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........................................................................................12-1

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 Guides....................................................................................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...................................................12-3

12.2.3.3 Manufacturer Subgroup Analysis ..........................................................12-4

12.2.3.4 Manufacturing Capacity Impact.............................................................12-5

12.2.3.5 Employment Impact...............................................................................12-5

12.2.3.6 Cumulative Regulatory Burden .............................................................12-5

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES.............................................12-6

12.3.1 Certification, Compliance, and Enforcement Costs..............................................12-6

12.3.2 Repair and Replacement Rates .............................................................................12-6

12.3.3 Alignment with ASHRAE Standards....................................................................12-7

12.4 GRIM INPUTS AND ASSUMPTIONS...........................................................................12-7

12.4.1 Overview of the GRIM .........................................................................................12-7

12.4.2 Sources for GRIM Inputs......................................................................................12-8

12.4.2.1 Corporate Annual Reports .....................................................................12-8

12.4.2.2 Standard and Poor Credit Ratings..........................................................12-9

12.4.2.3 Shipment Model.....................................................................................12-9

12.4.2.4 Engineering Analysis.............................................................................12-9

12.4.2.5 Manufacturer Interviews......................................................................12-10

12.4.3 Financial Parameters...........................................................................................12-10

12.4.4 Corporate Discount Rate .....................................................................................12-11

12.4.5 Trial Standard Levels..........................................................................................12-13

12.4.6 NIA Shipments....................................................................................................12-14

12.4.7 Manufacturer Production Costs ..........................................................................12-14

12.4.8 Conversion Costs ................................................................................................12-16

12.4.8.1 Capital Conversion Costs.....................................................................12-16

12.4.8.2 Product Conversion Costs....................................................................12-17

12.4.9 Markup Scenarios ...............................................................................................12-17

12.4.9.1 Preservation of Gross Margin Percentage Scenario.............................12-18

12.4.9.2 Preservation of Per Unit Operating Profit Scenario.............................12-18

12.5 INDUSTRY FINANCIAL IMPACTS ...........................................................................12-19

12.5.1 Introduction.........................................................................................................12-19

12.5.2 Small, Large and Very Large Air-Cooled Commercial Package Air Conditioner and 

Heat Pump Industry Financial Impacts...........................................................................12-20

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS..........................................12-22

12-i
12.7 OTHER IMPACTS.........................................................................................................12-24

12.7.1 Direct Employment.............................................................................................12-24

12.7.2 Production Capacity............................................................................................12-26

12.7.3 Cumulative Regulatory Burden ..........................................................................12-26

12.7.3.1 DOE Regulations for Other Products Produced by Manufacturers in the 

Small, Large and Very Large Air-Cooled Commercial Package Air Conditioner and 

Heat Pump Industry ............................................................................................12-26

12.7.3.2 Other DOE and Federal Actions Affecting Manufacturers in the Small, 

Large and Very Large Air-Cooled Commercial Package Air Conditioner and Heat 

Pump Industry.....................................................................................................12-28

12.8 CONCLUSION...............................................................................................................12-29

REFERENCES ........................................................................................................................12-32

LIST OF TABLES

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This 

Rulemaking ........................................................................................................12-4

Table 12.4.1 Financial Parameters Used for GRIM Analysis (Based on 2006–2011 Weighted 

Company Financial Data) ................................................................................12-10

Table 12.4.2 Financial Parameters Used to Determine Base Case Markup ............................12-11

Table 12.4.3 Base Case Manufacturer Markups......................................................................12-11

Table 12.4.4 Cost of Equity Calculation..................................................................................12-12

Table 12.4.5 Cost of Debt Calculation.....................................................................................12-13

Table 12.4.6 Summary of TSLs for the Small, Large, and Very Large Air-Cooled Commercial 

Package Air Conditioner and Heat Pump Industry..........................................12-13

Table 12.4.7 Manufacturer Production Cost Breakdown (2012$) for Small Commercial Package 

Air Conditioners...............................................................................................12-15

Table 12.4.8 Manufacturer Production Cost Breakdown (2012$) for Small Commercial Package 

Heat Pumps......................................................................................................12-15

Table 12.4.9 Manufacturer Production Cost Breakdown (2012$) for Large Commercial Package 

Air Conditioners...............................................................................................12-15

Table 12.4.10 Manufacturer Production Cost Breakdown (2012$) for Large Commercial Package 

Heat Pumps......................................................................................................12-15

Table 12.4.11 Manufacturer Production Cost Breakdown (2012$) for Very Large Commercial 

Package Air Conditioners ................................................................................12-15

Table 12.4.12 Manufacturer Production Cost Breakdown (2012$) for Very Large Commercial 

Package Heat Pumps........................................................................................12-16

Table 12.4.13 Industry Cumulative Capital Conversion Cost .................................................12-16

Table 12.4.14 Industry Cumulative Product Conversion Cost ................................................12-17

Table 12.4.15 Percentage of Product Listings that Meet Proposed Standard Level................12-17

Table 12.4.12.4.16 Base Case Markups...................................................................................12-18

Table 12.5.1 Changes in INPV for the Small, Large and Very Large Air-Cooled Commercial 

Package Air Conditioner and Heat Pump Industry, 2013-2048 (Preservation of 

Gross Margin Percentage Scenario).................................................................12-20

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Table 12.5.2 Changes in INPV for the Small, Large and Very Large Air-Cooled Commercial 

Package Air Conditioner and Heat Pump Industry, 2013-2048 (Preservation of 

Per Unit Operating Profit Scenario).................................................................12-20

Table 12.6.1 Impacts of Conversion Costs on a Small Manufacturer .....................................12-24

Table 12.6.2 Impacts of Conversion Costs on a Large Manufacturer .....................................12-24

Table 12.7.1 Potential Changes in the Total Number of Domestic Production Workers in the 

Small, Large and Very Large Air-Cooled Commercial Package Air Conditioner 

and Heat Pump Industry in 2019 .....................................................................12-26

Table 12.7.12.7.2 Compliance Dates and Expected Conversion Expenses of Federal Energy 

Conservation Standards Affecting the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry.....................12-27

LIST OF FIGURES

Figure 12.4.1 Using the GRIM to Calculate Cash Flow............................................................12-8

Figure 12.5.1 Annual Industry Net Cash Flows for the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry (Preservation of 

Gross Margin Percentage Scenario).................................................................12-21

Figure 12.5.2 Annual Industry Net Cash Flows for the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry (Preservation of 

Per Unit Operating Profit Scenario).................................................................12-22

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CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S. Department of 

Energy (DOE or the Department) is required to consider the economic impact of the standard on 

the manufacturers and on the consumers of the products subject to such a standard. (42 U.S.C. 

6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any lessening of 

competition as determined in writing by the Attorney General. Id. DOE conducted a 

manufacturer impact analysis (MIA) to estimate the financial impact of amended energy 

conservation standards on manufacturers of small, large and very large air-cooled commercial 

package air conditioning and heating equipment, and assessed the impact of such standards on 

direct 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 adapted for each product in this rulemaking. The GRIM inputs include information on 

industry cost structure, shipments, and pricing strategies. The GRIM’s key output is the industry 

net present value (INPV). The model estimates the financial impact of more-stringent energy 

conservation standards for each product by comparing changes in INPV between a base case and 

the various trial standard levels (TSLs) in the standards case. The qualitative part of the MIA 

addresses product characteristics, manufacturer characteristics, and market and product trends, as 

well as 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 small, large and very large air-cooled commercial 

package air conditioner and heat pump industry. This characterization included data on sales 

volumes, pricing, employment, and financial structure. In Phase II, “Industry Cash Flow,” DOE 

used the GRIM to assess the potential impacts of amended energy conservation standards on 

manufacturers. DOE also developed interview guides to gather information on the potential 

impacts on these manufacturers. In Phase III, “Subgroup Impact Analysis,” DOE interviewed 

manufacturers representing a broad cross-section of the small, large and very large air-cooled 

commercial package air conditioner and heat pump industry. Using information from these 

interviews, DOE refined its analysis in the GRIM, developed additional analyses for subgroups 

that required special consideration, and incorporated qualitative data from interviews into its 

analysis.

12.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the small, large and very large aircooled commercial package air conditioner and heat pump industry that built on the market and 

technology assessment prepared for this rulemaking (refer to chapter 3 of the technical support 

document (TSD)). Before initiating the detailed impact studies, DOE collected information on 

the present and past structure and market characteristics of the small, large and very large aircooled commercial package air conditioner and heat pump industry. This information included 

12-1
shipments, manufacturer markups, and the cost structures of various manufacturers. The industry 

profile includes: (1) further detail on the overall market and product characteristics; (2) estimated 

manufacturer market shares; (3) financial parameters such as net plant, property, and equipment

(PPE); selling, general and administrative (SG&A) expenses; cost of goods sold, etc.; and (4) 

trends in the number of firms, market, and product characteristics. The industry profile included 

a top-down cost analysis of small, large and very large air-cooled commercial package air 

conditioner and heat pump manufacturers that DOE used to derive the preliminary financial 

inputs for the GRIM (e.g., revenues, depreciation, SG&A, and research and development (R&D) 

expenses). 

DOE also used public information to further calibrate its initial characterization of the 

industry, including Securities and Exchange Commission (SEC) 10-K reports,1 Standard & 

Poor’s (S&P) stock reports,2 market research tools (i.e., Hoovers3), corporate annual reports, and 

the U.S. Census Bureau’s 2011 Annual Survey of Manufacturers.4 DOE also characterized these 

industries using information from its engineering analysis and the life-cycle cost analysis.

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

Phase II focused on the financial impacts of potential amended energy conservation 

standards on manufacturers of small, large and very large air-cooled commercial package air 

conditioners and heat pumps. More stringent energy conservation standards can affect 

manufacturer cash flows in three distinct ways: (1) create a need for increased investment; (2) 

raise production costs per unit; and (3) alter revenue due to higher per-unit prices and/or possible 

changes in sales volumes. To quantify these impacts, DOE used the GRIM to perform a cashflow analysis for the small, large and very large air-cooled commercial package air conditioner 

and heat pump industry. In performing these analyses, DOE used the financial values derived 

during Phase I and the shipment scenarios used in the national impact analysis (NIA). In Phase 

II, DOE performed these preliminary industry cash-flow analyses and prepared written guides 

for manufacturer interviews.

12.2.2.1 Industry Cash-Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows from the 

announcement year of amended energy conservation standards until 30 years after the standards’ 

compliance date. These factors include annual expected revenues, costs of goods sold, SG&A, 

taxes, and capital expenditures related to the amended standards. Inputs to the GRIM include 

manufacturer production costs (MPCs), markup assumptions, and shipments forecasts developed 

in other analyses. DOE derived the manufacturing costs from the engineering analysis and 

information provided by the industry. It estimated typical manufacturer markups from public 

financial reports and interviews with manufacturers. DOE developed alternative markup 

scenarios for the GRIM based on discussions with manufacturers. DOE’s shipments analysis, 

presented in chapter 9 of the TSD, provided the basis for the shipment projections in the GRIM. 

The financial parameters were developed using publicly available manufacturer data and were 

revised with information submitted confidentially during manufacturer interviews. The GRIM 

results are compared to base-case projections for the industry. The financial impact of amended 

energy conservation standards is the difference between the discounted annual cash flows in the 

base case and standards case at each TSL.

12-2
12.2.2.2 Interview Guides

During Phase II of the MIA, DOE interviewed manufacturers to gather information on 

the effects of amended energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Before the interviews, DOE 

distributed an interview guide to interviewees. The interview guide provided a starting point for 

identifying relevant issues and impacts of amended energy conservation standards on individual 

manufacturers or subgroups of manufacturers. Information received from these meetings is 

protected by non-disclosure agreements and resides with DOE’s contractors. The MIA interview 

topics included: (1) engineering analysis follow-up; (2) key issues to this rulemaking; (3) 

company overview and organizational characteristics; (4) manufacturer markups and 

profitability; (5) shipment projections; (6) financial parameters; (7) conversion costs; (8) 

cumulative regulatory burden; (9) direct employment impact assessment; (10) capacity, exports, 

foreign competition, and outsourcing; (11) consolidation; and (12) impacts on small businesses.

12.2.3 Phase III: Subgroup Analysis

For its analysis, DOE presented the impacts on all classes of small, large and very large 

air-cooled commercial package air conditioners and heat pumps as a whole. While conducting 

the MIA, DOE interviewed a representative cross-section of equipment manufacturers. During 

interviews, DOE defined one manufacturer subgroup, small manufacturers, that could be

impacted disproportionately by amended energy conservation standards.

12.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash-flow analysis performed in Phase II are 

supplemented with information gathered from manufacturer interviews in Phase III. The 

interview process provides an opportunity for interested parties to express their views on 

important issues privately, allowing confidential or sensitive information to be considered in the 

rulemaking process. DOE sought industry feedback on approaches used in the GRIM as well as

input on key issues and concerns.

DOE used these interviews to tailor the GRIM to reflect financial characteristics unique 

to the small, large and very large air-cooled commercial package air conditioner and heat pump

industry. Interviews were scheduled well in advance to provide every opportunity for key 

individuals to be available for comment. Although a written response to the questionnaire was 

acceptable, DOE sought interactive interviews, which help to clarify responses and identify 

additional issues. The resulting information provides valuable inputs to the GRIM developed for 

the equipment classes.

12.2.3.2 Revised Industry Cash-Flow Analysis

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input 

financial figures for review and evaluation. During the interviews, DOE requested comments on 

the values it selected for the parameters. DOE revised its industry cash-flow model based on this 

feedback. Section 12.4.3 provides more information on how DOE calculated the parameters.

12-3
12.2.3.3 Manufacturer Subgroup Analysis 

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

adequately assess differential impacts of amended energy conservation standards among 

manufacturer subgroups. For example, small manufacturers, niche players, or manufacturers 

exhibiting a cost structure that largely differs from the industry average could be more negatively 

affected. To address this possible impact, DOE used the results of the industry characterization 

analysis in Phase I to group manufacturers that exhibit similar characteristics. 

During the interviews, DOE discussed the potential subgroups and subgroup members it 

identified for the analysis. DOE asked manufacturers and other interested parties to suggest what 

subgroups or characteristics are the most appropriate to analyze. As noted, DOE presents the 

industry impacts on small, large and very large air-cooled commercial package air conditioner 

and heat pump manufacturers as a whole because most of the equipment classes represent the 

same market served by the same manufacturers. However, as discussed below, DOE identified 

one manufacturer subgroup that warranted a separate impact analysis: small manufacturers.

Small Business Manufacturer Subgroup

DOE investigated whether small business manufacturers should be analyzed as a 

manufacturer subgroup. DOE used the Small Business Administration (SBA) small business size 

standards effective on November 5, 2010, as amended, and the North American Industry 

Classification System (NAICS) code, presented in Table 12.2.1, to determine whether any small 

entities would be affected by the rulemaking.5 For the equipment classes under review, the SBA 

bases its small business definition on the total number of employees for a business, its 

subsidiaries, and its parent companies. An aggregated business entity with fewer employees than 

the listed limit is considered a small business.

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by 

This Rulemaking

Industry Description Revenue Limit Employee Limit NAICS

Air-Conditioning and Warm Air Heating 

Equipment and Commercial and Industrial 

Refrigeration Equipment Manufacturing

N/A 750 333415

DOE used publicly available and proprietary information to identify potential small 

manufacturers. DOE’s research involved industry trade association membership directories (e.g.,

American Heating and Refrigeration Institute (AHRI) Directory 6

), public databases (e.g.,

California Energy Commission Appliance Efficiency Database 7), individual company websites, 

and market research tools (e.g., Hoovers reports) to create a list of companies that manufacture 

or sell equipment covered by this rulemaking. DOE also asked stakeholders and industry 

representatives if they were aware of any other small manufacturers during manufacturer 

interviews and at previous DOE public meetings. DOE screened out companies that did not offer 

equipment covered by this rulemaking, did not meet the definition of a “small business,” or are 

foreign owned and operated.

Based on this analysis, DOE identified three manufacturers in the small, large and very 

large air-cooled commercial package air conditioner and heat pump industry that qualify as small 

12-4
businesses. DOE made an effort to contact the small businesses to solicit feedback on the 

potential impacts of energy conservation standards. DOE spoke with two of the three small 

businesses. DOE obtained further information on small business impacts in the course of 

interviews with large manufacturers. In addition to posing a subset of modified MIA interview 

questions, DOE solicited data on differential impacts these companies might experience as a 

result of amended energy conservation standards. Based on these interviews and industry 

research, DOE reports the potential impacts of this rulemaking on small manufacturers in section 

12.6.

12.2.3.4 Manufacturing Capacity Impact

One significant outcome of amended energy conservation standards could be the 

obsolescence of existing manufacturing assets, including tooling and investment. The 

manufacturer interview guides include a series of questions to help identify impacts of amended 

standards on manufacturing capacity. Specifically, questions address: capacity utilization and 

plant location decisions in the United States and North America, with and without amended 

standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate 

the new requirements; the nature and value of any stranded assets; and estimates for any onetime changes to existing PPE. DOE’s estimates of the one-time capital changes and stranded 

assets affect the cash flow estimates in the GRIM. These estimates can be found in section 

12.4.8. DOE’s discussion of the capacity impact can be found in section 12.7.2.

12.2.3.5 Employment Impact 

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

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

might be affected, the interviews explored current employment trends in the small, large and 

very large air-cooled commercial package air conditioner and heat pump industry. The 

interviews also solicited manufacturer views on changes in employment patterns that may result 

from more stringent standards. The employment impacts section of the interview guide focused 

on current employment levels associated with manufacturers at each production facility, 

expected future employment levels with and without amended energy conservation standards, 

and differences in workforce skills and issues related to the retraining of employees. The 

employment impacts are reported in section 12.7.1.

12.2.3.6 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy 

conservation standards and other regulatory actions affecting the same products. DOE analyzed 

the impact on manufacturers of multiple, product-specific regulatory actions. Based on its own 

research and discussions with manufacturers, DOE identified regulations relevant to

manufacturers of small, large and very large air-cooled commercial package air conditioners and 

heat pumps, including other Federal regulations that impact other products made by the same 

manufacturers. Discussion of the cumulative regulatory burden can be found in section 12.7.3.

12-5
12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA interview starts by asking: “What are the key issues for your company 

regarding the energy conservation standard rulemaking?” This question prompts manufacturers 

to identify the issues they feel DOE should explore and discuss further during the interview. The 

following sections describe the most significant issues identified by manufacturers of small, 

large and very large air-cooled commercial package air conditioners and heat pumps. These 

summaries are provided in aggregate to protect manufacturer confidentiality. 

12.3.1 Certification, Compliance, and Enforcement Costs

Nearly all manufacturers expressed concern over certification, compliance, and 

enforcement (CC&E) costs. In particular, confusion over the definition of “basic model,” 

“equipment class,” and the implementation of alternative efficiency determination methods

(AEDMs) has made it difficult for some manufacturers to anticipate their total testing needs and 

total testing costs. These issues will significantly impact the number of models that require 

testing. 

Additionally, manufacturers noted that the replacement of the current energy efficiency 

ratio (EER) standard with the proposed integrated energy efficiency ratio (IEER) standard*

introduces additional testing complications. IEER testing necessitates four data points, at 25%, 

50%, 75%, and 100% capacity, thereby introducing additional cumulative uncertainty. 

Manufacturers noted that the proposed +/- 1% repeatability standard is more stringent than 

current laboratory capabilities as well as current industry standard practice. Manufacturers also 

expressed the need for additional increases in the acceptable tolerances when testing.

12.3.2 Repair and Replacement Rates

During interviews, most manufacturers expressed concerns that an increase in standards 

may make customers more likely to repair an old unit rather than replace it with a new one. 

Manufacturers noted that more efficient units tend to be larger, and customers may need to make 

significant alterations to roofs at existing installations in order to accommodate larger equipment. 

The high cost of redesigning, reconstructing, or possibly replacing a roof to hold a new unit 

could deter customers from purchasing one. According to manufacturers, another reason an 

amended standard may lead to a drop in shipments is the price sensitivity of end users. More 

efficient units tend to be more expensive. The lower cost of fixing an old unit relative to 

purchasing a new unit may make repairs a more attractive option than replacement for some 

customers. Furthermore, manufacturers suggested a higher standard could lead to a reduction in 

energy savings due to the increase in the number of older, less efficient units that are repaired 

*

In the February 2013 RFI, DOE noted that it was considering whether to replace the existing efficiency descriptor, EER, with a 

new energy-efficiency descriptor, IEER. The EER metric only uses the efficiency of the equipment operating at full load. By 

contrast, the IEER metric factors in the efficiency of operating at part-loads of 75 percent, 50 percent, and 25 percent of capacity, 

as well as the efficiency at full load. This is accomplished by weighting the full- and part-load efficiencies with the average 

amount of time operating at each loading point; thus, IEER provides a more representative measure of the annual energy 

consumption in actual operation. The IEER metric incorporates part-load efficiencies measured with outside temperatures 

appropriate for the load levels, i.e. at lower temperatures for lower load levels. 78 FR 7296, 7299 (Feb. 1, 2013).

12-6

 
rather than replaced with newer, more efficient units. Manufacturers expressed concern over a 

potential contraction in market size resulting from amended standards. 

12.3.3 Alignment with ASHRAE Standards

Several manufacturers suggested during interviews that DOE standards should be aligned 

with other industry standards set by ASHRAE and AHRI. A few standards, such as ASHRAE 

37, ASHRAE 41, and AHRI 340/360 are currently being revised, and manufacturers believe that 

a coordination of standards between DOE and industry organizations would be a practical way to 

reduce the amount of time they need to spend on redesigning products and meeting multiple 

regulations.

12.4 GRIM INPUTS AND ASSUMPTIONS

The Government Regulatory Impact Model serves as the main tool for assessing the 

impacts on industry due to amended energy conservation standards. DOE relies on several 

sources to obtain inputs for the GRIM. Data and assumptions from these sources are then fed 

into an accounting model that calculates the industry cash flow both with and without amended 

energy conservation standards.

12.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 12.4.1, is an annual cash flow 

analysis that uses manufacturer production costs, manufacturer selling prices, industry 

shipments, and industry financial information as inputs, and accepts a set of regulatory 

conditions such as changes in costs, investments, and associated margins. The GRIM spreadsheet 

uses a number of inputs to arrive at a series of annual cash flows, beginning with the base year of 

the analysis, 2013, and continuing to 2048. The model calculates the INPV by summing the 

stream of annual discounted cash flows during this period and adding a discounted terminal 

value.8

12-7
Figure 12.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares 

changes in INPV between the base-case scenario and the standards-case scenario induced by 

amended energy conservation standards. The difference in INPV between the base case and the 

standards case(s) represents the estimated financial impact of the amended energy conservation 

standard on manufacturers. Appendix 12A provides more technical details and user information 

for the GRIM.

12.4.2 Sources for GRIM Inputs

The GRIM uses several different sources for data inputs in determining industry cash 

flow. These sources include corporate annual reports, company profiles, census data, credit 

ratings, the shipments model, the engineering analysis, and the manufacturer interviews.

12.4.2.1 Corporate Annual Reports

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the initial financial 

inputs to the GRIM. These reports exist for publicly held companies and are freely available to 

the general public. DOE developed initial financial inputs to the GRIM by examining the annual 

SEC 10-K reports filed by publicly traded manufacturers of small, large and very large aircooled commercial package air conditioners and heat pumps. Since these companies do not 

provide detailed information about their individual product lines, DOE used the financial 

information for the entire companies when developing initial estimates of financial parameters 

for the GRIM analysis. These figures were later revised using feedback from interviews to be 

representative of manufacturing for each product grouping. DOE used corporate annual reports 

to derive the following initial inputs to the GRIM:

• tax rate

12-8
• working capital

• SG&A

• R&D

• depreciation

• capital expenditures

• net PPE

12.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial information. DOE relied 

on S&P reports to determine the industry’s average cost of debt when calculating the cost of 

capital.

12.4.2.3 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the NIA. 

Chapter 9 of the TSD describes the methodology and analytical model DOE used to forecast 

shipments.

12.4.2.4 Engineering Analysis 

The engineering analysis estimates the cost-efficiency relationship of equipment at 

different levels of increased energy efficiency. This relationship serves as the basis for the costbenefit calculations for commercial customers, manufacturers, and the nation. In determining the 

cost-efficiency relationship, DOE estimates the increase in manufacturing costs associated with 

increasing the efficiency of equipment above the baseline up to the maximum technologically 

feasible (“max-tech”) efficiency level for each equipment class. 

DOE conducted the engineering analyses for the small, large and very large air-cooled 

commercial package air conditioner and heat pump industry using the reverse-engineering 

approach.

† DOE began its analysis by conducting industry research to select equipment classes 

for direct analysis, to develop baseline unit specifications, and to identify representative 

equipment for further analysis. Next, DOE developed efficiency levels based on a review of 

industry standards, equipment available on the market, and computer simulations of equipment 

efficiencies. To develop cost estimates, DOE conducted a price analysis, based upon physical 

teardowns of selected units, cost estimates from publicly available sources, and price quotes 

from manufacturers. DOE then developed a cost model to determine manufacturing production 

† DOE has identified three basic methods for generating manufacturing costs: (1) the design-option 

approach, which provides the incremental costs of adding to a baseline model design options that will improve its 

efficiency (i.e., lower its energy use); (2) the efficiency-level approach, which provides the incremental costs of 

moving to higher energy efficiency levels, without regard to the particular design option(s) used to achieve such 

increases; and (3) the reverse-engineering (or cost-assessment) approach,which provides “bottom-up” 

manufacturing cost assessments for achieving various levels of increased efficiency based on teardown analyses (or 

physical teardowns) that provides detailed data on costs for parts and material, labor, shipping/packaging, and 

investment for models that operate at particular efficiency levels.

12-9

 
costs (MPCs). By applying derived manufacturer markups to the MPCs, DOE calculated the 

manufacturer selling price (MSP) and constructed industry cost-efficiency curves. See chapter 5 

of the TSD for a complete discussion of the engineering analysis. 

12.4.2.5 Manufacturer Interviews

During the course of the MIA, DOE interviewed manufacturers representing 

approximately 97 percent of the industry by revenue. The information gathered during these 

interviews enabled DOE to tailor the GRIM to reflect the unique financial characteristics of the 

small, large, and very large air-cooled commercial package air conditioner and heat pump 

industry. In interviews, DOE asked manufacturers to describe their major concerns about this 

rulemaking. Key topics discussed during the interviews and reflected in the GRIM include:

• capital conversion costs (one-time investments in PPE);

• product conversion costs (one-time investments in research, product development, 

testing, and marketing);

• product cost structure, or the portion of the MPCs related to materials, labor, 

overhead, and depreciation costs;

• MPCs estimated in the engineering analysis; and

• possible profitability impacts.

12.4.3 Financial Parameters

Table 12.4.1 provides financial parameters for seven public companies engaged in 

manufacturing and selling small, large and very large air-cooled commercial package air 

conditioners and heat pumps. The values listed are averages over a six-year period (2006 to 

2011).

Table 12.4.1 Financial Parameters Used for GRIM Analysis (Based on 2006–2011

Weighted Company Financial Data)

Parameter

IndustryWeighted 

Average

Manufacturers

A B C D E F G

Tax Rate 

(% of Taxable Income) 25.15% 34.85% 41.30% 17.67% 15.43% 33.80% 30.14% 27.97%

Working Capital

(% of Revenue) 6.20% 18.58% 12.16% -1.71% 2.93% 9.89% 13.96% 9.45%

SG&A 

(% of Revenue) 14.95% 8.65% 25.34% 18.05% 10.00% 21.10% 20.27% 11.24%

R&D 

(% of Revenues) 2.06% 1.21% 2.80% 1.67% 1.23% 1.41% 2.63% 3.15%

Depreciation 

(% of Revenues) 1.86% 3.84% 3.92% 1.63% 2.00% 1.56% 1.84% 1.53%

Capital Expenditures 

(% of Revenues) 2.22% 6.65% 4.52% 1.66% 2.42% 1.74% 1.27% 1.83%

While most of these companies also manufacture products not covered by this 

rulemaking, DOE used these parameters as initial estimates. During interviews, manufacturers 

were asked to provide their own figures for the parameters listed in Table 12.4.1. Where 

12-10
applicable, DOE adjusted the parameters in the GRIM using manufacturer feedback and market 

share information.

In addition to these parameters, DOE used financial information sourced from SEC 

filings for the seven public manufacturers to determine an average manufacturer markup. 

Table 12.4.2 Financial Parameters Used to Determine Base Case Markup

Manufacturer

A B C D E F G

Average Net 

Revenues (Million) $255 $10,876 $12,000 $34,759 $3,359 $2,117 $54,630 

Corporate Gross 

Margin 22% 33% 28% 14% 27% 28% 27%

Markup 1.28 1.48 1.39 1.17 1.37 1.39 1.37

Table 12.4.2 lists the average net revenues, estimated corporate gross margin, and 

estimated manufacturer markup for the years 2006 to 2011 for the seven manufacturers. The 

weighted average of the estimated manufacturer markup based on public filings by these seven 

companies is 1.34. To further refine the base case markup, DOE solicited feedback from 

manufacturers on this value in confidential interviews. Based on manufacturer feedback, DOE 

adjusted its estimate manufacturer markup and applied the values listed in Table 12.4.3 for 

covered equipment.

Table 12.4.3 Base Case Manufacturer Markups

Equipment Markup

Small Commercial Package Air-Conditioners (Air-Cooled) -

≥65,000 Btu/h and <135,000 Btu/h 1.30

Small Commercial Package Heat Pumps (Air-Cooled) -

≥65,000 Btu/h and <135,000 Btu/h 1.30

Large Commercial Package Air-Conditioners (Air-Cooled) -

≥135,000 Btu/h and <240,000 Btu/h 1.34

Large Commercial Package Heat Pumps (Air-Cooled) -

≥135,000 Btu/h and <240,000 Btu/h 1.34

Very Large Commercial Package Air-Conditioners (AirCooled) - ≥240,000 Btu/h and <760,000 Btu/h 1.41

Very Large Commercial Package Heat Pumps (Air-Cooled) -

≥240,000 Btu/h and <760,000 Btu/h 1.41

12.4.4 Corporate Discount Rate

DOE used the weighted-average cost of capital (WACC) as the discount rate to calculate 

the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is 

the total cost of debt and equity weighted by their respective proportions in the capital structure 

of the industry. DOE estimated the WACC for the small, large and very large air-cooled 

12-11
commercial package air conditioner and heat pump industry based on seven representative 

companies, using the following formula:

WACC = After-Tax Cost of Debt × (Debt Ratio) + Cost of Equity × (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 × Risk Premium

Where:

Riskless Rate of Return = the rate of return on a “safe” benchmark investment, typically 

considered the short-term Treasury Bill (T-Bill) yield,

Risk Premium = the difference between the expected return on stocks and the riskless rate, and

Beta (β) = 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 calculated that the industry average cost of equity for the small, large and very large 

air-cooled commercial package air conditioner and heat pump industry is 13.2 percent (Table 

12.4.4).

Table 12.4.4 Cost of Equity Calculation

Parameter

Industry 

Weighted 

Average

A B C D E F G

(1) Average Beta 1.32 1.11 1.00 1.60 1.73 1.07 0.80 1.09

(2) Average Yield on 10-

Year Bonds (1928-2012) 5.16%

(3) Market Risk 

Premium 6.10%

Cost of Equity 

(2)+[(1)*(3)] 13.2% 11.9% 11.3% 14.9% 15.7% 11.7% 10.0% 11.8%

Equity/Total Capital 68.9% 96.4% 63.1% 70.9% 71.2% 50.4% 100.0% 70.6%

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 seven public manufacturers by using S&P ratings and

estimated credit worthiness and 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 the 10-year Treasury bond rate because it captures long-term inflation 

expectations and is less volatile than short-term rates. The risk-free rate is estimated to be 

12-12
approximately 5.16 percent, which is the average 10-year Treasury bond rate between 1928 and 

2012.

For the cost of debt, DOE used bond ratings from S&P’s Credit Services to calculate an 

average spread of corporate bonds.‡ DOE added these spreads to the estimated risk-free rate of 

5.16% to determine the gross cost of debt for each company. It then calculated an industry 

weighted average gross cost of debt of 6.5 percent. Since proceeds from debt issuance are tax 

deductible, DOE adjusted the gross cost of debt by the industry average tax rate to determine the 

net cost of debt for the industry. Table 12.4.5 presents the derivation of the cost of debt and the 

capital structure of the industry (i.e., the debt ratio (debt/total capital)).

Table 12.4.5 Cost of Debt Calculation

Parameter

Industry 

Weighted 

Average

A B C D E F G

S&P Bond Rating AAA AA BBB BBB BBB B A

(1) Avg. Yield on 10-

Yr Bonds (1928-2012) 5.16%

(2) Gross Cost of Debt 6.5% 5.66% 5.81% 6.76% 6.76% 6.76% 10.16% 6.16%

(3) Tax Rate 25.1% 34.85% 41.30% 17.67% 15.43% 33.80% 30.14% 27.97%

Net Cost of Debt

(2) x [1-(3)] 4.9% 3.7% 3.4% 5.6% 5.7% 4.5% 7.1% 4.4%

Debt/Total Capital 31.1% 3.6% 36.9% 29.1% 28.8% 49.6% 0.0% 29.4%

Using public information for these seven companies, the initial estimate for the industry’s 

nominal WACC was approximately 10.6 percent. Subtracting an inflation rate of 3.08 percent 

over the analysis period used in the initial estimate, the inflation-adjusted WACC and the initial 

estimate of the discount rate used in the straw-man GRIM is 7.52 percent. DOE also asked for 

feedback on the discount rate during manufacturer interviews. Based on this feedback, DOE used 

a discount rate of 6.2 percent in the GRIM.

12.4.5 Trial Standard Levels 

DOE developed a number of efficiency levels for each type of equipment class. TSLs 

were then developed by selecting likely groupings of efficiency levels for all equipment types. 

Table 12.4.6 presents the TSLs used for energy efficiency analysis in the GRIM.

Table 12.4.6 Summary of TSLs for the Small, Large, and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry

Equipment Class TSL 1 TSL 2 TSL 3 TSL 4

‡ For two of the seven manufacturers, S&P bond ratings were not available. In these cases, DOE estimated the 

companies’ synthetic bond ratings based on their interest coverage ratio. The interest coverage ratio is calculated as 

the ratio of earnings before interest and taxes (EBIT) to current interest expenses, with the present value of operating 

leases reclassified as debt. The estimated synthetic bond ratings are based on a valuation method available through 

the NYU Stern School of Business and may be found at: http://www.stern.nyu.edu/~adamodar/pc/ratings.xls

12-13

 
Efficiency Level §

Small Commercial Package Air 

Conditioners – ≥65,000 Btu/h and 

<135,000 Btu/h Cooling Capacity

1 2 3 4

Large Commercial Package Air 

Conditioners – ≥135,000 Btu/h and 

<240,000 Btu/h Cooling Capacity

1 2 3 4

Very Large Commercial Package Air 

Conditioners – ≥240,000 Btu/h and 

<760,000 Btu/h Cooling Capacity

1 2 3 4

Small Commercial Package Heat Pumps –

≥65,000 Btu/h and <135,000 Btu/h 

Cooling Capacity

1 2 3 4

Large Commercial Package Heat Pumps – 

≥135,000 Btu/h and <240,000 Btu/h 

Cooling Capacity

1 2 3 4

Very Large Commercial Package Heat 

Pumps – ≥240,000 Btu/h and <760,000 

Btu/h Cooling Capacity

1 2 3 4

12.4.6 NIA Shipments

The GRIM estimates manufacturer revenues based on total unit shipment forecasts and the 

distribution of these values by efficiency level. Changes in sales volumes and efficiency mix 

over time can significantly affect manufacturer finances. For this analysis, the GRIM uses the 

NIA’s annual shipment forecasts derived from the shipments analysis from 2013 (the base year)

to 2048 (the end year of the analysis period). The NIA shipments forecasts are, in part, based on 

a consumer choice model that estimates customer sensitivity to total installed cost as well as 

operating costs. See chapter 9 of the TSD for more information on the standards-case shipment

forecasts. 

12.4.7 Manufacturer Production Costs

Changes in production costs affect revenues and gross profits. Products that are more 

efficient typically cost more to produce than baseline products (as shown in chapter 5 of the 

TSD). For the MIA, DOE used the manufacturing production costs (MPCs) derived in the 

engineering analysis. 

Manufacturing a higher efficiency product is typically more expensive than 

manufacturing a baseline product. MPCs increase at higher efficiency levels due to the use of 

more complex components, which are more costly than baseline components. These changes in 

MPCs can affect the revenues, gross margins, and cash flow of the industry, making product cost 

data key inputs into the GRIM analysis.

To calculate the baseline manufacturer selling price (MSP), DOE used the MPCs from 

the engineering and teardown analyses and applied a manufacturer markup, which varies with 

the markup scenario (discussed in detail in section 12.4.9), to the MPCs. 

§ For the IEERs that correspond to efficiency levels 1 through 4, see NOPR Section IV.C.3. 

12-14

 
Table 12.4.7 through 12.4.10 show the production cost estimates used in the GRIM for 

each analyzed equipment class.

Table 12.4.7 Manufacturer Production Cost Breakdown (2012$) for Small Commercial 

Package Air Conditioners

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $1,553.36 $185.25 $76.26 $105.20 $1,920.07 1.30 $2,753.23

EL 1 $1,658.01 $192.25 $80.07 $105.67 $2,036.00 1.30 $2,903.94

EL 2 $2,054.08 $245.12 $83.89 $120.45 $2,503.54 1.30 $3,511.74

EL 3 $2,230.21 $263.72 $106.76 $108.25 $2,708.95 1.30 $3,778.78

EL 4 $2,651.64 $303.84 $114.39 $127.24 $3,197.11 1.30 $4,516.24

Table 12.4.8 Manufacturer Production Cost Breakdown (2012$) for Small Commercial 

Package Heat Pumps

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $1,654.65 $237.19 $78.16 $110.58 $2,080.58 1.30 $2,961.90

EL 1 $1,759.31 $244.19 $82.06 $114.78 $2,196.51 1.30 $3,112.61

EL 2 $2,155.37 $297.07 $85.97 $131.61 $2,664.05 1.30 $3,720.41

EL 3 $2,331.50 $315.67 $109.42 $139.93 $2,869.46 1.30 $3,987.44

EL 4 $2,752.94 $355.79 $117.23 $160.85 $3,357.62 1.30 $4,724.91

Table 12.4.9 Manufacturer Production Cost Breakdown (2012$) for Large Commercial 

Package Air Conditioners

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $2,828.22 $411.02 $127.90 $184.73 $3,551.88 1.34 $5,016.66

EL 1 $3,204.91 $438.20 $134.30 $199.94 $3,971.04 1.34 $5,578.34

EL 2 $3,518.48 $480.76 $140.69 $214.14 $4,344.64 1.34 $6,271.82

EL 3 $3,892.54 $529.08 $179.06 $231.46 $4,788.86 1.34 $6,867.07

EL 4 $4,167.27 $557.73 $191.85 $244.41 $5,106.14 1.34 $7,292.23

Table 12.4.10 Manufacturer Production Cost Breakdown (2012$) for Large Commercial 

Package Heat Pumps

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $3,154.04 $2,273.19 $647.63 $331.87 $4,002.14 1.34 $5,620.01

EL 1 $3,530.73 $2,300.37 $680.01 $347.07 $4,421.30 1.34 $6,181.68

EL 2 $3,844.30 $2,342.92 $712.39 $361.27 $4,794.90 1.34 $6,875.17

EL 3 $4,218.36 $2,391.25 $906.68 $378.59 $5,239.12 1.34 $7,470.42

EL 4 $4,493.09 $2,419.90 $971.44 $391.55 $5,556.40 1.34 $7,895.58

Table 12.4.11 Manufacturer Production Cost Breakdown (2012$) for Very Large 

Commercial Package Air Conditioners

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $5,914.24 $700.12 $197.56 $335.91 $7,147.82 1.41 $10,678.43

EL 1 $6,400.31 $732.00 $201.09 $357.06 $7,690.47 1.41 $11,443.56

EL 2 $7,065.54 $778.33 $210.48 $389.88 $8,444.23 1.41 $12,506.36

12-15
EL 3 $7,527.41 $829.39 $215.06 $410.63 $8,982.49 1.41 $13,265.31

EL 4 $8,338.11 $891.64 $222.71 $448.68 $9,901.14 1.41 $15,004.61

Table 12.4.12 Manufacturer Production Cost Breakdown (2012$) for Very Large 

Commercial Package Heat Pumps

Efficiency

Level Material Labor Depreciation Overhead MPC Markup MSP

Baseline $6,497.42 $879.52 $163.83 $348.02 $7,888.78 1.41 $11,723.18

EL 1 $6,983.50 $911.41 $167.36 $369.17 $8,431.43 1.41 $12,488.32

EL 2 $7,648.72 $957.73 $176.75 $401.99 $9,185.19 1.41 $13,551.12

EL 3 $8,110.59 $1,008.79 $181.33 $422.74 $9,723.45 1.41 $14,310.06

EL 4 $8,921.29 $1,071.04 $188.98 $460.79 $10,642.1 1.41 $16,049.36

12.4.8 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur one-time 

conversion costs to bring their production facilities and product designs into compliance with 

new regulations. For the MIA, DOE classified these one-time conversion costs into two major 

groups: capital conversion costs and product conversion costs. Capital conversion costs are onetime investments in property, plant and equipment to adapt or change existing production 

facilities in order to fabricate and assemble new product designs that comply with amended 

energy conservation standards. Product conversion costs are one-time investments in research, 

development, industry certification testing, marketing, and other costs to make product designs 

comply with amended energy conservation standards. DOE based its estimates of the conversion 

costs for each efficiency level on information obtained from manufacturer interviews and the 

design pathways analyzed in the engineering analysis.

12.4.8.1 Capital Conversion Costs

To evaluate the level of capital conversion expenditures manufacturers would likely incur 

to comply with amended energy conservation standards, DOE used the manufacturer interviews 

to gather data on the level of capital investment required at each efficiency level. DOE validated 

manufacturer comments through estimates of capital expenditure requirements derived from the 

product teardown analysis and engineering model described in chapter 5 of the TSD. In general, 

as the trial standard level increased, a greater number of production lines would need to be retooled. A large portion of capital conversion cost was related to tooling costs for revised cabinet 

designs.

Table 12.4.13 Industry Cumulative Capital Conversion Cost

TSL Capital Conversion Cost

$millions

Base 0

TSL 1 14.9

TSL 2 39.2

TSL 3 105.5

TSL 4 113.3

12-16
12.4.8.2 Product Conversion Costs

DOE assessed the product conversion costs at each considered efficiency level by 

integrating data from quantitative and qualitative sources. DOE considered market-shareweighted feedback regarding the potential costs of each efficiency level from multiple 

manufacturers to estimate product conversion costs and validated those numbers against 

engineering estimates of redesign efforts. In general, as the standard increases, more products

require redesign, as show in Table 12.4.15. Furthermore, as the standard increases, the 

complexity of redesign increases. Additionally, DOE incorporated estimates of the incremental 

Certification, Compliance & Enforcement (CC&E) testing costs that result from the change in 

test procedure. This results in product conversion costs that occur even at the baseline. 

Table 12.4.14 Industry Cumulative Product Conversion Cost

TSL Product Conversion Cost 

$millions

Base 12.7

TSL 1 38.7

TSL 2 58.52

TSL 3 120.9

TSL 4 210.9

Table 12.4.15 Percentage of Product Listings that Meet Proposed Standard Level**

TSL % of Product Listings

TSL 1 62%

TSL 2 33%

TSL 3 19%

TSL 4 2%

In the base case, conversion costs of $12.7 million are attributed to CC&E costs 

associated with new product certification requirements under the proposed test procedure. These 

costs reflect modeling and equipment-testing requirements needed to recertify available 

products. In particular, the base-case product conversion cost represents the projected cost to 

physically test units to validate AEDMs and the cost to run simulations on every basic model 

listing in the AHRI Directory and CEC Appliance Database. The figure is based on a simulation 

cost-per-listing of approximately $900 applied to 6,366 listings plus the additional cost of 

physical testing two units per equipment class per manufacturer, at an expense of $10,000 per 

test (covering the cost of the unit and the testing expense).

12.4.9 Markup Scenarios

DOE modeled two markup scenarios to capture uncertainty regarding potential impacts 

on prices and profitability following implementation of amended energy conservation standards: 

(1) a preservation of gross margin percentage markup scenario and (2) a preservation of per-unit 

operating profit markup scenario. These scenarios lead to different markup values that, when 

applied to MPCs, result in varying revenue and cash flow impacts.

** Based on product listings in the AHRI Certification Directory, accessed June 2013.

12-17

 
12.4.9.1 Preservation of Gross Margin Percentage Scenario

Under the preservation of gross margin percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels. This assumes 

manufacturers would be able to maintain the same amount of profit, as a percentage of revenues, 

at all efficiency levels within an equipment class. As production costs and sales prices increase 

with more stringent efficiency levels, this scenario implies that the absolute dollar markup will 

increase as well. The manufacturer, in this case, will see more profit in absolute terms on a perunit basis. In analyzing the preservation of gross margin percentage scenario, DOE assumed the 

average non-production cost markup—which includes SG&A expenses, R&D expenses, interest,

and profit— to be the following for each equipment class in the small, large and very large aircooled commercial package air conditioner and heat pump industry:

Table 12.4.12.4.16 Base Case Markups 

Equipment Markup

Small Commercial Package Air-Conditioners (Air-Cooled) -

≥65,000 Btu/h and <135,000 Btu/h 1.3

Small Commercial Package Heat Pumps (Air-Cooled) -

≥65,000 Btu/h and <135,000 Btu/h 1.3

Large Commercial Package Air-Conditioners (Air-Cooled) -

≥135,000 Btu/h and <240,000 Btu/h 1.34

Large Commercial Package Heat Pumps (Air-Cooled) -

≥135,000 Btu/h and <240,000 Btu/h 1.34

Very Large Commercial Package Air-Conditioners (AirCooled) - ≥240,000 Btu/h and <760,000 Btu/h 1.41

Very Large Commercial Package Heat Pumps (Air-Cooled) -

≥240,000 Btu/h and <760,000 Btu/h 1.41

Because this markup scenario implies manufacturers would be able to maintain their 

gross margin percentage markups as production costs increase in response to amended energy 

conservation standards, DOE assumes this scenario represents an upper bound to industry 

profitability under amended standards.

12.4.9.2 Preservation of Per Unit Operating Profit Scenario

In the preservation of per unit operating profit scenario, manufacturer markups are set so 

that operating profit one year after the compliance date of the amended energy conservation 

standards is the same as in the base case on a per-unit basis. Under this scenario, as the 

production costs and sales price increase with more stringent efficiency standards, manufacturers 

are generally required to reduce their markups to a level that maintains base-case operating profit

per unit. The implicit assumption behind this markup scenario is that the industry can only 

maintain its operating profit in absolute dollars per unit after compliance with the new standard. 

Operating profit per unit does not change in absolute dollar terms but declines as a percentage of 

revenue. As a result, operating margin in percentage terms falls between the base case and 

standards case. In analyzing the preservation of operating profit scenario, DOE adjusted the 

manufacturer markups in the GRIM at each TSL to yield approximately the same earnings before 

interest and taxes in the standards case as in the base case. This markup scenario represents a low 

bound to industry profitability under an amended energy conservation standard.

12-18
12.5 INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in previous sections, DOE estimated financial 

impacts on the small, large and very large air-cooled commercial package air conditioner and 

heat pump industry resulting from amended energy conservation standards. The following 

sections address two key financial metrics analyzed in the MIA: industry net present value 

(INPV) and annual cash flows.

12.5.1 Introduction

The INPV measures the industry value and is used in the MIA to compare the economic 

impacts of different TSLs. The INPV is different from DOE’s net present value, which is applied 

to the U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost 

of capital or discount rate. The GRIM for this rulemaking estimates cash flows from 2013 to 

2048, the same analysis period used in the NIA (chapter 10 of the TSD). This timeframe models 

both the short-term impacts on the industry from the base year of the analysis until the 

compliance date (2013 until 2019) and a long-term assessment over the 30-year analysis period 

used in the NIA (2019–2048).

In the MIA, DOE compares the INPV of the base case (no amended energy conservation 

standards) to that of each TSL. The difference between the base case and a standards case INPV 

is an estimate of the economic impacts the TSL would have on the industry. The markup 

scenarios are described in greater detail in section 12.4.9.

While INPV is useful for evaluating the long-term effects of amended energy 

conservation standards, short-term changes in cash flow are also important indicators of the 

industry’s financial situation. For example, a large investment over one or two years could strain 

the industry’s access to capital. Consequently, the sharp drop in financial performance could 

cause investors to flee, even though recovery may be possible. Thus, a short-term disturbance 

can have long-term effects that the INPV cannot capture. To provide an idea of the behavior of 

short-term annual net cash flows, Figures 12.5.1 and 12.5.2 present annual net cash flows 

through 2048. 

Annual cash flows are discounted to the base year, 2013. After the standards 

announcement date (i.e., the publication date of the final rule), industry cash flows begin to 

decline as companies use their financial resources to prepare for the amended energy 

conservation standard. Cash flows between the announcement date and the compliance date are 

driven by the level of conversion costs and the proportion of these investments spent each year. 

The more stringent the amended energy conservation standard, the greater the impact on industry 

cash flows in the years leading up to the compliance date, as product conversion costs lower cash 

inflows from operations and capital conversion costs increase cash outflows for capital 

expenditures. 

Free cash flow in the year the amended energy conservation standards take effect is 

driven by two competing factors. In addition to capital and product conversion costs, amended 

energy conservation standards could create stranded assets, i.e., tooling and equipment that could 

12-19
have been used longer if the energy conservation standard had not made them obsolete. In this 

year, manufacturers write down the remaining book value of existing tooling and equipment 

whose value is affected by the amended energy conservation standard. This one-time write-down 

acts as a tax shield that alleviates decreases in cash flow from operations in the year of the writedown. In this year, there is also an increase in working capital that reduces cash flow from 

operations. A large increase in working capital is needed due to more costly production 

components and materials, higher inventory carrying to sell more expensive products, and higher 

accounts receivable for more expensive products. Depending on these two competing factors, 

cash flow can be affected either positively or negatively in the year the standard takes effect. 

12.5.2 Small, Large and Very Large Air-Cooled Commercial Package Air Conditioner 

and Heat Pump Industry Financial Impacts

Table 12.5.1 and Table 12.5.2 provide the INPV estimates for the small, large and very 

large air-cooled commercial package air conditioner and heat pump industry under the two 

markup scenarios analyzed. 

Figure 12.5.1 and Figure 12.5.2 graph the net annual cash flows for the two scenarios.

Table 12.5.1 Changes in INPV for the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry, 2013-2048 (Preservation

of Gross Margin Percentage Scenario)

Units Base 

Case

Trial Standard Level

1 2 3 4

INPV 2012$ M 1,260.91 1,249.47 1,208.04 1,172.36 1,142.78 

Change in 

INPV

2012$ M - (11.45) (52.87) (88.55) (118.13)

(%) - (0.91) (4.19) (7.02) (9.37)

* Numbers in parentheses indicate negative numbers. 

Table 12.5.2 Changes in INPV for the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry, 2013-2048 (Preservation

of Per Unit Operating Profit Scenario)

Units Base 

Case

Trial Standard Level

1 2 3 4

INPV 2012$ M 1,260.91 1,187.02 1,015.61 949.34 822.75 

Change in 

INPV

2012$ M - (73.89) (245.30) (311.58) (438.16)

(%) - (5.86) (19.45) (24.71) (34.75)

* Numbers in parentheses indicate negative numbers. 

12-20
Figure 12.5.1 Annual Industry Net Cash Flows for the Small, Large and Very Large AirCooled Commercial Package Air Conditioner and Heat Pump Industry (Preservation of

Gross Margin Percentage Scenario)

12-21
Figure 12.5.2 Annual Industry Net Cash Flows for the Small, Large and Very Large AirCooled Commercial Package Air Conditioner and Heat Pump Industry (Preservation of 

Per Unit Operating Profit Scenario)

12.6 IMPACTS ON SMALL BUSINESS MANUFACTURERS

DOE conducted a more focused inquiry of the companies that could be small business 

manufacturers of products covered by this rulemaking. For the category “Air-Conditioning and 

Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment 

Manufacturing,” the SBA has set a size threshold of 750 employees or less for an entity to 

qualify as a small business. To identify the number of companies that could be small business 

manufacturers of products covered by this rulemaking, DOE conducted a market survey using 

available public information. DOE’s research included industry trade association membership 

directories (e.g., AHRI), public databases (e.g., California Energy Commission Appliance 

Efficiency Database), individual company websites, and market research tools (e.g., Hoovers

reports) to create a comprehensive list of companies that manufacture or sell products covered by 

this rulemaking. DOE also asked stakeholders and industry representatives if they were aware of 

any small manufacturers during manufacturer interviews and at DOE public meetings. DOE 

reviewed publicly available data and contacted select companies on its list, as necessary, to 

determine whether they met the SBA’s definition of a small business manufacturer of covered 

equipment. DOE screened out companies that do not offer products covered by this rulemaking, 

do not meet the definition of a small business, or are foreign owned and operated.

DOE initially identified at least 13 potential manufacturers of small, large and very large 

air-cooled commercial package air conditioners and heat pumps sold in the U.S. DOE then 

12-22
determined that 10 were large manufacturers, manufacturers that are foreign owned and 

operated, or manufacturers that do not produce equipment classes covered by this rulemaking.

DOE was able to determine that three manufacturers meet the SBA’s definition of a “small 

business” and manufacture products covered by this rulemaking.

Before issuing this NOPR, DOE spoke with two of the small business manufacturers of 

commercial packaged air conditioners. DOE also obtained information about small business 

impacts while interviewing large manufacturers.

Based on DOE’s research, one small manufacturer focused exclusively on the design and 

specification of product – but had no production assets of its own. All production was 

outsourced. The other small manufacturers performed all design and specification work but also 

owned domestic production facilities and employed production workers. The proposed standards

for the small, large and very large air-cooled commercial package air conditioner and heat pump 

industry could disadvantage small manufacturers relative to large manufacturers. One way in 

which small manufacturers could be at a disadvantage is that they may be disproportionately 

affected by product conversion costs. Product redesign, testing, and certification costs tend to be 

fixed and do not scale with sales volume. For each product model, small businesses must make 

investments in research and development to redesign their products, but because they have lower 

sales volumes, they must spread these costs across fewer units. Moreover, smaller manufacturers 

may experience higher testing costs relative to larger manufacturers as they may not possess their 

own test facility and therefore must outsource all testing at a higher per-unit cost. In general, the 

small manufacturers had a number of product lines that was similar to that of larger competitors 

with similar market share. However, because small manufacturers have fewer engineers than 

large manufacturers, they may face greater difficulty bringing their portfolio of products in-line

with an amended energy conservation standard within the allotted timeframe or may have to 

divert engineering resources from customer and new product initiatives for a longer period of 

time. 

Furthermore, smaller manufacturers may lack the purchasing power of larger 

manufacturers. For example, since motor suppliers give discounts to manufacturers based on the 

number of motors they purchase, larger manufacturers may enjoy a pricing advantage because 

they have higher volume purchases. This purchasing power differential between high-volume 

and low-volume orders applies to other components of small, large and very large air-cooled 

commercial package air conditioners and heat pumps as well.

In order to meet the proposed standard, manufacturers may have to seek outside capital to 

cover expenses related to testing and product design equipment. Smaller firms typically have a 

higher cost of borrowing due to higher perceived risk on the part of investors, largely attributed 

to lower cash flows and lower per-unit profitability. In these cases, small manufacturers may 

observe higher costs of debt than larger manufacturers. 

To estimate how small manufacturers would potentially be impacted, DOE compared 

required conversion costs at each TSL for a small manufacturer with on-site production to those 

of an average large manufacturer (see Tables 12.6.1 and 12.6.2). In the following tables, TSL 2

represents the proposed standard.

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Table 12.6.1 Impacts of Conversion Costs on a Small Manufacturer

Capital Conversion 

Cost as a Percentage 

of Annual Capital 

Expenditures

Product Conversion 

Cost as a Percentage 

of Annual R&D 

Expense

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

Total Conversion 

Cost as a 

Percentage of 

Annual EBIT

TSL 1 122% 526% 14% 159%

TSL 2 199% 932% 24% 276%

TSL 3 407% 1948% 49% 573%

TSL 4 430% 3369% 77% 896%

Table 12.6.2 Impacts of Conversion Costs on a Large Manufacturer

Capital Conversion 

Cost as a Percentage 

of Annual Capital 

Expenditures

Product Conversion 

Cost as a Percentage 

of Annual R&D 

Expense

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

Total Conversion 

Cost as a 

Percentage of 

Annual EBIT

TSL 1 42% 213% 5% 62%

TSL 2 105% 287% 9% 100%

TSL 3 279% 536% 19% 216%

TSL 4 310% 898% 26% 307%

At TSL 3, the level proposed in the NOPR, DOE estimates capital conversion costs of 

$2.32 million and product conversion costs of $7.04 million for a typical small manufacturer that 

owns production facilities. This compares to capital conversion costs of $9.08 million and 

product conversion costs of $11.05 million for a typical large manufacturer. 

At these levels, the amended standard could contribute to the consolidation of the 

industry. The GRIM free cash flow results indicate that some manufacturers may need to access 

capital markets in order to fund conversion costs directly related to amended standards. Given 

small manufacturers tend to have more limited access to capital and face conversion costs that 

tend to be higher relative to the size of the business, it is possible the small manufacturers will 

choose to leave the industry or choose to be purchased by or merged with larger market players.

Since the proposed standard could disadvantage small manufacturers relative to large 

manufacturers, DOE cannot certify that the proposed standards would not have a significant 

impact on small businesses.

12.7 OTHER IMPACTS 

12.7.1 Direct Employment

Employment impacts from new or amended energy conservation standards include direct 

and indirect impacts. Direct employment impacts are any changes in the number of employees of 

manufacturers of the equipment subject to standards. Indirect employment impacts are changes 

in national employment that occur due to the shift in expenditures and capital investment caused 

by the purchase and operation of more efficient equipment

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To quantitatively assess the direct employment impacts of amended energy conservation 

standards on the small, large and very large air-cooled commercial package air conditioner and 

heat pump industry, DOE used the GRIM to estimate the domestic labor expenditures and 

number of employees in the base case and at each TSL from 2013 through 2048. DOE used 

statistical data from the U.S. Census Bureau’s 2011 Annual Survey of Manufacturers (ASM), the 

results of the engineering analysis, and interviews with manufacturers to determine the inputs 

necessary to calculate industry-wide labor expenditures and domestic employment levels. Labor 

expenditures related to manufacturing of the product are a function of the labor intensity of the 

product, the sales volume, and an assumption that wages remain fixed in real terms over time. 

The total labor expenditures in each year are calculated by multiplying the MPCs by the labor 

percentage of MPCs. 

The total labor expenditures in the GRIM are then converted to domestic production 

employment levels by dividing production labor expenditures by the annual payment per 

production worker (production worker hours times the labor rate found in the U.S. Census 

Bureau’s 2011 ASM). The estimates of production workers in this section cover workers, 

including line supervisors who are directly involved in fabricating and assembling a product 

within the manufacturing facility. Workers performing services that are closely associated with 

production operations, such as materials handling tasks using forklifts, are also included as 

production labor. DOE’s estimates only account for production workers who manufacture the 

specific products covered by this rulemaking. The total direct employment impacts calculated in 

the GRIM are the changes in the number of production workers resulting from the amended 

energy conservation standards for small, large and very large air-cooled commercial package air 

conditioners and heat pumps, as compared to the base case. In general, more efficient equipment 

is larger, more complex, and more labor intensive to build. Per-unit labor requirements and 

production time requirements increase with a higher energy conservation standard. As a result, 

the total labor calculations described in this paragraph are considered an upper bound to direct 

employment forecasts.

On the other hand, the domestic HVAC industry has had a track record of consolidation 

over the past decade. DOE recognizes the potential for industry consolidation and its 

concomitant impacts on employment levels, especially at higher TSLs. As shipments drop and 

conversion costs increase, some manufacturers may choose not to make the necessary 

investments. Alternatively, they may choose to relocate production facilities where conversion 

costs are lower. To establish a lower bound to negative employment impacts, DOE estimated the 

maximum potential job loss due to manufacturers either leaving the industry or moving 

production to foreign locations as a result of an amended standard. These lower bound estimates 

were based on GRIM results, conversion cost estimates, and content from manufacturers 

interviews. 

DOE estimates that 95 percent of small, large, and very large air-cooled commercial 

package air conditioners and heat pumps sold in the United States are manufactured 

domestically. In the absence of amended energy conservation standards, DOE estimates that the 

industry would employ 1,085 domestic production workers in 2019. Table 12.7.1 below depicts

the range of potential employment impacts projected to result from amended energy conservation 

standards. 

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Table 12.7.1 Potential Changes in the Total Number of Domestic Production Workers in 

the Small, Large and Very Large Air-Cooled Commercial Package Air Conditioner and 

Heat Pump Industry in 2019

Trial Standard Level*

Base Case 1 2 3 4

Potential Changes in Domestic 

Production Workers in 2019 (Compared 

to Base-Case Employment of 1,085)

-

(181)

to

(10)

(482)

to

(69)

(543)

to

(27)

(1,085)

to

(31)

*Parentheses indicate negative values

12.7.2 Production Capacity

According to small, large and very large air-cooled commercial package air conditioner

and heat pump manufacturers interviewed, amended energy conservation standards could lead to 

higher fabrication labor hours. However, excess capacity in the industry today and any drop in 

shipments that result from higher prices could offset the additional production times. In the 

long-term, no manufacturers expected to face capacity constraints.

12.7.3 Cumulative Regulatory Burden 

While any one regulation may not impose a significant burden on manufacturers, the 

combined effects of recent or impending regulations may have serious consequences for some 

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. In addition to energy conservation 

standards, other regulations can significantly affect manufacturers’ financial operations. Multiple 

regulations affecting the same manufacturer can strain profits and lead companies to abandon 

product lines or markets with lower expected future returns than competing products. For these 

reasons, DOE conducts an analysis of cumulative regulatory burden as part of its rulemakings 

pertaining to appliance efficiency. 

12.7.3.1 DOE Regulations for Other Products Produced by Manufacturers in the

Small, Large and Very Large Air-Cooled Commercial Package Air 

Conditioner and Heat Pump Industry

For the cumulative regulatory burden analysis, DOE looks at other regulations that could 

affect manufacturers of small, large and very large air-cooled commercial package air 

conditioners and heat pumps and that will take effect approximately three years before or after 

the 2019 compliance date of amended energy conservation standards for these products. In 

interviews, manufacturers cited Federal regulations on equipment other than small, large and 

very large air-cooled commercial package air conditioners and heat pumps that contribute to 

their cumulative regulatory burden. The compliance years and expected industry conversion 

costs of relevant amended energy conservation standards are indicated in the table below:

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Table 12.7.12.7.2 Compliance Dates and Expected Conversion Expenses of Federal Energy 

Conservation Standards Affecting the Small, Large and Very Large Air-Cooled 

Commercial Package Air Conditioner and Heat Pump Industry

Federal Energy Conservation 

Standards

Approximate Compliance 

Date

Estimated Total Industry 

Conversion Expense

2007 Residential Furnaces & 

Boilers Final Rule

72 FR 65136 (Nov. 19, 2007)

2015 $88M (2006$)*

2010 Gas Fired and Electric 

Storage Water Heaters

75 FR 20112 (April 16, 2010)

2015 $95.4M (2009$)

2011 Residential Furnaces Direct 

Final Rule

76 FR 37408 (June 27, 2011);

76 FR 67037 (Oct. 31, 2011)

2015 $2.5M (2009$)**

2011 Residential Central Air 

Conditioners and Heat Pumps

76 FR 37408 (June 27, 2011);

76 FR 67037 (Oct. 31, 2011)

2015 $26.0M (2009$)**

Walk-in Coolers and Freezers

79 FR 32050 (June 3, 2014) 2017 $33.6M (2012$)

Furnace Fans

79 FR 38129 (July 3, 2014) 2019 $40.6M (2012$)

Packaged Terminal Air 

Conditioners and Heat Pumps*** TBD TBD

Commercial and Industrial Fans 

and Blowers*** TBD TBD

Furnace Test Procedures*** TBD TBD

Residential Central Air 

Conditioners and Heat Pumps*** TBD TBD

* Conversion expenses for manufacturers of oil-fired furnaces and gas- and oil-fired boilers associated with the 

November 2007 final rule for residential furnaces and boilers are excluded from this figure. The 2011 direct final 

rule for residential furnaces sets a higher standard and earlier compliance date for oil furnaces than the 2007 Final 

Rule. As a result, manufacturers will be required design to the 2011 direct final rule standard. The conversion costs 

associated with the 2011 direct final rule are listed separately in this table. EISA 2007 legislated higher standards 

and earlier compliance dates for residential boilers than were in the November 2007 final rule. As a result, gas- and 

oil-fired boiler manufacturers were required to design to the EISA 2007 standard beginning in 2012. The 

conversion costs listed for residential gas- and oil-fired boilers in the November 2007 residential furnaces and 

boilers final rule analysis are not included in this figure.

**Estimated industry conversion expense and approximate compliance date reflect DOE’s January 2013 remand of 

the residential non-weatherized and mobile home gas furnaces standards set in the 2011 Energy Conservation 

Standards for Residential Furnaces and Residential Central Air Conditioners and Heat Pumps.

*** The final rule for this energy conservation standard has not been published. Where available, draft compliance 

date and draft conversion costs estimates have been provided. However, these values have not been finalized and 

are subject to change.

During previous stages of this rulemaking, DOE identified a number of requirements in 

addition to amended energy conservation standards for small, large, and very large air-cooled 

commercial package air conditioners and heat pumps. The following section briefly summarizes 

those identified regulatory requirements and addresses comments DOE received with respect to 

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the cumulative regulatory burden, as well as other key related concerns manufacturers raised 

during interviews.

12.7.3.2 Other DOE and Federal Actions Affecting Manufacturers in the Small, 

Large and Very Large Air-Cooled Commercial Package Air Conditioner 

and Heat Pump Industry

DOE Certification, Compliance, and Enforcement Rule

On May 31, 2012, DOE published a notice of proposed rulemaking proposing to revise 

and expand its existing regulations governing the use of particular methods as alternatives to 

testing, known as Alternative Efficiency Determination Methods (AEDM), including for use in 

rating small, large and very large air-cooled commercial package air conditioners and heat 

pumps. The last public meeting was held on June 5, 2012, and the rule is currently in 

negotiations with stakeholders. 77 FR 32038. Manufacturers highlighted the regulatory burden 

from certification and compliance testing as one of the primary concerns for the industry’s health 

going forward. Several manufacturers asserted the potential for additional industry consolidation 

and potential exit of current competitors due to the large number of basic models that may need 

to be tested as well as uncertainty regarding IEER tolerance for compliance purposes. 

EPA Phaseout of Hydrochlorofluorocarbons (HCFCs)

The U.S. is obligated under the Montreal Protocol to limit production and consumption of 

HCFCs through incremental reductions, culminating in a complete phaseout of HCFCs by 

2030††. On December 15, 2009, EPA published the “2010 HCFC Allocation Rule,” which 

allocates production and consumption allowances for HCFC-22 for each year between 2010 and 

2014. (74 FR 66412) The rule also prohibited the manufacture of new appliances using virgin 

HCFC-22, effective January 1, 2010, with limited exceptions. On April 3, 2013, EPA published 

the “2012-2014 HCFC Allocation Proposed Rule,” which lifted the regulatory ban on the 

production and consumption of HCFC-22 (following a court decision‡‡ in August 2010 to vacate 

a portion of the “2010 HCFC Allocation Rule”) by establishing company-by-company HCFC-22 

baselines and allocating allowances for 2012-2014. 78 FR 20004. On December 24, 2013, EPA 

published the “2015-2019 HCFC Allocation Proposed Rule,” which would provide HCFC 

allowances, including HCFC-22, through 2019. 78 FR 78072. Effective January 1, 2020, there 

will be no new production or import of virgin HCFC-22.

Manufacturers of small, large, and very large air-cooled commercial package air 

conditioning equipment must comply with the allowances established by the allocation rule as 

well as the prohibition on manufacture of new HFC-22 appliances that took effect January 1, 

2010. As such, no covered manufacturers offer R-22 products today. The MPCs used for the 

baseline and higher efficiency design options account for the move away from R-22 and the 

changes in production costs that resulted from the shift to HFC refrigerants.

†† "Montreal Protocol." United NationsEnvironment Programme. Web. 26 Aug. 2010. 

<http://ozone.unep.org/new_site/en/montreal_protocol.php>.

‡‡ See Arkema v. EPA, 618 F.3d 1 (D.C. Cir. 2010).

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ASHRAE Standard 90.1

ASHRAE Standard 90.1, “Energy Standard for Buildings Except Low-Rise Residential 

Buildings,” sets minimum efficiency standards for buildings with the exception of low-rise 

residential buildings. On May 16, 2012, DOE published the final rule in the Federal Register for 

Energy Conservation Standards and Test Procedures for Commercial Heating, Air-Conditioning, 

and Water-Heating Equipment, through which DOE adopted the efficiency levels specified in 

ASHRAE Standard 90.1–2010. 77 FR 28928. Included in the ASHRAE standards are minimum 

efficiency levels for commercial heating, air-conditioning, and water-heating equipment. 

12.8 CONCLUSION

The following section summarizes the impacts for the scenarios DOE believes are most 

likely to capture the range of impacts on manufacturers of small, large and very large air-cooled 

commercial package air conditioners and heat pumps as a result of amended energy conservation 

standards. DOE also notes that while these scenarios bound the range of most plausible impacts 

on manufacturers, circumstances could potentially cause manufacturers to experience impacts 

outside of this range. 

The table below summarizes INPV impacts and conversion costs projected to result from

each of the trial standard levels analyzed. 

Table 12.8.1 INPV and Conversion Cost Impacts at Each TSL (Evaluated over the Full 

Analysis Period, 2013-2048)

Base 

Case TSL 1 TSL 2 TSL 3 TSL 4

INPV ($MM) 1,260.9 1187.02 to 

1249.47

1015.61 to 

1208.04

949.34 to 

1172.36

822.75 to 

1142.78

Change in INPV 

($MM) - -73.9 to -11.5 -245.3 to -52.9 -311.6 to -88.6 -438.2 to -118.1

Change in INPV (% ) - -5.9 to -0.9 -19.5 to -4.2 - 24.7 to -7.0 -34.8 to -9.3

Product Conversion 

Costs ($MM) 12.7 38.73 58.52 120.90 210.96 

Capital Conversion 

Costs ($MM) - 14.94 39.23 105.54 113.31 

Total Investment 

Required ($MM) 12.7 53.68 97.75 226.44 324.28

TSL 1 represents EL 1 for all equipment classes. At TSL 1, DOE estimates impacts on 

INPV for commercial packaged air conditioning manufacturers to range from -5.86 percent to -

0.91 percent, or a change in INPV of -$73.89 million to -$11.45 million. At this potential 

standard level, industry free cash flow is estimated to decrease by approximately 20.7 percent to 

$58.19 million, compared to the base-case value of $73.38 million in the year before the 

compliance date (2018).

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At TSL 1, the industry is likely to face a small contraction. Industry wide shipments drop 

by approximately 5.04%. In addition, manufacturers incur conversion costs totaling $53.68

million due to CC&E requirements, product redesigns for the Very Large equipment classes, and 

new tooling associated with their largest equipment offerings. While impacts on the industry as a 

whole are relatively mild, small manufacturers may have greater difficulty with re-rating their 

products to an IEER metric since they generally do not have the testing capacity or engineering 

resources of larger competitors.

TSL 2 represents EL 2 across all equipment classes. At TSL 2, DOE estimates impacts on 

INPV for commercial packaged air conditioning manufacturers to range from -19.45 percent to -

4.19 percent, or a change in INPV of -$245.30 million to -$52.87 million. At this potential 

standard level, industry free cash flow is estimated to decrease by approximately 44.37 percent to 

$40.82 million, compared to the base-case value of $73.38 million in the year before the 

compliance date (2018).

At TSL 2, industry-wide shipments drop by 28.32% relative to the base case. 

Additionally, DOE anticipates conversion costs to increase to $97.75 million for the industry as 

roughly 67% of equipment listed in the AHRI directory would need to be redesigned in order to 

meet the higher proposed efficiency levels. A key indicator of impact on the industry is the 

industry free cash flow. The negative free cash flow indicates that players in the industry would 

need to access cash reserves or borrow money from capital markets to cover conversion costs. 

Given the industry’s existing trend of consolidation, DOE expects further consolidation at TSL 

2. Manufacturers with limited market share may choose to sell off their small, large, and very 

large air-cooled commercial package air conditioning and heating equipment business to larger 

competitors. 

TSL 3 represents EL 3 for all equipment classes. At TSL 3, DOE estimates impacts on 

INPV for commercial packaged air conditioning manufacturers to range from –24.71 percent to 

-7.02 percent, or a change in INPV of -$311.58 million to -$88.55 million. At this potential 

standard level, industry free cash flow is estimated to decrease by approximately 112.70 percent

to -9.32 relative to the base-case value of $73.38 million in the year before the compliance date 

(2018).

At TSL 3, industry-wide shipments drop by 28.76% relative to the base case. DOE 

anticipates large capital conversion costs at TSL 3, as extensive redesigns necessitate additional 

investments in tooling for cabinets and heat exchangers to meet amended efficiency standards. 

Roughly 81% of equipment listings would require changes to meet the standard. Conversion 

costs total $226.44 million for the industry. Given expectation for a shrinking market and high 

conversion costs, some manufacturers indicated they would move production to lower-cost 

12-30
foreign markets at this level. Additionally, DOE would anticipate further consolidation in the 

industry.

TSL 4 represents max tech across all equipment classes. At TSL 4, DOE estimates 

impacts on INPV for commercial packaged air conditioning manufacturers to range from -34.75

percent to -9.37 percent, or a change in INPV of -$438.16 million to -$118.13 million. At this 

potential standard level, industry free cash flow is estimated to decrease by approximately 

157.42 percent relative to the base-case value of $73.38 million in the year before the 

compliance date (2018).

At max-tech, DOE estimates a 35.12% drop in shipments, a maximum loss of nearly 

34.75% of industry value, and conversion costs approaching $650 million. Only 2% of 

equipment listings could meet this trial standard level today. At TSL 4, all manufacturers would 

be re-evaluating their role in the industry. Those that do remain would strongly consider all cost 

cutting measures, including relocation to foreign countries.

12-31
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