CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE O F CONTENTS

**12.1 I**  **NTRODUCTION..........................................................................................................12­1**

**12.2 M**  **ETHODOLOGY.........................................................................................................12­1**

**12.2.1 P**  **hase I:**  **Industry Profile**  **....................................................................................12­2**

**12.2.2 P**  **hase II:**  **Industry Cash­Flow**  **Analysis and**  **Interview Guide**  **...........................12­2**

**12.2.2.1 I**  **ndustry Cash­Flow**  **Analysis ...............................................................12­2** 

**12.2.2.2 I**  **nterview Guide....................................................................................12­2** 

**12.2.3 P**  **hase III:**  **Sub­Group Analysis..........................................................................12­2** 

**12.2.3.1 M**  **anufacturer Interviews**  **......................................................................12­3**

**12.2.3.2 R**  **evised Industry**  **Cash­Flow Analysis**  **.................................................12­3**

**12.2.3.3 M**  **anufacturer Sub­Group**  **Analysis ......................................................12­3** 

**12.2.3.4 C**  **ompetitive Impact**  **Assessment ..........................................................12­4** 

**12.2.3.5 M**  **anufacturing Capacity**  **Impact...........................................................12­4**

**12.2.3.6 E**  **mployment Impact**  **.............................................................................12­4**

**12.2.3.7 C**  **umulative Regulatory**  **Burden............................................................12­4**

**12.3 P**  **RELIMINARY MANUFACTURER**  **IMPACT ANALYSIS**  **RESULTS ...................12­5** 

**12.3.1 I**  **mpact on**  **Financial Performance**  **......................................................................12­5**

**12.3.1.1 C**  **onversion Costs**  **.................................................................................12­5**

**12.3.1.2 P**  **roduct Mix**  **and Profitability...............................................................12­6** 

**12.3.1.3 C**  **ustomer Mix.......................................................................................12­6** 

**12.3.2 I**  **mpact on**  **U.S. Production**  **and Jobs**  **..................................................................12­6**

**12.3.2.1 F**  **oreign Labor**  **.......................................................................................12­6**

**12.3.2.2 I**  **ndustry Consolidation**  **.........................................................................12­7**

**12.3.3 I**  **mpact on**  **Product Utility**  **and Innovation..........................................................12­7** 

**12.3.4 C**  **umulative Burdens**  **...........................................................................................12­7**

**12.3.4.1 H**  **ydrochlorofluorocarbon Phaseout**  **and Foam**  **Insulation Blowing**  **Agent**

**Phaseout .............................................................................................................12­8** 

**12.3.4.2 S**  **tandards for**  **Other Products**  **Made by**  **Commercial Refrigeration** 

**Equipment Manufacturers**  **..................................................................................12­9**

**12.3.4.3 S**  **tate Energy**  **Conservation Standards**  **..................................................12­9**

**12.3.4.4 I**  **nternational Energy**  **Conservation Standards......................................12­9** 

**12.3.4.5 I**  **mpact of**  **Cumulative Burden**  **on Small**  **Manufacturers ......................12­9** 

**12­i 12­ii** CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

**The p**  **urpose of**  **the manufacturer**  **impact analysis**  **(MIA) is**  **to identify**  **the likely** 

**impacts of**  **efficiency standards**  **on manufacturers.**  **DOE will**  **conduct this**  **analysis with** 

**input from**  **manufacturers and**  **other interested**  **parties and**  **will apply**  **this methodology**  **to**

**its evaluation**  **of standards.**  **DOE will**  **also consider**  **financial impacts,**  **and of**  **a wide** 

**range of**  **quantitative and**  **qualitative industry**  **impacts that**  **might occur**  **following the** 

**adoption of**  **a standard.**  **For example,**  **a particular**  **standard level,**  **if adopted**  **by DOE,** 

**could require**  **changes to**  **CRE manufacturing**  **practices. DOE**  **will identify**  **and**

**understand these**  **impacts through**  **interviews with**  **manufacturers and**  **other stakeholders** 

**during the**  **Notice of**  **Proposed Rulemaking**  **(NOPR) stage**  **of its**  **analysis.**

**Recently, D**  **OE announced**  **changes to**  **the MIA**  **format through**  **a report**  **issued to** 

**Congress on**  **January 31,**  **2006 (as**  **required by**  **section 141**  **of the**  **Energy Policy**  **Act of** 

**2005 (EPACT**  **2005)), entitled**  **“Energy Conservation**  **Standards Activities.”**  **a Previously,** 

**DOE did**  **not report**  **any MIA**  **results during**  **the Advanced**  **Notice of**  **Proposed**

**Rulemaking (ANOPR)**  **phase; however,**  **under this**  **new format,**  **DOE has**  **collected,**

**evaluated, and**  **reported preliminary**  **information and**  **data in**  **the ANOPR.**  **Such**

**preliminary information**  **includes the**  **anticipated conversion**  **capital expenditures**  **by**

**efficiency level**  **and the**  **corresponding anticipated**  **impacts on**  **jobs. DOE**  **solicited this** 

**information during**  **the ANOPR**  **engineering analysis**  **manufacturer interviews**  **and**

**reported the**  **results below.** 

12.2 METHODOLOGY

**DOE c**  **onducts the**  **MIA in**  **three phases,**  **and further**  **tailors the**  **analytical**

**framework based**  **on stakeholder**  **comments. In**  **Phase I,**  **an industry**  **profile is**  **created to** 

**characterize the**  **industry, and**  **a preliminary**  **MIA is**  **conducted to**  **identify important** 

**issues that**  **require consideration.**  **Results of**  **the Phase**  **I analysis**  **are presented**  **in the** 

**ANOPR TSD.**  **In Phase**  **II, an**  **industry cash**  **flow model**  **and an**  **interview questionnaire** 

**are prepared**  **to guide**  **subsequent discussions.**  **In Phase**  **III, manufacturers**  **are**

**interviewed, and**  **the impacts**  **of standards**  **are assessed**  **both quantitatively**  **and**

**qualitatively. Industry**  **and sub­group**  **cash flow**  **and NPV**  **are assessed**  **through use**  **of the** 

**Government Regulatory**  **Impact Model**  **(GRIM). Then**  **impacts on**  **competition,**

**manufacturing capacity,**  **employment, and**  **regulatory burden**  **are assessed**  **based on** 

**manufacturer interview**  **feedback and**  **discussions. Results**  **of the**  **Phase II**  **and III** 

**analyses are**  **presented in**  **the NOPR**  **TSD.**

**a This**  **report is**  **available on**  **the DOE**  **website at:** 

**http://www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html.**

**12­1**12.2.1 Phase I : Industry Profile

**In P**  **hase I**  **of the**  **manufacturer impact**  **analysis, DOE**  **collects pertinent**  **qualitative**

**and quantitative**  **financial and**  **market information.**  **This includes**  **CRE manufacturer** 

**market share,**  **corporate operating**  **ratios, wages,**  **employment, and**  **production cost**  **ratios.**

**Sources of**  **information include**  **reports published**  **by industry**  **groups, trade**  **journals, the** 

**U.S. Census**  **B ureau,**  **and copies**  **of Securities**  **Exchange Commission**  **(SEC) 10­K**  **filings.**

**In addition,**  **DOE relies**  **on information**  **from its**  **market and**  **technology assessment,** 

**engineering analysis,**  **life­cycle cost**  **analysis, and**  **analysis of**  **markups to**  **determine**

**equipment price**  **to characterize**  **the CRE**  **manufacturing industry.** 

12.2.2 Phase I I: Industry Cash­Flow Analysis and Interview Guide

**In P**  **hase II,**  **DOE will**  **perform a**  **preliminary industry**  **cash­flow analysis**  **and**

**prepare written**  **guidelines for**  **interviewing manufacturers.** 

12.2.2.1 Industry C ash­Flow Analysis

**DOE u**  **ses the**  **GRIM to**  **analyze the**  **financial impacts**  **of energy**  **conservation**

**standards on**  **the CRE**  **industry. Standards**  **will likely**  **require additional**  **investment, raise** 

**production costs,**  **and affect**  **revenue through**  **higher prices**  **and, possibly,**  **lower sales.** 

**The GRIM**  **uses a**  **number of**  **factors to**  **determine a**  **series of**  **annual cash**  **flows for**  **the**

**year standards**  **become effective**  **and continuing**  **for several**  **years after**  **implementation.**

**These factors**  **include annual**  **expected revenues,**  **costs of**  **sales, selling**  **and general** 

**administration costs,**  **taxes, and**  **capital expenditures**  **related to**  **depreciation, new** 

**standards, and**  **maintenance. Inputs**  **to the**  **GRIM include**  **manufacturing costs,**  **shipments**

**forecasts, and**  **price forecasts**  **developed in**  **other analyses.**  **Another input,**  **financial**

**information, will**  **be developed**  **based on**  **publicly available**  **data and**  **confidentially**

**submitted manufacturer**  **information. The**  **results of**  **the GRIM**  **are compared**  **against**

**baseline projections**  **where no**  **standards are**  **in place.**  **The financial**  **impact of**  **new**

**standards is**  **the difference**  **between the**  **two sets**  **of discounted**  **annual cash**  **flows.**

12.2.2.2 Interview G uide

**During P**  **hase III**  **of the**  **MIA, DOE**  **will conduct**  **interviews with**  **manufacturers to** 

**gather information**  **on the**  **effects of**  **standards on**  **revenues and**  **finances, direct** 

**employment, capital**  **assets, and**  **on industry**  **competitiveness. Prior**  **to the**  **interviews,**

**DOE will**  **distribute an**  **interview guide**  **that will**  **provide a**  **starting point**  **to identify** 

**relevant issues**  **and help**  **identify the**  **impacts of**  **standards on**  **individual manufacturers**  **or**

**sub­groups of**  **manufacturers. DOE**  **anticipates that**  **the interview**  **guide will**  **cover current** 

**organizational characteristics,**  **industry infrastructure,**  **manufacturer cash­flow**  **analysis, a** 

**competitive impacts**  **assessment, an**  **employment impacts**  **assessment, and**  **a**

**manufacturing capacity**  **impacts assessment.** 

12.2.3 Phase I II: Sub­Group Analysis

**The P**  **hase III**  **activities will**  **take place**  **after the**  **publication of**  **the ANOPR,**  **and**

**will include**  **manufacturer interviews,**  **revision of**  **the industry**  **cash­flow analysis,** 

**12­2 manufacturer**  **sub­group cash­flow**  **analysis, competitive**  **impact assessment,** 

**manufacturing capacity**  **impact, employment**  **impact, and**  **cumulative regulatory**  **burden.**

12.2.3.1 Manufacturer I nterviews

**The i**  **nformation gathered**  **in Phase**  **I and**  **the cash­flow**  **analysis performed**  **in**

**Phase II**  **will be**  **supplemented with**  **information gathered**  **during interviews**  **with**

**manufacturers during**  **Phase III.**  **The interview**  **process has**  **a key**  **role in**  **the manufacturer** 

**impact analyses,**  **since it**  **provides an**  **opportunity for**  **interested parties**  **to express**  **their**

**views privately**  **on important**  **issues, allowing**  **confidential or**  **sensitive information**  **to be** 

**considered in**  **the rulemaking**  **decision.**

**DOE w**  **ill conduct**  **detailed interviews**  **with as**  **many manufacturers**  **as is**  **necessary**

**to gain**  **insight into**  **the range**  **of potential**  **impacts of**  **standards. During**  **the interviews,** 

**DOE will**  **solicit information**  **on the**  **possible impacts**  **of standards**  **on sales,**  **direct**

**employment, capital**  **assets, and**  **industry competitiveness.**  **Both qualitative**  **and**

**quantitative information**  **are valuable.**  **Interviews will**  **be scheduled**  **well in**  **advance in** 

**order to**  **provide every**  **opportunity for**  **key individuals**  **to be**  **available for**  **comment.**

**Although a**  **written response**  **to the**  **questionnaire will**  **be acceptable,**  **DOE prefers**  **an**

**interactive interview**  **process because**  **it helps**  **clarify responses**  **and provides**  **the**

**opportunity to**  **identify additional**  **issues.**

**All i**  **nformation transmitted**  **will be**  **considered, as**  **appropriate, in**  **DOE’s decision** 

**making process.**  **Interview participants**  **will be**  **asked to**  **identify all**  **confidential**

**information provided**  **in writing**  **or orally;**  **no confidential**  **information will**  **be made** 

**available in**  **the public**  **record. Participants**  **will also**  **be asked**  **to identify**  **all information** 

**they wish**  **included in**  **the public**  **record but**  **that they**  **do not**  **want to**  **have associated**  **with**

**their interview.**  **This information**  **will be**  **incorporated into**  **the public**  **record but**  **reported**

**without attribution.** 

12.2.3.2 Revised I ndustry Cash­Flow Analysis

**In P**  **hase II**  **of the**  **MIA, DOE**  **will provide**  **manufacturers with**  **a preliminary** 

**GRIM for**  **review and**  **evaluation. During**  **the interviews,**  **DOE will**  **seek comment**  **and**

**suggestions regarding**  **the values**  **selected for**  **the parameters.**  **Upon completion**  **of the** 

**interviews, DOE**  **will revise**  **its industry**  **cash flow**  **model based**  **on the**  **feedback provided** 

**through the**  **interviews.**

12.2.3.3 Manufacturer S ub­Group Analysis

**Using a**  **verage cost**  **assumptions to**  **develop an**  **industry cash**  **flow estimate**  **is not** 

**adequate for**  **assessing differential**  **impacts among**  **sub­groups of**  **manufacturers. Smaller** 

**manufacturers, niche**  **players, or**  **manufacturers exhibiting**  **a cost**  **structure that**  **differs**

**largely from**  **the industry**  **average could**  **be more**  **negatively affected.**  **Ideally, DOE** 

**would consider**  **the impact**  **on every**  **firm individually;**  **however, it**  **typically uses**  **the**

**results of**  **the industry**  **characterization to**  **group manufacturers**  **exhibiting similar** 

**characteristics. During**  **the interview**  **process, DOE**  **will discuss**  **the potential**  **sub­groups**

**and sub­group**  **members that**  **have been**  **identified for**  **the analysis.**  **DOE will**  **look to**  **the**

**12­3 manufacturers**  **and other**  **stakeholders to**  **suggest what**  **sub­groups or**  **characteristics are** 

**the most**  **appropriate for**  **the analysis.** 

12.2.3.4 Competitive I mpact Assessment

**Section 3**  **42 (6)(B)(i)(V)**  **of the**  **Energy Policy**  **Act of**  **1992 (EPCA)**  **directs DOE** 

**to consider**  **any lessening**  **of competition**  **that is**  **likely to**  **result from**  **imposition of** 

**standards. It**  **further directs**  **the U.**  **S. Attorney**  **General to**  **determine the**  **impacts, if**  **any,**

**of any**  **decrease in**  **competition. DOE**  **will make**  **a determined**  **effort to**  **gather and**  **report**

**firm­specific financial**  **information and**  **impacts. The**  **competitive analysis**  **will focus**  **on**

**assessing the**  **impacts on**  **smaller, yet**  **significant, manufacturers.**  **The assessment**  **will be** 

**based on**  **manufacturing cost**  **data and**  **on information**  **collected from**  **interviews with** 

**manufacturers. The**  **manufacturer interviews**  **will focus**  **on gathering**  **information that** 

**would help**  **in assessing**  **asymmetrical cost**  **increases to**  **some manufacturers,**  **the potential** 

**increase in**  **business risks**  **from an**  **increased proportion**  **of fixed**  **costs, and**  **potential**

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

12.2.3.5 Manufacturing C apacity Impact

**One o**  **f the**  **significant outcomes**  **of standards**  **could be**  **the consequential** 

**obsolescence of**  **existing manufacturing**  **assets, including**  **tooling and**  **investment. The** 

**manufacturer interview**  **guide will**  **have a**  **series of**  **questions to**  **help identify**  **impacts on** 

**manufacturing capacity,**  **specifically capacity**  **utilization and**  **plant location**  **decisions in** 

**the United**  **States and**  **North America**  **with and**  **without a**  **standard; the**  **ability of** 

**manufacturers to**  **upgrade or**  **remodel existing**  **facilities to**  **accommodate the**  **new**

**requirements; the**  **nature and**  **value of**  **stranded assets,**  **if any;**  **and estimates**  **for any**  **one**

**time restructuring**  **and other**  **charges, where**  **applicable.**

12.2.3.6 Employment I mpact

**The i**  **mpact of**  **new energy­efficiency**  **standards on**  **employment is**  **an important** 

**consideration in**  **the rulemaking**  **process. In**  **order to**  **assess how**  **domestic employment** 

**patterns might**  **be affected,**  **the interview**  **will explore**  **current employment**  **trends in**  **the**

**air­conditioning industry.**  **In addition,**  **the interview**  **will solicit**  **manufacture views**  **on**

**changes in**  **employment patterns**  **that may**  **result from**  **increased standard**  **levels. The** 

**employment impacts**  **section of**  **the interview**  **guide will**  **focus on**  **current employment** 

**levels associated**  **with manufacturers**  **at each**  **of their**  **production facilities,**  **expected future** 

**employment levels**  **with and**  **without a**  **standard, and**  **differences in**  **workforce skills**  **and**

**issues related**  **to the**  **retraining of**  **employees.**

12.2.3.7 Cumulative R egulatory Burden

**DOE r**  **ecognizes and**  **seeks to**  **mitigate the**  **overlapping effects**  **on manufacturers**  **of**

**new or**  **revised DOE**  **standards and**  **other regulatory**  **actions affecting**  **the same**  **equipment.**

**DOE will**  **analyze and**  **consider the**  **impact on**  **manufacturers of**  **multiple, equipment** 

**specific regulatory**  **actions.**

**12­4 Based**  **on its**  **own research**  **and discussions**  **with manufacturers,**  **DOE identified** 

**several regulations**  **relevant to**  **commercial refrigeration**  **equipment, including:**  **existing**

**or new**  **standards for**  **commercial refrigeration**  **equipment, hydrochlorofluorocarbon** 

**(HCFC) phaseout**  **and foam**  **insulation blowing**  **agent phaseout,**  **standards for**  **other**

**equipment made**  **by CRE**  **manufacturers, State**  **energy conservation**  **standards, and** 

**international energy**  **conservation standards.**  **DOE will**  **study the**  **potential impacts**  **of**

**these cumulative**  **burdens in**  **greater detail**  **during the**  **MIA conducted**  **during the**  **NOPR**

**phase.**

12.3 PRELIMINARY MANUFACTURER IMPACT A NALYSIS RESULTS

**During t**  **he ANOPR**  **phase, DOE**  **conducted a**  **preliminary evaluation**  **of the**  **impact**

**of potential**  **new regulations**  **on CRE**  **manufacturer financial**  **performance, manufacturing** 

**capacity and**  **employment levels,**  **and equipment**  **utility and**  **innovation. A**  **primary focus** 

**was to**  **identify the**  **cumulative burden**  **that industry**  **faces from**  **the overlapping**  **effect of** 

**new or**  **recent DOE**  **energy conservation**  **standards and/or**  **other regulatory**  **action**

**affecting the**  **same equipment**  **or industry.** 

**The p**  **rimary sources**  **of information**  **for this**  **analysis were**  **telephone interviews** 

**with manufacturers**  **of commercial**  **refrigeration equipment**  **that were**  **carried out**  **during**

**the fall**  **of 2006.**  **To maintain**  **confidentiality, DOE**  **did not**  **identify the**  **individual**

**manufacturers that**  **disclosed information.**  **Instead, the**  **evaluation only**  **reports aggregated** 

**information and**  **does not**  **disclose sensitive**  **information or**  **identify company­specific** 

**information.**

12.3.1 Impact o n Financial Performance

**DOE r**  **eceived views**  **from manufacturers**  **about what**  **they perceived**  **to be**  **the**

**possible impact**  **of potential**  **new standards**  **on their**  **future profitability.**  **As stated**  **by**

**manufacturers, a**  **new energy**  **conservation standard**  **has the**  **potential to**  **impact financial** 

**performance in**  **several different**  **ways. The**  **capital investment**  **needed to**  **upgrade or** 

**redesign equipment**  **and platforms**  **before they**  **have reached**  **the end**  **of their**  **useful life** 

**can require**  **conversion costs**  **that otherwise**  **would not**  **be expended,**  **resulting in**  **stranded**

**investments. In**  **addition, more**  **stringent standards**  **can result**  **in higher**  **per­unit costs**  **that**

**may deter**  **some customers**  **from buying**  **higher­margin units**  **with more**  **features, thereby** 

**decreasing manufacturer**  **profitability.**

12.3.1.1 Conversion C osts

**DOE e**  **stimates that**  **a CRE**  **production line**  **would have**  **a life**  **cycle of** 

**approximately 15**  **to 20**  **years in**  **the absence**  **of standards.**  **During that**  **period,**

**manufacturers would**  **not make**  **major equipment**  **changes that**  **altered the**  **underlying**

**platforms. Thus,**  **a standard**  **that took**  **effect and**  **resulted in**  **a major**  **platform redesign** 

**before the**  **end of**  **the platform’s**  **life would**  **strand a**  **portion of**  **the earlier**  **capital**

**investments.**

**12­5 DOE**  **asked manufacturers**  **what level**  **of conversion**  **costs they**  **anticipated if** 

**efficiency standards**  **were to**  **take effect.**  **In general,**  **manufacturers expected**  **only**

**conversion costs**  **associated with**  **redesigning insulation**  **foaming fixtures.**  **One**

**manufacturer estimated**  **this to**  **be approximately**  **$10 million**  **in new**  **fixtures, research,** 

**and testing.**  **Manufacturers indicated**  **there would**  **not be**  **a significant**  **amount of**  **stranded**

**assets because**  **of standards,**  **but any**  **stranded assets**  **that did**  **exist would**  **be primarily**  **in**

**the insulation**  **foaming fixtures.**  **The manufacturers**  **also indicated**  **that standards**  **would**

**have little**  **effect on**  **capacity and**  **utilization.**

12.3.1.2 Product M ix and Profitability

**DOE a**  **sked manufacturers**  **how a**  **new efficiency**  **standard would**  **affect equipment** 

**mix and**  **profitability. Manufacturers**  **replied that**  **efficiency standards**  **would have**  **a**

**significant impact**  **on the**  **equipment mix**  **of commercial**  **refrigeration equipment.**  **They**

**felt that**  **standards might**  **push the**  **equipment mix**  **of the**  **overall market**  **toward**

**commercial refrigeration**  **equipment with**  **doors and**  **away from**  **low­volume equipment.** 

**This would**  **result in**  **an overall**  **equipment mix**  **that is**  **less diverse**  **than what**  **is currently** 

**available. However,**  **manufacturers felt**  **that it**  **was very**  **difficult to**  **make accurate** 

**projections without**  **knowing the**  **level of**  **the standards.** 

**Also, m**  **anufacturers suggested**  **that standards**  **would not**  **have a**  **significant effect** 

**on profit**  **margins, since**  **they would**  **pass the**  **increase in**  **cost along**  **to the**  **customer.**

**Because the**  **majority of**  **commercial refrigeration**  **equipment sales**  **is directly**  **to the** 

**customer, there**  **are no**  **distribution markups**  **that would**  **be affected.** 

12.3.1.3 Customer M ix

**Because m**  **anufacturers would**  **pass on**  **cost increases**  **to the**  **customer, many** 

**manufacturers believed**  **that the**  **customer stood**  **to lose**  **the most**  **from a**  **new efficiency** 

**standard. Several**  **manufacturers predicted**  **that the**  **increased cost**  **of commercial** 

**refrigeration equipment**  **could squeeze**  **smaller “mom**  **and pop”**  **grocers financially,**  **and**

**could cause**  **consolidation within**  **the supermarket**  **industry. However,**  **some**

**manufacturers felt**  **there would**  **be little**  **change in**  **the customer**  **mix, thus**  **indicating the** 

**difficulty in**  **projecting these**  **trends.**

12.3.2 Impact o n U.S. Production and Jobs

**The i**  **mpact of**  **new efficiency**  **standards on**  **employment is**  **an important** 

**consideration in**  **the rulemaking**  **process. To**  **assess how**  **domestic employment**  **patterns**

**might be**  **affected by**  **new energy**  **efficiency standards**  **for commercial**  **refrigeration**

**equipment, DOE**  **posed several**  **questions related**  **to this**  **topic to**  **manufacturers.**

12.3.2.1 Foreign L abor

**Over t**  **he past**  **several years,**  **some CRE**  **manufacturers have**  **moved a**  **portion of** 

**their production**  **out of**  **the United**  **States, primarily**  **driven by**  **concerns about**  **profitability**

**and the**  **opportunity for**  **lower labor**  **costs. Mexico**  **is the**  **most common**  **location for**  **U.S.**

**manufacturers to**  **establish new**  **production capacity,**  **since it**  **offers low**  **labor rates** 

**12­6 (relative**  **to the**  **United States)**  **and proximity**  **to the**  **U.S. market.**  **Manufacturers indicated** 

**that they**  **anticipate new**  **standards will**  **accelerate the**  **trend to**  **manufacture commercial** 

**refrigeration equipment**  **outside of**  **the United**  **States. Further,**  **new standards**  **may**

**accelerate the**  **rate at**  **which CRE**  **production is**  **moved to**  **Mexico because**  **if**

**manufacturers need**  **to make**  **large capital**  **investments to**  **produce redesigned**  **platforms,**

**they have**  **strong financial**  **incentives to**  **invest in**  **a location**  **with lower**  **labor costs.** 

12.3.2.2 Industry C onsolidation

**Manufacturers i**  **ndicated that**  **new standards**  **could cause**  **them to**  **exit one**  **or more** 

**portions of**  **the markets**  **affected by**  **the standards.**  **Thus, standards**  **could affect**  **the degree** 

**to which**  **a limited**  **number of**  **companies dominate**  **a market.**  **At present,**  **four companies** 

**account for**  **a large**  **majority of**  **CRE sales.** 

**DOE a**  **sked manufacturers**  **to what**  **degree they**  **expected industry**  **consolidation to** 

**occur in**  **the absence**  **of standards.**  **In general,**  **manufacturers felt**  **that there**  **would be**  **little**

**industry consolidation**  **in the**  **future. Historically,**  **the commercial**  **refrigeration industry** 

**has not**  **seen extensive**  **consolidation, although**  **several manufacturers**  **have been**  **bought**

**and sold**  **by parent**  **companies in**  **the past.** 

12.3.3 Impact o n Product Utility and Innovation

**DOE u**  **nderstands that**  **new standards**  **can impact**  **purchasers of**  **commercial**

**refrigerators and**  **commercial freezers**  **by increasing**  **or decreasing**  **the utility**  **of such** 

**equipment, e.g.,**  **the interior**  **volume or**  **non­energy­related features.**  **Manufacturers**

**generally believed**  **that more**  **stringent energy**  **efficiency standards**  **would decrease** 

**innovations and,**  **in some**  **cases, result**  **in reduced**  **equipment utility.** 

**DOE a**  **sked manufacturers**  **how a**  **new efficiency**  **standard would**  **affect**

**innovation. Some**  **manufacturers stated**  **that more**  **stringent standards**  **would require** 

**redesigning some**  **portion of**  **their equipment**  **lines. In**  **turn, this**  **would consume**  **research**

**and development**  **resources, both**  **human and**  **financial, and**  **directs these**  **assets away**  **from**

**other potential**  **investments that**  **would normally**  **go toward**  **enhancing the**  **functionality of** 

**existing equipment**  **or developing**  **new equipment.**  **They pointed**  **out that**  **their primary** 

**customers (major**  **supermarket chains)**  **drive innovation**  **by demanding**  **unique equipment,** 

**and standards**  **could hurt**  **a manufacturer’s**  **ability to**  **meet customer**  **demands for** 

**customized equipment.**  **Other manufacturers**  **asserted that**  **standards would**  **spur technical** 

**innovation, leading**  **to advancements**  **in air­curtain**  **design, and**  **other case**  **features.**

12.3.4 Cumulative B urdens

**Based o**  **n its**  **own research**  **and discussions**  **with manufacturers,**  **DOE identified** 

**several regulations**  **relevant to**  **commercial refrigeration**  **equipment, including:** 

• **Existing o**  **r new**  **standards for**  **commercial refrigeration**  **equipment;**

• **Phaseout o**  **f HCFC**  **refrigerants and**  **foam insulation**  **blowing agents;** 

• **Standards f**  **or other**  **equipment made**  **by CRE**  **manufacturers;**

**12­7**• **State e**  **nergy conservation**  **standards; and** 

• **International e**  **nergy conservation**  **standards.**

**Complying w**  **ith such**  **regulations requires**  **corporations to**  **invest both**  **human and** 

**capital resources.**  **The following**  **subsections discuss**  **in greater**  **detail regulations** 

**impacting the**  **CRE industry.** 

**Also, D**  **OE considers**  **the possibility**  **of small**  **businesses being**  **particularly**

**impacted by**  **the promulgation**  **of minimum**  **efficiency standards**  **for commercial** 

**refrigeration equipment.**  **In the**  **market and**  **technology assessment**  **(chapter 3)**  **of the** 

**Technical Support**  **Document (TSD),**  **DOE identified**  **a number**  **of small**  **businesses, as** 

**defined by**  **the Small**  **Business Administration**  **(SBA).**

**DOE w**  **ill study**  **the potential**  **impacts of**  **these cumulative**  **burdens and**  **impacts to** 

**small businesses**  **in greater**  **detail during**  **the MIA,**  **which it**  **will conduct**  **as a**  **part of**  **the**

**NOPR analysis.** 

12.3.4.1 Hydrochlorofluorocarbon P haseout and Foam Insulation Blowing

Agent Phaseout

**Due t**  **o the**  **phase­out of**  **chlorofluorocarbons (CFCs)**  **and HCFCs,**  **the commercial** 

**refrigeration industry**  **must transition**  **to non­ozone­depleting**  **refrigerants. As**  **a result,**  **the**

**refrigeration industry**  **is transitioning**  **to hydrofluorocarbon­based**  **(HFC­based)**

**refrigerants in**  **its equipment.**  **For the**  **remote condensing**  **and self­contained**  **equipment**

**covered in**  **this rulemaking,**  **DOE understands**  **that most**  **of the**  **industry has**  **already been** 

**using HFC­based**  **refrigerants such**  **as HFC­134a**  **and HFC­404a.** 

**Production o**  **f foam**  **insulation uses**  **a blowing**  **agent. The**  **Environmental**

**Protection Agency’s**  **(EPA) strategy**  **for meeting**  **U.S. obligations**  **under the**  **Montreal**

**Protocol requires**  **the United**  **States to**  **phase out**  **the production**  **and use**  **of HCFC**  **blowing**

**agents. For**  **example, the**  **United States**  **phased out**  **HCFC­141b on**  **January 1,**  **2003.**

**Further, import**  **of HCFC­141b**  **is prohibited**  **and production**  **of HCFC­141b**  **may only** 

**continue in**  **the United**  **States for**  **export to**  **other countries**  **with a**  **later phaseout**  **date, such** 

**as Mexico.**  **HCFC­22 and**  **HCFC­142b will**  **be phased**  **out on**  **January 1,**  **2010. This** 

**impacts equipment**  **produced in**  **the United**  **States and**  **causes manufacturers**  **to switch**  **to**

**other blowing**  **agents with**  **zero ozone**  **depletion potential**  **(ODP). One**  **CRE manufacturer** 

**estimated the**  **required investment**  **to be**  **approximately $500,000.**  **An example**  **of a**  **zero**

**ODP blowing**  **agent is**  **HFC­245fa. Only**  **one company,**  **however, produces**  **HFC­245fa**

**for the**  **U.S. market.**  **This represents**  **a significant**  **challenge for**  **manufacturers to**  **control**

**equipment costs**  **and avoid**  **future production**  **disruptions. Alternative**  **blowing agents** 

**such as**  **HFC­134a or**  **cyclopentane have**  **other drawbacks,**  **such as**  **lower thermal** 

**resistance or**  **increased implementation**  **costs due**  **to flammability.** 

**12­8**12.3.4.2 Standards f or Other Products Made by Commercial Refrigeration

Equipment Manufacturers

**In a**  **ddition to**  **the efficiency**  **regulations on**  **commercial refrigeration**  **equipment,**

**several other**  **Federal regulations**  **and their**  **pending regulations**  **apply to**  **other equipment** 

**made by**  **CRE manufacturers.**  **For example,**  **some manufacturers**  **in the**  **commercial**

**refrigeration industry**  **are subsidiaries**  **of larger**  **parent companies**  **that manufacture** 

**equipment, such**  **as heating,**  **ventilating and**  **air­conditioning (HVAC)**  **equipment that**  **is**

**subject to**  **Federal regulations.**  **The HVAC**  **industry must**  **address the**  **EPA­mandated**

**phaseout of**  **HCFC refrigerants**  **in their**  **equipment as**  **well. DOE**  **will investigate**  **these**

**cumulative regulatory**  **burdens in**  **greater detail**  **during the**  **MIA analysis**  **in the**  **NOPR**

**phase of**  **the rulemaking.** 

12.3.4.3 State E nergy Conservation Standards

**DOE i**  **dentified and**  **described regulatory**  **programs at**  **the State**  **level in**  **Chapter 3** 

**of the**  **TSD for**  **the equipment**  **covered in**  **this rulemaking.**  **For example,**  **the California** 

**Energy Commission**  **regulates commercial**  **ice­cream freezer**  **energy consumption.**  **Other**

**States have**  **requirements for**  **other types**  **of commercial**  **refrigeration equipment**  **not**

**covered under**  **this rulemaking.**  **Most manufacturers**  **have equipment**  **lines that**  **include**

**equipment under**  **both categories.** 

12.3.4.4 International E nergy Conservation Standards

**DOE a**  **ddressed regulatory**  **programs from**  **certain other**  **countries, such**  **as Canada** 

**and Australia,**  **in Chapter**  **3 of**  **the TSD**  **for commercial**  **refrigeration equipment.**  **Most**

**CRE manufacturers**  **sell a**  **small portion**  **of their**  **total production**  **to countries**  **besides the** 

**United States.**  **In such**  **cases, the**  **equipment must**  **meet the**  **standards for**  **each of**  **those**

**countries. Companies**  **may design**  **some units**  **to meet**  **standards that**  **are more**  **stringent**

**than those**  **imposed by**  **the United**  **States to**  **minimize the**  **number of**  **equipment variations.** 

12.3.4.5 Impact o f Cumulative Burden on Small Manufacturers

**In C**  **hapter 3**  **of the**  **TSD, DOE**  **identified a**  **number of**  **small businesses**  **as defined** 

**by the**  **SBA. The**  **SBA defines**  **small business**  **manufacturing enterprises**  **for commercial** 

**refrigeration equipment**  **as having**  **750 employees**  **or fewer.**  **SBA lists**  **small business**  **size**

**standards that**  **are matched**  **to industries**  **as they**  **are described**  **in the**  **North American** 

**Industry Classification**  **System (NAICS).**  **A size**  **standard is**  **the largest**  **that a**  **for­profit**

**concern can**  **be and**  **still qualify**  **as a**  **small business**  **for Federal**  **Government programs.** 

**Size standards**  **are generally**  **based on**  **the average**  **annual receipts**  **or the**  **average number** 

**of employees**  **at a**  **firm. For**  **commercial refrigeration**  **equipment, the**  **size standard**  **is**

**matched to**  **NAICS code**  **333415, Air­Conditioning**  **and Warm**  **Air Heating**  **Equipment**

**and Commercial**  **and Industrial**  **Refrigeration Equipment**  **Manufacturing, which**  **has a**  **size**

**standard of**  **750 employees.** 

**The m**  **anufacturer interviews**  **indicated that**  **smaller CRE**  **manufacturers typically** 

**have smaller**  **corporate research**  **and development**  **staff than**  **do larger**  **manufacturers.**

**Smaller manufacturers**  **tend to**  **produce niche**  **or specialty**  **equipment and**  **focus on** 

**12­9 providing**  **equipment that**  **other larger**  **manufacturers do**  **not produce.**  **Although small** 

**manufacturers often**  **have a**  **more limited**  **product range**  **than larger**  **manufacturers, the** 

**effort to**  **address some**  **aspects of**  **regulations are**  **relatively fixed**  **and do**  **not scale**  **directly**

**with the**  **number of**  **products or**  **product platforms**  **produced. Consequently,**  **the**

**cumulative burden**  **of regulations**  **will tend**  **to place**  **more of**  **a burden**  **on smaller** 

**manufacturers because**  **of their**  **more limited**  **resources.**

**DOE w**  **ill study**  **the potential**  **impacts to**  **these small**  **businesses in**  **greater detail** 

**during the**  **MIA as**  **a part**  **of the**  **NOPR analysis.** 

**12­10**