2- i CHAPTER 2: ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1

2.2 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4

2.3 MARKET AND TECHNOLOGY ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4

2.3.1 Market Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4 2.3.2 Technology Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4

2.4 SCREENING ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5 2.4.1 Technology Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5 2.4.2 Baseline Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5

2.5 ENGINEERING ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6 2.5.1 Design Option Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6 2.5.2 Efficiency-Level Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-7 2.5.3 Cost-Assessment Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-8 2.5.4 Other Regulatory Impacts on the Engineering Analysis . . . . . . . . . . . . . . . . . . 2-8

2.6 ENERGY USE AND END-USE LOAD CHARACTERIZATION . . . . . . . . . . . . . . . 2-8 2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION . . . . . . . . . . . . . . . . . . . 2-8

2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES . . . . . . . . . . . . . . . . . . 2-9 2.8.1 LCC Spreadsheet Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-9

2.9 SHIPMENTS ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10

2.10 NATIONAL IMPACT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-11

2.11 LIFE-CYCLE COST SUB-GROUP ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-12

2.11.1 Purchase Price Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13 2.11.2 Consumer Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13

2.12 MANUFACTURER IMPACT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13 2.12.1 Industry Characterization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13 2.12.2 Industry Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-14 2.12.3 Manufacturer Sub-Group Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-14

2.12.4 Interview Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-15 2.12.5 Competitive Impact Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-16

2.13 UTILITY IMPACT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-16

2.14 EMPLOYMENT IMPACT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-16

2.15 ENVIRONMENTAL ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-17

2.16 REGULATORY IMPACT ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-182- ii LIST OF FIGURES

Figure 2.1.1 Analyses for Distribution Tr ansformer Energy-Efficiency Standards . . . . . . . . 2-32-1 CHAPTER 2: ANALYTICAL FRAMEWORK

2.1 INTRODUCTION

This chapter provides a description of the general analytical framework used by the Department in developing standards and assessing the impacts for distribution transformers. The description addresses the methodology, the analytical tools, and the relationship between the various analyses conducted in the rulemaking. The objective of the rulemaking process is to determine minimum efficiency standards for distribution transformers that are technologically feasible and economically justified. In this context, economic justification includes consideration of the economic impact on manufact urers and consumers, the na tional benefits, the impacts on utilities, and the impacts from any lessening of competition. The Department will conduct several of these analyses following the A dvance Notice of Proposed Rulemaking (ANOPR).

Figure 2.1.1 summarizes the analytical component s of the standard-setting process. The focus of this figure is the third column, identified as “Analysis.” The columns labeled “Key Inputs” and “Key Outputs” indicate how the analyses fit into the rulemaking process, and how the analyses relate to each other. Key outputs are analytical results that feed directly into the standard-setting process. Dotted lines connecting analyses indicate types of information that feed from one analysis to another. Key inputs are the types of data and information that the analyses require. Some key inputs exist in public da tabases and DOE will also collect inputs from stakeholders or others with special knowledge. Inputs developed by the project team for the standards-setting process are presented and open for stakeholder review.

The analyses that the Department performed for the ANOPR include:



### C a market and technology assessment to char acterize the distribution transformer market and review techniques and approaches used to produce more efficient transformers;



### C a screening analysis to identify design op tions that improve distribution transformer efficiency and to determine which should be evaluated and which should be screened out;



### C an engineering analysis to estimate the relationship between the manufacturing cost of a transformer and its efficiency level;



### C an energy use and end-use load characterization to generate energy use estimates and enduse load profiles of di stribution transformers;



### C a markup process to convert ma nufacturer sales prices to customer installed prices;



### C a life-cycle cost (LCC) analysis to calculate, at the consumer level, the discounted savings in operating costs throughout the estimated av erage life of the distribution transformer, compared to any increase in the installed costs likely to result directly from the imposition of the standard. As a suppor ting or parallel analysis, a payback period (PBP) analysis is performed to calculate the amount of time it takes consumers to recover the assumed2-2 higher purchase expense of more energy-e fficient equipment through lower operating

costs;



### C a shipments analysis to estimate shipments of distribution transformers over the time period examined in the analysis; and



### C a national impacts analysis to assess the aggregate impacts at the national level of consumer payback, net present value (NPV) of total consumer LCC, national energy savings, and national employment.

The analyses that the Department will perfo rm for the Notice of Proposed Rulemaking (NOPR), after publishing the ANOPR, include:



### C an LCC sub-group analysis to evaluate imp acts on identifiable groups of customers of distribution transformers, including various types of electric utilities or various types of

commercial or industrial transformer purchasers or owners, who may be disproportionately affected by a na tional energy-efficiency standard;



### C a manufacturer impact analysis (MIA) to estimate the financial impact of standards on distribution transformer manufacturers and to calculate impacts on competition, employment at the manufacturing plant, and manufacturing capacity;



### C a utility impact analysis to estimate the eff ects of proposed standards on the installed capacity and generating base of electric utilities;



### C an employment impact analysis to estimate the impacts of standards on net jobs eliminated or created in the general economy as a consequence of increased spending on the purchase price of transformers and reduced customer spending on energy;



### C an environmental assessmen t to assess the impacts of proposed standards on certain environmental indicators; and



### C a regulatory impact analysis to present major alternatives to proposed standards that could achieve comparable energy savings at a reasonable cost.

In response to comments it receives after publishing the NOPR, the Department may revise some of its analyses be fore publishing the Final Rule.2-3 Figure 2.1.1 Analyses for Distribution Tran sformer Energy-Efficiency Standardsd!1·".'.•c••e""IiIIIIIiI:IIII,"d','idHE',i.,':.i.j.i"Ii1ld),·'1'..IiUjii1111uu......."-iI..! i]l!!I,(iI(iI11I I I I".!----"91'..I·····1························1···_····1,..•...0....'''''o."-s•I...''''''''Oi'"'"."i!l,,!Eccoc'"I"'"::;.'lDO1"i(f).fj.£!-1!••'.-0ijiiico0"-::;,""i;"0'"".'i'-:5"-I"•"'"0"=-::;let_co1l."'''wIs".!j"-E",,-1l.c0.\i.'i'ei".t=1-:;;;;"-13Oi;;;;.,,,",,,;:l"1l.>=""i!l0'"0"co",02wc;r'iCC2","C...-<""'''0""'"E0'"><D-"'"'".,"=,"-",""-C,,",DOZct--'§iii-=E W.,(f),.SWct----I--,-!I'lfT!lt",i'i'...i"'iiH•tf}"eD,•<jHjn(f),I,"ii"I,i........'1......·...., ..f,1II"liI'Ii:n..• iI'II..1"s.1hlh":1i'j<II:IIiJ:iwI!1•I,Jdl!IE,IjjIIe..,i•:1],-<,..,"I!I•,2-4 2.2 BACKGROUND

As described in Chapter 1, in September, 1995, the Department announced a formal effort to consider further improvements to the process used to develop appliance efficiency standards. The Department called on energy efficiency gr oups, manufacturers, trade associations, state agencies, utilities, and other interest ed parties to provide input to th is effort. As a result of this combined effort, the Department published Procedures, Interpretations and Policies for Consideration of New or Revised Energy Conservation Standards for Consumer Products (the “Process Rule”), 10 CFR 430, Subpart C, Appendix A. The Process Rule outlined the procedural improvements identified by the interested partie s, and included a review of the: 1) economic models, 2) analytical tools, 3) methodologies, 4) non-regulatory approach es, and 5) prioritization

of future rules. The Process Rule reco mmended that the Depar tment take into account uncertainty and variability by carrying out scenario or probability analysis. The following sections provide a general desc ription of the analytical com ponents of the improved rulemaking

framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology asse ssment characterizes the distribution transformer markets and existing technology options for making a transformer more efficient. Although the Department did not develop a detailed market and technology assessment for this Technical Support Document (TSD) on distribution transforme rs, the TSD discusses elements of the work completed.

2.3.1 Market Assessment

When initiating a standards rulemaking, the Department develops information on the present and past industry structure and market characteristics of the pr oduct(s) concerned. This activity consists of both quan titative and qualitative efforts to assess the industry and products based on publicly available informa tion. Issues to be addressed include: 1) nati onal transformer shipments; 2) identification of largest players in the transformer industry; 3) discussion of existing non-regulatory efficiency improvement initiatives; 4) developm ents around standards in States and neighboring countries; a nd 5) trends in product character istics and retail markets. The

information collected serves as resource material to be us ed throughout the rulemaking.

2.3.2 Technology Assessment

This chapter provides information about existing technology options and designs to construct more energy-efficient di stribution transformers. In cons ultation with interested parties, the Department devel oped several technology options and designs for consideration. Some examples of these design options include: 1) higher-grade core steels, 2) use of different conductors, and 3) adjustments to core dimensions and the number of turns.2-5 As described in Chapter 4, the Department reviewed and analyzed some emerging technologies for distribution transformers (e .g., superconducting materi als). Although these technologies are not generally considered commercially available, the Department discusses their potential impact on the distribution transformer industry.

Another key part of the tec hnology assessment is the determination of the product classes that will be used in the rulemaking. Distribution transformers are divided into classes using the following criteria: a) the type of energy us ed, b) capacity, and c) pe rformance-related features that affect consumer utility or efficiency. Different efficiency standards apply to different product classes. In genera l, DOE defined classes usin g information obtained from manufacturers, trade associations, and other intere sted parties.

2.4 SCREENING ANALYSIS

The screening analysis (Chapter 4) reviews various technologies with regard to whether they: 1) are technologically feasible, 2) are prac ticable to manufacture, in stall and service, 3) do not have an adverse impact on product utility or product availability, a nd 4) do not adversely impact health and safety.

2.4.1 Technology Screening

The Department developed an initial list of efficiency enhancement design options from the technologies identified in the technology asse ssment. Then the Depa rtment, in consultation with interested parties, reviewed the list to determine if they are practicable to manufacture, install and service, would adversely affect product utility or pr oduct availability, or would have adverse impacts on health and sa fety. The Department used efficiency enhancement design options that pass the four screening criteria in th e engineering analysis. It did not consider hose options that fail one or more of the screening cr iteria in the analysis. Chapter 4 discusses which design options are considered in the distribution transformer engineering analysis. Also included is a list of emerging technologies which c ould impact future distribution transformer manufacturing costs.

2.4.2 Baseline Equipment

To analyze design options for energy-effici ency improvements, the Department typically defines a baseline unit against which to compare more-efficient units. For products with existing standards, the baseline unit will usually be a unit just meeting the standard. However, since distribution transformers do not have an existing efficiency standard, th e Department developed an approach based on estimated purchases in the current environment, pr oducing a distribution of efficiencies for a baseline scenario. The Departme nt established the baseline scenario as part of the LCC analysis.2-6 2.5 ENGINEERING ANALYSIS

The engineering analysis (Chapter 5) develops cost-efficiency relationships for distribution transformers, estimating manufacturer costs of achieving increased efficiency levels. Manufacturing costs are used as the means of determining retail prices in the life-cycle cost analysis, and are needed for the MIA. The engi neering analysis also determines the maximum technologically feasible energy efficiency level.

In general, the engineering analysis estimates the efficiency improvement potential of the individual or combinations of design options that passed the four criteria in the screening analysis. The Department, in c onsultation with stakeholders, us es the most appropriate method to determine the manufacturing cost-energy efficiency relationship. This cost-efficiency relationship developed in the engineering analysis is used in the LCC analysis.

As described in Chapter 1, the Department will consider those distribution transformers that are designed to achieve the maximum improvement in energy efficiency that the Secretary determines is technologically feasible and economically jus tified. (42 U.S.C. 6295(o)(2)(A)) Therefore, an important role of the engineering analysis is to identify the maximum technologically feasible level. The maximum technologically feas ible level is one that can be reached by the addition of efficiency improve ments and/or design options, both commercially feasible and in prototypes, to the baseline units. The Department believes that the design options comprising the maximum technologically feasible level must have been physically demonstrated in at least a prototype form to be considered technolog ically feasible.

In general, three methodologies can be used to generate the manufacturing costs needed for the engineering analys is. These methods are:

1. the design-option approach - reporting the incremental costs of adding design options to a baseline model; 2. the efficiency-level approach - reporting relative costs of achieving energy efficiency improvements; and 3. the reverse engineering or cost-assessm ent approach - involves a "bottoms-up" manufacturing cost assessment based on a detailed bill of materials derived from

transformer tear-downs.

The Department consider s public comments in determining the best approach for a rulemaking.

2.5.1 Design Option Approach

The design option approach identifies individua l or combinations of design options which increase efficiency. These increases in efficiency are typically either based on manufacturer or component supplier estimates or on engineering co mputer simulation models. The incremental manufacturing costs of adding design options to a baseline model are th en determined. The Department added indivi dual or combinations of design options to the baseline model in ascending order of cost-effectiven ess. Typically, the payback period is used to establish a design2-7 option’s cost-effectiveness and is determined by the ratio of the change in total consumer cost to the change in operating cost.

The primary advantage of the design option approach is its ability to analyze individual technologies. The approach is transparent in th at the impact of any single technology on cost and efficiency is explicit. An additional advantage is its ability to incorporate designs that have been demonstrated to perform in prototypes but have yet to be utilized in equipment currently available on the market. Thus, maximum tec hnologically feasible designs are more easily

established than in the e fficiency level approach.

Although individual technologies can be assessed, the design option approach tends to be complex. The material combinations considered may be combined in ways not typically utilized by manufacturers, making it di fficult to assess the impact of a design on system cost and efficiency. In order to determine a tec hnology’s impact on system efficiency, computer simulation models are typically employed, but these models exhibit at least some level of inaccuracy, and only approximate the performance of actual manufactured units.

Another drawback to the design option approach is its imperfect compatibility with the manufacturing impact analysis. The Department recognizes that the manufacturer selling price information derived in a compone nt-based analysis does not refl ect the variability in baseline units, design strategies and cost structures that can exist between manufacturers. Therefore, in the manufacturing impact analysis (see Chapte r 12), the Department may need to derive additional manufacturing cost estimates, using other approaches developed in consultation with interested parties.

2.5.2 Efficiency-Level Approach

The efficiency-level approach, which the Depa rtment did not select for the distribution transformer engineering analysis, establishes the relationship between manufacturer sales price and increased efficiency at incremental increases in efficiency levels. Manufacturers provide incremental manufacturer cost data for incremental increases in efficiency. Cost-efficiency curves can be easily constructed to clearly identify at what point manufacturers are incurring significant costs to raise efficiency. Additionally, the efficiency-level approach allows manufacturers the ability to suppl y detailed cost data without revealing their unique design strategies for achieving increased efficiency levels.

The simplicity of the efficiency-level approach is also its primary drawback. Namely, since technological details are not provided, it is extremely difficu lt to verify whether the costs provided for each specific efficiency level are truly representative of the costs for that level. In addition, prototypical designs become difficult to evaluate and maximum technologically feasible designs are then difficult to ascertain. As a resu lt, some other type of supplementary analysis is likely needed in order to verify the accuracy of the costs supplied thr ough the efficiency-level approach.2-8 2.5.3 Cost-Assessment Approach

The cost-assessment approach, also called the ‘reverse engineering approach,’ is based around a component-based technology-costing of the various technologi cal paths manufacturers typically use to achieve increased product energy efficiency. Under this type of analysis, DOEphysically analyzes, i.e., dismantles actual pieces of equipment on the market , component-bycomponent to determine what technologies and designs manufacturers employ to increase efficiency. The Department th en uses independent costing methods and manufacturer and component supplier data to estimate the costs of the components. This approach has the distinct advantage of using “real” market equipment to establish the technologies that are used by manufacturers and to establish the manufacturing cost to produce more-efficient units.

The primary disadvantage of reverse engineering is the time and effort required to analyze “real” equipment. Several models from a di verse range of manufact urers may have to be

assessed in order to ensure that an accurate re presentation of technologi cal paths for increasing efficiency are identified. In addition, since only equipment in the market is analyzed, prototypical designs may not be captured by the analysis, thus making it difficult to establish maximum technologically feasible designs.

2.5.4 Other Regulatory Impacts on the Engineering Analysis

In conducting an engineering analysis, regula tory changes sometimes occur outside of the standards-setting process that can impact product manufacturing. Some of these changes can also affect the efficiency of th e product. The Departme nt attempts to identify all “outside” issues that can impact the engineering analysis.

2.6 ENERGY USE AND END-USE LOAD CHARACTERIZATION

The energy use and end-use load characteriz ation analysis (Chapter 6) produces energy use estimates and end-use load shapes for distribution transformers. The energy use estimates enable evaluation of energy savings from the ope ration of distribution tr ansformer equipment at various efficiency levels, while the end-use load characterization allows evaluation of the impact on electricity monthly and peak demand from th e operation of transformers. The analysis produces a distribution of results for a variety of building types and uses covering a range of climate locations in order to represent the diversity of use, and performance, of distribution transformer equipment.

2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION

Chapter 7 describes the process used to de termine the installed price of distribution transformers. The Department de rives this by applying markups to the manufacturer selling price from the engineering analysis (Chapter 5). Mar kup, shipping costs, sale s tax, and installation costs are the costs associated with bringing a manufactured transformer into service as an2-9 installed piece of electrical equi pment. Since electric utilities typically purchase liquid-immersed transformers directly from ma nufacturers, there are no hand ling markups applied to the manufacturer selling price. Dr y-type transformers, on the ot her hand, are subject to both

distributor and contractor mar kups. Both liquid-immersed and dr y-type distribution transformers are subject to shipping, sale s tax and insta llation markups.

2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

Chapter 8 describes the LCC analysis, wh ich calculates the discounted savings in operating costs throughout the estimated average life of the covered product compared to any increase in the installed cost for the product lik ely to result directly from the imposition of a standard. In determining ec onomic justification, the Energy Policy and Conservation Act (EPCA) directs the Department to consider a number of different factors, including the economic impact of potential standards on cons umers (42 U.S.C. 6295 (o)(2)(B)(i)).

To consider these requirements, the Department calculated changes in LCC to the consumers that are likely to result from the candidate standard level as well as a simple payback period. The Department calculated both the L CC and the PBP in a Monte Carlo framework, so results are represented by distributions. The e ffect of standards on indi vidual consumers includes a change in operating expense (usually decreas ed) and a change in purchase price (usually increased). The Department analyzed the ne t effect by calculating the change in LCC as compared to the base case. Inputs to the L CC calculation include the installed consumer cost (purchase price plus shipping, sales tax and in stallation cost), operatin g expenses (energy and maintenance costs), life time of the equipment, and a discount rate.

Chapter 8 also describes the PBP Analysis, which calculates the amount of time needed to recover the additional cost that consumers pay for increased efficiency. Numerically, the simple payback period is the ratio of the increase in purchase price to the decrease in annual energy

costs.

2.8.1 LCC Spreadsheet Model

The Department developed an LCC spreadsheet model to calculate the economic impacts

of more efficient distribution transformers . The LCC spreadsheet estimates the economic impacts on the consumer (i.e., the owner or pur chaser) of a transformer by calculating the difference between pairs of transf ormers. In these pairs, one transformer is a baseline model representing a typical transformer that would be purchased in the current environment (i.e., without an efficiency standard). The Department selects the other transformer model in two

ways:

• For those purchasers conducting Total Owning Cost (TOC) evaluations, the transformer corresponds to the lowest-TOC design meeting a particular energy efficiency standard.2-10 • For those purchasers not basing pur chase decisions on TOC evaluation, the second transformer in the pair is the one with minimum first cost meeting the specific energy efficiency standard which the Department decides to evaluate.

The LCC spreadsheet compares the life-cycl e costs for a representative unit from the baseline scenario with life-cycle costs for more efficient units. Baseline units are those designs

that customers would choose in th e absence of a new efficiency st andard. Identifying a specific baseline for transformers is complicated for two reasons: 1) the lack of existing mandatory efficiency standards, and 2) the wide variability in designs available to potential purchasers at any given efficiency level. To address these issues, the Department developed an LCC model

that uses distributions of i nputs to produce a representative ra nge of transformer costs and efficiencies. That representative distribution of costs and efficiencies determines the baseline

LCC scenario.

The Department used the LCC spreadsheet to determine the effects of more-efficient units on operating expenses (usually decreased ) and purchase prices (usually increased) of distribution transformers. The LCC spreadsheet focuses on a distribution of potential transformer designs for selected efficiency levels (see Chapter 5, Engineering Analysis, for a discussion of the potential designs). These designs differ in cost, no-load losses, and load losses. Using the LCC spreadsheet, the Department cal culated operating costs, taking into account distributions in loading and marginal electricity prices, and compared several poten tial candidate

standard levels.

For the LCC analysis, DOE used a spreadsh eet model developed in Microsoft Excel® combined with Crystal Ball® (a commercially available soft ware program for conducting a Monte Carlo analysis). The model uses a Mont e Carlo simulation (described in Appendix 8-B) to perform the analysis, considering uncertainty and variability. The LCC spreadsheet is organized so that users can enter ranges (or probability distributions) for each input variable needed to perform the calculations.

The Department calculated the payback period based on the same inputs used for the LCC analysis (with the difference that it based the va lues only on the first year the standard takes effect). The output is a probability distribution of payback periods, including the mean and median payback period as well as the minimu m and maximum payback periods. Additional information is available in Chapter 8 and the LCC spreadsheets are available on the DOE

website: http://www.eere.energy.gov/buildings/appliance_ standards/commercial/d ist_transformers.html.

2.9 SHIPMENTS ANALYSIS

One of the more important components of any estimate of future impacts from energy efficiency standards is transformer shipments (C hapter 9). Forecasts of shipments for the base case and each potential standard case need to be obtained as an input to the national energy savings (NES) model. The De partment chose an accounting m odel method to prepare shipment2-11 scenarios for the base case and the candidate standa rd levels. The model keeps track of the aging and replacement of transformer capacity given a pr ojection of future transformer sales growth. New transformer capacity demand is created by growth in electrical demand. Transformer shipments, a retirement function, and initial number of transfor mers in service influence how transformers in service and supply of transformer capacity changes over time.

Shipments are organized into two categories: replacements and new capacity. Replacements occur when old transformers break down, corrode, are struck by lightning, or otherwise need to be replaced. New capacity purch ases occur due to increases in electricity use that may be driven by increasing population, increasing commercial a nd industrial activity, or growth in electricity distribution systems. The model starts with an estimate of the overall growth in transformer capacity and then estimates shipments for particular design lines and transformer sizes using estimates of the relative market share for different design and size categories. Chapter 9 provide s a detailed description of how DOE conducted its shipments

forecasts.

2.10 NATIONAL IMPACT ANALYSIS

National energy savings and net present value impacts are the cumulative energy and economic effects of a transformer energy conser vation standard (Chapter 10). The Department projected the impacts from the year the standard would take effect through a selected number of years in the future. The Department analyzed en ergy savings, energy cost savings, equipment costs, and net present value of savings (or costs) for each candidate standard level. The national energy and cost savings (or increases) that would result from energy conservation standards depend on the projected energy savings per transformer and the anticipated numbers of transformers sold. The Depar tment created base case transfor mer shipments projections that include units at various efficiency levels. It based the projections on hi storical information plus forecasts of market influences, national econo mic growth, and electric ity consumption. The Department then derived energy savings for various candidate standard levels from the costefficiency schedules.

To make the analysis more accessible and transparent to all stakeholders, DOE used a Microsoft Excel® spreadsheet model to calcula te the NES and the NP V (i.e., national economic costs and savings from new standards). Users can change input quantities within the spreadsheet to test the impact of alternative input a ssumptions. Unlike the LCC analysis, the NES spreadsheet does not use distribu tions for inputs or outputs. Us ers can demonstrate sensitivities by running different scenarios using the spreadsheet. The NES spreadsheet model is available on

the DOE website: http://www.eere.energy.gov/buildings/appliance_ standards/commercial/d ist_transformers.html

As discussed in Chapter 10, the national impact analysis assesses the NPV of total consumer LCC, energy savings, and direct a nd indirect employment impacts. The Department conducted an assessment of the aggregate imp acts at the national level for the ANOPR. Analyzing impacts of Federal energy-efficiency standards requires a comparison of projected2-12 U.S. energy consumption with and without standa rds. The base case, which is the projected US energy consumption without standards, includes the mix of efficiencies being sold at the time the

standard becomes effective.

The Department estimated national energy consumption for each year beginning with the expected effective date of the standard. Th e Department calculated national annual energy savings as the difference between two projections: a base case and a st andards case. Analysis included estimated energy savings by fuel type used for generating electricity. The Department estimated energy consumption and savings based on site energy (kWh of electricity), and then converted the electricity consumption and savings to primary energy consumption.

2.11 LIFE-CYCLE COST SUB-GROUP ANALYSIS

The Department will conduct the LCC sub-group analys is after the ANOPR and report

the results in the NOPR.

While DOE expects distribution transformer energy conservation standards to reduce overall costs to the economy and consumers, th ere may be groups of consumers who see some increase in cost. In the next phase of the rulemaking, DOE will consider the results from the LCC analysis to evaluate the cost impacts on c onsumer sub-groups, such as owners and operators of different types of buildings, and other categories of transformer owners, including utilities, to see if they are differentially affected by potential energy conservation standards in a significant

manner.

The analysis of these subgroups of tr ansformer owners depends on identifying

characteristics related to transf ormer use or economics that sets the subgroup apart from other transformer owners. The Depar tment will analyze the effects on these groups by comparing the transformer owners’ capital and operating costs with and wit hout an energy conservation standard. The Departme nt will use LCC analysis methods for consumer sub-group analysis by modifying cost assumptions to reflect the situati ons of the subgroups. Factors that could result in differential impacts to subgroups include differences in energy prices and transformer loading.

The Department plans to eval uate variations in regional energy prices, variations in energy use, and variations in installation costs that might affect the net present value of a standard to consumer sub-populations. To the extent possible, DOE obtains estimates of the variability in each input quantity and considers this variability in its calculation of consumer impacts. The analysis is structured to answer questions such as: How many companies are better off with standards and by how much? How many companies are not better off and by how much? The Department discu sses the variability in each input quantity and likely sources of information with the interested parties.2-13 2.11.1 Purchase Price Increases

The Department will be sensitive to purchase price increases to avoid negative impacts to identifiable population groups. Additionally, th e Department will asse ss the likely impacts of purchase price increases on product sales.

2.11.2 Consumer Participation

The Department seeks to inform and involve consumers and consum er representatives in the process of developing sta ndards. This includes notifica tion of consumer representatives during the rulemaking process and, where a ppropriate, seeking direct consumer input.

2.12 MANUFACTURER IMPACT ANALYSIS

The Department will conduct the MIA after the ANOPR a nd report the results in the NOPR. This analysis will estimate the financial impact of standards on distribution transformer manufacturers and also calculate the impact of standards on competition, direct employment, and manufacturing capacity within the industry. Thr ee important elements of the approach are the preparation of an industry cash flow, the devel opment of a process to consider sub-group cash flow, and the design of a guide to interview manufacturers and others in gathering information.

The policies outlined in the Process Rule resulted in substantial revisions to the analytical framework to be used in performing the MIA for each rulemaking. The Department intends to conduct the MIA in three phases. Phase 1 consis ts of two activities, na mely, preparation of an industry characterization and iden tification of issues. Phase 2 evaluates the industry from a macro perspective. In this phase, the DOE will use Government Regulatory Impact Model (GRIM) to perform an industry cash flow anal ysis. Phase 3 involves repeating the process described in Phase 2 (the industry cash-fl ow analysis) but on different sub-groups of

manufacturers. Phase 3 also entails calcu lating additional impacts on competition, direct employment, and manufacturing capacity.

2.12.1 Industry Characterization

Phase 1 of the MIA consists of collecting pertinent financial a nd market information. This activity involves both quan titative and qualitative efforts. Data gathered include market share, corporate operating ratios, wages, em ployment, and production cost ratios. The Department incorporates these data into the engineering analysis in to estimate equipment production costs and distribution markups. Sources of information typically used for phase 1 include experts from industry as well as reports published by industry groups, trade journals, the U.S. Census Bureau, and SEC 10-K filings.2-14 2.12.2 Industry Cash Flow

Increased efficiency standards affect manufacturers in three ways: 1) by requiring additional investment, 2) by raising production costs, and 3) by affecting revenue because of higher prices and, possibly, lower quantities sol d. To quantify these manufacturer impacts, the Department performs an industry cash flow analysis using the GRIM. Usually this analysis will use manufacturing costs, shipments forecasts, and price forecasts developed for the LCC and NES analyses. The Department will develop financial information, also required as an input to GRIM, based on publicly available data and manufacturer information confidentially submitted to the Department’s contractor.

The GRIM analysis uses a number of factors—annual exp ected revenues; manufacturer costs such as cost of selling, general and administrative (SG&A); property taxes; and capital expenditures related to deprecia tion, new standards, and maintena nce—to arrive at a series of annual cash flows beginning from before implementation of sta ndards and continuing explicitly for several years after implement ation. The Department calculate d industry net present values by discounting the annual cash flows from the period before implementation of standards to some future point in time.

2.12.3 Manufacturer Sub-Group Analysis

Assessment of impacts on sub-groups of manufact urers is Phase 3 of the MIA. Using industry “average” cost values is not adequate for assessing the variation in impacts among subgroups of manufacturers. Sm aller manufacturers, niche ma nufacturers, or manufacturers exhibiting a cost structure largely different from industry averages could be affected differently. Ideally, the Department would consider the impact on every firm individually. In highly concentrated industries this may be possible. In industries having num erous participants, the Department uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. The financial analysis of the “prototypical” firm performed in the Phase 2 industry analysis can serve as a benchmark against which manufacturer sub-groups can be analyzed.

The Department will use the manufacturing cost data collected for the engineering analysis to the extent practical in the sub-gr oup impact analysis. To be useful, however, these data should be disaggregated to reflect the va riability in costs between relevant sub-groups of

firms.

The Department will c onduct detailed interviews with manufacturers to gain insight into the potential impacts of standards. During these interviews, the Department will solicit the information necessary to evaluate cash fl ows and to assess impacts on competition, direct employment and manufacturing capacity. The Department will also consider company-specific

cumulative burden.2-15 2.12.4 Interview Process

The revised rulemaking proce ss provides for greater public input and improved analytical approaches, with particular emphasis on earlier and more-extensi ve information gathering from interested parties. The propos ed three-phase MIA process w ill draw on multiple information sources, including structured interviews w ith manufacturers and a broad cross-section of interested parties. Intervie ws may be conducted in any and all phases of the analyses as

determined in Phase 1 of the MIA.

The interview process has a key role in th e MIAs, since it provides an opportunity for manufacturers to privately express their views on important issues. A key characteristic of the interview process is that it is designed to allow confidential information to be considered in the rulemaking process.

The initial industry characterization will coll ect information from relevant industry and market publications, industry trade organiza tions, company financia l reports, and product

literature. This information will aid in the de velopment of detailed a nd focused questionnaires, as needed, to perform all phases of the MIAs.

The Phase 3 (sub-group analysis) questionnair e will solicit information on the possible impacts of potential efficiency levels on manuf acturing costs, product prices, and sales. Evaluation of the possible impacts on direct employment, capital assets, and industry competitiveness will also draw heavily on the information gathered during the interviews. The questionnaires will solicit both qualitative and quantitative information. The Department will request supporting informati on whenever applicable.

Interviews will be scheduled well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire is acceptable, an interactive interv iew process is preferred because it helps clarify responses and provides the opportunity for additi onal issues to be identified.

The Department will request interview participants to identify all confidential information provided in writing or orally. Approximately two weeks following the interview, DOE will provide an interview summary to give participants the opportunity to confirm the accuracy and protect the confidentiality of all collected info rmation. All the information transmitted will be considered, when appropr iate, in the Department’s decisi on-making process. However, DOE

will not make confidentia l information available in the public record.

The Department’s contractor will collate the completed interview questionnaires and prepare a summary of the major issues and outco mes. The Department will seek public comment on the outcome of the interview process.2-16 2.12.5 Competitive Impact Assessment

Executive Order 12866 directs the Department to consider any lessening of competition that is likely to result from standards. It further directs the Attorney General to gauge the impacts, if any, of any lessening of competition. The Department will make an effort to gather and report firm-specific financial information and impacts. The competitive analysis will focus on assessing the impacts to smaller, yet significant, manufacturers. The Department will base the assessment on manufacturing cost data and on information collected from interviews with manufacturers, consistent with Phase 3 of the MIA. The Department of Justice (DOJ) has offered to help in drafting questions to be used in the manufact urer interviews. These questions will pertain to the assessment of the likelihood of increases in ma rket concentration levels and other market conditions that could lead to anti-competitive pricing behavior. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some manufacturers, increased proportion of fixed costs potentially increasing business risks, and potential barriers to mark et entry (e.g., proprie tary technologies).

2.13 UTILITY IMPACT ANALYSIS

The Department will conduct the utility impact analysis after the ANOPR and report the results in the NOPR. In addition to the economic impacts on electric utilities, as consumers of distribution transformers, standards could affect utilities through the reduction in net generation resulting from the increased transformer efficiency of their electricity customers who purchase their own transformers. To perform the utility impacts analysis, the Department will use the BT (Building Technologies) version of the Energy Information Administration (EIA)'s National Energy Modeling System (NEMS). NEMS 1 is a large, general equilibrium energy-economy model of the U.S. that EIA has developed ove r several years, primarily for the purpose of preparing the Annual Energy Outlook ( AEO ). 2

NEMS produces a widely recognized baselin e forecast for the U.S. through 2020 and is available in the public domain. Typical NEMS output includes forecasts of electricity sales and prices. The Department will conduct the utility analysis by comparing NEMS-BT output for

various distribution transformer st andard levels with the latest AEO forecasts. The comparison

between NEMS-BT and the AEO forecasts will incorporate time -differentiated load impacts of transformer standards. The time-differentiated load impact estimate will use load shape information from the LCC analysis, and national energy use impact forecasts from the NES analysis. Other assumptions used in the AEO also will serve as the basic assumptions applied to the analysis of the impacts of energy conservation standards on utilities.

2.14 EMPLOYMENT IMPACT ANALYSIS

The Department will conduct the employment impact analysis after the ANOPR and report the results in the NOPR. The Process Ru le directs DOE to consider employment impacts in selecting a proposed standard. The Depar tment will estimate the impacts of standards on2-17 employment for transformer manufact urers, relevant service industr ies, energy suppliers, and the economy in general. The Depar tment separates empl oyment impacts into direct and indirect impacts. Direct employment impacts would result if standards led to a change in the number of employees at transformer manufact uring plants and related supply and service firms. The MIA discusses direct impacts. Indi rect impacts are impacts on the nati onal economy other than in the manufacturing sector DOE is regu lating (including supply and serv ice firms). Indirect impacts may result from both expenditures shifting am ong goods (substitution effect), and income changing, which will lead to a change in overall expenditure levels (income effect).

An important indirect employment effect may arise from shifting investment from the energy sector into more (or less) labor-intensi ve industries. The Department defines indirect employment impacts from standards as net jobs e liminated or created in the general economy as a consequence of increased spending to purchase di stribution transformers and reduced spending to pay utility costs. The Department expects new equipment standards to increase a transformer’s purchase price, which includes reta il price, sales tax, and insta llation. The Department expects the same standards to decrease energy consumption, and therefore reduce expenditures for energy. Over time, the increased purchase price may be paid back through energy savings. Consumers may spend the savings in energy ex penditures on other items. Using an input/output model of the U.S. economy, this analysis seeks to estimate the effects on different sectors, and the net impact on jobs. The Department will estimate national impacts for major sectors of the U.S. economy. The Department will use public and commercially available data sources and software to estimate employment impacts. The Department will analyze at least three scenarios to bound the range of uncertainty in future ener gy prices. All methods and documentation will be

available for review when DOE conducts the employment impact anal ysis for the NOPR.

2.15 ENVIRONMENTAL ASSESSMENT

The Department will conduct the environmen tal assessment after the ANOPR and report the results in the NOPR. The Environmental Assessment is required pursuant to the National Environmental Policy Act of 1969 (NEPA)(42 U.S.C. 4321 et seq.), regulations of the Council on Environmental Quality (49 CF R parts 1500-1508), the Department regulations for compliance with NEPA (10 CFR part 1021), and the Secretar ial Policy on the Nationa l Environmental Policy Act (June 1994).

The main environmental concer n addressed is emissions fro m fossil fuel-fired electricity generation. Power plant emissions include oxides of nitrogen (NO

x ) and sulfur (SO 2 ), as well as carbon dioxide (CO 2 ). The first two are major causes of acid precipitation, which can affect humans by reducing the productivity of farms, forests, and fisheries, decreasing recreational opportunities and degrading susceptible buildings and monuments. Nitrogen oxides are also precursor gases to urban smog and are particularly detrimental to air quality during hot, still weather. Carbon dioxide emissions are believed to contribute to raising the global temperature via the “greenhouse effect.”2-18 The major environmental effects of transformer energy conserva tion standards would

result from reduced electrical ener gy consumption, and would take the form of reduced emissions from the operation of power plants. Analyses fo r previous standards have reported reductions in energy-related emissions of SO 2, NO

x , and CO 2 . The Department will estimate the emission impacts at the national level.

2.16 REGULATORY IMPACT ANALYSIS

The Department will c onduct the regulatory impact anal ysis after the ANOPR, and will report the results in the NOPR. The Department will prepare a draft regulatory analysis pursuant to E.O. 12866, Regulatory Planning and Review , which will be subject to review under the Executive Order by the Office of Informati on and Regulatory Affairs (OIRA) 58 FR 51735 (October 4, 1993). The Department identified eight major alterna tives as representing feasible policy options to achieve consum er product energy efficiency. The Department will evaluate

each alternative in terms of its ability to achieve significant ener gy savings at a reasonable cost, and will compare these results to the effectiveness of the rule.

Under the Process Rule , the Department is committed to continually explore nonregulatory alternatives to standards. The list below indicates those alternatives the Department intends to examine for this rulemaking. The Department will seek comments on this approach. Through manufacturer interviews and literature searches, the Department will compile

information on burdens on manufacturers from ex isting and impending regulations affecting

distribution transformers. The Department also seeks input fro m stakeholders regarding other regulations it should consider. The Department intends to exa mine the following non-regulatory

alternatives to standards:

• No regulatory action

• Consumer tax credits

• Manufacturer tax credits

• Performance standards

• Rebates • Voluntary energy-efficiency targets • Early replacement • Government bulk procurement2-19 REFERENCES

1. U.S. Department of Energy-E nergy Information Administration, National Energy Modeling System: An Overview 2003 , 2003. Report No. DOE/EIA-0581(2003).

2. U.S. Department of Energy - Energy Information Administration, Annual Energy Outlook 2003: With Projections Through 2025, January, 2003. Washington, DC. Report No. DOE/EIA-0383(2003). <http://www.eia.doe.gov/oiaf/aeo>