U.S. Department of Energy

Office of Codes and Standards

1000 independence Ave., SW

Washington, DC

Date: April 10, 1998

EE-RM-97-500 COMMENT 20K

Ballast 

Manufacturer 

Impact 

Analysis 

Analytical 

Approach 

U.S. Department of Energy 

Office of Codes and Standards 

1000 Independence Ave., SW 

Washington, DC 

Date: April 10, 1998 
PRELIMINARY DRAFT - For discussion purposes oniy

Table of Contents

1.0 Approach to Future Analysis ................................................................................1

2.0 Phase 1: Industry Profile .....................................................................................4

2.1. Industry Characterization ....................................................................................... 4

2.1.1. Introduction ......................................................................................................4

2.1.2. Initial Review of Industry Sectors .....................................................................4

2.1.3. Quantitative Analysis ....................................................................................... 6

2.1.4. Qualitative Analysis .......................................................................................... 9

2.2. Issue Identification ...............................................................................................12

3.0 Phase 2: Industry Cash Flow Analysis ..............................................................14

3.1. Introduction ..........................................................................................................14

3.2. GRIM Model .........................................................................................................14

3.3. Manufacturing Cost Forecasts ...........................................................................15

3.3.1. Engineering Analysis Past Practices ..............................................................21

3.3.2. Modeling Approach (1978-1981 ) ...................................................................22

3.3.3. Survey Approach (1987- 1996) .......................................................................22

3.3.4. ASH RAE Approach ........................................................................................ 23

3.4. Price Forecasts ....................................................................................................24

3.4.1. Survey Data Approach.......' ...........................................................................25

3.4.2. Markup Pricing Approach ............................................................................... 26

3.4.3. Economic Markup Approach .......................................................................... 26

3.4.4. Other Approaches ..........................................................................................27

3.5. Shipment Forecasts .............................................................................................28

3.5.1. Expert Forecasts ............................................................................................ 29

3.5.2. Models for Predicting Future Shipments and National Impacts...................... 30

3.5.3. Scenario Analysis ..........................................................................................34

3.6. Financial Information ............................................................................................ 35

3.7. Cash Flow Analysis .............................................................................................. 36

4.0 Phase 3: Sub-Group Impact Analysis ..............................................................37

4.1. Introduction .......................................................................................................... 37

4.2. Manufacturing Cost Estimates .............................................................................37

4.3. Price and Shipment Forecasts ............................................................................. 38

4.4. Competitive Impacts Assessment ........................................................................ 39

4.4.1. Introduction .................................................................................................... 39

4.4.2. Past Analysis .................................................................................................40

4.4.3. New Competitive Assessment Methodology ..................................................41

4.5. Employment Impacts Assessment ..............................................:........................42

4.5.1. Introduction ....................................................................................................42

4.5.2. Engineering Analysis Labor Data ...................................................................42

4.5.3. Interview Process...........................................................................................43

4.6. Manufacturing Capacity Impacts Assessment ......................................................43

5.0 Manufacturing Impact Analyses Intervie w Process ..........................................

6.0 Cumulative Regulatory Bu rden .....................................:.................................... 46

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT A FOi d~scussion purposes only 

Table of Contents 

1.0 Approach to Future Analysis ................................................................................ 1 

2.0 Phase 1: Industry Profile ..................................................................................... 4 

2.1. Industry Characterization ....................................................................................... 4 . 

2.1.1. Introduction ...................................................................................................... 4 

2.1.2. Initial Review of Industry Sectors ..................................................................... 4 

2.1.3. Quantitative Analysis ........................................................................................ 6 

2.1.4. Qualitative Analysis .................. , ....................................................................... 9 

2.2. Issue Identification ............................................................................................... 12 

3.0 Phase 2: Industry Cash Flow Analysis .............................................................. 14 

3.1. Introduction .......................................................................................................... 14 

3.2. GRIM Model ...................................... , .................................................................. 14 

3.3. Manufacturing Cost Forecasts ............................................................................. 15 

3.3.1. Engineering Analysis Past Practices .............................................................. 21 

3.3.2. Modeling Approach (1978-1981) ................................................................... 22 

3.3.3. Survey Approach (1987-1996) ....................................................................... 22 

3.3.4. ASHRAE Approach ........................................................................................ 23 

3.4. Price Forecasts .................................................................................................... 24 

3.4.1. Survey Data Approach ....... · ........................................................................... 25 

3.4.2. Markup Pricing Approach ............................................................................... 26 

3.4.3. EconomiC Markup Approach .......................................................................... 26 

3.4.4. Other Approaches ...................................................... ~ ................................... 27 

3.5. Shipment Forecasts ............................................................................................. 28 

3.5.1. Expert Forecasts ............................................................................................. 29 

3.5.2. Models for Predicting Future Shipments and National Impacts ...................... 30 

3.5.3. ScenariO Analysis .......................................................................................... 34 

3.6. Financial Information ...... ' ...................................................................................... 35 

3.7. Cash Flow Analysis .............................................................................................. 36 

4.0 Phase 3: Sub-Group Impact Analysis .............................................................. 31 

4.1. Introduction .......................................................................................................... 37 

4.2. Manufacturing Cost Estimates ............................................................................. 37 

4.3. Price and Shipment Forecasts ............................................................................. 38 

4.4. Competitive Impacts Assessment ........................................................................ 39 

4.4.1. Introduction .................................................................................................... 39 

4.4.2. Past Analysis ................................................................................................. 40 

4.4.3. New Competitive Assessment Methodology ................................................. .41 

4.5. Employment Impacts Assessment .............................................. : ........................ 42 

4.5.1. Introduction .................................................................................................... 42 

4.5.2. Engineering Analysis Labor Oata .................................................................. .42 

4.5.3. Interview Process ........................................................................................... 43 

4.6. Manufacturing Capacity Impacts Assessment.. .................................................... 43 

5.0 Manufacturing Impact Analyses Interview Process .......................................... 44 

6.0 Cumulative Regulatory Burden ....... e ••••••••••••••••••••••••••••• · •••••••••• ., •••••••••••••••••••••••••• 46 
PRELIMINARY DRAFT -For discussi n purposes only

Atlachments

Description of L.' ation I:iJlable in Census of Manufacturers

`''-il Rc^

Interview Guide from 199611997 Stakeholder Inte ie B-1

C. Financial Inputs to GI for the Ballast Rulemaking Analysis .....................C®1

Ballast Indust Cost Structure ....................................................................... 4

E. Fluorescent Lamp Ballast Manufacturers Interview Guide ...........................E®1

F. GRIM Operating Principles ...................e.......................................................... F4

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Attachments 

A. Description of Information Available in Census of Manufacturers 

and Current Industrial Reports ....................................................................... .Aa1 

B. Interview Guide from 1996/1991 Stakeholder Interviews .............................. Ba1 

. C. Financial Inputs to GRIM for the Ballast Rulemaking Analysis ..................... Ca1 

D~ Ballast Industry Cost StructUfe ... OIllCl •••• O •••••• oo ••• ao ••• a ••••••• Dlu.a ••••• aa80.0.0 ••• 0 •• II ••• 8 ••••••• D .. 1 

E. Fluorescent Lamp Ballast Manufacturers Interview Guide ........................... E-1 

F G GRIM Opera.ting Principles 11111 •••• 0 •••• 111111 ••••• 0" •••• 0 •••••••••••••••••• 0.0111 •••••• 0oa •••• o.a ••••• o •••• o •• IiI.F-1 

.,. 

II 
PRELIMINARY DRAFT - For discussion purposes only

List of Figures

Figure 1. Flow Diagram of the Future Manufacturer Impact Analyses

. Methodology ..................................................................................................2

Figure 2. Using GRIM to Perform an Industry Cash Flow Analysis ............................ 15

Figure 3 . Magnetic Ballast Industry Cost Structure as a Percentage of

Revenues... ................................................................................................ 20

Figure 4. Schematic Diagram of the LBNL-REM, Outlining Major Input

Requirements, Algorithms and Outputs ......................................................33

EE-RM-97-500 COMMENT 20K

PRE.L1MINARY DRAFT A For dJscussion purposes only 

list of Figures 

Figure 1. Flow Diagram of the Future Manufacturer Impact Analyses 

Methodology ................................................................................................. 2 

Figure 2. Using GRIM to Perform an Industry Cash Flow Analysis ............................ 15 

Figure 3. Magnetic Ballast Industry Cost Structure as a Percentage of 

Revenues ................................................................................................... 20 

Figure 4. Schematic Diagram of the LBNL-REM, Outlining Major Input 

Requirements, Algorithms and Outputs ...................................................... 33 

iii 
PRELOO ARY DRAFT - For discussion purposes only

Ballast Manufacturi ng Impact Analysis Analytical Approach

1.0 Approach to Future Analysis

Preface

This document describes the analytical framework for conducting manufacturing

impact analyses as originally described at the Manufacturing Impact Analysis

Workshop held in March 1997. This document also describes the application of the

analytical framework to the ballast rule. Following a generic description of each

component of a "typical" rulemaking a comment box has been added to discuss

elements of the ballast rule . Ballast-specific comments include summaries of past

events, status reports of current analysis, discussion of key issues, the Department of

Energy 's (DOE) perspectives on these issues, and requests for additional stakeholder

input.

It is important to note that the generic portions of this document (i.e. outside the

comment boxes) have not been updated since the March 1997 Manufacturer Impact

Analysis Workshop. In most instances references to future work have been

completed and some analysis sections have been refined (e.g. life-cycle-cost analysis,

national energy forecasting spreadsheet , etc.).

The Department will be presenting this document and hopes to receive comment at

the Ballast workshop to be held on April 28th, 1998 . Following the workshop

comment period, the document will be revised and will form the basis of the

Department's approach to proceeding with the Manufacturer Impact Analysis for the

ballast rule.

In the future, manufacturer impact analyses will be conducted in three phases:

Phase 1: Industry Profile and Issue Definition

Phase 2: Industry Cash Flow Analysis

Phase 3: Sub-Group Impact Analysis

A detailed flow diagram of the future analyses is presented in Figure 1. Sections 2.0, 3.0

and 4.0 detail each of the three phases of the Manufacturer Impact Analyses.

al^^:^•w.?ii`>.k^^:;. chi` 1

EE-RM-97-500 COMMENT 20K

PRE.L1MINARY DRAFT ~ For cHscussion purposes only 

Ballast Manufacturilllllg Impact Analysis Analytical Approach 

1.0 Approach to Future Analysis 

Preface 

This document describes the analytical framework for conducting manufacturing 

impact analyses as originally described at the Manufacturing Impact Analysis 

Workshop held in March 1997. This document also describes the application of the 

analytical framework to the ballast rule. Following a generic description of each 

component of a ''typical'' rulemaking a comment box has been added to discuss 

elements of the ballast rule. Ballast-specific comments include summaries of past 

events, status reports of current analysis, discussion of key issues, the Department of 

Energy's (DOE) perspectives on these issues, and requests for additional stakeholder 

input. 

It is important to note that the generic portions of this document (i.e. outside the 

comment boxes) have not been updated since the March 1997 Manufacturer Impact 

Analysis Workshop. In most instances references to future work have been 

completed and some analysis sections have been refined (e.g. life-cycle-cost analysis, 

national energy forecasting spreadsheet, etc.). 

The Department will be presenting this document and hopes to receive comment at 

the Ballast workshop to be held on April 28th, 1998. Following the workshop 

comment period, the document will be revised and will form the basis of the 

Department's approach to proceeding with the Manufacturer Impact Analysis for the 

ballast rule. 

In the future, manufacturer impact analyses will be conducted in three phases: 

Phase 1: 

Phase 2: 

Phase 3: 

Industry Profile and Issue Definition 

Industry Cash Flow Analysis 

Sub-Group Impact Analysis 

A detailed flow diagram of the future analyses is presented in Figure 1. Sections 2.0, 3.0 

and 4.0 detail each of the three phases of the Manufacturer Impact Analyses. 

1 
PRELIMINARY DRAFT - For discussion purposes only

Ir-sue Identification

Estimate Manufacturing Costs

^ p'nce FOre^StS -;

Figure 1. Flow Diagram the F

Flow Diagram for Ballas

re Manufacturer Impact Analyses Methado9 If

As is described later in this document the Phase 2: Industry Cash Flow, will in fact

involve a two step process. The Department will use Cost, Price and Shipment

forecasts from other analysis sections (life-cycle costs and national energy savings)

to prepare a "strawman" industry cash flow using the GRIM model. This strawman

cash flow will be used by individual ballast manufacturers as a template from which

individual cash flow analyses will be conducted. In the last step, a final cash flow

analysis will be conducted for the whole industry from an aggregation of individual

cash flows. Thus the flow diagram for the Ballast MIA includes 4 phases:

Phase 1: Industry Profile

Phase 2: "Stra " Industry Cash Flow

Phase 3: Sub-Group Analysis

Individual Manufacturer Cash Flows

Interviews

Phase 4: Industry Cash Flow

•A egated Cash Flow

2

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT - For d~sc.ussion purposes ordy 

ANOPR 

Figure 1. Flow Diagram of the Future ManLilfacturer Impact Analyses Methodology 

Flow Diagram for Ballast MIA 

As is described later in this document the Phase 2: Industry Cash Flow, Will in fact 

involve a two step process. The Department win use Cost, Price and Shipment 

forecasts from other analysis sections (life-cycle costs and national energy savings) 

to prepare a "strawman" industry cash flow using the GRIM model. This strawman 

cash flow will be used by individual ballast manufacturers as a template from which 

individual cash flow analyses will be conducted. In the last step, a final cash flow 

analysis will be conducted for the whole industry from an aggregation of individual 

cash flows. Thus the flow diagramfor the Ballast MIA includes 4 phases: 

Phase 1: 

Phase 2: 

Phase 3: 

Phase 4: 

Industry Profile 

"Stmwman" Industry Cash Flow 

Sub-Group Analysis 

~ Individual Manufacturer Cash Flows 

~ Interviews 

Industry Cash Flow 

~ . Aggregated Cash Flow 
PRELIMINARY DRAFT - For discussion purposes only

Interviews were conducted with stakeholders in regards to the Ballast Rulemaking in

late 1996 and early 1997. These interviews provided valuable insights into the

development of the Generic Manufacturing Impact Methodology that was presented

at the March workshop in 1997.

The Manufacturer Impact Analysis (MIA) for ballasts is currently in Phase 1. Both

the industry characterization and issue identification tasks are underway and will be

completed in the next several weeks. The 1996/1997 interviews provided a good

first step in developing the Phase 1: Industry Profile. Where possible, this draft

document includes insights obtained during the interview process and requests

information to enhance the analysis.

Additionally the Department has begun the development of the "strawman" industry

cash flow. This includes two tasks: the adaptation of the GRIM model to the ballast

rule in order to aggregate different product classes, and the incorporation of

"placeholder" values for the key GRIM inputs (Prices, Costs, Shipments, and

Financial data). A preliminary version of G -Ballastl is available from the

Department.

Finally DOE is developing the interview guide to be used in the Subgroup analysis.

A preliminary version of this guide is included as Attachment E.

Consistent with the overall ballast rulemaking schedule, the Manufacturing Impact

Analysis timetable is described below.

Draft Schedule for Ballast Manufacturing Impact Analysis

Complete Draft Methodology for MIA workshop

MIA Approach Workshop "

Workshop Comment Period Ends

GRIM strawman complete

Interview questionnaire complete

Begin Interview Process

Complete Draft MIA Document

MIA Draft Results Workshop

April 7, 1998

April 28, 1998

May 28, 1998

June 11,1998

June 11, 1998

June 11, 1998

August 28, 1998

Sept 29, 1998

.t^^V.? fe £,051.ik 3

EE-RM-97-500 COMMENT 20K

PRE.LlMINARY DRAFT A For d~scussicn purposes onlY 

Interviews were conducted with stakeholders in regards to the Ballast Rulemaking in 

late 1996 and early 1997. These interviews provided valuable insights into the 

development of the Generic Manufacturing Impact Methodology that was presented 

at the March workshop in 1997. 

The Manufacturer Impact Analysis (MIA) for ballasts is currently in Phase 1. Both 

the industry characterization and issue identification tasks are underway and will be 

completed in the next several weeks. The 1996/1997 interviews provided a good 

first step in developing the Phase 1: Industry Profile. Where possible, this draft 

document includes insights obtained during the interview process and requests 

information to enhance the analysis. 

Additionally the Department has begun the development of the "strawman" industry 

cash flow. This includes two tasks: the adaptation of the GRIM model to the ballast 

rule in order to aggregate different product classes, and the incorporation of 

"placeholder" values for the key GRIM inputs (prices, Costs, Shipments, and 

Financial data). A preliminary version of GRIM-Ballast 1 is available from the 

Department. 

Finally DOE is developing the interview guide to be used in the Subgroup analysis. 

A preliminary version of this guide is included as Attachment E. 

Consistent with the overall ballast rulemaking schedule, the Manufacturing Impact 

Analysis timetable is described below. 

Draft Schedule for Ballast Manufacturing Impact Analysis 

Complete Draft Methodology for MIA workshop 

MIA Approach Workshop 

Workshop Comment Period Ends 

GRIM strawman complete 

Interview questionnaire complete 

Begin Interview Process 

Complete Draft MIA Document 

MIA Draft Results Workshop 

April 7, 1998 

April 28, 1998 

May 28,1998 

June 11, 1998 

June 11; 1998 

June 11, 1998 

August 28, 1998 

Sept 29, 1998 

3 
PREUMNARY DRAFT - For discussionn purposes only

2.0 Phase 1 : Indust Profile

Phase 1 of the Manufacturer Impact Analyses consists of two activities, namely,

preparation of an Industry Characterization (Section 2.1), and the conduct of Issue

Identification workshop (Section 2.2).

The Department is holding a workshop on April 28, 1998. At this time DOE will

solicit stakeholder input on the preliminary market characterization described in the

document. Also, the agenda provides for a discussion of manufacturing impact issues

that will require detailed consideration as the Manufacturing Impact Analysis

proceeds.

2.1. Industry Characterization

2.1.1. Introduction

Prior to initiating detailed impact studies, the Department will seek input on the present

and past industry structure and market characteristics of the product(s) concerned. This

activity will consist of both quantitative and qualitative efforts to assess the industry and

products to be analyzed. Issues to be addressed include the following: manufacturer

market shares and characteristics; trends in number of firms; the financial situation of

manufacturers; and trends in product characteristics and retail markets.

The end result of the Industry Characterization will consist of the issuance of a databook

profiling the industry. This will serve as a common source of information for participants

in the rulemaking. In particular, the competition impacts task will likely make use of the

market structure data. The nature of the qualitative component of this task will allow for

substantial manufacturer input. In addition, stakeholders will be asked to review the

databook and provide comments.

Sections 2.1.2-2. 1.5 describe the steps and elements the Dep artment envisions as part

of the industry characterization task.

2.1.2. Initial Review of Industry Sectors

Before commencing the characterization, a few key tasks must be completed, the most

important of which is the identification firms subject to potential standards. At this

point in the analysis, contacts at each firm will be identified, and basic information about

firm product lines will be collected. In addition, experts with industry knowledge will be

identified to provide information and act as reviewers as the characterization proceeds.

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For d!scussion purposes only 

2.0 Phase 1: Industry Profile 

Phase 1 of the Manufacturer Impact Analyses consists of two activities, namely, 

preparation of an Industry Characterization (Section 2.1), and the conduct of an Issue 

Jdentification workshop (Section 2.2). 

The Department is holding a workshop on April 28, 1998. At this time DOE will 

solicit stakeholder input on the preliminary market characterization described in the 

document. Also, the agenda provides for a discussion of manufacturing impact issues 

that will require detailed consideration as the Manufacturing Impact Analysis 

proceeds. 

2.1. Industry Characterization 

2.1.1. Introduction 

Prior to initiating detailed impact studies, the Department will seek input on the present 

and past industry structure and market characteristics of the product(s) concerned. This 

activity will consist of both quantitative and qualitative efforts to assess the industry and 

products to be analyzed. Issues to be addressed includethe following: manufacturer 

market shares and characteristics; trends in number offirms; the financial situation of 

manufacturers; and trends in product characteristics and retail markets. 

The end result of the Industry Characterization will consist of the issuance of a databook 

profIling the industry. This will serve as a common source of information for participants 

in the rulemaking. In particular, the competition impactS task will likely make use of the 

market structure data The nature of the qualitative component of this task will allow for 

substantial manufacturer input. In addition, stakeholders will be asked to review the 

databook and provide comments. 

Sections 2.1.2-2.1.5 describe the steps and elements the Department envisions as part 

of the industry characterization task. -

2.1.2. Initial Review of Industry Sectors 

Before commencing the characterization, a few key tasks must be completed, the most 

important of which is the identification offirms subject to potential standards. At this 

point in the analysis, contacts at each firm win be identified, and basic information about 

firm product lines will be collected. In addition, experts with industry knowledge will be 

identified to provide information and act as reviewers as the characterization -proceeds. 

4 
PRELIMINARY DRAFT - For discussion purposes oniy

The information compiled at this time will serve as the basis for the eventual survey and

interview component discussed in the qualitative analysis section below.

It is crucial to the quantitative analysis to properly define the relevant product markets.

Often, a broader duct market will be associated with lower concentration measures.

For example, when discussing water heaters, several different market definitions may be

applied. One could examine the market for all water-heating appliances, the gas water

heater market, and the even smaller category of 82 percent efficient gas water heaters,

and potentially find drastically different results. Although there may be several firms. in

the water-heating industry, it is possible that few may be present in any given subcategory. Generally, products that are good substitutes for another product, or

significantly constrain the price of that product, should be included in the definition of a

given market for concentration measures to provide value as a performance predictor. In

some cases, products cut across categories. Examples include heat pumps and

year-round air-conditioners, which could be viewed as part of both space-heating and

space-cooling markets.

For instance, another issue that must be addressed at this point is the handling of imports

and exports. Imported goods are subject to regulation, while exports are exempted.

Unfortunately, data sources are often based on point of manufacture rather than point of

sale. Thus, they include export figures with domestic production and exclude imports.

Obtaining data for foreign manufacturers will likely be difficult. Sources such as the

Bureau of the Census' National Trade Data Bank will be used to assess the significance

of international trade in each defined market, and input regarding the issue will be sought

from the workgroup and industry experts.

5

EE-RM-97-500 COMMENT 20K

PRELIMiNARY DRAFT ~ For O!scussion purposes only 

The information compiled at this time will serve as the basis for the eventual survey and 

interview component discussed in the qualitative analysis section below. 

It is crucial to the quantitative analysis to properly define the relevant product markets. 

Often, a broader l"Oduct market will be associated with lower concentration measures. 

For example, when discussing water heaters, several different market definitions may be 

applied. One could examine the market for all water-heating appliances, the gas water 

heater market, and the even smaller category of 82 percent efficient gas water heaters, 

and potentially find drastically different results. Although there may be several firms· in 

the water-heating industry, it is possible that few may be present in any given subcategory. Generally, products that are good substitutes for another product, or 

significantly constrain the price of that product, should be included in the defmition of a 

given market for concentration measures to provide value as a performance predictor. In 

some cases, products cut across categories. Examples include heat pumps and 

year-round air-conditioners, which could be viewed as part of both space-heating and 

space-cooling markets. 

For instance, another issue that must be addressed at this point is the handling of imports 

and exports. Imported goods are subject to regulation, while exports are exempted. 

Unfortunately, data sources are often based on point of manufacture rather than point of 

sale. Thus, they include export figures with domestic production and exclude imports. 

Obtaining data for foreign manufacturers will likely be difficult. Sources such as the 

Bureau of the Census' National Trade Data Bank will be used to assess the significance 

of international trade in each defmed market, and input regarding the issue will be sought 

from the workgroup and industry experts. 

5 
P l.,UM iNA Y DRAFT - For discussion purposes only

The Department conducted a series of interviews with ballast manufacturers in late

1996 and early 1997. Summaries of these interview were distributed at the "Public

Workshop on the Revised Life Cycle Cost and Engineering Analysis of Fluorescent

Lamp Ballasts", held on March 18, 1997. Major firms subject to potential sdards

have been identified. Contacts at each firm were also identified, and basic

information about the firms' product lines was collected. The firms interviewed are

Advance Transformer m Co., Howard Industries, Motorola Lighting Inc., Magnetek

Inc., and Valmont Electric (now known as Power Lighting Products).

As the analysis proceeds, the Department intends to conduct additional in-depth

interviews with these manufacturers and also with Robertson Transformer Co.

Are there additional ballast manufacturers which the Department should contact?

The manufacturer interviews previously conducted suggest the establishment of

several different ballast product-markets. The. Department will consider how

standards may effect markets for electronic and magnetic ballasts as well as

secondary effects on closely related products, such as residential ballasts, which are

not covered by minimum efficiency standards.

Where feasible the Department will consider the possible effects of new standards on

ballast imports and exports and attempt to quantify these effects.

2.1.3. uant° tive Analysis

While the information necessary to conduct an industry characterization is generally

difficult to obtain, it is possible to access firm-level data from the Current Industrial

Reports (CIR) and Census of Manufactures (CM) via the U.S. Census Bureau's Center

for Economic Studies. Although the Bureau will not allow release of firm-level data, it

still is possible to utilize concentration analysis and econometric estimation techniques.

The available data will allow examination of determinants of firm shipments shares and

trends in market concentration and firm mobility over the last 20 years for industries

affected by standards..

The proper method of measuring the competitiveness of a market is not universally

agreed upon. Without knowledge of the underlying cost structure, price observations

provide little value, unless viewed over time. Profit rates and market shares are more

informative variables. Although a large number of firms is not a necessary condition for a

competitive outcome, the study of market shares, or concentration analysis is the

often-used option. The goal is to assess the distribution of market power using market

share as a proxy. Two of the primary techniques used to assess market structure are the

h'•

2 6

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For dlscu~sion purposes O!1~Y 

The Department conducted a series of interviews with ballast manufacturers in late 

1996 and early 1997. Summaries of these interview were distributed at the "Public 

Workshop on the Revised Life Cycle Cost and Engineering Analysis of Fluorescent 

Lamp Ballasts", held on March 18, 1997. Major firms subject to potential standards 

have been identified. Contacts at each firm were also identified, and basic 

information about the firms' product lines was collected. The:firms interviewed are 

Advance Transformer Co., Howard Industries, Motorola Lighting Inc., Magnetek 

Inc., and Valmont Electric (now known as Power Lighting Products). 

As the analysis proceeds, the Department intends to conduct additional in-depth 

interviews with these manufacturers and also with Robertson Transformer Co. 

Are there additional ballast manufacturers which the Department should contact? 

The manufacturer interviews previously conducted suggest the establishment of 

several different ballast product-markets. The. Department will consider how 

'standards may effect markets for electronic and magnetic ballasts as well as 

secondary effects on closely related products, such as residential ballasts, which are 

not covered by minimum efficiency standards. 

Where feasible the Department will consider the possible effects of new standards on 

ballast imports and exports and attempt to quantify these effects. 

2.1.3. Quantitative Analysis 

While the information necessary to conduct an industry characterization is generally 

difficult to obtain, it is possible to access jjrm-ltwel data from the Current Industrial 

Reports (CIR) and Census of Manufactures (CM) via the U.S. Census Bureau's Center 

for Economic Studies. Although the Bureau will not allow release of firm-level data, it 

still is possible to utilize concentration analysis and econometric estimation techniques. 

The available data will allow examination of determinants of firm shipments shares and 

trends in market concentration and firm mobility over the last 20 years for industries 

affected by standards .. 

The proper method of measuring the competitiveness of a market is not universally 

agreed upon. Without knowledge of the underlying cost structure, price observations 

provide little value, unless viewed over time. Profit rates and market shares are more 

informative variables. Although a large number of firms is not a necessary condition for a 

competitive outcome, the study of market shares, or concentration analysis is the 

often-used option. The goal is to assess the distribution of market power using market 

share as a proxy. Two of the primary techniques used to assess market structure are the 

6 
PRELINI&NARV DRAFT - For discussion purposes only

n-firm concentration ratio and the Herfindahl index. Through use of these two standard

measures of market structure, it will be possible to examine the extent to which large

firms dominate the market, and to determine the significance of small firms. The available

data will be used to construct both current and historical concentration ratios and

Herfindahl-Hiirs indices.

Concentration indices are often criticized because any given level of concentration may

be consistent with a wide range of mobility patterns. In addition to the concentration

indices noted above, measures of the intensity of competition based on mobility statistics

will be computed. The intent is to use this measure to examine patterns in market share

changes for the defined equipment markets.

To characterize the distribution of shipment shares among producers over time, a

regression model using a time series of 20 years will be used. This model explains firm

shares for each of the defined markets as a function of several firm-specific variables. It

may capture impacts of previous standards imposed on equipment in the markets, and

will gauge the significance of overall firm size (across markets) in determination of

post-standard market share.

Information available from the U.S. Bureau of Census on the ballast industry is

contained in two reports: Current Industrial Reports (CIR) and Census of

Manufacturers (both Industry Series and Subject Series-Concentration Ratios in

Manufacturing) . These reports include such statistics as the number of establishments,

employment, payroll, value added, cost of materials consumed, capital expenditures,

product shipments, concentration ratios, etc.

The Census of Manufacturers covers all establishments with one paid employee or more

primarily engaged in manufacturing as defined in the Standard Industrial Classification

(SIC) Manual. A company operating at more than one location is required to file a

separate report for each location. An industry is defined as a group of establishments

producing the same product or a closely related group of products. The system works

in such a way that the definitions progressively become narrower with successive

additions of numerical digits. Thus ballasts are of the Major Group 36 - Electronic and

other Electric Equipment, in the Industry Group 3612 - Transformers, Except

Electronic, and have the five digit product code 36124.

Table 1 summarizes Bureau of Census data available on the ballast industry. A detailed

definition of terms and the information available is contained in Attachment A of this

document. Table 2 summarizes the characteristics of the U. S. Manufacturing industry

as reported in the four most recent Census of Manufacturers. It is important to note

that most of the information with regards to industry characterization dates back to

1992 and mostly pre-dates the major structural changes resulting from the emergence of

electronic ballast technology.

7

EE-RM-97-500 COMMENT 20K

PREliMINARY DRAFT ~ FOf d~scussion purposes only 

n-firm concentration ratio and the Herfindahl index. Through use of these two standard 

measures of market structure, it will be possible to examine the extent to which large 

firms dominate the market, and to determine the significance of small firms. The available 

data will be used to construct both current and historical concentration ratios and 

Herfindahl-Hirschman indices. 

Concentration indices are often criticized because any given level of concentration may 

be consistent with a wide range of mobility patterns. In addition to the concentration 

indices noted above, measures of the intensity of competition based on mobility statistics 

will be computed. The intent is to use this measure to examine patterns in market share 

changes for the defined equipment markets. 

To characterize the distribution of shipment shares among producers over time, a 

regression model using a time series of 20 years will be used. This model explains firm 

shares for each of the defined markets as a function of several firm-specific variables. It 

may capture impacts of previous standards imposed on equipment in the markets, and 

will gauge the significance of overall firm size (across markets) in determination of 

post-standard market share. 

Information available from the U.S. Bureau of Census on the ballast industry is 

contained in two reports: Current Industrial Reports (CIR) and Census of 

Manufacturers (both Industry Series and Subject Series-Concentration Ratios in 

Manufacturing) . These reports include such statistics as the number of establishments, 

employment, payroll, value added, cost of materials consumed, capital expenditures, 

product shipments, concentration ratios,etc. 

The Census of Manufacturers covers all establishments with one paid employee or more 

primarily engaged in manufacturing as defined in the Standard Industrial Classification 

(SIC) Manual. A company operating at more than one location is required to file a 

separate report for each location. An industry is defined as a group of establishments 

producing the same product or a closely related group of products. The system works 

in such a way that the definitions progressively become narrower with successive 

additions of numerical digits. Thus ballasts are of the Major Group 36 - Electronic and 

other Electric Equipment, in the Industry Group 3612 - Transformers, Except 

Electronic, and have the five digit product code 36124. 

Table 1 summarizes Bureau of Census data available on the ballast industry. Adetailed 

defInition of terms and the information available is contained in Attachment A of this 

document. Table 2 summarizes the characteristics of the U.S. Manufacturing industry 

as reported in the four most recent Census of Manufacturers. It is important to note 

that most of the information with regards to industry characterization dates back to 

1992 and mostly pre-dates the major structural changes resulting from the emergence of 

electronic ballast technology. . 

1 
P .IMIN RY DRAFT - For discussion purposes only

Table 1: Publicly Available Info tion on U.S. Fluorescent Lamp Ballast Industry

' Number of companies with shipments more than $ 100 thousand.

M -1A

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT - For discussion purposes ordy 

Table 1: Publicly Available Information on U.S. Fluorescent Lamp Ballast Industry 

x 

x 

x 

x 

x 

I Number of companies with shipments more than $100 thousand. 

(up to 1982) 

x 

x 

x 

x 

(up to 1982) 

x 
PRELIMINARY DRAFT - For discussion purposes only

Table 2: Characteristics of U.S. Ballast Manufacturing

v.:vm:.w.,:x•.w.w::.,:::::•:,:•.,:•n:vv.:,::•n•.v :::::vw::. •n:v:v+.v: n,vnv::.•.;:• :. :...:..+.. i :•n•.x..:::. . •..:.x .,..:,•.:..,..

Fluorescent Lamp Ballasts

Shipment Value (millions $) 210.7 312.1: 414.5 537.7

Number of companies: 9 12: 9 15

Number of establishments; 17 12 14

Corrected Power Factor Tvoe

Shipments (in millions): 39.7 38.9; 54.8 55.4

Shipment Value (millions $) 181.2 272: 378.2 468.9

Ship. value (Corr. Power/Fluo. ballasts): 86% .............................................................. ¢..................... 87%: 91% 87%

# of All Employees

Fluorescent ballasts: 6000; 4400 5200

............................................................ ............................ .................. ........................................... ..................

# of Production Workers

Fluorescent ballasts: 5300: 3800 4500

New capital expenditures ($ mill)

Fluorescent ballasts`:

................................................................................................ .... ...........

10.1 .................. 4.8 10.1

Manufacturing Facilities (Shipment: million $)

Arkansas! (NA) 33.1:

Illinois: 52.4 135.7: 82.6 119

Indiana: (NA) 2.4:

Kentucky: 20-50 6.6:

Mississippi: >50 73.7:

New Jersey. 20-50 26:

Pennsylvania: (NA) 5.41

Wisconsin: 20-50 24.2:

2.1.4. Qualitative Analysis

Surveys and/or interviews will be used to collect characterization information not

captured by the quantitative analysis. While the market structure study will focus more

on entire markets, survey-based techniques will help develop detailed profiles of

individual manufacturers, providing a better understanding of the potential impacts of

standards on both individual firms and particular categories of firms.

A prime advantage of surveys and interviews is that they allow examination of a variety

of firms experiencing potentially diverse impacts. While the somewhat anecdotal

evidence produced by this approach must be used carefully, it is often one of the only

means to identify and discuss important issues such as additional regulatory impacts

faced by industry or individual firms. This technique will also characterize specific

manufacturers and their product lines, assess their financial situation, and identify trends

in product characteristics and retail markets. The resulting data may assist in dividing

firms into "sub-groups" for Phase 3 GRIM analysis, and the small-firm evidence will be

useful in determining the effects on competition.

,<,:><,.:. <: t^:: 9

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Table 2: Characteristics of U.S. Ballast Manufacturing 

Shipments (in milli,nn~ 

Shipment Value (millions 

% . value Power/Fluo. 

Fluorescent 

Fluorescent 

1.M!mY.~tyriJ[lgj~ti!tli!~ (Shipment: million $) 

2.1.4. Qualitative Analysis 

New 

Pennsylvania 

Wisconsin 

10.1 

5.4 

242 

10.1 

82.6 11 

Surveys and/or interviews will be used to collect characterization infonnation not 

captured by the quantitative analysis. While the market structure study will focus more 

on entire markets, survey-:-based techniques will help develop detailed profiles of 

individual manufacturers, providing a better understanding of the potential impacts of 

standards on both individual firms and particular categories of firms. 

A prime advantage of surveys and interviews is that they allow examination of a variety 

of firms experiencing potentially diverse impacts. While the somewhat anecdotal 

evidence produced by this approach must be used carefully, it is often one of the only 

means to identify and discuss important issues such as additional regulatory impacts 

faced by industry or individual :firms. This technique will also characterize specific 

manufacturers and their product lines, assess their :financial situation, and identify trends 

in product characteristics and retail markets. The resulting data may assist in dividing 

:firms into "sub-groups" for Phase 3 GRIM analysis, and the small-firm evidence will be 

useful in determining the effects on competition. 

9 
PRELIMINARY DRAFT -. For discussion purposes only

It is anticipated that information gathered from surveys of selected firms will be

supplemented by interviews with manufacturers, industry experts, trade groups, and

working group members. Other sources of information will be sought as necessaxy and

available, and may include trade journals and financial reports.

10

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For d~scussion purposes on~y 

It is anticipated that information gathered from surveys of selected firms will be 

supplemented by interviews with manufacturers, industry experts, trade groups, and 

working group members. Other sources of information will be sought as necessary and 

available, and may include trade journals and financial reports. 

10 
PREUI^IINA Y CRAFT - For discussion purposes only

Department representatives visited and conducted p liminary interviews with

representatives of 5 of the 6 major ballast manufacturers (Robertson Transformer

Company was not visited) during the winter of 1996/97. The following manufacturers

were included in this series of preliminary interviews.

® Advance Transformer Company at Monroe, Wisconsin

o Howard Industries at Laurel, Mississippi

• MagneTek, Inc at Nashville, Tennessee

Motorola Lighting, Inc at Buffalo Grove, Illinois

• Power Lighting Products (Valmont Electric at time of visit) at El Paso, Texas

Department representatives also interviewed persons from the following organizations.

• The Alliance to Save Energy at Washington, DC

• The American Council for An Energy-Efficient Economy at Washington, DC

• The Natural Resources Defense Council by telephone

The interviews included open-ended discussions based on the 25 items outlined in the

interview guide included in this document as Attachment B. Three questions in Section

C of the interview guide were used to develop a simplified description of the important

qualitative features that can characterize the current structure and situation of the

industry vis-a-vis energy efficiency standards for fluorescent lamp ballasts ' . The results

suggested three possible characteristics that could be used to define subgroup

categories for the manufacturers.

1. There was general agreement that the firms could be categorized according to

product mix with "electronic only" and "both electronic and magnetic" as the

distinguishing categories.

2. A second categorization of firms could be carried out according to size as defined

by number of units produced (large, medium, small). There was not universal

agreement on this, however, as some respondents suggested that size is not a

problem or advantage among the current manufacturers.

3. Some respondents suggested foreign vs. domestic production as an attribute to be

considered.

4. Other suggestions included vertically integrated vs. assembler production capability,

and specialty vs. broad target markets.

As a first approximation the six previously identified manufacturers could be described

as

• Advance Transformer: Large, full line with both foreign and domestic plants

o Howard Industries: Electronic only2 with all production domestic

• MagneTek: Full line with both foreign and domestic

o Motorola Lighting: Electronic only with all production domestic

o Power, Lighting Products: Large, full line with predominantly foreign plants

o Robertson Transformer: Both magnetic and electronic for specialty markets

2 Information published since the interview suggest that Howard Industries is considering manufacturing magnetic

ballasts at a Simpson County , Mississippi plant currently occupied by MagneTek.

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Department representatives visited and conducted pJeliminary interviews with 

representatives of 5 of the 6 major ballast manufacturers (Robertson Transformer 

Company was not visited) during the winter of 1996/97. The following manufacturers 

were included in this series of preliminary interviews. 

• Advance Transformer Company at Monroe, Wisconsin 

• Howard Industries at Laurel, Mississippi 

• MagneTek, Inc at Nashville, Tennessee 

• Motorola Lighting, Inc at Buffalo Grove, Illinois 

CD Power Lighting Products (Valmont Electric at time of visit) at El Paso, Texas 

Department representativ~s also interviewed persons from the following organizations. 

CD The Alliance to Save Energy at Washington, DC 

• The American Council for An Energy-Efficient Economy at Washington, DC 

• The Natural Resources Defense Council by telephone 

The interviews included open-ended discussions based on the 25 items outlined in the 

interview guide included in this document as Attachment B. Three questions in Section 

C of the interview guide were used to develop a simplified description of the important 

qualitative features that can characterize the current structure and situation of the 

industry vis-a.-vis energy efficiency standards for fluorescent lamp ballasts. The results 

suggested three possible characteristics that could be used to defme subgroup 

categories for the manufacturers. 

1. There was general agreement that the firms could be categorized according to 

product mix with "electronic only" and "both electronic and magnetic" as the 

distinguishing categories. 

2. A second categorization of firms could be carried out according to size as defined 

by number of units produced (large, medium, small). There was not universal 

agreement on this, however, as some respondents suggested that size is not a 

problem or advantage among the current manufacturers. 

3. Some respondents suggested foreign vs. domestic production as an attribute to be 

considered. 

4. Other suggestions included vertically integrated vs. assembler production capability, 

and specialty vs. broad target markets. 

As a first approximation the six previously identified manufacturers could be described 

as 

• Advance Transformer: Large, full line with both foreign and domestic plants 

• Howard Industries: Electronic only2 with all production domestic 

• MagneTek: Full line with both foreign and domestic 

• Motorola Lighting: Electronic only with all production domestic 

• Power, Lighting Products: Large, full line with predominantly foreign plants 

• Robertson Transforriler: Both magnetic and electronic for specialty markets 

2 Information published since the interview suggest that Howard Industries is considering manufacturing magnetic 

ballasts at a Simpson County, Mississippi plant currently occupied by MagneTek. 

11 
PR t.i &N Y DRAFT ^ For discussion purposes only

ere was general consensus that the most important phenomenon affecting the

character of the ballast industry is the trend in recent years toward higher market share

for electronic ballasts. This has several important implications for the industry. Electronic

ballasts are produced through equipment and methods Band en y different than those

used for traditional magnetic ballasts causing significant investments in new plant and

equipment and dislocation of manufacturing infrastructure. The new industry dynamics

have opened potential market try to a broad range of new manufacturers, many of

which are outside the US. Many believe that the market share of electronic ballasts will

continue to grow, although at a slower rate than during the mid-90s, even as electric

utility DSM programs phase out. The growth in market shares of electronic ballasts and

price pressure on both electronic and magnetic ballasts have been factors in the migration

of ballast production to plants in Mexico and other countries.

The preliminary interviews, supplemented with a review of public literature, have

suggested the following relevant industry characteristics that can guide the Department's

investigation into the expected of a lighting ' ballaststandard on manufacturers.

® The Manufacturer pact Analysis should be performed on a company-bycompany basis. The industry is made up of such a small number ofmajor

manufacturers that any m sub-group segmentation would result in a greater

number of categories than there are manufacturers. Thus the industry impact would

be most effectively constructed from an aggregation of impacts on individual

companies.

® The analysis should recognize the increasingly global nature of the ballast

industry. Gains or losses in US sales will bestow consequences to manufacturers

regardless of where their production facilities are located. Where possible, the

analysis should be structured to assess impacts at US National, North American, and

Global levels.

® The Manufacturer pact Analysis should include consideration of di rect

indus suppliers. The Department recognizes that manufacturers do not operate in

isolation and that changes in production levels or economic health of a manufacturer

can have significant impacts on its suppliers and other trade allies. These impacts will

be assessed qualitatively and DOE will consider such impacts as the data provided

pe .

2.2. ' Issue Identification

Following the preliminary industry characterization, the Department will hold a

workshop to identify issues that will require detailed consideration in the manufacturer

impact analyses. The goals of the workshop are to:

f0l 1.43::1^«s1.0i^.^ 12

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

There was general consensus that the most important phenomenon affecting the 

character of the ballast industry is the trend in recent years toward higher market share 

for electronic ballasts. This has several important implications for the industry. Electronic 

ballasts are produced through equipment and methods fundamentally different than those 

used for traditional magnetic ballasts causing significant investments in new plant and 

equipment and dislocation of manufacturing infrastructure. The new industry dynamics 

have opened potential market entry to a broad range of new manufacturers, many of 

which are outside the US. Many believe that the market share of electronic ballasts will 

continu~ to grow, although at a slower rate than during the mid-90s, even as electric 

utility DSM programs phase out. The growth in market shares of electronic ballasts and 

price pressure on both electronic and magnetic ballasts have been factors in the migration 

of ballast production to plants in Mexico and other countries. 

The preliminary interviews, supplemented with a review of public literature, have 

. suggested the following relevant industrY characteristics that can guide the Department's 

investigation into the expected impact of a lighting ballast standard on manufacturers. 

• The Manufacturer Impact Analysis should be perfonned on a company-bycompany basis. The industry is made up of such a small number of ~or 

manufacturers that any meaningful sub-group segmentation would result in a greater 

number of categories than there are manufacturers. Thus the industry impact would 

be most effectively constructed from an aggregation of impacts on individual 

companies. 

• The analysis should recognize the increasingly global nature of the ballast 

industry. Gains or losses in US sales will bestow consequences to manufacturers 

regardless of where their production facilities are located. Where possible, the 

analysis should be structured to assess impacts at US National, North American, and 

Global levels. 

• The Manufacturer Impact Analysis should include consideration of direct 

industry suppliers. The Department recognizes that manufacturers do not operate in 

isolation and that changes in production levels or economic health of a manufacturer 

can have significant impacts on its suppliers and other trade allies. These impacts win 

be assessed qualitatively and DOE will consider such impacts as the data provided 

permits. . 

2.2.' Issue Identification 

Following the preliminary industry characterization, the Department will hold a 

workshop to identify issues that will require detailed consideration in the manufacturer 

impact analyses. The goals of the workshop are to: 

12 
PRELIMINARY DRAFT - For discussion purposes on€y

® Identify specific types or groups of manufacturers

® Identify issues of access to technology

® Identify the necessary contractor expertise

® Establish the data requirements and data collection methodologies

® Specify special analytical tool requirements to perform the impact analyses

® Adapt the generic analyses work plan to the specific rulemaking including a selection

of the approaches to estimating key , variables

® Develop regulatory scenario(s) to guide further impact assessments including:

® Possible sets of regulations

Conceivable range of standards

® Conceivable range of impacts

® Issues which could change the regulatory level or decisions made by DOE

® Key data or other areas of importance

® Establish a schedule for the completion of the manufacturing impact analyses

consistent with the regulatory agenda, including a timeline for later workshops and

public review

® Establish a working group for ongoing consultation

The Department will also use this workshop as an opportunity to review the industry

databook. A major desired outcome is the establishment of a working group of interested

parties to participate in the analyses.

During the April 28th workshop the Department will review and obtain comments

on how to adapt the generic manufacturer analysis work plan for the ballast rule.

DOE will also review the preliminary schedule for the completion of the

manufacturing impact analyses including a timeline for additional workshops and

public review.

At the conclusion of the workshop the Department expects to have made progress in

establishing the data requirements and data collection methodologies including a

process to conduct the cash flow analyses described in Section 3.0: Industry Cash

flow Analysis and Section 4.0: Sub-Group Impact Analysis.

13

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

€I Identify specific types or groups of manufacturers 

€I Identify issues of access to technology 

€I Identify the necessary contractor expertise 

€I Establish the data requirements and data collection methodologies 

ED Specify special analytical tool requirements to perform the impact analyses 

€I Adapt the generic analyses work plan to the specific rulemaking including a selection 

of the approaches to estimating key variables 

€I Develop regulatory scenario(s) to guide further impact assessments including: 

€I Possible sets of regulations 

€I Conceivable range of standards 

€I Conceivable range of impacts 

€I Issues which could change the regulatory level or decisions made by DOE 

€I Key data or other areas of importance 

ED Establish a schedule for the completion of the manufacturing impact analyses 

consistent with the regulatory agenda, including a timeline for later workshops and 

public review ' 

€I Establish a working group for ongoing consultation 

The Department will also use this workshop as an opportunity to review the industry 

databook. A major desired outcome is the establishment of a working group of interested 

parties to participate in the analyses. 

During the April 28th workshop the Department will review and obtain comments 

on how to adapt the generic manufacturer analysis work plan for the ballast rule. 

DOE will also review the preliminary schedule for the completion of the 

manufacturing impact analyses including a timeline for additional workshops and 

public review. 

At the conclusion of the workshop the Department expects to have made progress in 

establishing the data requirements and data collection methodologies including a 

process to conduct the cash flow analyses described in Section 3.0: Industry Cash 

flow Analysis and Section 4.0: Sub-Group Impact Analysis. 

13 
PRELIMINARY DRAFT - For discussion purposes only

3.0 Phase 2: Industry Cash Flow Analysis

3.1. Introduction

The second phase of themanufacturer analyses has as its focus the "larger" industry. As

such, this phase resembles the Department's past practice of modeling a "prototypical"

firm using average industry values. The analytical tool that will be used for calculating

the financial impacts of standards on manufacturers is the Government Regulatory

Impact Model (GRIM). In this phase, the GRIM will be used to perform industry cash

flow analysis.

Section 3.2 describes briefly the G 's operating principles. Subsequent sections

present alternative approaches to developing the information necessary to perform the

computations.

Given the relatively small number offirms in the industry, the Department proposes

to create industry Cash Flow Analysis using a "bottom-up" approach.

Essentially, each manufacturer would provide its own cash flow analysis to be

aggregated with all other manufacturer submittals. In order to facilitate individual

manufacturer analysis, the Department will prepare baselinescenarios for a

"prototypical" manufacturer using publicly available financial information.

Manufacturers will be able to modify relevant parameters to meet their own situation

(price, cost, financial, shipments, etc.)

For discussion purposes, the Department has prepared a list of financial values to be

used in the GRIM industry analysis. These were calculated by studying publicly

available financial statements of fluorescent lamp ballast manufacturers. A detailed

definition of financial inputs and their values for a "prototypical" ballast

manufacturer is contained in Attachment C of this document, entitled "Financial

Inputs to GRIM for the Ballast Rul 'ng Analysis."

Are the values proposed reasonable?

3.2. GRIM Model

The GRIM is a standard annual cash flow analysis which uses price, quantity and cost

information to assess the impact of regulatory conditions on manufacturer income and

cash flow. In the Phase 2 manufacturer analysis, the GRIM will be used with industryaverage values of pre- and post-standards manufacturing costs, prices, shipments, and

financial information to perform an industry cash flow analysis. This process is shown

n... ,.Yd 14

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes ordy 

3.0 Phase 2: Industry Cash Flow Analysis 

3.1. Introduction 

The second phase of the manufacturer analyses has as its focus the "larger" industry. As 

such, this phase resembles the Department's past practice of modeling a ''prototypical'' 

firm using average industry values. The analytical tool that will be used for calculating 

the financial impacts of standards on manufacturers is the Government Regulatory 

Impact Model (GRIM). In this phase, the GRIM will be used to perform an industry cash 

flow analysis. 

Section 3.2 desqibes briefly the GRIM's operating principles. Subsequent sections 

present alternative approaches to developing the information necessary to perform the 

computations. 

Given the relatively small number offirms in the industry, the Department proposes 

to create an Industry Cash Flow Analysis using a ''bottom-up'' approach. 

Essentially, each manufacturer would provide its own cash floW' analysis to be 

aggregated with all other manufacturer submittals. In order to facilitate individual 

manufacturer analysis, the Department will prepare baseline scenarios for a 

''prototypical'' manufacturer using publicly available financial information. 

Manufacturers will be able to modify relevant parameters to meet their own situation 

(price, cost, financial, shipments, etc.) . 

For discussion purposes, the Department has prepared a list offinancial values to be 

used in the GRIM industry analysis. These were calculated by studying publicly 

available financial statements of fluorescent lamp ballast manufacturers. A detailed 

definition offinancial inputs. and their values for a ''prototypical'' ballast 

manufacturer is contained in Attachment C of this document, entitled "Financial 

Inputs to GRIM for the Ballast Rulemaking Analysis." 

Are the values proposed reasonable? 

3.2. GRIM ~odel 

The GRIM is a standard annual cash flow analysis which uses price, quantity and cost 

information to assess the impact of regulatory conditions on manufacturer income and 

cash flow. In the Phase 2 manufacturer analysis, the GRIM will be used with industryaverage values of pre- and post-standards manufacturing costs, prices, shipments, and 

financial information to perform an industry cash flow analysis. This process is shown 

14 
PRELIMINARY DRAFT - For discussion purposes only

graphically in Figure 4. Attachment F provides a description of GRIM's operating

principles..

Section 3.3 (Manufacturing Cost Forecasts), 3.4 (Price Forecasts), 3.5 (Shipment

Forecasts) and 3.6 (Financial Information) present approaches that can be used to

generate the inputs necessary in performing the Phase 2, Industry Cash Flow Analysis.

f...:>:ri: r`>r xmN ;xis >r

Price >»-€ Manufacturing Costs ............. - - ------------------------- -

;;.;.;..::..< (Section 3.4) (Section 3.3)

Qty_ uanti

(Section 3.5) $........... .

Cash Flow

® Financial Information

(Section 3.6)

Figure 2 . Using GRIM to Perform an Industry Cash Flow Analysis

3.3. Manufacturing Cost Forecasts

The manufacturing costs to be used in the industry cash flow analysis will be those

developed in the engineering analysis. The costs of interest are those that represent

"average" costs of achieving a specified efficiency level. Three approaches to developing

these average costs, namely, Manufacturer Surveys, Cost Modeling, and ASHRAE costefficiency curves, are described in this section.

Each approach has its strengths and weaknesses, and it is likely that no approach is

universally better. Characteristics that can be important in evaluating these for a specific

rulemaking include: accuracy of results, time and cost of implementation, opportunity

(need) for stakeholder input, treatment of uncertainty, validation of results, and, linkage

to the Phase 3, Sub-group Analysis.

EE-RM-97-500 COMMENT 20K

PRE.LlMINARY DRAFT ~ For cnscw~sion purposes only 

graphically in Figure 4. Attachment F provides a description of GRIM's operating 

principles. 

Section 3.3 (Manufacturing Cost Forecasts), 3.4 (Price Forecasts), 3.5 (Shipment 

Forecasts) and 3.6 (Financial Information) present approaches that can be used to 

generate the inputs necessary in performing the Phase 2, Industry Cash Flow Analysis. 

Price IIIiP IIIIIIiI 

Manufacturing Costs 

(Section 3.4) (Section 3.3) 

Quantity financiallnforma1ion 

IIIiP 41 

(Section 3.5) (Section 3.6) 

: Cash flow 

Figme 2. Using GRIM to Perform an Indt:!stry Cash Flow Analysis 

3.3. Manufacturing Cost Forecasts 

The manufacturing costs to be used in the industry cash flow analysis will be those 

developed in the engineering analysis. The costs of interest are those that represent 

"average" costs of achieving a specified efficiency level. Three approaches to developing 

these average costs, namely, Manufacturer Surveys, Cost Modeling, and ASHRAE cost-· 

efficiency curves, are described in this section. 

Each approach has its strengths and weaknesses, and it is likely that no approach is 

universally better. Characteristics that can be important in evaluating these for a specific 

rulemaking include: accuracy of results, time and cost of implementation, oppornmity 

(need) for stakeholder input, <treatment of uncertainty, validation of results, and, linkage 

to the Phase 3, Sub-group Analysis. 

15 
PRELIMINARY DRAFT - For tiacuacion purposes only

For the February 1996 "Draft Report on the Potential Impact of Possible Energy

Efficiency Levels for Fluorescent Lamp Ballasts," manufacturer cost data were not

received from enough ballast manufacturers to allow their use directly in a public

document without compromising the confidential nature of the data. The average

manufacturing costs were reverse-calculated from prices paid by the largest ballast

customers, and an average markup computed from confidential data supplied by ballast

manufacturers. The consumer price data were obtained from the L survey of lighting

management companies (LMCs) and luminaire manufacturers (OEMs). Average prices to

the largest customers, LMCs and OEMs, were determined as follows. LBNL

subcontracted LRI to develop price data for each of the l p/ballast combinations and up

to four technologies (or design options). These options were energy efficient magnetic,

cathode cutout, electronic rapid start, and electronic instant start. LRI collected data from

ballast manufacturers, LMCs, and OEMs. L provided aggregated data on the ballast

prices paid by OEMs and LMCs, and market share weighting factors to account for the

share purchased by each. The aggregated prices paid by each group were weighted by the

share purchased to arrive at an average price. The average manufacturing cost was

computed by dividing the average price by the average markup.

In the revised July 1997 report entitled "Draft Report on the Potential Impact of Possible

Energy Efficiency Levels for Fluorescent Lamp Ballasts," the ballast end-user prices were

determined by a survey of l ' re manufacturers (OEMs), ballast manufacturers, and

lighting management companies (LMCs). LBNL contracted with Gough and Associates

(G & A) to develop price data for 1996 sales for each of the product classes and

technology options. G & A collected data from OEMs, ballast manufacturers, and LMCs

on prices paid by OEMs and LMCs, as well as on their average industry markups to

customers. As opposed to the 1996 Draft Report, the July 1997 Draft Report has no

references to manufacturing markups or manufacturing costs

Another potential source of ballast prices (and indirectly of m ` n manufacturing costs) are the

Current Industrial Reports (CIRs). CIRs have been providing monthly, quarterly, and

annual measures of industrial activity for many years. The CIRs include statistics for the

United States on the quantity and value of shipments along with comparative data on

exports, imports, and domestic output. The figures on quantity and value of shipments

represent physical shipments of all products sold, transferred to other establishments of the

same company or shipped on consignment, whether for domestic or export sale. The

value represents the net sales price, f.o.b. plant, to the customer or branch to which the

products are shipped, net of discounts, allowances, freight charges, and returns.

Shipments to a company's own branches are assigned the same value as comparable

appropriate allocation of company overhead and profit. Products bought and resold

without fin-ther manufacture are excluded. Shipment information from the CIR can be used

to approximate3 manufacturer prices for certain categories of magnetic and electronic

ballasts.

3 Reporting categories for CIRs are not a perfect fit with product classes defined for the Ballast Rule and

MHA

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

For the February 1996 "Draft Report on the Potential Impact of Possible Energy 

Efficiency Levels for Fluorescent Lamp Ballasts," manufacturer cost data were not 

received from enough ballast manufacturers to allow their use directly in a public 

document without compromising the confidential nature of the data. The average 

manufacturing costs were reverse-calculated from prices paid by the largest ballast 

. customers, and an average markup computed from confidential data supplied by ballast 

manufacturers. The consumer price data were obtained from the LRI survey of lighting 

management companies (LMCs) and luminaire manufacturers (OEMs). Average prices to 

the largest customers, LMCs and OEMs, were determined as follows. LBNL 

subcontracted LRI to develop price data for each of the lamplballast combinations and up 

to four technologies (or design options). These options were energy efficient magnetic, 

cathode cutout, electronic rapid start, and electronic instant start. LRI collected data from 

ballast manufacturers, LMCs, and OEMs. LRI provided aggregated data on the ballast 

prices paid by OEMs and LMCs, and market share weighting factors to account for the 

share purchased by each. The aggregated prices paid by each group were weighted by the 

share purchased to arrive at an average price. The average manufacturing cost was 

computed by dividing the average price by the average markup. 

In the revised July 1997 report entitled "Draft Report on the Potential Impact of Possible 

Energy Efficiency Levels for Fluorescent Lamp Ballasts," the ballast end-user prices were 

determined by a survey ofluminaire manufacfurers (OEMs), ballast manufacturers, and 

lighting management companies (LMCs). LBNL contracted with Gough and Associates 

(G & A) to develop price data for 1996 sales for each of the product classes and 

technology options. G & A collected data from OEMs, ballast manufacturers, and LMCs 

on prices paid by OEMs and LMCs, as wen as on their average industry markups to 

customers. As opposed to the 1996 Draft Report, the July 1997 Draft Report has no 

references to manufacturing markups or manufacturing costs. . 

Another potential source of ballast prices (and indirectly of manufacturing costs) are the 

Current Industrial Reports (CIRs). CIRs have been providing monthly, quarterly, and 

annual measures of industrial activity for many years. The CIRs include statistics for the 

United States on the quantity and value of shipments along with comparative data on 

exports, imports, and domestic output. The figures on quantity and value of shipments 

represent physical shipments of all products sold, transferred to other establishments of the 

same company or shipped on consignment, whether for domestic or export sale. The 

value represents the net sales price, f.o.b. plant, to the customer or branch to which the 

products are shipped, net of discounts, allowances, freight charges, and returns. 

Shipments to a company's own branches are assigned the same value as comparable 

appropriate allocation of company overhead and profit. Products bought and resold 

without further manufacture are excluded. Shipment infonnation from the cm can be used 

to approximate3 manufacturer prices for certain categories of magnetic and electronic 

ballasts .. 

3 Reporting categories for CIRs are not a perfect fit 'With product classes dermed for the Ballast Rule and 

16 
PRELIMINARY DRAFT - For discussion purposes only

Table 3 provides the estimated manufacturer price of magnetic and electronic ballasts. The

dollar value of ballast shipments from factories is divided by the quantity of ballasts shipped

to arrive at the per unit manufacturer price.

Table 4 summarizes retail price, manufacturer/OEM price and manufacturing cost

information as presented in the February 1996 Draft Report and in the revised Draft Report

presented in July 1997. These prices are then compared with manufacturer prices obtained

using data published in the Current Industrial Reports.

thus the "prices" calculated are approximate only and to be used solely as placeholder values for GRIM

d,> 17

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT A FOf d!scussion purposes only 

Table 3 provides the estimated manufacturer price of magnetic and electronic ballasts. The 

dollar value of ballast shipments from factories is divided by the quantity of ballasts shipped 

to arrive at the per unit manufacturer price. 

Table 4 summarizes retail price, manufacturer/OEM price and manufacturing cost 

information as presented in the February 1996 Draft Report and in the revised Draft Report 

presented in July 1997. These prices are then compared with manufacturer prices obtained 

using data published in the Current Industrial Reports. 

thus the "prices" calculated are approximate only and to be used solely as placeholder values for GRIM 

17 
PRELIMINARY DRAFT - For discussion purposes only

Table 3. Quantity and Value of Ship nts, by Type of Ballast for 1997

QUANTITY AND VALUE OF SHIPMENTS, BY TYPE OF BALLAST: 2nd, 3rd 4rth Quarters 1997

(Quantity in 1,000 ballasts ; Value in $1,000)

Product 1997

code :Product description

36124- Fluorescent Lamp Ballasts ..............

MAGNETIC PE.........................

Corrected panw -factor type

Total

Quantity

78679

50544

Value

679904

301617

GRIM

Avg. Price ::Product Class

(85°/®powar U'acttar or abve)....... 31825 ; 250265

Slimline and instant start........... 4926; 52490

36124 67 Two-tamp 96T12 & 72T12 ....... 1 4510; 47615: $10.56 F96T12

36124 68 Other Slimline and instant........ 416: 4875:

Rapid start ............................. ......: . 25513;, 217449:

36124 69 One lamp 40W/48T12/RS,........ (2): (2):

36124 71 Two lamp 40W148T121RS........ 19864: . 115177: $5.80 1 F40T12

36124 75 Two lamp 32W/48T8/RS......... ; . 2/: 1721 ; 2/ 12489: $7.26 2 F40T12

All other rapid start .................. 3928. 59783:

3612472 800 to 1000 mA ...................... (3) (3);

3612473 1500 mA.................................: . 142: 4751:

3612474 Other rapid start.....................: 3/ 3786: 55032 $14.54

Preheat start ................................: (4): (4)

3612477 Single ended compact lamps ...... (4); (4)

3612478 Linear and circline lamps.......... (4); (4)

F96T12H04

36124 98 All other corrected power........... : 4/; 1386; 4/: 10326:

:ELECTRONIC TYPE..................... 28135 378287.

Uncorrected power factor type

(less than 90% power factor) (D): (D)

36124 91 Single ended compact lamps ....... (D); (D):

36124 92 All other uncorrected power ..... (D) (D)

Corrected power factor type

(90% power factor or above ) (D): (D)

Instant start:

36124 93 1 1 and 2 lamp 32W/48T8 ........... 11899 139783 : $11.75 1 & 2 F32T8

3612494 3 and 4 lamp 32W/48T8........... 9744! 134600: $13.81 3 & 4 F32T8

36124 95 2 lamp 59W/96T8..................... 775• [ 14670:

36124 96 2 lamp 75W/96T12/IS .............. (5) (5)

36124 97 All other instant start ................ 5/: 873: 5/' 13288:

Rapid start:

3612482 All 32W/48T8........................... : (D):: D

3612484 All other T8, 4 foot and less..... (D); (D):

36124 86 2 lamp 40W/48T12/RS ............. 472: 7439 : $15.76 2 F40T12 RS

36124 88 800 mA..................................... . (D); (D)

36124 89 All other rapid start.................. 631: 10648:

36124 99 All other corrected power .........

1/2/3/415/ Products were combined to avoid disclosing data^ for individual companies.

- Represents zero. (D) Data withheld to avoid discl osing figures for individual companies.

4 Since shipments of 2F96T 12HO represent a minor fraction of this CIR category, the price estimate is

not as reliable as for other baflast types.

'4' VA --EaIla 1,doi: 18

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Table 3. Quantity and Value of Shipments, by Type of Ballast for 1991 

QUANTITY AND VALUE OF SHIPMENTS, BY TYPE OF BALLAST: 2nd, 3rd & 4rth Quarters 1997 

Quantity in 1,000 ballasts; Value in $1,(00) 

GRIM roouct 11997 Tomll 

lProduet deSCription . Quantltyl 

36124- l Fluorescent Lamp Ballasts .............. i 786791 

Value: Avg. Price Product Class 

679904: 

lMAGNETIC TYPE ••• ~ ••••••••••••••••••• ~. l 50544::: 

i Corrected power-facior type i 

j (85% power factor or above) ....... ! 318251 

1 Slimline and instant start ............. 1 49261 

3612467 i Two-lamp 96T12 & 72T12 ....... i 4510! 

36124 68 ~ Other Slimline and instant. ....... j 25451163l.:., ' 

l Rapid start ................................... i 

3612469 lOne lamp 40W/48T121RS ........ i (2)! 

3612471 i Two lamp 40W/48T121RS ........ i 198641 

3612475 \ Two lamp 32W/48T8/RS......... 1 21:'::::::.:: 1721 \ 

1 All other rapid start .... , ............. 1 39281 

3612472 1 800 to 1000 mA ...................... 1 (3)1 

3612473 [, 1500 mA ................. ··· .......... · .. l 142[ 

3612474 1 Other rapid start ..................... 1 3/:.;:::::' 37861 

i Preheat start ......................... : ....... j (4)! 

3612477 1 Single ended compact lamps ...... i (4)! 

3612478 \ Unear and circline lamps.......... 1 (4)\ 

3612498 i All other corrected power........... i 1386! 

lELECTRONIC TYPE..................... i 28135::.~.· l Uncorrected power factor type 1 

i (less than 90% powerfactor) 1 (D)l 

36124 91 1 Single ended compact lamps ....... 1 (D)! 

36124 92! All other uncorrected power...... ! (D)l:. 

\ Corrected power factor type ! 

l (90% power factor or above) l (D):::. 

1 Instant start: 1 

3612493! 1 and 2 lamp 32W/48T8 ........... l 11899\ 

3612494 1 3 and 4 lamp 32W/48T8 ........... 1 9744\ 

36124 95 l 2 lamp 59W/96T8 ..................... ! 775! 

36124 96! 2 lamp 75W/96T121IS .............. 1 (5)! 

3612497 1 All other instant start ......•......... 1 873~:: 

301617: 

250265\ 

52490: 

47615: 

4875: 

217449) 

(2») 

115177: 

12489\ 

59783\ 

(3): 

4751) 

55032: 

(4») 

(4): 

(4): 

10326: 

378287) 

139783\ 

1346(0) 

'14670' 

(5») 

13288: 

! Rapid start: 1 

36124 82 l All 32W/48T8 ........................... i (D)! (D): 

3612484 1 All other T8, 4 foot and less..... i (D)! (D)' 

$10.56' 

$5.80 

$7.26 

$14.54 

$11.75 

$13.81 

612486 \ 2 lamp 40W/48T12/RS ... ~ ......... i 472\ 7439\ $15.76 

3612488! 800 mA ..................................... ! (D)! (D): 

3612489 l All other rapid start.................. ! 63_1.i:· 10648: 

36124 99 ~ All other corrected power.......... ~ -: 

·11213/4/51 Products were combined to avoid diSclosing data' for individual companies. 

- Represents zero. (D) Data withheld to avoid disclosing figures for individual companies. 

F96T12 

1 F40T12 

2 F40T12 

F96T12H04 

1 & 2 F32T8 

3 &4 F32T8 

2 F40T12 RS 

4 Since shipments of 2F%T 12HO represent !l minor fraction of this em. category, the price estimate is 

not as reliable as for other ballast types. 

18 
PRELIMINARYRY DRAFT - For discussion purposes only

Table 4. Ballast Manufacturing Cost and Prices

Ballast 1996 1997 1997

$

........................

....................... ..........................Draft TSD ................. ... ...Draft TSD ...................... ........................ CIR ..

1 F40T12 Retail price 12.87 11.69

(Magnetic) OEM / Mfg. price 6.33 7.26

Mfg. cost

. . .

2F40T92

.....................

Retail price

...........................

12.87

.. .....................

11.43

.... ....................

(Magnetic) OEM /Mfg Price„ 6.21 5.80

Mfg. cost .: ......:... . ..... . .. ....9 9 . .

2F96T12

. . . Retail price. ... . ........

20.74

........................

19.90

. .........................

(Magnetic) OEM / Mfg. price 10.85 10.56 .......................................... . Mfg. cost

... ..... .----...............

9.97

................---...... ...... ...................

2F96T121-IO Retail price .................. ......... . ..... . ..... 39.33 32.85

(Magnetic)

. . . ....

OEM / Mfg. price

.. ..................... .........................

17.86

..........................

14.54

Mfg. cost 18.89

.........................

2F40T92

........ .........

Retail price

. .

28.94 22.35

- ...............

(Electronic) OEM /_Mfg..Pr i ce . ..... ... 16.07 15.76

Mfg. cost

.. ............ ..

1424

.

1 F32T8/IS Retail price ..... .. 29.37 18.69

(Electronic)

.. ..............................

OEM / Mfg. price .....

........

.......

. ...........

... .

..........................

13.51.

..........................

11.75

Mfg. cost

. ...............

13.79

.................. ...... ..........................

2F32T8/IS Retail price

.......... ..............

28.67

..........................

18.60

..................•--•....

(Electronic) OEM / Mfg. price . :

-

13.51

-- - - -------------

11.75

Mfg. cost

.......

13.79

.......

.

..........................

..............................

3F32T8/IS

........................................ .

Retail price

......... ....................

31.92

..........................

20.83

..........................

(Electronic) OEM / Mfg. price 15.13 13.81

Mfg. cost 15.35

.....

4F32T8/IS

p.:......................

Retail nce

............................

33.91.

..........................

22.70

.........................

(Electronic)

...........

OEM / Mfg. price

.............. ........... .........................

16.62

..........................

13.81

Mfg. cost 16.31

0 -S 19

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT A For discussion purposes only 

Table 4. Ballast Manufacturing Cost and Prices 

Ballast 1 1996 1997 1997 

~~ ................................................................. l.~.~~ .. !~~ .. ~~~.!~.~ ......... ~!.~.~ ...... ~ 1 F40T12 Retail price 1 12.87 11 .69 

(Magnetic) o"Et~fTMfg·:·pii·ce·····T······················· ········Ef."33········ ········j:2Ef······ 

............................... f0.1ij~~~~~I::~:::::::::~:~~r:::::~:~~r::::: :~::::::~:~~::~~:~ .=~:~:~~:~~~:. 2F40T12 Retail price i 12.87 11.43 

(Magnetic) oEtvfTMfg·:·pii·ce .. ···T·········· .. ··········· ········6·:2f· .. ···· ········5:'80········ --------,,----------------~------,-~---------------~ ------------~ ------------------- Mfg. cost i 6.19 ........................................................................... ). ........................................................................... . 

2F96T12 Retail price 1 20.74 19.90 

(Magnetic) OE·M··'·Mfg: .. pii·ce·· .... T .... ··· .... ·· .. ··· ...... ·· .... 1·0:S·5 .. · .... ··· .. ··1'0·:56······· ............................................. ,. ........................................................................... . Mfg. cost i 9.97 

2F96T12HO Retail price ! 39.33 32.85 

(Magnetic) OE·M"TMfg: .. piice··· .. T .. ········· .. · .... ·· .... ······fi:s·s· ...... ··· .. ··1·.(54··· .. .. •••••• u ..................................... ,. ............................................................................ . 

Mfg. cost .. " .... i 18.89 iF40T12··········· ·Retaii·piice· .... ··············T······2sjj4· .. ··· ···· .. ·22·:35· .. ···· .... ·.· ....... · ........ e .... • 

(Electronic) oe'M'7·Mfg: .. price· .... T···· .. · ...... ·· ........ · · ...... 1·Efoi .... ·· ...... '1'5'.76 ...... · ............................................ ,. ........................................................................... . 

Mfg. cost ..1 14.24 

1r.1-=Fc:- 32o:::':To:::':8-.".IIS."...--\·Retaii·piice·· .. · ..e .. ··· .. ·······r .. ··"29·j7e~-""~'1'Sj)9"'"'' ...... w •• • •••••• _ •••••• •• 

(Electronic) Q~~f1..}~~f~.~·.~eH·~.~.·.·.~·.~·.L~~~·.·.·.~·.~~~·.·.· ......... ~ ...... -. · ..... ·.~j·~·;.~f ....... ~· ... ~·.· ....... tI?~ ..... ~~~~· 

. Mfg. cost 1 13.79 

2·F32TSiis· .. ···· ~~~_iLp~_~~=~~~~~~~_~·_~~~~L~ .. 2~~7 .. ··~ =I~~~=~' .~=~~~~~~~~~~~._~~~= (Electronic) OEM I Mfg. price 1 13.51 11.75 ............................................. } ........................................................................... . Mfg. cost 1 13.79 . ' 

3F32TS/is ...... · ·~~~J.Le~_~~~~~~~~~~~~~~~_~cJr~~_~~~~JQ_~~~~= =~=~~=== (Electronic) . OEM I Mfg. price i 15.13 13.81 ............................................. ~ ........................................................................... . Mfg. cost i 15.35 ~"F32TS/is .... · .. · Retaii'pric·e .......... · .... · .. T .... ·33·:§'f· .... · ...... ;22·:7'0 ............ · .................. .. ............................................ ,. ........................................................................... . (Electronic) OEM I Mfg. price 1 16.62 13.81 

Mfg. cost' .. . ~16.31 . 

(* These values will be used in GRIM) 

19 
PRELIMINARY DRAFT -. For discussion purposes only

In order to estimate manufacturing costs-labor, materials, depreciation/tooling, etc.-

from the average manufacturer prices obtained from CIRs and compare them to those of

the 1996 Draft Report, a typical ballast industry cost swas developed using

publicly available information from the Census of Manufacturers (C Ms) and from

transformer industry statistics (SIC# 3612) obtained from Robert Morris Associates

reports. The resulting cost structure is shown in Figure 3. This is a composite for

the ballast industry as a whole; no single firm may have these actual results. In using

data for developing the ballast industry cost structure it is assumed that ballast

industry (SIC# 36124) structure is quite similar to the transformer industry (SIC# 3612)

structure. Summary of information obtained from CMs and RMA is presented in

Attachment D: Ballast Ind Cost Structure.

Depreciation COst of

2.6% Materials

Overhead ! 53 '70/-

9.3%

Figure 3. Magnetic Ballast Industry Cost Structure as a Percentage of Revenues.

Manufacturing cost estimates-labor, material, depreciation/tooling, overhead-for

ballasts can be estimated from average manufacturer price and the above displayed

industry cost structure. These cost estimates for labor, material, depreciation/tooling and

overhead are used in GRIM to set up a "prototypical" manufacturer's income statement

to conduct a cash flow analysis. Manufacturing costs estimated using price and industry

structure are presented in Table 5. The Department proposes using these manufacturing

costs to set up GRIM for a "prototypical" manufacturer. The Department understands

that these are only approximate costs and may not be a fairly accurate representation of

the manufacturing costs of any particular manufacturer. Manufacturers will be able to

modify relevant parameters/costs to meet their own situation.

i^"s il:,t 1.dx ; 20

EE-RM-97-500 COMMENT 20K

PR.ELlMINARY DRAFT - F(jf discussion purposes on~y 

In order to estimate manufacturing costs-labor, materials, depreciation/tooling, etc.-

from the average manufacturer prices obtained from CIRs and compare them to those of 

the 1996 Draft Report, a typical ballast industry cost structure was developed using 

publicly available information from the Census of Manufacturers (CMs) and from 

transformer industry statistics (SIC# 3612) obtained from Robert Morris Associates 

(RMA) reports. The resulting cost structure is shown in Figure 3. This is a composite for 

the ballast industry as a whole; no single firm may have these actual results. In using 

RMA data for developing the ballast industry cost structure it is assumed that ballast 

industry (SIC# 36124) structure is quite similar to the transformer industry (SIC# 3612) 

structure. Summary of information obtained from CMs and RMA is presented in 

Attachment D: Ballast Industry Cost Structure. 

SG~A 

17.00,(, 

Depreciation 

2.6% 

. Overhead 

9.3% 

11.2% 

Profit before 

tax 

6.3% 

C6st of 

Materials 

53.7% 

Figure 3. Magnetic Ballast Industry Cost Structure as a Percentage of Revenues. 

Manufacturing cost estimates-labor, material, deprechltion/tooling, ovemead-for 

ballasts can be estimated from average manufacturer price and the above displayed 

industry cost structure. These cost estimates for labor, material, depreciation/tooling and 

overhead are used in GRIM to set up a "prototypical" manufacturer's income statement 

to conduct a cash flow analysis. Manufacturing costs estimated using price and industry 

structure are presented in Table 5. The Department proposes using these manufacturing 

costs to set up GRIM for a "prototypical" manufacturer. The Department understands 

that these are only approximate costs and may not be a fairly accurate representation of 

the manufacturing costs of any particular manufacturer. Manufacturers will be able to 

modify relevant parameters/costs to meet their own situation. 

20 
O

PRELIMINARY DRAFT - For discussion purposes only

Table 5. Ballast Manufacturing Cost Estimates Using Industry Cost Structure

li st Dr 1 ...... ........... . . Drn TS E)

pg 19 9 1. ib r Material Tooli : Overhead` Total: 199

1 F40T12 OEM / Mfg. price 6.33 7.26;

(Magnetic) . Mfg. cost

. D.81. 3.90

. ... .....

0.19: ....................;.

0.67

................... .... .....

5.57

...............

6.19

.....................

2F40T12 OEM / Mfg. price 6.21

.

5.80: :

. ......... ..... ... ..

....

(Magnetic)

............. ......... ... ............,..........

Mfg.

..

c

..

ost

............. .................... :. .... ........

0.65

....................

3-111

.... ......

015! 0.54 4.45

........

6.19

2F96T12 : OEM / Mfg . price 1 10.85 10.56

........ ....... ...... ....................

Magnetic)

:.............. .................... . . .

t

.. ..

.

. .

c

..

os

. .

Mfg

... ............

. .

....................

... .................

.....

1.18

...

5.67J

...............

0.28i

....

0.98 1 8 11:.9.97

............................................................ .....................

2F96T12HO IOEM / Mfg. price

. .. . . ..........

.... ..... .

17.86

.............

.

14.54:

...:................ ......

-

....

(Magnetic)

............................... .. .. . ,

*:Mfg. cost

,

1-63 7 81 0 38 1.35 11.16; 18.89

2F40T12

...............................

OEM / Mfg. price '. 16.07 15.76

.. ... ..

.....................

(Electronic) Mfg. cost 9:76 8.471 0.41 1.461 12101 14.24

1 F32T8

...

IOEM / Mfg. price

............

13.51

....................¢....

11.75

... ..

(Electronic)

...................................... } .........

Mfg. cost ; ... .. ..

.............

........

.... ......

..........................

.

1.31

... ...

6.31

..................

0.31

..

..

1.09

...

9.02:: ......---...¢.

......

13.79

............... ....................

2F32T8

... .................................... .

:OEM / Mfg. price 13.51 11.751

.......................

(Electronic)

...:..............................

Mfg. cost

......... ..............

1I 31 6.31 0.31 1. 09 9.02': 13.79

.......................

3F32T8

...:......................................:......

OEM / Mfg. price 15.13 13.811

. ............ ................... ...

(Electronic) Mfg. cost 1 55 7.42 D 36: 1.28 1061 15.35

4F32T8 :OEM/ Mfg. price 1 16.62 13.81

. .

............... ¢.....................

I(Electronic) Mf t g. cos 1 .55 7 42 0.36; . 1.28

............. .

90:81:

......... ............ 16.31

(* These values will be used in GRIM)

3.3.1. Engineering Analysis Past Practices

The economic impacts of new or amended efficiency standards depend largely on the

relationship between the incremental cost of a product and its increased energy

efficiency. The cost-efficiency relationships are determined for each product class based

on the engineering analysis. The analysis involves three primary steps. First, for each

product class, a baseline unit representative of the least energy efficient product is

selected. Second, estimates of energy efficiency improvements are made based on the

implementation of various design options. Finally, estimates are made of the added cost

at the manufacturing level of achieving different efficiency levels . These steps are

described in greater detail below.

Baseline Units: A baseline unit is the starting point for analyzing options for improving

energy efficiency . The engineering analysis uses information gathered from trade

associations, manufacturers, and consultants having expertise in specific product types to

select a baseline unit.

A baseline factory cost must be calculated so that the incremental costs are placed in

perspective.

Design Options: The engineering analysis identifies individual or combinations of design

options with a potential for improving energy efficiency.

A aIza al.dco 21

EE-RM-97-500 COMMENT 20K

o 

PRELIMINARY DR~FT ~ For discussion purposes only 

Table 5. Ballast Manufacturing Cost Estimates Using Industry Cost Structure 

(* These values will be used in GRIM) 

3.3.1. Engineering Analysis Past Practices 

The economic impacts of new or amended efficiency standards depend largely on the 

relationship between the incremental cost of a product and its increased energy 

efficiency. The cost-efficiency relationships are determined for each product class based 

on the engineering analysis. The analysis involves three primary steps. First, for each 

product class, a baseline unit representative of the least energy efficient product is 

selected. Second, estimates of energy efficiency improvements are made based on the 

implementation of various design options. Finally, estimates are made of the added cost 

at the manufacturing level of achieving different efficiency levels. These steps are 

described in greater detail below. 

Baseline Units: A baseline unit is the starting point for analyzing options for improving 

energy efficiency. The engineering analysis uses information gathered from trade 

associations, manufacturers, and consultants having expertise in specific product types to 

select a baseline unit. 

A baseline factory cost must be calculated so that the incremental costs are placed in 

perspective. 

Design Options: The engineering analysis identifies individual or combinations of design 

options with a potential for improving energy efficieQCY. 

21 
PRELIM INARY DRAFT - For discussion purposes only

Incremental factory costs are added to the baseline factory cost to give them anufacturing

costs of the design options presented in the engineering analysis.

Two major approaches have been used for forecasting the baseline factory costs and the

manufacturing costs of the design options since the original rulemaking process began in

1978, as described in Sections 3.3.2 and 3.3.3.

Given that all ballast "design options " considered in the ballast rule are products

already in the market and sold at considerable-volumes, the Department elected to

"reverse-calculate" ballast manufacturing costs. These costs were compared for

reasonableness to costs obtained from confidential Industry sources. In order to refine

these costs for the G cash flow analysis the Department proposes to have

individual manufacturers input their own costs to G The Department will then

aggregate the inputs in a manner that preserves confidentiality . In effect this becomes a

variation on the Survey Approach described in Section 3.3.3.

3.3.2e M odeling Approach (19784981)

The engineering analysis documents prepared in support of the original stand ards

rulemaking derived manufacturing costs by characterizing and modeling the production

line layouts of manufacturing facilities. The manufacturing facilities were described in

terms of the type of equipment used and the track layout required. Manufacturing costs

for large (>10% share) and medium (>1% and <10% share) manufacturers of nine

different appliances were modeled. Small manufacturers (sales below 1% of the market)

were not analyzed. It was determined that no general manufacturing approach could be

identified for these firms because of the wide variability in their approach to.

manufacturing.

In the late 1980s, the Department faced rulemaking decisions on 16 appliances with

insufficient budget to construct adequate manufacturing cost estimates based on this

approach. The difficulty in generalizing the manufacturing costs for the industry,

combined with the budgetary and time constraints, forced the Department to investigate

alternative approach, resulting in the adoption of the survey approach.

3.3.3. Suruaz y Approach (1 9874996)

Recently, the manufacturer cost data was obtained through a process that included

submission of formal requests to manufacturers, and review of the data that was

received. The cost data presented in the Tec hnical Support Documents for each product

class represented the average of the figures obtained from manufacturers. Three basic

cost elements were considered : manufacturing costs, conversion capital costs, and

conversion expense costs. Manufacturing costs included materials, purchased p arts, labor

lk*l 1A - iI&ast1,€oc 22

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PREUM!NARY DRAFT ~ For discussion purposes only 

Incremental factory costs are added to the baseline factory cost to give the manufacturing 

costs of the design options presented in the engineering analysis. 

Two major approaches have been used for forecasting the baseline factory costs and the 

manufacturing costs of the design options since the original rulemaking process began in 

1978, as described in Sections 3.3.2 and 3.3.3. 

Given that all ballast "design options" considered in the ballast rule are products 

already in the market and sold at considerable·volumes, the Department elected to 

"reverse-calculate" ballast manufacturing costs. These costs were compared for 

reasonableness to costs obtained from confidential Industry sources. In order to refine 

these costs for the GRIM cash flow analysis the Department proposes to have 

individual manufacturers input their own costs to GRTh1. The Department will then 

aggregate the inputs in a manner that preserves confidentiality. In effect this becomes a 

variation on the Survey Approach described in Section 3.3.3. 

3.3.2. Modeling Approac~ (1978::-1981) 

-

The engineering analysis documents prepared in support of the original standards 

rulemaking derived manufacturing costs by characterizing and modeling the production 

line layouts of manufacturing facilities. The manufacturing facilities were described in 

terms'ofthe type of equipment used and the track layout required. Manufacturing costs 

for large (>10010 share) and medium (>1% and <10% share) manufacturers of nine 

different appliances were modeled. Small manufacturers (sales below 1% of the market) 

were not analyzed. It was determined that no general manufacturing approach could be 

identified for these firms because of the wide variability in their approach to . 

manufacturing. .. 

In the late 1980s, the Department faced rulemaking decisions on 16 appliances with an 

insufficient budget to construct adequate manufacturing cost estimates based on this 

approach. The difficulty in generalizing the manufa,cturing costs for the industry, 

combined with the budgetary and time constraints, forced the Department to investigate 

an alternative approach, resulting in the adoption of the survey approach. 

3.3.3 •. Survey Approach (1987=1996) 

Recently, the manufacturer cost data was obtained through a process that included 

submission offormal requests to manufacturers, and review of the data that was 

received. The cost data presented in the Technical Support Documents for each product 

class represented the average of the figures obtained from manufacturers. Three basic 

cost elements were considered: manufacturing costs, conversion capital costs, and 

conversion expense costs. Manufacturing costs included materials, purchased parts, labor 

22 
PRELIMINARY DRAFT— For discussion purposes only

and shipping. Conversion capital costs included investments in production machinery,

plant and tooling. Conversion expense costs included R&D, product certification,

administrative overhead, etc.

Uncertainty in Manufacturing Costs: The industry average manufacturing cost data

generated from the survey was used to calculate the impact on a "prototypical" firm. The

MAM model received the incremental variable cost and the one-time engineering

expenses and capital costs incurred in meeting the new efficiency levels. The model did

not consider any uncertainty in the manufacturing costs.

In the July 1996 Process Rule, the Department committed to establishing a range to

bound the uncertainty in the cost estimates of design options. Furthermore, the estimated

uncertainties must be carried forward in subsequent analyses.

The uncertainty range relevant to the industry cash flow analysis is limited to

understanding how the industry average costs may in fact differ from the average of

manufacturer cost submittals. This is different from the range represented by subtracting

the costs of the highest-cost producer from those of the low-cost producer, i.e., the

variability. Variability in costs among manufacturers is not considered in this phase.

Variability among firms is considered in the Phase 3, Sub-Group Analysis.

One difficulty encountered in applying uncertainty analysis to the past data collection

methodology involves explaining large differences in manufacturer estimates of

incremental costs, Data submittals reported in a recent draft engineering analysis

exhibited large variations in the expected costs for implementing various energy saving

design options. This range of values reflected both uncertainty and variability. Variability

is explained by the fact that different manufacturers incur different costs to produce the

same component. This may be due to differences in production processes or differences

in their base case design. Uncertainty relates to the fact that each manufacturer has

incomplete or inexact information upon which to base its estimate of future costs.

Uncertainty tends to increase as efficiency levels increas e.

The Department is currently seeking input as to how it can best isolate uncertainty from

variability for consideration in the engineering analysis. The range of uncertainty will be

carried through into the life-cycle analysis that is used to evaluate consumer impacts. One

possible solution would entail returning to a cost modeling approach. Such an approach,

and a discussion of uncertainty and variability follows in Section 3.3.4.

ASH RAE used a life-cycle cost (LCC) economic approach in developing cost-effective

efficiency requirements for space-conditioning and water heating equipment. The

approach was derived from the American Society for Testing and Materials (ASTM)

methodology developed by the ASTM Committee E-6 on Performance of Building

.Construction (ASTM 1993). The LCC approach assumed a step-by-step analysis in

H • ai asti.doc 23

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PRELlM!NARY DRAFT- For discussion purposes only 

and shipping. Conversion capital costs included investments in production machinery, 

plant and tooling. Conversion expense costs included R&D, product certification, 

administrative overhead, etc. 

Uncertainty in Manufacturing Costs: The industry average manufacturing cost data 

generated from the survey was used to calculate the impact on a "prototypical" firm. The 

MAM model received the incremental variable cost and the one-time engineering 

expenses and capital costs incurred in meeting the new efficiency levels. The model did 

not consider any uncertainty in the manufacturing costs. 

In the July 1996 Process Rule, the Department committed to establishing a range to 

bound the uncertainty in the cost estimates of design options. Furthermore, the estimated 

uncertainties must be carried forward in subsequent analyses. 

The uncertainty range relevant to the industry cash flow analysis is limited to 

understanding how the industry average costs may in fact differ from the average of 

manufacturer cost submittals. This is different from the range represented by subtracting 

the costs of the highest-cost producer from those of the low-cost producer, i.e., the 

variability. Variability in costs among manufacturers is not considered in this phase. 

Variability among firms is considere~ in the Phase 3, Sub-Group Analysis. 

One difficulty encountered in applying uncertainty analysis to the past data collection 

methodology involves explaining large differences in manufacturer estimates of 

incremental costs, Data submittals reported in a recent draft engineering analysis 

exhibited large variations in the expected costs for implementing various energy saving 

design options. This range of values reflected both uncertainty and variability. Variability 

is explained by the fact that different manufacturers incur different costs to produce the 

same component. This may be due to differences in production processes or differences 

in their base case design. Uncertainty relates to the fact that each manufacturer has 

incomplete or inexact information upon which to base its estimate of future costs. 

Uncertainty tends to increase as efficiency levels increase. 

The Department is currently seeking input as to how it can best isolate uncertainty from 

variability for consideration in the engineering analysis. The range of uncertainty will be 

carried through into the life-cycle analysis that is used to evaluate consumer impacts. One 

possible solution would entail returning to a cost modeling approach. Such an approach, 

and a discussion of uncertainty and variability follows in Section 3.3.4. 

3.3.4. ' ASHRAE Approach 

ASHRAE used a life-cycle cost (Lee) economic approach in developing cost-effective 

efficiency requirements for space-conditioning and water heating equipment. The 

approach was derived from the American Society for Testing and Materials (ASTM) 

methodology developed by the ASTM Committee E-6 on Performance of Building 

. Construction (ASTM 1993). The LCC approach assumed a step-by-step analysis in 

23 
PRELIMINARY DRAFT - For discussion purposes only

which each incremental efficiency level must cost-effective relative to the previous

efficiency level. To make. the approach workable for the many measures ASH RAE

considered, the economic parameters were simplified to a scalar ratio (SR).

The SR combines the effects of equipment life, discount. rate, fuel escalation rates,

federal and state tax rates, down payment, and financing costs. For cooling, the SR is

the ratio of the economic scalar for cooling energy savings over the life of the

equipment divided by the economic scalar for the cost of the measure. The SR is

applied to the annual energy costs for each measure in a fashion similar to a series

present worth factor. Annual energy costs are determined using the estimated annual

energy use for a measure and d nationat average fuel prices of $.05/kW h for electricity

and $.56/therm for natural gas. Since the analysis considered incremental efficiencies,

maintenance and installation costs for each increment of efficiency were assumed to

zero.

Costs of the measures were determined from a combination of base costs and

incremental costs. Base costs were determined by design engineers estimating installed

prices for base equipment. Estimates were obtained from three to four suppliers, and

the cost used was the average of all the estimates. Costs included the contractor

markup to reflect t the actual cost to',the consumer. Because the higher efficiency

measures for some equipment were not always readily available on the market,

industry surveys were performed to determine industry-wide incremental costs for

producing units with increased efficiency.

The final step in the ASH RAE L.CC approach was to calculate the minimum LCC by

combining the unit cost and the discounted annual energy costs over the lifetime of the

equipment. The efficiency level prescribed in the proposed Standard 90.1-1989R for

each of the HVAC equipment categories is the one with the lowest LCC.

One of the most controversial parts of past analyses has been the assumption of how

costs and associated margins are passed-through from manufacturers to consumers.

What proportion of the standards-induced costs will be reflected in prices is important in

two ways: (1) a lower margin over incremental costs passed-through justifies a less

stringent standard from a manufacturer impact standpoint, and (2) hasthe opposite effect

of lowering cons er life-cycle costs that justifies a more stringent standard from a

consumer perspective. The GRIM model-in sharp contrast to the -uses price

and quantity information as externally supplied input. In the new analysis process, the

Dep ent is committed to developing price and quantity estimates by drawing on

multiple sources. Various assumptions about cost pass-through will be reflected in the

price forecast approaches described in this section.

l'ilt,doo 24

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

which each incremental efficiency level must be cost-effective relative to the previous 

efficiency level. To make. the approach workable for the many measures ASHRAE 

considered, the economic parameters were simplified to a scalar ratio (SR). 

The SR combines the effects of equipment life, discount rate, fuel escalation rates. 

federal and state tax rates. down payment. and financing costs. For cooling, the SR is 

the ratio of the economic scalar for cooling energy savings over the life of the 

equipment divided by the economic scalar for the cost of the measure. The SR is 

applied to the annual energy costs for each measure in a fashion similar to a series 

present worth factor. Annual energy costs are determined using the estimated annual 

energy use for a measure and national average fuel prices of $.08IkWh for electricity 

and $.56/therm for natural gas. Since the analysis considered incremental efficiencies. 

maintenance and installation costs for each increment of efficiency were assumed to be 

zero. 

Costs of the measures were determined from a combination of base costs and 

incremental costs. Base costs were determined by design engineers estimating installed 

. prices for base equipment. Estimates were obtained from three to four suppliers, and 

the cost used was the average of all the estimates. Costs included the contractor 

markup to reflect the actual cost to',the consumer. Because the higher efficiency 

measures for some equipment were not always readily available on the market, 

industry surveys were performed to determine industry-wide incremental costs for 

producing units with increased efficiency. 

The final step in the ASHRAE LCC. approach was to calculate the minimum LCC by 

combining the unit cost and the diScounted annual energy costs over the lifetime of the 

equipment. The efficiency level prescribed in the proposed Standard 9O.1-1989R for 

each of the HV AC equipment categories is the one with the lowest LCC. 

3.4. Price Forecasts 

One of the most controversial parts of past analyses has been the assumption of how 

costs and associated margins are passed-through from manufacturers to consumers. 

What proportion of the standards-induced costs win be reflected in prices is important in 

two ways: (1) a lower margin over incremental costs passed-through justifies a less 

stringent standard from a manufacturer impact standpoint, and (2) has the opposite effect 

of lowering consumer life-cycle costs that justifies a more stringent standard from a 

consumer perspective. The GRIM model-in sharp contrast to the MAM-uses price 

and quantity infonnation as an externally supplied input. In the new analysis process, the 

Department is committed to developing p~ce and quantity estimates by drawing on 

multiple sources. Various assumptions about cost pass-through will be reflected in the 

price forecast approaches described in this section. 

24 
PRELI M INARY DRAFT - For discussion purposes only

For the life-cycle-cost analysis that is performed at the pre-ANOPR stage, a preliminary

forecast of retail prices is needed both for a base case (without new standards) and for

various levels of new minimum efficiency standards. In past analyses, these retail prices

were estimated by the MAM which applied a markup on long-run marginal costs. In

some cases data taken from market surveys were used as an indicator of current and

future manufacturer markups.

The following sections review certain approaches that could be used to forecast future

prices. The emphasis is on forecasting industry -wide prices to be used in the consumer

life-cycle cost analysis and in the industry cash flow analysis. Pricing behavior of specific

subgroups or of particular firms is treated in Section 4.3. Sections 3.4.1, 3.4.2, and 3.4.3

describe three different approaches that have been used to some degree in the past.

3.4.1. Survey Data Approach

In theory, actual data about the relationships between sales volumes and prices (both at

the manufacturer and retail levels) would provide the most insight into likely results

following standards. Some survey efforts have been attempted in the past Survey data is

most appropriately used to establish prices for existing models that are already produced

in large quantities. In the recent ballast analysis, the end-user prices used in the life-cycle

cost analysis were obtained from a survey performed by the Lighting Research Institute.

Survey data has also been used to obtain the retail price of baseline efficiency

refrigerators. The source for this data was Elrick and Lavidge's ELCAP refrigerator

retail price database.

The survey data approach is not universally applicable for several reasons . First, products

at the efficiency levels required may not be present in the marketplace or may be

produced at lower volumes than required to achieve economies of scale in production.

Second, energy efficiency features may be bundled with other efficiency and nonefficiency related features, such that the price of an individual feature cannot be deduced.

Thirdly, the type, range and accuracy of data necessary for a reasonable statistical

analysis is rarely available Finally, mandating higher efficiency levels in baseline models

may commoditize efficiency features and result in lower markups applied at the wholesale

and retail levels.

The survey data approach is quite suitable for finding ballast prices as the higher energy

efficiency products-electronic ballasts in this case-are available and being sold in the

U.S. market place along with the baseline magnetic ballasts.

The process used by the Department to approximate manufacturer prices is described in

Section 3.3.

:.X.:,. ti iil

EE-RM-97-500 COMMENT 20K

PRELlM!NARY DRAFT - For discussion purposes only 

For the life-cycle-cost analysis that is performed at the pre-ANOPR stage, a preliminary 

forecast of retail prices is needed both for a base case (without new standards) and for 

various levels of new minimum efficiency standards. In past analyses, these retail prices 

were estimated by the MAM which applied a markup on long-run marginal costs. In 

some cases data taken from market surveys were used as an indicator of current and 

future manufacturer markups. 

The following sections review certain approaches that could be used to forecast future 

prices. The emphasis is on forecasting industry-wide prices to be used in the consumer 

life-cycle cost analysis and in the industry cash flow analysis. Pricing behavior of specific 

subgroups or of particular firms is treated in Section 4.3. Sections 3.4.1,3.4.2, and 3.4.3 

describe three different approaches that have been used to some degree in the past. 

3.4.1. Survey Data Approach 

In theory, actual data about the relationships between sales volumes and prices (both at 

the manufacturer and retail levels) would provide the most insight into likely results 

following standards. Some survey efforts have been attempted in the past Survey data is 

most appropriately used to establish prices for existing models that are already produced 

in large quantities. In the recent ballast analysis, the end-user prices used in the life-cycle 

cost analysis were obtained from a survey performed by the Lighting Research Institute. 

Survey data has also been used to obtain the retail price of baseline efficiency 

refrigerators. The source for this data was Elrick and Lavidge's ELCAP refrigerator 

retail price database. 

The survey data approach is not universally applicable for several reasons. First, products 

at the efficiency levels required may not be present in the marketplace or may be 

produced at lower volumes than required to achieve economies of scale in production. 

Second, energy efficiency features may be bundled with other efficiency and nonefficiency related features, such that the price of an individual feature cannot be deduced. 

Thirdly, the type, range and accuracy of data necessary for a r~onable statistical 

analysis is rarely available. Finally, mandating higher efficiency levels in baseline models 

may commoditize efficiency features and result in lower markups applied at the wholesale 

and retail levels. 

The survey data approach is quite suitable for finding ballast prices as the higher energy 

efficiency products-electronic ballasts in this case---are available and being sold in the 

U.S. market place along with the baseline magnetic ballasts. 

The process used by the Department to approximate manufacturer prices is described in 

Section 3.3. 

25 
PRELIMINARY DRAFT - For discussion purposes only

3.4.2. Markup Pricing Approach

In the markup approach to pricing, a per-unit non-variable cost and a profit markup are

added to the per-unit variable cost to obtain a wholesale price. A retail markup is then

applied to the wholesale price to obtain the retail price.

The variable costs are estimated in the engineering analysis. These costs include the cost

of direct material, direct labor, and variable burden. By definition , these costs vary

according to the production level.

The non-variable and profit markup cost rates can be established by analysis of specific

accounts and notes included in the consolidated financial filings of manufacturers to the

Securities and Exchange Commission. The rates derived by this methodology

approximate a manufacturer's average markup on all models produced.

Two drawbacks ofthis method of forecasting future costs are the implicit assumption of

cost pass-through and the failure to recognize the real-life situation that markups can be

very different for different products in the product line . Past DOE analyses have

attempted to address this second issue by implenienti a sliding-scale markup structure

described by a ratio ofthe largest markup to the smallest.

3..3. Economics Markup Approach

Following .is example of price estimation for a general product such as "widgets,"

using an economic approach to estimating price.

Define:

The base case price = Prices

e forecasted price in the post-efficiency standards case = PriceN

According to economic theory, the new price, PriceN , is a markup over all variable

costs. Variable costs include both the direct manufacturing ' costs that vary with output

and the part of capital costs that vary with the amount of capacity converted to produce

the new product.

Constant t prkup Case

The new price is estimated from the following equation:

PriceN., ric + AL4RKUP ® (Change ° All Variable Cost)

Or, in the context of the data often received:

PriceN,, = Pric AAVC

WHA-Baiiasti,doc 26

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PREUM!NARY DRAFT ~ For discussion purposes ordy 

3.4.2. Markup Pricing Approach 

In the markup approach to pricing, a per-unit non-variable cost and a profit markup are 

added to the per-unit variable cost to obtain a wholesale price. A retail markup is then 

applied to the wholesale price to obtain the retail price. 

The variable costs are estimated in the engineering analysis. These costs include the cost 

of direct material, direct labor, and variable burden. By definition, these costs vary 

according to the production level. 

The non-variable and profit markup cost rates can be established by analysis of specific 

accounts and notes included in the consolidated financial filings of manufacturers to the 

Securities and Exchange Commission. The rates derived by this methodology 

approximate a manufacturer's average markup on all models produced. 

Two drawbacks of this method of forecasting future costs are the implicit assumption of 

cost pass-through and the failure to recognize the real-life situation that markups can be 

very different for different products in the product line. Past DOE analyses have 

attempted to address this second issue by implementing a sliding-scale markup structure 

. described by a ratio of the largest markup to the smallest. 

3.4.3. Economic Markup Approach 

Following ,is an example of pri'ce estimation for a general product such as "widgets," 

using an economic approach to estimating price. 

Define: 

The base case price = Prices_ 

The forecasted price in the post-efficiency standards case = PriceNew . 

According to economic theory, the new price, PriceNew. is a markup over all variable 

costs. Variable costs include both the direct manufacturing costs that vary with output 

and the part of capital costs that vary with the amount of capacity converted to produce 

the new product. . 

A. Constant Markup Case 

The new price is estimated from the following equation: 

PriceNew = Prices_ +MARKl1P • (Change in All Variable Cost) 

Or, in the context of the data often received: 

26 
PRELIMINARY DRAFT - For discussion purposes only

Where:

The

Markup = eB e IAVCs VCs,.,

where AVCB = All variable costs in the base case

® All variable costs include the variable part of fixed costs.

® AAVC is the change in All Variable Costs due to the efficiency level.

Variable Markup Case

A constant markup method tends to overestimate markup in cases where demand

depends on both initial purchase price and operating expense. In such cases, a variable

markup approach is more appropriate.

To account for the effect of both price and operating expense on quantity demanded, the

demand function has the general form of

Quantity = a ®[ Dice + 1/(discount rate) ® (annual operating cost)

where a and b are parameters.

Typically, the DISCOUNT RATE for a consumer product such as an appliance tends to

be fairly high, so that quantity depends more on purchase price than operating expense.

The introduction of an efficiency level decreases operating expense and tends to increase

purchase price. As price becomes a larger part of total expense, consumers become more

sensitive to price. This means that demand elasticity increases and markup decreases.

Since this negative impact on firms applies for all variable costs (not just new ones), and

new efficiency levels tend to increase variable costs, this effect should probably be taken

into account. Ignoring this effect by using the constant markup approach. will likely

overestimate markup.

3.4.4. Other Approaches

DOE is open to other approaches which may address the price/cost/markup question and

will review this issue on a case-by-case basis for each proposed rulemaking. In particular,

options which do not require unusual modeling or data gathering but which help

determine whether any of the rebuttable presumptions (Section 1.2) exist will be

requested.

x: 2h.fi.: 27

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PRELIMINARY DRAFT ~ For discussion purposes only 

Where: 

II The MARKUP is: 

Markup = PriceBase / AVCBase 

where A VCBase = All variable costs in the base case 

II All variable costs include the variable part of fixed costs. 

II M VC is the change in All Variable Costs due to the efficiency level. 

B. Variable Markup Case 

A constant markup method tends to overestimate markup in cases where demand 

depends on both initial purchase price and operating expense. In such cases, a variable 

markup approach is more appropriate. 

To account for the effect of both price and operating expense on quantity demanded, the 

demand function has the general form of: 

Quantity = a -/ Price + l/(discount rtite) - (annual operating cost)! 

where a and b are parameters. 

Typically, the DISCOUNT RATE for a consumer product such as an appliance tends to 

be fairly high, so that quantity depends more on purchase price than operating expense. 

The introduction of an efficiency level decreases operating expense and tends to increase 

purchase price. As price becomes a larger part of total expense, consumers become more 

sensitive to price. This means that demand elasticity increases and markup decreases. 

Since this negative impact on firms applies for all variable costs (not just new ones), and 

new efficiency levels tend to increase variable costs, this effect should probably be taken 

into account. Ignoring this effect by using the constant markup approach. will likely 

overestimate markup. 

3.4.4.· Other Approaches 

DOE is open to other approaches which may address the price/cost/markup question and 

will review this issue on a case-by-case basis for each proposed rulemaking. In particular, 

options which do not require unusual modeling or data gathering but which help 

determine whether any of the rebuttable presumptions (Section 1.2) exist will be 

requested. 

27 
PRELIMINARY DRAFT - For discussion purposes only

3.5. Shipment Forecasts

The relationship between the price of appliances and their sales volume can be developed

in several ways. Alternative appliance sales projections can be produced by soliciting the

advice of market experts (Section 3".5.1) or by using the same forecasting models used to

project future energy consumption (Section 3.5.2). Scenario Analysis (Section 3.5.3)

incorporating the previously generated forecasts could be used to bound the range of

possible price values.

'HA-Ballastl,do

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PREUM!NARY DRAFT ~ For discussion purposes only 

3.5. Shipment Forecasts 

The relationship between the price of appliances and their sales volume can be developed 

in several ways. Alternative appliance sales projections can be produced by soliciting the 

advice of market experts (Section 3'.5.1) or by using the same forecasting models used to 

project future energy consumption (Section 3.5.2). Scenario Analysis (Section 3.5.3) 

incorporating the previously generated forecasts could be used to bound the range of 

possible price values. 

28 
PRELI M INARY DRAFT - For discussion purposes only

The July 1997 "Draft Report on the Potential Impact of Possible Energy Efficiency

Levels for Fluorescent Lamp Ballasts" forecasted ballast shipments using EPRI's

COMN1END 4.0 commercial sector end-use forecasting model. The report included

three shipment scenarios, each consisting of a base case forecast absent new ballast

efficiency standards, and additional shipment forecasts for each of the standards

efficiency levels under consideration. These scenarios are summarized here:

Constant Conversion Scenario: for the constant conversion base case the magnetic

share of the total ballast sales drops from 50% in 1995 to about 30% by 2010. By

2030, just over 15% of all ballasts sold are magnetic.

No Conversion Scenario: In this scenario the shares of magnetic ballasts remain at

more than 50% over most of the forecasting years.

High Conversion Scenario: for the high conversion scenario the share of magnetic

ballasts reduces drastically : by 2001 ; less than 25% of 4-foot ballasts sold are

magnetic, and by 2010 that rate drops further to 9%.

The 1997 Draft Analysis for the Constant Conversion Scenario reported projections

for annual sales of ballasts for the base case and for four efficiency levels. For

efficiency levels 3 and 4 (Electronic) the total shipments of ballasts (in units) drops

due to instances where one 3- or 4-lamp electronic ballast replaces two magnetic

ballasts.

The Department has since July 1997 developed a spreadsheet model (the National

Energy Savings Spreadsheet - NESS) that is simpler than CONRvIEND yet captures

many of the same important variables. The spreadsheet can readily accept different

baseline scenarios and calculate several parameters including Energy Savings,

Consumer Investment, Consumer Cost Saving and tract ballast shipments. The

spreadsheet is designed to consider shipments of 2F40, 1F40, 2F96IES and 2F96/ES

magnetic, cathode cut-out and electronic ballasts.

In preparing the draft industry cash flow analysis , the Department intends to use the

same shipment scenarios in GRIM and NESS. As with all other GRIM parameters,

individual manufacturers will be able to modify these shipment forecasts to reflect

their particular situation.

3.5.1. Expert Forecasts

It is the intention of the Department to develop estimates of future shipments-through

discussions with manufacturers, retailers and other market experts. Trends and historical

information will serve as a starting point. Factors which are relevant to characterizing the

demand for the appliance include:

MIA

yti

^'`"v -K& €€a t1 ,doc 29

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PRELlM!NARY DRAFT ~ For discussion purposes only 

The July 1997 "Draft Report on the Potential Impact of Possible Energy Efficiency 

Levels for Fluorescent Lamp Ballasts" forecasted ballast shipments using EPRI's 

COMMEND 4.0 commercial sector end-use forecasting model. The report included 

three shipment scenarios, each consisting of a base case forecast absent new ballast 

efficiency standards, and additional shipment forecasts for each of the standards 

efficiency levels under consideration. These scenarios are summarized here: 

ConStant Conversion Scenario: for the constant conversion base case the magnetic 

share of the total ballast sales drops from 50% in 1995 to about 30% by 2010. By 

2030, just over 15% of all ballasts sold are magnetic. 

No Conversion Scenario: In this scenario the shares of magnetic ballasts remain at 

more than 50% over most of the forecasting years. 

High Conversion Scenario: for the high conversion scenario the share of magnetic 

ballasts reduces dntstically: by 2001; less than 25% of 4-foot ballasts sold are 

magnetic, and by 2010 that rate drops further to 9010. 

The 1997 Draft Analysis for the Constant Conversion Scenario reported projections 

for annual sales of ballasts for the base case and for four efficiency levels. For 

efficiency levels 3 and 4 (Electronic) the total shipments of ballasts (in units) drops 

due to instances where one 3- or 4-1amp electronic ballast replaces two magnetic 

ballasts. 

The Department has since July 1997 developed a spreadsheet model (the National 

Energy Savings Spreadsheet - NESS) that is simpler than COMMEND yet captures 

many of the same important variables. The spreadsheet can readily accept different 

baseline scenarios and calculate several parameters including Energy Savings, 

Consumer Investment, Consumer Cost Saving and tract ballast shipments. The 

spreadsheet is designed to consider shipments of2F40, IF40, 2F961ES and 2F961ES 

magnetic, cathode cut-out and electronic ballasts. 

In preparing the draft industry cash flow analysis, the Departmentintends to use the 

same shipment scenarios in GRIM and NESS. As with all other GRIM parameters, 

individual manufacturers will be able to modify these shipment forecasts to reflect 

their particular situation. 

3.5.1. Expert Forecasts 

It is the intention of the Department to develop estimates of future shipments· through 

discussions with manufacturers, retailers and other market experts. Trends and historical 

information will serve as a starting point. Factors which are relevant to characterizing the 

demand for the appliance include: 

29 
PRELIMINARY DRAFT - For discussion purposes only

® The size of the existing market and recognizable trends in growth

® Demographic shifts impacting sales

- trends in regional sales patterns

- saturation rates

- changes in the distribution chain

® Institutional factors such as government regulations and codes.

® Identifiable relationships (elasticities) between shipments and prices

® Identifiable relationships (elasticities) between shipments and operating costs

® Correlation between shipments and other variables, including housing construction,

retrofit markets, and energy prices

® Changes in consumer purchases, 'bits; and tastes

® Existing and future characteristics of substitute products

® Level of import competition and export sales

® Potential fuel switching

3.5.2. Models for Predicting Future Shipmentr3 and National Impacts

A. Overview

This section contains information about several alternative models that have been

developed to forecast the impacts of policy decisions on energy use. The objective of this

section is to provide some of the basic information about these tools and identify some of

the advantages and disadvantages involved in using them to forecast future appliance

shipments for input into the GRIM.

Section B describes the characteristics that will be discussed for each of the alternative

models. The alternatives include:

® For residential appliances -- REK PS, NEMS, and a spreadsheet

For the commercial sector (e.g. fluorescent ballasts) -- C® , NEMS, and a

spreadsheet

Shipment and national impacts have previously been estimated using an end-use model,

described in Section C. Section D describes an alternative detailed end use model

of the residential sector (REEPS) created under the sponsorship of the Electric Power

Research Institute (EP RI). Section E describes a concept for the development of a new,

simpler spreadsheet model.

Defining the Model Characteristics

No computer model will successfully forecast the future as it will actually happen, but

computer models o provide a method for testing hypotheses about whether a standard will

increase or decrease shipments, given what is known or expected about the driving

forces. Furthermore, a model can provide a quantitative estimate of whether the effect on

shipments will be large or small.

M l a s , 30

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PRELIMINARY DRAFT ~ For discussion purposes onfy 

II The size of the existing market and recognizable trends in growth 

II Demographic shifts impacting sales 

- trends in regional sales patterns 

- saturation rates 

- changes in the distribution chain 

II Institutional factors such as government regulations and codes. 

II Identifiable relationships (elasticities) between shipments and prices 

II Identifiable relationships (elasticities) between shipments and operating costs 

II Correlation between shipments and other variables, including housing construction, 

retrofit markets, and energy prices 

II Changes in consumer purchases, habits, and tastes 

II Existing and future characteristics of substitute products 

II Level of import competition and export sales 

II Potential fuel switching 

3.5.2. Models for Predicting Future Shipments and National Impacts 

A. Overview 

This section contains information about several alternative models that have been 

developed to forecast the impacts of policy decisions on energy use. The objective of this 

section is to provide some of the basic information about these tools and identify some of 

the advantages and disadvantages involved in using them to forecast future appliance 

shipments for input into the GRIM. . 

Section B describes the characteristics that will be discussed for each of the alternative 

models. The alternatives include: 

II For residential appliances - REM, REEPS, NEMS, and a spreadsheet 

• For the commercial sector (e.g. fluorescent ballasts) - COMMEND, NEMS, and a 

spreadsheet 

Shipment and national impacts have previously been estimated using an end-use model, 

REM, described in Section C. Section D describes an alternative detailed end-use model 

of the residential s~ctor (REEPS) created under the sponsorship of the Electric Power 

Research Institute (EPRI). Section E describes a concept for the development of a new, 

simpler spreadsheet model . 

. B. . Defining the Model Characteristics 

No computer model will successfully forecast the future as it will actually happen, but 

computer models provide a method for testing hypotheses about whether a standard will 

increase or decrease shipments, given what is known or expected about the driving 

forces. Furthermore, a model can provide a quantitative estimate of whether the effect on 

shipments win be large or small. 

M lA· BaHasti ,doc 30 
P L INARY DRAFT - For discussion purposes only

Equipment shipments depend upon a complex set of factors. The rationale for using

computer models is that models provide a consistent framework for organizing the many

important elements that influence shipments. Shipments are a function of demographics

(e.g., numbers and types of households, appliance ownership); engineering (e.g., energyusing characteristics of appliances); and economics (e.g., consumer decisions regarding

purchasing and using appliances). Accounting for all the important elements is not

simple, and computer models provide a mechanism for organizing many elements into a

logical and consistent framework.

There are many ways to characterize models. This discussion focuses on the following:

® Capability includes the completeness of the models with regard to the key elements

required and the approach to handling uncertainty.

® Track record includes the history of prior applications of the model and any

indication of its accuracy.

® Operating characteristics include what computer system and software is required,

training or other costs of putting the model in place , and likely effort and cost

required to maintain the model.

® User friendliness includes the size of the user community , the state of

documentation, how accessible the model is to the stakeholder audience, and the

presentation of results.

C. LBNL-IREM

The Lawrence Berkeley National Laboratory -Residential Energy Model (LBNL-REM) is

in the public domain and is available free upon request. This model has been used to

analyze appliance standards since 1979, and is the benchmark by which other models are

measured. The model structure was well designed, and the model remains fully capable

of handling all of the relevant analysis elements. With its long history, this model has a

successful track record, but it has also received criticism. The programming language is

old, and the model lacks user-friendly features. Some of the inputs need updating. Fully

replacing this model from the ground up with something of comparable capability would

be a major undertaking.

Capability. REM contains the framework for considering all the important issues that

have been raised, including demographic, engineering, and economic details at the

national level:

1. The model can segment the consumer population currently into three house

types: single-family, multi-family, and mobile homes . (Other divisions of the

. r -Raftt .dcti 31

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PRELIMINARY DRAFT ~ For d~scussion purposes only 

Equipment shipments depend upon a complex set of factors. The rationale for using 

computer models is that models provide a consistent framework for organizing the many 

important elements that influence shipments. Shipments are a function of demographics 

(e.g., numbers and types of households, appliance ownership); engineering (e.g., energyusing characteristics of appliances); and economics (e.g., consumer decisions regarding 

purchasing and using appliances). Accounting for all the important elements is not 

simple, and computer models provide a mechanism for organizing many elements into a 

logical and consistent framework. 

There are many ways to characterize models. This discussion focuses on the following: 

• Capability includes the completeness of the models with regard to the key elements 

required and the approach to handling uncertainty. 

• Track record includes the history of prior applications of the model and any 

indication of its accuracy. 

• Operating characteristics include what computer system and software is required, 

training or other costs of putting the model in place, and likely effort and cost 

required to maintain the model. 

• User friendliness includes the size of the user community, the state of 

documentation, how accessible the model is to the stakeholder audience, and the 

presentation of results. 

c. LBNL-REM 

The Lawrence Berkeley National Laboratory-Residential Energy Model (LBNL-REM) is 

in the public domain and is available free upon request. This model has been used to 

analyze appliance standards since 1979, and is the benchmark by which other models are 

measured. The model structure was well designed, and the model remains fully capable 

of handling all of the relevant analysis elements. With its long history, this model has a 

successful track record, but it has also received criticism. The programming language is . 

old, and the model lacks user-friendly features. Some of the inputs need updating. Fully 

replacing this model from the ground up with something of comparable capability would 

be a major undertaking. 

Capability. REM contains the framework for considering all the important issues that 

have been raised, including demographic, engineering, and economic details at the 

national level: 

1. The model can segment the consumer population currently into three house 

types: single-family, multi-family, and mobile homes. (Other divisions of the 

31 
PRELIMINARY DRAFT - For discussion purposes only

population are possible, given sicient input data for each population segment

from surveys).

2. Detailed information from the engineering and life-cycle analyses is used directly;

specifically, retail price and energy factor by design option for each class of

product.

3. The economic components of the model include accounting for consumer

decisions to purchase appliances (fuel choice and efficiency) and to operate them

as a function of price, operating expense, and household income. It is important

to note, however, that the elasticities used in the model are old and may need

updating.

4. Uncertainty is handled by sensitivity analysis on input variables or elasticities.

5. The output of the model includes, for each year:

® Projected annual shipments

® Per 't.energy consumption and price (for new units sold that year)

® Energy consumption of all units operating

® Average energy expenditures per household

® National aggregate energy consumption by fuel type

® National expenditures for appliance and energy purchases.

6. Net present values over a time period are calculated as a post-process from the

model outputs.

Track record Development of REM began with the Oak Ridge National Laboratory

(ORNL) Engineering-Economic Model of Residential Energy Use, ca. 1975. The model

has been in continuous use for analysis of U.S. appliance standards since 1979.

Operating characteristics. REM is written in FORTRAN, contains roughly 20,000 lines

of code, and runs on a minicomputer (Sun Workstation). (We believe the model can be

run on a PC, based upon successful runs of an earlier version ca. 1986, but have not

made the attempt recently.) Where the model is already in use for the Department's

analysis of appliance standards, no cost will be incurred to put the model in place. To

implement the model at a new location would require the requisite hardware, a

FORTRAN compiler, and significant training of staff, since technical and user

documentation have not been fully developed.

?:xllf f c 32

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population are possible, given sufficient input data for each population segment 

from surveys). 

2. Detailed infonnation from the engineering and life-cycle analyses is used directly; 

specifically, retail price and energy factor by design option for each class of 

product. 

3. The economic components of the model include accounting for consumer 

decisions to purchase appliances (fuel choice and efficiency) and to operate them 

as a function of pnce, operating expense, and household income. It is important 

to note, however, that the elasticities used in the model are old and may need 

updating. 

4. Uncertainty is handled by sensitivity analysis on input variables or elasticities. 

5. The output of the model includes, for each year: 

• Projected annual shipments 

• Per unit energy consumption and price (for new units sold that year) 

• Energy consumption of all units operating 

• Average energy expenditures per household 

• National aggregate energy consumption by fuel type 

• National expenditures for appliance and energy purchases. 

6. Net present values over a time period are calculated as a post-process from the . 

model outputs . 

. Track record Development of REM began with the Oak Ridge National Laboratory 

(ORNL) Engineering-Economic Model of Residential Energy Use, ca. 1975. The model 

has been in continuous use for analysis of U.S. appliance standards since 1979. 

Operating characteristics. REM is written in FORTRAN, contains roughly 20,000 lines 

of code, and runs on a minicomputer (Sun Workstation). (We believe the model can be 

run on a PC, based upon successful runs of an earlier version ca. 1986; but have not 

made the attempt recently.) Where the model is already in use for the Department's 

analysis of appliance standards, .no cost win be incurred to put the model in place. To 

implement the model at a new location would require the requisite hardware, a 

FORTRAN compiler, and significant training of staff, since technical and user 

documentation have not been fully developed. 

32 
PRELIMINARY DRAFT - For discus n purposes only

• Energy prices

• Household income

• Equipment prices

• Elasticities

Equipment and Building Stocks

f(inventory, starts, saturation)

• Number of households

• Housing starts

• Appliance saturation

Appliance Usage Behavior

f (energy price, energy use)

• Product shipments

• Energy consumption

• Fuel expenditure

Equipment expenditure

Figure 4. Schematic Diagram of the LSNL-REM, O utlining Major Input Requirements,

Algorithms and Outputs

User,friendliness. At present, REM is in use at one installation. There is some

documentation, but a new user would need to invest months of time to understand the

model. The model has no user-friendly interfaces either for changing inputs or viewing

results. All inputs are in data files that must be edited to make changes. All output is

tabular and can be imported into spreadsheets or other post -processors for conversion

into graphical output.

REEPS

The REEPS model has been under development since the mid-1980s by the Electric

Power Research Institute (EPRI) for use by utility companies. A license to use the model

can be purchased from EPRI. The model structure considers all fuels. and contains all the

elements needed for a national analysis of appliance standards; it is entirely comparable to

REM in'this regard. Some attention would be needed to develop and update a national

set of inputs and the model lacks a track record in national policy analyses. The

programming language is more modem than LBNL-REM (C++ rather than FORTRAN),

and REEPS runs on a PC. The model, while complex, has user-friendly features, such as

windows-type input tables and some graphical presentation of outputs.

Capability. REEPS contains the framework for considering all the important issues that

have been raised, including demographic, engineering, and economic details at the

Equipment Efficiency

Choice

L (energy price, energy use)

^ A.: ll r c 33

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Inputs 

• Existing stock 

• Retirement functions 

• Energy use 

Equipment Efficiency 

Choice 

Uenergy price, energy use) 

• Household income 

• Equipment prices 

• Elasticities 

Fuel Choice 

Uequipment price) 

• Housing starts 

• Appliance saturation 

Building Efficiency Choice 

Uenergy price) 

Equipment and Building Stocks 

Uirwentory, starts, saturation) 

Appliance Usage Behavior 

Uenergy price, energy use) 

Outputs • Product shipments 

• Energy consumption 

• Fuel expenditure 

• Equipment expenditure 

Figure 4. Schematic Diagram of the LBNL-REM, Outlining Major Input Requirements, 

Algorithms and Outputs 

User friendliness. At present, REM is in use at one installation. There is some 

documentation, but a new user would need to invest months of time to understand the 

model. The model has no user-friendly interfaces either for changing inputs or viewing 

results. All inputs are in data files that must be edited to make changes. All output is 

tabular and can be imported into spreadsheets or other post-processors for conversion 

into graphical output. 

D. REEPS 

The REEPS model has been under development since the mid-1980s by the Electric 

Power Research Institute (EPRI) for use by utility companies. A license to use the model 

can be purchased from EPRI. The model structure considers all fuels· and contains all the . 

elements needed for a national analysis of appliance standards; it is entirely comparable to 

REM in this regard. Some attention would be needed to develop and update a national 

set of inputs and the model lacks a track record in national policy analyses. The 

progranuning language is more modem than LBNL-REM (C++ rather than FORTRAN), 

and REEPS runs on a PC. The model, while complex, has user-friendly features, such as 

windows-type input tables and some graphical presentation of outputs. 

Capability. REEPS contains the framework for considering all the important issues that 

have been raised, including demographic, engineering, and economic details at the 

33 
PRELIMINARY DRAFT - For discussion purposes only

national level . The analysis framework and them el capabilities of the REEPS model

are very similar to those of the LB - M outlined in the previous s

However, the model is generally used by individual utility companies, so data

development Would be required to generate a default national data set.

Track record *Development of REEPS began in the 1980s. The current model is

REEPS-2, after a major redesign a few years ago. The model has been used for longterm end-use forecasting by many major utility companies.

Operating characteristics. REEPS is written in C++ and runs on an IBM-compatible

personal computer. A license must be purchased from the Electric Power Research

Institute (Palo Alto, California). To implement the model at a new location would require

the requisite hardware, a C++ compiler, and significant training of staff. provides

documentation and user support through a contractor.

User , Erie iness. Good documentation and training courses are available, but a new

user would need to invest months of time to understand the model. The model has userfriendly interfaces either for changing inputs or viewing results. Output is tabular and

graphical, and can be exported into spreadsheets for presentation.

E. Spreadsheet

A spreadsheet would represent a new approach, with the advantage of simplicity, but the

disadvantage of failing to fully integrate the interactions among the many variables to

consider. The resources needed to develop the spreadsheet are expected to be moderate.

Once- developed, the spreadsheet would be readily available and easily presentable to

stakeholders. Since this is only an idea for a new alternative, there is no track record and

no current user community. The spreadsheet design is open for discussion and could

benefit from ongoing stakeholder input.

E. C

G.

ND

3.5.3. Scenario QMalysls

Integrating the shipment forecasts previously developed, several different shipment

scenarios will be considered, and shipment forecasts could be made for each of these

scenarios. Different scenarios that may be considered include:

Constant Shipment Case: Here, it is assumed that consumers' appliance purchase

decisions are insensitive to increases in appliance price.

"' t1.d c 34

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national level. The analysis framework and the model capabilities of the REEPS model 

are very similar to those of the LBNL-REM outlined in the previous section. 

However, the model is generally used by individual utility companies, so data 

development would be required to generate a default national data set. 

Track record -Development ofREEPS began in the 1980s. The current model is 

REEPS-2, after a major redesign a few years ago. The model has been used for longterm end-use forecasting by many major utility companies. 

Operating characteristics. REEFS is written in C++ and runs on an ffiM-compatible 

personal computer. A license must be purchased from the Electric Power Research 

Institute (palo Alto, California). To implement the model at a new location would require 

the requisite hardware, a C++ compiler, and significant training of staff. £PRJ provides 

documentation and user support through a contractor. -

User friendliness. Good documentation and training courses are available, but a new 

user would need to invest months of time to understand the model. The model has userfriendly interfaces either for changing inputs or viewing results. Output is tabular and 

graphical, and can be exported into ~preadsheets for presentation. 

E. Spreadsheet 

A spreadsheet would represent a new approach, with the advantage of simplicity, but the 

disadvantage of failing to fully integrate the interactions among the many variables to 

consider. The resources needed to develop the spreadsheet are expected to be moderate. 

Once-developed, the spreadsheet would be readily available and easily presentable to 

stakeholders. Since this is only an idea for a new alternative, there is no track record and 

no current user community. The spreadsheet design is open for discussion and could 

benefit from ongoing stakeholder input. 

F. COMMEND 

G. NEMS 

3.S.3. Scenario Analysis 

Integrating the shipment forecasts previously developed, several different shipment 

scenarios will be considered, and shipment forecasts could be made for each of these 

scenarios. Different scenarios that may be considered include: 

Constant Shipment Case: Here, it is assumed that consumers' appliance purchase 

decisions are insensitive to increases in appliance price. -
PRELIM INARY DRAFT - For discussion purposes only

Decreasing Shipment Case: Here, it is assumed that consumers' appliance purchase

decisions are very sensitive to increases in appliance price . A simple elasticity value

would be used.

Expert Shipment Case: This would involve using shipment forecasts made by industry

experts.

Additional sensitivity cases may be analyzed, based on stakeholder inputs, and additional

data received about consumer purchase decisions.

3.6. Financial Information

To study the financial effects of regulation on manufacturers, DOE will simulate the

financial behavior of manufacturing operations both with and without regulation. This

will allow the DOE to determine incremental changes in financial performance. The

impacts of efficiency standards would be expected to depend on the type and financial

strength of the firms prior to regulation. Accordingly, data must be assembled for each

type of firm to represent their financial position prior to regulation.

A base case financial profile of manufacturers needs to be prepared. This can be

accomplished by studying balance sheets, income statements, and key performance ratios

for firms known to manufacture the same types of products.

In conducting the cash-flow analysis, the following financial information needs to be

input to the G :

® Tax rate (%): This is used to calculate the taxes on profit before tax.

• Interest rate (%): This is used as the discount rate for calculating the present value of

future cash flows.

® Working capital as a percentage of sales: This is used to calculate the change in

working capital resulting from increased revenues.

® Selling. General & Administration ($): This includes all non-factory costs. It is

computed by adding R&D, Product Conversion, and SG&A costs, which are

computed as a percentage of before regulation revenues.

® R&D (as a percentage of revenues): This is used to compute the R&D costs,

unrelated to regulation.

® Depreciation (as a percentage of revenues before regulation): This is a non-cash cost

and is used as a part of the cash flow calculation.

• Variable Overhead (as a percentage of Total Overhead): This helps to separate the

fixed and the variable parts of the overhead costs.

35

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Decreasing Shipment Case: Here, it is assumed that consumers' appliance purchase 

decisions are very sensitive to increases in appliance price. A simple elasticity value 

would be used. 

Expert'Shipment Case: This would involve using shipment forecasts made by industry 

experts. 

Additional sensitivity cases may be analyzed, based on stakeholder inputs, and additional 

data received about consumer purchase decisions. 

3.6. Financial Information 

To study the financial effects of regulation on manufacturers, DOE will simulate the 

financial behavior of manufacturing operations both with and without regulation. This 

. will allow the DOE to determine incremental changes in financial performance. The 

impacts of efficiency standards would be expected to depend on the type and financial 

strength of the firms prior to regulation. Accordingly, data must be assembled for each 

type offirm to represent their financial position prior to regulation. 

A base case financial profile of manufacturers needs to be prepared. This can be 

accomplished by studying balance sheets, income statements, and key performance ratios 

for firms known to manufacture the same types of products. 

In conducting the cash-flow analysis, the following financial information needs to be 

input to the GRIM: 

e Tax rate (%): This is used to calculate the taxes on profit before tax. 

e Interest rate (%): This is used as the discount rate for calculating the present value of 

future cash flows. 

e Working capital as a percentage of sales: This is used to calculate the change in 

working capital resulting from increased revenues. 

e Selling. General & Administration ($): This includes all non-factory costs. It is 

computed by adding R&D, Product Conversion, and SG&A costs, which are 

computed as a percentage of before regulation revenues. 

e R&D (as a percentage of revenues): This is used to compute the R&D costs, 

unrelated to regulation. 

e Depreciation (as a percentage of revenues before regulation): This is a non-cash cost 

and is used as a part of the cash flow calculation. . 

It Variable Overhead (as a percentage of Total Overhead): This helps to separate the 

fixed and the variable parts of the overhead costs. 

35 
PRELIMINARY DRAFT - For discussion purposes only

To obtain estimates for these inputs DOE has analyzed information available from

publicly available sources off -specific financial information for major fluorescent

lamp ballast manufacturers-SEC- Reports, Moody's Company Data Reports,

Standard Poor's (S&P) Stock Reports, and Robert Morris Associates. A detailed

definition of financial inputs and their values for a "prototypical" ballast manufacturer is

contained in Attachment C of this document, entitled "Financial Inputs to GRIK4 for the

Ballast Rulemaking Analysis."

Table 6 illustrates a representative financial structure that the Department proposes for

conducting the cash-flow analysis of a "prototypical" fluorescent lamp ballast

manufacturer. Individual manufacturers will be able to modify these financial inputs to

reflect their particular situation.

Table S. Financial Inputs for GRIM

Scenario Description

Base Year

Announcement Year

Standard Year

Tax Rate

Discount Rate for NPV

Inflation Rate

Working Capital

Standard SG&A

Research and Development

Ordinary Depreciation

Ordinary Capital Expenditures

3.7. Cash Flow Analysis

Fltic ess L p: Ball

99 13e Hangyeas for analptical purposes

1999 Year in whichc the regu ° n announcement is made

X002 Year in which the regulation takes effect

372%

'1D

0.0% r annum

164%m ofRevenue

15.9%

...........................

29%®

3 4%

of Revenue

of Revenue

ofRevenue

of Revenue

The three elements of profitability -- price, costs and volume -® are strategically

interdependent. Several analytical techniques can be used to highlight the tradeoffs

among these elements.

A• <aiiast1 d c 36

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To obtain estimates for these inputs DOE has analyzed information available from 

publicly available sources of firm-specific financial information for major fluorescent 

lamp ballast manufacturers-SEC-l OK Reports, Moody's Company Data Reports, 

Standard & Poor's (S&P) Stock Reports, and Robert Morris Associates. A detailed 

definition of financial inputs and their values for a "prototypical" ballast manufacturer is 

contained in Attachment C of this document, entitled "Financial Inputs to GRIM for the 

Ballast Rulemaking Analysis." 

. Table 6 illustrates a ~epresentative financial structure that the Department proposes for 

conducting the cash-flow analysis of a "prototypical" fluorescent lamp ballast 

manufacturer. Individual manufacturers will be able to modify these financial inputs to 

reflect their particular situation. 

Table 6. Financial Inputs for GRIM 

'/1998 Beginning yefU' /01' analytical purposes 

Scenario Description 

Base Year 

Announcement Year 

Standard Year 

:>;::'::=199~ Year in which the regulation announcement is made 

2002 Year in which the regulation takes effect 

Tax Rate 

Discount Rate for NPV 

Inflation Rate 

Working Capital 

Standard SG&A 

Research and Development 

IOrdinary Depreciation 

IOrdinary Capital Expenditures 

3.1. Cash Flow Analysis 

::::··:<3;1:.:2% 

<>TBD 

<,<:::;0.0% per annum 

. ":1614% of Revenue 

<:15,9% of Revenue 

:U:::d:/75% of Revenue 

:::i:'::2~9% of Revenue 

:::H:;:;';3)~% of Revenue 

The three elements of profitability - price, costs and volume - are strategically 

interdependent. Several analytical techniques can be used to highlight the tradeoffs 

among these elements. 

36 
PRELIMINARY DRAFT - For discussion purposes only

one of the most common tradeoffs made is price for volume, i.e., trading a price

reduction for increased volume or market share. Break-even analysis can help determine

necessary or permissible volume changes for considered price changes.

Manufacturers with greater proportions of fixed cost will be more sensitive to the pricevolume tradeoffs. Increased fixed costs resulting from standards can increase the

operating leverage of some firms, increasing their sensitivity to fluctuations in shipments.

Break-even analysis and profitability analysis around the break-even point can establish

threshold on the price vs. volume estimates. These threshold values can then be

compared with the price and quantity forecasts previously generated to assess the

likelihood that these will be surpassed.

4.0 Phase 3: Sub-Group Impact Analysis

For the Ballast Rule the Department wishes to consider the impacts on all

manufacturers separately. The GRIN4 aggregation previously described will provide a

"baseline" manufacturer impact. In order to maintain confidentiality the individual

manufacturer impacts will be reported relative to this baseline. For instance the

Department might qualitatively describe financial impacts as above or below the

baseline and quantify the extent of deviation from the Industry average. The potential

consequences, business and financial risks of these inputs will also be described.

4.1: Introduction

Phase 3 involves repeating the process described in Phase 2 -the industry cash-flow

analysis-but on different sub-groups of manufacturers, and calculating additional

impacts on competition, employment, and manufacturing capacity. This is a bottoms-up

analysis based on the results of interviews and visits to manufacturers.

4.2. M anufacturing Cost Estimates

Using industry "average" cost values is not adequate for assessing the variation in

impacts among sub-groups of manufacturers. Smaller manufacturers, niche players or

manufacturers exhibiting a cost structure largely different from industry averages could

be more negatively impacted. Ideally, the Department would consider the impact on

every firm individually. In highly concentrated industries this may be possible. In

industries having numerous participants, the Department will use the results of the

industry characterization to group manufacturers exhibiting similar characteristics.

:x <ls.t l.d^ 37

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One of the most common tradeoffs made is price for volume, i.e., trading a price 

reduction for increased volume or market share. Break-even analysis can help determine 

necessary or permissible volume changes for considered price changes. 

Manufacturers with greater proportions of fixed cost will be more sensitive to the pricevolume tradeoffs. Increased fixed costs resulting from standards can increase the 

operating leverage of some firms, increasing their sensitivity to fluctuations in shipments. 

Break-even analysis and profitability analysis around the break-even point can establish 

threshold on the price vs. volume estimates. These threshold values can then be 

compared with the price and quantity forecasts previously generated to assess the 

likelihood that these will be surpassed. 

4.0 Phase 3: Sub-Group Impact Analysis 

For the Ballast Rule ,the Department wishes to consider the impacts on all 

manufacturers separately. The GRIM aggregation previously described will provide a 

"baseline" manufacturer impact. In order to maintain confidentiality the individual 

manufacturer impacts will be repo~d relative to this baseline. For instance the 

Department might qualitatively describe financial impacts as above or below the 

baseline and quantify the extent of deviation from the Industry average. The potential 

consequences, business and financial risks of these inputs will also be described. 

4.1, introduction 

Phase 3 involves repeating the process described in Phase 2-the industry cash-flow 

analysis-but on different sub-groups of manufacturers, and calculating additional 

impacts on competition, employment, and manufacturing capacity. This is a bottoms-up 

analysis based on the results of interviews and visits to manufacturers. 

4.2. Manufacturing Cost Estimates 

Using industry "average" cost values is not adequate for assessing the variation in 

impacts among sub-groups of manufacturers. Smaller manufacturers, niche players or 

manufacturers exhibiting a cost structure largely different from industry averages could 

J?e more negatively impacted. Ideally, the Department would consider the impact on 

every firm individually. In highly concentrated industries this may be possible. In 

industries having numerous participants, the Department will use the results of the 

industry characterization to group manufacturers exhibiting similar characteristics. 

37 
PRELIMINARY DRAFT v For discussion purposes only

The manufacturing cost data collected for the engineering analysis wi ll be used to the

extent practical in the sub-group impact analysis. . To be useful, however, this data should

be disaggregated to reflect the variability in costs between relevant sub-groups of firms.

Survey Approach The survey approach as used in the engineering analysis is effective

way of calculating what is likely to be the average cost of manufacturing appliances at

various efficiency levels. The "component-by-component" build-up of incremental costs,

however, does not necessarily capture the true design path towards improvements in

efficiency that a manufacturer would use.This may explain, to a degree, the variability in

cost estimates submitted by different firms in the engineering analysis. This fact places

practical limitations on the degree of reliance that can be placed on this data to perform

the sub-group analysis. Unless the original engineering analysis survey data is collected

on "bundled" design options, or better yet, on the basis of reaching efficiency levels, it

will be necessary to perform a second sey for the manufacturer Phase 3 analysis.

The issue of data validation will be more important in Phase 3. In the engineering

analysis, the variation in cost estimates is "smoothed out" as expert forecasts are merged.

At the sub-group level, however, the small sample size will not exhibit the same balance

of estimates. It is expected that large reported variances will require explanation and

documentation. The interview process should prove valuable in this respect.

Cost M line The cost m eling approach has the necessary flexibility to consider

numerous co gurations of production facilities. Manufacturing processes of different

types can be modeled to incorporate alternate production layouts (worker-paced,

machine-paced, continuous flow etc.), capital utilization, process speeds, production run

lengths, vertical integration, and other features.

The results of cost modeling scenarios can serve as basis for stakeholder comment an

review. Manufacturer interviews could document variances in production process

assumptions. Uncertainty analysis as described for the Phase'2 analysis would be carried

out for all production process scenarios.

4.3. Price and Shipment Forecasts

To forecast a manufacturer sub-group's prices and shipments, it is necessary to have an

understanding of their business plans (1) in the absence of standards, and (2 ) in response

to standards. This includes a consideration of pricing policies (e.g., price leadership),

markets served (niche vs. full-line) and other policies that can significantly determine the

financial performance of a finn.

The financial analysis of the "prototypical" firm' performed in the Phase 2 Industry

Analysis can serve as a benchmark against which manufacturer sub-groups can be

analyzed. The price forecasts, based on average industry manufacturing costs, are on the

side of medium and large firms. It is reasonable to assume that these firms will exhibit

Fi - iss,t 1.d c 38

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

The manufacturing cost data collected for the engineering analysis will be used to the 

extent practical in the sub-group impact analysis. To be useful, however, this data should 

be disaggregated to reflect the variability in costs between relevant sub-groups offirms. 

Survey Approach The survey approach as used in the engineering analysis is an effective 

.way of calculating what is likely to be the average cost of manufacturing appliances at 

various efficiency levels. The "component-by-component" build-up of incremental costs, 

however, does not necessarily capture the true design path towards improvements in 

efficiency that a manufacturer would use. This may explain, to a degree, the variability in 

cost estimates submitted by different firms in the engineering analysis. This fact places 

practical limitations on the degree of reliance that can be placed on this data to perform 

. the sub-group analysis. Unless the original engineering analysis survey data is collected 

on "bundled" design options, or better yet, on the basis of reaching efficiency levels, it 

will be necessary to perform a second survey for the manufacturer Phase 3 analysis. 

The issue of data validation will be more impQrtant in Phase 3. In the engineering 

analysis,the variation in cost estimates is "smoothed out" as expert forecasts are merged. 

At the sub-group level, however, the small sample size will not exhibit the same balance 

of estimates. It is expected that large reported variances win require explanation and 

documentation. The interview proce~s should prove valuable in this respect . 

. Cost Modeling The cost modeling approach has the necessary fleXibility to consider 

numerous configurations of production facilities. Manufacturing processes of different 

types can be modeled to incorporate alternate production layouts (worker-paced, 

machine-paced, continuous flow etc.), capital utilization, process speeds, production run 

lengths, vertical integration, and other features. . 

The results of cost modeling scenarios can serve as basis for stakeholder comment and 

review. Manufacturer interviews could document variances in production process 

assumptions. Uncertainty analysis as described for the Phase 2 analysis would be carried 

out for all production process scenarios. 

4.3. Price and Shipment Forecasts 

To forecast a manufacturer sub-group's prices and shipments, it is necessary to have an 

understanding of their business plans (1) in the absence of standards, and (2) in response 

to standards. This includes a consideration of pricing policies (e.g., price leadership), 

markets served (niche vs. full-line) and other policies that can significantly determine the 

financial performance of a firm. 

The financial analysis of the "prototypical" fimi performed in the Phase 2 Industry 

Analysis can serve as a benchmark against which manufacturer sub-groups can be 

analyzed. The price forecasts, based on average industry manufaCturing costs, are on the 

side of medium and large firms. It is reasonable to assume that these firms will exhibit 

38 
PRELI M INARY DRAFT - For discussion purposes only

price leadership. Thus, the pricing policies of smaller or more specialized firms will

closely monitor the actions of the larger manufacturers.

To assess the impacts on "atypical" manufacturers, price and quantity scenarios could be

developed to achieve a stated performance measure. For instance, price and quantity

estimates corresponding to a Return on Investment (ROI) target might be generated. The

likelihood of achieving the resulting prices and quantities could be assessed based on past

experience.

4.4. Competitive Impacts Assessment

4.4.1. Introduction

Legislation directs the Department to consider any lessening of competition that is likely

to result from standards. It further directs the Attorney General to gauge the impact, if

any, of any lessening of competition.

The need to conduct an assessment of anti-competitive effects of proposed standards

comes from the need to protect the interests of the consumer. This assessment, however,

leads directly to evaluating the impacts on manufacturers . It is necessary to consider

whether the adoption of a standard would be likely to contribute to increased market

concentration levels and other market conditions that would facilitate either oligopolistic

pricing or actual price fixing. Market concentration plays an important part in the analysis

because it may indicate the existence of market power in a particular industry. Market

power is defined as the ability to set price within a limited range.

This analysis will examine the extent.to which large firms dominate the market, and to

determine the significance of small fines. If the market is characterized solely by a few

large firms, it could be expected that the impacts on competition from the implementation

of new standards would be minimal, although market share among firms could be

redistributed somewhat. However, if many small firms exist, there may be a larger

impact.

It should be noted that limited industry consolidation may not significantly affect

competitive pressures. If small firms play fairly insignificant roles in the industry, then it is

unlikely that their leaving the market would have any measurable effects on price levels.

Moreover, if the industry is already experiencing a trend toward higher concentration, it

is possible that new standards could accelerate, rather than create, the process.

The possibility that market concentration might increase depends primarily on whether

compliance with the standard, (1) increases costs significantly, and (2) results in such

increased costs being felt more severely by some firms than others.

Although increased costs may reduce demand, this alone would not necessarily affect

market structure. Increased costs may reduce sales if prices reflect a portion of the cost

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

price leadership. Thus, the pricing policies of smaller or more specialized firms will 

closely monitor the actions of the larger manufacturers. 

To assess the impacts on "atypical" manufacturers, price and quantity scenarios could be 

developed to achieve a stated performance measure. For instance, price and quantity 

estimates corresponding to a Return on Investment (ROI) target might be generated. The 

likelihood of achieving the resulting prices and quantities could be assessed based on past 

experience. 

4.4. Competitive Impacts· Assessment 

4.4.1. Introduction 

Legislation directs the Department to consider any lessening of competition that is likely 

to result from standards. It further directs the Attorney General to gauge the impact, if 

any, of any lessening of competition. 

The need to conduct an assessment of anti-competitive effects of proposed standards 

comes from the need to protect the interests of the consumer. This assessment, however, 

leads directly to evaluating the impacts on manufacturers. It is necessary to consider 

whether the adoption of a standard would be likely to contribute to increased market 

concentration levels and other market conditions that would facilitate either oligopolistic 

pricing or actual price fixing. Market concentration plays an important part in the analysis 

because it may indicate the existence of market power in a particular industry. Market 

power is defined as the ability to set price within a limited range. 

This analysis will examine the extent. to which large firms dominate the market, and to 

determine the significance of small firms. If the market is characterized solely by a few 

large firms, it could be expected that the impacts on competition from the implementation 

of new standards would be minimal, although market share among firms could be 

redistributed somewhat. However, if many small firms exist, there may be a larger 

impact. 

It should be noted that limited industry consolidation may not significantly affect 

competitive pressures. If small firms play fairly insignificant roles in the industry, then it is 

unlikely that their leaving the market would have any measurable effects on price levels. 

Moreover, if the industry is already experiencing a trend toward higher concentration, it 

is possible that new standards could accelerate, rather than create, the process. 

The possibility that market concentration might increase depends primarily on whether 

compliance with the standard, (1) increases costs significantly, and (2) results in such 

increased costs being felt more severely by some firms than others. . 

Although increased costs may reduce demand, this alone would not necessarily affect 

market structure. Increased costs may reduce sales if prices reflect a portion of the cost 

39 
PRELIMINARY DRAFT - For discussion purposes only

increase. However, two results of new sdards may counteract at least a portion of

sales declines for some appliances . These are : (1) substitutes beingre lated out of the

marketplace, and (2) the decrease in appliance operating costs resulting from s tandards,

to the extent that consumers value such a decrease. In any case, changes in sales alone

would not necessarily affect market sc e.

However, market concentration could increase if cost increases are significant and if they

affect smaller firms more severely thati larger ones. Typically, in the appliana n ce industry,

average cost decreases with increasing firm size. Increases in costs that vary with the

output (better known as variable manufacturing costs) should not disadvantage smaller

firms, while increases in fixed costs or costs independent of the output (like redesign

D costs) might disadvantage smaller firms with a smaller number of units across

which to spread the same fixed costs. Additionally, smaller firms may find it more

difficult to meet any new capital requirement induced by more stringent equipment

standards. These factors, coupled with increasing competitive pressures of the market,

could act as a catalyst for the consolidation of the industry. A trend of consolidation

strongly corroborates the finding that large fi rms have a cost advantage.

A principal characteristic of consolidation is that smaller fi rms will be, on average, in

more danger of failing or being bought out than will larger firms, as a result of

compliance with certain standards. This could be categorized as adverse effect of

standards. Because smaller firms .tend to have fewer resources and capacity to withstand

economic adversity, any decrease in average profitability is more likely to seriously affect

a smaller firm, and increase in average profitability is more likely to mean the

difference between success and failure for a smaller firm. From a standpoint of

competitiveness, a decrease in average profitability could speed up the consolidation

process, further reducing the number of firms . On the other hand, an increase in average

profitability could help maintain the current level of competition.

It is important to note that even if average industry profits increase, it is possible for

individual equipment makers to experience,negative impacts. New standards may lead to

redistribution among firms, with some faring better than others. A firm that can meet a

standard with an existing product will certainly feel less pain than one that must redesign

its goods to comply.

In past rulemakings, the determination of the impact of lessening of competition was

made by the Attorney General. In making this determination, the Department of Justice

(DOJ) relied on facts set forth in DOE's Technical Support Documents (TSD), as well as

other information that could be collected by the Department of Justice in the time

allowed.

EE-RM-97-500 COMMENT 20K

PIREUIVHNARY DRAFT ~ For discussion purposes only 

increase. However, two results of new standards may counteract at least a portion of 

sales declines for some appliances. These are: (1) substitutes being regulated out of the 

marketplace, and (2) the decrease in appliance operating costs resulting from standards, 

to the extent that consumers value such a decrease. In any case, changes in sales alone 

would not necessarily affect market structure. 

However, market concentration could increase if cost increases are significant and if they 

affect smaller firms more severely than larger ones. Typically, in the appliance industry, 

average cost decreases with increasing firm size. Increases in costs that vary with the 

output (better known as variable manufacturing costs) should not disadvantage smaller 

firms, while increases in fixed costs or costs independent of the output (like redesign 

R&D costs) might disadvantage smaller firms with a smaller number ofumts across 

which to spread the same fixed costs. Additionally, smaller firms may find it more 

difficult to meet any new.capital requirement induced by more stringent equipment 

standards. These factors, coupled with increasing competitive pressures of the market, 

could act as a catalyst for the consolidation of the industry. A trend of consoli dation 

strongly corroborates the finding that large firms have a cost advantage. 

A principal characteristic of consolidation is that smaller firms will be, on average, in 

more danger of failing or being bought out than will larger firms, as a result of 

compliance with certain standards~ This could be categorized as an adverse effect of 

standards. Because smaller firms tend to have fewer resources and capacity to Withstand 

economic adversity, any decrease in average profitability is more likely to seriously affect 

a smaller firm, and an increase in average profitability is more likely to mean the 

difference between success and failure for a smaller firm. From a standpoint of 

competitiveness, a decrease in average profitability could speed up the consolidation 

process, further reducing the.number offirms. On the other hand, an increase in average 

profitability could help maintain the current level of competition. 

It is important to note that even if average industry profits increase, it is possible for 

individual equipment makers to experience·negative impacts. New standards may lead to 

redistribution among firms; with some faring better than others. A firm that can meet a 

standard with an existing product will certainly feel less pain than one that must redesign 

its goods to comply .. 

4.4.2. Past Analysis 

In past rulemakings, the determination oftlie impact of lessening of competition was 

made by the Attomey General. In making this determination, the Department of Justice 

(DOl) relied on facts set forth in DOE's Technical Support Documents (TSD), as well as 

otherinformation that could be collected by the Department of Justice in the time 

allowed. 

40 
PRELIMINARY DRAFT - For discussion purposes only

As the financial analysis provided by DOE in its past TSDs were based on modeling a

hypothetical "prototypical" firm, DOJ did not consider this information sufficient to be

able to assess the anti-competitive impacts of standards.

In order to assess anti-competitive effects, DOJ relied heavily on interviews with

manufacturers in order to determine how a particular standard would impact them. The

line of interrogation used by DOJ followed the guidelines used in analyzing impacts of

horizontal company mergers. Anti-competitive effects were assumed to increase as the

disparity in costs related to meeting standards increased between firms. The DOJ analysis

consisted in answering two questions: (1) Is the standard likely to change the number of

competitors? and (2) If yes, does it matter to the consumer?

DOJ's approach consisted in constructing a firm-specific financial analysis that would

document how much a firm would be negatively impacted by a regulation. Particular

attention was paid to any additions to fixed costs required to meet the standards.

In its assessment of competitive impacts, DOE will draw heavily from the experience of

DOJ. This will involve working closely with DOJ from the early stages of the rulemaking

process. The approach is explained in greater detail in the following section.

4.4.3. New Competitive Assessment Methodology

DOE will make a determined effort to gather and report firm-specific financial

information and impacts. The competitive analysis will focus on assessing the impacts to

smaller, yet significant, manufacturers. The assessment will be based on manufacturing

cost data and on information collected from interviews with manufacturers, consistent

with Phase 3 of the manufacturer impact analyses..

The quantitative portion of the industry characterization task may be an input used to

assess competitive impacts. For example, the historical concentration data will provide

snapshots of the industry structure over time, revealing existing consolidation trends.

DOJ has offered to help in drafting questions to be used in the manufacturer interviews.

These questions will pertain to the assessment of the likeliness of increases in market

concentration levels and other market conditions that could lead to anti-competitive

pricing behavior. The manufacturer interviews will focus on gathering information that

would help in assessing:

® asymmetrical cost increases to some manufacturers;

• increased proportion of fixed costs potentially increasing business risks; and

® potential barriers to market entry (proprietary technologies, etc.).

The Department of Energy will consult with the Department of Justice to draft

questions for the interview guide.

`Y . *tic^ I I.£'o 41

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

As the financial analysis provided by DOE in its past TSDs were based on modeling a 

hypothetical "prototypical" firm, DOJ did not consider this information sufficient to be 

able to assess the anti-competitive impacts of standards. 

In order to assess anti-competitive effects, DOJ relied heavily on interviews with 

manufacturers in order to determine how a particular standard would impact them. The 

line of interrogation used by DOJ followed the guidelines used in analyzing impacts of 

horizontal company mergers. Anti-competitive effects were assumed to increase as the 

disparity in costs related to meeting standards increased between firms. The DOJ analysis 

consisted in answering two questions: (1) Is the standard likely to change the number of 

competitors? and (2) If yes, does it matter to the consumer? 

DOl's approach consisted in constructing a firm-specific financial analysis that would 

document how much a firm would be negatively impacted by a regulation. Particular 

attention was paid to any addition.s to fixed costs required to meet the standards. 

In its assessment of competitive impacts, DOE will draw heavily from the experience of 

DOl This will involve working closely with DOJ from the early stages of the rulemaking 

process. The approach is explained in greater detail in the following section. 

4.4.3. New Competitive Assessment Methodology 

DOE will make a determined effort to gather and report firm-specific financial 

information and impacts. The competitive analysis will focus on assessing the impacts to 

smaller, yet significant, manufacturers. The assessment will be based on manufacturing 

cost data and on information collected from interviews with manufacturers, consistent 

with Phase 3 of the manufacturer impact analyses. 

The quantitative portion of the industry characterization task may be an input used to 

assess competitive impacts. For example, the historical concentration data will provide 

snapshots of the industry structure over time, revealing existing consolidation trends. 

DOJ has offered to help in drafting questions to be used in the manufacturer interviews. 

These questions will pertain to the assessment of the likeliness of increases in market 

concentration levels and other market conditions that could lead to anti-competitive 

pricing behavior. The manufacturer interviews will focus on gathering information that 

would help in assessing: 

CD asymmetrical cost increases to some manufacturers~ 

CD increased proportion of fixed costs potentially increasing business risks~ and 

CD potential barriers to market entry (proprietaIy technologies, etc.). 

The Department of Energy will consult with the Department of Justice to draft 

questions for the interview guide .. 

41 
PRELIMINARY DRAFT r For discussion purposes only

4.5. . - _'ent Impacts Assessment

4.5.1. Intr-)

e July 1996 Process Rule includes employment impacts among the factors to be

considered in selecting a proposed standard. The Department will estimate the direct and

indirect impacts on employment for appliance manufacturers, relevant service industries,

energy suppliers, and the economy in general. Additionally, the Process Rule states a

presumption against any proposed standard level that would cause significant plant

closures or losses of domestic employment.

evaluation of the direct employment impacts of standards on manufacturers and

relev t.industries will be performed in Phase 3 of the manufacturer impact analyses.

Two impacts on employment are possible from standards-direct impacts and indirect

impacts. Direct employment impacts would result if standards lead to a change in the

number of employees at manufacturing plants and related supply and service firms.

Indirect impacts may result from b oth expenditures shifting among goods (substitution

effect), and income changing, which, ill lead to a change in overall expenditure levels

(income effect).

The direct impact on employment in the appliance manufacturing sector will be estimated

by the manufacturer impact analyses. The impact on employment in the general economy,

including energy and consumer goods, will be estimated using a macro -economic model.

Alternative models and approaches will be addressed by the working group.

Sections 4.5.2' and 4. 5.3 discuss possible approaches to conducting the analysis of direct

employment impacts.

For the Ballast Rule the Interview Process described in Section 4.5.3 will be used to

evaluate direct employment impacts. Engineering Analysis Labor Data (4.5.2) might

be used to verify the estimates of job impacts on new capital additions and correlate

employment levels with ballast shipments.

4.5.2. Engineering rnlysls Labor Data

In some situations, the engineering analysis could be used to provide a first-order

estimate of direct employment impacts. The engineering analysis compiles manufacturers'

direct labor costs for a base case (without standards) and for various efficiency levels.

Other cost elements that potentially incorporate labor have not been disaggregated in the

f.K .. a IIa. t1.doo 42

EE-RM-97-500 COMMENT 20K

PREUMINARY DRAFT ~ For discussion purposes only 

4.5. Employment Impacts Assessment 

4.5.1. Introduction 

The July 1996 Process Rule includes employment impacts among the factors to be 

considered in selecting a proposed standard. The Department will estimate the direct and 

indirect impacts on employment for appliance manufacturers, relevant service industries, 

energy suppliers, and the economy in general. Additionally, the Process Rule states a 

presumption against any proposed standard level that would cause significant plant 

closures or losses of domestic employment. 

An evaluation of the direct employment impacts of standards on manufacturers and 

relevant.industries will be performed in Phase 3 of the manufacturer impact analyses. 

Two impacts on employment are possible from standards-direct impacts and indirect 

impacts. Direct employment impacts would result if standards lead to a change in the 

number of employees at manufacturing plants and related supply and service firms. 

Indirect impacts may result from both expenditures shifting among goods (substitution 

effect), and income changing, which ,will lead to a change in overall expenditure levels 

(income effect). 

The direct impact on employment in the appliance manufactufing sector will be estimated 

by the manufacturer impact analyses. The impact on employment in the general economy, 

including energy and consumer goods, will be estimated using a macro-economic model. 

Alternative models and approaches will be addressed by the working group. 

Sections 4.5.2 and 4.5.3 discuss possible approaches to conducting the analysis of dire~t 

employment impacts. 

For the Ballast Ruie the Interview Process described in Section 4.5.3 will be used to 

evaluate direct employment impacts. Engineering Analysis Labor Data (4.5.2) might 

be used to verify the estimates of job impacts 01;1 new capital additions and correlate 

employment levels with ballast shipments. 

4.5.2. Engineering Analysis labor Data 

In some situations, the engineering analysis could be used to provide a first-order 

estimate of direct employment impacts. The engineering analysis compiles manufacturers' 

direct labor costs for a base case (without standards) and for various efficiency levels. 

Other cost elements that potentially incorporate labor have not been disaggregated in the 

42 
PRELIMINARY DRAFT - For discussion purposes only

past. For example, the labor portions of factory overhead, shipping, R&D, and selling

costs were not identified in previous engineering analysis data submittals. These could be

estimated and added to the unit labor costs . Multiplying unit labor costs by total

shipments would give a first-order estimate of increased labor due to standards.

Recent interviews with ballast manufacturers highlighted the practical limitations of using

disaggregated cost estimates to predict the direct domestic employment impacts of

standards. The ballast industry is characterized by two distinct product technologies

(electronic and magnetic) and a worldwide distribution of production facilities serving the

U.S. market. It cannot be assumed that capital investments in meeting new standards and

the jobs associated with these investments will replace current U. S. manufacturing assets

used to produce the older technology.

4.5.3. Interview Process

The interview process conducted for the ballast rulemaking provided new insight as to

the value of this process to evaluate direct manufacturing employment. For discontinuous

technology improvements, it is likely that interviews and site visits will identify major

shifts in employment levels at existing plants. Siting of new production facilities,

however, will be more difficult to evaluate. For incremental product improvements that

do not significantly alter production processes, supplier, and distribution channels, it is

likely that marginal labor data from the engineering analysis will serve as a benchmark

against which individual manufacturer circumstances can be evaluated.

4.6. M anufacturing Capacity Impacts Assessment

One of the significant burdens of new appliance standards can be the consequential

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

Process Rule states a presumption against any proposed standard level that would be the

direct cause of significant losses of capital investment by domestic manufacturers.

A change in standards will generally create three types of costs for a firm. First, variable

costs will be affected by new parts and labor requirements. Second , some engineering

will be required to design, test, and plan the manufacturing of new products. And third,

new products often require retooling and new equipment (capital costs). In the

engineering analysis, data is collected on each of these cost components for all the design

options considered.

The capital cost requirements will be greatly dependent on the stringency of the standard

and can differ very significantly from one manufacturer to the next. Standards that can

only be met with radical changes in the product (i.e., heat pump water heaters) will

require large capital investments for all manufacturers of the product. More incremental

efficiency improvement requirements will impact manufacturers differently, based on the

N!i - Ilast !,doc; 43

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

past. For example, the labor portions offactory overhead, shipping, R&D, and selling 

costs were not identified in previous engineering analysis data submittals. These could be 

estimated and added to the unit labor costs. Multiplying unit labor costs by total 

shipments would give a first-order estimate of increased labor due to standards. 

Recent interviews with ballast manufacturers highlighted the.practicallimitations of using 

disaggregated cost estimates to predict the direct domestic employment impacts of 

standards. The ballast industry is characterized by two distinct product technologies 

(electronic and magnetic) and a worldwide distribution of production facilities serving the 

U.S. market. It cannot be assumed that capital investments in meeting new standards and 

the jobs associated with these investments will replace current U. S. manufacturing assets 

used to produce the older technology. 

4.5.3. Interview Process 

The interview process conducted for the ballast rulemaking provided new insight as to 

the value of this process to evaluate direct manufacturing employment. For discontinuous 

technology improvements, it is likely that interviews and site visits will identify major 

shifts in employment levels at existing plants. Siting of new production facilities, 

however, will be more difficult to evaluate. For incremental product improvements that 

do not significantly alter production processes, supplier, and distribution channels, it is 

likely that marginal labor data from the engineering analysis will serve as a benchmark 

against which individual manufacturer circumstances can be evaluated. 

4.6. Manufacturing Capacity Impacts Assessment 

One of the significant burdens of new appliance standards can be the consequential 

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

Process Rule states a presumption against any proposed standard level that would be the 

direct cause of significant losses of capital investment by domestic manufacturers. 

A change in standards will generally create three types of costs for a firm. First, variable· 

costs will be affected by new parts and labor requirements. Second, some engineering 

will be required to design, test, and plan the manufacturing of new products. And third, 

new products often require retooling and new equipment (capital costs). In the 

engineering analysis, data is collected on each of these cost components for all the design 

options considered. 

The capital cost requirements will be greatly dependent on the stringency of the standard 

and can differ very significantly from one manufacturer to the next. Standards that can 

only be met with radical changes in the product (i.e., heat-pump water heaters) will 

require large capital investments for all manufacturers of the product. More incremental 

efficiency improvement requirements will impact manufacturers differently, based on the 

43 
PRELIMINARY DRAFT - For discussion purposes only

characteristics of their current designs and the nature of their existing assets. Thus,

accurate assessment of stranded assets requires consideration at the firm (or sub-group)

level.

The GRIK4 model will capture the financial impacts of stranded assets. A firm which has

capital assets that are not applicable to the production of the redesigned product will

need to invest more in new capital equipment. These investments will produce a larger

negative cash-flow and a lower Net Present Value.

As currently programmed, the GRIK4 does not allow for the write-off of existing assets;

it assumes that these will be depreciated over their remaining life. The spreadsheet could

be redesigned to permit asset write-offs. The impact would be to improve cash flow since

write-offs would reduce the taxable income and thus taxes payable.

Given the clear difference in manufacturing technologies for magnetic and electronic

ballasts, and the potentially large financial impacts of stranded assets , the value of

stranded assets will be reported separately from other measures of impact.

5.0 Manufacturing Impact Analyses Interview Pro

Introduction: As previously described, the revised rulemaking process provides for

greater public input and for improved analytical approaches, with particular emphasis on

earlier and more extensive information gathering from interested parties. The proposed

three-phase process will draw on multiple information sources, including structured

interviews with manufacturers and a broad cross-section of interested parties. Interviews

may be conducted in any and all phases of the analyses as det ermined at the Phase 1 Issue

Identification workshop.

The interview process has a key role in the manufacturer impact analyses, since it

provides an opportunity for interested parties to privately express their views on

important issues. A key characteristic of the interview process, as envisioned, is that it is

designed to allow confidential information to be considered in the rulemaking decision.

Interview Questionnaire: The initial industry characterization will collect information

from relevant industry and market publications, industry trade organizations, company

financial reports, and product literature. 's information will aid in the development of

detailed and focused questionnaires, as needed, to perform all phases of the manufacturer

impact analyses. It is the intention of the Department that the contents of questionnaires

and the list of interview participants be publicly vetted prior to initiating the interview

process.

M -?:'s . tF..doc

EE-RM-97-500 COMMENT 20K

PRELlM!NARY DRAFT - For discussion purposes only 

characteristics of their current designs and the nature of their existing assets. Thus, an 

accurate assessment of stranded assets requires considenl.tion at the firm (or sub-group) 

level. 

The GRIM model will capture the financial impacts of stranded assets. A finn which has 

capital assets that are not applicable to the production of the redesigned product win 

need to invest more in new capital equipment. These investments will produce a larger 

negative cash-flow and· a lower Net Present Value. 

As currently programmed, the GRIM does not allow for the write-off of existing assets; 

it assumes that these will be depreciated over their remaining life. The spreadsheet could 

be redesigned to pennit asset write-offs. The impact would be to improve cash flow since 

write-offs would reduce the taxable income and thus taxes payable. 

Given the clear difference in manufacturing technologies for magnetic and electronic 

ballasts, and the potentially large financial impacts of stranded assets, the value of 

stranded assets win be reported separately from other measures of impact. 

5.0 Manufacturing Impact Analyses Interview Process 

Introduction: As previously described, the revised rulemaking process provides for 

greater public input and for improved analytical approaches, with particular emphasis on 

earlier and more extensive information gathering from interested parties. The proposed 

three-phase process will draw on multiple information sources, including structured 

interviews with manufacturers and a broad cross-section of interested parties. Interviews 

may be conducted in any and all phases of the analyses as determined at the Phase 1 Issue 

Identification workshop. 

The interview process has a key role in the manufacturer impact analyses, since it 

provides an opportunity for interested parties to privately express their views on 

important issues. A key characteristic of the interview process, as envisioned, is that it is 

designed to allow confidential information to be considered in the rulemaking decision. 

Interview Questionnaire: The initial industry characterization will collect information 

from relevant industry and market publications, industry trade organizations, company 

financial reports, and product literature. This information will aid in the development of 

detailed and focused questionnaires, as needed, to perform all phases of the manufacturer 

impact analyses. It is the intention of the Department that the contents of questionnaires 

and the list of interview participants be publicly vetted prior to initiating the interview 

process. 
PRELIMINARY DRAFT - For discussion purposes only

The Phase 3 (sub-group analysis) questionnaire will solicit information on the possible

impacts of potential efficiency levels on manufacturing costs, product prices, and sales.

Evaluation of the possible impacts on direct employment , capital assets, and industry

competitiveness will also draw heavily on the information gathered during the interviews.

The questionnaires will solicit both qualitative and quantitative information . Supporting

information will be requested whenever applicable.

Interview Process: Interviews will be scheduled well in advance in order to provide

every opportunity for key individuals to be available for comment. Although a written

response to the questionnaire is acceptable, an interactive interview process is preferred

because it helps clarify responses and provides the opportunity for additional issues to be

identified.

Confidential Information: Interview participants will be requested to identify all

confidential information provided in writing or orally . Approximately two weeks

following the interview, an interview summary will be provided to give participants the

opportunity to confirm the accuracy and protect the confidentiality of all collected

information. All the information transmitted will be considered , when appropriate, in

DOE's decision-making process. However, confidential information will not be made

available in the public record.

Participants will also be asked to identify all information they wish included in the public

record but that they do not want to have associated with their interview . This information

will be incorporated into the public record but reported without attribution.

Reporting: DOE will collate the completed interview questionnaires and prepare a

summary of the major issues and outcomes. The Department will seek comment on the

outcome of the interview process.

W .B~,l? ttdcc 45

EE-RM-97-500 COMMENT 20K

PREUMiNARY DRAFT ~ For d~scussion purposes only 

The Phase 3 (sub-group analysis) questionnaire will solicit information on the possible 

impacts of potential efficiency levels on manufacturing costs, product prices, and sales. 

Evaluation of the possible impacts on direct employment, capital assets, and industry 

competitiveness will also draw heavily on the information gathered during the interviews. 

The questionnaires will solicit both qualitative and quantitative information. Supporting 

information will be requested whenever applicable. 

Interview Process: Interviews will be scheduled well in advance in order to provide 

every opportunity for key individuals to be available for comment. Although a written 

response to the questionnaire is acceptable, an interactive interview process is preferred 

because it helps clarify responses and provides the opportunity for additional issues to be 

identified. 

Confidential Information: Interview participants will be requested to identify all 

confidential information provided in writing or orally. Approximately two weeks 

following the interview, an interview summary will be provided to give participants the 

opportunity to confirm the accuracy and protect the confidentiality of all collected 

information. All the information transmitted will be considered, when appropriate, in 

DOE's decision-making process. However, confidential information will not be made 

available in the public record. 

Participants will also be asked to identify all information they wish included in the public 

record but that they do not want to have associated with their interview. This information 

will be incorporated into the public record but reported without attribution. 

Reporting: DOE will collate the completed interview questionnaires and prepare a 

summary of the major issues and outcomes. The Department will seek coll1l'i1ent on the 

outcome of the interview process. 

45 
PRELIMINARY DRAFT d For discussion purposes only

During late 1997 and early 1998 the Department met with staff of five major

manufacturers of fluorescent lamp ballasts. The purpose of this useful and informative

series of meetings was to initiate a dialog between the Department of Energy and each

of themanufacturers to educate Department representatives about the context in which

the industry operates and to discuss manufacturer concerns about how energy efficiency

standards might affect them. The interview guide and a summary of the results of these

interviews is presented as Attachment E.

A second series of interviews is planned for June-August of 1998 to fully explore with

the manufacturers the following issues and topics.

s Current Organizational Characteristics

® Industry Infrastructure

® Global Competition

® Manufacturer Cash Flow Analysis

0 Competitive Impacts Assessment

Employment Impacts Assessment

ufa ring Capacity Impacts Assessment

A Draft Interview Guide for this interview series is shown as Attachment E.

6.0 Cumulative Regulatory Burden

The GRIK4 model supports three forms of multiple regulation analysis:

® Regulations on multiple products

® Several regulations on same product

® A combination of both approaches

For multiple products, such as refrigerators and clothes washers, the procedure is

straightforward. Accounting for multiple regulations on a single appliance requires

building-up from several sub-analyses. The Department is currently preparing a proposal

to add capabilities to the current cumulative regulatory burden features of the GRIM.

More detail will be provided at the March I Ph workshop.

The Department is not currently aware of any additional regulations which might need

consideration within the Manufacturer pact Analysis.

? tl .• al last .doo 46

EE-RM-97-500 COMMENT 20K

PRELIMiNARY DRAFT ~ For discussion purposes only 

During late 1997 and early 1998 the Department met with staff of five major 

manufacturers of fluorescent lamp ballasts. The purpose of this useful and informative 

series of meetings was to initiate a dialog between the Department of Energy and each 

of the manufacturers to educate Department representatives about the context in which 

the industry operates and to discuss manufacturer concerns about how energy efficiency 

standards might affect them. The interview guide and a summary of the results of these 

interviews is presented as Attachment B. 

A second series of interviews is planned for June-August of 1998 to fully explore with 

the manufacturers the following issues and topics. 

• Current Organizational Characteristics 

• Industry Infrastructure 

• Global Competition 

• Manufacturer Cash Flow Analysis 

• Competitive Impacts Assessment 

• Employment Impacts Assessment 

• 'Manufacturing Capacity ImpactS Assessment 

A Draft Interview Guide for this interview series is shown as Attachment E. 

6.0 - Cumulative Regulatory Burden 

The GRIM: model supports three forms of multiple regulation analysis: 

• Regulations on multiple products 

• Several regulations on same product 

• A combination of both approaches 

For multiple products, such as refrigerators and clothes washers, the procedure is 

straightforward.- Accounting for multiple regulations on a single appliance requires 

building-up from several sub-analyses. The Department is currently preparing a proposal 

to add capabilities to the current cumulative regulatory burden features of the GRIM:. 

More detail win be provided at the March 11thworkshop. 

The Department is not currently aware of any additional regulations which might need 

consideration within the Manufacturer Impact Analysis. 

46 
PRELIMINARY DRAFT - For discussion purposes only

ATTACHMENT A

Description of Information Available in Census of Manufacture rs and

Current Industrial Reports

[1] The Census of Manufactures (CM) is conducted to provide periodic and

comprehensive statistics about manufacturing establishments, activities, and

production. The United States Code, Title 13, requires this census and provides

for mandatory responses. The Census of Manufactures provides the single best

measure of U. S. manufacturing industry outputs, inputs and operating status, and

is a major resource for the establishment-based Longitudinal Research Database.

The Census of Manufactures covers all establishments with one paid employee

or more primarily engaged in manufacturing as defined in the Standard Industrial

Classification (SIC) Manual. A company operating at more than one location is

required to file a separate report for each location. An industry is defined as a

group of establishments producing the same product or a closely related group of

products. The system works in such a way that the definitions progressively

become narrower with successive additions of numerical digits.

The Current Industrial Report (CIR) program has been providing monthly,

quarterly, and annual measures of industrial activity for many years. The primary

objective of the CIR program is to produce timely, accurate data on production

and shipments of selected products. The data are used to satisfy economic policy

needs and for market analysis, forecasting, and decision-making in the private

sector. The data for fluorescent lamp ballasts is available in CIR series

MQ36C. These data cover all companies engaged in the manufacturing of

fluorescent lamp ballasts. The statistics are collected by mail on Bureau of

Census quarterly Form MQ36C, Fluorescent Lamp Ballasts. The survey panel for

1995 included all known producers of this product, approximately 12 companies.

[2] A company is defined as a business organization consisting of one establishment

or more under common ownership or control.

[3] An establishment is defined as a single physical location where manufacturing is

performed.

[4] Employment and Payroll

# of all employees: This item includes all full-time and part-time employees on

the payrolls of operating manufacturing establishments. Included are all persons

on paid sick leave, paid holidays, and paid vacations. Officers of corporations are

included as employees; proprietors and partners of unincorporated firms are

excluded.

A®1

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

ATTACHMENT A 

Description of Information Available in Census of Manufacturers and 

Current Industrial Reports 

[1] The Census of Manufactures (CM) is conducted to provide periodic and 

comprehensive statistics about manufacturing establishments, activities, and 

production. The United States Code, Title 13, requires this census and provides 

for mandatory responses. The Census of Manufactures provides the single best 

measure of U.S. manufacturing industry outputs, inputs and operating status, and 

is a major resource for the establishment-based Longitudinal Research Database. 

The Census of Manufactures covers all establishments with one paid employee 

or more primarily engaged in manufacturing as defined in the Standard Industrial 

Classification (SIC) Manual. A company operating at more than one location is 

required to file a separate report for each location. An industry is defined as a 

group of establishments producing the same product or a closely related group of 

products. The system works in such a way that the definitions progressively 

become narrower with successive additions of numerical digits. 

The Current Industrial Report (CIR) program has been providing monthly, 

quarterly, and annual measures of industrial activity for many years. The primary 

objective of the CIR. program is to produce timely, accurate data on production 

and shipments of selected products. The data are used to satisfy economic policy 

needs and for market analysis, forecasting, and decision-making in the private 

sector. The data for fluorescent lamp ballasts is available in CIR. series 

MQ36C. These data cover all companies engaged in the manufacturing of 

fluorescent lamp ballasts. The statistics are collected by mail on Bureau of 

Census quarterly Form MQ36C, Fluorescent Lamp Ballasts. The survey panel for 

1995 included all known producers of this product, approximately 12 companies. 

[2] A company is defined as a business organization consisting of one establishment 

or more under common ownership or control. 

[3] An establishment is defined as a single physical location where manufacturing is 

performed. 

[4] Employment and Payroll 

. # of all employees: This item includes all full-time and part-time employees on 

the payrolls of operating manufacturing establishments. Included are all persons 

on paid sick leave, paid holidays, and paid vacations. Officers of corporations are 

included as employees; proprietors and partners of unincorporated firms are 

excluded. 

A-1 
PRELIMINARY DRAFT v For discussion purposes only

Payroll: This item includes the gross earnings of all employees on the payroll of

operating manufacturing establishments paid in the calendar year covered by the

survey. Respondents were told they could follow the definition of payrolls used

for calculating the Federal withholding tax. It includes all forms of compensation,

such as salaries, wages, commissions, dismissal pay, bonuses, vacation and sick

leave pay, and compensation in kind, prior to such deductions as employees'

Social Security contributions, withholding taxes, group insurance, union

dues, and 'savings bonds. The total includes salaries of officers of corporations; it

excludes payments to proprietors or partners of unincorporated concerns.

Production workers: This item includes workers (up through the line-supervisor

level) engaged in fricating, processing, assembling, inspecting, receiving,

storing, handling, packing, warehousing, shipping (but not delivering),

maintenance, repair, janitorial and guard services, product development,

auxiliary production for plant's own use (e.g., power plant), record-keeping, and

other services closely associated with these production operations at the

establishment covered by the report. Employees above the working-supervisor

level are excluded from this item.

Production-worker hours:. is item covers hours worked or paid for at the plant,

including actual overtime hours (not straight-time equivalent hours). It excludes

hours paid for vacations, holidays, or sick leave.

[5] Shipment, Cost of materials,: d Value added

Value of shipments: This item covers the received or receivable net selling

values, f o..b, plant (exclusive of freight and taxes), of all products shipped, both

primary and secondary, as well as all miscellaneous receipts, such as receipts for

contract work performed for others, installation and repair, sales of scrap, and

sales of products bought and resold without further processing . Included are all

items made by or for the establishments from materials owned by it, whether

sold, transferred to other plants of the same company, or shipped on

consignment. The net selling value of products made in one plant on a contract

basis from materials owned by another was reported by the plant providing the

materials.

Value added by manufacture : This measure of manufacturing activity is derived

by subtracting the cost of materials, supplies, containers, fuel, purchased

.electricity, d contract work from the value of shipments (products

manufactured plus receipts for services rendered). The result of this calculation

is adjusted by the addition of value added by merch dising operations (i.e. the

difference between the sales value and the cost ofmerchandise sold without

finther manufacture, processing, or assembly) plus the'net change in finished

goods and work-in-process between the beginning- and end-of-year inventories.

A-2

EE-RM-97-500 COMMENT 20K

PREUlIJHNARY DRAFT ~ For discussion purposes only 

Payroll: This item includes the gross earnings of all employees on the payroll of 

operating manufacturing establishments paid in the calendar year covered by the 

survey. Respondents were told they could follow the definition of payrolls used 

for calculating the Federal withholding tax. It includes all forms of compensation, 

such as salaries, wages, commissions, dismissal pay, bonuses, vacation and sick 

leave pay, and compensation in kind, prior to such deductions as employees' 

Social Security contributions, withholding taxes, group insurance, union 

dues, and savings bonds. The total includes salaries of officers of corporations; it 

excludes payments to proprietors or partners of unincorporated concerns. 

Production workers: This item includes workers (up through the line-supervisor 

level) engaged in fabricating, processing, assembling, inspecting, receiving, 

storing, handling, packing, warehousing, shipping (but not delivering), 

maintenance, repair, janitorial and guard services, product development, 

auxiliary production for plant's own 1,lse (e.g., power plant), record-keeping, and 

other services closely associated with these production operations at the 

establishment covered by the report. Employees above the working-supervisor 

level are excluded from this item. 

Production-worker hours: This item covers hours worked or paid for at the plant, 

including actual overtime hours (not straight-time equivalent hours). It excludes 

hours paid for vacations, holidays, or sick leave. 

[5] Shipment, Cost of materials, and Value added 

Value of shlpments: This item C9vers the received or receivable net selling 

values, f.o.b, plant (exclusive of freight and taxes), of all products shipped, both 

primary and secondary, as well as all miscellaneous receipts, such as receipts for 

contract work performed for others;' installation and repair, sales of scrap, and 

sales of products bought and resold without further processing. Included are all 

items made by or for the establishments from materials owned by it, whether 

sold, transferred to other plants of the same company. or shipped on 

consignment. The net selling value of products made in one plant on a contract 

basis from materials owned by another was reported' by the plant providing the 

materials. 

Value added by manufacture: This measure of manufacturing activity is derived 

by subtracting the cost of materials, supplies, containers, fuel, purchased 

. electricity, and contract work from the value of shipments (products 

manufactured plus receipts for services rendered). The result of this calculation 

is adjusted by the addition of value added by merchandising operations (i.e. the 

difference between the sales value and the cost of merchandise sold without 

further manufacture, processing, or assembly) plus the'net change in finished 

goods and work-in-process between the beginning- and end-of-year inventories, 

A-2 
PRELIMINARY DRAFT - For discussion purposes only

Cost of Materials: This term refers to direct charges actually paid or payable for

items consumed or put into production during the year, including freight charges

and other direct charges incurred by the establishment in acquiring these

materials. It includes the cost of materials or fuel consumed, whether purchased

by the individual establishment from other companies , transferred to it from

other establishments of the same company , or withdrawn from inventory during

the year.

The important items of this cost item are (1 ) all raw materials, semifinished

goods, parts, containers, scrap, and supplies put into production or used as

operating supplies and for repair and maintenance during the year , (2) electric

energy purchased, (3) fuels consumed for heat, power, or the generation of

electricity, (4) work done by others on materials or parts furnished by

manufacturing establishments (contract work), and (5) products bought and

resold in the same condition.

[6] Export of domestic merchandise : Source : Bureau of the Census report EM 545,

U. S. Exports.

[7]

[9]

Import for consumption: Source : Bureau of the Census report 145, U. S.

Imports for Consumption. .

Herfindahl-Hirschman Index: The Herfindahl-Hirschman Index is a truncated

index in that it is the square of the individual company ratios summed across the

largest 50 companies or the complete universe , whichever is lower. It is

calculated by squaring the concentration ratio for each company and summing

those squares to a cumulative total . The cumulative total (sum of squares) is the

Herfindahl-Hirschman Index. Application of the index is relatively

straightforward. The higher the index, the more concentrated the industry or

product class is as the top.

From the concentration ratio, it is impossible to determine the amount accounted

for by the top ranked companies. The Herfindahl-Hirschman Index would

provide an insight to this determination . If each of the largest 50 companies

accounted for two percentage points of the 100 percent it would produce an

index of 200. However, if the top ranked company accounted for 50 percentage

points and the remaining 49 companies slightly over one percentage point each,

the resulting index would be 2550.

[10] . New capital expenditures: For establishments in operation and any known plants

under construction, manufacturers were asked to report their new expenditures

for (1) permanent additions and major alterations to manufacturing

establishments, and (2) machinery and equipment used for replacement and

additions to plant capacity if they were of the type for which depreciation

accounts were ordinarily maintained.

A-3

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Cost of Materials: This tenn refers to direct charges actually paid or payable for 

items consumed or put into production during the year, including freight charges 

and other direct charges incurred by the establishment in acquiring these 

materials. It includes the cost of materials or fuel consumed, whether purchased 

by the individual establishment from other companies, transferred to it from 

other establishments of the same company, or withdrawn from inventory during 

the year. 

The important items of this cost item are (1) all raw materials, semifinished 

goods, parts, containers, scrap, and supplies put into production or used as 

operating supplies and for repair and maintenance during the year, (2) electric 

energy purchased, (3) fuels consumed for heat, power, or the generation of 

electricity, (4) work done by others on materials or parts furnished by 

manufacturing establishments (contract work), and (5) products bought and 

resold in the same condition. 

[6] Export of domestic merchandise: Source: Bureau of the Census report EM 545, 

U.S. Exports. 

[7] Import for consumption: Source: Bureau of the Census report 1M 145, U. S. 

Imports for Consumption. . 

[9] Herfindahl-Hirschman Index: The Herfindahl-Hirschman Index is a truncated 

index in that it is the square of the individual company ratios summed across the 

largest 50 companies or the complete universe, whichever is lower. It is 

calculated by squaring the concentration ratio for each company and summing 

those squares to a cumulative total. The cumulative total (sum of squares) is the 

Herfindahl-Hirschman Index. Application of the index is relatively 

straightforward. The higher the index, the more concentrated the industry or 

product class is as the top. 

From the concentration ratio, it is impossible to determine the amount accounted 

for by the top ranked companies. The Herfindahl-Hirschman Index would 

provide an insight to this detennination. If each of the largest 50 companies 

accounted for two percentage points of the 100 percent it would produce an 

index of 200. However, if the top ranked company accounted for 50 percentage . 

points and the remaining 49 companies slightly over one percentage point each, 

the resulting index would be 2550. 

[10] New capital expenditures: For establishments in operation and any known plants 

under construction, manufacturers were asked to report their new expenditures 

for (1) pennanent additions and major alterations to manufacturing 

establishments, and (2) machinery and equipment used for replacement and 

additions to plant capacity if they were of the type for which depreciation 

accounts were ordinarily maintained. 

A-3 
PRELI M INARY DRAFT - For discussion purposes only

The totals for new expenditures include expenditures leased from nonmanufacturing concerns through capital leases from manufacturing concerns

through capital leases, new facilities owned by the Federal Government but

operated under contract by private companies, and plant and equipment

furnished to the manufacturer by communities and nonprofit organizations. Also

excluded are expenditures for used plant and equipment (although reported in the

census), expenditures for land, and cost of maintenance and repairs changed as

current operating expenses.

EE-RM-97-500 COMMENT 20K

PREUlliHNARY DRAFT ~ For discussion purposes only 

The totals for new expenditures include expenditures leased from nonmanufacturing concerns through capital leases from manufacturing concerns 

through capital leases, new facilities owned by the Federal Government but 

operated under contract by private companies, and plant and equipment 

furnished to the manufacturer by communities and nonprofit organizations. Also .. 

excluded are expenditures for used plant and equipment (although reported in the 

census), expenditures for land, and cost of maintenance and repairs changed as 

current operating expenses. 

A-4 
PRELIMINARY DRAFT - For discussion purposes only

ATTACHMENT B

Interview Guide from 1 96/1 97 Stakeholder Interviews

Background

The July 1996 interpretive rule established procedures, interpretations and policies to

guide the Department in the consideration of new or revised appliance efficiency

standards. Key elements of this rule which have a direct bearing on the conduct of any

future analyses include:

1. Providing opportunities for public input early in the rulemaking process.

2. Developing qualitative and quantitative estimates of critical variables from

multiple sources with inputs from interested parties.

3. Understanding and reporting the distribution of costs and benefits of standards

on different manufacturers.

4. Considering the impacts of standards on existing domestic manufacturing

facilities including capital investments and employment levels.

5. Utilizing an annual cash flow approach to determine quantitative impacts on

manufacturers.

Introduction

The interpretive rule describes the approach DOE will use in the engineering, consumer,

and manufacturer analyses . The process provides for consultation with interested parties

before initiating a detailed analysis.

The purpose of this interview is to help identify issues, gather information and identify

additional sources of information that could help assess the likely impact of standards.

This is only one of several opportunities that stakeholders in the ballast rulemaking

process will have to contribute information.

Approach

To reflect the analysis approach described in the interpretive rule, this interview guide

has been divided into six parts.

Part A of the guide provides information on how the Department is proceeding with the

engineering issues raised from the June 20, 1996, workshop and requests information on

specific issues.

Part B of the guide provides information on consumer and national issues raised at the

June workshop and requests information on specific issues.

Part C of the guide solicits input on the present and past ballast industry structure and

market characteristics. This is a high-level, qualitative and quantitative effort to segment

B-1

EE-RM-97-500 COMMENT 20K

PRELlM!NARY DRAFT ~ For discussion purposes only 

A TIACHMENT B 

Interview Guide from 1996/1997 Stakeholder Interviews 

Background 

The July 1996 interpretive rule established procedures, interpretations and policies to 

guide the Department in the consideration of new or revised appliance efficiency 

standards. Key elements of this rule which have a direct bearing on the conduct of any 

future analyses include: 

1. Providing opportunities for public input early in the rulemaking process. 

2. Developing qualitative and quantitative estimates of critical variables from 

multiple sources with inputs from interested parties. 

3 .. Understanding and reporting the distribution of costs and benefits of standards 

on different manufacturers. 

4. Considering the impacts of standards on existing domestic manufacturing 

facilities including capital investments and employment levels. 

5. Utilizing an annual cash flow approach to determine quantitative impacts on 

manufacturers. 

Introduction 

The interpretive rule describes the approach DOE will use in the engineering, consumer, 

and manufacturer analyses. The process provides for consultation with interested parties 

before initiating a detailed analysis. 

The purpose of this interview is to help identify issues, gather information and identify 

additional sources of information that could help assess the likely impact of standards. 

This is only one of several opportunities that stakeholders in the ballast rulemaking 

process will have to contribute information. 

Approach 

To reflect the analysis approach described in the interpretive rule, this interview guide 

has been divided into six parts. 

Part A of the guide provides information on how the Department is proceeding with the 

engineering issues raised from the June 20, 1996, workshop and requests information on 

specific issues. 

Part B of the guide provides information on consumer and national issues raised at the 

June workshop and requests information on specific issues. 

Part C of the guide solicits input on the present and past ballast industry structure and 

market characteristics. This is a high-level, qualitative and quantitative effort to segment 

B-1 
PRELIMINARY DRAFT - For discussion purposes only

the industry in order to structure themanufacturer analysis and ensure accurate

representation of the variability of impacts among different firms.

Part D of the guide solicits input as to the likely cost impacts on manufacturers of

possible standards. The goal consists in obtaining high-level qualitative and quantitative

descriptions of the likely incremental capital manufacturing costs at different

efficiency levels. DOE is seeking input on possible sources of information and

appropriate data collection methodologies.

Part E of the guide seeks qualitative information which could help develop price and

quantity forecasts of future ballast sales:

Part F of the guide addresses issues for which the Department has outlined policies to be

used in the economic justification of standards.

Interview participants are invited to comment on all or part of the questions which

follow. Comments on issues which are not directly reflected in the guide are welcomed.

PART A: ENGINEERING ISSUES

PART CONS

Part C® BALLAST INDUSTRY C

C. l What are the relevant characteristics that could be used to divide ballast

manufacturers into meaningful subgroups for the purpose of evaluating the impacts of

standards? (i.e. firm size; plant location, product mix, etc.)

C.2 How would you characterize your firm relative to the previous characteristics?

C.3 What changes have occurred in the ballast industry in recent years (such as the shift

to electronic ballasts), and how have these changes impacted your company?

®2

EE-RM-97-500 COMMENT 20K

PREUM!NARY DRAFT ~ For discussion purposes ol1ly 

the industry in order to structure the manufacturer analysis and ensure an accurate 

representation of the variability of impacts among different firms. 

Part D of the guide solicits input as to the likely cost impacts on manufacturers of 

possible standards. The goal consists in obtaining high-level qualitative and quantitative 

descriptions of the likely incremental capital and manufacturing costs at different 

efficiency levels. DOE is seeking input on possible sources of information and 

appropriate data collection methodologies. , 

Part E of the guide seeks qualitative information which could help develop price and 

quantity forecasts of future ballast sales: 

Part F of the guide addresses issues for which the Department has outlined policies to be 

used in the economic justification of standards. 

Interview participants are invited to comment on all or part of the questions which 

follow. Comments on issues which are not directly reflected in the guide are welcomed. 

PART A: ENGINEERING ISSUES 

PART B: CONSUMER AND NATIONAL ISSUES 

Part C: BALLAST INDUSTRY CHARACTERIZATION 

C.I What are the relevant characteristics that could·be used to divide ballast 

manufacturers into meaningful subgroups for the purpose of evaluating the impacts of 

standards? (Le. firm size; plant location, product mix, etc.) 

, . 

C.2 How would you characterize your firm relative to the previous characteristics? 

C.3 What changes have occurred in the ballast industry in recent years (such as the shift 

to electronic ballasts), and how have these changes impacted your company? 

8-2 
PRELIMINARY DRAFT - For discussion purposes only

T NUFACTURER COST IMPACTS

For each of the efficiency levels described in Section 3.6 of the "Draft Report on

Potential Impact of Possible Energy Efficiency Levels for Fluorescent Lamp Ballasts",

February 1996. (Included below):

D. 1 Are the manufacturing costs described in the LBNL engineering analysis - labor,

materials/parts, shipping/packaging, and tooling/equipment - representative of your

manufacturing costs? Please explain.

D.2 Is there a large variation in costs between different ballast manufacturers? If so,

how large, and what elements might account for these variations?

D.3 What would be the effect on the value of your current assets in such areas as plant,

equipment, and tooling?

PART E: EWPACTS ON PRODUCT SALES AND PRICE

For each of the efficiency levels described in Section 3.6:

E.1 Would the total number of ballasts sold by your firm increase or decrease from

current forecasts? Why?

E.2 Would the price on ballasts increase or decrease ? Why? By how much?

E.3 Would the gross profit margin on ballasts increase or decrease? Why? By how

much?

E.4 Are you aware of other factors that could influence the price and quantity variables

for your firm? (changes in distribution channels, changes in suppliers, etc.)

PART F: OTHER ISSUES

For each of the efficiency levels described in Section 3.6:

F.1 What might be the effect on current employment levels at your domestic

manufacturing plants? Please explain and quantify if possible.

B-3

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT - For discussion purposes only 

PART D: MANUFACTURER COST IMPACTS 

For each of the efficiency levels described in Section 3.6 of the "Draft Report on 

Potential Impact of Possible Energy Efficiency Levels for Fluorescent Lamp Ballasts", 

February 1996. (Included below): 

D.1 Are the manufacturing costs described in the LBNL engineering analysis - labor, 

materials/parts, shipping/packaging, and tooling/equipment - representative of your 

manufacturing costs? Please explain. 

D.2 Is there a large variation in costs between different ballast manufacturers? If so, 

how large, and what elements might account for these variations? 

D.3 What would be the effect on the value of your current assets in such areas as plant, 

equipment, and tooling? 

PARTE: IMPACTSONPRODUCTSALESANDPRICE 

For each of the efficiency levels described in Section 3.6: 

E.1 Would the total number of ballasts sold by your firm increase or decrease from 

current forecasts? Why? 

E.2 Would the price on ballasts increase pr decrease? Why? By how much? 

E.3 Would the gross profit margin on ballasts increase or decrease? Why? By how 

much? 

E.4 Are you aware of other factors that could influence the price and quantity variables 

for your firm? (changes in distribution channels, changes in suppliers, etc.) 

PART F: OTHER ISSUES 

For each of the efficiency levels described in Section 3.6: 

F.1 What might be the effect on current employment levels at your domestic 

manufacturing plants? Please explain and quantify if possible. 

B-3 
PRELIMINARY DRAFT d For discussion purposes only

F.2 What might be the effect on your company's return on investment and overall

economic value? Please elaborate.

F.3 How might your competitive position in the industry be affected?

F.4 What other federal product regulations are likely to impact your firm in the near

future?

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

F.2 What might be the effect on your company's return on investment and overall 

economic value? Please elaborate. 

F.3 How might your competitive position in the industry be affected? 

F.4 What other federal product regulations are likely to impact your finn in the near 

future? 
PRELIMINARY DRAFT r For discussion purposes only

Financial Inputs to GRI M for the Ballast Rulernaking Analysis

Abstract: The following table illustrates a representative financialstructure to be used

for conducting the cash flow analysis of a `prototypical" fluorescent lamp ballast

manufacturer.

Assumptions Page for

Scenario Description

Base Year

Announcement Year

Standard Year

Tax Rate

Discount Rate for NPV

Inflation Rate

Working Capital

Standard SG&A

Research and Development

Ordinary Depreciation

Ordinary Capital Expenditures

uo cem Lamp Baall;ants

Fluorescent Lamp Ballasts

1998

1999

2002

37.2%

TBD

0.0%

Beginningyear for analytical purposes

Year in which the regulation announcement is made

Year in which the regulation takes effect

16.4%k

15.9%

1.75%

2:9%

-3:4%

of Revenue

ofRevenue

of Revenue

of Revenue

I

EE-RM-97-500 COMMENT 20K

PRELlM!NARY DRAFT ~ For discussion purposes only 

ATTACHMENT C 

Financial Inputs to GRIM for the Ballast Rulemaking Analysis 

Abstract: The following table illustrates a representative financial structure to be used 

for conducting the cash flow analysis of a ''prototypical'' fluorescent lamp ballast 

manufacturer. 

Scenario Description 

Base Year 

Announcement Year 

Standard Year 

Tax Rate 

Discount Rate for NPV 

Inflation Rate 

Working Capital 

Standard SG&A 

Research and Development 

Ordinary Depreciation 

Ordinary Capital Expenditures 

..Assumptions :pageJor .. ...... . ........ . 

f;luore~nt l4lmpBaJI~8ts . 

Fluorescent Lamp Ballasts 

.1998 Beginning year for analytical purposes 

~~---~ 1999 Year in which the regulation announcement is made 

"""",,-,-;,--..,.,.o! 

2002 Year in which the regulation takes effect L--;";";"---,,---.J 

C-1 
PRELIMINARY DRAFT - For discussion purposes only

Flnancla.: -'.,o GRI M for t r-ee®'.,=ul ak° nal is

1. Elora

The Department of Energy proposes to use the Government Regulatory pact Model

(GRIM) to cculate the financial impacts of new sdards on manufacturers of

fluorescent lamp ballasts.

Given the relatively small number of firms in the industry, the Department proposes to

create industry cash flow analysis using a "bottoms-up" approach. Essentially each

manufacturer would provide its own cash flow analysis to be aggregated with all other

manufacturer submittals. order to facilitate individual manufacturer analysis, the

Department will prepare baseline scenarios for a "prototypical" manufacturer using

publicly available financial information. objective of this document is to outline and

document the basis of financial assumptions to be used in GRIK4 when performing the

cash flow analyses for a "prototypical" ballast manufacturer. Manufacturers will be able

to modify relevant part -meters to meet their own situation (price, cost, financial

parameters, shipments, ,.

The GRIK4 model is used to conduct a standard cash flow analysis that uses price,

quantity, and cost information to assess the impact of regulatory conditions on

manufacturer income and cash flow. This process is represented in Figure 1.

....................}..»..... ....

.......................................

I ..................

Figure 1. Usi 1 " perforrn an industry cash fir, i

C- 2

EE-RM-97-500 COMMENT 20K

PRELlM!NARY DRAFT N For discussion purposes only 

Financial Inputs to GRIM for the Ballast Rulemaking Analysis 

Introduction 

The Department of Energy proposes to use the Government Regulatory Impact Model 

(GRIM) to calculate the financial impacts of new standards on manufacturers of 

fluorescent lamp ballasts. 

Given the relatively small number of firms in the industry, the Department proposes to 

create an industry cash flow analysis using a "bottoms-up" approach. Essentially each 

manufacturer would provide its own cash flow analysis to be aggregated with all other 

manufacturer submittals. In order to facilitate individual manufacturer analysis, the 

Department will prepare baseline scenarios for a "prototypical" manufacturer using 

publicly available financial information. The objective of this document is to outline and 

document the basis of financial assumptions to be used in GRIM: when perfonning the 

cash flow analyses for a "prototypical" ballast manufacturer. Manufacturers will be able 

to modify relevant parameters to meet their own situation (price, cost, financial 

parameters, shipments, ./. 

2.0 GRIM Model 

The GRIM: model is used to conduct a standard annual cash flow analysis that uses price, 

quantity, and cost information to assess the impact of regulatory conditions on 

manufacturer income and cash flow. This process is represented in Figure 1. 

Price .. Manufacturing Cost 

Quantity .. Financial Information 

Cash Flow 

Figure 1. Using GRIM to perfonn an industry cash flow analysis 

C-2 
PRELIMINARY DRAFT - For discussion purposes only

3.0 Financial Inputs to GRIM

Prior to initiating the cash-flow analysis, financial data on variables such as tax rate,

working capital, depreciation, cost of capital, etc., need to be input into GRIM. To

obtain estimates for these inputs DOE has analyzed information available from publicly

available sources of firm-specific financial information for major fluorescent lamp ballast

manufacturers-SEC-1OK Reports, Moody's Company Data Reports, Standard &

Poor's (S&P) Stock Reports, and Robert Morris Associates.

For the purpose of the GRIM cash flow analysis only the ballast segment of each firm's

operations will be considered. Thus financial information relevant to the GRIM analysis

should be representative of plant level statistics to the extent possible. Where firm

specific data are to be used these should be drawn only from firms with a substantial

portion of their operations concentrated in ballast manufacturing (i.e. Motorola's

financials are not representative of ballast manufacturing cost structure).

Publicly available financial information was analyzed to identify industry financial data. In

addition, financial data .2 ?Tansformer indus : C#3612), as obtained from Robert

Moms Associates, is also presee s ollowing sub-sections present

historical financial data Obtain

3.1 Tax Rate

Firms pay an annual tax, levied by the federal and state governments, based on income.

Taxable income and the income taxes paid are presented as separate line items in a

company's income statement. Table 1 presents the effective income tax rates for three

ballast manufacturers over the period 1990-96 . This information was obtained from the

manufacturers' income statements, by dividing the income taxes paid by the taxable

income. The marginal tax rates paid by diversified manufacturers for their ballast

operations is difficult to estimate and may or may not be reflected by the "effective" tax

rate reported on financial reports.

A 42.31 % 1990-1996

B 35.88% 1990-1996

C 33.52% 1990-1996

Table 1 . Average income tax rates

The Department proposes using an income tax rate of 37.2%, a simple arithmetic average

of the three manufacturers, as an input to GRIM. `

C- 3

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

3.0 Financial Inputs to GRIM 

Prior to initiating the cash-flow analysis, financial data on variables such as tax rate, 

working capital, depreciation, cost of capital, etc., need to be input into GRIM. To 

obtain estimates for these inputs DOE has analyzed information available from publicly 

available sources of firm-specific financial information for maj or fluorescent lamp ballast 

manufacturers-SEC-I0K Reports, Moody's Company Data Reports, Standard & 

Poor's (S&P) Stock Reports, and Robert Morris Associates. 

For the purpose of the GRIM cash flow analysis only the ballast segment of each firm's 

operations will be considered. Thus financial information relevant to the GRIM analysis 

should be representative of plant level statistics to the extent possible. Where firm 

specific data are to be used these should be drawn only from firms with a substantial 

portion of their operations concentrated in ballast manufacturing (i.e. Motorola's 

financials are not representative of ballast manufacturing cost structure). 

Publicly available financial information was analyzed to identify industry financial data. In 

addition, financial data sformer indus C#3612), as obtained from Robert 

Moms Associates, is al ollowing sub-sections present 

historical financial data 

3.1 Tax Rate 

Firms pay an annual tax, levied by the federal and state governments, based on income. 

Taxable income and the income taxes paid are presented as separate line items in a 

company's income statement. Table 1 presents the effective income tax rates for three 

ballast manufacturers over the period 1990-96. This information was obtained from the 

manufacturers' income statements, by dividing the income taxes paid by the taxable 

income. The marginal tax rates paid by diversified manufacturers for their ballast 

operations is difficult to estimate and mayor may not be reflected by the "effective" tax 

rate reported on financial reports. 

Table 1. Average income tax rates 

The Department proposes using an income tax rate of 37.2%, a simple arithmetic average 

of the three manufacturers, as an input to GRIM. 

C-3 
PRELIMINARY DRAFT d For discussion purposes only

3.2 Working Capital

Working capital is defined as the difference between a firm's short-term (or current)

assets and short-term (or current) liabilities. It is the part of a company's capital that

must be maintained in order to undertake day-to-day operations of the company without

experiencing liquidity problems. Because cash inflows and outflows are not

synchronized, a firin needs to maintain access to cash either from its own liquidity

portfolio, or from back-up liquidity. This capital cannot be used in the investing activities

of the company.

Table 2 presents average working capital maintained by a major ballast manufacturer as a

percentage of its annual revenues. Data has been averaged over the period 1990-97.

Working capital data is also presented for the transformer industry (SIC# 3612) for

companies with annual sales greater than $25 million as reported by Robert Morris

Associates. Working capital is calculated by subtracting current liabilities from current

assets of the firm, where the current assets and liabilities are obtained from the firm's

annual balance sheets.

Table 2. Average working capital as a percentage revenues

Based on information available in Table 2, the Department will assume working capital to

be 16.4% (simple arithmetic average ofthe two values) of revenues for input into GRIM.

In general, companies will strive to lower their working capital needs to the lowest

amount possible so as to free up as much cash flow as possible for revenue-generating

investing activities. According to Standard Poor's, in the last few years improved

working-capital management techniques have greatly reduced the investment that might

otherwise have been required.

3._1 Aatratin (SG&A)

Table 3 presents average SG&A expenses for a major ballast manufacturer as a

percentage of its annual revenues. The data has been averaged over seven years, 1991

through 1997. SG&A information is presented as a line item in individual manufacturers'

income statements, presented in SEC 10-K reports. SG&A expenses are also presented

for the transformer industry (SIC# 3612) for companies with annual sales greater than

$25 million as reported by Robert Morris Associates.

C- 4

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discliission purposes only 

3.2 Working Capital 

Working capital is defined as the difference between a firm's short-term (or current) 

asset~ and short-term (or current) liabilities. It is the part of a company's capital that 

must be maintained in order to undertake day-to-day operations of the company without . 

experiencing liquidity problems. Because cash inflows and outflows are not 

synchronized, a firm needs to maintain access to cash either from its own liquidity 

portfolio, or from back-up liquidity. This capital cannot be used in the investing activities 

of the company. 

Table 2 presents average working capital maintained by a major ballast manufacturer as a 

percentage of its annual revenues. Data has been averaged over the period 1990-97. 

Working capital data is also presented for the transformer industry (SIC# 3612) for 

companies with annual sales greater than $25 million as reported by Robert Morris 

Associates. Working capital is calculated by subtracting current liabilities from current 

assets of the firm, where the current assets and liabilities are obtained from the firm's 

annual balance sheets. 

Table 2. Average working capital as a percentage of revenues 

Based on information available in Table 2, the Department will assume working capital to 

be 16.4% (simple arithmetic average of the two values) of revenues for input into GRIM. 

In general, companies will strive to lower their working capital needs to the lowest 

amount possible so as to free up as much cash flow as possible for revenue-generating 

investing activities. According to Standard & Poor's, in the last few years improved 

working-capital management techniques have greatly reduced the investment that might 

otherwise have been required. 

3.3 Selling, General and Administration (SG&A) 

Table 3 presents average SG&A expenses for a major ballast manufacturer as a 

pe~centage ofits annual revenues. The data has been averaged over seven years, 1991 

through 1997. SG&A information is presented as a line item in individual manufacturers' 

income statements, presented in SEC 10-K reports. SG&A expenses are also presented 

for the transformer industry (SIC# 3612) for companies with annual sales greater than 

$25 million as reported by Robert Morris Associates. 

C-4 
PRELIMINARY DRAFT - For discussion purposes only

Dda ref ctur a as ¢% o of

:Wry

year

:

A 14.8 1991-1997

RMA 17. 0 1995-1997

Table 3. Average SG &A expense as a pe rcentage of revenues

Selling costs include any expense or class of expense incurred in selling or marketing. In

a manufacturing firm, selling costs include both marketing (order getting) costs and

logistics (order-filling) costs. Marketing costs include market research, advertising,

point-of-sale promotions, and salespersons' compensation and travel costs. Logistics

costs include warehousing and delivery costs as well as record-keeping costs associated

with processing an order.

General and Administrative (G&A) costs are expenses incurred for the general direction

of the enterprise. G&A costs include the cost of service and staff units (such as the

personnel office) and general corporate costs, including compensation of top

management and donations to charitable organizations.

The Department propos usin a value of 1 5°A s ple arithmetic average of the two

values in Table 3) of revenues Ir R, ex X ns asgin- input to GRIM.

3.4 Research and Development (R&D)

Research and development (R&D) costs are costs incurred for the purpose of developing

new or improved goods, processes or services . The results of R&D efforts are increased

revenues or lower costs. Since these results will not occur until future periods, often five

or more years after the research project is started , a case could be made for capitalizing

R&D costs and amortizing them over the benefits period. However, this practice would

be counter to the Generally Accepted Accounting Principles (GAAP) promulgated by the

Financial Accounting Standards Board (FASB). Instead, it requires that R&D costs be

treated as period costs-that is, charged off as an expense of the current period. The

reason given by the FASB for its requirement is that by their very nature, the future

benefits to be derived from current R&D efforts are highly uncertain.

Table 4 presents the R&D costs incurred by a major ballast manufacturer as a percentage

of its annual revenues. The R&D cost data has been averaged over the past six years,

1992 through 1997.

C- 5

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Table 3. Average SG&A expense as a percentage of revenues 

Selling costs include any expense or class of expense incurred in selling or marketing. In 

a manufacturing firm, selling costs include both marketing (order getting) costs and 

logistics (order-filling) costs. Marketing costs include market research, advertising, 

point-of-sale promotions, and salespersons' compensation and travel costs. Logistics 

costs include warehousing anel delivery costs as well as record-keeping costs associated 

with processing an order. 

General and Administrative (G&A) costs are expenses incurred for the general direction 

of the enterprise. G&A costs include the cost of service and staff units (such as the 

personnel office) and general corporate costs, including compensation of top 

management and donations to charitable organizations. 

The Department propo 

values in Table 3) of r 

3.4 Research and Development (R&D) 

,Ie arithmetic average of the two 

n : as'. input to GRIM:. 

Research and development (R&D) costs are costs incurred for the purpose of developing 

new or improved goods, processes or services. The results of R&D efforts are increased 

revenues or lower costs. Since these results will not occur until future periods, often five 

or more years after the research project is started, a case could be made for capitalizing 

R&D costs and amortizing them over the benefits period. However, this practice would 

be counter to the Generally Accepted Accounting Principles (GAAP) promulgated by the 

Financial Accounting Standards Board (F ASB). Instead, it requires. that R&D costs be 

treated as period costs-that is, charged off as an expense of the current period. The 

reason given by the F ASB for its requirement is that by their very nature, the future 

benefits to be derived from current .R&D efforts are highly uncertain. 

Table 4 presents the R&D costs incurred by a major ballast manufacturer as a percentage 

of its annual revenues. The R&D cost data has been averaged over the past six years, 

1992 through 1997. 

C-5 
PRELIMINARY DRAFT - For discussion purposes only

Table 4. Avera osts as a pew--- :._ ; if revenues

The separate disclosure of research and development expense is a relatively recent

requirement. Formerly, most companies included this expense as a part of general and

administrative expenses. Because the amount spent on research and development can

provide important clue as to how energetic the company is in keeping its products and

processes up to date, FASB requires that this amount be reported separately if it is

material.

Based on the information in Table 4, the Department proposes using R&D expense as

1.75% of revenues for input into GRIM.

3.5 Depreciation

Plant and ufa ng^ Iuipr r sKp ii useful lives; that is, they will

provide service to the f _ gate BHT ? Je f J-pre accounting periods. A

fraction of the cost of these assets is therefor properly chargeable as expense in each of

the accounting periods in which the assets provide service to the firm. The accounting

process for this gradual conversion of plant and equipment capitalized cost into expense

is called depreciation.

Table 5 presents average depreciation for a major ballast manufacturer as a percentage of

its annual revenues. The data has been averaged over eight years, 1990 through 1997.

Depreciation is presented a separate line item in the manufacturers' income statements

as presented in SEC 10-K reports. Depreciation expense is also presented for the

transformer industry (SIC# 3612) for companies with annual sales greater than $25

million as reported by Robert Morris Associates.

............... .................... ........ ........ ................. .............

A 3.17 199€3-1997

RMA 2.6 1995-1997

Table Average depreciation expense as a percentage of venues.

Based on information in Table 5, the Department proposes using a value of 2.9% (simple

arithmetic average of the two values in Table 5) of revenues for depreciation expense as

input into GRIM.

C- 6

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For di~cus~!on purposes only 

Table 4. Average costs as a percentage of revenues 

The separate disclosure of research and development expense is a relatively recent 

requirement. Formerly, most companies included this expense as a part of general and 

administrative expenses. Because the amount spent on research and development can 

provide an important clue as to how energetic the company is in keeping its products and 

processes up to date, F ASB requires that this amount be reported separately if it is 

material. 

Based on the information in Table 4, the Department proposes using R&D expense as 

1.75% of revenues for input into GRIM. 

3.5 Depreciation 

Plant and manufacturinsefullives; that is, they will 

provide service to the fi accounting periods. A 

fraction of the cost of these assets is there ore properly chargeable as expense in each of 

the accounting periods in which the assets provide service to the firm. The accounting 

process for this gradual conversion of plant and equipment capitalized cost into expense 

is called depreciation. 

Table 5 presents average depreciation for a major ballast manufacturer as a percentage of 

its annual revenues. The data has been averaged over eight years, 1990 through 1997. 

Depreciation is presented as a separate line item in the manufacturers' income statements 

as presented in SEC lO-K reports. Depreciation expense is also presented for the 

transformer industry (SIC# 3612) for companies with annual sales greater than $25 

million as reported by R.obert Morris Associates. 

Table 5. Average depreciation expense as a percentage of revenues. 

Based on information in Table 5, the Department proposes using a value of 2.9% (simple 

arithmetic average of the two values in Table 5) of revenues for depreciation expense as 

an input into GRIM:. 
PRELIM INARY DRAFT .For discussion purposes only

3.6 Capital Expenditures

These are the expenditures made for additions to fixed assets, like plant, equipment, etc.,

intended to benefit future accounting periods (in contrast with other expenditures that

benefit the current period). These expenditures are aimed at increasing the capacity,

efficiency, life span, or economy of the operation of an existing fixed asset, or, in some

cases, to build entirely new assets.

Table 6 presents average capital expenditures for a major ballast manufacturer as a

percentage of its annual revenues. The data has been averaged over eight years, 1990

through 1997. The table also presents data from the 1992 Census of Manufactures.

A 3.39 1990-1997

Census of Manufactures 1.88 1992

RMA -

Table 6. Average capita A itures as a perc . %v or revenues

The Department has no Lrare^.spmi . g v r p iation from the Census of

Manufactures. H Ience th t p t r us a capital expenditure

information available from the 10-K financial reports of Manufacturer A. Based on

information in Table 6, the Department proposes using capital expenditures as 3.4% of

base year revenues for input into GRIM.

3.7 Cost of Capital/Discount Rate

Cost of capital is a measure of a company 's cost of using capital that it raises either

through loans (i.e., debt) or by issuing equity. It is the minimum rate of return that must

be earned on new investments that will not dilute the equity of the shareholders. This

rate of return is often referred to as the discount rate, hurdle rate, or the opportunity cost

of capital.

The company cost of capital is a weighted average of the returns that investors expect

from various debt and equity securities issued by the firm. It is calculated as the cost of

debt capital (which is then adjusted for the income tax effect of debt financing) plus the

cost of equity capital, weighted by the relative, amount of each in a company's capital

structure. For the purpose of characterizing financial impacts of regulations on

manufacturers using GRIM, the Department proposes using the company cost of capital

to discount future cash flows for arriving at the ballast industry value.

C- 7

EE-RM-97-500 COMMENT 20K

PREUMINARY DRAFT ~·For discussion purposes only 

3.6 Capital Expenditures 

These are the expenditures made for additions to fixed assets, like plant, equipment, etc., 

intended to benefit future accounting periods (in contrast with other expenditures that 

benefit the current period). These expenditures are aimed at increasing the capacity, 

efficiency, life span, or economy of the operation of an existing fixed asset, or, in some 

cases, to build entirely new assets. 

Table 6 presents average capital expenditures for a major ballast manufacturer.as a 

percentage of its annual revenues. The data has been averaged over eight years, 1990 

through 1997. The table also presents data from the 1992 Census of Manufactures. 

Table 6. Average capi.tamJiP~ 

The Department has no iation from the Census of 

Manufactures. Hence e capital expenditure 

information available from the 10-K financial reports of Manufacturer A. Based on 

information in Table 6, the Department proposes using capital expenditures as 3.4% of 

base year revenues for input into GRIM. 

3.7 Cost of Capital/Discount Rate 

Cost of capital is a measure of a company's cost of using capital that it raises either 

through loans (Le., debt) or by issuing equity. It is the minimum rate of return that must 

be earned on new investments that will not dilute the equity of the shareholders. This 

rate of return is often referred to as the discount rate, hurdle rate, or the opportunity cost 

of capital. 

The company cost of capital is a weighted average of the returns that investors expect 

from various debt and equity securities issued by the firm. It is calculated as the cost of 

debt capital (which is then adjusted for the income tax effect of debt financing) plus the 

cost of-equity capital, weighted by the relative. amount of each in a company's capital 

structure. For the purpose of characterizing financial impacts of regulations on 

manufacturers using GRIM, the Department proposes using the company cost of capital 

to discount future cash flows for arriving at the ballast industry value. 

C-7 
PRELIMINARY DRAFT d For discussion purposes only

In order to calculate the company cost of capital, it is essential to identify a company's

cost of raising debt, cost of raising capital through issuing equity, and the capital

structure of the company. Capital structure of a company gives information about the

cunt of debt versus the amount of equity in the company.

Cost of debt: Cost of debt is a weighted average cost of debt based on all forms of debt

financing outstanding. Information on the amount of debt outstanding and the interest

rate at which it was issued was obtained from SEC 10-IC financial statements and

Moody's reports for two publicly traded fluorescent lamp ballast manufacturers.

Manufacturer A: The ballast manufacturer has a line of credit available from a group of

banks. Borrowing under the credit facility bear interest at the London Interbank Offered

Rate (LIBOR which is currently 5.8125%) plus three quarter percent which would imply

a nominal rate of 6.56%. addition the company can raise debt through offering

corporate bonds. The company's corporate bonds have been rated B i by Moody's

rating services. This would mean a borrowing rate of 2775 basis points above the

Treasury bills for a 5 year debt instrument. At the present time this would mean a

nominal borrowing rate of approximately 7.77% (@T bill rate = -'5.00%). Adjusting for

inflation rate of 2.2%J1-: ' 997, the real cost of would be around 5%.

Manufacturer This cc" ,I, pis tr :- 71 11 t primarily by issuing corporate

bonds. The company's c io*° t; s av r6.` Aa3 (and in few cases Al) by

Moody's rating services: z i Quid-me45 a orr® 'itE rate of 755 basis points above the

Treasury bills for a 30-year debt instrument. At the present time this would mean a

nominal borrowing rate of approximately 5.75% (@T bill rate = -5.00%). Adjusting for

inflation rate of 2.2% in 1997, the real cost of debt would be around 3.55%.

Debt ratio is defined as the ratio of long-term debt to total long-term capital (i.e., longterm debt plus equity), and illustrates a company's capital structure.

A

B

Table 7. Debt do for t-..

0.79

0.15

st Manufacturers

Comparing the debt ratios of 0.79 and 0. 15 with a five-year average debt ratio of 0.17

for the industry composite represented by SIC code 361-Electric Transmission and

Distribution Equipment (which would probably more closely represent the ballast

industry than any other SIC code) it appears that there is a large variation in the debt

ratios among companies within the industry. The five-year average debt ratio is obtained

5 Source: Bridge Corp= Spreads for Industrials, refer

h :/ c l.bridge.com/publicspre s.cgi

6-Most of the debt offerings by this company in the 30-year range.

C- 8

EE-RM-97-500 COMMENT 20K

PREliMINARY DRAFT ~ For discussion purposes only 

In order to calculate the company cost of capital, it is essential to identify a company's 

cost of raising debt, cost of raising capital through issuing equity, and the capital 

structure of the company. Capital structure of a company gives information about the 

amount of debt versus the amount of equity in the company. 

Cost of debt: Cost of debt is a weighted average cost of debt based on all forms of debt 

financing outstanding. Information on the amount of debt outstanding and the interest 

rate at which it was issued was obtained from SEC 10-K financial statements and 

Moody's reports for two publicly traded fluorescent lamp ballast manufacturers. 

Manufacturer A: The ballast manufacturer has a line of credit available from a group of 

banks. Borrowing under the credit facility bear interest at the London Interbank Offered 

Rate (LIBOR which is currently 5.8125%) plus three quarter percent, which would imply 

a nominal rate of 6.56%. In addition the company can raise debt through offering 

corporate bonds. The company's corporate bonds have been rated B 1 by Moody's 

rating services. This would mean a borrowing rate of 2775 basis points above the 

Treasury bills for a 5 year debt instrument. At the present time this would mean a 

nominal borrowing rate of approximately 7.77% (@Tbill rate = -5.0(010). Adjusting for 

an inflation rate of 2.2«Y« • 7, the real cost of would be around 5%. 

Manufacturer B: This ccllpan t primarily by issuing corporate 

bonds. The company's Aa3 (and in few cases AI) by 

Moody's rating services s wo m rate of 755 basis points above the 

Treasury bills for a 30-year6 debt instrument. At the present time this would mean a 

nominal borrowing rate of approximately 5.75% (@T bill rate = -5.0(010). Adjusting for 

an inflation rate of2.2% in 1997, the real cost of debt would be around 3.55%. 

Debt ratio is defined as the ratio of long-term debt to total long-term capital (i.e., longterm debt plus equity), and illustrates a company's capital structure. 

Table 1. Debt Ratio for two Ballast Manufacturers 

Comparing the debt ratios of 0.79 and 0.15 with a five-year average debt ratio of 0.17 

for the industry composite represented by SIC code 361-Electric Transmission and 

Distribution Equipment (which would probably more closely represent the ballast 

industry than any other SIC code) it appears that there is a large variation in the debt 

ratios among companies within the industry. The five-year average d.ebt ratio is obtained . . 

5 Source: Bridge Corporate Spreads for Industrials, refer 

http://bondchannel.bridge.com/p1.lblicspreads.cgi 

6. Most of the debt offerings by this company are in. the 30=year range. 
PRELI M INARY DRAFT - For discussion purposes only

from Ibbotson Associates, a company that tracks the industry cost of capital for over 300

industries. This indicates that different companies adopt different ways of raising

capital-some depend more on equity while others depend more on debt for raising

capital.

Cost of equity: Cost of equity is the rate of return that equity investors expect to earn

on their investments in a company's stock. These expectations are reflected in the

market price of the company's stock. One way of estimating the cost of equity is by

using the capital asset pricing model (CAPM). The CAPM is based on the premise that

the expected or the required rate of return on any firm's common stock equals the

riskless rate of interest plus a premium for risk. The CAPM is widely used by large

corporations to estimate their costs of equity.' Another method that could be used to

determine the cost of equity is the historical rate of return to the stockholder.

According to the CAPM, the cost of equity, or, the expected return for equity, is

determined as:

cost of equity = riskless rate + beta * [risk premium]

where:

ris ess rate is usually K sho to r or the long-term government

bond rate adjusted for ` `ri sk r bills,

risk premium is the di `re ' e ' ee e p to eturn on the market portfolio and

the riskless rate, and

beta is a measure of the sensitivity of a company's stock to market movements.

Table 8 presents yields on Treasury bills artd government bonds, and the average risk

premium associated with these securities. Each portfolio offers different degrees of risk.

Treasury bills are about as safe an investment as one can make. There is little risk of

default, and their short maturity means that the prices of Treasury bills are relatively

stable. However, investors cannot lock in a real rate of return; there is still some

uncertainty about inflation. By switching to long-term government bonds, investors

acquire an asset whose prices fluctuate as interest rates vary. (Bond prices fall when

interest rates rise and rise when interest rates fall.) An investor who switches from

government bonds-to common stocks has a direct share in the risks of the enterprise, and

hence accepts the additional default risk. Investors who accepted the extra risk of

common stocks received, on average, a premium of 8.5 % a year over the return on

Treasury bills.

' For more information on CAPM refer to Chapters 7, 8 and 9 of Corporate Finance by Brealey, R.A.,

and Myers, S.C.; and the article entitled Does Capital Asset Pricing Model Work by Mullins, D.W.,

published in the Harvard Business Review.

CEE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT M For discussion purposes only 

from Ibbotson Associates, a company that tracks the industry cost of capital for over 300 

industries. This indicates that different companies adopt different ways of raising 

capital-some depend more on equity while others depend more on debt for raising 

capital. 

Cost of equity: Cost of equity is the rate of return that equity investors expect to earn 

on their investments in a company's stock. These expectations are reflected in the 

market price of the company's stock. One way of estimating the cost of equity is by 

using the capital asset pricing model (CAPM). The CAPM is based on the premise that 

the expected or the required rate of return on any firm's common stock equals the 

riskless rate of interest plus a premium for risk. The CAPM is widely used by large 

corporations to estimate their costs of equity? Another method that could be used to 

determine the cost of equity is the historical rate of return to the stockholder. 

According to the CAPM, the cost of equity, or, the expected return for equity, is 

determined as: 

cost of equity = riskless rate + beta lit [risk premium] 

where: 

riskless rate is usually 

bond rate adjusted for 

risk premium is the di 

the riskless rate, and 

or the long-term government 

ills, 

tum on the market portfolio and 

beta is a measure of the sensitivity of a company's stock to market movements. 

Table 8 presents yields on Treasury bills add government bonds, and the average risk 

premium associated with these securities. Each portfolio offers different degrees of risk. 

Treasury bills are about as safe an investment as one can make. There is little risk of 

default, and their short maturity means that the prices of Treasury bills are relatively 

stable. However, investors cannot lock in a real rate of retllm~ there is still some 

uncertainty about inflation. By switching to long-term government bonds, investors 

acquire an asset whose prices fluctuate as interest rates vary. (Bond prices fall when 

interest rates rise and rise when interest rates fall.) An investor who switches from 

government bonds·to common stocks has a direct share in the risks of the enterprise, and 

hence accepts the additional default risk. Investors who accepted the extra risk of 

common stocks received, on average, a premium of8.5 % a year over the return on 

Treasury bills. 

7 For more information on CAPM refer to Chapters 7, 8 and 9 of Corporate Finance by Brealey, RA., 

and Myers, S.C.; and the article entitled Does Capital Asset Pricing Model Work by Mullins, D.W., 

published in the Harvard Business Review. 

e-9 
PRELIMINARY DRAFT m For discussion purposes only

Bu L -es retu (1990-96) and risk premiums (1926-94) on some

cririties (figs- s in percent per year)

Table 9 presents average values of beta for two ballast manufacturers. The data has been

averaged over the period 1990-96. The values of beta are obtained from financial

services provided by the Dow Jones Company. They measure the sensitivity of a stock's

price to overall fluctuations in the S&P 500 stock index. Beta measures the sensitivity of

the return on individual stock to the return on the market portfolio. A stock with a

beta of 1 tends to move up and down in the same percentage as the market. Stocks with

a beta coefficient less ^.d to move in pert a terms less than the market.

Similarly, a stock with %. )eta t n: n to move up down more

than the market.

1.20

Average e values for two ally Manufacturers

Using CAPM to calculate the cost of equity, the following results are obtained for the

ballast manufacturer:

Manufacturer A: Cost of equity = (7.06®1.5) + 1.01 * (8.5) =

[ris ess rate] beta: * [risk premium]

14.15%

Manufacturer B: Cost of equity = (7.06®1.5) + 1.20 * (8.5) =

[riskless rate] beta * [risk premium]

15.75%

Adjusting for inflation (averaging 3.42% per year over the period 1990-96), the real cost

of equity for Manufacturers A and B are 1 0.73% and 12.33% respectively.

8 Based on data from the Federal Reserve Statistical Release.

9 -Source: Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation, 1994 Yearbook

C4 0

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PREUMjNARY DRAFT ~ For discussion purposes .only 

Table 8. Average rates of return (1990=96) and risk premiums (1926=94) on some 

securities (figures in percent per year) 

Table 9 presents average values of beta for two ballast manufacturers. The data has been 

averaged over the period 1990-96. The values of beta are obtained from financial 

services provided by the Dow Jones Company. They measure the sensitivity of a stock's 

price to overall fluctuations in the S&P 500 stock index. Beta measures the sensitivity of 

the return on an individual stock to the return on the market portfolio. A stock with a 

beta of 1 tends to move up and down in the same percentage as the market. Stocks with 

a beta coefficient less to move in terms less than the market. 

Similarly, a stock with to move up and down more 

than the market. 

Table 9. Average Beta values for two Ballast Manufacturers 

Using CAPM to calculate the cost of equity, the following results are obtained for the 

ballast manufacturer: 

Manufacturer A: Cost of equity = (7.06 .. 1.5) + 1.01 >I< (8.5) = 14.150/0 

[riskless rate] beta '" [risk premium] 

Manufacturer B: Cost of equity = (7.06-1.5) + 1.20 II< (8.5) = 15.75% 

[riskless rate] beta II< [risk premium] 

Adjusting for inflation (averaging 3.42% per year over the period 1990-96), the real cost 

of equity for Manufacturers A and Bare 10.73% and 12.33% respectively. 

8 Based on data from the Federal Reserve Statistical Release. 

9.Somce: Ibbotson Associates, Inc., Stocks. Bonds. Bills. and Inflation. 1994 Yearbook 

C40 
PRELIMINARY DRAFT - For discussion purposes only

Weighted Average Cost of Capital ACC) is defined as:

WACC = ( 1-tax rate) * cost of debt * [debt/(debt+equity)] +

cost of equity * [equity/(debt+equity)]

Manufacturer A: WACC = [(1-0.42) * 5.00 * 0.79 ] + [10.73 * (1-0.79)] = 4.5%

Manufacturer B: WACC = [( 1-0.335) * 3.55 * 0. 15 ] + [12.33 * ( 1-0.15)] = 10.8%

The weighted average cost of capital calculated accounts for inflation, as real values of

cost of equity and debt are used in the calculation . In calculating WACC it is assumed

that the manufacturer maintains the same capital structure in the future , i.e. future debt

ratios remain the same as in the past (see Table 7).

Cost of debt*

Cost of equity*

Capital Structure

ebt'Total Value

WACC *

I Beta

* Values have been adjusted for inflation.

Table 10. Comparison of financial data.

Based on the analysis of financials of two ballast manufacturers there appears to be a

wide spectrum of WACC. The WACC for the industry composite represented by SIC

code 361 as provided by Ibbotson Associates is 8.37 %10. Given the wide variation in the

WACC the Department will continue to refine its estimates of the cost of capital and seek

additional information.

10 Data obtained from Ibbotson Associates (for the year 1997) suggests 10.57% as the nominal WACC

for the industry composite represented by SIC code 361. CAPRI-Ordinary least squares method is used

for arriving at this value . Adjusting for inflation (2.2% in 1997), the real cost of capital is 8.37%.

C41

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Weighted Average Cost of Capital (W ACC) is defined as: 

WACC = (I-tax rate) >I< cost of debt >I< [debtl(debt+equity)] + 

cost of equity >I< [equity/(debt+equity)] 

Manufacturer A: 

Manufacturer B: 

WACC = [(1-0.42) * 5.00>1< 0.79] + [10.73 * (1-0.79)] = 4.5% 

WACC = [(1-0.335) >I< 3.55 * 0.l5 ] + [12.33 21< (1-0.15)] = 10.8% 

The weighted average cost of capital calculated accounts for inflation, as real values of 

cost of equity and debt are used in the calculation. In calculating W ACC it is assumed 

that the manufacturer maintains the same capital structure in the future, i.e. future debt 

ratios remain the same as in the past (see Table 7). 

Table 10. Comparison of financial data. 

Based on the analysis of financials of two ballast manufacturers there appears to be a 

wide spectrum ofW ACC. The W ACC for the industry composite represented by SIC 

code 361 as provided by Ibbotson Associates is 8.37 %10. Given the wide variation in the 

W ACC the Department will continue to refine its estimates of the cost of capital and seek 

additional information. 

10 Data obtained from Ibbotson Associates (for the year 1997) suggests 10.57% as the nominal W ACC 

for the industry composite represented by SIC code 361. CAPM-Ordinary least squares method is used 

for arriving at this value. Adjusting for inflation (2.2% in 1997), the real cost of capital is ~.37%. 

C41 
PRELIMINARY DRAFT - For -discussion purposes only

ATTACHMENT D

Ballast Industry Cost Structure

Information from the Census of M anufactures ( C -1-36A):

Industry: Fluorescent Lamp Ballasts (SIC# 36124)

production workers

as`'percent of value'

of shipments'::,'

(percent)

: ...........:.:........

48.3 16.1

66.0 19.0

Information from Robert M orris Associates:

SIC# 3612 (13,2 1)

RIVIA 1997

Manufacturers--Equipment for Public Utilities & Industrial Use: SIC# 3612 (13,21)

1995-971 1997 1996 1995

Number of companies with sales > 25MM 36 33 34

Net Sales ($ million) 3737.63 3602.98 3164.13

Total Assets ($ million) 2624.39 2060.85 2057.08

%

Net Sales 10 100 100 100

Gross Profit 27. 27.2 25.6 29.1

Operating Expenses (SG&A + Depreciation) 19.6 19.3 18.4

21.

Profit before tax 6. 6 6.3 6.5

Fixed Assets (net)' 16. 19.8 12.9 15.1

Total Current Assets 39. 39.4 38.6 39.9

Net Working Capital 13.8 13.33

(median)

11.36

(median)

16.67

(median)

Depreciation, Amortization, Depletion 2.61 2.9

(median)

2.5

(median)

2.4

(median)

SG&A (= Operating Expenses - Depreciation) 17.0

(All property, plant, leasehold improvements and equipment, net of accumulated depreciation or depletion)

D-1

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

ATTACHMENT D 

Ballast Industry Cost Structure 

Infonnation from the Census of Manufactures (MCxx-I-36A): 

Industry: Fluorescent Lamp Ballasts (SIC# 36124) 

Infonnation from Robert Morris Associates: ' 

SIC# 3612 (13,21) 

RMA 1991 

Manufacturers-Equipment for Public Utilities & Industrial Use: SIC# 3612 (13,21) 

1995-9 1991 1996 1995 

Number of companies with sales> 25MM 36 33 34 

Net Sales ($ million) 3737.63 3602.98 3164.13 

otal Assets ($ million) 2624.39 2060.85 2057.08 

% % % 

Net Sales 100 100 100 

Gross Profit 27.2 25.6 29.1 

Operating Expenses (SG&A + Depreciation) 19.3 18.4 21. 

Profit before tax 6 6.3 6.5 

Fixed Assets (net) 1 19.8 12.9 15.1 

Total Current Assets ' 39.4 38.6 39.9 

Net Working Capital 13.33 11.36 16.67 

(median) (median) (median) 

Depreciation, Amortization, Depletion 2.9 2.5 2.4 

(median) (median) (median) 

SG&A (= Operating Expenses - Depreciation) 17. 

1 (All property, plant, leasehold improvements and equipment, net of accumulated depreciation or depletion) 

D-1 
PRELIMINARY DRAFT . For discussion purposes only

ATTAC HM ENT E

Fluorescent Lamp Ballast Manufacturers

Interview Guide

Introduction

During late 1997 and early 1998 the Department of Energy met with staff of five major

manufacturers of fluorescent lamp ballasts. The purpose of this series of meetings was to

initiate a dialog between the Department of Energy and each of the manufacturers to help

educate Department representatives about the context in which the industry operates and

about the nature of manufacturer concerns about how energy efficiency standards might

affect them. The preliminary meetings proved to be useful and informative, and as the

rulemaking process moves toward a decision, this second series of interviews with

manufacturer representatives will be used to gather key information on the effects that

potential new energy efficiency standards for ballasts might have on their workforce,

their companies, and thes, liers.

A focus of the Department's interest concerning manufacturer impact is at the plant or

profit center level directly pertinent to ballast production. The context within which the

plant operates and the details of plant production and costs are not readily available from

the published literature, however, so the Department invites the manufacturers to provide

these details confidentially in their own words to the extent practical. The organizational

setting around the ballast profit center is of interest to round out the Department's

understanding of the probable future of the ballast manufacturing activity without and

with energy efficiency standards.

A.1 Identify names of parent companies and any subsidiaries relevant to the ballast

industry.

A.2 Please provide the locations of your production facilities and the product mix

manufactured there.

A.2.1 How would energy efficiency standards affect each production facility mix?

A.3 How has [your company] incorporated energy efficiency improvements in ballast

technology into its product line and marketing strategy?

A.3.1 Are products meeting the energy efficiency standards represented by cathode

cutout or electronic ballasts being produced at increasing rates?

E-1

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

Introduction 

ATTACHMENT E 

Fluorescent lamp Ballast Manufacturers 

Interview Guide 

During late 1997 and early 1998 the Department of Energy met with staff of five major 

manufacturers of fluorescent lamp ballasts. The purpose of this series of meetings was to 

initiate a dialog between the Department of Energy and each of the manufacturers to help 

educate Department representatives about the context in which the industry operates and 

about the nature of manufacturer concerns about how energy efficiency standards might 

affect them. The preliminary meetings proved to be useful and informative, and as the 

rulemaking process moves toward a decision, this second series of interviews with 

manufacturer representatives will be used to gather key information on the effects that 

potential new energy efficiency standards for ballasts might have on their workforce, 

their companies, and th . liers. 

Part A: Current Orga __ 

A focus of the Department's interest concerning manufacturer impact is at the plant or 

profit center level directly pertinent to ballast production. The context within which the 

plant operates and the details of plant production and costs are not readily available from 

the published literature, however, so the Department invites the manufacturers to provide 

these details confidentially in their own words to the extent practical. The organizational 

setting around the ballast profit center is of interest to round out the Department's 

understanding of the probable future of the ballast manufacturing activity without and 

with energy efficiency standards. 

A.l Identify names of parent companies and any subsidiaries relevant to the ballast 

industry. 

A.2 Please provide the locations of your production facilities and the product mix 

manufactured there. 

A.2.1 How would energy efficiency standards affect each production facility mix? 

A.3 How has [your company] incorporated energy efficiency improvements in ballast 

technology into its product line and marketing strategy? 

A.3.1 Are products meeting the energy efficiency standards represented by cathode 

cutout or electronic ballasts being produced at increasing rates? 

E-1 
PRELIMINARY DRAFT r For discussion purposes only

A.4 How would a new energy efficiency standard on ballast products affect your product

mix and marketing strategy?

Part B: IndusInfrastructure

As pof attempt to better understand the industry infrastructure and the impact

energy efficiency standards might have on it, the Department would like for mufacturer

representatives to discuss the following questions.

Major customer types

The following questions are intended to gain understanding of how potential energy

standards levels might affect your consumer mix, distribution channels and related profit

margins. For each of the questions below (as relevant) please emphasize how new

standards might change these factors.

I Please describe roar_ $ > ^^t fraction of ye- t ballast sales goes to each of these

lana other, it appropr:at

OEM

Distributors

Company owned

Independent

Lighting Contractors

Export

B.2 How do the product types differ among these customer types?

B.3 How do prices charged per unit differ among these customer types, and what are the

important determinants of these price differences?

BA In general, could you outline the various paths from the plant to final user for each

major product through each of the significant distribution channels?

B.5 Do you see any impending changes in your distribution channels or in the relative

fractions of sales directed through each?

B.6 Do you see any changes in emphasis on export sales, and would the presence of new

energy efficiency standards have impact on production of ballasts for export sale?

B.7 Generally how would a new ballaststandard impact your client mix, distribution

channels and corresponding profit margins?

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

A.4 How would a new energy efficiency standard on ballast products affect your product 

mix and marketing strategy? 

Part B: Industry Infrastructure 

As part of an attempt to better understand the industry infrastructure and the impact 

energy efficiency standards might have on it, the Department would like for manufacturer 

representatives to discuss the following questions. 

Major customer types 

The following questions are intended to gain an understanding of how potential energy 

standards levels might affect your consumer mix, distribution channels and related profit 

margins. For each of the questions below (as relevant) please emphasize how new 

standards might change these factors. 

B.I Please describe ro 

(and other, if appropria 

OEM 

Distributors 

Company owned 

Independent 

Lighting Contractors 

Export 

t ballast sales goes to each of these 

B.2 How do the product types differ among these customer types? 

B.3 How do prices charged per unit differ among these customer types, and what are the 

important determinants of these price differences? 

B.4 In general, could you outline the various paths from the plant to final user for each 

major product through each of the significant distribution channels? 

B.5 Do you see any impending changes in your distribution channels or in the relative 

fractions of sales directed through each? 

B.6 Do you see any changes in emphasis on export sales, and would the presence of new 

energy efficiency standards have an impact on production of ballasts for export sale? 

B.7 Generally how would a new ballast standard impact your client mix, distribution 

channels and corresponding profit margins? 
PRELIMINARY DRAFT - For discussion purposes only

Major Suppliers

The Department recognizes that manufacturers do not operate in isolation and that

changes in production levels or economic health of a manufacturer can have significant

impacts on its suppliers and other trade allies. Therefore each manufacturer will be

invited to provide information about its trade allies and any impacts they might

.experience from new energy efficiency standards on ballasts. The Department plans to be

available to meet with representatives of these trade allies and to consider their views as

stakeholders. Accordingly, the Department invites each manufacturer to discuss the

following topics during the interviews.

The impacts of new energy efficiency standards on employment and foreign vs. domestic

trade allies will be discussed in the employment assessment section, Questions F.5 & F.6.

B.8 What are the important materials and their suppliers that may be affected by changes

in your product mix?

B.9 What are the important services and their suppliers that may be affected by changes

in your product mix

Part C: Global Comp

Competition has become more and more global in nature, particularly with regard to

products such as lamp ballasts. The Department is interested in learning how ballast

manufacturers view current trends in the global nature of the lamp ballast industry and

how these trends are affecting marketing and plant siting strategies. This information

would be useful in establishing a baseline for measuring the impact of further ballast

efficiency standards.

C.l Absent new energy efficiency standards, do you see the production of ballasts sold in

the US moving out of the US?

C.2 What fraction of your domestic sales for each ballast type is currently produced in

the US? In all North America?

C.3 What fraction of your total worldwide production of each ballast type is currently

sold in the US market?

C.4 What are the most important reasons for choosing plant sites?

C.5 What do you believe to be the market shares of foreign producers (i.e., other than

Advance Transformer, Howard Industries, MagneTek, Motorola Lighting, Power

Lighting Products, and Robertson Transformer) for each ballast type sold in the US

market?

C.6 Do you anticipate new entrants in the ballast manufacturing industry absent new

standards? With new standards?

E-3

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PRELIMiNARY DRAFT ~ For discussion purposes only 

Major Suppliers 

The Department recognizes that manufacturers do not operate in isolation and that 

crumges in production levels or economic health of a manufacturer can have significant 

impacts on its suppliers and other trade allies. Therefore each manufacturer will be 

invited to provide information about its trade allies and any impacts they might 

"experience from new energy efficiency standards on ballasts. The Department plans to be 

available to meet with representatives of these trade allies and to consider their views as 

stakeholders. Accordingly, the Department invites each manufacturer to discuss the 

following topics during the interviews. 

The impacts of new energy efficiency standards on employment and foreign vs. domestic 

trade allies will be discussed in the employment assessment section, Questions F.5 & F.6. 

B.8 What are the important materials and their suppliers that may be affected by changes 

in your product mix? 

B.9 What are the important services and their suppliers that may be affected by changes 

in your product miX·.~h 

Part C: Global ComlrpdkmiF" 

Competition has become more and more global in nature; particularly with regard to 

products such as lamp ballasts. The Department is interested in learning how ballast 

manufacturers view current trends in the global nature of the lamp ballast industry and 

how these trends are affecting marketing and plant siting strategies. This information 

would be useful in establishing a baseline for measuring the impact of further ballast 

efficiency standards. 

C.l Absent new energy efficiency standards, do you see the production of ballasts sold in 

the US moving out of the US? " 

C.2 What fraction of your domestic sales for each ballast type is currently produced in 

the US? In all North America? 

C.3 What fraction of your total worldwide production of each ballast type is currently 

sold in the US market? " " 

C.4 What are the most important reasons for choosing plant sites? 

C.S What do you believe to be the market shares of foreign producers (Le., other than 

Advance Transformer, Howard Industries, MagneTek, Motorola Lighting, Power 

Lighting Products, and Robertson Transformer) for each ballast type sold in the US 

market? 

C.6 Do you anticipate new entrants in the ballast manufaCturing industry absent new 

standards? With new standards? 

E-3 
PRELIMINARY DRAFT d For discussion purposes only

Part Manufacturer Cash Flow Analysis

The Department is developing a preliminary Industry cash flow analysis based on

published values for the elements making up a standard income statement. Industry wide

data such as this, however, fails to take into account diversity among the firms making up

the industry.

Each manufacturer has been given the Government Regulatory Impact Model (GRIM) to

develop its own cash flow model to compare with that of the industry -wide model. This

should allow each respondent to use its o wn financial information to arrive at the

expected differences in cash flow due to new energy efficiency standards. These results,

together with adequate understanding of how they were developed, will help the

Department to estimate industry impacts through a bottom-up approach, which combines

results from the individual manufacturers.

DA Costs

How do you quality d, F- in ffer'nc iI ,.ny, between your manufacturing

costs with and with^ ^t _ ; - SP

-

ry ; days and those presented in the

sample results for mu _fl;

D. 1.1 Is the " dus ry` costs ucturre represents ive of your firm's costs?

z D. 1.2 Is the cost sre different for magnetic and electronic ballasts?

D.1.3 Would new standards alter this cost scture?

D. 1.4 What general assumptions did you make about the magnitude and timing of

future investments?

D.2 Prices

How do you qualitatively explain differences, if any, between your expected product

prices with without new energy efficiency standards and those presented in the and

sample results for the industry as a whole?

D.2.1 Do you expect the average prices of electronic (or cathode-cutout) ballasts to

change given a new ballaststandard?

D.2.2 Are your gross margins (®/® revenue) different post sdards? If so, what are

the causes?

D.3 Shipments

How do you qualitatively explain differences, if any, between your expected product

shi manta with and without new energy efficiency s tanlords and those presented in

the sample results for the industry as a whole?

D.3.1 What assumption(s) did you make about your firm 's market share poststandards? What was your reasoning?

EE-RM-97-500 COMMENT 20K

PIREUNHNARY DRAFT ~ For discussion purposes only 

Part D: Manufacturer Cash Flow Analysis 

The Department is developing a preliminary Industry cash flow analysis based on 

published yalues for the elements making up a standard income statement. Industry wide 

data such as this, however, fails to take into account diversity among the firms making up 

the industry. 

Each manufacturer has been given the Government Regulatory Jmpact Model (GRIIvI) to 

develop its own cash flow model to compare with that of the industry-wide model. This 

should allow each respondent to use its own financial information to arrive at the 

expected differences in cash flow due to new energy efficiency standards. These results, 

together with an adequate understanding of how they 'were developed, will help the 

Department to estimate industry impacts through a bottom-up approach, which combines 

results from the individual manufacturers. 

D.l Costs 

How do you qualit '~y, between your manufacturing 

costs with and wi ards and those presented in the 

sample results for 

D .l.1 Is the "Ind ve of your firm's costs? 

z D .1.2 Is the cost structure different for magnetic and electronic ballasts? . 

0.1.3 Would new standards alter this cost structure? 

D.l.4 What general assumptions did you make about the magnitude and timing of 

future investments? 

D.2 Prices 

How do you qualitatively explain differences, if any, between your expected product 

prices with and without new energy efficiency standards and those presented in the 

sample results for the industry as a whole? 

·0.2.1 Do you expect the average prices of electronic (or cathode-cutout) ballasts to 

change given a new ballast standard? 

D.2.2 Are your gross margins (% revenue) different post standards? If so, what are 

the causes? 

D.3 Shipments 

How do you qualitatively explain differences, if any, between your expected product 

shipments with and without new energy efficiency standards and those presented in 

the sample results for the industry as a whole? 

0.3.1 What assumption(s) did you make about your firm's market share poststandards? What was your reasoning? 
PRELIMINARY DRAFT - For discussion purposes only

D.3.2 Is your product mix significantly different from the overall industry

proportions?

DA Financial

How do you qualitatively explain differences, if any, between your financial data and

those presented in the sample results for the industry as a whole?

Are there additional financial impacts of new standards which are not being captured

in the cash flow analysis? Please explain?

D.4.1 Tax Rate, Discount Rate, Working Capital, SG&A, R&D, Depreciation?

Part E: Competitive Impacts Assessment

Competitive impacts are assessed mainly in terms of market power, which is defined as

the ability to set a given product price within a limited range. The Department is

interested in manufacturer viewpoints on the extent to which new energy efficiency

standards would increas '-?,t power and then ssen competition within the ballast

industry

E. I How would new ene ci cy - rd t your ability to compete in the

marketplace?

E.2 Do you believe that new energy efficiency standards would unfairly assist or harm

the ability of some firms in the industry to compete?

Part F: Employment pacts Assessment

The impact of new energy efficiency standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to

explore current trends in ballast production employment and solicit manufacturer views

on how domestic employment patterns might be affected by new energy efficiency

standards.

F.1 What has been your ballast manufacturing employment level and annual production

rate at each production facility located in the US during each of the years 1990,

1995, and as of March 30, 1998. What are the equivalent employment levels and

production rates for all of North America and worldwide for the same time periods?

F.2 How do you project your plant production and employment levels in the above

regions to change during the next 5 and 10 years under current energy efficiency

standards?

E-5

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PRELIMINARY DRAFT ~ For discussion purposes only 

D.3.2 Is your product mix significantly different from the overall industry 

proportions? 

D.4 Financial 

How do you qualitatively explain differences, if any, between your financial data and 

. those presented in the sample results for the industry as a whole? 

Are there additional financial impacts of new standards which are not being captured 

in the cash flow analysis? Please explain? 

D.4.1 Tax Rate, Discount Rate, Working Capital, SG&A, R&D, Depreciation? 

Part E: Competitive Impacts Assessment 

Competitive impacts are assessed mainly in terms of market power, which is defined as 

the ability to set a given product price within a limited range. The Department is 

interested in manufacturer viewpoints on the extent to which new energy efficiency 

standards would incre~! t power and ther: ssen competition within the ballast 

industry. . t : 

E.l How would new en ,Li ci your ability to compete in the 

marketplace? 

E.2 Do you believe that new energy efficiency standards would unfairly assist or harm 

the ability of some firms in the industry to compete? 

Part F: Employment Impacts Assessment 

The impact of new energy efficiency standards on employment is an important 

consideration in the rulemaking process. This section of the interview guide seeks to 

explore current trends in ballast production employment and solicit manufacturer views 

on how domestic employment patterns might be affected by new energy efficiency 

standards. 

F.l What has been your ballast manufacturing employment level and annual production 

rate at each production facility located in the US during each of the years 1990, 

1995, and as of March 30, 1998. What are the equivalent employment levels and 

production rates for all of North America and worldwide for the same time periods? 

F.2 How do you project your plant production and employment levels in the above 

regions to change during the next 5 and 10 years under current energy efficiency 

standards? 

E-5 
PRELI M INARY DRAFT d For discussion purposes only

F.3 How would you project your plant production and employment levels in the above

regions to change during the next 5 and 10 years under new energy efficiency

standards?

P.4 Would the workforce skills required be different enough to require extensive

retraining or replacement of employees?

Employment Impacts on major suppliers

The Department recognizes that secondary employment impacts could occur particularly

for important suppliers as a result of new ballast sdards.

F.5 what ways, if any, would the standards tend to change the relative fractions of

foreign vs. domestic sources of supplies?

F.6 In what ways, if any, would the standards tend to change a size and nature of the

US workforce employed by the suppliers?

Part

The preliminary interviews su ested that ahenergy efficiency standard favoring

electronic ballasts would reduce capacity utilization for magnetic ballast production as

sales of magnetic ballasts decrease. Some restructuring within the industry has occurred

since that time, and the status of capacity utilization and expectations for the future need

to be revisited and explored in greater detail.

G.1 How would the imposition of new energy efficiency standards affect your capacity

utilization and manufacturing assets levels at your domestic production facilities?

G. 1.1 Would any facilities be closed or do sized?

G. 1.2 Would any facilities added or upgraded?

G.2 If current capacity were to be made obsolete, would it be remodeled to

accommodate a new product mix?

G.3 Please estimate the value of stranded assets resulting from a new sdard, and/or

the costs for refitting the facility and carrying out the research, engineering, and other

supporting activities required to accommodate the new product mix.

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT - For d~scussion purposes only 

F.3 How would you project your plant production and employment levels in the above 

regions to change during the next 5 and 10 years under new energy efficiency 

standards? 

F.4 Would the workforce skills required be different enough to require extensive 

retraining or replacement of employees? 

Employment Im'pacts on major suppliers 

The Department recognizes that secondary employment impacts could occur particularly 

for important suppliers as a result of new ballast standards. 

F.S In what ways, if any, would the standards tend to change the relative fractions of 

foreign vs. domestic sources of supplies? 

F.6 In what ways, if any, would the standards tend to change the size and nature of the 

US workforce employed by the suppliers? . 

Part G: Manuracturi 

The preliminary interviews suggested that an energy e ciency standard favoring 

electronic ballasts would reduce capacity utilization for magnetic ballast production as 

sales of magnetic ballasts decrease. Some restructuring within the industry has occurred 

since that time, and the status of capacity utilization and expectations for the future need 

to be revisited and explored in greater detail. . 

G.l How would the imposition of new energy efficiency standards affect your capacity 

utilization and manufacturing assets levels at your domestic production facilities? 

G.l.1 Would any facilities be closed or downsized? 

G.1.2 Would any facilities added or upgraded? 

G.2 If current capacity were to be made obsolete, would it be remodeled to 

accommodate a new product mix? 

G.3 Please estimate the value of stranded assets resulting from a new standard, and/or 

the costs for refitting the facility and carrying out the research, engineering, and other 

supporting activities required to accommodate the new product mix. 
PRELI MINARY DRAFT - For discussion purposes only

ATTACHMENT F

GRI M Operating Principles

1.0 Introduction and purpose

The purpose of the Government Regulatory Impact Model (GRIM) is to help identify the

effects of various efficiency regulations and other regulations on manufacturers. The

basic mode of analysis is to determine the change in value of the manufacturers(s)

following a regulation or a series of regulations. The model structure also allows an

analysis of multiple products with regulations taking effect over a period of time, and of

multiple regulations on the same- product.

Industry value is defined, for the purposes of this analysis as the present value of cash

flows for the manufacturer(s) in question. Cash flow is calculated by the user entering

shipment volumes and manufacturer prices (i.e., prices from manufacturers to the first

customer, such as a wh and then selecti -defined regulatory levels. The

model calculates the a 3 cas 64 y Y n determines the present value of

those cash flows both out ' 41 ig ati -r lation base case) and with

regulations (the post-reg7t M star

Output comes from the model in terms of summary statistics, graphs of major variables,

and, when appropriate , access to the complete cash flow calculation.

2.0 M odel description

The basic structure of the GRIM is a standard annual cash flow analysis which uses price

and volume information as an input, builds on fundamental base cost information, and.

accepts a set of regulatory conditions as changes in costs and investments. The cash flow

analysis is separated into two major blocks: income and cash flow. The income

calculation determines the profit after taxes but before financial charges. The cash flow

calculation converts profit after taxes into an annual cash flow by including investment

and non-cash items. Below are definitions of listed items on the printout of the output

sheet. (see Section 3.0)

(1) Income Statement.- Overall calculation ofNet Income Before

Financing (17) using revenue and cost items

subject to income tax effects as described in (2)

through (17).

(2) °c °t: Actual manufacturer unit price charged to the first

level of distribution (distributor, etc.), entered as an

F-1

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

ATTACHMENT F 

GRIM Operating Principles 

1.0 Introduction and purpose 

The purpose of the Government Regulatory Impact Model (GRIM) is to help identify the 

effects of various efficiency regulations and other regulations on manufacturers. The 

basic mode of analysis is to determine the change in value of the manufacturers(s) 

following a regulation or a series of regulations. The model structure also allows an 

analysis of multiple products with regulations taking effect over a period of time, and of 

multiple regulations on the same product. 

Industry value is defined, for the purposes of this analysis as the present value of cash 

flows for the manufacturer(s) in question. Cash flow is calculated by the user entering 

shipment volumes and manufacturer prices (i.e., . from manufacturers to the first 

customer, such as a wh d then regulatory levels. The 

model calculates the a determines the present value of 

those cash flows both base case) and with 

regulations (the post-r 

Output comes from the model in terms of summary statistics, graphs of major variables, 

and, when appropriate, access to the complete cash flow calculation. 

2.0 Model description 

The basic structure of the GRIM is a standard annual cash flow analysis which uses price 

and volume information as an input, builds on fundamental base cost information, and 

accepts a set of regulatory conditions as changes in costs and investments. The cash flow 

analysis is separated into two major blocks: income and cash flow. The income 

calculation determines the profit after taxes but before financial charges. Ute cash flow 

calculation converts profit after taxes into an annual cash flow by including investment 

and non-cash items. Below are definitions of listed items on the printout of the output 

sheet. (see Section 3.0) 

(1) Income Statement: 

(2) PriceiUnit: 

Overall calculation of Net .Income Before 

Fi.nancing (17) using revenue and cost items 

subject to income tax effects as described in (2) 

through (17). 

Actual manufacturer unit price charged to the first 

level of distribution (distributor, etc.), entered as an 

F-1 
PRELIMINARY DRAFT d For discussion purposes only

input variable by user. ("placeholder" values:

obtained from C 1997.)

(3) Unit Sales:

(4) Revemes:

Annual shipments; entered as in ut variable by

user. ("placeholder" values obtained from NESS)

Annual revenues; computed by multiplying

°c nit(2) by Unit Sales (3).

(5) Base Costs: Costs per 't prior to regulations entered as input

or, Material, Overhead) variables by the user.

(6) New Cost.,:

(Labor, !,'

(7) or: Factory direct labor and fringe benefit costs;

entered as. *7pi t variable by the user.

(8) MateHal.

(9) ate:.. _ :T 1:

(10) Depreciation:

(11) Cost of Sales:

(12) R&D:

rials and components; entered as

the user.

Factory overhead excluding depreciation; entered

as an input variable by the user.

Annual depreciation on pre-regulation assets;

computed as a percentage ofRevenues (4). Annual

depreciation on post-regulation assets is computed

by dividing Capital en res(24) by a useful

life from Major Assumptions. For post-regulation

years, Depreciadon is the sum of depreciation on

pre- and post-regulation assets.

Total cost of sales, computed by adding Labor (7),

Material (8), Overhead (9) and epreci °on (10).

Research and development costs unrelated to

regulations; computed as a percentage ofRevenues

(4). From Major Assumptions.

(13) Product Conversion: Expensable costs related to meeting a regulation,

often including product redesign costs and

expensable factory conversion expenses. Also

includes costs incurred for new product literature

and catalogs, product obsolescence, and various

Costs per unit following regulations; entered as

1, Overhead) input variables by the user.

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

(3) Unit Sales: 

(4) Revenues: 

input variable by user. ("placeholder" values: 

obtained from cm 1997.) 

Annual shipments; entered as an input variable by 

user. ("placeholder" values obtained from NESS) 

Annual revenues; computed by multiplying 

PricelUnit (2) by Unit Sales (3). 

(5) Base Costs: Costs per unit prior to regUlations entered as input 

(Labor, Material, Overhead) variables by the user. 

(6) New Costs: Costs per unit following regulations; entered as 

(Labor, Material, Overhead) input variables by the user. 

(7) Labor: . ", 

(8) Material: 

(9) Overhead: 

(10) Depreciation: 

(11) Cost of Sales: 

(12) R&D: 

(13) Product Conversion: 

Factory direct labor and fringe benefit costs; 

entered as . variable by the user . 

als and components; entered as an 

the user. 

Factory overhead excluding depreciation; entered 

as an input variable by the user. 

Annual depreciation on pre-regUlation assets; 

computed as apercentage of Revenu.es (4). Annual 

depreciation on post-regulation assets is computed 

by dividing Capital Expenditures (24) by a useful 

life from Maior Assumptions. For post-regUlation 

years, Depreciation is the sum of depreciation on 

pre- and post-regulation assets. 

Total cost of sales, computed by adding Labor (7), 

Material (8), Overhead (9) and Depreciation (10). 

Research and development costs unrelated to 

regUlations; computed as a percentage of Revenu.es 

(4). From Major Assumptions. 

Expensable costs related to meeting a regulation, 

often including product redesign costs and 

expensable factory conversion expenses. Also 

includes costs incurred for new product literature 

and catalogs, product obsolescence, and various 

F-2 
PRELIMINARY DRAFT - For discussion purposes only

(14) SG&A:

(15) Profit Before Tax:

(16)Taxes:

(17) Net Income.

(18) Cash F'l State

(19) Cash Flow:

(20) Net Income.

related marketing expenses. GRIM computation

based on regulatory level selected by user (ONE,

TWO, 7HREE, etc.) and allocated out for the

appropriate number of years.

Selling, general and administrative costs are

computed as a percentage of Revenues (4).

Profit before taxes and any financing costs;

computed by subtracting the Cost of Sales (11) and

SG&A (14) from Revenues (4).

Taxes on Profits Before Tax; computed by

multiplying the tax rate contained in Mai or

Assumptions by profit Before Tax (15).

Profits after taxes; computed by subtracting Taxes

(16) from _#w before Tax (15).

ent including net income, other

tm,s and adjustments and

investments.

Determination of cash flow generated from

operations.

Net income; identical to Net Income (17).

(21) Depreciation: Depreciation is a non-cash cost and is added back

into Net Income (20) as part of the cash flow

calculation; identical to Depreciation (10).

(22) Change in Working Capital. Additional accounts receivable, inventory, and

other cash investments necessary to support

increased revenues; computed by multiplying a

percentage from Major Assumptions by the change

in Revenues (4).

(23) Cash F° from Operations: The cash flow from operating activities; computed

by adding Net Income (20), Depreciation (21) and

subtracting Change in Working Capital (22).

(24) Capital enditures: Investment to maintain and replace existing

production assets; computed as a percentage of

base year Revenues (4) using a percentage

F-3

EE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT N For discussion purposes only 

(14) SG&A: 

(15) Profit Before Tax: 

(16) Taxes: 

(17) Net Income: 

(18) Cash Flow State 

related marketing expenses. GRIM computation 

based on regulatory level selected by user (ONE, 

TWO, THREE, etc.) and allocated out for the 

appropriate number of years. 

Selling, general and administrative costs are 

computed as a percentage of Revenues (4). 

Profit before taxes and any financing costs; 

computed by subtracting the Cost of Sales (11) and 

SG&A (14) from Revenues (4). 

Taxes on Profits Before Tax; computed by 

multiplying the tax rate contained in Major 

Assumptions by Profit Before Tax (15). 

Profits after taxes; computed by subtracting Taxes 

(16) from t before Tax (15). 

1 

investments. 

nt including net income, other 

and adjustments and 

(19) Cash Flow: Determination of cash flow generated from 

operations. 

(20) Net Income: Net income; identical to Net Income (17). 

(21) Depreciation: Depreciation is a non-cash cost and is added back 

into Net Income (20) as part of the cash flow 

calculation; identical to Depreciation (10). 

(22) Change in Working Capital: Additional accounts receivable, inventory, and 

other cash investments necessary to support 

increased revenues; computed by multiplying a 

percentage from Major Assumptions by the change 

in Revenues (4). 

(23) Cash Flow from Operations: The cash flow from operating activities; computed 

by adding Net Income (20), Depreciation (21) and 

subtracting Change in Working Capital (22). 

(24) Capital Expenditures: Investment to maintain and replace existing 

production assets; computed as a percentage of 

base year Revenues (4) using a percentage 

F-3 
PRELIMINARY DRAFT - For discussion purposes Only

contained in Ma°or r Assumptions. Post-regulation

capital expenditures equal pre-regulation

expenditures plus depreciation on Cons

:-- _ --?s (25).

(25) Conversion Exj, use Depreciation costs for meeting regulations,

typically including plant equipment, tooling and

the like; GRIK4 computation based on regulatory

level selected by user (ONE, TWO, 7' "- _TE, etc.)

and listed out for the appropriate numL a of years.

(26) Cash Used in Investments. Cash required for assets; computed by adding

Capital Expenditures (24) and Conversion

Expenditures (25).

(27) Net Cash

cc--ra)u ' "1" _ icting Cash Used in

ual cash flow from operations and investments;

i from Cash

(28) Post-Regulation Value. Value of the relevant industry following adoption

and implementation of the regulatory scenario; the

present value of the annual Net Cash Flow (27)

from the base year to eight years after the

regulation goes into effect, plus a terminal value

based on the final year's cash flow valued as

annuity, are computed by model and listed. The

discounted rate for the present value is the

"Discount Rate" contained in Major Assumptions.

Pre-re ati®n value is computed by taking the base

year Net Cash F?ow (27), excluding any regulation

effects, and treating it as a perpetual annuity.

FEE-RM-97-500 COMMENT 20K

PRELIMINARY DRAFT ~ For discussion purposes only 

contained in Major Assumptions. Post-regulation 

capital expenditures equal pre-regulation 

expenditures plus depreciation on Conversion 

Expenditures (25). 

(25) Conversion Expenditures: Depreciation costs for meeting regulations, 

typically including plant, equipment, tooling and 

the like; GRllvI computation based on regulatory 

level selected by user (ONE, TWO, THREE, etc.) 

and listed out for the appropriate number of years. 

(26) Cash Used in Investments: Cash required for assets; computed by adding 

Capital Expenditures (24) and Conversion 

Expenditures (25). 

(27) Net Cash Flow: 

(28) Post-Regulation Value: 

Annual cash flow from operations and investments; 

cting Cash Used in 

from Cash Flow from 

Value of the relevant industry following adoption 

and implementation of the regulatory scenario; the 

present value of the annual Net Cash Flow (27) 

from the base year to eight years after the 

regulation goes into effect, plus a terminal value 

based on the final year's cash flow valued as an 

annuity, are computed by model and listed. The 

. discounted rate for the present value is the 

"Discount Rate" contained in Major Assumptions. 

Pre-regulation value is computed by taking the base 

year Net Cash Flow (27), excluding any regulation 

effects, and treating it as a perpetual annuity. 
PRELIMINARY DRAFT - For discussion purposes only

3.0 Income statement (1)

Base

Year

1989 1990 1991 1992 1993 1994 1995 1996 1997

Price/Unit (2) 400 400 400 440 440 440 440 440 440

Unit Sales (3) 2 2 2 2 2 2 2 2 2

Revenues (4) 800 800 800 880

(6)

New

(5)

Base

(11) Cost of Sales 336.05 316.00 640 640 640 680 680 680 680 680 680

labor 32.30 32.00 64 64 64 65 65 65 65 65 65

(8) Material 228.58 220.00 440 440 440 457 457 457 457 457 457

9 Overhead 52.58 51 .00 110 110 110 113 113 113 113 113 113

10 Depreciation 22.59 13.00 26 26 26 45 45 45 45 45 45

14 SG&A 112 157 149 115 114 114 114 114 114

(12) R&D 16 16 16 18 18 18 18 18 18

(13) Product Conversion 45 37 2

(15) Profit Before Tax 48 3 11 85 86 86 86 86 86

(16) Taxes 19 1 4 34 35 35 35 35 35

1 Net Income 29 2 7 51 52 52 52 52 52

18 19 Cash Flow

(20) Net Income 29 2 7 51 52 52 52 52 52

(21) iation 26 216- 26 45 45 45 45 45 45

(22) Change in Work

Capital

0 0 14 0 0 0 0 0

(23) Cash Flow from

Operations

:.8 33 92 97 97 97 97 97

(24) Capital Expenditures 32 51 51 51 (51) (51) 51

(25) Conversion

Expenditure

(158) (129)

26 Cash Used in Investments 32 190 (161) (51) 51 51 (51 ) (51) 51

2 Net Cash Flow 23 162 129 30 46 46 46 46 46

(28) Others 46

F-5

EE-RM-97-500 COMMENT 20K

PREUlIJHNARY DRAFT ~ For discussion purposes ol'lly 

3.0 Income statement (1) 

Base 

Year 

1989 1990 1991 1992 1993 1994 1995 1996 1997 

Price/Unit (2) 400 400 400 440 440 440 440 440 440 

Unit Sales (3) 2 2 2 2 2 2 2 2 2 

Revenues (4) 800 800 800 880 

(6) (5) 

New Base 

{111 Cost of Sales 336.05 316.00 640 640 640 680 680 680 680 680 680 

(7) labor 32.30 32.00 64 64 64 65 65 65 65 65 65 

(8) Material 228.58 220.00 440 440 440 457 457 457 457 457 457 

(9) Overhead 52.58 51.00 110 110 110 113 113 113 113 113 113 

(10) Depreciation 22.59 13.00 26 26 26 45 45 45 45 45 45 

(14)SG&A 112 157 149 115 114 114 114 114 114 

(12)R&D 16 16 16 18 18 18 18 18 18 

(13) Product Conversion 45 37 2 

J15)Profit Before Tax 48 3 11 85 86 86 86 86 86 

(16) Taxes (Rate) 19 1 4 34 35 35 35 35 35 

(17) Net Income 29 2 7 51 52 52 52 52 52 

(18) (19) Cash Flow 

(20) Net Income 29 2 7 51 52 52 52 52 52 

(21) Depreciation 26 j 26 45 45 45 45 45 45 

(22) Change in Work. a· 0 14 0 0 0 0 0 

Capital 

~ iA1l I:t« 

(23) Cash Flow from 33 82 97 97 97 97 97 

Operations ; 

(24) Capital Expenditures ?2) :>l(32) (51) _(51) (51) (51) (51) (51) 

(25) Conversion (158) (129) 

Expenditure 

(26) Cash Used in Investments (32) (190) (161) (51) (511 (51) (51) (51) (51) 

(27) Net Cash Flow 23 (162) (129) 30 46 46 46 46 46 

(28) Others 46 

f-5 
PRELIMINARY DRAFT - For discussion purposes only

4° °or um,-'

making the cash flow calculations, the model uses several major assumptions, each of

which can be modified. The values most representative of a firm are:

Scenario Description

Base Year

Announcement Year

Standard Year

Tax Rate

Discount Rate for NPV

Inflation Rato

Working Ci

Standard SG&A

Research and Development

Ordinary Depreciation

ordinary Capital Expenditures

Fluorescent L p Ballasts

9991B

1999

fling yearfor al ° al purpos

Year iwhich the regulation announcement is

QU2 Year in which the regulation takes effed

ofRevenue

ofRevenue

EE-RM-97-500 COMMENT 20K

PREliMINARY DRAFT ~ For discussion purposes only 

4.0 Major assumptions 

In making the cash flow calculations, the model uses several major assumptions, each of 

which can be modified. The values most representative of a firm are: 

Scenario Description 

Base Year 

Announcement Year 

Standard Year 

Tax Rate 

Discount Rate for NPV 

Inflation Rate 

. Working Capital 

Standard SG&A 

..•.... A,ssumptiollsPagefor:. • .•...... 

. ·~'luo~sCeilt:~m· ·Bailiu~i~.:········ 

Fluorescent Lamp Ballasts 

>.199.$ Beginning year /01' analytical purposes 

1999 Year in which the regulation announcement is made 

2002 Year in which the regulation takes effect ,",---,----..;--.;1 

esearch and Development .~ I.;...,;;,.,--';;;;';';":.;.;..;;;J 

i.nmy Depreciation 

rdinmy Capital Expenditures