# 12C-i

APPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL ( GRIM)

SUPPORTING DOCUMENTATION

TABLE OF CONTENTS

**12C.1 INTRODUCTION AND PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-1** 

**12C.2 MODEL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-1** 

**12C.3 DETAILED CASH FLOW EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-4** 

**12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTI ONS . . . . . . . . 12C-5** 

# 12C-1

APPENDIX 12C. GOVERNMENT REGULATORY IMPACT MODEL ( GRIM)

SUPPORTING DOCUMENTATION

12C.1 INTRODUCTION AND PURPOSE

**The purpose of the Government Regulatory Impact Mod el (GRIM) is to help quantify the** 

**impacts of energy conservation standards and other regulations on manufacturers. The basic** 

**mode of analysis is to estimate the change in value of the industry or manufacturers(s) following** 

**a regulation or a series of regulations. The model structure also allows an analysis of multiple** 

**products with regulations taking effect over a peri od of time, and of multiple regulations on the** 

**same product.**

**Industry net present value is defined, for the purp ose of this analysis, as the discounted** 

**sum of industry free cash flows plus a discounted t erminal value. The model calculates the** 

**actual cash flows by year and then determines the p resent value of those cash flows both without** 

**an energy conservation standard (i.e., the base cas e) and under different trial standard levels** 

**(TSLs).**

**Output from the model consists of summary financial metrics, graphs of major variables,** 

**and, when appropriate, the complete cash flow calcu lation.** 

12C.2 MODEL DESCRIPTION

**The basic structure of the GRIM is a standard annua l cash flow analysis that uses** 

**manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters** 

**as inputs and accepts a set of regulatory condition s as changes in costs and investments. The** 

**cash flow analysis is separated into two major bloc ks: income and cash flow. The income** 

**calculation determines net operating profit after t axes. The cash flow calculation converts net** 

**operating profit after taxes into an annual cash fl ow by including investment and non-cash items.** 

**Below are definitions of listed items on the printo ut of the output sheet (see Section 12.C.3).** 

(1) Unit Sales: **Total annual shipments for the industry were obtai ned from the National** 

**Impact Analysis Spreadsheet;**

(2) Revenues: **Annual revenues; computed by multiplying manufact urer selling price at each** 

**kilovolt-ampere (kVA) rating by the annual shipment s at the same kVA rating, summed over all** 

**kVA ratings;**

(3) Labor: **The portion of cost of goods sold (COGS) that inc ludes direct labor, commissions,** 

**dismissal pay, bonuses, vacation, sick leave, socia l security contributions, fringe, and assembly** 

**labor up-time;**

(4) Material: **The portion of COGS that includes materials;**

# 12C-2

(5) Overhead: **The portion of COGS that includes indirect labor, indirect material, energy use,** 

**maintenance, depreciation, property taxes, and insu rance related to assets. While included in** 

**overhead, the depreciation is shown as a separate l ine item;** 

(6) Depreciation: **Annual depreciation computed as a percentage of** Revenues (2) **. While**

**included in overhead, the depreciation is shown as a separate line item;** 

(7) Standard SG&A: **Selling, general, and administrative costs are co mputed as a percentage of** 

Revenues (2) **;**

(8) R&D: **GRIM separately accounts for ordinary research and development (R&D) as a** 

**percentage of** Revenues (2);

(9) Product Conversion Expense: **Product conversion expenses are one-time investmen ts in** 

**research, development, testing, and marketing focus ed on making product designs comply with** 

**the new efficiency standard. GRIM allocates these costs over the period between the standard’s** 

**announcement and effective dates;**

(10) Stranded Asset Writeoff: **In the year the standard becomes effective, a one t ime write-off of** 

**stranded assets is accounted for;**

(11) Earnings Before Interest and Taxes (EBIT): **Includes profits before deductions for interest**

**paid and taxes;**

(12) EBIT as a Percentage of Sales: **GRIM calculates EBIT as a percentage of sales to c ompare** 

**with the industry’s average reported in financial s tatements;** 

(13) Taxes: **Taxes on** EBIT (11) **are calculated by multiplying the tax rate containe d in Major** 

**Assumptions by**  EBIT (11)

**.**

(14) Net Operating Profits After Taxes (NOPAT): **Computed by subtracting** Cost of Goods

Sold ((3) to (6))

**,** SG&A (7)

**,** R&D (8)

**,** Product Conversion Expense (9), Stranded Asset

Writeoff (10), **and** Taxes (13) **from** Revenues (2)

**.**

(15) NOPAT repeated: **NOPAT is repeated in the Statement of Cash Flows;**

(16) Depreciation repeated: **Depreciation is added back in the Statement of Ca sh Flows because** 

**it is a non-cash expense;**

(17) Change in Working Capital: **Change in cash tied up in accounts receivable, inv entory, and** 

**other cash investments necessary to support operati ons is calculated by multiplying working** 

**capital (as a percentage of revenues) by the change in annual revenues.** 

(18) Cash Flow From Operations: **Calculated by taking** NOPAT (15) **, adding back non-cash**

# 12C-3

**items such as a** Depreciation (16), **and subtracting out** Change in Working Capital (17) **;**

(19) Ordinary Capital Expenditures: **Ordinary investments in property, plant, and equip ment to** 

**maintain and replace existing production assets, co mputed as a percentage of**  Revenues (2) **;**

(20) Conversion Capital Expenditures: **Conversion capital expenditures are one-time**

**investments in property, plant, and equipment to ad apt or change existing production facilities so** 

**that new product designs can be fabricated and asse mbled under the new regulation;** 

(21) Cash Used in Investment: **Total investments in property, plant, and equipme nt are** 

**computed by adding** Ordinary Capital Expenditures (19) **and** Conversion Capital Expenditures

(20);

(22) Free Cash Flow: **Annual cash flow from operations and investments; computed by** 

**subtracting** Cash Used in Investment (21) **from** Cash Flow from Operations (18) **;**

(23) Terminal Value: **Estimate of the continuing value of the industry a fter 2038. Computed by** 

**growing the Free Cash Flow in year 2038 at a consta nt rate in perpetuity;** 

(24) Present Value Factor: **Factor used to calculate an estimate of the presen t value of an** 

**amount to be received in the future;**

(25) Discounted Cash Flow: Free Cash Flows (22) **multiplied by the** Present Value Factor

(24). **For 2038 the discounted cash flow includes the disc ounted**  Terminal Value (23) **; and** 

(26) Industry Net Present Value: **The sum of** Discounted Cash Flows (25).**12C-4**12C.3 DETAILED CASH FLOW EXAMPLEStd TSL1 Base YearSuperclassLiquidAnnouncementYearStandard Year200420052006200720082009201020112012Income Statement (Million U.S.$)**Unit Sales**1.0961.1281.1501.1781.2091.2341.2561.2781.302**Revenues**1,269.591,307.381,332.921,365.191,400.501,429.721,502.511,529.651,557.34Cost of Goods Sold**Labor**116.59120.06122.41125.37128.61131.30137.86140.35142.89**Material**747.54769.79784.83803.83824.62841.83884.82900.81917.11**Overhead**130.72134.61137.24140.56144.20147.21154.68157.48160.33**Depreciation**20.8221.4421.8622.3922.9723.4524.6425.0925.54[Rev / COGS] 1.25001.25001.25001.25001.25001.25001.25001.25001.2500Selling, General and Administrative**Standard SG&A**171.39176.50179.94184.30189.07193.01202.84206.50210.24**R&D**19.7220.3120.7121.2121.7622.2123.3423.7624.19**Product Conversion Expense**---------**Compliance Costs**---------Stranded Asset Writeoff---------**Earnings Before Interest and Taxes**62.8064.6765.9367.5369.2870.7274.3375.6777.04**[EBIT / Rev]**4.9% 4.9% 4.9% 4.947% 4.9% 4.9% 4.9% 4.9% 4.9%**Taxes**18.8219.3819.7620.2320.7621.1922.2722.6723.08**Net Operating Profit After Taxes (NOPAT)**43.9845.2946.1847.3048.5249.5352.0653.0053.96**[non-prod costs / COGS]**0.25000.25000.25000.25000.25000.25000.25000.25000.2500Cash Flow Statement**NOPAT**43.9845.2946.1847.3048.5249.5352.0653.0053.96**Depreciation**20.8221.4421.8622.3922.9723.4524.6425.0925.54**Change in Working Capital**-(5.82)(3.93)(4.97)(5.44)(4.50)(11.21)(4.18)(4.26)**Cash Flows from Operations**64.8160.9164.1064.7166.0568.4865.4973.9075.23**Ordinary Capital Expenditures**(24.40)(25.13)(25.62)(26.24)(26.92)(27.48)(28.88)(29.40)(29.93)**Conversion Capital Expenditures**---(0.63)(0.88)(1.01)---**Cash Used In Investment**(24.40)(25.13)(25.62)(26.87)(27.80)(28.49)(28.88)(29.40)(29.93)**Free Cash Flow**40.4035.7838.4837.8438.2539.9936.6144.5045.30**Terminal Value**---------**Present Value Factor**0.920.840.780.710.650.600.550.510.47**Discounted Cash Flow**37.1230.2029.8426.9625.0324.0420.2222.5821.11**Industry Value (Net Present Value)**Millions532$NPV base year: 2004Real dollars are in year for Eng Analysis (2004$)Terminal Values (depends on TV calc option) 520460495487492514471572583perpetual growth TV

# 12C-5

12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTI ONS

**The following user-instructions are contained on th e “Welcome” sheet of the distribution** 

**transformer GRIM:**

**1. The red-tabbed sheets pertain to overview infor mation. The pink-tabbed sheets refer to** 

**input information. The green-tabbed sheets represe nt calculations. The blue-tabbed sheets** 

**contain numerical and graphical output.**

**2. Pink cells designate input information. Green cells designate intermediate calculations.** 

**3. By clicking on sheet names in column B of the " Index" sheet, the workbook can be** 

**quickly navigated.**

**4. Use the "Major Assumptions" sheet to choose the desired scenario. Cell B3 is used to** 

**choose the superclass. Cell B6 is used to choose t he trial standard level (TSL). Cell B7** 

**allows toggling between TSL5 and TSL6. Row 33 is u sed to select the markup scenarios.** 

**Within each superclass (LV dry-type, MV dry-type, a nd Liquid-Immersed), the markup** 

**scenario should be chosen consistently. Markup Sce nario 1 is the "Preservation of Gross** 

**Margin Percentage Scenario." Markup Scenario 2 is the "Preservation of Operating Profit** 

**Scenario." See Chapter 12 of the Technical Support Document for more information.** 

**5. After selecting the desired scenario, go to the blue-tabbed sheet entitled "Summary** 

**Report." Rows 16-18 summarize the impact on Indust ry Net Present Value (INPV).** 

**6. Other blue-tabbed sheets provide graphical info rmation summarizing the scenario.** 

Note, on some computers, the workbook may need to b e closed and re-opened before

the graphical information will completely update.