CHAPTER 2. ANALYTIC FRAMEWORK 

TABLE OF CONTENTS 

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


2.2 BACKGROUND ..................................................... 2-5


2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................... 2-5


2.3.1 Market Assessment ........................................ 2-5


2.3.2 Technology Assessment ..................................... 2-5


2.4 SCREENING ANALYSIS ............................................... 2-6


2.4.1 Technology Screening ...................................... 2-6


2.4.2 Baseline Equipment ....................................... 2-6


2.5 ENGINEERING ANALYSIS ............................................ 2-7


2.5.1 Design-Option Approach .................................... 2-7


2.5.2 Efficiency-Level Approach .................................. 2-8


2.5.3 Cost-Assessment Approach .................................. 2-9


2.5.4 Other Regulatory Impacts on the Engineering Analysis ............ 2-9


2.6 ENERGY USE AND END-USE LOAD CHARACTERIZATION ............... 2-9


2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION .................. 2-10


2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES ................. 2-10


2.8.1 Life-Cycle Cost Spreadsheet Model .......................... 2-10


2.9 SHIPMENTS ANALYSIS .............................................. 2-12


2.10 NATIONAL IMPACT ANALYSIS ...................................... 2-12


2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS ............................. 2-13


2.12 MANUFACTURER IMPACT ANALYSIS ................................ 2-14


2.12.1 Industry Characterization ................................... 2-14


2.12.2 Industry Cash Flow ....................................... 2-15


2.12.3 Manufacturer Subgroup Analysis ............................ 2-15


2.13 UTILITY IMPACT ANALYSIS ......................................... 2-17


2.14 EMPLOYMENT IMPACT ANALYSIS ................................... 2-17


2.15 ENVIRONMENTAL ASSESSMENT .................................... 2-18


2.16 REGULATORY IMPACT ANALYSIS ................................... 2-18


LIST OF FIGURES 

Figure 2.1.1 Analyses for Distribution Transformer Energy-Efficiency Standards ........ 2-4


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CHAPTER 2. ANALYTIC FRAMEWORK 

2.1 INTRODUCTION 

This chapter provides a description of the general analytic framework the Department of 

Energy (DOE) used 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 the project team developed for the standards-setting 

process are presented and open for stakeholder review. 

The analyses that DOE 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 ones DOE should evaluate and which it should screen 

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; 

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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. In parallel, 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; 

C a shipments analysis to estimate shipments of distribution transformers over the time 

period examined in the analysis; and 

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

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

savings (NES), and national employment. 

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

stakeholders, DOE revised the ANOPR analyses and published a notice of proposed rulemaking 

(NOPR) on August 4, 2006. 71 FR 44356. In addition to revising some of the ANOPR analyses, 

DOE 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. 

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In response to comments it received on the NOPR, DOE revised some of its analyses 

before publishing its final rule and this accompanying technical support document (TSD). 

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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, DOE announced a formal 

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

standards. DOE called on energy efficiency groups, manufacturers, trade associations, State 

agencies, utilities, and other interested parties to provide input to this effort. As a result of this 

combined effort, DOE 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 DOE’s: 1) economic models, 2) 

analytic tools, 3) methodologies, 4) non-regulatory approaches, and 5) prioritization of future 

rules. The Process Rule recommended that DOE 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, DOE 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 the largest players in the 

transformer industry; 3) 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 served as resource material that 

DOE 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, DOE identified 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, DOE reviewed and analyzed some emerging technologies for 

distribution transformers (e.g., superconducting materials). Although these technologies are not 

generally considered commercially available, DOE discusses their potential impact on the 

distribution transformer industry. 

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

that DOE will use in the rulemaking. DOE divided distribution transformers 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. DOE 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 

DOE developed an initial list of efficiency enhancement design options from the 

technologies identified in the technology assessment. Then DOE 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, DOE considered those 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. 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, DOE 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, DOE 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 products 

that are the subject of a rulemaking, estimating manufacturer costs of achieving increased 

efficiency levels. DOE 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 

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

screening analysis. DOE uses this cost-efficiency relationship, developed in the engineering 

analysis, in the LCC analysis. 

As described in Chapter 1, DOE considered 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 was to identify the maximum 

technologically feasible efficiency 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. DOE 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, DOE can use three methodologies 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 teardowns. 

DOE considers public comments in determining the best approach for each rulemaking. 

2.5.1	 Design-Option Approach 

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

design options, that increase efficiency. DOE typically bases these increases in efficiency either 

on manufacturer or component supplier estimates or on engineering computer simulation models. 

DOE 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 that it allows DOE 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 used in equipment 

currently available on the market. Thus, DOE can more easily establish maximum 

technologically feasible designs using the design-option approach than it can using the 

efficiency-level approach. 

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

DOE 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), DOE 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. 

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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. DOE then uses independent costing methods and manufacturer and component 

supplier data to estimate the costs of the components. This approach has the distinct advantage 

of using “real” market equipment to establish the technologies that manufacturers use 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. DOE may have to assess several models from a diverse range of 

manufacturers to ensure an accurate representation of technological paths for increasing 

efficiency. In addition, since DOE only analyzes equipment in the market, prototypical designs 

may not be captured by the analysis, 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 recognizes 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. DOE 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) produced energy 

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

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

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

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

analysis produced a distribution of results for a variety of transformer types and uses, to 

represent the diversity of use and performance of distribution transformer equipment. 

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2.7 MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

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

transformers. DOE derived this installed price by applying markups to the manufacturer selling 

price it determined in 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 liquidimmersed 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. 

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 DOE 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 the economic impacts of standards, DOE calculated changes in LCC that are 

likely to result from the candidate standard level, as well as a simple payback period. DOE 

calculated both the LCC and the PBP using a Monte Carlo framework (described in Appendix 

8B), 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). DOE 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 

DOE developed an LCC Spreadsheet Model to calculate the economic impacts of moreefficient 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 

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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). DOE 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 

energy efficiency standard that DOE decided 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. As indicated above, baseline units 

are those designs that customers would choose in the absence of a new efficiency standard. 

Identifying a specific 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, DOE 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. 

DOE 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, DOE calculated operating costs, taking into account distributions in loading and 

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

DOE developed the spreadsheet model 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, to consider 

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. 

DOE calculated the PBP based on the same inputs it 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 

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2.9 SHIPMENTS ANALYSIS 

One of the more important components of any estimate of future impacts from energy 

efficiency standards is transformer shipments (Chapter 9). DOE must obtain forecasts of 

shipments for the base case and each potential standards case as an input to the NES Model. For 

the distribution transformer rulemaking, DOE 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. 

Distribution transformer 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 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). DOE projected the impacts from the year 

the standard would take effect through a selected number of years in the future. DOE 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. DOE 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. DOE 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 

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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. DOE 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. 

DOE estimated national energy consumption for each year beginning with the expected 

effective date of the standard. DOE 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. DOE 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. 

2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS 

DOE conducted the LCC subgroup analysis after the ANOPR was published and reported 

the results in the NOPR. DOE provides the revised LCC subgroup analysis for the final rule 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 LCC. 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 would be 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. DOE analyzed the effects on these groups by comparing the transformer 

owners’ capital and operating costs with and without an energy conservation standard. DOE 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, transformer loading, and the extra 

installation costs associated with replacing or expanding transformer vaults. 

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DOE 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. DOE discussed the 

variability in each input quantity and likely sources of information with the interested parties. 

2.12 MANUFACTURER IMPACT ANALYSIS 

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

procedural and analytical approaches for the MIA. As outlined, DOE 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, DOE adapted the GRIM’s generic structure to perform an analysis of 

distribution transformer energy conservation standards. In Phase 3, the “Subgroup Impact 

Analysis,” DOE conducted interviews with several manufacturers. The group of manufacturers 

interviewed included small, medium, and large manufacturers providing a representative crosssection of the U.S. distribution transformer industry. During these interviews, DOE 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 DOE 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, DOE prepared a profile of the distribution transformer industry that 

built on the market and technology assessments it had 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 

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

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. To calibrate its initial characterization of the 

industry, DOE used public sources of information, 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 this MIA, DOE used the GRIM to perform a distribution transformer 

industry cash-flow analysis. 

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

the GRIM. DOE originally based these financial parameters on its topdown financial analysis but, 

in response to discussions with transformer manufacturers, subsequently adjusted them to be more 

representative of the industry. DOE used similar sources of information (i.e., public financial 

reports and manufacturer discussions) during the ANOPR phase of the analysis to derive the 

manufacturer markups it used to establish manufacturer selling prices in the 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. DOE ensured 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, DOE’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 by standards. DOE used the results of the 

industry characterization to group manufacturers exhibiting similar characteristics. As discussed 

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in the ANOPR, DOE established two distinct subgroups of distribution transformer manufacturers 

that could be affected by efficiency standards: liquid-immersed transformer manufacturers, and 

medium-voltage dry-type transformer manufacturers. A discussion of these superclasses appears 

in Chapter 12. 

Within each superclass, DOE contacted companies from its database of manufacturers that 

represented firms operating in that superclass. DOE interviewed small and large companies, 

subsidiaries and independent firms, public and private corporations, and a mix of National 

Electrical Manufacturers Association (NEMA) and non-NEMA members. DOE 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 DOE’s understanding of how manufacturer impacts change with each of 

the trial standard levels. 

DOE 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. 

DOE conducted telephone interviews with nine small businesses, to determine if there are 

differential impacts on these companies that may result from the standard. 

DOE 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. DOE 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 woundcore configurations). DOE also spoke 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, DOE spoke with the only domestic supplier of 

amorphous ribbon and several transformer manufacturers who had experience working with 

amorphous material. Through this dialogue, DOE gained a better understanding of manufacturing 

amorphous core transformers, including issues related to core processing equipment, annealing 

furnaces, and material handling. 

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2.13 UTILITY IMPACT ANALYSIS 

DOE 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 electricity generation 

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

their own transformers. To perform the utility impact analysis, DOE 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 2030 and is 

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

prices. DOE 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. DOE also used 

other assumptions from the AEO as basic assumptions for analyzing the impacts of energy 

conservation standards on utilities. 

2.14 EMPLOYMENT IMPACT ANALYSIS 

DOE 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. DOE estimated the impacts of standards on employment in the transformer 

manufacturing industry and relevant service industries, among energy suppliers, and in the 

economy in general. DOE separates employment impacts into direct and indirect impacts. Direct 

employment impacts—discussed in the MIA—would result if standards led to a change in the 

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

DOE defines indirect employment impacts from standards as net jobs eliminated or 

created in the general economy (other than in the manufacturing sector DOE is regulating). 

Indirect impacts may result both from expenditures shifting among goods (substitution effect), and 

from incomes changing, which will lead to a change in overall expenditure levels (income effect). 

An important indirect employment effect may arise from shifting investment from the energy 

sector into more (or less) labor-intensive industries. DOE expects new equipment standards to 

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

DOE 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 

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

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

the U.S. economy and the net impact on jobs. It used public and commercially available data 

sources and software to estimate employment impacts. DOE 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 final rule TSD, Chapter 14. 

2.15 ENVIRONMENTAL ASSESSMENT 

DOE 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), DOE 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 dioxide (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. NOx emissions are also 

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

weather. CO2 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. DOE 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. 

2.16 REGULATORY IMPACT ANALYSIS 

DOE conducted the regulatory impact analysis after the ANOPR, and reported the results 

in the NOPR. DOE prepared a draft regulatory impact analysis pursuant to Executive Order 

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). DOE 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. 

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Under the Process Rule, DOE is committed to continually explore non-regulatory 

alternatives to standards. The list below indicates those alternatives DOE examined for this 

rulemaking. Through manufacturer interviews and literature searches, DOE 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. DOE 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> 

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