12

- i CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

................................ ................................ ................................ ......... 12

- 1

12.2 METHODOLOGY

................................ ................................ ................................ ........ 12

- 1

12.2.1 Phase I: Industry Profile

................................ ................................ ..................... 12

- 2

12.2.2 Phase II: Industry Cash

- Flow Analysis and Interview Guide

............................ 12

- 2 12.2.2.1 Industry Cash

- Flow Analysis

................................ ............................... 12

- 2

12 .2.2.2 Interview Guide

................................ ................................ ................... 12

- 3

12.2.3 Phase III: Subgroup Analysis

................................ ................................ ............. 12

- 3

12.2.3.1 Manufacturer Interviews

................................ ................................ ...... 12

- 3 12.2.3.2 Revised Industry Cash

- Flow Analysis

................................ ................. 12

- 4 12.2.3.3 Manufacturer Subgroup Analysis

................................ ........................ 12

- 4 12.2.3.4 Small Business Manufacturer Subgroup

................................ .............. 12

- 4 12.2.3.5 Manufacturing Capacity Impact

................................ .......................... 12

- 5 12.2.3.6 Employment Impact

................................ ................................ ............. 12

- 5 12.2.3.7 Cumulative Regulatory Burden

................................ ........................... 12

- 5

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

................................ .......... 12

- 5

12.3.1 Consumer Utility

................................ ................................ ................................ 12

- 6

12.3.2 Profitability

................................ ................................ ................................ ........ 12

- 6

12.4 GRIM INPUTS AND ASSU MPTIONS

................................ ................................ ........ 12

- 6

12.4.1 Overview of the GRIM

................................ ................................ ...................... 12

- 6

12.4.2 Sources GRIM Inputs

................................ ................................ ........................ 12

- 7 12.4.2.1 Corporate Annual Reports

................................ ................................ ... 12

- 7 12.4.2.2 Standard and Poor Credit Ratings

................................ ........................ 12

- 8 12.4.2.3 Dun and Bradstreet Reports

................................ ................................ . 12

- 8 12.4.2.4 Shipment Model

................................ ................................ ................... 12

- 8

12.4.2 .5 Engineering Analysis

................................ ................................ ........... 12

- 8

12.4.2.6 Manufacturer Interviews

................................ ................................ ...... 12

- 8

12.4.3 Financial Parameters

................................ ................................ .......................... 12

- 9

12.4.4 Corporate Discount Rate

................................ ................................ .................... 12

- 9

12.4.5 Trial Standard Levels

................................ ................................ ....................... 12

- 11

12.4.6 NIA

- Shipments Forecast

................................ ................................ .................. 12

- 11 12.4.6.1 Base Case Shipments Forecast

................................ ........................... 12

- 12 12.4.6.2 Standards Case Shipments Forecast

................................ ................... 12

- 12 12.4.6.3 Price Elasticity of Demand Shipments Scenario

............................... 12

- 13 12.4.6.4 Economic Growth Shipments Scenario

................................ ............. 12

- 13

12.4.7 Production Costs

................................ ................................ .............................. 12

- 14

12.4.8 Conversion Costs

................................ ................................ ............................. 12

- 15

12.4.8 .1 Capital Conversion Costs

................................ ................................ ... 12

- 15

12.4.8.2 Product Conversion Costs

................................ ................................ .. 12

- 16

12.4.9 Markups

................................ ................................ ................................ ........... 12

- 18 12.4.9.1 Preservation of Gross Margin Percentage

................................ .......... 12

- 18 12.4.9.2 Preservation of Gross Margin in Absolute Dollars

............................ 12

- 1912

- ii 12.5 MICROWAVE OVEN INDUS TRY FINANCIAL IMPACT S

................................ .. 12

- 20

12.5.1 Impacts on Industry Net Present Value

................................ ........................... 12

- 20

12.5.2 Impacts on Annual Cash Flow

................................ ................................ ......... 12

- 22

12.6 OTHER IMPACTS

................................ ................................ ................................ ...... 12

- 26

12.6.1 Employment

................................ ................................ ................................ ..... 12

- 26 12.6.1.1 Methodology

................................ ................................ ...................... 12

- 26

12.6.2 Production Capacity

................................ ................................ ......................... 12

- 30

12.6.3 Cumulative Regulatory Burden

................................ ................................ ....... 12

- 30 12.6.3.1 Standby Power Requirements

................................ ............................ 12

- 30 12.6.3.2 Additional Federal Energy Conservation Standards

.......................... 12

- 31

12.6.3.3 Restriction of Hazardous Substance Directive

................................ .. 12

- 33 12.6.3.4 International Energy Conservation Standards

................................ ... 12

- 34

12.7 CONCLUSIONS

................................ ................................ ................................ .......... 12

- 35

LIST OF TABLES

Table 12.4.1 GRIM Financial Parameters Based on 1999

– 2006 Weighted Company Financial

Data

................................ ................................ ................................ ................................ ............ 12

- 9 Table 12.4.2 Cost of Equity Calculation

................................ ................................ .................. 12

- 10

Table 12.4.3 Cost of Debt Calculation

................................ ................................ ..................... 12

- 11 Table 12.4.4 Product Class 1 Standby Power Efficiency Levels and TSLs

............................ 12

- 11 Table 12.4.5 Product Class 2 Standby Power Efficiency Levels and TSLs

............................ 12

- 11

Table 12.4.6 Tot al NIA

- Shipments Forecast in 2014

................................ .............................. 12

- 12 Table 12.4.7 Base Case Standby Power Distribution of Efficiencies for Product Class 1 in 201 4

Estimated in the NIA

................................ ................................ ................................ ............... 12

- 12 Table 12.4.8 Base Case Standby Power Distribution of Efficiencies for Product Class 2 in 2014

Estimated in the NIA

................................ ................................ ................................ ............... 12

- 12 Table 12.4.9 Distribution of Standby Power Product Class 1 Shipments in the Standards Case in

2014

– Rol lup Scenario

................................ ................................ ................................ ............ 12

- 13 Table 12.4.10 Distribution of Standby Power Product Class 2 Shipments in the Standards Case in

2014

– Rollup Sce nario

................................ ................................ ................................ ............ 12

- 13 Table 12.4.11 Base Case Standby Power Production Costs (2010$) used in the GRIM for Product

Class 1

................................ ................................ ................................ ................................ ...... 12

- 14 Table 12.4.12 Base Case Standby Power Production Costs (2010$) used in the GRIM for Product

Class 2

................................ ................................ ................................ ................................ ...... 12

- 15 Table 12.4.13 Standby Power Capital Conversion Costs for Product Class 1 by TSL

........... 12

- 16 Table 12.4.14 Standby Power Capital Conversion Costs for Product Class 2 by TSL

........... 12

- 16 Table 12.4.15 Per Platform Assumptions for Capital Conversion Costs (Product Class 1 and Product Class 2)*

................................ ................................ ................................ ..................... 12

- 16

Table 12.4.16 Standby Power Product Conversion Costs for Product Class 1 by TSL

.......... 12

- 17 Table 12.4.17 Standby Power Product Conversion Costs for Pro duct Class 2 by TSL

.......... 12

- 17

Table 12.4.18 Per

- Platform Assumptions for Product Conversion Costs (Product Class 1)*

. 12

- 18 Table 12.4.19 Per Platform Assumptions for Product Conversion Costs (Product Class 2)*

. 12

- 18 Table 12.4.20 Product Class 1 Preservation of Gross Margin in Absolute Dollars Manufacturer Markups

................................ ................................ ................................ ................................ ... 12

- 1912

- iii Table 12.4.21 Product Class 2 Preservation of Gross Margin in Absolute Dollars Manufacturer Markups

................................ ................................ ................................ ................................ ... 12

- 20 Table 12.5.1 Product Class 1 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario

................................ ................................ ....................... 12

- 21 Table 12.5.2 Product Class 1 Manufacturer Impact Analysis Under the Preservation of Gross Margin in Absolute Dollars Markup Scenario

................................ ................................ ......... 12

- 21 Table 12.5.3 Product Class 2 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario

................................ ................................ ....................... 12

- 21 Table 12.5.4 Product Class 2 Manufacturer Impact Analysis Under the Preservation of Gross Margin in Absolute Dollars Markup Scenario

................................ ................................ ......... 12

- 21 Table 12.5.5 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario for Product Class 1 and 2 Combined

................................ ........................... 12

- 21 Table 12.5.6 Manufacturer Impact Analysis Under the Preservation of Gross Margin in Absolute Dollars Markup Scenario for Product Class 1 and 2 Combined

................................ .............. 12

- 22 Table 12.6.1 Industry Estimated Employment Impacts in 2014 for Product Classes 1 and 2

Combined

................................ ................................ ................................ ................................ . 12

- 28 Table 12.6.2 Other DOE and Federal Actions Affecting Microwave Oven Manufacturers

... 12

- 32

LIST OF FIGURES

Figure 12.4.1 Using the GRIM to Calculate Cash Flow

................................ ............................ 12

- 7 Figure 12.5.1 Annual Net Cash Flows for Product Class 1 (Preservation of Gross Margin Percentage Markup Scenario)

................................ ................................ ................................ .. 12

- 22 Figure 12.5.2 Annual Net Cash Flows Product Class 1 (Preservation of Gross Margin in Absolute Dollars Markup Scenario)

................................ ................................ ........................ 12

- 23 Figure 12.5.3 Annual Net Cash Flows for Product Class 2 (Preservation of Gross Margin Percentage Markup Scenario)

................................ ................................ ................................ .. 12

- 23 Figure 12.5.4 Annual Net Cash Flows Product Class 2 (Preservation of Gross Margin in Absolute Dollars Markup Scenario)

................................ ................................ ........................ 12

- 24 Figure 12.5.5 Annual Net Cash Flows for Product Class 1 and Product Class 2 Combined (Preservation of Gross Margin Percentage Markup Scenario)

................................ ................ 12

- 24 Figure 12.5.6 Annual Net Cash Flows for Product Class 1 and Product Class 2 Combined (Preservation of Gross Margin in Absolute Dollars Markup Scenario)

................................ .. 12

- 25 Figure 12.6.1 Microwave Oven Industry Cost Structure

................................ ......................... 12

- 27 Figure 12.6.2 Total Microwave Ovens Industry Domestic Employment by Year for Product

Classes 1 and 2 Combined.

................................ ................................ ................................ ...... 12

- 2912

- 1 CHAPTER 1 2

. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a n energy conservation 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 l aw 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 for standby mode and off mode power on manufacturers of microwave

ovens 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 the Government Regulatory Impact Model (GRIM), an industry

- cash

- flow model adopted to analyze the impact of standby mode and

off mode energy conservation standards on microwave oven manufacturers

. The GRIM inputs

include information on industry c ost structure, shipments, and pricing strategies. The GRIM’s key output is the industry net present value (INPV). The model estimates the finan cial impact of energy conservation standards by comparing changes in INPV between a base case and the

various tri al 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.

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I , “Industry Profile,” consisted of preparing an industry characterization for the microwave oven indust ry , including data on market share, sales volumes and trends, pricing, employment

, and financial structure. Phase II , “Industry Cash Flow,” focused on the microwave oven industr y individually

. Two major product categories were identified for this rulemaking:

**•** Product Class 1: Microwave

- Only Ovens and Countertop Combination Microwave

Ovens

**•** Product Class 2: Built

- In and Over

- the

- Range Combination Microwave Ovens

.

DOE developed a GRIM to prepare an industry cash flow analysis

. Using publicly

available information developed in Phase I , DOE adapted the GRIM’s generic structure to facilitate analysis of new standby power requirements for microwave oven manufacturers

.

In Phase III , “Sub g roup Impact Analysis,” DOE interviewed three microwave oven

manufacturers with varying product focus and market sha res , providing a representative cros s

section of t he industr y

. 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 informat ion that DOE used to evaluate the impacts of new standby mode and12

- 2 off mode standard s 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

.

12.2.1 Phase I : Industry Profile

In Phase I of the MIA, DOE prepared a profile of the microwave oven industr y that built upon the market and technology assessment prepared for this rulemaking (see c hapter 3 of this

T echnical Support Document (TSD) )

. Before initiating the detailed impact studies, DOE

collect ed qualitative and quantitative financial information and past and present market data

. This included estimated market share s , corporate operating ratios, wages, employment , and

financial ratios for several home appliance manufacturers

. The industry profile included a top

down cost analysis of microwave oven manufacturers that DOE used to derive cost and preliminary financial inputs for the GRIM ( 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

microwave oven industr y , including Securities and Exchange Commission (SEC) 10

– K reports, Standard & Poor’s (S&P) stock reports, Dun and Bradstreet (D&B) company profiles, corporate annual reports

, and U.S. Census Bureau’s 2006 Annual Survey of Manufactures (2006 ASM )

. In addition, DOE reli ed on information from its engineering analysis, life

- cycle cost analysis, and analysis of markups to determine product price s to characterize the industry

. DOE also

interviewed manufacturers of microwave ovens . These preliminary interviews were designed to solicit key concerns, industry structure, and other data points for the subsequent analysis.

12.2.2 Phase II : Industry Cash

- Flow Analysis and Interview Guide

In Phase II

, DOE performed industry cash

- flow analyse s and prep are d written guidelines for interviewing manufacturers. Phase II focused on the financial impacts of new standb y mode

and off mode standards on the microwave oven industr y

. New standards can affect manufacturers 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 energy conservation standards

on manufacturers is the GRIM. DOE performed a cash flow analysis by modifying the GRIM for

the microwave oven industr y to quantify these impacts.

12.2.2.1 Industry Cash

- Flow Analysis

T he GRIM uses several factors to determine a series of annual cash flows for the time

between the announcement of the standard and the compliance year and for several years after implementation. These factors include annual e xpected revenues ; costs of sales ; SG&A

expenses ; taxes ; and capital expenditures related to new standards

. Inputs to the GRIM include manufacturing costs, shipments forecasts, and price s 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. DOE developed alternative markup scenarios for each GRIM based on12

- 3 discussions with manufacturers during the rulemaking. DOE’s shipments analysis, presented in

c hapter 9 of th is TSD, provided the basis for the ship ments projection under each TSL in each

GRIM. The financial parameters were developed using publicly available data of manufacturers

of products covered by this rulemaking

. The results of the GRIM are compared against base

- case projections

. The financial impact of new stand by mode and off mode standards is the difference

between the baseline and the standards

- impacted sets o f discounted annual cash flows.

12.2.2.2 Interview Guide

During Phase III of the MIA, DOE conduct ed interviews with manufacturer s that cover

all or some microwave oven product categorie s to gather information on the effects of new standby mode and off mode energy conservation standards on revenues and finances, direct employment, capital assets, and on industry competitiveness. Prior to the interviews, DOE

distribute d a standard interview guide t hat provide d a starting point to identify relevant issues and help identify the impacts of e nergy conservation standards on individual manufacturers or

sub groups of manufacturers. T he int er view guide cover ed c urrent o rganizational c haracteristics,

i ndustry i nfrastructure, manufacturer c ash

- flow analysis, a competitive impacts assessment, an employment impacts assessment, a nd a manufacturing capacity impacts assessment. The

i nterview guides used to conduct the manufacturer interviews are found in appendix 1 2

- A of this

TSD.

12.2.3 Phase III : Sub g roup Analysis

During the course of the MIA, DOE interviewed manufacturers representing a large
percent age of microwave oven sales

. Many of th ese 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 ind ustry on the approaches used in the GRIM and to isolate key issues and

concerns. The following sections summarize the methodology and findings of this assessment.

12.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash

- flow analysis perfor med 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 analys i s, 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 two d iffe rent interview guides

— one for microwave oven manufacturers dealing with energy factor standards and one for microwave oven manufacturers regarding standby power requirements

. a

a DOE published its final rule setting energy factor microwave oven standards on April 8, 2009. Plea se see DOE used t hese interview s to tailor the GRIM for microwave oven standby mode and off mode standards

. DOE contacted companies from its database of manufacturers, which provided a representation of the industry

. DOE interviewed three

http://www1.eere.energy.gov/buildings/appliance_standards/residential/cooking_products.html

.12

- 4 microwave oven manufacturers with varying product focus and market shares , providing a representative cros s

- section of the indus try

. Interviews were scheduled well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written

respo nse to the questionnaire was acceptable, DOE preferred an interactive in terview process

because it helped clarify responses and provide the opportunity to identify additional issues.

DOE conduct ed detailed interviews with all manufacturers that agreed to participate to gain insight into the range of potential impacts and how this range varies with eac h TSL

. The resulting qualitative and quantitative information are valuable inputs for the GRIM

.

12.2.3.2 Revised Industry Cash

- Flow Analysis

In Phase II of the MIA, DOE provide d 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,

DO E revise d its industry cash flow model s based on the feedback provided through the

interviews. More informat ion on how DOE calculated the parameters for the GRIM is found in

section 12.4.3 of this chapter

.

12.2.3.3 Manufacturer Sub g roup Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among sub g roups of manufacturers. M anufacturers exhibiting a

cost structure that differs significantly from the industry average could be more negativ ely

affected

. Ideally, DOE would 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 discuss ed the potential sub g roups and

sub g roup members that have been identified for the analysis. DOE look ed to the manufacturers

and other interested parties to suggest what su bg roups or characteristics are the most appropriate for the analysis. However, DOE did not identify any subgroups to present INPV impacts separately.

12.2.3.4 Small Business Manufacturer Subgroup

DOE used the small business size standards published on November 5 , 20 10 , as amended, by the Small Business Administration (SBA) to determine wh ether any small entities would be required to comply with the rule (c odified at 13 CFR P art 121 )

. The size standards are listed by North American Industry Classification System (NAICS) code and industry description.

DOE used the SBA limits for NAICS code 3 35221 ( Household Cooking Appliance Manufacturing ) to determine if any small business manufacturers would be affected by this rulemaking. T he 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. For NAICS code 335221, the SBA size limit is a total of 750 employees.

DOE surveyed the Association of Home Appliance Manufacturers ( AHAM ) member’s directory to identify manufacturers of microwave oven products

. DOE also asked stakeholders12

- 5 and AHAM representatives within the industry if they were aware of any other small business

manufacturers. DOE then consulted publicl y available data , purchased company reports from

vendors such as D & B, 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 withi n the United States

. Based on this analysis, DOE did not identify any small

business manufacturers of microwave ovens.

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of energy conservation standard s could be the consequential obsolescence o f existing manufacturing assets, including tooling and investment.

The manufa cturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in the

U nited S tates and North America with and without a standar d; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements due to energy conservation stand ards ; the nature and value of stranded assets, if any; and estimates for any one

time restructuring and other charges, where applicable.

12.2.3.6 Employment Impact

The impact o f energy conservation standards on employment is an important consideration in the rulemaking process. T o assess how domestic employment patterns mi ght be affected, the interview s explore d current employment trends in the microwave oven industr y

. In addition, the interview s solicit ed manufacture r views on changes in employment patterns that may result from more stringent standard levels. The employmen t impacts sect ion of the interview guide focus ed on current employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without energy conservation

standard s for standby mode and off mo de , a nd differences in workforce skills and issues related to the retraining of employees.

12.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers due to energy conservation standards and other Federal regulatory actions affectin g the same products

. DOE analyze d and consider ed the impact on ma nufacturers of multiple, product

- specific regulatory actions. Based on its own research and discussions with manufacturers, DOE

identified se veral regulations relev ant to microwave oven manufacturers including: Federal energy conservation standards for other products ma nufactured by these manufacturers and other environmental regulations

.

12.3 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 inte rview. The following section describes key issues mentioned for all12

- 6 product categories under review. Manufacturers indicated that, for the most part, the risks

associated with these issues increase with more stringent TSL s

.

12.3.1 Consumer Utility

All manufactu rers of microwave oven s are concerned that amendments 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 , depending on the level chosen by DOE, a new standby power requirement could lead to the elimination of cooking

sensor s from its products. However, m ultiple manufacturers stated that they already use or are in the process of adopting no

- standby cooking sensors. A nother potential impact on consumer utility related to cooking sensors mentioned by manufacturers was wait ing for sensor s to activate

or a hard off switch causing microwave ovens to have a delayed start

.

On a related note, manufacturers stated that low er standby power could impact display

and control choices which would also affect consumer utility. Finally, manufacturers indicated some other features that add consumer utility ( i.e. , a clock or nightlight) also could be impacted by standby mode and off od e standards since these features consume standby power.

12.3.2 Profitability

M anufacturers of microwave ovens stated that standby mode and off mode standards have the potential to hurt profitability. Manufacturers typically earn a premium on higher

- end

models wh ile low

- end models are extremely commoditized. The premium on high

- end products would be squeezed if standards eliminated product differentiators ( such as larger, premium displays) or forced high

- end features to lower end models ( such as cooking sensors)

. Manufacturers indicated that standards have the potential to eliminate remaining U.S. production due to already tight margins, especially if standards impact consumer utility.

12.4 GRIM INPUTS AND ASSU MPTIONS

The GRIM serves as the main tool for assessing the impact on indus try due standby mode

and off mode energy conservatio n standards

. DOE relie s on several sources to obtain inputs for

the GRIM

. D ata and assumptions from these sources are then feed into an accounting model that

details the cash flow on a baseline basis

, as well as calculat es the impacts on manufacturers due

to energy conservation standards

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4

. 1 , is a n 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 a s 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, 2011, and continuing explicitly through 2043. The model calculat es the INPV by summing the stream of annual discounted cash flows during this period and adding a terminal value

. 112

- 7 Figure 12.4

. 1 Using the GRIM to Calculate Cash Flow

The GRIM project s cash flows using standard accounting principles and compare s changes in INPV between the base case scenario and the standard case scenario, evaluating changes induced by the energy conservat ion standards

. The difference in INPV between the base

case and the standard case (s ) represents the estimated financial impact of the energy

co nservation standard on manufacturers. Appendix 1 2

- B provides more technical detail s and user

information for the GRIM.

12.4.2 Sources GRIM Inputs

The GRIM use s 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.

12.4.2.1 Co rporate Annual Reports

Corporate annual reports to the SEC ( 10

- Ks) provided many of t he financial inputs to the

GRIM. 2 T hese reports exist for publicly held companies and are freely available to the general publi c. 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 microwave ovens

. Because these companies are typically diversified, producing a ra nge of different appliances, an industry average was assumed by DOE to be representative for the manufacture of each type of appliance. In deter mining financial parameters for the industry

, DOE weighted corporate financial inf ormation 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,

• SG&A

,

• R&D expenses,

• Depreciation,

• Capital expe nditures, and

• Net property, plant, and equipment (PPE)

.12

- 8 DOE also used information from co mpany SEC 10

- K reports to calibrate the GRIM’s operating profit margin against the industry weighted average.

12.4.2.2 Standard and Poor Credit Ratings

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.

12.4.2.3 Dun and Bradstreet Reports

D&B pro vides 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.

12.4.2.4 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model i n the national impact analysis

. The model relied on historical shipments data for microwave oven from

AHAM for the supplemental notice of proposed rulemaking ( S NOPR ) analysis. Chapter 9 of th is

TSD describes the methodology and analytical model DOE used to forecast shipments.

12.4.2.5 Engineering Analysis

During the engineering analysis, DOE used data submitted from AHAM, manufacturer

interviews , and product testing and tear downs to de velop manufacturing cost estimates for

Product Class 1 ( Microwave

- Only Ovens and Countertop Combination Microwave Ovens ) and

Product Class 2 ( Built

- In and Over

- the

- Range Combination Microwave Ovens )

.

12.4.2.6 Manufacturer Interviews

During the course of the MIA , D OE conducted interviews with manufacturers of

microwave oven s

. 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 t he GRIM include:

**•** Conversion capital costs (one

- time investments in property, plant, and equipment) ;

**•** Product conversion costs ( o ne

- 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 ; and

**•** Engineering analysis estimate d manufacturer production costs.12

- 9 12.4.3 Financial Parameters

Table 12.4

. 1 provides financial parameters for three public companies engaged in manufacturing and selling microwave ovens

. The values listed are averages over an eight

- year period (1999

– 2006).

Table 12.4

. 1 GRIM Financial Parameters Based on 1999

– 2006 Weighted Company

Financial Data

Parameter Industry

Weighted Average Manufacturer

A B C

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

These companies constitute a significant portion of the microwave oven industr y

. For other companies in the industry, public data is not available and was not used to calculate the
parameters

. The values used in the GRIM

, therefore

, represent the industry’s weighted average

estimate s using financial data from three publicly traded manufacturers. During manufacturer interviews, microwave ovens manufacturers were asked to review the parameters listed in Table

12.4

. 1 and comment on how the parameters related to their specific industry. Where applicable,

t he parameters were then adjusted for the GRIM.

12.4.4 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 s tructure of the industry. DOE estimated the WACC for the microwave oven industr y based on several representative companies, using the following formula:

WACC = After

- Tax Cost of Debt x (Debt R atio) + 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:12

- 10 Riskless rate of return is the rate of return on a “safe” benchmark investment, typically considered the short

- term Treasury B ill (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 determi ned that the industry average cost of equity for the microwave oven industry

is 17.9 percent as calculated in Table 12.4

. 2

.

Table 12.4

. 2 Cost of Equity Calculation

Parameter Industry

Weighted Average (%) Manufacturer

A B C

(1) Average Beta

(2002

– 2006) 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

* E stimated 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

- t erm rates. The risk

- free

rate is estimated to be approximately 6 percent , which is the average 10

- year Treasury bond

return over the period of 1990 to 200 6

.

For the cost of debt, S& P’s Credit Services provided the average spread of corporate

bonds for th e three public manufacturers over the period 2002

– 200 6

. To this, DOE added the industry

- weighted average spread to the average T

- Bill yield over the same period. S ince 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 12.4

. 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).12

- 11 Table 12.4

. 3 Cost of Debt Calculation

Parameter Industry

Weighted Average (%) Manufacturer

A B C

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

DOE estimated the microwave oven industr y ’ WACC to be approximately 10.1 percent.
S ubtracting an inflation rate of 2.9 percent between 1990 and 200 6 , the inflation adjusted WACC, and the corporate discount rate used in the GRIM, is 7.2 percent.

12.4.5 Trial Standard Levels

DOE developed TSLs for microwa ve oven standby mode and off mode energy

conservation standards

. The efficiency levels used in the GRIM and other analyses are presented

in Table 12.4

. 4 and Table 12.4

. 5

.

Table 12.4

. 4 Product Class 1 Standby Power Efficiency Levels and TSLs

Product Class Efficiency Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4

Product Class

1 W 4.0 0 2.0 0 1.5 0 1. 00 0.02

Description Baseline FEMP

Procurement

Efficiency

Recommendation Gap Fill IEA 1

- Watt Program Max
Tech

Table 12.4

. 5 Product Class 2 Standby Power Efficiency Levels and TSLs

Product Class Efficiency

Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4

Product Class

2 W 4. 50 3.70 2.70 2.20 0.0 4

Description Baseline FEMP

Procurement

Efficiency

Recommendation Gap Fill IEA 1

- Watt Program Max
Tech

12.4.6 NIA

- 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 GR IM used the national impact analysis (NIA ) shipments forecasts for microwave ovens from 20 11 to 2043

.12

- 12 Only the shipments in 2011 and beyond hav e an im pact on INPV because 2011 is the base year

to which future cash flows are summed. Further explanation of approaches and calculations of total shipments can be found in the shipment analysis section of this TSD ( c hapter 9 ). Total shipments forecasted in the shipment analysis for all efficiency levels in 2014 are shown in Table

12.4

. 6 and are further detailed below.

Table 12.4

. 6 Total N IA

- Shipments Forecast in 201 4

Product Class Total Industry Shipments *

Product Class 1 15,004,000

Product Class 2 151,600

* Estimates rounded to the nearest hundred

12.4.6.1 Base Case Shipments Forecast

As part of the shipment analysis, DOE estimated the shipment distribution by efficiency

level for Product Class 1 and Product Class 2

. Table 12.4

. 7 and Table 12.4

. 8 show the base case

distr ibutions of shipments by TSL estimated in the NIA for various product classes for 2014

.

Table 12.4

. 7 Base Case Standby Power Distribution of Efficiencies for Product Class 1 in

2014 Estimated in the NIA
Shipments Efficiency Level ( Watts ( W ) ) Baseline ( 4

. 0 0 ) TSL 1 ( 2.0 0 ) TSL 2 ( 1.5 0 ) TSL 3 ( 1.0 0 ) TSL 4 ( 0.02 )

% 46.2 34.6 19 .2 0 0

Table 12.4

. 8 Base Case Standby Power Distribution of Efficiencies for Product Class 2 in

201 4 Estimated in the NIA
Shipments Efficiency Level (W) Baseline ( 4.50 ) TSL 1 ( 3.70 ) TSL 2 ( 2.70 ) TSL 3 ( 2.20 ) TSL 4 ( 0.04 )

% 100 0 0 0 0

12.4.6.2 Standards Case Shipments Forecast

To exam ine the e ffects of energy conservation standards on shipments, which affect the INPV, DOE used the base case shipments described in the previous section

. For the standards

case, DOE assumed shipments at lower efficiencies were most likely to roll up into higher efficiency levels in response to more stringent energy conservation standard s

. This scenario assumes that demand for high efficiency equipment is a function of its price without regards for

the standard level. Table 12.4

. 9 and Table 12.4

. 10 show the distributions of efficiencies for the various equipment classes in 201 4 under the roll

- up scenario.12

- 13 Table 12.4

. 9 Distribution of Standby Power Product Class 1 Shipmen ts in the Standards

Case in 2014

– Rollup Scenario

TSL (W) Baseline

4.0 0 TSL 1

2.0 0 TSL 2

1.5 0 TSL 3

1.0 0 TSL 4

0.02

Baseline

4.0 0 46.2% 34.6% 19.2% 0% 0%

TSL 1

2.0 0 80.8% 19.2% 0% 0%

TSL 2

1.5 0 100% 0% 0%

TSL 3

1.0 0 100% 0%

TSL 4

0.02 100%

Table 12.4

. 10 Distribution of Standby Power Product Class 2 Shipmen ts in the Standards

Case in 2014

– Rollup Scenario

TSL (W) Baseline

4.50 TSL 1

3.70 TSL 2

2.70 TSL 3

2.20 TSL 4

0.04

Baseline

4. 50 100% 0% 0% 0% 0%

TSL 1

3.70 100% 0% 0% 0%

TSL 2

2.70 100% 0% 0%

TSL 3

2.20 100% 0%

TSL 4

0.0 4 100%

12.4.6.3 Price Elasticity of Demand Shipments Scenario

In the GRIM, DOE modeled a shipment scenario that considers the impacts of changes in

relative prices on consumer demand for each product. As described in chapter 9 of this TSD

, the

p urchase this shipment scenario estimates how the combined effects of increases in purchase price a nd decreases in operating costs due to 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

. U nder 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. For the INPV impacts described in this chapter, DOE uses the elasticity case for economic growth, though results without the relative price elasticity can also be generated in the GRIM.

See chapte r 9 of this TSD f or more details on the shipment scenarios.

12.4.6.4 Economic Growth Shipments Scenario

In the GRIM, 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) 2010 Annual Ener gy Outlook Report (AEO2010). 312

- 14 AEO2010 provides three scenarios: the Reference case, the High Economic Growth case, and the

Low Economic Growth case. For the INPV impacts described in this chapter, DOE uses the Reference case for economic growth. However, this option is left as an option for the user to select in the GRIM. It is also possible for the user to combine the price elasticity scenario with an

economic scenario. See chapter 9 of this TSD for more details on the economic growth shipment

scenarios.

12.4.7 Production Costs

Changes in production costs impact revenues and gross profits. As shown in the engineering a nalysis ( chapter 5 of this TSD ), products that are more efficient typically cost more to pr oduce 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 t han products at the baseline for standby mode power consumption

. E nact ing more stringent energy conservation standards will increase production

volumes for more efficien t units

.

As described in c hapter 5 of this TSD , the costs for Product Class 1 and Product Class 2

were calculated using data supplied by AHAM and product testing and tear

- downs

. For the SNOPR, DOE updated the manufacturer production costs and prices for Product Class 1 that it estimated in the notice of proposed rulemaking (NOPR) fo r residential cooking products, including microwave ovens, and commercial clothes washers that it published on October 17, 2008 (73 FR 62034) (hereinafter referred to as the October 2008 NOPR)

, to 20 10 $ using the

Producer Price Index ( PPI )

. The GRIM includ ed the proportion of costs devoted to labor, materials, overhead, and depreciation that ma ke 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

Table 12.4

. 11 and the 2006

ASM

. and Table 12.4

. 12 provide the MPC result s used in the GRIM for microwave

ovens

.

Table 12.4

. 11 Base Case Stan dby Power Production Costs ( 2010$ ) used in the GRIM for

Product Class 1

TSL (W) Labor Material Overhead Depreciation MPC

Baseline (4.0 0 ) $10.6 3 $101

. 28 $3.2 8 $5.1 6 $120.35

TSL 1 (2.0 0 ) $10.6 5 $101. 51 $3.2 9 $5.1 7 $120.62
TSL 2 (1.5 0 ) $10.6 8 $101. 79 $3. 30 $5.1 8 $120.9 5 TSL 3 (1.0 0 ) $10.7 4 $102. 39 $3.3 2 $5.2 1 $121. 66 TSL 4 (0.02) $11.0 3 $105. 13 $3.41 $5.3 5 $12 4

. 9212

- 15 Table 12.4

. 12 Base Case Standby Power Production Costs ( 2010$ ) used in the GRIM for

Product Class 2

TSL (W) Labor Material Overhead Depreciation MPC

Baseline (4.50 ) $ 22. 95 $ 21 8

. 73 $ 7.0 9 $ 11. 13 $ 25 9

. 90

TSL 1 (3.70 ) $ 22. 95 $21 8

. 73 $ 7.0 9 $ 11. 13 $ 25 9

. 90 TSL 2 (2.70 ) $ 2 3

. 15 $ 2 20

. 66 $ 7. 15 $ 11. 23 $ 26 2

. 19 TSL 3 (2.20 ) $23. 78 $ 22 6

. 67 $ 7. 35 $ 11. 54 $ 26 9

. 34 TSL 4 (0.04 ) $ 23. 41 $ 22 3

. 09 $ 7. 23 $ 11. 36 $ 26 5

. 09

12.4.8 Conversion Costs

E nergy conservation standards typically cause manufacturers to incur one

- time conversion costs to bring their p roduction facilities and product designs in to compliance with new regulation s

. For the purpose of the MIA, DOE classified these one

- time conversion costs into two major groups : (1) capital conversion costs

, and (2) product conversion costs

. C apital

conversion costs 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 costs are one

- time investments in research, development, testing, and mar keting focused on making product designs comply with new energy conservation

stan dards. The following sections describe in greater detail the inputs DOE used in the GRIM

.

12.4.8.1 Capital Conversion Costs

DOE evaluated the level of capital investment needed to comply with the energy conservation standards for standby power efficiencies at each TSL

. For each TSL , DOE

estimate d the proportion of the products on the market will have to be redesigned to meet that

TSL

. The higher the TSL , the greate r the proportion products on the market that will require redesign.

DOE used a platform approach to estimate the capital conversion costs

. For standby

mode and off mode standards, DOE used information submitted during manufacturer interviews

, conversations with industry experts, and product catalogs to estimate the percentage of platforms

at each TSL tha t 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 the platform’s of all

manufacture r s in the industry.

Because the design options for Product Class 1 and Product Class 2 are similar at each TSL, DOE used the same per

- platform costs for both product classes. DOE also used the same per platform cost as in the October 2008 NOPR, but convert ed each cost to 2010$ using the PPI. To segment the total capital conversion costs between Product Class 1 and Product Class 2, DOE used the same split as the shipments in the NIA.

Component switches for standby power TSLs do not require major changes to the microwave enclosure or cavity because the se design options all have standard hole locations that

will not be altered if more efficient components are used

. Table 12.4

. 13 and Table 12.4

. 1412

- 16 s ummarize the breakdown of capital conversion costs by TSL for energy conservation standards

for standby mode and off mode

. Table 12.4

. 15 shows the per

- platform capital cost assumptions DOE made for the tooling changes required for each platform that did not meet the require d efficiency.

Table 12.4

. 13 Standby Power Capital Conversion Costs for Product Class 1 by TSL

TSL Total Industry Capital Conversion Costs (2010$ million)

Baseline $0

TSL 1 $3.9

TSL 2 $4.3

TSL 3 $4.7

TSL 4 $ 7 .8

Table 12.4

. 14 Standby Power Capital Conversion Costs for Product Class 2 by TSL

TSL Total Industry Capital Conversion Costs (2010$ million)

Baseline $0 .0

TSL 1 $ 0 .0

TSL 2 $ 0 .0

TSL 3 $ 0 .0

TSL 4 $ 0.1

Table 12.4

. 15 Per Platform Assumptions for Capital Conversion Costs (Product Class 1 and Product Class 2) *

TSL 1 TSL 2 TSL 3 TSL 4

Per

- Platform Tooling Capital Cost Assumption $ 150 ,000 $ 165 ,000 $ 180 ,000 $300,000

* The platform costs are in 2008$. These are converted to 2010$ when calculating the industry

- wide conversion

costs.

12.4.8.2 Product Conversion Costs

DOE conducted interviews with manufacturers to better understand the many steps that

manufacturers have to take b efore they can release new or improved products

. The magnitude of the required investments varies by manufacturer and the TSL analyzed.

M ultiple manufacturer s estimate d 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 Product Class 1 and Product Class 2

, DOE estimated the engine ering, reliability testing, and product development expenses per platform necessary at each TSL. DOE used the

same per

- platform cost as in the October 2008 NOPR, but converted each to 2010$ using the

PPI. F or the SNOPR, DOE also estimated a per

- platform co st where it analyzed a power

- down12

- 17 design option to achieve the required standby mode and off mode efficiencies. The marketing cost equaled half the estimated engineering expense per platform. For TSL 3, DOE analyzed a power down for only one type of displa y technology and DOE used the percentage of models with that technology as a weight to calculate the platform market cost. To segment the total product conversion costs between Product Class 1 and Product Class 2, DOE used the same split as the shipments i n the NIA. DOE multiplied the estimate of these development costs per platform by its approximation of the number of platforms available in the United States that fell below the required efficiency

. 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

. DOE also a

per

- platform cost where it analyzed a power

- down design option to achieve the required standby power level . The marketing cost equaled half the estimated engineering expense per platform.

T here is a large jump in conversion expenses at TSL 4 because there changes that impact other

function s of each platform

. Table 12.4

. 16 and Table 12.4

. 17 summarize the breakdown of product conversion costs by TSL for PC 1 and PC 2 for standby mode and off mode standards

. Table 12.4

. 18 and Table 12.4

. 19 show the per

- platform product conversion cost assumptions DOE made for each platform that did not meet the required efficiency.

Table 12.4

. 16 Standby Power Product Conversion Costs for Product Class 1 by TSL

TSL Total Industry Product Conversion Costs (2010$ million)

Baseline $0

TSL 1 $ 3 9.2

TSL 2 $ 70.5

TSL 3 $ 8 9 .1

TSL 4 $ 1 72

. 3

Table 12.4

. 17 Standby Power Product Conversion Costs for Product Class 2 by TSL

TSL Total Industry P roduct Conversion Costs (2010$ million)

Baseline $0

T SL 1 $0.4

TSL 2 $0.7

TSL 3 $0.9

TSL 4 $1. 712

- 18 Table 12.4

. 18 Per

- Platform Assumptions for Product Conversion Costs (Product Class 1) *

TSL 1 (2.00 W) TSL 2 (1.500 W) TSL 3 (1.00 W) TSL 4 (0.02 W)

Per

- Platform Engineering

Cost Assumption $ 50,000 $ 100,000 $ 150,000 $ 200,000

Per

- Platform Reliability

Cost Assumption $ 50,000 $ 100,000 $ 100,000 $ 200,000

Per

- Platform Product Development Expenses Assumption $ 25,000 $ 25,000 $ 25,000 $ 50,000

Extraordinary Marketing

Expenses per Platform $0.0 $0.0 $10,000 $100,000

* The platform costs are in 2008$. These are converted to 2010$ when calculating the industry

- wide conversion

costs.

Table 12.4

. 19 Per Platform Assumptions for Product Conversion Costs (Product Class 2) *

TSL 1 (3.7 0 W) TSL 2 (2.7 0 W) TSL 3 (2.2 0 W) TSL 4 (0.04 W)

Per Platform Engineering

Cost Assumption $ 50,000 $ 100,000 $ 150,000 $ 200,000

Per Platform Reliability

Cost Assumption $ 50,000 $ 100,000 $ 100,000 $ 200,000

Per Platform Product Development Expenses Assumption $ 25,000 $ 25,000 $ 25,000 $ 50,000

Extraordinary Marketing

Expenses per Platform $0.0 $0.0 $0.0 $100,000

* The platform costs are in 2008$. These are converted to 2010$ when calculating the industry

- wide conversion

costs.

12.4.9 Markups

T o understand how baseline and more efficient products are differentiated, DOE reviewed manufacturer catalogs and utilized information gathered from manufacturers

. To
estimate the price s at which manufacturers sell their products , DOE applied markups to the production costs it had developed earlier

. DOE used markup s cenarios to bound the range of expected product prices following 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 as a result of energy conservation standards for standby mode and off mode

.

DOE analyzed two distinct markup scenarios : (1) p reservation

- o f

- gross

- margin

percentage

, and (2) preservation of gross margin ( in absolute dollars)

.

12.4.9.1 Preservation of Gross Margin Percentage

The gross margin is defined as revenues less cost s of good s sold. Under the preservation

of gross margin percentage scenario in t he GRIM , DOE applied a single uniform “gross margin percentage” markup to MPCs across all efficiency levels. As production cost s increase by efficiency level , this scenario implies that the absolute dollar markup will increase also

. DOE12

- 19 used a manufacturer markup of 1.26

, which includes SG&A expenses; R&D expenses; interest; and profit

. This markup is consistent with the manufacturer markup DOE assumed in the base

case for the GRIM. Most m anufacturers stated it is optimistic to assume that they could maintain their gross margin percentages despite production cost increase s due to new standby mode and

off mode standard s

. Therefore, DOE assumes that this scenario represents a high bound to industry profitability under a n energy conservation standar d.

12.4.9.2 Preservation of Gross Margin in Absolute Dollars

The implicit assumption behind the “ preservation of gross margin in absolute dollars” markup scenario is that the industry will lower its markups in response to the standards to maintain only its gross m argin (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 part of

the increase in production costs while increased R&D and SG&A lower profit. DOE implemented this scenario in the GRIM 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 after

standard s are effective (201 5 ) as is yielded in the base case. Table 12.4

. 20 and Table 12.4

. 21 show the manufacturer markups for Product Cla ss 1 and Product Class 2 under the Preservation of Gross Margin in Absolute Dollars markup scenario.

Table 12.4

. 20 Product Class 1 Preservation of Gross Margin in Absolute Dollars Manufacturer Markups

Baseline (4.00 W) TSL 1 (2.00 W) TSL 2 (1.500 W) TSL 3 (1.00 W) TSL 4 (0.02 W)

Baseline (4.00 W) 1.2600

- - - -

El 1 (2.00 W) 1.2600 1.2 5 97

- - -

EL 2 (1.500 W) 1.2600 1.2600 1.2593

- -

EL 3 (1.00 W) 1.2600 1.2600 1.2600 1.258 1

-

EL 4 (0.02 W) 1.2600 1.2600 1.2600 1.2600 1.252 612

- 20 Table 12.4

. 21 Product Class 2 Preservation of Gross Margin in Absolute Dollars Manufacturer Markups

Baseline (4.50 W) TSL 1 (3.70 W) TSL 2 (2.70 W) TSL 3 (2.20 W) TSL 4 (0.04 W)

Baseline (4.50 W) 1.2600

- - - -

EL 1 (3.70 W) 1.2600 1.2600

- - -

EL 2 (2.70 W) 1.2600 1.2600 1.25 81

- -

EL 3 (2.20 W) 1.2600 1.2600 1.2600 1.252 6

-

EL 4 (0.04 W) 1.2600 1.2600 1.2600 1.2600 1.2559

12.5 MICROWAVE OVEN INDUSTRY FINANCIAL I MPACTS

Using the inputs and assumptions described in the previous sections , the GRIM produced indicators of financial impacts on the microwav e oven industry. The following sections detail additional inputs and assumptions for microwave ovens . The main results of the MIA are also reported in this section. The MIA results consist of two key financial metrics: INPV and annual

cash flows

.

12.5.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic impacts o f different TSLs. For the microwave oven industry, t he GRIM estimated cash flows

between 20 11 and 20 4 3 , consistent with the forecast period used in the national impact analysis ( c hapte r 1 0 of this TSD ).

In the MIA, DOE compares the INPV of the base case (no new standby mode and off

mode 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 particula r TSL would have on the entire industry

. For the microwave oven industry, DOE examined the two markup

scenarios described in the manufacturer markup section above

. Table 12.5.1 through Table

12.5.6 provide the I NPV estimates for the microwave oven industry under the different

scenarios.12

- 21 Table 12.5

. 1 Product Class 1 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario
Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 1,103.4 1,076.6 1,058.6 1,050.6 1,013.9 Change

in INPV (2010$ millions)

- (26.8) (44.9) (52.8) (89.6) (%)

- ( 2.4 ) ( 4.1 ) ( 4.8 ) ( 8.1 )

Table 12.5

. 2 Product Class 1 Manufacturer Impact Analysis Under the Preservation of Gross Margin in Absolute Dollars Markup Scenario
Preservation of Gross Margin in Absolute Dollars Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 1,103.4 1,074.4 1,051.8 1,031.6 939.5 Change

in INPV (2010$ millions)

- (29.0) (51.7) (71.9) (163.9) (%)

- ( 2.6 ) ( 4.7 ) ( 6.5 ) ( 14.9 )

Table 12.5

. 3 Product Class 2 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario
Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 24.0 23.8 23.7 23.9 23.2 Change

in INPV (2010$ millions)

- (0.3) (0.4) (0.1) (0.9) (%)

- ( 1.2 ) ( 1.5 ) ( 0.3 ) ( 3.6 )

Table 12.5

. 4 Product Class 2 Manufacturer Impact Analysis Under the Preservation of Gross Margin in Absolute Dollars Markup Scenario
Preservation of Gross Margin in Absolute Dollars Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 24.0 23.8 23.3 22.3 22.3 Change

in INPV (2010$ millions)

- (0.3) (0.8) (1.7) (1.8) (%)

- ( 1.2 ) ( 3.1 ) ( 7.1 ) ( 7.3 )

Table 12.5

. 5 Manufacturer Impact Analysis Under the Preservation of Gross Margin Percentage Markup Scenario for Product Class 1 and 2 Combined
Preservation of Gross Margin Percentage Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 1,127.5 1,100.4 1,082.2 1,074.5 1,037.0 Change

in INPV (2010$ millions)

- (27.1) (45.2) (52.9) (90.4) (%)

- ( 2.4 ) ( 4.0 ) ( 4.7 ) ( 8.0 )12

- 22 Table 12.5

. 6 Manufacturer Impact Analysis Under the Preservation of Gross Margin in

Absolute Dollars Markup Scenario for Product Class 1 and 2 Combined
Preservation of Gross Margin in Absolute Dollars Markup Scenario

Units Base

Case Trial Standard Level

1 2 3 4

INPV (2010$ millions) 1,127.5 1,098.2 1,075.0 1,053.9 961.8 Change

in INPV (2010$ millions)

- (29.3) (52.4) (73.6) (165.7) (%)

- ( 2.6 ) ( 4.6 ) ( 6.5 ) ( 14.7 )

12.5.2 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 20 10 through 20 4 3 for the different TSL levels. Figure 12.5

. 1 through Figure 12.5

. 6 present the annual net cash flows for the base case and each of the four standb y mode and off mode TSLs for the microwave oven industry assuming the different markup

scenarios

.

Figure 12.5

. 1 Annual Net Cash Flows for Product Class 1 (Preservation of Gross Margin Percentage Markup Scenario ) $

- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin Percentage Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

201412

- 23 Figure 12.5

. 2 Annual Net Cash Flows Product Class 1 (Preservation of Gross Margin in Absolute Dollars Markup Scenario )

Figure 12.5

. 3 Annual Net Cash Flows for Product Class 2 (Preservation of Gross Margin Percentage Markup Scenario ) $

- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin (Absolute Dollars) Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

2014

$

- $0.5 $1.0 $1.5 $2.0 $2.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin Percentage Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

201412

- 24 Figure 12.5

. 4 Annual Net Cash Flows Product Class 2 (Preservation of Gross Margin in

Absolute Dollars Markup Scenario )

Figure 12.5

. 5 Annual Net Cash Flows for Product Class 1 and Product Class 2 Combined (Preservation of Gross Margin Percentage Markup Scenario ) $

- $0.5 $1.0 $1.5 $2.0 $2.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin (Absolute Dollars) Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

2014

$

- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin Percentage Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

201412

- 25 Figure 12.5

. 6 Annual Net Cash Flows for Product Class 1 and Product Class 2 Combined (Preservation of Gross Margin in Absolute Dollars Markup Scenario )

Prior to the compliance date of the energy conservation standard, c ash flows are driven by the lev el of capital and product conversion costs and the proportion of these investments spent

each year. After the standard announcement date in 2011 , industry cash flows begin to decline as companies use their financial resources to prepare for the new standard. T he more stringent the energy conservation standard, the greater the impact on industry cash flows in the years prior to

the compliance date

. In the year s before the compliance date of the standard, capital investments and product conversion cost s 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 compliance date of the standards are the same in both markup scenarios for these years. 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 compliance year of the standards from a write

- down.

The markup scenario has a large impact on cash flows in the year the compliance year of

the standard. The preservation of gross margin percentage markup scenario immediately restores the original cash flow. Higher selling prices increase operating profit and increase cash flow due to a higher depreciation expense. Since depreciation is a non

- cash expense, it does not require an outflow of cash but does lower operating profit. Therefore, this expense gets added back to cash

flow.

For the preservation of g ross margin in absolute dollars the impact on operating profit and the need to boost working capital in 20 14 are not significant for standby power because the incremental manufacturing costs are low for all TSLs. Therefore, cash flow increases in 201 4 for $

- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20252010$ Millions NET CASH FLOW TOTALS

Baseline TSL1 TSL2 TSL3 TSL4 Markup Scenario Preservation of Gross Margin (Absolute Dollars) Elasticity: RP Elasticity 0.34

Economic Growth: Reference
Energy Conservation Standards Compliance Date

201412

- 26 standby mode and off mode standards. After 201 4 , h igher 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 l ower 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 in absolute dollars scenario depends on the incremental cost of standards

- com pliant products. The higher the relative cost, the larger the impact on operating revenue and cash flow in the years following the compliance date of the standard.

12.6 OTHER IMPACTS

12.6.1 Employment

12.6.1.1 Methodology

To quantitatively assess the impacts of energy conser vation standards on microwave oven manufacturing employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL. DOE used statistical data from the

Census Bureau’s 2006 ASM and 2006 CIR , t he 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 wo rker wages by the total value of shipments. For microwave ovens , DOE used the same industry cost structure

constructed from 2006 ASM data classified under NAICS 335221 ( h ousehold c ooking a ppliance

m anufacturing)

. The labor percentage and other components o f the industry cost structure for

microwave ovens are show n in Figure 12.6

. 1 below.12

- 27 Figure 12.6

. 1 Microwave Oven Industry Cost Structure

To determine the total annual labor expenditure on production labor , the value o f production labor in the industry cost structure was converted to a percentage of the cost of goods sold (COGS). In the GRIM, 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.

To calculate the annual domestic labor expenditures, DOE used the 2006 CIR to estimate the percentage of domestic production in each industry. DOE estimated that 4 percent of

microwave ovens are manufactured and sold in the United States

.

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 GRIM were

converted to domestic production employment levels by dividing production labor expenditures by the annual payment per production worker (production worker hours tim es the labor rate

found in the 2006 ASM ). b

b 2006 ASM labor rates and production hours per y ear 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. 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 A SM

. Materials, 66.8% SG&A, 12.5% R&D, 2.2% Labor (production

workers), 7.0% Overhead, 2.2% Depreciation,
3.4% Income from Operations, 6.0%12

- 28 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 the GRIM, the employment results represent domestic production workers that are impacted by this rulemaking. W orkers involved in manufacturing or supporting products for exports would not be impacted and are not included as part of the labor impacts.

T he domestic industry labor expenditure for microwave oven production workers in

201 4 is approximately $ 5 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 2 03 production employees involved in manufacturing micro wave ovens covered by this rulemaking

in the United States (total COGS in 2014 times the production labor percentage of COGS times the percentage of domest ic production). In addition , DOE estimates that 27 indirect employees in

the United States support microwave oven production. The employment spreadsheet of the microwave oven GRIM shows the annual domestic employment impacts due to amended energy

conservat ion standards in further detail.

Table 12.6

. 1 illustrates the impact of new standby mode and off mode standards on employment levels at each TSL for the microwave ov en industry calculated by the GRIM.

Table 12.6

. 1 Industry Estimated Employment Impacts in 2014 for Product Classes 1 and 2

Combined

Trial Standard Level Base

Case TSL 1 TSL 2 TSL 3 TSL 4

Total Number of Domestic

Microwave Oven Production Employees in 2014 203 204 204 205 209

Change in Total Number of

Domestic Microwave Oven Production Employees in 2014

Due to Standards - 0.1% 0.3% 0. 7 % 2

. 6 %

Total Number of Domestic

Microwave Oven Non

Production Employees in 2014 27 27 27 27 27

Total Number of Domestic Microwave Oven Employees in

2014 230 230 231 232 236

Figure 12.6

. 2 shows annual domestic employment levels for each TSL calculated in the GRIM for standby mode and off mode standards.12

- 29 Figure 12.6

. 2 Total Microwave Ovens Industry Domestic Employment by Year for Product

Classes 1 and 2 Combined

.

Approximately 96 percent of microwave ovens sold in the United States are imported. Because most microwave ovens are produced abroad, any standby power requi rements for

microwave ovens have a larger impact on labor in other countries. American companies are all still impacted by the product conversion costs , capital conversion costs , 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 standby mode and off mode 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 s tandby power efficiency levels , 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. F or all TSLs, the GRIM employment results agree with the bottoms up analysis in the engineering. However, t he incremental costs for more efficient components at all TSLs are relatively small. Consequently, i n response to standards, domestic manufacturers wo uld most likely not alter employment levels much because inserting a more efficient component does not necessarily require more labor

.

The employment c onclusions ignore the possible relocation of domestic jobs to lower

labor

- cost countries

, which may occu r 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 0 50 100 150 200 250Total DomesticEmployement (# of Workers)

Year Total Employment

Baseline TSL 1 TSL 2 TSL 3 TSL 412

- 30 employment would b e mostly impacted if any manufacturer decided to shift remaining domestic production to lower

- cost

- countries.

12.6.2 Production Capacity

According to many oven manufacturers, 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 minor changes to tooling at all

TSLs for more efficient standby power. For all efficiency levels for standby mode and off mode standards, the most significant conversion costs are the research and development, testing, and certification of products with more

- efficient components, which does not affect productio n line capacity. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity levels and continue to meet market demand under energy conservation standards.

12.6.3 Cumulative Regulatory Burden

While any one regulation may not impose a signific ant 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 cumulativ e regulatory burden. For the cumulative regulatory burden analysis, DOE describes other significant product

- specific regulations that could affect

microwave oven manufacture r s that will take effect 3 years before or 3 years after the compliance date of the amended energy conservation standards for these products c

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 burden s can prompt companies to exit the market or reduce their product offerings, potentially reducing competition. .

In addition to the energy conservation regulations on microwave oven standby mode and

off mode

. several other Federal regulations and pending re gulations apply to these products and other equipment produced by the same manufacturers. DOE recogniz es that each regulation can significantly impact manufacturers’ financial operations. The following sections provide a qualitative discussion of some of t hese regulations and standards.

12.6.3.1 Standby Power Requirements

Section 310 of the Energy Independence and Security Act of 200 7 ( EISA 2007 ) amends

Section 325 of the Energy Policy and Conservation Act ( 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 this rulemaking, EISA 2007 specifies that the test

c The compliance date for energy conserva tion standards for microwave oven standby mode and off mode is 3 years from the date of publication of the final rule.12

- 31 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) Standard 62301

,

“ Household electrical appliances

– Measurement of standby power ” (IEC Standard 62301).

Besides today’s standard which sets a minimum standby mode and off mode requirement,

manufacturers st ated a concerned with EISA 2007 is the requirement that all covered products measure standby power and off mode. Manufacture r s 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.

12.6.3.2 Additional Federal Energy Conservation Standards

Besides the energy conservation regulations on microwave ovens

, 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 manufactur ers’ financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the market. Table 12.6

. 2 list s the Federal regulations that could also affect manufacturers of the microwave oven industr y in the 3 years leading up to and the 3 years preceding the compliance date of the amended ene rgy 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.12

- 32 Table 12.6

. 2 Other DOE and Federal Actions Affecting Microwave Oven Manufacturers

Regulation Approximate Compliance

Date* Number of Impacted Companies from the Market and Technology Assessment (MTA) (See c hapter 3) Estimated Total Industry

Conversion Costs

ASHRAE Products 2012 0 N/A Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps 2012 2 $17.3 million (2007$) d

Cooking Products 2012 9 $22.6 million (2006$) e

Residential Boilers 2012 1 N/A †

General Service Fluorescent Lamps and Incandescent Reflector Lamps 2012 0 $363.1 million (2008$) f

Dehumidifiers 2012 3 N/A†††
Beverage Vending Machines 2012 0 $14.5 million (2008$) g

Commercial Clothes Washers 2013 1 $20.4 million (2008$) h

Direct Heating Equipment 2013 0 $5.39 million (2009$) i

Residential Pool Heaters 2013 0 $0.3 million (2009$) j
Battery Chargers and External Power Supplies 2013* 5 N/A ††
Residential Refrigerators and

Freezers 2014* 9 N/A ††

Room Air Conditioners 2014* N/A N/A ††

Residential Clothes Dryers 2014* 5 N/A ††

Fluorescent Lamp Ballasts 2014* 0 N/A ††

d Estimated industry conversion expenses were pu blished in the TSD for the October 2008 packaged terminal air conditioners and packaged terminal heat pumps final rule. 73 FR 58772 . The TSD for the 2008 packaged terminal air conditioners and packaged terminal heat pumps final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_final_tsd.html

.

e Estimated industry conversion expenses were pu blished in the TSD for the April 2009 residential cooking products

final rule. 74 FR 16040 . The TSD for the 2009 residential cooking products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/cooking_products_final_rule_tsd.html

. f Estimated industry conversion expenses were pu blished in the TSD for the July 2009 general service fluorescent lamps and incandescent reflector lamps final rule. 74 FR 3408 0 . The TSD for the 2009 lamps final rule can be found

at http://www1.ee re.energy.gov/buildings/appliance_standards/residential/incandescent_lamps_standards_final_rule_

tsd.html

. g Estimated industry conversion expenses were pu blished in the TSD for the August 2009 beverage vending

machines final rule. 74 FR 44914 . The TSD for the 2009 beverage vending machines final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/c ommercial/beverage_machines_final_rule_tsd.html

. h Estimated industry conversion expenses were pu blished in the TSD for the January 2010 commercial clothes

washers final rule. 75 FR 1122 . The TSD for the 2010 commercial clothes washers final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/commercial/clothes_washers_ecs_final_rule_tsd.html

. i Estimated in dustry conversion expenses were pu blished in the TSD for the April 2010 heating products final rule.

75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/heating_products_fr_tsd.html

. j Estimated industry conversion expenses were pu blished in the TSD for the April 2010 heating products final rule.

75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://www1.eere.energy.gov/buildings/appliance_standards/residential/ heating_products_fr_tsd.html

.12

- 33 Walk

- In Freezers and Coolers 2015* 0 N/A ††

Metal Halide Lamp Fixtures 2015* 0 N/A ††

Residential Clothes Washers 2015* 7 N/A ††

Small Electric Motors 2015 0 $51.2 million (2009$) k

Residential Water Heaters 2015 2 $95.9 million (2009$) l

Commercial Electric Motors 2015* 0 N/A ††

Residential Furnaces 2015* 0 N/A ††

Commercial Distribution

Transformers 2016* 0 N/A ††
Commercial Refrigeration Equipment 2016* 0 N/A ††

Residential Central Air

Conditioners 2016* 1 N/A ††
*The dates listed are an approximation. The exact dates are pending final DOE action. † Energy conservation standards and compliance dates for residential boilers can be found at 10 CFR 430.32(e)(2)(ii)

- (iv). †† For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized estimated total industry conversion cost. ††† For minimum performance requirements prescribed by the Energy Independence and Security Act of 2007 (EISA 2007), DOE did not estimate total industry conversion costs because an MIA was not completed as part of a rulemaking. Pub. L. 110

- 140. EISA 2007 made numerous amendments to t he Energy Policy and Conservation Act (EPCA) of 1975, Pub. L. 94

- 163, (42 U.S.C. 6291

– 63 09) , which established an energy conservation program for major household appliances and industrial and commercial equipment.

Additional 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 microwave ovens. Differences in market shares and manufacturing processes of other regulated products for each manufacture r could cause varying degrees of burdens on these manufacture r s. Therefore

, DOE only estimated the cost of compliance to meet other energy conservation standards for regulated products if DOE had published a final rule

.

12.6.3.3 Restriction of Hazardous Substance Directive

Acc ording to manufacturers, the Restriction of Hazardous Substance Directive m

k Estimated industry conversion expenses were pu blished in the TSD for the March 2010 small motors final rule. 75

FR 10874 . The TSD for the 2010 small motors final rule can be found at (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

http://www1.eere.energy.gov/buildings/appliance_standards/commercial/sem_finalrule_tsd.html

. l Estimated industry conversion expenses were pu blished in the TSD for the April 2010 heating products final rule.

75 FR 20112 . The TSD for the 2010 heating products final rule can be found at http://ww w1.eere.energy.gov/buildings/appliance_standards/residential/heating_products_fr_tsd.html

.

m Further information about RoHS can be found at http://eur

- lex. europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf12

- 34 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, s everal northeastern states have plac ed a ban on any product that contains more than 1 ounce of mercury (a substance listed in RoHS ). This primarily affects mercury

based 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 th at 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. O ne manufacturer stated that

there are number of exemptions found in RoHS which must be periodically renewed by the EU.

M anufacturers 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.

Most 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 restrictio n on mercury n

12.6.3.4 International Energy Conservation Standard s , 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 potent ial restrictions of other hazardous substances in the future, such as fire protection materials, which could be costly to remove from existing products.

Canada does set energy conservation standards for cooking products. However, these standards are less stringent than those of the United States. M anufacturers stated their concern that Canada will begin to regulate products at the provincial level. Unlike the United States,

Canada doesn’t have F ederal pre

- emption clauses for efficiency standards so province

- by

province standards c ould create a patchwork of standards and result in even great er testing costs.

DOE surveyed foreign regulatory and non

- regulatory programs, identifying Korea’s e

standby program, Austral ia’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

n 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

.12

- 35 to lower standby power consumption below 1 watt ( W ) for microwave ovens

. o

12.7 CONCLUSIONS Korea’s e

standby progr am 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 standa rd 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.

The following sections summarize the different impacts for the scenarios DOE believes are most likely to capture the range of impacts on microwave oven manufacturers as a result of energy conservation standards for standby mode and off mode

. 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.

To assess the lower end of the range of potential impacts for t he microwave oven industry, DOE considered the scenario reflecting the preservation of gross margin percentage. As production cost increases with efficiency, this scenario implies manufacture r s 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 compliance date. The industry would do so by passing through its increased costs to customers without increasing its gross margin in ab solute dollars

.

TSL 1 represents an improvement in standby power from the baseline level of 4.0 W to 2.0 W for Product Class 1 and an improvement in standby power from the baseline level of 4.5 W to 3.7 W for Product Class 2. At TSL 1, the impact on INPV and cash flow varies depending on the manufacturers’ ability to pass on increases in MPCs to their customers. DOE estimated the impacts in INPV at TSL 1 to range

- $27.1 million to

- $29.3 million, or a change in INPV of

- 2.4 percent to

- 2.6 percent. At this level, the industry cash flow decreases by approximately 14.0 percent, to $72.3 million, compared to the base

- case value of $84.2 million in the year leading up

to the standards.

TSL 2 represents an improvement in standby power from the baseline level of 4.0 W to 1.5 W for Product Class 1 and an improvement in standby power from the baseline level of 4.5 W to 2.7 W for Product Class 2. At TSL 2, the impact on INPV and cash flow would be similar to TSL 1 and depend on whether manufacturers can fully recover the increases in MPCs from their customers. DOE estimated the impacts in INPV at TSL 2 to range from

- $45.2 million to

- $52.4 million, or a change in INPV of

- 4.0 percent to

- 4.6 percent. At this level, the industry cash

o IEA Energy Information Centre, Standby Power Use and the IEA “1

- Watt Plan” http://www.iea.org/textbase/subjectqueries/standby.asp12

- 36 flow decreases by approximately 24 .0 percent, to $64.0 million, compared to the base

- case value of $84.2 million in the year leading up to the standards.

TSL 3 represents an improvement in standby power from the baseline level of 4.0 W to 1.0 W for Product Class 1 and an improvement in sta ndby power from the baseline level of 4.5 W to 2.2 W for Product Class 2. At TSL 3, the impact on INPV and cash flow continues to vary depending on the manufacturers and their ability to pass on increases in MPCs to their customers. DOE estimated the impac ts in INPV at TSL 3 to range from approximately

- $52.9

million to

- $73.6 million, or a change in INPV of

- 4.7 percent to

- 6.5 percent. At this level, the industry cash flow decreases by approximately 29.9 percent, to $59.0 million, compared to the

base

- cas e value of $84.2 million in the year leading up to the standards.

TSL 4 represents an improvement in standby power from the baseline level of 4.0 W to 0.02 W for Product Class 1 and an improvement in standby power from the baseline level of 4.5

W to 0.04 W for Product Class 2. At TSL 4, DOE estimated the impacts in INPV to range from approximately

- $90.4 million to

- $165.7 million, or a change in INPV of

- 8.0 percent to

- 14.7 percent. At this level, the industry cash flow decreases by approximately 57.3 per cent, to $35.9 million, compared to the base

- case value of $84.2 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 their customers. At TSL 4, the conversion costs are higher than the other TSLs because the design of all microwave platforms must be more significantly altered.

For new standby mode and off mode energy conservation standards, conversion costs increase 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 still 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 co sts required to achieve these efficiencies. 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

al ong to customers (the preservation of gross margin in absolute dollars scenario), the negative impacts on INPV are amplified at each TSL.12

- 37 REFERENCES

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