2-i i CHAPTER 2. ANALYTIC FRAMEWORK

TABLE OF CO NTENTS 2.1 INTRODUCTI ON

..................................................... 2-1 2.2 BACKGROUND

..................................................... 2-4 2.3 MARKET AND TECHNOLOGY A SSESSMENT

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

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

Assessment

........................................... 2-4 2.4 SC RE ENIN G AN ALYS IS

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

Screening

............................................ 2-5 2.4.2 Baseline Equipme nt

............................................. 2-5 2.5 ENG INEE RING ANA LYSIS

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

.......................................... 2-6 2.5.2 Efficiency-Level Approac h

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

........................................ 2-7 2.5.4 Other Re gulator

y I mpacts on

the Eng ineerin

g Analy sis

.................. 2-8 2.6 ENERGY USE AND END-USE LOA D CHARACTERIZATION

............... 2-8 2.7 MARKUPS FOR EQUIPMENT PRI CE DETERMINATI ON

................... 2-8 2.8 LI FE-CYCLE COST AND PAYBACK PERI OD ANALYSES

.................. 2-9 2.8.1 Life-Cy

cle Cost Spreadsheet Model

................................. 2-9 2.9 SH IPM ENT S A NALY SIS

.............................................. 2-10 2.10 NAT IONA L IMPA CT ANA LYSIS

...................................... 2-11 2.11 LIFE- CYC LE CO ST SU BGR OUP ANA LYSIS

............................. 2-12 2.12 MAN UFA CT URE R IMP ACT ANA LYSIS

................................ 2-12 2.12.1 Industry

Characterization

......................................... 2-13 2.12.2 Industry

Cash Flow

............................................. 2-13 2.12.3 Manufac

turer Sub group A

naly sis

.................................. 2-14 2.13 UTILIT Y IMP ACT ANA LYSIS

......................................... 2-15 2.14 EMP LOYM ENT IMP ACT ANA LYSIS

................................... 2-15 2.15 ENVIRONMENTAL ASSESSMENT

.................................... 2-16 2.16 REGUL

ATORY I

MPACT ANAL

YSIS

................................... 2-17

LIST OF F IGURES Figure 2.1.1 Analyses for Distribution Transformer Energy -Efficiency

Standards

........ 2-32-1 CHAPTER 2. ANALYTIC FRAMEWORK
2.1 INTRODUC TION This chapter provides a description of the ge neral analy

tic 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 r elationship between the various a naly ses condu

cted in th e rulema

king. Th e object

ive of the rulemak ing proc ess is to determine minimum e fficien cy standar ds for dis tribution t

ransfor mers that are tec hnologic ally feasible and economically justified. In this context, economic justification includes consideration of the economic impact on manufacturers and c onsumers, the national benefits, the impacts on utilities, and the impacts from any lessening of competition. Figure 2.1.1 summarizes the analy tic components of the standard-setting process. The focus of this figure is the third column, identifie d as “Ana lys es.” The

columns labeled “Key Inputs” and “Key

Outputs” indicate how the analy ses fit into the rulemaking process, and how the analyses r

elate to each other. Key

outputs are analy

tical results that feed directly into the standard-setting process. Key inputs are the types of

data and information that the analy ses require. Some key

inputs exist in public databases; DOE also collects inputs from stakeholders or others with special knowledge. I nputs developed by the pr oject team for the standards-setting process are presented and open f or stakeholder review. The analyse s that the Department performed for the adva nce notice of proposed rulemaking (ANOPR) include:

C a market and technology assessment to characterize the distribution transformer market and revi ew tech

niques an d approa ches use d to produc e more e fficien t transformers;

C a screening analy

sis to identify design options that improve distribution transformer efficie ncy and to det

ermine w hich shoul d be eva

luated a nd which should be sc

reened out;

C an engineering ana

lysis to estimate the relationship between the manufacturer’s selling price of a transf ormer a nd its eff iciency level;

C an energy

use and end-use load character ization to generate energyuse estimates and enduse load profiles o f distribu tion trans formers ;

C a markup

process to conver t manufa cturer sales pr ices to c ustomer in stalled pr

ices;

C a life -cycle cos t (LCC) a nalysis to cal culat e, at t he con sumer level , the d iscou nted s avings in operating costs throughout the estimated avera ge 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 a nalysis, DOE perf

ormed a pay

back period (PBP) analysis to ca

lculate the amount of time it takes consumers to recover the assumed higher purchas e expense

of more- efficie

nt equipme

nt throug h lower o peratin g costs;2-2

C a shipmen

ts analy sis to estima

te shipmen

ts of distr ibution tra

nsforme rs over t he time period examined in the analysis; and

C a national impacts analy sis to assess the aggrega te impacts at the national level of consu mer paybac k, net presen t valu e (NPV ) of to tal co nsum er LCC, n ation al ener gy savings , and nati onal empl oyment. After th e Depar

tment publi shed the A

NOPR on July

29, 2004 a

nd rece ived comm ents from stakeholders, the Department revised the ANO PR analyses in the manner de scribed in the notice of proposed rulemaking (NOPR) Fede ral Register Notice that accompanies this technic al support document (TSD). The Dep artme nt als o cond ucted severa l new a nalyses f or the NOPR , incl udin g:

C an LCC subgroup analy sis to evaluate impacts on identifiable groups of customers of distribution transformers, including various ty pes of electric utilities or various ty pes of commercial or industrial transformer purchaser s or owners, who may

be disproportionately aff

ected by a national energy

-efficiency

standard ;

C a manufacturer impact analy sis (MIA) to estimate the financial impact of standards on distribution transformer manufacturers and to calculate impacts on competition, em pl oym en t a t t he ma nu fa ct ur in g p la nt , a nd ma nu fa ct ur in g c ap ac it y;

C a utility impact analy

sis to estimate the effects of proposed standards on the installed capaci ty a nd gene rating base of e lectric

utilities;

C an employment impact ana lysis to estimate the impacts of standards on ne t jobs eliminated or created in the gener al economy a s a consequence of increased spe nding on th e p ur ch as e p ri ce of

tr an sf or me rs an d r ed uc ed cu st om er sp en di ng on en er gy;

C an environmental assessment to assess the impacts of proposed standards on certa in environmental indicators; and

C a regu latory impact an

aly sis to pres ent major

alterna tives to pr

oposed sta

ndards that could achieve compara ble ener gy savings at a rea sonable c ost. In re sponse to c omments it r eceive s on the NO PR, the Dep artment may revise s ome of its analyses be fore publishing the Final Rule.2-3

Figure 2.1.1 Analyses for Distribution Transformer Energy-Efficiency Standards Approaches

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.. Rule2-4

2.2 BACKGROUND As described in Chapter 1 of the TSD, in September 1995, the Department a nnounced a formal effort to consider further improvements to the proc ess used to develop appliance efficiency standards. The Department called on ener gy- efficiency

groups, manufacturers, trade associations, tate agencies, utilities, and other interested pa rties 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) analy tic tools, 3) methodologies, 4) non-regulatory approaches, and 5) prioritiza tion of fu ture rule s. The Pro cess Rule recomme nded that the Depa rtment ta ke into account uncertainty

and variability by

carry ing out scenario or probability analysis. The following sections provide a genera l description of the analy

tic components of the improved rulemaking framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT The market and technology assessment (Chapter 3) characterizes the distribution transfo rmer mar

kets and e xisting tec

hnology options for making

a transf ormer mor

e effic ient.
2.3.1 Market A ssessm ent When initiating a standards rulemaking, the Department de velops information on the present and past industry struc ture and market characteristics of the pr oduct(s) concerned. The market assessment consists of both quantitative and qualitative efforts to assess the industry and products based on publicly a vailable information. Issues addre ssed in this market assessment included: 1) national transformer shipments; 2) identification of large st players in the transfo rmer indu stry ; 3) discu ssion of existing non -regu latory efficie ncy improveme

nt initiativ es; 4) developments around standards in States and neighboring countries; and 5) trends in product characteristics and retail markets. The infor mation collected serves as resource mater ial to be used t hrough out t he rul emaki ng. 2.3.2 Technology

Assessm ent The technology

assessment provided information about existing technology options and designs to constr uct more energ y- efficie nt distribu

tion trans formers . In c onsultation with interested parties, the Department developed seve ral technology

options and designs for consider ation. Some

examples o f these d

esign options are : 1) high er-gr ade ele ctrical

core ste els, 2) use of differe nt conductor ty

pes and ma

terials, and 3) ad

justments t

o core a nd coil config urations

.2-5

As described in Chapter 4, the Department reviewe d and analyzed some e merging technolo gies for distribu

tion trans formers

(e.g. , superc onducting

materia ls). Altho

ugh the se technolo gies ar

e not ge nerally consider ed comme

rcially availab le, the De

partmen t discusse s their po te nt ia l i mp ac t o n t he di st ri bu ti on tr an sf or me r i nd us tr y. Another key pa

rt 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 ty pe of energy

used, b) capacity , and c) performance-re lated features that affect consumer utility or efficiency . Different efficiency standards apply to diffe

rent product classes. The Department developed its product c lasses using information obtained from manufacturers, trade associations, and other inter ested parties.

2.4 SCREENING

ANALYSIS The screening analy

sis (Chapter 4) reviews various technologies with re gard to whether they : 1) are technologically feasible, 2) are practicable to manuf acture, install, and service, 3) do not have a

n advers e impact on produc t utility or produc

t availab ility , and 4) d

o not adve

rsely im pa ct he al th an d s af

et y. 2.4.1 Technology

Screenin g The Department developed an initial list of efficiency enhancement design options from the tech nologie s identifi ed in the t echnolog y a ssessmen

t. Then the

Department revi ewed the list to deter mine if the

design o ptions ar e pract icable to manufacture, ins tall, and service , would adverse ly a

ffect product ut

ility or produc

t availab ility , or would

have ad verse imp acts on he alth and sa fety. In the e nginee ring an alysis, the De partm ent us ed effi ciency enh anceme nt des ign options that passed the four screening criteria . It did not consider those options that failed one or more o f the s creeni ng crit eria i n the a nalysis . Chap ter 4 o f this TSD di scuss es whi ch des ign options DO E conside

red in the distributi on transf

ormer e nginee ring analy sis. The c

hapter a lso includes a list of emerging technologies that could impact future distribution transformer manufacturing c osts. 2.4.2 Baseline Equipment To analy ze desig n options f

or ener gy-effic iency

improveme

nts, the De

partmen t typ ically 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 c onsumer choice model, involving a distribution of efficie ncies in the baseli

ne. The c onsumer c

hoice mod

el is part of the L CC analy

sis, and is discussed in Chapter 8 of this TSD.2-6

2.5 ENGINEER

ING ANA

LYSIS The engineering ana

lysis (Chapter 5) deve lops cost-efficiency relationships for distribution transformers, estimating manufacturer costs of ac hieving increased efficienc y levels. The Depa rtment use s manufa

cturing costs to de

termine r etail pri ces in the

LCC analy sis, and a

lso uses them in the MI A. The en

gineer ing ana lys is also determines

the maximum te chnolog ically feasible energ y- efficie ncy level. In gener al, the engineering ana

lysis estimates the efficie ncy improvement potential of the individual or combinations of design options that pass the four criteria in the scree ning analy sis. This cost- efficie

ncy relation ship deve loped in th e engineering analy sis is used i

n the L CC analy sis. As described in Chapter 1, the Department considers those distribution transforme rs that are designed to achieve the ma ximum improvement in energy ef ficiency tha

t the Secretary determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) Therefore, an important role of the eng ineering analysis is to identify the maximum technologically

feasible level. The maximum technologically feasible level is one that can be reache d by

adding efficie ncy improveme

nts and/or design o ptions, bot

h commer

cially feasible and in prototypes, to the baseline units. The D epartment believes that the design options comprising the maximum technologically feasible level must have been physically demonstrated in at least a prototype f

orm to be considered technologically feasible. In gener al, three methodologies can be used to g enerate the manufacturing c osts needed for the e nginee ring analy sis. These

methods a

re: 1. the de sign-o ptio n appr oach – report ing th e incre menta l cost s of ad ding d esign options to a

baseline model;
2. the eff

iciency -level a pproach – report ing rel ative co sts of achieving improveme

nts in energy efficiency ; and
3. the reverse engineer ing or cost-assessment approach – involving a "bottom-up" manufacturing cost assessment based on a de tailed bill of materials derived from transfo rmer tea

r-downs

. The Department considers public comments in determining the best a pproach for each rulem aking.
2.5.1 Design-Option Approach The design-option approach identifies individual or combinations of desig n options that increase efficiency . These increases in efficiency are typica

lly based either on ma

nufacturer or component supplier estimates or on engineering computer simulation models. The Department then determines the incremental manufacturing costs of adding design options to a baseline2-7

model. It adds individual or combinations of design options to the baseline model in asc ending order of cost effectiveness. Ty pically, DOE uses the pa

yback pe riod—determined by the

ratio of the change in total consumer cost to the chang e in operating cost—to establish a design option’s cost effectiveness. The primary a

dvantage of the design-option appr oach is its ability to analy ze individual technologies. The approach is transpar ent 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 demonstr ated to pe rform in prototy

pes but ha

ve y et to be ut ilized in eq

uipment c urrently availab le on the market. T hus, maximum t

echnolog ically feasible designs are mor e easily established than in the efficiency -level approach. A drawback to the design-option approac h is its imperfect compatibility with the MI A. The Department recognizes that the manufa cturer selling price information derived in a component-based analy sis does not reflect the variability in baseline units, design strategies, and cost structures that can exist among manufacturers. The refore, in the MIA ( see Chapter 12), the Department may

need to derive additional manufacturing cost e stimates, using other approaches developed in consultation with interested parties.
2.5.2 Efficiency-Level Approach The efficiency

-level approach establishes the relationship between ma nufacturer sales price and increased efficie ncy at incre

mental increases in efficiency levels. Manufacturers provide i ncreme ntal manufactur

er cost d ata for increme ntal incr eases in efficie ncy . Costefficiency curves can be easily

constructed to clearly

identify at what point manufa cturers are incurring significant costs to raise eff iciency. Additionally

, the efficiency

-level approach gives manuf acture rs the abili ty to sup ply detai led co st dat a with out re veali ng thei r uniq ue des ign strategies for achieving inc reased efficiency

levels. Th e s im pl ic it y of

th e e ff ic ie nc y-l ev el ap pr oa ch is al so it s p ri ma ry d ra wb ac k. Na me ly, since te chnolog ical deta

ils are no t provide d, it can b e diffic ult to veri fy

whether the costs pro vi ded for eac h sp eci fic eff ici enc y lev el a re r epr ese nt ati ve o f th e co st s fo r th at l eve l. In addition, prototy

pical de signs be come dif

ficult to e valuate and maximum t

echnolog ically feasible designs are then difficult to ascertain. As a result, some supplementary a nalysis is often necessary to verify the a

ccuracy of the costs supplied through the efficiency -level approach.
2.5.3 Cost-Assessment Approach The cost- assessme

nt approa ch, also c alled the

‘reverse eng ineerin

g appr oach,’ i s a componen

t-based technolo gy-costing

of the va rious tec hnologic al paths ma

nufactu rers ty pically use to achieve increased product ene rgy efficiency . To carry

out this type of analy

sis, DOE ph ysi ca ll y an al yze s ( i. e. , d is ma nt le s) ac tu al pi ec es of eq ui pm en t o n t he ma rk et , c om po ne nt -b ycomponen

t, to dete rmine wha

t technol ogies a

nd desig ns manufa

cturer s employ

to incre ase efficiency

. The Department then uses independent costing methods and ma nufacturer and component supplier data to estimate the costs of the components. This approach has the distinct2-8

advantage of using “re al” market equipment to establish the technologies that are use d by manufacturers and to establish the manufacturing cost to produce more-efficient units. The p rima

ry disad vantage of re vers e eng inee ring is the time a nd ef fort requ ired to an aly ze “real” equipment. Several models from a diverse range of manufacture

rs may have

to be ass ess ed t o en sur e an acc ura te r epr ese nt ati on o f te chn ol ogi cal pat hs f or i ncr eas in g ef

fic ien cy. In addition, since only equipment in the marke t is analyzed, prototy

pical designs may

not be capture d by

the anal ysi s, thus mak

ing it dif ficult to e stablish ma

ximum techno logica

lly f easible designs

. 2.5.4 Other Re gulatory I mpacts on the Engine ering Anal ysis In conducting an e

ngineering analy

sis, DOE must recognize that regulatory changes occurring outside of the standards-setting process can affect product manuf acturing. Some of these changes can also af fect the efficiency

of the product. The Department attempts to identify all “outsi de” issue s that ca n impact the engineering

analy sis. For d istributio n transf

ormers, this included consideration of a core steel ty pe that is only available f rom Japan, whose core steel ex po rt s t o t he U. S. ar e s ub je ct to an an ti -d um pi ng du ty.

2.6 ENERGY U SE AND END- USE LOAD CHA RACTERIZ

ATION The ene rgy use and e nd-us e load charact eriza tion analysis (Chap ter 6) produ ces ene rgy 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 character ization allows evaluation of the impact on monthly

and pea k demand f

or elec tricity

from the o

peration of tran sformers. The analy sis produces a distribution of results for a variety of transformer ty

pes and uses, to represent the diversity of use an d perfor mance of distributi on transf

ormer e quipment.

2.7 MARKU PS FOR EQUIPME NT PRIC E DETERMIN ATION Chapter 7 describes the process used to determine the installed pr ice of distribution transformers. The Department derives this installed price by applying ma

rkups to the manufacturer se lling pr

ice fro m the engineerin

g analy sis (Chapt

er 5). Ma rkups, shi pping c osts, sales tax, and installation costs are the costs associated with bringing a manuf actured transformer into service as a

n installe d piece o f electr ical equ ipment. El ectric u

tilities ty pically purchas e liquid-imme

rsed tra nsforme rs from ma

nufactu rer re present atives, s o the sale s price in cludes a relatively small handling

markup applied to the manufacturer selling pric e. Dry- type transformers are subject to both distributor and contractor mar kups. Both liquid-immersed and dry-ty pe distrib ution tran sformers are sub ject to shi pping, s ales tax, a

nd installa

tion marku

ps.2-9

2.8 LIFE-CY CLE COST ANDPAYBAC K PERI OD ANALYSE S Chapter 8 describ es the L CC analy sis, which calcula tes the dis counted s avings i n operating costs throughout the estimated aver age life of the covered pr

oduct 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 diffe rent factors, including the economic impact of potential standards on consumers. (42 U.S.C. 6295 (o)(2)(B)( i ) To consid er these factor s, the De

partmen t calcula ted chan ges in LCC that are

likely to result from the candidate standard level, as well as a simple payback pe riod. The Department calculated both the LCC and the PBP using a Monte Carlo framework, so results are repre sented by distributions. The effec t of standards on individual consumers includes a change in ope rating expense (usually decr

eased) and a change

in purchase price (usually increased). The Department analy zed the ne

t effect by calcula ting the chang e in L CC as compa red to the base ca se. I

nputs to the L CC calcula

tion i nclude th e inst

alle d con sumer

cost ( purchase pric e plu s ship

ping , sale s tax, and installation cost), operating expenses (energ y and maintenanc e costs), lifetime of the equipment, and a discount rate. Chapter 8 also desc

ribes the PBP analy

sis, which calcula tes the a mount of time neede d to recove r the add itional co st that con sumers pa y f or incre ased ef

ficienc y. N umerica lly, the simple paybac k period is the ratio of the increase in purchase pr ice to the decrease in annual ener gy c osts.

2.8.1 Life-Cycle Cost Spreadsheet Model The Depa rtment de veloped a n LCC Spr

eadshee t Model to c alculate

the econ omic impac

ts of more- efficie

nt distribu

tion trans formers . The L CC spread sheet es timates th e econo mic impac ts on the consumer (i.e., the owner or purchase r) of a transformer by

calculating the difference betwe en pai rs of t ransfo rmers . In thes e pairs , one t ransfo rmer i s a bas eline model repres entin g a typical transfor

mer that would be purchased in the current environme nt (i.e., without an efficiency standar d). The D epartme

nt selec ts the othe

r transf ormer mod

el in two w ay s:

• For those purchasers conducting total owning cost (TOC) evaluations, the transformer corresponds to the lowest TOC design mee ting a particular energ

y-eff iciency standard.

• For those purchasers not basing purc hase decisions on TOC evaluation, the second tr an sf or me r i n t he pa ir is th e o ne wi th mi ni mu m f ir st co st me et in g t he sp ec if ic en er gyefficiency standard that the Department decides to evaluate.
The LCC spreadsheet compar es the life-cy

cle costs for a representative unit from the baseline scenario with life-cy cle costs for more efficient units. Baseline units are those designs that customers woul d choose in the abs ence of

a new ef ficienc y st andard. Ide

ntify ing a spe cific2-10

baseline for transformers is complicated for two re asons: 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 a n LCC model that uses distributions of inputs to produce a representative range of transformer costs and efficiencie s. That representative distribution of costs and efficiencies de termines the baseline LCC scenar io. The Depa rtment use d the L CC spread sheet to d etermine the eff ects of more-ef

ficient u nits on operating expenses (usually decreased) and purchase

prices (usually inc

reased) of distribution transformers. The LCC sprea dsheet focuses on a distribution of potential transformer designs for selected efficiency

levels (see Chapter 5, Enginee ring Analy

sis, for a discussion of the potential designs ). These

designs differ i n cost, no- load losse s, and loa d losses. U sing the

LCC spreadsheet, the

Department calc

ulated op erating

costs, ta king into accoun t distribut ions in loading and marg

inal elec tricity prices, and compa

red seve ral pote ntial can didate sta ndard le vels. The spre adsheet

model DOE

used was develope d in Micro soft Excel combined

with Crystal Ball (a

commercially a

vailable software program for conducting a Monte Carlo analy sis). The mode l uses a Monte Carlo simulation

(descr ibed in Ap

pendix 8B)

to perform the analy sis, considering uncertainty

and variability. The L

CC spreadsheet is organized so that users can enter range s (or pro

bability distributi ons) for

each inp ut varia ble need ed to per form the c alculati ons. The Depa rtment ca lculated the PBP ba sed on the

same inpu

ts used for the L CC analy sis (with the difference that it based the values only on the first year

the standard takes effect). The output is a probability distribution of pay back periods, including the mean and median pay back periods a s well as t

he minimum a

nd maximum pa

yba ck perio ds. Additional infor mation is availab le in Chapt

er 8 and t he LC C spread sheets a

re avai lable on t

he DOE we

bsite: http://www .eere. energ

y.gov/buildin

gs/appl iance_s tandard s/commer cial/dist ribution_ transformers. html

2.9 SHIPMEN TS ANALYSIS On e o f t he mo re im po rt an t c om po ne nt s o f a ny e st im at e o f f ut ur e i mp ac ts fr om en er gyefficie ncy standar ds is trans former shipments ( Chapter 9 ). Fore casts of shipments f

or the ba se case an d each p otent ial st andard s case n eed to be obt ained as an i nput to th e nati onal e nergy savings (NES) model. The Department chose a n accounting model method to prepare shipment scenarios for the base case and the candidate standard levels. The model keeps trac k of the aging and replacement of transformer c apacity g iven a projection of future transformer sale s growth. New transformer capacity demand is created by

growth in electrical demand. Transf ormer 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: re placements and new capacity

. Replacements occur when old transformers br eak down, corrode, are struck by lightning, or otherwis e need to

be repla ced. Ne w capac ity p

urchase s occur d

ue to incr eases in electri city

use that may be driven by

increasing population, increasing c ommercial and industrial activity, or2-11

growth in electr icity distributi on sy stems. The model star

ts with an e stimate of

the over all growth in transformer capacity

and then estimates shipments for particular design lines and transf ormer sizes using estimates of the relative market share for diff erent design and size categor ies. Chapter 9 provides a detailed description of how DOE conducted its shipments forec asts.

2.10 NATIONAL I MPACT A NALYSIS The NES and NPV impacts are the cumulative energ y and ec onomic effects of a transfo rmer energy

conserv ation stan

dard (Ch apter 10 ). The De partmen t projec ted the imp acts from the yea

r the standard would take effect throug h a selected number of y

ears in the future. The Depart ment a nalyzed e nergy savi ngs, en ergy cost s avings , equi pment costs , and N PV of s avings (or cost s) for e ach can

didate sta ndard le vel. The national energ y a nd cost sa vings (or incre ases) that would result from energy conservation standards depend on the projected e nergy savings per transfo rmer an

d the anti cipated

numbers o f transf

ormers so ld. The De

partmen t create d base ca se transformer shipments projections that include units at various efficiency levels. It based the project ions on hist

orical information plus for ecasts o f market influenc es, national econ omic growth, and electricity

consumption. The Department then derived energ y savings f

or various candida te standa rd level s from the

cost-ef ficienc y sc hedules. To make the analy sis more accessible and transparent to all stakeholders, DO E used a Microsof t Excel spr

eadshee t model to c alculate

the NES an

d the NPV ( i.e., nat

ional ec onomic 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 analy sis, the NES spreadsheet does not use distributions for inputs or outputs. Users can demonstrate sensitivities by r unning different scenarios using the sprea dsheet. The NES spreadsheet model is available on the DOE website: http://www .eere. energ

y.gov/buildin

gs/appl iance_s tandard s/commer cial/dist ribution_ transformers. html As discussed in Chapter 10, the national impact analy sis assesses the NPV of total consumer LCC, energ

y savings, a

nd direct and indirect employ ment impacts. The Department conducted an assessment of the agg regate impacts at the national level for the NOPR. Analyzing impac ts of F ederal energy-effi ciency st andard s requ ires a compa rison of pro jecte d U.S . energy consu mpti on wit h and w itho ut st andard s. The base ca se, wh ich is the pr oject ed U.S . energy consumption without standards, includes the mix of efficiencies being sold at the time the standard becomes effective. The Department estimated national energ y consumption for eac

h year be ginning with the expected effec tive date

of the sta ndard. T he Depa rtment calcul ated n ation al ann ual en ergy savings as the dif ferenc e betwe en two pr

ojection s: a base

case an d a standa rds case . Analy

sis included estimated energy savings by f

uel type used for

generating electr

icity. The Depa

rtment estimated energy

consumption and savings based on site energy (kilowatt-hours (kWh) of elect ricit y), and th en con verted the el ectri city cons umpt ion an d savi ngs to prima ry energy consumption.2-12

2.11 LIFE-CY CLE COST SUBG ROUP AN

ALYSIS The Department conducted the L CC subgroup analy sis 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 cons umers, th ere may

be gro ups of con sumers who see some increase in life-cy

cle cost. In the NOPR phase of the r ulemaking, DOE examined the results from the LCC analysis to evaluate the cost impacts on consumer subgroups, such as diffe rent types of utilities, to see if they are diff erentially af

fected by potential energy

conservation standards in a significant manner. The analysis of the se subgroups of transformer owners de pended on identifying characteristics related to transformer use or economics that sets the subgroup apart fr om other transformer owners. The Department a nalyzed the eff

ects on these groups by

comparing the transformer owners’ capital and oper ating costs with and without an energy conservation standard. The Department used LCC ana lysis methods for the consumer subg roup analysis by

modifying cost assumptions to reflect the situations of the subgroups. Factors that could re sult in differential impac ts to subgro ups i nclud e diff erences in pu rchase price, energy pric e, and trans forme r load ing. 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 e ach input quantity and considere d this variability in its calculation of consumer impacts. The Department discussed the variability in ea ch input quantity and likely sources of information with the interest ed parti es.

2.12 MANUF

ACTURER I MPACT A NALYSIS The Department conducted the MI A (see Chapter 12) to estimate the financial impact of efficiency standards on manufacturers of distribution transformers and to a ssess the impact of such standards on employme nt and manufacturing capacity . The MIA has both quantitative and qualitative components. The quantitative part of the MI A primarily relies on the

Government Regulatory

Impact Model (GRI

M), an industry-ca sh-flow model adapted for this rulemaking. The key GRI M inputs relate to industry cost structure, shipments, and pr icing strategies. The GRI M’s key output is the industry net present value (I

NPV). The model estimates the financial impact of higher efficiency

standards by compa

ring changes in I

NPV between the base case and the va rious trial sta ndard le vels. The qualitati ve part o f the MI

A addre sses factors such

as the ma

terial su pply chain, ma nufactu ring te chniques

and equipment, and

market a nd produc

t trends, and inclu

des a subgro up assessment of the

impacts on

small manufactur

ers. In the Department’s Framework Document published on November 1, 2000, DOE outlined the procedural and analy tical approaches for the MI A. As outlined, the Department2-13

conducted the MIA in three phases. Phase 1, “Industry Profile,” consisted of the preparation of an indu stry chara cteri zati on, i nclud ing dat a on ma rket s hare, s ales v olum es and trend s, pri cing, employ ment, and financi al struct

ure. Pha se 2, “I

ndustry Cash Flow ,” focus ed on the i ndustry as a whole. In this phase, DOE used the GRI M to prepare an industry

cash flow analy sis. Using publicly availab le information dev eloped in Phase 1, the Depar

tment ada pted the G

RIM’ s gene

ric st ruc tu re t o pe rfo rm a n an alys is of d is tri but io n t ran sfo rme r en erg y con ser vat io n st and ard s. In Phase 3, the “Sub-Group Impact Analysis,” DOE conduc ted interviews with several manufacturers. The group of ma nufacturers included small, medium, and large ma nufacturers providing a representative cross-se ction of the U.S. distribution transformer industry. Dur ing these interviews, the Department discussed engine ering, manufacturing, proc urement, and financial topics specific to each company and also obtained each manufacturer ’s view of the industry as a whole unde

r standards. The interviews provided valuable information that the Department used t

o evalua te the impa

cts of a s tandard

on manufa

cturer s’ cash f

lows, manufacturing capacities, and e mployment levels.
2.12.1 Industry Characterization In Phase 1 of the MI

A, the Department prepared a prof ile of the distribution transformer industry that built on the market and technolog y assessments prepa

red for the ANOPR analy sis. DOE collected additional information about the present and past industry structure and market characteristics for distribution transformers, including infor mation on national shipments, market leaders, and cost structure for a ra nge of manufacturers. I

n characterizing the industry , the Department gat

hered in formation about pr oduct con struction , produc t chara cteristi cs, manufacturing techniques, trends in the number of f irms, and market characteristics. The industry profile include d a topdown cost analysis of the distribution transformer industry that DOE u sed to der

ive initia l cost and financi al inputs f

or the GRI

M, e.g. , revenu

es; material; labor; overhead; depreciation; selling, g eneral and administrative (SG&A) expenses; and research and development (R&D) expenses. The Department used public sources of information to cal ibrat e its i niti al char acteri zati on of t he ind ustry, i nclud ing Se curit ies an d Exc hange Commission ( SEC) 10–K r eports, c orporat

e annua l reports , the U.S. C ensus Bu reau’s Economic Census, Du

n & Bra dstreet r eports, a nd industr

y a naly sis from I

bbotson As sociate s. 2.12.2 Industry Cash Flow Phase 2 of th e MIA focu sed on the in dust ry-wide fi nanci al im pacts of sta ndard s. Ene rgy conservation standards can affec t distribution transformer manufacturers in three distinct way s. They ca n: 1) require additional investment, 2) raise production costs, and 3) aff ect revenues through higher prices and, possibly , lower shipments. The analy tical tool DOE uses for calcula ting the financi al impact s of stand ards on ma

nufactu rers is th e GRIM. To quan tify these impacts in

Phase 2 of

the MI A, the De partmen t perfor med a distr

ibution tra

nsforme r industry cash flow ana lys is using t

he GRI M. For the i ndustry cash flow analy

sis, DOE pr

epared a set of f inancia l parame ters for use in the GRIM. The Department or iginally base d these financial parameters on the its topdown2-14

financi al analy

sis but, in r

esponse t o discussi ons with tr

ansform er manuf

acture rs, subse quently adjusted them be mo re repr

esentat ive of the industry . The Dep artment u sed a simil ar proc ess during the ANOPR phase of the analy sis (i.e., public financial reports and manufacturer discussions) to der

ive the ma

nufactu rer mar kups used to establi sh manufa

cturer selling prices in its engineering analy

sis. The MIA production costs and manufac turer selling prices are consistent with both th e LCC a

naly sis and the

engine ering a

naly sis, upon w

hich DOE

based the LCC pricing. The Department established this consistency by using the mea

n values for production co st s a nd se ll in g p ri ce s i n t he GR IM, as se le ct ed by t he LC C’ s M on te Ca rl o a lg or it hm . F in al ly, the Department’s shipments analy sis (Chapter 9) provided the basis for the shipments projection under ea ch of the trial sta ndard le vels in the

GRIM.
2.12.3 Manufactur er Subgroup Analysis Using a verag e cost an

d financ ial assumptions to de velop an i ndustry cash flow model is not adequate for assessing differe ntial impacts among subgroups of manufacture rs. Smaller manufacturers, niche play ers, or manufacturers exhibiting a cost structure that diff ers largely

from the industry avera

ge could be more nega

tively impacted. The De

partment used the results of the industry chara

cterization to group manufacturers exhibiting similar charac teristics. As discussed in the ANOPR, the Department established two distinct subgroups of distribution transformer manufacturers that could b e affe cted by efficie ncy standar ds: liquid- immersed , and mediumvoltage (MV) dry

-type. A discussion of these superclasses appears in Chapter 12. Within each superclass, the Department contacted companie s from its database of manufacturers who provided represe ntation of firms operating in that superclass. The Depa rtment intervie wed small

and larg e compan

ies, subsi diaries a

nd indepe ndent fir ms, public

and priva te corporations, and a mix of National Electrical Manufacturers Association (NEMA) and nonNEMA members. The Department also made an ef fort to interview companies who had been interviewed for the engineer ing analy sis in 2002, as well as those who had previously pa rticipated in the rulemaking process. The purpose of the me etings was to enhance the Depar tment’s understa nding of how manuf

acture r impacts chang e with ea

ch of the trial sta ndard le vels. The Depa rtment al so evalua

ted the imp act of th e energ y c onserva

tion stand ards on small businesses. Small businesses, as defined by the Small Business Administration (SBA) for the distribution transformer manufacturing industry, are manufacturing enter prises with 750 or fewer employ ees. The Department condu

cted tele phone inte

rviews with nine sma

ll business es, to determine if there are differe ntial impacts on these companies that may result from the standard. The Department contacted material and e quipment suppliers to the distribution transformer industry

to enhance its understanding of the context in which transformer manufacturers operate and to assist in quantify ing conversion costs. The Department conducte d interviews with the two domestic suppliers of electrical core stee l and with two core steel distributors. The domestic suppliers of core steel are larg e corporations that have a broad rang e of steel products, of which electrical core stee l is one product offering. The core ste el distributors offer ma nufactu rers a v ary

ing deg ree of processi

ng, ra nging from bas ic slit-to-width roll s to prefabricated cores (both stacke d and wound-core configura tions). The Department also spoke2-15

with four equipment suppliers, including manufacturers of both distributed g ap and mitered core process ing machines, an

d two manufactur

ers of a nnealing furnac es. The information from the se discussions was helpful in understanding comments and concerns expressed by manufacturers as well as in estimating the conversion capital expenditures used in the GRI M. 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 manufacture rs who had experience working with amorphous materia l. Through this dialogue, the Department g ained a better understanding of manufa cturing amorphous core transformers, including core processing equipment, annealing fur naces, and material handling issues.

2.13 UTILITY IMP

ACT ANALY SIS The Department conducted the utility impact analysis afte

r 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 re duction in net generation resulting from the i

ncreas ed trans former e fficien cy of their e lectric ity c

ustomers w

ho purch ase their own t ransformers. To perform th e utility impact s analysis, the Depa rtment used the BT (Building Technologies) version of the Energy Information Administration (EI A)'s National Energy Modeling System (NEMS). 1 NEMS is a la rge, g eneral -equilibr

ium ener gy-econom

y model of the United States that EIA has deve loped over several y ears, primarily

for the purpose of preparing the Annual Energy Outlook ( AEO ). 2 NEMS produ

ces a wid ely recog nized base line fore cast for the U.S. th

rough 2 020 and is available in the public domain. Typic al NEMS output includes forecasts of electricity sales and prices. The Department conducted the utility analysis by

comparing NEMS-BT output for various distributi on transf

ormer sta ndard le vels with t

he latest AEOforecasts. The comparison between NEMS-BT and the AEOforecasts incorporated time-differe ntiated load impacts of transformer standards. The time-differentiated load impact estimate used loa d shape information from the LCC analy sis, and national energy use impact forecasts from the NES analy sis. Other assumptions used in the AEOalso served as the basic assumptions applied to the analy sis of the impacts of

energ y c onserva

tion stand ards on ut ilities.

2.14 EMPLOYM

ENT IMPA CT ANALYSI S The Department conducted the employ ment impact analysis afte r the ANOPR and reporte d the res

ults in the N OPR. The Pr ocess Rule

directs D OE to cons ider emp loy ment impac

ts in selecting a proposed standard. The De partment estimated the impacts of standards on emplo yment in the tr ansfo rmer m anufac turin g indu stry, rel evant servi ce ind ustri es, en ergy suppliers, and the economy in general. The Department sepa rates employment impacts into direct and indirect impacts. Direct employ ment impacts would result if standards led to a change in the number of employe es at transformer manufacturing plants and related supply a nd service firms. The MIA discusses direct impacts. Indirect impacts are impac ts on the national economy other2-16

than in the

manufacturing s ector DO E is reg ulating . Ind

irect imp acts may

result fr om both expenditur

es shiftin g among goods ( substitution effect), and income cha nging , which wi ll lead to a change in overall expenditure levels (income effect). The Department defines indirect employ ment impacts from standards as net jobs eliminate d or cre ated in th e gene ral economy

as a cons equenc e of incr eased sp ending

to purcha se distribution transformers and reduced spending to pay utility costs. An important indirect employ ment eff ect may arise fr om shifting

investmen

t from the energ y se ctor into m

ore (or less) labor-intensive industries. The Department expects new equipment standards to incre ase a transformer’s purchase price, w hich includes retail price, sales tax, and installation. The Department expects the same standards to decrease energy consumption, and therefore reduce expe ndit ures fo r energy. Ov er tim e, the increa sed pu rchase price m ay be paid b ack th rough energy savings. Consumers may spend the savings in energy expenditures on other items. Using an input/output model of the U.S. economy, the Depa rtment estimated national impacts for major sectors of the U.S. economy and the net impact on jobs. The Department used public and commercially a

vailable data sources and software to estimate e mployment impacts. I

t 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 analy sis in the NOPR.

2.15 ENVIRONMENTAL ASSESSMENT The Department conducted the environmental assessment a fter the ANOPR and reported the results in the NOPR. The Environmental Assessment is required under the National Environmental Policy Act of 1969 (N EPA) (42 U.S.C. 4321 et seq.), regulations of the Council on Environmental Quality (49 CFR par ts 1500-1508), the Department regulations for complianc e with NEPA (10 CFR part 1021), and the Secretarial Policy on the National Environmental Policy Act (June 1994). The main e

nvironme ntal conc ern addr

essed is e missions fr

om fossil- fuel-fi

red ele ctricity generation. Power plant emissions include oxides of nitrogen (NO x ) and sulf ur (SO 2 ), as well as carbon d ioxide (CO 2 ). The first two are major causes of ac id precipitation, which can affect humans by reduc ing the productivity of farms, forests, and fisheries, decrea sing recreational opportunities, and degrading susceptible buildings a nd monuments. Nitroge

n oxides ar

e also precursor gas es to urba

n smog an

d are pa rticular ly d etriment al to air q uality during h ot, still weather. Carbon dioxide emissions are believed to contribute to raising the global temperature via the “greenhouse eff

ect.” The major

environmental ef

fects of transformer en ergy

conserv ation stan

dards wo uld result from reduced electrical ene rgy consumption, and would take the form of reduced emissions from the o

peratio n of powe

r plants. Analyses for previous s tandard s have re ported r eduction s in energ y- related emissions o f SO 2, NO x , and CO 2 . The Dep artment e stimated t he emission impacts at the national level. Details of the this analy sis are in the Environmental Assessment , published as a separate report within this TSD.2-17

2.16 REGULATO RY IMPACT ANALY SIS The Department conducted the reg ulatory impact ana

lysis after the AN OPR, and reported the resu lts in the N OPR. The D epartme nt prepa red a dr aft reg ulatory impact an

aly sis pursua

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

Office of Inf

ormation and Regulatory

Affairs (OIRA)

58 FR 51735 (Octobe r 4, 1993) . The Dep artment i dentifie d seven ma jor alter natives a s repre senting

feasible policy options to a

chieve c onsumer product e nergy efficie ncy . It e valuate d each a

lternati ve in terms of i ts ability to achie ve signi ficant e

nergy savings at a rea sonable c ost, and c ompared these results to the effectiveness of the rule. Under the Process Rule, the Department is committed to continuallyexplore nonregulatory

alternatives to standards. The list below indicates those alternatives the Depa rtment examined for this rulemaking. Through manufactur er interviews and literature searche s, the Department compiled information on burdens on manufacturers from existing and impending regulations affecting distribution transforme rs. It also sought input from stakeholders r egarding other regulations it should consider. The Department examined the following non-regulatory alterna tives to sta

ndards:

• No new regulatory

action

• Consumer rebates

• Consumer t

ax credits

• Manufac

turer ta x credits

• Voluntar

y e nergy -effic iency

targe ts

• Early re

placement

• Bulk government purchases Details of the this analysis ar e in the Regulator

y Impac t Analysis , publishe d as a sep arate report within this TSD.2-18 REFEREN CES

1. U.S. Department of Energy -Energy Information Administration. National Energy Modeling System: An Overview 2003. 2003. Report No. DOE/EIA-0581(2003)

. <http://ww

w.eia.d oe.gov /oiaf/ae o/overvi ew/index.h tml>
2. U.S. Department of Energy - Energy Information Administration. Annual Energy Outlook 2005: With Projections Through 2025. January, 2005. Washington, DC. Report No. DOE/EI A-0383( 2005). <

http://www .eia.doe .gov/oia f/aeo/in dex.html>