CHAPTER 1 2. PRELIMINARY M ANUFACTURER I MPACT ANALYSIS

TA BLE OF CONTENTS

**12 .1**  **INTRODUCTION**

**..................................................................................................... 12­1** 

**12 .2**  **METHODOLOGY**

**.................................................................................................... 12­1** 

**12 .2.1**  **Phase 1: Industry Profile................................................................................ 12­2**

**12 .2.2**  **Phase 2:**  **Industry Cash­Flow**  **A nalysis**  **and Interview**  **G uide** 

**........................ 1**  **2­2**

**12 .2.2.1**  **Industry Cash­Flow**  **Analysis........................................................ 1**  **2­2**

**12 .2.2.2**  **Interview G**  **uide**

**............................................................................ 1**  **2­2**

**12 .2.3**  **Phase 3:**  **Sub­Group A**  **nalysis**

**........................................................................ 12­3** 

**12 .2.3.1**  **Manufacturer Interviews............................................................... 12­3** 

**12 .2.3.2**  **Revised Industry**  **Cash­Flow A**  **nalysis.......................................... 12­3** 

**12 .2.3.3**  **Manufacturer Sub­Group**  **A nalysis............................................... 12­3** 

**12 .2.3.4**  **Competitive Impact**  **Assessment................................................... 1**  **2­4**

**12 .2.3.5**  **Manufacturing Capacity**  **Impact**

**................................................... 1**  **2­4**

**12 .2.3.6**  **Employment Impact......................................................................**  **1 2­4** 

**12 .2.3.7**  **Cumulative Regulatory**  **Burden**

**.................................................... 1**  **2­4**

**12 .3**  **PRELIMINARY M**  **ANUFACTURER IMPACT**  **ANALYSIS RESULTS............... 12­5** 

**12 .3.1**  **General Interview**  **S tructure........................................................................... 12­5** 

**12 .3.1.1**  **Key Issues** 

**..................................................................................... 12­5** 

**12 .3.1.2**  **Shipment Projections** 

**.................................................................... 12­6** 

**12 .3.1.3**  **Profitability**

**................................................................................... 12­6** 

**12 .3.1.4**  **Product Mix** 

**.................................................................................. 1**  **2­6**

**12 .3.1.5**  **Conversion Costs,**  **M anufacturing**  **Capacity, and**  **Employment**

**Le vels** 

**....................................................................................................... 1**  **2­6**

**12 .3.1.6**  **Market Shares**  **and Industry**  **Consolidation................................... 1**  **2­7**

**12 .3.1.7**  **Product Utility**  **and Innovation......................................................**  **1 2­8** 

**12 .3.1.8**  **Impact on**  **Small Manufacturers.................................................... 12­8** 

**12 .3.1.9**  **Cumulative Burden** 

**....................................................................... 12­8** 

**12 .3.1.10**  **State Energy Conservation Standards......................................... 12­9**

**12 .3.1.11**  **International Energy**  **Conservation Standards** 

**............................ 1**  **2­9**

**12 .3.2**  **Residential Heating Product Preliminary MIA Results................................. 12­9**

**12 .3.2.1**  **Key Issues** 

**..................................................................................... 12­9** 

**12 .3.2.2**  **Residential Water**  **Heaters........................................................... 1**  **2­10**

**12 .3.2.3**  **Direct Heating**  **Equipment**

**.......................................................... 12­11** 

**12 .3.2.4**  **Pool Heaters................................................................................ 12­12** 

**12 .3.2.5**  **Profitability, Product**  **Mix, and**  **Shipments**

**................................. 1**  **2­13**

**12 .3.2.6**  **Residential Water**  **Heaters........................................................... 1**  **2­13**

**12 .3.2.7**  **Direct Heating**  **Equipment**

**.......................................................... 12­14** 

**12 .3.2.8**  **Pool Heaters................................................................................ 12­15** 

**12 .3.2.9**  **Conversion Costs,**  **M anufacturing**  **Capacity, and**  **Employment**

**Le vels** 

**..................................................................................................... 1**  **2­16**

**12 .3.3**  **Impact on**  **U.S. Production**  **and Jobs............................................................ 12­17** 

**12 .3.3.1**  **Foreign Labor..............................................................................**  **1 2­17** 

**12­i 12.3.3.2**  **Industry Consolidation................................................................**  **1 2­17** 

**12 .3.4**  **Impact on**  **Product Utility**  **and Innovation** 

**................................................... 1**  **2­17**

**12 .3.5**  **Cumulative Burdens.....................................................................................**  **1 2­18** 

**12 .3.5.1**  **Air Quality**  **Management Districts**  **and Low**  **NO**

**x Requirements**  **12­19**

**12 .3.5.2**  **Standards for**  **Other Products**  **Made by**  **Residential Heating** 

**Pr oducts**  **Manufacturers**

**............................................................................... 1**  **2­19**

**12 .3.5.3**  **Uniform Building,**  **Plumbing, Health**  **and Safety**  **Codes............. 1**  **2­19**

**12 .3.6**  **Impact on**  **Small Manufacturers................................................................... 12­20** 

**12­ii**12.1 INTRODUCTION

**The purpose**  **of the**  **manufacturer impact**  **analysis (MIA)**  **is to**  **identify the**  **likely**

**im pacts**  **of amended**  **energy conservation**  **standards on**  **manufacturers. Th**  **e U.S.** 

**De partment**  **of Energy**  **(DOE) w**  **ill conduct**  **this analysis**  **with input**  **from manufacturers** 

**an d**  **other interested**  **parties and**  **will apply**  **this methodology**  **to its**  **evaluation of**  **amended**

**en ergy**  **conservation standards**  **for residential**  **water heaters,**  **d irect**  **heating equipment,**  **and**

**po ol**  **heaters. D**  **OE will**  **also consider**  **financial impacts**  **and a**  **w ide**  **range of**  **quantitative**

**an d**  **qualitative industry**  **impacts that**  **might occur**  **following the**  **amendment of**  **an energy** 

**co nservation**  **standard. For**  **example, a**  **p articular**  **energy conservation**  **standard level,**  **if**

**ad opted**  **by DOE,**  **c ould**  **require changes**  **to residential**  **heating products**  **manufacturing**

**pr actices.**  **DOE will**  **identify and**  **come to**  **understand these**  **impacts through**  **interviews**

**wi th**  **manufacturers and**  **other interested**  **parties during**  **the Notice**  **of Proposed** 

**Ru lemaking**  **(NOPR) stage**  **of its**  **analysis.**

**Re cently,**  **DOE announced**  **changes to**  **the MIA**  **format through**  **a r**  **eport issued**  **to**

**Co ngress**  **on January**  **31, 2006**  **(as required**  **by section**  **141 of**  **the Energy**  **Policy Act**  **of**

**20 05**  **(EPACT 2005)),**  **entitled “Energy**  **Conservation Standards**  **Activities.” a**  **Previously,**

**DO E**  **did not**  **report any**  **MIA results**  **until the**  **Notice of**  **Proposed Rulemaking**  **(NOPR)**

**ph ase;**  **however, under**  **this new**  **f ormat,**  **DOE has**  **collected, evaluated,**  **and reported** 

**pr eliminary**  **information and**  **data during**  **the preliminary**  **phase (the**  **phase preceding**  **the**

**NOP R)**  **of this**  **rulemaking. Such**  **preliminary information**  **includes the**  **anticipated**

**co nversion**  **capital expenditures**  **by efficiency**  **level a**  **nd the**  **corresponding anticipated** 

**im pacts**  **on jobs.**  **D OE**  **solicited this**  **information during**  **the engineering**  **analysis**

**ma nufacturer**  **interviews and**  **reported the**  **results below.** 

12 .2 METHODOLOGY

**DO E**  **conducts the**  **MIA in**  **three phases**  **and further**  **tailors the**  **analytical**

**fr amework**  **based on**  **comments from**  **interested parties.**  **In Phase**  **1, DOE**  **creates an** 

**in dustry**  **profile to**  **characterize the**  **industry and**  **conducts a**  **p reliminary**  **MIA to**  **identify**

**im portant**  **issues that**  **require consideration.**  **The preliminary**  **technical support**  **document**

**(p reliminary**  **TSD) presents**  **the results**  **of the**  **Phase 1**  **a nalysis.**  **In Phase**  **2, DOE**  **p repares** 

**an industry**  **cash­flow m**  **odel and**  **an interview**  **q uestionnaire**  **to guide**  **subsequent**

**di scussions.**  **In Phase**  **3, DOE**  **interviews manufacturers,**  **a nd**  **assesses the**  **impacts of** 

**am ended**  **energy conservation**  **standards both**  **quantitatively and**  **qualitatively. Using**  **the**

**go vernment**  **regulatory impact**  **model (GRIM),**  **DOE assesses**  **industry and**  **sub­group**

**c ash**  **flow a**  **nd NPV.**  **Then, DOE**  **assesses impacts**  **on competition,**  **manufacturing**

**ca pacity,**  **employment, and**  **regulatory burden**  **based on**  **manufacturer interview**  **f eedback** 

**an d**  **discussions. Th**  **e NOPR**  **TSD presents**  **results of**  **the Phase**  **2 a**  **nd 3**  **a nalyses.** 

**a This**  **report is**  **available on**  **the DOE**  **website a**  **t**

**ww w.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html.** 

**12­1**12.2.1 Phase 1: Industry Profile

**In Phase**  **1 o**  **f the**  **manufacturer impact**  **analysis, D**  **OE collects**  **pertinent qualitative** 

**an d**  **quantitative financial**  **and market**  **information. This**  **includes residential**  **water**

**he ating,**  **direct heating,**  **and pool**  **heating manufacturer**  **market share,**  **corporate operating** 

**ra tios,**  **w ages,**  **employment, and**  **production cost**  **ratios. S**  **ources of**  **information include** 

**re ports**  **published by**  **industry groups,**  **t rade**  **journals, t**  **he U.S.**  **Census Bureau,**  **and copies** 

**of Securities**  **Exchange Commission**  **(SEC) 10­K**  **filings. D**  **OE also**  **relies on**  **information**

**fr om**  **its market**  **and technology**  **assessment, engineering**  **analysis, l**  **ife­cycle cost**  **analysis,**

**an d**  **analysis of**  **markups to**  **determine the**  **product prices**  **to characterize**  **the three** 

**in dustries**  **of residential**  **heating products.** 

12 .2.2 Phase 2: Industry Cash­Flow Analysis and Interview Guide

**In Phase**  **2, DOE**  **will perform**  **a p**  **reliminary industry**  **cash­flow analysis**  **and**

**pr epare**  **written guidelines**  **for interviewing**  **manufacturers.**

12 .2.2.1 Industry Cash­Flow Analysis

**DO E**  **uses the**  **GRIM to**  **analyze the**  **financial impacts**  **of amended**  **energy**

**co nservation**  **standards on**  **the residential**  **heating products**  **industries. S**  **tandards will** 

**li kely**  **require additional**  **investment, raise**  **production costs,**  **a nd**  **affect revenue**  **through**

**hi gher**  **prices and,**  **p ossibly,**  **lower sales.**  **Th e**  **GRIM uses**  **several factors**  **to determine**  **a**

**s eries**  **of annual**  **cash flows**  **for the**  **year standards**  **become effective**  **and for**  **several years** 

**af**

**ter implementation.**  **These factors**  **include annual**  **expected revenues,**  **c osts**  **of sales,** 

**se lling**  **and general**  **administration costs,**  **t axes,**  **a nd**  **capital expenditures**  **related to** 

**de preciation,**  **new s**  **tandards, a**  **nd maintenance.**  **Inputs t**  **o the**  **GRIM include** 

**ma nufacturing**  **costs, s**  **hipments forecasts,**  **a nd**  **price forecasts**  **developed in**  **other**

**an alyses.**  **A nother**  **input, financial**  **information, will**  **b e**  **developed based**  **on publicly** 

**av ailable**  **data and**  **confidentially submitted**  **manufacturer information.**  **DOE compares**  **the**

**re sults**  **of the**  **GRIM against**  **baseline projections**  **where no**  **standards are**  **in place.**  **The**

**fi nancial**  **impact of**  **amended energy**  **conservation standards**  **is the**  **difference between**  **the**

**tw o**  **sets of**  **discounted annual**  **cash flows.** 

12 .2.2.2 Interview Guide

**DO E**  **will conduct**  **interviews with**  **manufacturers to**  **gather information**  **on the** 

**ef**

**fects of**  **standards on**  **revenues and**  **finances, d**  **irect employment,**  **capital assets,**  **a nd** 

**in dustry**  **competitiveness. Before**  **the interviews,**  **D OE**  **will distribute**  **an interview**  **guide**

**th at**  **will provide**  **a s**  **tarting point**  **to identify**  **relevant issues**  **and help**  **identify the**  **impacts**

**of standards**  **on individual**  **manufacturers or**  **sub­groups of**  **manufacturers. D**  **OE**

**an ticipates**  **that the**  **interview g**  **uide will**  **cover current**  **organizational characteristics,** 

**in dustry**  **infrastructure, manufacturer**  **cash­flow a**  **nalysis, a**  **c ompetitive**  **impacts**

**as sessment,**  **an employment**  **impacts assessment,**  **and a**  **m anufacturing**  **capacity impacts** 

**as sessment.** 

**12­2**12.2.3 Phase 3: Sub­Group Analysis

**Ph ase**  **3 a**  **ctivities will**  **take place**  **after the**  **publication of**  **the NOPM**  **documents**

**an d**  **will include**  **manufacturer interviews,**  **revision of**  **the industry**  **cash­flow a**  **nalysis,**

**ma nufacturer**  **sub­group c**  **ash­flow analysis,**  **c ompetitive**  **impact assessment,** 

**ma nufacturing**  **capacity impact,**  **employment impact,**  **and cumulative**  **regulatory burden.** 

12 .2.3.1 Manufacturer Interviews

**The information**  **gathered in**  **Phase 1**  **a nd**  **the cash­flow**  **a nalysis**  **performed in** 

**Ph ase**  **2 w**  **ill be**  **supplemented with**  **information gathered**  **during interviews**  **with**

**ma nufacturers**  **during Phase**  **3. The**  **interview process**  **h as**  **a k**  **ey role**  **in the**  **manufacturer**

**im pact**  **analyses, s**  **ince it**  **provides an**  **opportunity for**  **interested parties**  **to express**  **their**

**vi ews**  **privately on**  **important issues,**  **a llowing**  **confidential or**  **sensitive information**  **to be** 

**co nsidered**  **in the**  **rulemaking decision.** 

**DO E**  **will conduct**  **detailed interviews**  **with as**  **many manufacturers**  **as necessary**  **to**

**ga in**  **insight into**  **the range**  **of potential**  **impacts of**  **standards. D**  **uring the**  **interviews, D**  **OE**

**wi ll**  **solicit information**  **on the**  **possible impacts**  **of standards**  **on sales,**  **d irect**  **employment,**

**ca pital**  **assets, a**  **nd industry**  **competitiveness. B**  **oth qualitative**  **and quantitative**  **information**

**ar e**  **valuable. Interviews**  **will be**  **scheduled well**  **in advance**  **in order**  **to provide**  **every**

**opp ortunity**  **for key**  **individuals to**  **be available**  **for comment.**  **Although a**  **w ritten**  **response**

**to the**  **questionnaire will**  **be acceptable,**  **DOE p**  **refers an**  **interactive interview**  **process**

**be cause**  **it helps**  **clarify responses**  **and provides**  **the opportunity**  **to identify**  **additional**

**is sues.** 

**Al l**  **information transmitted**  **will be**  **considered, as**  **appropriate, in**  **DOE’s decision** 

**m aking**  **process. Interview**  **participants will**  **be asked**  **to identify**  **all confidential** 

**in formation**  **provided in**  **writing or**  **orally; no**  **confidential information**  **will be**  **made**

**av ailable**  **in the**  **public record.**  **Participants will**  **also b**  **e asked**  **to identify**  **all information** 

**th ey**  **wish included**  **in the**  **public record**  **but do**  **not want**  **to have**  **associated with**  **their**

**in terview.**  **This information**  **will be**  **incorporated into**  **the public**  **record but**  **reported**

**wi thout**  **attribution.**

12 .2.3.2 Revised Industry Cash­Flow Analysis

**In Phase**  **2 o**  **f the**  **MIA, DOE**  **will provide**  **manufacturers with**  **a p**  **reliminary**

**GR IM**  **for review**  **a nd**  **evaluation. During**  **the interviews,**  **D OE**  **will seek**  **comment and** 

**su ggestions**  **regarding the**  **values selected**  **for the**  **parameters. U**  **pon completion**  **of the** 

**in terviews,**  **D OE**  **will revise**  **its industry**  **cash­flow model**  **based on**  **manufacturer**

**fe edback.** 

12 .2.3.3 Manufacturer Sub­Group Analysis

**Us ing**  **average cost**  **assumptions to**  **develop a**  **n industry**  **cash­flow estimate**  **is not** 

**ad equate**  **for assessing**  **differential impacts**  **among sub­groups**  **of manufacturers.**  **S maller** 

**ma nufacturers,**  **n iche**  **players, o**  **r manufacturers**  **exhibiting a**  **c ost**  **structure that**  **differs**

**la rgely**  **from the**  **industry average**  **could be**  **more negatively**  **affected. Ideally,**  **DOE would** 

**12­3 consider**  **the impact**  **on every**  **firm individually;**  **however, it**  **typically uses**  **the results**  **of**

**th e**  **industry characterization**  **to group**  **m anufacturers**  **exhibiting similar**  **characteristics.**

**Du ring**  **the interview**  **process, D**  **OE will**  **discuss the**  **potential sub­groups**  **and sub­group** 

**m embers**  **that have**  **been identified**  **for the**  **analysis. DOE**  **will look**  **to the**  **manufacturers**

**an d**  **other stakeholders**  **to suggest**  **what sub­groups**  **or c**  **haracteristics are**  **most appropriate** 

**fo r**  **the analysis.** 

12 .2.3.4 Competitive Impact Assessment

**Se ction**  **342 (6)(B)(i)(V)**  **of the**  **Energy Policy**  **Act of**  **1992 (EPCA)**  **directs DOE** 

**to consider**  **any lessening**  **of competition**  **likely to**  **result from**  **imposition of**  **standards. It** 

**fu rther**  **directs the**  **U.S. Attorney**  **General to**  **determine the**  **impacts, i**  **f any,**  **of any**  **decrease**

**in competition.**  **DOE will**  **make a**  **d etermined**  **effort to**  **gather and**  **report firm­specific** 

**fi nancial**  **information and**  **impacts. Th**  **e competitive**  **analysis will**  **focus on**  **assessing the** 

**im pacts**  **on smaller,**  **yet significant,**  **manufacturers. The**  **assessment will**  **be based**  **on**

**ma nufacturing**  **cost data**  **and information**  **collected from**  **interviews with**  **manufacturers.**

**The manufacturer**  **interviews will**  **focus on**  **gathering information**  **that would**  **help in** 

**as sessing**  **asymmetrical cost**  **increases to**  **some manufacturers,**  **t he**  **potential increase**  **in**

**bu siness**  **risks from**  **an increased**  **proportion of**  **fixed costs,**  **a nd**  **potential barriers**  **to**

**ma rket**  **entry (**  e.g.

**, p**  **roprietary technologies).** 

12 .2.3.5 Manufacturing Capacity Impact

**On e**  **of the**  **significant outcomes**  **of standards**  **could be**  **the obsolescence**  **of**

**ex isting**  **manufacturing assets,**  **i ncluding**  **tooling and**  **investment. The**  **manufacturer**

**in terview**  **guide will**  **have a**  **s eries**  **of questions**  **to help**  **identify impacts**  **on manufacturing** 

**ca pacity,**  **specifically capacity**  **utilization and**  **plant location**  **decisions in**  **North America** 

**wi th**  **and without**  **a s**  **tandard; the**  **ability of**  **manufacturers to**  **upgrade or**  **remodel existing** 

**fa cilities**  **to accommodate**  **the new**  **r equirements;**  **the nature**  **and value**  **of stranded**  **assets,**

**if any;**  **and estimates**  **for any**  **one­time restructuring**  **and other**  **charges, where**  **applicable.**

12 .2.3.6 Employment Impact

**The impact**  **of amended**  **energy conservation**  **standards on**  **employment is**  **an**

**im portant**  **consideration in**  **the rulemaking**  **process. To**  **a ssess**  **how d**  **omestic employment** 

**pa tterns**  **might be**  **affected, the**  **interview w**  **ill explore**  **current employment**  **trends in**  **the**

**he ating**  **products industry.**  **The interview**  **w ill**  **also solicit**  **manufacturer views**  **on changes** 

**in employment**  **patterns that**  **may result**  **from increased**  **standard levels.**  **Th e**  **employment**

**im pacts**  **section of**  **the interview**  **guide will**  **focus on**  **current employment**  **levels associated** 

**wi th**  **manufacturers at**  **each of**  **their production**  **facilities, e**  **xpected future**  **employment**

**le vels**  **with and**  **without a**  **s tandard,**  **and differences**  **i n**  **workforce skills**  **and issues**  **related**

**to the**  **retraining of**  **employees.**

12 .2.3.7 Cumulative Regulatory Burden

**DO E**  **recognizes and**  **seeks to**  **mitigate the**  **overlapping effects**  **on manufacturers**  **of**

**am ended**  **energy conservation**  **standards and**  **other regulatory**  **actions affecting**  **the same** 

**pr oducts.**  **D OE**  **will analyze**  **and consider**  **the impact**  **o n**  **manufacturers of**  **multiple,**

**12­4 product­specific**  **regulatory actions.**  **B ased**  **on its**  **own research**  **and discussions**  **with**

**ma nufacturers,**  **D OE**  **identified several**  **regulations relevant**  **to residential**  **water heaters,** 

**di rect**  **heating equipment,**  **and pool**  **heaters, i**  **ncluding low**  **n itrogen**  **oxides (NOx)**  **and**

**ig nition**  **source requirements,**  **a mended**  **energy conservation**  **standards for**  **other products** 

**ma de**  **by heating**  **products manufacturers,**  **S tate**  **energy conservation**  **standards, a**  **nd**

**in ternational**  **energy conservation**  **standards. DOE**  **will study**  **the potential**  **impacts of** 

**th ese**  **cumulative burdens**  **in greater**  **detail during**  **the MIA**  **conducted during**  **the NOPR** 

**ph ase.** 

12 .3 PRELIMINARY M ANUFACTURER I MPACT ANALYSIS RESULTS

**Du ring**  **the preliminary**  **rulemaking phase,**  **DOE conducted**  **a p**  **reliminary**

**ev aluation**  **of the**  **impact of**  **potential amended**  **energy conservation**  **standards on** 

**ma nufacturer**  **financial performance,**  **manufacturing capacity**  **and employment**  **levels, a**  **nd**

**pr oduct**  **utility and**  **innovation. A**  **p rimary**  **focus was**  **t o**  **identify the**  **cumulative burden** 

**th at**  **industries face**  **from the**  **overlapping effect**  **of new**  **o r**  **recent DOE**  **energy**

**co nservation**  **standards and/or**  **other regulatory**  **action affecting**  **the same**  **products or** 

**in dustries.** 

**The primary**  **sources of**  **information for**  **this analysis**  **w ere**  **on­site or**  **telephone**

**in terviews**  **with manufacturers**  **of residential**  **heating products**  **conducted during**  **the**

**wi nter**  **of 2007.**  **To m**  **aintain confidentiality,**  **DOE did**  **n ot**  **identify the**  **individual**

**ma nufacturers**  **that disclosed**  **information. The**  **evaluation only**  **reports aggregated** 

**in formation**  **and does**  **not disclose**  **sensitive or**  **company­specific information.** 

**Fo r**  **the preliminary**  **MIA, DOE**  **conducted interviews**  **with manufacturers** 

**pr imarily**  **to identify**  **key issues**  **and gain**  **insights into**  **the qualitative**  **impacts of**  **amended**

**en ergy**  **conservation standards.**  **F or**  **each product,**  **DOE used**  **an interview**  **guide to**  **gather**

**re sponses**  **from multiple**  **manufacturers on**  **many issues.**  **A ll**  **of the**  **interview g**  **uides**

**co vered**  **the same**  **general topic**  **areas, b**  **ut each**  **interview guide**  **was adapted**  **to the**  **needs**

**of each**  **product category.**  **Appendix A**  **contains a**  **c opy**  **of the**  **interview guides**  **for**

**re sidential**  **water heaters,**  **direct heating**  **equipment, and**  **pool heaters.** 

12 .3.1 General Interview Structure

**The manufacturer**  **interviews included**  **questions relating**  **to the**  **following topics.** 

**DO E**  **received responses**  **to most,**  **if not**  **all, of**  **these t**  **opics from**  **various manufacturers.** 

12 .3.1.1 Key Issues

**Pe rhaps**  **the most**  **important aspect**  **of the**  **preliminary MIA**  **is the**  **opportunity to** 

**id entify**  **key manufacturer**  **issues early**  **in the**  **development of**  **amended energy** 

**co nservation**  **standards. During**  **the interviews,**  **D OE**  **e ngages**  **manufacturers in**  **a**

**d iscussion**  **about what**  **they perceive**  **to be**  **the key**  **issues in**  **the rulemaking.**  **Key issues,** 

**on ce**  **identified, are**  **added to**  **the list**  **of topics**  **explored during**  **the interviews.**  **F or** 

**ex ample,**  **key issues**  **in previous**  **rulemakings have**  **included concerns**  **over patent** 

**12­5 protections**  **that might**  **prevent some**  **companies from**  **implementing higher**  **efficiency**

**de signs.** 

12 .3.1.2 Shipment Projections

**Sh ipment**  **projections can**  **be a**  **s ignificant**  **factor in**  **determining the**  **impacts of** 

**am ended**  **energy conservation**  **standards. Th**  **e interviews**  **provide an**  **opportunity for** 

**ma nufacturers**  **to share**  **information that**  **can help**  **DOE q**  **uantify the**  **magnitude of**  **any**

**ch anges**  **in shipments**  **resulting from**  **amended energy**  **conservation standards.**  **D OE**  **is**

**in terested**  **in information**  **relating to**  **the current**  **number of**  **product shipments,**  **b roken** 

**do wn**  **by product**  **class (such**  **as capacity**  **rating) and**  **efficiency level.**  **DOE also**  **seeks**

**inp ut**  **on the**  **forecast of**  **future shipments**  **absent amended**  **energy conservation**  **standards.**

**Ma nufacturers**  **are asked**  **how t**  **hey would**  **expect shipments**  **to change**  **for the**  **industry as**  **a**

**w hole**  **as a**  **f unction**  **of standard**  **levels and**  **why they**  **expect these**  **changes might**  **occur.**

**Mo re**  **specific questions**  **aim to**  **derive a**  **p rice**  **elasticity estimate**  **for use**  **in the**  **national**

**im pact**  **analysis (NIA)**  **spreadsheet.**

**An other**  **aspect of**  **the shipments**  **discussion is**  **understanding the**  **impacts of**  **a**

**r eduction**  **in shipments**  **on heating**  **products companies.** 

12 .3.1.3 Profitability

**DO E**  **requests manufacturers’**  **views on**  **what they**  **perceive to**  **be the**  **possible**

**im pact**  **of potential**  **amended energy**  **conservation standards**  **on their**  **future profitability.** 

**Am ended**  **energy conservation**  **standards could**  **affect financial**  **performance in**  **several**

**di fferent**  **ways. S**  **everal of**  **these impacts**  **are captured**  **in previous**  **sections. F**  **or instance,** 

**th e**  **capital and**  **product conversion**  **outlays needed**  **to up**  **grade or**  **redesign products**  **and**

**pr oduct**  **platforms before**  **they have**  **reached the**  **end of**  **their useful**  **life can**  **engender**

**si gnificant**  **conversion costs**  **that otherwise**  **would not**  **be expended,**  **resulting in**  **reduced**

**ca sh**  **flow a**  **nd stranded**  **investments. H**  **igher energy**  **efficiency standards**  **also can**  **result in** 

**hi gher**  **per­unit costs**  **that may**  **deter some**  **consumers from**  **purchasing the**  **products, o**  **r**

**ca use**  **some consumers**  **to choose**  **less efficient**  **products, t**  **hereby reducing**  **shipments.**

12 .3.1.4 Product Mix

**DO E**  **is interested**  **in understanding**  **if amended**  **energy conservation**  **standards**

**mi ght**  **change a**  **m anufacturer’s**  **product mix**  **and if**  **this change**  **affects profits.**  **F or** 

**ex ample,**  **higher energy**  **efficiency standards**  **might limit**  **a m**  **anufacturer’s ability**  **to**

**di fferentiate**  **products and**  **market premium**  **products that**  **command higher**  **profit margins.** 

**The interview**  **guide also**  **investigates how**  **amended energy**  **conservation**

**st andards**  **might affect**  **a m**  **anufacturer’s consumer**  **mix a**  **nd its**  **distribution channels,**  **a nd** 

**ho w**  **i n**  **turn this**  **might change**  **profitability.**

12 .3.1.5 Conversion Costs, M anufacturing Capacity, and Employment Levels

**Du ring**  **the interviews,**  **D OE**  **asks manufacturers**  **to quantify**  **and explain**  **both the** 

**ca pital**  **and product**  **conversion costs**  **necessary to**  **raise the**  **energy efficiency**  **of their** 

**12­6 product**  **lines to**  **the proposed**  **standard levels.**  **In some**  **instances, m**  **anufacturers may**  **be**

**ab le**  **to meet**  **proposed standard**  **levels by**  **modifying existing**  **products. In**  **other cases,**  **t he** 

**ne cessary**  **changes may**  **entail a**  **c omplete**  **product­line redesign.**  **In these**  **situations, a**  **n**

**in crease**  **in efficiency**  **standards will**  **cause manufacturers**  **to incur**  **one­time conversion** 

**ca pital**  **expenditures and**  **product­conversion expenses.**  **C onversion**  **capital expenditures** 

**ar e**  **one­time investments**  **in property,**  **p lant,**  **and equipment.**  **Product­conversion expenses** 

**in clude**  **one­time investments**  **in research,**  **p roduct**  **development, testing,**  **and marketing.** 

**On e**  **of the**  **significant outcomes**  **of amended**  **energy conservation**  **standards could** 

**be the**  **obsolescence of**  **existing manufacturing**  **assets, i**  **ncluding tooling**  **and other**  **capital**

**in vestment.**  **The interview**  **g uide**  **includes questions**  **to identify**  **impacts on**  **manufacturing**

**ca pacity.**  **DOE developed**  **these questions**  **to understand**  **the impact**  **of potential**  **amended**

**st andards**  **on:**

• **No rth**  **American manufacturing**  **capacity;**

• **c apacity**  **utilization and**  **plant location**  **decisions in**  **No rth**  **America both**  **with and** 

**wi thout**  **standards;**

• **t he**  **ability of**  **manufacturers to**  **upgrade or**  **remodel e**  **xisting facilities**  **to**

**ac commodate**  **a n**  **ew product**  **mix; and** 

• **t he**  **nature and**  **value of**  **stranded assets,**  **i f**  **any.**

**The impact**  **of amended**  **energy conservation**  **standards on**  **employment is**  **an**

**im portant**  **consideration in**  **the rulemaking**  **process. DOE**  **uses the**  **interviews to**  **explore**

**cu rrent**  **trends in**  **production employment**  **and solicit**  **m anufacturer**  **views on**  **changes in** 

**em ployment**  **patterns resulting**  **from amended**  **energy conservation**  **standards. Q**  **uestions**

**re garding**  **employment impacts**  **help to**  **understand**

• **c urrent**  **employment levels**  **associated with**  **manufacturing the**  **subject products**  **at**

**ea ch**  **production facility;** 

• **e xpected**  **future employment**  **levels both**  **with and**  **without amended**  **standards; and** 

• **d ifferences**  **in workforce**  **skills and**  **issues related**  **t o**  **retraining employees.** 

12 .3.1.6 Market Shares and Industry Consolidation

**Am ended**  **energy conservation**  **standards can**  **alter the**  **competitive dynamics**  **of the** 

**ma rketplace.**  **This can**  **include prompting**  **companies to**  **enter the**  **market, exit**  **the market,** 

**or merge**  **with other**  **companies. Th**  **e preliminary**  **MIA interview**  **q uestions**  **ask**

**ma nufacturers**  **to share**  **their perspectives**  **on industry**  **consolidation both**  **in the**  **absence of** 

**am ended**  **standards and**  **assuming amended**  **standards at**  **various efficiency**  **levels. Th**  **e**

**in terview**  **q uestions**  **focus on**  **gathering information**  **that helps**  **in assessing** 

**12­7**• **disproportionate cost**  **increases to**  **some manufacturers;** 

• **i ncreased**  **proportion of**  **fixed costs**  **potentially increasing**  **business risks;**  **and**

• **p otential**  **barriers to**  **market entry**  **(** e.g.

**, p**  **roprietary technologies).** 

**DO E**  **conducts an**  **assessment of**  **anti­competitive effects**  **of proposed**  **standards in** 

**or der**  **to protect**  **the interests**  **of the**  **consumer. During**  **the interviews,**  **D OE**  **solicits**

**in formation**  **to understand**  **if amended**  **standards could**  **r esult**  **in disproportionate** 

**ec onomic**  **or performance**  **penalties for**  **particular consumer/user**  **sub­groups.**

**DO E**  **also asks**  **manufacturers if**  **amended energy**  **conservation standards**  **could**

**re sult**  **in products**  **that will**  **be more**  **or less**  **desirable to**  **consumers due**  **to changes**  **in**

**pr oduct**  **functionality, utility,**  **or other**  **features.**

12 .3.1.7 Product Utility and Innovation

**Am ended**  **energy conservation**  **standards can**  **force manufacturers**  **to compromise** 

**pr oduct**  **utility to**  **consumers by**  **eliminating energy­consuming**  **features. D**  **uring the** 

**in terviews,**  **D OE**  **requests information**  **on the**  **effects o**  **f proposed**  **standards on**  **product**

**ut ility.** 

**Am ended**  **energy conservation**  **standards may**  **require investment**  **in conversion** 

**co sts,**  **i ncluding**  **research and**  **development (R&D).**  **This required**  **spending may**  **force a** 

**m anufacturer**  **to reduce**  **funding usually**  **allocated to**  **product innovation.**  **Amended energy** 

**co nservation**  **standards may**  **also force**  **manufacturers to**  **eliminate innovative**  **energy**

**c onsuming**  **features from**  **their products.**  **D uring**  **the interviews,**  **D OE**  **requests**

**in formation**  **on the**  **effect of**  **proposed standards**  **on innovation.** 

12 .3.1.8 Impact on Small Manufacturers

**DO E**  **will consider**  **the possibility**  **of small**  **businesses being**  **affected by**  **the**

**pr omulgation**  **of amended**  **energy conservation**  **standards for**  **residential water**  **heaters,**

**di rect**  **heating equipment,**  **and pool**  **heaters. S**  **hould any**  **small business**  **manufacturers be** 

**id entified,**  **DOE will**  **study the**  **potential impacts**  **on these**  **small businesses**  **in greater** 

**de tail**  **during the**  **MIA.**

12 .3.1.9 Cumulative Burden

**Wh ile**  **any one**  **regulation may**  **not impose**  **a s**  **ignificant burden**  **on manufacturers,** 

**th e**  **combined effects**  **of several**  **impending regulations**  **may have**  **serious consequences** 

**fo r**  **some manufacturers,**  **groups of**  **manufacturers, or**  **entire industries.**  **A ssessing**  **the**

**im pact**  **of a**  **s ingle**  **regulation may**  **overlook this**  **cumulative regulatory**  **burden.**

**Exp enditures**  **associated with**  **meeting other**  **regulations are**  **an important**  **aspect of** 

**DO E’s**  **consideration of**  **the “cumulative**  **regulatory burden”**  **the industry**  **faces. Th**  **e**

**in terviews**  **help DOE**  **identify the**  **level and**  **timing of**  **investments manufacturers**  **are**

**ex pecting**  **to incur**  **as a**  **r esult**  **of these**  **regulations. Manufacturers**  **are also**  **asked under** 

**12­8 what**  **circumstances they**  **might be**  **able to**  **coordinate any**  **expenditures related**  **to these** 

**re gulations**  **and efficiency**  **standards.**

**In addition**  **to the**  **amended energy**  **conservation for**  **residential water**  **heaters,**

**di rect**  **heating equipment,**  **and pool**  **heaters, s**  **everal other**  **Federal regulations**  **and pending** 

**re gulations**  **apply to**  **other products**  **these manufacturers**  **make. DOE**  **will investigate**  **these**

**cu mulative**  **regulatory burdens**  **in greater**  **detail during**  **the NOPR**  **phase of**  **the**

**ru lemaking.** 

12 .3.1.10 State Energy Conservation Standards

**DO E**  **identified and**  **described regulatory**  **programs at**  **the state**  **level in**  **the market** 

**an d**  **technology assessment**  **(chapter 3**  **o f**  **the preliminary**  **TSD) for**  **the products**  **covered**

**in this**  **rulemaking. Multiple**  **States have**  **requirements for**  **products covered**  **under this** 

**ru lemaking.**  **Accommodating multiple**  **State standards**  **in addition**  **to National**  **standards**

**ra ises**  **costs for**  **manufacturers.**

12 .3.1.11 International Energy Conservation Standards

**DO E**  **discussed regulatory**  **programs from**  **certain other**  **countries, s**  **uch as**  **Canada**

**an d**  **Mexico, in**  **the market**  **and technology**  **assessment, (chapter**  **3 o**  **f the**  **preliminary**

**TSD ).**  **A f**  **ew m**  **anufacturers sell**  **a s**  **mall portion**  **of their**  **total production**  **to countries** 

**ou tside**  **the United**  **States. In**  **these cases,**  **t he**  **products must**  **meet the**  **standards for**  **each**

**co untry.**  **Companies may**  **design some**  **units to**  **meet more**  **stringent standards**  **than those** 

**im posed**  **by the**  **United States**  **in order**  **to minimize**  **the number**  **of product**  **variations.**

12 .3.2 Residential Heating Product Preliminary MIA Results

**Du ring**  **the preliminary**  **MIA interview,**  **manufacturers identified**  **key issues** 

**su rrounding**  **DOE’s rulemaking**  **for heating**  **products and**  **provided feedback**  **regarding the** 

**po tential**  **impact of**  **amended energy**  **conservation standards.**  **D OE**  **summarized the** 

**fe edback**  **below**

12 .3.2.1 Key Issues

**On e**  **of the**  **main questions**  **in each**  **of the**  **preliminary interview**  **guide asks:**  **“What**

**ar e**  **the key**  **issues for**  **your company**  **regarding the**  **heating products**  **energy conservation** 

**st andard**  **rulemaking?” This**  **open question**  **initiated dialogue**  **with the**  **manufacturers,**

**en abling**  **them to**  **identify key**  **points that**  **DOE would**  **explore and**  **discuss during**  **the**

**in terview.**  **This section**  **describes the**  **key issues**  **manufacturers felt**  **were of**  **the highest** 

**im portance**  **in relation**  **to the**  **heating products**  **energy conservation**  **standards rulemaking** 

**an d**  **that would**  **have the**  **most significant**  **impact on**  **the industry.**  **Manufacturers indicated** 

**th at,**  **for the**  **most part,**  **the risks**  **associated with**  **these issues**  **increase with**  **more stringent** 

**en ergy**  **conservation standards.**  **Th e**  **issues are**  **overall concerns**  **that many**  **manufacturers**

**ex pressed**  **and in**  **some cases,**  **a re**  **dependent upon**  **the product**  **class.**

**12­9**12.3.2.2 Residential Water Heaters

**In general,**  **water heater**  **manufacturers cited**  **concerns regarding**  **the development** 

**of the**  **ENERGY S**  **TAR program,**  **p otential**  **increases in**  **installation costs,**  **i mpacts**  **on**

**pa ckaging**  **and shipment**  **costs, s**  **afety concerns**  **regarding near­condensing**  **instantaneous**

**wa ter**  **heaters, and**  **fuel and**  **equipment switching.** 

• EN ERGY STAR

­ **M any**  **manufacturers of**  **residential water**  **heaters pointed**  **out**

**du ring**  **interviews that**  **the ENERGY**  **S TAR**  **program for**  **residential water**  **heaters**

**wa s**  **currently under**  **developed by**  **DOE (criteria**  **was f**  **inalized on**  **April 1,**  **2008,**

**af**

**ter engineering**  **interviews). According**  **to manufacturers,**  **t he**  **key to**  **maintaining**

**ENERG Y**  **S TAR**  **levels is**  **setting minimum**  **energy conservation**  **standards for** 

**re sidential**  **water heaters**  **that are**  **similar and**  **low enough**  **to allow**  **c ost­effective** 

**pr emium­efficiency**  **products to**  **be developed.**  **To t**  **hat end,**  **all manufacturers**  **with**

**kn owledge**  **of the**  **ENERGY S**  **TAR development**  **program expressed**  **support for** 

**th e**  **ENERGY S**  **TAR and**  **minimum energy**  **conservation standards**  **programs to** 

**co llaborate**  **in setting**  **standards as**  **a m**  **eans of**  **reducing manufacturer**  **uncertainty**

**an d**  **development expenses.** 

**Co nventional**  **electric, storage**  **and gas­fired**  **storage water**  **heaters were**  **not**

**co nsidered**  **in the**  **draft proposal**  **because the**  **ENERGY STAR**  **program believes** 

**“e lectric**  **resistance water**  **heaters are**  **not appropriate**  **for inclusion**  **in ENERGY** 

**STA R”**  **because stakeholders**  **indicated that**  **the energy**  **savings are**  **too**

**1 insignificant. Oil­fired**  **products are**  **not included**  **in the**  **draft criteria**  **and**

**ma nufacturers**  **of oil­fired**  **products expressed**  **their desire**  **to be**  **included in**  **the**

**ENERG Y**  **S TAR**  **program.**

• I ncreases in Installation Costs **­ Water heater**  **manufacturers commented**  **on the** 

**im pacts**  **of installation**  **costs on**  **consumers if**  **standards are**  **amended at**  **higher**

**ef**

**ficiency levels.**  **M anufacturers**  **commented that**  **water heaters**  **with power**  **vents**

**re quire**  **electrical connections**  **and specific**  **vent configurations.**  **M anufacturers** 

**in dicated**  **that these**  **can double**  **the installation**  **costs of**  **baseline designs.** 

**Ad ditionally,**  **condensing systems**  **requiring condensate**  **removal or**  **heat pump** 

**wa ter**  **heaters requiring**  **ducting, which**  **can also**  **raise installation**  **costs.**

**Ma nufacturers**  **of storage**  **water heater**  **products cited**  **concerns regarding**  **loss of** 

**ma rket**  **share and**  **product switching**  **to instantaneous**  **s ystems**  **if installation**  **costs**

**be come**  **too high.** 

• I ncreases in Shipping C osts **­ Water heater**  **manufacturers also**  **commented on**  **the**

**si gnificance**  **of shipping**  **costs and**  **their sensitivity**  **to changes**  **in shipping**  **costs as** 

**th e**  **physical dimensions**  **of storage**  **water heaters**  **increase with**  **efficiency. For**  **gas**

**f ired**  **and electric**  **storage water**  **heaters, o**  **ne way**  **manufacturers typically**  **increase**

**th e**  **efficiency of**  **products is**  **increasing the**  **insulation thickness**  **surrounding the** 

**ta nk**  **to reduce**  **standby losses**  **from the**  **surface area**  **around the**  **tank.**

**Ma nufacturers**  **stated their**  **concerns regarding**  **increasing the**  **physical dimensions** 

**of the**  **storage tank**  **because they**  **are restricted**  **to a**  **f inite**  **amount of**  **space within**  **a**

**s hipping**  **trailer and**  **a f**  **inite amount**  **of space**  **for installing**  **these units**  **into existing** 

**12­10 closets.**  **A s**  **the overall**  **dimensions of**  **a s**  **torage water**  **heater increases,**  **t he**  **number**

**of products**  **that can**  **be loaded**  **into a**  **t railer**  **decreases. Th**  **is raises**  **the shipping** 

**co sts**  **per product.**  **Additionally, if**  **more trailers**  **are needed**  **to compensate**  **for this** 

**de creased**  **in products**  **per trailer,**  **the effects**  **of increasing**  **fuel prices**  **for the** 

**de livery**  **trucks can**  **also impact**  **the full**  **cost of**  **production. Manufacturers** 

**ex pressed**  **concern that**  **these increases**  **in shipping**  **costs would**  **not be**  **able to**  **be**

**fu lly**  **passed on**  **to the**  **consumer and**  **further reduce**  **their profit**  **margins.**

• S afety Concerns

**­ Water**  **heater manufacturers**  **commented that**  **instantaneous**

**wa ter**  **heaters near**  **0.85 EF**  **are operating**  **at near­condensing**  **levels. O**  **perating at** 

**th ese**  **levels may**  **result in**  **corrosive condensation**  **formation. Manufacturers** 

**ex pressed**  **concern regarding**  **the risk**  **associated with**  **operating instantaneous** 

**wa ter**  **heaters at**  **near condensing**  **levels for**  **all types**  **of installations**  **found in**  **the**

**ma rket.**  **Many manufacturers**  **stated they**  **would be**  **unwilling to**  **bear the**  **risks**

**as sociated**  **with this**  **level. In**  **addition, to**  **mitigate risk**  **if standards**  **require gas** 

**f ired**  **instantaneous water**  **heaters at**  **these energy**  **efficiency levels,**  **m anufacturers** 

**wo uld**  **incorporate a**  **c ondensing**  **design, which**  **would s**  **ignificantly increase**  **the**

**pr oduct**  **cost. The**  **safety margin**  **is needed**  **to account**  **for variations**  **due to** 

**ma nufacturing**  **tolerances, g**  **as quality,**  **differences in**  **venting configurations,** 

**al titude,**  **ambient conditions,**  **a nd**  **installer experience.**  **Increasing conservation** 

**st andards**  **reduces that**  **margin of**  **safety, and**  **a c**  **onservation standard**  **at 0.85**  **EF**

**d oes**  **not provide**  **an adequate**  **safety margin.** 

• F uel Switching

**­ Manufacturers**  **also commented**  **on potential**  **fuel switching**  **if**

**am ended**  **conservation standards**  **required heat**  **pump water**  **heaters. If**  **consumers**

**ar e**  **required to**  **install heat**  **pump water**  **heaters, i**  **n addition**  **to drain**  **lines for** 

**co ndensate,**  **and venting**  **and ducting**  **for the**  **cooled air,**  **manufacturers believe** 

**co nsumers**  **will most**  **likely switch**  **to gas­fired**  **water heaters**  **or fix**  **their existing** 

**wa ter**  **heaters upon**  **failure rather**  **than replace**  **them. H**  **igher first**  **costs for**  **these**

**pr oducts**  **and installation**  **costs may**  **make switching**  **to gas,**  **and possibly**  **installing**

**a g**  **as line,**  **an affordable**  **option for**  **some consumers.** 

1 2.3.2.3 Direct Heating Equipment

**Di rect**  **heating equipment**  **manufacturers cited**  **concerns regarding**  **the potential** 

**in creases**  **in installation**  **costs and**  **impacts on**  **utility and**  **the consumer**  **due to**  **derating.**

• I nstallation Costs **­ Direct heating**  **equipment manufacturers**  **cited concerns** 

**re garding**  **increases in**  **installation costs**  **similar to**  **w ater**  **heater manufacturers.** 

**Ma nufacturers**  **submitted feedback**  **regarding the**  **impacts of**  **conservation**

**st andards**  **requiring electrical**  **connections, p**  **ower vents,**  **a nd**  **condensate removal** 

**sy stems.**  **M anufacturers**  **of direct**  **heating equipment**  **cited concerns**  **regarding loss** 

**of market**  **share to**  **alternative heating**  **methods if**  **installation costs**  **become too** 

**hi gh.**  **In addition,**  **some baseline**  **direct heating**  **equipment currently**  **does not** 

**re quire**  **electrical connections.**  **A s**  **efficiency levels**  **increase for**  **direct heating** 

**eq uipment,**  **electrical connections**  **can become**  **a c**  **ostly adder**  **for consumers,**  **who**

**mi ght**  **switch to**  **another type**  **of heating**  **system.**

**12­11**• Derating

­ **Manufacturers of**  **direct heating**  **equipment indicated**  **that amended** 

**st andards**  **might impact**  **the utility**  **of their**  **products for**  **consumers. M**  **anufacturers**

**ty**

**pically derate**  **direct heating**  **equipment products,**  **so that**  **can increase**  **the**

**ef**

**ficiency of**  **their unit**  **without changing**  **the overall**  **physical dimensions.** 

**Tra ditionally,**  **manufacturers have**  **increased the**  **heat exchanger**  **dimensions to** 

**in crease**  **the efficiency,**  **which would**  **also increase**  **the overall**  **dimensions of**  **the**

**pr oducts.**  **Instead, manufacturers**  **of direct**  **heating equipment**  **would choose**  **to**

**re duce**  **the capacity**  **of the**  **existing models**  **to get**  **a h**  **igher efficiency**  **from the** 

**sa me**  **heat exchanger.**  **A s**  **trategy typically**  **called derating.**  **Manufacturers use** 

**sm aller**  **burner assemblies**  **while maintaining**  **the same**  **h eat**  **exchanger and**  **outer**

**ca sing**  **designs. D**  **erating increases**  **the ratio**  **of heat**  **exchanger surface**  **area to** 

**bu rner**  **input, thus**  **increasing the**  **energy efficiency**  **of the**  **heater (which**  **is similar** 

**to increasing**  **the heat**  **exchanger surface**  **area while**  **maintaining the**  **same burner** 

**si ze).**  **Manufacturers indicated**  **this method**  **would be**  **used to**  **meet amended** 

**en ergy**  **conservation standards**  **and they**  **believe it**  **is t**  **ypically the**  **most cost** 

**ef**

**fective method.**  **However, they**  **stated their**  **concerns on**  **the reduction**  **in**

**ca pacity.**  **Derating may**  **limit the**  **products’ ability**  **to provide**  **adequate heat**  **to**

**me et**  **consumers’ needs.**  **Manufacturers avoid**  **incorporating design**  **changes into** 

**th e**  **product that**  **would cause**  **changes in**  **the overall**  **p hysical**  **dimensions because** 

**mo st**  **consumers would**  **have to**  **make other**  **installation changes**  **to the**  **space the** 

**un it**  **is kept.**  **Again, manufacturers**  **cited concerns**  **regarding loss**  **of market**  **share to** 

**al ternative**  **heating methods**  **if installation**  **costs become**  **too high**  **as a**  **r esult**  **of**

**in creased**  **standards.**

12 .3.2.4 Pool Heaters

**Po ol**  **heater manufacturers**  **cited concerns**  **regarding the**  **potential increases**  **in**

**in stallation**  **costs, t**  **he safety**  **concerns regarding**  **near­condensing operation,**  **and decreases** 

**in overall**  **shipments as**  **a r**  **esult of**  **increased cost**  **t o**  **the consumer.** 

• I nstallation Costs

­ **Pool heater**  **manufacturers also**  **cited concerns**  **regarding**

**in creases**  **in installation**  **costs similar**  **to water**  **heater and**  **direct heating**  **equipment**

**ma nufacturers.**  **M anufacturers**  **submitted feedback**  **regarding the**  **impacts of** 

**am ended**  **energy conservation**  **standards requiring**  **electrical connections,**  **p ower** 

**ve nts,**  **a nd**  **condensate removal**  **systems. M**  **anufacturers cited**  **complex installations** 

**wo uld**  **require additional**  **training for**  **field technicians**  **at a**  **c ost**  **to the** 

**ma nufacturer**  **and the**  **consumer. Manufacturers**  **explained pool**  **maintenance**

**te chnicians**  **traditionally install**  **pool heaters**  **(** i.e.

**, p**  **ool maintenance**  **technicians**

**tr aditionally**  **install the**  **pool heater,**  **clean the**  **pool on**  **a r**  **egular basis,**  **a nd**  **trouble**

**sh oot**  **the pool**  **heater if**  **something is**  **wrong). There**  **is a**  **l ower**  **level of**  **field**

**tr aining**  **required because**  **the market**  **is not**  **as established**  **for pool**  **heaters as**  **it**

**ma y**  **be for**  **other appliances.**  **A s**  **the complexity**  **of the**  **pool heater**  **increases, the** 

**re quired**  **skills necessary**  **to be**  **able to**  **install these**  **systems increase.** 

**Ma nufacturers**  **would contemplate**  **training installers,**  **s o**  **their systems**  **work**

**pr operly**  **in the**  **field and**  **avoid potential**  **safety concerns.** 

**12­12**• Safety Concerns

**­ Manufacturers**  **commented that**  **pool heaters**  **operating near**  **85**

**an d**  **86 percent**  **thermal efficiency**  **are operating**  **at near­condensing**  **levels.**

**Op erating**  **at these**  **levels may**  **result in**  **corrosive condensation**  **formation.**

**Ma nufacturers**  **expressed concern**  **regarding the**  **risk and**  **additional costs**  **to**

**mi tigate**  **risk if**  **standards require**  **pool heaters**  **at t**  **hese energy**  **efficiency levels.** 

**Ma nufacturers**  **stated there**  **are variations**  **and constraints**  **that must**  **be addressed,** 

**wh ich**  **require a**  **m argin**  **of safety.**  **The safety**  **margin is**  **needed to**  **account for** 

**va riations**  **due to**  **manufacturing tolerances,**  **gas quality,**  **differences in**  **installation**

**co nfigurations,**  **a ltitude,**  **ambient conditions,**  **a nd**  **installer experience.**  **Increasing**

**co nservation**  **standards reduces**  **that margin**  **of safety,**  **and conservation**  **standards**

**at 85**  **to 86**  **percent thermal**  **efficiency for**  **pool heaters**  **does not**  **provide an** 

**ad equate**  **safety margin.**  **Instead, either**  **manufacturers would**  **contemplate**

**in corporating**  **condensing designs**  **at these**  **levels to**  **avoid safety**  **issues in**  **certain**

**in stallations**  **or they**  **would choose**  **not to**  **manufacturer products**  **at these**  **levels.**

• P roduct Price Increases Resulting i n Declining M arket

­ **Manufacturers of** 

**re sidential**  **pool heaters**  **also commented**  **that amended**  **energy conservation** 

**st andards**  **might result**  **in a**  **d ecrease**  **in overall**  **shipments. If**  **amended energy** 

**co nservation**  **standards require**  **power venting,**  **electrical connections,**  **c ondensate** 

**dr ain**  **lines, a**  **nd a**  **c ondensate**  **neutralization system,**  **consumers may**  **be**

**di scouraged**  **from purchasing**  **products entirely**  **due to**  **t he**  **increase in**  **total**

**in stalled**  **costs. U**  **nlike water**  **heaters, p**  **ool heaters**  **are not**  **considered a**  **c ommodity** 

**or a**  **n ecessity,**  **rather they**  **are luxury**  **products. A**  **c onsumer’s**  **decision to**  **purchase**

**a p**  **ool heater**  **often depends**  **on several**  **factors, i**  **ncluding total**  **installed cost.**  **For**

**ex ample,**  **current financial**  **status, d**  **esire of**  **use, and**  **weather can**  **influence a** 

**c onsumer’s**  **decision. Compounding**  **these factors**  **with increased**  **product and** 

**in stallation**  **cost and**  **complexity, a**  **c onsumer**  **may decide**  **to avoid**  **the burdens**  **of**

**pu rchasing**  **and installation**  **all together**  **if amended**  **standards raise**  **the level**  **to a** 

**p oint,**  **where such**  **technologies are**  **required.**

**DO E**  **considered all**  **of the**  **feedback and**  **comments supplied**  **by the**  **manufacturers**

**wh o**  **participated in**  **the engineering**  **interviews.**

12 .3.2.5 Profitability, Product Mix, and Shipments

12 .3.2.6 Residential Water Heaters

**DO E**  **asked manufacturers**  **during the**  **preliminary manufacturer**  **interviews how** 

**am ended**  **energy conservation**  **standards would**  **affect their**  **profitability. All** 

**ma nufacturers**  **of residential**  **water heaters**  **stated that**  **amended energy**  **conservation**

**st andards**  **could have**  **a s**  **ignificant impact**  **on the**  **product mix**  **of certain**  **products**

**de pending**  **upon the**  **efficiency level**  **under consideration**  **by DOE.**  **I n**  **p articular,** 

**ma nufacturers**  **were concerned**  **about fuel**  **and equipment**  **switching, a**  **r eduction**  **in the** 

**nu mber**  **of product**  **tiers they**  **are able**  **to offer**  **consumers, a**  **nd an**  **overall reduction**  **in**

**sh ipments**  **as a**  **r esult**  **of fixing**  **upon failing**  **instead of**  **replacement.**

**12­13 Manufacturers**  **of all**  **types of**  **water heaters**  **were concerned**  **about fuel**  **and**

**eq uipment**  **switching. In**  **particular, storage**  **manufacturers stated**  **that if**  **storage, water** 

**he ater**  **standards are**  **increased to**  **a l**  **evel, which**  **is significantly**  **more stringent**  **than**

**in stantaneous**  **water heaters**  **and the**  **first cost**  **differences shrink,**  **they believe**  **more**

**co nsumers**  **will begin**  **purchasing instantaneous**  **water heaters.**  **O n**  **the contrary,** 

**in stantaneous**  **water heater**  **manufacturers voiced**  **their concerns**  **regarding the**  **stringency**

**of instantaneous**  **water heater**  **standards. In**  **p articular,**  **they believe**  **any significant** 

**in crease**  **in the**  **amended energy**  **conservation standards**  **will cause**  **a f**  **urther disparity** 

**be tween**  **the first**  **cost of**  **storage and**  **instantaneous w**  **ater heaters,**  **t hus**  **shifting the**  **market**

**ba ck**  **to storage**  **water heaters.**  **A ll**  **manufacturers echoed**  **a s**  **imilar concern**  **of maintaining** 

**eq uivalent**  **stringencies across**  **all product**  **classes of**  **residential water**  **heaters. A**  **ll**

**ma nufacturers**  **also had**  **concerns about**  **DOE considering**  **efficiency levels**  **near the**  **max**

**t ech**  **efficiency levels**  **identified in**  **the engineering**  **analysis.**

**In p**  **articular, manufacturers**  **would be**  **very concerned**  **if DOE**  **considers amended** 

**en ergy**  **conservation standards,**  **w hich**  **require condensing**  **technologies for**  **gas products** 

**or heat**  **pump technologies**  **for electric**  **water heaters.**  **A t**  **these levels,**  **f uel**  **switching and** 

**de clining**  **shipments can**  **become a**  **m ajor**  **issue due**  **to the**  **high first**  **costs and**  **increased**

**in stallation**  **costs.**

**An other**  **issue, which**  **affects manufacturers’**  **profitability, is**  **the number**  **of**

**pr oduct**  **tiers they**  **are able**  **to offer**  **to consumers.**  **As the**  **stringency of**  **amended energy** 

**co nservation**  **standards is**  **increased, the**  **efficiency span**  **for which**  **manufacturers are**  **able**

**to produce**  **units shrinks,**  **d iminishing**  **the number**  **of tiers**  **they offer**  **to consumers.**  **In turn,** 

**de creasing**  **the product**  **offering would**  **reduce profits**  **b ecause**  **manufacturers typically** 

**enj oy**  **a h**  **igher markup**  **w ith**  **premium products.**  **R educing**  **the number**  **of tiers**  **also**

**de creases**  **the amount**  **of differentiation**  **between baseline**  **and premium**  **products, f**  **urther**

**re ducing**  **product mix**  **and profitability.**  **In p**  **articular, manufacturers**  **stated if**  **amended**

**en ergy**  **conservation standards**  **are raised**  **to a**  **l evel**  **requiring power**  **vent or**  **condensing**

**te chnologies**  **for gas**  **water heaters,**  **t he**  **differentiation they**  **offer to**  **consumers and**  **the**

**as sociated**  **higher profits**  **offered with**  **premium products**  **would be**  **diminished. Water** 

**he ater**  **manufacturers said**  **that amended**  **energy conservation**  **standards requiring**  **power**

**ve nting**  **or condensing**  **that increase**  **installation costs**  **could affect**  **low­income families.** 

**Ad ditionally,**  **consumers without**  **a m**  **eans to**  **dispose of**  **condensate may**  **be forced**  **to**

**sw itch**  **fuels. If**  **amended standards**  **require heat**  **pump water**  **heaters, c**  **onsumers without**  **a**

**m eans**  **to duct**  **the cool**  **air may**  **also b**  **e forced**  **to switch**  **fuels.**

12 .3.2.7 Direct Heating Equipment

**Ma nufacturers**  **of direct**  **heating equipment**  **stated that**  **increased standards**  **could**

**re duce**  **profitability. The**  **direct heating**  **industry is**  **a s**  **mall market**  **and some**  **products are** 

**so ld**  **only as**  **replacement units.**  **A mended**  **energy conservation**  **standards could**  **cause**

**in creased**  **first costs.**  **Increased installation**  **costs and**  **requirements (**  i.e.

**, a**  **n electrical** 

**co nnection**  **could be**  **required for**  **electronic ignition)**  **may deter**  **consumers from** 

**pu rchasing**  **products or**  **cause them**  **to switch**  **to other**  **methods to**  **heat their**  **homes.**

**12­14 Manufacturers**  **cited particular**  **concerns regarding**  **low­income families**  **being**

**de terred**  **by increased**  **costs. M**  **any low­income**  **households opted**  **for direct**  **heating**

**eq uipment**  **as an**  **affordable means**  **to heat**  **their homes.**  **Eq uipment**  **switching may**  **occur if** 

**di rect**  **heating equipment**  **costs become**  **comparable to**  **other home**  **heating methods**  **as a** 

**r esult**  **of amended**  **standards. C**  **onsumer mix**  **may also**  **be affected**  **if consumers**  **are**

**re quired**  **to have**  **electrical connections**  **for ignition**  **because standards**  **are raised**  **to a**  **l evel** 

**th at**  **would require**  **the elimination**  **of pilots.**  **C onsumers**  **not capable**  **of installing**  **an**

**el ectrical**  **connection would**  **be forced**  **to use**  **a m**  **eans other**  **than direct**  **heating equipment** 

**to supply**  **heat.**

12 .3.2.8 Pool Heaters

**Po ol**  **heater manufacturers**  **said that**  **an increase**  **in standards**  **would most**  **likely**

**re duce**  **profits. S**  **ince pool**  **heaters are**  **typically considered**  **luxury items**  **and not**  **necessary**

**fo r**  **homes, a**  **c onsumer’s**  **decision to**  **purchase a**  **p ool**  **heater often**  **depends on**  **family**

**dy namics,**  **economic conditions,**  **a nd**  **the season.**  **An increase**  **in standards**  **that increases** 

**co sts**  **could deter**  **consumers when**  **high prices**  **are compounded**  **by these**  **other factors.** 

**Ad ditionally,**  **p roduct**  **mix could**  **be reduced**  **if amended**  **standards require**  **condensing,**

**si nce**  **this would**  **raise the**  **standard to**  **the current**  **maximum available**  **technology. This** 

**sc enario**  **may cause**  **consumers to**  **switch to**  **heat pumps,**  **s olar**  **heaters, o**  **r geothermal**  **pool**

**he aters.** 

**Wi th**  **regards to**  **the impact**  **of amended**  **standards on**  **sub­groups, m**  **anufacturers**

**in dicated**  **that overall**  **shipments might**  **decrease amongst**  **all consumers.**  **H owever,** 

**ma nufacturers**  **do not**  **think an**  **individual sub­group**  **would be**  **adversely affected**  **since**

**po ol**  **heaters are**  **considered a**  **l uxury**  **item.**

**Ma nufacturers**  **would be**  **particularly concerned**  **if DOE**  **considers amended** 

**en ergy**  **conservation standards**  **that require**  **condensing technologies.**  **A t**  **these levels,**  **f uel** 

**sw itching**  **and declining**  **shipments can**  **become a**  **m ajor**  **issue due**  **to the**  **high first**  **costs,**

**in creased**  **installation costs,**  **i ncreased**  **complexity, and**  **lack of**  **training for**  **field**

**te chnicians.** 

**An other**  **issue, which**  **affects manufacturers’**  **profitability, is**  **the number**  **of**

**pr oduct**  **tiers they**  **are able**  **to offer**  **to consumers.**  **As energy**  **conservation standards**  **are**

**in creased,**  **the efficiency**  **span for**  **which they**  **are able**  **to manufacturer**  **products shrinks,** 

**di minishing**  **the number**  **of tiers**  **they offer**  **to consumers.**  **In turn,**  **decreasing the**  **product**

**of fering**  **would reduce**  **profits because**  **manufacturers typically**  **enjoy a**  **h igher**  **markup**

**w ith**  **premium products.**  **R educing**  **the number**  **of tiers**  **also decreases**  **the amount**  **of**

**di fferentiation**  **between baseline**  **and premium**  **products, f**  **urther reducing**  **product mix**  **and**

**pr ofitability.**  **In p**  **articular, manufacturers**  **stated if**  **amended energy**  **conservation**

**st andards**  **are raised**  **to a**  **l evel**  **requiring power**  **vent or**  **condensing technologies,**  **t he** 

**di fferentiation**  **they offer**  **to consumers**  **and the**  **associated higher**  **profits offered**  **with**

**pr emium**  **products would**  **be diminished.**  **Additionally, consumers**  **without a**  **m eans**  **to**

**di spose**  **of condensate**  **or regulated**  **by local**  **noise ordinances**  **(regulations against**  **high**

**po wered,**  **high noise**  **fans installed**  **near property**  **lines) may**  **be forced**  **to switch**  **fuels or** 

**eq uipment.** 

**12­15**12.3.2.9 Conversion Costs, M anufacturing Capacity, and Employment Levels

**DO E**  **estimated that**  **a d**  **omestic storage**  **water heater**  **production line**  **would have**  **a**

**l ife**  **cycle of**  **approximately 15**  **years in**  **the absence**  **of amended**  **energy conservation** 

**st andards.**  **D uring**  **that period,**  **manufacturers would**  **not make**  **major equipment**  **changes**

**th at**  **alter the**  **underlying platforms.**  **Th us,**  **a n**  **amended energy**  **conservation standard**  **that**

**to ok**  **effect and**  **resulted in**  **a m**  **ajor platform**  **redesign before**  **the end**  **of the**  **platform’s life** 

**wo uld**  **strand a**  **p ortion**  **of the**  **earlier capital**  **investments.**

**DO E**  **asked manufacturers**  **what level**  **of conversion**  **costs they**  **anticipate if** 

**am ended**  **energy conservation**  **standards were**  **to take**  **effect. Generally,**  **water heater** 

**ma nufacturers**  **said that**  **conversion costs**  **would be**  **significant if**  **amended standards** 

**re quire**  **a s**  **ignificant alternation**  **to tank**  **size, heat**  **pump, power**  **venting, or**  **condensing**

**te chnologies**  **that would**  **now r**  **epresent the**  **baseline products.**  **In addition,**  **manufacturers**

**of electric**  **storage water**  **heaters voiced**  **a c**  **oncern regarding**  **increasing the**  **physical**

**di mensions**  **of the**  **tank size.** 

**Ma nufacturers**  **would have**  **to incorporate**  **changes in**  **order to**  **include new** 

**pr oduction**  **lines or**  **increase production**  **volumes of**  **existing lines.**  **C hanges**  **would also** 

**in clude**  **new f**  **abrication processes**  **for flue**  **baffles and**  **heat exchangers**  **so that**  **they work** 

**pr operly**  **with power**  **vent systems.**  **A lso,**  **p roper**  **protection of**  **the flue**  **and vent**  **parts**

**wo uld**  **need to**  **be determined**  **so that**  **condensing does**  **n ot**  **create any**  **safety or** 

**pe rformance**  **issues.**

**Di rect**  **heating equipment**  **manufacturers said**  **that conversion**  **costs would**  **be**

**si gnificant**  **if amended**  **standards require**  **electronic ignition**  **or power**  **venting. Typically,** 

**ma nufacturers**  **would need**  **to add**  **new e**  **quipment to**  **manufacturing processes**  **so that** 

**el ectronic**  **ignitions could**  **be installed.**  **Also, conversion**  **costs would**  **be significant**  **if**

**po wer**  **venting were**  **required in**  **an industry**  **dominated by**  **natural draft**  **products.**

**Ma nufacturers**  **would need**  **to include**  **equipment for**  **installation of**  **fan motor**  **assemblies.**

**Po wer**  **venting would**  **also require**  **new h**  **eat exchanger**  **designs, a**  **nd manufacturers**  **would**

**ne ed**  **to convert**  **this fabrication**  **and assembly**  **process as**  **well.**

**DO E**  **also asked**  **pool heater**  **manufacturers about**  **conversion costs.**  **G enerally,** 

**po ol**  **heater manufacturers**  **cited concerns**  **similar to**  **water heater**  **manufacturers regarding** 

**sa fety**  **and performance**  **issues if**  **a s**  **tandard requires**  **condensing. Manufacturers**  **also said** 

**th at**  **additional installation,**  **repair, and**  **maintenance training**  **would be**  **required for**  **pool**

**he ater**  **repair technicians.**  **If amended**  **standards require**  **power vents**  **or condensing** 

**ope rations,**  **t he**  **overall complexity**  **of pool**  **heater products**  **will increase.**  **According to** 

**ma nufacturers,**  **t he**  **pool heater**  **maintenance industry**  **is immature**  **and lacks**  **regulation.**

**Ma nufacturers**  **are burdened**  **with training**  **and educating**  **repair technicians**  **properly so** 

**th at**  **products can**  **be serviced**  **correctly and**  **safely. To**  **m aintain**  **consumer confidence**  **in**

**th eir**  **pool heater**  **brand, manufacturers**  **anticipate this**  **conversion cost**  **with an**  **amended**

**st andard.** 

**12­16**12.3.3 Impact on U.S. Production and Jobs

**The impact**  **of amended**  **energy conservation**  **standards on**  **employment is**  **an**

**im portant**  **consideration in**  **the rulemaking**  **process. To**  **a ssess**  **how d**  **omestic employment** 

**pa tterns**  **might be**  **affected by**  **amended energy**  **conservation standards**  **for residential** 

**he ating**  **products, D**  **OE p**  **osed several**  **questions about**  **this topic**  **to manufacturers.** 

12 .3.3.1 Foreign Labor

**Fo r**  **storage water**  **heaters, manufacturers**  **said that**  **the majority**  **of production** 

**oc curs**  **in the**  **United States**  **and that**  **amended energy**  **conservation standards**  **could affect** 

**th is**  **status. F**  **or gas­fired**  **instantaneous water**  **heaters, p**  **roducts are**  **produced by**  **foreign or** 

**in ternational**  **manufacturers operating**  **facilities outside**  **of the**  **United States.**  **Th is**  **is**

**pr imarily**  **driven by**  **concerns about**  **profitability and**  **the opportunity**  **for lower**  **labor costs.** 

**If a**  **l arge**  **shift is**  **seen between**  **these storage**  **and instantaneous**  **water heating**  **markets, a** 

**s hift**  **in the**  **location where**  **product occurs**  **will be**  **seen as**  **a r**  **esult.**

**Di rect**  **heating equipment**  **is manufactured**  **mostly in**  **the United**  **States, e**  **xcept for** 

**so me**  **hearth products,**  **a nd**  **manufacturers said**  **that they**  **do not**  **anticipate moving**  **their**

**ma nufacturing**  **facilities offshore.** 

**Po ol**  **heater manufacturers**  **said that**  **nearly 100**  **percent of**  **pool heaters**  **are**

**ma nufactured**  **in the**  **United States**  **and that**  **a s**  **mall portion**  **of these**  **products are**  **exported**

**to foreign**  **counties.**

12 .3.3.2 Industry Consolidation

**Thr ee**  **companies now**  **a ccount**  **for the**  **majority of**  **residential water**  **heater sales.** 

**2 The**  **January 2001**  **water heater**  **final rule ,**  **in addition**  **to other**  **industry factors,** 

**co ntributed**  **to recent**  **consolidation. For**  **instantaneous water**  **heaters, m**  **anufacturers could** 

**on ly**  **see consolidation**  **if the**  **market dynamics**  **shift t**  **o further**  **increase the**  **cost differential** 

**be tween**  **instantaneous and**  **conventional water**  **heating systems.** 

**The direct**  **heating equipment**  **industry is**  **comprised of**  **several companies**  **and**

**ma nufacturers**  **do not**  **anticipate any**  **consolidation.**

**In the**  **pool heater**  **industry, four**  **manufacturers have**  **an equal**  **share of**  **the majority** 

**of pool**  **heater sales.**  **M anufacturers**  **do not**  **anticipate any**  **consolidation, b**  **ut if**  **an**

**am ended**  **standard requires**  **condensing operations**  **some manufacturers**  **may be**  **at a**  **s evere** 

**di sadvantage.** 

12 .3.4 Impact on Product Utility and Innovation

**Am ended**  **energy conservation**  **standards (**  e.g.

**, r**  **equirements for**  **electrical**

**co nnections**  **or installation**  **requirements that**  **increase the**  **space needed)**  **can affect** 

**pu rchasers**  **of residential**  **heating products**  **by increasing**  **or decreasing**  **the utility**  **of such** 

**pr oducts.**  **M anufacturers**  **generally believe**  **that more**  **stringent energy**  **efficiency standards** 

**wo uld**  **decrease innovations**  **and, in**  **some cases,**  **result in**  **reduced product**  **utility.**

**12­17 Water**  **heater manufacturers**  **said that**  **patents for**  **insulation application**  **methods**

**an d**  **heat exchanger**  **(** i.e.

**, f**  **lue baffle)**  **limit other**  **manufacturers’ methods**  **for improving** 

**en ergy**  **efficiency. Some**  **manufacturers stated**  **that more**  **stringent standards**  **would require** 

**re designing**  **some portion**  **of their**  **product lines.**  **In turn,**  **this would**  **consume research**  **and**

**de velopment**  **resources, b**  **oth human**  **and financial,**  **and direct**  **these assets**  **away from** 

**ot her**  **potential investments**  **that would**  **normally go**  **toward enhancing**  **the functionality**  **of**

**ex isting**  **products or**  **developing new**  **products. M**  **anufacturers stressed**  **the impact**  **on**

**ut ility**  **of a**  **s tandard**  **requiring power**  **venting, heat**  **pump, or**  **condensing. An**  **increase in** 

**in stallation**  **requirements (**  i.e.

**, e**  **lectrical connection,**  **drain for**  **condensate, and**  **plenum**

**sp ace**  **for airflow)**  **would limit**  **the utility**  **of certain**  **products to**  **some consumers.** 

**Di rect**  **heating equipment**  **manufacturers indicated**  **similar impacts**  **on utility**  **and**

**in novation,**  **similar to**  **water heater**  **manufacturers. Conversion**  **costs would**  **draw f**  **rom**

**re sources**  **intended for**  **improving current**  **products. Also,**  **if standards**  **require electronic** 

**ig nition**  **or power**  **venting, this**  **may affect**  **the utility**  **of direct**  **heating equipment**  **for some** 

**co nsumers**  **since electrical**  **connections would**  **be required.**  **From section**  **12.3.2.3,**

**ma nufacturers**  **may also**  **derate products**  **as a**  **r esult**  **o f**  **amended standards**  **as a**  **m eans**  **to**

**ma intain**  **cost­competitiveness. Th**  **is would**  **impact utility**  **for consumers**  **since products** 

**ma y**  **no longer**  **be capable**  **of supplying**  **the same**  **amount of**  **heat the**  **consumer is** 

**ac customed**  **to with**  **the baseline**  **product.**

**Po ol**  **heater manufacturers**  **cited similar**  **concerns if**  **standards require**  **power**

**ve nting**  **or condensing.**  **Manufacturers said**  **that condensing**  **operations shorten**  **the life**  **of**

**a w**  **ater heater**  **due to**  **the increased**  **risk of**  **corrosion. Manufacturers**  **also said**  **that energy** 

**ef**

**ficiency scales**  **with repair**  **and maintenance**  **requirements because**  **as efficiency** 

**im proves,**  **p roduct**  **complexity increases.**  **F inally,**  **products with**  **loud noises**  **generated by** 

**po wer**  **vents may**  **not appeal**  **to consumers**  **and may**  **even violate**  **regional zoning** 

**re gulations.** 

12 .3.5 Cumulative Burdens

**Ba sed**  **on its**  **own research**  **and discussions**  **with manufacturers,**  **D OE**  **identified**

**se veral**  **regulations relevant**  **to residential**  **heating products,**  **i ncluding:** 

• **C alifornia,**  **Texas, a**  **nd Florida**  **Air Quality**  **Management Districts**  **low n**  **itrogen**

**ox ides**  **(NOx) and**  **design requirements;** 

• **u niform**  **building, plumbing,**  **and health**  **and safety**  **codes**

• **s tandards**  **for other**  **products made**  **by residential**  **heating products**  **manufacturers;**

• **o ther**  **State energy**  **conservation standards;**  **and**

• **i nternational**  **energy conservation**  **standards.**

**Co mplying**  **with such**  **regulations requires**  **corporations to**  **invest both**  **human and** 

**ca pital**  **resources. Th**  **e following**  **subsections discuss**  **i n**  **greater detail**  **regulations affecting** 

**th e**  **residential heating**  **products industry.** 

**12­18**12.3.5.1 Air Quality Management Districts and Low NO

x Requirements

**Ca lifornia,**  **Texas, a**  **nd Florida**  **have regulations**  **to limit**  **the amount**  **of NOx**  **that**

**re sidential**  **products may**  **exhaust into**  **the atmosphere.**  **For regions**  **like the**  **South Coast** 

**Ai r**  **Quality Management**  **District (SCAQMD),**  **stricter regulations**  **will go**  **into affect** 

**th rough**  **2012. Other**  **States and**  **regions may**  **adopt similar**  **standards in**  **the future,**  **which**

**ma y**  **affect gas**  **and oil­fired**  **residential heating**  **products. (**  **See chapter**  **3 o**  **f the** 

**pr eliminary**  **TSD f**  **or more**  **information.)**

**L ow**  **NOx standards**  **require manufacturers**  **to develop**  **cleaner burning**  **fuel**

**bu rners**  **and methods**  **to properly**  **control the**  **amount of**  **primary and**  **secondary air.** 

**Ma nufacturers**  **have spent**  **time and**  **resources on**  **developing cleaner**  **burning products**  **and**

**th ese**  **costs have**  **been passed**  **along to**  **the consumer.**  **The introduction**  **of amended** 

**st andards**  **may compound**  **the burden**  **on consumers.** 

**Cu rrently,**  **low NOx**  **standards affect**  **fuel­fired water**  **heaters. M**  **anufacturers said** 

**th at**  **incorporating a**  **l ow**  **NOx burner**  **into a**  **d esign**  **makes it**  **more difficult**  **and costly**  **to**

**obt ain**  **higher energy**  **efficiency levels.** 

**Di rect**  **heating equipment**  **is similarly**  **burdened by**  **low NOx**  **requirements.**

**As of**  **May 2006,**  **p ool**  **heater manufacturers**  **are exempt**  **from low**  **NOx**

**re quirements.**  **S tates**  **have determined**  **that the**  **increase in**  **cost to**  **meet the**  **requirements is** 

**no t**  **justified since**  **water heaters**  **are used**  **for a**  **s hort**  **time over**  **the course**  **of a**  **y ear.** 

**Ho wever,**  **this exemption**  **may change**  **since California,**  **the largest**  **market for**  **pool**

**he aters,**  **i s**  **considering setting**  **pool heater**  **requirements.**

12 .3.5.2 Standards for Other Products Made by Residential Heating Products

Ma nufacturers

**In addition**  **to the**  **efficiency regulations**  **on residential**  **water heaters,**  **d irect**  **heating**

**eq uipment,**  **and pool**  **heaters, s**  **everal other**  **Federal regulations**  **and their**  **pending**

**re gulations**  **apply to**  **other products**  **that heating**  **products manufacturers**  **make. For** 

**ex ample,**  **some manufacturers**  **in the**  **residential heating**  **products industry**  **are subsidiaries** 

**of larger**  **parent companies**  **that manufacture**  **equipment, such**  **as heating,**  **ventilating, and** 

**ai r­conditioning**  **(HVAC) equipment,**  **that is**  **subject to**  **Federal regulations.**  **The HVAC** 

**in dustry**  **must address**  **the Environmental**  **Protection Agency**  **(EPA) mandated**  **phaseout of** 

**hy drochlorofluorocarbons**  **(HCFC) refrigerants**  **and blowing**  **agents in**  **their products**  **as**

**we ll.**  **DOE will**  **investigate these**  **cumulative regulatory**  **burdens in**  **greater detail**  **during**

**th e**  **MIA analysis.** 

12 .3.5.3 Uniform Building, Plumbing, Health and Safety Codes

**Bu ilding,**  **p lumbing,**  **and health**  **and safety**  **codes regulate**  **how r**  **esidential heating** 

**pr oducts**  **may be**  **installed. Water**  **heater manufacturers**  **said that**  **amended standards** 

**re quiring**  **power venting,**  **electronic ignition,**  **or condensing**  **would increase**  **installation**

**co sts.**  **M anufacturers**  **described instances**  **when consumers**  **were required**  **to obtain** 

**12­19 permits**  **or inspections**  **or have**  **a c**  **ertified technician**  **perform the**  **work, which**  **increased**

**th e**  **cost of**  **installation.**

**Di rect**  **heating equipment**  **manufacturers cited**  **similar instances**  **and explained** 

**ho w**  **a mended**  **standards requiring**  **power venting**  **or electrical**  **connections would**  **increase**

**in stallation**  **costs.**

**Po ol**  **heater manufacturers**  **cited similar**  **instances. Pool**  **heater manufacturers**  **also**

**sa id**  **zoning regulations**  **may prohibit**  **installation of**  **power vented**  **pool heaters**  **near**

**pr operty**  **lines where**  **high noise**  **levels could**  **disturb neighbors.** 

**DO E**  **will investigate**  **these codes**  **in greater**  **detail during**  **the MIA**  **analysis.**

12 .3.6 Impact on Small Manufacturers

**The Small**  **Business Administration**  **(SBA) defines**  **small business**  **manufacturing**

**en terprises**  **for residential**  **heating products**  **as having**  **500 employees**  **or fewer.**  **In chapter** 

**3 o**  **f the**  **preliminary TSD,**  **DOE identified**  **several such**  **small businesses**  **as defined**  **by the** 

**SB A.**  **SBA l**  **ists small**  **business size**  **standards that**  **are matched**  **to industries**  **as they**  **are**

**de scribed**  **in the**  **North American**  **Industry Classification**  **System (NAICS).**  **A s**  **ize**

**st andard**  **is the**  **largest that**  **a f**  **or­profit concern**  **can be**  **and still**  **qualify as**  **a s**  **mall business** 

**fo r**  **Federal Government**  **programs. S**  **ize standards**  **are generally**  **based on**  **the average** 

**an nual**  **receipts or**  **the average**  **number of**  **employees at**  **a f**  **irm. For**  **residential water** 

**he ater,**  **the size**  **standard is**  **matched to**  **NAICS code**  **335228,** Other Major Household

App liance Manufacturing

**, w**  **hich has**  **a s**  **ize standard**  **of 500**  **employees. F**  **or residential** 

**di rect**  **heating equipment**  **and pool**  **heaters, t**  **he size**  **standard is**  **matched to**  **NAICS code** 

**33 3414,**  He at Equipment (except Warm Air Furnaces) Manufacturing

**, which**  **has a**  **s ize** 

**st andard**  **of 500**  **employees.**

**The manufacturer**  **interviews indicated**  **that smaller**  **heating products** 

**ma nufacturers**  **typically have**  **smaller corporate**  **research and**  **development staff**  **than**

**la rger**  **manufacturers. S**  **maller manufacturers**  **tend to**  **produce niche**  **or specialty**  **products**

**an d**  **focus on**  **providing products**  **that other**  **larger manufacturers**  **do not**  **produce.**

**Al though**  **small manufacturers**  **often have**  **a m**  **ore limited**  **product range**  **than larger** 

**ma nufacturers,**  **t he**  **effort to**  **address some**  **aspects of**  **regulations are**  **relatively fixed**  **and**

**do not**  **scale directly**  **with the**  **number of**  **products or**  **product platforms**  **produced.**

**Co nsequently,**  **the cumulative**  **burden of**  **regulations will**  **tend to**  **place more**  **of a**  **b urden** 

**on smaller**  **manufacturers because**  **of their**  **more limited**  **resources.**

**DO E**  **will study**  **the potential**  **impacts to**  **these small**  **businesses in**  **greater detail** 

**du ring**  **the MIA.** 

**12­20**REFERENCES

**1 U**  **.S. Department**  **of Energy,**  **ENERGY S**  **TAR Program.**  **Water Heater**  **Criteria**

**De velopment.**  **October 26,**  **2007.**

**<h ttp://www.energystar.gov/ia/partners/prod_development/new_specs/downloads/water_** 

**he aters/WaterHeaterSecondDraftCriteriaAnalysis.pdf>** 

**2 U**  **.S. Department**  **of Energy,**  **Office of**  **Energy Efficiency**  **and Renewable**  **Energy.**

**Ene rgy**  **Conservation Program**  **for Consumer**  **Products: Energy**  **Conservation Standards** 

**fo r**  **Water Heaters;**  **Final Rule.**  **January 17,**  **2001. Washington,**  **D.C. Last**  **accessed March** 

**18**

**, 2008.** 

**<h ttp://www.eere.energy.gov/buildings/appliance_standards/residential/pdfs/water_heate** 

**r_ fr.pdf>** 

**12­21**