Finally, some manufacturers stated that warranty costs would probably increase at higher

standard levels. Warranty costs typically run at 2 to 3 percent of revenues. Past experience indicates

that warranty, consumer education, and maintenance costs increase significantly in the first few years

after a new product is launched. It should be noted that not every manufacturer considered these

additional costs in their respective data submittals to AHAM.

11.3.2.3 Definition of Business Scenarios

To capture the uncertainty in future industry dynamics, DOE evaluated the industry financial

impacts using two different business scenarios. In the first scenario, the "no consolidation scenario,"

it is assumed that all current manufacturers continue to manufacture clothes washers and maintain

their market share, even if they believe they will be unable to recuperate their incremental costs.

This could result in a negative Standard Case NPV for some manufacturers. In the second scenario,

the "industry consolidation scenario," it is assumed that some manufacturers would indeed exit the

industry or lose significant market share. In this scenario, their volumes are redistributed among the

remaining and more profitable players in the industry.

The aggregated industry Standard Case NPV for the two business scenarios is presented in

Tables 11.18 through 11.23 for each of the shipment scenarios. Not all manufacturers provided

information for standard level 6 (50 percent efficiency) and hence it was difficult to estimate the total

industry impact at these levels. Data for the 50 percent efficiency level was extrapolated from the

given data.

We also present results for a two-tier standard (Trial Standard Level 3), which consists of two

standards coming into effect in two distinct years. The two-tier standard modeled in this chapter has

an initial level of 21.4% efficiency improvement (MEF= 1.04) effective in 2004 and a second level

representing a 35.2% efficiency improvement (MEF= 1.26) effective in 2007. Tier one (1.04 MEF

in 2004) is modeled as a simple one-tier standard with effective date 2004. Tier two (1.26 MEF in

2007) is modeled as a one-tier standard delayed by three years. The GRIM model combines the cash

flows. The operating principles for the two-tier standard are presented in Appendix P.

11.3.2.4 "No Consolidation" Scenario

The cash flow results for the three shipment scenarios are presented in Tables 8 through 10

for the "no consolidation" business scenario. Results are presented for Trial Standard Levels 1

through 6.

11-31

EE-RM-PET-100 COMMENT 88
Table 11.18 Industry Cash Flow Results for the "No Consolidation" Scenario - High Price

Elasticity

Trial Standard

Level

MEF

______________

Base Case NPV

($million)

Standard Case

NPV ($million)

Change in NPV

($million)

% Change in

NPV

1 1.021 1,445.8 1,417.6-1,346.7 (28.1)-(99.1) (1.9)-(6.9)

2 1.089 1,445.8 1,005.2-852.9 (440.5)-(592.9) (30.5)-(41.0)

3 1,04 in 2004

1.26 in 2007

1,445.8 948.6-846.7 (497.2)-(599.0) (34.4)-(41.4)

4 1.257 1,445.8 877.1-781.9 (568.7)-(663.9) (39.3)-(45.9)

5 1.362 1,445.8 930.1-863.1 (515.7)-(582.7) (35.7)-(40.3)

6 1.634 1,445.8 876.8-722.2 (569.0)-(723.5) (39.4)-(50.0)

Table 11.19 Industry Cash Flow Results for the "No Consolidation" Scenario - Medium

Price Elasticity

Trial Standard

Level

MEF -

____________

Base Case NPV

($million)

Standard Case

NPV ($million)

Change in NPV

($million)

% Change in

NPV

1 1.021 1,439.1 1,420.4-1,349.5 (18.7)-(89.6) (1.3)-(6.2)

2 1.089 1,439.1 1,033.8-877.2 (405.2)-(561.9) (28.2)-(39.0)

3 1.04 in 2004

1.26 in 2007

1,439.1 1,027.8-920.8 (411 .0)-(5 18.3) (28.6)-(36.0)

4 1.257 1,439.1 944.7-842.3 (494.4)-(596.8) (34.4)-(41.5)

5 1.362 1,439.1 1,002.1-929.9 (437.0)-(509.2) (30.4)-(35.4)

6 1.634 1,439.1 989.7-815.2 (449.4)-(623.8) (31.2)-(43.3)

11-32

EE-RM-PET-100 COMMENT 88
Table 11.20 Industry Cash Flow Results for the "No Consolidation" Scenario - Medium

Price/Income Elasticity

Trial Standard

Level

MEF

____________

Base Case NPV

($million)

Standard Case

NPV ($million)

Change in NPV

($million)

% Change in

NPV

1 1,021 1,452.0 1,438.8-995.8 (13.2)-(85.3) (0.9)-(5.9)

2 1.089 1,452.0 1,061.2-899.6 (390.8)-(552.4) (26.9)-(38.0)

3 1.04 in 2004

1.26 in 2007

1,452.0 1075.2-962.9 (376.8)-(489.1) (25.9)-(33.7)

4 1.257 1,452.0 995.8-887.5 (456.2)-(564.5) (31.4)-(38.9)

5 1.362 1,452.0 1,056.6-980.2 (395.4)-(471.8) (27.2)-(32.5)

6 1.634 1,452.0 1,029.7-876.8 (422.3)-(575.2) (29.1)-(39.6)

The cash flow results show a lower industry negative impact at Trial Standard Level 5 than

at Trial Standard Level 4. Most manufacturers stated that efficiency improvements at Trial Standard

Level 5 could only be met with an H-axis product offering and some reported they would have a

competitive advantage if that were the case. In support of this view, individual manufacturer cash

flow impacts at Trial Standard Level 5 (expressed as a percentage loss in company value) were far

more polarized than at Trial Standard Level 4. Calculating the standard deviation (SD) of company

value change at each efficiency level yields the following values: at Trial Standard Level 1 (20%

efficiency improvement) the SD in company value change is 11.5%; at Trial Standard Level 2 (25%

efficiency improvement) the SD is 11.37%; at Trial Standard Level 4 (35% efficiency improvement)

the SD is 17.65%; and at Trial Standard Level 5 (40% efficiency improvement) the SD leaps to

27.65%. This is significant because the greater the difference in impacts between manufactures, the

greater the risk of industry consolidation. For Trial Standard Level 3 the SD in individual company

percent changes in value is estimated to be l5.76%.

aThe Standard Deviation (SD) was calculated using the equation

SDjN ,'(x-)MS

where

N = Number of manufacturers

i = Manufacturer i

X = the % change in value of manufacturer i

X = % change in industry value

MS, = Market share of manufacturer i

11-33

EE-RM-PET-100 COMMENT 88
To calculate the change in industry value for the consensus proposal it was necessary to

interpolate manufacturing costs and prices. Costs and prices for an MEF of 1.04 were derived from

data at 20% and 25% efficiency improvement (Trial Standard Levels 1 and 2, respectively).

Similarly data for an MEF of 1.26 were interpolated from data at 20% and 25% efficiency

improvement. Modeling the cash flows of a two-tier implementation required additional

assumptions which are discussed in Appendix P.

Standard Case cash flow spreadsheet outputs for Trial Standard Level 4 (35 percent

efficiency) are presented in Appendix P, Exhibits 9 through 14, and for Trial Standard Level 3 (twotier standard) in Exhibits 19 through 24. For the V-axis standard levels (5 percent through 25

percent) the GRIM spreadsheet assumes that the H-axis market segment in the Standards Case will

remain a market niche, as in the Base Case, and hence the industry will maintain its value on H-axis

washers. For H-axis standard levels (35 percent and higher), only H-axis washers will be sold in the

market post-standards and a single markup assumption is used.

11.3.2.5 Consolidation Scenario

At Trial Standard Level 2, some manufacturers predicted that one or more of the current

manufacturers would most likely exit the industry as the investments required to reach such

standards would be of a sufficient scale to drive them out of business. Other manufacturers indicated

that based on their perceived inability to pass on fixed (and sometimes even variable) costs it may

be more profitable for them to cease manufacturing washers; they might, however, source and

distribute them, as they believe they need to continue offering a full product line to compete

effectively in the appliance industry. These effects would result in industry consolidation whereby

the manufacturers that remain in the business experience an increase in their volumes and a

corresponding increase in their Standard Case NPVs. This is reflected in the cash flow results for

Trial Standard Levels 1 through 6 in Tables 11.21 through 11.23.

Table 11.21 Industry Cash Flow Results for the" Industry Consolidation" Scenario - High

Price Elasticity

Trial Standard

Level

MEF

____________

Base Case NPV

($million)

Standard Case

NPV ($million)

Change in

NPV ($million)

% Change in

NPV

1 1.021 1,445.8 1,417.6-1,346.7 (28,1)-(99.1) (1.9)-(6.9)

2 1.089 1,445.8 1,004.6-872.1 (441.2)-(573.7) (30.5)-(39.7)

3 1.04 in 2004

1.26 in 2007

1,445.8 1,215.9-1,068.4 (229.9)-(377.4) (15.9)-(26.1)

4 1.257 1,445.8 1,187.1-1,038.3 (258.7)-(407.5) (17.9)-(28.2)

5 1.362 1,445.8 1,239.4-1,124.5 (206.4)-(321 .3) (14.3)-(22.2)

6 1.634 1,445.8 1,186.6-1,009.3 (259. 1)-(436.5) (17.9)-(30.2)

11-34

EE-RM-PET-100 COMMENT 88
Table 11.22 Industry Cash Flow Results for the "Industry Consolidation" Scenario -

Medium Price Elasticity

TrOil Standard

Level

MEF Base Case NPV

(Smillioin)

Staudrd Case

PV (Snillhlon)

Change in

NIV ($iniHion)

'%Change in

____________

NPV

1.021 1,439.! 1,420.4-1,349.5 (I#.7)-(9.6J (I3H6.2)

2 1.089 1,439. 1.033.2-896.9 (405.9)4542.1) (282)-( 37.7)

3 1.04 in 2004

1.26 in 2007

1,439.1 1,312.1-1,156.3 (127.O)-(282.7) (8.8)-(19.6)

4 .257 1,439.1 ]1,278.2-1,118.1 l60.9)-(321.0) (11.2)422.3)

5 1.362 1,439.1 1,335.2-1,211.5 (103.8)-(227.6) (7.2)-(15.8)

6 1.634 1,439.1 1,339.3-1,139.2 (99.8)-(299.9) (6.9)-(20.8)

Table 11.23 Industry Cash Flow Results for the "Industry Consolidation" Scenario -

Medium Price/Income Elasticity

Trial Standard

Level

MEF Base Case NPV

($million)

Standard Case

NPV (Smillion)

Change in

NPV ($million)

% Change in

NPV

1

____________

1.021 1,452.0 1,438,8-1,366.7 (13.2)-(85.3) (0.9)-(5.9)

2 1.089 1,452.0 1,060.5-920.0 (391.5)-(532.0) (27.0)-(36.6)

3 1.04 in 2004

1.26 in 2007

1,452.0 1,375.0-1,211.4 (77.0)-(240.6) (5.3)-(16.6)

4 1.257 1,452.0 1,348,5-1,179.2 (103.5)-(272.8) (7.1)-(18.8)

5 1.362 1,452.0 1,409.2-1,278.3 (42.8)-(173.7) (2.9)-(12.0)

6 1.634 1,452.0 1,443.4-1,227.0 (8.6)-(225.0) (0.6)-(1 5.5)

The values in Tables 11.21 through 11.23 represent results based on the Department's

estimates of possible shifts in market share based on manufacturer interviews and observed

differences in costs and profitability. As can be observed by comparing Tables 11.18 through 11.20

and Tables 11.21 through 11.23, consolidation is assumed to begin at Trial Standard Level 2 (25

percent improvement) and become very significant at Trial Standard Level 4 (35 percent

improvement).

The outcome of industry consolidation is a redistribution of volumes from less-profitable

manufacturers to more-profitable manufacturers and therefore a lower total reduction in industry

value (relative to the no-consolidation scenario). Furthermore, the cash flow may overstate the

negative impact as it does not consider the increased market power of an industry with fewer

competitors (possibly three or four instead of six) or more concentration of market share.

11-35

EE-RM-PET-100 COMMENT 88
11.4 IMPACT ON CLOTHES DRYER BUSINESS

An important consideration regarding new efficiency standards that came to light during the

course of DOE's interviews with manufacturers was the pull-through effect of clothes washers on

the clothes dryer market. The majority of manufacturers indicated that stringent standards on clothes

washers would have an effect on dryers as consumers frequently buy washers and dryers as a set.

From the manufacturers' data, it is estimated that approximately 45 percent to 55 percent of washers

are sold in pairs with dryers. Therefore, any change in washer volumes will impact a significant

portion of the dryer business. A separate cash flow analysis was run in an effort to model the

financial impact of these considerations on the dryer business.

In conducting the cash flow analysis, the GRIM assumes that 50 percent of clothes washers

are sold as pairs with dryers and that the purchase of these paired dryers will be directly impacted

by any changes in washer volumes. The GRIM estimates the NPV of the clothes dryer business both

in the absence and the presence of a standard. If a new standard results in a decrease in clothes

washer sales, this negatively impacts the sales of dryers, thereby reducing the NPV of the dryer

business. Shipment forecasts for the Dryer cash flows correspond to the same NES shipments used

to run the Clothes Washer cash flows.

The Department used industry-average values of manufacturer prices, shipments,

manufacturing costs and financial information to perform the dryer cash flow analysis.

Industry-average manufacturer prices were obtained from the CIR. The shipment-weighted price is

obtained by dividing the dollar value of all dryers (both gas and electric) shipped from factories by

the quantity of shipments. Clothes dryer shipments, including those exported and imported, were

obtained from the AHAM Fact Book. Table 11.24 provides the shipment-weighted manufacturer

price and shipments of clothes dryers from 1990 through 1996.

Table 11.24 Shipment-weighted Manufacturer Price of Dryers from 1990 throw'h 1996

Year 1990 1991 1992 1993 1994 1995 1996

ManufacturerPrice(S) 211.5 213.8 214.5 217.0 233.7 223.4 224.8

Clothes Dryer Shipments (000)

Industry unit shipments* 4320 4313 4717 5074

________

5339 5225 5528

Export 105.9 169.2 201.6 181.6 217.4 207.5 368.8

Import 57.4 76.1 140.4 190.1 191.4 324.9 446.4

Dryers produced

by U.S. manufacturers

4262.6 4236.9 4576.6 4883.9 5147.6 4900.1 5081.7

* Includes shipments for the U.S. market whether imported or domestically produced, and export shipments.

The GRIM considers the impact of clothes dryers produced by U. S. manufacturers. The 1996

dryer shipments of 5.08 million are used to develop the Base Case shipment forecasts. Future Base

11-36

EE-RM-PET-100 COMMENT 88
Case dryer sales are forecasted using the growth rate projections from the Base Case clothes washer

shipment forecasts. Standard Case dryer shipments are calculated assuming that 50 percent of clothes

washers are sold as pairs with dryers. Hence, for each standard level analyzed, a drop in clothes

washer shipments results in a drop in the dryers that are bought as pairs. Any drop in dryer sales

resulting from a standard will result in a negative financial impact on the dryer business.

Disaggregated manufacturing costs, namely material, labor and overhead, and financial

information including tax rate, working capital, depreciation, cost of capital, etc., were obtained from

a top-down analysis of the appliance industry. These inputs are similar to those used for the clothes

washer cash flow analysis. Table 11.25 presents the cost and financial information used in the Dryer

cash flow analysis; assumptions for the GRIIvI Dryer analysis are presented in Appendix P, Exhibit

6.

Table 11.25 Cost and Financial Information Used in the GRIM Dryer Analysis

Input Parameters Percent of revenue Dollar per Unit

Manufacturer price 100% $220.4

Manufacturing Cost

Material 52% $114.6

Labor 10.2% $22.5

Overhead (excluding depreciation) 8.2% $18.3

Depreciation 3.5% $7.7

Financial Information

Tax rate 42.8%

Discount rate for NPV 6.65%

Working Capital 10.5%

Standard SG&A 18.0%

R&D 1.8%

Ordinary Capital Expenditure 3.9%

Net Profit before tax 6.2%

Using the above inputs, the GRIN'! spreadsheet was used to analyze the financial impacts at

each standard level and shipment scenario. The Base Case NPV for the clothes dryer business is

11-3 7

EE-RM-PET-100 COMMENT 88
$665.2, $665.1, $677.2 million dollars respectively for the high price, medium price and medium

price/income elasticity scenarios. Tables 11.26 through 11.28 present the Standard Case NPV for

Trial Standard Levels 1-6, along with the change in NPV. Base Case cash flows for the mediumprice elasticity scenario are presented in Appendix P; Base Case cash flows are in Exhibit 7; cash

flows for the 35% level (Trial Standard Level 4) in Exhibit 15 and 16; and cash flows for the two-tier

standard (Trial Standard Level 3) in Exhibits 25 and 26.

Table 11.26 Standard Case NPV for Dryer Business - High Price Elasticity Scenario

Efficiency Improvement

Trial Standard

Level

MEF - Base Case NPV

($milhion)

Standard Case

NPV (Smillion)

Change in

NPV ($million)

% Change in

NPV

1

____________

1.021 665.2 662.0 (3.12) (0.5)

2 1.089 665.2 650.8 (14.4) (2.2)

3 1.04in2004

1.26 in 2007

665.2 641.3 (23.9) (3.5)

4 1.257 665.2 628.5 (36.6) (5.5)

5 1.362 665.2 627.9 (37.3) (5.6)

6 1.634 665.2 609.6 (55.6) (8.4)

Table 11.27 Standard Case NPV for Dryer Business - Medium Price Elasticity Scenario

Efficiency Improvement

Trial Standard

Level

MEF - Base Case NPV

($milion)

Standard Case

NPV ($million)

Change in

NPV ($million)

% Change in

NPV

1

____________

1.021 665.1 664.5 (0.6) (0.1)

2 1.089 665.1 660.6 (4.48) (0.7)

3 1.04in2004

1.26 in 2007

665.1 654.1 (11.0) (1.7)

4 1.257 665.1 648.3 (16.84) (2.5)

5 1.362 665.1 647.9 (17.2) (3.9)

6 1.634 665.1 638.3 (26.8) (4.0)

11-3 8

EE-RM-PET-100 COMMENT 88
Table 11.28 Standard Case NPV for Dryer Business - Medium Price/Income Elasticity

Scenario

Trial Standard

Level

MEF Base Case NPV

($million)

Standard Case

NPV ($million)

Change in

NPV (Smillion)

% Change in

NPV

1

______________

1.021 677.2 677.80 .5 0.1

2 1.089 677.2 677.3 0.1 0.0

3 1.04 in 2004

1.26 in 2007

677.2 673.4 (3.8) (0.3)

4 1.257 677.2 670.9 (6.3) (0.9)

5 1.362 677.2 670.8 (6.4) (1.0)

6 1.634 677.2 665.5 (11.3) (1.7)

A further concern voiced by manufacturers, besides the impact on dryer sales, is that the

clothes dryer may no longer match the clothes washer if the new standard results in significant

redesign and retooling of their washer platform. This would decrease the utility of the dryer to the

consumer, further impacting sales and leaving manufacturers with stranded inventory. Since washers

and dryers are generally designed and sold as matched pairs, it is imperative that they conform to a

similar appearance (height, cabinets, control panel, etc.).

At the more stringent standard levels manufacturers expect to significantly redesign and

retool their clothes washer platforms, implying a change to the dryer platform as well. Manufacturers

estimate that at the more stringent Trial Standard Level of 2 and above, total industry conversion

costs for dryers could be in the range of $25 million to $75 million. The GRIM Dryer Analysis does

not consider any conversion costs (capital and design) that might be required to upgrade the dryer

platforms at the higher standard levels. Any such investments that are not reflected in manufacturer

prices would increase the negative impact of standards on the dryer industry's NPV, over and above

those presented in the preceding tables.

11.4.1 Dryer Employment Impacts

The close correlation between dryer and clothes washer shipments could also have an impact

on employment levels within the dryer business. Manufacturers indicated that approximately 50

percent of clothes washers are sold in pairs with dryers. Any decline in clothes washer shipments

would therefore impact dryer shipments. Unlike clothes washers, however, this impact would not

be counter-balanced by increased labor requirements due to more labor-intensive machining and

assembly requirements. Changes to dryers would primarily entail "cosmetic" adjustments to create

a new look to "match" the new washers, rather than a platform change. Consequently, given the

assumption that employment basically tracks shipments (or production levels), the expected impact

of new clothes washer standards on dryer related employment would be a decline in employment

proportionate to the decline in washer-related dryer sales (i.e., the "paired" sales).

11-39

EE-RM-PET-100 COMMENT 88
The implied impact on dryer related employment is detailed in Figure 11.3 below. As

expected, up to a 20 percent improvement in clothes washer efficiency standards (Trial Standard

Level 1) has a minimal effect on dryer employment, given that there is a minimal effect on shipments

at these levels. The greatest impact is at and above a 35 percent improvement (Trial Standard Level

4 and above), when shipments are expected to decline substantially, resulting in a similar impact on

dryer employment levels. At these higher efficiency levels, a 15 to 20 percent decline in

washer-related dryer employment, relative to the Base Case, is to be expected; this decline equates

to between 300 and 500 jobs in the dryer business.

3500

I ___

::: i ________ ______________

_______

2000

C 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 . - - - - - N

- N N N N N N N N N N N N N N N N N N N N N

Figure 11.3 Implied Impact of Decline in Washer Shipments on Clothes Dryer Employment

Levels

11-40

EE-RM-PET-100 COMMENT 88
11.5 CLOTHES WASHER REPAIR INDUSTRY ANALYSIS

From the manufacturer interviews and the clothes washer shipments analysis, it became

apparent that, should an increase in energy efficiency standards result in higher prices for new

clothes washers, consumers may repair old units rather than purchase new ones at the higher price.

This section contains an analysis estimating the impact of any change in clothes washer repair

revenues on clothes washer manufacturers' NPV.

11.5.1 Key Assumptions

In conducting this analysis, several assumptions were considered:

• The number of repairs performed absent standards and at various Trial Standard Levels

• The average cost of repairs

• The parts/labor split for average repair jobs

• OEM market share for repair parts

• OEM market share for repair labor

Number of Repairs. The number of repairs performed absent standard levels and at various

standard levels was estimated using the clothes washer NES-shipment model.

Average Cost of Clothes Washer Repairs. RepairNet.com provides publicly available

information on the average cost of clothes washer repairs. Based on surveys of appliance parts

distributors and service repair technicians, RepairNet.com provides estimates of the average cost of

common repair jobs for each washer manufacturer. A simple average of the costs of all repair jobs

for each of the five maj or manufacturers results in an estimated average repair cost of $133.01. No

data is available on how frequently each repair occurred.

In addition, Consumers' Union was contacted for information to provide a cost comparison

with the above average repair estimate. According to Consumer Union's Survey Research, data on

repair costs have approximately a normal distribution with a trimmed mean of $100 and a range of

$60-$ 130. Given that this mean incorporates the frequency of individual repairs, the $100 figure

seems to be the most reasonable estimate.

Parts/Labor Split. As no data was publicly available on this topic, experienced industry

personnel were interviewed to derive estimates. These interviews indicated that a representative split

for companies who service clothes washers is 80 percent labor and 20 percent parts. This split was

confirmed by a combination of independent and manufacturer-affiliated service companies.

To provide some validation on the annual spare parts revenue, we compared our estimates

to Census data. In 1996, the Census Bureau reported the value of shipments of parts and accessories

for household washing machines at $171 million. Using a cost of $100 per repair and a parts split

of 20 percent, the model produces an estimate of $202 million in annual revenue.

11-41

EE-RM-PET-100 COMMENT 88
OEM Market Share for Repair Parts. In the late 1980's, the National Appliance Parts

Suppliers Association (NAPSA) produced a report titled "Future Study of the Appliance Parts

Industry." NAPSA interviewed a number of manufacturers and suppliers to gain previously

unrecorded knowledge concerning the repair parts industry. Based on responses from the study

participants, original equipment manufacturers controlled 68 percent of the appliance parts market.

It is well known that many OEM's purchase appliance parts, and repackage them under their own

brand. The study did not clarify whether the market share included only OEM-manufactured parts,

or OEM-repackaged parts as well. As this distinction could make a difference in the repair revenue

returned to the OEM, a range of repair revenues was considered in the analysis.

OEM Market Share for Repair Labor. DOE's research indicates that independent service

companies perform approximately 90 percent of post-warranty major appliance repairs, and that this

number is most likely to increase in the immediate future. Based on this information, 10 percent of

the labor revenue was apportioned to the OEM's.

11.5.2 Impact of New Energy Efficiency Standards on the Repair Industry

Figure 11.4 demonstrates the effect of changes in the efficiency standards on the number of

clothes washer repairs performed. The cyclical pattern in the number of repairs is a function of the

average unit life and average life extension achieved through repairs.

11-42

EE-RM-PET-100 COMMENT 88
14.00

13.50

- riT1

13.00 -

__ 12.50 ----------_________ - - ____

12.00 // 2

---

: ___

• Two-tier

10.50 -________ ____________________- ____________-

10.00

9.50

9.00

0)0000000 000 (N

0) 0 (N C) U) (0 N- (0 0) 0 (N C) IC) (0 N- (0 0) 0

0) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N (N

Figure 11.4 Estimated Number of Clothes Washer Repairs (High Price Elasticity Shipment

Scenario)

Source: NES-Shipment Spreadsheet

Using the assumptions summarized in Table 11.29, revenue is calculated by multiplying

$21.60 (Average OEM revenue per repair) times the number of repairs in a given year. A GRIM

Repair Analysis was developed based on the revenues generated from the repairs shown in Figure

11.4. The real impact of these revenues is determined by the extent to which the OEMs are able to

profit from them. A typical net profit figure for the electrical repair industry over the last few years

is 5 percent.a Using this net profit value, the NPV of the estimated profit stream for each shipment

scenario is presented in Table 11.30.

aDu and Bradstreet, Inc., Electrical Repair Industry Profile, October 1999. Gross margin 44%.

11-43

EE-RM-PET-100 COMMENT 88
Table 11.29 Repair Industry Revenue Assum tions

Average cost of repairs $100

The parts/labor split for average repair jobs 20%/80%

OEM market share for repair parts 68%

OEM market share for repair labor 10%

Average OEM revenue per repair $21.60

Table 11.30 Net Present Value of OEM Repair Revenues ($ Millions)

Trial Standard Level

________________________

MEF

________________

High Price

Elasticity

Medium Price

Elasticity

Medium Price/Income

Elasticity

1 1.021 0.2 0.1 (0.0)

2 1.089 0.7 0.2 (0.1)

3

____________________

1.04in2004

1.26 in 2007

1.43

_____________

0.9 (0.0)

4 1.257 1.7

_____________

1.1 0.0

5 1.362 1.8 1.1 0.1

6 1.634 2.4 1.7 0.3

Cash flows for the medium-price elasticity scenario are presented in Appendix P; Base Case

cash flows are in Exhibit 8; cash flows for the 35% level (Trial Standard Level 4) in Exhibit 17 and

18; and cash flows for the two-tier standard (Trial Standard Level 3) in Exhibits 27 and 28.

11-44

EE-RM-PET-100 COMMENT 88
11.6 IMPACTS ON MANUFACTURING CAPACITY

One of the significant outcomes of new standards could be the consequential obsolescence

of existing manufacturing assets, including tooling and investment. The Manufacturer Interview

Guide used a series of questions to identify impacts on manufacturing capacity. These questions were

developed to understand the impact of a clothes washer standard on:

• U.S. and North American manufacturing capacity associated with the production of clothes

washers

• Capacity utilization and plant location decisions in the U.S. and North America both with and

without standards

• The ability of manufacturers to upgrade or remodel existing facilities to accommodate a new

product mix

• The nature and value of stranded assets, if any

During the interviews manufacturers were asked to provide their estimates for any one-time

restructuring and other charges, where applicable. These one-time costs were considered in

developing the cash flow results for both the "no consolidation" and "industry consolidation"

scenarios.

11.6.1 Manufacturing Facilities

The majority of the facilities associated with the manufacture of clothes washers or clothes

washer components distributed within the U.S. residential laundry market are located in the U.S.,

although some manufacturers also have facilities in Canada and Mexico that produce largely for the

U.S. market and that would be significantly affected by any change in U.S. standards. The majority

of these facilities produce a combination of washers and dryers; however the bulk of volume is

driven by washers and any impact on this product affects the capacity utilization of the plant as a

whole.

11.6.2 The Impact ofNew Energy Efficiency Standards on the Production Facility Mix

The impact of any new efficiency standards on the production facility mix depends on the

standards chosen. Table 11.31 below illustrates the effect that various standards levels could have

on the number of clothes washer and clothes washer component manufacturing facilities; the results

indicate at each level either partial or full closure of residential clothes washer or clothes washer

component operations at the affected facilities.

The general conclusion from the Department's interviews is that a standard level of 4 or

greater (improvement of 35 percent and above) will result in the full or partial closure of the

residential clothes washer manufacturing operations at between four to six clothes washer or clothes

washer component manufacturing facilities. At Trial Standard Level 4 and above, the vast majority

of manufacturers maintain that the level of improvement demanded could only be achieved by

converting their platform technology to H-axis from the current V-axis. This would require

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EE-RM-PET-100 COMMENT 88
large-scale investments and broad-based "retooling" of current facilities. At these levels,

manufacturers expect at least one further plant would close and it is possible that another participant

would exit the industry.

Table 11.31 Manufacturer Implied Impact of New Efficiency Standards on Production

Facility Mix

MEF 0.817 0.961 1.021 1.089 1.257

__________________________________________________

(baseline)

________ ________ ________

# of Manufacturing Facilities for Clothes 9 9 9 6-7

________

5-6

Washer*

# of Manufacturing Facilities for Clothes 3 3 2-3 1-2 0-1

Washer components/subassemb1ies*

__________ ________ _______ _______

*Includes facilities in both the U.S. and Mexico

Source: DOE Interviews of U.S. Clothes Washer Manufacturers

As illustrated, most manufacturers predict that there will be minimal, if any, impact on the

number of production facilities up to an MEF of 0.961 (15 percent improvement above the Base

Case).

In the range of MEF 1.021 to MEF 1.089 (20 to 25 percent), manufacturers predicted that at

least one U. S.-based component manufacturing facility would most likely be partially or fully closed.

At least two factors would drive this possible closure:

(i) The overall investment required by manufacturers at this level would be such that in order

to pass on increased fixed costs, prices would rise, reducing volumes and creating excess

capacity to the extent that some consolidation of production facilities may be warranted.

(ii) Higher manufacturing costs associated with the more stringent efficiency standards are likely

to lead to a consolidation in the range of products being manufactured, meaning that some

products or product classes could become obsolete. Plants that currently manufacture these

products would be closed rather than "retooled" as they would be too small to warrant the

investment required to conduct a maj or retooling of machinery to meet the increased

efficiency standards.

One manufacturer indicated its concern that changes above Trial Standard Level 1 (20

percent) would drastically affect its entire product line. Each model would be affected, meaning all

products would need to be redesigned and facilities retooled.

The principal factor forcing players to exit the industry at standard levels greater than Trial

Standard Level 4 is the amount of investment required to change clothes washer platform

technology. Manufacturers estimate that the introduction of a new product or a platform change

would cost tens of millions of dollars in product development costs alone. Tooling and equipment

investments for a mid-size manufacturer could total well in excess of$ 100 million. In order to avoid

11-46

EE-RM-PET-100 COMMENT 88
the financial risk associated with these investments, one or more manufacturer may move towards

sourcing complete washing machines from other manufacturers or source assembled sub-assemblies.

The time needed to retool production facilities for a new design platform and transition

planning is an important consideration. Several manufacturers indicated that it could take more than

3 years of intensive effort to ramp up design to the stage where they could produce a

cost-competitive, mass-market, H-axis washer.

11.6.3 The Impact of New Energy Efficiency Standards on Capacity Utilization and

Manufacturing Assets Levels at Domestic Production Facilities

The total cost to the industry of stranded assets resulting from new efficiency standards is

difficult to judge. The value of stranded assets depends not only on the standard level introduced but

also on the year of introduction, the age of existing assets and the method used for depreciation. The

value of stranded assets is also driven by the amount of specialized fabrication lines that can be

salvaged. In any case, stranded assets would be significantly reduced if there was no requirement

to move to a new technology platform, or if the standard introduction date was such that most

existing assets were fully depreciated by that time.

The determination of industry and company value discussed in Section 11.3 implicitly takes

into account stranded assets. Cash flow analyses are based on a forward-looking assessment of return

on future investment. Any decline in value below the Base Case company/industry value implies a

loss due to "stranded assets." Specifically, on a cash basis, the cash flow analysis captures stranded

assets in the magnitude of the new capital requirements - larger stranded assets lead to greater capital

conversion requirements.

DOE examined industry statistics on the value of property, plant and equipment to gain

insights into the significance of stranded assets. In Section 11.7 the estimate of stranded assets is

used to evaluate the Industry benefit from a greater standards phase-in delay. The analysis also gives

context to the industry's data submittal for capital conversion costs. Table 11.32 is an example of the

break down of the clothes washer industry's property, plant, and equipment assets as percentage

value of industry revenues based on financial information for the appliance industry.

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EE-RM-PET-100 COMMENT 88
Table 11.32 Clothes Washer Industry Property, Plant and Equipment Forecasts for the

Baseline and Trial Standard Level 4 (35 nercent Efficienc ImnrovementI

Industry Statistics % of Revenue

Distribution

Base Case Values Yr

2003 ($ millions)

Standard Case

Values Yr 2004

($ millions)

Revenue 100% 2,374 2,833

Land 0.8% 19 23

Buildings 9.5% 226 269

Machinery and Equipment 44.1% 1,047 1,249

Total Property, Plant and

Equipment

54.4%

______________

1,292

___________________

1,541

_______________

Accumulated Depreciation 29.7% 705 705*

Net Property, Plant and

Equipment

24.8%

_____________

589

__________________

836

______________

* Based on 2003 asset base.

Based on this analysis of industry statistics, DOE estimates that manufacturing assets (i.e.,

net property, plant and equipment value) total approximately 24.8 percent of annual revenue. Based

on annual revenues of $2.374 billion in the year 2003 the net asset base would total $589 million.

These assets would have been acquired at a cost of$ 1.292 billion dollars. Machinery and equipment

represent over 80 percent of the property, plant and equipment assets.

The next subsections illustrate two possible assumptions to estimate stranded assets using

current industry statistics, the AHAM data submittal, and investment figures taken from a

manufacturing cost assessment of V and H-axis clothes washers. In the first approach it is assumed

that the industry cost structure (as a % of revenue) will remain unchanged. The second approach

assumes that the total capital requirements (per unit clothes washer) remains unchanged after a new

standard. Finally, the manufacturing cost assessment is examined to provide insight as to which of

the previous two assumptions is supported by current H-axis manufacturing practice.

11.6.3.1 Assumption 1: Capital Structure (% of Revenue) Remains Unchanged

Table 11.32 describes how the current industry cost structure can be used to estimate future

capital requirements. Assuming the capital structure (% of revenue) remains unchanged after a new

standard comes into effect, the value of total, property, plant and equipment needed to manufacture

clothes washers that are 35 percent more efficient (Trial Standard Level 4) is $ 1.541 billion.

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EE-RM-PET-100 COMMENT 88
Hypothetically, a standard that completely obsoletes manufacturer property, plant and

equipment assets would result in a write-off of $589 million in 2003 ($l.292 billion less

accumulated depreciation). Furthermore, new physical assets would need to be purchased at a cost

of$l.54l billion. Of course, this is a worst case scenario. A best case scenario would assume that

the pre-standard assets would roll over completely in the post-standards manufacturing processes and

thus only $249 million of new assets would be required. By means of comparison, manufacturefs

data submittal at the 35 percent efficiency (Trial Standard Level 4) is $631 million, a value closer

to the best case.

Table 11.33 illustrates an approach used to estimate the book value of stranded assets in

2004, for Trial Standard Levels 1,2,4, and 5.

Table 11.33 Estimate of Industry Stranded Assets (Assuming Industry Maintains Current

Cost Structure) ($million)

Description Trial Standard Level

1 2 4 5

Revenues $2,489 $2,749 $2,833 $2,844

Pre-standard Property, Plant and Equipment $1,292 $1,292 $1,292 $1,292

Post-standard Property, Plant and Equipment $1,354 $1,495 $1,541 $1,547

New Capital Required (Based on new

revenues)

$62 $204 $250 $255

AHAM Capital Conversion Costs (AHAM

data submittal)

$166 $533 $631 $631

Capital Replaced (Gross Stranded Assets) $104 $330 $381 $375

NET Capital Write-off (subtract depreciation) $48 $150 $174 $171

Capital Replaced as % of Pre-standard

Property,_Plant and_Equipment

7.9%

___________

25.1%

__________

29.0%

__________

28.5%

__________

From the above analysis, a standard requiring a 35 percent energy efficiency improvement

(Trial Standard Level 4) would obsolete $381 million in assets resulting in an accounting loss of

$174 million dollars. Similar analyses yield asset write-offs of $48 million, $150 million and $171

million at efficiency levels of 20 percent (Trial Standard Level 1), 25 percent (Trial Standard Level

2) and 40 percent (Trial Standard Level 5), respectively.

11.6.3.2 Assumption 2: The Per Unit Clothes Washer Capital Requirements Are

Unchanged

The analysis summarized in Table 11.33 explicitly assumes that the manufacturing cost

structure remains unchanged after a new standard comes into effect (i.e. the value of property, plant

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EE-RM-PET-100 COMMENT 88
and equipment will represent the same percent of annual revenues before and after standards). This

may not be the case however. The differential manufacturing cost assessment of baseline and high

efficiency clothes washer performed by the Department calculated slightly lower per unit clothes

washer investments for H-axis clothes washers compared to V-axis clothes washers despite total

production costs which are 60 percent greater for H-axis designs. The higher production cost of

H-axis designs was attributed primarily to the much greater value of purchased components. The

manufacturing cost assessment summarized in Chapter 5 notes that the investment costs are driven

by design choices, manufacturing process selection, and make versus buy decisions. All of these are

subject to change if the manufacturing volumes are significantly increased.

From the above observation, another possible assumption for future capital requirements is

that for a given manufacturing capacity, industry will maintain its current total value of plant,

property and equipment. This is an intermediate assumption that sits squarely between the constant

percent revenue assumption and the manufacturing cost assessment result of reduced per unit capital

costs. Table 11.34 recalculates the value of stranded assets assuming the absolute value of property,

plant and equipment post-standards is the same as the pre-standard value. Given the available

information, the values for capital replaced calculated as a percent of pre-standard property, plant,

and equipment, are our best estimate of the value of stranded assets.

Table 11.34 Estimate of Industry Stranded Assets (Assuming Industry Maintains Current

Value of Plant, Property and Equipment) ($million)

Description Trial Standard Level

1 2 4 5

Revenues

Pre-standard Property, Plant and Equipment $1,292 $1,292 $1,292 $1,292

Post-standard Property, Plant and Equipment $1,292 $1,292 $1,292 $1,292

New Capital Required (Based on new revenues) $0 $0 $0 $0

AHAM Capital Conversion Costs (AHAM data

submittal)

$166 $533 $631 $631

Capital Replaced (Gross Stranded Assets)

______________

$166

_____________

$533

_____________

$631

_____________

$631

NET Capital Write-off (subtract depreciation) $76 $243 $288 $288

Capital Replaced as % of Pre-standard Property,

Plant and Equipment

13%

___________

41%

___________

48%

___________

48%

___________

11.7 IMPACT OF THE EFFECTIVE DATE ON NEW STANDARD

Except for the consensus recommendation, the Industry cash flow Impacts presented in

Section 11.3 assume a standard announcement date of late 2000 with the new standard taking effect

at the beginning of 2004. This corresponds to the minimum phase-in time required by the

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EE-RM-PET-100 COMMENT 88
legislation. This section analyzes the impact of a longer phase-in period on the industry cash flows.

It provides an analytical foundation to the enhancements to the GRTM made necessary by the desire

to study the impact of delaying standard implementation dates. Section 11.7.1 discusses the effect

of increasing the phase-in time by up to 6 additional years. Section 11.7.2 analyzes the effect of a

delay on both dryer and clothes washer repair businesses. GRIM operating principles for a delay in

the effective date are discussed in Appendix P.

11.7.1 The Impact of a Delay in the Effective Date on Cash Flow

A delay in the effective date of a new standard can mitigate the cash flow impact of standards

in several ways. First, delaying the effective date discounts the net present value of the

standards-induced investments. Second, a delay allows more time to plan an orderly transition

between existing and future capital requirements in plant, property and equipment. Third, more

lead-time increases the opportunity to divert "ordinary" research and development (R&D) towards

energy efficiency improvements. Given several additional years of product development, there is a

possibility that innovation may result in less costly high efficiency clothes washer designs than

currently anticipated.

The following sections detail how the GRIM model was used to estimate the change in

Industry cash flows resulting from a delay in the effective date. As described below, the GRIM

already captures the effects of discounting. However, additional assumptions and modifications

were made to capture the benefits of improved capital and R&D planning. Given the highly

speculative nature of forecasting product and process innovation, no attempt is made to quantify this

potential benefit.

11.7.1.1 Discounting

The GRIM model captures the time value of money by discounting future cash flows at the

Industry's weighted cost of capital adjusted for inflation. For instance, since GRJIM cash flows are

net of inflation, the capital conversion and product conversion costs are the same regardless of

implementation date. Each year the investments are delayed, lowers the NPV of these investments

by 6.65 percent.

11.7.1.2 Ordinary Capital Expenditures Assumption

Ordinary capital expenditures are the investments associated with maintaining and replacing

existing production assets. In the Base Case the GRIM models ordinary capital expenditures as a

percentage of revenues. This percentage value is slightly greater than the value of ordinary

depreciation. This allows for maintenance of the Industry's capital stock and factors the growth in

assets needed to respond to slowly increasing Industry shipments.

Given a delay in the implementation date, manufacturers can better plan their ordinary capital

expenditures and fuily depreciate that portion of their production assets that will not be required after

the standard. In order to model this effect the following steps were taken:

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EE-RM-PET-100 COMMENT 88
The value of "stranded" production assets was estimated for each standard level as detailed

in Section 11.6. Stranded assets do not need to be maintained.

For each delay year, the ordinary capital expenditures in the Base Case were reduced by a

factor equal to the percentage of stranded assets.

Table 11.35 summarizes the value of stranded assets and stranded assets as percentage of

pre-standard assets as previously described in Table 11.34. These figures are used to reduce ordinary

capital expenditures in delay years. It can be observed that at Trial Standard Level 4 (35 percent

efficiency improvement), 288 million dollars of current plant, property, and equipment assets are

stranded. This value represents 48 percent of the pre-standard assets. To model the potential benefit

from a delay, "ordinary" capital expenditures are reduced by this percentage value for the delayyears.

The GRIM model also allows the user to define stranded assets as a function of revenue consistent

with Table 11.33.

Table 11.35 Stranded Assets as a percent of Pre-standard Assets

Efficiency Stranded Assets

______________ I

Trial

Standard

Level

Efficiency

Level

MIFF Value of Stranded

Assets ($miltions)

Stranded Assets as a

% of Pre-Strallded

Assets

5% 0.860 0.5 0.1%

10% 0.908 6.6 1.1%

15% 0.961 10.6 1.8%

1 20% 1.021 75.9 12.7%

2 25% 1.089 243.2 40.6%

4 35% 1.257 287.5 48.0%

5 40% 1.362 287.5 48.0%

11.7.1.3 R&D Assumption

The design and marketing costs associated with a new standard are very significant. Design

costs are costs incurred for the purpose of designing and developing more efficient products and the

processes needed for their manufacture. Marketing costs are the expendable costs for new product

advertisements, product literature and catalogs, product obsolescence and various related marketing

expenses. Table 11.36 summarizes the aggregated design and marketing costs submitted by AHAM.

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EE-RM-PET-100 COMMENT 88
Table 11.36 Standards-Related Design & Marketing Expenditures

I

Efficiency Design & Marketing

Trial Standard Level J E1ilcicnc Level j iEJT StniItiouis

______________________ 5% 0.860 1.3

10% 0.908 7.3

15% 0.961 12.8

1 20% 1.021 54.8

2 25% 1.089 154.1

4 35% 1.257 179.0

5 40% 1.362 179.0

In the Base Case industry cash flow, it is assumed that industry spends 1.8 percent of annual

revenues on the design of new products and manufacturing processes. Assuming Base Case

revenues of $2.35 billion in 2002, this amounts to an annual expenditure of $42 million.

Additionally, manufacturers spend considerable sums marketing existing and new products. These

costs, included in the Base Case SG&A input, can approach the sums spent on R&D.

A delay in the standards phase-in delay allows more time for better integration of the Base

Case design and marketing of "ordinary" expenditures. To model these benefits we made the

assumption that a delay would allow companies to redirect their ordinary R&D costs towards

standard-related marketing and design in each delay year. The magnitude of the redirection is the

lower of the standard-related marketing and design value divided by the number of delay years or

50 percent of ordinary R&D.

11.7.2 The Impact of a Delay in Effective Date on Dryer and Clothes Washer Repair

Businesses

The impact of a delay on the dryer business is to postpone the reduction in shipments and the

associated revenue losses. For the repair business, delaying the implementation date postpones the

increase in the number of clothes washer repairs and lowers the NPV gains in the repair business.

11.8 IMPACT ON SMALL MANUFACTURERS

11.8.1 Introduction

During interviews DOE found that basic cost structures among the various manufacturers did

vary. Manufacturing large volumes and optimizing production for these levels can create a

significant cost advantage. Smaller manufacturers of clothes washers could thus be affected more

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EE-RM-PET-100 COMMENT 88
negatively than other manufacturers by any proposed standard because of their need to spread fixed

costs over smaller production volumes.

To assess the potential impacts of possible washer standards on smaller manufacturers, the

Department prepared a cash flow analysis of the potential effects on a prototypical smaller

manufacturer. Based on this analysis, it appears likely that any standard that necessitates a departure

from current basic designs would have substantial negative impacts on smaller manufacturers and

could well cause smaller manufacturers to cease producing washers covered by the proposed

regulations. However, while the smaller manufacturers may cease to manufacture clothes washers,

they may choose to remain in the market by sourcing washers from other producers.

At the time of the manufacturer interviews, the U.S. washer industry had one manufacturer

of washers with a production volume of approximately 300,000 units (Alliance Laundry Systems,

LLC), most of whose production was supplied to another relatively small appliance company

(Amana Appliances) under the terms of a private label supply agreement entered into when the two

companies were sold by Raytheon. This agreement ended in September 1999, and Amana announced

that it would produce its own vertical-axis washers instead of sourcing them from Alliance. Other

specialty niche manufacturers of washers do exist in the United States, but no other smaller company

has more than a 1 percent share of washer production.

Amana and Alliance both report that any standard that requires a 25 percent or higher

improvement (standard level 2 and above) in energy efficiency would certainly require major

investments and the development of a horizontal- axis machine. At this time, neither Amana nor

Alliance believes they have a functioning horizontal-axis washer capable of cost-competitively

participating in the mass consumer marketplace.

The fundamental challenge for a smaller manufacturer is to manage a major change in washer

technology. Converting from the company's current basic product line involves creating a new

design, testing it, and moving it into production, with any concomitant capital investments. Smaller

manufacturers typically have fewer resources in terms of both engineers and technical facilities than

do many of the larger washer producers. Moreover, as previously mentioned, in the specific situation

of the washer industry, neither of the two smaller manufacturers has access to horizontal-axis washer

designs appropriate for the mass consumer market. Therefore, any standard that forces these

companies to make a major change in technology would, at a minimum, force them to make

significant investments and could force them to develop a product for which they do not have an

existing technical base of experience. This would be a highly uncertain and risky set of

circumstances for either company.

One critical issue for smaller companies is their ability to spread the fixed costs of meeting

a standard over smaller production volumes, particularly engineering and product-development costs

and the necessary investments in plant and equipment. For an industry average firm (assuming

approximately a 20 percent market share), these costs (amortized over five years) range from $.07

per unit at a 5 percent efficiency improvement (MEF= 0.860) to nearly $25 per unit at 45 percent and

50 percent (MEF=l .63 4) improvements. At more stringent 45 and 50 percent standard levels, the

11-54

EE-RM-PET-100 COMMENT 88
per-unit cost for a smaller manufacturer could be $20 higher than for the industry average. This

difference is likely to result in a significant negative impact on smaller manufacturers since pre-tax

profits in the washer industry are currently less than $20 per unit for the average manufacturer and,

based on interviews, lower for smaller manufacturers.

Based on composite production-cost data and multiple reports from manufacturers on the

costs of product design and production capacity, a company currently producing 300,000 or fewer

units per year is likely to lose the majority of its value and could have a negative value if it chose to

convert to horizontal-axis technology. For reference, a company that maintains its current company

value would earn a market return on its investment. Any company whose value drops below the Base

Case is not earning economic returns and companies with a negative company value are probably

better off ceasing production than making the conversion investment.

11.8.2 Small Manufacturer Modeling Approach

The basic approach adopted in this report to analyze the economic effects on a smaller

manufacturer involves determining the smaller company's fixed cost structure relative to the industry

average and the likely ability of the smaller company to recover its full costs and investments after

a new standard. For the purposes of a small manufacturer impact analysis, DOE assumed that the

Base Case variable cost structure (including labor, materials, and factory overhead costs), which

represents the industry average, applies to smaller manufacturers as well. Second, DOE assumed that

the final post-standards ex-manufacturer price for washers equilibrates at a level that preserves the

value of the company with a 20 percent market share. Finally, to isolate variables, we assumed that

market share would remain constant after the introduction of a standard. All three of these

assumptions tend to minimize the effects of any potential standard on a smaller manufacturer.

All evidence from the manufacturers, and the basic tenets of economic theory, indicate that

the actual cost structure for a smaller company in the appliance industry will be higher, on a

percentage of revenue basis, than the cost structure for a larger company. Larger volumes allow

larger firms to secure better terms from suppliers, reducing their costs and improving their

competitive position and ability to absorb additional fixed costs. Therefore, this analysis which

assumes that a smaller company has a baseline cost structure that parallels the industry average

overstates the initial value of the company and understates the effects of any regulations.

11.8.2.1 Price Assumption

Small manufacturers, with equivalent market share, have relatively little market power and

so cannot affect market prices. They must accept the prices imposed by the larger players. Small

manufacturers carmot increase their prices to recoup their investments unless the larger

manufacturers succeed in doing so themselves. The exceptions to this are if they accept a loss in

market share (which they can ill afford due to the importance of volumes in spreading fixed costs)

or if they have a niche product with features that consumers value and are prepared to pay a higher

price for.

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EE-RM-PET-100 COMMENT 88
The assumption for the final washer prices in a post-regulation scenario is based on the cost

structure for a participant with a 20 percent market share. This is a company whose costs

approximate the industry average and, therefore, is a logical choice for modeling pricing equilibrium.

The price that generates a market rate of return on standards induced investment is likely to be, for

a firm with industry average costs, the maximum price achieved in the marketplace. Actual

competitive conditions, however, may cause manufacturers to compete more vigorously, pushing

down prices from this level.

11.8.2.2 Shipments Assumption

Based on the Department's shipment forecasts, shipments will decline initially for any

standard that leads to a significant increase in washer prices. The shipment forecasts used for small

manufacturers assume a constant market share before and after standards. The market share values

are 2.1 percent for small manufacturer 1 and 4.2 percent for small manufacturer 2. Table 11.37

illustrates base year shipments of V and H-axis washers for each manufacturer.

Table 11.37 Base Year Shipments

• Shipuicul

.Scenario

Small FIan i

(2.1%)

V-Axis

Small Man 1

(2.1 %1

H-Als

Small Man 2

(4.2%l

V-Axis

Small Man 2

(4.2%)

iI-Aii

Large Man

(20%)

V-Axi

Large Man

(20%)

H-Ais

High Price 151,900 15,100 303,700 30,100 1,446,400 143,500

Med Price 150,800 15,000 301,500 29,900 1,435,900 142,500

Med P/I 151,500 15,000 303,000 30,100 1,442,900 143,200

11.8.2.3 Product Conversion Cost Assumption

The costs to design, test and introduce a new technology have a significant fixed component.

It does not cost a company with four times the volume four times as much to develop a product

because much of the engineering and testing are a function of the number of models rather than the

production volume. In most manufacturing industries, companies with larger volumes tend to have

more extensive engineering organizations, do more testing and investigate more potential options

to enhance their products or reduce their manufacturing costs. Based on the Department's discussions

with washer manufacturers and the manufacturer's estimates of their own development costs, 15 to

25 percent of the engineering cost of the average sized firm is fixed, implying that a small

manufacturer will spend at least this fraction of the large manufacturer's engineering costs.

11.8.2.4 Capital Investment Assumption

Plant and equipment investments are inherently more variable than engineering costs.

Nevertheless, there is a fixed component to production engineering and to building the plant facilities

and there are minimum volumes for efficient production lines. Beyond these fixed costs, production

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EE-RM-PET-100 COMMENT 88
related investments are largely variable based on the number and capacity of the production lines

necessary to meet the anticipated volumes.

Again, based on discussions with washer manufacturers, 10 to 20 percent of the capital

investment requirements for the average sized firm are fixed.

11.8.2.5 Summary of Key Assumptions

In order to determine the financial effects on smaller manufacturers of a significant shift in

washer technology, DOE estimated the company value for a smaller manufacturer using the GRIM

and the following assumptions:

• Base Case V-axis production volume of approximately 300,000 units in 2004, approximately

equal to the past volume of Allianc&s production, with a sensitivity of approximately

150,000 units in 2004. These production volumes correspond to V-axis market shares of 4.2

percent and 2.1 percent respectively. These market shares are used to scale industry

shipments for the Base Case and Standard Case shipments.

• Total costs for engineering and investments for capital conversion as reported by AHAM.

• Fixed percentages of engineering and capital (15 percent for capital investment and 20

percent for engineering) based on interviews with manufacturers.

• Labor, material and overhead costs equal to the overall industry levels as submitted by

AHAM. All other assumptions from the Base Case industry GRIM analyses.

• Ex-manufacturer prices based on industry levels.

The results of the smaller company GRIM analysis are shown in Tables 11.38 through 11.40.

These results represent the change in millions from Base Case NPV to Standard Case NPV.

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EE-RM-PET-100 COMMENT 88
Table 11.38 Change in Value of Small Manufacturers, Results for the "No Consolidation"

Scenario - High Price Elasticity Scenario (%)

Trial

Standard

Level

MEF

____________

Large Manufacturer

(20% Market Share)

___________________

Small Manufacturer

(4.2% Market share)

_____________________

Small Manufacturer

(2.1% Market share)

1 1.021 (1 .9)-(6.9) (18. 1)-(23.0)

____________________

(38.5)-(43.4)

2 1.089 (30.5)-(41 .0) (80. 1)-(90.6) (142.8)-(1 53.4)

3

_________

1.04 in 2004

1.26 in 2007

(34.4)-(41.4)

__________________

(86.2)-(93.3) (151.9)-(158.9)

4 1.257 (39.3)-(45.9)

____________________

(93.2)-(99.8)

___________________

(161 .3)-(1 67.9)

5 1.362 (35.7)-(40.3) (89.4)-(94.0) (157.4)-(162.0)

6 1.634 (39.4)-(50.0) (93.1)-(103.8) (161.1)-(171.8)

Table 11.39 Change in Value of Small Manufacturers, Results for the "No Consolidation"

Scenario - Medium Price Elasticity Scenario (%)

Trial Standard

Level

MEF

_____________

Large Manufacturer

(20% Market Share)

Small Manufacturer

(4.2% Market share)

Small Manufacturer

(2.1% Market share)

1 1.021 (1.3)-(6.2) (17.4)-(22.4) (37.9)-(42.8)

2 1.089 (28.2)-(39.0) (78.9)-(89.8) (143.1 )-(1 53.9)

3

_____________

1.04 in 2004

1.26 in 2007

(28.6)-(36.0)

__________________

(83.1)-(90.6)

_________________

(152.2)-(159.6)

___________________

4 1.257 (34.4)-(41 .5) (91 .8)-(98.9) (1 64.4)-(171 .6)

5 1.362 (30.4)-(35.4) (87.7)-(92.7) (1 60.3)-(1 65.3)

6 1.634 (31 .2)-(43.3) (90.7)-(102.8) (1 66.0)-(178. 1)

Table 11.40 Change in Value of Small Manufacturers, Results for the "No Consolidation"

Scenario - Medium Price/Income Elasticity Scenario (%)

Trial

Standard

Level

MEF

_____________

Large Manufacturer

(20% Market Share)

____________________

Small Manufacturer

(4.2% Market share)

Small Manufacturer

(2.1% Market share)

1 1.021 (0.9)-(5.9)

______________________

(17.1)-(22.1)

_____________________

(37.6)-(42.6)

2 1.089 (26.9)-(38.0) (78.3)-(89.4) (143.2)-(154.4)

3

_________

1.04 in 2004

1.26 in 2007

(25.9)-(33.7)

___________________

(82.1)-(89.8)

____________________

(153.2)-(160.9)

___________________

4 1.257 (31 .4)-(38.9) (90.9)-(98.4) (166.2)-(173.7)

5 1.362 (27.2)-(32.5) (86.7)-(92.0) (162.0)-(167.2)

6 1.634 (26.6)-(39.6) (89.4)-(102.4) (168.8)-(181.8)

11.8.3 Summary of Results

The changes in value for the large company and for the smaller companies in Tables 11.38

through 11.40 illustrate how the inability to spread fixed costs over production volumes can

negatively impact the small manufacturers' value.

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EE-RM-PET-100 COMMENT 88
The results possibly understate the situation for the smaller manufacturers because they

assume that labor, materials, and overhead costs for the smaller manufacturers equal the industry

average. In reality, small manufacturers production costs are greater than the industry average, which

would tend to reduce both their Base Case and their post-regulatory company values.

The decision by either of the smaller producers, or any other washer manufacturer, to exit

washer production would require an assessment of the linkages with their dryer business and with

other appliances. Manufacturers and their retail partners generally perceive some value in being a

full-line producer and greater value in producing both washers and dryers. If a manufacturer

perceived significant value in its dryer businesses and if the total product line generated acceptable

rates of return, it might continue to produce washers, even in the face of declining company values

due to investment in new washer technology. Based on the major loss in company value associated

with meeting a Trial Standard Level of 2 and above (25 percent energy savings or more), it is likely

that one or both of the two smaller companies would cease to produce washers covered by the

standard and might also cease to market them.

11.8.4 Other Impacts

Beyond the evaluated cash flow impacts, smaller manufacturers face a number of other

challenges. Small manufacturers may find it difficult, relative to the larger manufacturers, to raise

the capital necessary to make the investments required for meeting the new efficiency standards.

This impacts small manufacturers' ability to achieve a seamless transfer to a new technology

platform. Moreover, because of a lack of economies of scale, smaller manufacturers may be unable

to achieve cost reductions when introducing new manufacturing processes.

11.9 EMPLOYMENT IMPACTS

The impact of new energy efficiency standards on employment is an important consideration

in the rule making process. In order to assess how domestic employment patterns might be affected

by new energy efficiency standards for clothes washers, the Manufacturer Interview Guide was used

to explore current trends in clothes washer production employment and solicit manufacturer views

on changes in employment patterns resulting from new energy efficiency standards. The employment

impacts section of the interview guide was used to understand:

Current employment levels associated with clothes washer manufacturing at each production

facility

Expected future employment levels both with and without a clothes washer standard

Differences in workforce skills, and issues related to retraining of employees

In order to maintain confidentiality, employment impacts were aggregated and reported at

the industry level.

The weight of available evidence does not support a conclusive assessment of the impact that

new energy efficiency standards would have on employment levels. The data that is available is

11-59

EE-RM-PET-100 COMMENT 88
extremely variable and the true extent of the impact will be largely dependent on whether

manufacturers choose to exit the industry or move to non-domestic production facilities.

During the course of the interviews, most manufacturers indicated that they believed any

increase in efficiency standards that affected the competitive environment of the clothes washer

industry would have a negative impact on industry employment levels. Manufacturers indicated that

there is some correlation between employment levels and production volumes. While the

relationship is not strictly linear, a decline in volume would nevertheless result in a decline in

employment levels. In addition, should margins decline, as expected, manufacturers maintained that

there would be increased pressure on cost reduction, which could result in further reductions in

overhead employment levels. This impact would be exacerbated should the cost pressure be such

that it forces firms to exit the industry.

Table 25 illustrates the "worst case" manufacturer implied impact of new energy efficiency

standards on employment levels in the clothes washer industry. This assumes the industry suffers

the full effect of the partial or full closure of operations relating to residential clothes washer or

clothes washer components manufacturing or firms exiting the industry as a result of the new

standards. Of note, in Table 11.41, at Trial Standard Level 4 and above (35 percent improvement

level or greater), the manufacturer's implied impact is a 25.6 percent decline in total industry

employment levels (driven primarily by the possible exit of one or more firms from the industry).

Table 11.41 "Worst Case" Manufacturer Implied Impact of New Energy Efficiency

Standards on Eirtployiienl Levels resulting from Plant Closures*

MEF ° 1 _0.961 02] I .089 I .257

Impac] untotal hidristrv EiiipIoyes Approx -250 -550 -1580 -2380

9,300

Mariiitc]utcn iii Iridusiry 6 6 6 [ L I

Source: DOE Interviews of U.S. Clothes Washer Manufacturers

*This table considers only employees at those facilities in the U.S. and Mexico that produce washers or washer

components for the U.S. home laundry market

However, while these numbers approximate the employment impact on current

manufacturers, total employment based on shipment volumes may more accurately reflect the impact

on the industry as a whole. While reductions in shipments may indeed lead to reductions in

employment at various manufacturers due to the full or partial closure of related manufacturing

facilities, any reductions from firms exiting could be matched by increased employment in U.S.

plants at those firms picking up this additional market share and volumes. In addition, the

manufacturers' data supplied to AHAM indicates that incremental labor-related costs are expected

to increase at the various efficiency levels, due to the increased complexity of production and

assembly of more efficient machines.

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EE-RM-PET-100 COMMENT 88
Table 11.42 illustrates the manufacturer's estimated incremental labor costs. Using this data,

and the shipment data, an estimated impact on employment levels can be implied that reflects

changes in employment levels based on the volume of production in the industry. Figure 11.4

illustrates the expected impact on employment levels based on industry shipments and using labor

expense as a proxy for labor levels.

Table 11.42 Expected Incremental Labor Costs at Various Efficiency Levels

Trial

Standard

Level

Efficiency

Level

_________

MEF

__________

Incremental Labor Coij

($ per machine)

- Total Labor Cost

($ per machine)

Baseline BaseLine 0.8 17

______________________

0

__________________

29.3

_____________

5% 0.860 00! 29.31

____________

10% 0.908 0.04 29.34

___________

15% 0.961 0.10 29.40

I 20% 1.021 (0.02) 29.28

2 25% 1.09 8.61 37.91

4 35% 1.257 10.94 -

40.24

5 40% 1.362 15.52 44.82

6 50% 1.634 15.68 44.98

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EE-RM-PET-100 COMMENT 88
14.00

13.50

- - -- -- --

bw'oiiej

_

10.00 __ _

9.50

9.00

O 0 (N C) U) (0 N- (0

0) 0 0 0 0 0 0 0 0 0

0) 0 (N 0) U) (0 N- (0 0) 0

0 (N

0) 0 0 0 0 0 0 0 0 0

(N (N (N (N (N (N (N (N (N

0 0 0 0 0 0 0 0 0 0 0 0

(N CN (N (N (N (N (N (N (N (N (N (N

Figure 11.5 Predicted Impact on U.S. Clothes Washer Industry Employment Levels

Source: AHAM Data Submittal, DOE Analysis

Figure 11.4 illustrates predicted changes in overall industry employment levels at various

Trial Standard Levels under "best case" assumptions. Changes in employment levels are calculated

as a function of total shipments, as forecasted in the NES, and incremental increases in labor

expense, at the various standard levels. The results show that employment will track shipments and

actually increase due to the incremental increase in labor required for more efficient machines. This

does not, however, take into effect the impact of plant closures nor of firms exiting the industry or

moving production offshore. It assumes domestic manufacturing facilities maintain their dominance

of the U.S. market and that any loss of jobs resulting from plant closures is compensated for by a

corresponding increase in employment at another domestic production facility.

All the above arguments have some validity, which makes it extremely difficult to accurately

assess the impact of new efficiency standards on industry employment levels. The clearest

conclusion is that the real impact on employment levels will be felt if standards are such that

manufacturers choose to exit the industiy or move domestic production facilities outside the U.S.

in an effort to reduce incremental labor costs associated with more efficient machines.

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EE-RM-PET-100 COMMENT 88
Finally, it should also be noted that as washer sales are correlated with dryer sales,

employment levels in the clothes dryer industry may also be impacted by changes to the clothes

washer standards. This impact is quantified in Section 11.4 entitled ulmpact on Clothes Dryer

Business."

11.9.1 Impact on Workforce Skills Required Under New Energy Efficiency Standards

The majority of manufacturers indicated that no extensive retraining would be required for

a shift toward a different platform technology as a result of changes in the energy efficiency

standards. Any changes/training would be job specific to particular manufacturing positions or

research positions (e.g., technical knowledge of H-axis design in R&D). There would be no changes

in corporate or associated manufacturing support activities (such as welding, painting, etc.).

11.10 CUMULATIVE REGULATORY BURDEN

While any one regulation may not impose a significant burden on manufacturers, the

combined effects of several impending regulations may have serious consequences for some

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single

regulation may overlook this cumulative regulatory burden.

Companies that produce a wider range of regulated products may be faced with more capital

and product development expenditures than their competitors. This can prompt those companies to

exit one or more markets or reduce their product offerings, potentially reducing competition. Smaller

companies can be especially hard hit since they have lower sales volumes over which to amortize

the costs of meeting new regulations. If multiple regulations drain the resources of companies across

an industry, industry value can be reduced. That can make the industry more susceptible to foreign

competition and reduce the attractiveness of investing in the sector.

DOE considers that a proposed standard is not economically justified if it contributes to an

unacceptable cumulative regulatory burden.

11.10.1 Regulations on Other Products Produced by Clothes Washer Manufacturers

In addition to the efficiency regulations DOE imposes on clothes washers, clothes washer

manufacturers typically produce other appliances, some of which face regulations of their own. For

instance, many clothes washer manufacturers will be impacted by recently published minimum

efficiency standards for refrigerator/freezers and room air-conditioners. DOE also plans to reassess

efficiency standards for central air conditioners, clothes dryers, and residential furnaces-products

produced by some clothes washer manufacturers. Additionally, most manufacturers are facing

regulations from other agencies. The most significant of these are the Environmental Protection

Agency (EPA)-mandated phase-outs of Hydrochlorofuorocarbons (HCFCs). Table 11.43 provides

the timetables for some key Federal regulations.

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EE-RM-PET-100 COMMENT 88
Table 11.43 Future Regulations Affecting Appliance Manufacturers

Regulation Affected Appliances Effective Date

DOE ban on the manufacture and Room air conditioners October 1, 2000

import of products that exceed

maximum energy use criteria Refrigerators/freezers July 1, 2001

Central air conditioners 2006*

___________________________________

(residential)

EPA ban on the manufacture and Refrigerators, freezers, and water

___________________________________

January 1, 2003

import of HCFC- 141b (blowing heaters

agent)

EPA ban on the manufacture and Room and central air conditioners January 1, 2010

import of equipment using HCFC (HCFC-22)

refrigerants

EPA standards on emissions of Clothes washers and dryers, central November 15, 2003 *

allowable hazardous air pollutants air conditioners, refrigerators,

from the coating of large freezers, furnaces

appliances (NESHAP/MACT

standards, Clean Air Act Section

112(d)) ______________________________ ______________________________

* Tentative

The above regulations can significantly affect the other product lines of clothes washer

manufacturers. Table 11.44 lists the market shares of clothes washer manufacturers in the products

that face the regulations listed in Table 11.43. Because of the extensive manufacturer overlap in the

production of both refrigerators and clothes washers, regulations affecting refrigerators, including

the HCFC- 141 b ban and the efficiency standards, will have a direct effect on the clothes washer

industry.

Table 11.44 Market Shares of Major Clothes Washer Manufacturers in Other Products

Faced with Future Regulations

Manufacturci Clothes Rcfrigcraors Fieezer Room Air Central Air

Was hers Coitd ilioners Conditioners

Whirlpool 52 26 20

Maytag 19 0

GeueiaI Elcctric 7 35

E1ecro1Lx/Frigidau 7 [9 75 20

Goodrnan/Amiria 5 9 7 19

TOTAL 100 99 75 47 19

Source: Appliance, September 1998.

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EE-RM-PET-100 COMMENT 88
Table 11.44 also illustrates how broadly regulations affect some companies. Amana and

Frigidaire, in particular, derive revenues from many appliances that are subject to Federal regulation.

Cumulative regulatory burden can be particularly acute for these companies and can raise concerns

over the continued viability of one or more of their product lines.

Table 11.45 indicates the level of impacts that the clothes washer industry may face due to

other regulations. The uncertainty surrounding these values is high for several reasons. First,

manufacturer impacts depend largely on the company's ability to pass conversion costs through to

consumers. Second, information on capital expenditures, R&D, and other conversion costs and

project plans are usually considered confidential. Third, companies may be able to incorporate

regulatory-driven expenditures into other product development or process improvement efforts.

Table 11.45 Estimated Impacts of Approaching Regulations on Clothes Washer

Manufacturers

Regu1fflon Estimated Inipa1 MIaSUF& of linpaci and Source of Data

(inillioli)

_________________________________

Refrigerator/freezer $500

___________________________________________________________________________________

Conversion costs from DOE rule-making analysis Reduction

efficiency standards $200 in industry net present value from the Joint Comments on

the DOE rule (EE-RM-93-801)

HCFC-141b phaseout $50 Conversion cost estimate based on manufacturer interviews

(assuming transition to 245fa)

Room air conditioner $60 Conversion cost estimate based on manufacturer interviews

efficiency $4 Conversion costs from DOE Room Air rule-making analysis

MACT standards N/A (lnfbrrnation not available)

HCFC-22 pimseout N/A lutormation not avaiabJe)

The most significant regulation facing the clothes washer industry appears to be the DOE

refrigerator/freezer efficiency standard that goes into effect July 1, 2001. Manufacturers are currently

making or have already made the investments required to meet the new standard.

Even though no cost information is available for either the HCFC-22 phaseout or the

Maximum Achievable Control Technology (MACT) standards, both are likely to have significant

impacts. Depending on the alternative refrigerant the market selects, the HCFC-22 phaseout could

cause air conditioner manufacturers to undergo complete product redesign and retooling. Depending

on each manufacturer's current coating process, the MACT standards could require manufacturers

to reformulate their coatings or completely replace their coating facilities and processes. In EPA's

preliminary study, none of the six clothes washer facilities attained the recommended MACT

requirements, and half exceeded the requirements by more than 400 percent. Three refrigerator plants

also exceeded the recommended MACT standards by a substantial margin. One manufacturer

anticipates spending over $50 million to comply with the pending MACT standards.

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EE-RM-PET-100 COMMENT 88
11.10.2 Other Regulations

In addition to the regulations described above, clothes washer manufacturers have identified

other regulations that concern them. One example is the DOE appliance test procedures. New test

procedures can prompt product redesign and investments in testing apparatus. DOE is revising its

test procedures for several products, including residential central air conditioners. DOE has currently

assigned a low priority to new test procedures for some other appliances that clothes washer

manufacturers produce: clothes dryers, HID lamps, refrigerators, room air conditioners, and small

electric motors.

Other potential regulations facing the clothes washer industry manufacturers include

international mandates on recycling, Federal Communications Commission (FCC) radio interference

regulations on microwave ovens, product safety standards, and EPA regulations on water discharge

and pretreatment.

11.11 IMPACT ON SUPPLIERS

The majority of manufacturers indicated that any change in standards that results in the

industry shifting to H-axis technology from V-axis technology will have a significant impact on U.S.

suppliers of washing machine components and raw materials.

Manufacturers that already produce H-axis washers in the U.S. source primarily from

overseas suppliers for H-axis technology-specific components, as these suppliers have much greater

experience in this technology. One manufacturer stated that over half the components used in H-axis

machines are sourced from overseas suppliers. If the industry were to shift to solely H-axis

technology, manufacturers believe that this would significantly alter the ratio of foreign to U.S.

suppliers that currently exists in the industry. While U.S. suppliers of components may become

competitive overtime, there is likely to be a definite shift to overseas suppliers in the short term and

once these relationships are established they provide considerable leverage to the incumbent.

Table 11.46 shows that for the typical H-axis machine, a significantly larger percentage of

total material costs is from foreign purchased parts relative to that of the typical V-axis clothes

washer, indicating that the emphasis on purchasing clearly shifts to foreign purchased parts.

Table 11.46 Average Breakup of Raw Materials and Component Costs in U.S

Manufactured Clothes Washers (as % of Total Materials Cost)

Typical V-axis Typical H-axis

% Domestic Purchased parts 2 1-55% 30-40%

% Foreign Purchased Parts 6-13% 38-42%

% Raw Materials 39-66% 22-28%

Source: DOE Reverse-Engineering Analysis of current U.S. manufactured clothes washers

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EE-RM-PET-100 COMMENT 88
Manufacturers also stated that while sheet metal, plastic, paint and other raw materials would

most likely still be sourced from the U.S., two other factors must be considered relating to raw

material suppliers. First, if there is a decline in the volume of clothes washers shipments, as most

analyses indicate, this will have a commensurate impact on raw material requirements.

Manufacturers indicated that there is no substantial incremental increase in the use of raw materials

with a shift from V-axis machines to H-axis. As illustrated in Table 11.46, this view was supported

by DOE's reverse-engineering analysis of current U.S. manufactured clothes washers.

Second, if the industry shifts to H-axis and manufacturers shift to increased sourcing of

components from overseas suppliers, then once such a disruption in the supply chain occurs,

manufacturers are likely to look to overhaul the entire supply chain process. This may result in some

manufacturers looking to source even the raw materials from the cheapest overseas sources.

Manufacturers stated that such a shift has already occurred in room air conditioners.

Another factor to consider is the fact that some manufacturers and suppliers have already

invested heavily in forging close partnerships. Any change that impacts the manufacturer/supplier

relationships will have an enhanced effect in such cases and impact both the supplier and the

manufacturer. As an example, only recently one manufacturer carried out a major redesign of its

clothes washer platform and used this opportunity to re-evaluate its manufacturing operations,

eventually deciding to source assembled components from its suppliers. It made significant

investments in building relationships with suppliers in the vicinity and actively helped them upgrade

their facilities. In some cases, suppliers built whole new plants to support the manufacturer's clothes

washer component requirements. Some employees even transferred from the manufacturer to the

suppliers, as the suppliers assumed some of the manufacturing activities. To manufacturers that have

a high level of integration with their suppliers and have invested in their production capabilities,

disruption in their suppliers' production processes would be particularly significant.

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EE-RM-PET-100 COMMENT 88
CHAPTER 12. UTILITY IMPACTS ANALYSIS

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TABLE OF CONTENTS

12.1 SUMMARY 12-1

12.2 PURPOSE OF THE ANALYSIS 12-1

12.3 ASSUMPTIONS 12-2

12.4 METHODS 12-3

12.5 RESULTS 12-4

LIST OF TABLES

Table 12.1 AE099 Reference Case Forecast 12-6

Table 12.2 MEF = 1.634 (50% Reduction in Energy Usage Forecast) 12-7

Table 12.3 MEF = 1.362 (40% Reduction in Energy Usage Forecast) 12-8

Table 12.4 MEF = 1.257 (35% Reduction in Energy Usage Forecast) 12-9

Table 12.5 MEF = 1.089 (25% Reduction in Energy Usage Forecast) 12-10

Table 12.6 MEF = 1.021(20% Reduction in Energy Usage Forecast) 12-11

Table 12.7 MEF 1.04 in 2004 and 1.26 in 2007; 2-Tier Forecast 12-12

Table 12.8 MEF 1.04 in 2004 and 1.26 in 2007; 2-Tier High Elasticity Sensitivity

Forecast 12-13

Table 12.9 MEF 1.04 in 2004 and 1.26 in 2007; 2-Tier Medium Price/Income

Sensitivity Forecast 12-14

Table 12.10 MEF 1.04 in 2004 and 1.26 in 2007; 2-Tier High Economic Growth

Forecast 12-15

Table 12.11 MEF 1.04 in 2004 and 1.26 in 2007; 2-Tier Low Economic Growth

Forecast 12-16

12-i

EE-RM-PET-100 COMMENT 88
CHAPTER 12. UTILITY IMPACTS ANALYSIS

12.1 SUMMARY

The effects of proposed clothes washer energy efficiency standards on the electricity and gas

industries were analysed using a variant of the US .Energy Information Administration's (DOE/ETA)

National Energy Modelling System (NEMS), called NEMS-BRS, together with some exogenous

calculations.a NEMS was used by the ETA to produce the Annual Energy Outlook 1999 (AE099),1

and NEMS-BRS is used to provide some key equivalent inputs to our standards analysis. Because

electric utility restructuring is well underway, it is no longer valid to assume the traditional cost

recovery regulation of utilities, which was the basis of previous utility impact analyses. Therefore,

the utility analysis consists of a comparison between model results for a case comparable to the

AE099 Reference Case, as reported in the AE099, and policy cases incorporating each of the clothes

washer standards scenarios. In this analysis, the reference case refers to cases with respect to the

AE099 Reference Case, not to be confused with the price sensitivities whose results are compared

with a base case trial standard level. Because the policy standards effects are too small to be seen

in the context of the whole gas and electricity sector, NEMS-BRS is not used directly. Rather,

exploratory runs are conducted to estimate marginal effects, which are then used to calculate the

small effects on utilities due to each proposed standard case. The reduced electricity demand from

clothes washer efficiency standards lowers generation from both coal and natural gas, but, because

natural gas is more frequently the marginal fuel, it is usually affected to a greater degree, particularly

early in the forecast period. Other generation is only minimally affected by the standard levels.

12.2 PURPOSE OF THE ANALYSIS

The requirement that the effects of proposed standards on electric utilities be analysed has

a long history. Analysis of the effects of proposed standards on the electric utility industry has

historically taken the form of estimated fuel savings and capital cost savings relative to the likely

reduction in revenues implied by lower electricity sales. In the short term, ratepayers of traditional

utilities gained because of reduced energy use at fixed prices, but any imbalance between revenue

and costs disappeared in the long run, as traditional regulation ensured utilities would recover their

costs. In a restructured industry, however, only transmission and distribution providers will be

permitted to recoup costs, and energy prices are not rigid in the short-run, so the basis of our analysis

must change. Using the AE099 assumptions regarding the spread of restructuring allows us to use

NEMS-BRS to estimate the overall effect of standards on the industry.b We assess the impact of

aFor more information on NEMS, please refer to the U.S. Department of Energy, Energy Information Administration

documentation. A useful summary is National Energy Modeling System: An Overview 1998, DOE/EIA-0581(98), February

1998. DOE/EIA approves use of the name NEMS to describe only an official version of the model without any modification to

code or data. Because our analysis entails some minor code modifications and the model is run under policy scenarios that are

variations on DOE/ETA assumptions, the name NEMS-BRS refers to the model as used here (BRS is DOE's Building Research

and Standards office, under whose aegis this work has been performed).

b The ETA assumptions on restructuring are explained on page 14-15 and pages 24-29 of the AE099.

12-1

EE-RM-PET-100 COMMENT 88
standards on utilities by reporting several key industry parameters, notably energy sales, generation,

and capacity.

No previous appliance standard setting process has considered the natural gas utility industry

and coverage of natural gas here is modest. Analysis of the effects of standards on the natural gas

sector is limited to the reporting of residential consumption of natural gas and the change in the

contribution of natural gas to electric generation.

12.3 ASSUMPTIONS

NEMS-BRS has several advantages that have led to its adoption as the source for basic

forecasting in the appliance energy efficiency analyses. NEMS-BRS relies upon a set of assumptions

which are well known and fairly transparent due to the exposure and scrutiny each AEO receives. In

addition, the comprehensiveness of NEMS-BRS permits the modelling of interactions among the

various energy supply and demand sectors and the economy as a whole, so it produces a sophisticated

picture of the effects of appliance standards. Perhaps most importantly, because it explicitly

simulates the impact on the industry, NEMS-BRS provides accurate estimation of marginal effects,

which yield better indicators of actual effects than estimates based on industry-wide average values.

We chose marginal rates over average rates because we wanted to show the effects of proposed

standards as well as what might also be happening in the market according to the AE099 Reference

Case.

The utility analysis uses the assumptions of AE099 and treats clothes washer efficiency

standards as variations in policy. Because the implementation of standards reduces demand by less

than 1% of total US electricity generation in any given year, its effect can not be detected directly

by simulations. Therefore, simulation runs are done for larger reductions in demand and results are

interpolated between AE099 and these runs. We assume that the effects measured are linear within

the range of interpolation. This issue is discussed further below and in Appendix EA-3.

Variations in some of these assumptions have also been explored through two scenarios that

represent alternative futures based on the Low and High Economic Growth cases of AE099,

demonstrating the effects of alternative growth assumptions on energy markets. The growth

assumptions for each case are based on macroeconomic forecasts prepared by DRI!IvlcGraw-Hill2.

The AE099 Reference Case assumes a moderate rate of economic growth, 2.1 % a year from 1997-

2020. The AE099 Low Economic Growth case is based on lower growth rates for population,

labour force, and productivity, resulting in higher prices and interest rates and lower growth in

industrial output. Economic output in the Low Economic Growth case increases by 1.5 % a year

from 1997 through 2020.TheAEO99 High Economic Growth case incorporates higher growth rates

for population, labour force, and labour productivity, resulting in lower inflation and interest rates

and an increased projected economic output of 2.6 % a year. The energy savings estimates used to

model the High and Low Economic Growth cases varied by a minor amount from that which we used

12-2

EE-RM-PET-100 COMMENT 88