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- i CHAPTER 13. INTERIM MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

13.1 INTRODUCTION ......................................................................................................... 13 -1 13.2 METHODOLOGY ........................................................................................................ 13 -1 13.2.1 Phase I: Industry Profile..................................................................................... 13 -2 13.2.2 Phase II: Industry Cash Flow Analysis and Interview Guide ............................ 13-2 13.2.2.1 Industry Cash Flow Analysis ........................................................... 13-2 13.2.2.2 Interview Guide ............................................................................... 13 -2 13.2.3 Phase III: Subgroup Analysis............................................................................. 13 -3 13.2.3.1 Manufacturer Interviews .................................................................. 13 -3 13.2.3.2 Revised Industry Cash Flow Analysis ............................................. 13 -3 13.2.3.3 Manufacturer Subgroup Analysis .................................................... 13 -3 13.2.3.4 Competitive Impact Assessment ...................................................... 13 -4 13.2.3.5 Manufacturing Capacity Impact ...................................................... 13 -4 13.2.3.6 Employment Impact ......................................................................... 13 -4 13.2.3.7 Cumulative Regulatory Burden ....................................................... 13-4 13.3 INDUSTRY OVERVIEW ............................................................................................. 13-4 13.3.1 Industry Cost Structure ...................................................................................... 1 3 -5 13.3.2 Inventory Levels ................................................................................................ 13-6 13.4 INTERVIEW TOPICS AND PRELIMINARY FINDINGS ......................................... 13 -6 13.4.1 Market Shares and Industry Consolidation ........................................................ 13-7 13.4.2 Production and Product Mix .............................................................................. 13 -8 13.4.2.1 Impact on Product Mix .................................................................... 13 -8 13.4.2.2 Product Utility .................................................................................. 13 -8 13.4.3 Conversion Costs ............................................................................................... 13-8 13.4.4 Cumulative Regulatory Burden ......................................................................... 13 -9 13.5 OVERALL KEY ISSUES ............................................................................................. 13-9 13.5.1 Energy Savings from Replacement HID Lamps ................................................ 13 -9 13.5.2 Testing Burden ................................................................................................. 13 -10 13.5.3 Technology Shift .............................................................................................. 13-10 13.5.4 Product Innovation ........................................................................................... 13-1013

- ii LIST OF TABLES

Table 13.3.1 Electric Lamp Bulb and Part Industry Employment and Earnings .................... 13 -5 Table 13.3.2 Electric Lamp Bulb and Part Industry Material and Payroll Costs .................... 13 -6 Table 13.3.3 Commercial Lighting Fixture Industry End- of -Year Inventory ........................ 13-613

- 1 CHAPTER 13. INTERIM MANUFACTURER IMPACT ANALYSIS

13.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the likely impacts of new energy conservation standards on manufacturers. The Process Rule a provides guidance for conducting this analysis with input from manufacturers and other interested parties. The U.S. Department of Energy (DOE) will apply this methodology to its

e valuation of new energy conservation standards for high-intensity discharge (HID) lamps. DOE will consider financial impacts and a wide range of quantitative and qualitative industry impacts that mi ght result from new energy conservation standards. For example, a particular standard level could require changes to manufacturing practices for HID lamps. DOE will identify and analyze these impacts through interviews with manufacturers and other interested parties during the n otice of proposed r

ul e making (NOPR) stage of the analysis.

DOE announced changes to the MIA format through a report issued to Congress in February 2006 (as required by section 141 of the Energy Policy Act of 2005 (EPACT 2005)),

e ntitled “Energy Conservation Standards Activities.” b Pr eviously, DOE did not report any MIA results before the NOPR phase; however, under this new format, DOE collects, evaluates, and reports preliminary information and data in the interim analysis. Such information includes market data, key issues, product mixes, conversion costs, foreign competition, market shares, industry consolidation, and cumulative regulatory burden information. DOE solicits this infor mation during the preliminary manufacturer interviews and reports the results in this

c hapter. Appendix 1 3 A includes a copy of the interview guides that DOE distributed to manuf acturers.

13.2 METHODOLOGY

DOE conducts the MIA in three phases. In Phase I, DOE creates an industry profile to characterize the industry and conducts preliminary MIA interviews to identify important issues that require consideration. Section 13.3 of this chapter presents initial findings of the Phase I

a nalysis. In Phase II, DOE prepares an industry cash flow model and an interview questionnaire to guide subsequent discussions with manufacturers. In Phase III, DOE interviews manufacturers

a nd assesses the impacts of new energy conservation standards both quantitatively and
qua litatively. DOE assesses industry and subgroup cash flow impacts and the industry net present value (INPV) using the Government Regulatory Impact Model (GRIM). DOE then

a ssesses impacts on competition, manufacturing capacity, employment, and regulatory burden

a On July 15, 1996, the Department of Energy published a Process Improvement Rule establishing procedures, interpretations and policies to guide the Department in the consideration of new or revised appliance efficiency standards (Procedures for Consideration of New or Revised Energy Conservation Standards for Consumer Products). 61 FR 36974.
b This report is available on the DOE website at http://www1.eere.energy.gov/buildings/appliance_standards/pdfs/2010_feb_report_to_congress.pdf13

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based on manufacturer interviews and discussions. The Federal Register NOPR and technical support doc ument (TSD ) will both present results of the Phase II and III analyse s.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE collects pertinent qualitative and quantitative financial and market information. This includes research and development (R&D) expenses; selling, general,

a nd administrative (SG&A) expenses; capital expenditures; property, plant, and equipment expenses; tax rate; and depreciation rate for HID lamp manufacturers as well as wages,

e mployment, and industry costs for HID lamps. Sources of information include reports published by industry groups, trade journals, the U.S. Census Bureau, and Securities Exchange Commission (SEC) 10-K filings. In addition, DOE relies on information from its market and technology assessment, engineering analysis, life-cycle cost analysis, and customer price

a nalysis to characterize the HID lamp manufacturing industry.

13.2.2 Phase II: Industry Cash Flow Analysis and Interview Guide

In Phase II, DOE performs an interim industry cash flow analysis and prepares a que stionnaire, or interview guide, for interviewing manufacturers.

13.2.2.1 Industry Cash Flow Analysis

DOE uses the GRIM to analyze the financial impacts of new energy conservation standa rds. The implementation of these standards may require additional investment, raise
pr oduction costs, and/or affect revenue through higher prices and lower shipments. The GRIM

uses se veral factors to determine a series of annual cash flows for the years leading up to the effective date of new energy conservation standards and for several years after implementation. The se factors include annual expected revenues, costs of sales, SG&A costs, taxes, and capital

e xpenditures. Inputs to the GRIM include financial information, manufacturing costs, shipment for ecasts, and price forecasts developed in other analyses. Financial information is developed based on publicly available data and confidentially submitted manufacturer information. DOE

c ompares the GRIM results for the standards case at each trial standard level (TSL) against the

re sults for the base case in which no new energy conservation standards are in place. The fina ncial impact of new energy conservation standards is the difference between the two sets of discounted

annual cash flows.

13.2.2.2 Interview Guide

DOE conducts interviews with manufacturers to gather information on the effects n ew

e nergy conservation standards could have on revenues and finances, direct employment, capital assets, and industry competitiveness. These interviews take place during Phase III of the MIA. B efore the interviews, DOE distributes an interview guide that will help identify the impacts of

ne w energy conservation standards on individual manufacturers or subgroups of manufacturers within the HID lamp industry. The interview guide covers production costs; shipment
pr ojections ; market share; product mix; conversion costs; markups and profitability ; assessment of the impact on competition ; manufacturing capacity; and other relevant topics.13

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13.2.3 Phase III: Subgroup Analysis

P hase III activities occur after publication of the interim analysis. These activities include manufacturer interviews; revision of the industry cash flow analysis; a manufacturer subgroup analysis; an assessment of the impacts on industry competition, manufacturing capacity, direct employment, and the cumulative regulatory burden; and other qualitative impacts.

13.2.3.1 Manufacturer Interviews

DOE supplements the information gathered in Phase I and the cash flow analysis
pe rformed in Phase II with information gathered through interviews with manufacturers during P hase III. The interview process has a key role in the MIA because it provides an opportunity for int erested parties to express their views privately on important issues.

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

A non -disclosure agreement allows DOE to consider confidential or sensitive information in the decision-making process. Confidential information, however, is not made available in the public record. At most, sensitive or confidential information may be aggregated and presented in indus try-wide representations.

13.2.3.2 Revised Industry Cash Flow Analysis

During the interviews, DOE requests information about profitability impacts, necessary plant c hanges, and other manufacturing impacts. Following the interviews, DOE revises the
pr eliminary GRIM prepared in Phase II based on the feedback it receives during interviews.

13.2.3.3 Manufacturer Subgroup Analysis

The use of average cost assumptions to develop an industry cash flow estimate does not

a dequate ly

assess differential impacts of new energy conservation standards among manufacturer subg roup s. Smaller manufacturers, niche players, and manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected. Ideally, DOE would consider the impact on every firm individually; however, it typically uses the results of the indus try characterization to group manufacturers with similar characteristics. During the int erviews, DOE discuss es the potential subgroups that have been identified for the analysis. DOE asks manufacturers and other interested parties to suggest what subgroups or characteristics

a re most appropriate for the analysis.

One common subgroup identified is small business manufacturers. Should DOE determine this rulemaking impacts small business manufacturers, DOE will conduct a regulatory flexibility analysis pursuant to the Regulatory Flexibility Act. (5 U.S.C. 601 et seq.)13

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13.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPACT 1992) directs DOE to

c onsider any lessening of competition likely to result from the imposition of standards. EP ACT 1992 further directs the U.S. Attorney General to determine any likely impacts resulting from a decrease in competition. DOE gathers firm-specific financial information and attempts to determine the impact of new standards on industry competition. The results of this effort are

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

13.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of new energy conservation standards can be the obsolescence of existing manufacturing assets, including tooling and other investments. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing

c apacity, specifically capacity utilization and plant location decisions in North America with and without new energy conservation standards; the ability of manufacturers to upgrade or remode l

e xisting facilities to accommodate the new requirements; the nature and value of any stranded assets; and estimates for any one-time restructuring or other charges, where applicable.

13.2.3.6 Employment Impact

The impact of new energy conservation standards on employment is an important consideration in the rulemaking process. Manufacturer interviews play a significant role in assessing how domestic employment patterns might be impacted by new conservation standards. The interview guide contains a series of questions that are designed to explore current employment trends in the HID lamp industry and to solicit manufacturers’ views on changes in employment patterns that may result from increased standard levels. These questions focus on current employment levels at production facilities, expected future employment levels with and without new energy conservation standards, differences in workforce skills, and employee retraining.

13.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of energy conservation standards and other regulatory actions affecting the same products or companies. DOE analyzes

a nd considers the impact of multiple, product-specific regulatory actions on manufacturers.

13.3 INDUSTRY OVERVIEW

The following section summarizes publicly available industry data.13

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13.3.1 Industry Cost Structure

DOE developed the HID lamp industry cost structure from the U.S. Census Bureau, Annual Surve y of Manufacturers : Statistics for Industry Groups and Industries with data from 200 2 to 2010. HID lamp manufacturing is classified under the North American Industry Classification System (NAICS) code 335110 ( Electric Lamp Bulb and Part Manufacturing ).

DOE is unaware of any publicly available industry-wide cost data specific to only manufacturers of HID lamps. DOE presents the data below as a broader industry proxy for the H ID lamp industr y.

Ta ble 13.3

. 1 presents the electric lamp bulb and part employment levels and payroll from 200 2 to 2010. The statistics show a 36.2 percent decrease in the number of production workers from 2002 to 2010 with a corresponding 4.9 percent decrease in the overall industry payroll from 2002 to 2010

.

T able 13.3. 1 Electric Lamp Bulb and Part Industry Employment and Earnings

Year Production Workers All Employees Payroll for All Employees thousand current year dollars 200 2 9,595 11,552 489,781 2003 8,972 10,790 481,524 2004 8,022 9,867 512,514 2005 7,604 9,289 495,057 2006 6,669 8,192 449,809 2007 7,477 9,358 447,983 2008 7,8 11 10, 050 4 57
, 719 2009 6,419 7,612 415,900 2010 6,120 7,724 465,734 U.S. Census Bureau. Annual Survey of Manufacture r s : 2005 and Earlier Years ; Annual Survey of Manufacturers: 2006 and 200 5 ; Annual Survey of Manufacturers: 2008 and 2007 ; Annual Survey of Manufacturers: 2009 and 2008 ; and Annual Survey of Manufacturers: 2010 and 2009

Table 13.3

. 2 presents the costs of electric lamp bulb and part materials and industry
pa yroll as a percentage of shipment value from 2002 to 20 10

. The cost of materials has

s ignificantly increased by 52.8 percent as a percentage of shipment value from 2002 to 2010

. While the cost of payroll for production workers has slightly decreased by 1.4 percent and the cost of payroll for all employees has moderately increased by 14.1 percent as a percentage of shipment value from 2002 to 2010.13

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Table 13.3. 2 Electric Lamp Bulb and Part Industry Material and Payroll Costs

Year Cost of Materials

percent of shipment value Cost of Payroll for Production Workers percent of shipment value Cost of Payroll for All Employees percent of shipment value 2002 33.9 14.5 18.6 2003 36.0 14.0 18.5 2004 35.8 15.4 20.4 2005 42.6 15.6 20.8 200 6 44.6 15.7 20.9 2007 44.7 14.7 20.3 2008 47.2 13.4 21.5 2009 49.0 16.3 21.4 2010 51.8 14.3 21.3 U.S. Census Bureau. Annual Survey of Manufacture r s : 2005 and Earlier Years ; Annual Survey of Manufacturers: 2006 and 200 5 ; Annual Survey of Manufacturers: 2008 and 2007 ; Annual Survey of Manufacturers: 2009 and 2008 ; and Annual Survey of Manufacturers: 2010 and 2009

13.3.2 Inventory Levels

Table 13.3

. 3 shows the year-end inventory for the electric lamp bulb and part industry obtaine d from the U.S. Census Bureau, Annual Survey of Manufacturer : Statistics for Industry Groups and Industries wi th data from 2002 to 2010. The industry’s end

- of -year inventory from 200 2 to 2010 decreased 4.4 percent when expressed in dollars, and grew moderately by 14.8 percent when expressed as a percentage of shipment value.

T able 13.3. 3 Commercial Lighting Fixture Industry End- of -Year Inventory

Year End

- of

- Year Inventory thousand current year dollars End

- of

- Year Inventory percent of shipment value 2002 213,569 8.1 2003 212,207 8.2 2004 226,482 9.0 2005 235,934 9.9 2006 227,013 10.5 2007 254,351 11.5 2008 255,709 12.0 2009 178,773 9.2 2010 204,270 9.3 U.S. Census Bureau. Annual Survey of Manufacture r s : 2005 and Earlier Years ; Annual Survey of Manufacturers: 2006 and 200 5 ; Annual Survey of Manufacturers: 2008 and 2007 ; Annual Survey of Manufacturers: 2009 and 2008 ; and Annual Survey of Manufacturers: 2010 and 2009

13.4 INTERVIEW TOPICS AND PRELIMINARY FINDINGS

The following section summarizes information gathered during interviews held in the fir st half of 2012 for the interim MIA.13

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13.4.1 Market Shares and Industry Consolidation

New energy conservation standards can alter the competitive dynamics of the

mar ketplace, prompting companies to enter the market, exit the market, or merge with other companies. The interim MIA interview questions ask ed manufacturers to share their perspectives on industry consolidation both in the absence of new energy conservation standards and assuming new standards at various efficiency levels. The interview questions focus ed on gathering information that assessed:

• disproportionate cost increases to some manufacturers;

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

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

The need to assess anti-competitive effects of proposed new energy conservation standa rds comes from the need to protect consumer interests. During the interviews, DOE solicited information to determine whether new energy conservation standards could result in dispropor tionate economic or performance penalties for particular consumer or user subgroups. Manufacturers were also asked if new energy conservation standards could result in equipment that will be more or less desirable to consumers due to changes in equipment functionality, utility, or other features.

Market Shares: DOE inquired about the current market share of manufacturers in the HID lamp industry and how those market shares might change due to the imposition of new energy conservation standards. Most manufacturers expected their market share to remain the same. However, some raised concerns that the HID lamps market might lose sales to other lighting markets due to an increase in the price of HID lamps as a result of the new standards. While these manufacturers may lose HID lamp sales, most large HID lamp manufacturers also manufacturer the majority of the replacement technologies that would likely be used if consumers switched from HID lighting to another lighting technology.

Industry Consolidation: The HID lamp industry is mainly composed of a few large manufacturers, but there are a handful of smaller manufacturers. As described in chapter 3 of the int erim TSD, four manufacturers hold the majority of the domestic market share of HID lamps. The lighting divisions of most of these companies also manufacture other products, such as fluor escent lamps, halogen lamps, light emitting diodes (LEDs), and compact fluorescent lamps (CFLs).

Most interviewed manufacturers did not think there would be significant consolidation in the HID lamp industry in the absence of standards. They also agreed that new standards most li kely would not lead to additional consolidation. However, some manufacturers stated that the small er HID lamp manufacturers could be disproportionately affected by a standard that required significant conversion costs.13

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13.4.2 Production and Product Mix

DOE requested manufacturers’ feedback on what they perceived to be the possible impact of new energy conservation standards on cash flow and profitability. For instance, the

c apital and equipment conversion outlays needed to upgrade or redesign equipment before they ha ve reached the end of their useful life may create significant conversion costs, resulting in

re duced cash flow and stranded investments. Higher energy conservation standards could also

re sult in higher per-unit costs that could cause consumers to shift to less expensive equipment.

13.4.2.1 Impact on Product Mix

Manufacturers believe that new energy conservation standards could affect the product mi x of HID lamps depending on the efficiency levels selected for the standards. Some manuf acturers stated they expect mercury vapor lamps to be phased out of production. Manufacturers also stated they expect the production of ceramic metal halide lamps to become more prevalent. Certain manufacturers commented that if the rulemaking increases efficiency l evels significantly, they plan on focusing the majority of their R&D effort on other lighting technologies such as fluorescent and LED, leading to a decrease in the production of HID lighting.

13.4.2.2 Product Utility

A few manufacturers expressed concern that new energy conservation standards might

re quire changes in equipment functionality, utility, and other features that would make equipment less desirable to consumers. These manufacturers stated that if efficiency standards were significantly more stringent, manufacturers might have to shorten the life of the lamp or ballast, or remove safety features to meet those more stringent standards.

13.4.3 Conversion Costs

In some instances, manufacturers may be able to meet proposed standard levels by modifying existing equipment. In other cases, the necessary changes may entail a complete
pr oduct-line redesign. In either case, more stringent energy conservation standards would cause manufacturers to incur one-time capital and equipment conversion costs. Capital conversion

c osts are one-time investments in property, plant and equipment. Equipment conversion costs include one-time investments in research, product development, testing, and marketing.

All m anufacturers stated that the conversion costs associated with new standards would depend on the efficiency level established by those standards. However, several manufacturers
state d that millions of dollars would be required for testing, accreditation, and laboratory expenditures due to new energy conservation standards for HID lamps. Also some manufacturers
state d that if standards forced all metal halide lamps to go pulse start, the conversion costs would be very high and the manufacturers would probably not make a large investment for the domestic
pr oduction of metal halide lamps. Manufacturers reiterated that HID lighting has to be cost competitive with other more efficient lighting technologies, such as LEDs, to remain in production.13

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13.4.4 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 individual manufacturers, groups of manufacturers, or entire industries. Assessing the impact of a single

re gulation may overlook this cumulative regulatory burden.

Expenditures associated with meeting other regulations are an important aspect of DOE’s consideration of the cumulative regulatory burden the industry faces. The manufacturer int erviews help ed DOE identify the level and timing of investments manufacturers are expecting to incur because of these regulations. Manufacturers were also asked under what circumstances the y might be able to make expenditures related to regulations and energy conservation standards.

Several Federal and international regulatory programs may affect the HID lamps market. The market and technology assessment discusses some of the notable initiatives that characterize recent developments in the lighting market. See chapter 3 for a list and description of the regulatory requirements DOE identified.

Several of the large HID lamp manufacturers also manufacture other lighting products that are regulated by other DOE efficiency standards, such as the fluorescent lamp ballast standa rds (76 FR 70548 ) and general service fluorescent lamp and incandescent reflector lamp standards (74 FR 34080 )

. Some m anufacturers also stated that adapting to the ongoing metal halide lamp fixture standard in addition to the HID lamp standard could b e very costly to their HID lighting production. In addition to DOE regulations, manufacturers spoke of potential F ederal legislation aimed at eliminating mercury vapor lamps by 2016. Manufacturers also stated there are several non-Federal regulations relating to the use of mercury vapor lamps, such the EU’s Restriction of Hazardous Substance Directive (RoHS), which went into effect in the EU in 2006 a nd have been adopted by a few US states as state regulations.

13.5 OVERALL KEY ISSUES

An important aspect of the interim MIA is the opportunity it creates for DOE to identify ke y manufacturer issues early in the evaluation of new energy conservation standards. During
pr eliminary interviews manufacturers identified four major areas of concern: (1) energy savings from replacement HID lamps, (2) testing burden, (3) technology shift, and (4) product innovation.

13.5.1 Energy Savings from Replacement HID Lamps

Some manufactures expressed doubt that new energy conservation standards for HID lamps would realize significant energy savings in the replacement HID lamp market. Because HID ballasts and fixtures typically work with only one lamp type and lamp wattage, consumers cannot simply replace a failed lamp with a reduced wattage lamp or different kind of HID lamp. Instead, some manufacturers argued, consumers would install wattage-equivalent lamps and accept high lumen output (given more efficacious lamps). Alternatively, consumers would face the high costs of replacing the ballast and/or fixture as well.13

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13.5.2 Testing Burden

Several manufacturers expressed concern over the testing burden associated with new efficiency standards for HID lamps. Manufacturers stated that there are already numerous testing

re quirements for compliance and certification and new HID lamp standards would add another standa rd to test for and meet. This could force manufacturers to increase the size of their current test laboratories and the number of man-hours associated with compliance testing. Additionally, the increase in the number of hours of testing would increase manufacturers’ electricity bill.

13.5.3 Technology Shift

Manufacturers reported that regardless of new standards, a technological shift away from HID lighting is already occurring. According to manufacturers, LEDs and fluorescent
tec hnologies are capturing significant market share of new construction in both indoor and outdoor applications. Manufacturers are concerned that standards will accelerate this migration to alternative technologies due to potential price increases from new energy conservation standards for HID lamps.

13.5.4 Product Innovation

Manufacturers expressed concern that this HID lamps rulemaking could force resources away from the R&D of more efficient lighting products, such as LEDs, in order to spend time and money on a product with diminishing market share. Manufacturers would then be forced to reallocate resources away from LEDs to make potentially more expensive changes to HID lamps that could end up driving consumers into the LED market due to the higher prices of HID li ghting.