12-i 

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION .......................................................................................................... 12-1

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

12.2.1 Phase I: Industry Profile .......................................................................................... 12-2

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

12.2.2.1 Industry Cash-Flow Analysis ........................................................................... 12-3

12.2.2.2 Interview Guides .............................................................................................. 12-3

12.2.3 Phase III: Subgroup Analysis .................................................................................. 12-4

12.2.3.3 Manufacturing Interviews ................................................................................ 12-4

12.2.3.4 Revised Industry Cash-Flow Analysis ............................................................. 12-4

12.2.3.6.1 Small-Business Manufacturer Subgroup ...................................................... 12-5

12.2.3.7 Manufacturing Capacity Impact ....................................................................... 12-6

12.2.3.8 Employment Impact ......................................................................................... 12-6

12.2.3.9 Cumulative Regulatory Burden ........................................................................ 12-6

12.3 Manufacturer Impact Analysis Key Issues ..................................................................... 12-6

12.3.1 Conversion costs and stranded assets ...................................................................... 12-6

12.3.2 Shortage of Materials ............................................................................................... 12-7

12.3.3 Compliance and Enforcement ................................................................................. 12-8

12.3.4 Effective Date .......................................................................................................... 12-8

12.3.5 Size and Weight Constraints .................................................................................... 12-8

12.3.6 Emergency Situations .............................................................................................. 12-8

12.4 GRIM INPUTS AND ASSUMPTIONS ......................................................................... 12-9

12.4.1 Overview of the GRIM ............................................................................................ 12-9

12.4.2 Sources for GRIM Inputs ........................................................................................ 12-9

12.4.2.1 Corporate Annual Reports .............................................................................. 12-10

12.4.2.2 Standard and Poor Credit Ratings .................................................................. 12-10

12.4.2.3 Shipment Model ............................................................................................. 12-10

12.4.2.4 Engineering Analysis ..................................................................................... 12-10

12.4.2.5 Manufacturer Interviews ................................................................................ 12-11

12.4.3 Financial Parameters .............................................................................................. 12-11

12.4.4 Corporate Discount Rate ....................................................................................... 12-13

12.4.5 Trial Standard Levels ............................................................................................. 12-15

12.4.6 NIA Shipment Forecast ......................................................................................... 12-17

12.4.7 Production Costs .................................................................................................... 12-18

12.4.8 Conversion Costs ................................................................................................... 12-23

12.4.8.1 Liquid Immersed Distribution Transformers ................................................. 12-23

12.4.8.1.1 Capital Conversion Expenditures ............................................................... 12-23

12.4.8.1.1.1 Uncertainty Associated with Amorphous Demand.................................... 12-26

12.4.8.1.2 Product Conversion Expenses .................................................................... 12-27

12.4.8.2 Dry Type Transformers .................................................................................. 12-29

12.4.8.2.1 Capital Conversion Expenditures ............................................................... 12-29

12.4.8.2.2 Product Conversion Expenses .................................................................... 12-30
12-ii

12.4.9 Markup Scenarios .................................................................................................. 12-31

12.4.9.1 Preservation of Gross Margin Percentage Markup Scenario ......................... 12-31

12.4.9.2 Preservation of Operating Profit Markup Scenario ........................................ 12-31

12.5 INDUSTRY FINANCIAL IMPACTS ......................................................................... 12-32

12.5.1 Impacts on Industry Net Present Value ................................................................. 12-32

12.5.2 Impacts on Annual Cash Flow............................................................................... 12-34

12.6 IMPACTS ON MANUFACTURER SUBGROUPS .................................................... 12-42

12.6.1 Impacts on Small Business Manufacturers ............................................................ 12-42

12.6.1.1 Description and Estimated Number of Small Entities Regulated .................. 12-42

12.6.1.2 Comparison Between Large and Small Entities ............................................. 12-44

12.6.1.3 Description and Estimate of Compliance Requirements................................ 12-45

12.7 OTHER IMPACTS ....................................................................................................... 12-47

12.7.1 Employment........................................................................................................... 12-47

12.7.2 Production Capacity .............................................................................................. 12-48

12.7.3 Cumulative Regulatory Burden ............................................................................. 12-49

12.7.3.1 Federal Regulations on Distribution Transformer Manufacturers ................. 12-50

12.7.3.2 Foreign Regulations on Distribution Transformer Manufacturers ................. 12-50

12.8 CONCLUSION ............................................................................................................. 12-50

LIST OF TABLES

Table 12.2-1 SBA and NAICS Classification of Small Businesses Potentially Affected 

by This Rulemaking ................................................................................................................... 12-5

Table 12.4-1 GRIM Financial Parameters Based on 2005–2010 Weighted Company 

Financial Data .......................................................................................................................... 12-12

Table 12.4-2 GRIM Revised Distribution Transformer Industry Financial Parameters ......... 12-13

Table 12.4-3 Cost of Equity Calculation ................................................................................. 12-14

Table 12.4-4 Cost of Debt Calculation .................................................................................... 12-15

Table 12.4-5 Trial Standard Levels for Liquid Immersed Distribution Transformers ............ 12-16

Table 12.4-6 Trial Standard Levels for Low-Voltage Dry-Type 

Distribution Transformers ........................................................................................................ 12-16

Table 12.4-7 Trial Standard Levels for Medium-Voltage Dry-Type 

Distribution Transformers ........................................................................................................ 12-17

Table 12.4-8 Manufacturer Production Cost Breakdown ($2011) for Design Line 1 ............. 12-18

Table 12.4-9 Manufacturer Production Cost Breakdown ($2011) for Design Line 2 ............. 12-19

Table 12.4-10 Manufacturer Production Cost Breakdown ($2011) for Design Line 3 ........... 12-19

Table 12.4-11 Manufacturer Production Cost Breakdown ($2011) for Design Line 4 ........... 12-19

Table 12.4-12 Manufacturer Production Cost Breakdown ($2011) for Design Line 5 ........... 12-20

Table 12.4-13 Manufacturer Production Cost Breakdown ($2011) for Design Line 6 ........... 12-20

Table 12.4-14 Manufacturer Production Cost Breakdown ($2011) for Design Line 7 ........... 12-20

Table 12.4-15 Manufacturer Production Cost Breakdown ($2011) for Design Line 8 ........... 12-21

Table 12.4-16 Manufacturer Production Cost Breakdown ($2011) for Design Line 9 ........... 12-21

Table 12.4-17 Manufacturer Production Cost Breakdown ($2011) for Design Line 10 ......... 12-21

Table 12.4-18 Manufacturer Production Cost Breakdown ($2011) for Design Line 11 ......... 12-22

Table 12.4-19 Manufacturer Production Cost Breakdown ($2011) for Design Line 12 ......... 12-22
12-iii

Table 12.4-20 Manufacturer Production Cost Breakdown ($2011) for Design Line 13A ...... 12-22

Table 12.4-21 Manufacturer Production Cost Breakdown ($2011) for Design Line 13B ...... 12-23

Table 12.4-22 Summary of Liquid-Immersed Distribution Transformer Conversion 

Capital Expenditures ................................................................................................................ 12-26

Table 12.4-23 Summary of Product Conversion Expenditures for Liquid 

Immersed Industry ................................................................................................................... 12-28

Table 12.4-24 Product and Capital Conversion Costs for Design Line 1 by TSL................... 12-28

Table 12.4-25 Product and Capital Conversion Costs for Design Line 2 by TSL................... 12-28

Table 12.4-26 Product and Capital Conversion Costs for Design Line 3 by TSL.................. 12-28

Table 12.4-27 Product and Capital Conversion Costs for Design Line 4 by TSL.................. 12-28

Table 12.4-28 Product and Capital Conversion Costs for Design Line 5 by TSL.................. 12-29

Table 12.4-29 Summary of Low Voltage Dry Type Distribution Transformer Capital 

Conversion Expenditures ......................................................................................................... 12-30

Table 12.4-30 Summary of Medium Voltage Dry Type Distribution Transformer Capital 

Conversion Expenditures ......................................................................................................... 12-30

Table 12.4-31 Summary of Product Conversion Expenditures for the Low-Voltage 

Dry-Type Industry ................................................................................................................... 12-30

Table 12.4-32 Summary of Product Conversion Expenditures for the Medium Voltage 

Dry Type Industry .................................................................................................................... 12-31

Table 12.5-1 Changes in Industry Net Present Value for Liquid-immersed Distribution 

Transformers - Preservation of Operating Profit Markup Scenario......................................... 12-32

Table 12.5-2 Changes in Industry Net Present Value for Liquid-immersed Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario .......................... 12-33

Table 12.5-3 Changes in Industry Net Present Value for Low-Voltage Dry-Type 

Distribution Transformers - Preservation of Operating Profit Markup Scenario .................... 12-33

Table 12.5-4 Changes in Industry Net Present Value for Low-Voltage Dry-Type Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario .......................... 12-33

Table 12.5-5 Changes in Industry Net Present Value for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Operating Profit Markup Scenario .................... 12-34

Table 12.5-6 Changes in Industry Net Present Value for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Gross Margin Percentage Markup Scenario ...... 12-34

Table 12.6-1 Estimated Product Conversion Costs as a Percentage of Annual R&D Expense . 12-

45

Table 12.6-2 Estimated Capital and Product Conversion Costs as a Percentage of Annual 

Capital Expenditures and R&D Expense ................................................................................. 12-46

Table 12.6-3 Estimated Capital and Product Conversion Costs as a Percentage of Annual 

Capital Expenditures and R&D Expense ................................................................................. 12-47

LIST OF FIGURES

Figure 12.4-1 Using the GRIM to Calculate Cash Flow ........................................................... 12-9

Figure 12.4-2 Capital Conversion Cost Methodology for Liquid Immersed Distribution 

Transformers ............................................................................................................................ 12-24
12-iv

Figure 12.5-1 Annual Industry Free Cash Flows for Liquid-immersed Distribution Transformers 

- Preservation of Gross Margin Percentage Markup Scenario................................................. 12-36

Figure 12.5-2 Annual Industry Free Cash Flows for Liquid-immersed Distribution Transformers 

- Preservation of Operating Profit Markup Scenario ............................................................... 12-37

Figure 12.5-3 Annual Industry Free Cash Flows for Low-Voltage Dry-Type Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario .......................... 12-38

Figure 12.5-4 Annual Industry Free Cash Flows for Low-Voltage Dry-Type Distribution 

Transformers - Preservation of Operating Profit Markup Scenario......................................... 12-39

Figure 12.5-5 Annual Industry Free Cash Flows for Medium-Voltage Dry-Type Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario .......................... 12-40

Figure 12.5-6 Annual Industry Free Cash Flows for Medium-Voltage Dry-Type Distribution 

Transformers - Preservation of Operating Profit Markup Scenario......................................... 12-41
12-1 

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining 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. 6312(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 conservation standards on manufacturers of 

distribution transformers, 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 relies on the Government Regulatory Impact Model (GRIM), an industry cash-flow 

model adapted for the equipment 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. 

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of 

preparing an industry characterization for the distribution transformer 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 distribution transformers. 

In Phase II, DOE created a GRIM for distribution transformers and an interview guide to 

gather information on the potential impacts on manufacturers. DOE presented the MIA results 

for distribution transformers based on a set of considered TSLs. These TSLs are described in 

Section 12.4.5 below. 

In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers representing 

65 percent of liquid-immersed transformer sales, 75 percent of medium-voltage dry-type 

transformer sales, and 50 percent of low-voltage dry-type transformer sales. Interviewees 

included large and small manufacturers with various market shares and market focus, providing a 

representative cross-section of the industries. During interviews, DOE discussed financial topics 

specific to each manufacturer and obtained each manufacturer’s view of the industry. The 

interviews provided DOE with valuable information for evaluating the impacts of amended 

energy conservation standards on manufacturer cash flows, investment requirements, and 

employment. 
12-2 

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the distribution transformer industry 

that built upon the market and technology assessment prepared for this rulemaking (see Chapter 

3 of this Technical Support Document). 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, unit shipments, manufacturer markups, 

and the cost structure for various manufacturers. The industry profile includes: (1) further detail 

on the overall market and equipment characteristics; (2) estimated manufacturer market shares; 

(3) financial parameters 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 analysis of 

distribution transformer 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 initial characterization of the 

distribution transformer industry, including Securities and Exchange Commission (SEC) 10–K 

reports, Standard & Poor’s (S&P) stock reports, and corporate annual reports. DOE 

supplemented this public information with data released by privately held companies. 

12.2.2 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 distribution transformers. More stringent energy conservation 

standards can affect manufacturer cash flows in three distinct ways: (1) create a need for 

increased investment, (2) raise production costs per unit, and (3) alter revenue due to higher perunit prices and/or possible changes in sales volumes. To quantify these impacts, DOE used the 

GRIM to perform a cash-flow analysis for distribution transformers. 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. 

In Phase II, DOE grouped the cash flow results for design lines made by the same sets of 

manufacturers serving the same markets to assess the impacts of amended energy conservation 

standards with more granularity. DOE presented the MIA cash flow results for this rulemaking in 

three classes: liquid-immersed transformers, medium-voltage dry type transformers, and lowvoltage dry type transformers. The Department believes that modeling the industry in separate 

”superclasses” offers a robust analytical approach for three reasons:

1. Customer profiles and market mechanisms – Generally, the profiles of the majority of 

customers purchasing transformers and the manner in which they are built and sold within each 

of the superclasses are distinct. Discussion of customer profiles and distribution chains can be 

found in the LCC analysis (Chapter 11 of the TSD).

2. Manufacturing equipment and transformer design – The equipment necessary for 

production and the methods by which manufacturers build transformers are different for each of 
12-3 

the superclasses. For example, in the liquid-immersed superclass, transformer cores tend to be 

wound, requiring distributed gap core winding machines, annealing furnaces, tanking machines, 

and other equipment that is commonly used in this superclass. Accordingly, the capital 

equipment investment necessary for compliance with a particular TSL typically differs between 

the superclasses. 

3. Industry structure – Reviewing the database of transformer manufacturers, the 

Department observed that many companies operate and specialize in one of the distribution 

transformer superclasses. For large companies that operate in more than one superclass, each 

manufacturing facility tends to be dedicated to producing transformers from one of the 

superclasses. Thus, the industry naturally breaks down into three superclasses. 

12.2.2.1 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 costs from the engineering analysis and 

information provided by the industry and estimated typical manufacturer markups 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 Chapter 9 of the 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 projections 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. 

12.2.2.2 Interview Guides

During Phase III of the MIA, DOE interviewed 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 distribution transformer 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 received 

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) key issues to this rulemaking; (2) company overview and 

organizational characteristics; (3) manufacturer markups and profitability; (4) distribution 

channels; (5) shipment projections and market shares; (6) financial parameters; (7) conversion 

costs; (8) cumulative regulatory burden; (9) direct employment impact assessment; (10) 

manufacturing capacity, foreign competition, and outsourcing; (11) consolidation, and (12) 

impacts on small business. The interview guides are presented in Appendix 12A. 
12-4 

12.2.3 Phase III: Subgroup Analysis

Using average cost and financial assumptions to develop an industry cash flow model 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 impacted. For the distribution transformer 

industry, DOE analyzes small business manufacturers as a subgroup. 

12.2.3.3 Manufacturing 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 parties to express 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 distribution transformer manufacturers. DOE contacted companies from its database of 

manufacturers and interviewed small and large companies, subsidiaries and independent firms, 

and public and private corporations to provide an accurate 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 helped clarify responses and identify additional issues. The 

resulting information provides valuable inputs to the GRIM developed for the equipment classes. 

12.2.3.4 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 12.4 provides more information on how DOE calculated the parameters. 

The Department conducted structured, detailed, face-to-face interviews with seven 

manufacturers, some of which produce transformers in more than one superclass. Three of the 

seven manufacturers are small businesses. Three of the manufacturers produce liquid-immersed 

transformers, collectively representing approximately 65 percent of the U.S. liquid-immersed 

market. Two of the manufacturers produce medium-voltage dry-type transformers, collectively 

representing approximately 75 percent of the U.S. medium-voltage dry-type market. Three of the 

manufacturers produce low-voltage dry-type transformers, collectively representing 

approximately 30 percent of the U.S. low-voltage dry-type market. DOE also conducted many 

more phone interviews and follow-up discussions with transformer manufacturers, particularly 

small businesses, to gather important information about their businesses and their perspectives 

on amended standards. Additionally, DOE gained invaluable insights during the many 

stakeholder negotiations when manufacturers openly discussed their businesses and concerns 

with amended standards. 
12-5 

12.2.3.6.1 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 12.2-1, to determine whether any small 

entities would be affected by the rulemaking.a For the equipment 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 12.2-1 SBA and NAICS Classification of Small Businesses Potentially Affected by 

This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS

Power, Distribution and Specialty 

Transformer Manufacturing

N/A 750 335311

DOE used the National Electrical Manufacturers Association (NEMA) member 

directory1 to identify manufacturers of distribution transformers. DOE also utilized information 

from previous rulemakings, UL qualification directories, individual company websites, and 

market research tools (e.g.

During its research, DOE identified approximately 30 companies which manufacture 

products covered by this rulemaking and qualify as small businesses per the applicable SBA 

definition. DOE contacted the small businesses to solicit feedback on the potential impacts of 

energy conservation standards. Two of the small businesses consented to being interviewed 

during the face-to-face MIA interviews and plant tours, while DOE’s contractor also received 

feedback from several additional small businesses through phone interviews and email 

correspondence. In addition to posing the standard MIA interview questions, DOE solicited data 

from manufacturers on differential impacts that small companies might 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 subgroup. The results of this subgroup 

analysis are presented in Section 

, Hoover’s reports) to create a list of companies that potentially 

manufacture distribution transformers covered by this rulemaking. Additionally, DOE also 

asked interested parties and industry representatives if they were aware of other small business 

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 distribution 

transformers. DOE screened out companies that did not offer products covered by this 

rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated. 

12.6. 

 

a The size standards are available on the SBA’s website at http://www.sba.gov/content/table-small-business-sizestandards
12-6 

12.2.3.7 Manufacturing Capacity Impact 

One significant outcome of amended energy conservation standards could be the 

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

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 estimates 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 12.4.8; DOE’s discussion of the capacity impact can be found in Section 

12.7.2. 

12.2.3.8 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 distribution 

transformer 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 12.7.1. 

12.2.3.9 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy 

conservation standards and other regulatory actions affecting the same equipment. DOE analyzed 

the impact on manufacturers of multiple, product-specific regulatory actions. Based on its own 

research and discussions with manufacturers, DOE identified regulations relevant to distribution 

transformer manufacturers, such as State regulations and other Federal regulations that impact 

other products made by the same manufacturers. Discussion of the cumulative regulatory burden 

can be found in Section 12.7.3. 

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA interview starts by asking: “What are the key issues for your company 

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 identified by manufacturers. These 

summaries are provided in aggregate to protect manufacturer confidentiality. 

12.3.1 Conversion costs and stranded assets

For manufacturers of distribution transformers, liquid-immersed, medium-voltage drytype, and low-voltage dry-type, conversion costs and stranded assets are a major concern. All 
12-7 

manufacturers stated that efficiency levels that require the use of amorphous steel would sharply 

increase conversion costs. Due to the thickness and brittleness of amorphous steel, unique 

production processes and new material handling processes must be applied. Manufacturers noted 

that they would need to make extensive capital investments in amorphous core production 

equipment, including core cutting machines, annealing ovens, and lacing tables. 

Dry-type manufacturers also stated that a standard that moves the industry to silicon steel 

wound cores would also greatly increase conversions costs. Since the vast majority of dry type

manufacturers produce stacked cores, a move to wound cores would lead to extensive stranded 

assets. In some cases, manufacturers may consider purchasing prefabricated cores rather than 

modifying their facilities to produce wound cores due to the extensive conversion costs. 

Additionally, dry-type manufactures stated that a revised standard that does not require 

amorphous steel or wound core designs could still lead to capital conversion costs. As the 

standard increases, manufacturers are likely to use higher grade steels for core production. 

Because high grade steels tend to be thinner, additional Georg machines, core assembly lines and 

workstations, custom miter cutters, and panel boards may be needed in order to maintain existing 

throughput levels. 

Some manufacturers mentioned that stranded assets may also be an issue when equipment 

needs to be retired and/or replaced if it cannot be repurposed for higher efficiency designs. DOE 

accounted for stranded assets in the GRIM. 

12.3.2 Shortage of Materials 

There is currently a limited supply of M4, M3, M2, ZDMH, H-0 DR, and SA1 

amorphous steels on the market and manufacturers expressed concern that higher standards may 

increase both demand and prices. Of these steels, M4 and M3 steels are currently the most 

widely produced, with suppliers such as AK Steel, Allegheny Ludlum, ThyssenKrupp, Nippon, 

JFE, Wuhan, Novolipetsk, Posco, ArcelorMittal, Orb, Baosteel, Stalproduct, Angang, and 

Arcelor/Hunan. However, as the grade of grain-oriented electrical steel improves, its availability 

decreases. M2 is a higher grade than M3 but it is produced by fewer suppliers, such as AK Steel, 

Allegheny Ludlum, ThyssenKrupp, Nippon, and JFE. The availability of mechanically-scribed, 

deep domain-refined steel such as ZDMH, H-0 DR, and SA1 amorphous is even more limited. 

ZDMH is only produced by Nippon, JFE, and AK Steel, and H-0 DR is only produced by 

Nippon, JFE, AK Steel, Posco, and Baosteel. Hitachi (MetGlas) and AT&M are currently the 

only suppliers of amorphous steel with significant capacity. However, AT&M only supplies the 

Chinese market. Other steel suppliers, such as Posco and NEC TOKIN have announced that they 

have begun to pursue commercial production of amorphous steel, but their production capacity is 

still to be determined. 

In addition to being in limited supply, higher efficiency steels are also 1) more expensive, 

2) subject to tariffs when imported from a foreign supplier, 3) subject to long lead times for both 

domestic and international suppliers, and 4) difficult to obtain for manufacturers that do not have 

contracts in place with suppliers. Furthermore, due in part to the major capital investment 

required to build a steel plant, barriers to entry are high and capacity cannot be easily increased. 
12-8 

All these factors contribute to the limited availability of higher efficiency steel for transformer 

manufacturers. 

12.3.3 Compliance and Enforcement

Manufacturers indicated the importance of compliance and enforcement. Some 

manufacturers are concerned that insufficient enforcement could result in an unfair competitive 

advantage for some companies who opt not to comply. Manufacturers were particularly 

concerned about importers of foreign manufactured products. 

With regard to low-voltage dry-type transformers, some manufacturers are concerned that 

higher standards could lead to customers to shift from low-voltage dry-type transformers that are 

within the scope of DOE coverage to low-voltage dry-type transformers that are outside the 

scope of DOE coverage. The market for products within the scope of DOE coverage and the 

market for products outside the scope of DOE coverage are approximately equal in terms of 

revenue. As a result, if standards increase for products that are in-scope, there may be an 

increase in the manufacturing of products that are out-of-scope because they will not be subject 

to the same compliance burdens. Some of these out-of-scope products are highly inefficient. 

Therefore, manufacturers are concerned that, if those products are more widely adopted, the total 

energy savings from this rulemaking may be less than projected. 

12.3.4 Effective Date

Manufacturers expressed concerns about the amount of time available to adapt to an 

amended standard. Manufacturers indicated that a transition period longer than three years is

needed to meet a new standard, especially if the standard requires a very high efficiency level

and a technology change, like a transition to amorphous material. In order to avoid stranding too 

many assets and materials, sufficient time must be given to manufacturers for the purchase and 

use of new equipment, development of new designs if needed, and transitioning of customers to 

new product offerings. Also, some manufacturers stated that standards for low-voltage dry-type 

transformers, which were not included in the previous 2007 rulemaking, should be on an 

extended timeline.

12.3.5 Size and Weight Constraints

Manufacturers were concerned that their customers’ dimensional and physical constraints 

would not be able to accommodate designs required to meet higher energy efficiency standards. 

In particular, manufacturers voiced concern regarding retrofit applications, mining applications, 

telephone pole capacities, and other installations where transformers have to comply with size 

and weight constraints.

12.3.6 Emergency Situations 

For liquid-immersed transformer manufacturers, the ability to obtain waivers during 

emergency situations is an important issue. For example, when a natural disaster occurs, there 

may be a sharp increase in demand for transformers and manufacturers may not be able to meet 

DOE’s efficiency requirements under these circumstances due to limitations of high efficiency 
12-9 

steel availability. In order to adequately supply areas facing such emergency situations, 

manufacturers need to produce transformers as quickly as possible. 

12.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for assessing the impacts on industry due to amended 

energy conservation standards. DOE relies on several sources to obtain inputs for the GRIM. 

Data and 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. 

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4-1, 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, 2012, and continuing 

to 2045. The model calculates the INPV by summing the stream of annual discounted cash flows 

during this period and adding a discounted terminal value. 2

Figure 12.4-1 Using the GRIM to Calculate Cash Flow 

The GRIM projects cash flows using standard accounting principles and 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 energy conservation standard on 

manufacturers. Appendix 12B provides more technical details and user information for the 

GRIM.

12.4.2 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. 
12-10

12.4.2.1 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 manufacture distribution 

transformers, among other products. Since these companies do not provide detailed information 

about their individual product lines, DOE used financial information at the parent company level

as its initial estimates of the financial parameters in the GRIM analysis. These figures were later 

revised using feedback from interviews to be representative of distribution transformer 

manufacturing. DOE used corporate annual reports to derive the following initial inputs to the 

GRIM: 

• Tax rate

• Working capital 

• SG&A

• R&D

• Depreciation

• Capital expenditures

• Net PPE

12.4.2.2 Standard and Poor Credit Ratings 

S&P provides independent credit ratings, research, and financial information. DOE relied 

on S&P reports to determine the industry’s average cost of debt when calculating the cost of 

capital.

12.4.2.3 Shipment Model

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

The model relied on historical shipments data for distribution transformers. Chapter 9 of the TSD 

describes the methodology and analytical model DOE used to forecast shipments. 

12.4.2.4 Engineering Analysis 

Using several transformer design characteristics in the Engineering Analysis, DOE

developed ten equipment classes. Within each of these equipment classes, DOE further classified 

distribution transformers by their kilovolt-ampere (kVA) rating. These kVA ratings are 

essentially size categories, of which there are more than 100 across all ten equipment classes in 

this rulemaking. Because DOE found that many of the units share similar designs and 

construction methods, DOE simplified the analysis by creating engineering design lines (DLs), 

which group kVA ratings based on similar principles of design and construction. After 

developing its DLs, DOE then selected one representative unit from each DL for study in the 

engineering analysis, greatly reducing the number of units for direct analysis. For each 

representative unit, DOE generated hundreds of unique designs by contracting with Optimized 

Program Services, Inc. (OPS), a software company specializing in transformer design. DOE 

obtained thousands of transformer designs for each representative unit. The performance of these 

designs ranged in efficiency from a baseline level, equivalent to the current distribution 

transformer energy conservation standards, to a theoretical max-tech efficiency level.
12-11

After generating each design, DOE used the outputs of the OPS software to create a 

manufacturer selling price (MSP). The material cost outputs of the OPS software, along with 

labor estimates were marked up for scrap factors, factory overhead, shipping, and nonproduction costs to generate an MSP for each design. Thus, DOE obtained a cost versus 

efficiency relationship for each representative unit. Finally, after DOE had generated the costefficiency relationship for each representative unit, it extrapolated the results for the other 

unanalyzed kVA ratings within that same engineering design line. 

12.4.2.5 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with a representative crosssection of manufacturers. DOE also interviewed manufacturers representing a significant portion 

of sales in every equipment class. During these discussions, DOE obtained information to 

determine and verify GRIM input assumptions in each industry. Key topics discussed during the 

interviews and 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; 

• impacts on small businesses; and

• cost-efficiency curves calculated in the engineering analysis.

12.4.3 Financial Parameters

Table 12.4-1 below provides financial parameters for five public companies engaged in 

manufacturing and selling distribution transformers. The values listed are averages over a 6-year 

period (2005 to 2010) and include manufacturers from all transformer superclasses. 
12-12

Table 12.4-1 GRIM Financial Parameters Based on 2005–2010 Weighted Company 

Financial Data

Parameter Weighted 

Average 

Manufacturer

A B C D E

Tax Rate % of taxable income 22.9 24.1 18.7 3.8 28.2 24.1

Working Capital % of revenues 16.1 25.5 10.9 10.4 8.9 13.3

SG&A % of revenues 16.5 15.7 19.0 17.0 16.4 20.7

R&D % of revenues 3.6 3.2 2.1 2.8 4.5 1.1

Depreciation % of revenues 3.2 1.9 2.4 3.9 4.8 3.2

Capital Expenditures % of revenues 3.3 2.8 2.0 2.7 4.6 2.1

Net PPE % of revenues 14.4 12.0 12.4 18.6 16.1 9.2

During interviews, distribution transformer manufacturers were asked to provide their 

own figures for the parameters listed in Table 12.4-1. Where applicable, DOE adjusted the 

parameters in the GRIM using this feedback and data from publicly traded companies to reflect 

the distribution transformer industry. Table 12.4-2 presents the revised parameters for 

distribution transformer manufacturers broken out into the three superclasses – liquid-immersed, 

medium-voltage dry-type, and low-voltage dry-type. 
12-13

Table 12.4-2 GRIM Revised Distribution Transformer Industry Financial Parameters

Parameter Revised Estimates

Liquid-immersed Medium-voltage 

Dry-type

Low-voltage 

Dry-type

Tax Rate % of taxable income 23.0 23.0 23.0

Working Capital % of revenues 19.4 18.0 16.0

SG&A % of revenues 13.4 12.5 13.0

R&D % of revenues 3.0 3.0 3.0

Depreciation % of revenues 2.5 2.0 3.2

Capital Expenditures % of revenues 3.0 2.3 3.0

Net PPE % of revenues 14.4 14.4 14.4

12.4.4 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 distribution transformer 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:

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 between the expected return on stocks and the riskless rate.
12-14

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 

index. 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 distribution transformer 

industry is 14.5 percent. 

Table 12.4-3 Cost of Equity Calculation 

Parameter

IndustryWeighted 

Average 

%

Manufacturer

A B C D E 

(1) Average Beta 1.52 1.50 1.55 1.42 1.58 1.65

(2) Yield on 10-Year T-Bill (1928-2009) 5.23 - - - - -

(3) Market Risk Premium (1928-2009) 6.09 - - - - -

Cost of Equity (2)+[(1)*(3)] 14.48 - - - - -

Equity/Total Capital 76.62 93.1 69.3 68.6 62.4 66.8

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond 

rating is associated with a particular spread. 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 five 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 volatile 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 

2010. 

For the cost of debt, S&P’s Credit Services provided the average spread of corporate 

bonds for the five 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 cost of debt for the 

industry. Table 12.4-4 presents the derivation of the cost of debt and the capital structure of the 

industry (i.e. the debt ratio (debt/total capital)).
12-15

Table 12.4-4 Cost of Debt Calculation 

Parameter

Industry-Weighted 

Average 

%

Manufacturer

A B C D E

S&P Bond Rating -- A A A- A+ BB

(1) Yield on 10-Year 

T-Bill (1928-2009) 5.23 - - - - - 

(2) Gross Cost of Debt 6.21 6.23 6.23 6.33 6.08 8.58

(3) Tax Rate 23.4 24.1 18.7 3.8 28.2 24.1

Net Cost of Debt 

(2) x (1-(3)) 6.21 - - - - - 

Debt/Total Capital 23.38 6.86 30.70 31.36 37.55 33.18

Using public information for these five companies, the initial estimate for the distribution 

transformer industry’s WACC was approximately 12.2 percent. Subtracting an inflation rate of 

3.1 percent between 1928 and 2010, the inflation-adjusted WACC and the initial estimate of the 

discount rate used in the straw-man GRIM is 9.1 percent. DOE also asked for feedback on the 

9.1 percent discount during manufacturer interviews and used this feedback to determine that the 

following WACCs for each superclass were appropriate discount rates for use in the GRIM: 7.4 

percent for liquid-immersed, 9 percent for medium-voltage dry-type, and 11.1 percent for lowvoltage dry-type.

12.4.5 Trial Standard Levels

DOE developed TSLs for distribution transformers. Consistent with the engineering 

analysis, DOE analyzed 10 equipment classes, which were subdivided into 14 design lines with 

14 representative units. Tables 12.4-5 through 12.4-7 show the efficiency levels (EL) at each 

TSL for the design lines analyzed by DOE. DOE scaled the standards for these representative 

equipment classes to create standards for other equipment classes that were not directly analyzed, 

as set forth in chapter 5 of the TSD. 
12-16

Table 12.4-5 Trial Standard Levels for Liquid Immersed Distribution Transformers

Design 

Line

Transformer Type, 

Rep Unit kVA, and 

Phase Count

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

1 Liquid-Immersed, 

50kVA, single-phase EL 1 EL 1 EL 1 EL 2 EL 3 EL 4 EL 6

2 Liquid-Immersed, 

25kVA, single-phase Base EL 1 EL 1 EL 2 EL 3 EL 4 EL 6

3 Liquid-Immersed, 

500kVA, single-phase EL 1 EL 1 EL 2 EL 4 EL 3 EL 5 EL 7

4 Liquid-Immersed, 

150kVA, three-phase EL 1 EL 1 EL 1 EL 2 EL 3 EL 4 EL 7

5 Liquid-Immersed, 

1500kVA, three-phase EL 1 EL 1 EL 2 EL 4 EL 3 EL 5 EL 7

TSL 1 represents an increase in efficiency where a diversity of electrical steels are costcompetitive and economically feasible for all design lines. TSL 2 represents EL1 for all design 

lines. TSL 3 represents the maximum efficiency level achievable with M3 core steel. TSL 4 

represents the maximum NPV with 7 percent discounting. TSL 5 represents EL 3 for all design 

lines. TSL 6 represents the maximum source energy savings with positive NPV with 7 percent 

discounting. TSL 7 represents the maximum technologically feasible level (max tech). 

Table 12.4-6 Trial Standard Levels for Low-Voltage Dry-Type Distribution Transformers

Design 

Line

Transformer Type, 

Rep Unit kVA, and 

Phase Count

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

6 

Low-Voltage DryType, 25kVA, singlephase

Baseline Baseline EL 4 EL 6 EL 6 EL 7

7 

Low-Voltage DryType, 75kVA, threephase

EL 2 EL 3 EL 4 EL 6 EL 6 EL 7

8 

Low-Voltage DryType, 300kVA, threephase

EL 2 EL 2 EL 4 EL 6 EL 7 EL 7

TSL 1 represents the maximum efficiency level achievable with M6 core steel. TSL 2 

represents EL 3 for design line 7, EL 2 for design line 8 and no efficiency increase for design 

line 6. TSL 3 represents the maximum EL achievable using butt-lap miter core manufacturing for 

single-phase distribution transformers, and full miter core manufacturing for three-phase 

distribution transformers. TSL 4 represents the maximum NPV with 7 percent discounting. TSL 

5 represents the maximum source energy savings with positive NPV with 7 percent discounting. 

TSL 6 represents the maximum technologically feasible level (max tech).
12-17

Table 12.4-7 Trial Standard Levels for Medium-Voltage Dry-Type Distribution 

Transformers

Design 

Line

Transformer Type, 

Rep Unit kVA, and 

Phase Count

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

9 

Medium-Voltage DryType, 300kVA, threephase, 45kV BIL

EL 1 EL 1 EL 2 EL 2 EL 6

10

Medium-Voltage DryType, 1500kVA, 

three-phase, 45kV BIL

EL 1 EL 2 EL 2 EL 2 EL 6

11

Medium-Voltage DryType, 300kVA, threephase, 95kV BIL

EL 1 EL 1 EL 4 EL 4 EL 6

12

Medium-Voltage DryType, 1500kVA, 

three-phase, 95kV BIL

EL 1 EL 2 EL 4 EL 4 EL 7

13A

Medium-Voltage DryType, 300kVA, threephase, 125kV BIL

EL 1 EL 1 EL 4 EL 4 EL 7

13B

Medium-Voltage DryType, 2000kVA, 

three-phase, 125kV 

BIL

EL 1 EL 2 EL 4 EL 4 EL 5

TSL 1 represents EL1 for all design lines. TSL 2 represents an increase in efficiency 

where a diversity of electrical steels are cost-competitive and economically feasible for all design 

lines. TSL 3 represents the maximum NPV with 7 percent discounting. TSL 4 represents the 

maximum source energy savings with positive NPV with 7 percent discounting. TSL 5 

represents the maximum technologically feasible level (max tech).

12.4.6 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 GRIM used the 

NIA’s annual shipment forecasts from 2012 to 2045, the end of the analysis period. The 

shipments analysis assumes that growth in distribution transformer shipments will be driven by 

long-term growth in electricity consumption. DOE’s shipments analysis also includes an 

elasticity factor based on the potential for transformers purchasers to elect to refurbish rather 

than replace failed transformers as the purchase price increases. The assumptions and 

methodology that drive this analysis are described in Chapter 9 of the Final Rule TSD.
12-18

12.4.7 Production Costs 

During the engineering analysis, the Department used transformer design software to 

create a database of designs spanning a broad range of efficiencies for each of the representative 

units. This design software generated a bill of materials, with information including pounds of 

core steel, pounds of conductor, insulation, ducting, and tank size. The software also provided 

information pertaining to the labor necessary to construct the transformer, including the number 

of turns in the windings, and core dimensions, including stack height. All the components from 

this bill of materials and labor estimate were combined with fixed hardware costs, such as 

bushings, busbar, and terminals. The Department then applied markups to allow for scrap, 

handling, factory overhead, and a “manufacturer markup” to account for per unit research and 

development, selling expenses, administrative expenses, and profit. This yielded an estimate of 

the manufacturer selling price. Details on the derivation of the manufacturer selling prices and 

discussion of manufacturer markups are in chapter 5. These designs and their MSPs are 

subsequently inputted into the LCC customer choice model. For each EL and within each design 

line, the LCC model uses a Monte Carlo analysis and criteria described in TSD chapter 8 to 

select a subset of all the potential designs options (and associated MSPs). This subset is meant to 

represent those designs that would actually be shipped in the market under various standard 

levels. DOE inputted into the GRIM the weighted average cost of the designs selected by the 

LCC model and scaled those MPCs to other selected capacities in each design line’s KVA range. 

Tables 12.4-8 through 12.4-21 show the average production cost estimates used in the 

GRIM for each design line at each efficiency level. 

Table 12.4-8 Manufacturer Production Cost Breakdown ($2011) for Design Line 1

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $186.11 $1,010.14 $78.69 $47.58 $1,322.51 $170.74 1.25 $1,866.57

EL 1 $184.88 $1,064.62 $83.35 $49.73 $1,382.58 $176.69 1.25 $1,949.08

EL 2 $166.29 $1,288.69 $104.49 $56.59 $1,616.07 $192.55 1.25 $2,260.77

EL 3 $160.25 $1,294.06 $105.34 $56.42 $1,616.07 $192.55 1.25 $2,260.77

EL 4 $163.57 $1,348.25 $108.26 $60.27 $1,680.35 $204.37 1.25 $2,355.91

EL 5 $144.47 $1,521.52 $123.51 $66.68 $1,856.19 $216.05 1.25 $2,590.29

EL 6 $155.78 $1,830.99 $149.85 $79.03 $2,215.65 $249.11 1.25 $3,080.95

EL 7 $155.78 $1,830.99 $149.85 $79.03 $2,215.65 $249.11 1.25 $3,080.95
12-19

Table 12.4-9 Manufacturer Production Cost Breakdown ($2011) for Design Line 2

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $128.40 $662.10 $51.55 $31.21 $873.26 $107.42 1.25 $1,225.85 

EL 1 $134.63 $722.12 $56.51 $33.76 $947.01 $114.81 1.25 $1,327.28 

EL 2 $128.69 $751.67 $59.11 $34.85 $974.33 $119.64 1.25 $1,367.46 

EL 3 $91.20 $814.51 $65.48 $36.34 $1,007.52 $123.37 1.25 $1,413.62 

EL 4 $93.02 $849.73 $68.43 $37.78 $1,048.96 $132.39 1.25 $1,476.69 

EL 5 $90.78 $995.73 $80.72 $43.74 $1,210.98 $153.31 1.25 $1,705.37 

EL 6 $90.35 $1,112.01 $90.18 $48.82 $1,341.36 $175.78 1.25 $1,896.43 

EL 7 $89.56 $1,483.58 $124.73 $60.72 $1,758.59 $146.13 1.25 $2,380.91 

Table 12.4-10 Manufacturer Production Cost Breakdown ($2011) for Design Line 3

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $410.81 $4,149.98 $338.63 $180.11 $5,079.53 $618.60 1.25 $7,122.66 

EL 1 $305.99 $4,874.69 $404.41 $204.92 $5,790.02 $655.57 1.25 $8,056.99 

EL 2 $301.96 $5,040.06 $418.61 $211.40 $5,972.02 $639.14 1.25 $8,263.95 

EL 3 $447.92 $5,284.14 $433.75 $226.76 $6,392.57 $655.67 1.25 $8,810.30 

EL 4 $306.35 $5,496.46 $458.30 $228.76 $6,489.86 $664.39 1.25 $8,942.82 

EL 5 $300.64 $5,865.99 $490.18 $243.07 $6,899.87 $698.94 1.25 $9,498.51 

EL 6 $303.99 $7,194.61 $603.77 $295.56 $8,397.92 $842.13 1.25 $11,550.07 

EL 7 $319.91 $9,223.29 $776.24 $376.68 $10,696.11 $1,070.05 1.25 $14,707.70 

Table 12.4-11 Manufacturer Production Cost Breakdown ($2011) for Design Line 4

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $327.69 $2,828.64 $222.66 $130.92 $3,509.91 $564.16 1.25 $5,092.59 

EL 1 $346.78 $3,046.55 $241.18 $139.64 $3,774.15 $579.26 1.25 $5,441.76 

EL 2 $364.00 $3,362.28 $266.94 $153.34 $4,146.56 $604.29 1.25 $5,938.56 

EL 3 $279.81 $3,437.11 $282.59 $147.05 $4,146.56 $604.29 1.25 $5,938.56 

EL 4 $200.00 $3,508.05 $290.29 $148.21 $4,146.56 $604.06 1.25 $5,938.27 

EL 5 $220.88 $3,518.48 $285.16 $154.65 $4,179.17 $614.92 1.25 $5,992.62 

EL 6 $233.02 $4,123.05 $334.82 $180.56 $4,871.44 $717.00 1.25 $6,985.55 

EL 7 $230.23 $6,089.59 $510.01 $251.19 $7,081.01 $753.89 1.25 $9,793.63 
12-20

Table 12.4-12 Manufacturer Production Cost Breakdown ($2011) for Design Line 5

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $1,668.71 $13,200.38 $1,016.01 $634.04 $16,519.15 $2,247.55 1.25 $23,458.37 

EL 1 $1,819.05 $15,108.11 $1,177.98 $710.53 $18,815.67 $2,303.29 1.25 $26,398.70 

EL 2 $1,804.61 $15,394.02 $1,203.39 $720.87 $19,122.88 $2,345.28 1.25 $26,835.21 

EL 3 $1,827.31 $16,465.92 $1,292.42 $765.82 $20,351.47 $2,456.47 1.25 $28,509.91 

EL 4 $1,848.08 $17,102.47 $1,344.69 $793.11 $21,088.36 $2,538.09 1.25 $29,533.06 

EL 5 $1,894.49 $19,028.35 $1,503.23 $875.32 $23,301.38 $2,782.40 1.25 $32,604.74 

EL 6 $2,040.91 $32,843.19 $2,717.39 $1,388.01 $38,989.50 $2,989.89 1.25 $52,474.23 

EL 7 $2,040.91 $32,843.19 $2,717.39 $1,388.01 $38,989.50 $2,989.89 1.25 $52,474.23 

Table 12.4-13 Manufacturer Production Cost Breakdown ($2011) for Design Line 6

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $221.50 $396.63 $20.84 $28.74 $667.71 $37.16 1.25 $881.08 

EL 1 $221.85 $404.68 $21.45 $29.13 $677.12 $37.38 1.25 $893.12 

EL 2 $171.94 $480.54 $29.41 $30.66 $712.55 $40.20 1.25 $940.95 

EL 3 $183.68 $536.11 $33.11 $33.90 $786.80 $43.47 1.25 $1,037.84 

EL 4 $181.28 $684.96 $44.65 $40.97 $951.85 $43.51 1.25 $1,244.20 

EL 5 $179.63 $715.88 $47.01 $42.47 $984.99 $46.19 1.25 $1,288.98 

EL 6 $172.63 $837.41 $56.44 $48.23 $1,114.72 $55.11 1.25 $1,462.28 

EL 7 $172.90 $1,274.48 $89.50 $69.81 $1,606.69 $87.53 1.25 $2,117.78 

Table 12.4-14 Manufacturer Production Cost Breakdown ($2011) for Design Line 7

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $363.74 $1,054.95 $63.60 $68.27 $1,550.55 $131.69 1.25 $2,102.81 

EL 1 $410.51 $1,194.11 $72.31 $76.95 $1,753.88 $139.65 1.25 $2,366.91 

EL 2 $415.58 $1,189.60 $71.93 $76.77 $1,753.88 $139.65 1.25 $2,366.91 

EL 3 $372.85 $1,229.32 $77.69 $75.98 $1,755.84 $139.59 1.25 $2,369.28 

EL 4 $316.76 $1,428.18 $94.76 $83.76 $1,923.47 $123.03 1.25 $2,558.12 

EL 5 $298.55 $1,636.31 $111.78 $92.76 $2,139.39 $116.35 1.25 $2,819.68 

EL 6 $292.50 $1,774.92 $122.31 $99.55 $2,289.29 $129.67 1.25 $3,023.69 

EL 7 $278.60 $2,686.36 $191.51 $144.29 $3,300.75 $207.24 1.25 $4,384.99 
12-21

Table 12.4-15 Manufacturer Production Cost Breakdown ($2011) for Design Line 8

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $644.47 $2,729.41 $176.13 $165.05 $3,715.06 $276.92 1.25 $4,989.97 

EL 1 $805.45 $2,946.67 $186.64 $181.70 $4,120.45 $294.44 1.25 $5,518.61 

EL 2 $773.04 $3,447.92 $227.80 $203.19 $4,651.95 $324.00 1.25 $6,219.93 

EL 3 $856.27 $4,028.47 $268.49 $235.07 $5,388.30 $350.22 1.25 $7,173.15 

EL 4 $851.41 $4,619.88 $313.08 $264.41 $6,048.77 $370.54 1.25 $8,024.14 

EL 5 $821.29 $5,149.34 $354.99 $288.68 $6,614.29 $356.94 1.25 $8,714.03 

EL 6 $719.26 $5,239.24 $366.45 $288.45 $6,613.40 $356.88 1.25 $8,712.86 

EL 7 $651.66 $8,956.38 $656.75 $462.80 $10,727.59 $530.85 1.25 $14,073.04 

Table 12.4-16 Manufacturer Production Cost Breakdown ($2011) for Design Line 9

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $1,756.20 $4,581.52 $386.14 $186.55 $6,910.40 $386.26 1.25 $9,120.83 

EL 1 $1,716.25 $4,679.51 $397.98 $186.96 $6,980.70 $386.49 1.25 $9,208.99 

EL 2 $1,705.13 $4,961.69 $425.21 $195.00 $7,287.03 $389.99 1.25 $9,596.28 

EL 3 $1,629.32 $5,640.27 $491.32 $213.72 $7,974.63 $417.90 1.25 $10,490.67 

EL 4 $1,184.02 $6,380.29 $572.51 $225.03 $8,361.85 $473.75 1.25 $11,044.50 

EL 5 $1,076.52 $6,798.05 $614.36 $235.40 $8,724.33 $506.12 1.25 $11,538.05 

EL 6 $1,036.03 $8,958.79 $819.51 $300.34 $11,114.67 $672.50 1.25 $14,733.96 

EL 7 $1,036.03 $8,958.79 $819.51 $300.34 $11,114.67 $672.50 1.25 $14,733.96 

Table 12.4-17 Manufacturer Production Cost Breakdown ($2011) for Design Line 10

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $3,139.96 $15,742.83 $1,404.37 $563.49 $20,850.64 $1,351.13 1.25 $27,752.22 

EL 1 $3,053.53 $15,960.31 $1,426.33 $568.71 $21,008.88 $1,344.47 1.25 $27,941.69 

EL 2 $2,997.40 $17,344.34 $1,560.52 $607.52 $22,509.78 $1,513.07 1.25 $30,028.57 

EL 3 $2,831.68 $20,742.52 $1,884.06 $708.76 $26,167.02 $1,774.37 1.25 $34,926.74 

EL 4 $2,579.69 $25,694.62 $2,353.97 $857.85 $31,486.14 $2,049.31 1.25 $41,919.31 

EL 5 $2,538.12 $27,821.04 $2,555.83 $921.80 $33,836.79 $2,221.47 1.25 $45,072.83 

EL 6 $2,320.33 $32,670.64 $3,016.75 $1,067.08 $39,074.79 $2,588.02 1.25 $52,078.52 

EL 7 $2,320.33 $32,670.64 $3,016.75 $1,067.08 $39,074.79 $2,588.02 1.25 $52,078.52 
12-22

Table 12.4-18 Manufacturer Production Cost Breakdown ($2011) for Design Line 11

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $2,246.16 $7,294.14 $632.05 $279.71 $10,452.06 $540.58 1.25 $13,740.80 

EL 1 $2,326.95 $7,772.70 $675.37 $296.22 $11,071.24 $563.59 1.25 $14,543.54 

EL 2 $2,298.84 $8,597.61 $753.45 $321.25 $11,971.15 $643.74 1.25 $15,768.62 

EL 3 $2,445.65 $9,259.37 $812.99 $344.44 $12,862.44 $637.75 1.25 $16,875.24 

EL 4 $2,200.74 $9,623.58 $854.65 $348.30 $13,027.26 $634.76 1.25 $17,077.53 

EL 5 $2,094.07 $10,861.51 $973.91 $383.78 $14,313.27 $727.93 1.25 $18,801.50 

EL 6 $1,947.03 $13,605.51 $1,236.94 $463.75 $17,253.23 $909.33 1.25 $22,703.19 

EL 7 $1,947.03 $13,605.51 $1,236.94 $463.75 $17,253.23 $909.33 1.25 $22,703.19 

Table 12.4-19 Manufacturer Production Cost Breakdown ($2011) for Design Line 12

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $3,447.63 $20,472.49 $1,846.60 $712.46 $26,479.18 $1,666.97 1.25 $35,182.69 

EL 1 $3,499.66 $21,554.30 $1,947.81 $746.48 $27,748.25 $1,631.23 1.25 $36,724.35 

EL 2 $3,481.31 $23,163.47 $2,099.56 $795.88 $29,540.21 $1,681.79 1.25 $39,027.50 

EL 3 $3,649.82 $26,167.23 $2,379.24 $891.66 $33,087.95 $2,018.95 1.25 $43,883.63 

EL 4 $3,330.93 $27,818.49 $2,542.60 $934.72 $34,626.73 $2,184.80 1.25 $46,014.40 

EL 5 $2,863.09 $30,374.01 $2,797.33 $999.43 $37,033.85 $2,345.07 1.25 $49,223.66 

EL 6 $2,874.77 $34,221.12 $3,159.12 $1,118.52 $41,373.53 $2,703.23 1.25 $55,095.96 

EL 7 $2,741.49 $40,916.95 $3,793.69 $1,320.93 $48,773.06 $3,242.73 1.25 $65,019.74 

Table 12.4-20 Manufacturer Production Cost Breakdown ($2011) for Design Line 13A

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $3,561.01 $8,534.01 $715.20 $351.55 $13,161.77 $734.97 1.25 $17,370.93 

EL 1 $3,426.87 $8,971.18 $759.84 $361.55 $13,519.44 $766.94 1.25 $17,857.98 

EL 2 $3,544.69 $9,595.94 $815.68 $383.81 $14,340.12 $791.00 1.25 $18,913.90 

EL 3 $3,791.47 $10,820.37 $924.97 $427.58 $15,964.38 $876.46 1.25 $21,051.06 

EL 4 $3,252.93 $12,524.69 $1,102.98 $462.60 $17,343.21 $872.83 1.25 $22,770.06 

EL 5 $3,192.24 $13,581.46 $1,204.42 $493.26 $18,471.38 $943.28 1.25 $24,268.33 

EL 6 $2,758.89 $18,565.27 $1,685.40 $635.25 $23,644.82 $1,291.78 1.25 $31,170.75 

EL 7 $2,758.89 $18,565.27 $1,685.40 $635.25 $23,644.82 $1,291.78 1.25 $31,170.75 
12-23

Table 12.4-21 Manufacturer Production Cost Breakdown ($2011) for Design Line 13B

EL Labor Materials Overhead Depreciation MPC Shipping Markup MSP

Baseline $4,174.29 $26,399.26 $2,387.53 $912.38 $33,873.45 $2,420.49 1.25 $45,367.43 

EL 1 $3,887.76 $27,129.03 $2,447.63 $943.50 $34,407.92 $2,512.39 1.25 $46,150.39 

EL 2 $4,217.87 $30,412.80 $2,758.59 $1,043.01 $38,432.28 $2,532.58 1.25 $51,206.07 

EL 3 $4,617.64 $35,162.33 $3,205.11 $1,190.18 $44,175.27 $2,877.82 1.25 $58,816.37 

EL 4 $4,712.67 $40,401.65 $3,695.63 $1,354.57 $50,164.52 $2,887.32 1.25 $66,314.80 

EL 5 $4,783.93 $45,787.74 $4,210.10 $1,513.36 $56,295.14 $3,263.41 1.25 $74,448.19 

EL 6 $3,814.98 $46,649.03 $4,314.42 $1,516.71 $56,295.14 $3,263.41 1.25 $74,448.19 

EL 7 $3,814.98 $46,649.03 $4,314.42 $1,516.71 $56,295.14 $3,263.41 1.25 $74,448.19 

12.4.8 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) capital conversion costs 

and (2) product conversion costs. 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. 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. 

12.4.8.1 Liquid Immersed Distribution Transformers

The liquid-immersed industry has evolved to be inherently flexible due to variation in 

customer purchasing criteria and wide fluctuations in critical materials prices, which represent 

the most significant fraction of product cost. Additionally, as the Department understands it, 

there is substantial excess production capacity for silicon steel transformers currently due to the 

recent economic downturn. Some manufacturers reported during interviews that shipments were 

down 25%-50% from their pre-recession peak. However, as discussed below, the production 

process for amorphous core transformers is much different and requires mostly new capital 

equipment. As such, currently the industry has very limited capacity for producing amorphous 

core distribution transformers and that capacity is concentrated among a few of the more 

sophisticated manufacturers in the industry. 

12.4.8.1.1 Capital Conversion Expenditures

Through interviews, DOE determined that two key factors will influence the extent of 

investment liquid-immersed distribution transformer manufacturers make in response to energy 

conservation standards: 

• The grade of core steel that manufacturers would most likely use to meet the 

standard; 

• The change in core mass required to meet the standard for a given steel grade.
12-24

These two factors, which vary with the stringency of the standard, shape manufacturers’ 

response to amended energy conservation standards. The most cost-effective core steels and the 

equipment necessary to process those steels affect manufacturers’ sourcing decisions, 

investments in production equipment, and selections of core designs. In light of these two 

considerations, DOE used a multi-step process to estimate capital conversion costs for liquid 

immersed transformers. First, it developed base-case and standards-case forecasts for core steel 

usage by steel grade and quantity. These forecasts provided an estimate of the change in core 

steel demand for each steel grade at each TSL. Second, based on forecasted changes in steel use, 

the Department estimated the conversion costs for the entire industry to adapt to the change in 

standard at each TSL. Third, DOE analyzed potential manufacturer responses to the changes in 

steel grades and in core masses. The methodology, sources of data and assumptions, and 

calculation flow are shown below in Figure 12.4-2. 

Figure 12.4-2 Capital Conversion Cost Methodology for Liquid Immersed Distribution 

Transformers

As shown by the figure above, to estimate conversion costs, DOE first needed an 

understanding of the steel grades used by manufacturers in the base case. Based on the LCC 

consumer choice model, DOE identified the most likely core design choices at each TSL. Using 

the engineering analysis, DOE determined the design parameters (e.g., core weight) for those 

design choices. Combining the core weights with industry shipments developed in the NIA, DOE 

projected future core steel needs by steel grade at each TSL. By comparing steel usage in the 

base case to that in the standards case, the department estimated change in core steel mix 

triggered by each TSL. In the liquid immersed superclass the transition to amorphous core steel 
12-25

is the most important variable in determining capital conversion costs because the production 

process is entirely different from that used for silicon steel.

It is important to note that the LCC consumer choice model assumes no availability 

constraints on amorphous steel, the core steel option which the engineering analysis generally

found to be the most cost-effective at efficiency levels 1 or 2 and above (depending on the design 

line) for most liquid immersed design lines. The engineering and LCC analyses also hold the 

relative prices of amorphous and silicon steels fixed, regardless of demand, which creates a 

‘toggle’ effect between the steels, in which at a given EL for a given DL, all or most demand 

swings to one steel type, a prospect that may not occur depending on how changes in demand of 

certain steel types cause steel suppliers to alter pricing schemes. By presuming unlimited 

availability at the prices assumed in the engineering analysis, it is no surprise that the steel 

forecast heavily favors amorphous steel usage at TSL 3 and above for the liquid immersed 

superclass. 

Next, DOE determined what investment would be required at each TSL, given the change 

in core steel demand estimated for each TSL. DOE used data gathered from interviews with core 

steel suppliers, core manufacturers, distribution transformer manufacturers, equipment suppliers 

and industry experts, as well as information gathered during the 2007 rulemaking to estimate 

equipment costs. Based on the gathered information, DOE assumed an amorphous production 

line with 1,200 tons of annual capacity would cost $950,000 to build. This figure includes costs 

associated with an annealing oven, core cutting machine, lacing tables and other miscellaneous 

equipment. 

In general, where manufacturers must use amorphous materials in substantially larger 

quantities than the base case, conversion costs escalate quickly because all new production 

equipment is necessary, as opposed to just adding incremental capacity to augment existing 

production. For the liquid immersed superclass, when conventional steels, or even ZDMH and 

H-0, can be used to meet the standard, incremental increases in production equipment are driven 

by the need to use thinner steels or produce larger cores to achieve higher efficiencies. 

Manufacturers could elect to source amorphous cores rather than produce them in-house. 

Many do this currently for the relatively small number of amorphous transformers they sell 

currently. During the manufacturer interviews, many manufacturers indicated that production of 

cores is an important part of the value chain and they would likely choose, in the long-run, to 

continue to produce them in-house rather than source them. A few of the larger manufacturers 

have already begun limited production of amorphous cores, as have some smaller Canadian 

manufacturers. Consequently, DOE believes most U.S. manufacturers would likely convert their 

facilities to produce the required number of amorphous cores at each TSL. As such, for the MIA, 

the Department modeled the scenario in which manufacturers would convert their facilities for 

in-house production of amorphous cores at the capacity necessary to meet the demand estimated 

at each of the TSLs by the LCC selection model. The LCC shows a migration to much higher 

volumes of amorphous core steel at every TSL for the liquid-immersed superclass. 

Based on the engineering analysis, the LCC, and the estimated capital costs necessary for 

an amorphous transformer production line, DOE estimates the conversion costs for liquidimmersed transformers presented in Table 12.4-22 below. 
12-26

Table 12.4-22 Summary of Liquid-Immersed Distribution Transformer Conversion 

Capital Expenditures

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Total Capital Conversion Costs 

($M)

25.3 57.8 60.6 92.8 96.2 101.5 124.5 

In terms of timing, DOE models all conversion costs occurring in the time period 

between the announcement year of the standard and the compliance date of the amended energy 

conservation standard. However, this may be an aggressive scenario in terms of timeline. In 

interviews, manufacturers expressed strong reservations about the availability of amorphous steel 

and stability of pricing under regulatory scenarios that triggered substantial increases in demand. 

Tight supply of amorphous could lead to higher prices and undercut the material’s relative costadvantage over conventional steels. This is one reason manufacturers may take a gradual 

approach to facility conversion at efficiency levels where conventional steels, while not currently 

forecast to be cost competitive with amorphous steel, could become so if amorphous prices 

increase in relative terms. As a result, the MIA may overstate the negative cash-flow impacts of 

the conversion costs on industry during the period leading up to the effective date of the 

standard. DOE therefore considers its estimates of capital conversion costs to be conservative, 

and most likely so at TSL 1 through TSL 3. 

12.4.8.1.1.1 Uncertainty Associated with Amorphous Demand

During interviews, manufacturers discussed several reasons why transformer production 

with amorphous material causes severe concerns: 

• The possible difficulty of access to the technology and manufacturing know-how; 

• The possible lack of availability of amorphous-core material at quantities 

necessary to meet industry demand; 

• The high level of capital equipment investment required (and the stranding of 

existing assets, particularly core-cutting equipment and annealing furnaces); and 

• The increased complexity associated with material processing and handling. 

The Department recognizes that the manufacturing process for amorphous core 

transformers is significantly different from that for silicon steel transformers. As such, all TSLs 

would render obsolete some portion of the liquid-immersed manufacturing equipment, primarily 

the core-cutting equipment and the annealing furnaces. Simply put, the more rapidly and 

substantially amorphous steel use penetrates the market, the greater the industry’s stranded 

silicon steel production assets will be. For example, the partial conversion to amorphous 

technology at TSL 1 would strand approximately $21.7 million in conventional steel core steel 

production equipment. If the highest (max tech) TSL is selected for the liquid-immersed

superclass, DOE estimates that the industry would have $57.7 million in stranded assets.

As mentioned above, all TSLs would likely trigger liquid-immersed transformer 

manufacturers to evaluate (though not force) whether to tool for amorphous technology, attempt 
12-27

to purchase assembled amorphous cores, or exit the industry. At TSL 1, manufacturers could 

choose to operate parallel processes for conventional steel and amorphous steel since only partial 

conversion to amorphous is expected in the LCC consumer choice model. However, this would 

make for complex operations within the same plant and would be especially burdensome for 

small manufacturers. At TSL 1, some manufacturers would likely choose to maintain a focus on 

silicon steel. Additionally, a few manufacturers indicated that those who choose to produce 

amorphous cores themselves would face a critical decision about whether or not to relocate 

outside of the U.S., since much of their existing equipment would become obsolete anyway. 

For those TSLs that can only be met with design options utilizing amorphous cores, 

industry conversion costs are easily estimated because, regardless of any assumptions about 

material availability or relative steel prices, manufacturers must either convert their facilities to 

produce amorphous, source amorphous cores, or exit the market. Since DOE is evaluating the 

scenario in which manufacturers convert their facilities, rather than source their cores, there is 

less uncertainty about total industry conversion costs. Based on DOE’s projections, TSLs 4 

through 7 fall into this category because only amorphous designs can meet the efficiency levels 

represented by these levels. No option to continue conventional steel production exists. 

For TSLs 1, 2, and 3, however, the dynamics of the core steel market introduce a great 

deal of uncertainty about potential manufacturer responses to standards. At these TSLs, 

manufacturers may still be able to meet minimum efficiency standards with traditional steels in 

some cases, but they may also transition to a greater use of amorphous. The extent to which 

manufacturers convert their facilities to manufacture more amorphous cores depends on their 

assessment of two core steel market dynamics. First, what are the prospects for the availability 

of amorphous steel? If manufacturers doubt that the supply of amorphous steel can match the 

market demand at these TSLs, then there will be at least some need for conventional steels, even 

though these steels are not cost-competitive designs at the prices assumed in the engineering 

analysis. The second major consideration depends on the first: to what extent would tight 

supply of amorphous steel increase its price and therefore make conventional steel once again 

cost competitive?

Manufacturer views on these two considerations will drive their response to standards at 

TSL 1, 2, and 3. Each manufacturer’s response, in the context of their base case market position 

and production capabilities, will determine the timing and level of conversion costs the industry 

ultimately incurs as a result of standards. Consequently, manufacturers could incur a range of 

conversion costs, depending upon how they elect to approach the market. 

12.4.8.1.2 Product Conversion Expenses

Product conversion expenses include engineering, prototyping, testing, and marketing 

expenses incurred by a manufacturer as it prepares to come into compliance with a standard. The 

Department’s estimates for product conversion expenses for liquid-immersed transformer 

manufacturers are based upon the industry’s annual R&D expenses and the extent to which the 

industry would need to convert to amorphous technology. DOE believes this is reasonable 

because the industry has very little experience producing amorphous transformers and will have 
12-28

to prepare to produce at volumes several times more than current volumes. Product conversion 

expenses are summarized in Table 12.4-23. 

Table 12.4-23 Summary of Product Conversion Expenditures for Liquid Immersed 

Industry

TSL 1 TSL 

2 

TSL 

3 

TSL 

4 TSL5 TSL 6 TSL 7

Product 

Conversion 

Expenditures ($M) 

24.2 65.2 65.7 96.1 96.1 96.1 96.1 

DOE’s estimates of the product and capital conversion costs for each representative 

design line can be found in Tables 12.4-24 through 12.4-28 below. 

Table 12.4-24 Product and Capital Conversion Costs for Design Line 1 by TSL

 TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Capital Conversion Costs ($M) $3.13 $3.13 $3.13 $18.85 $18.85 $20.55 $29.83

Product Conversion Costs ($M) $0.00 $0.00 $0.00 $16.20 $16.20 $16.20 $16.20

Total Conversion Costs ($M) $3.13 $3.13 $3.13 $35.05 $35.05 $36.75 $46.02

Table 12.4-25 Product and Capital Conversion Costs for Design Line 2 by TSL

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Capital Conversion Costs ($M) $0.00 $32.52 $32.52 $33.82 $37.11 $38.00 $49.78

Product Conversion Costs ($M) $0.00 $41.09 $41.09 $41.09 $41.09 $41.09 $41.09 

Total Conversion Costs ($M) $0.00 $73.61 $73.61 $74.90 $78.19 $79.09 $90.86

Table 12.4-26 Product and Capital Conversion Costs for Design Line 3 by TSL

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Capital Conversion Costs ($M) $0.30 $0.30 $0.60 $0.80 $0.80 $0.90 $1.50

Product Conversion Costs ($M) $0.46 $0.46 $0.91 $0.91 $0.91 $0.91 $0.91

Total Conversion Costs ($M) $0.76 $0.76 $1.51 $1.71 $1.71 $1.81 $2.41

Table 12.4-27 Product and Capital Conversion Costs for Design Line 4 by TSL

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Capital Conversion Costs ($M) $1.30 $1.30 $1.30 $15.26 $15.26 $15.26 $18.95 

Product Conversion Costs ($M) $0.00 $0.00 $0.00 $14.24 $14.24 $14.24 $14.24

Total Conversion Costs ($M) $1.30 $1.30 $1.30 $29.50 $29.50 $29.50 $33.19 
12-29

Table 12.4-28 Product and Capital Conversion Costs for Design Line 5 by TSL

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Capital Conversion Costs ($M) $20.55 $20.55 $23.04 $24.04 $24.14 $26.83 $24.44

Product Conversion Costs ($M) $23.70 $23.70 $23.70 $23.70 $23.70 $23.70 $23.70

Total Conversion Costs ($M) $44.25 $44.25 $46.74 $47.74 $47.84 $50.53 $48.14

12.4.8.2 Dry Type Transformers

The low-voltage dry-type and medium-voltage dry-type industries primarily rely on 

stacked core technologies. In large part, the medium-voltage dry-type market is standardized on 

mitered cores while the low-voltage market typically uses butt lap designs. 

12.4.8.2.1 Capital Conversion Expenditures

To determine capital conversion costs for dry type transformers for the final rule, DOE 

performed a bottoms-up analysis of conversion costs in a three-step process. In the first step, the 

Department developed base-case and standards-case forecasts for core steel usage using the LCC 

consumer choice model, which provided a distribution of likely design choices. Based on that 

distribution of design choices, DOE determined the most likely steel selections and identified a 

set of representative core design parameters (e.g.

For the purposes of modeling conversion costs, DOE assumed that transformers built 

with silicon steels would use stacked core designs. A representative core cutting machine is 

projected to cost $0.75 million installed for the low-voltage, dry type industry. A representative 

core cutting and mitering machine is projected to cost $2.5 million for the medium-voltage dry 

type industry. 

, core stack heights and lamination thicknesses). 

In the second step, based on the forecasted change in steel use and transformer core design, DOE 

determined the changes in production equipment necessary to produce the new mix of 

distribution transformer designs. The modeling of the production process and the equipment 

required (as well as the cost of that equipment) was based on data gathered through interviews 

with core steel manufacturers, core manufacturers, distribution transformer manufacturers, 

equipment suppliers and industry experts, as well as information gathered during the 2007 

rulemaking, In the third step, DOE estimated the capital outlays at each TSL for the industry 

based on the additional production equipment required. In the process of calculating capital 

conversion expenditures for dry type transformers, DOE also took into account feedback from 

manufacturers and industry experts. 

For low-voltage and medium-voltage distribution transformers using amorphous steel, 

DOE assumed that transformers would be built using wound core designs. Very few domestic 

dry-type manufacturers use wound core designs today. Dry-type manufacturing facilities would 

need to substantially retool to produce wound core products. Based on data gathered from 

interviews with core steel suppliers, core manufacturers, distribution transformer manufacturers, 
12-30

equipment suppliers and industry experts, DOE estimated that an amorphous production line 

with 1,200 tons of annual capacity would cost $950,000 to build. This production line cost was 

applied to calculate capital conversion costs for TSLs when the LCC analysis indicated the dry 

type market would convert to amorphous steel. 

The results of DOE’s capital conversion cost analysis can be found in Table 12.4-29 and 

Table 12.4.30. 

Table 12.4-29 Summary of Low Voltage Dry Type Distribution Transformer Capital 

Conversion Expenditures

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Total Capital Conversion Costs ($M) 4.5 5.3 12.0 28.5 30.7 45.6 

Table 12.4-30 Summary of Medium Voltage Dry Type Distribution Transformer Capital 

Conversion Expenditures

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Total Capital Conversion Costs ($M) 0.2 0.5 3.9 3.9 13.9 

12.4.8.2.2 Product Conversion Expenses

In the low-voltage dry-type market, DOE aggregated estimates of product conversion 

costs from manufacturers that were gathered during interviews and scaled those estimates to each 

design line based on market share. DOE’s estimates of product conversion costs for the lowvoltage dry-type market can be found in Table 12.4-31 below. 

Table 12.4-31 Summary of Product Conversion Expenditures for the Low-Voltage DryType Industry

TSL 1 TSL 2 TSL 3 TSL 4 TSL5 TSL6

Total Product Conversion Costs ($M) 2.9 3.6 5.0 8.0 8.0 8.0 

In the medium-voltage dry-type market, DOE calculated product conversion costs based 

on annual R&D expenditures for the industry and the steel types required at each efficiency 

level, focusing on the high volume design line 12. DOE’s estimates of the product conversion 

costs for the medium-voltage dry-type market can be found in Table 12.4-32 below. 
12-31

Table 12.4-32 Summary of Product Conversion Expenditures for the Medium Voltage Dry 

Type Industry

TSL 1 TSL 2 TSL 3 TSL 4 TSL5 

Total Product Conversion Costs ($M) 2.0 2.0 3.7 3.7 8.2 

12.4.9 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 

design lines. 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 standards: (1) a preservation of gross margin percentage 

markup scenario, and (2) a preservation of operating profit markup scenario. These scenarios 

lead to different markup values, which, when applied to the inputted MPCs, result in varying 

revenue and cash flow impacts.

12.4.9.1 Preservation of Gross Margin Percentage Markup Scenario

Under the preservation of gross margin percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels. As production costs 

increase with efficiency, this scenario implies that the absolute dollar markup will increase as 

well. Based on publicly available financial information for manufacturers of distribution 

transformers and comments from manufacturer interviews, DOE assumed the non-production 

cost markup—which includes SG&A expenses; research and development expenses; interest; 

and profit—to be 1.25 for distribution transformers. Because this markup scenario assumes that 

manufacturers would be able to maintain their gross margin percentage markups as production 

costs increase in response to an energy conservation standard, it represents a high bound to 

industry profitability under an energy conservation standard. 

12.4.9.2 Preservation of Operating Profit Markup Scenario

In the preservation of operating profit scenario, manufacturer markups are set so that 

operating profit one year after the compliance date of the new energy conservation standard is 

the same as in the base case. Under this scenario, as the cost of production and the cost of sales 

go up, manufacturers are generally required to reduce their markups to a level that maintains 

base case operating profit. The implicit assumption behind this markup scenario is that the 

industry can only maintain its operating profit in absolute dollars after the standard. Therefore, 

operating margin in percentage terms is squeezed (reduced) between the base case and standards 

case. 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. This markup scenario represents a low bound 

to industry profitability under an energy conservation standard. 
12-32

12.5 INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated 

indicators of financial impacts on the distribution transformer industry. The following sections 

detail additional inputs and assumptions for distribution transformers. The main results of the 

MIA are also reported in this section. The MIA consists of two key financial metrics: INPV and 

annual cash flows. 

12.5.1 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 distribution transformers GRIM 

estimates cash flows from 2012 to 2045. This timeframe models both the short-term impacts on 

the industry from the announcement of the standard until the compliance date (2012 until an 

estimated compliance date of January 2016) and a long-term assessment over the 30-year 

analysis period used in the NIA (2016 – 2045). 

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 distribution transformer industry, DOE examined the 

two markup scenarios described above, the preservation of gross margin percentage markup 

scenario and the preservation of operating profit markup scenario, for each superclass. Tables 

12.5-1 through 12.5-6 provide the INPV estimates for the three superclasses in the distribution 

transformers industry. 

Table 12.5-1 Changes in Industry Net Present Value for Liquid-immersed Distribution 

Transformers - Preservation of Operating Profit Markup Scenario

Units Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV 2011

$ M 575.1 526.9 465.9 461.7 389.0 382.1 358.4 181.6 

Change 

in INPV

2011

$ M - (48.2) (109.3) (113.4) (186.1) (193.0) (216.7) (393.5) 

% - (8.4) (19.0) (19.7) (32.4) (33.6) (37.7) (68.4) 
12-33

Table 12.5-2 Changes in Industry Net Present Value for Liquid-immersed Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario

 

Unit

s 

Base 

Case

Trial Standard Level

1 2 3 4 5 6 7

INPV 2011

$ M 575.1 551.6 508.1 506.2 477.8 473.8 486.6 575.6 

Change 

in INPV

2011

$ M - (23.5) (67.0) (68.9) (97.3) (101.4) (88.5) 0.5 

% - (4.1) (11.7) (12.0) (16.9) (17.6) (15.4) 0.1 

Table 12.5-3 Changes in Industry Net Present Value for Low-Voltage Dry-Type 

Distribution Transformers - Preservation of Operating Profit Markup Scenario

Units Base Case Trial Standard Level

1 2 3 4 5 6

INPV 2011$ M 237.6 229.6 226.5 219.0 198.7 190.8 159.0 

Change in INPV

2011$ M (8.0) (11.1) (18.6) (38.9) (46.8) (78.6) 

% (3.4) (4.7) (7.8) (16.4) (19.7) (33.1) 

Table 12.5-4 Changes in Industry Net Present Value for Low-Voltage Dry-Type 

Distribution Transformers - Preservation of Gross Margin Percentage Markup Scenario

Units Base Case Trial Standard Level

1 2 3 4 5 6

INPV 2011$ M 237.6 252.4 249.4 265.7 279.9 298.6 356.6 

Change in INPV

2011$ M 14.8 11.8 28.1 42.3 61.0 118.9 

% 6.2 5.0 11.8 17.8 25.7 50.1 
12-34

Table 12.5-5 Changes in Industry Net Present Value for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Operating Profit Markup Scenario

Units Base 

Case

Trial Standard Level

1 2 3 4 5

INPV 2011$ M 68.7 67.3 65.7 57.9 58.0 34.5 

Change in 

INPV

2011$ M - (1.4) (2.9) (10.7) (10.7) (34.1) 

% - (2.0) (4.2) (15.6) (15.5) (49.7) 

Table 12.5-6 Changes in Industry Net Present Value for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Gross Margin Percentage Markup Scenario

Units Base 

Case

Trial Standard Level

1 2 3 4 5

INPV 2011$ M 68.7 69.3 71.7 74.4 74.3 81.5 

Change in 

INPV

2011$ M - 0.7 3.0 5.7 5.6 12.9 

% - 1.0 4.4 8.3 8.2 18.7 

12.5.2 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, Figures 12.5-1 through 12.5-6 below present the annual free cash flows 

from 2012 through 2023 for the base case and different TSLs in the standards case. 

Annual cash flows are discounted to the base year, 2012. Between 2012 and the 2016, the 

compliance date of the amended energy conservation standard, cash flows are driven by the level 

of 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 
12-35

conversion costs lower cash inflows from operations 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, amended 

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 value 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 on cash flow 

depends on the operating revenue. In the preservation of gross margin percentage scenario, the 

manufacture markup is held constant to yield the same gross margin percentage in the standards 

case at each TSL as in the base case in the year after the standard takes effect. The implicit 

assumption is that manufacturers can freely pass on and mark up higher cost units. The result

under this scenario is that operating cash flow increases (in absolute terms) as revenue increases. 

At the highest TSLs where MPCs dramatically increase, this scenario drives large increases in

operating cash flow relative to the base case. The larger the production cost increase, then, the 

more likely it is that the increase in operating cash flow after the standard takes affect will 

outweigh the initial conversion costs. 

Under the preservation of operating profit scenario, cash flow decreases at each TSL in 

the standards case compared to the base case because, since the absolute dollar amount of the 

gross margin does not change despite an increase in sales and cost of goods sold, the gross 

margin percentage is reduced. Figures 12.5-1 through 12.5-6 present the annual free cash flows 

for each superclass of distribution transformers. 
12-36

Figure 12.5-1 Annual Industry Free Cash Flows for Liquid-immersed Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario

$(200)

$(150)

$(100)

$(50)

$-

$50 

$100 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7
12-37

Figure 12.5-2 Annual Industry Free Cash Flows for Liquid-immersed Distribution 

Transformers - Preservation of Operating Profit Markup Scenario

$(200)

$(150)

$(100)

$(50)

$-

$50 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7
12-38

Figure 12.5-3 Annual Industry Free Cash Flows for Low-Voltage Dry-Type Distribution 

Transformers - Preservation of Gross Margin Percentage Markup Scenario

$(60)

$(50)

$(40)

$(30)

$(20)

$(10)

$-

$10 

$20 

$30 

$40 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6
12-39

Figure 12.5-4 Annual Industry Free Cash Flows for Low-Voltage Dry-Type Distribution 

Transformers - Preservation of Operating Profit Markup Scenario

$(70)

$(60)

$(50)

$(40)

$(30)

$(20)

$(10)

$-

$10 

$20 

$30 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6
12-40

Figure 12.5-5 Annual Industry Free Cash Flows for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Gross Margin Percentage Markup Scenario

$(15)

$(10)

$(5)

$-

$5 

$10 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
12-41

Figure 12.5-6 Annual Industry Free Cash Flows for Medium-Voltage Dry-Type 

Distribution Transformers - Preservation of Operating Profit Markup Scenario

$(20)

$(15)

$(10)

$(5)

$-

$5 

$10 

2011$ Millions

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5
12-42

12.6 IMPACTS ON MANUFACTURER SUBGROUPS

As described in Section 12.2.3 above, DOE identified one subgroup of distribution 

transformer manufacturers: small manufacturers. The results of this subgroup analysis are

described below.

12.6.1 Impacts on Small Business Manufacturers

12.6.1.1 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), UL qualification 

directories, individual company websites, and market research tools (e.g., Dun and Bradstreet 

reports) to create a list of every company that manufactures or sells distribution transformers 

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 its list, as necessary, to determine 

whether they met the SBA’s definition of a small business manufacturer of covered distribution 

transformers. DOE screened out companies that did not offer products covered by this 

rulemaking, did not meet the definition of a “small business,” or are foreign owned and operated. 

DOE initially identified at least 63 potential manufacturers of distribution transformers 

sold in the U.S. DOE reviewed information on these 63 potential manufacturers and determined 

33 were large manufacturers, were foreign owned, and/or operated or did not manufacture 

transformers covered by this rulemaking. DOE then attempted to contact the remaining 

companies that were potential small business manufacturers. Though many companies were 

unresponsive, DOE was able to determine that approximately 30 meet the SBA’s definition of a 

small business and likely manufacture transformers covered by this rulemaking. 

Before issuing this NOPR, DOE attempted to contact the small business manufacturers of 

distribution transformers it had identified. Three of the small businesses consented to being 

interviewed during the MIA interviews, and DOE received feedback from additional small 

businesses through surveys, phone interviews, follow-up discussions, and consensus meetings. 

DOE also obtained information about small business impacts while interviewing large 

manufacturers. 

Liquid Immersed.

Six major manufacturers supply more than 80 percent of the market for liquid-immersed 

transformers. None of the major manufacturers of distribution transformers covered in this 

rulemaking are considered to be small businesses. The vast majority of shipments are 

manufactured domestically. Electric utilities compose the customer base and typically buy on 

first-cost. Many small manufacturers position themselves towards the higher end of the market or 

in particular product niches, such as network transformers or harmonic mitigating transformers, 

but, in general, competition is based on price after a given unit’s specs are prescribed by a 

customer.
12-43

Low-Voltage Dry-Type. 

Four major manufacturers supply more than 80 percent of the market for low-voltage 

dry-type transformers. None of the major low-voltage dry-type manufacturers of distribution 

transformers covered in this rulemaking are small businesses. The customer base rarely 

purchases on efficiency and is very first-cost conscious, which, in turn, places a premium on 

economies of scale in manufacturing. DOE estimates approximately 80 percent of the market is 

served by imports, mostly from Canada and Mexico. Many of the small businesses that compete 

in the low-voltage dry-type market produce specialized transformers that are exempted from 

standards. Roughly 50 percent of the market by revenue is exempted from DOE standards. This 

market is much more fragmented than the one serving DOE-covered low-voltage dry-type

transformers. 

In the DOE-covered low-voltage dry-type market, low-volume manufacturers typically 

do not compete directly with large manufacturers using business models similar to those of their 

bigger rivals because scale disadvantages in purchasing and production are usually too great a 

barrier in this portion of the market.. The exceptions to this rule are those companies that also 

compete in the medium-voltage market and, to some extent, are able to leverage that experience 

and production economies. More typically, low-volume manufacturers have focused their 

operations on one or two parts of the value chain—rather than all of it—and trained their sights 

on market segments outside of the high-volume baseline efficiency market.

In terms of operations, some small firms focus on the engineering and design of 

transformers and source the production of the cores or even the whole transformer, while other 

small firms focus on just production and rebrand for companies that offer broader solutions 

through their own sales and distribution networks. 

In terms of market focus, many small firms simply compete entirely in the DOEexempted markets. DOE did not attempt to contact companies operating entirely in this very 

fragmented market. Of those that do compete in the DOE-covered market, a few small 

businesses reported a focus on the high-end of the market, often selling NEMA Premium or 

better transformers as retrofit opportunities. Others focus on particular applications or other 

niches, like data centers, and become well-versed in the unique needs of a particular customer 

base. 

Medium-Voltage Dry-Type.

The medium-voltage dry-type transformer market is relatively consolidated with one 

large company holding a substantial share of the market. Electric utilities and industrial users 

make up most of the customer base and typically buy on first-cost or features other than 

efficiency. DOE estimates that at least 75 percent of production occurs domestically. Several 

manufacturers also compete in the power transformer market. Like the low-voltage dry-type

industry, most small business manufacturers often produce transformers exempted from DOE 

standards. DOE estimates 10 percent of the market is exempt from standards.
12-44

12.6.1.2 Comparison Between Large and Small Entities

Small distribution transformer manufacturers differ from large manufacturers in several 

ways that affect the extent to which they would be impacted by the proposed standard. 

Characteristics of small manufacturers include: less access to capital, lower production volumes, 

fewer engineering resources, less technical expertise, and lack of purchasing power for high 

performance materials.

In general, small manufacturers have less access to capital which would be needed to 

cover the conversion costs associated with a new standard. Investors have less of an incentive to 

make loans to small businesses because they are typically riskier than loans made to large 

businesses. Therefore, a manufacturer that has more than 750 employees, or that is owned by a 

parent company with more than 750 employees, would be able to obtain funds (either by itself or 

through its parent company) more easily than would a small manufacturer. 

Small manufacturers also have lower production volumes than large manufacturers. 

Therefore, their conversion costs would need to be spread across fewer units and the reduction in 

profit/unit would be significantly greater for them than for a large manufacturer. Although the 

same equipment would need to be purchased by both large and small manufacturers in order to 

produce transformers that meet DOE standards, the return on investment for a small 

manufacturer would be lower because it does not sell as many units. 

Since they have fewer employees, smaller companies are also more likely to have smaller 

engineering teams. If new standards require a lot of product development time to implement, the 

engineering staff of a small manufacturer may not be large enough to address higher efficiency 

standards while performing routine work. In addition, if investments need to be made for 

conversion costs, smaller companies are less likely to have enough capital left over to invest in 

the necessary additional engineering resources. 

Generally, smaller companies may also have less experience and expertise in working 

with newer technologies. Large companies with better access to capital and bigger R&D budgets 

have more resources to invest in the development of new technologies and product lines. In the 

case of transformers, large manufacturers have exhibited greater technical expertise and 

experience in working with amorphous core and symmetric core technologies, both of which 

allow higher efficiency levels to be achieved. During manufacturer interviews, one manufacturer 

stated that there should be no major impact on small manufacturers if standards can be met with 

stacked core technology, but if alternative core constructions are needed, then small 

manufacturers may be negatively impacted because they lack the resources to pursue or develop 

such technologies. 

Furthermore, small manufacturers can be at a disadvantage due to their lack of 

purchasing power for high performance materials, especially considering the limited availability 

of high grade steels in the production of distribution transformers. During manufacturer 

interviews, one manufacturer stated that it was unable to even obtain a quote for amorphous 

steel, let alone purchase the material.
12-45

12.6.1.3 Description and Estimate of Compliance Requirements

Liquid Immersed. Based on interviews with manufacturers in the liquid-immersed 

market, DOE does not believe small manufacturers will face significant capital conversion costs 

at the levels proposed in today’s rulemaking. DOE expects small manufacturers of liquidimmersed distribution transformers to continue to produce silicon steel cores, rather than invest 

in amorphous technology. While silicon steel designs capable of achieving TSL 1 would get 

larger, and thus reduce throughput, most manufacturers said the industry in general has 

substantial excess capacity due to the recent economic downturn. Therefore, DOE believes TSL 

1 would not require the typical small manufacturer to invest in additional capital equipment. 

However, small manufacturers may incur some engineering and product design costs associated 

with re-optimizing their production processes around new baseline products. DOE estimates TSL 

1 would require industry production development costs of only one-half of one year’s annual 

industry R&D expenses, as the levels do not require any changes in technology or steel types. 

Because these costs are relatively fixed per manufacturer, these one-time costs impact smaller 

manufacturers disproportionately compared to larger manufacturers. Table 12.6-1 below 

illustrates this effect by comparing the conversion costs to the annual R&D expenses of a typical 

small company and a typical large company. 

Table 12.6-1 Estimated Product Conversion Costs as a Percentage of Annual R&D 

Expense

Product 

Conversion Cost 

Product Conversion Cost as a 

Percentage of Annual R&D Expense 

Typical Large Manufacturer $1.34 M 20%

Typical Small Manufacturer $1.34 M 222%

While the costs disproportionately impact small manufactures, the standard levels, as 

stated above, do not require small manufacturers to invest in entirely different production 

processes nor do they require steels or core construction techniques with which these 

manufacturers are not familiar. A range of design options would still be available. 

Low-Voltage Dry-Type. For the low-voltage dry-type market, at TSL 2, DOE estimates 

capital conversion costs of $0.75 million and product conversion costs of $0.2 million for a 

typical small and large manufacturer, based on manufacturer interviews. Because of the largely 

fixed nature of these one-time conversion expenditures that distribution transformer 

manufacturers would incur as a result of standards, small manufacturers who choose to maintain 

in-house production will likely be disproportionately impacted compared to large manufacturers. 

As Table 12.6-2 indicates, small manufacturers face a greater relative hurdle in complying with 

standards should they opt to continue to maintain core production in-house. 
12-46

Table 12.6-2 Estimated Capital and Product Conversion Costs as a Percentage of Annual 

Capital Expenditures and R&D Expense

Capital Conversion 

Cost as a Percentage

of Annual Capital 

Expenditures

Product Conversion 

Cost as a Percentage 

of Annual R&D 

Expense

Total Conversion Cost 

as a Percentage of 

Annual EBIT

Large Manufacturer 37% 10% 15%

Small Manufacturer 137% 44% 70%

As demonstrated in the table above, the investments required to meet TSL 2 

disproportionately impact small businesses. However, DOE’s capital conversion costs estimates 

in the table above assume that small businesses are currently producing their cores in-house and 

will choose to do so in the future, rather than source them from third-party core manufactures 

who often have significant cost advantages through bulk steel purchasing power and greater 

production efficiencies due to higher volumes. As such, many small businesses DOE interviewed 

already source a large percentage of their cores and many indicated they expected such a strategy 

would be the low-cost option under higher standards. 

Compared to higher TSLs, TSL 2 provides many more design paths for small 

manufacturers to comply. DOE’s engineering analysis indicates manufacturers can continue to 

use the low-capital butt-lap core designs, meaning investment in mitering capability is not 

necessary to comply. Manufacturers can use higher-quality grain oriented steels in butt-lap 

designs to meet these proposed efficiency levels, source some or all cores, or invest in mitering 

capability. DOE notes that roughly half of the small business low-voltage dry-type

manufacturers DOE interviewed already have mitering capability. For all of the reasons 

discussed, DOE believes the capital expenditures it assumed for small businesses are likely 

conservative and that small businesses have a variety of technical and strategic paths to continue 

to compete in the market at TSL 2.

Medium-Voltage Dry-Type. Based on its engineering analysis and interviews, DOE 

expects minimal capital expenditures for the industry to meet TSL 2. DOE understands that the 

market is already standardized on step-lap mitering, so manufacturers will not need to make 

major investments for more advanced core construction. Furthermore, TSL 2 does not require a 

change to much thinner steels such as M3 or H0. The industry can use M4 and H1, thicker steels 

with which it has much more experience and which are easier to employ in the stacked-core 

production process that dominates the medium-voltage market. However, some investment will 

be required to maintain capacity as some manufacturers will likely migrate to more M4 and H1 

steel from the slightly thicker M5, which is also common. Additionally, design options at TSL 2 

typically have larger cores, also slowing throughput. Therefore, some manufacturers may need to 

invest in additional production equipment. Alternatively, depending on each company’s 

availability capacity, manufacturers could employ additional production shifts, rather than invest 

in additional capacity.

 For the medium-voltage dry-type market, at TSL 2, DOE estimates low capital and 

product conversion costs that are relatively fixed for both small and large manufacturers. Similar 

to the low-voltage dry-type market, small manufacturers will likely be disproportionately 
12-47

impacted compared to large manufacturers due to the fixed nature of the conversion 

expenditures. Table 12.6-3 illustrates the relative impacts on small and large manufacturers.

Table 12.6-3 Estimated Capital and Product Conversion Costs as a Percentage of Annual 

Capital Expenditures and R&D Expense

Capital Conversion 

Cost as a Percentage 

of Annual Capital 

Expenditures

Product Conversion 

Cost as a Percentage 

of Annual R&D 

Expense

Total Conversion Cost 

as a Percentage of 

Annual EBIT

Large Manufacturer 3% 9% 8%

Small Manufacturer 40% 117% 98%

Summary of Compliance Impacts. The compliance impacts on small businesses are 

discussed above for low-voltage dry-type, medium-voltage dry-type, and liquid-filled 

distribution transformer manufacturers. 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 and capital investments required. 

12.7 OTHER IMPACTS

12.7.1 Employment

 Liquid Immersed. Based on interviews and industry research, DOE estimates that 

there are roughly 5,000 employees associated with DOE-covered liquid immersed distribution 

transformer production and some three-quarters of these workers are located domestically. DOE 

does not expect large changes in domestic employment to occur due to today’s standard. 

Manufacturers generally agreed that amorphous production is more labor-intensive and would 

require greater labor expenditures than traditional steel core production. So long as domestic 

plants are not relocated outside the country, DOE expects moderate increases in domestic 

employment at TSL1 and TSL2. There could be a small drop in employment at small, domestic 

manufacturing firms if small manufacturers begin sourcing cores. This employment would 

presumably transfer to the core makers, some of whom are domestic and some of whom are 

foreign. There is a risk that energy conservation standards that largely require the use of 

amorphous steel could cause even large manufacturers who are currently producing transformers 

in the U.S. to evaluate offshore options. Faced with the prospect of wholesale changes to their 

production process, large investments and stranded assets, some manufacturers expect to 

strongly consider shifting production offshore at TSL 3 or TSL 4 due to the increased labor 

expenses associated with the production processes required to make amorphous steel cores. In 

summary, at TSLs 1 and 2, DOE does not expect significant impacts on employment, but at TSL 

3 or higher, which would require more investment, the impact is very uncertain. 
12-48

Low-Voltage Dry-Type. Based on interviews with manufacturers, DOE estimates that 

there are approximately 2,200 employees associated with DOE-covered low-voltage dry-type

production. Approximately 75 percent of these employees are located outside of the U.S. 

Typically, high volume units are made in Mexico, taking advantage of lower labor rates, while 

custom designs are made closer to the manufacturer’s customer base or R&D centers. DOE does 

not expect large changes in domestic employment to occur due to a standard. Most production 

already occurs outside the U.S. and, by and large, manufacturers agreed that most design changes 

necessary to meet higher energy conservation standards would increase labor expenditures, not 

decrease them. If, however, small manufacturers began sourcing cores instead of manufacturing 

them in-house, there could be a small drop in employment at these firms. This employment 

would presumably transfer to the core makers, some of whom are domestic and some of whom 

are foreign. In summary, DOE does not expect significant changes to domestic low-voltage drytype industry employment levels as a result of the proposed standards. Higher TSLs may lead to 

small declines in domestic employment as more firms will be challenged with what amounts to 

clean-sheet redesigns. Facing the prospect of greenfield investments, these manufacturers may 

elect to make those investments in lower-labor cost countries or source their cores from 

potentially foreign manufacturers. 

Medium-Voltage Dry-Type. Based on interviews with manufacturers, DOE estimates 

that there are approximately 1,850 employees associated with DOE-covered medium-voltage 

dry-type transformer production. Approximately 75 percent of these employees are located 

domestically. With the exception of TSLs that require amorphous cores, manufacturers agreed 

that most design changes necessary to meet higher energy conservation standards would increase 

labor expenditures, not decrease them, but current production equipment would not be stranded, 

mitigating any incentive to move production offshore. Corroborating this, the largest 

manufacturer and domestic employer in this market has indicated that the standard, as proposed 

in this rule, will not cause their company to reconsider production location. As such, DOE does 

not expect significant changes to domestic medium-voltage dry-type industry employment levels 

as a result of the standard proposed in this rule. For TSLs that would require amorphous cores, 

DOE does anticipate significant changes to domestic medium-voltage dry-type industry 

employment levels.

12.7.2 Production Capacity 

Capacity can be viewed from two perspectives: one focused on core steel supply and one 

focused more broadly on transformer production (which would encompass core steel supply 

issues). 

In terms of core steel, the issue of capacity rests largely with the liquid immersed market, 

which uses roughly three quarters of the core steel consumed by the entire DOE-covered 

distribution transformer market. It must be noted also that core steel is a global market and an 

active import/export market exists. Thus, surges in demand in foreign countries can constrain 

supply with respect to U.S. market needs. Additionally, some steel types and grades are used not 

only across superclasses but are also used substantially in transformers not covered by this 

analysis. Most notably, H0 and H1, steels well-suited to high-efficiency stacked-core designs in 

the dry-type market, happen to be most popular in the power transformer market. 
12-49

With that said, based on industry interviews, DOE expects minimal core steel capacity 

issues at those TSLs that do not force the entire market into amorphous steel usage. At those 

TSLs that are projected to move the majority of the market to amorphous steel, DOE believes 

there could be capacity issues associated with ramping amorphous steel production in time to 

meet the 1/1/2016 compliance date. This occurs at TSL 4 in the liquid immersed market, at TSL 

5 in the medium-voltage dry-type market, and at TSL 4 in the low-voltage dry-type market. In 

aggregate, based on DOE analysis, at current steel prices, these levels portend more than a 10-

fold increase in the demand of amorphous ribbon in the U.S. Because this is only supplied by 

one supplier, and because most of that supplier’s output is currently used to meet foreign 

demand, which DOE has no reason to believe will subside, let alone stop growing, the 

department has concerns about the availability of a sufficient supply of amorphous at these high 

TSLs.

DOE understands that M2 steel, which remains cost competitive with amorphous designs 

at efficiencies higher than M3 is capable of, has a technical engineering constraint associated 

with its output. A maximum of 1 pound of M2 steel can be produced for every 4 pounds of M3 

or lower steel. Therefore, if there is no market for M3 steel, it is highly unlikely that M2 steel 

could be used to meet a significant portion of the liquid immersed market demand. 

In terms of transformer production capacity, DOE understands from interviews that there 

is significant excess capacity in silicon steel production assets. Shipments are well off their peak 

from 2008. Therefore, DOE does not expect capacity problems at levels that maintain silicon 

steels as viable design options in the market. However, at the TSLs noted above, at which only 

amorphous cores would likely be competitive, transformer manufacturers would face large 

hurdles in changing over their entire production processes in three years, particularly in the 

medium dry-type market which has no experience using amorphous technology. Even under the 

assumption that all core steels are widely available, substantial changes in transformer efficiency 

standards could require the entire industry to order the same types of specialized equipment, 

which come with long lead times, and could only be ordered after a lengthy R&D process of 

engineering, testing, and prototyping. 

In summary, at TSLs 1 through 3 for the liquid immersed market, TSLs 1 through 4 for 

medium-voltage dry type market, and TSLs 1 through 3 for the low-voltage dry type market, 

DOE does not expect significant impacts on capacity. However, at higher TSLs, DOE believes 

there is a risk of adverse impacts on capacity due to a potential near-term limitation on 

amorphous steel supply and, to a lesser extent, long lead times for specialized production 

equipment. 

12.7.3 Cumulative Regulatory Burden 

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

combined effects of recent or impending 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. In addition to energy conservation 

standards, other regulations can significantly affect manufacturers’ financial operations. Multiple 

regulations affecting the same manufacturer can strain profits and lead companies to abandon 

product lines or markets with lower expected future returns than competing products. For these 
12-50

reasons, DOE conducts an analysis of cumulative regulatory burden as part of its rulemakings 

pertaining to appliance efficiency. During previous stages of this rulemaking DOE identified a 

number of requirements in addition to amended energy conservation standards for distribution 

transformers. 

12.7.3.1 Federal Regulations on Distribution Transformer Manufacturers

For low-voltage dry-type transformers, the Energy Policy Act of 2005 required 

compliance with NEMA TP-1 standards by the beginning of 2007. For liquid-immersed and 

medium voltage dry type transformers, DOE’s 2007 energy conservation standards rulemaking 

required compliance by the beginning of 2010. Since the last set of energy conservation 

standards for distribution transformers went into effect very recently and required large capital 

investments and retooling, any new standards which would require additional retooling and 

investment would create a cumulative burden for manufacturers. 

In addition to efficiency regulations, liquid-immersed distribution transformer 

manufacturers also need to comply with the National Energy Code (NFPA 70), which requires 

that indoor liquid-immersed transformers be located in separate transformer vaults and provides 

stipulations for fire walls, doors, ventilation, and oil containment. The impetus for this section of 

the National Energy Code is to prevent fires associated with flammable insulating fluids, but 

such requirements increase the installed cost of liquid-immersed transformers. 

12.7.3.2 Foreign Regulations on Distribution Transformer Manufacturers

Manufacturers that export their products to places such as Canada, China, Mexico, or the 

Middle East need to comply with foreign as well as domestic regulations. The Canadian 

government regulates efficiency of dry-type transformers through its Canadian Standards 

Association (CSA) standard C802.2-00 (effective January 1, 2005). China regulates transformer 

efficiency through its China Compulsory Certification (CCC) program (effective May 1, 2002), 

which requires manufacturers of various products including transformers to obtain the CCC 

Mark before exporting to or selling in the Chinese market. In Mexico, liquid-immersed units are 

regulated through NOM-002-SEDE-2010. 

12.8 CONCLUSION

The following section summarizes the impacts for the scenarios DOE believes are most 

likely to capture the range of impacts on distribution transformer 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. 

Liquid Immersed.

TSL 1 represents an increase in efficiency where a diversity of electrical steels are costcompetitive and economically feasible for all design lines. At TSL 1, DOE estimates impacts on 

INPV for liquid-immersed distribution transformer manufacturers to range from -$48.2 million 

to -$23.5 million, corresponding to a change in INPV of -8.4 percent to -4.1 percent. At this 

level, industry free cash flow is estimated to decrease by approximately 54.4 percent to $16.4 
12-51

million, compared to the base-case value of $36.0 million in the year before the compliance date 

(2015). 

While TSL 1 can be met with traditional steels, including M3, in all design lines, 

amorphous core transformers will be incrementally more competitive on a first cost basis. 

According to manufacturer interviews, this would likely induce some manufacturers to gradually 

build amorphous steel transformer production capacity. Because the production process for 

amorphous cores is entirely separate from that of silicon steel cores, large investments in new 

capital, including new core cutting equipment and annealing ovens will be required. 

Additionally, a great deal of testing, prototyping, design and manufacturing engineering 

resources will be required because most manufacturers have relatively little experience, if any, 

with amorphous steel transformers. These capital and production conversion expenses lead to a 

reduction in cash flow in the years preceding the standard. In the lower-bound scenario, DOE 

assumes manufacturers can only maintain annual operating profit in the standards case. 

Therefore, these conversion investments, and manufacturers’ higher working capital needs 

associated with more expensive transformers, drain cash flow and lead to a greater reduction in 

INPV, when compared to the upper-bound scenario. In the upper bound scenario, DOE assumes 

manufacturers will be able to fully markup and pass on the higher product costs, leading to 

higher operating income. This higher operating income essentially offsets the conversion costs 

and the increase in working capital requirements, leading to a negligible change in INPV at 

TSL1 in the upper-bound scenario. 

TSL 2 represents EL1 for all design lines. At TSL 2, DOE estimates impacts on INPV for 

liquid-immersed distribution transformer manufacturers to range from -$109.3 million to -$67.0 

million, corresponding to a change in INPV of -19.0 percent to -11.7 percent. At this level, 

industry free cash flow is estimated to decrease by approximately 133.7 percent to -$12.1 

million, compared to the base-case value of $36.0 million in the year before the compliance date 

(2015). 

TSL 2 requires the same efficiency levels as TSL 1, except for DL 2, which is increased 

from baseline to EL1. EL1, as opposed to the baseline efficiency, could induce manufacturers to 

build more amorphous capacity, when compared to TSL 1, because amorphous core transformers 

become incrementally more cost competitive. Because DL2 represents the largest share of core 

steel usage of all design lines, this has a significant impact on investments. There are more 

severe impacts on industry in the lower-bound profitability scenario when these greater one-time 

cash outlays are coupled with slight margin pressure. In the high-profitability scenario, 

manufacturers are able to maintain gross margins, mitigating the adverse cash flow impacts of 

the increased investment in working capital (associated with more expensive transformers).

TSL 3 represents the maximum efficiency level achievable with M3 core steel. At TSL 3, 

DOE estimates impacts on INPV for liquid-immersed distribution transformer manufacturers to 

range from -$113.4 million to -$68.9 million, corresponding to a change in INPV of -19.7 

percent to -12.0 percent. At this level, industry free cash flow is estimated to decrease by 

approximately 137.6 percent to -$13.6 million, compared to the base-case value of $36.0 million 

in the year before the compliance date (2015).
12-52

TSL 3 results are similar to TSL 2 results because the efficiency levels are the same 

except for DL3 and DL5, which each increase to EL 2 under TSL 3. The increase in stringency 

makes amorphous core transformers slightly more cost competitive in these DLs, according to 

the engineering analysis, which would likely increase amorphous core transformer capacity 

needs, all other things being equal, and drive more investment to meet the standards. 

TSL 4 represents the maximum NPV with 7 percent discounting. At TSL 4, DOE 

estimates impacts on INPV for liquid-immersed distribution transformer manufacturers to range 

from -$186.1 million to -$97.3 million, corresponding to a change in INPV of -32.4 percent to -

16.9 percent. At this level, industry free cash flow is estimated to decrease by approximately 

206.6 percent to -$38.4 million, compared to the base-case value of $36.0 million in the year 

before the compliance date (2015). 

During interviews, manufacturers expressed differing views on whether the efficiency 

levels embodied in TSL 4 would shift the market away from silicon steels entirely. Because 

DL3 and DL5 must meet EL4 at this TSL, DOE expects the majority of the market would shift to 

amorphous core transformers at TSL 4 and above. Even assuming a sufficient supply of 

amorphous steel were available, TSL 4 and above would require a dramatic build up in 

amorphous core transformer production capacity. DOE believes this wholesale transition away 

from silicon steels could seriously disrupt the market, drive small businesses to either source 

their cores or exit the market, and lead even large businesses to consider moving production 

offshore or exiting the market altogether. The negative impacts are again driven by the large 

conversion costs associated with new amorphous steel production lines. If the higher first costs 

at TSL 4 drive more utilities to refurbish rather than replace failed transformers, a scenario many 

manufacturers predicted at the efficiency levels and prices embodied in TSL 4, reduced 

transformer sales could cause further declines in INPV. 

TSL 5 represents EL 3 for all design lines. At TSL 5, DOE estimates impacts on INPV 

for liquid-immersed distribution transformer manufacturers to range from -$193.0 million to -

$101.4 million, or a change in INPV of -33.6 percent to -17.6 percent. At this level, industry free 

cash flow is estimated to decrease by approximately 210.8 percent to -$39.9 million, compared 

to the base-case value of $36.0 million in the year before the compliance date (2015). 

TSL 5 would likely shift the entire market to amorphous core transformers, leading to 

even greater investment needs than TSL 4, and further driving the adverse impacts discussed 

above. 

TSL 6 represents the maximum source energy savings with positive NPV with 7 percent 

discounting. At TSL 6, DOE estimates impacts on INPV for liquid-immersed distribution 

transformer manufacturers to range from -$216.7 million to -$88.5 million, corresponding to a 

change in INPV of -37.7 percent to -15.4 percent. At this level, industry free cash flow is 

estimated to decrease by approximately 217.5 percent to -$42.3 million, compared to the basecase value of $36.0 million in the year before the compliance date (2015). 

The impacts at TSL 6 are similar to those DOE expects at TSL 5, except that slightly 

more amorphous core production capacity will be needed because TSL 6-compliant transformers 
12-53

will have somewhat heavier cores and thus require more amorphous steel. This leads to slightly 

greater capital expenditures at TSL 6 compared to TSL 5.

TSL 7 represents the maximum technologically feasible level (max tech). At TSL 7, DOE 

estimates impacts on INPV for liquid-immersed distribution transformer manufacturers to range 

from -$393.5 million to $0.5 million, corresponding to a change in INPV of -68.4 percent to 0.1 

percent. At this level, industry free cash flow is estimated to decrease by approximately 246.2 

percent to -$52.7 million, compared to the base-case value of $36.0 million in the year before the 

compliance date (2015). 

The impacts at TSL 7 are similar to those DOE expects at TSL 6, except that slightly 

more amorphous core production capacity will be needed because TSL 7-compliant transformers 

will have somewhat heavier cores and thus require more amorphous steel. This leads to slightly 

greater capital expenditures at TSL 7 compared to TSL 6, incrementally reducing industry value. 

Low-Voltage Dry-Type. 

TSL 1 represents the maximum efficiency level achievable with M6 core steel. At TSL 1, 

DOE estimates impacts on INPV for low-voltage, dry-type distribution transformer 

manufacturers to range from -$8.0 million to $14.8 million, corresponding to a change in INPV 

of -3.4 percent to 6.2 percent. At this level, industry free cash flow is estimated to decrease by 

approximately 5.0 percent to $14.5 million, compared to the base-case value of $15.5 million in 

the year before the compliance date (2015).

TSL 1 provides many design paths for manufacturers to comply. DOE’s engineering 

analysis indicates manufacturers can continue to use the low-capital butt-lap core designs, 

meaning investment in mitering or wound core capability is not necessary. Manufacturers can 

use higher-quality grain oriented steels in butt-lap designs to meet TSL1, source some or all 

cores, or invest in modified mitering capability (if they do not already have it). 

TSL 2 represents EL 3 for design line 7, EL 2 for design line 8 and no efficiency increase 

for design line 6. At TSL 2, DOE estimates impacts on INPV for low-voltage, dry-type 

distribution transformer manufacturers to range from -$11.1 million to $11.8 million, 

corresponding to a change in INPV of -4.7 percent to 5.0 percent. At this level, industry free cash 

flow is estimated to decrease by approximately 9.1 percent to $13.8 million, compared to the 

base-case value of $15.5 million in the year before the compliance date (2015). 

TSL 2 differs from TSL1 in that DL7 must meet EL3, up from EL2. Comments received 

from the NOPR and consultations with technical experts suggest that butt-lap technology can 

still be used to achieve EL 3 for DL 7. However, DOE expects the high volume manufacturers 

which supply most of the market to employ mitered cores at this efficiency level. Therefore, the 

increase in conversion costs for DL 7, which represents more than three-quarters of the market 

by core weight in this superclass, is primarily driven by the need to purchase additional core 

cutting equipment to accommodate the production of larger, mitered cores. Furthermore, 

manufacturers also indicated that there would be a reduced burden at TSL 2 relative to TSL 1 

because they would be able to standardize the use of NEMA Premium® (with the exception of 

DL 6).
12-54

TSL 3 represents the maximum EL achievable using butt-lap miter core manufacturing 

for single-phase distribution transformers, and full miter core manufacturing for three-phase 

distribution transformers. At TSL 3, DOE estimates impacts on INPV for low-voltage, dry-type 

distribution transformer manufacturers to range from -$18.6 million to $28.1 million, 

corresponding to a change in INPV of -7.8 percent to 11.8 percent. At this level, industry free 

cash flow is estimated to decrease by approximately 31.9 percent to $10.4 million, compared to 

the base-case value of $15.5 million in the year before the compliance date (2015). 

Although manufacturers may be able to meet EL4 using M4, comments and interviews 

suggest uncertainty about the ability of M4 to meet EL 4 for all design lines. Manufacturers may 

be forced to use higher-grade and thinner steels like M3, H1, and H0. However, these thinner 

steels, in combination with larger cores, will dramatically slow production throughput and 

therefore require the industry to expand capacity to maintain current shipments. This is the 

reason for the increase in conversion costs. In the lower-bound profitability scenario, when DOE 

assumes the industry cannot fully pass on incremental costs, these investments and the higher 

working capital needs drain cash flow and lead to the negative impacts shown in the preservation 

of operating profit scenario. In the high-profitability scenario, impacts are slightly positive 

because DOE assumes manufacturers are able to fully recoup their conversion expenditures 

through higher operating cash flow. 

TSL 4 represents the maximum NPV with 7 percent discounting. At TSL 4, DOE 

estimates impacts on INPV for low-voltage, dry-type distribution transformer manufacturers to 

range from -$38.9 million to $42.3 million, corresponding to a change in INPV of -16.4 percent 

to 17.8 percent. At this level, industry free cash flow is estimated to decrease by approximately 

87.2 percent to $1.9 million, compared to the base-case value of $15.5 million in the year before 

the compliance date (2015). 

TSL 4 and higher would create significant challenges for the industry and likely disrupt 

the marketplace. DOE’s conversion costs at TSL 4 assume the industry will entirely convert to 

amorphous wound core technology to meet the efficiency standards. Few manufacturers of 

distribution transformers in this superclass have any experience with amorphous steel or wound 

core technology and would face a steep learning curve. This is reflected in the large conversion 

costs and adverse impacts on INPV in the Preservation of Operating Profit scenario. Most 

manufacturers DOE interviewed expected many low-volume manufacturers to exit the DOEcovered market altogether if amorphous steel was required to meet the standard. As such, DOE 

believes TSL 4 could lead to greater consolidation than the industry would experience at lower 

TSLs. 

TSL 5 represents the maximum source energy savings with positive NPV with 7 percent 

discounting. At TSL 5, DOE estimates impacts on INPV for low-voltage, dry-type distribution 

transformer manufacturers to range from -$46.8 million to $61.0 million, corresponding to a 

change in INPV of -19.7 percent to 25.7 percent. At this level, industry free cash flow is 

estimated to decrease by approximately 93.9 percent to $0.9 million, compared to the base-case 

value of $15.5 million in the year before the compliance date (2015).
12-55

The impacts at TSL 5 are similar to those DOE expects at TSL 4, except that slightly 

more amorphous core production capacity will be needed because TSL 5-compliant transformers 

will have somewhat heavier cores and thus require more amorphous steel. This leads to slightly 

greater capital expenditures at TSL 5 compared to TSL 4.

TSL 6 represents the maximum technologically feasible level (max tech). At TSL 6, DOE 

estimates impacts on INPV for low-voltage, dry-type distribution transformer manufacturers to 

range from -$78.6 million to $118.9 million, corresponding to a change in INPV of -33.1 percent 

to 50.1 percent. At this level, industry free cash flow is estimated to decrease by approximately 

138 percent to -$5.8 million, compared to the base-case value of $15.5 million in the year before 

the compliance date (2015). 

The impacts at TSL 6 are similar to those DOE expects at TSL 5, except that slightly 

more amorphous core production capacity will be needed because TSL 6-compliant transformers 

will have somewhat heavier cores and thus require more amorphous steel. This leads to slightly 

greater capital expenditures at TSL 6 compared to TSL 5.

Medium-Voltage Dry-Type. 

TSL 1 represents EL1 for all design lines. At TSL 1, DOE estimates impacts on INPV for 

medium-voltage dry-type distribution transformer manufacturers to range from -$1.4 million to 

$0.7 million, corresponding to a change in INPV of -2.0 percent to 1.0 percent. At this level, 

industry free cash flow is estimated to decrease by approximately 2.3 percent to $4.3 million, 

compared to the base-case value of $4.4 million in the year before the compliance date (2015). 

For DL12, the largest design line by core steel usage, manufacturers have a variety of 

steels available to them, including M4, the most common steel in the superclass. Additionally, 

the vast majority of the market already uses step-lap mitering technology. Therefore, DOE 

anticipates only moderate conversion costs for the industry, mainly associated with slower 

throughput due to larger cores. Some manufacturers may need to slightly expand capacity to 

maintain throughput and/or modify equipment to manufacturer with greater precision and tighter 

tolerances. In general, however, conversion expenditures should be relatively minor compared to 

INPV. For this reason, TSL 1 yields relatively minor adverse changes to INPV in the standards 

case. 

TSL 2 represents an increase in efficiency where a diversity of electrical steels are costcompetitive and economically feasible for all design lines. At TSL 2, DOE estimates impacts on 

INPV for medium-voltage dry-type distribution transformer manufacturers to range from -$2.9 

million to $3.0 million, corresponding to a change in INPV of -4.2 percent to 4.4 percent. At this 

level, industry free cash flow is estimated to decrease by approximately 6.0 percent to $4.2 

million, compared to the base-case value of $4.4 million in the year before the compliance date 

(2015). 

Compared to TSL 1, TSL 2 requires EL2, rather than EL1, in DLs 10, 12, and 13B. 

Because M4 (as well as the commonly used H1) can still be employed to meet these levels, DOE 

expects similar results at TSL 2 as at TSL 1. Slightly greater conversion costs will be required as 
12-56

the compliant transformers will have heavier cores, all other things being equal, meaning 

additional capacity may be necessary depending on each manufacturer’s current capacity 

utilization rate. As with TSL 1, TSL 2 will not require significant changes to most manufacturers 

production processes because the thickness of the steels will not change significantly, if at all. 

TSL 3 represents the maximum NPV with 7 percent discounting. At TSL 3, DOE 

estimates impacts on INPV for medium-voltage dry-type distribution transformer manufacturers 

to range from -$10.7 million to $5.7 million, corresponding to a change in INPV of -15.6 percent 

to 8.3 percent. At this level, industry free cash flow is estimated to decrease by approximately 

53.4 to $2.1 million, compared to the base-case value of $4.4 million in the year before the 

compliance date (2015). 

TSL 4 represents the maximum source energy savings with positive NPV with 7 percent 

discounting. At TSL 4, DOE estimates impacts on INPV for medium-voltage dry-type 

distribution transformer manufacturers to range from -$10.7 million to $5.6 million, 

corresponding to a change in INPV of -15.5 percent to 8.2 percent. At this level, industry free 

cash flow is estimated to decrease by approximately -53.4 percent to $2.1 million, compared to 

the base-case value of $4.4 million in the year before the compliance date (2015). 

TSL 3 and TSL 4 require EL2 for DL9 and DL10, but EL4 for DL11 through DL13B, 

which hold the majority of the volume. Several manufacturers were concerned TSL 3 would 

require some of the high volume design lines to use H1 or H0, or transition entirely to 

amorphous wound cores (with which the industry has experience). Without a cost effective Mgrade steel option, the industry could face severe disruption. Even assuming a sufficient supply 

of Hi-B steel, which is generally used and priced for the power transformer market, relatively 

large expenditures would be required in R&D and engineering as most manufacturers would 

have to move production to steel with which they have little experience. DOE estimates total 

conversion costs would more than double at TSL 3, relative to TSL 2. If, based on the movement 

of steel prices, EL4 can be met cost competitively only through the use of amorphous steel or an 

exotic design with little or no current place in scale manufacturing, manufacturers would face 

significant challenges that DOE believes would lead to consolidation and likely cause many lowvolume manufacturers to exit the product line. 

At TSL 5, DOE estimates impacts on INPV for medium-voltage dry-type distribution 

transformer manufacturers to range from -$34.1 million to $12.9 million, corresponding to a 

change in INPV of -49.7 percent to 18.7 percent. At this level, industry free cash flow is 

estimated to decrease by approximately 189.1 percent to -$3.9 million, compared to the basecase value of $4.4 million in the year before the compliance date (2015). 

TSL 5 represents max-tech and yields results similar to but more severe than TSL 4 

results. The engineering analysis shows that the entire market must convert to amorphous 

wound cores at TSL 5. Because the industry has no experience with wound core technology, and 

little, if any, experience with amorphous steel, this transition would represent a tremendous 

challenge for industry. Interviews suggest most manufacturers would exit the market rather 

altogether or source their cores rather than make the investments in plant, equipment, and R&D 

required to meet these levels. 
12-57

 

1 NEMA – NEMA Members. Last Accessed December 30, 2010. 

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

2

 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of 

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.