 

Annual Revenue 

Total Conversion 

Costs as a 

Percentage of 

Annual EBIT 

Average Small 

Manufacturer 0% 61% 2% 56% 

Average Large 

Manufacturer 29% 70% 4% 109% 

Because small businesses are not expected to incur capital conversion costs and 

are expected to face limited product conversion costs in order to comply with the 

proposed rule, DOE estimates that small businesses will experience lower conversion 

costs as a percentage of annual revenue and other financial metrics compared to large 

manufacturers. Nevertheless, DOE recognizes that amended energy conservation 

standards could potentially impact small businesses disproportionately. As noted, larger 

businesses tend to have larger production and/or sales volumes over which to spread 

costs and could have a competitive advantage due to their size and ability to access 

capital that may not be available to small businesses. Small businesses could also face 

higher per-unit costs for products if conversion costs incurred by overseas original 

equipment manufacturers are passed through to small business importers. If small 

businesses are not able to pass all additional costs onto customers, they could face 

reduced markups and profits. 

DOE provides additional analysis in section VI.B of the NOPR, Review Under 

the Regulatory Flexibility Act. 

12.7 OTHER IMPACTS 

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 2014 through 2048. DOE 

used statistical data from the U.S. Census Bureau’s 2011 Annual Survey of 

Manufacturers (ASM), 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 expenditures related to 

manufacturing of the equipment 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. The 
12-26 

total labor expenditures in each year are calculated by multiplying the MPCs by the labor 

percentage of MPCs. 

The total labor expenditures in the GRIM were then 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 2011 ASM). The production worker estimates in this section 

cover workers up to the line-supervisor level who are directly involved in fabricating and 

assembling equipment within the original equipment manufacturer facility. Workers 

performing services that are closely associated with production operations, such as 

materials handling tasks using forklifts, are also included as production labor. DOE’s 

estimates only account for production workers who manufacture the specific products 

covered by this rulemaking. 

To estimate an upper bound to employment change, DOE assumes all domestic 

manufacturers would choose to continue producing products in the U.S. and would not 

move production to foreign countries. To estimate a lower bound to employment, DOE 

estimates the maximum portion of the industry that would choose to leave the industry or 

relocate production overseas rather than make the necessary conversions at domestic 

production facilities. 

12.7.1.2 Direct Employment Impacts 

DOE estimates that 50 percent of standard-size PTAC and PTHP units are 

manufactured domestically. In the absence of amended energy conservation standards, 

DOE estimates that the PTAC and PTHP industry would employ 170 domestic 

production workers in 2019. 

 Table 12.7.1 shows the range of impacts of potential amended energy 

conservation standards on U.S. production workers of PTACs and PTHPs. The potential 

changes to direct employment presented suggest that the PTAC and PTHP industry could 

experience anything from a slight gain in domestic direct employment to a loss of all 

domestic direct employment. 

Table 12.7.1 Potential Changes in the Total Number of Production Workers in the 

PTAC and PTHP Industry in 2019 

Trial Standard Level* 

 Base Case* 1 2 3 4 5 

Potential Changes in 

Domestic Production 

Workers in 2019** 

- 

(170) (170) (170) (170) (170) 

to to to to to 

4 10 17 22 24 

*Base Case assumes 170 domestic production workers in the PTAC and PTHP industry in 2019. 

** Parentheses indicate negative values. 

The upper end of the range estimates the maximum increase in the number of 

domestic production workers in the PTAC and PTHP industry after implementation of an 
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amended energy conservation standard. It assumes manufacturers would continue to 

produce the same scope of covered products within the United States and would require 

some additional labor to produce more efficient products. 

The lower end of the range represents the maximum decrease in total number of 

U.S. production workers that could result from an amended energy conservation standard. 

During interviews, manufacturers stated their concerns about increasing offshore 

competition entering the market. If the cost of complying with amended standards 

significantly erodes the profitability of domestic manufacturers relative to their 

competitors who manufacture and/or import PTACs and PTHPs from overseas, 

manufacturers with domestic production could decide to exit the PTAC and PTHP market 

and/or shift their production facilities offshore. The lower bound of direct employment 

impacts therefore assumes domestic production of PTACs and PTHPs ceases, as 

domestic manufacturers either exit the market or shift production overseas in search of 

reduced manufacturing costs. 

The direct employment impacts discussed here do not include indirect 

employment impacts on the broader U.S. economy, which are documented in Chapter 16 

of the TSD. 

12.7.2 Production Capacity 

According to PTAC and PTHP manufacturers interviewed, amended energy 

conservation standards would not significantly constrain manufacturing production 

capacity. Among manufacturers with production assets, some indicated that higher 

energy conservation standards could reduce sales volumes, thereby resulting in excess 

capacity. Among importers and distributors, amended energy conservation standards 

would not likely impact production capacity. Accordingly, DOE believes manufacturers 

would be able to maintain production capacity levels sufficient to meet market demand 

under the proposed standard (TSL 2). 

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 consequences 

for some manufacturers, groups of manufacturers, or an entire industry. Assessing the 

impact of a single regulation may overlook this cumulative regulatory burden. Multiple 

regulations affecting the same manufacturer can strain profits and can lead companies to 

abandon equipment lines or markets with lower expected future returns than competing 

products. For these reasons, DOE conducts an analysis of cumulative regulatory burden 

as part of its rulemakings pertaining to equipment efficiency. 

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. Regulatory burdens can prompt companies to exit the market or reduce 

their equipment offerings, potentially reducing competition. Smaller companies in 
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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 proposed 

standard is not economically justified if it contributes to an unacceptable level of 

cumulative regulatory burden. 

For the cumulative regulatory burden analysis, DOE looks at other regulations that could 

affect PTAC and PTHP manufacturers that will take effect approximately three years 

before or after the 2019 compliance date of amended energy conservation standards for 

PTACs and PTHPs. In interviews, manufacturers cited federal regulations on equipment 

other than PTACs and PTHPs that contribute to their cumulative regulatory burden. The 

compliance years and expected industry conversion costs of relevant amended energy 

conservation standards are indicated in Table 12.7.2 below. 
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Table 12.7.2 Compliance Dates and Expected Conversion Expenses of Federal 

Energy Conservation Standards Affecting PTAC and PTHP Manufacturers 

Federal Energy Conservation 

Standards

Approximate Compliance 

Date

Estimated Total Industry 

Conversion Expense

2011 Room Air Conditioners 

76 FR 22454 (April 21, 2011); 

76 FR 52854 (August 24, 2011)

2014 $171M (2009$) 

2007 Residential Furnaces & 

Boilers 

72 FR 65136 (Nov. 19, 2007) 

2015 $88M (2006$)* 

2011 Residential Furnaces 

76 FR 37408 (June 27, 2011); 

76 FR 67037 (Oct. 31, 2011)

2015 $2.5M (2009$)**

2011 Residential Central Air 

Conditioners and Heat Pumps 

76 FR 37408 (June 27, 2011); 

76 FR 67037 (Oct. 31, 2011)

2015 $26.0M (2009$)**

2010 Gas Fired and Electric 

Storage Water Heaters 

75 FR 20112 (April 16, 2010) 

2015 $95.4M (2009$)

Dishwashers*** 2018 TBD 

Commercial Packaged Air 

Conditioners and Heat Pumps*** 2018 TBD 

Commercial Warm-Air 

Furnaces*** 2018 TBD 

Furnace Fans 

79 FR 38129 (July 3, 2014) 2019 $40.6M (2013$) 

Miscellaneous Residential 

Refrigeration*** 2019 TBD 

Single Packaged Vertical Units*** 2019 TBD 

Commercial Water Heaters*** 2019 TBD 

Commercial Packaged Boilers*** 2020 TBD 

Residential Water Heaters*** 2021 TBD 

Clothes Dryers*** 2022 TBD 

Central Air Conditioners*** 2022 TBD 

Room Air Conditioners*** 2022 TBD 

* Conversion expenses for manufacturers of oil-fired furnaces and gas-fired and oil-fired boilers associated 

with the November 2007 final rule for residential furnaces and boilers are excluded from this figure. The 

2011 direct final rule for residential furnaces sets a higher standard and earlier compliance date for oil-fired 

furnaces than the 2007 final rule. As a result, manufacturers will be required design to the 2011 direct final 

rule standard. The conversion costs associated with the 2011 direct final rule are listed separately in this 

table. EISA 2007 legislated higher standards and earlier compliance dates for residential boilers than were 

in the November 2007 final rule. As a result, gas-fired and oil-fired boiler manufacturers were required to 

design to the EISA 2007 standard beginning in 2012. The conversion costs listed for residential gas-fired 

and oil-fired boilers in the November 2007 residential furnaces and boilers final rule analysis are not 

included in this figure.

**Estimated industry conversion expense and approximate compliance date reflect a court-ordered April 

24, 2014 remand of the residential non-weatherized and mobile home gas furnaces standards set in the 2011 

Energy Conservation Standards for Residential Furnaces and Residential Central Air Conditioners and Heat 

Pumps. The costs associated with this rule reflect implementation of the amended standards for the 

remaining furnace product classes (i.e., oil-fired furnaces). 
12-30 

***The final rule for this energy conservation standard has not been published. The compliance date and 

analysis of conversion costs have not been finalized at this time. (If a value is provided for total industry 

conversion expense, this value represents an estimate from the NOPR.) 

Additionally, manufacturers cited increasing ENERGY STAR standards for room 

air conditioners and ductless heating and cooling systems as a source of regulatory 

burden. However, DOE does not consider ENERGY STAR in its presentation of 

cumulative regulatory burden because ENERGY STAR is a voluntary program and is not 

federally mandated. DOE also notes that it does not consider proposed legislation in its 

cumulative regulatory burden analysis because the impacts of such legislation would be 

speculative. 

12.8 CONCLUSION 

The following section summarizes the range of financial impacts DOE believes 

PTAC and PTHP manufacturers are likely to experience as a result of amended energy 

conservation standards. DOE also notes that while these scenarios bound the range of 

most plausible impacts on manufacturers, there potentially could be circumstances that 

cause manufacturers to experience impacts outside this range. 

Each TSL analyzed in this rulemaking represents a percentage increase in 

efficiency above current federal minimum efficiency standards. Specifically, TSLs 1, 2, 

3, 4, and 5 represent respective increases of 4 percent, 8 percent, 12 percent, 16 percent, 

and 18 percent above the current federal minimum efficiency standard for PTACs of a 

specified cooling capacity. See section 12.4.3 for further discussion of the TSLs. 

12.8.1 Conclusions for PTACs and PTHPs MIA 

Table 12.8.1 presents a range of results reflecting both the preservation of gross 

margin percentage markup scenario and the preservation of operating profit markup 

scenario. As explained in section 12.4.7, the preservation of operating profit scenario 

accounts for the more severe impacts presented. Estimated conversion costs and free cash 

flow in the year prior to the effective date of amended standards do not vary with the 

markup scenario. 
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Table 12.8.1 Manufacturer Impact Analysis Results for PTACs and PTHPs* 

 Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 

INPV 2013$M 58.5 57.1 to 

57.4 

57.7 to 

58.8 

55.4 to 

57.5 

55.0 to 

58.5 

51.8 to 

55.9 

Change in 

INPV 

2013$M - 

(1.4) to 

(1.1) 

(0.7) to 

0.3 

(3.1) to 

(0.9) 

(3.5) to 

0.0 

(6.7) to 

(2.6) 

% Change - 

(2.4) to 

(1.9) 

(1.3) to 

0.5 

(5.3) to 

(1.6) 

(5.9) to 

0.0 

(11.4) to 

(4.4) 

Product 

Conversion 

Costs 

2013$M - 2.2 4.7 7.2 8.5 13.5 

Capital 

Conversion 

Costs 

2013$M - 2.3 2.9 7.1 7.1 7.4 

Total 

Conversion 

Costs 

2013$M - 4.5 7.6 14.3 15.6 20.9 

Free Cash 

Flow 

2013$M 3.8 2.2 1.2 (1.5) (1.8) (3.4) 

% Change - (43.5) (69.9) (138.6) (148.2) (190.3) 

* Parentheses indicate negative values. 

TSL 1 represents a 4 percent increase above current federal minimum efficiency 

standards for PTACs. At TSL 1, DOE estimates the impacts on INPV to range from -$1.4 

million to -$1.1 million, or a change of -2.4 percent to -1.9 percent. Industry free cash 

flow is estimated to decrease by $1.7 million, or a change of 43.5 percent compared to 

the base-case value of $3.8 million in the year before the compliance date (2018). 

 DOE estimates that in the year of compliance (2019), 51 percent of all PTAC and 

PTHP shipments in the base case would already meet or exceed the standard levels at 

TSL 1. The capital and product conversion costs required to bring the balance of 

shipments into compliance with amended standards drive the negative INPV results at 

this level. DOE estimates industry conversion costs of $4.5 million at TSL 1. 

TSL 2 represents an 8 percent increase above current federal minimum efficiency 

standards for PTACs. At TSL 2, DOE estimates impacts on INPV to range from -$0.7 

million to $0.3 million, or a change in INPV of -1.3 percent to 0.5 percent. At this level, 

industry free cash flow is estimated to decrease by $2.7 million, or a change of 69.9 

percent compared to the base-case value of $3.8 million in the year before the compliance 

date. 

The INPV impacts at TSL 2 are slightly less severe than those at TSL 1 due to the 

interplay of conversion costs, manufacturer selling prices, and shipment projections. 

DOE estimates that in the year of compliance (2019), 37 percent of all PTAC and PTHP 

base case shipments would meet efficiency levels at TSL 2 or higher. DOE expects 

conversion costs required to bring the balance of shipments into compliance would 

increase to $7.6 million, reflecting the need for additional motor and control changes as 
12-32 

well as a more significant R&D and testing burden. However, an anticipated increase in 

per-unit purchase price at this level combined with steady shipments could dampen the 

effects of conversion costs on INPV. 

TSL 3 represents a 12 percent increase above current federal minimum efficiency 

standards for PTACs. At TSL 3, DOE estimates impacts on INPV to range from -$3.1 

million to -$0.9 million, or a change in INPV of -5.3 percent to -1.6 percent. At this level, 

industry free cash flow is estimated to decrease by $5.3 million, or a change of 138.6 

percent compared to the base-case value of $3.8 million in the year before the compliance 

date. 

DOE estimates that in the year of compliance (2019), only 6 percent of all PTAC 

and PTHP base case shipments would already meet efficiency levels at TSL 3 or higher. 

DOE also estimates conversion costs would nearly double relative to conversion costs at 

TSL 2, increasing to $14.3 million. Anticipated conversion costs at this level include 

investing in new tooling and redesigning products to incorporate additional coils and/or 

formed coils. 

TSL 4 represents a 16 percent increase above current federal minimum efficiency 

standards for PTACs. At TSL 4, DOE estimates impacts on INPV to range from -$3.5 

million to $0.0 million, or a change in INPV of -5.9 percent to 0.0 percent. At this level, 

industry free cash flow is estimated to decrease by $5.7 million, or a change of 148.2 

percent compared to the base-case value of $3.8 million in the year before the compliance 

date. 

DOE estimates that in the year of compliance (2019), less than 1 percent of all 

PTAC and PTHP base case shipments would already meet efficiency levels at TSL 4 or 

higher. Conversion costs required to bring nearly 100 percent of products into 

compliance would increase to an estimated $15.6 million. At this level, however, DOE 

does not anticipate capital conversion costs beyond those required at TSL 3. Rather, 

product conversion costs account for the full increase. 

TSL 5 represents the use of max-tech design options for each equipment class. At 

this level, DOE estimates impacts on INPV to range from -$6.7 million to -$2.6 million, 

or a change in INPV of -11.4 percent to -4.4 percent. Industry free cash flow is estimated 

to decrease by $7.3 million, or a change of 190.3 percent compared to the base-case value 

of $3.8 million in the year before the compliance date. 

DOE estimates that in the year of compliance (2019), less than 1 percent of all 

PTAC and PTHP base case shipments would already meet efficiency levels at TSL 5. At 

this level, conversion costs required to bring nearly 100 percent of products into 

compliance would increase to an estimated $20.9 million. 

At all TSLs, INPV impacts could prove more severe if customer demand falls in 

the face of higher per-unit purchase prices. 

 
12-33 

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