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# APPENDIX 12C: GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

SUPPORTING DOCUMENTATION

TABLE OF CONTENTS

12C.1 INTRODUCTION AND PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-1

12C.2 MODEL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-1

12C.3 DETAILED CASH FLOW EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12C-4

12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS . . . . . . . 12C-5

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# 12C.1 INTRODUCTION AND PURPOSE

The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the

impacts of energy conservation standards and other regulations on manufacturers. The basic mode

of analysis is to estimate the change in value of the industry or 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 net present value is defined, for the purpose of this analysis, as the discounted

sum of industry free cash flows plus a discounted terminal value. The model calculates the actual

cash flows by year and then determines the present value of those cash flows both without an

energy conservation standard (i.e., the base case) and under different TSL levels.

Output comes from the model in terms of summary financial metrics, graphs of major

variables, and, when appropriate, access to the complete cash flow calculation.

12C.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standard annual cash flow analysis that uses

manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters as

inputs 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 net operating profit after taxes. The cash flow calculation converts net operating

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 12.C.3)

(1) Unit Sales: Total annual shipments for the industry were obtained from the National Impact

Analysis Spreadsheet;

(2) Revenues: Annual revenues; computed by multiplying manufacturer selling price at each kVA

rating by the annual shipments at the same kVA rating, summed over all kVA ratings;

(3) Labor: The portion of Cost of Goods Sold (COGS) that includes direct labor, commissions,

dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and assembly

labor up-time;

(4) Material: The portion of Cost of Goods Sold (COGS) that includes materials;

(5) Overhead: The portion of Cost of Goods Sold (COGS) that includes indirect labor, indirect

material, energy use, maintenance, depreciation, property taxes, and insurance related to assets.

While included in overhead, the depreciation is shown as a separate line item;

(6) Depreciation: Annual depreciation computed as a percentage of Revenues (2) . While

included in overhead, the depreciation is shown as a separate line item;

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# (7) Standard SG&A: Selling, general, and administrative costs are computed as a percentage of

Revenues (2) ;

(8) R&D: GRIM separately accounts for ordinary R&D as a percentage of Revenues (2);

(9) Product Conversion Expense: Product conversion expenses are one-time investments in

research, development, testing, and marketing focused on making product designs comply with

the new efficiency standard. GRIM allocates these costs over the period between the standard’s

announcement and effective dates;

(10) Stranded Asset Writeoff: In the year the standard becomes effective a one time write-off of

stranded assets is accounted for;

(11) Earnings Before Interest and Taxes (EBIT): Includes profits before deductions for interest

paid and taxes;

(12) EBIT as a Percentage of Sales: GRIM calculates EBIT as a percentage of sales in order to

compare with the industry’s average reported in financial statements;

(13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major

Assumptions by EBIT (11)

.

(14) Net Operating Profits After Taxes (NOPAT): Net operating profit after taxes; computed by

subtracting Cost of Goods Sold ((3) to (6))

, SG&A (7)

, R&D (8)

, Product Conversion Expense

(9), Stranded Asset Writeoff (10), and Taxes (13) from Revenues (2)

.

(15) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

(16) Depreciation repeated: Depreciation is added back in the Statement of Cash Flows because

it is a non-cash expense;

(17) Change in Working Capital: Change in cash tied up in accounts receivable, inventory, and

other cash investments necessary to support operations is calculated by multiplying working

capital (as a percentage of revenues) by the change in annual revenues.

(18) Cash Flow From Operations: calculated by taking NOPAT (15) , adding back non-cash

items such as a Depreciation (16), and subtracting out Change in Working Capital (17) ;

(19) Ordinary Capital Expenditures: ordinary investments in property, plant, and equipment to

maintain and replace existing production assets computed as a percentage of Revenues (2) ;

(20) Conversion Capital Expenditures: conversion capital-expenditures are one-time investments

in property, plant, and equipment to adapt or change existing production facilities so that new

product designs can be fabricated and assembled under the new regulation;

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# (21) Cash Used in Investment: Total investments in property, plant, and equipment is computed

by adding Ordinary Capital Expenditures (19) and Conversion Capital Expenditures (20);

(22) Free Cash Flow: Annual cash flow from operations and investments; computed by

subtracting Cash Used in Investment (21) from Cash Flow from Operations (18) ;

(23) Terminal Value: estimate of the continuing value of the industry after 2038. Computed by

growing the Free Cash Flow in year 2038 at a constant rate in perpetuity;

(24) Present Value Factor: Factor used to calculate an estimate of the present value of an

amount to be received in the future;

(25) Discounted Cash Flow: Free Cash Flows (22) multiplied by the Present Value Factor

(24). For 2038 the discounted cash flow includes the discounted Terminal Value (23) ;

(26) Industry Net Present Value: The sum of Discounted Cash Flows (25);DRAFT12C-4Transformer_DRAFT_TSD_Appendix12C_version8-01-05_DOE.wpd12C.3 DETAILED CASH FLOW EXAMPLEStd TSL1Base YearSuperclass LV DryAnnouncementYearStandard Year200420052006200720082009201020112012Income Statement (Million U.S.$)Unit Sales0.3180.3270.3340.3420.3510.3590.3660.3730.380Revenues313.22321.45328.15336.44345.41353.50403.53411.37418.94Cost of Goods SoldLabor56.6658.1559.3760.8762.4963.9573.2074.6276.00Material152.19156.19159.45163.48167.84171.77195.85199.65203.32Overhead36.7737.7438.5239.5040.5541.5047.4048.3249.21Depreciation4.955.085.185.325.465.596.386.506.62[Rev / COGS] 1.25001.25001.25001.25001.25001.25001.25001.25001.2500Selling, General and AdministrativeStandard SG&A42.2843.4044.3045.4246.6347.7254.4855.5356.56R&D7.157.347.497.687.888.079.219.399.56Product Conversion Expense---0.751.051.200.06--Compliance Costs---------Stranded Asset Writeoff---------Earnings Before Interest and Taxes13.2113.5613.8413.4413.5213.7116.9617.3517.67[EBIT / Rev]4.2%4.2%4.2% 3.996%3.9%3.9%4.2%4.2%4.2%Taxes4.744.874.974.834.864.936.096.236.35Net Operating Profit After Taxes (NOPAT)8.478.698.878.628.678.7910.8711.1211.32[non-prod costs / COGS]0.25000.25000.25000.25000.25000.25000.25000.25000.2500Cash Flow StatementNOPAT8.478.698.878.628.678.7910.8711.1211.32Depreciation4.955.085.185.325.465.596.386.506.62Change in Working Capital-(1.22)(1.00)(1.23)(1.33)(1.20)(7.44)(1.16)(1.13)Cash Flows from Operations13.4212.5413.0612.7012.7913.179.8116.4516.82Ordinary Capital Expenditures(6.08)(6.24)(6.37)(6.53)(6.71)(6.87)(7.84)(7.99)(8.14)Conversion Capital Expenditures---(2.57)(3.59)(4.10)---Cash Used In Investment(6.08)(6.24)(6.37)(9.10)(10.30)(10.97)(7.84)(7.99)(8.14)Free Cash Flow7.336.306.693.602.492.201.978.478.68Terminal Value---------Present Value Factor0.920.840.780.710.650.600.550.510.47Discounted Cash Flow6.745.325.182.561.631.321.094.304.05Industry Value (Net Present Value)Millions90$NPV base year:2004Real dollars are in year for Eng Analysis (2004$)Terminal Values (depends on TV calc option)94818646322825109112perpetual growth TV

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# 12C.4 GOVERNMENT REGULATORY IMPACT MODEL INSTRUCTIONS

The following user-instructions are contained on the “Welcome” sheet of the distribution

transformer GRIM:

1. The red-tabbed sheets pertain to overview information. The pink-tabbed sheets refer to

input information. The green-tabbed sheets represent calculations. The blue-tabbed sheets

contain numerical and graphical output.

2. Pink cells designate input information. Green cells designate intermediate calculations.

3. By clicking on sheet names in column B of the "Index" sheet, the workbook can be

quickly navigated.

4. Use the "Major Assumptions" sheet to choose the desired scenario. Cell B3 is used to

choose the superclass. Cell B6 is used to choose the trial standard level (TSL). Cell B7

allows toggling between TSL5 and TSL6. Row 33 is used to select the markup scenarios.

Within each superclass (LV dry-type, MV dry-type, and Liquid-Immersed), the markup

scenario should be chosen consistently. Markup Scenario 1 is the "Preservation of Gross

Margin Percentage Scenario". Markup Scenario 2 is the "Preservation of Operating Profit

Scenario". See Chapter 12 of the Technical Support Document for more information.

5. After selecting the desired scenario, go to the blue-tabbed sheet entitled "Summary

Report." Rows 16-18 summarize the impact on Industry Net Present Value (INPV).

6. Other blue-tabbed sheets provide graphical information summarizing the scenario. Note,

on some computers, the workbook may need to be closed and re-opened before the

graphical information will completely update.