t (

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 is

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unable 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

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production 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 substantial

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evidence 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

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long-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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.J.; .

• *4'.

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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