CHAPTER 12. PRELIMINARY MANUFAC TURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

......................................................................................................... 12-1 12.2 METHODOLOGY

........................................................................................................ 12-1 12.2.1 Phase I: Industry Profile

.............................................................................................. .. 12-2 12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

....................................... 12-2 12.2.2.1 Industry Cash-Flow Analysis

....................................................................... 12-2 12.2.2.2 Interview Guide

........................................................................................... 12-2 12.2.3 Phase III: Sub-Group Analysis

..................................................................................... 12-3 12.2.3.1 Manufacturer Interviews

.............................................................................. 12-3 12.2.3.2 Revised Industry Cash-Flow Analysis

......................................................... 12-3 12.2.3.3 Manufacturer Sub-Group Analysis

.............................................................. 12-4 12.2.3.4 Competitive Impact Assessment

.................................................................. 12-4 12.2.3.5 Manufacturing Capacity Impact

.................................................................. 12-4 12.2.3.6 Employment Im pact

..................................................................................... 12-4 12.2.3.7 Cumulative Regulatory Burden

................................................................... 12-5 12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

................... 12-5 12.3.1 General Interview Structure

........................................................................................... 12 -5 12.3.1.1 Key Issues

.................................................................................................... 12-6 12.3.1.2 Shipment Projections

................................................................................... 12-6 12.3.1.3 Product Mix

................................................................................................. 12-6 12.3.1.4 Profitability

.................................................................................................. 12-7 12.3.1.5 Conversion Costs, Manufacturing Ca pacity and Employm ent Levels

........ 12-7 12.3.1.6 Market Shares and Industry Consolidation

.................................................. 12-8 12.3.1.7 Product Utility and Innovation

..................................................................... 12-8 12.3.1.8 Cumulative Burden

...................................................................................... 12-8 12.3.1.9 State Energy Conservation Standards

.......................................................... 12-9 12.3.1.10 International Energy Conservation Standards

............................................. 12-9 12.3.1.11 Impact of Cumulative Burden on Small Manufacturers

.............................. 12-9 12.3.2 Dishwasher Preliminary MIA Results

......................................................................... 12-10 12.3.2.1 Dishwasher Key Issues

.............................................................................. 12-10 12.3.2.2 Dishwasher Product Mix

............................................................................ 12-10 12.3.2.3 Dishwasher Profitability

............................................................................ 12-11 12.3.2.4 Dishwasher Conversion Costs

................................................................... 12-11 12.3.2.5 Dishwasher Manufacturing Capac ity and Em ployment Levels

................. 12-12 12.3.2.6 Dishwasher Market Share a nd Industry Consolidation

............................. 12-13 12.3.2.7 Dishwasher Product Util ity and Innovation

............................................... 12-13 12.3.2.8 Dishwasher Cumulative Burden

................................................................ 12-13 12.3.3 Dehumidifier Preliminary MIA Results

....................................................................... 12-14 12.3.3.1 Dehumidifier Key Issues

............................................................................ 12-14 12.3.3.2 Dehumidifier Product Mix

......................................................................... 12-14 12.3.3.3 Dehumidifier Profitability

.......................................................................... 12-15

12-i12.3.3.4 Dehumidifier Conversion Costs

................................................................. 12-15 12.3.3.5 Dehumidifier Manufacturing Capacity and Employment Levels

.............. 12-17 12.3.3.6 Dehumidifier Market Share a nd Industry Consolidation

........................... 12-17 12.3.3.7 Dehumidifier Product Utility and Innovation

............................................ 12-17 12.3.3.8 Dehumidifier Cumu lative Burden

.............................................................. 12-18 12.3.4 Commercial Clothes Washer Prelim inary MIA Results

.............................................. 12-18 12.3.4.1 Commercial Clothes Wa sher Key Issues

................................................... 12-18 12.3.4.2 Commercial Clothes Wa sher Product Mix

................................................ 12-18 12.3.4.3 Commercial Clothes Wash er Customer Mix

............................................. 12-19 12.3.4.4 Commercial Clothes Wa sher Profitability

................................................. 12-19 12.3.4.5 Commercial Clothes Wash er Conversion Costs

........................................ 12-19 12.3.4.6 Commercial Clothes Washer Manufacturing Capacity and Employment Levels

................................................................................... 12-20 12.3.4.7 Commercial Clothes Washer Market Share and Industry Consolidation

.. 12-20 12.3.4.8 Commercial Clothes Washer Pr oduct Utility and Innovation

................... 12-21 12.3.4.9 Commercial Clothes Washer Cumulative Burden

..................................... 12-22 12.3.4.10 Commercial Clothes Washer State E nergy Conservation Standards

......... 12-22 12.3.4.11 Commercial Clothes Washer In ternational Energy Conservation Standards

.................................................................................................... 12-23 12.3.4.12 Commercial Clothes Washer Im pact on Sm all Manufacturers

.................. 12-24

LIST OF TABLES

Table 12.3.1 Dishwasher One-Time Costs

........................................................................... 12-12 Table 12.3.2 AHAM Capital and Product C onversion Cost Data Subm ittal, 0 – 35.00 Pints/Day

.......................................................................................................... 12-16 Table 12.3.3 AHAM Capital and Product C onversion Cost Data Subm ittal, 35.01 – 45.00 Pints/Day

................................................................................................ 12-16 Table 12.3.4 AHAM Capital and Product C onversion Cost Data Subm ittal, 54.01 – 74.99 Pints/Day

................................................................................................ 12-16 Table 12.3.5 State Commercial Clothes Washer Regulations S imilar to EPACT 2005

....... 12-22 Table 12.3.6 California State Efficiency Standards for Commercial Clothes Washers

....... 12-22 Table 12.3.7 California Water Cons ervation Standards for Residential Clothes W ashers

... 12-23 Table 12.3.8 DOE Estimate of LVM Clothes Wa sher Sales and Unit Shipm ents in 2006

.. 12-25

12-iiCHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION The purpose of the manufacturer im pact analysis (MIA) is to identify the likely impacts of efficiency standards on manufacturers. The July 15, 1996, Process Rule (Procedures for Consideration of New or Revised Energy C onservation Standards for Consumer Products , 61 FR 36974, 10 CFR Part 430, Subpart C, Appendix A) (Process Rule) provides guidance for conducting this analysis with input from manufacturers and other in terested parties. The U.S. Department of Energy (DOE) will apply this methodology to its evaluation of standards. The Process Rule gives guidelines for the considerati on of financial impacts, and of a wide range of quantitative and qualitative industry impacts th at might occur following the adoption of a standard. For example, a particular standard le vel, if adopted by DOE, could require changes to dishwasher, dehumidifier, cooking product or commercial clothes washer manufacturing practices. DOE will identify and understa nd these impacts through interviews with manufacturers and other stakehol ders during the notice of propos ed rulemaking (NOPR) stage of its analysis. Recently, DOE announced changes to the MIA format through a report issued to Congress on January 31, 2006 (as required by sect ion 141 of the Energy Policy Act (E PACT) of 2005), entitled “Energy Conserva tion Standards Activities.” a Previously, DOE did not report any MIA results during the advance notice of proposed rulemaking (ANOPR) phase; however, under this new format, DOE has collected, evalua ted, and reported preliminary information and data in the ANOPR. Such preliminary informa tion includes the anticipated conversion capital expenditures by efficiency level and the corr esponding anticipated impacts on jobs. DOE solicited this information during the ANOPR engi neering analysis manufacturer interviews and reports the results in the preliminary MIA in section 12.3 of this chapter..

12.2 METHODOLOGY DOE conducts the MIA in three phases, and further tailors the analytical fram ework based on stakeholder comments. In Phase I, an industry profile is creat ed to characterize the industry, and a preliminary MIA is conducted to identify impo rtant issues that require consideration. Results of the Phase I analys is are presented in the ANOPR technical support document (TSD). In Phase II, an industry cash flow model and an interview questionnaire are prepared to guide subsequent discussions. In Phase III, manufacturers are interviewed, and the impacts of standards are assessed both quantit atively and qualitatively. Industry and sub-group cash flow and NPV are assessed through use of the Government Regulatory Impact Model (GRIM). Then impacts on competition, manufact uring capacity, employment, and regulatory

aThis report is available on the DOE website at: http://www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html.

12-1burden are assessed based on manufacturer interview feedback and discussions. Results of the Phase II and III analyses are presented in the NOPR TSD.

12.2.1 Phase I: Industry Profile In Phase I of the manufacturer impact anal y sis, DOE collects pertinent qualitative and quantitative financial and market information. This includes dishwasher, dehumidifier, cooking product and commercial clothes washer manufacture r market shares, corpor ate operating ratios, wages, employment, and production cost ratios. Sources of information include reports published by industry groups, trade journals, the U.S. Census Bur eau, and copies of Securities Exchange Commission (SEC) 10-K filings. In addition, DOE relies on information from its market and technology assessment, engineering analys is, life-cycle cost anal ysis, and analysis of markups to determine equipment price to char acterize the dishwasher , dehumidifier, cooking product and commercial clothes wa sher manufacturing industries.

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide In Phase II, DOE will perform a preliminar y industry cash-flo w analysis and prepare written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash-Flow Analysis DOE uses the GRIM to analyze the financia l im pacts of energy conservation standards on the dishwasher, dehumidifier, cooking product and commercial clothes washer industries. Standards will likely require additional investme nt, raise production costs, and affect revenue through higher prices and, possibly, lower sales. The GRIM uses a number of factors to determine a series of annual cash flows for the year standards becomes effective and continuing for several years after implementation. These factors include annua l expected revenues, costs of sales, selling and general administration costs, taxes, and capital expenditures related to depreciation, new standards, and maintenance. Inputs to the GRIM includ e manufacturing costs, shipments forecasts, and price forecasts developed in other analyses. Another input, financial information, will be developed based on publicly available data and confidentially submitted manufacturer information. The results of the GRIM are compared against baseline projections where no standards are in place. The financial imp act of new standards is the difference between the two sets of discounted annual cash flows.

12.2.2.2 Interview Guide
DOE will conduct interviews with manufacturers to gather inform ation on the effects of standards on revenues and finances, directemployment, capital assets, and on industry competitiveness. These interviews will take pla ce during Phase III of the MIA. Prior to the interviews, DOE will distribute an interview guide that will provide a starting point to identify relevant issues and help identify the impacts of standards on individual manufacturers or subgroups of manufacturers. It is anticipated that the interview guide will cover current

12-2organizational characteristics, industry infras tructure, manufacturer cash-flow analysis, a competitive impacts assessment, an employment impacts assessment, and a manufacturing capacity impacts assessment.

12.2.3 Phase III: Sub-Group Analysis
The Phase III activities will take place after the publica tion of the ANOPR, and will include m anufacturer interviews, revision of th e industry cash-flow anal ysis, manufacturer subgroup cash-flow analysis, competitive impact assessment, manufacturing capacity impact, employment impact, and cumulative regulatory burden.

12.2.3.1 Manufacturer Interviews The information gathered in Phase I and the ca sh-flow analysis performed in Phase II will be supplemented with information gathered durin g interviews with manuf acturers during Phase III. The interview process has a key role in th e m anufacturer impact analyses, since it provides an opportunity for interested parties to expr ess their views privatel y on important issues, allowing confidential or sensitiv e information to be considered in the rulemaking decision. DOE will conduct detailed interviews with as many manufacturers as is necessary to gain insight into the range of potenti al impacts of standards. Duri ng the in terviews, the Department will solicit information on the possible impacts of standards on sales, direct employment, capital assets, and industry competitiveness. Both qualita tive and quantitative information are valuable. Interviews will be scheduled well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire will be acceptable, an interactive inte rview process is preferred, because it helps clarify responses and provides the opportunity for additional issues to be identified. Interview participants will be asked to iden tify all confidential inform ation provided in writing or orally. All information transmitted will be considered, as appropriate, in DOE’s decision-making process. However, confidential information will not be made available in the public record. Participants will also be asked to identify all information they wish included in the public record but that they do not want to have associated with th eir interview. This information will be incorporated into the public record but reported without attribution.

12.2.3.2 Revised Industry Cash-Flow Analysis In Phase II of the MIA, DOE prepares a preliminary GRIM. During the interviews, DOE will seek co mment and suggestions regarding th e values selected for the parameters. Upon completion of the interviews, DOE will revise its industry cash flow model based on the feedback provided thro ugh the interviews.

12-312.2.3.3 Manufacturer Sub-Group Analysis Using average cost assumptions to develop an industry cash flow estim ate is not adequate for assessing differential impacts among sub-groups of manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected. Id eally, DOE would consider the impact on every firm individually; however, it typi cally uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview process, DOE will discuss the potential sub-groups and sub-gro up members that have been identified for the analysis. DOE will look to the manufacturers and other stak eholders to suggest what sub-groups or characteristics are the most appropriate for the analysis.

12.2.3.4 Competitive Impact Assessment Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to consider anylessening of competition that is like ly to result from imposition of standards. It further directs the Attorney General to determ ine the impacts, if any, of any decrease in competition. DOE will make a determined effort to gather and report firm-specific financial information and impacts. The competitive analysis will focus on assessing the impacts to smaller, yet significant, manufacturers. The a ssessment will be based on manufacturing cost data and on information collected from interviews wi th manufacturers. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some manufacturers, the potenti al increase in busine ss risks from an increased proportion of fixed costs, and potential barriers to market entry (e .g., proprietary technologies).

12.2.3.5 Manufacturing Capacity Impact One of the significant outcomes of standard s cou ld be the consequential obsolescence of existing manufacturing assets, in cluding tooling and investment. The manufacturer interview guide will have a series of questions to help identify impacts on manufacturing capacity, specifically capacity utili zation and plant location decisions inthe U.S. and North America with and without a standard; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of stranded assets, if any; and estimates for any one-time restructuring and other charges, where applicable.

12.2.3.6 Employment Impact The impact of new energy-efficiency st andards on em ployment is an important consideration in the rulemaking pr ocess. In order to assess how domestic employment patterns might be affected, the interview will explore current employment trends in the relevant industries. In addition, the interview will soli cit manufacture views on changes in employment patterns that may result from incr eased standard levels. The empl oyment impacts section of the interview guide will focus on current employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without a standard, and differences in workforce skills and issu es related to the re training of employees.

12-412.2.3.7 Cumulative Regulatory Burden DOE recognizes and seeks to mitigate th e overlapping effects on m anufacturers of standards and other regulatory actions affecting th e same equipment or companies. Based on its own research and discussions with manufacturers, DOE identified several re gulations relevant to dishwasher, dehumidifier, cooking product, a nd commercial clothes washer manufacturers, including existing or new standards, the phase-out of hydrochlor ofluorocarbon (HCFC) refrigerants and foam insulation blowing ag ents, standards for other products made by dishwasher, dehumidifier, cooking product, and co mmercial clothes washer manufacturers, State energy conservation standards, and Intern ational energy conservation standards.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS During the ANOPR phase, DOE conducted a pr elim inary evaluation of the impact of potential new regulations on manu facturer financial performance, manufacturing capacity and employment levels, and product u tility and innovation. A primar y focus was to identify the cumulative burden that industry faces from the ove rlapping effect of new or recent DOE energy conservation standards and/or other regulatory action affectin g the same product or industry. The primary sources of information for this analysis were tele phone interviews with
m anufacturers of cooking products , dishwashers, dehumidifiers, and commercial clothes washers carried out during the first qua rter of FY 2007. To maintainconfidentiality, DOE did not identify the individual manufacturers that disc losed information. Instead, the evaluation only reports aggregated information and does not disc lose sensitive information or identify companyspecific information. For the preliminary MIA, DOE conducted in terv iews with manufacturers primarily in order to identify key issues and gain insights into the qualitative impacts of energy conservation standards. For each product, DOE used an inte rview guide to gather responses from multiple manufacturers on several issues. All the interview guides covere d the same general topic areas but were adapted as needed to the needs of each product category. A copy of the interview guides for commercial clothes washer, dehumidifie r, and dishwasher manufacturers is contained in Appendix 5B. This chapter provides a summary of the in formation gathered during the manufacturer im pact analysis interviews. Section 12.3.1 follows the gene ral interview structure and summarizes the issues discussed during the interviews. Sectio ns 12.3.2 – 12.3.4 in turn present a summary of the interviews for each product.

12.3.1 General Interview Structure

12-5The manufacturer interviews included ques tions relating to the following topics. DOE received responses to most, if not all, of these topics from the various manufacturers.

12.3.1.1 Key Issues Perhaps the most important aspect of the pr elim inary MIA is the oppor tunity it creates for DOE to identify key manufacturer issues early in the development of new standards. During the interviews DOE engages the manufacturers in a disc ussion relating to what they perceive to be the key issues in the rulemaking fr om their perspective. Key issu es, once identified, are added to the list of questions and topics explored duri ng the interviews. For example, key issues in previous rulemakings have includ ed concerns over patent protect ions that might prevent some companies from implementing higher-efficiency designs.

12.3.1.2 Shipment Projections Shipment projections can be a significant factor in determining the impacts of new or revised efficiency standards. The interviews pr ovide an opportunity for manufacturers to share information that can help DOE quantify the magnitude of any changes in shipments resulting from new standards. DOE is interested in in formation relating to the current number of product shipments, broken-down by product class (such as cap acity rating) and by efficiency level. DOE also seeks input on the forecast of future shipments absent new standards. Manufacturers are asked how they would expect shipments to change for the industry as a whole as a function of standard levels and why they expect these change s might occur. More specific questions aim to derive a price elasticity estimate to be used in the National Impact Analysis (NIA) spreadsheet. Another aspect of the shipme nts discussion is targeted m ore specifically on the company being interviewed. Here DOE is seeking to identi fy firms which may be more (or less) impacted by a reduction in shipments.

12.3.1.3 Product Mix DOE requests manufacturers’ views on what they perceive to be the possible im pact of potential new standards on their future profitab ility. New energy conservation standards have the potential to impact financial performance in se veral different ways. Several of these impacts are captured in previous sections. For inst ance the capital and product conversion outlays needed to upgrade or redesign pr oducts and product platforms before they have reached the end of their useful life can engende r significant conversion costs that otherwise would not be expended resulting in reduced cash flow and stra nded investments. In addition, higher energy efficiency standards can result in higher per-unit costs that may deter some customers from purchasing the products thereby reducing shipments, or it may shift some purchases to lower efficiency products.

12-612.3.1.4 Profitability DOE is interested in understanding if sta ndards might change a m anufacturer’s product mix and if this change impacts profits. For ex ample; higher energy effi ciency standards might limit a manufacturer’s ability to market premium products that command higher profit margins. Also, given the success of the Energy Star pr ogram and its influence on sales, DOE needs to understand how a new standard will influence the Energy Star program and how this secondary effect might impact manufacturers. The interview guide also investigates how new product standards might impact a
m anufacturer’s customer mix and its distribution channels and how in turn this might change profitability.

12.3.1.5 Conversion Costs, Manufacturing Capacity and Employment Levels During the interviews, DOE asks manufacturer s to quantify and explain both the capital and the product conversion costs nece ssary to raise the energy effici ency of their product lines to the proposed standard levels. In some instances , manufactures may be able to meet proposed standard levels by modifying existing products. In other cases, the necessary changes may entail a complete product-line redesign. In these situati ons, an increase in efficiency standards will cause manufacturers to incur one-time convers ion capital-expenditures and product-conversion expenses. Conversion capital-expenditures are one-time investments in property, plant and equipment. Product-conversion expenses incl ude one-time investments in research, product development, testing and marketing. One of the significant outcomes of ne w standards could be the consequential obsolescence of existing m anufacturing assets, in cluding tooling and other capital investment. The interview guide includes que stions to identify impacts on manufacturing capacity. These questions were developed to understand the impact of potential new standards on:

• U.S. and North American m anufacturing capacity;

• capacity utilization and plant location decisions in the U.S. and North Am erica both with and without standards;

• the ability of manufacturers to upgrade or rem odel existing faci lities to accommodate a new product mix; and

• the nature and value of stranded assets, if any. The impact of new efficiency standards on em ployment is an important consideration in the rulemaking process. The in terviews are used to explor e current trends in production employment and solicit manufacturer views on changes in empl oyment patterns resulting from new energy efficiency standards. Questions re garding employment impacts help to understand:

• current employment levels associated with m anufacturing the subject products at each production facility;

• expected future employment levels both with and without new standards; and

12-7• differences in workforce skills, and issu es re lated to retrai ning of employees.

12.3.1.6 Market Shares and Industry Consolidation New efficiency standards can alter the comp etitiv e dynamics of the marketplace. This can include prompting companies to enter the ma rket, exit the market, or to merge with other companies. The preliminary MIA interview questions ask manufacturers to share their perspectives on industry consolid ation both in the absence of new standards and assuming new standards at various efficiency levels. The interview questions focus on gathering information that helps in assessing:

• disproportionate cost increas es to som e manufacturers;
• increased proportion of fixed costs pote ntially increasing business risks; and
• potential barriers to market entry (p roprietary t echnologies, etc.).

The need to conduct an assessment of an ti-com petitive effects of proposed standards comes from the need to protect the interests of the consumer. During the interviews DOE solicits information to understand if new standards could result in disproportionate economic or performance penalties for particular consumer/user subgroups.

Manufacturers are also asked if new standard s could result in products that will be more or less desirable to consumers due to changes in product functionality, utili ty, or other features.

12.3.1.7 Product Utility and Innovation New efficiency standards can force m anufacturer to co mpromise product utility to consumers by eliminating energy consuming feat ures. During the interview DOE requested information on the effects of pr oposed standards on product utility. New efficiency standards may require invest m ent in conversion costs, including research and development (R&D). This required spendi ng may force a manufact urer to reduce funding usually allocated to product i nnovation. New efficiency standard s may also force manufacturers to eliminate innovative energy consuming featur es on their products. During the interview DOE requested information on the effect of proposed standard on innovation

12.3.1.8 Cumulative Burden While any one regulation may not impose a sig nificant burden on manufacturers, the combined effects of several im pending regulations may have se rious consequences for some manufacturers, groups of manufactur ers, or entire industries. Assessing the impact of a single regulation may overlook this cu mulative regulatory burden. Expenditures associated with meeting other regulations are an im portant aspect of the DOE’s consideration of the “cumulative regul atory burden” faced by the industry. The

12-8interviews help DOE identify the level and timing of investments manufacturers are expecting to incur as a result of th ese regulations. Manufacturers are also asked unde r what circumstances they might be able to coordinate any expenditu res related to these regulations and efficiency standards. In addition to the efficiency regulations on residential dishw ashers and dehumidifiers, and commercial clothes washers, several other Fe deral regulations and pending regulations apply to other products made by these manufacturers. For example, some manufacturers in the residential dishwasher and dehumidifier, a nd commercial clothes washer industries are subsidiaries to larger parentcompanies which manufacture other products subject to Federal regulations. These manufacturers must addr ess the EPA-mandated phase-out of HCFC refrigerants. DOE will investigate these cumula tive regulatory burdens in greater detail during the NOPR phase of the rulemaking.

12.3.1.9 State Energy Conservation Standards DOE identified and described regulatory progr ams at the state level in the market and technology assessm ent, Chapter 3, of the TSD for the equipment covered in this rulemaking. Multiple States have requirements for products covered under this rulemaking. Accommodating multiple State standards in additional to nati onal standards raises costs for manufacturers.

12.3.1.10 International Energy Conservation Standards DOE discussed regulatory programs from certa in other countries, such as Canada and Australia, in the m arket and technology asse ssment, Chapter 3, of the TSD for residential dishwashers and dehumidifiers, and commercial cl othes washers. Most manufacturers sell a portion of their total pro duction to countries outsi de the United States. In these cases, the products must meet the standards for each countr y. Companies may design some units to meet more stringent standards than those imposed by the U.S. in order to minimize the number of product variations.

12.3.1.11 Impact of Cumulative Burden on Small Manufacturers DOE considers the possibility of small busin esses being im pacted by the promulgation of energy conservation standards for residential dishwashers and dehumidifiers, and commercial clothes washers. At this time, DOE is not aware of any small manufacturers, defined by the Small Business Association as having 750 employ ees or fewer, who would be impacted by a minimum efficiency standard. Should any sma ll business manufacturers be identified, DOE will study the potential impacts to th ese small businesses in greater detail during the MIA, which it will conduct as a part of the NOPR analysis.

12-912.3.2 Dishwasher Preliminary MIA Results During the course of the preliminary MIA for dishwashers, DOE interviewed
m anufacturers representing over 80 percent of domestic dishwasher sales. These same interviews were used to review the engineering analysis cost a nd performance data contained in Chapter 5 of the TSD. The MIA interviews shif ted the discussion from technology-related topics to business-related topics. DOE’s objective was to become familiar with each company’s particular market approach and financial structure, a nd its concerns and issues related to newefficiency standards. Most of the information received from these meetings is protected by nondisclosure agreements and resides with DOE’s contractors. Before each interview, DOE provided company representatives with an interv iew guide that included the topics that DOE hoped to cover. Additionally DOE often intr oduced, entertained, and discussed other topics during the course of the inte rviews. The following paragraphs summarize the principle manufacturer concerns and issu es related to new efficiency standards for dishwashers.

12.3.2.1 Dishwasher Key Issues The concerns expressed by dishwasher manuf acturers which in the i r opinion rise to the level of key issues are: the pot ential elimination of entry-leve l dishwashers from the market, reduced consumer exposure to dishwashers, a poss ible reduction in dishwa sher performance, the increased likelihood of consumers hand washi ng and pre-rinsing dish es, and the potential relocation of production facilities ov erseas. These issues are elabor ated in the relevant sections which follow.

12.3.2.2 Dishwasher Product Mix
Most dishwasher manufacturers believe that e fficiency standards would have a significant im pact on the product mix of dishwashers they produce. For many ma nufacturers, revised standards will push the product mix towards higher cost units and away from low-end products. This would result in an overall product mix that is less diverse than what is currently available. This loss of product diversity would be most severely felt in the poten tial elimination of low cost, low-end dishwashers from the market. Several manufacturers expresse d concern that higher prices would discourage first-time buyers. Low-cost dishwashers, priced belo w $300, currently repres ent 30 percent of the industry’s shipments. Some fear that elimina ting the ‘entry level’ low-end dishwasher product might reduce consumer exposure to dishwashers causing some to never consider purchasing a dishwasher. Additionally, large homebuilders who generally purchase low-end dishwashers might elect not to provide dishwa shers in new homes if prices were increased significantly. Another mechanism which could lead to reduced product shipments is an increase in the inciden ce of repair rather than the replacement of broken dishwasher s. Faced with the choice of repairing an older (and presumably less efficient) dishwasher or replacing it with a higher-priced current model, more consumers may decide to prolong the life of th eir existing washers.

12-1012.3.2.3 Dishwasher Profitability The Department invited manufacturers to sh are their v iews on the potential impacts of standards on their profits. Manufacturers highlighted the difficu lty they face in trying to recover standards-induced costs. Recent increases in the price of steel provi de an insight in to how an across-the-board increase in manufacturing costs mi ght affect industry profits. Manufacturers noted that they had little ability to set prices a nd that their profitability depe nded on how other manufacturers increased prices in response to their own highe r production costs. Passing-on costs often comes at the detriment of decreasing market share so manufacturers have not been able to fully pass on steel price increases, for example. Manufact urers fear that this dynamic will be more pronounced with new efficiency standards because cost increases will not be the same for all manufacturers and those manufactures with a lower cost to comply will dictate prices. Some manufacturers noted that a significan t proportion of dishwasher sales are to housing dev elopers. These developers sign mu lti-year fixed price contracts to purchase dishwashers. If dishwasher prices increase due to higher standards, profits would decrease as manufacturers are forced to absorb costs due to these fixed contracts.

Several manufacturers also not ed the im portant position that home-improvement retailers have attained in the industry. Some retailers insist on only carrying Ener gy Star-rated products, setting a de-facto minimum energy efficiency leve l that is above the federal minimum. This market demand was particularly pronounced for di shwashers. In 2005, 82 percent of dishwasher unit shipments were Energy Star-rated. As a result, manufacturers had great difficulty differentiating their products on the basis of energy efficiency alone. In January 2007, the Energy Star energy factor was ra ised from 0.58 to 0.65, reducing th e number of eligible washers somewhat. Offering a more optimistic view of future profitability, one f ore ign manufacturer noted that high efficiency standards did not reduce manufacturer profitability in Europe. This manufacturer believes that new standards in th e U.S. will have a similar effect in the U.S. particularly since several U.S. manufacturers have experience m eeting the European efficiency standards.

12.3.2.4 Dishwasher Conversion Costs One of DOE’s major objectives during the m anufacturer inte rviews was to determine the level and types of investment th e companies expected to incur to comply with a new efficiency standard. The Association of Home Applia nce Manufacturers (AHAM) provided aggregated industry values for the required cap ital and product conversion outlays for all efficiency levels up to an EF value of 0.72. These values are summarized in Table 12.3.1.

12-11Table 12.3.1 Dishwasher One-Time Costs Energy Factor (Cycles / kWh) 0.58 0.62 0.65 0.68 0.72 One-Time Product Conversion Expenses, Million $, T otal for all Manufacturers R&D 1.43 4.43 5.73 18.53 29.23 Marketing 0.99 1.99 3.29 7.49 13.99 Conversion Capital Expenditure Assum ptions, Million $, Total for all Manufacturers Building Insufficient Data Subm itted Tooling and Equipm ent 16.85 19.95 23.25 44.85 98.45

Capital investments include modifications or additions to plant, property, and equipm ent that increase its useful life. Capacity increa ses and new tooling are cap ital expenditures, which are amortized over the length of their useful lives . Non-capital expenses, such as marketing and R&D, are typically expensed in the year in which they are incurred. During the interviews manufacturers were asked to comment on the data submitted by AHAM and provide additional information to better explain the trends in costs and the cost drivers at each efficiency level. Manufacturers interviewed were all in agreement with the aggregated cost figures subm itted by AHAM. The cost increments are consis tent with the industry practice of designing and tooling product lines using common product platforms. In general, manufacturers only expected large conversion costs associated with standards thatwould require the complete redesign of a product platform. Manufacturers estimated these c onversion costs to range from $50 million to $100 million per manufacturer in capital costs for production line conversion costs, or in some cases, new factory construction. Manufacture rs indicated that significant stranded assets could occur at th e higher proposed standard levels , since higher standard levels would require complete redesign of low-end dish washers, and complete retooling of low-end dishwasher platforms and factories. Platform ch anges would also potentially result in relocation of factories to Mexico or to offshore sites.

12.3.2.5 Dishwasher Manufacturing Capacity and Employment Levels Based on the interviews the Department unde rstands that U.S . dishwasher production is still largely a U.S. based industry with several manufacturers ha ving domestic production facilities. Ultimately, manufacturers’ decisions regarding the location of production facilities will depend on the efficiency standard chosen. If manufacturers can meet the efficiency standard without needing to completely redesign their pro duct platform, they are likely to continue to produce dishwashers domestically. However if the standard is so high as to require entirely new platforms, manufacturing facilities may be relocated abroad to reduce labor costs. In some instances dishwashers may be manufact ured in integ rated facilities that produce more than just dishwashers. If dishwashers are a central focus of such an integrated facility manufacturer this facility may be relocated to a lower cost labor market, multiplying the impact on U.S. job losses.

12-1212.3.2.6 Dishwasher Market Share and Industry Consolidation Several manufacturers stated that any forced investm ent a company must make to stay in business increases the likelihood of consolidatio n. One way manufactur ers can avoid forced investments is by selling segments which require forced investments. An other way to reduce the burden of capital and product c onversion costs is to reduce the number of product platforms and consolidate manufacturing facilities. This strategy is particularly rewarding when companies are merged, allowing the merged firm to reduce costs. Finally it is possible that a company would elect to source their dishwashers inst ead on manufacturing them themselves.

12.3.2.7 Dishwasher Product Utility and Innovation Multiple manufacturers expressed concern th at high ef ficiency standards may require dishwasher performance tradeoffs. This could en courage consumers to increase their pre-rinsing of dishes, or to switch to hand-washing dishes altogether. Multiple manufacturers noted that dishwashers use much less energy compared to hand- washing dishes, so a standard that increases pre-rinsing and hand-washing could lead to incr eased energy use and decreased consumer utility. Multiple manufacturers noted that the trade-off between energy efficiency and perform ance is particularly acute in their lo w-end dishwasher models. These manufacturers stated that they had already made performance compromises on their low-end dishwasher models in order to meet existing standards without significantly increasing prices.

Some dishwasher manufacturers stated that m ore stringent standards would require the redesign of some portion of their products. This consumes R&D resources, both human and financial, and directs these assets away from other potential investment s that would normally go toward enhancing the functionality of ex isting products or developing new products. Manufacturers were not aware of any new pr oduct innovations that would increase energy efficiency further.

12.3.2.8 Dishwasher Cumulative Burden Regulations which contribute to the cum ulative burden of most or all of the products subject of this rulemaking are described in section 12.3.1.8. Other issues more specific to dishwashers were also discussed and are summarized below. Multiple manufacturers expressed the view th a t Energy Star efficiency levels have become a de-facto standard for dishwashers since multiple retail outlets require all dishwashers they carry to meet Energy Star levels. Ener gy Star released a new standard for dishwashers effective January, 2007 and manufacturers are working to meet this standard in order to meet retailers’ Energy Star requirements. Multiple manufacturers expressed concern about the po tential phase-out of phosphate in detergents. Several municipa lities in the U.S., including t hose within Spokane County, Washington, and Kootenai County, Idaho are debating bans on phosphates in dishwasher

12-13detergent. One manufactu rer stated that any decrease in th e chemical cleaning energy provided by the phosphates in the detergen t will have to be compensated with increased thermal and mechanical energy, increasing dishwasher energy consumption.

12.3.3 Dehumidifier Preliminary MIA Results During the course of the preliminary MIA for dehum idifiers, DOE interviewed manufacturers representing over 66 percent of domestic dehumidifier sales. These same interviews were used to review the engineering analysis cost a nd performance data contained in Chapter 5 of the TSD. The MIA interviews shif ted the discussion from technology-related topics to business-related topics. DOE’s objective was to become familiar with each company’s particular market approach and financial structure, a nd its concerns and issues related to newefficiency standards. Most of the information received from these meetings is protected by nondisclosure agreements and resides with DOE’s contractors. Before each interview, DOE provided company representatives with an interv iew guide that included the topics we hoped to cover. Additionally, DOE often introduced, ente rtained, and discussed ot her topics during the course of the interviews. The following para graphs summarize the principle manufacturer concerns and issues related to new e fficiency standards for dehumidifiers.

12.3.3.1 Dehumidifier Key Issues The concerns expressed by dehumidifier manufac turers which in their opinion rise to the level of key issues are: the ability to pass cost increases on to consumers, the increased pressure from foreign competition, and the ability to maintain Energy Star product offerings.

These issues are elaborated in th e relevant sections which follow.

12.3.3.2 Dehumidifier Product Mix Manufacturers noted that the upcoming EPAC T 2005 standards for dehum idifiers are the current Energy Star levels. Therefore, manufacturer s will have to develop a new, more efficient Energy Star-rated line and might not be able to maintain Ener gy Star-rated products in all product classes.

Dehumidifier manufacturers also make exte nsive use of product platforms to m inimize tooling costs. Dehumidifiers of varying capaci ties will thus share many common parts, such as injection-molded exterior panels, stamped base pans, controls, and the like. The common interior and exterior dimensions limit the ability of a manufacturer to offer optimized solutions for every capacity. Platforms are typically optimized around the capacitythat leads by sales volume. Within a product line of dehumidifiers, it is not unusual to find hi gher-capacity units that differ only from lower-capacity units via a larger compressor and some other minor changes. As the heat exchangers and fans are typically no t changed substantially whenever a chassis is

12-14shared, the energy efficiency of higher-capacity un its will thus suffer. While optimized units may be able to reach Energy Star efficiency le vels, other units within the same product line may not. The number of platforms per manufacturer is typically driven by shipm ent volumes. Higher volumes allow a manufacturer to offset the increased tooling investment requirements with savings via reduced material costs. According to one industry executive, the average lifecycle of a dehumidifier design is 3 years, which underscores why manuf acturers attempt to consolidate as many capacities into one package as they can.

Another trend within the dehum idifier industry is priv ate-label outsourcing where common platforms are clad with branded exterior cases. Branding effort s range from swapping logos to engineering custom ized external cases.

12.3.3.3 Dehumidifier Profitability
The dehumidifier manufacturers interviewed were not sure if the proposed standard levels would affect their profitability. Ma intaining profitability will require passing on standards-induced cost increases to consumers ho wever it is only possibly for a manufacturer to pass on cost increases to consumers if all manufac turers pass on cost increases. Otherwise, a manufacturer that chooses to ab sorb cost increases will gain ma rket share from manufacturers some that elect to pass on cost increase.

One manufacturer stated that consumers m ight tolerate a 25 percent cost increase since dehumidifiers are often not a disc retionary product, but that a ny cost increase will discourage first-time buyers and encourage consumers to repa ir broken units instea d of replacing them.

Dehumidifier manufacturers fo res ee other factors impacting profitability in addition to increased manufacturing costs. On e manufacturer stated that, if new standard levels required a chassis redesign that resulted in a different footprint, new packag ing would be required. This in turn would affect how many dehumidifiers coul d be loaded in a truc k for shipping, impacting shipping costs. One manufacturer commented on the changes in the number of units that could be packed in a shipping contai ner if the packaging needed to be changed, again affecting shipping costs.

12.3.3.4 Dehumidifier Conversion Costs One of DOE’s major objectives during the m anufacturer inte rviews was to determine the level and types of investment th e companies expected to incur to comply with a new efficiency standard. AHAM provided aggregated industry values for the requi red capital and product conversion outlays for all efficiency levels. These values are summari zed in Table 12.3.2, Table 12.3.3, and Table 12.3.4.

12-15Table 12.3.2 AHAM Capital and Product Conversio n Cost Data Submittal, 0 – 35.00 Pints/Day Product Class 0 – 35.00 pints/day Efficiency Level 1 2 3 4 5 Energy Factor (liters / kWh) 1.25 1.30 1.35 1.40 1.45 One-Time Product Conversion Expenses, Million $, T otal for all Manufacturers R&D 0.05 0.15 2.25 4.75 7.15 Marketing 0.1 0.15 1.7 4.75 6 Conversion Capital Expenditure Assum ptions, Million $, Total for all Manufacturers Building 0.025 5.05 5.1 5.15 5.2 Tooling and Equipm ent 0.3 1.85 3.9 6.95 9

Table 12.3.3 AHAM Ca pital and Product Convers ion Cost Data Submittal, 35.01 – 45.00 Pints/Day Product Class 35.01 – 45.00 pints/day Efficiency Level 1 2 3 4 5 Energy Factor (liters / kWh) 1.35 1.40 1.45 1.50 1.74 One-Time Product Conversion Expenses, Million $, T otal for all Manufacturers R&D 1.7 3.43 3.6 4.6 N/A Marketing 0.6 2.65 2.7 3.75 N/A Conversion Capital Expenditure Assum ptions, Million $, Total for all Manufacturers Building 0.025 0.05 0.1 5.15 N/A Tooling and Equipm ent 2.45 4.5 4.55 8.65 N/A

Table 12.3.4 AHAM Ca pital and Product Convers ion Cost Data Submittal, 54.01 – 74.99 Pints/Day Product Class 54.01 – 74.99 pints/day Efficiency Level 1 2 3 4 5 Energy Factor (liters / kWh) 1.55 1.60 1.65 1.70 1.80 One-Time Product Conversion Expenses, Million $, T otal for all Manufacturers R&D 0.1 0.23 0.4 6.9 11.8 Marketing 0.1 0.15 0.2 6.35 11 Conversion Capital Expenditure Assum ptions, Million $, Total for all Manufacturers Building 0.025 0.05 0.1 6.15 6.2 Tooling and Equipm ent 0.65 0.7 0.75 8.1 12

Capital investments include modifications or additions to plant, property, and equipm ent that increase its useful life. Capacity increa ses and new tooling are cap ital expenditures, which are amortized over their length of their useful liv es. Non-capital expenses, such as marketing and R&D, are typically expensed in the year in which they are incurred. During the interviews manufacturers were asked to comment on the data submitted by AHAM and provide additional information to better explain the trends in costs and the cost drivers at each efficiency level. Manufacturers interviewed were all in agreement with the aggregated cost figures subm itted by AHAM. The pattern of costs was explained by the industry practice of designing and tooling product lines using common product platforms. In general, manufacturers only

12-16expected large conversion costs associated with standards thatwould require the complete redesign of a product platform.

One manufacturer noted that dehumidifier ch assis designs are based around the size of the com pressor used in the dehumidifier. More efficient compressors are generally larger, and any efficiency standard which required modifica tion or redesign of the chassis to accommodate a larger compressor could require retooling and other significan t conversion costs. One manufacturer noted that they might try to ab sorb incremental efficiency improvement costs by reducing labor costs throug h dehumidifier design alterations. The reverseengineering team observed a wide range of manu facturing strategies, w ith some manufacturers making much more use of design for manufactur ing and assembly (DFMA) engineering than others. As a result, there were few consistent trends by efficien cy level regarding dehumidifier construction other than the HVAC circuit itself.

12.3.3.5 Dehumidifier Manufacturing Capa city and Employment Levels Based upon manufacturer interviews, DOE unders tands that the m ajor ity of dehumidifier production is situated outside of the United States . Dehumidifier manufacturers noted that few manufacturers produce dehumidifiers domestically. It is widely believed that any actions that increase the cost of dehumidifiers could move additional jobs overseas. Domestic manufacturing facilities would likel y not be relocated in re sponse to incremental efficiency improvements, but any step changes in efficiency standards would require complete redesign, and consideration of shifting production overseas.

12.3.3.6 Dehumidifier Market Share a nd Industry Consolidation
None of the manufacturers interviewed e xpressed the view that new standards would result in industry consolidation.

12.3.3.7 Dehumidifier Product Utility and Innovation
Interviews with manufactu rers yielded no significant concerns over future product innovation. One manufacturer noted that innova tion only occurs in high-end dehumidifier products, so standards are unlik ely to affect innovation. Another manufacturer agreed that standards would be unlikely to si gnificantly affect produce innovation. Product utility concerns cente red around price, perform ance and size. One manufacturer emphasized that consumers care primarily about basic performance and price. As long as efficiency standards do not dramatically decreas e performance or drama tically increase cost, consumer utility will not be affected. It was al so noted that dehumidifier efficiency is largely a function of compressor size and efficiency. Larger , more efficient compressors require increases in dehumidifier chassis size, restricting dehumidifier placement and reducing consumer utility.

12-1712.3.3.8 Dehumidifier Cumulative Burden
All dehumidifier manufacturers noted the U.S. Environm ental Protection Agency’s mandatory HCFC refrigerant phase-out. While so me low-capacity units on the market already feature non-HCFC refrigerants, th e industry still largel y relies on R22 at the present time. One manufacturer noted that the replacement refrigerant choice will be driven by compressor manufacturers, and that un til these manufacturers make a decision, the dehumidifier manufacturers cannot conduct th e necessary engineering to accommodate the change. Additionally, multiple dehumidifi er manufacturers pr oduce a wide range of consumer products which may face additional regulations.

12.3.4 Commercial Clothes Washer Preliminary MIA Results During the course of the preliminary MIA for commercial clothes washers, DOE interviewed m anufacturers repr esenting approximately 100 percent of domestic commercial clothes washer sales. These same interviews were used to review the engineering analysis cost and performance data contained in Chapter 5 of the TSD. The MIA interviews shifted the discussion from technology-related topics to bus iness-related topics. DOE’s objective was to become familiar with each company’s particular ma rket approach and financial structure, and its concerns and issues related to ne w efficiency standards. Most of the information received from these meetings is protected by non-disclosure agreements and resides with DOE’s contractor. Before each interview, DOE provided company re presentatives with an interview guide that included the topics we hoped to cover. A dditionally DOE often introduced, entertained, and discussed other topics during the course of the interviews. The following paragraphs summarize the principle manufacturer conc erns and issues related to new efficiency standards for commercial clothes washers

12.3.4.1 Commercial Clothes Washer Key Issues The concerns expressed by commercial clothes washer m anufacturers which in their opinion rise to the level of key issues are:

• the risk of eliminating low-cost ve rtical-axis washers from the market;

• reduced product shipments due to
o a m ove away from central laundry facil ities to in-unit residential laundry; and
o increased repair and remanuf acturing of existing units;

• reduced cleaning performance due to the use of som e energy saving design options;

• the possible relocation of production f acilities outside the country; and

• the potential for industry consolidation and/ or the elim ination of the Low-Volume Manufacturer (LVM).

12.3.4.2 Commercial Clothes Washer Product Mix
Commercial clothes washer ma nufacturers stated that the e ffect of standards on product offerings would depend significan tly on the standard level chosen. Multiple m anufacturers

12-18stated that high standards could eliminate th e vertical-axis washer product category, forcing manufacturers to only offer horizontal-axis washers. This would effectively eliminate an entire type of clothes washer, a move which one manu facturer asserts is inviolation of NAECA provisions protecting consumer utility.

12.3.4.3 Commercial Clothes Washer Customer Mix
Commercial clothes washer manufacturers st ated that the commer cial laundry industry structure en courages route operato rs to pass on cost increases to consumers. Route operators generally do not pay for the utilities their wa shers use on site, so they receive no economic benefit from higher efficiency commercial clothe s washers. Therefore, route operators would likely raise per load wash costs to recover th e additional purchase cost of higher efficiency commercial clothes washers.

One manufacturer stated that higher purchase costs of comm ercial clothes washers would increase the payback period of the washer’s ener gy savings to beyond the clothes washer’s life. If laundromat owners cannot rec oup the higher purchase cost of commercial clothes washers through energy savings, they will choose to pass on these costs by raising per load wash costs.

12.3.4.4 Commercial Clothes Washer Profitability
Manufacturers of commercial clothes wash ers are concerned that m ore stringent standards would reduce produc t shipments. At the higher effici ency levels it is believed that higher commercial clothes washer costs would encourage route operators and laundromats to repair existing washers more to avoid purchasin g new machines. This would reduce sales, and impact profitability. Manufacturers also fear that higher washer costs could encourage housing developers to consider elim inating central washing facilities in multi-family housing units in favor of in-unit washers instead. One manufacturer cited a st udy which indicates th at common-area laundry facilities are more energy-effi cient than in-unit facilities 1

. One manufacturer noted that sales of commerc ial clothes dryers ar e directly linked to sales of comm ercial clothes washers. Therefore, the financial impact of any decrease in sales of commercial clothes washers will be multiplied by a corresponding decrease in sales of commercial clothes dryers, further decreasing profitability.

12.3.4.5 Commercial Clothes Washer Conversion Costs
DOE asked commercial clothes washer manufac turers what level of conversion costs they anticip ated if efficiency standards were to take effect. In general, manufacturers noted that conversion costs were highly dependant on the sta ndard level adopted. A standard which would force manufacturers to convert th eir vertical-axis washer manufacturing facilities to horizontal12-19axis washers would result in the most significan t conversion costs, sin ce vertical-axis washers and horizontal-axis washers represen t completely different platforms a nd share few, if any, parts. Multiple manufacturers noted that it woul d be more cost ef fective to outsource horizontal-axis washers to foreign manufactur ers than to convert their vertical-axis manufacturing facilities to produ ce horizontal-axis washers. A ll manufacturers stated that a standard eliminating vertical-axis commercia l clothes washers would result in significant stranded assets. One manufacturer stated that a shutdown of its vertical-a xis commercial clothes washer line would likely cause it to exit manufacturing vertical-axis clot hes washers altogether.

12.3.4.6 Commercial Clothes Washer Manufactu ring Capacity and Employment Levels
Manufacturers stated that co mmercial clothes washers are still largely produced in the United Sta tes. Multiple manufacturers stated th at incremental efficiency improvements can be accommodated without platform redesign. Multip le manufacturers stated that they would consider outsourcing or moving their commercial washer manuf acturing abroad if standards require complete product platform re-design. One manufacturer expressed concern about such changes jeopardizing its entire dom estic clothes washer business. If significant investments were required, this manufacturer would choose am ong several options, incl uding moving production abroad, outsourcing production, or exiting th e clothes washer business altogether. All manufacturers currently make their vert ical-axis comm ercial clothes washers in the U.S., while horizontal-axis washers are manufactu red in the U.S. and abroad. Therefore, an efficiency standard which would eliminate ve rtical-axis washers w ould only affect U.S. production facilities. Any resu ltant increases in the producti on of horizontal-axis clothes washers would mainly benefit non-dome stic manufacturing facilities.

One domestic manufacturer of horizontal-axis clothes wash ers stated that a standard which prescribes horizontal-axis clothes washer s would likely lead to the commoditization of such units and hence margin pressure. The manuf acturer also stated that margin pressure could require it to move production abroad or ceas e clothes washer production altogether.

12.3.4.7 Commercial Clothes Washer Market Share and Industry Consolidation Multiple commercial clothes washer manufact urers s tated that the commercial clothes washer industry is already heavily consolidated. One manufacturer stated that high costs to meet standards could encourage additi onal industry consolidation if so me manufacturers cannot afford to meet these costs. This manufacturer believe s that certain efficiencylevels (MEF 1.60 / WF 8.5, MEF 1.72 / WF 8.0 , and MEF 1.80 / WF 7.5), are levels , which they can not achieve given the development costs and issues associated with developing top-loading cl othes washer to meet these levels.

12-20These issues include the existence of pr oprietary designs and the significant lower volume production associated with commercial clothes washers whic h do not justify investing in unconventional design options to meet efficiency standards with vertical -axis technology. Such options have proven costly and met poor acceptance in the residential market. For example, two non-agitator clothes washers have been withdrawn from the residential clothes washer market within the last five years. One manufacturer noted that high standards could attract n ew foreign entrants to the commercial clothes washer indus try, since developing commercia l versions of their existing high-efficiency, high-cost residential clothes washers as line extensions may become financially attractive.

12.3.4.8 Commercial Clothes Washer Product Utility and Innovation Multiple manufacturers noted that the commercial clothes washer market is not large enough to justify innovative research , so m anufacturers leverage th eir residential clothes washer technologies to develop effici ency improving options for commercial clothes washers. One manufacturer noted that the res ources required to meet the proposed standard levels could reduce manufacturers’ investment in residential pr oduct innovation. Manufacturer s were not aware of any new innovative product features that w ould reduce energy effi ciency significantly. Multiple manufacturers stated that commercial clothes washers are operated differently than res idential clothes washers and therefore theypossess a different set of utility attributes. For example, customers are more likely to overl oad commercial clothes washers in order to reduce their total wash cost. Manufacturers ar e aware of this, and design their machines and wash cycles to wash adequately despite being overloaded. Frequent overloading stresses the machines, and reduces the washing performan ce of some energy saving design options.

One manufacturer stated that commercial clothes washers tend to be used more efficiently s ince users have to pay for each wash individually. The ma nufacturer commented further that commercial clothes wa shers tend to be more fully lo aded than residential models, minimizing wash water and energy consumpti on per pound of clothing washed. While some residential clothes washers allow warm rinses as an option, all commercial clothes washers exclusively use cold rinses. Fi nal spin speeds on commercial models can also be higher than on residential models, further im proving energy efficiency. Higher mandatory standards that would force m anufacturers to utili ze residential design options in commercial clothe s washers could reduce the wash performance of overloaded commercial clothes washers. One manufactur e expressed concern that some commercial vertical-axis clothes washers currently sold ma y not have full acceptance by all customers or end-users. These models employ a rinsing meth od which is not embraced by all users. Without complete customer acceptance, the manufacturer believes these models can never become the basis of a national minimum standard.

12-2112.3.4.9 Commercial Clothes Washer Cumulative Burden One manufacturer noted that energy effici ency and environm ental regulations for multiple appliance categories it manufacturers would take precedence over its commercial clothes washer business.

12.3.4.10 Commercial Clothes Washer State Energy Conservation Standards Commercial clothes washers are covered by the State standards li sted in Table 12.3.5.

Table 12.3.5 State Commercial Clothes Washer Re gulations Similar to EPACT 2005 State Effective Date Difference from EPACT 2005 Arizona MEF and WF: 1/1/08 Standards e ffective one y ear later than EPACT 2005
California MEF: 1/1/05 WF: 1/1/0 7 MEF standard effective two years earlier than EPACT 2005
Connecticut MEF and WF: 7/1/06 Standards effective six months earlier than EPACT 2005 Maryland MEF and WF: 3/1/07 Standards e ffective two months later than EPACT 2005 New Jersey MEF: 1/1/07 WF: 1/1/1 0 Water factor standard effective three years later than EPACT 2005 Oregon MEF and WF: 1/1/08 Standards e ffective one y ear later than EPACT 2005 Rhode Island MEF and WF: 1/1/07 Identical to EPACT 2005 Washington MEF - For Sale: 1/1/07 MEF – Install ation: 1/1/08 Does not address water factor
As presented in the table above, the Stat e of California mandates energy and water conservation standards for commercial front-l oading and commercial top-loading automatic clothes washers. Table 12.3.6 provides the St ate’s commercial clothes washer energy conservation standards, which are dependent on clothes container capacity, and the water conservation standards, which are effec tive two years after the MEF standards.

Table 12.3.6 California State Efficiency Standards for Commer cial Clothes Washers Clothes Washer Cl assification Clothes Container Compartment Capacity (ft 3 ) Minimum MEF Effective January 1, 2005 Maximum Water Factor Effective January 1, 2007 Front-loading < 3.5 ft 3 1.26 9.5 Top-loading < 1.6 ft 3 ≥ 1.6 ft 3 and < 4.0 ft 3 0.65 1.26 9.5 9.5 In addition to the efficiency standards di scussed above, the S tate of California requires that commercial top-loading semi-automatic clothes washers and commercial suds-saving clothes washers manufactured on or after Janua ry 1, 2005 have an unheated rinse water option.

12-22Additionally, California issu ed minimum water conservation standards for residential clothes washers. While this does not directly affect products covered by the rulemakings, DOE is aware that this standard may have impact s on manufacturers of co mmercial clothes washers and other household appliances. Although Federal standards exist for the energy consumption of residential clothes washers, no su ch standard exists for the wate r efficiency. On September 16, 2005, the California Energy Commission (CEC) issued a petition for an exemption from Federal preemption to seek to apply its own State regul ation. DOE accepted written comments regarding this California petition until April 7, 2006. Table 12.3.7 provides the State’s proposed residential clothes washer water conservation standard s and their respective effective dates.

Table 12.3.7 California Water Conservation Standard s for Residential Clothes Washers Clothes Washer Maximum Water Factor (gallons/cu. ft.) Classification Effective January 1, 2007 Effective January 1, 2010 Top-loading 8.5 6.0 Front-loading 8.5 6.0
On December 28, 2006, DOE issued a deci sion denying the California petition. 71 FR 78157. The denial of the petition was based on three factors. First, DOE determined that it does not have the statutory authority to prescribe a rule for Californi a that would become effective by January 1, 2007, the first of two compliance date s contained in Title 20, section 1605.2(p)(1) of the California Code of Regulations. Second, DOE ruled that CEC ha d not established by a preponderance of the evidence that the State of California has unusual and compelling water interests, a condition required by EPCA for DOE to grant California a waiver from Federal preemption. 42 USC 6297(d)(1)(B). Finally, a preponderance of evidence showed that the California regulation would likely result in the unavailability of a class of residential clothes washers, specifically top-loader machines, in California.

12.3.4.11 Commercial Clothes Washer International Energy Conservation Standards DOE is not aware of any foreign standard s covering comm ercial clothes washers. However, several foreign standards cover reside ntial clothes washers, and DOE understands that this standard may still impact some North Am erican manufacturers in the home appliance industry. The Canadian government regulates the efficien cy of residential clothes washers. This standard applies to standard or com pact electrically operated hous ehold clothes washers that are top- or front-loaded, and th at have an internal control system that regulates the water temperature without the need for user interv ention subsequent to initiation of machine operation. The current standards went into effect Ja nuary 1, 2007, with increases in the standards for some product classes compared to the previous standards which had been in effect since January 1, 2004.

12-23Mexico mandates energy cons ervation standards for resident ial clothes washers sold in the country; however the standard do es not apply to clothes washers that do not use electricity or are used for commercial or industrial applications.

12.3.4.12 Commercial Clothes Washer Impact on Small Manufacturers The U.S. commercial clothes washer market has three principal manufacturers. While two of them are well-diversified applian ce manufacturers, the third is a low-volume manufacturer (LVM) that is focu sed principally on the laundry bus iness. In addition to being focused on laundry, the LVM derive s 87 percent of its clothes washer revenues from sales to commercial market segments. As a result, the LVM will be affected disproportionately by any changes to the commercial clothes washer ener gy efficiency requirements than its larger competitors, which are more diversified and for whom commercial clothes washer sales amount to less than 2 percent of total clothes washer sales. Should an energy efficiency standard eff ectively elim inate agita tor vertical axis commercial clothes washers, the LVM has threaten ed legal action since such a standard would more likely than not force it to exit the commercial clothes washer business. As described in the engineering analysis section (see Chapter 5 and Appendix 5C of the TSD), the LVM operates at m uch lower overall pr oduction volumes than its competitors. While its agitator vertical-axis clothes washers have benefited from decades of production experience at higher volumes, the horizontal-axis clothes wash er the LVM released to production in 1999 is unlikely to have benefited from cost optimi zation for higher production volumes that such volumes justify. As can be seen in Table 12.3.8, vertical-axis clothes washer sales dominate sales as a function of sales revenue and unit shipments.

12-24Table 12.3.8 DOE Estimate of LVM Clothes Wash er Sales and Unit Shipments in 2006 Market Seg ment Drum Axis Estimated Revenue Percentage Revenue of Unit Shipm ent Volume ($MM) Clothes W asher Business by Sales Channel Commercial Vertical $42.5 59.9% 81,502 Horizontal $19.2 27.0% 22,234 Residential Vertical $8.7 12.3% 19,586 Horizontal $0.6 0.8% 707 Total Clothes Washer Shipments 124,028 The legacy of higher-volume agitator vertical -axis clothes w asher production has allowed the LVM to accumulate a well-depreciated property plant and equipment that helps overcome one of the inherent disadvantages of producing at low volumes: high depreciation costs. These are sunk investments, along with accumulated re search and development. A transition to a horizontal-axis-only commercial clothes washer standard could have material effects to the LVM for the following reasons:

• Baseline vertical-axis clothes washers have a long history of price com petition and commoditization. Should the commercial clothes washer market shift to exclusive use of horizontal-axis clothes washers, a similar commoditization is likely to occur for horizontal-axis commercial clothes washers, causing margin pressure.

• A transition to higher-volume horizontal-axi s clothes washer pr oduction would require substantial investm ents by the LVM without the benefit of high production volumes to spread them over. Unlike its larger comp etitors, the LVM cannot treat its commercial clothes washer business as an extension of the residential clothes washer business. Lacking this scale, the LVM will likely encounter higher production costs due to higher depreciation, higher purchased part s costs, and lower productivity.

• In addition making investments that allo w higher-volum e manufacturing of horizontalaxis clothes washers, the likely commoditiz ation would force the LVM to redesign its horizontal-axis clothes washers to be less co stly to manufacture. However, given the high costs of such a redesign, the required manufacturing investments, and the low expected returns, the LVM would more li kely exit from manufacturing commercial clothes washers..

• Whether the LVM would continue to manufactur e agitator vertical-axis clothes washers f or the residential market is also debatable since the current shipment volumes for that market segment are relatively low and pric e competition is fierce. Its higher-volume competitors will continue to enjoy the benef its of scale, wider distribution, and lower costs. Thus, any transition to a horizontal-axis- only commercial clothes washer standard is likely to affect the LVM disp roportionately. The LVM has st ated that any large-scale

12-25investments without adequate re turns would ultimately force the LVM to exit the clothes washer business, which would cause material harm to it and damage competition as well. A wholesale plant refit could become sufficien tly expensive as to ju stify the construction of a new fac ility. This scenario could pr ompt management to move production to other countries, or to outsource production altogether, as some of the LVM competitors already have for some of their produc t lines. The LVM currently employs about 1,500 people, most of them in the United States.

12-261 REFERENCES
National Research Center, Inc. A N ational Study of Water a nd Energy Consumption in Multifamily Housing , November 2002. Boulder, CO. <http://www.laundrywise.com/downloads/Water_Energy%20Survey.pdf>

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