CHAPTER 12: PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

**12. 1**  **INTRODUCTION**

**......................................................................................................... 12­1** 

**12. 2**  **METHODOLOGY**

**........................................................................................................ 12­1** 

**12. 2.1**  **Phase 1: Industry Profile................................................................................... 12­2** 

**12. 2.2**  **Phase 2:**  **Industry Cash­Flow**  **Analysis and**  **Interview Guide** 

**........................... 12­2** 

**12. 2.2.1**  **Industry Cash­Flow**  **Analysis............................................................ 12­2** 

**12. 2.2.2**  **Interview Guide** 

**................................................................................ 12­2** 

**12. 2.3**  **Phase 3:**  **Subgroup Analysis..............................................................................**  **12­2**

**12. 2.3.1**  **Manufacturer Interviews................................................................... 12­3** 

**12. 2.3.2**  **Revised Industry**  **Cash­Flow Analysis..............................................**  **12­3**

**12. 2.3.3**  **Manufacturer Subgroup**  **Analysis**

**..................................................... 12­3** 

**12. 2.3.4**  **Competitive Impact**  **Analysis............................................................ 12­3** 

**12. 2.3.5**  **Manufacturing Capacity**  **Impact**

**....................................................... 12­4** 

**12. 2.3.6**  **Employment Impact..........................................................................**  **12­4**

**12. 2.3.7**  **Cumulative Regulatory**  **Burden**

**........................................................ 12­4** 

**12. 3**  **PRELIMINARY MANUFACTURER**  **IMPACT OVERVIEW....................................**  **12­4**

**12. 3.1**  **Overview of**  **Industry Data.................................................................................**  **12­5**

**12. 3.1.1**  **Industry Cost**  **Structure**

**..................................................................... 12­5** 

**12. 3.1.2**  **Inventory Levels**  **and Capacity**  **Utilization Rates** 

**............................. 12­6** 

**12. 3.2**  **Preliminary Manufacturing Interview Overview............................................... 12­7**

**12. 3.2.1**  **Key Issues** 

**......................................................................................... 12­7** 

**12. 3.2.2**  **Production and**  **Product Mix** 

**............................................................. 12­7** 

**12. 3.2.3**  **Compliance Costs** 

**............................................................................. 12­7** 

**12. 3.2.4**  **Exports, Foreign**  **Competition, and**  **Outsourcing**

**.............................. 12­8** 

**12. 3.2.5**  **Market Shares**  **and Industry**  **Consolidation....................................... 12­8** 

**12. 3.2.6**  **Cumulative Burden** 

**........................................................................... 12­8** 

**12. 4**  **SUMMARY OF**  **MAJOR ISSUES**  **FROM PRELIMINARY**  **MIA**

**.............................. 12­9** 

**12. 4.1**  **Capital Expenses**  **to Produce**  **Standards­Compliant Small**  **Electric Motors** 

**...... 12­9** 

**12. 4.2**  **Maintaining Product**  **Availability and**  **Features**

**................................................. 12­9** 

**12. 4.3**  **Enforcement of**  **Standards.................................................................................. 12­9** 

LIST OF TABLES

**Table 12.3.1**  **Motor and**  **Generator Employment**  **and Earnings** 

**.................................. 12­5** 

**Table 12.3.2**  **Motor and**  **Generator Industry**  **Census Data** 

**.......................................... 12­6** 

**Table 12.3.3**  **Motor and**  **Generator Industry**  **Census Data** 

**.......................................... 12­6** 

**Table 12.3.4**  **Full Production**  **Capacity Utilization**  **Rates**

**........................................... 12­6** 

**12­i**CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12. 1 INTRODUCTION

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

**potential impacts**  **of energy**  **conservation standards**  **on manufacturers.**  **The Process**  **Rule provides** 

**guidance for**  **conducting this**  **analysis with**  **input from**  **manufacturers and**  **other interested**  **parties.**

**The U.S.**  **Department of**  **Energy (DOE)**  **will apply**  **this methodology**  **to its**  **evaluation of**  **standards**

**to the**  **extent that**  **it is**  **appropriate for**  **developing energy**  **conservation standards**  **for the**  **small**

**electric motors**  **covered under**  **the preliminary**  **analyses. The**  **Process Rule**  **provides guidelines** 

**for considering**  **financial impacts**  **and a**  **wide range**  **of quantitative**  **and qualitative**  **industry**

**impacts that**  **might occur**  **after adoption**  **of a**  **standard. For**  **example, a**  **particular standard**  **level**

**could require**  **changes in**  **manufacturing practices**  **for small**  **electric motors.**  **DOE will**  **identify**

**and analyze**  **these impacts**  **through interviews**  **with manufacturers**  **and other**  **stakeholders during** 

**the notice**  **of proposed**  **rulemaking (NOPR)**  **stage of**  **its analysis.** 

**DOE announced**  **changes to**  **the MIA**  **format through**  **a report**  **issued to**  **Congress on** 

**January 31,**  **2006 (as**  **required by**  **section 141**  **of the**  **Energy Policy**  **Act of**  **2005 (EPACT**  **2005)),**

**1 entitled**  Energy Conservation Standards Activities

**. Previously,**  **DOE did**  **not report**  **any MIA** 

**results until**  **the notice**  **of proposed**  **rulemaking stage**  **(NOPR). However,**  **under this**  **new format,** 

**DOE collected,**  **evaluated, and**  **reported preliminary**  **information and**  **data in**  **the period**  **preceding**

**the NOPR**  **phase. Such**  **preliminary information**  **includes efficiency**  **and market**  **data, key**  **issues,**

**production mixes,**  **conversion costs,**  **foreign competition,**  **market shares,**  **industry consolidation,** 

**and cumulative**  **regulatory information.**  **DOE solicited**  **this information**  **during the**  **preliminary**

**manufacturer interviews**  **and reports**  **the results**  **in this**  **chapter. The**  **appendices to**  **this chapter** 

**include copies**  **of the**  **interview guides**  **that DOE**  **distributed to**  **manufacturers to**  **gather**

**information for**  **the preliminary**  **MIA and**  **other preliminary**  **analyses.**

12. 2 METHODOLOGY

**DOE will**  **conduct the**  **MIA in**  **three phases.**  **In Phase**  **1, DOE**  **will create**  **an industry** 

**profile to**  **characterize the**  **industry and**  **conduct a**  **preliminary MIA**  **to identify**  **important issues** 

**that require**  **consideration. Sections**  **12.3 and**  **12.4 present**  **DOE’s initial**  **findings from**  **the Phase** 

**1 analysis.**  **In Phase**  **2, DOE**  **will prepare**  **an industry**  **cash­flow model**  **and an**  **interview**

**questionnaire to**  **guide subsequent**  **discussions. In**  **Phase 3,**  **DOE will**  **interview manufacturers** 

**and assess**  **the impacts**  **of standards**  **both quantitatively**  **and qualitatively.**  **DOE will**  **assess**

**industry and**  **subgroup cash**  **flow and**  **net present**  **value (NPV)**  **using the**  **Government Regulatory** 

**Impact Model**  **(GRIM). DOE**  **will then**  **assess impacts**  **on competition,**  **manufacturing capacity,** 

**employment, and**  **regulatory burden**  **based on**  **the manufacturer**  **interviews and**  **discussions. DOE** 

**will conduct**  **Phases 2**  **and 3**  **in the**  **NOPR phase**  **of the**  **rulemaking.**

**1 This**  **report is**  **available on**  **the DOE**  **website at** 

**www.eere.energy.gov/buildings/appliance_standards/pdfs/congressional_report_0807.pdf.**

**12­1**12.2.1 Phase 1: Industry Profile

**In Phase**  **1 of**  **the manufacturer**  **impact analysis,**  **DOE collects**  **qualitative and**  **quantitative**

**financial and**  **market information.**  **This information**  **includes wages,**  **employment, and**  **industry**

**costs for**  **small electric**  **motors. Sources**  **include reports**  **published by**  **industry groups,**  **trade**

**journals, the**  **U.S. Census**  **Bureau, and**  **copies of**  **Securities Exchange**  **Commission (SEC)**  **10­K**

**filings. DOE**  **will also**  **rely on**  **information from**  **its market**  **and technology**  **assessment,**

**engineering analysis,**  **life­cycle cost**  **analysis, and**  **analysis of**  **consumer prices**  **to characterize**  **the**

**small electric**  **motor manufacturing**  **industry.**

12. 2.2 Phase 2: Industry Cash­Flow Analysis and Interview Guide

**In Phase**  **2, DOE**  **will perform**  **a preliminary**  **industry cash­flow**  **analysis and**  **prepare**

**written guidelines**  **for interviewing**  **manufacturers.**

12. 2.2.1 Industry Cash­Flow Analysis

**DOE will**  **use the**  **GRIM to**  **analyze the**  **financial impacts**  **of energy**  **conservation**

**standards on**  **the small**  **electric motor**  **industry. Standards**  **may require**  **additional investment,** 

**raise production**  **costs, and**  **affect revenue**  **through higher**  **prices and**  **possibly lower**  **sales. The** 

**GRIM uses**  **several factors**  **to determine**  **a series**  **of annual**  **cash flows**  **for the**  **year that**  **standards**

**become effective**  **and for**  **several subsequent**  **years. These**  **factors include**  **annual expected** 

**revenues; sales**  **costs; selling**  **and general**  **administration costs;**  **taxes; and**  **capital expenditures** 

**related to**  **depreciation, new**  **standards, and**  **maintenance. Inputs**  **to the**  **GRIM include** 

**manufacturing costs,**  **shipment forecasts,**  **and price**  **forecasts developed**  **in other**  **analyses. DOE** 

**develops another**  **input, financial**  **information, based**  **on publicly**  **available data**  **and confidentially** 

**submitted manufacturer**  **information. DOE**  **compares the**  **results of**  **the GRIM**  **against baseline** 

**projections where**  **no standards**  **are in**  **place. The**  **financial impact**  **of new**  **standards is**  **the**

**difference between**  **the two**  **sets of**  **discounted annual**  **cash flows.** 

12. 2.2.2 Interview Guide

**DOE will**  **conduct interviews**  **with manufacturers**  **to gather**  **information on**  **the effects**  **of**

**standards on**  **revenues and**  **finances, direct**  **employment, capital**  **assets, and**  **industry**

**competitiveness. These**  **interviews will**  **take place**  **during Phase**  **3 of**  **the MIA.**  **Before the** 

**interviews, DOE**  **will distribute**  **an interview**  **guide that**  **will help**  **identify the**  **impacts of** 

**standards on**  **individual manufacturers**  **or subgroups**  **of manufacturers.**  **The interview**  **guide will** 

**likely cover**  **current organizational**  **characteristics; industry**  **infrastructure; manufacturer**  **cash**

**flow analysis;**  **and assessments**  **of the**  **impact on**  **competition, employment,**  **and manufacturing** 

**capacity.**

12. 2.3 Phase 3: Subgroup Analysis

**Phase 3**  **activities will**  **occur after**  **publication of**  **the notice**  **of public**  **meeting (NOPM).** 

**These activities**  **will include**  **manufacturer interviews;**  **revision of**  **the industry**  **cash­flow**

**analysis; a**  **manufacturer subgroup**  **cash­flow analysis;**  **and assessment**  **of the**  **impacts on** 

**competition, manufacturing**  **capacity, employment,**  **and the**  **cumulative regulatory**  **burden.**

**12­2**12.2.3.1 Manufacturer Interviews

**DOE will**  **supplement the**  **information gathered**  **in Phase**  **1 and**  **the cash­flow**  **analysis**

**performed in**  **Phase 2**  **with information**  **gathered during**  **interviews with**  **manufacturers during** 

**Phase 3.**  **The interview**  **process has**  **a key**  **role in**  **the manufacturer**  **impact analyses,**  **because it** 

**provides an**  **opportunity for**  **interested parties**  **to express**  **their views**  **privately on**  **important**

**issues. This**  **allows consideration**  **of confidential**  **or sensitive**  **information during**  **the rulemaking** 

**decision.**

**DOE will**  **conduct detailed**  **interviews with**  **manufacturers to**  **gain insight**  **into the** 

**potential impacts**  **of standards**  **on sales,**  **direct employment,**  **capital assets,**  **and industry** 

**competitiveness. Both**  **qualitative and**  **quantitative information**  **are valuable.**  **Interviewees**

**schedule meetings**  **well in**  **advance to**  **provide every**  **opportunity for**  **key individuals’** 

**participation and**  **comment. Although**  **a written**  **response to**  **the questionnaire**  **is acceptable,**  **DOE**

**prefers an**  **interactive interview**  **process, which**  **helps clarify**  **responses and**  **provides the** 

**opportunity to**  **identify additional**  **issues.**

**DOE asks**  **all manufacturers**  **who participate**  **in the**  **interviews to**  **identify all**  **confidential**

**information provided**  **during and**  **after the**  **interview. DOE**  **will consider**  **all information** 

**transmitted in**  **its decision­making**  **process; however,**  **will not**  **make confidential**  **information**

**available in**  **the public**  **record. Also,**  **DOE will**  **ask participants**  **to identify**  **any information**  **they**

**wish to**  **include in**  **the public**  **record but**  **do not**  **want attributed**  **to them.** 

12. 2.3.2 Revised Industry Cash­Flow Analysis

**In Phase**  **2 of**  **the MIA,**  **DOE will**  **prepare a**  **preliminary GRIM.**  **During the**  **interviews,**

**DOE will**  **seek comments**  **about the**  **values DOE**  **selected for**  **the parameters.**  **DOE will**  **use the** 

**feedback provided**  **during the**  **interviews to**  **revise its**  **industry cash­flow**  **model.**

12. 2.3.3 Manufacturer Subgroup Analysis

**Using average**  **cost assumptions**  **to develop**  **an industry**  **cash­flow estimate**  **is not**  **adequate**

**for assessing**  **differential impacts**  **among subgroups**  **of manufacturers.**  **Standards could** 

**negatively affect**  **smaller manufacturers,**  **niche players,**  **or manufacturers**  **exhibiting a**  **cost**

**structure that**  **differs largely**  **from the**  **industry average.**  **Ideally, DOE**  **would consider**  **the**

**individual impact**  **on each**  **firm. However,**  **DOE typically**  **uses the**  **results of**  **the industry** 

**characterization to**  **group manufacturers**  **with similar**  **characteristics. During**  **the interviews,** 

**DOE will**  **discuss the**  **potential subgroups**  **that have**  **been identified**  **for the**  **analysis. DOE**  **will**

**ask manufacturers**  **and other**  **stakeholders to**  **suggest which**  **subgroups or**  **characteristics are**  **most**

**appropriate for**  **the analysis.** 

12. 2.3.4 Competitive Impact Analysis

**Section 342(a)(6)(B)(i)(V)**  **of the**  **Energy Policy**  **and Conservation**  **Act (EPCA),**  **42**

**U. S.C.**  **6313(a)(6)(B)(i)(V), directs**  **DOE to**  **consider any**  **lessening of**  **competition likely**  **to result** 

**from imposition**  **of standards.**  **It further**  **directs the**  **U.S. Attorney**  **General to**  **determine the** 

**impacts, if**  **any, of**  **any decrease**  **in competition.**  **DOE will**  **make a**  **determined effort**  **to gather** 

**12­3 and**  **report firm­specific**  **financial information**  **and impacts.**  **The competitive**  **analysis will**  **focus**

**on assessing**  **the impacts**  **on smaller**  **manufacturers. Manufacturing**  **cost data**  **and information** 

**collected from**  **interviews with**  **manufacturers will**  **provide the**  **basis of**  **the assessment.**  **The**

**manufacturer interviews**  **will focus**  **on gathering**  **information that**  **would help**  **in assessing** 

**asymmetrical cost**  **increases to**  **some manufacturers,**  **the potential**  **increase in**  **business risks**  **from**

**an increased**  **proportion of**  **fixed costs,**  **and potential**  **barriers to**  **market entry**  **(** e.g.

**, proprietary** 

**technologies).**

12. 2.3.5 Manufacturing Capacity Impact

**A potentially**  **significant outcome**  **of standards**  **is the**  **obsolescence of**  **existing**

**manufacturing assets,**  **including tooling**  **and investment.**  **The manufacturer**  **interview guide**  **will**

**have a**  **series of**  **questions to**  **help identify**  **impacts on**  **manufacturing capacity,**  **specifically**

**capacity utilization**  **and plant**  **location decisions**  **in the**  **United States**  **and North**  **America with**  **and**

**without a**  **standard; the**  **ability of**  **manufacturers to**  **upgrade or**  **remodel existing**  **facilities to** 

**accommodate the**  **new requirements;**  **the nature**  **and value**  **of stranded**  **assets, if**  **any; and** 

**estimates for**  **any one­time**  **restructuring or**  **other charges,**  **where applicable.** 

12. 2.3.6 Employment Impact

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

**consideration in**  **the rulemaking**  **process. To**  **assess affects**  **on domestic**  **employment patterns,**  **the**

**interviews will**  **explore current**  **employment trends**  **in the**  **motor industry**  **and solicit**  **manufacturer**

**views on**  **changes in**  **employment patterns**  **that may**  **result from**  **increased standard**  **levels. The** 

**employment impacts**  **section of**  **the interview**  **guide will**  **focus on**  **current employment**  **levels**

**associated with**  **manufacturers at**  **each production**  **facility, expected**  **future employment**  **levels**

**with and**  **without a**  **standard, differences**  **in workforce**  **skills, and**  **issues related**  **to employee** 

**retraining.**

12. 2.3.7 Cumulative Regulatory Burden

**DOE seeks**  **to mitigate**  **the overlapping**  **effects on**  **manufacturers of**  **standards and**  **other**

**regulatory actions**  **affecting the**  **same equipment**  **or companies.**  **Based on**  **its own**  **research and** 

**discussions with**  **manufacturers, DOE**  **has yet**  **to identify**  **regulations that**  **cover the**  **same set**  **of**

**motors covered**  **in the**  **preliminary analyses.** 

12. 3 PRELIMINARY MANUFACTURER IMPACT OVERVIEW

**During the**  **period preceding**  **the NOPR,**  **DOE identified**  **qualitative and**  **quantitative**

**public financial**  **and market**  **information to**  **help evaluate**  **the impact**  **of potential**  **new regulations** 

**on small**  **electric motor**  **manufacturer financial**  **performance, manufacturing**  **capacity and** 

**employment levels,**  **and product**  **utility and**  **innovation. DOE**  **also researched**  **the cumulative** 

**burden that**  **industry may**  **face from**  **the overlapping**  **effect of**  **new or**  **recent energy**  **conservation**

**standards or**  **other regulatory**  **action affecting**  **the same**  **product or**  **industry.**

**In addition**  **to researching**  **publicly available**  **data, DOE**  **conducted interviews**  **with**

**manufacturers primarily**  **to identify**  **key issues**  **and gain**  **insights into**  **the qualitative**  **impacts of** 

**12­4 energy**  **conservation standards.**  **The primary**  **sources of**  **this information**  **were interviews**  **with**

**manufacturers of**  **small electric**  **motors conducted**  **during the**  **last quarter**  **of 2007**  **and the**  **first**

**quarter of**  **fiscal year**  **2008. To**  **maintain confidentiality,**  **DOE did**  **not identify**  **the individual** 

**manufacturers that**  **disclosed information.**  **Instead, the**  **evaluation only**  **reports aggregated** 

**information and**  **does not**  **disclose sensitive**  **or company­specific**  **information. DOE**  **used an** 

**interview guide**  **to gather**  **responses from**  **multiple manufacturers**  **on several**  **issues. Appendix** 

**12A contains**  **a copy**  **of the**  **preliminary manufacturer**  **interview guide**  **DOE used**  **for small** 

**electric motor**  **manufacturers.**

**The following**  **sections summarize**  **publicly available**  **data as**  **well as**  **information gathered** 

**during interviews**  **for the**  **preliminary manufacturer**  **impact analysis.**  **Section 12.3.1**  **summarizes**

**the publicly**  **available industry**  **data. Section**  **12.3.2 outlines**  **the general**  **interview structure**  **and**

**summarizes the**  **issues discussed**  **during the**  **preliminary MIA**  **interviews. Section**  **12.4 addresses** 

**major manufacturer­related**  **issues for**  **motors covered**  **in the**  **preliminary analyses.** 

12. 3.1 Overview of Industry Data

**DOE compiled**  **industry data**  **to assess**  **the motor**  **industry cost**  **structure and** 

**manufacturing utilization**  **and capitalization**  **rates. The**  **following sections**  **summarize public**  **data**

**DOE obtained**  **from U.S.**  **Census Bureau**  **reports.**

12. 3.1.1 Industry Cost Structure

**DOE developed**  **the motor**  **and generator**  **industry cost**  **structure from**  **the U.S.**  **Census**

**Bureau,** Annual Survey of Manufacturers, Statistics for Industry Groups and Industries: 2005.

**Table 12.3.1**  **presents the**  **motor industry**  **employment levels**  **and earnings**  **for this**  **period. The** 

**data show**  **about an**  **18­percent decrease**  **in the**  **number of**  **production workers,**  **and about**  **a 13­** 

**percent decrease**  **in the**  **overall number**  **of employees**  **in the**  **industry.**

i Table 12.3.1 Motor and Generator Employment and Earnings

Year Production Workers All Employees Payroll for All Employees

**(thousand 2005**  **dollars)**

**2002 41,**  **272 54,**  **906 1,**  **840,379**

**2003 36,**  **357 49,**  **409 1,**  **739,725**

**2004 34,**  **944 48,**  **143 1,**  **755,630**

**2005 33,**  **989 47,**  **580 1,**  **831,619**

**Table 12.3.2**  **presents the**  **costs of**  **materials and**  **industry payroll**  **as a**  **percentage of** 

**shipment value**  **from 2002**  **to 2005.**  **The cost**  **of materials**  **increased in**  **that period,**  **whereas the** 

**cost of**  **payroll (both**  **production and**  **total) decreased.** 

**12­5**ii Table 12.3.2 Motor and Generator Industry Census Data

Year Cost of Materials

**(% of**  **shipment**

**value)** Cost of Payroll for

Production Workers

**(% of**  **shipment value)**  Cost of Total Payroll:

Production + Administration

**(% of**  **shipment value)** 

**2002 47.**  **0 12.**  **8 32.**  **9**

**2003 48.**  **3 11.**  **9 30.**  **7**

**2004 50.**  **0 10.**  **8 27.**  **8**

**2005 51.**  **3 9.**  **8 25.**  **6**

12. 3.1.2 Inventory Levels and Capacity Utilization Rates

**Table 12.3.3**  **shows the**  **year­end inventory**  **for the**  **motors industry**  **obtained from**  **the U.S.** 

**Census Bureau,**  Annual Survey of Manufacturers, Statistics for Industry Groups and Industries:

2005

**. The**  **dollar amount**  **of end­of­year**  **inventory has**  **increased, but**  **the inventory**  **as a** 

**percentage of**  **annual shipment**  **value has**  **decreased slightly.** 

iii Table 12.3.3 Motor and Generator Industry Census Data

Year End­of­Year Inventory

**(thousand 2005**  **dollars)** End­of­Year Inventory

**(% of**  **shipment value)** 

**2002 1,**  **252,225 13.**  **7**

**2003 1,**  **242,783 13.**  **4**

**2004 1,**  **384,081 13.**  **4**

**2005 1,**  **496,582 13.**  **0**

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

**Current Industrial**  **Reports,** Survey of Plant Capacity from 2001 to 2005

**. Table**  **12.3.4 shows** 

**production capacity**  **utilization rates**  **for the**  **motor and**  **generator industry.**  **Full production** 

**capacity is**  **defined as**  **the maximum**  **level of**  **production that**  **an establishment**  **could attain**  **under**

**normal operating**  **conditions. In**  **the** Survey of Plant Capacity **report, the**  **full production** 

**utilization rate**  **is a**  **ratio of**  **the actual**  **level of**  **operations to**  **the full**  **production level.** 

iv Table 12.3.4 Full Production Capacity Utilization Rates

Year Motor and Generator Manufacturing (%)

**2001 61** 

**2002 60** 

**2003 62** 

**2004 75** 

**2005 59** 

**12­6**12.3.2 Preliminary Manufacturing Interview Overview

**In addition**  **to reviewing**  **publicly available**  **data, DOE**  **interviewed manufacturers**  **for a** 

**preliminary manufacturer**  **impact analysis.**  **The following**  **section highlights**  **topics discussed** 

**during these**  **interviews.**

12. 3.2.1 Key Issues

**Perhaps the**  **most important**  **aspect of**  **the preliminary**  **MIA is**  **the opportunity**  **that it** 

**creates for**  **DOE to**  **identify key**  **manufacturer issues**  **early in**  **the development**  **of new**  **standards.**

**During the**  **interviews, DOE**  **engages manufacturers**  **in a**  **discussion about**  **what they**  **perceive as** 

**the key**  **issues in**  **the rulemaking.**  **Key issues**  **in previous**  **rulemakings have**  **included concerns** 

**over patents**  **that may**  **prevent some**  **companies from**  **implementing higher­efficiency**  **designs.**

12. 3.2.2 Production and Product Mix

**DOE asks**  **manufacturers what**  **they perceive**  **as the**  **possible impact**  **of new**  **standards on** 

**profitability. For**  **instance, the**  **capital and**  **product conversion**  **outlays needed**  **to upgrade**  **or**

**redesign products**  **before they**  **have reached**  **the end**  **of their**  **useful life**  **may create**  **significant**

**conversion costs,**  **resulting in**  **reduced cash**  **flow and**  **stranded investments.**  **Higher energy** 

**conservation standards**  **may also**  **result in**  **higher per­unit**  **costs that**  **could cause**  **consumers to** 

**shift to**  **less costly**  **products.**

12. 3.2.3 Compliance Costs

**During the**  **interviews, DOE**  **asks manufacturers**  **to quantify**  **and explain**  **both the**  **capital**

**and the**  **product conversion**  **costs necessary**  **to raise**  **the energy**  **efficiency of**  **their product**  **lines to** 

**the proposed**  **standard levels.**  **In some**  **instances, manufacturers**  **may meet**  **proposed standard** 

**levels by**  **modifying existing**  **products. In**  **other cases,**  **the necessary**  **changes may**  **entail a** 

**complete product­line**  **redesign. In**  **these situations,**  **an increase**  **in a**  **standard will**  **cause**

**manufacturers to**  **incur one­time**  **conversion capital**  **expenditures and**  **product­conversion**

**expenses. Conversion**  **capital expenditures**  **are one­time**  **investments in**  **property, plant,**  **and**

**equipment. Product­conversion**  **expenses include**  **one­time investments**  **in research,**  **product**

**development, testing,**  **and marketing.** 

**A potentially**  **significant outcome**  **of new**  **standards is**  **the obsolescence**  **of existing** 

**manufacturing assets,**  **including tooling**  **and other**  **capital investment.**  **The interview**  **guide**

**includes questions**  **to identify**  **impacts on**  **manufacturing capacity.**  **DOE developed**  **these**

**questions to**  **understand the**  **impact of**  **potential new**  **standards on**  **four areas:** 

• **U. S.**  **and North**  **American manufacturing**  **capacity;**

• **capacity utilization**  **and plant**  **location decisions**  **in the**  **United States**  **and North**  **America**

**with and**  **without standards;** 

• **the ability**  **of manufacturers**  **to upgrade**  **or remodel**  **existing facilities**  **to accommodate**  **a**

**new product**  **mix; and** 

• **the nature**  **and value**  **of stranded**  **assets, if**  **any.**

**12­7 DOE**  **will explore**  **current trends**  **in production**  **employment and**  **solicit manufacturer**  **views on** 

**changes in**  **employment patterns**  **resulting from**  **new energy**  **conservation standards.**  **Information**

**from manufacturers**  **about employment**  **impacts help**  **DOE to**  **understand current**  **employment**

**levels associated**  **with manufacturing**  **at each**  **production facility,**  **expected future**  **employment**

**levels with**  **and without**  **new standards,**  **and differences**  **in workforce**  **skills and**  **issues related**  **to**

**retraining.**

12. 3.2.4 Exports, Foreign Competition, and Outsourcing

**Energy conservation**  **standards for**  **small electric**  **motors can**  **affect projected**  **export sales,** 

**the portion**  **of the**  **domestic market**  **served by**  **foreign competition,**  **and domestic**  **production**

**levels. The**  **preliminary MIA**  **interview questions**  **examined manufacturer**  **views on**  **the impacts** 

**new standards**  **would have**  **on exports,**  **foreign competition,**  **and outsourcing.** 

12. 3.2.5 Market Shares and Industry Consolidation

**New standards**  **can alter**  **the competitive**  **dynamics of**  **the marketplace,**  **prompting**

**companies to**  **enter the**  **market, exit**  **the market,**  **or merge**  **with other**  **companies. The**  **preliminary**

**MIA interview**  **questions ask**  **manufacturers to**  **share their**  **perspectives on**  **industry consolidation** 

**both in**  **the absence**  **of new**  **standards and**  **assuming new**  **standards at**  **various efficiency**  **levels.**

**The interview**  **questions focus**  **on information**  **that helps**  **DOE assess**  **disproportionate cost** 

**increases to**  **some manufacturers,**  **increased proportion**  **of fixed**  **costs potentially**  **increasing**

**business risks,**  **and potential**  **barriers to**  **market entry**  **(** e.g.

**, proprietary**  **technologies).**

**The need**  **to assess**  **anticompetitive effects**  **of proposed**  **standards comes**  **from the**  **need to** 

**protect consumer**  **interests. During**  **the interviews,**  **DOE solicits**  **information to**  **understand**

**whether new**  **standards could**  **result in**  **disproportionate economic**  **or performance**  **penalties for** 

**particular consumer**  **or user**  **subgroups. Manufacturers**  **are also**  **asked whether**  **new standards** 

**could result**  **in more**  **or less**  **desirable products**  **due to**  **changes in**  **product functionality,**  **utility, or** 

**other features.** 

12. 3.2.6 Cumulative Burden

**A single**  **regulation might**  **not impose**  **a significant**  **burden on**  **manufacturers, but**  **several**

**impending regulations**  **may have**  **a combined**  **effect with**  **serious consequences**  **for individual** 

**manufacturers, groups**  **of manufacturers,**  **or entire**  **industries. Assessing**  **the impact**  **of a**  **single**

**regulation may**  **overlook this**  **cumulative regulatory**  **burden.**

**Expenditures associated**  **with meeting**  **other regulations**  **are an**  **important aspect**  **of DOE’s** 

**consideration of**  **the “cumulative**  **regulatory burden”**  **that the**  **industry faces.**  **The interviews**  **help**

**DOE identify**  **the level**  **and timing**  **of investments**  **that manufacturers**  **expect to**  **incur because**  **of**

**these regulations.**  **DOE also**  **asks manufacturers**  **which circumstances**  **will allow**  **them to**  **make**

**expenditures related**  **to regulations**  **and standards.** 

**12­8**12.4 SUMMARY OF MAJOR ISSUES FROM PRELIMINARY MIA

**DOE conducted**  **a series**  **of preliminary**  **interviews with**  **manufacturers to**  **assess their** 

**concerns about**  **the potential**  **impact of**  **a regulatory**  **standard for**  **small electric**  **motors. In** 

**general, manufacturers**  **identified three**  **major issues**  **of concern:**  **(1) capital**  **expenditure to**  **retool**

**in response**  **to the**  **standards, (2)**  **maintaining product**  **availability and**  **consumer­oriented features,** 

**and (3)**  **enforcement of**  **the new**  **standards.**

12. 4.1 Capital Expenses to Produce Standards­Compliant Small Electric Motors

**The manufacturers**  **DOE interviewed**  **expressed concern**  **over the**  **costs they**  **would incur** 

**in order**  **to produce**  **standards­compliant small**  **electric motors.**  **Large manufacturers**  **of electric** 

**motors, who**  **produce the**  **small electric**  **motors covered**  **by the**  **preliminary analyses**  **as well**  **as**

**many other**  **categories of**  **motors, dominate**  **the majority**  **of the**  **small electric**  **motors market.** 

**Manufacturers indicated**  **that the**  **proportion of**  **covered small**  **electric motors**  **represents a**  **small**

**share of**  **the manufacturer’s**  **overall business.**  **The increased**  **stringency at**  **each standard**  **level**

**will force**  **manufacturers to**  **increase the**  **amount of**  **capital expenditure,**  **potentially forcing**  **an**

**investment in**  **new lamination**  **dies, winding**  **tooling, and**  **testing equipment,**  **and even**  **re­allotting**

**factory floor**  **space. If**  **the standard**  **is set**  **too high,**  **manufacturers indicated**  **that they**  **may simply** 

**stop producing**  **small electric**  **motors rather**  **than develop**  **standards­compliant units.** 

**Small manufacturers**  **of small**  **electric motors**  **represent a**  **fraction of**  **the overall**  **national**

**market, and**  **they also**  **have fewer**  **sources from**  **which to**  **raise money**  **for an**  **investment. DOE**  **is**

**concerned that**  **small manufacturers**  **may choose**  **to leave**  **the small**  **electric motors**  **market**

**altogether instead**  **of dealing**  **with the**  **extra difficulty**  **of raising**  **the capital**  **necessary for**  **a small** 

**electric motors**  **regulation.**

12. 4.2 Maintaining Product Availability and Features

**Manufacturers expressed**  **concern about**  **the impact**  **on typical**  **motor characteristics**  **that**

**may result**  **from the**  **selection of**  **an efficiency**  **level that**  **is too**  **high. Specifically,**  **manufacturers**

**are concerned**  **that small**  **electric motors**  **will need**  **to increase**  **diameter, length,**  **and other** 

**dimensions if**  **efficiency levels**  **are pushed**  **high enough.**  **Some horsepower**  **ratings may**  **also**

**consolidate, eliminating**  **some of**  **today’s standard**  **ratings from**  **the market.**  **Manufacturers**

**expressed concerned**  **over the**  **ability to**  **retrofit newer,**  **potentially larger**  **motors into**  **existing**

**applications. End**  **users would**  **then have**  **to choose**  **another horsepower**  **or another**  **motor**

**category that**  **is not**  **covered, or**  **modify the**  **application to**  **allow installation**  **of the**  **standards**

**compliant small**  **electric motor.** 

12. 4.3 Enforcement of Standards

**Manufacturers also**  **expressed major**  **concerns about**  **the feasibility**  **of enforcing**  **the**

**energy conservation**  **standard. If**  **an efficiency**  **level is**  **established, the**  **standard will**  **require some** 

**investment for**  **all manufacturers**  **that choose**  **to continue**  **to produce**  **small electric**  **motors.**

**Manufacturers expressed**  **concern about**  **the inability**  **to enforce**  **the standard**  **level, particularly** 

**for motors**  **embedded in**  **other equipment.**  **They worry**  **that their**  **investment in**  **standards**

**compliance may**  **put them**  **at a**  **competitive disadvantage**  **to less**  **scrupulous manufacturers.**  **This**

**12­9 concern**  **was expressed**  **particularly in**  **the context**  **of foreign**  **companies importing**  **non­compliant**

**motors (potentially**  **as a**  **part of**  **some other**  **equipment) that**  **may put**  **U.S. manufacturers**  **at a** 

**competitive disadvantage.** 

**12­10 REFERENCES** 

**i U.S.**  **Census Bureau.**  2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. **Table 2.**  **Statistics for**  **Industry Groups**  **and Industries:**  **2005 and**  **Earlier**

**Years**

. **November 2006,**  **www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last**  **accessed April** 

**9, 2008.)**  **The April**  **9, 2008,**  **material from**  **this website**  **is available**  **in Docket**  **No. EERE­2007­** 

**BT­STD­0007. For**  **more information,**  **contact Brenda**  **Edwards at**  **(202) 586­2945.** 

**ii U.S.**  **Census Bureau.**  2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. **Table 2.**  **Statistics for**  **Industry Groups**  **and Industries:**  **2005 and**  **Earlier**

**Years and**  **Table 7.**  **Value of**  **Shipments by**  **Industry: 2005**  **and 2004** 

. **November 2006,** 

**www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last**  **accessed April**  **9, 2008.)**  **The April**  **9,**

**2008, material**  **from this**  **website is**  **available in**  **Docket No.**  **EERE­2007­BT­STD­0007. For** 

**more information,**  **contact Brenda**  **Edwards at**  **(202) 586­2945** 

**.**

**iii U.S.**  **Census Bureau.**  2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. **Table 6.**  **Value of**  **Manufacturers’ Inventories**  **by Stage**  **of Fabrication**  **for**

**Industry Groups**  **and Industries:**  **Beginning and**  **End of**  **Year. November**  **2006,**

**www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last**  **accessed April**  **9, 2008.)**  **The April**  **9,**

**2008, material**  **from this**  **website is**  **available in**  **Docket No.**  **EERE­2007­BT­STD­0007. For** 

**more information,**  **contact Brenda**  **Edwards at**  **(202) 586­2945.** 

**iv U.S.**  **Census Bureau.**  Current Industrial Reports. Survey of Plant Capacity: 2005. **Table 1a.** 

**Full Production**  **Capacity Utilization**  **Rates by**  **Industry: Fourth**  **Quarters 2001**  **through 2005.** 

**January 2007,**  **www.census.gov/prod/2007pubs/mqc1­05.pdf. (Last**  **accessed April**  **9, 2008.)** 

**The April**  **9, 2008,**  **material from**  **this website**  **is available**  **in Docket**  **No. EERE­2007­BT­STD** 

**0007. For**  **more information,**  **contact Brenda**  **Edwards at**  **(202) 586­2945.** 

**12­11**