U.S. Department of Energy Office of Codes and Standards 1000 independence Ave., SW Washington, DC

Date: April 10, 1998 

## 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, 1998PRELIMINARY DRAFT - For discussion purposes oniy
Table of Conten ts 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. Introd uction

.................................................................................................... 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 M anufacturing Impact Analyses Intervie w Process

.......................................... 6.0 Cumulative Regulatory B u rd en .....................................:.................................... 46 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 ••••••••••••••••••••••••••••• · •••••••••• ., ••••••••••••••••••••••••••46PRELIMINARY 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 B allast Rulemaking Analysis .....................C®1 Ballast Indust Cost St ru ctu re ....................................................................... 4 E. Fl uorescent Lamp B allast Manufacturers Interview Guide ...........................E®1 F. GR I M Operating Principles ...................e.......................................................... F4 PRELIMINARY DRAFT**~** For discussion purposes only

Attachments A. Description of Information Available in Census of Manufacturers and Current Industrial Reports

........................................................................Aa 1 B. Interview Guide from 1996/1991 Stakeholder Interviews

..............................Ba 1

. 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

.,.

IIPRELIMINARY DRAFT - For discussion purposes only


### List of Fi g ures 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 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

iiiPRELOO ARY DRAFT - For discussion purposes only
B allast 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.

1 ^^:^•w.?ii`>.k^^:;. chi` al 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 ofthe analytical framework to the ballast rule. Following a generic description of each component ofa ''typical'' rulemaking a comment box has been added to discuss elements ofthe ballast rule. Ballast-specific comments include summaries ofpast events, status reports ofcurrent analysis, discussion ofkey 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 ofthis 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 28 th

, 1998. Following the workshop comment period, the document will be revised and will form the basis ofthe 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 ofthe future analyses is presented in Figure 1. Sections 2.0, 3.0 and 4.0 detail each ofthe three phases ofthe Manufacturer Impact Analyses.

1PRELIMINARY DRAFT - For discussion purposes only

Ir-sue Identification

Estimate Manufacturing Costs ^ p'nce FOre^StS -;

Figure 1. Flow Diagram the F

Flow Diagram for B allas re M an ufacture r 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 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 ofindividual 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 FlowPRELIMINARY DRAFT - For discussion pu rposes 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 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 ofthe 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 ofthe "strawman" industry cash flow. This includes two tasks: the adaptation ofthe 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 ofGRIM-Ballast 1 is available from the Department. Finally DOE is developing the interview guide to be used in the Subgroup analysis. A preliminary version ofthis 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

3PREUMNARY DRAFT - For dis cussionn 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. PRELIMINARY DRAFT**~** For d!scussion purposes only
2.0 Phase 1: Industry Profile Phase 1 ofthe Manufacturer Impact Analyses consists oftwo activities, namely, preparation ofan 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 ofmanufacturing 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 ofthe product(s) concerned. This activity will consist ofboth 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 ofthe Industry Characterization will consist ofthe issuance ofa databook profIling the industry. This will serve as a common source ofinformation for participants in the rulemaking. In particular, the competition impactS task will likely make use ofthe market structure data The nature ofthe qualitative component ofthis 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 ofthe 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 ofwhich 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.
4PRELIMINARY 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. inthe 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 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 ofthat product, should be included in the defmition ofa 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 ofboth space-heating and space-cooling markets. For instance, another issue that must be addressed at this point is the handling ofimports and exports. Imported goods are subject to regulation, while exports are exempted. Unfortunately, data sources are often based on point ofmanufacture 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 ofthe Census' National Trade Data Bank will be used to assess the significance ofinternational 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 Anal ys is 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 PRELIMINARY DRAFT**~** For**dlscu~sion** purposes**O!1~Y**

The Department conducted a series ofinterviews with ballast manufacturers in late 1996 and early 1997. Summaries ofthese interview were distributed at the "Public Workshop on the Revised Life Cycle Cost and Engineering Analysis ofFluorescent 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 shouldcontact? 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 ofnew 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 ofManufactures (CM) via the U.S. Census Bureau's Center for Economic Studies. Although the Bureau will not allow release offirm-level data, it still is possible to utilize concentration analysis and econometric estimation techniques. The available data will allow examination ofdeterminants offirm shipments shares and trends in market concentration and firm mobility over the last 20 years for industries affected by standards
.. The proper method ofmeasuring the competitiveness ofa market is not universally agreed upon. Without knowledge ofthe 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 offirms is not a necessary condition for a competitive outcome, the study ofmarket shares, or concentration analysis is the often-used option. The goal is to assess the distribution ofmarket power using market share as a proxy. Two ofthe primary techniques used to assess market structure are the

6PRELINI&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 PREliMINARY DRAFT**~** FOf**d~scussion** purposes only n-firm concentration ratio and the Herfindahl index. Through use ofthese two standard measures ofmarket 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 ofconcentration may be consistent with a wide range ofmobility patterns. In addition to the concentration indices noted above, measures ofthe 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 of20 years will be used. This model explains firm shares for each ofthe defined markets as a function ofseveral firm-specific variables. It may capture impacts ofprevious standards imposed on equipment in the markets, and will gauge the significance ofoverall 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 ofestablishments, employment, payroll, value added, cost ofmaterials consumed, capital expenditures, product shipments, concentration ratios,etc. The Census ofManufacturers 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 ofestablishments producing the same product or a closely related group ofproducts. The system works in such a way that the definitions progressively become narrower with successive additions ofnumerical digits. Thus ballasts are ofthe 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 ofCensus data available on the ballast industry. Adetailed defInition ofterms and the information available is contained in Attachment A ofthis document. Table 2 summarizes the characteristics ofthe U.S. Manufacturing industry as reported in the four most recent Census ofManufacturers. It is important to note that most ofthe 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.
.
1P .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 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 ofcompanies with shipments more than $100 thousand. (up to 1982)

x x x x (up to 1982) xPRELIMINARY DRAFT

- For discussion purposes only
Table 2 : Characteristics of U.S . Ballast Manufactu ring

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 An alysis 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 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 ofthe potential impacts of standards on both individual firms and particular categories offirms. A prime advantage of surveys and interviews is that they allow examination ofa variety offirms experiencing potentially diverse impacts. While the somewhat anecdotal evidence produced by this approach must be used carefully, it is often one ofthe 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.
9PRELIMINARY 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 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 ofinformation will be sought as necessary and available, and may include tradejournals and financial reports.

10PREUI^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. PRELIMINARY DRAFT**~** For discussion purposes only Department representatives visited and conducted pJeliminary interviews with representatives of5 ofthe 6 major ballast manufacturers (Robertson Transformer Company was not visited) during the winter of 1996/97. The following manufacturers were included in this series ofpreliminary 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 ofvisit) 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 ofthe interview guide were used to develop a simplified description ofthe important qualitative features that 

### can characterize the current structure and situation ofthe 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 offirms could be carried out according to size as defined by number ofunits 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. 11PR t.i &N Y DRAFT ^ For discussion purpo ses 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 manufactur ers. ® The Manufacturer pact Analysis should be perf ormed on a comp any-bycomp any basis . The industry is made up of such a s mall number ofmaj or manufactur

ers that any m sub

-group segmen tation would result in a greater num ber of categories than there are manuf acturers . 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 qualita

tively and DOE will consider such impacts as the data provided pe .

2.2. ' Issue I dent ifi cation 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^.^ 1 2 PRELIMINARY DRAFT**~** For discussion purposes only

There was general consensus that the most important phenomenon affecting the character ofthe 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 ofmanufacturing infrastructure. The new industry dynamics have opened potential market entry to a broad range ofnew manufacturers, many of which are outside the US. Many believe that the market share ofelectronic 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 ofelectronic ballasts and price pressure on both electronic and magnetic ballasts have been factors in the migration ofballast production to plants in Mexico and other countries. The preliminary interviews, supplemented with a review ofpublic literature, have

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

investigation into the expected impact ofa lighting ballast standard on manufacturers.

• The Manufacturer Impact Analysis should be perfonned on a company-bycompany basis. The industry is made up ofsuch a small number of**~or** manufacturers that any meaningful sub-group segmentation would result in a greater number ofcategories than there are manufacturers. Thus the industry impact would be most effectively constructed from an aggregation ofimpacts on individual companies. • The analysis should recognize the increasingly global nature ofthe ballast industry. Gains or losses in US sales will bestow consequences to manufacturers regardless ofwhere 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 ofdirect industry suppliers. The Department recognizes that manufacturers do not operate in isolation and that changes in production levels or economic health ofa 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 ofthe workshop are to:

12PRELIMINARY 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 PRELIMINARY DRAFT**~** For discussion purposes only

€I Identify specific types or groups ofmanufacturers
€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 ofthe approaches to estimating key variables
€I Develop regulatory scenario(s) to guide further impact assessments including:
€I Possible sets ofregulations
€I Conceivable range of standards
€I Conceivable range ofimpacts
€I Issues which could change the regulatory level or decisions made by DOE
€I Key data or other areas ofimportance
ED Establish a schedule for the completion ofthe 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 ofa working group ofinterested 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 ofthe manufacturing impact analyses including a timeline for additional workshops and public review. At the conclusion ofthe 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.

13PRELIMINARY DRAFT - For discussion purposes only
3.0 Phase 2: Indu stry 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 num ber 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 manuf acturer submittals. In order to facilitate indivi dual manufacturer analysis , the Department will prepare baselinescenarios for a "prototypical" manuf

acturer 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 proposedreasonable?

3.2. GRI M 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 andcash 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 PRELIMINARY DRAFT**~** For discussion purposes ordy
3.0 Phase 2: Industry Cash Flow Analysis
3.1. Introduction The second phase ofthe manufacturer analyses has as its focus the "larger" industry. As such, this phase resembles the Department's past practice ofmodeling a ''prototypical'' firm using average industry values. The analytical tool that will be used for calculating the financial impacts ofstandards 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 offluorescent lamp ballast manufacturers. A detailed definition offinancial inputs. and their values for a ''prototypical'' ballast manufacturer is contained in Attachment C ofthis 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 ofregulatory conditions on manufacturer income and cash flow. In the Phase 2 manufacturer analysis, the GRIM will be used with industryaverage values ofpre- and post-standards manufacturing costs, prices, shipments, and financial information to perform an industry cash flow analysis. This process is shown

14PRELIMINARY 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 )
uanti Qty_ (Section 3.5)

......... $

.. .

Cash Flow ® Financial Info rmation (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 developingthese 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. PRE.LlMINARY DRAFT**~** For**cnscw~sion** purposes only graphically in Figure 4. Attachment F provides a description ofGRIM'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 ofinterest are those that represent "average" costs ofachieving 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 ofresults, time and cost ofimplementation, oppornmity (need) for stakeholder input,<treatment ofuncertainty, validation ofresults, and, linkage to the Phase 3, Sub-group Analysis.

15PRELIMINARY 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 . T he 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 PRELIMINARY DRAFT**~** For discussion purposes only

For the February 1996 "Draft Report on the Potential Impact ofPossible 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 ofthe 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 oflighting managementcompanies (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 ofthe 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 ofPossible 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 ofthe 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 ofballast prices (and indirectly ofmanufacturing costs) are the Current Industrial Reports (CIRs). CIRs have been providing monthly, quarterly, and annual measures ofindustrial activity for many years. The CIRs include statistics for the United States on the quantity and value ofshipments along with comparative data on exports, imports, and domestic output. The figures on quantity and value ofshipments represent physical shipments ofall products sold, transferred to other establishments ofthe 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 ofdiscounts, allowances, freight charges, and returns. Shipments to a company's own branches are assigned the same value as comparable appropriate allocation ofcompany 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 ofmagnetic and electronic ballasts
..
3 Reporting categories for CIRs are not a perfect fit 'With product classes dermed for the Ballast Rule and

16PRELIMINARY 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 PRELIMINARY DRAFT A FOf d!scussion purposes only

Table 3 provides the estimated manufacturer price ofmagnetic and electronic ballasts. The dollar value ofballast shipments from factories is divided by the quantity ofballasts 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 17PRELIMINARY DRAFT - For discussion purpo ses only
Table 3. Quantity and Value of Ship nts , by Type of B allast 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) Prod uct 1997 code :Prod uct description 36124- Fluorescent Lamp Ballasts
..............

MAGNETIC PE

......................... Corrected panw -factor ty pe 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 Oth er 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 sta rt ................ 5/: 873 : 5/' 13288:

Ra pid 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.

- Represe nts zero . ( D) Data with held 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: 1 8 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 of2F%T 12HO represent !l minor fraction ofthis 

### em. category, the price estimate is not as reliable as for other ballast types. 18PRELIMINARY RY DRAFT - For discussion purposes only
Table 4. Ballast M anufacturing 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 PRELIMINARY DRAFT A For discussion purposes only
Table 4. Ballast Manufacturing Cost and Prices
Ballast 1 1996 1997 1997

### ~~

# .................................................................**l.~.~~** 

# ..**!~~**

### ..**~~~.!~.~**

### .........**~!.~.~**

### ......**~** 1F40T12 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:-

32



### o:::':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)

19PRELIMINARY DRAFT -. For discussion purposes only

In order to esti ma

te 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 inf

ormation from the Census of Manuf acturers (C Ms) and from transformer industry statistics (SIC# 3612) obtained from Robert Morris Associates reports . The resulting cost structure is sho wn in Figure 3. This is a composite for the ballast industry as a whole ; no single firm ma y 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 Structu re 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 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 ofManufacturers (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 ofinformation 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.

20O

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 

### 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 ofnew or amended efficiency standards depend largely on the relationship between the incremental cost ofa 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 ofthe least energy efficient product is selected. Second, estimates ofenergy efficiency improvements are made based on the implementation ofvarious design options. Finally, estimates are made ofthe added cost at the manufacturing level ofachieving 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 ofdesign options with a potential for improving energy efficieQCY.
21PRELIM INARY DRAFT - For di scu s sion 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 rulem aking 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 odelin g 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 Dep artment 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 cl ass represented the average of the figures obtained from m anufacturers . 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 PREUM!NARY DRAFT**~** For discussion purposes only



### Incremental factory costs are added to the baseline factory cost to give the manufacturing costs ofthe design options presented in the engineering analysis. Two major approaches have been used for forecasting the baseline factory costs and the manufacturing costs ofthe 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 ofthe original standards rulemaking derived manufacturing costs by characterizing and modeling the production line layouts ofmanufacturing facilities. The manufacturing facilities were described in terms'ofthe type ofequipment used and the track layout required. Manufacturing costs for large (>10010 share) and medium (>1% and <10% share) manufacturers ofnine different appliances were modeled. Small manufacturers (sales below 1% ofthe market) were not analyzed. It was determined that no general manufacturing approach could be identified for these firms because ofthe 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 ofthe 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 ofthe data that was received. The cost data presented in the Technical Support Documents for each product class represented the average ofthe 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
22PRELIMINARY 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 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 ofthe highest-cost producer from those ofthe 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 ofvalues 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 offuture 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 ofuncertainty 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 ofuncertainty 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
23PRELIMINARY 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. Esti mates 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 increas ed 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 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 HVAC equipment categories is the one with the lowest LCC.
3.4. Price Forecasts 

### One ofthe most controversial parts ofpast analyses has 

### been the assumption ofhow costs and associated margins are passed-through from manufacturers to consumers. What proportion ofthe standards-induced costs win be reflected in 

### prices is important in 

## two ways: (1) 

### a lower margin over incremental costs passed-throughjustifies a less stringent standard from a manufacturer impact standpoint, and (2) 

### has the opposite effect oflowering consumer life-cycle costs thatjustifies 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.

24PRELI 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 D ata 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 PRELlM!NARY DRAFT
- For discussion purposes only 

### For the life-cycle-cost analysis that is performed at the pre-ANOPR stage, a preliminary forecast ofretail prices is needed both for a base case (without new standards) and for various levels ofnew 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 ofbaseline 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 ofdata 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.



### 25PRELIMINARY 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 var iable 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 situa tion 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. Economic

s Markup App roach 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 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 ofdirect 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 ofspecific accounts and notes included in the consolidated financial filings ofmanufacturers 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 offorecasting 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 ofthe 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 ofthe data often received:

26PRELIMINARY 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 PRELIMINARY DRAFT**~** For discussion purposes only



### Where:

II 

### The MARKUP is: Markup 

### = PriceBase / AVC Base 

### where AVCBase 

### = All variable costs in the base case

II 

### All variable costs include the variable part offixed 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 ofboth 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 oftotal 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 ofthe rebuttable presumptions (Section 1.2) exist will be requested.
27PRELIMINARY DRAF T - For discussion purposes only

3.5. S hipment F orecasts 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-Balla stl,do PREUM!NARY DRAFT**~** For discussion purposes only

3.5. Shipment Forecasts


### The relationship between the price ofappliances and their sales volume can be developed in several ways. Alternative appliance sales projections can be produced by soliciting the advice ofmarket 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.



### 28PRELI 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 Scenar

io : 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 Fo recasts 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 PRELlM!NARY DRAFT**~** For discussion purposes only



### The July 1997 "Draft Report on the Potential Impact ofPossible 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 ofa base case forecast absent new ballast efficiency standards, and additional shipment forecasts for each ofthe standards efficiency levels under consideration. These scenarios are summarized here: 

### ConStant Conversion Scenario: for the constant conversion base case the magnetic share ofthe total ballast sales drops from 50% in 1995 to about 30% by 2010. By 2030, just over 15% ofall ballasts sold are magnetic. 

### No Conversion Scenario: In this scenario the shares ofmagnetic ballasts remain at more than 50% over most ofthe forecasting years. 

### High Conversion Scenario: for the high conversion scenario the share ofmagnetic ballasts reduces dntstically: by 2001; less than 25% of4-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 ofballasts for the base case and for four efficiency levels. For efficiency levels 3 and 4 (Electronic) the total shipments ofballasts (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 ofthe 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 ofthe Department to develop estimates offuture 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:

29PRELIMINARY 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. M odels for Predicting Future Shipmentr3 and National I mpacts 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 ha ve 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 PRELIMINARY DRAFT**~** For discussion purposes onfy

II 

### The size ofthe 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 ofimport 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 ofpolicy decisions on energy use. The objective ofthis section is to provide some ofthe 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 ofthe 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 ofthe residential**s~ctor** 

### (REEPS) created under the sponsorship ofthe 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 ofwhether the effect on shipments 

### win be large or small.

MlA· BaHasti ,doc 

### 30

## P L INARY DRAFT - For discuss ion 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 -Raft t .dcti 31 PRELIMINARY DRAFT**~** For**d~scussion** purposes only


### Equipment shipments depend upon a complex set offactors. 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 ofdemographics (e.g., numbers and types ofhouseholds, 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 ofthe models with regard to 

### the key elements required and the approach to handling uncertainty.

• Track record 

### includes the history ofprior applications ofthe model and any indication ofits accuracy.

• Operating characteristics 

### include what computer system and software is required, training or other costs ofputting the model in place, and likely effort and cost required to maintain the model.

• User friendliness 

### includes the size ofthe user community, the state of documentation, how accessible the model is to the stakeholder audience, and the presentation ofresults. 

# 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 ofhandling all ofthe 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 ofthe inputs need updating. Fully replacing this model from the ground up with something ofcomparable 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 ofthe

31PRELIMINARY 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 PRELIMINARY DRAFT**~** For discussion purposes only 

### 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 ofthe model include accounting for consumer decisions to purchase appliances (fuel choice and efficiency) and to operate them as a function ofpnce, 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 ofthe model includes, for each year: • Projected annual shipments • Per unitenergy consumption and price (for new units sold that year) • Energy consumption ofall 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 ofREM began with the Oak Ridge National Laboratory (ORNL) Engineering-Economic Model ofResidential Energy Use, 

### ca. 1975. The model has been in continuous use for analysis ofU.S. appliance standards since 1979. 

### Operating characteristics. REM is written in FORTRAN, contains roughly 20,000 lines ofcode, and runs on a minicomputer (Sun Workstation). (We believe the model can be run on a PC, based upon successful runs ofan earlier version 

### ca. 1986; but have not made the attempt recently.) Where the model is already in use for the Department's analysis ofappliance 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.



### 32PRELIMINARY DRA FT - 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 PRELIMINARY DRAFT**~** For discussion purposes only

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 oftime 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 ofappliance standards; it 

### is entirely comparable to REM in this regard. Some attention would be needed to develop and update a national set ofinputs 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 ofoutputs. Capability. 

### REEPS contains the framework for considering all the important issues that have been raised, including demographic, engineering, and economic details at the

33PRELIMINARY DRAF T - 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 isREEPS-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 newuser 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 PRELIMINARY DRAFT**~** For discussion purposes only 

### national level. The analysis framework and the model capabilities ofthe REEPS model are very similar to those ofthe 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 ofstaff. £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 oftime 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 ofsimplicity, but the disadvantage offailing 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 ofthese 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.

-PRELI M 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 Info rm ation 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 PREUMlNARY DRAFT**~** For**d~scussion** 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 ofregulation on manufacturers, DOE will simulate the financial behavior ofmanufacturing operations both with and without regulation. This

. will allow the DOE to determine incremental changes in financial performance. The

impacts ofefficiency standards would be expected to depend on the type and financial strength ofthe 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 ofmanufacturers 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 ofproducts. 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 ofbefore regulation revenues. e 

### R&D (as a percentage ofrevenues): This is used to compute the R&D costs, unrelated to regulation.
e 

### Depreciation (as a percentage ofrevenues before regulation): This is a non-cash cost and is used as a part ofthe cash flow calculation.
. It 

### Variable Overhead (as a percentage ofTotal Overhead): This helps to 

### separate the fixed and the variable parts ofthe overhead costs.

35PRELIMINARY DRAFT - For discussion purpose s 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 Y ear in which

c the regu ° n announ cement is made X002 Year in which the regulat i on 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 PIREUM!NARY DRAFT**~** For discussion purposes only



### To obtain estimates for these inputs DOE has analyzed information available from publicly available sources offirm-specific financial information for major fluorescent lamp ballast manufacturers-SEC-lOK Reports, Moody's Company Data Reports, Standard & Poor's (S&P) Stock Reports, and Robert Morris Associates. A detailed definition offinancial inputs and their values for a "prototypical" ballast manufacturer is contained in Attachment C ofthis 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 ofa "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 BeginningyefU' /01' analyticalpurposes 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% perannum

. ":1614% of Revenue <:15,9% of Revenue :U:::d:/75% of Revenue**:::i:'::2~9%** of Revenue**:::H:;:;';3)~%** of Revenue



### The three elements ofprofitability

- price, costs and volume

- are strategically interdependent. Several analytical techniques can be used to 

### highlight the tradeoffs among these elements.



### 36PRELIMINARY 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 PREUMINARY·ORAFT**~** For discussion purposes only 

### One ofthe 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 offixed 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 ofdeviation from the Industry average. The potential consequences, business and financial risks ofthese 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 ofmanufacturers, and calculating additional impacts on competition, employment, and manufacturing capacity. This is a bottoms-up analysis based on the results ofinterviews 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 ofmanufacturers. 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 ofthe industry characterization to group manufacturers exhibiting similar characteristics.

37PRELIMINARY DRAFT v 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 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 S hipment 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 ofmedium and large firms. It is reasonable to assume that these firms will exhibit Fi - iss, t 1.d c 38 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 ofcalculating what is likely to be the average cost ofmanufacturing appliances at various efficiency levels. The "component-by-component" build-up ofincremental 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 ofreliance 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 ofreaching efficiency levels, it will be necessary to perform a second survey for the manufacturer Phase 3 analysis. The issue ofdata 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 ofestimates. It

### is expected that large reported variances win require explanation and documentation. The interview**proce~s** 

### should prove valuable in this respect
.

. CostModeling 

### The cost modeling approach has the necessary fleXibility to consider numerous configurations ofproduction facilities. Manufacturing processes ofdifferent 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 ofcost 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 oftheir business plans (1) in the absence ofstandards, and (2) in response to standards. This includes a consideration ofpricing policies (e.g., price leadership), markets served (niche vs. full-line) and other policies that can significantly determine the financial performance ofa firm. The financial analysis ofthe "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 ofmedium and large firms. It is reasonable to 

### assume that these firms will exhibit
38PRELI M INARY DRAFT - For discussi on 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 Asses sment 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 PRELIMINARY DRAFT**~** For discussion purposes only 

### price leadership. Thus, the pricing policies of smaller or more specialized firms will closely monitor the actions ofthe 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 onpast experience.
4.4. Competitive Impacts·Assessment 4.4.1. Introduction 

### Legislation directs the Department to consider any lessening ofcompetition that is likely to result from standards. It further directs the Attorney General to gauge the impact, if any, of any lessening ofcompetition. The need to conduct an assessment ofanti-competitive effects ofproposed standards comes from the need to protect the interests ofthe 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 ofmarket 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 ofnew standards would be minimal, although market share among firms could be redistributed somewhat. However, ifmany 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, ifthe 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 ifprices reflect a portion ofthe cost


### 39PRELIMINARY 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 si gnificant and if they aff ect smaller firms more severely thati larger ones . Typically, in the appliance a n industry, average cost decreases with increasing firm size. Increases in costs that vary with the output (better known as variable manufacturing costs) should not disadv antage 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 fi rms, as a result of compliance with certain standards . This could be categorized as adverse effect of standards
. Because smaller fi rms .tend to have fewer resources and capacity to withstand economic adversity , any decrease in average profitability is more likely to seriously aff ect 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 f

acts set forth in DOE' s Technical Support Documents (TSD), as well as other information that could be collected by the Department ofJustice in the time allowed. PIREUIVHNARY DRAFT**~** For discussion purposes only 

### increase. However, two results ofnew standards may counteract at least a portion of sales declines for some appliances. These are: (1) 

### substitutes being regulated out ofthe 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 ifcost increases are significant and ifthey 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 ofthe 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 ofthe market, could act as a catalyst for the consolidation ofthe industry. A trend 

### ofconsolidation strongly corroborates the finding that large firms have a cost advantage. A principal characteristic ofconsolidation is that smaller firms will be, on average, in more danger offailing 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 ofcompetition. It is important to note that even ifaverage 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 oflessening ofcompetition was made by the Attomey General. In 

### making this determination, the Department ofJustice (DOl) relied on facts set forth in DOE's Technical Support Documents (TSD), as well as otherinformation that could be collected by the Department ofJustice in the time allowed.

40PRELIMINARY 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 Asses sment 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 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 ofinterrogation 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 ofthe 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 ofthe manufacturer impact analyses. The quantitative portion ofthe industry characterization task may be an input used to assess competitive impacts. For example, the historical concentration data will provide snapshots ofthe 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 ofthe likeliness ofincreases 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 offixed costs potentially increasing business**risks~** 

### and CD 

### potential barriers to market entry (proprietaIy technologies, etc.).
The Department ofEnergy will consult with the Department ofJustice to draft questions for the interview guide
..

41PRELIMINARY DRAFT r For discussion purposes only

4. 5 . . - _'ent I mpacts 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 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 ofdomestic employment. An evaluation ofthe direct employment impacts ofstandards on manufacturers and relevant.industries will be performed in Phase 3 ofthe manufacturer impact analyses. Two impacts on employment are possible from standards-direct impacts and indirect impacts. Direct employment impacts would result ifstandards lead to a change in the number ofemployees 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 ofdirect 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
42PRELIMINARY 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 Pro ces s 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 Impa cts 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 - I last !,doc; 43 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 ofincreased labor due to standards. Recent interviews with ballast manufacturers highlighted the.practicallimitations ofusing 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 ofproduction 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 ofthis 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 ofnew 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 ofthe significant burdens ofnew appliance standards can be the consequential obsolescence ofexisting 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 ofcapital investment by domestic manufacturers. A change in standards will generally create three types ofcosts 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 ofnew products. And third, new products often require retooling and new equipment (capital costs). In 

### the engineering analysis, data is collected on each ofthese cost components for all the design options considered. The capital cost requirements will be greatly dependent on the stringency ofthe 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 ofthe product. More incremental efficiency improvement requirements will impact manufacturers differently, based on the

43PRELIMINARY DRAF T - 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 tax able income and thus taxes payable.
Given the cl ear difference in manufacturing technologies for magnetic and el ectronic 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 M anufacturing 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 p arties. 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 Identifi cation 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 Questionna

ire : The initial industry characteriza tion will collect information from relevant industry and market publications , industry trade org anizations, comp any 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 Dep artment that the contents of questionnaires and the list of interview participants be publicly vetted prior to initiating the interview process.

M -?:'s . t F..doc PRELlM!NARY DRAFT
- For discussion purposes only 

### characteristics oftheir current designs and the nature oftheir 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 ofstranded assets. A finn which has capital assets that are not applicable to the production ofthe 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-offofexisting 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 ofstranded assets, the value of stranded assets 

### win be reported separately from other measures ofimpact.

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 ofinterested parties. Interviews may be conducted in any and all phases ofthe 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 ofthe 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 ofthe manufacturer impact analyses. It

### is the intention ofthe Department that the contents of questionnaires and the list ofinterview 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? t tdcc 45 PREUMiNARY DRAFT**~** For**d~scussion** purposes only 

### The Phase 3 (sub-group analysis) questionnaire will solicit information on the possible impacts ofpotential efficiency levels on manufacturing costs, product prices, and sales. Evaluation ofthe 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 ofall 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 ofthe major issues and outcomes. The Department will seek coll1l'i1ent on the outcome ofthe interview process.

45PRELIMINARY 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 ® Manuf

acturer 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 Cu m ulative Reg ulato ry B urden 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 PRELIMiNARY DRAFT**~** For discussion purposes only


### During late 1997 and early 1998 the Department met with staffoffive major manufacturers offluorescent lamp ballasts. The purpose ofthis useful and informative series ofmeetings was to initiate a dialog between the Department ofEnergy and each ofthe 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 ofthe results ofthese interviews is presented as Attachment B. A second series ofinterviews 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 ofmultiple regulation analysis: • Regulations on multiple products • Several regulations on same product • A combination ofboth 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 ofthe GRIM:. More detail win be provided at the March 11 th 

### workshop.

The Department is not currently aware ofany additional regulations which might need consideration within the Manufacturer Impact Analysis.

46PRELIMINARY DRAFT - For discussion purposes only 

### ATTACH MENT A Description of Information Available in Census of M anufacture rs an d 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**~** For discussion purposes only ATTACHMENT A Description of Information Available in Census of Manufacturers and Current Industrial Reports 

### [1] The Census ofManufactures (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 ofManufactures provides the single best measure ofU.S. manufacturing industry outputs, inputs and operating status, and is a major resource for the establishment-based Longitudinal Research Database. The Census ofManufactures 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 ofnumerical digits. The Current Industrial Report (CIR) program has been providing monthly, quarterly, and annual measures ofindustrial activity for many years. The primary objective ofthe CIR. program is to produce timely, accurate data on production and shipments ofselected 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 ofthis product, approximately 12 companies. [2] A company is defined as a business organization consisting ofone 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 . # 

### ofall 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 ofcorporations are included as employees; proprietors and partners ofunincorporated firms are excluded.

A-1PRELIMINARY 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 calen dar 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 sal aries, wages, commissions , dismi ssal 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 : Thi s 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, j anitorial and guard services, product development, auxili ary 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 ad justed by the addition of value add ed by merch dising operations (i.e. the difference between the sales value and the cost ofmerch andise 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 PREUlIJHNARY DRAFT**~** For discussion purposes only 

### Payroll: This item includes the gross earnings ofall 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 ofpayrolls used for calculating the Federal withholding tax. It includes all forms ofcompensation, 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 ofofficers ofcorporations; it excludes payments to proprietors or partners ofunincorporated 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 ofmaterials, and Value added Value ofshlpments: This item C9vers the received or receivable net selling values, f.o.b, plant (exclusive offreight 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 ofscrap, and sales ofproducts 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 ofthe same company. or shipped on consignment. The net selling value ofproducts 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 ofmanufacturing activity is derived by subtracting the cost ofmaterials, supplies, containers, fuel, purchased

. electricity, and contract work from the value ofshipments (products manufactured plus receipts for services rendered). The result ofthis calculation is adjusted by the addition ofvalue added by merchandising operations (i.e. the difference between the sales value and the cost ofmerchandise 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-2PRELIMINARY DRA FT - 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 PRELIMINARY DRAFT**~** For discussion purposes only 

### Cost ofMaterials: 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 ofmaterials or fuel consumed, whether purchased by the individual establishment from other companies, transferred to it 

### from other establishments ofthe same company, or withdrawn from inventory during the year. The important items ofthis 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 ofdomestic merchandise: Source: Bureau ofthe Census report EM 545, U.S. Exports. [7] Import for consumption: Source: Bureau ofthe 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 ofthe 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 ofthe 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 ofthe largest 50 companies accounted for two percentage points ofthe 100 percent it would produce an index of200. However, ifthe 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 ifthey were ofthe type for which depreciation accounts were ordinarily maintained.

A-3PRELIM INA RY DRAFT - For discussion purposes onlyThe 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. 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 ofmaintenance and repairs changed as current operating expenses.

A-4PRELIMINARY DRAFT - For discussion purposes only ATTACHMEN T B Inte rv iew G ui de fro m 1 96/1 97 Sta kehol der Interv iews

B ackground 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 PRELlM!NARY DRAFT**~** For discussion purposes only ATIACHMENT 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 ofnew or revised appliance efficiency standards. Key elements ofthis rule which have a direct bearing on the conduct ofany future analyses include: 1. Providing opportunities for public input early in the rulemaking process. 2. Developing qualitative and quantitative estimates ofcritical variables from multiple sources with inputs from interested parties. 3
..Understanding and reporting the distribution ofcosts and benefits ofstandards on different manufacturers. 4. Considering the impacts ofstandards 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 ofthis interview is to help identify issues, gather information and identify additional sources ofinformation 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 ofthe 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 ofthe guide provides information on consumer and national issues raised at the June workshop and requests information on specific issues. Part C ofthe 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-1PRELIMINARY DRAF T - For discu ss ion 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 C ONS

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 ha

ve occurred in the ballast industry in recent years (such as the shift to electronic ball asts), and how ha ve these changes impacted your company?

®2 PREUM!NARY DRAFT**~** For discussion purposes ol1ly 

### the industry in order to structure the manufacturer analysis and ensure an accurate representation ofthe variability ofimpacts among different firms. Part D ofthe 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 ofthe likely incremental capital and manufacturing costs at different efficiency levels. DOE is seeking input on possible sources ofinformation and appropriate data collection methodologies.

### , Part E ofthe guide seeks qualitative information which could help develop price and quantity forecasts offuture ballast sales: Part F ofthe guide addresses issues for which the Department has outlined policies to be used in the economicjustification ofstandards. Interview participants are invited to comment on all or part ofthe 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 ofevaluating 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?

8-2PRELIMINARY 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 PRELIMINARY DRAFT
- For discussion purposes only


### PART D: MANUFACTURER COST IMPACTS 

### For each ofthe efficiency levels described in Section 3.6 ofthe "Draft Report on Potential Impact ofPossible 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 ofyour 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 ofyour current assets in such areas as plant, equipment, and tooling?
PARTE: IMPACTSONPRODUCTSALESANDPRICE 

### For each ofthe efficiency levels described in Section 3.6: E.1 Would the total number ofballasts 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 ofother 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 ofthe 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 ifpossible.

B-3PRELIMINARY 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? 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 discuss ion purposes only

Financial Inpu ts to GRI M for the B allast Rulernakin g Analysis Abstract: The following table illustrates a representativefinancial structure 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 PRELlM!NARY DRAFT**~** For discussion purposes only 

### ATTACHMENT C Financial Inputs to GRIM for the Ballast Rulemaking Analysis Abstract: 

### Thefollowing table illustrates a representativefinancial 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 Beginningyear for analyticalpurposes**~~---~** 1999 Year in which the regulation announcement is made """",,-,-;,--..,.,.o! 2002 Year in which the regulation takes effect L--;";";"---,,---.J

C-1PRELIMINARY 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 docum ent 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 ..................

Fig ure 1. Usi 1 " pe rf orrn an industry cash fir, i

C- 2 PRELlM!NARY DRAFT N For discussion purposes only
Financial Inputs to GRIM for the Ballast Rulemaking Analysis
Introduction


### The Department ofEnergy proposes to use the Government Regulatory Impact Model (GRIM) 

### to calculate the financial impacts ofnew standards on manufacturers of fluorescent lamp ballasts. Given the relatively small number offirms 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 ofthis document is to outline and document the basis offinancial 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 ofregulatory 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-2PRELIMINARY DRAFT - For d iscussion 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 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 offirm-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 ofthe GRIM cash flow analysis only the ballast segment ofeach firm's operations will be considered. Thus financial information relevant to the GRIM analysis should be representative ofplant 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 oftheir operations concentrated in ballast manufacturing (i.e. Motorola's financials are not representative ofballast 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 of37.2%, a simple arithmetic average ofthe three manufacturers, as an input to GRIM.

C-3PRELIMINARY 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. B ecause 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. Thi s 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 S G&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 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 ofa company's capital that must be maintained in order to undertake day-to-day operations ofthe 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 ofthe company. Table 2 presents average working capital maintained by a major ballast manufacturer as a percentage ofits 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 ofthe 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 ofthe two values) ofrevenues 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-4PRELIMINARY DRAFT - F or discus sion purpo ses 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 expe nse 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 as gin- 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 PRELIMINARY DRAFT**~** For discussion purposes only

Table 3. Average SG&A expense as a percentage of revenues 

### Selling costs include any expense or class ofexpense 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 ofthe enterprise. G&A costs include the cost of service and staffunits (such as the personnel office) and general corporate costs, including compensation oftop management and donations to charitable organizations. The Department propo values in Table 3) ofr
3.4 Research and Development (R&D) 

### ,Ie arithmetic average ofthe 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 ofR&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 ofthe 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 ofits annual revenues. The R&D cost data has been averaged over the past six years, 1992 

### through 1997.

C-5PRELIMINARY DRAF T - 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 inf

ormation in Table 4, the Department proposes using R&D expense as 1.75% of revenues for input into GRIM.
3.5 Depreciati o n 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 perce ntage 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 PRELIMINARY DRAFT**~** For**di~cus~!on** purposes only

Table 4. Average costs as a percentage of revenues 

### The separate disclosure ofresearch and development expense is a relatively recent requirement. Formerly, most companies included this expense as a part ofgeneral 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, FASB requires that this amount be reported separately ifit is material. Based on the information in Table 4, the Department proposes using R&D expense as 1.75% ofrevenues for input into GRIM.
3.5 Depreciation 

### Plant and manufacturinsefullives; that is, they will provide service to the fi accounting periods. A fraction ofthe cost ofthese 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 ofplant 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 ofthe two values in Table 5) ofrevenues for depreciation expense as an input into GRIM:.PRELI M 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 L rare^.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/D iscount 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 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 ofthe 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 ofits annual revenues. The data has been averaged over eight years, 1990 through 1997. The table also presents data from the 1992 Census ofManufactures.

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 ofManufacturer 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 ofcapital is a measure ofa company's cost ofusing capital that it 

### raises either through loans (Le., debt) or by issuing equity. It is the minimum rate ofreturn that must be earned on new investments that will not dilute the equity ofthe shareholders. This rate ofreturn is often referred to as the discount rate, hurdle rate, or the opportunity cost ofcapital. The company cost ofcapital is a weighted average ofthe 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 ofdebt financing) plus the cost of-equity capital, weighted by the relative. amount ofeach in a company's capital structure. For the purpose ofcharacterizing financial impacts ofregulations on manufacturers using GRIM, the Department proposes using the company cost ofcapital to discount future cash flows for arriving at the ballast industry value.

C-7PRELIMINARY 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 Man ufactu rers 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 compani es within the industry . The five

-year average debt ratio is ob tained 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 PREliMINARY DRAFT**~** For discussion purposes only
In order to calculate the company cost of capital, it is essential to identify a company's cost ofraising debt, cost ofraising 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 ofcredit 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 of6.56%. 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 277 5 basis points above the Treasury bills for a 5 year debt instrument. At the present time this would mean a nominal borrowing rate ofapproximately 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 of75 5 basis points above the Treasury bills for a 30-year 6 debt instrument. At the present time this would mean a nominal borrowing rate ofapproximately 5.75% (@T bill rate = -5.0(010). Adjusting for an inflation rate of2.2% in 1997, the real cost ofdebt would be around 3.55%. Debt ratio is defined as the ratio oflong-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 of0.79 and 0.15 with a five-year average debt ratio of0.17 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 ofthe 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.
CPRELIMINARY DRAFT M For discussion purposes only 

### from Ibbotson Associates, a company that tracks the industry cost ofcapital for over 300 industries. This indicates that different companies adopt different ways ofraising capital-some depend more on equity while others depend more on debt for raising capital. Cost of equity: 

### Cost ofequity is the rate ofreturn that equity investors expect to earn on their investments in a company's stock. These expectations are reflected in the market price ofthe company's stock. One way ofestimating the cost ofequity is by using the capital asset pricing model (CAPM). The CAPM is based on the premise that the expected or the required rate ofreturn on any firm's common stock equals the riskless rate ofinterest plus a premium for risk. The CAPM is widely used by large corporations to estimate their costs ofequity? Another method that could be used to determine the cost ofequity is the historical rate ofreturn to the stockholder. According to the CAPM, the cost ofequity, 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 ofthe sensitivity ofa 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 ofrisk. 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 ofTreasury bills are relatively stable. However, investors cannot lockin 

### 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 ofthe 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 CapitalAssetPricing Model Work by Mullins, D.W., published inthe Harvard Business Review. 

## e-9PRELIMINARY DRAFT m For discussion purposes only

Bu L -es retu ( 1990-96 ) and risk premiums (1926

-94) on some cririties (figs- s in pe rcent 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 Man uf acture rs Using CAPM to calculate the cost of equity, the following results are obtain ed 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 B ased on data from the Federal Reserve Statistical Release. 9

-Source : Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation, 1994 Yearbook C

## 4 0 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 ofbeta for two ballast manufacturers. The data has been averaged over the period 1990-96. The values ofbeta are obtained from financial services provided by the Dow Jones Company. They measure the sensitivity ofa 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 ofequity, the following results are obtained for the ballast manufacturer: Manufacturer A: Cost ofequity 

## = (7.06
.. 1.5) 

### + 1.01 >I< (8.5) 

## = 14.150/0 [riskless rate] beta '" [risk premium] Manufacturer B: Cost ofequity 

### = (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 ofequity 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. andInflation. 1994 Yearbook C40PRELIMINARY DRAFT - For discussion purpose s 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 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 ofcapital calculated accounts for inflation, as real values of cost ofequity 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).

Table 10. Comparison of financial data. Based on the analysis offinancials oftwo ballast manufacturers there appears to be a wide spectrum ofW ACC. 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 ofthe 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. CAPM-Ordinary least squares method is used for arriving at this value. Adjusting for inflation (2.2% in 1997), the real cost ofcapital is**~.37%.**

C41PRELIMINARY DRAFT - For -discussion purposes only 

### ATTAC HMEN T D B allast In dustry 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 o rris 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, lea sehold improvements and equipment, net of accumulated depreciation or depletion)

D-1 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-1PRELIMINARY 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 PRELIMINARY DRAFT**~** For discussion purposes only



### Introduction ATTACHMENT E Fluorescent lamp Ballast Manufacturers Interview Guide



### During late 1997 and early 1998 the Department ofEnergy met with staffoffive major manufacturers offluorescent lamp ballasts. The purpose ofthis series ofmeetings was to initiate a dialog between the Department ofEnergy and each ofthe manufacturers to 

### help educate Department representatives about the context in which the industry operates and about the nature ofmanufacturer 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 ofinterviews 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 ofthe 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 ofplant 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 ofinterest to round out the Department's understanding ofthe probable future ofthe ballast manufacturing activity without and with energy efficiency standards. A.l Identify names ofparent companies and any subsidiaries relevant to the ballast industry. A.2 Please provide the locations ofyour 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-1PRELIMINARY DRAFT r For discussion purposes only

A.4 How would a new energy efficiency standard on ballast products aff ect 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. Maj or custo m er type s 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? 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 ofhow potential energy standards levels might affect your consumer mix, distribution channels and related profit margins. For each ofthe 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 ofthese

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 ofthese price differences? B.4 In 

### general, could you outline the various paths from the plant to final user for each major product through each ofthe significant distribution channels? B.5 Do you see any impending changes in your distribution channels or in the relative fractions ofsales directed through each? B.6 Do you see any changes in emphasis on export sales, and would the presence ofnew energy efficiency standards have an impact on production ofballasts 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 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 ofa 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 ofthese 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 ofnew 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 ofthe 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 offurther ballast efficiency standards. C.l Absent new energy efficiency standards, do you see the production ofballasts sold in the US moving out ofthe US? " C.2 What fraction ofyour domestic sales for each ballast type is currently produced in the US? In 

### all North America? C.3 What fraction ofyour total worldwide production ofeach 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 offoreign 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-3PRELIMINARY 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 s tandards. These results, together with adequate understanding of how they were developed , will help the Department to estimate industry impacts throu gh 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; re D. 1.1 Is the " dus ry` costs ucturrepresents 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 thi s 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 diff erences, 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? 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 ofthe 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 ofhow 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 ofyour 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, ifany, 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 ofelectronic (or cathode-cutout) ballasts to change given a new ballast standard? D.2.2 Are your gross margins (% revenue) different post standards? Ifso, what are the causes? D.3 Shipments How do you qualitatively explain differences, ifany, 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 : E m ploy m ent 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 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, ifany, between your financial data and

. those presented in the sample results for the industry as a whole?

Are there additional financial impacts ofnew 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 ofmarket 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 ofnew energy efficiency standards on employment is an important consideration in the rulemaking process. This section ofthe 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 ofthe years 1990, 1995, and as ofMarch 30, 1998. What are the equivalent employment levels and production rates for all ofNorth 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-5PRELI M INARY DRAFT d F or discuss ion 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 workf

orce 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. 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 ofemployees? Employment Im'pacts on major suppliers The Department recognizes that secondary employment impacts could occur particularly for important suppliers as a result ofnew ballast standards. F.S In 

### what ways, ifany, would the standards tend to change the relative fractions of foreign vs. domestic sources of supplies? F.6 In 

### what ways, ifany, would the standards tend to change the size and nature ofthe 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 ofmagnetic ballasts decrease. Some restructuring within the industry has occurred since that time, and the status ofcapacity utilization and expectations for the future need to be revisited and explored in greater detail.
. G.l How would the imposition ofnew 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 

### ATTAC HMENT F GRI M O peratin g P rinciples
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 PRELIMINARY DRAFT**~** For discussion purposes only ATTACHMENT F 

### GRIM Operating Principles

1.0 Introduction and purpose 

### The purpose ofthe Government Regulatory Impact Model (GRIM) is to help identify the effects ofvarious efficiency regulations and other regulations on manufacturers. The basic mode of analysis is to determine the change in value ofthe manufacturers(s) following a regulation or a series ofregulations. The model structure also allows an analysis ofmultiple products with regulations taking effect over a period oftime, and of multiple regulations on the same product. Industry value is defined, for the purposes ofthis 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 ofsummary statistics, graphs ofmajor variables, and, when appropriate, access to the complete cash flow calculation.
2.0 Model description 

### The basic structure ofthe 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 ofregulatory 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 oflisted items on the printout ofthe 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 ofdistribution (distributor, etc.), entered as an

F-1PRELIMINARY 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 NE SS) Annual revenues ; computed by multiplying
°c nit (2) by Unit Sales (3). (5) Base C

osts : 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), Mat erial (8), Over

head (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. 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 ofRevenu.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 ofdepreciation on pre- and post-regulation assets. Total cost ofsales, computed by adding Labor (7), Material 

### (8), Overhead 

### (9) and Depreciation (10). 

### Research and development costs unrelated to regUlations; computed as a percentage ofRevenu.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-2PRELIMINARY 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, 7HRE

E, 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

before Tax (15). (16) from _#w 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 W

orking 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 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 ofyears. Selling, general and administrative costs are computed as a percentage ofRevenues (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 ofcash 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 ofthe 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-3PRELIMINARY 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 ( O

N E , TWO, 7' "- _TE, etc.) and listed out for the appropriate numL a of years.
(26) Cash Used in Investments. Cash required for as sets ; computed by adding Capital Expenditures (24) and Conversion Expend itures (25). (27) Net Cash cc--ra)u ' "1" _ icting C ash Used in ual cash flow from operations and investments;

i from Cash
(28) Post-Regulati

on 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.

FPRELIMINARY 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 ofyears. (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 ofthe relevant industry following adoption and implementation ofthe regulatory scenario; the present value ofthe 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 Deprec iation 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 Expenditu

res 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 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 ofSales 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-5PRELIMINA RY DRAFT - For discuss ion purpos es 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 year

for al ° al purpos Y ear iwhich the regulat i on announ cement is QU2 Year in which the regulation takes effed

ofRevenue ofRevenue 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 ofa 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.$ Beginningyear /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