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CHAPTER 12: MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY . . . . . . . . . . . . . . . 12-1

12.1.1 Phase 1: Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2

12.1.2 Phase 2: Industry Cash Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2

12.1.3 Phase 3: Sub-Group Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2

12.1.3.1 Major Manufacturer Subgroups - Superclasses . . . . . . . . . . . . . . . . 12-4

12.1.3.2 Small-Business Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-4

12.2 MANUFACTURER KEY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-6

12.3 GRIM INPUTS AND ASSUMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.1 Overview of GRIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.2 Financial Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.3 Corporate Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-10

12.3.4 Shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-11

12.3.5 Production Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.6 Conversion Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.7 Markup Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.7.1 Preservation of Gross Margin Percentage Scenario . . . . . . . . . . . 12-14

12.3.7.2 Preservation of Operating Profit Scenario . . . . . . . . . . . . . . . . . . 12-14

12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED . . . . . . 12-15

12.4.1 Conversion Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-15

12.4.2 Product Conversion Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-21

12.4.3 Industry Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.1 Trial Standard Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.2 Impacts on Industry Net Present Value . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.3 Impacts on Annual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-24

12.4.4 Other Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-26

12.4.4.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-26

12.4.4.2 Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-27

12.4.4.3 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-27

12.4.4.4 Cumulative Regulatory Burden . . . . . . . . . . . . . . . . . . . . . . . . . . 12-28

12.4.4.5 Impacts on Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-28

12.4.4.6 Worker Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.4.4.7 Other Engineering Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.4.5 Summary of Impacts for Liquid-Immersed Superclass

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.5 MANUFACTURER IMPACT ANALYSIS - LOW-VOLTAGE DRY-TYPE . . . . 12-33

12.5.1 Conversion Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-33

12.5.2 Product Conversion Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-37

12.5.3 Industry Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-38

12.5.3.1 Trial Standard Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-38

12.5.3.2 Impacts on Industry Net Present Value . . . . . . . . . . . . . . . . . . . . 12-38

12.5.3.3 Impacts on Annual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-40

12.5.4 Other Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-41

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12.5.4.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-42

12.5.4.2 Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-42

12.5.4.3 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-43

12.5.4.4 Cumulative Regulatory Burden . . . . . . . . . . . . . . . . . . . . . . . . . . 12-43

12.5.4.5 Impacts on Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-44

12.5.5 Summary of Impacts for Low-Voltage Dry-Type Superclass . . . . . . . . . . . 12-45

12.6 MANUFACTURER IMPACT ANALYSIS - MEDIUM VOLTAGE DRY-TYPE

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-48

12.6.1 Conversion Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-48

12.6.2 Product Conversion Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-54

12.6.3 Industry Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-55

12.6.3.1 Trial Standard Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-55

12.6.3.2 Impacts on Industry Net Present Value . . . . . . . . . . . . . . . . . . . . 12-55

12.6.3.3 Impacts on Annual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-57

12.6.4 Other Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-58

12.6.4.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-58

12.6.4.2 Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-59

12.6.4.3 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-60

12.6.4.4 Cumulative Regulatory Burden . . . . . . . . . . . . . . . . . . . . . . . . . . 12-60

12.6.4.5 Impacts on Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-61

12.6.5 Summary of Impacts for Medium-Voltage Dry-Type Superclass

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-61

LIST OF TABLES

Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry . . . . . . . 12-10

Table 12.3.2 Non-Production Cost Markups for the Preservation of Operating Profit Scenario

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-14

Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional Annealing

Furnace Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-17

Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous Annealing

Furnace Capital Expenditures . . . . . . . . . . . . . . . . . 12-17

Table 12.4.3 Summary of Additional Core-Cutting Machine Estimate for Liquid-Immersed

Superclass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-19

Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional CoreCutting Equipment Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20

Table 12.4.5 Summary of Liquid-Immersed Distribution Transformer Amorphous Core-Cutting

Equipment Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20

Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-21

Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product Conversion

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

Table 12.4.8 Changes in Liquid-Immersed Industry Net Present Value, Preservation of Gross

Margin Percentage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-23

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Table 12.4.9 Changes in Liquid Immersed Industry Net Present Value, Preservation of

Operating Profit Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-23

Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010) . . . . . . . 12-26

Table 12.5.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 7 . . . . . . 12-35

Table 12.5.2 Calculation of Core-Mitering Machines Needed for Design Line 7 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-35

Table 12.5.3 Calculation of Core-Mitering Machines Needed for Design Line 8 . . . . . . . 12-36

Table 12.5.4 Summary of LV Dry-Type Distribution Transformer Core-Mitering Equipment

Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-36

Table 12.5.5 Summary of LV Dry-Type Distribution Transformer Conversion Capital

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-37

Table 12.5.6 Summary of LV Dry-Type Distribution Transformer Product Conversion Expenses 12-38

Table 12.5.7 Changes in LV Dry-Type Industry Net Present Value, Preservation of Gross

Margin Percentage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-39

Table 12.5.8 Changes in LV Dry-Type Industry Net Present Value, Preservation of Operating

Profit Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-39

Table 12.5.9 Projected Change in Labor Expenditures, Low-Voltage Dry-Type (2010) . . 12-42

Table 12.6.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 9 . . . . . . 12-50

Table 12.6.2 Calculation of Core-Mitering Machines Needed for Design Line 9 . . . . . . . 12-51

Table 12.6.3 Calculation of Core-Mitering Machines Needed for Design Line 10 . . . . . . 12-51

Table 12.6.4 Calculation of Core-Mitering Machines Needed for Design Line 11 . . . . . . 12-52

Table 12.6.5 Calculation of Core-Mitering Machines Needed for Design Line 12 . . . . . . 12-52

Table 12.6.6 Calculation of Core-Mitering Machines Needed for Design Line 13 . . . . . . 12-53

Table 12.6.7 Summary of MV Dry-Type Distribution Transformer Core-Cutting Equipment

Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-53

Table 12.6.8 Summary of MV Dry-Type Distribution Transformer Conversion Capital

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-54

Table 12.6.9 Summary of MV Dry-Type Distribution Transformer Product Conversion

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-55

Table 12.6.10 Changes in MV Dry-Type Industry Net Present Value, Preservation of Gross

Margin Percentage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-56

Table 12.6.11 Changes in MV Dry-Type Industry Net Present Value, Preservation of Operating

Profit Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-56

Table 12.6.12 Projected Change in Labor Expenditures, Medium-Voltage Dry-Type (2010)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-59

LIST OF FIGURES

Figure 12.3.1 Using the GRIM to Calculate Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

Figure 12.4.1 Industry Net Cash Flow for Preservation of Gross Margin Percentage Scenario,

Liquid-Immersed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-24

Figure 12.4.2 Industry Net Cash Flow for Preservation of Operating Profit Scenario, LiquidImmersed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-25

Figure 12.5.1 Industry Net Cash Flow for Preservation of Operating Profit Scenario, LV Dry-type 12-40

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Figure 12.5.2 Industry Net Cash Flow for Preservation of Gross Margin Percentage Scenario, LV

Dry-type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-41

Figure 12.6.1 Industry Net Cash Flow for Preservation of Gross Margin Percentage Scenario,

MV Dry-type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-57

Figure 12.6.2 Industry Net Cash Flow for Preservation of Operating Profit Scenario, MV Drytype . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-58

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a

 The Department of Energy’s standards program for commercial equipment is conducted under Title III, Part C of

the Energy Policy and Conservation Act (EPCA), 42 U.S.C. 6311-6317.

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CHAPTER 12: MANUFACTURER IMPACT ANALYSIS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY

In determining whether a standard is economically justified, the Secretary of Energy 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.”a

 The legislation also calls for an

assessment of the impact of any lessening of competition as determined in writing by the Attorney

General. The Department conducted the manufacturer impact analysis (MIA) to estimate the

financial impact of efficiency standards on manufacturers of distribution transformers and to

assess the impact of such standards on employment and manufacturing capacity. The MIA has

both quantitative and qualitative components. The quantitative part of the MIA primarily relies

on the Government Regulatory Impact Model (GRIM), an industry-cash-flow model adapted for

this rulemaking. The key GRIM inputs relate to 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 higher efficiency standards by comparing changes in INPV

between the base case and the various trial standard levels. The qualitative part of the MIA

addresses factors such as the material supply chain, manufacturing techniques and equipment,

market and product trends, and includes a subgroup assessment of the impacts on small

manufacturers.

In the Department’s Framework Document published on November 1, 2000, DOE

outlined the procedural and analytical approaches for the MIA. As outlined, the Department

conducted the MIA in three phases. Phase 1, “Industry Profile,” consisted of the preparation of

an industry characterization, including data on market share, sales volumes and trends, pricing,

employment and financial structure. Phase 2, “Industry Cash Flow,” focused on the industry as a

whole. In this phase, DOE used the GRIM to prepare an industry cash flow analysis. Using

publicly available information developed in Phase 1, the Department adapted the GRIM’s generic

structure to perform an analysis of distribution transformer energy conservation standards. In

Phase 3, the “Sub-Group Impact Analysis,” DOE conducted interviews with several

manufacturers. The group of manufacturers included small, medium, and large manufacturers

providing a representative cross-section of the U.S. distribution transformer industry. During

these interviews, the Department discussed engineering, manufacturing, procurement, and

financial topics specific to each company and also obtained each manufacturer’s view of the

industry as a whole under standards. The interviews provided valuable information that the

Department used to evaluate the impacts of a standard on manufacturers’ cash flows,

manufacturing capacities, and employment levels. 

This chapter provides detail on the approach followed by the Department in developing

the MIA for this rulemaking.

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12.1.1 Phase 1: Industry Profile 

In Phase 1 of the MIA, the Department prepared a profile of the distribution transformer

industry that built upon the market and technology assessments prepared for the Advance Notice

of Proposed Rulemaking (ANOPR) analysis. Prior to initiating the detailed impact studies, DOE

collected information about the present and past industry structure and market characteristics for

distribution transformers. At that time, DOE collected information on national shipments, market

leaders, and cost structure for a range of manufacturers. In creating the industry profile, the

Department gathered information about product construction, product characteristics,

manufacturing techniques, trends in the number of firms, and market characteristics. 

The industry profile included a topdown cost analysis of the distribution transformer

industry that DOE used to derive initial cost and financial inputs for the GRIM, e.g., revenues;

material; labor; overhead; depreciation; selling, general and administrative expenses (SG&A); and

research and development (R&D) expenses. The Department used public sources of information

to calibrate its initial characterization of the industry, including Securities and Exchange

Commission (SEC) 10–K reports, corporate annual reports, the U.S. Census Bureau’s Economic

Census, Dun & Bradstreet reports, and industry analysis from Ibbotson Associates.

12.1.2 Phase 2: Industry Cash Flow Analysis

Phase 2 of the MIA focused on the industry-wide financial impacts of standards. Energy

conservation standards can affect distribution transformer manufacturers in three distinct ways: 1)

require additional investment, 2) raise production costs, and 3) impact revenues through higher

prices and, possibly, lower shipments. The analytical tool DOE uses for calculating the financial

impacts of standards on manufacturers is the GRIM. To quantify these impacts in Phase 2 of the

MIA, the Department performed a distribution transformer industry cash flow analysis using the

GRIM.

For the industry cash flow analysis, DOE prepared a set of financial parameters for use in

the GRIM. These financial parameters were originally based on the Department’s topdown

financial analysis, but based upon discussions with transformer manufacturers, were subsequently

adjusted to be more representative of the industry. The Department used a similar process during

the Advanced Notice of Proposed Rulemaking Phase (ANOPR) of the analysis (i.e., public

financial reports and manufacturer discussions) to derive the manufacturer markups used to

establish manufacturer selling prices in the Department’s engineering analysis. The MIA

production costs and manufacturer selling prices are consistent with both the LCC analysis and

the engineering analysis, upon which the LCC pricing is based. The Department established this

consistency by using the mean values for production costs and selling prices in the GRIM, as

selected by the LCC’s Monte Carlo algorithm. Finally, the Department’s shipments analysis

(Chapter 9) provided the basis for the shipments projection under each of the TSLs in the GRIM.

12.1.3 Phase 3: Sub-Group Impact 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. The Department used the results of the

industry characterization to group manufacturers exhibiting similar characteristics. As discussed

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in the ANOPR, the Department established three distinct subgroups of distribution transformer

manufacturers that could be impacted by efficiency standards: liquid-immersed, low-voltage (LV)

dry-type, and medium-voltage (MV) dry-type. A discussion of the superclasses follows in section

12.1.3.1.

Within each of these superclasses, the Department contacted companies from its database

of manufacturers (see Chapter 3) which provided a representation of each superclass. Small and

large companies, subsidiaries and independent firms, public and private corporations, and a mix of

NEMA and non-NEMA members were interviewed. The Department also made an effort to

interview companies who had been interviewed for the Engineering Analysis in 2002, as well as

those who have previously participated in the rulemaking process. The purpose of the meetings

was to enhance the Department’s understanding as to how manufacturer impacts change with

each of the trial standard levels. A copy of the interview guides for each of three superclasses can

be found in Appendix 12.A.

The Department also evaluated the impact of the energy conservation standards on small

businesses. Small businesses, as defined by the Small Business Administration (SBA) for the

distribution transformer manufacturing industry, are manufacturing enterprises with 750 or fewer

employees. The Department conducted telephone interviews with nine small businesses, to

determine if there are differential impacts on these companies that may result from the standard. 

A copy of the interview guide for these interviews can be found in Appendix 12.B. Discussion on

the purpose of the small business interviews and the small-business subgroup methodology

follows in section 12.1.3.2.

The Department contacted material and equipment suppliers to the distribution

transformer industry to enhance its understanding of the context in which transformer

manufacturers operate and to assist in quantifying conversion costs. The Department conducted

interviews with the two domestic suppliers of electrical core steel and with two core steel

distributors. The domestic suppliers of core steel are large corporations which have a broad range

of steel products of which electrical core steel is one product offering. The core steel distributors

offer manufacturers a varying degree of processing, ranging from basic slit-to-width rolls to

prefabricated cores (both stacked and wound-core configurations). The Department also spoke

with four equipment suppliers, including manufacturers of both distributed gap and mitered core

processing machines, and two manufacturers of annealing furnaces. The information from these

discussions was helpful in understanding comments and concerns expressed by manufacturers as

well as in estimating the conversion capital expenditures used in the GRIM. To prepare the

liquid-immersed industry conversion costs for switching to amorphous material at TSLs 5 and 6,

the Department spoke with the only domestic supplier of amorphous ribbon and several

transformer manufacturers who had experience working with amorphous material. Through this

dialogue, the Department gained a better understanding of manufacturing amorphous core

transformers, including core processing equipment, annealing furnaces, and material handling

issues. 

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b

 Small Business Administration - www.sba.gov/size/indextableofsize.html

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12.1.3.1 Major Manufacturer Subgroups - Superclasses

As proposed at the ANOPR public workshop, the Department subdivided the distribution

transformer industry into three ‘superclasses’: liquid-immersed, LV dry-type and MV dry-type. 

These superclasses take into account differences among the manufacturers, including the

equipment and tooling used, product designs, customer types, and the characteristics of the

markets in which the manufacturers operate. The Department believes that modeling the industry

in three separate subgroups offers a robust analytical approach for three reasons:

1. Customer profiles and market mechanisms - generally, the profile of the majority of

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

each of the three superclasses is distinct. Discussion on customer profiles and distribution

chains can be found in the LCC analysis (Chapter 8). 

2. Manufacturing equipment and transformer design - within each of the three superclasses,

the equipment necessary for production and the methods by which manufacturers build

transformers are grouped. 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 only used in this superclass. 

Accordingly, the capital equipment investment necessary for compliance with a particular

trial standard level typically differs among the three 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 these three superclasses. 

The primary exception to this general statement is that a single manufacturing facility can

produce both LV dry-type and MV dry-type distribution transformers because of the

commonalities in these superclasses’ products. 

12.1.3.2 Small-Business Subgroup

The Department undertook a small business subgroup analysis in order to assess the

importance of small businesses within the distribution transformer industry and to understand how

the impacts of standards on small business might be different from those on large manufacturers. 

Small businesses, as defined by the Small Business Administration (SBA) for the distribution

transformer manufacturing industry, are manufacturing enterprises with 750 employees or fewer.b

To prepare a list of eligible companies, the Department constructed a transformer manufacturers

database containing available data from eleven sources including the Department’s stakeholder

contact list for this rulemaking, the Oak Ridge National Laboratory determination analysis

database, the Underwriters Laboratory (UL) certification database, the National Electrical

Manufacturers Association membership list (NEMA), and the Transformer Association

membership list. (Details about the compilation of this database and the sources used are

discussed in the market and technology assessment, Chapter 3.) Small businesses were then

selected and contacted to assess their interest in participating in an interview. If they were

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agreeable, the Department sent a short questionnaire to the small businesses and a date was

scheduled for discussion. A copy of the small business interview guide can be found in Appendix

12.B. 

The Department’s database of transformer manufacturers includes approximately 45 small

businesses, most of which have less than 100 employees. Small businesses operate in all three

superclasses. The database identifies 15 small businesses that sell liquid-immersed distribution

transformers, 30 that sell LV dry-type, and 20 that sell MV dry-type. The total of these three

groups exceeds 45 because several of these small businesses operate in more than one superclass

(e.g., LV dry-type and MV dry-type transformers are often produced by the same small business). 

Upon reviewing the material provided by the small businesses interviewed, the Department

concluded that using the GRIM was not the best way to capture and represent the differential

impacts on small business. Instead, the differential impacts on small business are discussed

qualitatively for each of the three superclasses in this chapter. 

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12.2 MANUFACTURER KEY ISSUES

The first question of each of the MIA interview guides asks, “What are the key issues for

your company regarding the distribution transformer energy conservation standard rulemaking?” 

This open question initiated the dialogue with the manufacturers, enabling them to identify key

points that the Department would explore and discuss during the interview. This section lists

those issues that were raised most often by the manufacturers interviewed. 

Manufacturers indicated that, for the most part, the risks associated with these issues

increase with increasing TSL. Discussion and consideration of many of these issues are discussed

later in this chapter. 

• Core steel availability - concern was expressed over whether sufficient quantities of high

grade core steels needed for the construction of energy efficient distribution transformers

would be available. This concern is amplified by recent core steel availability problems in

the U.S. market. Not only will the standard drive the market to higher grades of steel

(which are thinner, and therefore take more time for steel companies to manufacture) but

the quantities (pounds of steel) per transformer will also increase. Transformer

manufacturers are concerned that these compounding factors may further limit the

availability of core steel.

• Core steel price volatility and uncertainty - starting in late 2003, core steel prices started

to increase. Core steel prices increased dramatically after mid-2004. For some

manufacturers core steel prices have doubled since 2003. In response to these and other

material input cost increases, transformer manufacturers have been raising their own

prices. However, transformer manufacturers report that they have not passed through all

input cost increases to customers. Furthermore, manufacturers questioned the costeffectiveness of energy conservation standards under higher steel prices. They commented

that higher transformer selling prices (driven by the higher material inputs prices), would

erode customer cost savings and lengthen the payback periods of transformers under

standards. Core steel price uncertainty is addressed in the Department’s core steel price

scenarios as part of the engineering analysis (see Chapter 5 of this Technical Support

Document). 

• Dimensional and physical constraints - manufacturers expressed concern over meeting the

Department’s efficiency standard and their customers’ dimensional and physical

constraints simultaneously. In particular, manufacturers voiced concern for retrofit

applications, mining applications, telephone pole capacities, and other installations where

transformers have to comply with dimensional or physical constraints. 

• Enforcement of efficiency standard - manufacturers expressed concern over how the

Department intended to enforce the standards, to make sure that all manufacturers,

particularly importers, comply with the regulations.

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• Definition loopholes - manufacturers cautioned that if the standard is set above a certain

level, some customers may start looking for standards relief by specifying transformers

from the Department’s exemption list and using them in general purpose applications. 

• Amorphous material - liquid-immersed manufacturers expressed their concern that the

Department is considering amorphous material at some of its TSLs. In particular, they

discussed concerns about: 1) the ease of access to the technology, 2) the availability of

amorphous-core material at quantities necessary to meet industry demand, 3) the level of

capital equipment investment, 4) increased complexity associated with material processing

and handling during manufacturing, and 5) the consequent obsolescence of existing core

fabrication and annealing capacity within the industry.

• Backsliding - liquid-immersed manufacturers identified two impacts related to backsliding. 

Manufacturers report that they are currently beginning to experience these impacts as a

result of state standards (one state has enacted NEMA TP-1 for liquid-immersed

transformers). Manufacturers have reported that, in the state that has enacted TP-1, some

utility customers have ceased evaluating their purchases and are simply purchasing

standards-compliant transformers. According to manufacturers, while the minimum

efficiency of transformers sold in this state has increased, the average efficiency has

decreased. The first impact of such backsliding is that liquid-immersed manufacturers may

experience lower revenue. Secondly, the liquid-immersed market may move from a highly

customized market, where U.S. manufacturers enjoy a competitive advantage over foreign

manufacturers because of their flexibility and short lead times, to a homogenized,

commoditized market. Ultimately, liquid-immersed manufacturers suggest that this may

lead to a deterioration in the U.S. manufacturing base of liquid-immersed distribution

transformers.

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12.3 GRIM INPUTS AND ASSUMPTIONS

12.3.1 Overview of GRIM

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

implementation of efficiency standards. The GRIM is a financial model of the industry that

captures the impact of efficiency standards on industry value. The basic structure of the GRIM,

illustrated in Figure 12.3.1, is a standard annual cash flow analysis that uses manufacturer prices,

manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of

regulatory conditions as changes in costs, investments, and associated margins. The GRIM

spreadsheet calculates a series of annual cash flows, beginning with the base year of the analysis,

2004, and continuing explicitly to 2038. The model calculates the INPV by summing the stream

of annual discounted cash flows during this period.1

The Department used the GRIM to project cash flows based upon standard accounting

principles and compared changes in INPV between a base case (no mandatory standard) and

different TSLs for the energy conservation standard (the standard case). The difference in INPV

between the base case and the standard case(s) represents the financial impact of the standard on

manufacturers. Appendix 12.C provides more technical detail and user information for the

GRIM.

12.3.2 Financial Parameters

The Department relied on several sources to obtain financial inputs and assumptions for

the GRIM, including corporate annual reports and the manufacturer interviews. Corporate annual

reports to the Securities and Exchange Commission (SEC 10-Ks) provided many of the draft

financial inputs to the GRIM.2

 These reports exist for publicly held companies, and are freely

available to the general public. The Department used these annual reports to derive the following

draft GRIM inputs:

• Tax rate,

GRIM

Manufacturing Costs

Financial Parameters

Manufacturer Selling 

Prices

Shipment Forecasts

Cash Flow

Spreadsheet Model

Manufacturing Costs

Financial Parameters

Manufacturer Selling 

Prices

Shipment Forecasts

Cash Flow

Spreadsheet Model

Figure 12.3.1 Using the GRIM to Calculate Cash Flow

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• Working capital,

• Selling, general, and administrative expenses,

• Research and development expenses,

• Depreciation,

• Capital expenditures, and

• Net property, plant, and equipment (i.e., net of accumulated depreciation).

The Department then revised its own estimates of financial parameters through interviews

with manufacturers during both the ANOPR and NOPR phases of the rulemaking. The

Department relied on manufacturer input for these revisions for two reasons. First, many

distribution transformer manufacturers, both large and small, are not public corporations so

industry-wide financial data are not readily available. Second, many manufacturers of distribution

transformers are diverse businesses that participate in markets that are substantially different from

distribution transformer markets; therefore, the available financial information is not clearly

representative of the distribution transformer market. Table 12.3.1 provides the representative

financial parameters that were used for all three superclasses in the distribution transformer

GRIM.

The Department also used information from the SEC 10-K reports to calibrate the

GRIM’s base case operating profit margin to be representative for the industry. Operating margin

is defined as earnings before interest and taxes as a percentage of net revenue. The Department

calibrated the GRIM to have a 4.9 percent operating margin in the base case. 

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Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry

Parameter

Representative

Value for LiquidImmersed

Representative

Value for LV

Dry-Type

Representative

Value for MV

Dry-Type

Tax Rate

 (% of Taxable Income)

30.0% 35.9% 33.9%

Net Working Capital 

(% of Revenues)

15.4% 14.9% 10.6%

SG&A 

(% of Revenues)

13.5% 13.5% 14.0%

R&D 

(% of Revenues)

1.6% 2.3% 1.1%

Depreciation 

(% of Revenues)

1.6% 1.6% 1.8%

Capital Expenditures

 (% of Revenues)

1.9% 1.9% 2.1%

Net Property, Plant, and

Equipment (% of Revenues)

16.6% 20.0% 16.1%

Source: SEC, 10-K Reports, Fiscal Years 1999-2004. Revised based on discussion with manufacturers.

12.3.3 Corporate Discount Rate

The Department uses the weighted-average cost of capital (WACC) for the industry as the

discount rate to calculate 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.1

 The Department estimated the WACC for the industry

based on a few representative companies using the following formula:

 WACC = After-Tax Cost of Debt x (Debt ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors 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 = risk free rate of return + Beta * risk premium

where:

Risk free rate of return is the rate of return on a “safe” benchmark investment. In

practice, investors use a variety of different maturity Treasury notes to estimate the

risk-free rate. The Department used a long-term Treasury note return (10-year

bond return) because it captures long-term inflation expectations and is less

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c

 In previous rulemakings, this was based on book value; in this rulemaking a slightly more accurate debt ratio is

based on market value of equity rather than book value; the book value of long-term debt, however, is used to estimate

the debt ratio. 

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volatile than short-term rates in the GRIM. The risk free rate was estimated to be

6.2 percent, which is the average 10-year Treasury note return from 1990 to 2003.

Risk premium is the difference between the expected return on stocks and the

riskless rate, assumed to be 9.2 percent.

Beta is the covariance of a stock with the market as a fraction of the market’s

variance. The 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. For this analysis, Beta was assumed to be equal to 0.8.

Using these inputs, the Department estimated the cost of equity (expected return) to be

13.6 percent.

The Department estimated the cost of debt for each company based on the average

interest rate reported on each company’s SEC 10-K report. The average cost of debt was

estimated to be 6.6 percent. Assuming a marginal tax rate of 35 percent, the after-tax cost of debt

is 4.3 percent. The Department estimated the debt ratio (debt/total capital) of the industry to be

26 percent.c

 The equity ratio estimate is therefore 74 percent.

Using the formula for the WACC, the Department estimated the industry’s WACC to be

11.2 percent. Subtracting an estimated inflation rate of 2.3 percent (assumed in the LCC

analysis), the inflation adjusted WACC is 8.9 percent.

For validation, Ibbotson Associates3 provided a WACC for a set of companies in the

electric transmission and distribution equipment industry, which the Department assumed to be a

good surrogate for the distribution transformer industry. The Ibbotson nominal WACC is 12.5

percent, which corresponds to an inflation-adjusted WACC of 10.3 percent. This is close to the

Department calculated value of 8.9 percent. 

During the manufacturer interviews, no manufacturer expressed disagreement with the

industry-wide, inflation-adjusted WACC estimate of 8.9 percent (though some individual

companies have substantially different costs of capital). 

For the reasons discussed above, the GRIM uses an 8.9 percent discount rate for

calculating the INPV of the distribution transformer industry.

12.3.4 Shipments

The GRIM used shipment projections derived from the Department's shipments model in

the national impact analysis. The shipments model provides an estimate of the annual sales and inservice stock of distribution transformers for each year of the forecast period. The estimate

includes both the age distribution of transformers for each type (according to product class) and

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each transformer size. The Department selected an accounting model method to prepare

shipment scenarios for the base case and the six trial standard levels. Chapter 9 of this Technical

Support Document provides a description of the methodology and analytical model DOE used to

forecast distribution transformer shipments.

In its shipments analysis, the Department determined that the demand for distribution

transformers is relatively inelastic. Therefore, in the long-run, more expensive standardscompliant transformers are not expected to trigger substantial reductions in shipments. 

Transformers are understood to be a ‘must-have,’ thus the shipments analysis was modeled with a

small price-elasticity. During the MIA interviews, several manufacturers expressed concerns over

shipments, which they feel are subject to a greater price elasticity of demand than the Department

estimates. 

The Department was informed of three mechanisms by which higher standards could

reduce shipments. Firstly, manufacturers commented that transformer budgets are often finite line

items in a utility’s overall budget, and as costs per unit increase, it is unlikely that utilities’

transformer budgets will increase proportionately. Thus, proactive maintenance programs that

replace and/or upgrade transformers nearing the end of their useful life will be reduced (on a unit

basis), resulting in more failures and outages, and lower system reliability. The installed capital of

the distribution network will be worked harder, and transformers will only be fixed upon failure. 

Secondly, utilities may increase their purchase of multi-voltage (primary) distribution

transformers, enabling them to reduce inventories. Multi-voltage primary transformers are able to

operate at more than one primary voltage, reducing the number of transformers kept in stock for

emergencies and upgrades. Thirdly, engineers who specify transformer orders may look at an

application, and select a slightly lower kVA rating than they ordinarily would have because of the

higher (standards-compliant) price. For example, a customer who would have purchased a 50

kVA unit for an application may select a 37.5 kVA because of the cost increase for a standardscompliant 50 kVA. By working a lower kVA unit with a higher average load, its operating life

will be reduced (compared to the larger kVA operating the same load), however on a first-cost

basis, the specifier will have saved money. This risk of derating transformers ordered was not

modeled in the shipment analysis. Furthermore, if lower kVA ratings are specified, the actual per

unit loading may move away from the assumed 50% for liquid-immersed and MV dry-type and

35% for LV dry-type, resulting in greater load losses and lower system efficiency than modeled in

the Department’s national impact analysis.

Finally, the Department’s shipments analysis does not take into account any constraints on

the availability of materials for manufacturing transformers. Manufacturers expressed concern

during the interviews about the availability of core steel. The transformer materials supply-chain

has been experiencing consolidation over the years, such that now, manufacturers would be

vulnerable to price changes or availability of wire, copper-sheet, electrical paper, mineral oil and

other critical materials for building a transformer. Such input price changes would flow through

to impact transformer prices. Since the Department’s engineering analysis assumes flat equipment

prices in real terms over time, the Department’s shipments analysis cannot capture such second

order impacts for any given set of equipment prices.

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12.3.5 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, tank size, etc. 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 then combined with fixed hardware costs such as

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

scrap, handling, factory overhead, and non-production markups to estimate the manufacturer

selling price. Detail on the derivation of the manufacturer selling prices and discussion of

manufacturer markups used appears in the engineering analysis (Chapter 5). The Department

derived the manufacturer’s production cost inputs for the GRIM from the engineering analysis

databases.

12.3.6 Conversion Costs

Efficiency standards typically cause manufacturers to incur conversion costs prior to the

standard effective date in order to bring their production facilities and product designs into

compliance with the standard. For the purpose of the MIA, DOE classified these conversion

costs into two major categories. Conversion capital expenditures are investments in property,

plant, and equipment to adapt or change existing production facilities so that new product designs

can be fabricated and assembled under the standard. Product conversion expenses relate to

research, development, testing, and marketing that aims to make product designs comply with the

new efficiency standard. Conversion costs specific to each superclass are discussed separately in

each of the following sections for liquid-immersed, LV dry-type, and MV dry-type distribution

transformers.

12.3.7 Markup Scenarios

In order to estimate the manufacturer selling price of distribution transformers sold, the

Department applied markups to the production costs. In an effort to gather information on

industry pricing scenarios, the DOE invited manufacturers to discuss how standards might change

the industry’s profits. Manufacturers and DOE discussed issues such as the impact of higher core

steel prices and transformer pricing scenarios to obtain manufacturers’ insights as to how

increased production costs under standards might be passed on to their customers. All of the

manufacturers interviewed had applied one or more price increases within the last two years in

order to recover some of the production cost increases resulting from higher commodity prices. 

A few of the larger manufacturers recently established pricing contracts with their customers

which had a base price and then a variable “surcharge.” The surcharge is adjusted on a periodic

(e.g., monthly or quarterly) basis, and is calculated based on the transformer manufacturer’s major

input materials costs (e.g., core steel). All manufacturers discussed the recent material price

increases within the context of the Department’s questions about markups.

For the MIA, the Department considered two distinct markup scenarios, which are

discussed in the following sections.

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12.3.7.1 Preservation of Gross Margin Percentage Scenario

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

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

increases with efficiency, this scenario implies that the absolute dollar markup will increase. The

non-production cost markup, which includes selling, general, and administrative expenses;

research and development expenses; interest; and profit was assumed to be 1.25. This markup is

consistent with the one that the Department assumed in the engineering analysis and the base case

of the GRIM. Manufacturers believe it is optimistic to assume they would be able to maintain the

same gross margin percentage markup as their production costs increase in response to an

efficiency standard. Therefore, the Department assumes that this scenario represents a high

bound to industry profitability under an energy conservation standard. 

12.3.7.2 Preservation of Operating Profit Scenario

Operating profit is defined as earnings before interest and taxes. The implicit assumption

behind this markup scenario is that the industry can maintain or preserve its operating profit (in

absolute dollars) after the standard. The industry would do so by passing its increased costs on to

its customers without increasing its operating profits in absolute dollars. The Department

implemented this markup scenario in the GRIM by setting the non-production cost markups at

each TSL to yield approximately the same operating profit in both the base case and the standard

case in the year after standard implementation (2011). This scenario is less optimistic than the

preservation of gross margin percentage scenario. For this scenario, the financial metrics of

return on sales (percent) and return on invested capital (ROIC) decline with increasing TSL,

indicating reduced industry profitability. The non-production cost markups under this scenario

are summarized in Table 12.3.2. 

Table 12.3.2 Non-Production Cost Markups for the Preservation of Operating Profit

Scenario

Trial Standard

Level

Superclass

Liquid-Immersed LV Dry-Type MV Dry-Type

Base Case 1.250 1.250 1.250

TSL1 1.248 1.243 1.248

TSL2 1.246 1.239 1.247

TSL3 1.241 1.235 1.245

TSL4 1.239 1.227 1.240

TSL5 1.224 1.219 1.223

TSL6 1.209 1.219 1.223

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12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED

The liquid-immersed transformer industry is characterized by a high degree of flexibility,

total ownership cost evaluation, and sophisticated customers. Liquid-immersed customers

typically use a cost of ownership evaluation (see the Total Ownership Cost section of Chapter 5),

which minimizes the sum of first cost and the present value of future core and coil losses that a

given transformer will experience over its lifetime. Because these evaluation formulae vary from

customer to customer, and because material prices fluctuate on a daily basis, the liquid-immersed

industry evolved to be inherently flexible and responsive to customer needs. 

As the Department understands it, there are approximately 25 companies active in the

liquid-immersed market in the U.S., some of which are branding units manufactured by another

company. The Department estimates that the nine or so largest liquid-immersed transformer

manufacturing companies collectively control 90 percent of the market or more. They are (in

alphabetical order): ABB, Central Maloney, Cooper Power, ERMCO, GE Prolec, Howard

Industries, Kuhlman Electric, Pauwels, and Power Partners. Of these, the Department estimates

that the top three companies supply approximately 60% of the liquid-immersed market. For more

information on the transformer market, refer to the Market and Technology Assessment (Chapter

3).

12.4.1 Conversion Capital Expenditures

Through its interviews with manufacturers, the Department learned that the conversion

capital expenditures that liquid-immersed transformer manufacturers would have to make in

response to an energy conservation standard fall into three major categories: 1) annealing furnace

capacity, 2) core-cutting and core-winding equipment, and 3) miscellaneous, including buildings

and coil winding equipment. Manufacturers of liquid-immersed transformers provided capital

cost estimates for each of these capital expenditure categories. The Department used the

estimates provided by industry for comparative purposes and prepared its own bottom-up

estimates of conversion capital expenditures. The bottom-up estimates are based on the

Department’s understanding of typical manufacturing processes at liquid-immersed facilities. This

understanding is based on manufacturer interviews and discussions with suppliers of equipment to

the industry. Typical equipment throughput and cost information was obtained directly from

equipment suppliers and reconciled with information provided by manufacturers. Furthermore,

transformer design parameters that vary with efficiency level (e.g., core weight) were obtained

from the Department’s engineering analysis and used to estimate the equipment capacity increases

associated with increasing efficiency.

In the liquid-immersed superclass, TSLs 1 through 4 would require only conventional

electrical steels. In contrast, TSL6 would require all of the liquid-immersed design lines to

convert to amorphous core technology. TSL5 would require three of the five liquid-immersed

design lines (DL3 - DL5) to convert to amorphous core technology. During the interviews,

manufacturers discussed several reasons why, although technologically feasible, amorphous

material is, in their opinion, not a good technology option for regulatory consideration: 

1. Possible difficulty of access to the technology, including very limited sourcing options, 

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2. Concerns over availability of amorphous-core material at quantities necessary to meet

industry demand,

3. The high level of capital equipment investment required (and the stranding of existing

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

4. Increased complexity associated with material processing and handling.

Thus, the Department recognizes that the manufacturing process for amorphous core

transformers is completely different from that for silicon steel transformers. TSL6 would obsolete

a large portion of the liquid-immersed manufacturing equipment, primarily the core-cutting

equipment and the annealing furnaces. The Department estimates that the industry’s stranded

assets at TSL6 would represent a loss of approximately $59 M. TSL5 would not obsolete as

much equipment as TSL6 because TSL5 would only require a conversion to amorphous core

technology for three of the five design lines. The Department estimates that the industry’s

stranded assets at TSL5 would represent a loss of approximately $16 M. The Department’s

stranded asset estimates represent lower bounds to the book values of obsolete core-cutting

equipment, annealing furnaces, and miscellaneous equipment such as conveyers and fixturing at

each TSL.

The Department recognizes that TSL5 has the potential to severely distort and disturb

both liquid-immersed product purchase decisions across design lines and manufacturers’

operations. These distortions would arise because some design lines would necessarily be

constructed with amorphous cores but some would still be designed with conventional grainoriented electrical steels. A significant burden, which is difficult to quantify using the GRIM,

would be placed on industry if it had to maintain parallel manufacturing operations for both

conventional and amorphous core technology. 

Based on the manufacturer interviews, TSLs 5 and 6 would cause liquid-immersed

transformer manufacturers to decide whether they would tool for amorphous technology, attempt

to purchase assembled amorphous cores, or exit the industry. If manufacturers were to choose to

produce amorphous cores themselves, manufacturers indicated that they would face a critical

decision about whether or not to relocate outside of the U.S., since much of their equipment

would become obsolete.

The additional annealing furnace capacity that the industry would need at TSLs 1 through

4 is directly related to the increase in wound core mass that would be processed by the industry at

each TSL. The Department assumed that a typical conventional annealing furnace that can

process 6,000 tons of core steel per year has an installed cost of $2.2 M. Based on the

engineering analysis and those designs selected by the LCC analysis customer choice model, the

Department estimated increases in wound core mass processed at TSLs 1 through 4 to be 2

percent, 4 percent, 8 percent, and 9 percent, respectively. For TSL5, no additional conventional

annealing furnace capacity would be necessary because some of the annealing furnaces currently

used for DL3-DL5 would become available for use in DL1-DL2 (this transfer of capacity is also

accounted for in the Department’s stranded asset estimate above to avoid overestimation of

stranded assets). For TSL6, no additional conventional annealing furnace capacity would be

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necessary because all production would convert to amorphous core technology. The Department

estimated that conventional annealing furnace capital expenditures for the industry would be $2.2

M, $4.4 M, $6.6 M, and $6.6 M for TSLs 1 through 4, respectively, as shown in Table 12.4.1. 

Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional

Annealing Furnace Capital Expenditures

Trial Standard Level Additional Wound

Core Mass 

(Tons/yr)

Additional

Annealing Furnaces

Needed by Industry

Annealing Furnace

Conversion Capital

Expenditure 

(2004$, Millions)

TSL1 3,359 1 2.2

TSL2 8,555 2 4.4

TSL3 15,090 3 6.6

TSL4 17,458 3 6.6

The new amorphous annealing furnace capacity that the industry would need at TSLs 5

and 6 is directly related to the amorphous core mass that would be processed by the industry at

each TSL. Based on information obtained from liquid-immersed transformer manufacturers and

annealing furnace suppliers, the Department estimated that a typical amorphous annealing furnace,

which can process 1,005 tons of core steel per year, has an installed cost of $0.54 M. The

Department estimated that amorphous annealing furnace capital expenditures for the industry

would be $52.4 M and $149.6 M for TSLs 5 and 6, respectively, as shown in Table 12.4.2. 

Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous

Annealing Furnace Capital Expenditures

Trial Standard Level Amorphous Core

Steel Mass 

(Tons/yr)

Amorphous

Annealing Furnaces

Needed by Industry

Amorphous

Annealing Furnace

Conversion Capital

Expenditure 

(2004$, Millions)

TSL5 96,700 97 52.4

TSL6 278,101 277 149.6

The Department assumed that the additional conventional core-cutting equipment required

by the industry for TSLs 1 through 4 is directly related to the increase in core weight at each TSL. 

Based on discussions with a leading supplier of wound core-cutting equipment to the liquidimmersed superclass, the Department calculated the processing capacity of a distributed-gap core

winding machine. This equipment supplier estimates that a new machine can process 150 ft/min

of M6 core steel, which translates into 2,510 lbs/hr of core steel. Allowing for set-up, wound

core removal and down-time, the Department applied a 75% utilization on this processing speed,

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resulting in a single core-cutting machine being capable of processing about 1,883 lbs/hr of core

steel. Furthermore, the Department assumes that the core-cutting machines operate two shifts per

day, 250 days per year. One of these core-cutting and winding machines costs approximately

$200 k installed. 

The Department’s assumption that the increase in conventional core-cutting capacity

required at each of TSLs 1 through 4 is best approximated using the increases in core weight at

each TSL is based on dialogue with the aforementioned leading equipment supplier. Standard

core-cutting equipment used by liquid-immersed manufacturers operates at varying linear rate

depending on lamination thickness and strip width. The machines maintain approximately a

constant processing throughput in terms of weight, irrespective of thickness and strip width. For

each design line, the Department estimated the increases in core steel weight processed at each

TSL using the engineering analysis and the designs selected by the LCC analysis customer choice

model. Table 12.4.3 provides detail explaining the estimate of additional core-cutting machines

needed at each TSL. 

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Table 12.4.3 Summary of Additional Core-Cutting Machine Estimate for LiquidImmersed Superclass

Design Line DL1 DL2 DL3 DL4 DL5

Additional CoreCutting

Machines, 

Liquid-Immersed

Approximate

Number of CoreCutting Machines

in Base Case

11.3 19.3 0.9 6.5 8.9 0

Ratio of TSL1 Core

Weight to Base

Case Core Weight

1.009 1.006 1.008 1.040 1.031 1

Ratio of TSL2 Core

Weight to Base

Case Core Weight

1.009 1.016 1.026 1.120 1.072 2

Ratio of TSL3 Core

Weight to Base

Case Core Weight

1.009 1.026 1.110 1.220 1.120 4

Ratio of TSL4 Core

Weight to Base

Case Core Weight

1.065 1.026 1.183 1.220 1.132 5

Notes: The above matrix is used to estimate the number of core-cutting machines required for TSLs 1-4. The

additional machines (above the 47 machines required for the base case) are obtained by difference. For example, at

TSL1: (1.009×11.3) + (1.006×19.3) + (1.008×0.9) + (1.040×6.5) + (1.031×8.9) - 47 = 1 machine (rounded up).

The Department estimated that core-cutting equipment capital expenditures for the

superclass would be $0.2 M, $0.4 M, $0.8 M and $1.0 M for TSL1 through TSL4, respectively. 

These capital outlays are relatively small compared to those that the industry would incur to

expand annealing furnace capacity. The core-cutting equipment estimates are summarized in

Table 12.4.4. 

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Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional CoreCutting Equipment Capital Expenditures

Trial Standard Level Additional Core-Cutting

Machines Needed by Industry

Core-Cutting Conversion

Capital Expenditure 

(2004$, Millions)

TSL1 1 0.2

TSL2 2 0.4

TSL3 4 0.8

TSL4 5 1.0

The Department estimated the amorphous core-cutting capacity at TSLs 5 and 6 based on

the total weight of amorphous core steel projected to be processed at each TSL. Based on

discussions with amorphous core-cutting equipment suppliers and transformer manufacturers, the

Department estimates that a typical amorphous core-cutting machine can process 1,250 lbs/hr of

core steel. The Department applied a 75% utilization on this processing speed, resulting in a

single core-cutting machine being capable of processing about 938 lbs/hr of core steel. 

Furthermore, the Department assumes that the core-cutting machines would operate two shifts

per day, 250 days per year. One of these amorphous core-cutting machines costs approximately

$500 k installed. The Department estimated that amorphous core-cutting equipment capital

expenditures for the superclass would be $26.0 M and $74.5 M for TSL5 and 6, respectively. 

The amorphous core-cutting equipment estimates are summarized in Table 12.4.5.

Table 12.4.5 Summary of Liquid-Immersed Distribution Transformer Amorphous CoreCutting Equipment Capital Expenditures

Trial Standard Level Number of Amorphous

Core-Cutting Machines

Needed by Industry

Amorphous Core-Cutting

Conversion Capital

Expenditure 

(2004$, Millions)

TSL5 52 26.0

TSL6 149 74.5

For TSLs 1 through 4, the Department estimated miscellaneous capital investments,

primarily buildings and coil winding equipment, based on a multiplier approach. With respect to

buildings, the manufacturers indicated that additional building space will be necessary in some

cases to accommodate expanded annealing furnace capacity. With respect to coil winding

equipment, the Department understands that as transformers become more energy efficient,

manufacturers may switch from winding coils with aluminum conductor to copper. Copper has a

higher conductivity, allowing for smaller cross-sectional areas and transformer cores. However,

copper requires more torque when winding in order to ensure the same winding quality. The

higher torque can be met by slowing existing machines or winding fewer coils simultaneously. In

both scenarios, additional coil-winding capacity is required. To estimate the total conversion

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capital investments, including those required for buildings and coil winding equipment, the

Department applied a multiplier of 1.05 to the sum of the explicitly estimated core-cutting and

annealing furnace capital expenditures. The 1.05 multiplier is based on information submitted by

industry. 

For TSLs 5 and 6, before applying a multiplier to the explicitly estimated amorphous corecutting and annealing furnace capital expenditures, the Department estimated the costs of

converting the portion of the liquid-immersed industry that uses shell designs to core form

designs. For TSL5, since the single-phase design lines would not have to convert to amorphous

core technology, the costs of converting to core form designs would be zero. For TSL6, the

Department estimates the costs of converting the liquid-immersed industry fully to core form

designs to be $48 M. This estimate includes $6 M for lacing tables and $42 M for coil winding

equipment. After adding these costs of converting to core form designs to the previously

tabulated amorphous core-cutting and annealing furnace estimates, the Department applied an

assumed multiplier of 1.2 at TSL5 and TSL6 to account for the cost of conveyers, fixturing, tank

washers, hangers, buildings, etc. The total conversion capital expenditures for the liquidimmersed superclass are summarized in Table 12.4.6.

Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital

Expenditures

Trial

Standard

Level

Annealing Furnace

Conversion Capital

Expenditure

(2004$, Millions)

Core-Cutting

Conversion Capital

Expenditure

(2004$, Millions)

Miscellaneous,

incl. Buildings

and Coil Winding

Equipment

Total Conversion

Capital

Expenditure

(2004$, Millions)

TSL1 2.2 0.2 0.1 2.5

TSL2 4.4 0.4 0.2 5.0

TSL3 6.6 0.8 0.4 7.8

TSL4 6.6 1.0 0.4 8.0

TSL5 52.4 26.0 15.7 94.1

TSL6 149.6 74.5 *102.4 326.5

* Includes $48 M to fully convert industry from shell to core form designs.

12.4.2 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 assumes that product conversion expenses for liquid-immersed transformer

manufacturers at TSLs 5 and 6 will require total additional expenses equivalent to 100 percent of

the industry’s R&D budget for three years. Since manufacturers already produce liquid-immersed

transformers that would comply with TSLs 1 through 4, product conversion expenses are

expected to be negligible for these TSLs. Product conversion expenses are summarized in Table

12.4.7.

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Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product Conversion

Expenses

Trial Standard Level Basis Product Conversion

Expenses

(2004$, Millions)

TSL1-4 Industry makes these designs

today.

0

TSL5 Amount equivalent to 100%

of industry R&D budget for 3

years.

109.2

TSL6 Amount equivalent to 100%

of industry R&D budget for 3

years.

161.2

12.4.3 Industry Financial Impacts

 The Department used the GRIM and the inputs and assumptions described in the previous

sections to produce indicators of financial impacts on the liquid-immersed distribution transformer

superclass at each TSL. This document reports the results of the MIA using two key financial

metrics: INPV and annual net cash flow to the industry. 

12.4.3.1 Trial Standard Levels

The Department developed six TSLs for the liquid-immersed distribution transformer

superclass. TSL1 is the NEMA TP-1 standard. TSL6 represents the maximum TSL that is

technologically feasible. TSLs 2 through 5 are bundles of various candidate standard levels as

described in Chapter 10 (section 10.2.2.3) of this Technical Support Document. TSL6 would

require all liquid-immersed design lines to convert to amorphous core technology. TSL5 would

require design lines 3 through 5 to convert to amorphous core technology.

12.4.3.2 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the Department’s NPV

applied to the whole 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 Department used the GRIM to estimate cash flows

between 2004 and 2038, consistent with the forecast period used in the national impact analysis. 

In the manufacturer impact analysis, the Department compared the INPV of the base case

(no efficiency standard) to that of each TSL. The difference in INPV is an estimate of the

economic impacts that implementing each particular TSL would have on the entire industry.

To evaluate the range of cash flow impacts on the industry, the Department constructed two MIA

analyses based on the two markup scenarios discussed in section 12.3.7. In the first scenario, the

gross margin percentage is held constant at all TSLs (and equal to the base case gross margin

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percentage). In the second scenario, it is assumed that the industry could preserve its operating

profit at all TSLs. Tables 12.4.8 and 12.4.9 provide the INPV estimates under the two scenarios.

Table 12.4.8 Changes in Liquid-Immersed Industry Net Present Value, Preservation of

Gross Margin Percentage Scenario

Trial Standard Level INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $526 - -

TSL1 $532 $5.8 1.1%

TSL2 $537 $10.7 2.0%

TSL3 $553 $27.0 5.1%

TSL4 $561 $34.9 6.6%

TSL5 $549 $22.3 4.2%

TSL6 $552 $25.8 4.9%

Table 12.4.9 Changes in Liquid Immersed Industry Net Present Value, Preservation of

Operating Profit Scenario

Trial Standard Level

INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $526 - -

TSL1 $521 ($5.7) -1.1%

TSL2 $513 ($12.9) -2.4%

TSL3 $496 ($30.0) -5.7%

TSL4 $490 ($36.9) -7.0%

TSL5 $323 ($203.8) -38.7%

TSL6 $27 ($499.6) -94.9%

The results from the preservation of gross margin percentage scenario provide a more

favorable projection than do the results from the preservation of operating profit scenario. 

Industry value would increase if manufacturers could sustain their gross margin percentage as

their production costs increase in response to a standard. However, as previously mentioned, the

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preservation of gross margin percentage assumption may be optimistic, particularly at higher

TSLs. 

The preservation of operating profit markup scenario provides a low bound for INPV

under a standard. The decrease in industry value under this scenario comes from the inability of

industry to fully recoup the capital investments required for standard compliance, including

investments in working capital. The negative impacts on INPV are much greater at TSL5 and

TSL6, which are the two TSLs that would require partial or full conversion of the industry to

amorphous core technology. 

12.4.3.3 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long-term effects of standards, short-term changes

in net cash flow are also important and indicative of the impacts on industry during the years

between final rule publication and the standard effective date. For example, a large investment

over a period of a few years could strain the industry’s access to capital. Consequently, the sharp

drop in net cash flow might lead to additional borrowing; changes in leverage, interest coverage

ratios, and/or bond ratings; and possibly increased concern among investors. Thus, a short-term

disturbance can have long-term effects that the INPV cannot capture. To get an idea of the

behavior of annual net cash flows, the Department reports the annual net or free cash flows from

2004 through 2020 for the different TSL levels. Figures 12.4.1 and 12.4.2 present the annual net

cash flows for the base case and each of the six TSLs evaluated for the two different markup

scenarios.

$(200.00)

$(150.00)

$(100.00)

$(50.00)

$-

$50.00

$100.00

$150.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5

TSL6

Standard becomes effective in 2010

Figure 12.4.1 Industry Net Cash Flow for Preservation of Gross Margin Percentage

Scenario, Liquid-Immersed

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Prior to the final rule publication date, the cash flows are identical for all TSLs in both

scenarios. After final rule publication, cash flows are driven by the level of capital investments

and product conversion expenses and the proportion of these investments spent every year. In

addition, in the year of the standard, a relatively large investment in working capital is required. 

The incremental investments in working capital are about $7 M, $13 M, $30 M, $38 M, $123 M,

and $284 M for TSLs 1 through 6, respectively (with about 5-6 percent variation at each TSL

between markup scenarios). After final rule publication, industry cash flows begin to decline as

industry uses its financial resources to prepare for the standard. In the year the standard becomes

effective, new capital equipment goes into production.

While the behavior of cash flows for each TSL varies between the two markup scenarios,

there are three observations that are common across the two scenarios. First, the net annual cash

flows do not go negative for TSL1 through TSL4. Second, for TSL3 and TSL4, net annual cash

flows dip close to zero in 2010, the year of standard implementation. The dip in cash flow in

2010 is due to a relatively large investment in working capital that would be required to finance

increased inventories, accounts receivable, etc. Third, net annual cash flows go negative during

the compliance period for TSL5 and TSL6, which are the two TSLs that would require a partial

or full conversion to amorphous core technology. 

$(250.00)

$(200.00)

$(150.00)

$(100.00)

$(50.00)

$-

$50.00

$100.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5

TSL6

Standard becomes effective in 2010

Figure 12.4.2 Industry Net Cash Flow for Preservation of Operating Profit Scenario,

Liquid-Immersed

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12.4.4 Other Impacts

12.4.4.1 Employment

Industry-wide labor expenditures are estimated based on the engineering analysis. 

Winding of the primary and secondary coils; cutting, forming and annealing of the core; core

assembly; testing; and packing of the completed transformer represent the bulk of the labor. The

Department incorporated these assumptions into the GRIM, which projects labor expenditures

annually. Labor expenditures are a function of the labor intensity of the product, the sales

volume, and an implicit wage assumption that remains fixed in real terms over time. Table

12.4.10 provides the changes in labor measured as the change in labor expenditures for liquidimmersed transformers in 2010, the standard effective date, versus the base case.

Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010)

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 TSL6

3.1% 3.2% 0.8% 1.2% 34.9% 98.8%

 Based on the GRIM and the assumption that 95 percent of liquid-immersed transformers

sold in the U.S. are manufactured in the U.S., the Department estimates that there are currently

4,247 production employees in the U.S. liquid-immersed distribution transformer industry. This

estimate excludes non-production workers and assumes a level annual production rate. In

practice, including non-production workers and seasonal effects, the actual number of employees

in the liquid-immersed superclass would be higher. Due to the fact that labor content does not

vary between the markup scenarios, projected labor expenditures are equivalent for both. Based

on these results, DOE expects no significant discernable direct employment impacts among

transformer manufacturers for TSL1 through TSL4, but potentially large increases in employment

for TSL5 and TSL6. These conclusions are independent of any conclusions regarding

employment impacts from the broader U.S. economy, which are documented in Chapter 14 of this

Technical Support Document. These conclusions also ignore the possible relocation of domestic

employment to lower labor cost countries such as Mexico. Also, for TSLs 5 and 6, this

conclusion ignores the possibility of outsourcing amorphous core production to companies in

other countries such as India.

Manufacturers expressed concern during the MIA interviews that establishing an energy

conservation standard would ‘commoditize' the distribution transformer market, making it easier

for foreign manufacturers who specialize in low-cost mass production of one design to enter the

U.S. market. Today's liquid-immersed market is characterized by total ownership cost evaluation

formulae and customer design requirements and specifications. U.S. manufacturers differentiate

themselves in the market by employing rapid turn-around times and demonstrating responsiveness

to their customer needs. According to some manufacturers, in Massachusetts where a state

standard of NEMA TP-1 was passed for both liquid-immersed and dry-type transformers, several

utilities have abandoned their evaluation formulae and simply ordered standards-compliant

transformers. In many cases, according to manufacturers, these standards-complaint units are less

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efficient than those that were purchased before the state standard took effect. In other words,

according to manufacturers, there has been a backsliding in average efficiency in this market, and

an associated ‘commoditization’ of the product offering which has opened the door to foreign

competition. Industry fears this situation will worsen under a federal standard. This concern was

independently raised by several liquid-immersed manufacturers during the MIA interviews and

represents a critical concern in the industry.

U.S. manufacturers believe that they could be impacted from ‘commoditization’ in several

ways. Less efficient transformers are smaller and less costly; therefore, ‘commoditization’ could

result in reduced capacity utilization and lower revenues. Increased competition from foreign

manufacturers could result from U.S. manufacturers’ loss of competitive advantage, which today

is derived from the flexibility of U.S. manufacturing processes and product customization

capabilities. Finally, manufacturers believe they may have no alternative other than to relocate

their facilities outside of the U.S. to compete on an equal basis with lower labor cost foreign

producers. In essence, after an energy conservation standard, manufacturers believe that the

liquid-immersed distribution transformer industry would begin to more closely resemble today’s

LV dry-type market.

12.4.4.2 Production Capacity

The Department believes that there are only minor production capacity implications for the

standard at TSL4 and below. At TSL6, all liquid-immersed design lines would have to convert to

amorphous core technology. At TSL5, three design lines would have to convert to amorphous

core designs. Conversion to amorphous core designs would obsolete a large portion of the

equipment used in the liquid-immersed industry (e.g., annealing furnaces, core-cutting and

winding equipment). 

12.4.4.3 Exports

Domestic manufacturers produce and export liquid-immersed transformers around the

world. Due to the inherent manufacturing flexibility built into their production lines,

manufacturers can readily retool and build export units (even 50 Hz fundamental frequency)

without problem. Once the standard takes effect, transformer manufacturers would still be able to

produce and export units that are below the Department’s minimum efficiency standard, as the

standard only applies to transformers for use in the United States.

During the MIA interviews, one manufacturer expressed concern that an existing volume

discount enjoyed on a low-grade grain-oriented steel that the manufacturer uses to build

transformers for export may no longer be available if the Department’s standard drives the

minimum efficiency to a point where M3 or M2 core steel become the primary steels used by the

U.S. transformer industry. In this way, exported transformers that have lower quality steel may

become slightly more expensive and therefore less competitive globally. The Department

recognizes this concern, but does not expect its impact to significantly degrade the existing export

market. 

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12.4.4.4 Cumulative Regulatory Burden

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

combined effects of several regulations, existing or pending, 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.

Companies that produce a wider range of regulated products may be faced with more

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, potentially reducing competition.

Smaller companies can be especially impacted since they have lower sales volumes over which to

amortize the costs of meeting new regulations. The Department considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3)

Other regulations and standards.

1. Federal Regulations on Distribution Transformer Manufacturers - in addition to potential

efficiency regulations on distribution transformers, the National Energy Code (NFPA 70)

places additional restrictions on liquid-immersed transformers, requiring that indoor liquidimmersed transformers be located in separate transformer vaults. Furthermore, the code

provides stipulations for fire walls, doors, ventilation, and oil containment, increasing the

installed cost of these types of transformers. The impetus for this section of the National

Energy Code is to prevent fires associated with flammable insulating fluids, however this

mandate applies to all indoor liquid-immersed transformers, including those containing

non-flammable liquid products.

2. Regulations and Pending Regulations at the State Level - manufacturers also discussed the

recent trend of state governments to implement NEMA TP-1 as a mandatory standard for

transformers sold within state borders. At this time, the Department knows of one state

that requires this minimum efficiency standard for liquid-immersed distribution

transformers. These standards, when preempted by federal energy efficiency regulation,

will not create a cumulative burden on domestic manufacturers.

3. Other Regulations and Standards - manufacturers were not aware of other regulations or

standards, in effect or pending, which affect liquid-immersed distribution transformers.

12.4.4.5 Impacts on Small Businesses

The Small Business Administration defines a small business, for the distribution

transformer industry, as a business that has 750 employees or fewer. The Department estimates

that of the approximately 25 U.S. manufacturers that make liquid-immersed distribution

transformers, about 15 of them are small businesses. About one-third of the small businesses have

fewer than 100 employees. 

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Because the liquid-immersed distribution transformer superclass largely produces

customized transformers, small businesses can compete because each unique design is produced in

relatively small volumes for a given order. Implementation of an energy conservation standard

would have a relatively minor differential impact on small liquid-immersed distribution

transformer manufacturers. Disadvantages to small business such as having little leverage over

suppliers (e.g., core steel suppliers) are present with or without an energy conservation standard.

12.4.4.6 Worker Safety

During the interviews, manufacturers expressed concern for their workers, who handle

heavy material and equipment on a daily basis while producing transformers. For manufacturing

industries like distribution transformers, the Occupational Safety and Health Administration

(OSHA) established a maximum handling weight of 70 pounds per worker. As transformers

become larger and more energy efficient, the core material will get heavier, coils will become

heavier, and tanks and enclosures will increase in size. Bearing this in mind, plant managers are

acutely aware and concerned about the fact that as weights increase, so do accident frequencies. 

12.4.4.7 Other Engineering Issues

Manufacturers are concerned that the dimensionally constrained transformers they

produce today may be difficult or perhaps impossible to build to meet standards. For example, for

round-tank liquid-immersed transformers (design line 3), they indicated that going above TSL3

would be problematic due to the size of the transformer exceeding the capacity of the industrystandard pole-mounting brackets. According to manufacturers, these transformers hit their

maximum height at TSL2 (between the power lines overhead and the telephone and cable lines

underneath), and thus all size expansion at higher TSLs is in the diameter of the tank. 

Approximately 80 percent of overhead transformers sold are for replacement installations, so this

issue of a pre-existing space limit will cause problems for utilities and may increase outage times.

Manufacturers also expressed concern over a second dimensionally constrained liquidimmersed transformer - subsurface retrofit transformers. These liquid-immersed units are

designed to be installed within an existing concrete vault to service an underground distribution

network. If the efficiency standard is significantly different from the levels being built today, it

may require substantial (extremely expensive) rework of these vaults, increasing downtime or

stress on the local distribution network while a failed unit is replaced. 

12.4.5 Summary of Impacts for Liquid-Immersed Superclass

The electric utility industry appears to be making mostly evaluated transformer purchase

decisions. However, in the state that has adopted an energy conservation standard for liquidimmersed distribution transformers, the average efficiency of the purchased transformers is

reported by manufacturers to be in decline. The explanation for this counterintuitive trend, as

reported by several manufacturers, is that after the efficiency standards were implemented, electric

utilities abandoned their evaluation formulae and simply have purchased the least-expensive

standards-compliant transformers. This backsliding may result in ‘commoditization’ of liquidimmersed transformers, ultimately making it easier for foreign competition to compete in the U.S.

liquid-immersed market. Manufacturers fear that this situation may worsen under a federal

standard.

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TSL6 would require all liquid-immersed design lines to convert to amorphous core

technology. TSL5 would require three of the five liquid-immersed design lines to convert to

amorphous core technology. Since the manufacturing process for amorphous core transformers is

completely different from that for conventional transformers, TSLs 5 and 6 would obsolete a

significant portion of U.S. industry’s equipment. The Department estimates the stranded assets

for TSL5 and TSL6 to be $16 M and $59 M, respectively. In addition, manufacturers detailed

many technical reasons why amorphous core material is difficult and potentially hazardous for

workers. 

TSL4 can be met without using amorphous core technology. However, manufacturers

expressed concerns over meeting TSL4 while simultaneously being able to meet customer

specifications including size and weight limitations. 

Conversion capital expenditures in the liquid-immersed distribution transformer superclass

include primarily expanded annealing furnace capacity, but also additional core-cutting equipment,

coil-winding equipment, and building construction. The need for additional annealing furnace

capacity and core-cutting equipment is driven by the increase in core weights that would be

experienced at higher TSLs. Conversion capital expenditures would be relatively modest for

TSL1 through TSL4, ranging from $2.5 M (TSL1) to $8.0 M (TSL4) in an industry with

projected revenue of $1.4 B in 2007. The industry would experience negligible product

conversion expenses in the TSL1 to TSL4 range because products meeting these efficiency levels

are produced in significant quantities today. Conversion capital expenditures and product

conversion expenses would be substantially higher for TSL5 and TSL6, the standard levels that

would require partial or full conversion to amorphous core technology. The Department

estimates that conversion capital expenditures would be $94.1 M and $326.5 M for TSL5 and

TSL6, respectively. The Department estimates the corresponding product conversion expenses to

be $109 M and $161 M, respectively. 

The impact on INPV at TSL6 ranges between -94.9 percent and +4.9 percent, depending

upon the assumed markup scenario. There is a great deal of uncertainty in these impact estimates,

primarily due to uncertainty around transformer pricing at high TSLs. At TSL6, the magnitude of

the peak negative net annual cash flow would be more than three times that of the positive base

case cash flow.

The impact on INPV at TSL5 ranges between -38.7 percent and +4.2 percent, depending

upon the assumed markup scenario. There is a great deal of uncertainty in these impact estimates,

primarily due to uncertainty around transformer pricing at high TSLs. At TSL5, the magnitude of

the peak negative net annual cash flow would be about equal to that of the positive base case cash

flow. A significant burden, which is difficult to quantify using the GRIM, would be placed on

industry if it had to maintain parallel manufacturing operations for both conventional and

amorphous core technology under TSL5. 

The impact on INPV at TSL4 ranges between -7.0 percent and +6.6 percent, depending

upon which markup scenario is assumed. The impact on annual net cash flow would be

significant at TSL4, bringing net cash flow nearly to zero in 2010 in a low markup scenario. The

2010 impacts would largely be driven by the need to invest in working capital. Although cash

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flow impacts would be significant at TSL4, the industry would likely recover from them in the

years following standard implementation. 

The impact on INPV at TSL3 ranges between -5.7 percent and +5.1 percent, depending

upon which markup scenario is assumed. The impact on annual net cash flow would be

significant at TSL3, bringing net cash flow nearly to zero in 2010 in a low markup scenario. The

2010 impacts would largely be driven by the need to invest in working capital. Although cash

flow impacts would be significant at TSL3, the industry would likely recover from them in the

years following standard implementation. 

At TSL2, the impact on INPV ranges between -2.4 percent and +2.0 percent. The impact

on annual net cash flow would be small at TSL2.

At TSL1, the impact on INPV ranges between -1.1 percent and +1.1 percent. The impact

on annual net cash flow would be negligible at TSL1.

Finally, there are several additional factors to be considered from the standpoint of

manufacturers in selecting the proposed standard:

1. If the liquid-immersed standard is high relative to the standard for MV dry-type

transformers, there could be a switch to MV dry-type transformers for certain

products where there is substitutability between the superclasses. For reasons related

to the properties inherent in their operation, for equivalent kVA ratings and TSLs, the

efficiency levels of MV dry-type transformers are lower than those of liquid-immersed.

2. If the standard is set above a certain level, some customers may look for loop-holes in

the Department’s definition of a distribution transformer through which it can

circumvent the standard. If a speciality or niche application transformer exempted

from standards is less expensive than a standards-complaint distribution transformer,

these customers may purchase a standards-exempt transformer which is also capable

of serving a distribution function.

3. Several manufacturers expressed concern about enforcement. Many manufacturers

urged the Department to make enforcement a top priority to ensure an effective

standard.

4. At TSL2 and higher, certain high fire-point products might become uncompetitive.

5. Differential impacts on small businesses do not appear to be important for the liquidimmersed distribution transformer superclass.

6. Manufacturers mentioned maximum practical efficiencies based on dimensional,

weight, and other practical limitations. The practical maxima reported to the

Department fell in the range of 99.4 to 99.5 percent for liquid-immersed transformers.

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7. Manufacturers relayed concerns about utility capital budgets. If standards go above a

certain level, the capital budgets for distribution transformers might not be able to

accommodate the transformer price increases, thereby creating downward pressure on

manufacturer profit margins.

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12.5 MANUFACTURER IMPACT ANALYSIS - LOW-VOLTAGE DRY-TYPE

The LV dry-type market is characterized by several features which have a large bearing on

the manufacturer impacts at the various TSLs. LV dry-type transformers are sold primarily and

overwhelmingly on first cost. From a manufacturer perspective, they are relatively

undifferentiated commodity products manufactured repeatedly using the same “cookie cutter”

design. The industry is also characterized by a large number of manufacturers, most of them

small. Several of the larger manufacturers have moved some (or all) of their production outside

the United States to reduce the labor cost component of finished units. Typical core steels used in

this market include inefficient non-oriented steels, such as M19 and M36.

The Department is aware of more than 40 companies active in the LV dry-type market in

the United States. These companies can be grouped into three tiers based on sales volume. Tier

one companies include those who manufacturer and bundle switchgear with their transformers. 

There are three tier one companies - Cutler-Hammer, General Electric, and Square D. Tier two

consists of eight or so smaller companies who mass produce catalogue / stock-item LV dry-type

transformers. Companies in this tier include Acme Electric (Actuant), Federal Pacific, Jefferson

Electric, Sola Hevi-Duty, Hammond, MGM, and Olsun. Finally, there are tier three companies

that are smaller, and build some catalogue stock, but tend to be customer-focused, following

detailed specifications and producing made-to-order units. The Department’s database lists

approximately 30 companies that fall into this third tier. The Department estimates that tier one

companies, including other switchgear manufacturers that may not manufacture their own

transformers, account for approximately 50 percent of sales. Tier two companies account for the

vast majority of remaining product sales. As discussed further in this section, each tier, while

facing many of the same technology issues, differs in its ability to finance and meet the

investments needed to comply with the standard. 

For information on the transformer market in general, and LV dry-type transformers in

particular, refer to the Market and Technology Assessment (Chapter 3). 

12.5.1 Conversion Capital Expenditures

Through the MIA interviews, the Department learned that there are two principal

conversion capital expenditures that LV dry-type transformer manufacturers would have to make

in response to a standard. These are: 1) investments in core-cutting equipment capable of making

mitered cuts, and 2) investments in miscellaneous tooling and equipment including that used for

coil winding. Core-cutting equipment capable of making mitered cuts is a key component of the

LV dry-type analysis. Mitered construction techniques are often needed to reduce no-load losses

in the cores of LV dry-type transformers. Mitered joints have lower destruction factors and are

more efficient than conventional butt-lap joints.

Currently most “baseline” LV dry-type transformers are constructed using non-oriented

electrical steel and are assembled in a butt-lap core configuration. Butt-lap joints do not require

complex tooling, rather they involve simple 90 degree cuts and can be performed using

inexpensive tooling. Manufacturers have commented repeatedly, and the Department’s

engineering analysis confirms, that TSL1 (NEMA TP-1) was established at a level attainable using

grain-oriented M6 core steel and butt-lap construction. Currently, manufacturers can cost-

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competitively trade-off core construction techniques (and associated capital investments) and core

steel quantities. For example, TSL1 can be achieved with butt-lap joints and relatively large

amounts of M6 core steel at low flux density, or using mitered joints with less steel at a higher

flux density. Effectively, capital investments in core-mitering equipment can be avoided and

traded off for a variable cost penalty in the form of greater amounts of core steel with butt-lap

designs. However, above TSL1, mitered cores (or wound cores) become the only cost-effective

design path and at higher levels the only possible design path. Thus the manufacturing impacts in

the LV dry-type superclass are primarily due to capital investments for mitered core-cutting

equipment. 

The Department’s analytical approach to estimating the capital requirements for mitered

core-cutting equipment relied on the engineering analysis and equipment vendor product

information and costs. The Department estimated that the equivalent of three full-time mitered

core-cutting machines are currently in use by the LV dry-type superclass. At TSL1, the

Department estimated that 30 percent of the LV dry-type transformers would be manufactured

using core-cutting equipment capable of making mitered cuts. At TSL2, the Department assumed

that 95 percent of LV dry-type transformers would be manufactured using core-cutting equipment

capable of making mitered cuts. At TSL3 and higher, mitered construction is necessary, thus all

cores (in design lines 7 and 8) would be manufactured using core-cutting equipment capable of

making mitered cuts. 

The Department sent select designs from the engineering analysis to the primary supplier

of mitered core-cutting equipment to help prepare an estimate of the processing time per machine. 

The equipment manufacturer estimates that each machine, working in a normal setting

(accounting for set-up, processing, downtime), would process approximately two cores per hour,

or sixteen cores per shift. This estimate applies to design lines 7 and 8 for processing TSL1-

compliant transformer cores using M6 core steel in batches of five (design line 6 typically is not

mitered). Each core-mitering machine is estimated to cost the LV dry-type distribution

transformer superclass about $750 k installed plus $200 k for additional building space. 

At TSL2 and higher, the processing time per core is higher than at TSL1, increasing the

number of mitered-core cutting machines required by the superclass. The processing time per

core increases for two reasons: 1) more core-cutting time is required as stack height increases

with higher efficiencies, and 2) the processing time increases in inverse proportion to lamination

thickness and more efficient grades of steel typically are thinner (e.g., lamination thickness

changes from 0.014" for M6 to 0.009" for M3, representing a 56 percent increase in core-mitering

time for M3). Some manufacturers report that their core-mitering equipment operates poorly

with thinner steels, which would require them to operate at lower speeds, exacerbating the

capacity impacts. Average core stack height and lamination thickness are based on the

engineering analysis and the LCC analysis. Accounting for these increases in processing time per

core, the Department estimated the number of mitered core-cutting machines required at TSL2

and higher. Table 12.5.1 shows an example calculation for the core-mitering capacity multiplier

at each TSL for DL7, not accounting for the fraction of transformers that are mitered at each

TSL.

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Table 12.5.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 7

Trial Standard

Level

Typical Stack

Height

(in.)

Typical

Lamination

Thickness

(in.)

Typical

Number of

Laminations

per Inch

(in. -1)

*Multiplier for

Increased CoreMitering

Capacity

TSL1 3.79 0.0140 71.4 1.00

TSL2 3.79 0.0140 71.4 1.00

TSL3 4.36 0.0090 111 1.79

TSL4 5.04 0.0090 111 2.07

TSL5/6 6.08 0.0090 111 2.50

* Based on the ratios of stack heights and number of laminations per inch, normalized to TSL1. For example, at

TSL3, the multiplier is calculated as (4.36/3.79)×(111/71.4) = 1.79.

The Department estimates that 313,199 DL7 transformers would be sold in 2010 at TSL1. 

With the assumptions of 16 cores per shift, two shifts per day, and 250 operating days per year,

the Department estimates that 39.1 core-mitering machines would be needed at TSL1 if every

DL7 transformer was mitered. For DL8, the Department estimates that 22,731 transformers

would be sold in 2010 at TSL1. With the assumptions of 16 cores per shift, two shifts per day,

and 250 operating days per year, the Department estimates that 2.8 core-mitering machines would

be needed at TSL1 if every DL8 transformer was mitered. Table 12.5.2 and Table 12.5.3 provide

the calculation for the estimated number of core-mitering machines at each TSL for DL7 and

DL8, respectively.

Table 12.5.2 Calculation of Core-Mitering Machines Needed for Design Line 7 

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

TSL1 1.00 39.1 0.30 11.7

TSL2 1.00 39.2 0.95 37.2

TSL3 1.79 70.0 1.00 70.0

TSL4 2.07 81.0 1.00 81.0

TSL5/6 2.50 97.7 1.00 97.7

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Table 12.5.3 Calculation of Core-Mitering Machines Needed for Design Line 8

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

TSL1 1.00 2.8 0.30 0.9

TSL2 1.01 2.9 0.95 2.7

TSL3 1.35 3.8 1.00 3.8

TSL4 1.55 4.4 1.00 4.4

TSL5/6 1.78 5.1 1.00 5.1

Based on the assumptions of three full-time equivalent core-mitering machines in the base

case and $0.95 M per additional core-mitering machine (including building adder of $0.2 M), the

Department estimated that core-mitering equipment capital expenditures for the industry would be

$9.5 M, $35.2 M, $67.5 M, $78.9 M, $95.0 M, and $95.0 M for TSL1 through TSL6,

respectively. The core-cutting equipment estimates are summarized in Table 12.5.4. 

Table 12.5.4 Summary of LV Dry-Type Distribution Transformer Core-Mitering

Equipment Capital Expenditures

Trial Standard

Level

Mitered CoreCutting Machines

Needed by Industry

Incremental

Mitered CoreCutting Machines

Needed by Industry

Core-Mitering

Conversion Capital

Expenditure 

(2004$, Millions)

TSL1 13 10 9.5

TSL2 40 37 35.2

TSL3 74 71 67.5

TSL4 86 83 78.9

TSL5/6 103 100 95.0

The number of mitered core-cutting machines required by industry increases with

increasing TSL for three reasons. First, as discussed earlier, the Department assumes that at

TSL1, 30 percent of the nation’s shipments are mitered. At TSL2, this assumption increases to

95 percent, and at TSL3 through TSL6, 100 percent. Thus 70% and 5% of the transformers at

TSL1 and TSL2, respectively, are built with butt-lap cores. The Department assumes there is no

incremental tooling cost for butt-lap core construction. Second, steel laminations are thinner at

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higher efficiency, thus for the same core stack height (e.g., 5 inches of steel), a shift from M6 to

M3 requires 56 percent more laminations, or 56 percent more pieces of steel that have to be

processed and cut. Finally, above TSL2, most of the efficiency improvement is captured by

reducing flux density, which involves adding more steel and therefore stack height to the cores. 

Illustrative of the last two factors, the average number of pieces of core steel in DL7 (75 kVA, 3-

phase, LV dry-type) increases from approximately 270 at TSL1 and TSL2, to 485 at TSL3, 560

at TSL4, and 675 at TSL5 and TSL6. 

The Department estimates the capital investment for additional miscellaneous equipment,

including that needed for coil winding, based on a multiplier applied to the core-cutting equipment

capital investment. Industry sources indicated that a multiplier of 1.08 would give a reasonable

estimate of the total conversion capital expenditure, including miscellaneous equipment costs such

as coil winding machines. For example, during the MIA interviews, manufacturers discussed the

costs associated with upgrading their coil winding equipment to enable it to wind copper

conductor. Copper requires more torque (i.e., slowing winding speeds) on the winding lathe. 

The complete conversion capital expenditures for the LV dry-type superclass are summarized in

Table 12.5.5.

Table 12.5.5 Summary of LV Dry-Type Distribution Transformer Conversion Capital

Expenditures

Trial Standard Level Core-Cutting

Conversion Capital

Expenditure

(2004$, Millions)

Multiplier for Winding and

Miscellaneous Tooling

Total Conversion

Capital Expenditure

(2004$, Millions)

TSL1 9.5

1.08

10.3

TSL2 35.2 38.0

TSL3 67.5 72.9

TSL4 78.9 85.2

TSL5/6 95.0 102.6

12.5.2 Product Conversion Expenses

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

training expenses incurred by a transformer manufacturer as it prepares for compliance with the

standard. The Department based its industry-wide product conversion expense estimates on

information submitted by the interviewed manufacturers. It should be noted that contrary to

manufacturers of liquid-immersed transformers, manufacturers of LV dry-type do not have

flexibility in design. Typically, their customers do not evaluate, therefore the design software, the

employees, the equipment, tooling and other infrastructure are not oriented toward custom-build

designs. Instead, LV dry-type manufacturers’ product lines today are typically concentrated

around products at the baseline (lowest first cost) and TSL1 (NEMA TP-1). Product conversion

expenses are summarized in Table 12.5.6.

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Table 12.5.6 Summary of LV Dry-Type Distribution Transformer Product Conversion

Expenses

Trial

Standard

Level

R&D

(2004$,

Millions)

Testing 

(2004$,

Millions)

Marketing 

(2004$,

Millions)

UL Listing 

(2004$,

Millions)

Training 

(2004$,

Millions)

TOTAL

(2004$,

Millions)

TSL1 1.7 1.0 0.4 0 0 3.0

TSL2 6.3 1.2 0.5 0.3 0 8.4

TSL3 6.8 1.5 0.5 0.6 0.3 9.7

TSL4 7.3 1.5 0.5 0.9 0.3 10.6

TSL5 7.7 1.5 0.5 0.9 0.3 10.9

TSL6 7.7 1.5 0.5 0.9 0.3 10.9

The large jump in estimated research and development expenses between TSL1 and TSL2

are attributed to the fact that industry currently produces designs that are compliant with TSL1

but not TSL2. Some research and development would still be required at TSL1 as the entire

industry’s production would shift to TSL1, but this effort would be focused on optimization and

would be much less than the research and development effort required to meet TSL2. Design,

prototyping, and testing requirements would be more pronounced at TSL2. 

12.5.3 Industry Financial Impacts

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

the financial impacts on the LV dry-type distribution transformer industry at each TSL. This

document reports the output of the GRIM analysis using two key financial metrics: INPV and

annual net cash flow to the industry. 

12.5.3.1 Trial Standard Levels

The Department developed six TSLs for LV dry-type distribution transformers. TSL1 is

the NEMA TP-1 standard. TSL6 represents the maximum TSL that is technologically feasible. 

TSL5 is the highest TSL that yields national NPV greater than zero. For dry-type transformers,

TSL5 and TSL6 are the same. TSL4 results in the maximum LCC savings. TSL2 and TSL3 are

spaced equally between TSL1 and TSL4. 

12.5.3.2 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the Department’s NPV

applied to the whole 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 GRIM estimated cash flows between 2004 and

2038, consistent with the forecast period used in the national impact analysis. 

In the manufacturer impact analysis, the Department compared the INPV of the base case

(no efficiency standard) to that of each TSL. The difference in INPV is an estimate of the

economic impacts that implementing each particular TSL would have on the entire industry.

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To evaluate the range of cash flow impacts on the industry, the Department constructed two MIA

analyses based on the two markup scenarios discussed in section 12.3.7. In the first scenario, the

gross margin percentage is held constant at all TSLs (and equal to the base case). In the second

scenario, it is assumed that the industry could preserve its operating profit at all TSLs. Tables

12.5.7 and 12.5.8 provide the INPV estimates under the two scenarios.

Table 12.5.7 Changes in LV Dry-Type Industry Net Present Value, Preservation of Gross

Margin Percentage Scenario

Trial Standard Level INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $93 - -

TSL1 $90 ($3.8) -4.1%

TSL2 $72 ($21.1) -22.6%

TSL3 $53 ($40.2) -43.0%

TSL4 $53 ($40.1) -42.9%

TSL5/6 $57 ($36.5) -39.1%

Table 12.5.8 Changes in LV Dry-Type Industry Net Present Value, Preservation of

Operating Profit Scenario

Trial Standard Level

INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $93 - -

TSL1 $80 ($13.8) -14.7%

TSL2 $56 ($37.9) -40.5%

TSL3 $28 ($65.3) -69.9%

TSL4 $8 ($85.9) -92.0%

*TSL5/6 ($22) ($115.8) -124.0%

* INPV is shown to be negative. Practically, this means that industry value would go to zero. The large impact on

INPV would be driven by capital investment, including investments in working capital.

The results from the preservation of gross margin percentage scenario provide a more

favorable projection than do the results from the preservation of operating profit scenario. Under

a standards scenario, industry is investing heavily during the compliance period to prepare for the

effective date of the standard. These investments include both the aforementioned capital

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equipment and product conversion costs. Industry value would not decrease as much if

manufacturers could preserve their gross margin percentage as their production costs increase in

response to a standard. However, as previously mentioned, manufacturers felt that the constant

gross margin percentage scenario may be optimistic.

The preservation of operating profit scenario provides a lower bound for INPV under a

standard. The Department projects that the INPV impact in this scenario will be approximately

two to four times as large as that in the preservation of gross margin percentage scenario. This is

due to the fact that the same capital equipment investments are being made but the industry is still

only making the same operating profit (in absolute dollars) as it did in the base case. The

decrease in industry value under both scenarios comes from the inability of industry to fully

recoup the capital investments required for standard compliance, including investments in working

capital. 

12.5.3.3 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long-term effects of standards, short-term changes

in net cash flow are also important and indicative of the impacts on industry during the years

between final rule publication and the standard effective date. For example, a large investment

over a period of a few years could strain the industry’s access to capital. Consequently, the sharp

drop in net cash flow might lead to additional borrowing; changes in leverage, interest coverage

ratios, and/or bond ratings; and possibly increased concern among investors. Thus, a short-term

disturbance can have long-term effects that the INPV does not capture. To get an idea of the

behavior of annual net cash flows, the Department reports the annual net or free cash flows from

2004 through 2020 for the different TSL levels. Figures 12.5.1 and 12.5.2 present the annual net

cash flows for the base case and each of the six TSLs evaluated for the two different markup

scenarios. 

$(50.00)

$(40.00)

$(30.00)

$(20.00)

$(10.00)

$-

$10.00

$20.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5 & 6

Standard becomes effective in 2010

Figure 12.5.1 Industry Net Cash Flow for Preservation of Operating Profit Scenario, LV

Dry-type

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Prior to the final rule publication date, the cash flows are identical for all TSLs in both

scenarios. After final rule publication, cash flows are driven by the level of capital investments

and product conversion expenses and the proportion of these investments spent every year. 

Additionally, in the year of the standard, a relatively large investment in working capital is

required. The incremental investments in working capital are about $6 M, $11 M, $17 M, $30 M,

$53 M, and $53 M for TSL1 through TSL6, respectively (with about 5-6 percent variation at

each TSL between markup scenarios). After the final rule is published, industry cash flows begin

to decline as industry uses its financial resources to prepare for the standard. In the year the

standard becomes effective, new capital equipment goes into production. The Department

assumed that no assets are stranded for the six TSLs evaluated. 

While the behavior of cash flows for each TSL varies between the two markup scenarios,

there are two observations that are common across the two scenarios. First, the net annual cash

flows go negative for all TSLs except for TSL1. Second, for TSL4 through TSL6, the noticeable

impact on cash flow in 2010 is due to a relatively large investment in working capital that would

be required to finance increased inventories, accounts receivable, etc. 

12.5.4 Other Impacts

$(50.00)

$(40.00)

$(30.00)

$(20.00)

$(10.00)

$-

$10.00

$20.00

$30.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5 & 6

Standard becomes effective in 2010

Figure 12.5.2 Industry Net Cash Flow for Preservation of Gross Margin Percentage

Scenario, LV Dry-type

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12.5.4.1 Employment

Industry-wide labor expenditures are estimated based on the engineering analysis. 

Winding of the primary and secondary coils, stacking and assembly of the core, enclosure

manufacturing, testing, and packing of the completed transformer represent the bulk of the labor. 

The Department incorporated these assumptions into the GRIM, which projects labor

expenditures annually. Labor expenditures are a function of the labor intensity of the product, the

sales volume, and an implicit wage assumption that remains fixed over time in real terms. Table

12.5.9 provides the changes in labor measured as the change in labor expenditures for LV drytype transformers in 2010, the standard effective date, versus the base case.

Table 12.5.9 Projected Change in Labor Expenditures, Low-Voltage Dry-Type (2010)

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 & 6

12.4% 5.4% 3.9% 8.1% 13.4%

Based on the GRIM and the assumption that 50 percent of LV dry-type transformers sold

in the U.S. are manufactured in the U.S., the Department estimates that there are currently 1,074

production employees in the U.S. LV dry-type distribution transformer industry. Due to the fact

that labor content does not vary between the markup scenarios, projected labor expenditures are

equivalent for both. Based on these results, DOE expects increased employment levels among

transformer manufacturers at all TSLs compared to the base case. The employment level

increases at TSL2 and TSL3 are expected to be lower than at other TSLs because of increased

use of mitered core construction and improvements in the quality of core steel (i.e., from M6 to

M3 and HO). At TSL1 some manufacturers will continue to use buttlap core construction,

increasing employment levels. At TSLs 4 through 6, employment level increases will be high due

to increasingly larger cores, requiring more labor. 

Computationally, the analysis shows that the direct employment impacts will be positive,

however the end result could be exactly the opposite. During the MIA interviews, manufacturers

stated that at higher standard levels, it becomes increasingly likely that they will relocate their

production facilities to Mexico or China, where the labor cost component of a transformer can be

reduced. Indeed, in this superclass, more than half of the LV dry-type transformers purchased in

the U.S. are imported. Competitive forces have already led to a manufacturing shift to Mexico, as

the market seeks to find the lowest cost transformers in the global economy, after accounting for

transportation costs (which can be substantial for transformers coming from overseas). 

12.5.4.2 Production Capacity

Energy conservation standards will impact the industry’s manufacturing capacity because

the core stack heights will increase and laminations will become thinner. Thinner laminations

require more pieces of steel per inch of core stack, therefore requiring more cuts. Thinner

laminations are also more cumbersome to handle. Manufacturers would have to invest in

additional core cutting machinery or modifications and improvements to recover any losses in

productivity, and these factors might also contribute to a need for more plant floor space. 

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Because more efficient transformers tend to be larger than standard units, this issue can also

contribute directly to the need for additional floor space.

12.5.4.3 Exports

Exports of LV dry-type transformers are not considered to be a significant percentage of

domestic shipments. However, during the interviews, manufacturers did not comment that they

anticipate the impact of a standard to negatively affect exports.

12.5.4.4 Cumulative Regulatory Burden

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

combined effects of several regulations, existing or pending, 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.

Companies that produce a wider range of regulated products may be faced with more

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, reducing competition. Smaller

companies can be especially impacted since they have lower sales volumes over which to amortize

the costs of meeting new regulations. The Department considers that a proposed standard is not

economically justified if it contributes to an unacceptable level of cumulative regulatory burden. 

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3)

Other regulations and standards.

1. Federal Regulations on Distribution Transformer Manufacturers - manufacturers were not

aware of any federal regulations on low-voltage dry-type distribution transformer

manufacturers that would cause a cumulative regulatory burden.

2. Regulations and Pending Regulations at the State Level - manufacturers also discussed the

recent trend of state governments to implement NEMA TP-1 as a mandatory standard for

transformers sold within state borders. At this time, the Department knows of eight states

and one city that require this minimum efficiency standard for LV dry-type distribution

transformers. The states requiring TP-1 are California, Connecticut, Maryland,

Massachusetts, Minnesota, New York, Oregon, and Wisconsin. The city requiring TP-1 is

Burlington, VT. However, these standards, when preempted by federal energy efficiency

regulation, will not create a cumulative burden on domestic manufacturers.

3. Other Regulations and Standards - During the MIA interviews, some manufacturers

expressed concern regarding Underwriters Laboratories (UL) and other safety agency

listing requirements. These requirements could impose a burden on the LV dry-type

industry, as transformer manufacturers may need to obtain UL listing for the new

standards-compliant transformer designs. The UL listing impact was accounted for in the

product conversion expense estimates provided by industry to the Department. 

Manufacturers were not aware of other regulations or standards, in effect or pending, that

affect LV dry-type distribution transformers.

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12.5.4.5 Impacts on Small Businesses

The Small Business Administration defines a small business, for the distribution

transformer industry, as a business having 750 employees or fewer. The Department estimates

that of the approximately 40 U.S. manufacturers that produce LV dry-type distribution

transformers, more than 30 of them are small businesses. In such a highly competitive industry,

an important manufacturer may ship only a few percent of the market total. Some of the

relatively important manufacturers in the industry are small businesses. About two-thirds of the

small LV dry-type businesses have fewer than 100 employees. 

The LV dry-type distribution transformer market is characterized by off-the-shelf

products. In this market, it is difficult for small businesses to be profitable, even in the base case. 

Small businesses have less leverage over their suppliers and cannot realize the economies of scale

enjoyed by larger manufacturers. The competitive position of small LV dry-type manufacturers

will likely erode further under an energy conservation standard. At higher TSLs, the competitive

position of a small business would be impacted even more.

At TSL3 and higher, the negative net cash flows for the industry during the compliance

period are more than twice the magnitude of the positive cash flow in the base case. Thus, the

impacts for TSL3 and higher on the LV dry-type industry as a whole are large for businesses of all

sizes and overshadow the potential differential impacts on small businesses.

To facilitate discussion of the impacts on small LV dry-type businesses, it is useful to

conceptualize these small businesses as coming from the tier two and tier three companies

described in the introduction to section 12.5. The impacts on these two tiers will likely be

different. Tier two consists of eight or so smaller companies that mass produce catalogue / stockitem LV dry-type transformers. Companies in this tier include Acme Electric (Actuant), Federal

Pacific, Jefferson Electric, Sola Hevi-Duty, Hammond, MGM, and Olsun. Tier three companies

are smaller, and build some catalogue stock, but tend to be customer-focused, following detailed

specifications and producing made-to-order units to sell. The Department’s database lists

approximately 30 companies that fall into this third tier. 

Tier three LV dry-type manufacturers often buy prefabricated cores today. At TSL2, this

trend would be reinforced and magnified for two reasons. First, these companies would not have

capital budgets large enough to invest in the core mitering equipment that most manufacturers

would find necessary to meet TSL2. Second, many of the smallest manufacturers lack the design

expertise and labor skills necessary to build cores that would be compliant with TSL2. Not only

had many of the smallest manufacturers interviewed by the Department never considered

designing above TSL1, many of them were not even aware that a DOE rulemaking for

distribution transformers was underway. 

The design efforts and reporting requirements alone will likely cause some tier three

manufacturers to exit the market, even at TSL1. There seems to be general agreement among

manufacturers of all sizes that the smallest, marginal businesses will be at risk after standards

implementation, even at TSL1. Similarly, the recent trend for smaller businesses to sell a greater

percentage of their products into specialized and niche markets may also be magnified at TSL1

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and TSL2. If they possess sufficient engineering expertise, the smallest businesses can still

compete effectively in the market for specialized products.

For the tier two LV dry-type manufacturers, the reaction and impacts at TSL1 and TSL2

would likely be more varied. At TSL2, most of these businesses would invest in equipment to cut

mitered cores, some would design and construct highly efficient butt-lap constructed cores, and

some would purchase pre-cut (mitered) cores. It will be difficult for many small businesses to

purchase core-mitering equipment because of the lack of capital typically available to small

businesses. Capital outlays for core-mitering equipment may not be justified if other higher return

projects exist. This impact will be compounded because of the discrete sizes in which coremitering equipment is available (i.e., some small businesses would have to buy equipment that is

large relative to their production quantities). For those small businesses that opt to construct

well-designed butt-lap cores, they will experience a significant variable cost disadvantage at

TSL2, but not at TSL1. For this reason, over time, TSL2 would likely have a negative impact

either on the market share or the profitability of many small businesses. In addition, as discussed

in the Market and Technology Assessment (Chapter 3), the butt-lap designs will be larger, and

therefore will disadvantage small manufacturer products from a size and weight perspective,

particularly for products that meet TSL2. Small businesses that opt to purchase pre-cut cores will

end up sharing a portion of the value-added with their core suppliers, thus eroding the transformer

manufacturers’ margins. These businesses that opt to purchase pre-cut cores will have to make

relatively large investments in working capital to support the increased inventories that will be

required for the manufacturer to have the hundreds of cut piece sizes available to be responsive to

customer orders for different kVA ratings. This contrasts sharply with the comparatively lower

costs of carrying an inventory of a few different width rolls of core steel, which is currently the

case. Additionally, the need to procure cores from a third party will erode the flexibility and short

delivery times which today enable small manufacturers to compete with lower-cost large

manufacturers.

The Department learned about a few other noteworthy impacts on small businesses during

the manufacturer interview process. First, irrespective of the standard level, small businesses have

lower production over which to spread costs such as design work, testing, prototyping, and UL

certification and listing. This would disadvantage small businesses, even at TSL1. Secondly, if a

small business decided to exit the ventilated dry-type market because of the costs of complying

with the standard, it would impact the small business’s profitability in other (non-regulated)

product markets by diminishing the volume discounts that manufacturers currently enjoy for

certain materials. Finally, small manufacturers perceive themselves at a disadvantage under

standards compared to large manufacturers that bundle transformers and switchgear into a single

product offering.

12.5.5 Summary of Impacts for Low-Voltage Dry-Type Superclass

The customers for LV dry-type transformers do not generally consider efficiency when

purchasing transformers. Price is the prime determinant of customer choice. Most LV dry-type

transformers are purchased by contractors or others who do not pay the associated electric bills

and therefore do not consider life-cycle costs. TP1-compliant LV dry-type transformer purchases

are driven by state mandated efficiency levels and not consumer preferences. 

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Conversion capital expenditures in the LV dry-type distribution transformer superclass

include primarily core-mitering equipment, but some additional expenditures would be necessary

to upgrade coil winding equipment and miscellaneous tooling. Today, only a few full-time

equivalent core-mitering machines are required by the LV dry-type superclass. At TSL1, the

Department estimates that 30 percent of the LV dry-type transformers would be manufactured

using core-cutting equipment capable of making mitered cuts. At TSL2, about 95 percent of LV

dry-type transformers would require mitered cuts, and at TSL3 and higher, 100 percent of designs

would be mitered.

Above TSL1, the core-cutting time per transformer, and consequently the number of coremitering machines required by the industry, increases because of two factors. First, more corecutting time is required in proportion to increases in stack height at higher efficiencies. Second,

the shift to thinner core steel laminations at higher efficiencies implies increases in core-cutting

time that are inversely proportional to lamination thickness. The Department accounted for these

two factors in estimating the increases in mitered core-cutting equipment required at each TSL

above TSL1. The Department estimated that mitered core-cutting equipment capital expenditures

for the industry would be $10.3 M, $38.0 M, $72.9 M, $85.2 M, $102.6 M, and $102.6 M for

TSL1 through TSL6, respectively. These are large capital expenditures for a low-margin industry

projected to have only $330 M in revenue in 2007, particularly above TSL2. Other capital

conversion expenditures for the LV dry-type superclass would add less than 10 percent to the

core-mitering equipment expenditure estimates. Product conversion expenses for the LV dry-type

superclass would be signficant above TSL1, based on information submitted by industry. Industry

currently makes designs that are compliant with TSL1, so research and development costs would

be mitigated at TSL1.

The impact on INPV at TSL5 and TSL6 would range between complete elimination of

industry value and -39 percent. The magnitude of the peak negative net cash flow would be about

five or six times that of the base case positive net cash flow. The 2010 impacts would largely be

driven by the need to invest in working capital. Manufacturers commented that at these levels,

with all the shipments based on laser-scribed HO core steel, that global production would be

insufficient to meet their needs. Furthermore, at these TSLs, manufacturers stated they would

seriously consider either relocating outside the U.S. to recoup some labor costs or simply to exit

the business.

At TSL4, the impact on INPV would range between -92 percent and -43 percent. At

TSL3, the impact on INPV would range between -70 percent and -43 percent. The impact on

annual net cash flow from capital expenditures prior to the standard would be similar for TSL3

and TSL4, but the need to invest in working capital in the standard year would be greater at

TSL4. For TSL3 and TSL4, the magnitude of the peak negative net cash flow would be three to

four times that of the base case positive net cash flow. 

At TSL3 and TSL4, industry would likely see considerable consolidation as not all current

manufacturers would invest the capital required to manufacture standards-compliant transformers

(and butt-lap designs would not be competitive). Those who remain and do not already have

production capability for high efficiency LV dry-type transformers, will consider manufacturing

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outside the U.S. as it will enable them to capture labor savings on each unit shipped, enhancing

their competitiveness and profitability.

At TSL2, the impact on INPV would range between -41 percent and -23 percent. At

TSL1, the impact on INPV would range between -15 percent and -4 percent. There would be

tangible net cash flow impacts at both TSL1 and TSL2, but the industry as a whole would likely

recover in the years following standard implementation. Recovery will be easier at TSL1. Besides

the difference in INPV impacts, the primary difference between TSL1 and TSL2 from the

manufacturers’ viewpoint is that TSL1 preserves more design pathways, each trading off material

for capital. Butt-lap designs would be cost-effective at TSL1, which would allow small

businesses to remain more competitive because they would not have to make large capital outlays

or outsource their core production. TSL2 is a much tougher standard to reach cost-effectively

with butt-lap designs, thus TSL2 would hurt the margins or decrease the market share of small

businesses in the long-run. However, even at TSL1, some tier three LV dry-type manufacturers

(there are approximately 30 of them in the U.S.) would exit the market because of compliance

costs, including re-design, testing, and record keeping costs. Many of the smallest manufacturers

likely are not aware of the DOE rulemaking and have never contemplated making designs more

efficient than TSL1.

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12.6 MANUFACTURER IMPACT ANALYSIS - MEDIUM VOLTAGE DRY-TYPE

The MV dry-type transformer market is characterized by large commercial and industrial

users, some of which evaluate and are concerned about losses when making transformer purchase

decisions. Of the three superclasses, this superclass has the lowest shipments and lowest revenue. 

In recent years, there has been some consolidation in the MV dry-type industry, with a MV drytype production facility closing in North Carolina, and the associated business being taken over by

a competitor in Virginia.

The Department estimates that there are approximately 25 companies active in the MV

dry-type market in the U.S. Of these, the seven largest companies retailing MV dry-type

distribution transformers are (in alphabetical order): ABB, Federal Pacific, General Electric,

Hammond, MGM, Olsun and Square D. Of the three superclasses, the MV dry-type superclass is

the most concentrated - the top three companies manufacture over 75 percent of all transformers

in this superclass. For more information on the transformer market in general, and MV dry-type

transformers in particular, please see the Market and Technology Assessment (Chapter 3). 

12.6.1 Conversion Capital Expenditures

Through its MIA interviews, the Department gained an understanding of the conversion

capital expenditures that MV dry-type transformer manufacturers would have to make in response

to a standard. These are: 1) investments in additional core-cutting equipment capable of making

mitered cuts, and 2) investments in miscellaneous tooling and equipment, including that used for

conductor winding. Core-cutting equipment capable of making mitered cuts is a key component

of the MV dry-type analysis. Mitered and cruciform core construction techniques are often used

to reduce no-load losses in MV dry-type transformers. Mitered joints have lower destruction

factors and are more efficient than butt-lap joints.

Reviewing the shipments analysis, the Department estimated that the equivalent of five

full-time mitered core-cutting machines are currently being used by the MV dry-type industry. 

The Department estimates that about 85 percent of the MV dry-type transformers produced today

have mitered cores. At TSL1, the Department assumed that 95 percent of the MV dry-type

transformers would be manufactured using mitered cores. At TSL2 and above, the Department

assumed that 100 percent of the MV dry-type transformers would be manufactured using corecutting equipment capable of making mitered cuts. 

The Department provided a few core designs from the MV dry-type engineering database

to the primary supplier of core-cutting equipment. This equipment manufacturer then prepared

processing time estimates based on the core dimensions. The manufacturer’s assumptions are

applicable for processing M6 core steel in batches of one. The assumption of single unit batches

is appropriate for the MV dry-type superclass because there is often a high degree of

customization associated with customer orders. Based on the core-cutting equipment

manufacturer’s processing time estimates, the Department derived the following production

assumptions - for design lines 9 through 13, the number of cores produced per machine per year

are estimated to be 1,400; 700; 1,400; 700; and 525, respectively. A representative coremitering machine is projected to cost the MV dry-type distribution transformer industry about

$2.4 M installed, plus $0.3 M for expanded building capacity. Because of the large amount of

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core steel that needs to be processed for a typical MV dry-type transformer, and the increased

cutting requirements at higher efficiency due to greater stack height (or piece length) and thinner

laminations, industry indicated that additional core stacking equipment would be necessary to

optimize production at higher TSLs. The Department recognizes the potential for this automatic

core stacking machine expenditure and accounted for it by assuming that the core-mitering

equipment purchased by the MV dry-type industry would include automatic core-stacking

capability. Core-mitering equipment in the MV dry-type industry typically includes such corestacking capability.

At TSL1 and higher, the processing time per core is higher than for the base case,

increasing the number of mitered-core cutting machines required by the superclass. The

processing time per core increases for two reasons: 1) more core-cutting time is required as core

size increases with higher efficiencies, and 2) the processing time increases in inverse proportion

to lamination thickness and more efficient grades of steel typically are thinner (e.g., lamination

thickness changes from 0.011" for M4 to 0.009" for M3, representing a 22 percent increase in

core-mitering time for M3). Some manufacturers report that their core-mitering equipment

operates poorly with thinner steels, which would require them to operate at lower speeds,

exacerbating the capacity impacts. Estimates of the core size increases and lamination thickness

changes are based on the engineering analysis. The Department accounted for these two factors

in estimating the increases in core-mitering equipment required at each TSL. Table 12.6.1 shows

an example calculation for the core-mitering capacity multiplier at each TSL for DL9, not

accounting for the fraction of transformers that are mitered at each TSL.

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Table 12.6.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 9

Trial Standard

Level

Typical Core

Weight

(lbs)

Typical Stack

Height

(in.)

Typical

Lamination

Thickness (in.)

Typical

Number of

Laminations

per Inch 

(in -1)

*Multiplier for

Increased

Core-Mitering

Capacity

Base Case 1,251 6.94 0.0114 87.4 1.00

TSL1 1,221 6.89 0.0109 91.5 1.04

TSL2 1,230 7.06 0.0092 109 1.26

TSL3 1,235 7.80 0.0090 111 1.43

TSL4 1,238 8.19 0.0090 111 1.50

TSL5/6 1,588 10.20 0.0090 111 1.93

* For TSL1 - TSL4, the multiplier is based on the ratios of stack heights and number of laminations per inch, normalized to the

base case. For example, at TSL3, the multiplier is calculated as (7.80/6.94)×(111/87.4) = 1.43. 

For TSL5 and TSL6, the multiplier is based on the ratios of core weight and number of laminations per inch,

normalized to TSL4. At TSL5 and TSL6, the multiplier is calculated as (1,588/1,238)×(111/111)×1.50 = 1.93. The multiplier

at TSL5 and TSL6 is calculated differently because for some MV dry-type design lines, particularly DL12 which is high

volume and therefore critical for the analysis, the designs in the engineering database involve longer pieces of core steel above

TSL4 and therefore the required increased cutting time is better captured through core weight increases than through stack

height increases (in the Department’s engineering analysis stack height increases are not significant for DL12 above TSL4). 

The Department confirmed the assumption that core steel piece length (and consequently weight when stack height and piece

width are relatively fixed) is an important determinant of mitering time after speaking with the primary supplier of coremitering equipment and reviewing equipment performance curves.

Base case 2010 unit shipments projections for DL9 through DL13 are 372; 592; 423;

2,761; and 260, respectively. Using these shipments projections, the assumed core production

rates per core-mitering machine for each design line (discussed above), and the multipliers for

increased core-mitering capacity, the Department estimated the number of core-mitering machines

needed at each TSL. Table 12.6.2 through Table 12.6.6 provide the calculations for the estimated

number of core-mitering machines needed at each TSL for DL9 through DL13, respectively. 

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Table 12.6.2 Calculation of Core-Mitering Machines Needed for Design Line 9

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

Base Case 1.00 *0.27 0.85 0.23

TSL1 1.04 0.28 0.95 0.26

TSL2 1.26 0.34 1.0 0.34

TSL3 1.43 0.38 1.0 0.38

TSL4 1.50 0.40 1.0 0.40

TSL5/6 1.93 0.51 1.0 0.51

* (372 units shipped)/(1,400 units per machine per year) = 0.27 core mitering machines

Table 12.6.3 Calculation of Core-Mitering Machines Needed for Design Line 10

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

Base Case 1.00 *0.85 0.85 0.72

TSL1 1.09 0.92 0.95 0.87

TSL2 1.11 0.94 1.0 0.94

TSL3 1.21 1.02 1.0 1.02

TSL4 1.23 1.04 1.0 1.04

TSL5/6 1.71 1.44 1.0 1.44

* (592 units shipped)/(700 units per machine per year) = 0.85 core mitering machines

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Table 12.6.4 Calculation of Core-Mitering Machines Needed for Design Line 11

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

Base Case 1.00 *0.30 0.85 0.26

TSL1 1.28 0.39 0.95 0.37

TSL2 1.31 0.40 1.0 0.40

TSL3 1.38 0.42 1.0 0.42

TSL4 1.32 0.40 1.0 0.40

TSL5/6 1.54 0.46 1.0 0.46

* (423 units shipped)/(1,400 units per machine per year) = 0.30 core mitering machines

Table 12.6.5 Calculation of Core-Mitering Machines Needed for Design Line 12

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

Base Case 1.00 *3.94 0.85 3.35

TSL1 1.10 4.35 0.95 4.13

TSL2 1.22 4.81 1.0 4.81

TSL3 1.30 5.14 1.0 5.14

TSL4 1.32 5.19 1.0 5.19

TSL5/6 1.76 6.96 1.0 6.96

* (2,761 units shipped)/(700 units per machine per year) = 3.94 core mitering machines

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Table 12.6.6 Calculation of Core-Mitering Machines Needed for Design Line 13

Trial Standard

Level

Multiplier for

Increased CoreMitering

Capacity

Number of

Core-Mitering

Machines if all

Transformers

are Mitered

Fraction of

Transformers

that are

Mitered

Number of

Core-Mitering

Machines

Base Case 1.00 *0.50 0.85 0.42

TSL1 1.01 0.50 0.95 0.47

TSL2 1.11 0.55 1.0 0.55

TSL3 1.17 0.58 1.0 0.58

TSL4 1.17 0.58 1.0 0.58

TSL5/6 1.67 0.83 1.0 0.83

* (260 units shipped)/(525 units per machine per year) = 0.50 core mitering machines

Based on the assumption that each core-mitering machine for the MV dry-type industry

would cost $2.7 M installed (including $0.3 M for the building adder), the Department estimated

that core-mitering equipment capital expenditures for the industry would be $3.1 M, $5.6 M, $6.9

M, $7.1 M, $14.1 M and $14.1 M for TSL1 through TSL6, respectively. The core-cutting

equipment estimates are summarized in Table 12.6.7. 

Table 12.6.7 Summary of MV Dry-Type Distribution Transformer Core-Cutting

Equipment Capital Expenditures

Trial Standard Level Mitered CoreCutting

Machines

Needed by

Industry

Incremental

Mitered CoreCutting Machines

Needed by Industry

Core-Mitering

Conversion Capital

Expenditure 

(2004$, Millions)

Base Case 5.0 - -

TSL1 6.1 1.1 3.1

TSL2 7.0 2.0 5.6

TSL3 7.5 2.5 6.9

TSL4 7.6 2.6 7.1

TSL5/6 10.2 5.2 14.1

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The Department estimated total conversion capital expenditures, including capital

investments for additional miscellaneous equipment such as coil winding equipment, based on

multipliers applied to the core-cutting equipment capital investment. Based on information

submitted to the Department by industry, this multiplier was estimated to be 1.06. The

conversion capital expenditures are summarized in Table 12.6.8.

Table 12.6.8 Summary of MV Dry-Type Distribution Transformer Conversion Capital

Expenditures

Trial Standard Level Core-Cutting

Conversion Capital

Expenditure

(2004$, Millions)

Multiplier for

Miscellaneous Tooling

Including Coil Winding

Equipment 

Total Conversion

Capital Expenditure

(2004$, Millions)

TSL1 3.1

1.06

3.2

TSL2 5.6 5.9

TSL3 6.9 7.3

TSL4 7.1 7.5

TSL5/6 14.1 15.0

12.6.2 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 assumes that product conversion expenses for MV dry-type transformer

manufacturers at TSLs 3 through 6 will require total additional expenses equivalent to 100

percent of the industry’s R&D budget for 3 years. At TSL3 and above, manufacturers indicated

that research and development engineers would be fully utilized (both electrical and mechanical

engineers), along with production design engineers and mechanical drafters during the conversion

and compliance period. Since manufacturers already produce relatively large volumes of

transformers that would comply with TSL1 and TSL2, product conversion expenses are expected

to be negligible for these lower TSLs. Product conversion expenses are summarized in Table

12.6.9. 

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Table 12.6.9 Summary of MV Dry-Type Distribution Transformer Product Conversion

Expenses

Trial Standard Level Basis Product Conversion

Expenses

(2004$, Millions)

TSL1 - TSL2 Industry makes relatively

large volumes of these

transformers today.

0

TSL3 Amount equal to 100% of

industry R&D budget for 3

years.

3.3

TSL4 Amount equal to 100% of

industry R&D budget for 3

years.

3.6

TSL5/6 Amount equal to 100% of

industry R&D budget for 3

years.

5.0

12.6.3 Industry Financial Impacts

Using the inputs and assumptions described in the previous sections, the GRIM produced

indicators of financial impacts on the MV dry-type distribution transformer industry at each TSL. 

This document reports the results of the MIA using two key financial metrics: INPV and annual

net cash flow to the industry. 

12.6.3.1 Trial Standard Levels

The Department developed six TSLs for MV dry-type distribution transformers. TSL1 is

the NEMA TP-1 standard. TSL6 represents the maximum TSL that is technologically feasible. 

TSL5 is the highest TSL that yields national NPV greater than zero. For dry-type transformers,

TSL5 and TSL6 are the same. TSL4 results in the maximum LCC savings. TSL2 and TSL3 are

spaced equally between TSL1 and TSL4. 

12.6.3.2 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the Department’s NPV

applied to the whole 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 GRIM estimated cash flows between 2004 and

2038, consistent with the forecast period used in the national impact analysis. 

In the manufacturer impact analysis, the Department compared the INPV of the base case

(no efficiency standard) to that of each TSL. The difference in INPV is an estimate of the

economic impacts that implementing each particular TSL would have on the entire industry.

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To evaluate the range of cash flow impacts on the industry, the Department constructed two MIA

analyses based on the two markup scenarios discussed above. In the first scenario, the gross

margin percentage is held constant at all TSLs (and equal to the base case). In the second

scenario, it is assumed that the industry could preserve its operating profit at all TSLs. Tables

12.6.10 and 12.6.11 provide the net present value estimates for the industry under the two

scenarios.

Table 12.6.10 Changes in MV Dry-Type Industry Net Present Value, Preservation of Gross

Margin Percentage Scenario

Trial Standard Level INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $32 - -

TSL1 $30 ($1.8) -5.5%

TSL2 $29 ($3.3) -10.1%

TSL3 $27 ($5.1) -15.7%

TSL4 $28 ($3.8) -11.8%

TSL5/6 $30 ($2.0) -6.1%

Table 12.6.11 Changes in MV Dry-Type Industry Net Present Value, Preservation of

Operating Profit Scenario

Trial Standard Level

INPV 

(2004$,

Millions)

Change in INPV from Base Case

 2004$, Millions % Change

Base Case $32 - -

TSL1 $30 ($2.5) -7.7%

TSL2 $28 ($4.3) -13.4%

TSL3 $25 ($6.9) -21.5%

TSL4 $24 ($7.8) -24.3%

TSL5/6 $15 ($17.0) -52.8%

The results from the preservation of gross margin percentage scenario provide a more

favorable projection than do the results from the preservation of operating profit scenario. 

Industry value would not decrease as much if manufacturers could sustain a constant gross margin

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percentage as their production costs increase in response to a standard. However, as previously

mentioned, the preservation of gross margin percentage assumption may be optimistic. It noted

that, in the preservation of gross margin percentage scenario, impacts above TSL3 decline with

increasing TSL. This is because the incremental conversion costs above TSL3 are small relative

to the revenue gains under the preservation of gross margin percentage scenario. The

preservation of operating profit scenario provides a lower bound for INPV under a standard. The

decrease in industry value under both scenarios comes from the inability of industry to fully

recoup the capital investments required for standard compliance, including investments in working

capital. 

12.6.3.3 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long-term effects of standards, short-term changes

in net cash flow are also important and indicative of the impacts on industry during the years

between final rule publication and the standard effective date. For example, a large investment

over a period of a few years could strain the industry’s access to capital. Consequently, the sharp

drop in net cash flow might lead to additional borrowing; changes in leverage, interest coverage

ratios, and/or bond ratings; and possibly increased concern among investors. Thus, a short-term

disturbance can have long-term effects that the INPV cannot capture. To get an idea of the

behavior of annual net cash flows, the Department reports the annual net or free cash flows from

2004 through 2020 for the different TSL levels. Figures 12.6.1 and 12.6.2 present the annual net

cash flows for the base case and each of the six TSLs evaluated for the two different markup

scenarios. 

$(6.00)

$(4.00)

$(2.00)

$-

$2.00

$4.00

$6.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5 & 6

Standard becomes effective in 2010

Figure 12.6.1 Industry Net Cash Flow for Preservation of Gross Margin Percentage

Scenario, MV Dry-type

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Prior to the final rule publication date, the cash flows are identical for all TSLs in both 

scenarios. After final rule publication, cash flows are driven by the level of capital investments

and the proportion of these investments spent every year. In addition, in the year of the standard,

investment in working capital is required. The incremental investments in working capital are

about $0.20 M, $0.34 M, $0.66 M, $1.56 M, $5.90 M, and $5.90 M for TSL1 through TSL6,

respectively (with about 5-6 percent variation at each TSL between markup scenarios). These

investments in working capital are relatively insignificant, except those at TSL5 and TSL6. After

final rule publication, industry cash flows begin to decline as industry uses its financial resources

to prepare for the standard. In the year the standard becomes effective, new capital equipment

goes into production. It is assumed that no assets are stranded for the TSLs evaluated. 

While the behavior of cash flows for each TSL varies between the two markup scenarios,

there are two observations that are common across the two scenarios. First, the net annual cash

flows go negative at TSL3 and above. Second, net annual cash flows go nearly to zero during the

compliance period at TSL2 but not at TSL1.

12.6.4 Other Impacts

12.6.4.1 Employment

Industry-wide labor expenditures are estimated based on the engineering analysis. 

Winding of the primary and secondary coils, stacking and assembly of the core, enclosure

manufacturing, testing, and packing of the completed transformer represent the bulk of the labor.

The Department incorporated these assumptions into the GRIM, which projects labor

expenditures annually. Labor expenditures are a function of the labor intensity of the product, the

sales volume, and an implicit wage assumption that remains fixed over time. Table 12.6.12

$(6.00)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

Standard becomes effective in 2010 TSL5 & 6

Figure 12.6.2 Industry Net Cash Flow for Preservation of Operating Profit Scenario, MV

Dry-type

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provides the changes in labor measured as the change in labor expenditures for MV dry-type

transformers in 2010, the standard effective date, versus the base case.

Table 12.6.12 Projected Change in Labor Expenditures, Medium-Voltage Dry-Type (2010)

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 & 6

2.1% -1.0% -1.4% -1.6% -0.1%

Based on the GRIM and the assumption that 100 percent of MV dry-type transformers

sold in the U.S. are manufactured in the U.S., the Department estimates that there are currently

252 production employees in the U.S. MV dry-type distribution transformer industry. The

Department recognizes that this estimate is somewhat low, perhaps by 30 percent. This estimate

excludes non-production workers and assumes a level annual production rate. In practice,

including non-production workers and seasonal effects, the actual number of employees in the

MV dry-type superclass would be higher. Because labor content does not vary between the

markup scenarios, projected labor expenditures are equivalent for both. Based on these results,

DOE expects no significant discernable employment impacts among MV dry-type transformer

manufacturers for any TSL compared to the base case. Increased employment levels are not

expected at higher TSLs because the Department assumed that the core-cutting equipment

typically purchased by the MV dry-type industry is highly automated and includes core-stacking

equipment. This conclusion is independent of any conclusions regarding employment impacts

from the broader U.S. economy.

Another concern relayed by some manufacturers during the interviews is the potential

impact stemming from the cast-coil transformer exemption. These manufacturers claim that

setting a standard above a certain threshold may trigger a market switch from standardscompliant, open-wound transformers to exempt cast-coil transformers. If the market does shift to

cast-coil, there is a risk of imported pre-fabricated cast-coils dominating the market in the longterm. This would have a significant effect on domestic industry value and domestic employment.

Some manufacturers feel that regulation at any level will decrease the diversity of

transformer designs which will make it easier for foreign production to compete in the U.S.

market. These manufacturers claim that designs may cluster around the standard, allowing

foreign competition to produce large quantities of common kVA rated transformers at lower labor

costs. 

12.6.4.2 Production Capacity

Energy conservation standards will impact the industry’s manufacturing capacity because

the core stack heights (or core steel piece length) will increase and laminations will become

thinner. Thinner laminations require more cuts and are more cumbersome to handle. Therefore,

manufacturers would have to invest in additional core-mitering machinery or modifications and

improvements to recover any losses in productivity, and these factors might also contribute to a

need for more plant floor space. Because more efficient transformers tend to be larger, this could

also contribute to the need for additional floor space.

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12.6.4.3 Exports

Distribution transformer exports comprise a small fraction of distribution transformer

sales. However, domestic manufacturers do sell to nations that do not currently require products

to meet minimum efficiency requirements for distribution transformers. Since the MV dry-type

industry is largely a customized industry, the impact of a standard on U.S. exports will be

minimal.

12.6.4.4 Cumulative Regulatory Burden

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

combined effects of several regulations, existing or pending, 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.

Companies that produce a wider range of regulated products may be faced with more

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, potentially reducing competition.

Smaller companies can be especially impacted since they have lower sales volumes over which to

amortize the costs of meeting new regulations. The Department considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3)

Other regulations and standards.

1. Federal Regulations on Distribution Transformer Manufacturers - manufacturers were not

aware of any federal regulations on medium-voltage dry-type distribution transformer

manufacturers that would cause a cumulative regulatory burden in conjunction with the

efficiency regulations on distribution transformers.

2. Regulations and Pending Regulations at the State Level - manufacturers discussed the

recent trend of state governments in instituting NEMA TP-1 as a mandatory standard for

transformers sold within their state’s borders. At this time, three states and one city

require this minimum efficiency standard for MV dry-type distribution transformers. The

states requiring TP-1 are Massachusetts, Minnesota, and Oregon. The city requiring TP-1

is Burlington, VT. Federal regulation would preempt these standards so no cumulative

burden would be imposed.

3. Other Regulations and Standards - manufacturers were not aware of other regulations or

standards, in effect or pending, that pertain to MV dry-type distribution transformers.

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12.6.4.5 Impacts on Small Businesses

The Small Business Administration defines a small business, for the distribution

transformer industry, as a business that has 750 employees or fewer. The Department estimates

that of the 25 U.S. manufacturers that make MV dry-type distribution transformers, about 20 of

them are small businesses. About one-half of the small businesses have fewer than 100

employees. 

At TSL3 and above, net cash flows for the MV dry-type industry will go negative during

the compliance period. At TSL3 and above, the impacts on the industry as a whole are large and

affect businesses of all sizes, but there would be some differential impacts on small businesses. At

TSL3 and above, it is noted that the use of M3 core steel will be needed. Cutting M3 core steel

on the core-mitering equipment typically purchased by smaller businesses can be problematic

because of the extremely thin laminations. Small businesses would also be at a relative

disadvantage at TSL3 and higher because research and development efforts would be on the same

scale as those for larger companies, but these expenses would be recouped over lower sales

volumes by small businesses. Product redesign costs tend to be fixed and do not scale with sales

volume.

At TSL2, all designs would have to be mitered. This could constrain the core-mitering

resources of small businesses that share core-cutting capacity between LV dry-type and MV drytype transformers. At TSL1, many kVA ratings could still be constructed using butt-lap joints,

alleviating the constraint on core-mitering resources. Thus, TSL1 is less capital-intensive for

small businesses than TSL2. In an industry such as MV dry-type, which is heavily consolidated

already, there is the risk that TSL2 could lead to further advantage for the largest manufacturers

and thus further concentrate the industry’s production.

12.6.5 Summary of Impacts for Medium-Voltage Dry-Type Superclass

More than one-half of the customers for MV dry-type transformers consider efficiency

when purchasing transformers. A sizeable portion of the market is evaluating losses and making

rational economic judgements in purchasing transformer products. With this in mind, it is

significant to note that about one percent or less of the market chooses to purchase transformers

that meet TSL3 or above.

Conversion capital expenditures in the MV dry-type distribution transformer superclass

include primarily core-mitering equipment, but some additional expenditures would be necessary

to upgrade coil winding equipment and miscellaneous tooling. Today, about five full-time

equivalent core-mitering machines are required by the MV dry-type superclass. At TSL1, the

Department estimates that 95 percent of the MV dry-type transformers would be manufactured

using core-cutting equipment capable of making mitered cuts. At TSL2 and above, 100 percent

of MV dry-type transformers would be produced with core-mitering equipment.

The core-cutting time per transformer, and consequently the number of core-mitering

machines required by the industry, increases with increasing TSL because of two factors. First,

more core-cutting time is required in proportion to increases in core size at higher efficiencies. 

Second, the shift to thinner core steel laminations at higher efficiencies implies increases in corecutting time that are inversely proportional to lamination thickness. The Department accounted

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for these two factors in estimating the increases in core-cutting equipment required at each TSL. 

The Department estimated that total equipment capital expenditures for the industry would be

$3.2 M, $5.9 M, $7.4 M, $7.5 M, $15.0 M, and $15.0 M for TSL1 through TSL6, respectively. 

Product conversion expenses for the MV dry-type superclass would be negligible at TSL1 and

TSL2 because products meeting these levels are produced in relatively large volumes today. 

Above TSL2, product conversion expenses would become more significant.

The impact on INPV at TSL5 and TSL6 would range between -53 percent and -6 percent. 

The impact on INPV at TSL4 would range between -24 percent and -12 percent. The impact on

INPV at TSL3 would range between -22 percent and -16 percent. In the preservation of gross

margin percent scenario, impacts above TSL3 decline with increasing TSL. This is because the

incremental conversion costs above TSL3 are small relative to the revenue gains under the

preservation of gross margin percent scenario. This counterintuitive trend does not exist for the

low markup scenario, the preservation of operating profit scenario. Net annual cash flows would

go negative during the compliance period, irrespective of the markup scenario, for TSLs 3

through 6. For TSLs 3 and 4, the magnitude of the peak negative net annual cash flow would be

about half of that of the positive base case cash flow. For TSLs 5 and 6, the magnitude of the

peak negative net annual cash flow would be more than twice that of the positive base case cash

flow.

For some of the MV dry-type design lines, the cost-effective designs at TSL4 would

require laser-scribed domain refined, HO core steel. In the U.S., this steel is only manufactured

by one company. HO is also manufactured in Japan, but steel imports from Japan are subject to

import duties, providing a production cost advantage to foreign transformer manufacturers. The

cost-effective designs at TSL3 would likely rely on M3 core steel and copper windings. TSL3

would therefore not have the same supply chain constraints as TSL4.

At TSL2, the impact on INPV would range between -13 percent and -10 percent. At

TSL1, the impact on INPV would range between -8 percent and -6 percent. The impact on

annual net cash flow from capital expenditures during the compliance period would be greater for

TSL2 than for TSL1. At TSL2, the net annual cash flows would go nearly to zero during the

compliance period. The primary difference between TSL1 and TSL2 from the manufacturers’

viewpoint is that TSL1 preserves more design pathways, each trading off material for capital. 

Butt-lap designs would be cost-effective at TSL1 for some kVA ratings, which would allow small

businesses to remain more competitive because they would not necessarily have to make large

capital outlays. TSL2 cannot be met cost-effectively with butt-lap designs, thus TSL2 would hurt

the margins or decrease the market share of small businesses in the long-run. 

Finally, there are three additional factors to be considered from the standpoint of

manufacturers in selecting the proposed standard:

1. If the MV dry-type standard is set low relative to that for liquid-immersed

transformers, there could be a switch to MV dry-type transformers for certain

products where there is substitutability between the two superclasses. For

otherwise equivalent transformers, the TSLs are less stringent for MV dry-type

transformers.

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2. Cast-coil transformers are currently exempt from NEMA TP-1, and the

Department may exempt them from the standard. Pushing the MV dry-type

standard too high could trigger a market switch from standards-compliant openwound to exempt cast-coil designs. If the market does shift to cast-coil, there is a

risk of prefabricated Chinese imported cast-coils dominating the market in the

long-term.

3. The MV dry-type superclass is already heavily consolidated. If the standard is set

above TSL1, it will likely increase consolidation because the largest manufacturers

are better equipped to produce transformers at TSL2 or TSL3.

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1. McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons,

2000.

2. Securities and Exchange Commission, Annual 10-K Reports, Various Years, Washington

D.C., <www.sec.gov>.

3. Ibbotson Associates, Ibbotson Beta Book, 2003, Chicago, IL.

<http://www.ibbotson.com>.

REFERENCES

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