13 -i 

### CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

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 Guides ........................................................................... 13-3

13.2.3 Phase III : Subgroup Analysis ..................................................................... 13-3

13.2.3.1 Manufacturing Interviews

............................................................. 13-3

13.2.3.2 Revised Industry Cash

- Flow Analysis

.......................................... 13-4 13.2.3.3 Manufacturer Subgroup Analysis ................................................. 13-4

13.2.3.3.1 Small -Business Manufacturer Subgroup ....................... 13-4

13.2.3.3.1 Sign Ballast Manufacturer Subgroup ............................. 13-5

13.2.3.4 Manufacturing Capacity Impact

................................................... 13-5

13.2.3.5 Employment Impact

................................ ...................................... 13-6 13.2.3.6 Cumulative Regulatory Burden .................................................... 13-6

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

.............................. 13-6

13.3.1 Component Shortage .................................................................................. 13-6

13.3.2 Market Erosion ........................................................................................... 13-7

13.3.3 Opportunity Cost of Investments ................................................................ 13-8

13.3.4 Maintaining Product Tiers .......................................................................... 13-8

13.3.5 Adequate Compliance Perio ds .................................................................... 13-9

13.4 GRIM INPUTS AND ASSUMPTIONS

............................................................ 13-9

13.4.1 Overview of the GRIM

............................................................................... 13-9

13.4.2 Sources for GRIM Inputs .......................................................................... 13-10 13.4.2.1 Corporate Annual Reports .......................................................... 13-10 13.4.2.2 Standard and Poor Credit Ratings............................................... 13-10 13.4.2.3 Shipment Model.......................................................................... 13-10

13.4.2.4 Engineering Analysis

.................................................................. 13-10

13.4.2.5 Manufacturer Interviews

............................................................. 13-11

13.4.3 Financial Parameters

................................................................................. 13-11

13.4.4 Corporate Discount Rate ........................................................................... 13-12

13.4.5 Trial Standard Levels

................................................................................ 13-14

13.4.6 NIA Shipment Forecast ............................................................................ 13-15

13.4.7 Production Costs ....................................................................................... 13-17

13.4.8 Product and Capital Conversion Costs ..................................................... 13-19

13.4.9 Markup Scenarios ..................................................................................... 13-22 13.4.9.1 Preservation of Operating Profit Markup Scenario .................... 13-22

13.4.9.2 Two

- Tier Markup Scenario

........................................................ 13-27

13.5 INDUSTRY FINANCIAL IMPACTS

............................................................ 13-31

13.5.1 Impacts on Industry Net Present Value .................................................... 13-32

13.5.2 Impacts on Annual Cash Flow .................................................................. 13-34

13.6 IMPACTS ON MANUFACTURER SUBGROUPS

....................................... 13-39

13.6.1 Impacts on Small Business Manu facturers

............................................... 13-3913

- ii 

### 13.6.1.1 Description and Estimated Number of Small Entities Regulated 13-39

13.6.1.2 Description and Estimate of Compliance Requirements

............ 13-41

13.6.2 Impacts on Sign Ballast Manufacturers

.................................................... 13-44

13.7 OTHER IMPACTS

.......................................................................................... 13-46

13.7.1 Employment .............................................................................................. 13-46

13.7.2 Production Capacity .................................................................................. 13-47

13.7.3 Cumulative Regulatory Burden ................................................................ 13-47 13.7.3.1 DOE Regulations for Other Products Produced by Fluorescent Lamp

Ballast Manufacturers

................................................................... 13-48 13.7.3.2 Other Regulations That Could Impact Fluorescent Lamp B allast

Manufacturers

............................................................................... 13-51 State Energy Conservation Standards ...................................... 13-51 International Toxic Materials Regulations

............................... 13-52

Anti

- Arcing Protection Requirements

..................................... 13-52 Electromagnetic Interference (EMI) Requirements

................. 13-52

End -of- Life (EOL) Requirements

............................................ 13-53

13.8 CONCLUSION

................................................................................................ 13-53

LIST OF TABLES

Table 13.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking ............................................................................................................ 13-5 Table 13.4.1 GRIM Financial Parameters Based on 2002–2007 Weighted Company

Financial Data .............................................................................................................. 13-12 Table 13.4.2 GRIM Revised Fluorescent Lamp Ballast Industry Financial Parameters . 13-

12 Table 13.4.3 Cost of Equity Calculation ...................................................................... 13-13

Table 13.4.4 Cost of Debt Calculation......................................................................... 13-14

Table 13.4.5 Trial Stand ard Levels for Fluorescent Lamp Ballasts ............................ 13-14 Table 13.4.6 Total Base Case NIA Shipments Forecast in 2014 under the Existing and Emerging Technologies Scenarios ............................................................................... 13-16 Table 13.4.7 MPC Breakdown for Two Lamp Normal BF 4ft MBP IS & RS ............ 13-17 Table 13.4.8 MPC Breakdown for Two Lamp Normal BF 4ft MBP PS ..................... 13-17 Table 13.4.9 MPC Breakdown for Four Lamp Normal BF 4ft MBP IS & RS ........... 13-18 Table 13.4.10 MPC Breakdown for Four Lamp Normal BF 4ft MBP PS................... 13-18 Table 13.4.11 MPC Breakdown for Two Lamp Normal BF 8ft SP Slimline .............. 13-18 Table 13.4.12 MPC Breakdown for Two Lamp 8ft RDC HO I S & RS ...................... 13-18 Table 13.4.13 MPC Breakdown for Two Lamp Normal BF 4ft T5 MiniBP SO ........ 13-18 Table 13.4.14 MPC Breakdown for Two Lamp 4ft T5 MiniBP HO ........................... 13-18 Table 13.4.15 MPC Breakdown for Two Lamp 4ft MBP IS & RS Residential .......... 13-19

Table 13.4.16 MPC Breakdown fo r Four Lamp Sign Ballast ...................................... 13-19 Table 13.4.17 Product and Capital Conversion Costs for Product Class 1 (4-foot MBP IS

and RS Ballasts and 8

- foot SP Slimline Ballasts) by TSL ........................................... 13-21 Table 13.4.18 Product and Capital Conversion Costs for Product Class 2 (PS Ballasts) by

TSL .............................................................................................................................. 13-2213

- iii 

### Table 13.4.19 Product and Capital Conversion Costs for Product Class 3 (8- foot HO IS and RS Ballasts) by TSL .............................................................................................. 13-22 Table 13.4.20 Product and Capital Conversion Costs for Product Class 5 (Sign Ballasts) by TSL ......................................................................................................................... 13-22 Table 13.4.21 Preservation of Operating Profit Markups for Two Lamp Normal BF 4ft MBP IS & RS (Roll -up Shipment Scenario) ............................................................... 13-23 Table 13.4.22 Preservation of Operating Profit Markups for Two Lamp Normal BF 4ft MBP IS & RS (Shift Shipment Scenario) .................................................................... 13-23 Table 13.4.23 Preservation of Operating Profit Markups for Two Lamp Normal BF 4ft

MBP PS (Roll -up Shipment Scenario) ........................................................................ 13-24 Table 13.4.24 Preservation of Operating Profit Markups for Two Lamp Normal BF 4ft MBP PS (Shift Shipment Scenario) ............................................................................. 13-24 Table 13.4.25 Preservation of Operating Profit Markups for Four Lamp Normal BF 4ft MBP IS & RS (Roll -up Shipment Scenario) ............................................................... 13-24 Table 13.4.26 Preservation of Operating Profit Markups for Four Lamp Normal BF 4ft MBP IS & RS (Shift Shipment Scenario) .................................................................... 13-24 Table 13.4.27 Preservation of Operating Profit Markups for Four Lamp Normal BF 4ft MBP PS (Roll -up Shipment Scenario) ........................................................................ 13-24 Table 13.4.28 Preservation of Operating Profit Markups for Four Lamp Normal BF 4ft MBP PS (Shift Shipment Scenario) ............................................................................. 13-24 Table 13.4.29 Preservation of Operating Profit Markups for Two Lamp Normal BF 8ft SP Slimline (Roll -up Shipment Scenario) ................................................................... 13-25 Table 13.4.30 Preservation of Operating Profit Markups for Two Lamp Normal BF 8ft SP Slimline (Shift Shipment Scenario) ........................................................................ 13-25 Table 13.4.31 Preservation of Operating Profit Markups for Two Lamp 8ft RDC HO IS & RS (Roll

- up Shipment Scena rio) ............................................................................. 13-25 Table 13.4.32 Preservation of Operating Profit Markups for Two Lamp 8ft RDC HO IS & RS (Shift Shipment Scenario) .................................................................................. 13-25 Table 13.4.33 Preservation of Operating Profit Markups for Two Lamp Normal BF 4ft T5 MiniBP SO (Roll-up Shipment Scenario) .............................................................. 13-25 Table 13.4.34 Preservation of Operating Profit Markups for Tw o Lamp Normal BF 4ft T5 MiniBP SO (Shift Shipment Scenario)................................................................... 13-26 Table 13.4.35 Preservation of Operating Profit Markups for Two Lamp 4ft T5 MiniBP HO (Roll -up Shipment Scenario)................................................................................. 13-26 Table 13.4.36 Preservation of Operating Profit Markups for Two Lamp 4ft T5 MiniBP HO (Shift Shipment Scenario) ..................................................................................... 13-26 Table 13.4.37 Preservation of Operating Profit Markups for Two Lamp 4ft MBP IS & RS Residential (Roll -up Shipment Scenario) .................................................................... 13-26 Table 13.4.38 Preservation of Operating Profit Markups for Two Lamp 4ft MBP IS & RS Residential (Shift Shipment Scenario) ......................................................................... 13-26 Table 13.4.39 Preservation of Operating Profit Markups for Four Lamp Sign Ballast (Roll -up Shipment Scenario) ....................................................................................... 13-27 Table 13.4.40 Preservation of Operating Profit Markups for Four Lamp Sign Ballast (Shift Shipment Scenario) ............................................................................................ 13-27 Table 13.4.41 Two-Tier Markups for Two Lam p Normal BF 4ft MBP IS & RS (Existing Technologies Scenario) ................................................................................................ 13-2813

- iv 

### Table 13.4.42 Two-Tier Markups for Two Lamp Normal BF 4ft MBP IS & RS (Emerging Technologies Scenario) .............................................................................. 13-28 Table 13.4.43 Two-Tier Markups for Two Lamp Normal BF 4ft MBP PS (Existing Technologies Scenario) ................................................................................................ 13-28 Table 13.4.44 Two-Tier Markups for Two L amp Normal BF 4ft MBP PS (Emerging Technologies Scenario) ................................................................................................ 13-28 Table 13.4.45 Two-Tier Markups for Four Lamp Normal BF 4ft MBP IS & RS (Existing Technologies Scenario) ................................................................................................ 13-28

Table 13.4.46 Two- Tier Markups for Four Lamp Normal BF 4ft MBP IS & RS (Emerging Technologies Scenario) .............................................................................. 13-29

Table 13.4.47 Two- Tier Markups for F our Lamp Normal BF 4ft MBP PS (Existing Technologies Scenario) ................................................................................................ 13-29 Table 13.4.48 Two-Tier Markups for Four Lamp Normal BF 4ft MBP PS (Emerging Technologies Scenario) ................................................................................................ 13-29

Table 13.4.49 Two- Tier Markups for Two Lamp Normal BF 8ft SP Slimline (Existing Technologies Scenario) ................................................................................................ 13-29

Table 13.4.50 Two- Tier Markups for Tw o Lamp Normal BF 8ft SP Slimline (Emerging Technologies Scenario) ................................................................................................ 13-29 Table 13.4.51 Two-Tier Markups for Two Lamp 8ft RDC HO IS & RS (Existing Technologies Scenario) ................................................................................................ 13-30

Table 13.4.52 Two- Tier Markups for Two Lamp 8ft RDC HO IS & RS (Emerging Technologies Scenario) ................................................................................................ 13-30 Table 13.4.53 Two-Tier Markups for Two Lamp Normal BF 4ft T5 MiniBP SO (Existing Technologies Scenario) ................................................................................................ 13-30 Table 13.4.54 Two-Tier Markups for Two Lamp Normal BF 4ft T5 MiniBP SO (Emerging Technologies Scenario) .............................................................................. 13-30 Table 13.4.55 Two-Tier Markups for Two Lamp 4ft T5 MiniBP HO (Existing Technologies Scenario) ................................................................................................ 13-30 Table 13.4.56 Two-Tier Markups for Two Lamp 4ft T5 MiniBP HO (Emerging Technologies Scenario) ................................................................................................ 13-31 Table 13.4.57 Two-Tier Markups for Two Lamp 4ft MBP IS & RS Residential (Existing Technologies Scenario) ................................................................................................ 13-31 Table 13.4.58 Two-Tier Markups for Two Lamp 4ft MBP IS & RS Residential (Emerging Technologies Scenario) .............................................................................. 13-31

Table 13.4.59 Two- Tier Markups for Four La mp Sign Ballast (Existing Technologies Scenario) ...................................................................................................................... 13-31

Table 13.4.60 Two- Tier Markups for Four Lamp Sign Ballast (Emerging Technologies Scenario) ...................................................................................................................... 13-31 Table 13.5.1 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Roll-up Shipments, and Existing Technologies Scenarios) ..................................................................................................................... 13-32 Table 13.5.2 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Roll-up Shipments, and Emerging Technologies Scenarios) .............................................................................................. 13-3213 -v 

### Table 13.5.3 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Shift Shipments, and Existing Technologies Scenarios) ..................................................................................................................... 13-33 Table 13.5.4 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Shift Shipments, and Emerging Technologies Scenarios) ..................................................................................................................... 13-33

Table 13 .5.5 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (TwoTier Markup, Roll-up Shipments, and Existing Technologies Scenarios)................... 13-33 Table 13.5.6 Changes in Industry Net Pr esent Value for Fluorescent Lamp Ballasts (Two

Tier Markup, Roll-up Shipments, and Emerging Technologies Scenarios) ................ 13-33 Table 13.5.7 Changes in Industry Net Present Value for Fluorescent Lam p Ballasts (Two

Tier Markup, Shift Shipments, and Existing Technologies Scenarios) ....................... 13-34Table 13.5.8 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (TwoTier Markup, Shift Shipments, and Emerging Technologies Scenarios) ..................... 13-34 Table 13.6.1 Comparison of a Typical Small and Large Manufacturer’s Product Conversion Costs to Annual R&D Expense ................................................................ 13-42 Table 13.6.2 Comparison of a Typical Small and Large Manufacturer’s Total Conversion

Costs to Annual Revenue and EBIT ............................................................................ 13-43

Table 13.6.3 Manufa cturer Impact Analysis for Sign Ballasts – Preservation of Operating Profit Markup, Existing Technologies, and Roll-up Shipment Scenario..................... 13-45 Table 13.6.4 Manufacturer Impact Analysis for Sig n Ballasts – Preservation of Operating Profit Markup, Emerging Technologies, and Roll-up Shipment Scenario .................. 13-45 Table 13.7.1 Other DOE and Federal Actions Affecting the Fluorescent Lamp Balla st Industry ........................................................................................................................ 13-49 Table 13.7.2 DOE Regulations on Products For Which Fluorescent Lamp Ballast Manufacturers Hold Significant Market Share ............................................................ 13-51

LIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow ................................................ 13-9 Figure 13.5.1 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Roll-up Shipments, and Existing Technologies Scenarios) ..................................................................................................................... 13-35 Figure 13.5.2 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Preservatio n of Operating Profit Markup, Roll-up Shipments, and Emerging Technologies Scenarios) .............................................................................................. 13-36 Figure 13.5.3 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Preservation of Operati ng Profit Markup, Shift Shipments, and Existing Technologies Scenarios) ..................................................................................................................... 13-36 Figure 13.5.4 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Preservation of Operating Profit Mark up, Shift Shipments, and Emerging Technologies Scenarios) ..................................................................................................................... 13-37 Figure 13.5.5 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Two- Tier Markup, Roll-up Shipments, and Existing Technologies Scenarios) .......................... 13-3713

- vi 

### Figure 13.5.6 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Two- Tier Markup, Roll-up Shipments, and Emerging Technologies Scenarios) ........................ 13-38 Figure 13.5.7 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Two- Tier Markup, Shift Shipments, and Existing Technologies Scenarios) ............................... 13-38 Figure 13.5.8 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Two- Tier Markup, Shift Shipments, and Emerging Technologies Scenarios) ............................ 13-3913 -1 

### CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

13.1 INTRODUCTION

In dete rmining whether a standard is economically justified, the U.S. Department of Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a) (6)(B)(i)) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id . DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of amended energy conser vation standards on manufacturers of fluorescent lamp ballasts

, and assessed the impact of such standards on direct employment and manufacturing capacity.

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA primarily re lies on the Government Regulatory Impact Model (GRIM), an industry cash-flow model adapted for the products in this rulemaking. The GRIM inputs include information on industry cost structure, shipments, and pricing strategies. The GRIM’s key output is the industry net present value (INPV). The model estimates the financial impact of more stringent energy conservation standards for each product by comparing changes in INPV between a base case and the various trial standard levels (TSLs) in the standards case . The qualitative part of the MIA addresses product characteristics, manufacturer characteristics , market and product trends, as well as the impact of standards on subgroups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of preparing an industry characterization for the fluorescent lamp ballasts industry, including data on market share, sales volumes and trends, pricing, employment, and financial structure. In Phase II, “Industry Cash Flow,” DOE used the GRIM to assess the impacts of amended energy conservation standards on fluorescent lamp ballasts.

In Phase II, DOE created a GRIM for fluorescent lamp ballasts and an interview guide to gather information on the potential impacts on manufacturers. DOE presented the MIA results for fluorescent lamp ballasts based on a set of considered TSLs. These

TSLs are described in Section 13.4.5 below

.

In Phase III, “Subgroup Impact Analysis,” DOE inter viewed manufacturers representing more than 90 percent of fluorescent lamp ballast sales . Interviewees included large and small manufacturers with various market shares and market focus, providing a representative cross-section of the industries. During in terviews, DOE discussed financial topics specific to each manufacturer and obtained each manufacturer’s view of the industry. The interviews provided DOE with valuable13 -2 

### information for evaluating the impacts of amended energy conservation standards on manufacturer cash flows, investment requirements, and employment.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the fluorescent lamp ballast industry that built upon the market and technology assessment prep ared for this rulemaking . (See chapter 3 of this Technical Support Document (TSD).) Before initiating the detailed impact studies, DOE collected information on the present and past structure and market characteristics of each industry. This information included market share data, product shipments, manufacturer markups, and the cost structure for various manufacturers. The industry profile includes: (1) further detail on the overall market and product characteristics; (2) estimated manufacturer market shares; (3) financial

paramet ers such as net plant, property, and equipment; selling, general and administrative (SG&A) expenses; cost of goods sold, etc.; and (4) trends in the number of firms, market, and product characteristics. The industry profile included a top-down cost analysi s of fluorescent lamp ballast manufacturers that DOE used to derive preliminary financial inputs for the GRIM ( e.g., revenues, depreciation, SG&A, and research and development (R&D) expenses).

DOE also used public information to further calibrate its init ial characterization of

the fluorescent lamp ballast industry, including Securities and Exchange Commission (SEC) 10

– K reports

, 1 

### Standard & Poor’s (S&P) stock reports, 2 

### and corporate annual

reports. DOE supplemented this public information with data releas ed by privately held companies.

13.2.2 Phase II: Industry Cash -Flow Analysis and Interview Guide

Phase II focused on the financial impacts of potential amended energy

conservation standards on manufacturers of fluorescent lamp ballasts

. More stringent energy conservation standards can affect manufacturer cash flow s in three distinct ways: (1) create a need for increased investment, (2) raise production costs per unit, and (3) alter revenue due to higher per -unit prices and /or possible changes in sales volumes. To quantify these impacts, DOE used the GRIM to perform a cash- flow analysis for fluorescent lamp ballasts . In performing these analyses, DOE used the financial values derived during Phase I and the shipment scenarios used in the national impact analysis ( NIA ). In Phase II, DOE performed these preliminary industry cash

- flow analyses and prepared written guides for manufacturer interviews.

13.2.2.1 Industry Cash -Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows from

the announcement year of amended energy conservation standards until several years after the standards’ compliance date. These factors include annual expected revenues, costs of sales, SG&A, taxes, and capital expenditures related to the amended standards. Inputs to the GRIM include manufacturing production costs

, selling prices , and shipments forecasts developed in other analyses. DOE derived the manufacturing costs13 -3 

### from the engineering analysis and information provided by the industry and estimated typical manufacturer ma rkups from public financial reports and interviews with manufacturers. DOE developed alternative markup scenarios for the GRIM based on discussions with manufacturers. DOE’s shipments analysis, presented in c hapter 11 of this TSD, provided the basis for the shipment projections in the GRIM. The financial parameters were developed using publicly available manufacturer data and were revised with information submitted confidentially during manufacturer interviews. The GRIM results are compared to base case pro jections for the industry. The financial impact of amended energy conservation standards is the difference between the discounted annual

cash flows in the base case and standards case at each TSL

.

13.2.2.2 Interview Guides

During Phase III of the MIA, DOE intervie wed manufacturers to gather information on the effects of amended energy conservation on revenues and finances, direct employment, capital assets, and industry competitiveness. Before the interviews, DOE distributed an interview guide for the fluorescent l amp ballast industry . The interview guide provided a starting point to identify relevant issues and help identify the impacts of amended energy conservation standards on individual manufacturers or subgroups of manufacturers. Most of the information DOE re ceived from these meetings is protected by non-disclosure agreements and resides with DOE’s contractors. Before each telephone interview or site visit, DOE provided company representatives with an interview guide that included the topics for which DOE sought input. The MIA interview topics included (1) test procedure follow- up; (2) preliminary analysis follow -up; (3 ) k ey issues to this rulemaking; (4 ) a company overview and organizational characteristics; (5)

manufacturer mar kups and profitability; (6 ) ship ment projections and market shares; (7 )

financial parameters; (8) conversion costs; (9) cumulative regulatory burden; (10) direct employment impact assessment; (11) manufacturing capacity and non- US sales; (12) impact on competition ; and (13) impacts on small business. The interview guides are presented in appendix 13 A.

13.2.3 Phase III: Subgroup Analysis

For its analysis, DOE presented the impacts on all product classes of fluorescent lamp ballasts as a whole. While conducting the MIA, DOE interviewed a represent ative

cross -section of fluorescent lamp balllast manufacturers. The MIA interviews broadened the discussion to include business-related topics. DOE sought to obtain feedback from industry on the approaches used in the GRIMs and to isolate key issues and concerns. During interviews, DOE defined two manufacturer subgroups (small manufacturers and sign ballast manufacturers) that could be disproportionately impacted by amended energy conservation standards. These subgroups are described in detail below.

13.2.3.1 Manuf acturing Interviews

The information gathered in Phase I and the cash-flow analysis performed in Phase II are supplemented with information gathered from manufacturer interviews in Phase III. The interview process provides an opportunity for interested part ies to express13 -4 

### their views on important issues privately, allowing confidential or sensitive information to be considered in the rulemaking process.

DOE used these interviews to tailor the GRIM to reflect unique financial

characteristics for fluorescent la mp ballast manufacturers . DOE contacted companies

from its database of manufacturers and interviewed s mall and large companies, subsidiaries and independent firms, and public and private corporations to provide a representation of the industry. Interviews were scheduled well in advance to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE sought interactive interviews, which help clarify responses and identify additional issues. The resulting information provides valuable inputs to the GRIM developed for the product classes.

13.2.3.2 Revised Industry Cash -Flow Analysis

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input financial figures for review and evaluation. During the interviews, DOE requested comments on the values it selected for the parameters. DOE revised its industry cash

flow models based on this feedback. Section 13.4.3 provides more information on how DOE calculated the parameters.

13.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among manufacturer subgroups. Small

manufacturers and othe r manufacturers with a cost structure significantly different from the industry average could be more negatively affected. DOE uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview s, DOE discussed the potential subgroups and subgroup members it identified for the analysis. DOE asked manufacturers and other interested parties to suggest what subgroups or characteristics are the most appropriate to analyze. As

described in section 13.2.3 , DOE presents the industry impacts on fluorescent lamp

ballasts as a whole because most of the product classes represent the same market served by the same manufacturers. However, as discussed below, DOE ide ntified two additional manufacturer subgroups that warranted a separate impact analysis: small manufacturers and sign ballast manufacturers.

13.2.3.3.1 Small

- Business Manufacturer Subgroup

DOE investigated whether small business manufacturers should be analyzed as a manufacturer subgroup. DOE used the Small Business Administration (SBA) small business size standards published on August 22, 2008, as amended, and the North American Industry Classification System (NAICS) code, presented in Table 13.2.1 , to determine whether any small entities would be affected by the rulemaking. a 

### For the

a The size standards are available on the SBA’s website at http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf

.13 -5 

### product classes under review, the SBA bases its small business definition on the total number of employees for a business, its subsidiaries, and its parent companies. An aggregated business entity with fewer employees than the listed limit is considered a

small business.

Table 13.2.1 SBA and NAICS Classification of Small Businesses Potentially Affecte d by This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS Power, Distribution and Specialty

Transformer Manufactur ing N/A 750 335311



### DOE used the National Electrical Manufacturers Association (NEMA) 3 

### member directory to identify manufa cturers of fluorescent lamp ballasts . DOE asked interested parties and industry representatives if they were aware of other smal l business

manufacturers. DOE also consulted product databases like the Consortium for Energy Efficiency (CEE) 4 

### and the Californ ia Energy Commission (CEC) 5 

### for potential manufacturers. DOE contacted select companies on its list, as necessary, to determine whether they met the SBA’s definition of a small business manufacturer of covered fluorescent lamp ballasts. DOE screened out co mpanies that did not offer products covered by this rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated.

During its research, DOE identified approximately ten companies which

manufacture products covered by this rulemaking and quali fy as small business es per the applicable SBA definition. DOE contacted the small business es to solicit feedback on the potential impacts of energy conservation standards. Two of the small businesses consented to being interviewed duri ng the MIA interviews, and DOE received feedback from one additional small business through a survey response. In addition to posing the standard MIA interview questions, DOE solicited data from other manufacturers on differential impacts the se companies m ight experience from amended energy conservation standards. Because DOE was not able to certify that the proposed rulemaking would not have a significant economic impact on a substantial number of small entities, DOE has analyzed small manufacturers as a s ubgroup. The results of this subgroup analysis are presented in section 13.6

.

13.2.3.3.1 Sign Ballast Manufacturer Subgroup

DOE investigated sign ballast manufacturers as a second subgroup. Unlike the traditional fluorescent lamp ballast market, which is dominated by four large manufacturers with high volume product lines, the sign ballast market is significantly more fragmented, with numerous small players providing products in low volumes to distinct markets. As such, DOE conducted a subgroup analysis for sign ballast manufacturers, the results of which are presented in section 13.6

.

13.2.3.4 Manufacturing Capacity Impact

One significant outcome of amended energy conservation standards could be the obsolescence of existing manufacturing assets, including tooling and investment. The13 -6 

### manufacturer interview guides have a series of questions to help identify impacts of amended standards on manufacturing capacity, specifically capacity utilization and plant location decisions in the United States and North America, with and without amended standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of any stranded assets; and

estim ates for any one -time changes to existing plant, property, and equipment (PPE).

DOE’s estimates of the one

- time capital changes and stranded assets affect the cash flow

estimates in the GRIM. These estimates can be found in section 13.4.8 ; DOE’s discussion of the capacity impact can be found in section 13.7.2

.

13.2.3.5 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic direct employment patterns might be affected, the interviews explored current employment

trends in the fluorescent lamp ballast industry . The interviews also solicited manufacturer views on changes in employment patterns that may result from more stringent standards. The employment impacts section of the interview guide focused on current employment levels associated with manufacturers at each production facility, expected future employment levels with and without amended energy conservation standards, and differences in workforce skills and issues related to the retraining of employees. The employment impacts are reported in section 13.7.1

.

13.2.3.6 Cumulative Regul atory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy conservation standards and other regulatory actions affecting the same products. DOE analyzed the impact on manufacturers of multiple, product- specific regula tory actions. Based on its own research and discussions with manufacturers, DOE identified regulations relevant to fluorescent lamp ballast manufacturers, such as State regulations and other Federal regulations that impact other products made by the same

m anufacturers . Discussion of the cumulative regulatory burden can be found in section

13.7.3

.

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA interview starts by asking: “What are the key issues for your compan y regarding the energy conservation standard rulemaking?” This question prompts manufacturers to identify the issues they feel DOE should explore and discuss further during the interview. The following sections describe the most significant issues

identifi ed by manufacturers . These summaries are provided in aggregate to protect manufacturer confidentiality.

13.3.1 Component Shortage

All manufacturers stated that an ongoing component shortage, which began in the fall of 2009, is a key concern for their industry. During the recent economic downturn,13 -7 

### component suppliers scaled back production significantly. When demand recovered as the recession ended, electronics suppliers lacked the capacity to meet demand. Suppliers have been reluctant to add capacity for fear t hat the downturn has not actually ended; this reluctance has driven a prolonged shortage of ballast components. Electrolytic capacitors and transistors are key examples of components in relatively short supply, which come almost entirely from Asia.

The fact that these components are shared among many electronics industries has exacerbated the problem for the ballast industry. Because the selling price of a ballast is much lower than that of many other products demanding these components, such as

televisi ons and cell phones, other industries, which are better able to absorb small component prices increases, are able to pay more for these components and thus receive priority over the ballast industry. Some of these competing industries also have greater

sca le to help justify prioritization from vendors. Additionally, component manufacturers are seeing their customers place duplicate orders with several suppliers (only to later cancel the orders with all but one supplier). This has led to component suppliers being skeptical that the demand for components is as great as manufacturers claim. As a result, suppliers currently cannot meet the full demand for several components used in the ballasts industry and many other electronics industries.

In turn, ballast manufacturers have been unable to have their orders filled with lead times they have been accustomed to. They have been forced to pay higher charges to rush parts in order to fill their own customers’ orders. The shortage not only disrupted

manufacturers’ ability to fill ballast orders within historical lead times, but also hampered their R&D efforts as obtaining parts for product development is more difficult. Manufacturers predicted the component shortage would last at least into 2011.

Manufacturers wer e concerned that energy conservation standards for fluorescent lamp ballasts would exacerbate the component shortage. New and amended standards, particularly at the highest efficiency levels analyzed, would greatly increase the demand for highly efficient components, which are only available from a limited number of suppliers and are already in short supply. The more stringent the standards are set, the more severe the component shortage could be.

Manufacturers also stated that the component shortage has forced them to expand the number of suppliers they use, which could cause greater variation in production output. The component shortage has also impacted their profitability because manufacturers are paying more for components but have not yet been able to pass on

these increased costs to consumers.

13.3.2 Market Erosion

Manufacturers stated that emerging technologies are penetrat ing the fluorescent lamp ballasts market. Several manufacturers worried that new and amended energy

conservation standards for ballasts would force them to invest in a shrinking market

. Depending on the pace of market pe netration of emerging technologies

— such as light

emitting diodes ( LEDs )—these investments might never be recouped. Also,13 -8 

### manufacturers were concerned that new and a mended standard s on ballasts could hasten

t he switch to emerging technologies by lowering the difference in their first

- cost price. If the standard did increase the natural migration toward new technology, manufacturers said they would be less likely to make the substantial investments to modify ballasts production equipment fo r some of their product lines. (To address emerging technologies issues discussed by manufacturers, DOE included several shipment scenarios in both the

NIA and the G RIM. See chapter 11 of th is notice of proposed rulemaking ( NOPR ) TSD for a discussion of the shipment scenarios used in the respective analyses .)

13.3.3 Opportunity Cost of Investments

Manufacturers also stated that the financial burden of developing products to meet amended energy cons ervation standards has an opportunity cost due to the limited pool of capital and R&D dollars. Currently, manufacturers are reinvesting the lion’s share of the cash flow from fluorescent lamp ballast operations into emerging technologies such as LEDs and control systems. Any investments incurred to meet amended ballast standards would therefore reflect foregone investments in these emerging technologies, which the industry believes offer both better prospects for market growth and greater potential for

ene rgy savings than traditional fixed

– light -output fluorescent lamp ballasts. Compared to these emerging technologies, manufacturers stated that they have little room for efficiency improvements within their ballast product lines.

13.3.4 Maintaining Product Tiers

Several manufacturers stated that they would not want standards to be so stringent that they eliminate the ability to carry two efficiency tiers within a product class. Most

manufacturers

— and all major manufacturers

— currently offer both standard- efficiency and high- efficiency product lines. The standard

- efficiency product lines are typically lower cost and lower margin. These high-volume products provide economies of scale and, by establishing a market presence and brand, enhance manufacturers’ ability to enter the more profitable retrofit and aftermarket sales. Meanwhile, the high

- efficiency product lines allow manufacturers to bundle other features within these products, which allows

them to upsell these products and often command a better margin. Utility rebates and other similar programs also play a large role in driving the purchase of higher efficiency

ballasts.

If DOE set standards that did not leave room for a high-efficiency product to differentiate itself from a baseline product, manufacturers wor ry

the new standard would commoditize these now-premium products. In turn, prices of the high- efficiency ballasts

would fall to the level of what were former ly the lower -tier products, harming manufacturer profitability. Utility companies and other progr ams would have little incentive to offer rebates for these former upper -tier products, which would then be baseline units. Without rebate incentives, sales to the energy retrofit market could decrease greatly due to cost, which would diminish the potential for energy savings due

to the standard.13 -9 

### 13.3.5 Adequate Compliance Periods

A number of manufacturers expressed concern about the timing between the

announcement of the standard and the effective date of the standard. Manufacturers stated that they need adequate time to develop products that meet the amended efficiency standards. Without enough development time, manufacturers may not have the resources to redesign and test all of their product lines before the required compliance date in 2014,

which could result in lost sales opportunities in the market.

13.4 GRIM INPUTS AND ASSU MPTIONS

The GRIM serves as the main tool for assessing the impact s on industry due to amended energy conservation standards. DOE relies on several sources to obtain inputs

for the GRIM. Data an d assumptions from these sources are then fed into an accounting

model that calculates the industry cash flow both with and without amended energy

conservation standards.

13.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1 , is an annual cash flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of regulatory conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis , 2011 , and continuing to 2043 . The model calculates the INPV by summing the

str eam of an nual discounted cash flows during this period and adding a discounted

terminal value

. 6



### Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles a nd compares changes in INPV between the base case and the standard

- case scenario induced by amended energy conservation standards. The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy13

- 10 

### conservation standard on manufacturers. Appendix 13B provides more technical details

and user information for the GRIM.

13.4.2 Sources for GRIM Inputs

The GRIM uses several different sources for data inputs in determining industry cash flow. These sources include corporate annual reports, company profiles, Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer

interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the initial financial inputs to the GRIM. These reports exist for publicly held companies and are freely available to the general public. DOE developed initial financial inputs to the GRIM by examining the annual SEC 10-K reports filed by publicly- traded manufacturers that

manufactur e fluorescent lamp ballasts, among other products. Since these companies do not provide detailed information about their individual product lines, DOE used the financial information for the entire companies as its initial estimates of the financial parameters in the GRIM analys is . These figures were later revised using feedback from

interviews to be representative of fluorescent lamp ballast manufacturing . D OE used corporate annual reports to derive the following initial inputs to t he GRIM:

• Tax rate • Working capital

• SG&A

• R&D • Depreciation • Capital expenditures

• Net PPE

13.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial information. DOE relied on S&P reports to determine the in dustry’s average cost of debt when calculating the cost of capital.

13.4.2.3 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in

the NIA . The model relied on historical shipments data for fluorescent lamp ballasts

. Chapter 10 of the TSD describes the methodology and analytical model DOE used to forecast shipments.

13.4.2.4 Engineering Analysis

The engineering analysis establishes the relationship between manufacturer production cost (MPC) and energy efficiency for the products covered in this rulemaking.13

- 11 

### DOE has adopted an efficiency level approach paired with reverse engineering cost estimates to develop cost

- efficiency curves. DOE began its analysis by conducting industry research to determine representative product classes, select baseline ballasts, and select representative ballasts for further testing and analysis. Next DOE determined efficiency levels based on the design options associated with the specific ballasts studied and the maximum technologically feasible efficiency level. La stly

, DOE conducted a price analysis by generating a bill of materials (BOM) by tearing down representative ballasts and developing a cost model that converts the BOMs for each efficiency level into MPCs. By applying derived manufacturer markups to the MPC , DOE calculated the manufacturer selling price (MSP) and constructed industry cost-efficiency curves. In cases where DOE was not able to generate a BOM for representative ballasts, DOE estimated an MSP based on the relationship between teardown data, blue book prices, and manufacturer-supplied MSPs. See chapter 5 for a complete discussion of the engineering analysis.

13.4.2.5 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative

cross -section of manufacturers. DOE also interviewed manufacturers representing a significant portion of sales in every product class . During these discussions, DOE obtained information to determine and verify GRIM input assumptions in each industry. Key topics discussed during the interviews a nd reflected in the GRIM include:

• capital conversion costs (one- time investments in PPE); • product conversion costs (one-time investments in research, product development, testing, and marketing); • product cost structure, or the portion of the MPCs related to materials, labor, overhead, and depreciation costs;

• possible profitability impacts ; and

• cost

- efficiency curves calculated in the engineering analysis.

13.4.3 Financial Parameters

Table 13.4.1 below provides financial parameters for four public companies engaged in manufacturing and selling fluorescent lamp ballasts . The values listed are averages over a 6 -year period (2002 to 2007 ).13

- 12 

### Table 13.4.1 GRIM Fi nancia l Parameters Based on 2002–2007 Weighted Company

Financial Data

Parameter Weighted Average Manufacturer

A B C D

Tax Rate % of taxable income 23.4 11.4 28.4 13.1 32.6 Working Capital % of revenues 8.3

- 29.4 17.9 11.9 16.4

SG&A % of revenues 19.4 14.0 20.8 17.8 22.6

R&D % of revenues 3.8 3.6 2.7 6.1 3.9 Depreciation % of revenues 3.7 2.1 3.8 5.9 2.7 Capital Expenditures % of revenues 4.2 3.0 4.6 6.4 2.3

Net PPE % of revenues 14.6 18.2 14.1 13.5 13.7



### During interviews, fluorescent lamp ballast manufacturers were asked to provide their own figures for the parameters listed in Table 13.4.1 . Where applicable, DOE adjusted the parameters in the GRIM using this feedback and data from publicly traded companies to reflect manufacturing fluorescent lamp ballasts

. Table 13.4.2 presents the revised parameters for fluorescent lamp ballast manufacturers.

Table 13.4.2 GRIM Revised Flu orescent Lamp Ballast Industry Financial

Parameters

Parameter Revised Estimate

Tax Rate % of taxable income 31.8 Working Capital % of revenues 8.3

SG&A % of revenues 16.6

R&D % of revenues 3.7 Depreciation % of revenues 3.1 Capital Expenditures % of revenues 3.2

Net PPE % of revenues 11.4



### 13.4.4 Corporate Discount Rate

DOE used the weighted

- average cost of capital (WACC) as the discount rate to calculate the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is the total cost of debt and equity weighted by their respective proportions in the capital structure of the industry. DOE estimated the WACC for the fluorescent lamp ballast industry based on several representative companies, using the following formula:

WACC = After -Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio) Eq. 1

The cost of equity is the rate of return that equity investors (including, potentially, the company) expect to earn on a company’s stock. These expectations are reflected in

the market price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used means to estimate the cost of equity. According to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium Eq. 2

where:13

- 13 

### Riskless rate of return is the rate of return on a “safe” benchmark investment, typically considered the short- term Treasury Bill (T

- Bill) yield.

Risk premium is the difference betwee n the expected return on stocks and the

riskless rate.

Beta (β) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated

with the S&P 500 market ind ex. A Beta lower than one means the stock is less volatile

than the market index.

DOE determined that the industry average cost of equity for the fluorescent lamp

ballast industry is 10.7 percent ( Table 13.4.3 ).

T able 13.4.3 Cost of Equity Calculation

Parameter Industry

Weighted Average

% Manufacturer

A B C D

(1) Average Beta 1.29 1.65 1.24 1.48 0.92 (2 ) Yield on 10

- Year

T

- Bill (1928

- 2009 ) 5. 2

- - - -
(3) Market Ri sk Premium (1928

- 2009) 6.0

- - - -
Cost of Equity (2)+[(1)*(3)] 1 2.9

- - - - Equity/Total Capital 87.5 90.8 94.7 75.0 82.4



### Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spr ead. One way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis points) over the risk- free

rate. DOE used this method to calculate the cost of debt for all four manufacturers by using S&P ratings and adding the relevant spread to the risk- free rate.

In practice, investors use a variety of different maturity Treasury bonds to

estimate the risk

- free rate. DOE used the 10-year Treasury bond return because it captures long

- term inflation expectations and is less volat ile than short- term rates. The

risk free rate is estimated to be approximately 5 .2 percent, which is the average 10- year Treasury bond return between 1928 and 2009.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for the four public manufacturers. DOE added the industry- weighted average spread to the average T

- Bill rate. Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry average tax rate to

determine the net co st of debt for the industry. Table 13.4.4 presents the derivation of the cost of debt and the capital structure of the industry ( i.e. the debt ratio (debt/total capital) ).13

- 14 

### Table 13.4.4 Cost of Debt Calculation

Parameter Industry

Weighted Average

% Manufacturer

A B C D

S&P Bond Rating

-- AA+ A- A+ AA

- (1) Yield on 10

- Year

T- Bill (1928

- 2009 ) 5. 2

- - - -

(2) Gross Cost of Debt 8.1 7.2 8.7 7.9 7.7

(3) Tax Rate 23.4 11.4 28.4 13.1 32.6

Net Cost of Debt (2) x (1

- (3)) 6.2

- - - -

Debt/Total Capital 12.5 9.2 5.3 25.0 17.6



### Using public information for these four companies, the initial estimate for the fluorescent lamp ballast industry’s WACC was approximately 10.2 pe rcent. Subtracting

an inflation rate of 3.1 percent between 1928 and 2009 , the inflation -adjusted WACC and

the initial estimate of the discount rate used in the straw

- man GRIM is 7.1 percent. DOE also asked for feedback on the 7.1 percent discount during m anufacturer interviews and

used this feedback to determine that 7.4 percent was an appropriate discount rate for use

in the GRIM.

13.4.5 Trial Standard Levels

DOE developed TSLs for fluorescent lamp ballasts

. Consistent with the engineering analysis, DOE analyzed four representative product classes based on ten representative ballasts. Table 13.4.5 show th e TSLs for the product classes analyzed by

DOE. DOE scaled the standards for these representative product classes to create standards for other product classes that were not directly analyzed ( programmed start ( PS ) ballasts that operate 8 -foot high output ( HO ) lamps), as set forth in chapter 5 of the

TSD. Table 13.4.5 presents the efficiency level (EL) at each TSL used in the GRIM.

Table 13.4.5 Trial Standard Levels for Fluorescent Lamp Ballasts Representative Product Class TSL 1 TSL 2 TSL 3 IS and RS ballasts that operate

4-foot MBP lamps

8

- foot slimline lamps EL1 EL2 EL3

PS ballasts that operate 4-foot MBP lamps

4- foot MiniBP SO lamps

4

- foot MiniBP HO lamps EL1 EL2 EL3

IS and RS ballasts that operate

8

- foot HO lamps EL1 EL2 EL3

Ballasts that operate 8-foot HO lamps in cold temperature outdoor signs EL1 EL1 EL113

- 15 

### TSL 1, which would set energy conservation standards at EL1 for all product classes, would eliminate currently available 2

- lamp MBP T12 RS (commercial and residential), low

- effi ciency 2

- lamp 4 -foot MBP T8 PS, magnetic 8-foot HO, and magnetic sign ballasts. TSL 1 would require IS and RS 2- lamp MBP ballasts that operate T8 lamps. TSL 1 does not impact 8- foot slimline or 4 -lamp MBP IS and RS ballasts. TSL 1 also prevents the baseline inefficient T5 standard and high output ballasts from becoming prevalent in future years. For the reasons explained in chapter 5 of the NOPR

TSD , sign ballasts have only one EL, so TSL 1 represents the max tech level for the sign ballast representative p roduct class. TSL 2 and TSL 3 also require EL1 for sign ballasts.

TSL 2 would set energy conservation standards at EL2 for the IS and RS, PS, and 8-foot HO IS and RS product classes. This level would eliminate standard- efficiency, dedicated voltage 2

- lamp MBP T8 IS ballasts (commercial and residential), but can be

met with standard -efficiency universal input voltage 2- lamp MBP T8 IS ballasts commercial ballasts and high

- efficiency dedicated input voltage 2 -lamp MBP T8 IS

residential ballasts. TSL 2 elimina tes the least efficient T12 2

- lamp slimline ballasts, and is just met by the least efficient T8 8

- foot slimline ballasts. TSL 2 does not affect 4

- lamp MBP T8 IS ballasts. For PS ballasts, high

- efficiency 4 -foot MBP and high- efficiency T5 standard and high output ballasts are required at TSL 2. This TSL would eliminate the least efficient currently available standard and high output T5 ballasts). TSL 2 for the 8- foot HO IS and RS product class results in the elimination of current T12 electronic ballasts, bu t can be met with T8 electronic ballasts. All three of these ELs represent the

elimination of the least efficient T8 electronic ballasts.

TSL 3 would set energy conservation standards at EL3 for the IS and RS, PS, and 8-foot HO IS and RS product class. TS L 3 represents the highest EL analyzed in all representative product classes and is the max tech TSL. Ballasts that meet TSL 3 represent the most efficient models tested by DOE in their respective representative product classes.

13.4.6 NIA Shipment Forecast

The GRIM estimates manufacturer revenues based on total -unit-shipment forecasts and the distribution of these values by efficiency level. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this analysis, the GRI M used the NIA shipments forecasts under two scenarios: existing technologies and emerging technologies. In the existing technologies scenario, no technologies outside of those covered by this rulemaking were analyzed for market penetration. However, DOE r ecognizes that rapidly emerging new lighting technologies could penetrate the fluorescent lighting market and significantly affect ballast shipment

forecasts. Therefore, in the emerging technologies scenario, DOE calculated the market penetration of LED an d ceramic metal halide ( CMH ) systems annually through 2043, assessing each sector separately. DOE decreased the analyzed market size in each year in each sector by the amount that corresponded to the highest level of market penetration achieved by LED or C MH systems. The assumptions and methodology that drive these scenarios and the details specific to each are described in chapter 11 of the NOPR TSD.13

- 16 

### Only the shipments in 2011 and beyond hav e an impact on INPV because 2011 is the base year to which future cash flows are summed. Table 13.4.6 shows total shipments forecasted in the shipment analysis for fluorescent lamp ballasts in 2014 under each

scenario . In order to aggregate shipments in the GRIM, DOE assigned each of the

repres entative units to one of the four representative product classes shown in Table

13.4.5

. DOE aggregated the shipments for all the scaled product classes under the corresponding representative product class and used the cost curve for the representative product class with which it is associated.

Table 13.4.6 Total Base Case NIA Shipments Forecast in 2014 b 

### under the Existing and Emerging Technologies Scenarios

Representa tive

Product Class No. Representative Unit Total Industry Shipments (thousands) Existing Technologies Emerging Technologies

1 Two Lamp Normal BF 4ft

MBP IS & RS 37,875 37,301

2 Two Lamp Normal BF 4ft

MBP PS 3,840 3,782

1 Four Lamp Normal BF 4ft

MBP I S & RS 15,602 15,366

2 Four Lamp Normal BF 4ft

MBP PS 3,495 3,442

1 Two Lamp Normal BF 8ft SP

Slimline 1,355 1,355

3 Two Lamp 8ft RDC HO IS &

RS 70 70

2 Two Lamp Normal BF 4ft T5

MiniBP SO 14,428 14,206

2 Two Lamp 4ft T5 MiniBP

HO 6,253 6,253

1 Two L amp 4ft MBP IS & RS

Residential 35,214 35,214

5 Four Lamp Sign Ballast 3,866 3,808



### As part of the shipments analysis, DOE estimated the base

- case shipment distribution by efficiency level for each representative ballast . In the standards case, DOE

deter mine d efficiency distributions for cases in which a potential standard applies for 2014 and beyond. DOE assumed that product efficiencies in the base case that did not

meet the standard under consideration would move to meet the new standard in 2014

under two scenarios: roll -up and shift. The roll- up scenario represents the case in which all shipments in the base case that do not meet the new standard roll up to meet the new standard level. Consumers in the base case who purchase ballasts above the standard level are not affected as they are assumed to continue to purchase the same base

- case ballast or lamp

- and

- ballast system in the standards case. In contrast, in a shift scenario, DOE assumes that any consumer may purchase a more efficient ballast. The shi ft

scenario models a standards case in which all base

- case consumer purchases are affected by the standard (regardless of whether their base- case efficiency is below the standard).

b The compliance date for the fluorescent lamp ballast energy conservation standard is estimated to be July

2014.13

- 17 

### As the standard level increases, market share migrates to, and accumulates at, the highest efficiency level because it represents “max tech” for each representative ballast type ( i.e.

, moving beyond it is impossible given available technology options). See chapter 11 of

the NOPR TSD for more information on the ballasts standards- case shipment scenarios.

13.4.7 Production Costs

M anufacturing a higher -efficiency product is typically more expensive than manufacturing a baseline product due to the use of more complex components , which are more costly than baseline components. The changes i n the MPC s of the analyzed products can affect the revenues, gross margins , and cash flow of the industry, making these product cost data key GRIM inputs for DOE’s analysis.

To calculate MPCs at each efficiency level , DOE followed a two-step process. First, DOE derived MSPs for each analyzed product and efficiency level from blue book, online retail, and teardown- sourced prices as described in chapter 5 of the TSD . Next, DOE discounted these MSPs by the manufacturer markup to arrive at the MPCs. For all prod uct classes , DOE used a 1.4 manufacturer markup based on manufacturer feedback. DOE also used confidential information from manufacturer interviews to verify its MPC

estimates. In addition, DOE used teardown cost data to disaggregate the MPCs into

material , labor, and overhead costs. DOE used a depreciation value for fluorescent lamp

ballasts that is consistent with historical information in SEC 10 -Ks. The remainder of total overhead was allocated to factory overhead.

As stated in section 13.4.6 , DOE allocated shipments for the unanalyzed product classes to the product class for which the amended energy conservation standard is scaled. That way, the total revenue and INPV impacts for each representative product class is also representative of the INPV impacts on the unanalyzed product classes used to promulgate the amended energy conversation standards.

Table 13.4.7 through Table 13.4.16 show the production cost estimates used in the

GRIM for each representative unit

.

Table 13.4.7 MPC Breakdown for Two Lamp Normal BF 4ft MBP IS & RS

Table 13.4.8 MPC Breakdown for Two Lamp Normal BF 4ft MBP PS TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr.

M arkup MSP
$

Baseline Baseline (78.3) 0.53 5.11 0.11 0.26 6.01 1.40 8.41

TSL 1 EL 1 (85.8) 0.44 4.21 0.09 0.22 4.96 1.40 6.94

TSL 2 EL 2 (90.2) 0.56 5.37 0.12 0.27 6.32 1.40 8.85

TSL 3 EL 3 (92.2) 0.58 5.63 0.12 0.29 6.62 1.40 9.27

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (83.5) 0.53 5.09 0.11 0.26 5.99 1.40 8.39

TSL 1 EL 2 (90.0) 0.58 5.64 0.12 0.29 6.63 1.40 9.28

TSL 2 EL 2 (90.0) 0.58 5.64 0.12 0.29 6.63 1.40 9.2813

- 18 

### Table 13.4.9 MPC Breakdown for Four Lamp Normal BF 4ft MBP IS & RS

Table 13.4.10 MPC Breakdown for Four Lamp Normal BF 4ft MBP PS

Table 13.4.11 MPC Breakdown for Two Lamp Normal BF 8ft SP Slimline

Table 13.4.12 MPC Breakdown for Two Lamp 8ft RDC HO IS & RS

Table 13.4.13 MPC Breakdown for Two Lamp Normal BF 4ft T5 MiniBP SO

Table 13.4.14 MPC Breakdown for Two Lamp 4ft T5 MiniBP HO TSL 3 EL 3 ( 91.2 ) 0.60 5.82 0.13 0.30 6.85 1.40 9.59

TS L Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline EL 2 (92.1) 0.62 5.94 0.13 0.30 6.99 1.40 9.79

TSL 1 EL 2 (92.1) 0.62 5.94 0.13 0.30 6.99 1.40 9.79

TSL 2 EL 2 (92.1) 0.62 5.94 0.13 0.30 6.99 1.40 9.79

TSL 3 EL 3 (93.4) 0.73 7.06 0.15 0.36 8.31 1.40 11.63

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (82.2) 0.57 5.50 0.12 0.28 6.46 1.40 9.05

TSL 1 EL 1 (90.6) 0.74 7.19 0.16 0.37 8.46 1.40 11.84

TSL 2 EL 3 (93.0) 0.84 8.09 0.18 0.41 9.52 1.40 13.33

TSL 3 EL 3 (93.0) 0.84 8.09 0.18 0.41 9.52 1.40 13.33

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline EL 1 (88.9) 0.56 5.37 0.12 0.27 6.31 1.40 8.84

TSL 1 EL 1 (88.9) 0.56 5.37 0.12 0.27 6.31 1.40 8.84

TSL 2 EL 2 (91.6) 0.63 6.10 0.13 0.31 7.18 1.40 10.05

TSL 3 EL 3 (93.2) 0.65 6.25 0.14 0.32 7.35 1.40 10.29

TSL Efficiency

Level Labor
$ Mat erial
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (69.9) 0.83 8.05 0.18 0.41 9.46 1.40 13.25

TSL 1 EL 1 (80.4) 0.60 5.80 0.13 0.30 6.82 1.40 9.55

TSL 2 EL 2 (91.5) 0.51 4.95 0.11 0.25 5.82 1.40 8.15

TSL 3 EL 3 (9 2 .5) 0.69 6.71 0.15 0. 34 7.89 1.40 11.05

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (82.8) 0.68 6.55 0.14 0.33 7.70 1.40 10.78

TSL 1 EL 1 (88.7) 0.68 6.59 0.14 0.34 7.75 1.40 10.85

TSL 2 EL 2 (89.6) 0.75 7.24 0.16 0.37 8.51 1.40 11.92

TSL 3 EL 3 ( 92.3 ) 0.97 9.33 0.20 0.48 10.97 1.40 15.36

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (84.2) 0.60 5.84 0.13 0.30 6.86 1.40 9.61

TSL 1 EL 1 (90.6) 0.79 7.64 0.17 0.39 8.99 1.40 12.5813

- 19 

### Table 13.4.15 MPC Breakdown for Two Lamp 4ft MBP IS & RS Residential

Table 13.4.16 MPC Breakdown for Four Lamp Sign Ballast

13.4.8 Product and Capital Conversion Costs

New and amended energy conservation standards will cause manufacturers to incur conversion costs to bring their production facilities and product designs into compliance. For the MIA, DOE classified these conversion costs into two major groups: (1) product conversion costs and (2) capital conversion costs. Product conversion costs are investments in research, development, testing, marketing, and other non- capitalized costs necessary to make product designs comply with the new or amended energy conservation standard. Capital conversion costs are investments in property, plant, and equipment necessary to adapt or change existing production facilities such that new product designs can be fabricated and assembled.

DOE’s interviews with manufacturers revealed that the majority of the conversion costs manufacturers expect to incur at various TSLs derive from the need to develop new and improved circuit designs, rather than the purchase of new capital equipment. Due to the flexible nature of most ballast production equipment, manufacturers do not expect

new o r amended standards to strand a significant share of their production assets. As opposed to other more capital-intensive appliance industries, much of the cash outlay required to achieve higher efficiency levels would be expensed through research and

devel opment, engineering, and testing efforts.

DOE based its estimates of the product conversion costs that would be required to meet each TSL on information obtained from manufacturer interviews, the engineering analysis, the NIA shipment analysis, and market information about the number of models and stock-keeping units (SKUs) each major manufacturer supports. DOE estimated the product development costs manufacturers would incur for each model that would need to be converted in response to new or amended energy conservation standards based on the TSL 2 EL 2 (91.4 ) 0.92 8.93 0.19 0.46 10.50 1.40 14.70

TSL 3 EL 3 (9 2 .4) 1.05 10.18 0.22 0.52 11.97 1.40 16.76

TSL Efficiency

Level Labor
$ Material
$ Ov erhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (77.7) 0.29 2.84 0.06 0.15 3.34 1.40 4.68

TSL 1 EL 1 (87.8) 0.24 2.29 0.05 0.12 2.69 1.40 3.77

TSL 2 EL 3 (92.0) 0.29 2.81 0.06 0.14 3.30 1.40 4.62

TSL 3 EL 3 (92.0) 0.29 2.81 0.06 0.14 3.30 1.4 0 4.62

TSL Efficiency

Level Labor
$ Material
$ Overhead
$ Dep.
$ MPC
$ Mfr. Markup MSP
$

Baseline Baseline (71.4) 2.53 24.43 0.53 1.25 28.74 1.40 40.23

TSL 1 EL 1 (90.3) 2.24 21.61 0.47 1.10 25.41 1.40 35.58

TSL 2 EL 1 (90.3) 2.24 21.61 0.47 1.10 25.41 1.40 35.58

TSL 3 EL 1 (90.3) 2.24 21.61 0.47 1.10 25.41 1.40 35.5813

- 20 

### necessary engineering and testing resources required to redesign each model. The R&D resources required to reach the efficiency levels represented at each TSL varied according to whether models could be converted based on minor upgrades, redesigns based on existing topologies, or full redesigns. In addition to per-model R&D costs, DOE considered testing and validation costs for every SKU, which included internal testing, UL testing, additional certifications, pilot runs , and product training. DOE then multiplied these per -model and per- SKU estimates by the total number of ballast models and SKUs offered based on information from manufacturer catalogs and interviews to calculate the total potential costs each manufacturer could incur to redesign its products. Next, to assign these costs to particular representative product classes, DOE multiplied this total for each manufacturer by the percentage of models in each product class based on the NIA shipment analysis and manufacturer feedback. Lastly, to consider the models manufacturers offered that already met efficiency levels above baseline, DOE multiplied the total costs for each product class by the percentage of models DOE determined would need to be redesigned at each efficiency level based on data from the engineering analysis and manufacturer catalogs.

This methodology derived total product conversion cost estimates for most product classes and efficiency levels. For residential ballasts, however, DOE assumed a

smaller redesign cost per model. According to manufacturer interviews, the residential ballast market does not support manufacturer attempts to differentiate through better designs, product variation, or additional value-added features. As such, suppliers, often Asian manufacturers selling directly to fixture manufacturers, make little attempt to compete on anything other than price. Interviews suggested suppliers would leverage R&D invested in the larger, more valuable commercial market, making minor design adj ustments to meet minimum requirements of the residential market. For sign ballasts, DOE determined the number of magnetic models on the market based on manufacturer catalogs and estimated testing and redesign costs for each of these models.

As discussed ab ove, DOE also estimated the capital conversion costs manufacturers would incur to comply with potential amended energy conservation standards represented by each TSL. During interviews, DOE asked manufacturers to estimate the capital expenditures required to expand the production of higher- efficiency products. These estimates included the required tooling and plant changes that would be necessary if product lines meeting the potential required efficiency level did not currently exist. Estimates for capital conversion costs varied greatly from manufacturer to manufacturer, as manufacturers anticipated different paths to compliance based on the modernity, flexibility, and level of automation of the equipment already existing in their factories. However, all manufacturers DOE interviewed indicated that capital costs would be relatively moderate compared to the required engineering effort. The modular nature of ballast production and the flexibility of the necessary production capital allows for significant equ ipment sharing across product lines. Based on interviews, DOE assumed that for most manufacturers, design changes would require moderate product conversion costs but would not require significant changes to existing production lines and equipment. It is th erefore unlikely that most manufacturers would require high levels of capital expenditures compared to ordinary capital additions or existing net plants, property, and equipment (PPE).13

- 21 

### To calculate its estimates of capital conversion costs, DOE aggregate d its estimated capital costs for the major players in the industry rather than scaled up a “typical” manufacturer’s expected conversion costs. Two considerations drove this choice in methodology. First, manufacturer feedback varied widely, making it impo ssible to characterize a “typical” manufacturer for conversion cost purposes. Second, the expected costs often depended upon the timing of the manufacturers’ last redesign efforts and its strategy regarding the capital intensity of their plants and sourcin g decisions. DOE estimated that some manufacturers would incur very minor capital expenditures per product class for testing equipment, even at max tech levels, as theirfactories’ capital equipment would not require significant modification to produce higherefficiency ballasts. For other manufacturers, DOE assumed greater investments would be necessary to upgrade lines for each product class with new wave solder equipment, reflow solder systems and surface mount device placement machines. The placement

ma chines become increasingly important as ballasts become more complex with additional circuitry and components. DOE estimates capital conversion costs would rise most rapidly at high-efficiency levels not only because of the new production and testing equipment described above but also because manufacturers would need to expand capacity to account for lower throughput on high- efficiency lines.

For residential ballasts, DOE assumed the same magnitude of conversion costs as

for commercial ballasts of the sam e starting method. While residential ballasts are generally not produced by the major four manufacturers, the Asian manufacturers who source them to domestic companies would be required to make similar modifications to their production lines in response to standards. For sign ballasts, DOE was unable to interview a representative sample of the industry. However, DOE recognizes that magnetic ballast lines have more capital exposure to changes in efficiency standards than electronic lines due to the change in technology. Because several manufacturers produce magnetic sign ballasts, DOE assumed new lines would be needed to convert magnetic products to electronic ballasts and scaled these line costs to the entire sign ballast market for this product class.

Fina lly, DOE estimated industry capital conversion costs for all analyzed product classes other than residential ballasts and sign ballasts by extrapolating the interviewed manufacturers’ costs for each product class to account for the companies that DOE did

not interview. DOE’s estimates of the product and capital conversion costs for each representative product class can be found in Table 13.4.17 through Table 13.4.20 below.

T able 13.4.17 Product and Capital Conversion Costs for Product Class 1 (4-foot

MBP IS and RS Ballasts and 8

- foot SP Slimline Ballasts ) by TSL

TSL (Efficiency Level) Product Conversion Costs
2009$ millions Capit al Conversion Costs
2009$ millions TSL 1 (EL 1) 2.2 0.5 TSL 2 (EL 2) 16.6 7.9

TSL 3 (EL 3) 39.5 13.213

- 22 

### Table 13.4.18 Product and Capital Conversion Costs for Product Class 2 ( PS

Ballasts ) by TSL

TSL (Eff iciency Level) Product Conversion Costs
2009$ millions Capital Conversion Costs
2009$ millions
TSL 1 (EL 1) 0.8 4.7

TSL 2 (EL 2) 5.0 9.2

TSL 3 (EL 3) 14.6 12.0



### Table 13.4.19 Product and Capital Conversion Costs for Product Class 3 (8-foot HO

IS and RS Ballasts ) by TSL

TSL (Efficiency Level) Product Conversion Costs
2009$ millions Capital Conversion Costs
2009$ millions
TSL 1 (EL 1) 0.0 0.3

TSL 2 (EL 2) 0.1 2.1

TSL 3 (EL 3) 0.3 2.6



### Table 13.4.20 Product and Capital Conversion Costs for Product Class 5 ( Sign

Ballasts ) by TSL

TSL (Efficiency Level) Product Conversion Costs
2009$ millions Capital Conversion Costs
2009$ millions

TSL 1, TSL 2, TSL 3 (E L 1) 2.4 6.0



### 13.4.9 Markup Scenarios

DOE used several standards case markup scenarios to represent the uncertainty about the impacts of amended energy conservation standards on prices and profitability. In the base case, DOE used the same baseline markups calculated in the engineering analysis for all product classes. In the standards case, DOE modeled two markup scenarios to represent the uncertainty about the potential impacts on prices and profitability following the implementation of amended energy conservation stand ards : (1)

a preservation of operating profit markup scenario, and (2) a two

- tier markup scenario. These scenarios lead to different markups values, which, when applied to the inputted MPCs, result in varying revenue and cash flow impacts.

13.4.9.1 Preservation of O perating Profit Markup Scenario
DOE implemented the preservation of operating profit markup scenario because manufacturers stated that they do not expect to be able to markup the full cost of production given the highly competitive market, in the standards case. The preservation of operating profit markup scenario assumes that manufacturers are able to maintain only

the base -case total operating profit in absolute dollars in the standards case, despite higher product costs and investment. The base- case tota l operating profit is derived from marking up the cost of goods sold for each product by a flat percentage (the baseline markup, discussed in chapter 5 of the NOPR TSD) to cover standard SG&A expenses, R&D expenses, and profit. To derive this percentage, D OE evaluated publicly available financial information for manufacturers of ballasts. DOE also requested feedback on this13

- 23 

### value during manufacturer interviews. DOE adjusted the manufacturer markups in the GRIM at each TSL to yield approximately the same earnings before interest and taxes in the standards case in the year after the compliance date of the amended standards as in the base case. DOE assumed that the industry -wide impacts would occur under the new minimum efficiency levels. DOE altered the markups only for the minimally compliant products in this scenario, with margin impacts not occurring for products that already exceed the amended energy conservation standard. The preservation of operating profit markup scenario represents the upper bound of industry profitability following amended energy conservation standards. Under this scenario, while manufacturers are not able to

earn additional operating profit on higher production costs and the investments required to comply with the amended energy conservation standard, they are able to maintain the same operating profit in the standards case as was earned in the base case.

Table 13.4.21 through Table 13.4.40 lists the representative ballast types DOE analyzed with the corresponding markups at each TSL under the preservation of operating profit markup scenario. Separate markups were calculated for each of the four shipment scenarios, but the markups did not vary within four digits between the emerging and existing technologies scenarios, so the roll-up and shift shipment scenario markups presented encompass both technology scenarios. It is worth noting that in cases where the average MPC decreases at a higher efficiency level, this scenario yields a high er markup

at the new baseline than in the base case.

Table 13.4.21 Preservation of Operating Profit Markups for Two Lamp Normal BF

4ft MBP IS & RS (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 78.3 ) 1.4000

- - -

EL 1 ( 85.8 ) 1.4000 1.4001

- -

EL 2 ( 90.2 ) 1.4000 1.4000 1.3730

-
EL 3 ( 92.2 ) 1.4000 1.4000 1.4000 1.3714



### Table 13.4.22 Preservation of Operating Profit Mar kups for Two Lamp Normal BF

4ft MBP IS & RS (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 78.3 ) 1.4000

- - -

EL 1 ( 85.8 ) 1.4000 1.3660

- -

EL 2 ( 90.2 ) 1.4000 1.3660 1.3660

-
EL 3 ( 92.2 ) 1.4000 1.4000 1.4000 1.371413

- 24 

### Table 13.4.23 Preservation of Operating Profit Markups for Two Lamp Normal BF

4ft MBP PS (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 83.5 ) 1.4000

- - -

E L 2 ( 90.0 ) 1.4000 1.3883 1.3883

-
EL 3 ( 91.2 ) 1.4000 1.4000 1.4000 1.3855



### Table 13.4.24 Preservation of Operating Profit Markups for Two Lamp Normal BF

4ft MBP PS (Shift Shipment Scenario)

EL (BE ) Markups b y TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 83.5 ) 1.4000

- - -

EL 2 ( 90.0 ) 1.4000 1.3843 1.3843

-
EL 3 ( 91.2 ) 1.4000 1.4000 1.4000 1.3855



### Table 13.4.25 Preservation of Operating Profit Markups for Four Lamp Normal BF 4ft MBP IS & RS (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 2 ( 92.1 ) 1.4000 1.4000 1.4000

-
EL 3 ( 93.4 ) 1.4000 1.4000 1.4000 1.38 30



### Table 13.4.26 Prese rvation of Operating Profit Markups for Four Lamp Normal BF

4ft MBP IS & RS (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 2 ( 92.1 ) 1.4000 1.4000 1.4000

-

EL 3 ( 93.4 ) 1.4000 1.4000 1.4000 1.3 830



### Table 13.4.27 Preservation of Operating Profit Markups for Four Lamp Normal BF

4ft MBP PS (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.2 ) 1.4000

- - -

EL 1 ( 90.6 ) 1.4000 1.3706

- -
EL 3 ( 93.0 ) 1.4000 1.4000 1.3589 1.3589



### Table 13.4.28 Preservation of Operating Profit Markups for Four Lamp Normal BF

4ft MBP PS (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.2 ) 1.4000

- - -

EL 1 ( 90.6 ) 1.4000 1.3603

- -
EL 3 ( 93.0 ) 1.4000 1.4000 1.3589 1.358913

- 25 

### Table 13.4.29 Preservation of Operating Profit Markups for Two Lamp Normal BF

8ft SP Slimline (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 1 ( 88.9 ) 1.4000 1.4000

- -

EL 2 ( 91.6 ) 1.4000 1.4000 1.3990

-
EL 3 ( 93.2 ) 1.4000 1.4000 1.4000 1.396 7



### Table 13.4.30 Preservation of Operating Profit Markups for Two Lamp Normal BF

8ft SP Slimline (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 1 ( 88.9 ) 1.4000 1.4000

- -

EL 2 ( 91.6 ) 1.4000 1.4000 1.3228

-
EL 3 ( 93.2 ) 1.4000 1.4000 1.4000 1.3 967



### T able 13.4.31 Preservation of Operating Profit Markups for Two Lamp 8ft RDC

HO IS & RS (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 69.9 ) 1.4000

- - -

EL 1 ( 80.4 ) 1.4000 1.4094

- -

EL 2 ( 91.5 ) 1.4000 1.4000 1.4274

-
EL 3 ( 92.5 ) 1.4000 1.4000 1.4000 1.3809



### Table 13.4.32 Preservation of Operating Profit Markups for Two Lamp 8ft RDC

HO IS & RS (Shift Shipment Scenario )

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 69.9 ) 1.4000

- - -

EL 1 ( 80.4 ) 1.4000 1.4752

- -

EL 2 ( 91.5 ) 1.4000 1.4000 1.4182

-
EL 3 ( 92.5 ) 1.4000 1.4000 1.4000 1.3809



### Table 13.4.33 Preservation of Operating Profit Markups for Two Lamp Normal BF

4ft T5 MiniBP SO (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.8 ) 1.4000

- - -

EL 1 ( 88.7 ) 1.4000 1.3998

- -

EL 2 ( 89.6 ) 1.4000 1.4000 1.3873

-
EL 3 ( 92.3 ) 1.4000 1.4000 1.4000 1.357913

- 26 

### Table 13.4.34 Preservation of Operating Profit Markups for Two Lamp Normal BF

4ft T5 MiniBP SO (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TS L 2 TSL 3

Baseline ( 82.8 ) 1.4000

- - -

EL 1 ( 88.7 ) 1.4000 1.3998

- -

EL 2 ( 89.6 ) 1.4000 1.4000 1.3828

-
EL 3 ( 92.3 ) 1.4000 1.4000 1.4000 1.3579



### Table 13.4.35 Preservation of Operating Profit Markups for Two Lamp 4ft T5

MiniBP HO (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 84.2 ) 1.4000

- - -

EL 1 ( 90.6 ) 1.4000 1.3957

- -

EL 2 ( 91.4 ) 1.4000 1.4000 1.3773

-
EL 3 ( 92.4 ) 1.4000 1.4000 1.4000 1.3636



### Table 13.4.36 Preservation of Operating Profit Markups for Two Lamp 4ft T5

MiniBP HO (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 84.2 ) 1.4000

- - -

EL 1 ( 90.6 ) 1.4000 1.3 957

- -

EL 2 ( 91.4 ) 1.4000 1.4000 1.3720

-
EL 3 ( 92.4 ) 1.4000 1.4000 1.4000 1.3636



### Table 13.4.37 Preservation of Operating Profit Markups for Two Lamp 4ft MBP IS

& RS Residential (Roll

- up Shipment Scenario )

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 77.7 ) 1.4000

- - -

EL 1 ( 87.8 ) 1.4000 1.4017

- -
EL 3 ( 92.0 ) 1.4000 1.4000 1.3801 1.3801



### Table 13.4.38 Preservation of Operating Profit Mar kups for Two Lamp 4ft MBP IS

& RS Residential (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 77.7 ) 1.4000

- - -

EL 1 ( 87.8 ) 1.4000 1.3809

- -
EL 3 ( 92.0 ) 1.4000 1.3809 1.3801 1.380113

- 27 

### Table 13.4.39 Preservation of Operating Profit Markups for Four Lamp Sign

Ballast (Roll

- up Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 71.4 ) 1.4000

- - -

EL 1 ( 90.3 ) 1.4000 1.4069 1.4069 1.4069



### Table 13.4.40 Preservation of Operating Profit Markups for Four Lamp Sign

Ballast (Shift Shipment Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 71.4 ) 1.4000

- - -

EL 1 ( 90.3 ) 1.400 0 1.4069 1.4069 1.4069



### 13.4.9.2 Two

- Tier Markup Scenario

DOE also modeled a lower bound profitability scenario. During interviews, multiple manufacturers stated that they offer two tiers of product lines that are differentiated, in part, by efficiency level. The higher- efficiency tier typically earns a premium over the baseline efficiency tier. Several manufacturers suggested that the premium currently earned by the higher-efficiency tier would erode under new or amended standards due to the disappearance of the b aseline efficiency tier, which would significantly harm profitability. Because of this pricing dynamic described by manufacturers and because of the pressure from luminaire manufacturers to commoditize the baseline efficiency tier, DOE also modeled a two -tier markup scenario. In this scenario, DOE assumed that the markup on fluorescent lamp ballasts varies according to two efficiency tiers in both the base case and the standards case. During the MIA interviews, manufacturers provided information on the rang e of typical efficiency levels in those two tiers and the change in profitability at each level. DOE used this information, retail prices derived in its product price determination, and industry average gross margins to estimate markups for fluorescent lam p ballasts under a two- tier pricing strategy in the base case. In the standards case, DOE modeled the situation in which portfolio reduction squeezes the margin of higher- efficiency products as they become the new baseline, presumably high-volume products. This scenario is consistent with information submitted during manufacturing interviews and responds to manufacturers’ concern that DOE standards could severely disr upt profitability

.

Table 13.4.41 through Table 13.4.60 lists the products DOE analyzed with the corresponding two

- tier markups at each TSL.13

- 28 

### Table 13.4.41 Two

- Tier Markups for Two Lamp Normal BF 4ft MBP IS & RS (Existing Technologies Scenario)

EL (B E) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 78.3 ) 1.3 401

- - -

EL 1 ( 85.8 ) 1.3 401 1.3 401

- -

EL 2 ( 90.2 ) 1.5 46 3 1.5 463 1.3 401

-
EL 3 ( 92.2 ) 1.5 463 1.5 463 1.5 463 1.3 401



### Table 13.4.42 Two

- Tie r Markups for Two Lamp Normal BF 4ft MBP IS & RS ( Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 78.3 ) 1.3 36 9

- - -

EL 1 ( 85.8 ) 1.3 369 1.3 369

- -

EL 2 ( 90.2 ) 1.5 42 6 1.5 426 1.3 369

-
EL 3 ( 92.2 ) 1.5 426 1.5 4 26 1.5 426 1.3 369



### Table 13.4.43 Two

- Tier Markups for Two Lamp Normal BF 4ft MBP PS ( Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3
Baseline (83.5) 1.3 401

- - - EL 2 (90 .0) 1.5 463 1.3 401 1.3 401

- EL 3 ( 91.2 ) 1.5 463 1.5 463 1.5 463 1.3 401



### Table 13.4.44 Two

- Tier Markups for Two Lamp Normal BF 4ft MBP PS (Emerg ing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 T SL 2 TSL 3
Baseline (83.5) 1.3 369

- - - EL 2 (90.0) 1.5 426 1.3 369 1.3 369

- EL 3 ( 91.2 ) 1.5 426 1.5 426 1.5 426 1.3 369



### Table 13.4.45 Two

- Tier Markups for Four Lamp Normal BF 4ft MBP IS & RS ( Existing Technol ogies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 2 ( 92.1 ) 1.3 401 1.3 401 1.3 401

-
EL 3 ( 93.4 ) 1.5 463 1.5 463 1.5 463 1.3 40113

- 29 

### Table 13.4.46 Two

- Tier Markups for Four Lamp Normal BF 4ft MBP IS & RS (Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 2 ( 92.1 ) 1.3 369 1.3 369 1.3 369

-
EL 3 ( 93.4 ) 1.5 426 1.5 426 1.5 426 1.3 369



### Table 13.4.47 Two

- Tier Markups for Four Lamp Normal BF 4ft MBP PS ( Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.2 ) 1.3 401

- - -

EL 1 ( 90.6 ) 1.3 401 1.3 401

- -
EL 3 ( 93.0 ) 1.5 463 1.5 463 1.3 401 1.3 401



### Table 13.4.48 Two

- Tier Markups for Four Lamp Normal BF 4ft MBP PS (Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.2 ) 1.3 369

- - -

EL 1 ( 90.6 ) 1.3 369 1.3 369

- -
EL 3 ( 93.0 ) 1.5 426 1.5 426 1.3 36 9 1.3 369



### Table 13.4.49 Two

- Tier Markups for Two Lamp Normal BF 8ft SP Slimline ( Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 1 ( 88.9 ) 1.3 401 1.3 401

- -

EL 2 ( 91.6 ) 1.3 401 1.3 401 1.3 401

-
EL 3 ( 93.2 ) 1.5 463 1.5 463 1.5 463 1.3 401



### Table 13.4.50 Two

- Tier Markups for Two Lamp Normal BF 8ft SP Slimline (Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

EL 1 ( 88.9 ) 1.3 369 1.3 369

- -

EL 2 ( 91.6 ) 1.3 369 1.3 369 1.3 369

-
EL 3 ( 93.2 ) 1.5 426 1.5 426 1.5 426 1.3 36913

- 30 

### Table 13.4.51 Two

- Tier Markups for Two Lamp 8ft RDC HO IS & RS ( Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 69.9 ) 1.3 401

- - -

EL 1 ( 80.4 ) 1.3 401 1.3 401

- -

EL 2 ( 91.5 ) 1.5 463 1.5 463 1.3 401

-
EL 3 ( 92.5 ) 1.5 463 1.5 463 1.5 463 1.3 401



### Table 13.4.52 Two

- Tier Markups for Two Lamp 8ft RDC HO IS & RS ( Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 69.9 ) 1.3 369

- - -

EL 1 ( 80.4 ) 1.3 369 1.3 369

- -

EL 2 ( 91.5 ) 1.5 426 1.5 426 1.3 369

-
EL 3 ( 92.5 ) 1.5 426 1.5 426 1.5 426 1.3 369



### Table 13.4.53 Two

- Tier Markups for Two Lamp Normal BF 4ft T5 MiniBP SO (Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.8 ) 1.3 401

- - -

EL 1 ( 88.7 ) 1.3 401 1.3 401

- -

EL 2 ( 89.6 ) 1.5 463 1.5 463 1.3 401

-
EL 3 ( 92.3 ) 1.5 463 1.5 463 1.5 463 1.3 401



### Table 13.4.54 Two

- Tier Markups for Two Lamp Normal BF 4ft T5 MiniBP SO ( Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 82.8 ) 1.3 369

- - -

EL 1 ( 88.7 ) 1.3 369 1.3 369

- -

EL 2 ( 89.6 ) 1.5 426 1.5 426 1.3 369

-
EL 3 ( 92.3 ) 1.5 426 1.5 426 1.5 426 1.3 369



### Table 13.4.55 Two

- Tier Markups for Two Lamp 4ft T5 MiniBP HO (Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 84.2 ) 1.3 401

- - -

EL 1 ( 90.6 ) 1.3 401 1.3 401

- -

EL 2 ( 91.4 ) 1.5 463 1.5 463 1.3 401

-
EL 3 ( 92.4 ) 1.5 46 3 1.5 463 1.5 463 1.3 40113

- 31 

### Table 13.4.56 Two

- Tier Markups for Two Lamp 4ft T5 MiniBP HO ( Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 84.2 ) 1.3 369

- - -

EL 1 ( 90.6 ) 1.3 369 1.3 369

- -

EL 2 ( 91.4 ) 1.5 426 1.5 426 1.3 369

-
EL 3 ( 92.4 ) 1.5 426 1.5 426 1.5 426 1.3 369



### Table 13.4.57 Two

- Tier Markups for Two Lamp 4ft MBP IS & RS Residential (Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 77.7 ) 1.3 401

- - -

EL 1 ( 87.8 ) 1.3 401 1.3 401

- -
EL 3 ( 92.0 ) 1.3 401 1.5 463 1.3 401 1.3 401



### Table 13.4.58 Two

- Tier Markups for Two Lamp 4ft MBP I S & RS Residential (Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 77.7 ) 1.3 369

- - -

EL 1 ( 87.8 ) 1.3 369 1.3 369

- -
EL 3 ( 92.0 ) 1.5 42 6 1.5 42 6 1.3 369 1.3 369



### Table 13.4.59 Two

- Tier Markups for Four Lamp Sign Ballast (Existing Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 71.4 ) 1.3 401

- - -

EL 1 ( 90.3 ) 1.5 463 1.3 401 1.3 401 1.3 401



### Table 13.4.60 Two

- Tier Markups for Four Lamp Sign Ballast (Emerging Technologies Scenario)

EL (BE ) Markups by TSL

Baseline TSL 1 TSL 2 TSL 3

Baseline ( 71.4 ) 1.3 369

- - -

EL 1 ( 90.3 ) 1.5 426 1.3 369 1.3 369 1.3 369



### 13.5 INDUSTRY FINANCIAL IMPACTS

Usin g the inputs and scenarios described in the previous sections, the GRIM estimated indicators of financial impacts on the fluorescent lamp ballast industry . The following sections detail additional inputs and assumptions for fluorescent lamp ballasts

. The m ain results of the MIA are also reported in this section. The MIA consists of two key financial metrics: INPV and annual cash flows.13

- 32 

### 13.5.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs in the standards case . The INPV is different from

DOE’s net present value, which is applied to the U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost of capital, or discount rate. The

fluoresc ent lamp ballasts GRIM estimates cash flows from 2011 to 2043. This timeframe

models both the short- term impacts on the industry from the announcement of the standard until the compliance date (2011 until an estimated compliance date of J uly 2014) and a lo ng

- term assessment over the 30- year analysis period used in the NIA (2014 – 2043).

In the MIA, DOE compares the INPV of the base case (no amended energy conservation standards) to that of each TSL in the standards case. The difference between the base case and a standards case INPV is an estimate of the economic impacts that implementing that particular TSL would have on the industry. For the fluorescent lamp

ballast industry , DOE examined the two markup scenarios described above: the preservation of operating profit markup and the two

- tier markup. DOE also examined the existing and emerging technologies scenarios and the roll-up and shift shipment scenarios. This yields eight sets of INPV results for fluorescent lamp ballasts, bounded by the preservation o f operating profit markup, existing technologies, and shift shipments combination and the two-tier markup, emerging technologies, and roll-up shipments

combination. Table 13.5.1 through Table 13.5.8 provide the INPV estimates for the fluorescent lamp ballasts industry.

Table 13.5.1 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Roll- up Shipments, and Existing Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 1,241 1,229 1,191 1,145

Change

in INPV ( 2009$ millions) - (11.2) (49.7) (95.3)

(%)

- - 0.9%

- 4.0%

- 7.7%

*For tables in sectio n 13.5.1

, values in parenthesis indicate negative numbers



### Table 13.5.2 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts ( Preservation of Operating Profit Marku p, Roll

- up Shipments, and Emerging Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 853 841 808 772

Change

in INPV ( 2009$ millions) - (11.5) (44.6) (81.0)

(%)

- - 1.4%

- 5.2%

- 9.5%13

- 33 

### Table 13.5.3 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Shift Shipments, and Existing Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 1,241 1,221 1,189 1,145

Change

in INPV ( 2009$ millions) - (19.4) (51.6) (95.3)

(%)

- - 1.6%

- 4.2%

- 7.7%



### Table 13.5.4 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Shift Shipments, and Emerging Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 853 836 807 772

Change

in INPV ( 2009$ millions) - (16.5) (45.7) (81.0)

(%)

- - 1.9 %

- 5.4%

- 9.5%



### Table 13.5.5 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Roll- up Shipments, and Existing Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 1,241 1,092 957 847

Change

in INPV ( 2009$ millions) - (149.0) (283.8) (393.5)

(%)

- - 12.0%

- 22.9%

- 31.7%



### Table 13.5.6 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Roll

- up Shipments, and Emerging Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 853 740 635 557

Change

in INPV ( 2009$ millions) - (112.7) (217.9) (296.2)

(%)

- - 13.2 %

- 25.5%

- 34.7%13

- 34 

### Table 13.5.7 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts ( Two

- Tier Marku p, Shift Shipments, and Existing Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 1,241 1,611 1,108 847

Change

in INPV ( 2009$ millions) - 370.7 (133.0) (393.5)

(%)

- 29.9%

- 10.7%

- 31.7%



### Table 13.5.8 Changes in Industry Net Present Value for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Shift Shipments, and Emerging Technologies Scenarios )

Units Base

Case Trial Standard Level

1 2 3

INPV ( 2009$ millions) 853 1,084 723 557

Change

in INPV ( 2009$ millions) - 230.9 (130.3) (296.2)

(%)

- 27.1%

- 15.3%

- 34.7%



### 13.5.2 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long

- term effects of amended energy conservation standards, short-term changes in cash flow are also important indicators of the industry’s financial situation. For example, a large investment over one or two years could strain the industry’s access to capital. Consequently, the sharp drop in financial performance could cause investors to flee, even though recovery may be possible. Thus, a short-term disturbance can have long- term effects that the INPV cannot capture. To get

an idea of the behavior of annual free cash flows, Figure 13.5.1 through Figure 13.5.8

below present the annual free cash flows from 2011 through 2025 for the base case and

different TSLs in the standards case.

Annual cash flows are discounted to the base year, 2011. Between 2011 and the 2014 compliance date of the amended energy conservation standard, cash flows are driven by the level o f conversion costs and the proportion of these investments spent every year. After the standard announcement date ( i.e. , the publication date of the final rule) , industry cash flows begin to decline as companies use their financial resources to prepare for the amended energy conservation standard. The more stringent the amended energy conservation standard, the greater the impact on industry cash flows in the years leading up to the compliance date, as product conversion costs lower cash inflows from

operat ions and capital conversion costs increase cash outflows for capital expenditures.

Free cash flow in the year the amended energy conservation standards take effect is driven by two competing factors. In addition to capital and product conversion costs,

am ended energy conservation standards could create stranded assets, i.e. , tooling and equipment that would have enjoyed longer use if the energy conservation standard had not made them obsolete. In this year, manufacturers write down the remaining book value13

- 35 

### of existing tooling and equipment whose value is affected by the amended energy

conservation standard. This one- time write

- down acts as a tax shield that alleviates decreases in cash flow from operations in the year of the write-down. In this year, there is also an increase in working capital that reduces cash flow from operations. A large increase in working capital is needed due to more costly production components and materials, higher inventory carrying to sell more expensive products, and higher accounts receivable for more expensive products. Depending on these two competing factors, cash flow can either be positively or negatively affected in the year the standard takes effect.

In the years following the compliance date of the standard, the impact o n cash flow depends on the operating revenue. There is very little impact on cash flow from operations under the preservation of operating profit scenario because this scenario is calibrated to have the same operating income in the standards case at each TSL as the base case in the year after the standard takes effect. In this scenario, the industry value is impacted because production costs increase, but operating profit remains approximately equal to the base case which decreases profit margins as a percentage of revenue. Under

the two

- tier markup scenario, cash flow decreases at each TSL in the standards case compared to the base case because products are commoditized in the standards case and are unable to command as high of margins in the standards case as in the base case. The exception to this pattern under the two-tier markup scenario is at TSL 1 under the shift scenario because enough shipments shift to higher- priced units with higher margins to compensate for lower markups for minimally compliant products. Figure 13.5.1 through Figure 13.5.8 present the annual free cash flows for fluorescent lamp ballasts.

0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.1 Annual Indus try Free Cash Flows for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Roll- up Shipments, and Existing Technologies Scenarios )13

- 36 0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.2 Annual Industry Free Cash Flows for Fluores cent Lamp Ballasts (Preservation of Operating Profit Markup, Roll- up Shipments, and Emerging Technologies Scenarios )

0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.3 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts ( Preservatio n of Operating Profit Markup, Shift Shipments, and Existing Technologies Scenarios )13

- 37 0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.4 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts (Preservation of Operating Profit Markup, Shi ft Shipments, and Emerging Technologies Scenarios )

0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.5 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Roll

- up Shipments, and Existing Technologies Scenarios )13

- 38 0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### F igure 13.5.6 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Roll

- up Shipments, and Emerging Technologies Scenarios )

0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.7 Annual Industry Free Cash Flows for Fluorescent Lamp Ballasts ( Two

- Tier Markup, Shift Shipments, and Existing Technologies Scenarios )13

- 39 0 20 40 60 80 100 120 1402009$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 Estimate d Energy Conservation Standards Compliance Date

- July 2014



### Figure 13.5.8 Annual Industry Free Cash Flows for Fluorescent Lam p Ballasts ( Two

- Tier Markup, Shift Shipments, and Emerging Technologies Scenarios )

13.6 IMPACTS ON MANUFACTURER SUBGROUPS

As described in section 13.2.3.3 above, DOE identified two subgroups of fluorescent lamp ballast manufacture rs: small manufacturers and sign ballast manufacturers. The results of these subgroup analyses are described below.

13.6.1 Impacts on Small Business Manufacturers

13.6.1.1 Description and Estimated Number of Small Entities Regulated

DOE conducted a more focused inquiry of the companies that could be small business manufacturers of products covered by this rulemaking. During its market survey, DOE used all available public information to identify potential small

manufacturers. DOE’s research involved industry trade association membership directories (including NEMA ), product databases ( e.g. , CEC and CEE databases), individual company websites, and market research tools ( e.g. , Dun and Bradstreet reports) to create a list of every company that manufactures or sells fluorescent lamp ballasts covered by this rulemaking. DOE also asked stakeholders and industry representatives if they were aware of any other small manufacturers during manufacturer interviews and at previous DOE public meetings. DOE contacted select companies on it s list, as necessary, to determine whether they met the SBA’s definition of a small business13

- 40 

### manufacturer of covered fluorescent lamp ballasts. DOE screened out companies that did not offer products covered by this rulemaking, did not meet the definition o f a “small business,” or are foreign owned and operated.

DOE initially identified at least 54 potential manufacturers of fluorescent lamp ballasts sold in the U.S. DOE reviewed publically available information on these 54 potential manufacturers and determined 30 were large manufacturers, were foreign owned, and /or operated or did not manufacture ballasts covered by this rulemaking. DOE then attempted to contact the remaining 24 companies that were potential small business manufacturers. Though man y compan ies were unresponsive, DOE was able to determine that approximately 10 meet the SBA’s definition of a small business and likely manufacture ballasts covered by this rulemaking

.

Before issuing this NOPR, DOE attempted to contact the small business manufacturers of fluorescent lamp ballasts it had identified . Two of the small businesses consented to being interviewed during the MIA interviews, and DOE received feedback from one additional small business through a survey response. DOE also obtained

information about small business impacts while interviewing large manufacturers.

Four major manufacturers with non-domestic production supply the vast majority of the marketplace. None of the four major manufacturers is considered a small business. The remaining market share is held by foreign manufacturers and several smaller domestic companies with relatively negligible market share. Even for these U.S.

- operated firms, most production is outsourced to overseas vendors or captive overseas manufacturing facilities. Some very limited production takes place in the United States

– mostly magnetic ballasts for specialty applications. DOE is unaware of any fluorescent lamp ballast companies, small or large, that produce only domestically. See chapter 3 of

the TSD for furthe r details on the fluorescent lamp ballast market.

The four large manufacturers typically offer a much wider range of designs of covered ballasts than small manufacturers. Ballasts can be designed, or optimized, to operate different lamp lengths and numbers of lamps under various start methods, often in combination with various additional features. Large manufacturers typically offer many SKUs per product line to meet this wide range of potential specifications. Generally, one product family shares some fun damental characteristic (i.e., lamp diameter, number of lamps, etc.) and hosts a large number of SKUs that are manufactured with minor variations on the same product line. Some product lines, such as the 4-foot MBP IS ballast, are manufactured in high volumes, while other products may be produced in much lower volumes but can help manufacturers meet their customers’ specific needs and provide higher margin opportunities. For their part, small manufacturers generally do not have the volume to support as wide a range of products.

Beyond variations in ballast types and features, the large manufacturers also offer multiple tiers of efficiency, typically including a baseline efficiency product and a high

efficiency product within the same family. On the other h and, some small manufacturers frequently only offer one efficiency level in a given product class to reduce the number of SKUs and parts they must maintain. This strategy is important to small

- scale13

- 41 

### manufacturers because many product development costs ( e.g ., testing, certification, and marketing) are relatively fixed per product line.

Small manufacturers are able to compete in the fluorescent lamp ballast industry despite the dominance of the four major manufacturers due, in large part, to the fragmented n ature of the fixture industry. The largest four fixture manufacturers compose about 60 percent of the industry, while as many as 200 smaller fixture manufacturers hold the remaining share. Many small ballast manufacturers have developed relationships with these small fixture manufacturers, whose production volumes may not be attractive to the larger players. The same structure applies to the electrical distributor market

– while small ballast manufacturers often cannot compete for the business of the large st distributors, they are able to successfully target small distributors, often on a regional

basis.

Lastly, like the major manufacturers, small manufacturers usually offer products in addition to those fluorescent lamp ballasts covered by this rulemaking, such as additional dimming ballasts, LED drivers, and compact fluorescent ballasts.

13.6.1.2 Description and Estimate of Compliance Requirements

At TSL3, the level proposed in today’s notice, DOE estimates capital conversion costs of $0.3 million and product conversion costs of $1.3 million for a typical small manufacturer, compared to capital and product conversion costs of $7.6 million and $12.7 million, respectively, for a typical large manufacturer. These costs and their impacts are described in detail below.

Those small manufacturers DOE interviewed did not expect increased capital conversion costs to be a major concern because most of them source all or the majority of their products from Asia. Those that source their products would likely not make the

direct capital investments themselves. Small manufacturers experience the impact of sourcing their products through a higher cost of goods sold, and thus a lower operating margin, as compared to large manufacturers. The capital costs estimated are largely

associ ated with those small manufacturers producing magnetic ballasts. DOE estimates capital costs of approximately $340,000 for a typical small manufacturer at TSL 3, based on the cost of converting magnetic production lines, such as sign ballasts, to electroni c production lines.

Another challenge facing the industry is the component shortage discussed in

section 13.3.1 . As with large manufacturers, the component shortage is a significant issue for small manufacturers, but some sma ll manufacturers stated that the shortage does not differentially impact them. At times, they actually can obtain components more easily than large manufacturers: because their volumes are lower, they generally pay higher prices for parts than their larger competitors, which incentivizes suppliers to fill small manufacturers’ orders relatively quickly. The lower

- volume orders also allow small manufacturers to piggyback off the orders for certain components that are used throughout the consumer electronics industry.13

- 42 

### While capital conversion costs were not a large concern to the small manufacturers DOE interviewed, product conversion costs could adversely impact small manufacturers at TSL 3, the level proposed in today’s notice. To estimate the differential impacts of the proposed standard on small manufacturers, DOE compared their cost of compliance with that of the major manufacturers. First, DOE examined the number of

basic models and SKUs available from each manufacturer to determine an estimate for overall compliance costs. The number of basic models and SKUs attributed to each manufacturer is based on information obtained during manufacturer interviews and an examination of the different models advertised by each on company websites. DOE assumed that the product conversion costs required to redesign basic models and test and certify all SKUs to meet the standard levels presented in today’s notice would be lower per model and per SKU for small manufacturers, as detailed below. (A full description of

DOE’s methodology for developing product conversion costs is found in section 13.4.8

above. ) The table below compares the estimated product conversion costs of a typical small manufacturer as a percentage of annual R&D expense to those of a typical large

manufacturer.

Table 13.6.1 Comparison of a Typical Small and Large Manufacturer’s Product Conversion Costs to Annual R&D Expense

Large Manufacturer Small Manufacturer

Product Conversio n Costs for a Typical Large

Manufacturer (2009$ millions) Product

Conversion Costs as a Percentage of

Annual R&D

Expense Product Conversion Costs for a Typical

Small

Manufacturer (2009$ millions) Product

Conversion Costs as a Percentage of

Annual R&D

Expen se Baseline $0.00 0% $0.00 0%

TSL 1 $1.48 17% $0.15 39%

TSL 2 $10.19 116% $1.05 269%

TSL 3 $12.73 145% $1.31 336%



### Based on discussions with manufacturers, DOE estimated that the cost to fully redesign every ballast model for large manufacturers is a pproximately $120,000 per model and the cost to test and certify every SKU is approximately $20,000 per SKU. A typical major manufacturer offers approximately 80 basic covered models and 300 SKUs. Based on DOE’s GRIM analysis, a typical major manufacturer has an annual R&D expense of $8.6 million. Because not all products would need to be redesigned at TSL 3, DOE estimates $12.7 million in product conversion costs for a typical major manufacturer at TSL 3 (compared to $15.5 million if all products had to be fully redesigned), which represents 145 percent of its annual R&D expense. This means that a typical major manufacturer could redesign its products in under a year and a half if it were to devote its entire R&D budget for fluorescent lamp ballasts to prod uct redesign and could retain the engineering resources.

On the other hand, DOE’s research indicated that a typical small manufacturer offers approximately 50 basic covered models and 100 SKUs. However, based on manufacturer interviews, DOE does not beli eve that small manufacturers would incur the same level of costs per model and SKU as large manufacturers. Small manufacturers13

- 43 

### would not be as likely to redesign models in- house as large manufacturers. Instead, they

would source and rebrand some or all pro ducts from the Asian manufacturers who supply their ballasts. As a result, DOE assumed a lower R&D investment, in absolute dollars, per model. Because this design is effectively sourced, DOE believes smaller manufacturers would face a higher level of cost of goods sold (i.e. a higher MPC). Therefore, in a competitive environment, small manufacturers would earn a lower markup than their larger peers and consequently operate at lower margins. Small manufacturers would also have to test and certify every SKU they offer, but they would not conduct the same extent of pilot runs and internal testing as large manufacturers because less production takes place in internal factories. As such, DOE estimates that their testing and certification costs are expected to be $10,000 per SKU for UL and other certifications. Thus, the product conversion costs for a typical small manufacturer could total $1.6 million, but because not all products would need to be fully redesigned at TSL 3, DOE estimates product conversion costs of $1.3 million at TSL 3. Based on scaling GRIM results to an average small

- manufacturer market share of 1.0 percent, DOE assumed that a small manufacturer has an annual R&D expense of $0.4 million, so the estimated product

conversion costs at TSL 3 would represent 3 36 percent of its annual R&D expense. This means that a typical small manufacturer could redesign its products in a little over the

three -year compliance period if it were to devote its entire R&D budget for fluorescent lamp ballasts to product redesign and could retain the engineering resources.

Although the conversion costs required can be considered substantial for all companies, the impacts could be relatively greater for a typical small manufacturer because of much lower production volumes and the relatively fixed nature of the R&D resources required per model. The table below compares the total conversion costs of a typical small manufacturer as a percentage of annual revenue and earnings before taxes and interest (EBIT) to those of a typic al large manufacturer.

Table 13.6.2 Comparison of a Typical Small and Large Manufacturer’s Total

Conversion Costs to Annual Revenue and EBIT
Large Manufacturer Small Manufacturer

Total

Conversion

Costs for a Typical Large Mfr. (2009$

millions) Total

Conversion

Costs as a Percentage

of Annual

Revenue Total

Conversion

Costs as a Percentage of

Annual EBIT Total

Conversion

Costs for a Typical Small Mfr. (2009$

millions) Total

Conversion

Costs as a Percentage

of Annual

Revenue Total

Conversion

Costs as a Percentage of

Annual EBIT

Baseline $0.00 0% 0% $0.00 0% 0%

TSL 1 $4.06 2% 21% $0.27 3% 38%

TSL 2 $15.85 7% 81% $1.30 12% 184%

TSL 3 $20.33 9% 104% $1.65 16% 233%



### As seen in the table above, the impacts for a typical small manufacturer are relatively greater than for a large manufacturer at TSL 3. Total conversion costs represent

233 percent of annual EBIT for a typical small manufacturer compared to 10 4 percent of annual EBIT for a typical large manufacturer. DOE believes these estimates reflect a

worst

- case scenario because they assume small manufacturers would redesign all13

- 44 

### proprietary models immediately, and not take advantage of the industry’s supply chain dynamics or take other steps to mitigate the impac ts. However, DOE anticipates that small manufacturers would take several steps to mitigate the costs required to meet new and amended energy conservation standards.

At TSL 3, it is more likely that ballast manufacturers may temporarily reduce the number of SKUs they offer as in-house designs to keep their product conversion costs at manageable levels in the year preceding the compliance date. As noted above, the typical small manufacturer business model is not predicated on the supply of a wide range models and specifications. They frequently either focus on a few niche markets or on customers seeking only basic, low-cost solutions. They therefore can satisfy the needs of their customers with a smaller product portfolio than large manufacturers who often compete on brand reputation and the ability to offer a full product offering. As such, DOE believes that under the proposed standards small businesses would likely selectively upgrade existing product lines to offer products that are in high demand or off er strategic advantage. Small manufacturers could then spread out further investments over a longer time period by upgrading some product lines prior to the compliance date while sourcing others until resources allow—and the market supports— in -house desig n. Furthermore, while the initial redesign costs are relatively large, the estimates assume small manufacturers would bring compliant designs to market in concert with large manufacturers. In reality, there is a possibility some small manufacturers would conserve resources by selectively upgrading certain products until new baseline designs become commonplace to the point where their in-house development is less resource-intensive. The commonality of many consumer electronics components, designs, and produ cts fosters considerable sharing of experience throughout the electronics supply chain, particularly when unrestricted by proprietary technologies. DOE did not find any intellectual property restrictions that would prevent small manufacturers from achievi ng the technologies necessary to meet today’s proposed levels.

13.6.2 Impacts on Sign Ballast Manufacturers

DOE is not presenting results under the two- tier markup scenario for sign ballasts

because it did not observe this two- tier effect in the sign ballast mar ket. Electronic ballasts at EL1 neither command a higher price nor a higher markup in the base case. Additionally, roll-up and shift scenarios do not have separate impacts for sign ballasts because there are no higher ELs above the new baseline to which pr oducts could potentially shift in the standards case. As such, the tables below present the cash- flow analysis results under the preservation of operating profit markup and roll-up shipment scenarios with existing or emerging technologies for sign ballast manufacturers.13

- 45 

### Table 13.6.3 Manufacturer Impact Analysis for Sign Ballasts – Preservation of Operating Profit Markup, Existing Technologies, and Roll

- up Shipment Scenario

Units Base

Case Trial Standard Level

1 2 3

INPV (2009$ millions) 142 138 138 138

Change in INPV (2009$ millions) - (4.2) (4.2) (4.2)

(%)

- - 2.9%

- 2.9%

- 2.9%

Product

Conversion Costs (2009$ millions) - 2 2 2

Capital

Conversion Costs (2009$ millions) - 6 6 6

Total Conversi on Costs (2009$ millions) - 8 8 8



### Table 13.6.4 Manufacturer Im pact Analysis for Sign Ballasts – Preservation of Operating Profit Markup, Emerging Technologies, and Roll- up Shipment Scenario

Units Base

C ase Trial Standard Level

1 2 3

INPV (2009$ millions) 116 111 111 111

Change in INPV (2009$ millions) - (5.1) (5.1) (5.1)

(%)

- - 4.4%

- 4.4%

- 4.4%

Product

Conversion Costs (2009$ millions) - 2 2 2

Capital

Conversion Costs (2009$ millions) - 6 6 6

Total Conversion

Costs (2009$ millions) - 8 8 8



### For sign ballasts (product class 5), DOE analyzed only one efficiency level; thus, the results are the same at each TSL. TSLs 1 through 3 represent EL1 for product class 5. At TSLs 1 through 3, DOE estimates impacts on INPV to range from -$4.2 million to

- $5.1 million, or a change in INPV of -2.9 percent to -4.4 percent. At these proposed levels, industry free cash flow is estimated to decrease by approximately 38. 4 percent to $4.9 million, comp ared to the base

- case value of $7. 9 million in the year leading up to the proposed energy conservation standards.

As shown by the results, DOE expects sign ballast manufacturers to face small negative impacts under TSLs 1 through 3. DOE estimates that 64 percent of product class 5 shipments would meet EL1 in the base case. This means that many manufacturers already produce electronic sign ballasts, which is the design option represented by EL1. However, many other manufacturers produce only magnetic T12 s ign ballasts and therefore would face significant capital exposure moving from magnetic to electronic to meet TSLs 1 through 3. For that reason, DOE estimates relatively high capital conversion costs of $6 million for sign ballast manufacturers. Product re design and testing costs are expected to total $2 million for sign ballasts.13

- 46 

### Unlike most product classes, sign ballasts are expected to decrease rather than increase in price moving from baseline to EL1 by a shipment- weighted average decrease

in MPC of 4.5 percent. This is because electronic ballasts are a cheaper alternative to magnetic ballasts, even though the industry has not fully moved toward electronic production yet. During interviews, manufacturers stated that consumers were reluctant to convert to electronic ballasts although there were no technical barriers to doing so. Under the preservation of operating profit markup scenario, however, manufacturers are able to

maintain the base

- case operating profit for the year following the compliance date of amended standards despite lower production costs, so the average markup increases slightly to 1.41 to account for the decrease in MPC. Despite this markup increase, revenue is lower at TSLs 1 through 3 than in the base case because of the lower average unit price, and the $8 million in conversion costs increases the negative impact. When the preservation of operating profit markup is combined with the existing technologies scenario rather than the emerging technologies scenario, the impact of this maximize d revenue per unit is greatest because it is applied to a larger total quantity of shipments.

13.7 OTHER IMPACTS

13.7.1 Employment

DOE typically presents modeled quantitative estimates of the potential changes in production employment that could result following amend ed energy conservation standards. However, for this rulemaking, DOE determined that none of the major manufacturers, which compose more than 90 percent of the market, have domestic fluorescent lamp ballast production. Although a few niche manufacturers hav e relatively limited domestic production, based on interviews, DOE believes there are very few domestic production employees in the United States Because many niche manufacturers did not respond to interview requests, DOE is unable to fully quantify domes tic production employment. Therefore, while DOE qualitatively discusses potential employment impacts below, DOE did not model direct employment impacts explicitly because the results would not be meaningful given the very low number of domestic production employees.

Based on interviews, DOE believes that direct employment impacts of relatively significant magnitude would only occur in the event that one or more businesses chose to

exit the market due to new standards. Discussions with manufacturers indica ted that, at the highest efficiency level (TSL 3), some small manufacturers will be faced with the decision to make the investments necessary to remain in the market based on their current technical capabilities. In general, however, DOE believes that TSL 3, the level proposed in today’s notice, will not have significant adverse impacts on employment because achieving these levels is within the expertise of most manufacturers, including small manufacturers, due to the lack of intellectual property restrictions and similarity of products among manufacturers.

In summary, however, given the low number of production employees and the unlikelihood that manufacturers would exit the market at the efficiency levels proposed in

the NOPR notice, DOE does not expect a significant impact on direct employment13

- 47 

### following new and amended energy conservation standards. DOE notes that t he employment impacts discussed here are independent of the employment impacts from the broader U.S. economy, which are documented in chapter 15 , Employment Impact Analysis , of the NOPR TSD

.

13.7.2 Production Capacity

Manufacturers stated that new and amended energy conservation standards could harm manufacturing capacity due to the current component shortage discussed in section

13.3.1 above. Manufacturers presently are struggling to produce enough fluorescent lamp ballasts to meet demand because of a worldwide shortage of electrical components. The components most affected by this shortage are high- efficiency parts, for wh ich demand would increase even further following new and amended conservation standards. The increased demand could exacerbate the component shortage, thereby impacting manufacturing capacity in the near term. While DOE recognizes that the component

shorta ge is currently a significant issue for manufacturers, DOE believes it is a relatively short term phenomenon to which component suppliers will ultimately adjust. According to manufacturers, suppliers have the ability to ramp up production to meet ballast component demand by the compliance date of potential new standards, but those suppliers have hesitated to invest in additional capacity due to economic uncertainty and skepticism about the sustainability of demand. The state of the macroeconomic environment through 2014 will likely impact the duration of the component shortage. However, potential mandatory standards could create more certainty for suppliers about the eventual demand for these components. Additionally, the components at issue are not

new te chnologies; rather, they have simply not historically been demanded in large quantities by ballast manufacturers.

13.7.3 Cumulative Regulatory Burden

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

the combined effects of several i mpending regulations may have serious consequences for some manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. For the cumulative regulatory burden anal ysis, DOE looks at other significant product- specific regulations that could affect fluorescent lamp ballast manufacturers that will take effect 3 years before or after the compliance date of amended energy conservation standards for these products. c 

### In ad dition to the amended energy conservation regulations on fluorescent lamp ballasts , several other Federal regulations apply to these products and other equipment produced by the same manufacturers. While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, DOE also has described a number of other regulations in section 13.7.3.2 because it recognizes that these regulations also impact the products covered by this rulemaking.

c The compliance date for fluorescent lamp ballasts products is 3 years from the date of publication of the final rule (approximately July 2014).13

- 48 

### Companies that produce a wide range of regulated products may be faced with more capital and product development expenditures than competitors with a narrower scope of products. Regulatory burdens can prompt companies to exit the market or reduce their produc t offerings, potentially reducing competition. Smaller companies in particular

can be disproportionately affected by regulatory costs since these companies have lower sales volumes over which they can amortize the costs of meeting new regulations. A proposed standard is not economically justified if it contributes to an unacceptable level of cumulative regulatory burden.

13.7.3.1 DOE Regulations for Other Products Produced by Fluorescent Lamp Ballast Manufacturers

In addition to the amended energy conservation standards on fluorescent lamp

ballasts , several other Federal regulations and pending regulations apply to other products produced by the same manufacturers. DOE recognizes that each regulation can significantly affect a manufacturer’s financial operations. Mu ltiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an

exit from the market. Table 13.7.1 list s the other DOE energy conservation standards that

could als o affect manufacturers of fluorescent lamp ballasts in the 3 years leading up to and after the compliance date of amended energy conservation standards for these products.13

- 49 

### Table 13.7.1 Other DOE and Federal Actions Affecting the Fluorescent Lamp

Ballast Industry

Regulation Approximate Compliance

Date* Number of Impacted Companies from the Market and Technology Assessment (MTA) (See C hapter 3) Estimated Total Industry

Conversion Costs

Packaged Terminal Air

Co nditioners and Packaged Terminal Heat Pumps 2012 1 $17.3 million (2007$) d

Ranges and Ovens 2012 1 $22.6 million (2006$) e

General Service Fluorescent Lamps and Incandescent Reflector Lamps 2012 10 $363.1 million (2008$) f

Dehumidifiers 2012 1 N/A†††

Comm ercial Clothes Washers 2013 1 $20.4 million (2008$) g

Direct Heating Equipment 2013 1 $5.39 million (2009$) h

Battery Chargers and External Power Supplies 2013* 1 N/A ††

Residential Refrigerators and

Freezers 2014* 1 N/A ††

Room Air Conditioners 2014* 1 N/ A ††

Residential Clothes Dryers 2014* 1 N/A ††

Microwave Ovens 2014* 2 N/A ††

d Estimated industry conversion expenses were pu blished in the TSD for the October 2008 packaged terminal air conditioners and packaged term inal heat pumps final rule. 73 FR 58772 . The TSD for the 2008 packaged terminal air conditioners and packaged terminal heat pumps final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_final_tsd.html

.

e Estimated industry conversion expenses were pu blished in the TSD for the April 2009 residential cooking products final rule. 74 FR 16040 . The TSD for the 2009 residential cooking products final rule can be

found at http://www1.eere.energy.gov/buildings/app liance_standards/residential/cooking_products_final_rule_tsd.ht

ml

. f Estimated industry conversion expenses were pu blished in the TSD for the July 2009 general service fluorescent lamps and incandescent reflector lamps final rule. 74 FR 3408 0 . The TSD for the 2009 lamps

final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/incandescent_lamps_standards_fina l_rule_tsd.html

. g Estimated industry conversion expenses were pu blished in the TSD for the January 2010 commer cial

clothes washers final rule. 75 FR 1122 . The TSD for the 2010 commercial clothes washers final rule can be

found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/clothes_washers_ecs_final_rule_t

sd.html

h Estimated industry conver sion expenses were pu blished in the TSD for the April 2010 heating products

final rule. 75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/heating_products_fr_ tsd.html

.13

- 50 E liptical R eflector (ER) , B u l ge
R eflector (BR) , and Small

Diameter Incandescent Reflector Lamps 2014* 3 N/A ††

Metal Halide Lamp Fixtures 2015* 16 N/A ††

Residential Clothes Wash ers 2015* 1 N/A ††

Residential Water Heaters 2015 1 $95.9 million (2009$) i

Commercial Electric Motors 2015* 1 N/A ††

Commercial Distribution

Transformers 2016* 2 N/A ††

High

- Intensity Discharge Lamps 2017* 8 N/A ††

*The dates listed are an approximation. The exact dates are pending final DOE action. †† For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized estimated total industry conversion cost. ††† For minimum performance requirements prescribed by the Energy Independence and Security Act of 2007 (EISA 2007), DOE did not estimate total industry conversion costs because an MIA was not completed as part of a rulemaking. Pub. L. 110

- 140. EISA 2007 made numerous amendments to t he Energy Policy and Conserva tion Act (EPCA) of 1975, Pub. L. 94

- 163, (42 U.S.C. 6291

– 6309) , which established an energy conservation program for major household appliances and industrial and commercial equipment.



### Some Federal DOE regulations have a more significant impact on manufa cturers
of fluorescent lamp ballasts than others because manufacturers hold a significant market

share in those covered products. Table 13.7.2 below shows the DOE energy conservation standards with compliance dates within three ye ars of fluorescent lamp ballasts where manufacturers are expected to be most impacted due to their market positions. For these rulemakings, fluorescent lamp ballast manufacturers would likely be burdened by a significant portion of the estimated industry c onversion costs

. In some cases, specific market share data was not available, but manufacturers were identified as major or minor manufacturers in the given market when this information was publicly available.

i Estimated industry conversion expenses were pu blished in the TSD for the April 2010 heating products

final rule. 75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_stand ards/residential/heating_products_fr_tsd.html

.13

- 51 

### Table 13.7.2 DOE Regulations on Products For Which Fluorescent Lamp Ballast Manufacturers Hold Significant Market Share

Manufacturer Market Share in DOE Regulated Product

Regulation Estimated Industry Total

Conversion

Expenses (millions) G eneral

E lect ric Philips Osram Sylvania Universal

Packaged Terminal Air

Conditioners and Packaged Terminal Heat Pumps $17.3 million (2007$) N/A (major)

Ranges and Ovens $22.6 million (2006$) 47% (electric); 37% (gas)

General Service Fluorescent Lamps and

Incan descent Reflector Lamps $363.1 million (2008$) N/A (major) N/A (major) N/A (major) N/A (minor)

Commercial Clothes

Washers $20.4 million (2008$) N/A (major)

Residential Refrigerators

and Freezers N/A 27% (refrigerators)

Room Air Conditioners N/A N/ A (major)

Residential Clothes Dryers N/A 16% (electric); 10% (gas)

Residential Clothes

Washers N/A 16%

ER, BR, and Small

Diameter Incandescent Reflector Lamps N/A N/A (major) N/A (major) N/A (major)

Metal Halide Lamp

Fixtures N/A N/A (major) N/A (major) N/A (major) N/A (minor) High

- Intensity Discharge Lamps N/A N/A (major) N/A (major) N/A (major)



### 13.7.3.2 Other Regulations That Could Impact Fluorescent Lamp Ballast

Manufacturers

While the cumulative regulatory burden focuses on the impacts on manufa cturers of other Federal requirements, in this section DOE has described a number of other regulations below that could also impact the fluorescent lamp ballasts covered by this rulemaking.

State Energy Conservation Standards
The CEC specifies appliance standards that are applicable as state law to the sale of appliances in California. Recent s tandards set minimum ballast efficacy factor requirements for ballasts that operate one and two F34T12 lamps, two F96T12/ES lamps, and two F96T12HO/ES lamps. The stan dards apply to fluorescent lamp ballast s manufactured on or after July 1, 2009; sold by the manufacturer on or after October 1,13

- 52 

### 2009; or incorporated into a luminaire by a luminaire manufacturer on or after July 1,

2010. j



### International Toxic Materials Regu lations

Fluorescent lamp ballast manufacturers that sell products outside of the United States are subject to several internation al toxic materials regulations. In the European Union ( EU ), products are subject to the Restriction of Hazardous Substances Dir ective ( RoHS ). This regulation bans the sale of new equipment in the EU that contains more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ethers ( PBDE ) flame retardants.

Manufact urers do not have a lengthy history using lead- free solder and expressed concerns regarding the reliability of the material based on the experience of European as well as U.S. suppliers compliant with RoHS. Manufacturers commented that lead- free solder is harder and more brittle, and it is still unknown whether exposure to long term thermal expansion and contraction could lead to additional solder joint cracking and, ultimately, ballast malfunctioning. While no current Federal U.S. regulation impacts the

u se of lead -solder in ballasts, NEMA has issued a call to action for its members to be

RoHS

- com pliant in 2010.

Anti

- Arcing Protection Requirements
The provisions contained in ANSI/UL1598 Standard Third Edition require that luminaires be constructed using UL Type CC rated (anti

- arcing) ballasts or high temperature Circle I rated lampholders in original equipment manufacturer ( OEM )

fixtures and UL- marked retrofit kits . While ballast manufacturers are not required to offer Type CC

- rated ballasts since fixture manufacturers could use Circle I lampholders to prevent arcing and meet UL specifications, offering Type CC- rated ballasts does create a regulatory burden for ballast manufacturers. Type CC rating requires control circuitry to implement, and these circuits consume system power, which decreases overall ballast electrical efficiency.

E lectromagnetic Interference (EMI) Requirements
Currently, in the U.S. and Canada, electronic fluorescent ballasts are tested only for conducted emission and are required to compl y with Federal Communications Commission (FCC ) Part 18, Subpart C, Class A for industrial and commercial applications, or Class B for residential applications. The burden of proof for existing EMI

tests rests with the luminaire manufacturers. These requirements are not as rigorous as the CISPR 15 requirements effective in Europe which require more filtering stages, but

manufacturers could be required to comply with the model European EMI regulation in the future, which would result in design changes that co uld decrease efficiency or increase the cost to meet a given efficiency level

.

j California Energy Commission. 200 9 Appliance Efficiency Regulations . 2009.

< http://www.energy.ca.gov/2009publications/CEC

- 400

- 2009

- 013/CEC

- 400

- 2009

- 013.PDF >.13

- 53 

### End -of- Life (EOL) Requirements
T5 ballasts are required to have EOL protection systems that detect characteristic electrical signals of a lamp in distress and activate control functions in the ballast to limit energy supplied to the lamp. This protection prevents fire hazards resulting from melted sockets and cracked glass near the lamp base caused by overheating. Compliance with EOL requirements has added cost and design complexity to these systems. In the future, T8 and T12 ballasts could also require EOL protection, which could add cost and decrease efficiency , but DOE does not expect EOL protection to be required for T8 and

T12 ballasts in the United States as required in Euro pe due to significant differences between the lamps used in the United States and Europe.

13.8 CONCLUSION
The following section summarize s the impacts for the scenarios DOE believes are most likely to capture the range of impacts on fluorescent lamp ballast manufacturers as a result of amended energy conservation standards. DOE also notes that while these scenarios bound the range of most plausible impacts on manufacturers, there potentially could be circumstances which cause manufacturers to experience impacts outside of this

range

.

TSL 1 represents EL1 for all four representative product classes. At TSL 1, DOE estimates impacts on INPV to range from -$19.4 million to -$112.7 million, or a change

in INPV of -1.6 percent to -13.2 percent. At this proposed level, industry free cash flow is estimated to decrease by approximately 11.9 percent to $43.8 million, compared to the

base -case value of $49.7 million in the year leading up to the proposed energy

conservation standards.

The INPV impacts at TSL 1 are relativel y minor, in part because the vast majority of shipments already meet EL1. DOE estimates that in 2014, the year in which compliance with any new and amended standards is proposed to be required, 98 percent of product class 1 shipments, 69 percent of product class 2 shipments, 88 percent of product class 3 shipments, and 64 percent of product class 5 shipments would meet EL1 or higher in the base case. The majority of shipments that are at baseline efficiency levels

and would need to be converted at TSL 1 are 2- lamp 4

- foot MBP IS/RS residential ballasts in product class 1, 2-lamp and 4-lamp 4ft MBP PS ballasts in product class 4, and 4-lamp sign ballasts in product class 5.

Because most fluorescent lamp ballast shipments already meet the efficiency

levels ana lyzed at TSL 1, DOE expects conversion costs to be small compared to the industry value. DOE estimates product conversion costs of $5 million due to the research, development, testing, and certification costs needed to upgrade product lines that do not

mee t TSL 1. For capital conversion costs, DOE estimates $11 million for the industry, largely driven by the cost of converting all magnetic sign ballast production lines to electronic sign ballast production lines.

Under the preservation of operating profit markup scenario, impacts on manufacturers are marginally negative because while manufacturers earn the same operating profit as is earned in the base case for 2015 (the year following the compliance13

- 54 

### date of amended standards), they are faced with $17 million in conversion costs. INPV impacts on manufacturers are not as significant under this scenario as in other scenarios because despite most shipments already meeting TSL 1, the shift shipment scenario moves products beyond the eliminated baseline to higher- price (and higher gross profit) levels. This results in a shipment-weighted average MPC increase of 7.8 percent applied to a growing market over the analysis period. While total shipments increase under both technology scenarios, shipments under the existing technologies scenario are 216 percent greater than shipments under the emerging technologies scenario by the end of the analysis period. At TSL 1, the moderate price increase applied to a large quantity of shipments lessens the impact of the minor conve rsion costs estimated at TSL 1, resulting in slightly negative impacts at TSL 1 under the preservation of operating profit markup

scenario.

Under the two-tier markup scenario, manufacturers are not able to fully pass on

additional costs to consumers and ar e not guaranteed base -case operating profit levels. Rather, products that once earned a higher- than

- average markup at EL1 become commoditized once baseline products are eliminated at TSL 1. Thus, the average markup drops below the base- case average markup (which is equal to the flat manufacturer markup of 1.4). There is a slight increase in shipment- weighted average MPC (less than 1 percent) under the roll-up scenario, but this increase is much smaller than under the shift scenario because shipments above t he baseline do not move to higher efficiencies with greater costs. This MPC increase is outweighed by a lower average markup of 1.38 and $17 million in conversion costs, resulting in more negative impacts at TSL 1 under the

two

- tier markup scenario. These impacts increase on a percentage basis under the emerging technologies scenario relative to the existing technologies scenario because the

base

- case INPV against which changes are compared is 31 percent lower.

TSL 2 represents EL1 for product class 5 (4- la mp sign ballasts). For product classes 1 (4 -foot MBP IS/RS and 8-foot SP Slimline), 2 (4-foot MBP PS, 4-foot T5 MiniBP SO, and 4-foot T5 MiniBP HO),and 3 (2- lamp 8 -foot HO), TSL 2 represents

EL2. At TSL 2, DOE estimates impacts on INPV to range from -$51.6 million to -$217.9 million, or a change in INPV of -4.2 percent to -25.5 percent. At this proposed level, industry free cash flow is estimated to decrease by approximately 3 2.9 percent to $33.3 million, compared to the base-case value of $49.7 million in the year leading up to the proposed energy conservation standards.

Because product class 5 remains at EL1 at TSL 2, the additional impacts at TSL 2 relative to TSL 1 result from increasing product classes 1, 2, and 3 to EL2. At TSL 2,

DOE estimates that 40 percent of product class 1 shipments, 13 percent of product class 2 shipments, and 27 percent of product class 3 shipments would meet EL2 or higher in the base case. Since product class 3 represents only 0.1 percent of the fluorescent lamp ballast market, the vast majority of impacts at TSL 2 relative to TSL 1 result from changes in product classes 1 and 2.

At TSL 2, conversion costs nearly triple compared to TSL 1 but remain small compared to the industry value. Product conversion costs increase to $24 million due to the increase in the number of product lines within product classes 1 and 2 that would13

- 55 

### need to be redesigned at TSL 2. Capital conversion costs grow to $25 million at TSL 2 because manufacturers would need to invest in additional testing equipment and convert some production lines.

Under the preservation of operating profit markup scenario, INPV impacts are negative because manufacturers are not able to fully pass on higher product costs to consumers. The shipment- weighted average MPC increases by 11.1 percent compared to the baseline MPC, but this increase does not generate enough cash flow to outweigh the $49 million in conversion costs at TSL 2, resulting in a -4.2 percent change in INPV at TSL 2 compared to the base case.

Under the two- tier m arkup scenario, more products are commoditized to a lower markup at TSL 2. The impact of this lower average markup of 1.36 outweighs the impact of a 10.3 percent increase in shipment- weighted average MPC, resulting in a negative change in INPV at TSL 2. Th e $49 million in conversion costs further erodes profitability, and the lower base case INPV against which the change in INPV is compared under the emerging technologies scenario increases impacts on a percentage

basis.

TSL 3 represents EL1 for product class 5 and EL3 for product classes 1, 2, and 3. At TSL 3, DOE estimates impacts on INPV to range from -$95.3 million to -$296.2 million, or a change in INPV of -7.7 percent to -34.7 percent. At this proposed level, industry free cash flow is estimated to dec rease by approximately 57. 4 percent to $21.2 million, compared to the base-case value of $49.7 million in the year leading up to the proposed energy conservation standards.

Because product class 5 remains at EL1 at TSL 3, the additional impacts at TSL 3

re lative to TSL 2 result from increasing product classes 1, 2, and 3 to EL3. At TSL 3, DOE estimates that only 20 percent of product class 1 shipments, 5 percent of product class 2 shipments, and 2 percent of product class 3 shipments would meet the efficien cy levels proposed by TSL 3 or higher in the base case.

At TSL 3, conversion costs nearly double again compared to TSL 2. Product conversion costs increase to $57 million because a far greater number of product lines within product classes 1, 2, and 3 wou ld need to be redesigned at TSL 3. Capital
conversion costs rise to $34 million at TSL 3 because manufacturers would need to invest in equipment such as surface-mount device placement machinery and solder machines to convert production lines for the manufa cturing of more efficient ballast designs.

Under the preservation of operating profit markup, existing technologies, and shift shipment scenarios, INPV decreases by 7.7 percent at TSL 3 compared to the base case, which is nearly double the percentage impact at TSL 2. The shipment- weighted average MPC increases by 19.5 percent, but manufacturers are not able to pass on the full amount of these higher costs to consumers. This MPC increase is outweighed by the $91 million

in conversion costs at TSL 3.13

- 56 

### Under th e two -tier markup scenario, at TSL 3, products are commoditized to a lower markup to an even greater extent. The impact of this lower average markup of 1.34 outweighs the impact of a 19.3 percent increase in shipment- weighted average MPC, resulting in a ne gative change in INPV at TSL 3 compared to TSL 2. Profitability is further impacted by the $91 million in conversion costs and the lower base- case INPV over which change in INPV is compared under the emerging technologies scenario.13

- 57 

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3 NEMA

– NEMA Me mbers. Last Accessed December 30, 2010.

< http://www.nema.org/about/members/ >.

4 CEE Qualifying Products. <http://www.cee1.org/com/com- lt/lamps

- ballasts.xls >

5 California Energy Commission. Appliance Efficiency Database. <http://www.appliances.energy.ca.gov/QuickSearch.aspx>

6 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Companies , 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons,

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