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CHAPTER 2. ANALYTIC FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ..................................................... 2-1

2.2 BACKGROUND ..................................................... 2-4

2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................... 2-4

2.3.1 Market Assessment .............................................. 2-4

2.3.2 Technology Assessment ........................................... 2-4

2.4 SCREENING ANALYSIS ............................................... 2-5

2.4.1 Technology Screening ............................................ 2-5

2.4.2 Baseline Equipment ............................................. 2-5

2.5 ENGINEERING ANALYSIS ............................................ 2-6

2.5.1 Design-Option Approach .......................................... 2-6

2.5.2 Efficiency-Level Approach ........................................ 2-7

2.5.3 Cost-Assessment Approach ........................................ 2-7

2.5.4 Other Regulatory Impacts on the Engineering Analysis .................. 2-8

2.6 ENERGY USE AND END-USE LOAD CHARACTERIZATION ............... 2-8

2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION ................... 2-8

2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES .................. 2-9

2.8.1 Life-Cycle Cost Spreadsheet Model ................................. 2-9

2.9 SHIPMENTS ANALYSIS .............................................. 2-10

2.10 NATIONAL IMPACT ANALYSIS ...................................... 2-11

2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS ............................. 2-12

2.12 MANUFACTURER IMPACT ANALYSIS ................................ 2-12

2.12.1 Industry Characterization ......................................... 2-13

2.12.2 Industry Cash Flow ............................................. 2-13

2.12.3 Manufacturer Subgroup Analysis .................................. 2-14

2.13 UTILITY IMPACT ANALYSIS ......................................... 2-15

2.14 EMPLOYMENT IMPACT ANALYSIS ................................... 2-15

2.15 ENVIRONMENTAL ASSESSMENT .................................... 2-16

2.16 REGULATORY IMPACT ANALYSIS ................................... 2-17

LIST OF FIGURES

Figure 2.1.1 Analyses for Distribution Transformer Energy-Efficiency Standards ........ 2-3
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CHAPTER 2. ANALYTIC FRAMEWORK

2.1 INTRODUCTION

This chapter provides a description of the general analytic framework used by the

Department in developing standards and assessing the impacts for distribution transformers. The

description addresses the methodology, the analytic tools, and the relationship between the

various analyses conducted in the rulemaking. The objective of the rulemaking process is to

determine minimum efficiency standards for distribution transformers that are technologically

feasible and economically justified. In this context, economic justification includes consideration

of the economic impact on manufacturers and consumers, the national benefits, the impacts on

utilities, and the impacts from any lessening of competition. 

Figure 2.1.1 summarizes the analytic components of the standard-setting process. The

focus of this figure is the third column, identified as “Analyses.” The columns labeled “Key

Inputs” and “Key Outputs” indicate how the analyses fit into the rulemaking process, and how

the analyses relate to each other. Key outputs are analytical results that feed directly into the

standard-setting process. Key inputs are the types of data and information that the analyses

require. Some key inputs exist in public databases; DOE also collects inputs from stakeholders

or others with special knowledge. Inputs developed by the project team for the standards-setting

process are presented and open for stakeholder review. 

The analyses that the Department performed for the advance notice of proposed

rulemaking (ANOPR) include:

C a market and technology assessment to characterize the distribution transformer market

and review techniques and approaches used to produce more efficient transformers;

C a screening analysis to identify design options that improve distribution transformer

efficiency and to determine which should be evaluated and which should be screened out;

C an engineering analysis to estimate the relationship between the manufacturer’s selling

price of a transformer and its efficiency level;

C an energy use and end-use load characterization to generate energy use estimates and enduse load profiles of distribution transformers;

C a markup process to convert manufacturer sales prices to customer installed prices; 

C a life-cycle cost (LCC) analysis to calculate, at the consumer level, the discounted savings

in operating costs throughout the estimated average life of the distribution transformer,

compared to any increase in the installed costs likely to result directly from the imposition

of the standard. As a supporting or parallel analysis, DOE performed a payback period

(PBP) analysis to calculate the amount of time it takes consumers to recover the assumed

higher purchase expense of more-efficient equipment through lower operating costs;
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C a shipments analysis to estimate shipments of distribution transformers over the time

period examined in the analysis; and

C a national impacts analysis to assess the aggregate impacts at the national level of

consumer payback, net present value (NPV) of total consumer LCC, national energy

savings, and national employment.

After the Department published the ANOPR on July 29, 2004 and received comments

from stakeholders, the Department revised the ANOPR analyses in the manner described in the

notice of proposed rulemaking (NOPR) Federal Register Notice that accompanies this technical

support document (TSD). 

The Department also conducted several new analyses for the NOPR, including:

C an LCC subgroup analysis to evaluate impacts on identifiable groups of customers of

distribution transformers, including various types of electric utilities or various types of

commercial or industrial transformer purchasers or owners, who may be

disproportionately affected by a national energy-efficiency standard;

C a manufacturer impact analysis (MIA) to estimate the financial impact of standards on

distribution transformer manufacturers and to calculate impacts on competition,

employment at the manufacturing plant, and manufacturing capacity;

C a utility impact analysis to estimate the effects of proposed standards on the installed

capacity and generating base of electric utilities;

C an employment impact analysis to estimate the impacts of standards on net jobs

eliminated or created in the general economy as a consequence of increased spending on

the purchase price of transformers and reduced customer spending on energy;

C an environmental assessment to assess the impacts of proposed standards on certain

environmental indicators; and

C a regulatory impact analysis to present major alternatives to proposed standards that could

achieve comparable energy savings at a reasonable cost.

In response to comments it receives on the NOPR, the Department may revise some of its

analyses before publishing the Final Rule.
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Figure 2.1.1 Analyses for Distribution Transformer Energy-Efficiency Standards

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2.2 BACKGROUND 

As described in Chapter 1 of the TSD, in September 1995, the Department announced a

formal effort to consider further improvements to the process used to develop appliance

efficiency standards. The Department called on energy-efficiency groups, manufacturers, trade

associations, tate agencies, utilities, and other interested parties to provide input to this effort. As

a result of this combined effort, the Department published Procedures, Interpretations and

Policies for Consideration of New or Revised Energy Conservation Standards for Consumer

Products (the “Process Rule”), 10 CFR 430, Subpart C, Appendix A. The Process Rule outlined

the procedural improvements identified by the interested parties, and included a review of the: 1)

economic models, 2) analytic tools, 3) methodologies, 4) non-regulatory approaches, and 5)

prioritization of future rules. The Process Rule recommended that the Department take into

account uncertainty and variability by carrying out scenario or probability analysis. The

following sections provide a general description of the analytic components of the improved

rulemaking framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment (Chapter 3) characterizes the distribution

transformer markets and existing technology options for making a transformer more efficient.

2.3.1 Market Assessment

When initiating a standards rulemaking, the Department develops information on the

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

market assessment consists of both quantitative and qualitative efforts to assess the industry and

products based on publicly available information. Issues addressed in this market assessment

included: 1) national transformer shipments; 2) identification of largest players in the

transformer industry; 3) discussion of existing non-regulatory efficiency improvement initiatives;

4) developments around standards in States and neighboring countries; and 5) trends in product

characteristics and retail markets. The information collected serves as resource material to be

used throughout the rulemaking.

2.3.2 Technology Assessment

The technology assessment provided information about existing technology options and

designs to construct more energy-efficient distribution transformers. In consultation with

interested parties, the Department developed several technology options and designs for

consideration. Some examples of these design options are: 1) higher-grade electrical core steels,

2) use of different conductor types and materials, and 3) adjustments to core and coil

configurations.
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As described in Chapter 4, the Department reviewed and analyzed some emerging

technologies for distribution transformers (e.g., superconducting materials). Although these

technologies are not generally considered commercially available, the Department discusses their

potential impact on the distribution transformer industry.

Another key part of the technology assessment is the determination of the product classes

that will be used in the rulemaking. Distribution transformers are divided into classes using the

following criteria: a) the type of energy used, b) capacity, and c) performance-related features

that affect consumer utility or efficiency. Different efficiency standards apply to different

product classes. The Department developed its product classes using information obtained from

manufacturers, trade associations, and other interested parties. 

2.4 SCREENING ANALYSIS

The screening analysis (Chapter 4) reviews various technologies with regard to whether

they: 1) are technologically feasible, 2) are practicable to manufacture, install, and service, 3) do

not have an adverse impact on product utility or product availability, and 4) do not adversely

impact health and safety.

2.4.1 Technology Screening

The Department developed an initial list of efficiency enhancement design options from

the technologies identified in the technology assessment. Then the Department reviewed the list

to determine if the design options are practicable to manufacture, install, and service, would

adversely affect product utility or product availability, or would have adverse impacts on health

and safety. In the engineering analysis, the Department used efficiency enhancement design

options that passed the four screening criteria. It did not consider those options that failed one or

more of the screening criteria in the analysis. Chapter 4 of this TSD discusses which design

options DOE considered in the distribution transformer engineering analysis. The chapter also

includes a list of emerging technologies that could impact future distribution transformer

manufacturing costs.

2.4.2 Baseline Equipment 

To analyze design options for energy-efficiency improvements, the Department typically

defines a baseline unit against which to compare more-efficient units. For products with existing

standards, the baseline unit is usually a unit designed at the existing standard level. However,

since distribution transformers do not have an existing efficiency standard, the Department

developed an approach based on a consumer choice model, involving a distribution of

efficiencies in the baseline. The consumer choice model is part of the LCC analysis, and is

discussed in Chapter 8 of this TSD.
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2.5 ENGINEERING ANALYSIS

The engineering analysis (Chapter 5) develops cost-efficiency relationships for

distribution transformers, estimating manufacturer costs of achieving increased efficiency levels. 

The Department uses manufacturing costs to determine retail prices in the LCC analysis, and also

uses them in the MIA. The engineering analysis also determines the maximum technologically

feasible energy-efficiency level.

In general, the engineering analysis estimates the efficiency improvement potential of the

individual or combinations of design options that pass the four criteria in the screening analysis. 

This cost-efficiency relationship developed in the engineering analysis is used in the LCC

analysis.

As described in Chapter 1, the Department considers those distribution transformers that

are designed to achieve the maximum improvement in energy efficiency that the Secretary

determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) 

Therefore, an important role of the engineering analysis is to identify the maximum

technologically feasible level. The maximum technologically feasible level is one that can be

reached by adding efficiency improvements and/or design options, both commercially feasible

and in prototypes, to the baseline units. The Department believes that the design options

comprising the maximum technologically feasible level must have been physically demonstrated

in at least a prototype form to be considered technologically feasible. 

In general, three methodologies can be used to generate the manufacturing costs needed

for the engineering analysis. These methods are: 

1. the design-option approach – reporting the incremental costs of adding design

options to a baseline model;

2. the efficiency-level approach – reporting relative costs of achieving improvements

in energy efficiency; and 

3. the reverse engineering or cost-assessment approach – involving a "bottom-up"

manufacturing cost assessment based on a detailed bill of materials derived from

transformer tear-downs.

The Department considers public comments in determining the best approach for each

rulemaking.

2.5.1 Design-Option Approach

The design-option approach identifies individual or combinations of design options that

increase efficiency. These increases in efficiency are typically based either on manufacturer or

component supplier estimates or on engineering computer simulation models. The Department

then determines the incremental manufacturing costs of adding design options to a baseline
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model. It adds individual or combinations of design options to the baseline model in ascending

order of cost effectiveness. Typically, DOE uses the payback period—determined by the ratio of

the change in total consumer cost to the change in operating cost—to establish a design option’s

cost effectiveness. 

The primary advantage of the design-option approach is its ability to analyze individual

technologies. The approach is transparent in that the impact of any single technology on cost and

efficiency is explicit. An additional advantage is its ability to incorporate designs that have been

demonstrated to perform in prototypes but have yet to be utilized in equipment currently

available on the market. Thus, maximum technologically feasible designs are more easily

established than in the efficiency-level approach. 

A drawback to the design-option approach is its imperfect compatibility with the MIA. 

The Department recognizes that the manufacturer selling price information derived in a

component-based analysis does not reflect the variability in baseline units, design strategies, and

cost structures that can exist among manufacturers. Therefore, in the MIA (see Chapter 12), the

Department may need to derive additional manufacturing cost estimates, using other approaches

developed in consultation with interested parties. 

2.5.2 Efficiency-Level Approach

The efficiency-level approach establishes the relationship between manufacturer sales

price and increased efficiency at incremental increases in efficiency levels. Manufacturers

provide incremental manufacturer cost data for incremental increases in efficiency. Costefficiency curves can be easily constructed to clearly identify at what point manufacturers are

incurring significant costs to raise efficiency. Additionally, the efficiency-level approach gives

manufacturers the ability to supply detailed cost data without revealing their unique design

strategies for achieving increased efficiency levels. 

The simplicity of the efficiency-level approach is also its primary drawback. Namely,

since technological details are not provided, it can be difficult to verify whether the costs

provided for each specific efficiency level are representative of the costs for that level. In

addition, prototypical designs become difficult to evaluate and maximum technologically feasible

designs are then difficult to ascertain. As a result, some supplementary analysis is often

necessary to verify the accuracy of the costs supplied through the efficiency-level approach.

2.5.3 Cost-Assessment Approach

The cost-assessment approach, also called the ‘reverse engineering approach,’ is a

component-based technology-costing of the various technological paths manufacturers typically

use to achieve increased product energy efficiency. To carry out this type of analysis, DOE

physically analyzes (i.e., dismantles) actual pieces of equipment on the market, component-bycomponent, to determine what technologies and designs manufacturers employ to increase

efficiency. The Department then uses independent costing methods and manufacturer and

component supplier data to estimate the costs of the components. This approach has the distinct
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advantage of using “real” market equipment to establish the technologies that are used by

manufacturers and to establish the manufacturing cost to produce more-efficient units. 

The primary disadvantage of reverse engineering is the time and effort required to analyze

“real” equipment. Several models from a diverse range of manufacturers may have to be

assessed to ensure an accurate representation of technological paths for increasing efficiency. In

addition, since only equipment in the market is analyzed, prototypical designs may not be

captured by the analysis, thus making it difficult to establish maximum technologically feasible

designs.

2.5.4 Other Regulatory Impacts on the Engineering Analysis

In conducting an engineering analysis, DOE must recognize that regulatory changes

occurring outside of the standards-setting process can affect product manufacturing. Some of

these changes can also affect the efficiency of the product. The Department attempts to identify

all “outside” issues that can impact the engineering analysis. For distribution transformers, this

included consideration of a core steel type that is only available from Japan, whose core steel

exports to the U.S. are subject to an anti-dumping duty.

2.6 ENERGY USE AND END-USE LOAD CHARACTERIZATION

The energy use and end-use load characterization analysis (Chapter 6) produces energy

use estimates and end-use load shapes for distribution transformers. The energy use estimates

enable evaluation of energy savings from the operation of distribution transformer equipment at

various efficiency levels, while the end-use load characterization allows evaluation of the impact

on monthly and peak demand for electricity from the operation of transformers. The analysis 

produces a distribution of results for a variety of transformer types and uses, to represent the

diversity of use and performance of distribution transformer equipment.

2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION

Chapter 7 describes the process used to determine the installed price of distribution

transformers. The Department derives this installed price by applying markups to the

manufacturer selling price from the engineering analysis (Chapter 5). Markups, shipping costs,

sales tax, and installation costs are the costs associated with bringing a manufactured transformer

into service as an installed piece of electrical equipment. Electric utilities typically purchase

liquid-immersed transformers from manufacturer representatives, so the sales price includes a

relatively small handling markup applied to the manufacturer selling price. Dry-type

transformers are subject to both distributor and contractor markups. Both liquid-immersed and

dry-type distribution transformers are subject to shipping, sales tax, and installation markups.
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2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

Chapter 8 describes the LCC analysis, which calculates the discounted savings in

operating costs throughout the estimated average life of the covered product compared to any

increase in the installed cost for the product likely to result directly from the imposition of a

standard. In determining economic justification, the Energy Policy and Conservation Act (EPCA)

directs the Department to consider a number of different factors, including the economic impact

of potential standards on consumers. (42 U.S.C. 6295 (o)(2)(B)(i)

To consider these factors, the Department calculated changes in LCC that are likely to

result from the candidate standard level, as well as a simple payback period. The Department

calculated both the LCC and the PBP using a Monte Carlo framework, so results are represented

by distributions. The effect of standards on individual consumers includes a change in operating

expense (usually decreased) and a change in purchase price (usually increased). The Department

analyzed the net effect by calculating the change in LCC as compared to the base case. Inputs to

the LCC calculation include the installed consumer cost (purchase price plus shipping, sales tax,

and installation cost), operating expenses (energy and maintenance costs), lifetime of the

equipment, and a discount rate.

Chapter 8 also describes the PBP analysis, which calculates the amount of time needed to

recover the additional cost that consumers pay for increased efficiency. Numerically, the simple

payback period is the ratio of the increase in purchase price to the decrease in annual energy costs. 

2.8.1 Life-Cycle Cost Spreadsheet Model

The Department developed an LCC Spreadsheet Model to calculate the economic impacts

of more-efficient distribution transformers. The LCC spreadsheet estimates the economic impacts

on the consumer (i.e., the owner or purchaser) of a transformer by calculating the difference

between pairs of transformers. In these pairs, one transformer is a baseline model representing a

typical transformer that would be purchased in the current environment (i.e., without an efficiency

standard). The Department selects the other transformer model in two ways: 

• For those purchasers conducting total owning cost (TOC) evaluations, the

transformer corresponds to the lowest TOC design meeting a particular energy-efficiency

standard. 

• For those purchasers not basing purchase decisions on TOC evaluation, the second

transformer in the pair is the one with minimum first cost meeting the specific energyefficiency standard that the Department decides to evaluate.

The LCC spreadsheet compares the life-cycle costs for a representative unit from the

baseline scenario with life-cycle costs for more efficient units. Baseline units are those designs

that customers would choose in the absence of a new efficiency standard. Identifying a specific
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baseline for transformers is complicated for two reasons: 1) the lack of existing mandatory

efficiency standards, and 2) the wide variability in designs available to potential purchasers at any

given efficiency level. To address these issues, the Department developed an LCC model that

uses distributions of inputs to produce a representative range of transformer costs and efficiencies. 

That representative distribution of costs and efficiencies determines the baseline LCC scenario.

The Department used the LCC spreadsheet to determine the effects of more-efficient units

on operating expenses (usually decreased) and purchase prices (usually increased) of distribution

transformers. The LCC spreadsheet focuses on a distribution of potential transformer designs for

selected efficiency levels (see Chapter 5, Engineering Analysis, for a discussion of the potential

designs). These designs differ in cost, no-load losses, and load losses. Using the LCC

spreadsheet, the Department calculated operating costs, taking into account distributions in

loading and marginal electricity prices, and compared several potential candidate standard levels.

The spreadsheet model DOE used was developed in Microsoft Excel combined with

Crystal Ball (a commercially available software program for conducting a Monte Carlo analysis). 

The model uses a Monte Carlo simulation (described in Appendix 8B) to perform the analysis,

considering uncertainty and variability. The LCC spreadsheet is organized so that users can enter

ranges (or probability distributions) for each input variable needed to perform the calculations.

The Department calculated the PBP based on the same inputs used for the LCC analysis

(with the difference that it based the values only on the first year the standard takes effect). The

output is a probability distribution of payback periods, including the mean and median payback

periods as well as the minimum and maximum payback periods. Additional information is

available in Chapter 8 and the LCC spreadsheets are available on the DOE website: 

http://www.eere.energy.gov/buildings/appliance_standards/commercial/distribution_transformers.

html 

2.9 SHIPMENTS ANALYSIS

One of the more important components of any estimate of future impacts from energyefficiency standards is transformer shipments (Chapter 9). Forecasts of shipments for the base

case and each potential standards case need to be obtained as an input to the national energy

savings (NES) model. The Department chose an accounting model method to prepare shipment

scenarios for the base case and the candidate standard levels. The model keeps track of the aging

and replacement of transformer capacity given a projection of future transformer sales growth. 

New transformer capacity demand is created by growth in electrical demand. Transformer

shipments, a retirement function, and the initial number of transformers in service influence how

transformers in service and supply of transformer capacity change over time.

Shipments are organized into two categories: replacements and new capacity. 

Replacements occur when old transformers break down, corrode, are struck by lightning, or

otherwise need to be replaced. New capacity purchases occur due to increases in electricity use

that may be driven by increasing population, increasing commercial and industrial activity, or
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growth in electricity distribution systems. The model starts with an estimate of the overall growth

in transformer capacity and then estimates shipments for particular design lines and transformer

sizes using estimates of the relative market share for different design and size categories. Chapter

9 provides a detailed description of how DOE conducted its shipments forecasts. 

2.10 NATIONAL IMPACT ANALYSIS

The NES and NPV impacts are the cumulative energy and economic effects of a

transformer energy conservation standard (Chapter 10). The Department projected the impacts

from the year the standard would take effect through a selected number of years in the future. The

Department analyzed energy savings, energy cost savings, equipment costs, and NPV of savings

(or costs) for each candidate standard level. The national energy and cost savings (or increases)

that would result from energy conservation standards depend on the projected energy savings per

transformer and the anticipated numbers of transformers sold. The Department created base case

transformer shipments projections that include units at various efficiency levels. It based the

projections on historical information plus forecasts of market influences, national economic

growth, and electricity consumption. The Department then derived energy savings for various

candidate standard levels from the cost-efficiency schedules.

 

To make the analysis more accessible and transparent to all stakeholders, DOE used a

Microsoft Excel spreadsheet model to calculate the NES and the NPV (i.e., national economic

costs and savings from new standards). Users can change input quantities within the spreadsheet

to test the impact of alternative input assumptions. Unlike the LCC analysis, the NES spreadsheet

does not use distributions for inputs or outputs. Users can demonstrate sensitivities by running

different scenarios using the spreadsheet. The NES spreadsheet model is available on the DOE

website:

http://www.eere.energy.gov/buildings/appliance_standards/commercial/distribution_transformers.

html 

As discussed in Chapter 10, the national impact analysis assesses the NPV of total

consumer LCC, energy savings, and direct and indirect employment impacts. The Department

conducted an assessment of the aggregate impacts at the national level for the NOPR. Analyzing

impacts of Federal energy-efficiency standards requires a comparison of projected U.S. energy

consumption with and without standards. The base case, which is the projected U.S. energy

consumption without standards, includes the mix of efficiencies being sold at the time the

standard becomes effective. 

The Department estimated national energy consumption for each year beginning with the

expected effective date of the standard. The Department calculated national annual energy

savings as the difference between two projections: a base case and a standards case. Analysis

included estimated energy savings by fuel type used for generating electricity. The Department

estimated energy consumption and savings based on site energy (kilowatt-hours (kWh) of

electricity), and then converted the electricity consumption and savings to primary energy

consumption. 
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2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS

The Department conducted the LCC subgroup analysis after the ANOPR was published

and reported the results in the NOPR and in Chapter 11 of this TSD.

While DOE expects distribution transformer energy conservation standards to reduce

overall costs to the economy and consumers, there may be groups of consumers who see some

increase in life-cycle cost. In the NOPR phase of the rulemaking, DOE examined the results from

the LCC analysis to evaluate the cost impacts on consumer subgroups, such as different types of

utilities, to see if they are differentially affected by potential energy conservation standards in a

significant manner.

The analysis of these subgroups of transformer owners depended on identifying

characteristics related to transformer use or economics that sets the subgroup apart from other

transformer owners. The Department analyzed the effects on these groups by comparing the

transformer owners’ capital and operating costs with and without an energy conservation standard. 

The Department used LCC analysis methods for the consumer subgroup analysis by modifying

cost assumptions to reflect the situations of the subgroups. Factors that could result in differential

impacts to subgroups include differences in purchase price, energy price, and transformer loading.

The Department evaluated variations in regional energy prices, variations in energy use,

and variations in installation costs that might affect the NPV of a standard to consumer

sub-populations. To the extent possible, DOE obtained estimates of the variability in each input

quantity and considered this variability in its calculation of consumer impacts. The Department

discussed the variability in each input quantity and likely sources of information with the

interested parties.

2.12 MANUFACTURER IMPACT ANALYSIS

The Department conducted the MIA (see Chapter 12) to estimate the financial impact of

efficiency standards on manufacturers of distribution transformers and to assess the impact of

such standards on employment and manufacturing capacity. The MIA has both quantitative and

qualitative components. The quantitative part of the MIA primarily relies on the Government

Regulatory Impact Model (GRIM), an industry-cash-flow model adapted for this rulemaking. The

key GRIM inputs relate to industry cost structure, shipments, and pricing strategies. The GRIM’s

key output is the industry net present value (INPV). The model estimates the financial impact of

higher efficiency standards by comparing changes in INPV between the base case and the various

trial standard levels. The qualitative part of the MIA addresses factors such as the material supply

chain, manufacturing techniques and equipment, and market and product trends, and includes a

subgroup assessment of the impacts on small manufacturers.

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

outlined the procedural and analytical approaches for the MIA. As outlined, the Department
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conducted the MIA in three phases. Phase 1, “Industry Profile,” consisted of the preparation of an

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

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

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

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

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

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

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

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

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

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

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

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

manufacturing capacities, and employment levels. 

2.12.1 Industry Characterization

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

industry that built on the market and technology assessments prepared for the ANOPR analysis. 

DOE collected additional information about the present and past industry structure and market

characteristics for distribution transformers, including information on national shipments, market

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

Department gathered information about product construction, product characteristics,

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

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

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

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

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

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

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

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

2.12.2 Industry Cash Flow

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

conservation standards can affect distribution transformer manufacturers in three distinct ways. 

They can: 1) require additional investment, 2) raise production costs, and 3) affect revenues

through higher prices and, possibly, lower shipments. The analytical tool DOE uses for

calculating the financial impacts of standards on manufacturers is the GRIM. To quantify these

impacts in Phase 2 of the MIA, the Department performed a distribution transformer industry cash

flow analysis using the GRIM.

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

the GRIM. The Department originally based these financial parameters on the its topdown
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financial analysis but, in response to discussions with transformer manufacturers, subsequently

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

during the ANOPR phase of the analysis (i.e., public financial reports and manufacturer

discussions) to derive the manufacturer markups used to establish manufacturer selling prices in

its engineering analysis. The MIA production costs and manufacturer selling prices are consistent

with both the LCC analysis and the engineering analysis, upon which DOE based the LCC

pricing. The Department established this consistency by using the mean values for production

costs and selling prices in the GRIM, as selected by the LCC’s Monte Carlo algorithm. Finally,

the Department’s shipments analysis (Chapter 9) provided the basis for the shipments projection

under each of the trial standard levels in the GRIM.

2.12.3 Manufacturer Subgroup Analysis

Using average cost and financial assumptions to develop an industry cash flow model is

not adequate for assessing differential impacts among subgroups of manufacturers. Smaller

manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely from

the industry average could be more negatively impacted. The Department used the results of the

industry characterization to group manufacturers exhibiting similar characteristics. As discussed

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

manufacturers that could be affected by efficiency standards: liquid-immersed, and mediumvoltage (MV) dry-type. A discussion of these superclasses appears in Chapter 12.

Within each superclass, the Department contacted companies from its database of

manufacturers who provided representation of firms operating in that superclass. The Department

interviewed small and large companies, subsidiaries and independent firms, public and private

corporations, and a mix of National Electrical Manufacturers Association (NEMA) and nonNEMA members. The Department also made an effort to interview companies who had been

interviewed for the engineering analysis in 2002, as well as those who had previously participated

in the rulemaking process. The purpose of the meetings was to enhance the Department’s

understanding of how manufacturer impacts change with each of the trial standard levels.

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

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

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

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

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

The Department contacted material and equipment suppliers to the distribution

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

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

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

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

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

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

prefabricated cores (both stacked and wound-core configurations). The Department also spoke
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with four equipment suppliers, including manufacturers of both distributed gap and mitered core

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

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

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

liquid-immersed industry conversion costs for switching to amorphous material at trial standard

levels 5 and 6, the Department spoke with the only domestic supplier of amorphous ribbon and

several transformer manufacturers who had experience working with amorphous material. 

Through this dialogue, the Department gained a better understanding of manufacturing amorphous

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

handling issues. 

2.13 UTILITY IMPACT ANALYSIS

The Department conducted the utility impact analysis after the ANOPR and reported the

results in the NOPR. In addition to the economic impacts on electric utilities as consumers of

distribution transformers, standards could affect utilities through the reduction in net generation

resulting from the increased transformer efficiency of their electricity customers who purchase

their own transformers. To perform the utility impacts analysis, the Department used the BT

(Building Technologies) version of the Energy Information Administration (EIA)'s National

Energy Modeling System (NEMS).1 NEMS is a large, general-equilibrium energy-economy

model of the United States that EIA has developed over several years, primarily for the purpose of

preparing the Annual Energy Outlook (AEO).2

NEMS produces a widely recognized baseline forecast for the U.S. through 2020 and is

available in the public domain. Typical NEMS output includes forecasts of electricity sales and

prices. The Department conducted the utility analysis by comparing NEMS-BT output for various

distribution transformer standard levels with the latest AEO forecasts. The comparison between

NEMS-BT and the AEO forecasts incorporated time-differentiated load impacts of transformer

standards. The time-differentiated load impact estimate used load shape information from the

LCC analysis, and national energy use impact forecasts from the NES analysis. Other

assumptions used in the AEO also served as the basic assumptions applied to the analysis of the

impacts of energy conservation standards on utilities.

2.14 EMPLOYMENT IMPACT ANALYSIS

The Department conducted the employment impact analysis after the ANOPR and

reported the results in the NOPR. The Process Rule directs DOE to consider employment impacts

in selecting a proposed standard. The Department estimated the impacts of standards on

employment in the transformer manufacturing industry, relevant service industries, energy

suppliers, and the economy in general. The Department separates employment impacts into direct

and indirect impacts. Direct employment impacts would result if standards led to a change in the

number of employees at transformer manufacturing plants and related supply and service firms. 

The MIA discusses direct impacts. Indirect impacts are impacts on the national economy other
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than in the manufacturing sector DOE is regulating. 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 Department defines indirect employment impacts from standards as net jobs

eliminated or created in the general economy as a consequence of increased spending to purchase

distribution transformers and reduced spending to pay utility costs. An important indirect

employment effect may arise from shifting investment from the energy sector into more (or less)

labor-intensive industries. The Department expects new equipment standards to increase a

transformer’s purchase price, which includes retail price, sales tax, and installation. The

Department expects the same standards to decrease energy consumption, and therefore reduce

expenditures for energy. Over time, the increased purchase price may be paid back through

energy savings. Consumers may spend the savings in energy expenditures on other items. Using

an input/output model of the U.S. economy, the Department estimated national impacts for major

sectors of the U.S. economy and the net impact on jobs. The Department used public and

commercially available data sources and software to estimate employment impacts. It analyzed at

least three scenarios to bound the range of uncertainty in future energy prices. All methods and

documentation are available for review in the employment impact analysis in the NOPR. 

2.15 ENVIRONMENTAL ASSESSMENT

The Department conducted the environmental assessment after the ANOPR and reported

the results in the NOPR. The Environmental Assessment is required under the National

Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq.), regulations of the Council on

Environmental Quality (49 CFR parts 1500-1508), the Department regulations for compliance

with NEPA (10 CFR part 1021), and the Secretarial Policy on the National Environmental Policy

Act (June 1994).

The main environmental concern addressed is emissions from fossil-fuel-fired electricity

generation. Power plant emissions include oxides of nitrogen (NOx) and sulfur (SO2), as well as

carbon dioxide (CO2). The first two are major causes of acid precipitation, which can affect

humans by reducing the productivity of farms, forests, and fisheries, decreasing recreational

opportunities, and degrading susceptible buildings and monuments. Nitrogen oxides are also

precursor gases to urban smog and are particularly detrimental to air quality during hot, still

weather. Carbon dioxide emissions are believed to contribute to raising the global temperature

via the “greenhouse effect.”

The major environmental effects of transformer energy conservation standards would

result from reduced electrical energy consumption, and would take the form of reduced emissions

from the operation of power plants. Analyses for previous standards have reported reductions in

energy-related emissions of SO2, NOx, and CO2. The Department estimated the emission impacts

at the national level. Details of the this analysis are in the Environmental Assessment, published

as a separate report within this TSD.
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2.16 REGULATORY IMPACT ANALYSIS 

The Department conducted the regulatory impact analysis after the ANOPR, and reported

the results in the NOPR. The Department prepared a draft regulatory impact analysis pursuant to

E.O. 12866, Regulatory Planning and Review, which will be subject to review under the

Executive Order by the Office of Information and Regulatory Affairs (OIRA) 58 FR 51735

(October 4, 1993). The Department identified seven major alternatives as representing feasible

policy options to achieve consumer product energy efficiency. It evaluated each alternative in

terms of its ability to achieve significant energy savings at a reasonable cost, and compared these

results to the effectiveness of the rule.

Under the Process Rule, the Department is committed to continually explore nonregulatory alternatives to standards. The list below indicates those alternatives the Department

examined for this rulemaking. Through manufacturer interviews and literature searches, the

Department compiled information on burdens on manufacturers from existing and impending

regulations affecting distribution transformers. It also sought input from stakeholders regarding

other regulations it should consider. The Department examined the following non-regulatory

alternatives to standards:

• No new regulatory action

• Consumer rebates

• Consumer tax credits

• Manufacturer tax credits

• Voluntary energy-efficiency targets

• Early replacement

• Bulk government purchases

Details of the this analysis are in the Regulatory Impact Analysis, published as a separate

report within this TSD.
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REFERENCES

1. U.S. Department of Energy-Energy Information Administration. National Energy

Modeling System: An Overview 2003. 2003. Report No. DOE/EIA-0581(2003).

<http://www.eia.doe.gov/oiaf/aeo/overview/index.html>

2. U.S. Department of Energy - Energy Information Administration. Annual Energy Outlook

2005: With Projections Through 2025. January, 2005. Washington, DC. Report No.

DOE/EIA-0383(2005). <http://www.eia.doe.gov/oiaf/aeo/index.html>