APPENDIX 13A. MANUFACTURER IMPACT ANALYSIS INTERVIEW GUIDE AND

GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

TABLE OF CONTENTS

13A.1 MANUFACTURER IMPACT ANALYSIS INTERVIEW GUIDE........................... 13A­1

13A.1.1 Manufacturer impact analysis interview guide ............................................. 13A­1

13A.1.2 General Service Fluorescent and Incandescent Reflector Lamps Energy

Conservation Standards Rulemaking Manufacturer Impact Analysis Interview

Guide for Small Businesses ....................................................................... 13A­11

13A.2 GOVERNMENT REGULATORY IMPACT MODEL ............................................ 13A­12

13A.2.1 Introduction and Purpose ............................................................................ 13A­12

13A.2.2 Model Description....................................................................................... 13A­12

13A.2.3 Detailed Cash Flow Example...................................................................... 13A­15

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APPENDIX 13A. MANUFACTURER IMPACT ANALYSIS INTERVIEW GUIDE AND

GOVERNMENT REGULATORY IMPACT MODEL

13A.1 MANUFACTURER IMPACT ANALYSIS INTERVIEW GUIDE

13A.1.1 Manufacturer impact analysis interview guide

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Lamps Rulemaking

Manufacturer Impact Analysis Interview Guide: General Service

Fluorescent Lamps and Incandescent Reflector Lamps

April 23, 2008

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1 KEY ISSUES

1.1 What are the key lamp manufacturing issues for your company related to energy

conservation standards and this rulemaking?

1.2 For the issues identified, how significant are they for each efficiency level? See section

6.1 of this interview guide for a description of efficiency levels.

1.3 How can we most effectively incorporate these issues in the Manufacturer Impact

Analysis (MIA)?

1.4 Max Tech: DOE is required to consider the maximum technically feasible energy

conservation standard. DOE’s efficiency levels considered in the ANOPR were based on

commercially available product. Table 1.4.1 lists the highest efficacy lamp in each product class

that DOE analyzed. Please provide any efficacy improvements that may be possible as well as

the associated cost increase expected for such a lamp.

Table 1.4.1 Maximum Technically Feasible Lamps

Product Class Highest Efficacy Commercially

Available Product Analyzed

Potential

Efficacy

Improvement

Associated Cost

Increase

4­foot MBP

CCT ≤ 4500K

28W T8

2,725 initial lumens

8­foot SP Slimline

CCT ≤ 4500K

55W T8

5,700 initial lumens

8­foot RDC HO

CCT ≤ 4500K

86W T8

8,200 initial lumens

IRL, Standard

Spectrum

Improved HIR

(e.g., 40W PAR30 4,000hr

17.0 lm/W)

2 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impact at the plant or profit center level

directly pertinent to GSFL and IRL production. However, the context within which the plant

operates and the details of plant production and costs are not readily available from the published

literature. Therefore, DOE invites you to provide these details confidentially in your own words

to the extent possible and practical. Understanding the organizational setting around the GSFL

and IRL industries profit center will help DOE understand the probable future of the GSFL and

IRL manufacturing activity with and without energy conservation standards.

2.1 Do you have a parent company, and/or any subsidiaries relevant to the GSFL and IRL

industries?

2.2 Do you manufacture any equipment other than GSFL and IRL? If so, what other

products do you manufacture?

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2.3 What percentage of your total manufacturing corresponds to GSFL and IRL?

2.4 Where are your production facilities located, and what types of products are

manufactured at each location? Could you provide figures for your company’s manufacturing at

each location by product type (GSFL, IRL, or other), and efficiency (i.e., provide the product

mix for each location).

2.5 At a particular facility, would potential GSFL and IRL redesigns be difficult to

implement? If so, would your company modify the existing facility or develop a new facility?

2.6 What are your employment levels at each of these facilities?

2.7 What are your company’s total GSFL and IRL production volumes (i.e., units per year)

for the past 5 years? What are the production volumes of your five highest volume product

classes?

2.8 What are your equipment lines, niches, and relative strengths in the GSFL and IRL

market?

2.9 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of new standards would have a severe impact? If so, would

manufacturers of this equipment have different incremental impacts from implemented energy

conservation standards than from the rest of the industry?

3 FINANCIAL PARAMETERS

Navigant Consulting, Inc. has developed a “strawman” model of the GSFL and IRL industry

financial performance called the GRIM, using publicly available data on lighting manufacturers.

(e.g., U.S. Securities and Exchange Commission (SEC) 10­K Forms) This section attempts to

understand how your company’s financial situation differs from our industry aggregate picture.

3.1 Please compare your financial parameters to the GRIM parameters tabulated below.

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Table 3.1 Financial Parameters for Lamp Manufacturers

GRIM Input Definition GRIM

Estimated

Value

Your Actual (if

significantly

different from our

estimate)

Income Tax Rate Corporate (average) effective

income tax paid (percentage of

earnings before interest and

taxes, EBIT)

16.2%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

18.4%

Working Capital Current assets less current

liabilities (percentage of

revenues)

12.1%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

19.6%

R&D Research and development

expenses (percentage of

revenues)

6.6%

Depreciation Amortization of fixed assets

(percentage of revenues) 3.5%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

3.6%

Costs of Goods Sold Includes material, labor,

overhead, and depreciation 70.39%

3.2 How would you expect new energy conservation standards impact your company’s

financial parameters?

4 PRODUCTION COST BREAKDOWN

To help understand the industry and costs associated with manufacturing GSFL and IRL, DOE

will study the effects of energy conservation standards on the full production costs breakdowns.

DOE will estimate the industry average percentage of each cost in the full production cost.

4.1 Could you please provide the breakdown in the total production costs for lamps by the

percentage for labor, materials, overhead, and depreciation by filling in the table below?

Labor % of full Materials % of full Overhead % of full Depreciation % of full

production costs production costs production costs production costs

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4.2 Do the percentages for the full production costs found above vary significantly between

IRL and GSFL?

4.3 Within the covered IRL and GSFL, do the percentages vary significantly by efficiency

level?

5 SHIPMENT PROJECTIONS AND MARKET SHARES

A new energy conservation standard can change overall shipments by changing product

attributes, marketing approaches, equipment availability, and price. The GRIM bases revenue

projections on the shipments modeled in the National Impact Analysis Spreadsheet (NIA)

prepared by NCI. The NIA includes shipment forecasts for the baseline (absent new standards)

and new standards at each efficiency level being analyzed.

5.1 What is your company’s approximate market share of the GSFL and IRL industries?

5.2 Would you expect your market share to change once higher energy conservation

standards become effective?

6 CONVERSION COSTS

An increase in energy conservation standards may cause your company to incur one­time capital

and product conversion costs . DOE calls these conversion costs because they are the costs of

changing your business to comply with new energy conservation standards.

6.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels? Refer to the tables below to provide your company’s estimates. Please provide

additional qualitative information to help us understand the nature of your investments.

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Table 6.1 GSFL: 4­Foot Medium Bipin Product Class

Standard Investment Numbers for Comment Design Option for Each Baseline

Level Conversion

Capital

Expenditure

Product

Conversion

Expenses

Stranded

Assets

40W T12 34W T12 32W T8

Baseline 700 series 600 series ­

EL 1 Improved

700 series

or 800

series

700 series ­

EL 2 800 series 800 series 700 series

EL 3 Improved

800 series

Improved 800

series

800 series

EL 4 Improved

800 series –

30W lamp

available

EL 5 Improved

800 series –

28W lamp

available

Table 6.2 GSFL: 8­Foot Single Pin Slimline Product Class

Standard

Level

Investment Numbers for Comment Design Option for Each Baseline

Conversion

Capital

Expenditure

Product

Conversion

Expenses

Stranded

Assets

75W T12 60W T12 59W T8

Baseline 700 series ­ ­

EL 1 800 series 600 series ­

EL 2 Improved

800 series

700 series ­

EL 3 Improved

800 series

Improved 700

series

700 series

EL 4 800 series

EL 5 Improved

800 series –

57W and

55W

available

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Table 6.3 GSFL: 8­Foot Recessed Double Contact High Output Product Class

Standard Investment Numbers for Comment Design Option for Each Baseline

Level Conversion

Capital

Expenditure

Product

Conversion

Expenses

Stranded

Assets

110W T12 95W T12 86W T8

Baseline 700 series 600 series ­

EL 1 800 series ­ ­

EL 2 700 series ­

EL 3 800 series ­

EL 4 700 series

EL 5 800 series

Table 6.4 IRL Conversion Costs Product Class

Standard

Level

Conversion

Capital

Expenditures

Product

Conversion

Expenses

Stranded

Assets

Design Option

Baseline Halogen (3,000 hr)

EL 1 Improved Halogen (2,500­3,000 hr)

EL 2 Halogen Infrared (3,000 hr)

EL 3 Improved Halogen Infrared (4,000 hr)

* Note: “improved” design options may employ the use technologies such as improved optics, enhanced reflector

materials, or higher efficiency filaments. “Improved halogen” and “improved halogen infrared” lamps may have

approximately a 10 percent efficacy improvement over the “halogen” and “halogen infrared” lamps, respectively.

6.2 If DOE were to regulate the nominal 4­foot T5 fluorescent lamp it would be required to

analyze both the standard efficacy 28W T5 lamp (2,900 initial lumens) as well as the premium

efficacy 28W T5 lamp (3,050 initial lumens) offered by OSI. What would be the conversion

capital expenditures, product conversion expenses, and stranded assets associated with energy

conservation standards set at the higher efficacy T5 lamp?

6.3 DOE is required to consider the maximum technically feasible energy conservation

standard. DOE’s efficiency levels currently being considered are based on commercially

available product. As discussed earlier in section 1.4, if higher efficiency products can be

manufactured, what would be the conversion capital expenditures, product conversion expenses,

and stranded assets associated with increasing energy conservation standards to that level?

6.4 What is your depreciation period for the capital expenditures (building, equipment, and

tooling)?

7 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of efficiency levels on industry

profitability. In this section, DOE would like your assistance in understanding how the

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efficiency levels would impact your company’s revenues and profitability. The following

questions will assist DOE in developing industry revenues and profitability for a base­case cash

flow and several standards cases using the GRIM model.

In order to assess industry revenue, DOE needs to determine manufacturing selling price.

During the Framework workshop, manufacturers suggested DOE obtain market or consumer

prices first and work backwards to derive manufacturing selling price.

7.1 DOE needs to translate market (or consumer purchasing) prices for lamps into

manufacturing selling prices. DOE estimates that manufacturing selling price is approximately

60% of consumer (end­user) prices for GSFL and approximately 70% of consumer prices for

IRL. Referencing DOE’s medium prices in Table 7.3.1 through Table 7.3.8 in Chapter 7 of the

technical support document (TSD), please comment on these approximations of manufacturing

selling price. Also, please comment on whether these percentages vary with lamp type or

efficacy.

7.2 One potential effect of standards is to commoditize what are currently premium products.

Do profit levels vary by product class? Do profit levels vary by efficiency level? Please explain

why or why not?

7.3 Do you expect changes in your estimated profitability following the new energy

conservation standard? If so, please explain why.

8 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards and/or other regulatory actions affecting the same products or

industry.

8.1 Are there other recent or impending regulations that lamp manufacturers face (from DOE

or otherwise)? What level of investment are you expecting to incur as a result of these

regulations?

8.2 Under what circumstances would you be able to coordinate any expenditures related to

other regulations thereby lessening the cumulative burden?

9 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from energy conservation standards, may

impact sourcing decisions.

9.1 What percentage of your company’s GSFL and IRL sales are domestically

manufactured? Absent standards, are production facilities being relocated to foreign countries?

Would new energy conservation standards impact your domestic vs. foreign manufacturing

decision?

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9.2 Does your company export domestically manufactured GSFLs and/or IRLs? If so, to

what regions do you export your equipment? What percentage of sales can be attributed to each?

9.3 Would a new standard be expected to affect your export sales? What would the resulting

impact be, if any, on your manufacturing operations and profitability?

9.4 Are your foreign exports of domestically manufactured lamps affected by energy

conservation standards in other countries?

9.5 What percentage of the U.S. market for GSFLs and IRLs has been captured by foreign

competition? Would standards have an impact on foreign competition?

9.6 What is your outlook for the future operation of your company and the GSFL and IRL

industries with regard to exports?

10 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of new energy conservation standards on employment is an important consideration

in the rulemaking process. This section of the interview guide seeks to explore current trends in

lamp production employment and solicit manufacturer views on how domestic employment

patterns might be affected by new energy conservation standards.

10.1 Would your domestic employment levels change under new energy conservation

standards? If so, please explain how they would change.

10.2 Would the workforce skills necessary under new energy conservation standards require

extensive retraining or replacement of employees?

11 CONSOLIDATION

New energy conservation standards can alter the competitive dynamics of the market. This can

include prompting companies to enter or exit the market, or to merge. DOE and the Justice

Department are both interested in any potential reduction in competition that would result from a

new energy conservation standard.

11.1 In the absence of new standards, do you expect any industry consolidation? Please

describe your expectations.

11.2 How would new standards affect your ability to compete?

11.3 Could new standards disproportionately advance or harm the competitive positions of

some firms (e.g., small businesses)?

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13A.1.2 General Service Fluorescent and Incandescent Reflector Lamps Energy

Conservation Standards Rulemaking Manufacturer Impact Analysis Interview Guide for

Small Businesses

General Service Fluorescent and Incandescent Reflector Lamps

Energy Conservation Standards Rulemaking

Manufacturer Impact Analysis Interview Guide for Small Businesses

1. Are you aware of the US Department of Energy’s (DOE’s) on­going rulemaking to

establish national minimum energy conservation standards for certain general service fluorescent

lamps and incandescent reflector lamps? Would you like to be added to DOE’s email database

for updates relating to this rulemaking?

2. We are assessing the impacts of a potential minimum energy conservation standard on

small businesses. Is your company a small business (defined as less than 1,000 employees by the

US Small Business Administration (SBA), including all subsidiaries and parent companies, and

employees in all countries where you operate)?

3. Would a minimum energy conservation standard set higher than current standards for

incandescent reflector lamps or general service fluorescent lamps (whereby all your competitors

would also required to meet the same standard), cause any burdens on your business? If so,

please explain. Please consider costs such as new designs, capital investment, prototype testing,

and marketing that might be required.

4. Are there any reasons that a small business such as yours might be at a competitive

disadvantage relative to a larger business under mandatory energy conservation standards?

Please consider such factors as technical expertise, capital budgets, bulk purchasing power for

materials, etc.

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13A.2 GOVERNMENT REGULATORY IMPACT MODEL

13A.2.1 Introduction and Purpose

The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the

impacts of energy conservation standards and other regulations on manufacturers. The basic

mode of analysis is to estimate the change in value of the industry or manufacturers(s) following

a regulation or a series of regulations. The model structure also allows an analysis of multiple

products with regulations taking effect over a period of time, and of multiple regulations on the

same products.

Industry net present value is defined, for the purpose of this analysis, as the discounted

sum of industry free cash flows plus a discounted terminal value. The model calculates the

actual cash flows by year and then determines the present value of those cash flows both without

an energy conservation standard (i.e., the base case) and under different trial standard levels

(TSLs).

Output from the model consists of summary financial metrics, graphs of major variables,

and, when appropriate, access to the complete cash flow calculation.

13A.2.2 Model Description

The basic structure of the GRIM is a standard annual cash flow analysis that uses

manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters

as inputs and accepts a set of regulatory conditions as changes in costs and investments. The

cash flow analysis is separated into two major blocks: income and cash flow. The income

calculation determines net operating profit after taxes. The cash flow calculation converts net

operating profit after taxes into an annual cash flow by including investment and non­cash items.

Below are definitions of listed items on the printout of the output sheet (see Section J.2.3).

(1) Unit Sales: Total annual shipments for the industry were obtained from the National

Impact Analysis Spreadsheet;

(2) Revenues: Annual revenues ­ computed by multiplying equipment unit price at each

efficiency level by the appropriate manufacturer markup;

(3) Labor: The portion of cost of goods sold (COGS) that includes direct labor, commissions,

dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and

assembly labor up­time;

(4) Material: The portion of COGS that includes materials;

(5) Overhead: The portion of COGS that includes indirect labor, indirect material, energy use,

maintenance, depreciation, property taxes, and insurance related to assets. While included

in overhead, the depreciation is shown as a separate line item;

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(6) Depreciation: Annual depreciation computed as a percentage of COGS. While included in

overhead, the depreciation is shown as a separate line item;

(7) Stranded Assets: In the year the standard becomes effective, a one time write­off of

stranded assets is accounted for;

(8) Standard SG&A: Selling, general, and administrative costs are computed as a percentage

of Revenues (2);

(9) R&D: GRIM separately accounts for ordinary research and development (R&D) as a

percentage of Revenues (2);

(10) Product Conversion Expense: Product conversion expenses are one­time investments in

research, development, testing, and marketing focused on making product designs comply

with the amended energy conservation standard. GRIM allocates these costs over the

period between the standard’s announcement and effective dates;

(11) Earnings Before Interest and Taxes (EBIT): Includes profits before deductions for

interest paid and taxes;

(12) EBIT as a Percentage of Sales: GRIM calculates EBIT as a percentage of sales to

compare with the industry’s average reported in financial statements;

(13) Taxes: Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major

Assumptions by EBIT (11).

(14) Net Operating Profits After Taxes (NOPAT): Computed by subtracting Cost of Goods

Sold ((3) to (6)), SG&A (8), R&D (9), Product Conversion Expense (10), and Taxes (13)

from Revenues (2).

(15) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

(16) Depreciation repeated: Depreciation is added back in the Statement of Cash Flows

including stranded assets because both are non­cash expenses;

(17) Change in Working Capital: Change in cash tied up in accounts receivable, inventory, and

other cash investments necessary to support operations is calculated by multiplying

working capital (as a percentage of revenues) by the change in annual revenues.

(18) Cash Flow From Operations: Calculated by taking NOPAT (15), adding back non­cash

items such as a Depreciation (16), and subtracting out Change in Working Capital (17);

(19) Ordinary Capital Expenditures: Ordinary investments in property, plant, and equipment to

maintain and replace existing production assets, computed as a percentage of Revenues (2);

(20) Conversion Capital Expenditures: Conversion capital expenditures are one­time

investments in property, plant, and equipment to adapt or change existing production

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facilities so that new product designs can be fabricated and assembled under the new

regulation;

(21) Capital Investment: Total investments in property, plant, and equipment are computed by

adding Ordinary Capital Expenditures (19) and Conversion Capital Expenditures (20);

(22) Free Cash Flow: Annual cash flow from operations and investments; computed by

subtracting Capital Investment (21) from Cash Flow from Operations (18);

(23) Terminal Value: Estimate of the continuing value of the industry after 2042. Computed

by growing the Free Cash Flow in year 2042 at a constant rate in perpetuity;

(24) Present Value Factor: Factor used to calculate an estimate of the present value of an

amount to be received in the future;

(25) Discounted Cash Flow: Free Cash Flows (22) multiplied by the Present Value Factor

(24). For 2042 the discounted cash flow includes the discounted Terminal Value (23); and

(26) Industry Value thru 2042: The sum of Discounted Cash Flows (25).

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13A.2.3 Detailed Cash Flow Example

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