CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

13.1 INTRODUCTION

......................................................................................................... 13-1

13.2 METHODOLOGY

........................................................................................................ 13-1

13.2.1 Phase I: Industry Profile

.................................................................................... 13-2

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

........................... 13-2

13.2.2.1 Industry Cash-Flow Analysis

............................................................... 13-3

13.2.2.2 Interview Guide

................................................................................... 13-3

13.2.3 Phase III: Sub-Group Analysis

......................................................................... 13-3

13.2.3.1 Manufacturer Interviews

...................................................................... 13-4

13.2.3.2 Revised Industry Cash-Flow Analysis

................................................. 13-4

13.2.3.3 Manufacturer Sub-Group Analysis

...................................................... 13-4

13.2.3.4 Small-Business Manufacturer Subgroup

............................................. 13-5

13.2.3.5 Manufacturing Capacity Impact

.......................................................... 13-6

13.2.3.6 Employment Impact

............................................................................. 13-6

13.2.3.7 Cumulative Regulatory Burden

........................................................... 13-6

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

.......................................... 13-7

13.3.1 Conventional Cooking Products

........................................................................ 13-7

13.3.1.1 Lack of Cost-Effective Design Options for Energy Conservation

Standards

............................................................................................................ 13-7

13.3.1.2 Standing Pilot Ignition Systems

........................................................... 13-7

13.3.1.3 Profitability

.......................................................................................... 13-8

13.3.2 Microwave Ovens

.............................................................................................. 13-8

13.3.2.1 Standby Power

..................................................................................... 13-8

13.3.2.2 Profitability

.......................................................................................... 13-9

13.3.3 Commercial Clothes Washers

............................................................................ 13-9

13.3.3.1 Product Class Separation

..................................................................... 13-9

13.3.3.2 Potential Elimination of Top-Loading (Vertical-Axis) Washers

......... 13-9

13.3.3.3 Reduced Cleaning Performance and Consumer Dissatisfaction for Top- Loading Washers

............................................................................................. 13-10

13.3.3.4 Test Procedure Implications

.............................................................. 13-10

13.4 GRIM INPUTS AND ASSUMPTIONS

...................................................................... 13-10

13.4.1 Overview of the GRIM

.................................................................................... 13-11

13.4.2 Sources GRIM Inputs

...................................................................................... 13-11

13.4.2.1 Corporate Annual Reports

................................................................. 13-11

13.4.2.2 Standard and Poor Credit Ratings

...................................................... 13-12

13.4.2.3 Dun and Bradstreet Reports

............................................................... 13-12

13.4.2.4 Shipment Model

................................................................................. 13-12

13.4.2.5 Engineering Analysis

......................................................................... 13-12

13.4.2.6 Manufacturer Interviews

.................................................................... 13-13

13.4.3 Financial Parameters

........................................................................................ 13-13

13.4.4 Corporate Discount Rate

.................................................................................. 13-14

13.4.5 Trial Standard Levels

....................................................................................... 13-16

13-i13.4.6 NES-Shipments Forecast

................................................................................. 13-17

13.4.6.1 Base Case Shipments Forecast

........................................................... 13-17

13.4.6.2 Standards Case Shipments Forecast

................................................... 13-18

13.4.6.3 Price Elasticity of Demand Shipments Scenario

............................... 13-21

13.4.6.4 Economic Growth Shipments Scenario

............................................. 13-22

13.4.7 Production Costs

.............................................................................................. 13-22

13.4.8 Conversion Costs

............................................................................................. 13-25

13.4.8.1 Conversion Capital Expenditures

...................................................... 13-25

13.4.8.2 Product Conversion Expenses

............................................................ 13-27

13.4.9 Markups

........................................................................................................... 13-29

13.4.9.1 Preservation of Gross Margin Percentage

.......................................... 13-29

13.4.9.2 Preservation of Gross Margin (Absolute Dollars)

............................. 13-30

13.5 CONVENTIONAL COOKING PRODUCTS INDUSTRY FINANCIAL

IMPACTS

.................................................................................................................... 13-30

13.5.1 Impacts on Industry Net Present Value

........................................................... 13-30

13.5.2 Impacts on Annual Cash Flow

......................................................................... 13-32

13.6 MICROWAVE OVEN INDUSTRY FINANCIAL IMPACTS

.................................. 13-37

13.6.1 Impacts on Industry Net Present Value

........................................................... 13-38

13.6.2 Impacts on Annual Cash Flow

......................................................................... 13-39

13.7 COMMERCIAL CLOTHES WASHERS INDUSTRY FINANCIAL IMPACTS

..... 13-42

13.7.1 Impacts on Industry Net Present Value

........................................................... 13-42

13.7.2 Impacts on Annual Cash Flow

......................................................................... 13-44

13.8 IMPACTS ON COOKING PRODUCTS SMALL BUSINESSES

............................. 13-49

13.9 IMPACTS ON THE LOW-VOLUME COMMERCIAL CLOTHES WASHER

MANUFACTURER

.................................................................................................... 13-50

13.9.1 Introduction

...................................................................................................... 13-50

13.9.2 Low Volume Manufacturer Competitiveness

.................................................. 13-51

13.9.3 Effects of a Transition to Front-Loading (Horizontal-Axis) Platforms

........... 13-51

13.9.4 Fixed Cost Impacts on a Low Volume Manufacturer

...................................... 13-52

13.9.5 Financial Position of the LVM

........................................................................ 13-55

13.9.6 Additional Impacts on the Low Volume Manufacturer

................................... 13-56

13.9.7 Consequences of Higher Energy Conservation Standards on the LVM

.......... 13-57

13.10 OTHER IMPACTS

...................................................................................................... 13-58

13.10.1 Employment

............................................................................................. 13-58

13.10.1.1 Methodology

.................................................................................... 13-58

13.10.1.2 Conventional Cooking Products

...................................................... 13-60

13.10.1.3 Microwave Ovens

............................................................................ 13-63

13.10.1.4 Commercial Clothes Washers

.......................................................... 13-66

13.10.2 Production Capacity

................................................................................. 13-69

13.10.2.1 Conventional Cooking Products Production Capacity Impacts

....... 13-69

13.10.2.2 Microwave Oven Production Capacity Impacts

.............................. 13-69

13.10.2.3 Commercial Clothes Washer Capacity Impacts

.............................. 13-70

13.10.3 Cumulative Regulatory Burden

............................................................... 13-70

13.10.3.1 Standby Power Requirements

.......................................................... 13-71

13.10.3.2 Additional Federal Energy Conservation Standards

........................ 13-72

13.10.3.3 State Energy and Water Conservation Standards

............................ 13-75

13-ii13.10.3.4 Refrigerant Phase-out....................................................................... 13-76

13.10.3.5 Restriction of Hazardous Substance Directive ................................ 13-77 13.10.3.6 International Energy Conservation Standards ................................. 13-78

13.10.3.7 International Test Procedures .......................................................... 13-79

13.11 CONCLUSIONS.......................................................................................................... 13-79 13.11.1.1 Conventional Cooking Products Industry........................................ 13-79 13.11.1.2 Microwave Ovens Industry.............................................................. 13-83 13.11.1.3 Commercial Clothes Washers Industry ........................................... 13-85

LIST OF TABLES

Table 13.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking................................................................................................................................ 13-5 Table 13.4.1 GRIM Financial Parameters Based on 1999-2006 Weighted Company Financial

Data.......................................................................................................................................... 13-13 Table 13.4.2 Cost of Equity Calculation................................................................................. 13-15

Table 13.4.3 Cost of Debt Calculation.................................................................................... 13-15 Table 13.4.4 Cooktops and Ovens Baseline Efficiency Levels and TSLs.............................. 13-16 Table 13.4.5 Microwave Ovens Baseline Energy Factor Efficiency Levels and TSLs.......... 13-16 Table 13.4.6 Microwave Ovens Standby Power Efficiency Levels and TSLs....................... 13-16 Table 13.4.7 Commercial Clothes Washers Baseline Efficiency Levels and TSLs ............... 13-17 Table 13.4.8 Total NES-Shipments Forecast in 2012............................................................. 13-17 Table 13.4.9 Base Case Distribution of Efficiencies for Cooktops and Ovens Estimated in 2012

in the NES................................................................................................................................ 13-18 Table 13.4.10 Base Case Energy Factor Distribution of Efficiencies for Microwave Ovens in

2012 Estimated in the NES...................................................................................................... 13-18 Table 13.4.11 Base Case Standby Power Distribution of Efficiencies for Microwave Ovens in

2012 Estimated in the NES...................................................................................................... 13-18 Table 13.4.12 Base Case Distribution of Efficiencies for Top-Loading Commercial Clothes

Washers in 2012 Estimated in the NES ................................................................................... 13-18 Table 13.4.13 Base Case Distribution of Efficiencies for Front-Loading Commercial Clothes

Washers in 2012 Estimated in the NES ................................................................................... 13-18 Table 13.4.14 Distribution of Electric Coil Cooktop Shipments in the Standards Case – Rollup

Scenario.................................................................................................................................... 13-19 Table 13.4.15 Distribution of Electric Smooth Cooktop Shipments in the Standards Case in 2012 – Rollup Scenario..................................................................................................................... 13-19 Table 13.4.16 Distribution of Gas Cooktop Shipments in the Standards Case in 2012 – Rollup

Scenario.................................................................................................................................... 13-19 Table 13.4.17 Distribution of Electric Standard Oven Shipments in the Standards Case in 2012 – Rollup Scenario........................................................................................................................ 13-19 Table 13.4.18 Distribution of Electric Self-Clean Oven Shipments in the Standards Case in 2012 – Rollup Scenario..................................................................................................................... 13-20 Table 13.4.19 Distribution of Gas Standard Oven Shipments in the Standards Case in 2012 – Rollup Scenario........................................................................................................................ 13-20

13-iiiTable 13.4.20 Distribution of Gas Self-Clean Oven Shipments in the Standards Case in 2012 – Rollup Scenario

........................................................................................................................ 13-20 Table 13.4.21 Distribution of Energy Factor Microwave Oven Shipments in the Standards Case

Table 13.4.22 Distribution of Standby Power Microwave Oven Shipments in the Standards Case

Table 13.4.23 Distribution of Top-Loading Commercial Clothes Washer Shipments in the

Table 13.4.24 Distribution of Front-Loading Commercial Clothes Washer Shipments in the

Table 13.4.25 Base Case Production Costs (2006$) used in the GRIM for Electric Coil Cooktops

Table 13.4.26 Base Case Production Costs (2006$) used in the GRIM for Electric Smooth

Table 13.4.28 Base Case Production Costs (2006$) used in the GRIM for Electric Standard

Table 13.4.29 Base Case Production Costs (2006$) used in the GRIM for Electric Self-Clean

Table 13.4.30 Base Case Production Costs (2006$) used in the GRIM for Gas Standard Ovens

Table 13.4.31 Base Case Production Costs (2006$) used in the GRIM for Gas Self-Clean Ovens

Table 13.4.32 Base Case Energy Factor Production Costs (2006$) used in the GRIM for

Table 13.4.33 Base Case Standby Power Production Costs (2006$) used in the GRIM for

Table 13.4.34 Base Case Production Costs (2006$) used in the GRIM for Top-Loading

Table 13.4.35 Base Case Production Costs (2006$) used in the GRIM for Front-Loading

Table 13.4.38 Standby Power Conversion Capital Expenditure for Microwave Ovens by TSL13­

Table 13.4.40 Product Conversion Expenses for Conventional Cooking Products Industry by

Table 13.4.41 Energy Factor Product Conversion Expenses for Microwave Ovens Industry by

Table 13.4.42 Standby Power Product Conversion Expenses for Microwave Ovens Industry by

Table 13.4.43 Product Conversion Expenses for Commercial Clothes Washers Industry by TSL in 2012 – Rollup Scenario

........................................................................................................ 13-20

in 2012 – Rollup Scenario

........................................................................................................ 13-21

Standards Case in 2012 – Rollup Scenario

.............................................................................. 13-21

Standards Case in 2012 – Rollup Scenario

.............................................................................. 13-21

............................................................................................................................... ................... 13-23

Cooktops

............................................................................................................................... ... 13-23 Table 13.4.27 Base Case Production Costs (2006$) used in the GRIM for Gas Cooktops

.... 13-23

Ovens

............................................................................................................................... ........ 13-23

Ovens

............................................................................................................................... ........ 13-23

............................................................................................................................... ................... 13-23

............................................................................................................................... ................... 13-24

Microwave Ovens

.................................................................................................................... 13-24

Microwave Ovens

.................................................................................................................... 13-24

Commercial Clothes Washers

.................................................................................................. 13-24

Commercial Clothes Washers

.................................................................................................. 13-24 Table 13.4.36 Conversion Capital Expenditure for Conventional Cooking Products by TSL

... 13­

25

Table 13.4.37 Energy Factor Conversion Capital Expenditure for Microwave Ovens by TSL. 13­

26

26 Table 13.4.39 Conversion Capital Expenditure for Commercial Clothes Washers by TSL

.. 13-27

TSL

............................................................................................................................... ........... 13-27

TSL

............................................................................................................................... ........... 13-28

TSL

............................................................................................................................... ........... 13-28

............................................................................................................................... ................... 13-29

13-ivTable 13.5.1 Changes in Industry Net Present Value for Electric Cooktops (Preservation of Gross Margin Percentage Markup)

.......................................................................................... 13-31 Table 13.5.2 Changes in Industry Net Present Value for Electric Cooktops (Preservation of

Table 13.5.3 Changes in Industry Net Present Value for Gas Cooktops (Preservation of Gross

Table 13.5.4 Changes in Industry Net Present Value for Gas Cooktops (Preservation of Gross

Table 13.5.5 Changes in Industry Net Present Value for Electric Ovens (Preservation of Gross

Table 13.5.6 Changes in Industry Net Present Value for Electric Ovens (Preservation of Gross

Table 13.5.7 Changes in Industry Net Present Value for Gas Ovens (Preservation of Gross

Table 13.5.8 Changes in Industry Net Present Value for Gas Ovens (Preservation of Gross

Table 13.6.1 Energy Factor Changes in Industry Net Present Value for Microwave Ovens

Table 13.6.2 Energy Factor Changes in Industry Net Present Value for Microwave Ovens

Table 13.6.3 Standby Power Changes in Industry Net Present Value for Microwave Ovens

Table 13.6.4 Standby Power Changes in Industry Net Present Value for Microwave Ovens

Table 13.7.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes

Table 13.7.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand

Table 13.7.3 Changes in Industry Net Present Value for Front-Loading Commercial Clothes

Table 13.7.4 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand

Table 13.7.5 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case

Table 13.7.6 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price

Table 13.9.2 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 100,000

Table 13.9.3 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 1,500,000 Gross Margin (Absolute Dollars) Markup)

.............................................................................. 13-31

Margin Percentage Markup)

.................................................................................................... 13-31

Margin (Absolute Dollars) Markup)

........................................................................................ 13-31

Margin Percentage Markup)

.................................................................................................... 13-31

Margin (Absolute Dollars) Markup)

........................................................................................ 13-32

Margin Percentage Markup)

.................................................................................................... 13-32

Margin (Absolute Dollars) Markup)

........................................................................................ 13-32

(Preservation of Gross Margin Percentage Markup)

............................................................... 13-38

(Preservation of Gross Margin (Absolute Dollars) Markup)

................................................... 13-38

(Preservation of Gross Margin Percentage Markup)

............................................................... 13-38

(Preservation of Gross Margin (Absolute Dollars) Markup)

................................................... 13-38

Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

.......... 13-43

Shipments)

.............................................................................................................................. . 13-43

Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

.......... 13-43

Shipments)

.............................................................................................................................. . 13-44

Shipments)

.............................................................................................................................. . 13-44

Elasticity of Demand Shipments)

............................................................................................ 13-44 Table 13.9.1 DOE Estimate of LVM Clothes Washer Sales and Unit Shipments in 2006

.... 13-51

units Per Year

........................................................................................................................... 13-53

units Per Year

........................................................................................................................... 13-53

13-vTable 13.9.4 Depreciation Lifetime Assumptions for a Low and High Volume Manufacturer. 13­

53 Table 13.9.5 Per Unit Depreciation Costs for a Low and High Volume Manufacturer ......... 13-54 Table 13.9.6 Per Unit Impacts of a $10 Million R&D Expense at Various Product Lifetimes.. 13­

54 Table 13.9.7 Total Per Unit Profit for a LVM after Depreciation and R&D Disadvantage... 13-55 Table 13.9.8 Comparison of the LVM’s 2007 Financials with DOE’s Green-Field Assumptions

............................................................................................................................... ................... 13-55 Table 13.10.1 Conventional Cooking Products Industry Estimated Employment Impacts in 2012

............................................................................................................................... ................... 13-61 Table 13.10.2 Microwave Ovens Industry Estimated Employment Impacts in 2012 for Energy

Factor Standards....................................................................................................................... 13-63 Table 13.10.3 Microwave Ovens Industry Estimated Employment Impacts in 2012 for Standby

Power Standards....................................................................................................................... 13-64 Table 13.10.4 Commercial Clothes Washer Industry Estimated Employment Impacts in 2012 13­

66 Table 13.10.5 Other DOE and Federal Actions Affecting the Cooking Products Industry (Conventional Cooking Products and Microwave Ovens) ...................................................... 13-73 Table 13.10.6 Other DOE and Federal Actions Affecting the CCW Industry ........................ 13-74 Table 13.10.6 State Commercial Clothes Washer Regulations Similar to EPACT 2005....... 13-75 Table 13.10.7 California State Energy and Water Conservation Standards for Commercial

Clothes Washers....................................................................................................................... 13-76

Table 13.10.8 California Water Conservation Standards for Residential Clothes Washers... 13-76

LIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow......................................................... 13-11 Figure 13.5.1 Annual Net Cash Flows for Electric Cooktops (Preservation of Gross Margin Percentage)............................................................................................................................... 13-33 Figure 13.5.2 Annual Net Cash Flows for Electric Cooktops (Preservation of Gross Margin (Absolute Dollars)) .................................................................................................................. 13-33 Figure 13.5.3 Annual Net Cash Flows for Gas Cooktops (Preservation of Gross Margin Percentage)............................................................................................................................... 13-34 Figure 13.5.4 Annual Net Cash Flows for Gas Cooktops (Preservation of Gross Margin (Absolute Dollars)) .................................................................................................................. 13-34 Figure 13.5.5 Annual Net Cash Flows for Electric Ovens (Preservation of Gross Margin Percentage)............................................................................................................................... 13-35 Figure 13.5.6 Annual Net Cash Flows for Electric Ovens (Preservation of Gross Margin (Absolute Dollars)) .................................................................................................................. 13-35 Figure 13.5.7 Annual Net Cash Flows for Gas Ovens (Preservation of Gross Margin Percentage)

............................................................................................................................... ................... 13-36 Figure 13.5.8 Annual Net Cash Flows for Gas Ovens (Preservation of Gross Margin (Absolute Dollars)) ................................................................................................................................... 13-36 Figure 13.6.1 Energy Factor Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin Percentage Markup) ............................................................... 13-39

13-viFigure 13.6.2 Energy Factor Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin (Absolute Dollars) Markup)................................................... 13-40 Figure 13.6.3 Standby Power Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin Percentage Markup) ............................................................... 13-40 Figure 13.6.4 Standby Power Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin (Absolute Dollars) Markup)................................................... 13-41 Figure 13.7.1 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)......................... 13-45 Figure 13.7.2 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) .. 13­

45 Figure 13.7.3 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)......................... 13-46 Figure 13.7.4 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) .. 13­

46 Figure 13.7.5 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments).......... 13-47 Figure 13.7.6 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) ............................................................................................................................... 13-48 Figure 13.10.1 Cooking Products Industry Cost Structure..................................................... 13-59 Figure 13.10.2 Commercial Clothes Washers Industry Cost Structure ................................... 13-59 Figure 13.10.3 Total Conventional Cooking Products Industry Domestic Employment by Year

............................................................................................................................... ................... 13-62 Figure 13.10.4 Total Microwave Ovens Industry Domestic Employment by Year for Energy

Factor Standards....................................................................................................................... 13-64 Figure 13.10.5 Total Microwave Ovens Industry Domestic Employment by Year for Standby

Power Standards....................................................................................................................... 13-65 Figure 13.10.6 Total Commercial Clothes Washer Industry Domestic Employment by Year13-67

13-viiCHAPTER 13. MANUFACTURER IMPACT ANALYSIS

13.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S Department of Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id. DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of higher energy conservation standards on manufacturers of cooking products and commercial clothes washers (CCWs), and to assess the impact of such standards on employment and manufacturing capacity. The MIA has both quantitative and qualitative aspects.

The quantitative part of the MIA primarily relies on Government Regulatory Impact Models (GRIMs), industry-cash-flow models adapted for each product in this rulemaking. The GRIM inputs include information on 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 energy conservation standards for each product by comparing changes in INPV between a base case and the various trial standard levels (TSLs). The qualitative part of the MIA addresses factors such as product characteristics, characteristics of particular manufacturers, and market and product trends. It also assesses the impact of standards on subgroups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of preparing an industry characterization for the cooking products and CCW industries, including data on market share, sales volumes and trends, pricing, employment, and financial structure. Phase II, “Industry Cash Flow,” focused on the cooking products and CCW industries individually. Three major product categories were identified for this rulemaking:

• Conventional cooking products, consisting of cooktops, standard ovens, self-cleaning ovens, and ranges fueled by either gas or electricity.

• Microwave ovens

• Commercial clothes washers.

DOE developed three separate GRIMs to prepare an industry cash flow analysis for the industry of each product category. Using publicly available information developed in Phase I, DOE adapted each GRIM’s generic structure to facilitate analysis of new standards for cooking products and amended standards for CCWs.

In Phase III, “Sub-Group Impact Analysis,” DOE interviewed manufacturers representing 25 to 82 percent of unit shipments of cooking products, depending on the specific cooking product category, and approximately 100 percent of CCW sales. This group included both large

13-1and small manufacturers, providing a representative cross-section of the industries. During these interviews, DOE discussed financial topics specific to each manufacturer and obtained each manufacturer’s view of the industry as a whole. The interviews provided valuable information that DOE used to evaluate the impacts of new or amended standards on manufacturers’ cash flows, investment requirements, and employment levels. The following subsections describe more specifically the steps DOE took in developing the information on which it based the MIA.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the conventional cooking products, microwave oven, and CCW industries that built upon the market and technology assessment prepared for this rulemaking (see chapter 3 of this Technical Support Document (TSD)). Before initiating the detailed impact studies, DOE collected qualitative and quantitative financial information and past and present market data. This included estimated market shares, corporate operating ratios, wages, employment, and production cost ratios for several home appliance manufacturers. The industry profile included a top-down cost analysis of cooking products and CCW manufacturers that DOE used to derive cost and preliminary financial inputs for the GRIMs ( e.g. , revenues; material; labor; overhead; depreciation; selling, general and administrative expenses (SG&A); and research and development (R&D) expenses).

DOE also used public information to further calibrate its initial characterization of the conventional cooking products, microwave oven, and CCW industries, including Securities and Exchange Commission (SEC) 10–K reports, Standard & Poor’s (S&P) stock reports, Dun and Bradstreet company profiles, corporate annual reports, and U.S. Census Bureau’s 2006 Annual Survey of Manufactures ( 2006 ASM ). In addition, DOE relied on information from its engineering analysis, life-cycle cost analysis, and analysis of markups to determine product prices to characterize these industries. DOE also interviewed three manufacturers of CCWs that collectively represent approximately 100 percent of U.S. CCW sales. These preliminary interviews were designed to solicit key concerns, industry structure, and other data points for the subsequent ANOPR analysis.

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

In Phase II, DOE performed industry cash-flow analyses and prepared written guidelines for interviewing manufacturers. Phase II focused on the financial impacts of new standards on the conventional cooking product and microwave oven industries, and amended standards on the CCW industry. Phase II also focused on the financial impacts of new standby power standards on the microwave oven industry. New or amended standards can affect manufacturers in these industries in three distinct ways: (1) require additional investment, (2) raise production costs, and (3) impact revenues through higher prices and possibly lower shipments. The analytical tool DOE uses for calculating the financial impacts of new or amended energy conservation standards on manufacturers is the GRIM. DOE performed a cash flow analysis using a separate GRIM for the conventional cooking products, microwave ovens, and CCW industries to quantify these impacts.

13-213.2.2.1 Industry Cash-Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows for the year standards become effective and several years after implementation. These factors include annual expected revenues; costs of sales; selling, general and administrative (SG&A) costs; taxes; and capital expenditures related to new standards. Inputs to the GRIM include manufacturing costs, shipments forecasts, and prices developed in other analyses. DOE derived the manufacturing costs from the engineering analysis and information provided by the industry, and estimated typical manufacturer markups from public financial reports and interviews with manufacturers. Where applicable, DOE used figures from its 1996 Technical Support Document for Residential Cooking Products (1996 TSD) revised by current production volumes and the Producer Price Index (PPI). DOE developed alternative markup scenarios for each GRIM based on discussions with manufacturers during the rulemaking. DOE’s shipments analysis, presented in chapter 10 of this TSD, provided the basis for the shipments projection under each TSL in each GRIM. The financial parameters were developed using publicly available data of manufacturers of products covered by this rulemaking. These parameters were revised with information submitted confidentially during manufacturer interviews. The results of the GRIM are compared against base case projections equivalent to current Federal efficiency levels for CCWs, and baseline efficiency levels defined in the 1996 TSD for all cooking product categories. The financial impact of new or amended energy conservation standards is the difference between the baseline and the standards-impacted sets of discounted annual cash flows.

13.2.2.2 Interview Guide

During Phase III of the MIA, DOE conducted interviews with manufacturers that cover all or some cooking product categories and manufacturers of CCWs to gather information on the effects of new and amended energy conservation and standby power standards on revenues and finances, direct employment, capital assets, and on industry competitiveness. Prior to the interviews, DOE distributed a standard interview guide for each major product category that provided a starting point to identify relevant issues and help identify the impacts of new and amended energy conservation standards on individual manufacturers or sub groups of manufacturers. The interview guide covered current organizational characteristics, industry infrastructure, manufacturer cash-flow analysis, a competitive impacts assessment, an employment impacts assessment, and a manufacturing capacity impacts assessment. The interview guides used to conduct the manufacturer interviews are found in Appendix 13B of this

TSD.

13.2.3 Phase III: Sub-Group Analysis

During the course of the MIA, DOE interviewed manufacturers representing 25 to 82 percent of unit shipments of cooking products, depending on the specific cooking product category, and approximately 100 percent of CCWs sales. Many of these same companies also participated in interviews for the engineering analysis. However, the MIA interviews broadened the discussion from primarily technology-related issues to include business related topics. One objective was to obtain feedback from industry on the approaches used in the GRIM and to isolate key issues and concerns. During interviews, DOE defined two appliance manufacturer sub groups that could be impacted by the energy conservation standards. For cooking products,

13-3DOE identified two small businesses that manufacture only residential cooking products. For CCW, due to one manufacturer’s focus on the laundry business, its lower total shipment volume,and lower revenues compared to its competitors, one manufacturer was identified as a “LowVolume Manufacturer” (LVM). The following sections summarize the methodology and findings of this assessment.

13.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash-flow analysis performed in Phase II are supplemented with information gathered during interviews with manufacturers during Phase III. The interview process has a key role in the manufacturer impact analyses, since it provides an opportunity for interested parties to express their views privately on important issues, allowing confidential or sensitive information to be considered in the rulemaking process.

DOE prepared four different interview guides – one for manufacturers of conventional cooking products (cooktops, ovens, and ranges), one for microwave oven manufacturers dealing with energy factor standards, one for microwave oven manufacturers regarding standby power standards, and one for CCW manufacturers. DOE used these interviews to tailor each GRIM to incorporate unique financial characteristics for each group of products. Within each of these manufacturer groups, DOE contacted companies from its database of manufacturers, which provided a representation of each industry. Small and large companies, subsidiaries and independent firms, and public and private corporations were interviewed. Interviews were scheduled well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE preferred an interactive interview process because it helped clarify responses and provide the opportunity to identify additional issues.

DOE conducted detailed interviews with all manufacturers that agreed to participate to gain insight into the range of potential impacts and how this range varies with each TSL. The resulting qualitative and quantitative information are valuable inputs for the GRIMs that were developed for each of the product categories.

13.2.3.2 Revised Industry Cash-Flow Analysis

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input financial figures for review and evaluation. During the interviews, DOE requested comment and suggestions regarding the values selected for the parameters. Upon completion of the interviews, DOE revised its industry cash flow models based on the feedback provided through the interviews. More information on how DOE calculated the parameters for the industry GRIMs is found in section 13.4.3 of this chapter.

13.2.3.3 Manufacturer Sub-Group Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among sub groups of manufacturers. Small, category-focused manufacturers and low volume manufacturers, or manufacturers exhibiting a cost structure that differs significantly from the industry average could be more negatively affected. Ideally, DOE

13-4would consider the impact on every manufacturer individually; however, it typically uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview process, DOE discussed the potential sub groups and sub group members that have been identified for the analysis. DOE looked to the manufacturers and other stakeholders to suggest what sub groups or characteristics are the most appropriate for the analysis.

13.2.3.4 Small-Business Manufacturer Subgroup

DOE used the small business size standards published on March 11, 2008, as amended, by the Small Business Administration (SBA) to determine whether any small entities would be required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The size standards are listed by North American Industry Classification System (NAICS) code and industry description. DOE used the SBA limits and NAICS classifications as shown in Table

13.2.1 to determine if any small businesses would be affected by this rulemaking. For the product categories under review, the SBA bases its small business definition on the total number of employees for a business, its subsidiaries, and its parent companies. Whenever an aggregated business entity has less than the listed number of employees, it is considered a small business.

Table 13.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS Residential Laundry Equipment Manufacturing N/A 1,000 335224 Commercial Laundry Equipment Manufacturing N/A 500 333312 Household Cooking Appliance Manufacturing N/A 750 335221

DOE surveyed the Association of Home Appliance Manufacturers (AHAM) members directory to identify manufacturers of cooking products and CCWs. DOE also asked stakeholders and AHAM representatives within the cooking products and CCW industries if they were aware of any other small business manufacturers. DOE then consulted publicly available data, purchased company reports from vendors like Dun and Bradstreet, and contacted manufacturers, where needed, to determine if they meet the SBA’s definition of a small business manufacturing facility and have their manufacturing facilities located within the United States.

Based on this analysis, DOE estimates that there are two small businesses that manufacture conventional cooking products. DOE is not aware of any small businesses in the microwave oven product category. Like all other manufacturers that were identified as supplying the U.S. market, DOE contacted both small businesses making conventional cooking appliances to solicit an interview. Both small businesses replied with varying amounts of information that consisted of written responses and/or interviews. Besides posing the standard MIA interview questions, DOE solicited any data that would detail differential impacts on these companies that may result from a standard.

DOE found some differences in the R&D emphasis and marketing strategies between small business manufacturers and large manufacturers. These two manufacturers sell residential equipment that is differentiated from larger manufacturers’ offerings due to size or use ( i.e. , have

13-5a standing pilot). In addition to the elimination of standing pilots, any rule affecting products manufactured by these small businesses will impact them disproportionately because of their size and their focus on cooking appliances. However, due to the low number of competitors that agreed to be interviewed, DOE was not able to characterize this industry segment with a separate cash-flow analysis due to concerns about maintaining confidentiality and uncertainty regarding the quantitative impact on revenues of a standing pilot ban. Consequently, DOE used the same GRIM, which models each product class separately, to represent the small businesses affected by standards and performed a qualitative evaluation of the differential impacts on these manufacturers. Impacts on these small businesses are found in section 13.8.

One category-focused manufacturer of laundry equipment has significant CCW market share, features much smaller revenues than its diversified competitors, but is not a small business per the definition of the SBA for either residential or commercial laundry equipment. DOE subsequently assigned this manufacturer its own sub-category, the LVM, to evaluate the disproportionate impacts of any CCW rulemaking on this manufacturer. The impacts on this sub group are found in section 13.9.

13.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of new or amended energy conservation and standby power standards could be the consequential obsolescence of existing manufacturing assets, including tooling and investment. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in the United States and North America with and without a standard; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements due to new or amended energy conservation and standby power standards; the nature and value of stranded assets, if any; and estimates for any one-time restructuring and other charges, where applicable.

13.2.3.6 Employment Impact

The impact of new or amended energy conservation and standby power standards on employment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, the interviews explored current employment trends in the conventional cooking products, microwave oven, and CCW industries. In addition, the interviews solicited manufacture views on changes in employment patterns that may result from more stringent standard levels. The employment impacts section of the interview guide focused on current employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without new or amended energy conservation and standby power standards, and differences in workforce skills and issues related to the retraining of employees.

13.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers due to new or amended energy conservation and standby power standards and other regulatory actions affecting the same products. DOE analyzed and considered the impact on manufacturers of

13-6multiple, product-specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified several regulations relevant to cooking products and CCW manufacturers including: Federal energy conservation standards for other products manufactured by cooking products and CCW manufacturers, and other environmental regulations.

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA starts by asking: “What are the key issues for your company regarding the energy conservation standard rulemaking?” This open question initiates dialogue with the manufacturers, enabling them to identify the issues that they feel DOE should explore and discuss further during the interview. The following section describes key issues mentioned for all product categories under review. Manufacturers indicated that, for the most part, the risks associated with these issues increase with more stringent TSLs.

13.3.1 Conventional Cooking Products

13.3.1.1 Lack of Cost-Effective Design Options for Energy Conservation Standards

All manufacturers believe that available products are already highly efficient and that additional energy savings are not cost-effective. For example, according to multiple manufacturers, any changes to the cavity of ovens and ranges require extensive engineering, significant capital investments, and result in a substantial price increase for consumers. Switching current parts, such as heating elements, insulation, or door seals, may not be capital intensive from a manufacturing point of view, but would require extensive engineering resources ( e.g. , redesigning, testing, and certification), which carry a high cost. Absent standards, efficiency improvements which initially appear first in high-end products tend to naturally trickle down the product line over time. Finally, all manufacturers stated that increases in prices are not easily accepted by consumers in the market place. Due to the high initial costs and long payback periods, consumers will experience price increases by any cooking efficiency standard set by

DOE.

13.3.1.2 Standing Pilot Ignition Systems

Manufacturers of conventional cooking products with standing pilot lights believe there are several issues regarding the elimination of standing pilot lights including; (1) the consumer utility of standing pilot ignition systems; (2) refurbishment of existing equipment with standing pilot ignition; and (3) the effects of ignition system switching.

• Consumer utility of standing pilot ignition systems – According to manufacturers, cooktops, ovens, and ranges with standing pilot ignition systems provide a unique performance characteristic and meet unique consumer needs since they can operate without the use of electricity. The unique consumer utility of standing pilot ignition includes: (1) providing safe ignition where electrical supply is unavailable (such as lodges and hunting cabins), and (2) providing safe ignition where religious and cultural practices prohibit the use of electronic ignition systems. Multiple manufacturers stated that remote areas which do not have electricity or have religious objections to line power

13-7in the home will be impacted disproportionately because there currently are no

alternatives for such consumers.

• Refurbishment of existing equipment with standing pilot ignitions – One manufacturer stated that if standing pilot ignition systems are eliminated on new equipment, that the refurbishment of used units would increase. Without alternatives, customers would be forced to extend the lifetime of these products, which would correspond to decreased revenues for manufacturers. Multiple manufacturers also stated that aftermarket alternatives not intended for indoor cooking appliances could potentially be installed and would result in safety issues: Unless the ignition system is installed by the manufacturer of the cooking product, it may not perform to safety standards and may cause potential fire hazards because of incorrect installation and operation.

• Effects of ignition system switching – Multiple manufacturers mentioned that the power cords on gas cooking appliances are intentionally kept short to ensure that they are only used with outlets specifically intended for these appliances. These manufacturers expressed a concern that consumers may balk at the cost of retrofitting line power behind a range, oven, or cooktop and would resort to using extension cords instead, a potential safety hazard. According to one manufacturer, the cost of installing an outlet for electronic ignition systems is costly and negates the savings from less fuel use.

13.3.1.3 Profitability

All manufacturers stated that energy conservation standards have the potential to greatly harm their profitability. Several manufacturers stated it is impossible to pass along cost increases to customers because of the competitive nature of the industry: Any cost increase due to standards set by DOE would thus automatically lower profit margins. Several manufacturers also stated that cooking standards have the potential to lower the market share of domestic manufacturers. Multiple manufacturers stated that any standard that creates the need for a complete redesign eliminates the competitive advantage of domestic firms.

13.3.2 Microwave Ovens

13.3.2.1 Standby Power

All manufacturers of microwave ovens are concerned that proposed standby power additions to the microwave oven test procedure could reduce consumer utility. For example, one manufacturer stated that it is not aware of cooking sensors that do not require standby power and thus a low standby power standard could lead to the elimination of cooking sensors from its products. However, multiple manufacturers stated that they already use or are in the process of adopting no-standby cooking sensors. All manufacturers stated that low standby power levels would impact display and controls choices which would also affect consumer utility. Manufacturers stated that standards have the potential to eliminate remaining U.S. production due to already tight margins.

13-813.3.2.2 Profitability

As with conventional cooking products, manufacturers of microwave ovens stated that high energy factor and standby power standards have the potential to hurt profitability. Manufacturers typically earn a premium on higher-end models while low-end models are extremely commoditized. The premium on high-end equipment would be squeezed if standby power standards eliminated product differentiators or energy factor standards forced high-end

features to lower end models.

13.3.3 Commercial Clothes Washers

13.3.3.1 Product Class Separation

All interviewed manufacturers stated that the CCW product class should be separated into two distinct product classes: top-loading washers and front-loading washers. All manufacturers

stated that the mode of access and the orientation of the wash basket inside the washer have unique utilities for end users and therefore should be subject to separate energy conservation

standards.

13.3.3.2 Potential Elimination of Top-Loading (Vertical-Axis) Washers

All manufacturers stated that high TSLs could potentially eliminate the top-loading washer product category, forcing manufacturers to only offer front-loading washers, a move which one manufacturer asserts is in violation of NAECA provisions protecting consumer utility. Even with two product categories, manufacturers are concerned that a top-loading CCW with max-tech efficiency but poor wash performance could cause consumer rejection and lead to a de facto front-loading standard. According to some manufacturers, higher TSLs are technically feasible with non-agitator top-loading platforms in a residential setting. However, multiple manufacturers stated that the adverse operating conditions in commercial settings make more efficient top-loading washers undesirable for that setting.

The elimination of top-loading washers would present problems for laundromats androute operators who own and operate CCWs: Existing inventories of replacement parts for toploading washers would become obsolete as manufacturers transition to incompatible platforms,potentially representing significant stranded capital. Furthermore, replacement parts for highefficiency washers can be more expensive than replacement parts for standard top-loading

clothes washers.

All manufacturers currently make their top-loading CCWs in the United States, while front-loading CCWs are manufactured in the U.S. and abroad. Therefore, an energy conservation standard that increases the efficiency of top-loading machines would disproportionately affect U.S. production facilities. Multiple manufacturers stated that anyresultant increases in the production of front-loading clothes washers would mainly benefit nondomestic manufacturing facilities.

13-913.3.3.3 Reduced Cleaning Performance and Consumer Dissatisfaction for Top-Loading

Washers

All manufacturers stated that the implementation of design options due to the conformance to energy conservation standards for top-loading CCW can potentially cause reduction in the cleaning performance and hence consumer dissatisfaction. All manufacturers stated that consumer satisfaction is of high priority and that disruptions can be detrimental to

their market share.

All manufacturers stated that overloading the washers is common practice for consumers and that some technologies found in residential washers are inapplicable because of that. Another consideration is cycle length, which owners and end-users like to be as short as possible. a According to all manufacturers, cycle time is critical for both consumers and customers. For customers, the longer the cycle, the less time there is available for consumers to use washers ( i.e. , smaller number of consumers equate to decreased revenues for CCW owners). For consumers, the longer the cycle time the less practical or desirable it is to use machines.

13.3.3.4 Test Procedure Implications

Several manufacturers stated that using the residential clothes washers test procedure for CCWs is inappropriate due to the very different usage patterns for residential versus commercial clothes washers. For example, all manufacturers agree that most, if not all, CCW cycles will feature full loads unlike the residential test procedure, which assumes a mix of load sizes. Features like load size switches and adaptive fill that boost test results per the current test procedure (which assumes variable load sizes) are thus unlikely to have any noticeable impact on actual CCW end-use energy consumption. While one manufacturer supported the continued use of the residential test procedure in the absence of better data, another manufacturer expressed support for a test procedure change which would change the test procedure load size to be 100 percent full for every wash. According to multiple manufacturers, R&D dollars should be focused on improvements that represent concrete energy savings and not on technology that provide efficiency credits per the test procedure, but which provide no energy savings under actual operating conditions.

13.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for assessing the impact on industry due new or amended energy conservation standards. In the microwave oven GRIM, DOE also assess the impact of new standby power standards. DOE relies on several sources to obtain inputs for the GRIM. Data and assumptions from these sources are then feed into an accounting model that details the cash flow on a baseline basis, as well as calculates the impacts on manufacturers due to energy conservation and standby standards. Three GRIM models were developed, one for each product category ( i.e. , conventional cooking products, microwave ovens, and CCWs).

a In stock configuration, CCWs typically run on a 26 minute cycle. Higher-efficiency residential clothes washers can run for more than an hour per cycle.

13-1013.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1, is an annual cash flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of regulatory conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning with the base year of the analysis, 2007, and continuing explicitly through 2042. The model calculates the INPV by summing the stream of annual discounted cash flows during this period. 1

Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares changes in INPV between the base case scenario and the standard case scenario, evaluating changes induced by the amended energy conservation or standby power standards. The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy conservation standard on manufacturers. Appendix 13C provides more technical details and user information for the GRIM.

13.4.2 Sources GRIM Inputs

The GRIM uses several different sources for data inputs in determining the cash flows for the industry, including corporate annual reports, company profiles, Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to the Securities and Exchange Commission (SEC 10-Ks) provided many of the financial inputs to the GRIM. 2 These reports exist for publicly held companies and are freely available to the general public. DOE developed average financial inputs to the GRIM by examining the annual SEC 10-K reports filed by publicly-traded manufacturers primarily engaged in appliance manufacturing and whose combined product range includes cooktops, ovens, ranges, microwaves, and commercial clothes washers. Because these companies are typically diversified, producing a range of different appliances, an industry average was assumed by DOE to be representative for the manufacture of each type of appliance.

13-11Since these companies do not provide detailed information about their individual product lines, DOE had to use the financial information for the entire companies to represent the financial parameters in all three GRIMs. In determining financial parameters for the industries, DOE weighted corporate financial information contained in the SEC 10-Ks by each company’s estimated market share to arrive at industry-weighted averages. DOE used corporate annual reports to derive the following GRIM inputs:

• Tax rate,

• Working capital,

• Sales, general, and administration expenses (SG&A),

• Research and development (R&D) expenses,

• Depreciation,

• Capital expenditures, and

• Net property, plant, and equipment (PPE).

DOE also used information from company SEC 10-K reports to calibrate the GRIM’s operating profit margin against the industry weighted average.

13.4.2.2 Standard and Poor Credit Ratings

Standard and Poor (S&P) provides independent credit ratings, research, and financial information. S&P reports are available for a nominal fee. DOE relied on S&P reports to determine the industry’s average cost of debt for the cost of capital calculation.

13.4.2.3 Dun and Bradstreet Reports

Dun and Bradstreet (D&B) provides independent research regarding company cash flows, revenues, employees, and credit-worthiness. Besides conducting manufacturer interviews, DOE used D&B reports to profile several manufacturers which had the potential to be small

businesses.

13.4.2.4 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the national impact analysis. The model relied on historical shipments data for cooking products and CCWs from AHAM for the NOPR analysis. Chapter 10 of the TSD describes the methodology and analytical model DOE used to forecast shipments.

13.4.2.5 Engineering Analysis

During the engineering analysis, DOE used data submitted from AHAM, information from the 1996 TSD, and manufacturer interviews to develop manufacturing cost estimates for conventional cooking products, microwave ovens, and CCWs. The analysis provided labor, materials, and overhead production costs which are representative of the conventional cooking products, microwave ovens, and CCW industries. For cooking products, the costs determined in

13-12the 1996 TSD were adjusted to 2006 prices based on the producer price index (PPI). b The input costs used for CCWs were obtained from information submitted by AHAM and from

manufacturer interviews.

13.4.2.6 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with manufacturers representing approximately 75 percent of the conventional cooking appliance industry, 35 percent of microwave manufacturers, and approximately 100 percent of the CCWs industry. During these discussions, DOE obtained information, which it used to determine and verify GRIM input assumptions for each industry. Key topics discussed during the interviews and

reflected in the GRIM include:

• Conversion capital expenditures (one-time investments in property, plant, and equipment.)

• Product conversion expenses (one-time investments in research, product development, testing, and marketing).

• The portion of the conversion capital expenditures that companies use to replace

stranded assets.

• Product cost structure: The portion of the manufacturer production costs related to materials, labor, overhead, and depreciation costs.

• Projected total shipment and shipment distribution mix

• Engineering analysis estimated manufacturer production costs.

13.4.3 Financial Parameters

Table 13.4.1 provides financial parameters for three public companies engaged in manufacturing and selling cooking products and commercial clothes washers. The values listed are averages over an eight-year period (1999-2006).

Table 13.4.1 GRIM Financial Parameters Based on 1999-2006 Weighted Company

Financial Data

Parameter IndustryWeighted Average Manufacturer

A C D

Tax Rate (% of Taxable Income) 33.9 6.6 34.1 34.5 Working Capital (% of Revenue) 2.9 9.6 5.6 2.0 SG&A (% of Revenue) 13.0 12.7 12.3 13.2 R&D (% of Revenues) 2.3 2.3 2.0 2.4 Depreciation (% of Revenues) 3.4 3.9 3.4 3.3 Capital Expenditures (% of Revenues) 3.5 1.9 3.4 3.6

Net Property, Plant, and Equipment (% of Revenues) 19.9 17.3 21.6 19.4

b For more information on the PPI, please see the Bureau of Labor Statistics web-site at: http://www.bls.gov

13-13These companies constitute a significant portion of the cooking products and CCW industries. For other companies in the industry, public data is not available and was not used to calculate the parameters. The values used in the GRIMs, therefore, represent the industry’s weighted average estimates using financial data from three publicly traded manufacturers. During manufacturer interviews, manufacturers of cooking products and CCWs were asked to review the parameters listed in Table 13.4.1 and comment on how the parameters related to their specific industry. Where applicable, the parameters were then adjusted for the GRIM for each industry.

13.4.4 Corporate Discount Rate

DOE used the weighted-average cost of capital (WACC) for the industry as the discount rate to calculate the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is the total cost of debt and equity weighted by their respective proportions in the capital structure of the industry. 1 DOE estimated the WACC for the cooking products and commercial clothes washers industries based on several representative companies, using the following formula:

WACC = After-Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors (including, potentially, the company) expect to earn on a company’s stock. These expectations are reflected in the market price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used means to estimate the cost of equity. According to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “safe” benchmark investment, typically considered the short-term Treasury Bill (T-Bill) yield.

Risk premium is the difference between the expected return on stocks and the

riskless rate.

Beta ( β ) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly

correlated with the S&P 500 market index. A Beta lower than one means the

stock is less volatile than the market index.

DOE determined that the industry average cost of equity for cooking products and CCWs industries is 17.9 percent as calculated in Table 13.4.2.

13-14Table 13.4.2 Cost of Equity Calculation

Parameter IndustryWeighted Average (%) Manufacturer

A C D

(1) Average Beta (2002 – 2006 year) 1.31 1.0* 1.77 1.17

(2) Yield on 10 Year T-Bill (1990-2006) 5.9

- - -

(3) Market Risk Premium (1926-1999) 9.2

- - -
Cost of Equity (2)+[(1)*(3)] 17.9

- - - Equity/Total Capital 37.2 23.7 -49.8 64.6

* Estimated Beta

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. One way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis points) over the risk-free rate. DOE used this method to calculate the cost of debt for all three manufacturers. S&P had bond ratings for all three manufacturers, so DOE used these ratings to estimate the manufacturers’ cost of debt by adding the relevant spread to the risk-free rate.

In practice, investors use a variety of different maturity Treasury bonds to estimate the risk-free rate. DOE used a long-term Treasury bond return (10-year bond return) because it captures long-term inflation expectations and is less volatile than short-term rates. The risk free rate is estimated to be approximately six percent, which is the average 10-year Treasury bond return over the period of 1990 to 2006.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for the three public manufacturers over the period 2002-2006. To this, DOE added the industry-weighted average spread to the average T-Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry average tax rate to determine the net cost of debt for the industry. Table 13.4.3 presents the derivation of the cost of debt. Also shown is the capital structure of the industry, i.e. the debt ratio (debt/total capital).

Table 13.4.3 Cost of Debt Calculation

Parameter IndustryWeighted Average (%) Manufacturer

A C D

S&P Bond Rating

-­ B­ BBB BBB

(1) Yield on 10 year T-Bill (1990-2002) 5.9

- - -

(2) Gross Cost of Debt 8.2 13.9 8.1 8.1

(3) Tax Rate 34 6.6 34.1 34.5

Net Cost of Debt (2)x((1)­ (3)) 5.4

- - -

Debt/Total Capital 62.8 76.3 149.8 35.4

13-15DOE estimated the conventional cooking products, microwave ovens, and CCW industries’ WACC to be approximately 10.1 percent. Subtracting an inflation rate of 2.9 percent between 1990 and 2006, the inflation adjusted WACC, and the corporate discount rate used in the GRIM, is 7.2 percent.

13.4.5 Trial Standard Levels

DOE developed TSLs for conventional cooking products, microwave ovens, and CCWs. As previously discussed, the effects of TSLs on cooktops, ovens, and ranges are examined in one GRIM, the effects of TSLs for microwave ovens are examined in another, and the effects of TSLs for CCWs examined in a final GRIM. Chapter 9 of the TSD describes the methodology DOE used to determine each TSL for each of the separate GRIMs. The efficiency levels used in the GRIMs are presented in Table 13.4.4 through Table 13.4.7.

Table 13.4.4 Cooktops and Ovens Baseline Efficiency Levels and TSLs

Product Class Efficiency

Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4

Electric Coil Cooktops EF 0.7370 0.7370 0.7690 0.7690 0.7690

Electric Smooth Cooktops EF 0.7420 0.7420 0.7420 0.7420 0.7530

Gas Cooktops EF 0.1560 0.3990 0.3990 0.3990 0.4200

Electric Standard Ovens EF 0.1066 0.1066 0.1163 0.1163 0.1209

Electric Self-Clean Oven EF 0.1099 0.1099 0.1099 0.1099 0.1123

Gas Standard Oven EF 0.0298 0.0583 0.0583 0.0583 0.0600

Gas Self-Clean Oven EF 0.0540 0.0540 0.0540 0.0625 0.0632

Table 13.4.5 Microwave Ovens Baseline Energy Factor Efficiency Levels and TSLs

Product Class Efficiency

Metric Baseline TSL 1a TSL 2a TSL 3a TSL 4a

Microwave

Ovens EF 0.557 0.586 .0588 0.597 0.602

Table 13.4.6 Microwave Ovens Standby Power Efficiency Levels and TSLs

Product Class Efficiency

Metric Baseline TSL 1b TSL 2b TSL 3b TSL 4b

Microwave

Ovens W 4.0 2.0 1.5 1.0 0.02

13-16Table 13.4.7 Commercial Clothes Washers Baseline Efficiency Levels and TSLs

Product Class Efficiency Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Top-Loading MEF 1.26 1.42 1.60 1.76 1.76 1.76

WF 9.5 9.5 8.5 8.3 8.3 8.3 Front-Loading MEF 1.72 1.80 2.00 2.00 2.20 2.35

WF 8.0 7.5 5.5 5.5 5.1 4.4

13.4.6 NES-Shipments Forecast

The GRIM estimates manufacturer revenues based on total-unit-shipment forecasts and the distribution of these values by efficiency level. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this analysis, the GRIM used the national energy savings (NES) shipments forecasts for cooktops, ovens, microwave ovens, and CCWs from 2007 to 2042. Further explanation of approaches and calculations of total shipments can be found in the shipment analysis section of this TSD (chapter 10). Total shipments forecasted in the shipment analysis for all efficiency levels in 2012 are shown in Table 13.4.8

and are further detailed below.

Table 13.4.8 Total NES-Shipments Forecast in 2012

Product Class Total Industry Shipments*

Electric Coil Cooktops 2,370,300 Electric Smooth Cooktops 2,798,000 Gas Cooktops 3,690,700

Electric Standard Ovens 1,366,500

Electric Self-Clean Ovens 4,230,600

Gas Standard Ovens 1,432,200

Gas Self-Clean Ovens 1,763,600

Microwave Ovens 16,116,700 Top-Loading Commercial Clothes Washers 152,100 Front-Loading Commercial Clothes Washers 39,900

* Estimates rounded to the nearest hundred

13.4.6.1 Base Case Shipments Forecast

As part of the shipment analysis, DOE estimated the shipment distribution by efficiency level for cooktops and ovens, microwave ovens, and CCWs. Table 13.4.9 through Table 13.4.12 show the base case distributions of shipments by TSL estimated in the NES for various product

classes for 2012.

13-17Table 13.4.9 Base Case Distribution of Efficiencies for Cooktops and Ovens Estimated in

2012 in the NES

Product Class Efficiency Metric Base Case Distribution of Shipments by Efficiencies

Baseline TSL 1 TSL 2 TSL 3 TSL 4

Electric Coil Cooktops EF 100% 0% 0% 0% 0%

Electric Smooth Cooktops EF 100% 0% 0% 0% 0% Gas Cooktops EF 6.8% 92.3% 0% 0% 0%

Electric Standard Ovens EF 100% 0% 0% 0% 0%

Electric Self-Clean Oven EF 100% 0% 0% 0% 0%

Gas Standard Oven EF 17.6% 82.4% 0% 0% 0%

Gas Self-Clean Oven EF 100% 0% 0% 0% 0%

Table 13.4.10 Base Case Energy Factor Distribution of Efficiencies for Microwave Ovens

in 2012 Estimated in the NES

Shipments Efficiency Level (EF) Baseline

0.557 TSL 1a

0.586 TSL 2a

0.588 TSL 3a

0.597 TSL 4a

0.602

Baseline

0.557 100% 0% 0% 0% 0%

Table 13.4.11 Base Case Standby Power Distribution of Efficiencies for Microwave Ovens

in 2012 Estimated in the NES

Shipments Efficiency Level (W) Baseline

4.0 TSL 1b

2.0 TSL 2b

1.5 TSL 3b

1.0 TSL 4b

0.02

Baseline

4.0 46.2% 34.6% 19.2% 0% 0%

Table 13.4.12 Base Case Distribution of Efficiencies for Top-Loading Commercial Clothes

Washers in 2012 Estimated in the NES

Shipments Efficiency Level (MEF/WF) Baseline

1.26/9.5 TSL 1

1.42/9.5 TSL 2

1.60/8.5 TSL 3, 4, 5

1.76/8.3

Baseline

1.26/9.5 63.7% 33.3% 0.0% 3.0%

Table 13.4.13 Base Case Distribution of Efficiencies for Front-Loading Commercial

Clothes Washers in 2012 Estimated in the NES

Shipments Efficiency Level (MEF/WF) Baseline

1.72/8.0 TSL 1

1.80/7.5 TSL 2, 3

2.00/5.5 TSL 4

2.20/5.1 TSL 5

2.35/4.4

Baseline

1.72/8.0 7.3% 4.4% 85.3% 1.5% 1.5%

13.4.6.2 Standards Case Shipments Forecast

To examine the effects of amended energy conservation standards on shipments, which affect the INPV, DOE used the base case shipments described in the previous section. For the

13-18standards case, DOE assumed shipments at lower efficiencies were most likely to roll up into higher efficiency levels in response to an increase in energy conservation standards. This pessimistic scenario assumes that demand for high efficiency equipment is a function of its price without regards for the standard level. Table 13.4.14 through Table 13.4.23 show the distributions of efficiencies for the various equipment classes in 2012 under the roll-up scenario.

Table 13.4.14 Distribution of Electric Coil Cooktop Shipments in the Standards Case – Rollup Scenario

TSL Baseline TSL 1, 2, 3, 4 (EF) 0.7370 0.7690

Baseline

0.7370 100% 0%

TSL 1, 2, 3, 4

0.7690 100%

Table 13.4.15 Distribution of Electric Smooth Cooktop Shipments in the Standards Case in 2012 – Rollup Scenario

TSL Baseline, TSL 4 (EF) TSL 1, 2, 3 0.7530

0.7420 Baseline, TSL 1, 2, 3 100% 0%

0.7420

TSL 4

0.7530 100%

Table 13.4.16 Distribution of Gas Cooktop Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (EF) Baseline

0.1560 TSL 1, 2, 3

0.3990 TSL 4

0.4200

Baseline

0.1560 6.8% 93.2% 0%

TSL 1, 2, 3

0.3990 100% 0%

TSL 4

0.4200 100%

Table 13.4.17 Distribution of Electric Standard Oven Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (EF) Baseline,

TSL 1

0.1066 TSL 2, 3

0.1163 TSL 4

0.1209

Baseline,

TSL 1

0.1066 100% 0% 0%

TSL 2, 3

0.1163 100% 0%

TSL 4

0.1209 100%

13-19Table 13.4.18 Distribution of Electric Self-Clean Oven Shipments in the Standards Case in 2012 – Rollup Scenario

TSL Baseline, TSL 4 (EF) TSL 1, 2, 3 0.1123

0.1099 Baseline, TSL 1, 2, 3 100% 0%

0.1099

TSL 4

0.1123 100%

Table 13.4.19 Distribution of Gas Standard Oven Shipments in the Standards Case in 2012

– Rollup Scenario

TSL (EF) Baseline

0.0298 TSL 1, 2, 3

0.0583 TSL 4

0.0600

Baseline

0.0298 17.6% 82.4% 0%

TSL 1, 2, 3

0.0583 100% 0%

TSL 4

0.0600 100%

Table 13.4.20 Distribution of Gas Self-Clean Oven Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (EF) Baseline, TSL 1, 2

0.0540 TSL 3

0.0625 TSL 4

0.0632

Baseline, TSL 1, 2

0.0540 100% 0% 0%

TSL 3

0.0625 100% 0%

TSL 4

0.0632 100%

Table 13.4.21 Distribution of Energy Factor Microwave Oven Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (EF) Baseline

0.557 TSL 1a

0.586 TSL 2a

0.588 TSL 3a

0.597 TSL 4a

0.602

Baseline

0.557 100% 0% 0% 0% 0%

TSL 1

0.586 100% 0% 0% 0%

TSL 2

0.588 100% 0% 0%

TSL 3

0.597 100% 0%

TSL 4

0.602 100%

13-20Table 13.4.22 Distribution of Standby Power Microwave Oven Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (Watts/H) Baseline

4.0 TSL 1b

2.0 TSL 2b

1.5 TSL 3b

1.0 TSL 4b

0.02

Baseline

4.0 46.2% 34.6% 19.2% 0% 0%

TSL 1

2.0 80.8% 19.2% 0% 0%

TSL 2

1.5 100% 0% 0%

TSL 3

1.0 100% 0%

TSL 4

0.02 100%

Table 13.4.23 Distribution of Top-Loading Commercial Clothes Washer Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (MEF/WF) Baseline

1.26/9.5 TSL 1

1.42/9.5 TSL 2

1.60/8.5 TSL 3, 4,5

1.76/8.3

Baseline

1.26/9.5 63.7% 33.3% 0.0% 3.0%

TSL 1

1.42/9.5 97.0% 0.0% 3.0%

TSL 2

1.60/8.5 97.0% 3.0%

TSL 3, 4, 5

1.76/8.3 100.0%

Table 13.4.24 Distribution of Front-Loading Commercial Clothes Washer Shipments in the Standards Case in 2012 – Rollup Scenario

TSL (MEF/WF) Baseline

1.72/8.0 TSL 1

1.80/7.5 TSL 2, 3

2.00/5.5 TSL 4

2.20/5.1 TSL 5

2.35/4.4

Baseline

1.72/8.0 7.3% 4.4% 85.3% 1.5% 1.5%

TSL 1

1.80/7.5 11.7% 85.3% 1.5% 1.5%

TSL 2, 3

2.00/5.5 97.0% 1.5% 1.5%

TSL 4

2.20/5.1 98.5% 1.5%

TSL 5

2.35/4.4 100.0%

13.4.6.3 Price Elasticity of Demand Shipments Scenario

In the microwave oven and CCW GRIMs, DOE modeled a shipment scenario that considers the impacts of changes in relative prices on consumer demand for each product. As described in the purchase price, operating cost, and household income impacts found in the shipments model in chapter 10, this shipment scenario estimates how the combined effects of

13-21increases in purchase price and decreases in operating costs due to new energy conservation standards affect shipments. DOE calculated the relative price elasticity of demand over time to determine how shipments would likely change after a standard sets a higher initial purchase price and lower operating costs. For the microwave oven and CCW GRIM shipments under the “price elasticity scenario,” the effects from the increase in product purchase prices offset the effects from decreased operating costs, resulting in a net decrease in shipments. See chapter 10 for more details on the shipment scenarios.

13.4.6.4 Economic Growth Shipments Scenario

In all three GRIMs, DOE modeled three shipment scenarios that consider the impacts of changes in the overall U.S economy. These shipment scenarios are based on the Energy Information Administration’s (EIA) 2007 Annual Energy Outlook Report (AEO2007) for the period 1990–2030. 3 AEO2007 provides three scenarios: the Reference case, the High Economic Growth case, and the Low Economic Growth case. DOE does not present the GRIM results for the economic growth shipment scenarios. However, this option is left as an option for the user to select in both GRIMs. It is also possible for the user to combine the price elasticity scenario with an economic scenario in the microwave oven and CCW GRIMs. See chapter 10 for more details on the economic growth shipment scenarios.

13.4.7 Production Costs

Changes in production costs impact revenues and gross profits. As shown in the engineering analysis (chapter 5), products that are more efficient usually cost more to produce than baseline products. For the MIA, DOE used the manufacturing production costs (MPCs) derived in the engineering analysis, with appropriate production volume estimates. For instance, more efficient products sold under existing energy conservation standards are manufactured at lower production volumes than standard efficiency products. Enacting more stringent energy conservation standards will increase production volumes for more efficient units.

As described in chapter 5, the costs of conventional cooking products and microwave ovens were calculated using data found in the 1996 TSD adjusted by production volume and the producer price index. The costs of CCWs were calculated using data supplied by AHAM and interviews with manufacturers. The GRIM included the proportion of costs devoted to labor, materials, overhead, and depreciation that make up the full cost of production or MPCs. DOE estimated the proportion of costs associated with each cost category by using information provided by AHAM 4 and U.S. Census Bureau’s Current Industry Reports (CIR) 5 and 2006 ASM for cooking products and CCWs (see section 13.10.1.1 for derivation of the industry cost structures). Table 13.4.25 through Table 13.4.34 provide the MPC results used in the GRIM for cooktops and ovens, microwave ovens, and CCWs.

13-22Table 13.4.25 Base Case Production Costs (2006$) used in the GRIM for Electric Coil Cooktops

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline, TSL 1 (0.7370) $7.21 $68.70 $2.23 $3.50 $81.63

TSL 2, 3, 4 (0.7690) $7.41 $70.62 $2.29 $3.59 $83.91

Table 13.4.26 Base Case Production Costs (2006$) used in the GRIM for Electric Smooth Cooktops

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline, TSL 1, 2, 3 (0.7420) $7.87 $75.02 $2.43 $3.82 $89.14

TSL 4 (0.7530) $15.74 $149.99 $4.86 $7.64 $178.23

Table 13.4.27 Base Case Production Costs (2006$) used in the GRIM for Gas Cooktops

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline (0.1560) $7.87 $74.98 $2.43 $3.82 $89.09
TSL 1, 2, 3 (0.3390) $8.93 $85.13 $2.76 $4.33 $101.15
TSL 4 (0.4200) $10.70 $101.96 $3.30 $5.19 $121.15

Table 13.4.28 Base Case Production Costs (2006$) used in the GRIM for Electric Standard

Ovens

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline, TSL 1 (0.1066) $12.91 $123.01 $3.99 $6.26 $146.17

TSL 2, 3 (0.1163) $13.34 $127.09 $4.12 $6.47 $151.01

TSL 4 (0.1209) $17.47 $166.51 $5.40 $8.48 $197.86

Table 13.4.29 Base Case Production Costs (2006$) used in the GRIM for Electric SelfClean Ovens

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline, TSL 1, 2, 3, (0.1099) $16.35 $155.82 $5.05 $7.93 $185.15
TSL 4 (0.1123) $20.23 $192.83 $6.25 $9.82 $229.13

Table 13.4.30 Base Case Production Costs (2006$) used in the GRIM for Gas Standard

Ovens

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline (.0298) $13.67 $130.28 $4.22 $6.63 $154.80
TSL 1, 2, 3 (.0583) $14.99 $142.90 $4.63 $7.27 $169.80
TSL 4 (.0600) $17.57 $167.40 $5.43 $8.52 $198.91

13-23Table 13.4.31 Base Case Production Costs (2006$) used in the GRIM for Gas Self-Clean

Ovens

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline, TSL 1, 2 (0.0540) $19.45 $185.37 $6.01 $9.44 $220.26
TSL 3 (0.0625) $20.42 $194.63 $6.31 $9.91 $231.27
TSL 4 (0.0632) $20.92 $199.34 $6.46 $10.15 $236.86

Table 13.4.32 Base Case Energy Factor Production Costs (2006$) used in the GRIM for

Microwave Ovens

TSL (EF) Labor Material Overhead Depreciation MPC

Baseline (0.557) $10.62 $101.18 $3.28 $5.15 $120.23
TSL 1a (0.586) $11.38 $108.49 $3.52 $5.52 $128.91
TSL 2a (0.588) $12.20 $116.29 $3.77 $5.92 $138.18
TSL 3a (0.597) $13.49 $128.56 $4.17 $6.54 $152.76
TSL 4a (0.602) $15.13 $144.20 $4.67 $7.34 $171.34

Table 13.4.33 Base Case Standby Power Production Costs (2006$) used in the GRIM for

Microwave Ovens

TSL (W) Labor Material Overhead Depreciation MPC

Baseline (4.0) $10.60 $100.99 $3.27 $5.14 $120.00
TSL 1b (2.0) $10.62 $101.24 $3.28 $5.15 $120.30
TSL 2b (1.5) $10.66 $101.55 $3.29 $5.17 $120.67
TSL 3b (1.0) $10.73 $102.23 $3.31 $5.20 $121.47
TSL 4b (0.02) $11.05 $105.31 $3.41 $5.36 $125.13

Table 13.4.34 Base Case Production Costs (2006$) used in the GRIM for Top-Loading

Commercial Clothes Washers

TSL (MEF/WF) Labor Material Overhead Depreciation MPC

Baseline (1.26/9.5) $32.47 $219.72 $20.57 $12.21 $284.97
TSL 1 (1.42/9.5) $40.97 $277.26 $25.96 $15.41 $359.60
TSL 2 (1.60/8.5) $47.26 $319.82 $29.94 $17.77 $414.80
TSL 3, 4, 5 (1.76/8.3) $48.93 $331.08 $31.00 $18.40 $429.40

Table 13.4.35 Base Case Production Costs (2006$) used in the GRIM for Front-Loading

Commercial Clothes Washers

TSL (MEF/WF) Labor Material Overhead Depreciation MPC

Baseline (1.72/8.0) $66.96 $453.10 $42.42 $25.17 $587.65
TSL 1 (1.80/7.5) $66.96 $453.10 $42.42 $25.17 $587.65
TSL 2, 3 (2.00/5.5) $68.52 $463.64 $43.41 $25.76 $601.32
TSL 4 (2.20/5.1) $71.27 $482.27 $45.15 $26.80 $625.49
TSL 5 (2.35/4.4) $74.21 $502.16 $47.01 $27.90 $651.28

13-2413.4.8 Conversion Costs

New or amended energy conservation standards typically cause manufacturers to incur one-time conversion costs to bring their production facilities and product designs into compliance with new regulations. For the purpose of the MIA, DOE classified these one-time conversion costs into two major groups: conversion capital expenditures and product conversion expenses. Conversion capital expenditures are one-time investments in property, plant, and equipment to adapt or change existing production facilities so that new product designs can be fabricated and assembled under the new regulation. Product conversion expenses are one-time investments in research, development, testing, and marketing focused on making product designs comply with new or amended energy conservation standards. The following sections describe in greater detail the inputs DOE used in the GRIM.

13.4.8.1 Conversion Capital Expenditures

DOE evaluated the level of capital investment needed to comply with the new or amended energy conservation and standby power standards at each TSL. For each TSL, DOE estimated the proportion of the products on the market will have to be redesigned to meet that TSL efficiency level. The higher the TSL, the greater the proportion of the products on the market that will require a redesign.

For conventional cooking products, DOE updated the conversion capital expenditure figures in the 1996 TSD with current manufacturing volumes and 2006 PPI figures. During interviews, manufacturers were asked to comment on the figures. When manufacturers responded with information about the necessary tooling costs at each TSL, the 1996 figures were revised based on the weighted market share of the companies responding. Where manufacturers did not comment, the updated figures from the 1996 TSD were used. Conversion capital at TSL1 through TSL3 is relatively small because the component switches for all product classes do not involve substantial changes to existing production equipment. However, at TSL 4 some product classes have changes that involve significant alterations to the cavity, which would require costly tooling changes. Table 13.4.36 summarizes the breakdown of conversion capital expenditure by TSL for the conventional cooking products industry.

Table 13.4.36 Conversion Capital Expenditure for Conventional Cooking Products by TSL

TSL Total Industry Conversion Capital Expenditure (2006$ million) by Product Class

Electric

Coil Cooktops Electric

Smooth Cooktops Gas Cooktops Electric

Standard

Oven Electric

Self-Clean

Oven Gas

Standard

Oven Gas

SelfClean

Oven Industry

Total

Baseline $0 $0 $0 $0 $0 $0 $0 $0

TSL 1 $0 $0 $2.2 $0 $0 $1.8 $0 $4.0

TSL 2 $0 $0 $2.2 $0.8 $0 $1.8 $0 $4.7

TSL 3 $0 $0 $2.2 $0.8 $0 $1.8 $5.8 $10.6

TSL 4 $0 $73.1 $3.3 $125.9 $53.9 $55.1 $16.9 $328.2

For microwave ovens, DOE used a platform approach to estimate the conversion capital costs. For standby power standards, DOE used information submitted during manufacturer

13-25interviews, conversations with industry experts, and product catalogs to estimate the percentage of platforms at each TSL that would require minor tooling changes to accommodate more efficient components and the cost of the tooling. DOE then weighted the costs of manufacturers that submitted information to account for the tooling necessary for all manufactures in the industry. For energy factor standards, DOE assumed that there were no capital conversion costs for TSL 1a through TSL 3a. Component switches for these TSLs do not require changes to the microwave enclosure or cavity because these design options all have standard hole locations that will not be altered if more efficient components are used. However, TSL 4a would involve substantial conversion capital because reflective surfaces would require stamping die changes. DOE estimated the tooling cost per platform for reflective surfaces and weighted the cost to account for the number of platforms offered by the industry. Table 13.4.37 and Table 13.4.38 summarize the breakdown of conversion capital expenditure by TSL for the microwave oven industry for both energy conservation and standby power standards.

Table 13.4.37 Energy Factor Conversion Capital Expenditure for Microwave Ovens by

TSL

TSL Total Industry Conversion Capital Expenditure (2006$ million)

Baseline $0

TSL 1a $0

TSL 2a $0

TSL 3a $0

TSL 4a $75.0

Table 13.4.38 Standby Power Conversion Capital Expenditure for Microwave Ovens by

TSL

TSL Total Industry Conversion Capital Expenditure (2006$ million)

Baseline $0

TSL 1b $3.8

TSL 2b $4.1

TSL 3b $4.5

TSL 4b $7.5

For CCWs, DOE used a platform approach to estimate the conversion capital costs for top-loading and front-loading washers. DOE used conversations with industry experts and product catalogs to estimate the number platforms at each TSL that would require tooling changes to accommodate newly redesigned washers. DOE assumed that a manufacturer that did not have any available products that met or exceeded a given TSL would have to make substantial tooling changes, either modifying existing tooling or ordering new sets. For manufacturers that had existing washers that were close to a given TSL or had more efficient washers, DOE lowered the cost of the tooling because it assumed these washers would not be as greatly redesigned and would not require as substantial changes to its existing manufacturing equipment. Table 13.4.39 summarizes the breakdown of conversion capital expenditure by TSL for the CCW industry.

13-26Table 13.4.39 Conversion Capital Expenditure for Commercial Clothes Washers by TSL

TSL Total Industry Conversion Capital Expenditure (2006$ million) by Product Class

Top-Loading CCW Front-Loading CCW

Baseline $0 $0

TSL 1 $0 $0

TSL 2 $1.0 $0.6

TSL 3 $2.0 $0,6

TSL 4 $2.0 $1.4

TSL 5 $2.0 $3.9

13.4.8.2 Product Conversion Expenses

DOE conducted interviews with manufacturers to better understand the many steps that manufacturers have to take before they can release new or improved products. The magnitude of the required investments varies by manufacturer and the TSL analyzed.

Multiple manufacturers estimate that the time and resources spent on research and development, testing, and certification of products would be significant depending on the design path chosen to achieve higher efficiency.

For conventional cooking products, DOE used the conversion capital expenditure figures in the 1996 TSD updated by current manufacturing volumes and 2006 PPI figures. DOE also used manufacturer responses, weighted market share, when manufacturers provided their own conversion costs during interviews. At higher TSLs, manufacturers must perform reliability testing and certify a greater portion of their existing platforms, increasing the conversion expenses. Design costs also increase at higher TSLs because there is a greater chance that the component interacts with other parts of the platform, lengthening the redesign time and cost. Table 13.4.40 summarizes the breakdown of product conversion expenses by TSL for the conventional cooking products industry.

Table 13.4.40 Product Conversion Expenses for Conventional Cooking Products Industry by TSL

TSL Total Industry Product Conversion Expenses (2006$ million) by Product Class

Electric

Coil Cooktops Electric

Smooth Cooktops Gas Cooktops Electric

Standard

Oven Electric

Self-Clean

Oven Gas

Standard

Oven Gas

SelfClean

Oven Industry

Total

Baseline $0 $0 $0 $0 $0 $0 $0 $0

TSL 1 $0 $0 $9.4 $0 $0 $9.4 $0 $18.7

TSL 2 $9.6 $0 $9.4 $20.8 $0 $9.4 $0 $49.2

TSL 3 $9.6 $0 $9.4 $20.8 $0 $9.4 $9.4 $58.5

TSL 4 $9.6 $12.2 $20.8 $48.9 $18.7 $58.3 $42.1 $210.6

13-27For microwave ovens, DOE estimated the engineering, reliability testing, and product development expenses per platform necessary at each TSL. DOE multiplied the estimate of these development costs per platform by its approximation of the number of platforms available in the U.S. For standby power, conversion costs become more expensive at higher TSLs as the complexity of further lowering standby power increases, substantially driving up engineering time and also increasing the testing and product development time. For the first three energy factor TSLs (TSL 1a through TSL 3a), the product conversion costs increases are fairly stable. Engineering, testing, and product development costs do not double with each additional switch out because there are efficiencies with doing the redesigns simultaneously ( i.e. , the testing only has to be completed once). However, there is a large jump in conversion expenses at TSL 4a because there are stamping, material, and other substantial changes to the basic function of each platform. Table 13.4.41 and Table 13.4.42 summarize the breakdown of product conversion expenses by TSL for the microwave oven industry for both energy conservation and standby power standards.

Table 13.4.41 Energy Factor Product Conversion Expenses for Microwave Ovens Industry by TSL

TSL Total Industry Product Conversion Expenses (2006$ million)

Baseline $0

TSL 1a $60.0

TSL 2a $75.0

TSL 3a $90.0

TSL 4a $225.0

Table 13.4.42 Standby Power Product Conversion Expenses for Microwave Ovens Industry by TSL

TSL Total Industry Product Conversion Expenses (2006$ million)

Baseline $0

TSL 1b $37.5

TSL 2b $67.5

TSL 3b $82.5

TSL 4b $135.0

For CCWs, DOE used a product platform approach to estimate the product conversion costs for top-loading and front-loading washers. DOE used conversations with industry experts and product catalogs to estimate the number platforms at each TSL that would need to be redesigned. DOE assumed that a manufacturer that did not have any available products that met or exceeded a given TSL would have to completely redesign, test, and certify a new product. For manufacturers that had existing washers that were close to a given TSL or had more efficient washers, DOE assumed it would cost some fraction of the cost of a complete redesign, depending on how close the existing washers were to the necessary efficiency. Table 13.4.43 summarizes the breakdown of product conversion expenses by TSL for the CCW industry.

13-28Table 13.4.43 Product Conversion Expenses for Commercial Clothes Washers Industry by

TSL

TSL Total Industry Product Conversion Expenditure (2006$ million) by Product Class

Top-Loading CCW Front-Loading CCW

Baseline $0 $0

TSL 1 $0 $0

TSL 2 $15 $3

TSL 3 $30 $3

TSL 4 $30 $6.7

TSL 5 $30 $19.5

13.4.9 Markups

To understand how baseline and more efficient products are differentiated, DOE reviewed manufacturer catalogs and utilized information gathered from manufacturers. To estimate the prices at which manufacturers sell their products, DOE applied markups to the production costs it had developed earlier. DOE considered different markup scenarios for each major product category (conventional cooking products, microwave ovens, and CCWs). DOE then used markup scenarios to bound the range of expected product prices following new or amended energy conservation standards. For each product class, DOE used the markup scenarios that best characterized the prevailing markups and described the range of market responses manufacturers expect as a result of new or amended energy conservation and standby power standards.

After discussions with manufacturers, DOE believes there are two distinct markup scenarios: preservation-of-gross-margin-percentage and preservation of gross margin (in absolute dollars).

13.4.9.1 Preservation of Gross Margin Percentage

The gross margin is defined as revenues less costs of goods sold. Under the preservationof-gross-margin-percentage scenario in the conventional cooking products, microwave oven, and CCW GRIMs, DOE applied a single uniform “gross margin percentage” markup to manufacturing production costs across all efficiency levels. As production costs increase by efficiency level, this scenario implies that the absolute dollar markup will increase also. DOE used a non-production cost markup of 1.26, which includes SG&A expenses; research and development expenses; interest; and profit. This markup is consistent with the one DOE assumed in the base case for the GRIM. Most manufacturers stated it is optimistic to assume that they could maintain their gross margin percentages despite production cost increases due to energy conservation or standby power standards. Therefore, DOE assumes that this scenario represents a high bound to industry profitability under an energy conservation standard.

13-2913.4.9.2 Preservation of Gross Margin (Absolute Dollars)

The implicit assumption behind the “preservation of gross margin (absolute dollars)” markup scenario is that the industry will lower its markups in response to the standards to maintain only its gross margin (in absolute dollars). This means the percentage difference between MPC and selling price will decrease in the standards case compared to the base case and the gross margin percentage will be lower. The industry would do so by passing through its increased production costs to customers, while increased R&D and selling, general, and administrative expenses directly lower profit. DOE implemented this scenario in the microwave oven and conventional cooking products GRIMs by lowering the production cost markups for each TSL to yield approximately the same gross margin in dollars in the standards cases in the year standard are effective (2012) as is yielded in the base case. This scenario is less optimistic than the preservation of gross margin percentage scenario.

13.5 CONVENTIONAL COOKING PRODUCTS INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated indicators of financial impacts on the conventional cooking products industry. The following sections detail additional inputs and assumptions related only to cooktops, ovens, and ranges. The main results of the MIA also reported in this section and consist of two key financial

metrics: INPV and annual cash flows.

13.5.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs. The INPV is different from DOE’s NPV applied to the whole U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost of capital or discount rate. The GRIM estimated cash flows between 2007 and 2042, consistent with the forecast period used in the national impact analysis (chapter 11).

In the MIA, DOE compares the INPV of the base case (no amended energy conservation standards) to that of each TSL. The difference between the base case INPV and a standards case INPV is an estimate of the economic impacts that implementing that particular TSL would have on the entire industry. For the conventional cooking products industry, DOE examined the two markup scenarios described in the mark-up section above. Table 13.5.1 through Table 13.5.8 provide the INPV estimates for the conventional cooking products industry under the different

scenarios.

13-30Table 13.5.1 Changes in Industry Net Present Value for Electric Cooktops (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 357 357 355 355 434

Change in INPV (2006 $ millions)

- 0 (2) (2) 77 (%)

- 0.00% -0.56% -0.56% 21.62%

Table 13.5.2 Changes in Industry Net Present Value for Electric Cooktops (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 357 357 346 346 (26)

Change in INPV (2006 $ millions)

- 0 (11) (11) (383) (%)

- 0.00% -3.18% -3.18% -107.19%

Table 13.5.3 Changes in Industry Net Present Value for Gas Cooktops (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 287 282 282 282 315

Change in INPV (2006 $ millions)

- (5) (5) (5) 28 (%)

- -1.74% -1.74% -1.74% 9.83%

Table 13.5.4 Changes in Industry Net Present Value for Gas Cooktops (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 287 275 275 275 146

Change in INPV (2006 $ millions)

- (12) (12) (12) (141) (%)

- -4.12% -4.12% -4.12% -49.12%

Table 13.5.5 Changes in Industry Net Present Value for Electric Ovens (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 793 793 785 785 782

Change in INPV (2006 $ millions)

- 0 (8) (8) (10) (%)

- 0.00% -0.99% -0.99% -1.27%

13-31Table 13.5.6 Changes in Industry Net Present Value for Electric Ovens (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 793 793 773 773 324

Change in INPV (2006 $ millions)

- 0 (19) (19) (469) (%)

- 0.00% -2.43% -2.43% -59.16%

Table 13.5.7 Changes in Industry Net Present Value for Gas Ovens (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 466 459 459 460 420

Change in INPV (2006 $ millions)

- (7) (7) (6) (47) (%)

- -1.57% -1.57% -1.38% -10.04%

Table 13.5.8 Changes in Industry Net Present Value for Gas Ovens (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2006 $ millions) 466 457 457 426 285

Change in INPV (2006 $ millions)

- (10) (10) (41) (181) (%)

- -2.10% -2.10% -8.68% -38.80%

13.5.2 Impacts on Annual Cash Flow

While NPV is useful for evaluating the long-term effects of amended energy conservation standards, short-term changes in cash flow are also important indicators of the industry’s financial situation. For example, a large investment over a period of one or two years could strain the industry’s access to capital. Consequently, the sharp drop in financial performance could cause investors to flee, even though recovery may be near. Thus, a short-term disturbance can have long-term effects that the INPV calculation does not capture. To get an idea of the behavior of annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.5.1 through Figure 13.5.8 present the annual net cash flows for the base case and each of the four TSLs for the conventional cooking products industry assuming the different markup scenarios.

13-32Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $602006$ Millions $50

$40

$30

$20

$10

$­

$(10)

$(20) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.1 Annual Net Cash Flows for Electric Cooktops (Preservation of Gross Margin Percentage)

Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario $602006$ Millions $50

$40

$30

$20

$10

$­

$(10)

$(20) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.2 Annual Net Cash Flows for Electric Cooktops (Preservation of Gross Margin (Absolute Dollars))

13-33Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $602006$ Millions $50

$40

$30

$20

$10

$­ Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.3 Annual Net Cash Flows for Gas Cooktops (Preservation of Gross Margin Percentage)

Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario $60

Energy Conservation Standards

Effective Date $50
March 20122006$ Millions $40

$30

$20

$10

$­

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.4 Annual Net Cash Flows for Gas Cooktops (Preservation of Gross Margin (Absolute Dollars))

13-34Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $1402006$ Millions $120

$100

$80

$60

$40

$20

$­

$(20)

$(40)

$(60) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.5 Annual Net Cash Flows for Electric Ovens (Preservation of Gross Margin Percentage)

Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario $1402006$ Millions $120

$100

$80

$60

$40

$20

$­

$(20)

$(40)

$(60) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.6 Annual Net Cash Flows for Electric Ovens (Preservation of Gross Margin (Absolute Dollars))

13-35Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $802006$ Millions $60

$40

$20

$­

$(20)

$(40) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.7 Annual Net Cash Flows for Gas Ovens (Preservation of Gross Margin Percentage)

Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario $802006$ Millions $60

$40

$20

$­

$(20)

$(40) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 Figure 13.5.8 Annual Net Cash Flows for Gas Ovens (Preservation of Gross Margin (Absolute Dollars))

13-36Prior to the effective date of the amended energy conservation standard, cash flows are driven by the level of capital investments and product conversion expenses and the proportion of these investments spent every year. After the standard announcement date, industry cash flows begin to decline as companies use their financial resources to prepare for the new standard. The more stringent the energy conservation standard, the greater the impact on industry cash flows in the years running up to the effective date, as capital expenditures and product development costs depress cash flows from operations. In addition to capital expenditures and product development expenses, manufacturers may also have to write down the value of existing tooling, equipment, and intellectual property whose value is impacted by an efficiency standard.

Efficiency standards have the potential of creating stranded assets, i.e. tools, equipment, and even intellectual property that would have enjoyed longer use, if the efficiency standard had not made them obsolete. For example, if a manufacturer has a stamping die for a gas cooktops which can only be used with standing pilot ignition systems, then a ban on standing pilot ignition systems could make the die functionally obsolete well before it used up from actual use. Similarly, a patent on a particular type of standing pilot ignition system potentially loses any residual value once its target market disappears.

For all conventional cooking products, TSL 1 through TSL 3 have similar impacts in the years prior to the effective date because these TSLs all have relatively low capital and product conversion expenses compared to industry revenues. These expenses are large for many products at TSL 4, creating a large, negative cash flow for many conventional cooking productsat this TSL. In the preservation of gross margin percentage markup scenario, a one time writedown on stranded assets yields a tax shield and that increases cash flows from operations for electric and gas ovens.

In the years following the standard, the impact on cash flow depends on the operating revenue. Higher TSLs have a positive impact on cash flows relative to the base case if manufacturers are able to fully pass along costs to consumers (the preservation of gross margin percentage markup scenario) and lower cash flow relative to the base case if manufacturers can only recover a portion of their increased costs (the preservation of gross margin in absolute dollars markup scenario). The magnitude of the positive cash flow impact under the preservation of gross margin percentage scenario and the negative cash flow impact under the preservation of gross margin (absolute dollars) scenario depends on the incremental cost of standards compliant products. The higher the relative cost, the larger the impact on operating revenue and cash flow in the years following the effective date of the standard.

13.6 MICROWAVE OVEN INDUSTRY FINANCIAL IMPACTS

Using the inputs and assumptions described in the previous sections, the GRIM produced indicators of financial impacts on the microwave oven industry. The following sections detail additional inputs relating only to microwave ovens, including the main MIA results for such ovens: INPV, and annual cash flows.

13-3713.6.1 Impacts on Industry Net Present Value

As previously stated, the INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs. For the microwave ovens industry, the GRIM estimated cash flows between 2007 and 2042, consistent with the forecast period used in the national impact analysis (chapter 11).

In the MIA, DOE compares the INPV of the base case (no new energy conservation or standby power standards) to that of each TSL. The difference between the base case INPV and a standards case INPV is an estimate of the economic impacts that implementing that particular TSL would have on the entire industry. For the microwave oven industry, DOE examined the two markup scenarios described in the mark-up section above. Table 13.6.1 through Table 13.6.4 provide the NPV estimates for the microwave oven industry under the different

scenarios.

Table 13.6.1 Energy Factor Changes in Industry Net Present Value for Microwave Ovens (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1a 2a 3a 4a

INPV (2006 $ millions) 1,450 1,494 1,567 1,687 1,717

Change in INPV (2006 $ millions)

- 44 117 237 267 (%)

- 3.04% 8.09% 16.34% 18.44%

Table 13.6.2 Energy Factor Changes in Industry Net Present Value for Microwave Ovens (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1a 2a 3a 4a

INPV (2006 $ millions) 1,450 1,250 1,064 775 284

Change in INPV (2006 $ millions)

- (199) (386) (675) (1,165)
(%)

- -13.74% -26.62% -46.56% -80.39%

Table 13.6.3 Standby Power Changes in Industry Net Present Value for Microwave Ovens (Preservation of Gross Margin Percentage Markup)

Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1b 2b 3b 4b

INPV (2006 $ millions) 1,450 1,428 1,414 1,413 1,415

Change in INPV (2006 $ millions)

- (22) (35) (37) (35)
(%)

- -1.50% -2.44% -2.52% -2.40%

Table 13.6.4 Standby Power Changes in Industry Net Present Value for Microwave Ovens (Preservation of Gross Margin (Absolute Dollars) Markup)
Preservation of Gross Margin (Absolute Dollars) Markup Scenario

Units Base

Case Trial Standard Level

1b 2b 3b 4b

INPV (2006 $ millions) 1,450 1,424 1,402 1,378 1,278

Change in INPV (2006 $ millions)

- (26) (48) (71) (172) (%)

- -1.77% -3.28% -4.92% -11.87%

13-3813.6.2 Impacts on Annual Cash Flow

To get an idea of the behavior of annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.6.1 through Figure 13.6.4 present the annual net cash flows for the base case and each of the four energy factor and standby power TSLs for the microwave oven industry assuming the different markup

scenarios.

Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $160

Energy Conservation Standards

Effective Date $140 March 2012

$120

$100

$80

$60

$40

$20

$­

$(20)2006$ Millions

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Baseline TSL1 TSL2 TSL3 TSL4
Figure 13.6.1 Energy Factor Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin Percentage Markup)

13-39Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario $1202006$ Millions $100

$80

$60

$40

$20

$­

$(20)

$(40) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Baseline TSL1 TSL2 TSL3 TSL4
Figure 13.6.2 Energy Factor Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin (Absolute Dollars) Markup)

Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario $1202006$ Millions $100

$80

$60

$40

$20

$­

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Baseline TSL1 TSL2 TSL3 TSL4 Energy Conservation Standards

Effective Date

March 2012

Figure 13.6.3 Standby Power Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin Percentage Markup)

13-40$100 $120 Preservation of Gross Margin (Absolute Dollars) Markup - Base Case Shipments Scenario

Energy Conservation Standards

Effective Date

March 2012

$80

$60

$40

$20

$­

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202006$ Millions

Baseline TSL1 TSL2 TSL3 TSL4
Figure 13.6.4 Standby Power Annual Net Cash Flows for the Microwave Oven Industry (Preservation of Gross Margin (Absolute Dollars) Markup)

Prior to the effective date of the amended energy conservation standard, cash flows are driven by the level of capital investments and product conversion expenses and the proportion of these investments spent every year. After the standard announcement date, industry cash flows begin to decline as companies use their financial resources to prepare for the new standard. As expected, the more stringent the energy conservation standard, the greater the impact on industry cash flows in the years prior to the effective date. In the years before a standard becomes effective, capital investments and product conversion costs depress cash flows from operations. Since the capital and conversion costs are the same regardless of the markup scenario, the impacts in the years prior to the effective date of the standards for both energy factor and cooking efficiency standards. The combined product conversion and capital conversion costs are larger for energy factor standards than standby power standards, making the impacts on cash flow greater for standby power standards (most noticeably so at max-tech). Since DOE assumed that standards compliant microwave ovens would be based on existing products, no capital assets are stranded due to standards. Consequently, there is not a one time injection of cash in the year

of the standards from a write-down.

The markup scenario has a large impact on cash flows in the year the standard takes effect. The preservation of gross margin percentage immediately restores the original cash flow for both energy factor and standby power standards. Higher selling prices increase operatingprofit and increase cash flow due to a higher depreciation expense. Since depreciation is a noncash expense, it does not require an outflow of cash but does lower operating profit. Therefore, this expense gets added back to cash flow.

13-41For the preservation of gross margin (absolute dollar) scenario for cooking efficiency, cash flow decreases in 2012 because operating profit decreases as manufacturers cannot fully pass on all increased expenses. In addition, since revenue increases greatly that year, there is a one-time need to boost working capital, lowering cash flow for 2012 only. For the preservation of gross margin (absolute dollars) the impact on operating profit and the need to boost working capital in 2012 are not as great for standby power because the incremental manufacturing costs are low for all TSLs. Therefore, cash flow increases in 2012 for standby power standards. After 2012, higher TSLs have a positive impact on cash flows relative to the base case if manufacturers are able to fully pass along costs to consumers (the preservation of gross margin percentage markup scenario) and lower cash flow relative to the base case if manufacturers can only recover a portion of their increased costs (the preservation of gross margin in absolute dollars markup scenario).

The magnitude of the positive cash flow impact under the preservation of gross margin percentage scenario and the negative cash flow impact under the preservation of gross margin (absolute dollars) scenario depends on the incremental cost of standards compliant products. The higher the relative cost, the larger the impact on operating revenue and cash flow in the years following the effective date of the standard. Since the incremental costs are greater for cooking efficiency, the positive impacts on cash flow under the preservation of gross margin percentage markup scenario and the negative impacts on cash flow under the preservation of gross margin (absolute dollars scenario are greater for cooking efficiency than standby power.

13.7 COMMERCIAL CLOTHES WASHERS INDUSTRY FINANCIAL IMPACTS

Using the inputs described in the previous sections, the GRIM produced indicators of financial impacts on the CCW industry. The following sections detail additional inputs and assumptions relating only to CCWs, including the MIA results for two key financial metrics: INPV, and annual cash flows.

13.7.1 Impacts on Industry Net Present Value

As previously stated, the INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs. For the CCW industry, the GRIM estimated cash flows between 2007 and 2042, consistent with the forecast period used in the national impact analysis (chapter 11).

In the MIA, DOE compares the INPV of the base case (no new energy conservation standards) to that of each TSL. The difference between the base case INPV and a standards case INPV is an estimate of the economic impacts that implementing that particular TSL would have on the entire industry. For the CCW industry, DOE examined a scenario where manufactures will be able maintain gross margins as a percentage of revenues and unit shipments will not be impacted regardless of new energy conservation standards. DOE also considered a scenario where manufacturers will maintain their gross margin as a percentage of revenues, but total industry shipments will decrease yearly due the combined effects of increases in purchase price and decreases in operating costs due to new energy conservation standards. These scenarios

13-42were chosen because all CCW manufacturers that were interviewed expressed little concern about preserving gross margin after the effective date of the standard, regardless of efficiency level. Rather, manufacturers were concerned about the potential of increased selling prices to shrink the size of the CCW market and the potentially large investments necessary to meet standards. The price elasticity scenario takes both of these concerns into consideration. Table

13.7.1 through Table 13.7.6 provide the NPV estimates for the CCW industry under these two

scenarios.

Table 13.7.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

Preservation of Gross Margin Percentage Markup with Base Case Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 36 40 34 23 23 23

Change in INPV (2006 $ millions) - 3.6 (2.0) (13.6) (13.6) (13.6)

(%)

- 9.93% -5.38% -37.18% -37.18% -37.18%

Table 13.7.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 36 39 32 20 20 20

Change in INPV (2006 $ millions) - 2.7 (4.1) (16.1) (16.1) (16.1)

(%)

- 7.49% -11.30% -44.16% -44.16% -44.16%

Table 13.7.3 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

Preservation of Gross Margin Percentage Markup with Base Case Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 19 19 17 17 15 3

Change in INPV (2006 $ millions) - 0.0 (2.0) (2.0) (4.4) (16.0)

(%)

- 0.00% -10.67% -10.67% -22.91% -83.52%

13-43Table 13.7.4 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 19 19 17 17 15 3

Change in INPV (2006 $ millions) - 0.0 (2.0) (2.0) (4.5) (16.3)

(%)

- 0.00% -10.70% -10.70% -23.58% -84.93%

Table 13.7.5 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

Preservation of Gross Margin Percentage Markup with Base Case Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 56 59 52 41 38 26

Change in INPV (2006 $ millions) - 4 (4) (15) (18) (30)

(%)

- 6.51% -6.37% -26.50% -32.02% -53.13%

Table 13.7.6 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base

Case Trial Standard Level

1 2 3 4 5

INPV (2006 $ millions) 56 58 50 38 35 23

Change in INPV (2006 $ millions) - 3 (6) (17) (20) (32)

(%)

- 4.91% -10.27% -31.09% -36.83% -58.19%

13.7.2 Impacts on Annual Cash Flow

To get an idea of the behavior of annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.7.1 and Figure

13.7.2 present the annual net cash flows for the base case and each of the five TSLs for the CCW industry assuming the different shipments scenarios.

13-44Scenario Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario
$202006$ Millions $15

$10

$5

$­

$(5)

$(10)

$(15) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.1 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

Preservation of Gross Margin Percentage Markup - Price Elasticity of Demand Shipments
$202006$ Millions $15

$10

$5

$­

$(5)

$(10)

$(15) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.2 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

13-45Scenario Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario
$202006$ Millions $15

$10

$5

$­

$(5)

$(10) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.3 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

Preservation of Gross Margin Percentage Markup - Price Elasticity of Demand Shipments
$202006$ Millions $15

$10

$5

$­

$(5)

$(10) Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.4 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

13-46Preservation of Gross Margin Percentage Markup - Base Case Shipments Scenario

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year $(20) $(15) $(10)

$(5) $­ $5 $10 $15 $202006$ Millions Energy Conservation Standards

Effective Date

March 2012

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.5 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)

13-47Scenario Preservation of Gross Margin Percentage Markup - Price Elasticity of Demand Shipments

$(20) $(15) $(10)

$(5) $­ $5 $10 $15 $202006$ Millions Energy Conservation Standards

Effective Date

March 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 Figure 13.7.6 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

Prior to the effective date of the amended energy conservation standard, cash flows are driven by the level of capital investments and product conversion expenses and the proportion of these investments spent every year. After the standard announcement date, industry cash flows begin to decline as manufacturers use their financial resources to prepare for the new standard. Because higher TSLs require more expensive redesigns and tooling to accommodate newly redesigned washers, more stringent the energy conservation standards have a greater impact on industry cash flows in the years prior to the effective date for both top-loading and front-loading

washers.

While the impact on cash flows from the necessary investments does not appear prohibitively burdensome in the previous graphs, standards do greatly alter the industry cash flows. For top-loading washers, the max-tech efficiency reduces cash flow by 454 percentcompared to the base case in the year prior to the effective date of the standard. For frontloading washers, the max-tech efficiency reduces cash flow by 668 percent compared to the base case in the year prior to the effective date of the standard. Based on conversations with manufacturers, DOE modeled that redesigned washers would be based on existing washers, and hence no capital assets would be stranded due to standards. Consequently, there is no one time injection of cash in the year of the standards from asset write-down. In the years following the standard, the impact on cash flow depends on the operating revenue. Companies receive positive cash flows from operating profit after taxes. However, since higher TSLs do not have a

13-48significant impact on net profit, standards do not significantly alter cash flow in the years after

the effective date of the standard.

13.8 IMPACTS ON COOKING PRODUCTS SMALL BUSINESSES

DOE identified three manufacturers of gas-fired ovens, stoves, and cooktops with standing pilot lights. Two of the three manufacturers are classified as small businesses by the SBA, while the third is a large, diversified appliance manufacturer. DOE found some differences in the R&D emphasis and marketing strategies between small business manufacturers and large manufacturers. These two smaller businesses tend to focus on appliance sizes not offered by larger manufacturers.

During the MIA, DOE contacted both small businesses and one of them agreed to be interviewed. DOE characterized the businesses based on this interview and D&B reports for both companies. The two small cooking businesses are privately held and each employs less than 300 employees. c Both businesses manufacture only residential cooking appliances. One of these appliance manufacturers produces just ranges, while the other produces cooktops, ranges, hoods, wall ovens, and cooking ventilation equipment. Both companies have annual revenues of less than $60 million.

DOE found that, as it pertains to the elimination of standing pilots, small manufacturers shared many of the same concerns as the large manufacturer. The large and small companies are concerned that eliminating standing pilots could leave some customers without access to electricity without alternatives. For example, certain religious groups and remote areas (hunting cabins) would be forced to prolong the life of existing products. In addition, customers thatcurrently use standing pilots could be forced to install an electrical outlet near a standardscompliant stove. These manufacturers expected a decrease in revenues as existing customers prolong the lifetime of existing products when forced with a costly installation or no viable

alternative.

Though the small manufactures shared many of the concerns as the large manufacturer, the small businesses will be much more impacted by a standard that eliminates standing pilots. The two small businesses indicated that 25 percent or more of their entire production consists of such niche products, now that most manufacturers have switched to electronic ignition in their gas-fired cooking appliances. In addition to the elimination of standing pilots, any rule affecting products manufactured by these small businesses will impact them disproportionately because of their size and their focus on cooking appliances. However, due to the low number of competitors that agreed to be interviewed, DOE could not characterize this industry segment with a separate cash-flow analysis due to concerns about maintaining confidentiality.

At TSL 1 for gas-ovens and gas cooktops, the elimination of standing pilot lights would eliminate one of the niches that these two small businesses serve in the cooking appliance industry. Both businesses also manufacture ovens and cooktops with electronic ignition systems,

c The SBA classifies a residential cooking appliance manufacturer as a small business if it has less than 750 employees. Refer to: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf

13-49but the ignition source would no longer be a differentiator within the industry as it is today. The result would be a potential loss of market share since consumers would be able to choose from a wider variety of competitors, all of which operate at much higher production scales.

For all other TSLs concerning conventional cooking appliances, the impact on small, focused business entities will be proportionately greater than for their competitors since these businesses lack the scale to afford significant R&D expenses, capital expansion budgets, etc. DOE could not gauge the extent of the difference since manufacturers did not respond to all proposed investment requirements by TSL during interviews. However, research associated with other small entities in prior rulemakings suggests that many costs associated with complying with rulemakings are fixed, regardless of production volume.

Since all domestic manufacturers already manufacture all of their conventional cooking appliances with electronic ignition modules as a standard feature or as an option for consumers, the cost of converting the remaining three domestic manufacturers exclusively to electronic ignition modules would be modest. However, given their focus and scale, any conventional cooking appliance rule will affect these two domestic small businesses disproportionately compared to their larger and more diversified competitor.

13.9 IMPACTS ON THE LOW-VOLUME COMMERCIAL CLOTHES WASHER

MANUFACTURER

13.9.1 Introduction

The U.S. CCW market has three principal manufacturers. While two of them are welldiversified appliance manufacturers, the third is an LVM. In addition to being focused exclusively on laundry products, the LVM derives 87 percent of its clothes washer revenues from sales to commercial market segments. Prior to 1999, the LVM manufactured over 300,000 residential washers and 100,000 CCWs annually. Due to a restructuring of its business, the LVM was contractually barred from manufacturing residential clothes washers from 1999 until 2004. While its subsequent SEC 10-K reports show significant growth in the residential market segment, Table 13.9.1 shows commercial sales still make up the overwhelming majority of its clothes washer shipments. As a result, the LVM will be affected disproportionately by any changes to the CCW energy efficiency requirements than its larger competitors, which are more diversified and for whom CCW sales amount to less than 2 percent of their total clothes washer sales. Appendix 13A further details the importance of the commercial clothes washer business

to the LVM.

13-50Table 13.9.1 DOE Estimate of LVM Clothes Washer Sales and Unit Shipments in 2006

Market Segment Drum

Axis Estimated

Revenue ($MM) Percentage Revenue of

Clothes Washer

Business Unit Shipment Volume by Sales

Channel

Commercial Top $42.5 59.9% 81,502

Front $19.2 27.0% 22,234

Residential Top $8.7 12.3% 19,586

Front $0.6 0.8% 707 Total Clothes Washer Shipments 124,028

13.9.2 Low Volume Manufacturer Competitiveness

The financial reasons that LVM has been able to stay competitive in the commercial laundry business range from its well depreciated machinery and legacy design to its successful customer and service networks. The LVM does not currently face a significant, inherent disadvantage in top-loading washers because these washers are based on legacy platforms for models originally produced at much higher volumes. Decades of production experience at higher volumes and a legacy design that has evolved gradually translates into lower per unit R&D expenses. As a result, the LVM’s depreciation cost for top-loading washers is in line withthose of manufactures which produce at higher volumes. Finally, the large installed base of toploading machines and stock of repair parts ensure a large market for replacement machines. The LVM sells its products to route operators and distributors who sell laundry services to end-users and who typically service the machines. Because the top-loading CCW design has not significantly changed since its introduction, route operators and distributors’ large inventory of service parts and repair knowledge represent a significant switching cost, discouraging customers from adopting competing platforms when a washer is replaced. A market disruption, such as the wholesale adoption of front-loading CCWs, could place the LVM at risk of losing market share.

13.9.3 Effects of a Transition to Front-Loading (Horizontal-Axis) Platforms

During comments following the ANOPR, the LVM stated that its most efficient toploading washer reaches an MEF of 1.50. However, this washer uses a “partial drain” rinse which has not been fully embraced by the market. Consequently, the LVM believes that any standard above a 1.42 MEF (TSL 3 through TSL 5) would only allow it to manufacturer front-loading washers. The LVM also stated that top-loading CCW with an MEF greater than 1.42 would have to be based on non-traditional technologies (technologies that do no use a traditional agitator). The LVM stated that these non-traditional washers employ technologies that are proprietary and which would require an unjustifiable investment for the LVM due to the size of the CCW market. Finally, the LVM stated that there have been issues with the performance of these products which have caused consumers to reject them.

DOE based the efficiency levels for top-loading washers on existing CCW. However, the LVM’s comments indicate that, due to the high design costs, uncertain technology, and potential rejection from consumers, the LVM would not invest in designing a non-traditional, top-loading washer. Rather, for any standard greater than 1.42 MEF, the LVM has stated that it would invest in expanding the production of its exiting front-loading washers to meet demand. If DOE energy

13-51conservation standards required the LVM to exclusively manufacture front-loading machines for the CCW market, the LVM projects that significant redesigns would be needed in order to make the design more cost competitive. Front-loading CCWs currently manufactured by the LVM have high variable costs due to a design that minimized required capital expenditures. Current LVM front-loading clothes washer designs are also relatively recent (market introduction: 1999)and lack the decades of refinement that the LVM has put into its top-loading designs. The frontloading designs have not benefited from long-term, high-volume cost optimization because they have never been produced in volumes higher than about 25,000 units per year. The LVM produces these machines to fill a niche in the industry for customers who will pay a premium for more energy efficient designs.

If a top-loading standard greater than a 1.42 MEF caused the LVM to only offer frontloading washers, the LVM would have to make significant investments in capital and engineering to redesign its front-loading machines to a lower cost and to expand production. Depending on CCW unit demand, the LVM’s competitors may or may not need to undertake similar line expansions of their combined residential and commercial clothes washer fabrication and assembly lines if they decided not to invest in a non-traditional, top-loading CCW. Such a need for expansion would depend on the amount of spare capacity that their current manufacturing facilities have. For example, the LVM’s principal competitor ships about 7.5 million clothes washers domestically per year, so its share of the U.S. CCW market represents approximately 1.5 percent of its total domestic clothes washer shipments.

Assuming that this larger competitor produces 80 percent top-loading and 20 percent front-loading clothes washers, a marginal transfer of 80,000 CCWs to the front-loading manufacturing line would represent approximately a 5 percent front-loading manufacturing line expansion. By comparison, the LVM would have to quadruple its front-loading clothes washer production to reach the same volumes. Furthermore, unlike the LVM, these larger competitors can base their front-loading CCW designs on high-volume residential platforms that have already benefited from years of refinement and production at high volumes.

13.9.4 Fixed Cost Impacts on a Low Volume Manufacturer

In order to determine how a lower production volume can disproportionately affect a manufacturer, DOE determined the costs needed to build a “green-field” manufacturing facility to produce a new line of front-loading CCWs. To represent a manufacturer with low production volume, DOE determined the upfront capital and engineering costs to build a facility to produce 100,000 units annually. For a manufacturer with a high production volume (1.5 million units annually), DOE assumed that the same line would be used to build both residential and commercial clothes washers. As a result, the upfront and depreciation costs would be spread over the entire volume. DOE used information provided by manufacturers, AHAM, and industry experts to estimate the total costs of a green-field manufacturing facility. Table 13.9.2 and Table

13.9.3 show the upfront costs to build the facility for the manufacturers with low and high production volumes.

13-52Table 13.9.2 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 100,000 units Per Year.

Total Equipment

Investment

($MM) Total Conveyer

Investment

($MM) Total Tooling

Investment

($MM) Total Building

Cost ($MM) Total Capital

Investment

($MM)

Manufacturer with

Low Production

Volume $13.53 $1.51 $17.65 $21.43 $54.12

Table 13.9.3 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 1,500,000 units Per Year.

Total Equipment

Investment

($MM) Total Conveyer

Investment

($MM) Total Tooling

Investment

($MM) Total Building

Cost ($MM) Total Capital

Investment

($MM)

Manufacturer with

High Production

Volume $76.6 $10.4 $39.6 $100 $226.8

After determining the total costs needed to design a new line of products and build a new facility, DOE depreciated the equipment, tooling, and building to examine how these upfront costs would impact the cost of each unit for a low and high volume manufacturer. In order to determine the depreciation costs, DOE estimated depreciation over the useful lives of the equipment, building, and tooling using the straight line method. The assumptions used for the lifetime of the equipment, building, and tooling for a low and high volume production facility are

shown in Table 13.9.4.

Table 13.9.4 Depreciation Lifetime Assumptions for a Low and High Volume

Manufacturer

Average Equipment

Life (Years) Average Tooling

Life (Years) Building

Life (Years) Average Plant Depreciation

Life (Years)

Manufacturer with Low

Production Volume (100,000 units per year) 10.17 7.53 25 15.2

Manufacturer with High

Production Volume (1,500,000 units per year) 10.77 2.99 25 15.69

Table 13.9.5 shows depreciation expenses per unit for a low and high volume manufacturer, as well as the cost disadvantage for a low volume manufacturer. If a redesigned front-loading washer were built in a low volume, green-field manufacturing facility, a low volume manufacturer would incur a significant depreciation cost disadvantage. In comparison to a manufacturer with a high production volume, DOE estimated that this disadvantage would be approximately $40.07 per unit.

13-53Table 13.9.5 Per Unit Depreciation Costs for a Low and High Volume Manufacturer

Equipment Building Tooling Total Depreciation

Cost Per Unit

Manufacturer with Low

Production Volume (100,000 units per year) $17.56 $11.97 $32.79 $62.32

Manufacturer with High

Production Volume (1,500,000 units per year) $6.27 $3.91 $12.07 $22.25

Low Volume Per Unit Disadvantage $11.29 $8.06 $20.72 $40.07

In addition to a depreciation cost disadvantage, a low volume manufacturer would also incur a per unit R&D cost disadvantage. To quantify the R&D cost disadvantage, DOE assumed that both types of manufacturers would have the same engineering costs to design a new line of front-loading washers. Based on information provided by manufacturers and industry experts, DOE estimated it would cost $10 million to redesign a front-loading washer from the ground up. If the product lifetime is assumed to be 7 years, a LVM would incur a R&D cost disadvantage of approximately $13.33 per unit. The impacts at other product lifetimes are shown in Table 13.9.6.

Table 13.9.6 Per Unit Impacts of a $10 Million R&D Expense at Various Product Lifetimes

Product Lifetime (years)

7 10 20

Low Volume Per Unit R&D (100,000 units per year) $14.29 $10 $5

High Volume Per Unit R&D

(1,500,000 units per year) $0.95 $.67 $0.33

Low Volume Per Unit Disadvantage $13.33 9.33 $4.67

In summary, if a new standard forces a low volume manufacturer to invest in a greenfield manufacturing facility to make front-loading units, a low volume manufacturer would incur a combined depreciation and R&D cost disadvantage of $53.40, $49.40, or $44.74 per-unit, depending on the assumed product lifetime. Based on a review of SEC 10-K forms and dataprovided by industry, DOE estimates that the earnings before interest and taxes for a frontloading washer is $51 per unit under present market conditions.

The per-unit cost impacts of R&D and capital investments suggest that a low volume manufacturer would most likely not invest in such an extensive project. It would not be economically justified to make the necessary investment for the green-field manufacturing plant because the depreciation and R&D cost disadvantages after the investment are severe enough to completely erode profits, assuming that front-loading CCWs remain as profitable as they have been traditionally. Manufacturers have stated that if the CCW industry were to transition to front-loading CCWs, commoditization and lower prices are likely to follow. Either affect would put even greater pressure on earnings before interest, taxes, and amortization (EBITA) per-unit. Table 13.9.7 summarizes the estimated profit per unit after the disadvantage from depreciation and R&D expenses that a manufacturer with low production volume will incur at various product

lifetimes.

13-54Table 13.9.7 Total Per Unit Profit for a LVM after Depreciation and R&D Disadvantage
Product Lifetime (years)

5 7 10 20
Estimated Industry

Average Profit from Front-loading

Washer $51.00

Low Volume Per

Unit Profit after Depreciation and

R&D Cost Disadvantage -$7.73 -$2.40 $1.60 $6.27

Based on this analysis, it is likely that any standard that necessitates a departure from current designs would have substantial negative impacts on a LVM and could cause it to cease the production of CCWs.

13.9.5 Financial Position of the LVM

If the LVM in the CCW industry were required to build the green-field site described in

13.9.4 to comply with a front-loading standard, the investments would represent a significant hardship. The LVM would devote almost all of its planned R&D expenses to the project and would have to spend approximately 6.5 times the planned annual capital expenses. Table 13.9.8 below compares the LVM’s 2007 expenditures on capital and R&D with the amounts DOE assumed would be needed to build a green-field facility for a new line of front-loading washers. Even though the necessary R&D expenses are lower than capital, R&D will have a significant impact on the profitability of the company the years in which they are incurred. R&D costs cannot be amortized so every additional dollar spent on R&D directly lowers profit. If the LVM had invested in the redesign in 2007, it would have reversed net income to a loss.

Table 13.9.8 Comparison of the LVM’s 2007 Financials with DOE’s Green-Field Assumptions

LVM’s 2007 Expense* DOE’s Expected Expense for a

Green-Field

site DOE’s Expected Expense as a Percentage of

the LVM’s 2007 Expense DOE’s Expected Expense as a Percentage of the

LVM’s 2007 Operating

Income DOE’s Expected Expense as a Percentage of

the LVM’s

2007 Net

Income Capital Expenditures $8.3 Million $54.12 Million 649.1% 105.1% 548.3%

R&D Expenditures $10.9 Million $10.0 Million 91.7% 19.4% 101.3%

*Source: LVM 2007 SEC 10-K

The current financial position of the LVM makes these one-time expenses even more costly. Its indebtedness and current schedule of payments may make it more difficult to raise theadditional capital needed to make the necessary changes to accommodate an exclusively frontloading line, as the firm is highly leveraged. According to the LVM’s 2007 SEC 10-K report, on December 31, 2007, it had $341.8 million of long-term debt or 4.94 times the adjusted EBITA.

13-55The report also stated that the indebtedness has the potential to put the LVM at a disadvantage compared to other manufacturers that do not carry significant long-term liabilities. The debt can also affect current operations by requiring a substantial portion of the cash flow from operations to make payments on the debt, reducing the available cash to fund working capital, capital expenditures, acquisitions, research and development, and planned expansion into consumer laundry. Due to this highly leveraged financial structure, interest represents a significant expense. The interest expense was 2.31 times the adjusted EBITA, or $34.7 million in 2007.

Due to the current structure of the LVM’s debt, it is unlikely that current credit lines could pay for the up-front costs of constructing a new front-loading manufacturing facility. The LVM’s 2007 10-K report stated that because of the covenants on the principal line of credit, only an additional $3.9 million could be borrowed. The LVM would likely have to seek a new line of credit to finance the changes needed to build a green-field facility and design a new line of washers. This would further increase the interest expense and strain the availability of cash for working capital, capital expenditures, and R&D. Finally, the timing of these expenditures would come a particularly bad period for the LVM. According to the 2007 SEC 10-K report, in 2012, the LVM has $184.2 million of its long-term debt due. Because it will most likely be refinancing a large portion of its debt at that time, it is likely that the credit and interest terms will be more stringent.

13.9.6 Additional Impacts on the Low Volume Manufacturer

The lower overall production volumes make it likely that the LVM will continue to face higher purchased parts costs and lower productivity, putting more upward pressure on manufacturing cost. The LVM is not projected to be able to produce CCWs at a scale that would allow it to overcome these disadvantages since it would have to increase its production volume by multiples to do so. As mentioned above, the LVM expects commoditization and lower profits if the CCW market were to transition to exclusively front-loading CCWs. The LVM noted that baseline top-loading clothes washers have a long history of price competition and commoditization. Should the CCW market shift to exclusive use of front-loading clothes washers due to concerns about the wash quality of top-loading CCWs that can meet 1.76MEF/8.3WF, for example, a similar commoditization is likely to occur for front-loading CCWs, causing margin pressure.

Thus, on top of a line expansion to cover the vast increase front-loading CCW demand (up to 400 percent, if demand is not impacted), expected margin pressure would require a redesign of the current front-loading CCW to be more cost competitive. Given the high costs of such a redesign, the required manufacturing investments, the low expected returns, and the probably cost disadvantages shown in 13.9.4, the LVM has stated that it would most likely exit from the CCW industry under such circumstances. Even if the LVM decided to stay in the CCW market, it could be capacity constrained due to the investment and line expansion requirements and hence its market share could shrink as competitors supply what the LVM cannot.

As previously stated, the well depreciated machinery and legacy top-loading design helps mitigate a natural cost disadvantage in depreciation and R&D that would be eliminated if the LVM had to shift a significant proportion of its production to front-loading washers. In addition,

13-56the LVM maintains a competitive advantage through its successful customer and service network. Lastly, a market disruption, such as a fast transition to front-loading CCWs would put the LVM at a greater disadvantage than its competitors since the LVM doesn’t have the scale to quickly deliver cost-effective front-loading clothes washers for the CCW market.

13.9.7 Consequences of Higher Energy Conservation Standards on the LVM

Due to its manufacturing scale and focus on the CCW industry, any efficiency standard affecting the CCW industry will impact the LVM disproportionately compared to its more diversified competitors that derive less than 2 percent of their revenues from the CCW market. The LVM has stated that any large-scale investments without adequate returns would likely force it to exit the residential-style CCW business, which would cause it material harm and damage CCW-market competition. As shown in section 13.9.4, an investment of that scale will still put the firm at a depreciation and R&D cost disadvantage that significantly erodes profits. A wholesale plant refit could become sufficiently expensive as to justify the construction of a new facility or to outsource production entirely.

The LVM stated that its U.S. facility would no longer be viable if washer production ceased. The domestic washer production equates to approximately 22 percent of the LVM’s total revenue. However, the roughly 124,000 annual washer shipments are vital to the facility as they give the facility the manufacturing scale: To remain competitive with larger companies, the LVM must spread its overhead, equipment, tooling, raw material, and purchased parts purchases over as large a volume as possible. Though extractors and tumbler dryers are important to overall revenue at the facility, the higher volume of the washer lines is critical to bringing down overhead. In addition, the LVM believes that it has remained successful by offering a complete line of commercial laundry equipment. It expects that the volume of all other equipment would fall if it no longer offered the most basic laundry equipment. The volume of dryers would be especially impacted because many washer sales are coupled with dryers.

Based on the commercial washer revenues reported in Appendix 13A and using the employment assumptions in section 13.10.1, DOE estimates there are approximate 150 production workers at the LVM manufacturing products directly covered by this rulemaking. In addition, DOE estimates that there are 20 non-production employees attributable to CCWs at the facility. The domestic facility also manufactures residential top-loading washers, standard dryers, front-loading residential washers, washer-extractors and tumbler dryers. If the LVM decided to no longer produce any soft mount washers or standard dryers at the facility because itcould not sell dryers without selling washers, approximately 292 production and 40 nonproduction jobs would be lost. Including all production workers involved in covered and noncovered products, the closure of the LVM domestic manufacturing plant equates to a loss of approximately 600 factory employees.

13-5713.10 OTHER IMPACTS

13.10.1 Employment

13.10.1.1 Methodology

To quantitatively assess the impacts of energy conservation standards on cooking products and CCW manufacturing employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL from 2007 through 2042 for the conventional cooking products, microwave oven, and CCW industries.

DOE used statistical data from the U.S. Census Bureau’s 2006 ASM and 2006 Current Industry Report ( 2006 CIR ), the results of the engineering analysis, and interviews with manufacturers to estimate the inputs necessary to calculate industry-wide labor expenditures and domestic employment levels.

DOE constructed the industry cost structure using publicly available information from the

2006 ASM and SEC 10-K reports filed by publicly owned manufacturers. The labor percentage of the industry cost structure is calculated by dividing total production worker wages by the total value of shipments. For cooking products, which covers both conventional cooking products and microwave ovens, DOE used the same industry cost structure constructed from 2006 ASM data classified under NAICS 335221 (household cooking appliance manufacturing). For CCW, DOE used the industry cost structure for the household laundry equipment manufacturing (NAICS 335224) because it most closely aligns with the cost structure of CCW. CCW manufacturing is classified under NAICS 333312, but the 2006 ASM only provides data for NAICS 33331 (commercial and service industry machinery manufacturing). The data for this broad code does not provide the level of detail necessary for calculating employment in the smaller CCW industry.

The labor percentage and other components of the industry cost structure for cooking products and CCW are show in Figure 13.10.1 and Figure 13.10.2 below.

13-58Income from Operations, 5.9%

Materials, 66.8% SG&A, 12.5% R&D, 2.2%

Overhead, 2.2%

Labor (production workers), 7.0% Depreciation, 3.4%

Figure 13.10.1 Cooking Products Industry Cost Structure

Labor (production

workers), 9.0%

R&D, 2.2%

SG&A, 12.5% Materials, 61.2% Overhead, 5.7%

Depreciation, 3.4% Income from Operations, 5.9%

Figure 13.10.2 Commercial Clothes Washers Industry Cost Structure

To determine the total annual labor expenditure on production labor, the value of production labor in the industry cost structure was converted to a percentage of the cost of goods sold (COGS). In the GRIMs, the labor expenditures in each year are calculated by multiplying the COGS or MPCs by the labor percentage of COGS. As a result, higher TSLs have greater direct labor costs because more efficient products have higher MPCs.

13-59To calculate the annual domestic labor expenditures, DOE used the 2006 CIR to estimate the percentage of domestic production in each industry. DOE estimated that approximately 27 percent of conventional cooking products and 4 percent of microwave ovens are manufactured and sold in the U.S. Census data was not available for CCW production. Approximately 81 percent of residential washer production is manufactured domestically for U.S. consumption. Since no census data was available for CCW individually, DOE used the residential domestic production percentage for CCW. Manufacturer interviews confirmed that the domestic production of CCW closely mirrors the residential market.

DOE multiplied the total annual labor expenditures in the GRIM by the percentage of

U.S. production for domestic consumption to calculate domestic labor expenditures for production labor in each industry. The domestic annual labor expenditures in the GRIMs were converted to domestic production employment levels by dividing production labor expenditures by the annual payment per production worker (production worker hours times the labor rate

found in the 2006 ASM ). d The number of non-production employees was calculated by multiplying the number of production workers by the ratio of non-production workers to production workers calculated using the employment data in the 2006 ASM

.

The domestic annual labor expenditures and employment levels were calculated for the base case and at each TSL. The impacts on domestic employment due to standards can be assessed by comparing the employment results in the base case to the results at each TSL. In all GRIMs, the employment results represent U.S. production workers that are impacted by this rulemaking. U.S. workers involved in manufacturing or supporting products for exports would not be impacted and are not included as part of the labor impacts.

13.10.1.2 Conventional Cooking Products

The GRIM calculates that the conventional cooking products industry’s domestic labor expenditure for production labor in 2012 is approximately $58 million (total COGS in 2012 times the production labor percentage of COGS times the percentage of U.S production). Using the $13.84 wage rate and 1,940 production hours per year per employee found in the 2006 ASM

, the GRIM estimates there are approximately 2,146 U.S. production employees involved in manufacturing conventional cooking products covered by this rulemaking. In addition, DOE estimates that 282 non-production employees in the U.S. support convention cooking product production e . The employment spreadsheet of the convention cooking products GRIM shows the annual domestic employment impacts in further detail.

d 2006 ASM labor rates and production hours per year per employee are very similar to figures reported in the engineering analysis. DOE used 2006 ASM figures to ensure a consistent set of publicly available data is used for the manufacturing employment analysis.

e As defined in the 2006 ASM, production workers number include “workers (up through the line-supervisor level) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product development, auxiliary production for plant's own use ( e.g. , power plant), recordkeeping, and other services closely associated with these production operations at the establishment covered by the report. Employees

13-602012 Table 13.10.1 illustrates the impact of new energy conservation standards on domestic employment levels at each TSL for the conventional cooking products industry calculated by the

GRIM.

Table 13.10.1 Conventional Cooking Products Industry Estimated Employment Impacts in

Trial Standard Level Base

Case TSL 1 TSL 2 TSL 3 TSL 4

Total Number of Domestic Conventional Cooking Products Production Employees in 2012 2,146 2,153 2,163 2,181 2,731

Change in Total Number of Domestic Conventional Cooking Products Production Employees in 2012 Due to

Standards - 7 17 35 585

Total Number of DomesticConventional Cooking Products NonProduction Employees in 2012 282 282 284 286 358

Total Number of Domestic Conventional Cooking Products Employees in 2012 2,428 2,435 2,447 2,467 3,090

Figure 13.10.3 shows total annual domestic employment levels for each TSL calculated by the GRIM.

above the working-supervisor level are excluded from this item.” Non-production workers are defined as“employees of the manufacturing establishment including those engaged in factory supervision above the linesupervisor level. It includes sales (including driver-salespersons), sales delivery (highway truck drivers and their helpers), advertising, credit, collection, installation and servicing of own products, clerical and routine office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), professional, and technical employees. Also included are employees on the payroll of the manufacturing establishment engaged in the construction of major additions or alterations utilized as a separate work force.”

13-61Total Employment

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2006
2 0 08
2 01

0 2012
2 01

4 2016
2 0 18 202 0
2 0 22
2 02

4 2026
2 02

8 2030
2 0 32
2 03

4 2036
2 03

8 2040
2 0 42

YearTotal Domestic Employment (# ofworkers)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 Energy Conservation

Standards Effective Date January 2012

Figure 13.10.3 Total Conventional Cooking Products Industry Domestic Employment by

Year

Currently, approximately 27 percent of conventional cooking products sold in the U.S. are manufactured in the U.S. DOE expects that there would be positive employment impacts among domestic conventional cooking products manufacturers for TSL 1 through TSL 4. Because production employment expenditures are assumed to be a fixed percentage of COGS and the MPCs increase with more efficient products, labor tracks the increased prices in the GRIM. The GRIM predicts a gradual increase in domestic employment after standards.

The results predicted in the GRIM potentially overstate the domestic employment impacts. From the engineering analysis, higher TSLs correspond to switches to more efficient components. Because many components are sourced for both large and small manufacturers, labor is more a function of units shipped, not production costs as calculated in the GRIM. For these manufacturers, the greater labor expenditures for more efficient components are born by their suppliers. However, since shipments are expected to increase gradually over time in the shipments model, employment levels for manufacturers of cooking products would still increase

at all TSLs.

For TSL 1 through TSL 3, the GRIM employment results do not overstate the impacts and agree with the bottoms up analysis in the engineering. The incremental costs for more efficient components at these TSLs are relatively small. In response to standards, manufacturers would most likely not alter employment levels significantly because inserting a more efficient component does not necessarily require more labor.

At TSL 4 the GRIM may overstate the employment impacts. The incremental costs for components are large at TSL 4, making the employment impacts more substantial. It is likely that the large, positive impacts in employment due to the incremental cost increase overstate the

13-62impacts that would result from increased shipments over time. This overstatement is caused by the assumption of constant labor content as a percentage of revenue. For TSL 4 in particular, the design options involve component substitution which substantially increase the cost of purchase parts but should not result in a proportionate increase in labor costs.

The employment conclusions ignore the possible relocation of domestic jobs to lowerlabor-cost countries, which may occur independently of new standards or may be influenced by the level of investments required by new standards. Because the labor impacts in the GRIM do not take relocation into account, the labor impacts would be different if manufacturers chose to relocate to lower cost countries. The relatively small capital costs at TSL 1 through TSL 3 make relocation less likely. However, at all TSLs manufacturers face significant product conversion costs that correspond to redesigning products and testing components on all platforms. These significant conversion costs put pressure on manufactures at all TSLs to cut costs. At TSL 4, manufacturers face both significant capital and product conversion costs, which put even greater pressure on cost reduction and for plant relocation to lower-cost countries.

13.10.1.3 Microwave Ovens

The GRIM calculates that the domestic industry labor expenditure for microwave oven production workers in 2012 is approximately $6 million. Using the $13.84 wage rate and 1,940 production hours per year per employee found in the 2006 ASM , the GRIM estimates there are approximately 229 U.S. production employees involved in manufacturing microwave ovens covered by this rulemaking (total COGS in 2012 times the production labor percentage of COGS times the percentage of U.S production). In addition, DOE estimates that 30 indirect employees in the U.S. support microwave oven production. The employment spreadsheet of the microwave oven GRIM shows the annual domestic employment impacts due to both energy factor and standby power standards in further detail.

Table 13.10.2 illustrates the impact of new cooking efficiency standards on employment levels at each TSL for the microwave oven industry calculated by the GRIM.

Table 13.10.2 Microwave Ovens Industry Estimated Employment Impacts in 2012 for Energy Factor Standards

Trial Standard Level Base

Case TSL 1 TSL 2 TSL 3 TSL 4

Total Number of Domestic Microwave Oven Production Employees in 2012 229 246 264 292 327

Change in Total Number of Domestic

Microwave Oven Production Employees in 2012 Due to Standards - 17 34 62 98

Total Number of Domestic Microwave Oven Non-Production Employees in

2012 30 32 35 38 43

Total Number of Domestic Microwave Oven Employees in 2012 260 278 298 330 370

Table 13.10.3 illustrates the impact of new standby power standards on employment levels at each TSL for the microwave oven industry calculated by the GRIM.

13-63Table 13.10.3 Microwave Ovens Industry Estimated Employment Impacts in 2012 for Standby Power Standards

Trial Standard Level Base

Case TSL 1 TSL 2 TSL 3 TSL 4

Total Number of Domestic Microwave Oven Production Employees in 2012 229 230 230 232 239

Change in Total Number of Domestic

Microwave Oven Production Employees in 2012 Due to Standards - 1 1 2 9

Total Number of Domestic Microwave Oven Non-Production Employees in

2012 30 30 30 30 31

Total Number of Domestic Microwave Oven Employees in 2012 260 260 260 262 270

Figure 13.10.4 shows annual domestic employment levels for each TSL calculated by the GRIM for energy factor standards.

Total Employment

0 100 200 300 400 500 600

200

6 2008 2010 2012 2014 2016
2 018
2 020 20 22 20 24 20 26 202 8 203 0 2032 2034 2036 2038 2040
2 042

YearTotal DomesticEmployement (# of Workers)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 Energy Conservation Standards

Effective Date January 2012

Figure 13.10.4 Total Microwave Ovens Industry Domestic Employment by Year for Energy

Factor Standards.

Figure 13.10.5 shows annual domestic employment levels for each TSL calculated by the GRIM for standby power standards.

13-64Total Employment

0 50 100 150 200 250 300 350 400

200

6 2008 2010 2012 2014 2016
2 018
2 020 20 22 20 24 20 26 202 8 203 0 2032 2034 2036 2038 2040
2 042

YearTotal DomesticEmployement (# of Workers)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 Energy Conservation Standards

Effective Date January 2012

Figure 13.10.5 Total Microwave Ovens Industry Domestic Employment by Year for Standby Power Standards.

Approximately 96 percent of microwave ovens sold in the United States are imported. Because most microwave ovens are produced abroad, any standard on energy factor or standby power has a larger impact on labor in other countries. U.S. companies are all still impacted by the product conversion, conversion capital, and higher MPCs. However, the impacts of standards on domestic employment would be small.

From the engineering analysis, higher TSLs correspond to switches to more efficient components for both energy factor and standby power standards. Because many components are sourced for both large and small manufacturers, labor is more a function of units shipped, not production costs as calculated in the GRIM. However, since shipments are expected to increase gradually over time in the shipments model, employment levels for manufacturers of microwave

ovens would still increase at all TSLs.

For all energy factor and standby power TSLs, the GRIM calculates an increase in domestic employment due to energy conservation standards because production labor expenditures are assumed to be a fixed percentage of COGS and MPCs increase with more efficient products. For all TSLs, the GRIM employment results agree with the bottoms up analysis in the engineering. However, the incremental costs for more efficient components at all TSLs are relatively small. Consequently, in response to standards, domestic manufacturers would most likely not alter employment levels much because inserting a more efficient component does not necessarily require more labor.

The employment conclusions ignore the possible relocation of domestic jobs to lowerlabor-cost countries, which may occur independently of new standards or may be influenced by the level of investments required by new standards. Since most microwave ovens are already imported and the employment impacts in the GRIM are small, the actual impacts on domestic

13-65employment would be mostly impacted if any U.S. manufacturer decided to shift remaining U.S. production to lower-cost-countries.

13.10.1.4 Commercial Clothes Washers

The GRIM calculates that the CCW industry’s domestic labor expenditure for production workers in 2012 is approximately $7 million (total COGS in 2012 times the production labor percentage of COGS times the percentage of U.S production). Using the $19.75 wage rate and 1,890 production hours per year per employee found in the 2006 ASM , the GRIM estimates there are approximately 178 U.S. production employees involved in manufacturing CCW products covered by this rulemaking. The employment spreadsheet of the GRIM shows the annual employment impacts in further detail.

Table 13.10.4 illustrates the impact of new energy conservation standards on employment levels at each TSL for the CCW industry calculated by the GRIM.

Table 13.10.4 Commercial Clothes Washer Industry Estimated Employment Impacts in

2012

Trial Standard Level Base

Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Total Number of Domestic CCW Production Employees in 2012 178 196 216 222 224 227

Change in Total Number of Domestic CCW Production Employees in 2012

Due to Standards - 18 38 44 46 48

Total Number of Domestic CCW NonProduction Employees in 2012 24 27 30 30 31 31

Total Number of Domestic CCW Oven Employees in 2012 202 223 246 252 255 258

Figure 13.10.6 shows annual domestic employment levels for each TSL calculated by the

GRIM.

13-66Direct Employment

0 50 100 150 200 250 300

20

0 6
2 00

8 2010
2 01

2 2014
2 01

6 2018
2 02

0 2022
2 02

4 202 6 20 2 8 203 0 20 3 2 203 4 20 3 6 203 8 20 4 0
2 04

2

YearTotal Domestic Employment (# of workers)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Energy Conservation

Standards Effective Date January 2012

Figure 13.10.6 Total Commercial Clothes Washer Industry Domestic Employment by Year

Because employment expenditures are assumed to be a fixed percentage of COGS and the MPCs increase with more efficient products, the GRIM predicts an increase in employment after standards. As discussed in manufacturing interviews, there are a variety of manufacturers with different capabilities. Since two out of the three manufacturers are large, diversified manufacturers that treat CCW as an extension of their residential washer lines, the domestic employment in the GRIM would only include those production workers involved in making commercial washers for U.S. consumption. The third manufacturer is a low volume manufacturer with the majority of its production focused on CCW and commercial laundry equipment rather than residential clothes washers. The domestic employment figures in the GRIM would only include those production workers directly involved in CCW manufacturing.

Due to the uncertainty in the business decisions of where to manufacture washers after standards, DOE presents a range of potential employment impacts if the potential for relocation is considered. If all manufacturers do not change sourcing and production facility locations in response to standards, amended energy conservation standards have the potential to increase the number of U.S. production workers as shown in Table 13.2.1. The proposed standard could result in the loss of 178 production jobs if all U.S. manufacturers source standards-compliant washers or shift U.S. production abroad.

At each TSL, manufacturers face different pressure that could impact their employment decisions. Currently, all top-loading CCW are produced in the U.S., whereas front-loading CCWs are produced both domestically and abroad. At TSL 1, the GRIM predicts that there will be positive direct employment impacts. Efficiency improvements are likely to increase the labor content of top-loading washers. All manufacturers already make front-loading and top-loading CCWs that either meet or exceed the efficiency requirements of TSL 1. Manufacturers have stated that they are not likely to relocate production because capital and conversion investments (if any) at this TSL are small.

13-67At TSLs 2 and 3, one of the CCW manufacturers has an existing top-loading CCW, another has an existing top-loading residential washer that could be modified for CCW-use, and the remaining manufacturer would have to reengineer its top-loading platform to meet the efficiency levels of TSL 2 and 3. Similarly, two of the three CCW manufacturers have existing front-loading CCWs that meet the efficiency levels of TSL 2 and 3, whereas the remaining CCW manufacturer would have to source a different front-loading CCW from its current supplier. Though there are capital and conversion costs associated with the modifications for two of the manufacturers, it is likely that the higher labor content needed for the more efficient washers would increase employment, as predicted in the GRIM. Manufacturers stated they are not likely to relocate production at this TSL.

At TSL 3, all CCW manufacturers have to update either a front-loading or a top-loading CCW to meet the efficiency levels. For two of the three manufacturers, the impacts will be greater since their top-loading CCWs will be impacted, which represent approximately 80 percent of each of their current production volumes. The remaining CCW manufacturer will have to update/change the front-loading CCW it currently sources from a domestic supplier. While this manufacturer will not incur any capital-expenditure from having to shift its product sourcing, it will still incur some costs for product development, field testing, payment system integration, etc. of the new platform.

For TSL 4 and above, the efficiency levels for top-loading CCWs remain the same as for TSL 3. Therefore the impacts on the top-loading operations at these manufacturers will remain the same at these higher TSLs also. Currently, only one of the three major CCW manufacturers currently produces a front-loading CCW that can meet the efficiency levels of TSL 4 and 5. For TSL 4 and 5, both remaining manufacturers would have to modify existing front-loading CCWs or outsource them from other manufacturers. For example, one of the two manufacturers already sources its front-loading CCWs from another domestic supplier, whose private-label CCWs are based on a residential platform and whose performance is identical to that of the residential platform. This supplier also makes more-efficient front-loading CCWs that it could private label instead. One of their models almost reaches the efficiency level of TSL 5, and minor modifications to the wash temperature or wash programs may allow it to extend its efficiency

level to 2.35MEF/4.4WF.

TSL 4 and above have a higher impact on manufacturers than TSL 3 and below, since these TSLs require manufacturers to update two product platforms ( i.e. , front-loading and toploading) rather than one. Thus, the required investments for product development would roughly double, an expense that the industry volume makes hard to bear. For example, the LVM is unlikely to be able to afford two concurrent product development cycles since they would require more manpower, investment, etc. than the LVM has funds for. Thus, such a scenario could cause the LVM to abandon one or both of its CCW platforms, causing it material harm and potentially having an adverse impact on the competitiveness of the CCW industry. Because the commercial production is treated as an extension of the residential washers, it is difficult to estimate the number of domestic manufacturing jobs that would be eliminated if either large manufacturer decreased CCW production at TSL 4 through TSL 5. The severity of the impact would depend upon how much domestic production remained after the standard.

13-68Finally, the LVM’s sourcing decision will have a large impact on the employment impacts for the industry. The LVM stated that standards could force it to exit the CCW industry if the necessary investments cannot be justified. The LVM also stated that it cannot manufacturer top-loading washers above TSL 2. Using the employment assumptions and the revenues reported in Appendix 13-A, DOE estimates that if the LVM exited the CCW market in response to standards it would directly impact 150 production workers. However, the LVM also stated that its U.S. facility would no longer be viable if washer production ceased. Washer sales are vital to the facility because they add substantial scale for spreading overhead, lead to coupled dryer sales, and allow them to offer a full range of laundry equipment to their customers. If all soft mount washers and standard dryer production ceased at the facility, approximately 292 production jobs would be lost. If the entire facility were closed, approximately 600 employees would be impacted. The employment impacts for the LVM are discussed individually in section

13.9.7.

13.10.2 Production Capacity

13.10.2.1 Conventional Cooking Products Production Capacity Impacts

According to the manufacturers of gas cooking products, amended energy conservation standards should not significantly affect production capacity, except at the max-tech levels. For example, in interviews, all manufacturers of cooking products with standing pilot lights stated they also manufacture products that do not use this type of ignition. Since manufacturers of gas cooking appliances with standing pilot ignitions typically also sell otherwise-identical appliances with electronic ignition systems, manufacturers stated that they expected impacts on manufacturing capacity due to changes in the ignition systems to be minimal. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity levels and continue to meet market demand under amended energy conservation standards. For most other products and efficiencies, manufacturers can modify existing equipment to accommodate redesigned products with more efficient components without significantly impacting production volumes.

However, max-tech levels for standard electric ovens and standard gas ovens strand some existing manufacturing equipment and tooling, and would require substantial product development and retooling. DOE believes setting a standard at this level could lead to short term capacity problems for these products if manufacturers cannot make the tooling changes in time to meet the standard. For the other efficiencies, manufacturers will be able to retool without causing capacity constraints.

13.10.2.2 Microwave Oven Production Capacity Impacts

According to the majority of microwave oven manufacturers, new energy conservation standards will not significantly affect production capacity. As with conventional cooking products, any necessary microwave oven redesigns involve component switches that will not change the fundamental assembly of the equipment. However, manufacturers anticipate significant changes to tooling for TSL 4 for energy factor standards and minor changes to tooling at all TSLs for standby power standards. For all efficiency levels for energy factor and standby power standards, the most significant conversion costs are the research and development (R&D), testing, and certification of products with more-efficient components, which does not affect

13-69production line capacity. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity levels and continue to meet market demand under new energy

conservation standards.

13.10.2.3 Commercial Clothes Washer Capacity Impacts

According to the majority of CCW manufacturers, new energy conservation standards could potentially impact manufacturers’ production capacity depending on the efficiency level required. Necessary redesigns of front-loading and top-loading CCWs will not change the fundamental assembly of the product or cause a drastic increase in the volume requirements of one type of washer. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity levels and continue to meet market demand under new energy conservation standards.

However, a very high efficiency standard for top-loading clothes washers could cause a manufacturer to abandon further manufacture of top-loading clothes washers after the effective date (if end-users reject the wash performance of higher-efficiency top-loading CCWs due to concerns about wash quality, for example). Instead of manufacturing top-loading clothes washers, the manufacturers could elect to switch their entire production over to front-loading clothes washers. Since top-loading and front-loading clothes washers share few, if any parts, are built on completely separate assembly lines, and are built at very different production volumes, a manufacturer may not be able to make a platform switch from top-loading to front-loading washers without significant impacts on product development and capital expenses, along with capacity constraints.

For example, multiple manufacturers stated during interviews that front-loading CCWs represent a relatively small segment of their total production volumes. Thus, their front-loadingproduction capacity may need to be substantially expanded to meet the demand that their topproduction lines used to meet. This expansion could possibly affect capacity until new production lines come on-line to service demand. In addition, manufacturers stated that the higher prices of front-loading washers could lead to a decrease in shipments. This could lead to a permanently lower production capacity as machines are repaired and the product lifetime of existing washers is extended.

13.10.3 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have serious consequences for some manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. For the cumulative regulatory burden analysis, DOE describes other significant product-specific regulations that could affect conventional cooking products, microwave oven, and CCW manufactures that will take effect

13-70three years before or three years after the effective date of the amended energy conservation standards for these products f

.

Companies which produce a wide range of regulated products may be faced with more capital and product development expenditures than competitors with a narrower scope of products. Regulatory burdens can prompt companies to exit the market or reduce their product offerings, potentially reducing competition. Especially smaller companies can be impacted by regulatory costs since such companies have lower sales volumes over which they can amortize the costs of meeting new regulations. DOE considers that a proposed standard is not economically justified if it contributes to an unacceptable level of cumulative regulatory burden.

In addition to the energy conservation regulations on conventional cooking products, microwave ovens, and CCWs, several other Federal regulations and pending regulations apply to these products and other equipment produced by the same manufacturers. DOE recognizes that each regulation can significantly impact manufacturers’ financial operations. The following sections provide a qualitative discussion of some of these regulations and standards.

13.10.3.1 Standby Power Requirements

Section 310 of the Energy Independence and Security Act of 2007 (EISA) amends Section 325 of the EPCA to require DOE to regulate standby mode and off mode energy consumption as part of an energy conservation standard for all covered products, including residential ranges and ovens and microwave ovens, for which a final rule is adopted after July 10, 2010. For products covered by this rulemaking, the EISA specifies that the test procedure for residential ranges and ovens and microwave ovens be amended to include measurement of standby mode and off mode energy consumption, taking into consideration the most current version of International Electrotechnical Commission’s (IEC) Standards 62301 Household electrical appliances – Measurement of standby power (IEC 62301). According to the EISA, an energy conservation standard for cooking products that would be put forth from this rulemaking is not required to incorporate standby mode and off mode energy consumption. However, in the ANOPR, DOE stated it intends to initiate a test procedure change to measure microwave oven standby power for reasons that: 1) standby power consumption represents a significant proportion of microwave oven annual energy consumption, and 2) the range of standby power consumptions among microwave ovens currently on the market suggests that the likely impact of a standard would be significant.

Besides the test procedure change for products in this rulemaking, manufacturers stated a concerned with the EISA requirement that all covered products measure standby power and off mode. Manufactures stated that this requirement will impose a heavy burden on their testing facilities going forward. In addition, because the test procedure change will affect all covered products, manufacturers expressed a concern that this had the potential to create many overlapping regulatory compliance costs in the future.

f The effective date for conventional cooking products, microwave oven, and CCW and PTHP is three years from the date of publication of the final rule. The effective date for standard size PTAC and PTHP is four years from the date of publication of this final rule (approximately September, 2012).

13-7113.10.3.2 Additional Federal Energy Conservation Standards

Besides the energy conservation regulations on conventional cooking products, microwave ovens and CCWs, several other Federal regulations and pending regulations apply to other products and equipment produced by the same manufacturers. DOE recognizes that each regulation can significantly impact manufacturers’ financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the market. Table 13.10.5 and Table 13.10.6 list the Federal regulations that could also affect manufacturers of the conventional cooking products, microwave oven, and CCW industries in the three years leading up to and the three years preceding the effective date of the amended energy conservation standards for these products. It must be noted that while the list of products is long, the amount of cumulative burden on any particular firm is extremely variable since the product scope of each company is different.

13-72Table 13.10.5 Other DOE and Federal Actions Affecting the Cooking Products Industry (Conventional Cooking Products and Microwave Ovens)

Regulation Approximate

Effective Date* Number of Impacted Companies

from the

MTA Estimated Industry Total

Conversion Expenses** (millions) Residential Refrigerators and

Freezers 2010* 18 N/A †

Residential Clothes Washers 2014* 14 N/A †

Dishwashers 2012 14 N/A †

Room Air Conditioners 2014* 9 N/A †

Battery Chargers 2014* 5 N/A †

Dehumidifiers 2012 4 N/A †

Residential Furnaces 2015* 3 $97 (2006$) g

Commercial Clothes Washers 2012* 3 See section 13.4.8

Packaged Terminal Air Conditioners and Heat Pumps 2012* 3 N/A †

External Power Supplies 2014* 3 N/A †

Residential Fluorescent and Incandescent Lamps 2012* 2 N/A †

Residential Water Heaters 2015* 2 N/A †

Commercial Beverage Vending

Machine 2012* 2 N/A †

Commercial Refrigeration Equipment 2012* 2 $112 (2007$) h

Commercial Unitary Air Conditioners and Heat Pumps 2010 2 N/A †

Ceiling Fans and Ceiling Fan Light

Kits 2010 1 N/A †

Commercial Distribution

Transformers 2010 1 $13.5 (2006$) i

*The dates listed are an approximation. The exact dates are pending final DOE action. ** Total conversion expenses include both capital and equipment conversion expenses for the rulemaking specific

industries. † For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not have finalized estimated total industry conversion expense. For minimum performance requirements prescribed by the Energy Policy Act of 2005 (EPACT 2005), DOE did not estimate total industry conversion expenses because a

g Estimated industry conversion expenses were published in the TSD for the November 2007 residential furnace

final rule. 72 FR 65136. The TSD for the 2007 residential furnace final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/furnace_boiler_fr.html

h Estimated industry conversion expenses were published in the TSD for the August 2008 commercial refrigeration equipment NOPR. 73 FR 50119. The TSD for the 2008 commercial refrigeration equipment NOPR can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/commercial/refrig_equip_nopr.html

i Estimated industry conversion expenses were published in the TSD for the October 2007 distribution transformers

final rule. 72 FR 58190. The TSD for the 2007 distribution transformers final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/commercial/distribution_transformers_finalrule.html

13-73MIA was not completed as part of a rulemaking. 42 U.S.C. 6291-6317. For minimum performance requirements prescribed by the Energy Independence and Security Act of 2007 (EISA), DOE did not estimate total industry conversion expenses because a MIA was not completed as part of a rulemaking. Pub. L. 110-140.

Table 13.10.6 Other DOE and Federal Actions Affecting the CCW Industry

Regulation Approximate Effective

Date* Number of Impacted Companies from the

MTA Estimated Total

Conversion Expenses**

Residential Clothes

Washers 2014* 6 N/A †

Residential Refrigerators

and Freezers 2010* 5 N/A †

Dishwashers 2012 4 N/A †

Packaged Terminal Air

Conditioners and Heat Pumps 2012* 4 N/A †

Room Air Conditioners 2014* 3 N/A †

Cooking Products 2012* 3 See section 13.4.8 Battery Chargers 2014* 2 N/A †

Dehumidifiers 2012 2 N/A †

Residential Furnaces 2015* 2 $97 (2006$) g
External Power Supplies 2014* 2 N/A †

Residential Fluorescent and Incandescent Lamps 2012* 1 N/A †

Residential Water

Heaters 2015* 1 N/A †

Commercial Beverage Vending Machines 2012* 1 N/A †

*The dates listed are an approximation. The exact dates are pending final DOE action ** Total conversion expenses include both capital and equipment conversion expenses. † For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not have finalized estimated total industry conversion expense. For minimum performance requirements prescribed by EPACT 2005, DOE did not estimate total industry conversion expenses because a MIA was not completed as part of a rulemaking. 42 U.S.C. 6291-6317. For minimum performance requirements prescribed by EISA 2007, DOE did not estimate total industry conversion expenses because a MIA was not completed as part of a rulemaking. Pub. L.

110-140.

13-74Additional investments necessary to meet these potential standards could have significant impacts on manufacturers of the covered products. However, DOE has limited data on the importance of these other regulated products for manufacturers of conventional cooking products, microwave ovens, and CCW. Differences in market shares and manufacturing processes of other regulated products for each manufacture could cause varying degrees of burdens on these manufactures. Therefore, DOE only estimated the cost of compliance to meet other energy conservation standards for regulated products if DOE had published a final rule.

While any company that manufacturers products covered in pending rulemakings has the potential to incur overlapping investments to comply with other standards, manufacturers of CCWs could be greatly impacted by the upcoming rule covering residential clothes washers. Manufacturers of CCW typically manufacture much of the washer on the same assembly lines as their residential washers. Any changes that are needed to comply with this rule have potential interactions with the production of residential washers. Depending on the standard level that is chosen for residential washers, the production lines for both products may have to be significantly altered.

13.10.3.3 State Energy and Water Conservation Standards

In addition to Federal regulations, cooking products and CCW manufacturers are also subject to State energy and water conservation standards. CCWs are covered by the State

standards listed in Table 13.10.7.

Table 13.10.7 State Commercial Clothes Washer Regulations Similar to EPACT 2005

State Effective Date Difference from EPACT 2005

Arizona MEF and WF: 1/1/08 Standards effective one year later than EPACT 2005

California MEF: 1/1/05 WF: 1/1/07 MEF standard effective two years earlier than EPACT 2005

Connecticut MEF and WF: 7/1/06 Standards effective six months earlier than EPACT 2005

Maryland MEF and WF: 3/1/07 Standards effective two months later than EPACT 2005

New Jersey MEF: 1/1/07 WF: 1/1/10 Water factor standard effective three years later than EPACT

2005 Oregon MEF and WF: 1/1/08 Standards effective one year later than EPACT 2005

Rhode Island MEF and WF: 1/1/07 Identical to EPACT 2005

Washington MEF - For Sale: 1/1/07 MEF –

Installation: 1/1/08 Does not address water factor

As presented in the table above, the State of California mandates energy and water conservation standards for commercial front-loading and commercial top-loading automatic clothes washers. Table 13.10.8 provides the State’s CCW energy conservation standards, which are dependent on clothes container capacity, and the water conservation standards, which are effective two years after the MEF standards.

13-75Table 13.10.8 California State Energy and Water Conservation Standards for Commercial

Clothes Washers

Clothes Washer Clothes Container Minimum MEF Maximum Water

Classification Compartment Effective January Factor Effective Capacity (ft3) 1, 2005 January 1, 2007

Front-loading < 3.5 ft 3 1.26 9.5

< 1.6 ft 3 0.65 9.5 Top-loading ≥ 1.6 ft 3 and < 4.0 ft 3 1.26 9.5

In addition to the efficiency standards discussed above, the State of California requires that commercial top-loading semi-automatic clothes washers and commercial suds-saving clothes washers manufactured on or after January 1, 2005 have an unheated rinse water option.

Additionally, California issued minimum water conservation standards for residential clothes washers. While this does not directly affect products covered by the rulemakings, DOE is aware that this standard may have impacts on manufacturers of CCWs and other household appliances. Although Federal standards exist for the energy consumption of residential clothes washers, no such standard exists for the water efficiency. On September 16, 2005, the California Energy Commission (CEC) issued a petition for an exemption from Federal preemption to seek to apply its own State regulation. DOE accepted written comments regarding this California petition until April 7, 2006. Table 13.10.9 provides the State’s proposed residential clothes washer water conservation standards and their respective effective dates.

Table 13.10.9 California Water Conservation Standards for Residential Clothes Washers

Clothes Washer Maximum Water Factor (gallons/cu. ft.)

Classification Effective January 1, 2007 Effective January 1, 2010

Top-loading 8.5 6.0

Front-loading 8.5 6.0

On December 28, 2006, DOE issued a decision denying the California petition. 71 FR 78157. The denial of the petition was based on three factors. First, DOE determined that it does not have the statutory authority to prescribe a rule for California that would become effective by January 1, 2007, the first of two compliance dates contained in Title 20, section 1605.2(p)(1) of the California Code of Regulations. Second, DOE ruled that CEC had not established by a preponderance of the evidence that the State of California has unusual and compelling water interests, a condition required by EPCA for DOE to grant California a waiver from Federal preemption. 42 USC 6297(d)(1)(B). Finally, a preponderance of evidence showed that the California regulation would likely result in the unavailability of a class of residential clothes washers, specifically top-loader machines, in California.

13.10.3.4 Refrigerant Phase-out

In 1987, the United Nations Environment Programme (UNEP) adopted the Montreal Protocol on Substances that Deplete the Ozone Layer (“Montreal Protocol”), which regulates the phase-out of ozone-depleting substances through a collaborative and international effort. In 1988, the United States ratified the Montreal Protocol and thus committed to the phase-out.

13-76In 1990, the Clean Air Act was amended to include Title VI, “Stratospheric Ozone Protection,” to implement the Montreal Protocol. (42 U.S.C 7671, et seq.) Title VI mandated the phase-out by 2020 of HCFC refrigerants for use in new air-conditioning systems. (42 U.S.C. 7671d) Title VI, however, also authorized the U.S. Environmental Protection Agency (EPA) to accelerate this date if certain criteria were met, (42 U.S.C. 7671e) and EPA subsequently adopted a rule on December 10, 1993 to require the phase-out of HCFC refrigerants for use in new equipment by 2010. 58 FR 65018. R-22, a refrigerant currently used by manufacturers of heating, ventilation, and air-conditioning (HVAC) systems, is an HCFC refrigerant. Phase-out of this refrigerant could have a significant impact on manufacturing, performance, and cost of HVAC equipment. Many of the same manufacturers that produce conventional cooking products, microwave ovens, and CCWs also manufacture equipment that utilizes R-22 refrigerant. These manufacturers will need to convert their manufacturing process and designs to meet the refrigerant requirements in addition to energy conservation standards.

13.10.3.5 Restriction of Hazardous Substance Directive

According to manufacturers, the Restriction of Hazardous Substance Directive j (RoHS) will have some global impact on manufacturing of electrical and electronic equipment. Under the directive, all manufacturers are banned from placing on the European Union (EU) market new electrical and electronic equipment containing more than agreed-upon levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether flame retardants. Although there is no Federal regulation on RoHS, California has passed SB 20: Electronic Waste Recycling Act of 2003. Under this law, California limits the

amount of hazards substances included in the RoHS directive that can be sold in California.

In addition, several northeastern states have placed a ban on any product that containsmore than 1 ounce of mercury (a substance listed in RoHS). This primarily affects mercurybased gas valves found in commercial and residential conventional cooking products. Manufacturers of conventional cooking products have said that these bans and RoHS will have some impacts in the way the electronic components in the cooktops and ovens are incorporated into the design. Currently, these manufacturers have electronic components in the cooktop and oven designs that contain substances banned by the RoHS and mercury limit passed by northeastern states. However, manufacturers do not anticipate these restrictions will significantly impact the cooking products industry as a whole.

A significant worry to manufacturers is the uncertainty about the future of RoHS. One manufacturer stated that California’s resumption of the RoHS initiative demonstrates the ease with which any state could selectively choose to ban its products. One manufacturer stated that there are number of exemptions found in RoHS which must be periodically renewed by the EU. Manufacturers use a number of these exempted substances in their products and are not sure if the exemptions will be renewed. Lastly, confirming RoHS-compliance will place additional testing burdens on manufacturers.

j Further information about RoHS can be found at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf

13-77Most manufacturers interviewed for this rulemaking are already compliant with the RoHS directive. The most significant cumulative regulatory burden for gas cooking appliance manufacturers is a state-by-state restriction on mercury k , which affects the gas valves used in their appliances. Most gas cooking appliance manufacturers have already eliminated mercury switches or already have plans in place to do so. However, all appliance manufacturers are concerned about potential restrictions of other hazardous substances in the future, such as fire protection materials, which could be costly to remove from existing products.

13.10.3.6 International Energy Conservation Standards

Commercial Clothes Washers

DOE is not aware of any foreign standards covering CCWs. However, several foreign standards cover residential clothes washers, and DOE understands that this rulemaking may still impact some North American manufacturers in the home appliance industry.

The Canadian government regulates the efficiency of residential clothes washers. This standard applies to standard or compact electrically operated household clothes washers that are top- or front-loaded, and that have an internal control system that regulates the water temperature without the need for user intervention subsequent to initiation of machine operation. The current standards went into effect January 1, 2007, with increases in the standards for some product classes compared to the previous standards which had been in effect since January 1, 2004.

Mexico mandates energy conservation standards for residential clothes washers sold in the country, however the standard does not apply to clothes washers that do not use electricity or are used for commercial or industrial applications.

Cooking Products

Canada does set energy conservation standards for cooking products. However, these standards are less stringent than those of the United States. Manufacturers stated their concern that Canada will begin to regulate products at the provincial level. Canada doesn’t have Federal pre-emption clauses for efficiency standards like the United States, so province-by-province standards could create a patchwork of standards and result in even greater testing costs.

DOE surveyed foreign regulatory and non-regulatory programs, identifying Korea’s estandby program, Australia’s standby program, and Japan’s Top Runner Program. All of them aim to meet or exceed the goals of the International Energy Agency (IEA)’s One-Watt program to lower standby power consumption below 1 W for microwave ovens. l Korea’s e-standby

k For example, the Interstate Mercury Education & Reduction Clearinghouse (IMERC) is a coalition of Northeast states coordinating the banning of products containing mercury, see http://www.newmoa.org/prevention/mercury/imerc.cfm

l IEA Energy Information Centre, Standby Power Use and the IEA “1-Watt Plan” http://www.iea.org/textbase/subjectqueries/standby.asp

13-78program currently has a voluntary labeling program for microwave ovens with less than 1 W of standby power. The program is currently transitioning to a mandatory 1 W maximum standby limit by the year 2010. Australia has plans to implement a mandatory 1 W standard by the year 2012. In accordance with Japan’s Top Runner Program, Japanese appliance manufacturers made a voluntary declaration to reduce standby power consumption of microwave ovens without a timer as close to 0 W as possible and that of microwave ovens with a timer to 1 W or lower.

13.10.3.7 International Test Procedures

Currently, manufacturers of conventional cooking products are principally impacted by foreign regulation due to the need to use a separate test procedure for foreign markets. Depending on the country where the regulation is from, manufacturers must use a separate test procedure for exported products. A similar situation exists for exports of CCWs to Australia. Manufacturers often have to contract foreign laboratories to conduct tests at the foreign

locations.

13.11 CONCLUSIONS

The following sections summarize the different impacts for the scenarios DOE believes are most likely to capture the range of impacts on conventional cooking products, microwave ovens, and CCW manufacturers as a result of both new and amended energy conservation standards. DOE also notes that while these scenarios bound the range of most plausible impacts on manufacturers, there potentially could be circumstances which cause manufacturers to experience impacts outside of this range.

13.11.1.1 Conventional Cooking Products Industry

To assess the lower end of the range of potential impacts for the conventional cooking products industry, DOE considered a scenario in which the industry gross margin percentage in the base case is preserved in the standards case ( i.e. , the markup is held constant for all products at all TSLs). Thus, a manufacturer is able to fully pass on any additional costs due to standards and maintain the percentage margin between COGS and manufacturing selling price. Thus, if unit sales remain constant, the gross margin in absolute dollars will increase after a standard

comes into effect.

To assess the higher end of the range of potential impacts for the conventional cooking products industry, DOE considered the scenario reflecting the preservation of industry gross margin in absolute dollars. Under this scenario, DOE assumed that the industry cannot pass on all additional costs due to efficiency-related changes ( i.e. , the markup decreases for all TSLs in the standards case.) Thus, the absolute gross margin is held constant. This means the percentage difference between manufacturer production cost and selling price will decrease in the standards case compared to the base case and the gross margin percentage will be lower. As a result, the industry will make the same gross margin in absolute dollars post-standard in a scenario with constant shipments but the industry will also have a lower INPV since the gross margin percentage is eroding.

Electric Cooktops

13-79At TSL 1, the impact on INPV and cash flow for electric cooktops is zero. At this level, DOE assumed both electric coil and smooth cooktops would have the same efficiency level as the baseline. Therefore, no impacts are reported at TSL 1.

At TSL 2 and TSL 3, the impact on INPV and cash flow varies depending on manufacturers’ ability to maintain gross margins as a percentage of revenues constant as the manufacturing product cost (MPC) increases as a result of standards. DOE estimated the impacts in INPV at TSL 2 and TSL 3 to range from -$2 million to -$11 million, or a change in INPV of -0.56 percent to -3.18 percent. At this level, the industry cash flow would decrease by approximately 12 percent, to $18.3 million, compared to the base-case value of $20.8 million in the year leading up to the standards. DOE does not expect significant impacts at TSL 2 and TSL 3 because the investments needed to conform to the standards are relatively small compared to overall SG&A and R&D annual costs. In addition, product price increases would benefit manufacturers if they can fully pass along MPC increases to customers. However, overall INPV would decline in all scenarios at these standard levels because, according to manufacturers, the research and engineering costs needed to achieve these levels would exceed the relatively small capital expenditures and incremental costs at this standard level.

At TSL 4, the impact on INPV and cash flow will vary significantly depending on the manufacturers’ ability to maintain a constant gross margin percentage as MPCs increase due to standards. DOE estimated the impacts in INPV to range from approximately positive $77 million to -$383 million, or a change in INPV of 21.62 percent to -107.19 percent. At this level, the industry cash flow decreases by approximately 168 percent, to -$14.1 million, compared to the base-case value of $20.8 million in the year leading up to the standards. At this TSL, if manufacturers are able to maintain their gross margin as a percentage of revenues, the impacts of higher manufacturing costs would be negated by the increases in total revenues. However, if manufacturers can only maintain their absolute dollar gross margin, then the impacts at TSL 4 would completely erode manufacturers’ profits. According to manufacturers, the energy savings at this level are not economically justified because both consumers and manufacturers will experience negative impacts. Consumers would experience significantly higher prices, while manufacturers will experience decreased profits, lower revenues, and much higher R&D costs.

Gas Cooktops

At TSL 1, TSL 2, and TSL 3, the impact on INPV and cash flow varies depending on manufacturers’ ability to fully maintain their gross margins as the MPCs increase as a result of the standards. These TSLs are equivalent to the elimination of standing pilot lights. DOE estimated the impacts in INPV at TSL 1, TSL 2, and TSL 3 to range from -$5 million up to -$12 million, or a change in INPV of -1.74 percent up to -4.12 percent. At this level, the industry cash flow decreases by approximately 19 percent, to $14.3 million, compared to the base case value of $17.6 million in the year leading up to the standards. Since more than 90 percent of the equipment being sold is already at or above this level ( i.e. , most products do not have standing pilot lights), those manufacturers that do not fall below the efficiency levels specified by TSL 1, TSL 2, and TSL 3 will not have to make additional modifications to their product lines to conform to the amended energy conservation standards. DOE expects the lower end of the impacts to be reached, which indicates that industry revenues and costs will not be significantly

13-80negatively impacted as long as manufacturers can maintain their gross margin as a percentage of

revenues.

Analysis shows that although the elimination of standing pilot lights may not significantly impact large manufacturers, small manufacturers that rely on revenues from theseproducts will be significantly impacted. In MIA interviews, all manufacturers of standing pilotequipped gas appliances expressed concern about the potential elimination of standing pilots.Two small businesses, which both focus solely on cooking appliances, produce standing pilotequipped products which comprise nearly half of their total annual gas product shipments and which they consider to be a differentiator from their larger, more-diversified competitors. While all these manufacturers also make comparable cooking appliances with electronic ignition systems, these two small businesses are likely to be disproportionately impacted by a ban on standing pilot ignition systems. DOE contacted both manufacturers multiple times to better understand the potential business impact of a standing pilot ban and believes that, while standing pilot ignition systems are a differentiator, gas cooking products made by these manufacturers are primarily differentiated by non-standard unit widths and other features. Thus, while the potential elimination of standing pilot lights would lead to some decrease in differentiation, the main differentiators, notably non-standard unit sizes, will remain.

At TSL 4, the analysis shows that the impact on INPV and cash flow continues to vary significantly depending on the manufacturers’ ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 4 to range from approximately positive $28 million to -$141 million, or a change in INPV of positive 9.83 percent to -49.12 percent. At this level, the industry cash flow decreases by approximately 38 percent, to $10.9 million, compared to the base case value of $17.6 million in the year leading up to the standards. At this level, the component switch also carries substantial redesign costs. Sealed burners affect the design of the entire cooktop, making product conversion and capital conversion costs much larger than a simpler component switch. At this TSL, if manufacturers can maintain their gross margin as a percentage of revenues, the impacts of higher manufacturing costs would be negated by the increases in total revenues. However, if manufacturers can only maintain their absolute dollar gross margin, then the impacts of TSL 4 would significantly erode manufacturers’ profits.

Electric Ovens

At TSL 1, the projected impact on INPV and cash flow for electric ovens is zero. At this level, DOE assumed both electric standard and self-cleaning ovens would have the same efficiency level as the baseline. Therefore, DOE reported no impacts at TSL 1.

At TSL 2 and TSL 3, the impact on INPV and cash flow varies depending on manufacturers’ ability to maintain gross margin as a percentage of revenues as the MPCs increase as a result of standards. DOE estimated the impacts in INPV at TSL 2 and TSL 3 to range from -$8 million to -$19 million, or a change in INPV of approximately -.99 percent to ­

2.43 percent. At these levels, the industry cash flow would decrease by approximately 12 percent, to $40.4 million, compared to the base-case value of $46.1 million in the year leading up to the standards. DOE does not expect significant impacts at TSL 2 and TSL 3 because the investments needed to conform to the standards are relatively small in comparison to overall

13-81SG&A and R&D annual costs. In addition, product cost increases would benefit manufacturers if they can fully pass along MPC increases to customers.

At TSL 4, the analysis shows that impacts on INPV and cash flow would vary significantly depending on the manufacturers’ ability to maintain gross margin as MPCs increase due to standards. DOE estimated the impacts in INPV to range from approximately -$10 million to -$469 million, or a change in INPV of -1.27 percent to -59.16 percent. At this level, the industry cash flow would decrease by approximately 194 percent, to -$43.3 million, compared to the base-case value of $46.1 million in the year leading up to the standards. At this level, the increase in efficiency also carries substantial redesign costs. Forced convection and reducing conduction losses affect the design of the entire cavity, making product conversion and capital conversion costs much larger than a simpler component switch. In addition, if manufacturers can maintain their gross margin as a percentage of revenues, the impacts of higher manufacturing costs would be relatively small. However, if manufacturers can only maintain their absolute dollar gross margin, then the impacts of TSL 4 would decrease the INPV of the industry by close

to half.

Gas Ovens

At TSL 1 and TSL 2, the impact on INPV and cash flow varies depending on manufacturers’ ability to fully maintain their gross margins as the MPC increases as a result of standards. These TSLs are equivalent to the elimination of standing pilot lights from gas cooking products. DOE estimated the impacts in INPV at TSL 1 and TSL 2 to range from a -$7 million up to -$10 million, or a change in INPV of -1.57 percent up to -2.10 percent. At this level, the industry cash flow decreases by approximately 11 percent, to $25.6 million, compared to the base case value of $28.8 million in the year leading up to the standards. Since more than 80 percent of the equipment being sold is already at or above this level ( i.e. , most products do not have standing pilot lights), those manufacturers that do not fall below the efficiency levels specified by TSL 1 and TSL 2 would not have to make additional modifications to their product lines to conform to the amended energy conservation standards. DOE expects the lower end of the impacts to be reached, which indicates that industry revenues and costs are not significantly negatively impacted as long as manufacturers can maintain their gross margin as a percentage of revenues. The analysis shows that although the elimination of standing pilot lights may not significantly impact large manufacturers, small manufacturers that rely on revenues from these products would be impacted significantly.

At TSL 3, the impact on INPV and cash flow continues to vary depending on the manufacturers’ ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 3 to range from approximately -$6 million to -$41 million, or a change in INPV of -1.38 percent to -8.68 percent. At this level, the analysis shows that the industry cash flow decreases by approximately 27 percent, to $20.9 million, compared to the base case value of $28.8 million in the year leading up to the standards.

At TSL 4, the impact on INPV and cash flow varies significantly depending on the manufacturers’ ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 4 to range from approximately -$47 million to -$181 million, or a change in INPV of -10.04 percent to -38.80 percent. At this level, the analysis shows that the industry cash

13-82flow decreases by approximately 190 percent, to -$26.0 million, compared to the base case value of $28.8 million in the year leading up to the standards. At this TSL, if manufacturers can maintain their gross margin as a percentage of revenues, the projected increase in total revenues negates the impacts of higher manufacturing costs. However, if manufacturers can only maintain their absolute dollar gross margin, then the impacts of TSL 4 would significantly erode manufacturers’ profits.

13.11.1.2 Microwave Ovens Industry

To assess the lower end of the range of potential impacts for the microwave oven industry, DOE considered the scenario reflecting the preservation of gross margin percentage. As production cost increases with efficiency, this scenario implies manufacturers will be able to maintain gross margins as a percentage of revenues. To assess the higher end of the range of potential impacts for the microwave oven industry, DOE considered the scenario reflecting preservation of gross margin in absolute dollars. Under this scenario, DOE assumed that the industry can maintain its gross margins in absolute dollars after the standard effective date. The industry would do so by passing through its increased costs to customers without increasing its gross margin in absolute dollars.

Energy Factor Standards

TSL 1a represents an improvement in cooking efficiency from the baseline level of 0.557 EF to 0.586 EF. At TSL 1a, the impact on INPV and cash flow varies greatly depending on the manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 1a to range from less than $44 million to -$199 million, or a change in INPV of 3.04 percent to -13.74 percent. At this level, the industry cash flow decreases by approximately 18 percent, to $71.7 million, compared to the base-case value of $87.3 million in the year leading up to the standards.

TSL 2a represents an improvement in cooking efficiency from the baseline level of 0.557 EF to 0.588 EF. At TSL 2a, the impact on INPV and cash flow would be similar to TSL 1a and depend on whether manufacturers can fully recover the increases in MPCs from the customer. DOE estimated the impacts in INPV at TSL 2a to range from $117 million to -$386 million, or a change in INPV of 8.09 percent to -26.62 percent. At this level, the industry cash flow decreases by approximately 22 percent, to $67.9 million, compared to the base-case value of $87.3 million in the year leading up to the standards.

TSL 3a represents an improvement in cooking efficiency from the baseline level of 0.557 EF to 0.597 EF. At TSL 3a, the impact on INPV and cash flow continues to vary depending on the manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 3a to range from approximately $237 million to -$675 million, or a change in INPV of 16.34 percent to -46.56 percent. At this level, the industry cash flow decreases by approximately 27 percent, to $64.0 million, compared to the base-case value of $87.3 million in the year leading up to the standards.

TSL 4a represents an improvement in cooking efficiency from the baseline level of

0.557 EF to 0.602 EF. At TSL 4a, DOE estimated the impacts in INPV to range from

13-83approximately $267 million to -$1,165 million, or a change in INPV of 18.44 percent to -80.39 percent. At this level, the industry cash flow decreases by approximately 101 percent, to -$1.0 million, compared to the base-case value of $87.3 million in the year leading up to the standards. At higher TSLs, manufacturers have a harder time fully passing on larger increases in MPCs to

the customer.

Due to the similarities in design requirements to meet each TSL, the results for each TSL are dependent on the ability of manufacturers to pass along increases in costs and the additional conversion costs. The engineering analysis assumes that each TSL adds an additional component switch-out. For example, to reach TSL 2, manufacturers must switch the fan in addition to switching the power supply required to meet TSL 1. The high conversion costs associated with these switches drive INPV negative if incremental costs are only partially passed along to consumers. If the incremental costs are fully passed along to consumers, which manufacturers stated was unlikely due to fierce competition in the industry, the higher purchase prices are enough to overcome the high product conversion and capital conversion costs, thereby making INPV positive. The magnitude of the positive cash flow impact under the preservation of gross margin percentage scenario and the negative cash flow impact under the preservation of gross margin (absolute dollars) scenario depends on the incremental cost of standards-compliant products. The higher the relative cost, the larger the impact on operating revenue and cash flow in the years following the effective date of the standard. Since higher TSLs correspond to higher relative costs, the impacts of the markup scenarios are greater at higher TSLs.

Standby Power Standards

TSL 1b represents an improvement in standby power from the baseline level of 4.0 W to

2.0 W. At TSL 1b, the impact on INPV and cash flow varies depending on the manufacturers’ ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 1b to range from less than -$22 million to -$26 million, or a change in INPV of -1.50 percent to -1.77 percent. At this level, the industry cash flow decreases by approximately 13 percent, to $76.1 million, compared to the base-case value of $87.3 million in the year leading up

to the standards.

TSL 2b represents an improvement in standby power from the baseline level of 4.0 W to

1.5 W. At TSL 2b, the impact on INPV and cash flow would be similar to TSL 1b and depend on whether manufacturers can fully recover the increases in MPCs from the customer. DOE estimated the impacts in INPV at TSL 2b to range from -$35 million to -$48 million, or a change in INPV of -2.44 percent to -3.28 percent. At this level, the industry cash flow decreases by approximately 22 percent, to $68.2 million, compared to the base-case value of $87.3 million in the year leading up to the standards.

TSL 3b represents an improvement in standby power from the baseline level of 4.0 W to

1.0 W. At TSL 3b, the impact on INPV and cash flow continues to vary depending on the manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated the impacts in INPV at TSL 3b to range from approximately -$37 million to -$71 million, or a change in INPV of -2.52 percent to -4.92 percent. At this level, the industry cash flow decreases by approximately 27 percent, to $64.1 million, compared to the base-case value of $87.3 million in the year leading up to the standards.

13-84TSL 4b represents an improvement in standby power from the baseline level of 4.0 W to

0.02 W. At TSL 4b, DOE estimated the impacts in INPV to range from approximately -$35 million to -$172 million, or a change in INPV of -2.40 percent to -11.87 percent. At this level, the industry cash flow decreases by approximately 43 percent, to $49.3 million, compared to the base-case value of $87.3 million in the year leading up to the standards. At higher TSLs, manufacturers have a harder time fully passing on larger increases in MPCs to the customer. At TSL 4b, the conversion costs are higher than for TSL 1b, TSL 2b, and TSL 3b because the design of all microwave platforms must be more significantly altered.

For standby power standards, conversion costs become more expensive at higher TSLs as the complexity of further lowering standby power increases, substantially driving up engineering time and also increasing the testing and product development time. If the increased production costs are fully passed on to consumers (the preservation of gross margin percentage scenario), the operating revenue from higher prices is not enough to overcome the negative impacts from the substantial conversion costs. The incremental costs are small for each TSL, meaning the positive impact on cash flows is small compared to the conversion costs. As a result of the small incremental costs and large conversion expenses, INPV is negative for all TSLs under the preservation of gross margin percentage scenario. If the incremental costs are not fully passed along to customers (the preservation of gross margin (absolute dollars) scenario), the negative impacts on INPV are amplified at each TSL.

13.11.1.3 Commercial Clothes Washers Industry

For CCWs, the major source of uncertainty voiced by manufacturers during the interviews is the impact of higher standards on the number of CCWs sold. Pricing and profit margin issues were not emphasized as they were for cooking products. Future product sales are particularly important considering the high capital costs (particularly design costs) in comparison to the small number of products sold. In light of the concern over future shipments, DOE modeled two MIA scenarios, based on two shipment projections from the NIA.

To assess the lower end of the range of potential impacts for the CCW industry, DOE considered a scenario wherein unit shipments will not be impacted regardless of new energy conservation standards – this scenario is called the base case shipments scenario. To assess the higher end of the range of potential impacts for the CCW industry, DOE considered a scenario in which total industry shipments would decrease due the combined effects of increases in purchase price and decreases in operating costs due to new energy conservation standards – this scenario is called the price elastic of demand scenario. In both scenarios it is assumed that manufacturers will be able maintain the same gross margins (as a percentage of revenues) that is currently

obtained in the base case.

At TSL 1, the impact on INPV and cash flow varies depending on the manufacturers’ ability to maintain revenues as shipments decrease due to the price elasticity. DOE estimated the impacts in INPV at TSL 1 to range from positive $3.6 million to positive $2.7 million, or a change in INPV of 6.51 percent to 4.91 percent. At this level, the industry cash flow does not decrease from the base-case value of $3.8 million in the year leading up to the standards. Since all manufacturers have top-loading and front-loading washers already above this level, DOE assumed that there would be no product conversion or conversion capital costs.

13-85At TSL 2, DOE estimated the impacts in INPV at TSL 2 to range from -$3.5 million to ­ $5.7 million, or a change in INPV of -6.37 percent to -10.27 percent. At this level, the industry cash flow decreases by approximately 153 percent, to -$2.0 million, compared to the base-case value of $3.8 million in the year leading up to the standards. To conform to the standards at TSL2, DOE estimated that at least one manufacturer will need to redesign and retool a line of toploading washers that falls below this standard level. Since over 88 percent of front-loading washers exceed this level, DOE assumed that there would be relatively small product conversion and conversion capital costs for these washers.

At TSL 3 DOE estimated the impacts in INPV at TSL 3 to range from -$14.7 million to ­ $17.3 million, or a change in INPV of -26.5 percent to -31.09 percent. At this level, the industry cash flow decreases by approximately 320 percent, to -$8.3 million, compared to the base casevalue of $3.8 million in the year leading up to the standards. Since over 88 percent of frontloading washers exceed this level, DOE assumed that there would be relatively small product conversion and conversion capital costs for these washers. However, at TSL 3 manufacturers stated that significant product redesigns and line retooling would be required to conform to the top-loading standard. Two manufacturers do not have any knowledge base for the technology needed to meet this standard, thereby leading to a substantial redesign expense. Beyond the concerns captured in the GRIM model, other issues we raised by manufacturers at TSL 3. For top-loading CCW, multiple manufacturers stated that customers could see a reduction in wash quality or reject new designs based on a perceived reduction in wash quality. As a consequence they believe that a significant portion of the industry could potentially shift from top-loadingdesigns to front-loading designs. For manufacturers that do not produce large volumes of frontloading washers this would require significant capital to expand front-loading production lines and may force them to redesign their current models to reduce cost. The uncertainty in product class shifting adds to the perceived financial risks of adopting a TSL 3 for front-loading washers. The department seeks comment on the possible magnitude of this shift.

At TSL 4, DOE estimated the impacts in INPV at TSL 4 to range from -$17.8 million to ­ $20.5 million, or a change in INPV of -32.02 percent to -36.83 percent. At this level, the industry cash flow decreases by approximately 367 percent, to -$10.0 million, compared to thebase-case value of $3.8 million in the year leading up to the standards. As with TSL 3, the toploading standard remains at max-tech at TSL 4, and the impacts as previously stated for this product class. Currently, 97 percent of front-loading washers shipped do not meet TSL 4, resulting in multiple manufacturers having to also redesign existing front-loading products to conform to the standard. The $8.1 million in product conversion and capital conversion costs to redesign and retool for the front-loading standard, while not appearing that substantial on a nominal basis, are significant for manufacturers due to low volumes of front-loading washers. Adjusting for shipment volumes, investing $8.1 million in front-loading washers is equivalent to investing over $26 million in top-loading washers. These investment costs are also high compared to the industry value of $19 million for front-loading washers. Consequently, it couldbe difficult for manufactures to justify the investments necessary to reach TSL 4 for frontloading washers.

At TSL 5, DOE estimated the impacts to range from -$29.5 million to -$32.3 million, or a change in INPV of -53.13 percent to -58.19 percent. At this level, the industry cash flow decreases by approximately 527 percent, to -$16.1 million, compared to the base-case value of

13-86$3.8 million in the year leading up to the standards. The top-loading standard remains at max tech at TSL 5. Almost all front-loading washers currently sold do not meet TSL 5. Since most manufacturers do not have existing washers that are close to meeting TSL 5, the redesign and tooling costs drive INPV extremely negative. At TSL 5, manufactures would have to invest $23.4 million in front-loading washer in an industry valued at $19 million. It could be difficult for manufactures to justify the investments necessary to reach max tech for both top-loading and front-loading washers.

13-87REFERENCES

1 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Companies, 3 rd Edition , Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.

2 Securities and Exchange Commission, Annual 10-K Reports , Various Years, Washington D.C., < www.sec.gov >.

3 U.S. Department of Energy-Energy Information Administration. Annual Energy Outlook 2007 with Projections to 2030 , February, 2007. Washington, DC. DOE/EIA-0383(2007).

4 Association of Home Appliance Manufacturers. AHAM 2005 Fact Book , 2005. Washington,

DC.

5 “Table 2 – Quantity and Value of Shipments of Refrigeration, Air-Conditioning, and Warm Air Heating Equipment: 2005 and 2004.” 2000 - 2005 Current Industrial Reports (CIR). U.S. Census Bureau, July 2006.

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