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CHAPTER 12 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION .............................................................................................................. 1

12.2 METHODOLOGY ............................................................................................................. 1

12.2.1 Phase I: Industry Profile......................................................................................... 2

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide................................ 2

12.2.2.1 Industry Cash-Flow Analysis................................................................ 2

12.2.2.2 Interview Guide .................................................................................... 2

12.2.3 Phase III: Subgroup Analysis................................................................................. 2

12.2.3.1 Manufacturer Interviews....................................................................... 3

12.2.3.2 Revised Industry Cash-Flow Analysis.................................................. 3

12.2.3.3 Manufacturer Subgroup Analysis......................................................... 3

12.2.3.4 Competitive Impact Assessment........................................................... 3

12.2.3.5 Manufacturing Capacity Impact ........................................................... 4

12.2.3.6 Employment Impact.............................................................................. 4

12.2.3.7 Cumulative Regulatory Burden ............................................................ 4

12.3 Preliminary manufacturer impact analysis overview.......................................................... 4

12.3.1 Industry Overview .................................................................................................. 5

12.3.1.1 Industry Cost Structure ......................................................................... 5

12.3.1.2 Inventory Levels ................................................................................... 6

12.3.2 Interview Topics and Preliminary Findings............................................................ 7

12.3.2.1 Market Shares and Industry Consolidation........................................... 7

12.3.2.2 Products & Profitability ........................................................................ 8

12.3.2.3 Conversion Costs.................................................................................. 9

12.3.2.4 Cumulative Regulatory Burden ............................................................ 9

12.4 Overall Key Issues.............................................................................................................. 9

12.4.1 Core Steel Availability.......................................................................................... 10

12.4.2 Equipment Conversion Costs................................................................................ 10

12.4.3 Intellectual Property.............................................................................................. 10
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LIST OF TABLES

Table 12.1 Power, Distribution and Specialty Transformer Manufacturing Industry Employment 

and Earnings 5

Table 12.2 Power, Distribution and Specialty Transformer Manufacturing Industry Material and 

Payroll Costs 6

Table 12.3 Power, Distribution and Specialty Transformer Manufacturing Industry End-of-Year 

Inventory 6

Table 12.4 Power, Distribution and Specialty Transformer Manufacturing Industry Full 

Production Capacity Utilization Rates.............................................................................................7
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CHAPTER 12 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the 

likely impacts of amended energy conservation standards on manufacturers. In the Notice of the 

Proposed Rulemaking (NOPR), DOE considers a wide range of quantitative and qualitative 

industry impacts that might occur due to an amended energy conservation standard. For example, 

a particular standard level could require changes in manufacturing practices, equipment, raw 

materials, etc. DOE fully analyzes these impacts during the NOPR stage of analysis.

DOE announced changes to the preliminary analysis MIA format through a report issued 

to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 

(EPACT 2005), entitled “Energy Conservation Standards Activities.”1 As a result, DOE collects, 

evaluates, and reports preliminary MIA information in the preliminary analysis (as opposed to 

waiting for the NOPR stage). Such preliminary information includes market data, market shares, 

industry consolidation, equipment mix, key issues, conversion costs, foreign competition, and 

cumulative regulatory burden information, if available. DOE solicits this information during the 

preliminary manufacturer interviews and reports the results in this chapter. Appendix 12A 

includes a copy of the interview guide that DOE distributed to manufacturers.

To the extent appropriate for this rulemaking, DOE plans to apply the methodology 

described below to evaluate amended energy conservation standards for Distribution 

Transformers.

12.2 METHODOLOGY

DOE conducts the MIA in three phases. In Phase I, DOE creates an industry profile to 

characterize the industries and conducts a preliminary MIA to identify important issues that 

require consideration. Section 12.3 of this chapter presents initial findings of the Phase I 

analysis. In Phase II, DOE prepares an industry cash flow model and a detailed interview 

questionnaire to guide subsequent discussions with manufacturers. In Phase III, DOE interviews 

manufacturers and assesses the impacts of amended energy conservation standards both 

quantitatively and qualitatively. DOE assesses industry and subgroup cash flow impacts and 

industry net present value (INPV) using the Government Regulatory Impact Model (GRIM). 

DOE also assesses impacts on competition, manufacturing capacity, employment, and regulatory 

burden based on manufacturer interviews and discussions. The Federal Register NOPR and 

technical support document (TSD) present results of the Phase II and III analyses.

 

1 This report is available on the DOE website at: 

http://www1.eere.energy.gov/buildings/appliance_standards/pdfs/congressional_report_013106.pdf.
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12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE collects pertinent qualitative and quantitative financial and 

market information. This includes data on wages, employment, industry costs, and capacity 

utilization rates for manufacturers of distribution transformers. Sources of information include 

reports published by industry groups, trade journals, the U.S. Census Bureau, and Securities 

Exchange Commission (SEC) 10-K filings. In addition, DOE relies on information from its 

market and technology assessment, engineering analysis, life-cycle cost analysis, shipments 

analysis, and equipment price determination to characterize the distribution transformer

manufacturing industry. 

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

In Phase II, DOE performs a preliminary industry cash-flow analysis and prepares written 

guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash-Flow Analysis

DOE uses the GRIM to analyze the financial impacts of amended energy conservation 

standards. Amended energy conservation standards may require additional investment, higher

production costs, and could affect revenue through higher prices and, potentially, lower 

shipments. The GRIM uses several financial parameters to determine a series of annual cash 

flows for the year that amended energy conservation standards become effective and for several 

additional years. These factors include annual expected revenues, costs of goods sold, selling and 

general administration expenses, research and development expenses, taxes, and capital 

expenditures. Inputs to the GRIM include those financial parameters, manufacturing costs, 

shipment forecasts, and markup assumptions. The financial information is developed from

publicly available data and confidentially submitted manufacturer information. DOE compares 

the GRIM results for the standards case at each trial standard level against the results for the base 

case in which no amended energy conservation standards are in place. The financial impact of 

amended energy conservation standards is the difference between the two sets of discounted 

annual cash flows.

12.2.2.2 Interview Guide

DOE conducts interviews with manufacturers to gather information on the effects of 

amended energy conservation standards on revenues, costs, direct employment, capital assets, 

and industry competitiveness. Before the interviews, which occur in Phase III, DOE distributes

an interview guide to help identify the impacts of amended energy conservation standards on 

individual manufacturers or subgroups of manufacturers. Interview guide topics include: 

production costs; shipment projections; market share; equipment mix; conversion costs; markups 

and profitability; competition; manufacturing capacity; cumulative regulatory burden; and other 

relevant topics.

12.2.3 Phase III: Subgroup Analysis

Phase III activities take place after publication of the preliminary analysis. These 

activities include manufacturer interviews; revision of the industry cash-flow analysis; a 
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manufacturer subgroup analysis; and an assessment of the impacts on industry competition, 

manufacturing capacity, direct employment, and cumulative regulatory burden.

12.2.3.1 Manufacturer Interviews

DOE conducts detailed interviews with manufacturers to gain insight into the potential 

impacts of amended energy conservation standards on sales, direct employment, capital assets, 

and industry competitiveness. The interview process is critical to the MIA because it provides an 

opportunity for interested parties to privately express their views on important issues. Interviews 

are scheduled well in advance to provide every opportunity for stakeholders to be available for 

comment. Although a written response to the questionnaire is acceptable, DOE prefers 

interactive interviews, which help clarify responses and provide the opportunity to identify 

additional issues not specifically addressed in the interview questionnaire. A non-disclosure 

agreement allows DOE to consider confidential or sensitive information in its decision-making 

process. Confidential information will not be made available in the public record. At most, 

sensitive or confidential information may be aggregated and presented in industry-wide 

representations. 

DOE uses information gathered during manufacturer interviews to supplement the 

information gathered in Phase I and the cash flow analysis performed in Phase II.

12.2.3.2 Revised Industry Cash-Flow Analysis

As discussed, DOE requests information about profitability impacts, changes in capital 

expenditures, and other manufacturing impacts during the interview process. DOE revises its 

industry cash flow model based on the feedback it receives in written comments and during 

interviews.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to develop an industry cash flow estimate will not 

adequately assess differential impacts among manufacturer subgroups. Smaller manufacturers, 

niche players, and manufacturers exhibiting a cost structure that differs greatly from the industry 

average could be more negatively affected. Ideally, DOE would consider the impact on every 

firm individually; however, it typically uses the results of the industry characterization to group 

manufacturers with similar characteristics. During the interviews, DOE discusses the potential 

subgroups that have been identified for the analysis. DOE asks manufacturers and other 

interested parties to suggest what subgroups or characteristics are most appropriate for the 

analysis.

12.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to 

consider any lessening of competition likely to result from the imposition of standards. EPCA 

further directs the U.S. Attorney General to determine the impacts, if any, of any decrease in 

competition. DOE makes a determined effort to gather and report firm-specific financial 

information and impacts. DOE bases the competitive impact assessment on manufacturer cost 

data and other information collected from interviews. When assessing competitive impacts, 
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DOE’s interviews generally focus on assessing asymmetrical cost increases, the potential 

increase in business risks from an increased proportion of fixed costs, and potential barriers to 

market entry (e.g., proprietary technologies). The competitive analysis may also focus on 

assessing any differential impacts on smaller manufacturers.

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards can be the 

obsolescence of existing manufacturing assets, including tooling and other investments. The 

manufacturer interview guide presents a series of questions to help identify impacts on 

manufacturing capacity, specifically capacity utilization and plant location decisions in North 

America with and without amended energy conservation standards. The interview guide also 

addresses the ability of manufacturers to upgrade or remodel existing facilities to accommodate 

the new requirements; the nature and value of stranded assets, if any; and estimates for any onetime restructuring or other charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important 

consideration in the rulemaking process. To assess how domestic employment patterns might be 

affected, the interview process explores current employment trends in the distribution 

transformer industry and solicits manufacturer views on changes in employment patterns that 

may result from new or amended standards. The employment impacts section of the interview 

guide focuses on current employment levels at production facilities, expected future employment 

levels with and without an amended energy conservation standard, differences in workforce 

skills, and employee retraining.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of energy conservation 

standards and other regulatory actions. DOE analyzes and considers the impact on manufacturers 

of multiple, equipment-specific regulatory actions.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS OVERVIEW 

During the preliminary analysis phase, DOE conducted a preliminary evaluation of the 

impact of potential new and amended energy conservation standards on the distribution 

transformer industry.

The primary sources of information for this analysis are the U.S. Census, industry 

reports, and interviews with manufacturers of distribution transformers, conducted in the third 

quarter of 2010. To maintain confidentiality, DOE only reports aggregated information here.

DOE does not disclose company-specific information, nor does it identify the individual 

manufacturers that disclosed information.
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12.3.1 Industry Overview 

The following section summarizes publicly available industry data.

12.3.1.1 Industry Cost Structure

DOE is unaware of any publicly available industry-wide cost data specific to only 

manufacturers of distribution transformers. Distribution transformers manufacturing is classified 

as a subset under the North American Industry Classification System (NAICS) code 335311

(Power, Distribution and Specialty Transformer Manufacturing). Therefore, DOE presents the 

data below as a broader industry proxy for the distribution transformer industry, which, in 

combination with information gained in interviews, inform DOE’s analysis of the industry cost 

structures. For simplicity, DOE will refer to these broader categories by the equipment they 

represent, namely distribution transformers. DOE obtained the below data from U.S. Census 

Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries from 

2005-2008.

Table 12.1 presents the employment levels and earnings from 2005 to 2008. The statistics 

illustrate approximately a 13-percent increase for both overall number of employees and 

production workers from 2005 to 2008. The statistics show the number of factory workers grew 

at a 3-percent rate annually from 2005 to 2008.

Table 12.1 Power, Distribution and Specialty Transformer Manufacturing Industry 

Employment and Earnings

Year Production Workers All Employees Annual Payroll

($000s)

2008 16,529 22,096 959,372

2007 16,538 22,307 976,611

2006 15,438 20,642 863,266

2005 14,529 19,509 781,440

U.S. Census Bureau. Annual Survey of Manufacturers, 2008-2007and 2006-2005.

Table 12.2 presents the costs of materials and industry payroll as a percentage of 

shipment value from 2005 to 2008. The cost of materials as a percentage of shipment value fell 

slightly over the 2005-2008 period. During the same time period, the cost of total payroll and the 

cost of payroll for production workers increased by 23.0 percent and 20.0 percent, respectively.
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Table 12.2 Power, Distribution and Specialty Transformer Manufacturing Industry 

Material and Payroll Costs

Year Cost of Materials

(percent of shipment value)

Cost of Payroll

for Production Workers

(percent of shipment value)

Cost of Total Payroll

(percent of shipment value)

2008 50.09 7.77 13.01

2007 52.03 7.80 13.21

2006 51.90 10.40 17.25

2005 51.20 11.10 18.47

U.S. Census Bureau. Annual Survey of Manufacturers, 2008-2007and 2006-2005

12.3.1.2 Inventory Levels

Table 12.3 shows the year-end inventory levels obtained from the U.S. Census Bureau, 

Annual Survey of Manufacturers, Statistics for Industry Groups and Industries from 2005 to 

2008. Again, DOE presents these data as a broader measure of the distribution transformer

industry. The industry’s end-of-year inventory from 2005 to 2008 increased in dollar value. 

However, as a percentage of shipment value the industry’s end-of-year inventory has seen a 

slight reduction. 

Table 12.3 Power, Distribution and Specialty Transformer Manufacturing Industry Endof-Year Inventory

Year End-of-Year Inventory

($000s)

End-of-Year Inventory

(percent of shipment value)

2008 865,396 11.74

2007 799,074 10.81

2006 637,235 12.73

2005 520,976 12.31

U.S. Census Bureau. Annual Survey of Manufacturers, 2008-2007and 

2006-2005

DOE obtained full production capacity utilization rates from the U.S. Census Bureau, 

“Current Industrial Reports,” Survey of Plant Capacity from 2002 to 2006. Table 12.4 presents

production capacity utilization rates for NAICS code 335311. Full production capacity is defined 

as the maximum level of production an establishment can attain under normal operating 

conditions. In the Survey of Plant Capacity report, the full production capacity utilization rate is 

a ratio of the actual level of operations to the full production level.
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Table 12.4 Power, Distribution and Specialty Transformer Manufacturing Industry Full 

Production Capacity Utilization Rates

Year Power, Distribution, and Specialty Transformer Manufacturing (%)

2006 66

2005 70

2004 61

2003 62

2002 57

U.S. Census Bureau. 2007 Current Industrial Reports: Table 1a - Full Production Capacity 

Utilization Rates by Industry: Fourth Quarters 2002 through 2006. November 2007

12.3.2 Interview Topics and Preliminary Findings

The following section summarizes information gathered during interviews held during 

the fourth quarter of 2010 for the preliminary MIA.

12.3.2.1 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the 

marketplace, prompting companies to enter the market, exit the market, or merge with other 

companies. The preliminary MIA interview questions asked manufacturers to share their 

perspectives on industry consolidation both in the absence of amended energy conservation 

standards and assuming amended standards at various efficiency levels. The interview questions 

focused on gathering information that assessed:

 current and anticipated market share in the event of standards;

 potential disproportionate cost increases to some manufacturers;

 likelihood of industry consolidation;

 increased proportion of fixed costs potentially increasing business risks; and

 potential barriers to market entry (e.g., proprietary technologies).

The need to assess anti-competitive effects of proposed amended energy conservation 

standards derives from the need to protect consumer interests. During the interviews, DOE also 

solicited information to determine whether amended energy conservation standards could result 

in disproportionate economic or performance penalties for particular consumer or user 

subgroups. Manufacturers were also asked if amended energy conservation standards could 

result in products that would be more or less desirable to consumers due to changes in product 

functionality, utility, or other features.

Market Shares: DOE inquired about the current market shares of manufacturers in the 

distribution transformer industry and how those shares might change after amended energy 

conservation standards. For manufacturers that already produced high efficiency products and 

use efficiency as a product differentiation tool, enhanced energy standards would provide a 

competitive advantage in the short term, but ultimately their market share would be unaffected in 
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the longer term. One manufacturer noted an energy conservation standard requiring intense use 

of amorphous material could negatively impact the competitive stance of the domestic industry

compared to foreign manufacturers. This is because several foreign countries have already set 

amorphous transformer technology as policy goals, and all amorphous steel production is owned 

by foreign companies. This manufacturer also expressed concern that if the new standards 

require the use of newer technologies, the market share for those manufacturers not already using 

the latest technology could be seriously affected in favor of competitors that already do use the 

technology. For example, a standard level that necessitates mitering of the core over butt-lap

designs (i.e., with a squared lamination edge) could disadvantage companies without mitering 

capabilities to cut the lamination edges on an angle. Additional detail on these design types can 

be found in chapter 5. Finally, some manufacturers expected some weaker companies to exit the 

industry due to the new standards and consequently expected a rise in their market share. 

Industry Consolidation: Although the United States’ distribution transformer industry

is composed of a relatively large number of manufacturers (above 60), the industry shows high 

levels of concentration in both the liquid-immersed and dry-type markets. As few as six liquidimmersed manufacturers and 11 dry-type manufacturers compose 80 percent of each of those 

markets. Most manufacturers did not think there would be significant consolidation in the 

industry in the absence of standards. They also agreed that new standards most likely would not 

lead to additional consolidation. However, a few manufacturers disagreed, and noted 

consolidation trends are highly dependent on the economic cycle. They believe, given the current 

difficult economic conditions, consolidation in the distribution transformer industry could take 

place in the near future. 

12.3.2.2 Products & Profitability

DOE requested manufacturers’ feedback on what they perceived to be the possible 

impact of amended energy conservation standards on manufacturers’ products and profits. 

Higher energy conservation standards would likely result in higher per-unit costs that could 

cause consumers to shift to less expensive alternative products, if such products were available.

New standards could result in a change in the products’ utility to consumers. Manufacturers

could also foresee a scenario in which new standards caused margin compression, which could 

threaten the viability of some firms in the industry. 

Product Differentiation: Distribution transformers have very few characteristics that 

provide differentiation in the market. Many of the differentiating options for transformers, such 

as harmonic mitigation, would preclude the unit from the definition of distribution transformer. 

Within the classification of distribution transformer, though, one manufacturer stated that 

efficiency is used as differentiation criteria in the distribution transformer market. This 

manufacturer did not expect DOE would set an efficiency standard so high as to prevent 

efficiency from being used as a product differention tool. Most manufacturers noted that 

currently about 85 percent to 90 percent of units are sold at the baseline efficiency level while 

the remainder are higher efficiency units. Several dry-type manufacturers expected this 

percentage to increase over time in the absence of new energy conservation standards with the 

adoption of NEMA Premium efficiency low-voltage dry-type transformers. 
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Product Utility: Some manufacturers believed that new standards could result in larger 

equipment being produced, consequently affecting consumer utility. For example, larger units 

could be more difficult to mount on poles or fit in underground vaults. In general, however, 

manufacturers found it highly unlikely that higher efficiency standards would result in products 

that are “more or less” desirable to consumers.

Profit Margins: Several manufacturers commented on the adverse negative impact new 

energy conservation standards may have on profit margins. One manufacturer in particular spoke 

of the possible profit erosion caused by a standard requiring increased used of core steel. Since 

the amorphous material is controlled by a single-source, internationally headquartered supplier,

increased demand of amorphous steel may jeopardize domestic operations while providing offshore competitors with a competitive advantage. Another set of manufacturers noted that new 

standards could result in a reduction of sales and thus, an erosion of profit margin as fixed costs 

would be spread over lower volumes. According to these manufacturers, as end users are 

confronted with higher prices resulting from higher efficiency standards, there would be a strong 

tendency to opt for repairs and refurbishments rather than purchasing a new unit. Only two 

manufacturers expected profit levels to rise in the short term upon the imposition of new 

standards. In any case, most manufacturers expected short term changes in margins, whether 

positive or negative, to level out and ultimately remain unchanged over the longer term. 

12.3.2.3 Conversion Costs

All manufacturers stated that the conversion costs associated with amended standards

would depend on the efficiency level established by those standards. If the efficiency levels are 

set to where they can only be obtained via amorphous material, the capital investment could be 

substantial. On the other hand, one manufacturer noted there will be minimal capital 

requirements if the new efficiency levels can be attained with traditional grain-oriented core 

steels.

According to manufacturers, conversion costs could range from one to six million dollars

per major manufacturer. This figure would include new production equipment purchases (e.g., 

mitering machines) necessary to accommodate higher efficiency standards and the required

increment in production capacity. 

12.3.2.4 Cumulative Regulatory Burden

Manufacturers did not identify any additional regulations that would add to the regulatory 

burden already imposed by amended energy conservation standards on the distribution 

transformer manufacturing industry. 

12.4 OVERALL KEY ISSUES

Perhaps the most important aspect of the preliminary MIA is the opportunity it creates for

DOE to identify key manufacturer issues early in the development of amended energy 

conservation standards. During preliminary interviews, manufacturers identified three major 
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areas of concern: (1) core steel availability, (2) equipment conversion costs, and (3) intellectual 

property.

12.4.1 Core Steel Availability

Manufacturers commented that there is limited global supply for the types of core steel 

necessary to build higher efficiency distribution transformers. In particular, a standard level that 

required the use of an M2 grade steel or better could result in supply issues due to a lack of 

qualified supply sources. Only a handful of global steel providers are capable of supplying M2 

grade steel and only one supplier is able to produce amorphous ribbon. As such, a sudden 

increase in demand for these core materials would likely result in a shortage, according to 

manufacturers. The increased demand for electrical steel from growing economies like China 

and India exacerbates the tight supply market. While the current global economic downturn has 

abated most supply issues, manufacturers indicated that a return of solid economic growth would

only further strain the limited supply of these high quality core steels.

12.4.2 Equipment Conversion Costs

Some manufacturers commented that certain technology options considered in the 

analysis may require large capital investments and retooling and strand existing assets. For 

example, entirely new machinery and manufacturing processes would be required to create 

symmetric core transformer designs. Similarly, if manufacturers decided to create their own 

amorphous cores for the amorphous design types, they would need to make large investments in 

new machinery to handle the amorphous material. While manufacturers could purchase 

prefabricated amorphous cores, a standard level that necessitates an amorphous design could 

cause the manufacturer to pursue its own amorphous core production to develop a competitive 

advantage in the marketplace. Lastly, a standard level where mitered core construction 

completely replaces butt-lapped cores would require some manufacturers to purchase additional 

mitering machines. Most small manufacturers do not currently have mitering capabilities, so 

they would have to outsource core production or face large capital investments. 

For each of the capital investments described, some portion of the manufacturers’

existing machinery for core production would be stranded. Additionally, manufacturers indicated 

that there are often very long lead times for getting advanced machinery. Several manufacturers 

commented that it would take approximately two years between the purchase request and the 

completed installation of new machinery for some of these capital investments.

12.4.3 Intellectual Property

Manufacturers expressed concerns about intellectual property rights pertaining to 

symmetric core designs. While the concept of a symmetric core transformer has existed for over 

a century, the practical implementation of the design was not developed until relatively recently. 

There are currently a small handful of companies in the world that have developed feasible 

symmetric core designs. Each of these companies owns patents for the designs, which are then 

licensed to other manufacturers who produce their own symmetric cores. This intellectual 
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property would be a high hurdle for any manufacturer seeking to produce the technology on a 

large-scale.