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U. S. Department of Justice

Antitrust Division

City Center Building

1401 H Street. NW

Wa.chingloa. DC 20530

September 16, 1994

Honorable Christine A. Ervin Assistant Secretary for Energy Efficiency and Renewable Energy
united States Department of Energy Forrestal Building 1000 Independence Ave., S.W. Washington, D.C. 20585

Dear Ms. Ervin:

By letter dated March 14, 1994, the Department of Energy ("DOE") transmitted to the Attorney General a Notice of Proposed Rulemaking (59 FR 10464) addressing energy standards for eight classes of household appliances. Those classes are: room air conditioners, water heaters, direct heating equjpment, mobile home furnaces, kitchen ranges and ovens, pool heaters, fluorescent lamp ballasts and television sets. Section 325 of the Energy Policy and Conservation Act, as amended in 1992 (42 U.S.C. 6295), ("the Act") requires the Attorney General to determine the impact, if any, of any lessening of. competition likely to result from the proposed standards.. This letter contains the competitive impact determination of the Department of Justice. ("Department")

Summary

The evidence available to the Department does not ±ndiate that any significant lessening of competition is likely to result from the imposition of the proposed standards for mobile home furnaces and pool heaters contained in the Notice. For television sets, fluorescent lamp ballasts and professional-style or high-end kitchen ranges it is the Department's judgement based p the available evidence that significant anticompetitive effects are likely to occur. For electric water heaters the evidence indicates that a significant anticompetitive effect could.take place if sufficient time is not permitted firms to develop, produce and market products complying with the new standard. For microwave ovens, oil-fired water heaters, room air conditioners, and direct heating equipment the evidence indicates that anticompetitive effects could result; the Department isunable on the basis of the available evidence to determine whether such effects are likely. Finally, the evidence indicates that the cumulative effects of these and other regulatory standards could be to lessen competition in certain market for household appliances. -

In preparing these •comments the Department has considered the Notice, the Technical Support Document (TSD) prepared by Lawrence Berkeley Laboratory, written comments and oral comments offered in this proceeding and other information that could be collected by the Department in the time allowed and without the benefit of compulsory process.

Discussion

Adoption of standards requiring greater energy efficiency in household appliances could affect competition in a nunther of ways. First, by raising the cost of appliances and reducing design and feature choices, standards may lower demand. If standards impose costs on manufacturers that can not be passed on to consumers they can lower manufacturers' rates of return. Either one or both of these effects could cause manufacturers to exit the market with the effect of lessening competition and raising prices. Second, imposition of standards may lessen or discourage competition in the design and development of new - product features or technologies; such competition benefits consumers and the economy.

The record in this proceeding raises many factual issues relating, among other things, to the technical feasibility of certain standards, their economic impact on manufacturers and consumers and consumer reaction to the changes in products that they might require. In numerous instances, industry representatives and technical consultants retained by them have challenged assumptions and conclusions in the Notice and TSD. The Department is not in a position to resolve many of these contested issues on the basis of the available record. Accordingly, in some instances,, the Department is unable- toreach a conclusion about the impact of the proposed standards on competition.

Fluorescent Lamp Ballasts One technical issue that has been raised is whether the proposed standards for fluorescent lamp ballasts are attainable with currently available technology. Numerous ballast manufacturers assert that in many instances they are not. The Department concludes that the doubts raised about the technical feasibility of the standards are serious and -affect a substantial nunther of ballast classes. Thus, if the proposed standards were adopted some or all manufacturers would likely have to cease the

2production of many products and competition in the sale of those products would cease or diminish.

Television Sets and Related Technologies The weight of available evidence is that adoption of the proposed standard for television sets could force all or many manufacturers to revise their products to lessen the number and quality of their features. Many in the industry contend that the only way to produce products that will comply with the standard would be to reduce or eliminate features that consume electricity such as brighter pictures, remote control, picture-in-picture, improved sound and in-set program guides and other features presentlybeing developed. Development an& marketing of product improvements and new features has been an important factor driving competition in the market for television sets. Reducing or retarding the development of such features could substantially reduce demand for sets, retard development and refinementof technology, and reduce utility of the product.

Manufacturers might attempt to circumvent the proposed standard by letting features "migrate" - - incorporating them in units to be sold separately or packaged with television sets. It is claimed that disaggregating features in this manner will decrease overall television, energy efficiency., There is evidence that it could also lessen competition because the development and marketing of features in such attached units could be costly and cumbersome, among other things encountering resistance from consumers and problems of access to television receivers that receive cable signals.

There is evidence that the proposed standard for television sets could affect competition in other markets. Representatives of the television industry assert that as the "Information Highway" develops television manufacturers intend to expand the capabilities of their products to include new features to enable them to serve as in-home devices for data transmission and communication. They argue that the TV receiver, already located in virtually every J1⁄2merican home, could be a uniquely ef{icient vehicle for the introduction of new data-processing and communication devices. The Department does not make a final judgement on this contention but does conclude that, given the apparent difficulties in the marketing of new features as part of attached units, the standard is likely to retard the development of technology and inhibit the ability of television manufacturers to compete with computer manufacturers and others in the development of new technologies and features for the Information Highway.

Professional-Style and Standard Ranges The Notice proposes a single set of standards for gas ovens and cooking tops in household ranges. There is substantialevidence that one category of home range cannot be manufactured to meet these proposed standards without losing-so much of its distinct characteristics that it is no longer marketable. Professional-style or high-end ranges are products designed to provide some of the performance characteristics of professional or restaurant ranges for home kitchens. Some of these. characteristics which differentiate them from standard kitchen ranges, such as high performance burners and ovens, involve considerably more energy consumption than do standard ranges; the special uses and appeal of these products, and their premium in price, depends in good measure on these features. Representatives of the range industry assert that high-end ranges cannot be modified to comply with the proposed standards without giving up so much of the special features of the product that they are no longer marketable. The Department concludes that it is likely that competition in the manufacture and sale of these products will be eliminated if the proposed standards are adopted.

While not as strong as the evidence relating to professional style, ranges there is evidence challenging the conclusions in the TSD that the proposed standards for standard gas and electric range ovens and cooking tops will not require significant retooling or redesign and will have no more than minimal impact on manufacturers' long run rates of return on equity. The Association of Home Appliance Manufacturers - contends that the standard could have a destructive impact on the range industry. It and various range manufacturers claim that. design options suggested in the TSD are not effective and that compliance would require substantial investments in redesign and retooling. The Association also insists that suppliers of equipment and technology necessary to comply may not be able, to respond simultaneously and evenly to range manufacturers, a problem that could impose a competitive handicap on some range

manufacturers.

A range manufacturer has commented that compliance with the standard could seriously weaken.it and its ability to compete. There is also evidence that the cumulative costs of compliance : with, this standard and with other and future appliance standards could induce or force "full line" appliance manufacturers to exit one or more of the markets that they serve. The range market is concentrated and, while there is conflicting evidence, the Department concludes that there is a possibility that this proposed standard could force one or more firms out of the manufacture of standard ranges thus lessening competition.

Microwave' Ovens . .. . The Notice and the TSD conclude that the proposed ,standard for microwave ovens will not involve any substantial redesign or retooling by manufacturers and will have little, impact on their

4long-run returns on equity. Representatives of the industry strongly challenge these conclusions. For example, a representative of MCD Corporation has testified that compliance with the standard would require that her company, a manufacturer of microwaves, make large investments in retooling, and would threaten its viability. The Association of Home Appliance Manufacturers contends that the standard will in all likelihood eliminate all U.S production of microwaves and concentrate U.S. sales in the hands of one or two companies. The Department is not in a position to resolve all of the contested technical and financial issues but concludes that this proposed standard could force some significant producers from this concentrated market and substantially lessen competition in it.

Room Air Conditioners

- The Notice and TSD conclude that this proposed standard will not involve substantial redesign or retooling and, while it may produce some reductions in the short run, will have little or no effect on manufacturers' long run returns on equity. This conclusion has been challenged by firms in the industry. There is evidence that some of the design- options suggested in the Notice are less effective and-more costly than the TSD assumes and that manufacturers may, among other things, need to redesign the chassis of some classes to comply with the standard. Such redesigns could add to unit installation costs, make units larger and more cumbersome to install, and otherwise depress demand. There is evidence that at least one product, the five thousand BTU unit, may cease to be manufactured if the standard is adopted. There are also unresolved issues about such matters as the availability and efficacy of some design options suggested in the TSD. - The Department is not able to resolve these issues but concludes that the standard could have a substantial negative impact on demand and rates of return, and cause one or more firms to cease the manufacture and sale of some of these products, thus lessening competition.

Direct Heating Equipment Manufacturers of direct heating equipment contend that-' this standard will-seriously depress demand for their product and likely force some, perhaps all, manufacturers out of this - business. Among other things, they contend that the TSD substantially underestimates the added costs of manufacture, and also the added installation costs for venting and-wiring, that will be required. They insist that consumer cost increases will seriously depress demand for their product and that their profit margins will suffer because it will be impossible to pass on much of the increased manufacturing costs to consumers. The Department can not resolve many of these issues but concludes that there is a possibility that several of the five companies that account for most of the production of these products might

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exit the market if the standard is adopted thus substantially lessening competition.

Water Heaters Manufacturers of oil-fired water heaters contend that the proposed standard for their product class would threaten.the survival of the product,' likely forcing all or most producers out of this business. Some claim that 'it may not be possible with presently avajiable technology to design and manufacture a product that would comply. Manufacturers assert that the added costs of producing a product in compliance with the standard would, in any event, be considerably higher than the TSD indicates and that increases in price woul& very seriously depress consumer demand for this product. Five firms, two of them Canadian producers, account for most of the sales of this product in the U.S. The Department is not able to resolve all the questions raised regarding this standard; it concludes that there is at least a possibility that the standard might force one or more of these competitors to exit the U.S. market. Another firm has been taking steps to enter the oil-fired water heater market; adoption of the standard may deter it from doing so. The loss of one such firm could result in a substantial lessening of competition.

DOE's proposed standard for electric water heaters would, in effect, require that such products have an integral heat pump.. DOE concedes that this would involve major changes and might cause one or more existing firms to cease the marketing of electric water heaters but believes that other firms such as air conditioner manufacturers may begin producing electric •water heaters as a result of the standard. There are complex and unresolved issues as to what would happen to demand for electric water heaters if consumers were required to purchase heat pumps with them. It seems clear that the price of such units will be considerably higher than that of the electric resistance heater that the standard would remove from the market, but the range of future prices, costs of installation and maintenance and degree of consumer acceptance of a product that has not been wi-dely accepted until now are very difficult to predict. Heat pump water heaters may be useful and economically attractive to many consumers but serious issues have been raised in this proceeding as to whether certain kinds of consumers, such as households with relatively little demand for hot water, will derive a benefit from the product.

Even if the heat pump water heater is eventually widely accepted in the market the Department has concluded that it is likely that competition will be adversely affected for some • period of time if adequate time is not permitted for the phasing in of the standard. Three million units or more of electric resistance units are now sold annually in the U.S. Only a few

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thousand heat pump units are now produced annually in this country, by two firms. It could take a considerable time for other firms to design new product lines and bring substantial new production capacity on line. There is also evidence from those with experience with the product that heat pump water heaters require special maintenance and servicing. Considerable time may be required for firms to develop and train adequate distribution and service networks if they are to compete effectively. If adequate time for phasing in the standard is not allowed, for a considerable period of time there could be fewer companies competing effectively in the electric water heater business than there are now, and competition in this concentrated market could be substantially lessened.

Cumulative Effects of Regulations Many of the manufacturers of appliances subject to the proposed standards manufacture several different types of appliance, each subject to those standards or to others authorized by the Act. As indicated above, there is evidence that compliance with some of these standards may require manufacturers to make considerable investments. It is anticipated that future standards for other appliances could require manufacturers to
make similar investments. Full-line manufacturers such as General Electric, Whirlpool, Frigidaire, Amana and Maytag could thus be required to make changes in several product lines.

As the TSD recognizes, it is difficult for manufacturers to pass redesign and retooling costs on to consumers. And the impact of a single product redesign may fall more heavily on firms with small shares of the market since they must write off
their costs against less sales volume. There is some evidence that firms, particularly the smaller ones, facing the prospect of repeated redesigns involving several different products, may be induced to cease manufacturing one or more of such product lines. Thus to a degree that we 'can not fully assess there is a possibility that the cumulative effect of these and future energy efficiency standards could be to lessen competition in one or more home appliance markets. - . , -

Anne K. Bingaman -

Assistant Attorney General

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