CHAPTER 12. MANUFACTURER IMPACT ANALYSIS


TABLE OF CONTENTS


12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY ................ 12-1


12.1.1 Phase 1: Industry Profile ........................................ 12-2


12.1.2 Phase 2: Industry Cash-Flow Analysis .............................. 12-2


12.1.3 Phase 3: Subgroup Impact Analysis ......................... 12-3


12.1.3.1 Major Manufacturer Subgroups - Superclasses ................ 12-4


12.1.3.2 Small-Business Subgroup ................................. 12-5


12.2 MANUFACTURER KEY ISSUES ....................................... 12-6


12.3 GRIM INPUTS AND ASSUMPTIONS ................................... 12-8


12.3.1 Overview of GRIM ............................................. 12-8


12.3.2 Financial Parameters ............................................ 12-8


12.3.3 Corporate Discount Rate .................................... 12-10


12.3.4 Shipments .................................................... 12-12


12.3.5 Production Costs .............................................. 12-13


12.3.6 Conversion Costs .............................................. 12-13


12.3.7 Markup Scenarios ............................................. 12-13


12.3.7.1 Preservation-of-Gross-Margin-Percentage Scenario ............ 12-14


12.3.7.2 Preservation-of-Operating-Profit Scenario ................... 12-14


12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED ............ 12-16


12.4.1 Conversion Capital Expenditures ................................. 12-16


12.4.2 Product Conversion Expenses .................................... 12-24


12.4.3 Industry Financial Impacts ....................................... 12-25


12.4.3.1 Trial Standard Levels ................................... 12-25


12.4.3.2 Impacts on Industry Net Present Value ...................... 12-25


12.4.3.3 Impacts on Annual Cash Flow ............................ 12-27


12.4.4 Other Impacts ................................................. 12-30


12.4.4.1 Employment .......................................... 12-30


12.4.4.2 Production Capacity .................................... 12-31


12.4.4.3 Exports .............................................. 12-31


12.4.4.4 Cumulative Regulatory Burden ............................ 12-32


12.4.4.5 Impacts on Small Businesses ............................. 12-33


12.4.4.6 Worker Safety ......................................... 12-33


12.4.4.7 Other Engineering Issues ................................ 12-33


12.4.5 Summary of Impacts for Liquid-Immersed Superclass ................. 12-34


12.5 MANUFACTURER IMPACT ANALYSIS - MEDIUM-VOLTAGE, DRY-TYPE 12-38


12.5.1 Conversion Capital Expenditures ................................. 12-38


12.5.2 Product Conversion Expenses .................................... 12-44


12.5.3 Industry Financial Impacts ....................................... 12-45


12.5.3.1 Trial Standard Levels ................................... 12-45


12.5.3.2 Impacts on Industry Net Present Value ...................... 12-45


12.5.3.3 Impacts on Annual Cash Flow ............................ 12-46


12.5.4 Other Impacts ................................................. 12-48


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12.5.4.1 Employment .......................................... 12-48


12.5.4.2 Production Capacity .................................... 12-49


12.5.4.3 Exports .............................................. 12-50


12.5.4.4 Cumulative Regulatory Burden .................. 12-50


12.5.4.5 Impacts on Small Businesses ............................. 12-51


12.5.5 Summary of Impacts for Medium-Voltage, Dry-Type Superclass ......... 12-51


Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry ....... 12-10 

Table 12.3.2 Non-Production Cost Markups for the Preservation-of-Operating-Profit Scenario 

Table 12.4.9 Changes in Liquid-Immersed Industry Net Present Value, Preservation-of-


Operating-Profit Scenario .................................... 12-26


Table 12.4.8 Changes in Liquid-Immersed Industry Net Present Value, Preservation-of-Gross-


Margin-Percentage Scenario ..................................... 12-26


Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product Conversion


Expenses .................................................... 12-25


Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital


Expenditures ................................................. 12-24


Table 12.4.5 Summary of Liquid-Immersed Distribution Transformer Amorphous Core-Cutting


Equipment Capital Expenditures .................................. 12-22


Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional Core-


Cutting Equipment Capital Expenditures ........................... 12-22


Table 12.4.3 Summary of Additional Conventional Core-Cutting Machine Requirements for


Liquid-Immersed Superclass ..................................... 12-21


Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous Annealing


Furnace Capital Expenditures .................. 12-20


Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional Annealing


Furnace Capital Expenditures .................................... 12-19


LIST OF TABLES 

............................................................ 12-15


Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010) ....... 12-30


Table 12.5.1
 Calculation of Core-Mitering Capacity Multiplier for Design Line 9 ...... 12-40


Table 12.5.2
 Calculation of Core-Mitering Machines Needed for Design Line 9 ....... 12-41


Table 12.5.3
 Calculation of Core-Mitering Machines Needed for Design Line 10 ...... 12-41


Table 12.5.4
 Calculation of Core-Mitering Machines Needed for Design Line 11 ...... 12-42


Table 12.5.5
 Calculation of Core-Mitering Machines Needed for Design Line 12 ...... 12-42


Table 12.5.6
 Calculation of Core-Mitering Machines Needed for Design Line 13 ...... 12-43


Table 12.5.7
 Summary of MV, Dry-Type Distribution Transformer Core-Cutting Equipment


Capital Expenditures .......................................... 12-43


Table 12.5.8 Summary of MV, Dry-Type Distribution Transformer Conversion Capital


Expenditures ................................................. 12-44


Table 12.5.9 Summary of MV, Dry-Type Distribution Transformer Product Conversion


Expenses ................................................ 12-44


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Table 12.5.10 Changes in MV, Dry-Type Industry Net Present Value, Preservation-of-Gross-


Margin-Percentage Scenario ..................................... 12-46


Table 12.5.11 Changes in MV, Dry-Type Industry Net Present Value, Preservation-of-


Operating-Profit Scenario ....................................... 12-46


Table 12.5.12 Projected Change in Labor Expenditures, MV, Dry-Type (2010) ......... 12-49


LIST OF FIGURES 

Figure 12.3.1 Using the GRIM to Calculate Cash Flow ............................. 12-8


Figure 12.4.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage Scenario,


Liquid-Immersed .................................................... 12-27


Figure 12.4.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, Liquid-


Immersed .......................................................... 12-29


Figure 12.5.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage Scenario,


MV, Dry-type ....................................................... 12-47


Figure 12.5.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, MV, Dry-


type ............................................................... 12-48


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CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY 

In determining whether a standard is economically justified, the Secretary of Energy 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.”a The legislation also calls for an 

assessment of the impact of any lessening of competition as determined in writing by the 

Attorney General. The Department conducted the manufacturer impact analysis (MIA) to 

estimate the financial impact of efficiency standards on manufacturers of distribution 

transformers and to assess the impact of such standards on employment and manufacturing 

capacity. The MIA has both quantitative and qualitative components. The quantitative part of 

the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an industrycash-flow model adapted for this rulemaking. The key GRIM inputs relate to industry cost 

structure, shipments, and product pricing. The GRIM’s key output is the industry net present 

value (INPV). The model estimates the financial impact of higher efficiency standards by 

comparing changes in INPV between the base case and the various trial standard levels (TSLs). 

The qualitative part of the MIA addresses factors such as the material supply chain, 

manufacturing techniques and equipment, market and product trends, and includes a subgroup 

assessment of the impacts on small manufacturers. 

In the Department’s Framework Document published on November 1, 2000, DOE 

outlined the procedural and analytical approaches for the MIA. As outlined, the Department 

conducted the MIA in three phases. Phase 1, “Industry Profile,” consisted of preparing an 

industry characterization, including data on market shares, sales volumes and trends, pricing, 

employment, and financial structure. Phase 2, “Industry Cash Flow,” focused on the industry as 

a whole. Using publicly available information developed in Phase 1, the Department adapted the 

GRIM’s generic structure to perform an analysis of the impact of distribution transformer energy 

conservation standards on the industry cash flow. In Phase 3, the “Sub-Group Impact Analysis,” 

DOE conducted interviews with several manufacturers. Those interviewed included small, 

medium, and large manufacturers providing a representative cross-section of the U.S. distribution 

transformer industry. During these interviews, the Department discussed engineering, 

manufacturing, procurement, and financial topics specific to each company, and also obtained 

each manufacturer’s view of the potential impacts of standards on the industry as a whole. The 

interviews provided valuable information that the Department used to evaluate the impacts of a 

standard on manufacturers’ cash flows, manufacturing capacities, and employment levels. 

This chapter provides details on the approach the Department followed in developing the 

MIA for this rulemaking. 

a

 The D epartment of Energy’s standards program for commercial equipment is conducted under Title III, Part C of the 

Energy Policy and Conservation Act (EPCA), 42 U.S.C. 6311-6317. 

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12.1.1 Phase 1: Industry Profile 

In Phase 1 of the MIA, the Department prepared a profile of the distribution transformer 

industry that built on the market and technology assessments prepared for the advance notice of 

proposed rulemaking (ANOPR) analysis. Prior to initiating the detailed impact studies, DOE 

collected information about the present and past industry structure and market characteristics for 

distribution transformers—including information on national shipments, market leaders, and cost 

structures for a range of manufacturers. In creating the industry profile, the Department gathered 

information about product construction, product characteristics, manufacturing techniques, trends 

in the number of firms, and market characteristics. 

The industry profile included a topdown cost analysis of the distribution transformer 

industry that DOE used to derive initial cost and financial inputs for the GRIM, e.g., revenues; 

material; labor; overhead; depreciation; selling, general, and administrative (SG&A) expenses; 

and research and development (R&D) expenses. The Department used public sources of 

information to calibrate its initial characterization of the industry, including Securities and 

Exchange Commission (SEC) 10-K reports, corporate annual reports, the U.S. Census Bureau’s 

Economic Census, Dun & Bradstreet reports, and industry analysis from Ibbotson Associates. 

12.1.2 Phase 2: Industry Cash-Flow Analysis 

Phase 2 of the MIA focused on the industry-wide financial impacts of standards. Energy 

conservation standards can affect distribution transformer manufacturers in three distinct ways. 

They can: 1) require additional investment, 2) raise production costs, and 3) impact revenues 

through higher prices and, possibly, lower shipments. The analytical tool DOE uses for 

calculating the financial impacts of standards on manufacturers is the GRIM. To quantify these 

impacts in Phase 2 of the MIA, the Department performed a distribution transformer industry 

cash-flow analysis using the GRIM. 

For the industry cash-flow analysis, DOE prepared a set of financial parameters for use in 

the GRIM. The Department originally based these financial parameters on its topdown financial 

analysis but, following discussions with transformer manufacturers, it adjusted them to be more 

representative of the industry. The Department used a similar process during the ANOPR phase 

of the analysis (i.e., public financial reports and manufacturer discussions) to derive the 

manufacturer markups it used to establish manufacturer selling prices in the engineering analysis. 

The MIA production costs and manufacturer selling prices are consistent with the life-cycle cost 

(LCC) analysis, as well as with the engineering analysis, on which DOE based the LCC pricing. 

The Department established this consistency by using the mean values for production costs and 

selling prices in the GRIM, as selected by the LCC’s customer choice model (Monte Carlo 

algorithm). Finally, the Department’s shipments analysis (Chapter 9) provided the basis for the 

shipments projection under each of the TSLs in the GRIM. 

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12.1.3 Phase 3: Subgroup Impact Analysis 

Using average cost and financial assumptions to develop an industry cash-flow model is 

not adequate for assessing differential impacts among subgroups of manufacturers. Smaller 

manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely 

from the industry average could be more negatively impacted. The Department used the results 

of the industry characterization to group together manufacturers exhibiting similar 

characteristics. It established two distinct subgroups of distribution transformer manufacturers 

that could be impacted by efficiency standards: (1) liquid-immersed, and (2) medium-voltage, 

dry-type. A discussion of these superclasses follows in section 12.1.3.1. 

Within each of these superclasses, the Department contacted companies from its database 

of manufacturers (see Chapter 3), which provided a representation of each superclass. The 

Department interviewed small and large companies, subsidiaries and independent firms, public 

and private corporations, and a mix of National Electrical Manufacturers Association (NEMA) 

members and non-NEMA members. It also made an effort to interview companies that had been 

interviewed for the engineering analysis in 2002, as well as those that had previously participated 

in the rulemaking process. The purpose of the meetings was to enhance the Department’s 

understanding of how manufacturer impacts change with each of the TSLs. A copy of the 

interview guides for each of the two superclasses can be found in Appendix 12.A. 

The Department also evaluated the impact of the energy conservation standards on small 

businesses. Small businesses, as defined by the Small Business Administration (SBA) for the 

distribution transformer manufacturing industry, are manufacturing enterprises with 750 or fewer 

employees. The Department conducted telephone interviews with four small businesses, to 

determine if the standard could result in differential impacts on these companies. A copy of the 

interview guide for these interviews can be found in Appendix 12.B. Discussion of the purpose 

of the small-business interviews and the small-business subgroup methodology follows in section 

12.1.3.2. Two of the manufacturers interviewed in the lengthier, face-to-face interviews are also 

categorized as small businesses. 

The Department contacted material and equipment suppliers to the distribution 

transformer industry to enhance its understanding of the context in which transformer 

manufacturers operate and to assist in quantifying conversion costs. The Department conducted 

interviews with the two domestic suppliers of electrical core steel and with two core steel 

distributors. The domestic suppliers of core steel are large corporations that sell a broad range of 

steel products, one of which is electrical core steel. The core steel distributors offer 

manufacturers a varying degree of processing, ranging from basic slit-to-width rolls to 

prefabricated cores (both stacked and wound-core configurations). The Department also spoke 

with four equipment suppliers, including manufacturers of both distributed gap and mitered core 

processing machines, and two manufacturers of annealing furnaces. The information from these 

discussions was helpful in understanding comments and concerns expressed by manufacturers, as 

well as in estimating the conversion capital expenditures used in the GRIM. 

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To prepare the liquid-immersed industry conversion costs for switching to amorphous 

material at TSLs 5 and 6 (and also TSLs 3, 4, and A), the Department spoke with the only 

domestic supplier of amorphous ribbon and several transformer manufacturers who had 

experience working with amorphous material. Through this dialogue, the Department gained a 

better understanding of manufacturing amorphous core transformers, including issues 

surrounding core processing equipment, annealing furnaces, and material handling. In response 

to comments on the proposed rule, DOE subcontracted a consultancy, Matrix Power, Inc., with 

expertise in amorphous core transformer materials, design, and production. Matrix Power 

reviewed the amorphous-related conversion capital expenditure estimates from the proposed rule 

and compared them to its own independent (previous) estimates. Through this process, DOE 

revised and refined its proposed rule estimates for manufacturers’ capital expenditures in 

converting to amorphous technology. 

12.1.3.1 Major Manufacturer Subgroups - Superclasses 

The Department subdivided the distribution transformer industry into two ‘superclasses’: 

liquid-immersed and medium-voltage, dry-type. (The low-voltage, dry-type superclass was 

removed after the ANOPR, because the Energy Policy Act of 2005, enacted in August 2005, 

prescribed standards for these types of transformers.) These superclasses take into account 

differences among the manufacturers, including the equipment and tooling used, product designs, 

customer types, and the characteristics of the markets in which the manufacturers operate. The 

Department believes that modeling the industry in two separate subgroups offers a robust 

analytical approach, for three reasons: 

1.	 Customer profiles and market mechanisms - Generally, the profiles of the majority of 

customers purchasing transformers and the manner in which they are built and sold within 

each of the two superclasses are distinct. Discussion of customer profiles and distribution 

chains can be found in the LCC analysis (Chapter 8). 

2.	 Manufacturing equipment and transformer design - The equipment necessary for 

production and the methods by which manufacturers build transformers are different for 

each of the superclasses. For example, in the liquid-immersed superclass, transformer 

cores tend to be wound, requiring distributed-gap core-winding machines, annealing 

furnaces, tanking machines, and other equipment that is only used in this superclass. 

Accordingly, the capital equipment investment necessary for compliance with a particular 

TSL typically differs between the two superclasses. 

3.	 Industry structure - Reviewing the database of transformer manufacturers, the Department 

observed that many companies operate and specialize in one of the distribution 

transformer superclasses. For large companies that operate in both superclasses, each 

manufacturing facility tends to be dedicated to producing transformers from one of the 

superclasses. Thus, the industry naturally breaks down into two superclasses (actually, 

three superclasses, if low-voltage, dry-type is considered). 

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The Department conducted structured, detailed, face-to-face interviews with six 

manufacturers, one of which produces transformers in both superclasses. Two of the six 

manufacturers are small businesses. Three of the manufacturers produce medium-voltage, drytype transformers, collectively representing more than an estimated 70 percent of the U.S. 

medium-voltage, dry-type market. Four of the manufacturers produce liquid-immersed 

transformers, collectively representing more than an estimated 70 percent of the U.S. liquidimmersed market. 

12.1.3.2 Small-Business Subgroup 

The Department undertook a small-business subgroup analysis to assess the importance 

of small businesses within the distribution transformer industry and to understand how the 

impacts of standards on small business might be different from those on large manufacturers. 

Small businesses, as defined by the SBA for the distribution transformer manufacturing industry, 

are manufacturing enterprises with 750 employees or fewer.b To prepare a list of eligible 

companies, the Department constructed a transformer manufacturers’ database containing 

available data from 11 sources, including the Department’s stakeholder contact list for this 

rulemaking, the Oak Ridge National Laboratory determination analysis database, the 

Underwriters Laboratory (UL) certification database, the NEMA membership list, and the 

Transformer Association membership list. (Additional details about the sources used are 

discussed in the market and technology assessment, Chapter 3.) The Department then selected 

small businesses and contacted them to assess their interest in participating in an interview. If a 

small business was interested, the Department sent them a short questionnaire and scheduled a 

date for discussion. A copy of the small-business interview guide can be found in Appendix 

12.B. 

In addition to the two small businesses that underwent detailed, structured, face-to-face 

interviews, DOE interviewed four additional small businesses by telephone. Three of the small 

businesses interviewed by telephone produce medium-voltage, dry-type transformers, and one of 

them produces liquid-immersed transformers. 

The Department’s database of transformer manufacturers includes approximately 28 

small businesses affected by this rulemaking, most of which have fewer than 100 employees. 

Small businesses operate in both superclasses. The database identifies 15 small businesses that 

sell liquid-immersed distribution transformers and 20 that sell medium-voltage, dry-type units. 

The total of these two groups exceeds 28, because some small businesses operate in more than 

one superclass. Upon reviewing the material provided by the small businesses interviewed, the 

Department concluded that using the GRIM was not the best way to capture and represent the 

differential impacts on small business. Instead, the differential impacts on small business are 

discussed qualitatively for each of the two superclasses in this chapter. 

b

 Sma ll Busin ess Ad ministratio n - www.sba.gov/size/indextableofsize.html 

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12.2 MANUFACTURER KEY ISSUES 

The first question in each MIA interview guide asks, “What are the key issues for your 

company regarding the distribution transformer energy conservation standard rulemaking?” This 

open question initiated the dialogue with the manufacturers, enabling them to identify key points 

that the Department would explore and discuss during the interview. This section lists those 

issues that the manufacturers interviewed raised most often. 

Manufacturers indicated that, for the most part, the risks associated with these issues 

increase with increasing TSL. Many of these issues are discussed later in this chapter. 

•	 Core steel availability - Manufacturers expressed concern over whether sufficient 

quantities of high-grade core steels needed for the construction of energy-efficient 

distribution transformers would be available. Manufacturers stated that this concern is 

amplified by recent core steel availability problems in the U.S. market. Not only will the 

standard drive the market to use higher grades of steel (which are thinner, and therefore 

take more time for steel companies to manufacture), but the quantities (pounds of steel) 

per transformer also will (typically) increase. Transformer manufacturers are concerned 

that these compounding factors may further limit the availability of core steel. 

•	 Core steel price volatility and uncertainty - Starting in late 2003, core steel prices started 

to increase, and increased dramatically after mid-2004. For some manufacturers, core 

steel prices have more than doubled since 2003. In response to these and other material 

input cost increases, transformer manufacturers have been raising their own prices. 

However, manufacturers reported that they have not passed all input cost increases 

through to customers. Furthermore, manufacturers questioned the cost-effectiveness of 

energy conservation standards under higher steel prices. They commented that higher 

transformer selling prices (driven by the higher material inputs prices), would erode 

customer cost savings and lengthen the payback periods of transformers under standards. 

The Department’s core steel market analysis is contained in Appendix 3A of this 

technical support document (TSD). Core steel price uncertainty is addressed in the 

Department’s core steel price scenarios as part of the engineering analysis and the LCC 

analysis (see Chapter 5 of this TSD, particularly Appendix 5C, and Chapter 8, particularly 

Appendix 8D). 

•	 Dimensional and physical constraints - Manufacturers expressed concern over meeting 

the Department’s efficiency standard and their customers’ dimensional and physical 

constraints simultaneously. In particular, manufacturers voiced concern regarding retrofit 

applications, mining applications, telephone pole capacities, and other installations where 

transformers have to comply with dimensional or physical constraints. 

•	 Enforcement of efficiency standard - Manufacturers expressed concern over how the 

Department intends to enforce the standards, to make sure all manufacturers, particularly 

of transformers imported to the U.S., comply with the regulations. 

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•	 Definition loopholes - Manufacturers cautioned that, if the standard is set above a certain 

level, some customers may start looking for standards relief by specifying transformers 

from the Department’s exemption list and using them in general purpose applications. 

•	 Amorphous material - Liquid-immersed transformer manufacturers expressed concern 

that the Department is considering amorphous material at some of its TSLs. In particular, 

they discussed concerns about: 1) the ease of access to the technology, 2) the availability 

of amorphous-core material at quantities necessary to meet industry demand, 3) the level 

of capital equipment investment, 4) increased complexity associated with material 

processing and handling during manufacturing, and 5) the consequent obsolescence of 

existing core fabrication and annealing capacity within the industry. 

•	 Backsliding - Liquid-immersed transformer manufacturers identified two impacts related 

to backsliding. First, manufacturers reported that they are currently beginning to 

experience these impacts as a result of State standards. Manufacturers reported that, in 

the State that has enacted NEMA’s TP-1 standard for liquid-immersed transformers, 

some utility customers have ceased evaluating their purchases (i.e., selecting transformers 

based on the capitalized cost per watt of no-load and load losses, using A and B factors), 

and are simply purchasing standards-compliant transformers. According to 

manufacturers, while the minimum efficiency of transformers sold in this State has 

increased, the average efficiency has decreased. The first impact of such backsliding is 

that liquid-immersed manufacturers may experience lower revenue. Second, the liquidimmersed market may move from a highly customized market, where U.S. manufacturers 

enjoy a competitive advantage over foreign manufacturers because of their flexibility and 

shorter lead times, to a homogenized, commoditized market. In such a market, 

backsliding in efficiency would be likely to occur as customized designs become less 

common. Ultimately, liquid-immersed manufacturers suggest that this may lead to a 

deterioration in the U.S. manufacturing base of liquid-immersed distribution 

transformers. 

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12.3 GRIM INPUTS AND ASSUMPTIONS 

12.3.1 Overview of GRIM 

The GRIM serves as the main tool for assessing the impact on industry of implementing 

efficiency standards. The GRIM is a financial model of the industry that captures the impact of 

efficiency standards on industry value. The GRIM, illustrated in Figure 12.3.1, carries out a 

standard annual cash-flow analysis, using manufacturer prices, manufacturing costs, shipments, 

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

changes in costs, investments, and associated margins. The GRIM spreadsheet calculates a series 

of annual cash flows, beginning with the base year of the analysis, 2007, and continuing 

explicitly to 2038. The model calculates the INPV by summing the stream of annual discounted 

cash flows during this period.1 

Figure 12.3.1 Using the GRIM to Calculate Cash Flow 

The Department used the GRIM to project cash flows based on standard accounting 

principles and compared changes in INPV between a base case (no mandatory standard) and 

different TSLs for the energy conservation standard (the standard case). The difference in INPV 

between the base case and the standard case(s) represents the financial impact of the standard on 

manufacturers. Appendix 12.C provides more technical detail and user information for the 

GRIM. 

12.3.2 Financial Parameters 

The Department relied on several sources to obtain financial inputs and assumptions for 

the GRIM, including corporate annual reports and the manufacturer interviews. Corporate 

annual reports to the SEC (SEC 10-Ks) provided many of the draft financial inputs to the GRIM.2 

These reports exist for publicly held companies, and are freely available to the general public. 

The Department used these annual reports to derive the following draft GRIM inputs: 

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• Tax rate, 

• Working capital, 

• Selling, general, and administrative expenses, 

• Research and development expenses, 

• Depreciation, 

• Capital expenditures, and 

• Net property, plant, and equipment (i.e., net of accumulated depreciation). 

The Department then revised its own estimates of financial parameters through interviews 

with manufacturers during both the ANOPR and notice of proposed rulemaking (NOPR) phases 

of the rulemaking. It relied on manufacturer input for these revisions for two reasons. First, 

many distribution transformer manufacturers, both large and small, are not public corporations, 

so industry-wide financial data are not readily available. Second, many manufacturers of 

distribution transformers are diverse businesses that participate in markets that are substantially 

different from distribution transformer markets; therefore, the available financial information is 

not clearly representative of the distribution transformer market. Table 12.3.1 provides the 

representative financial parameters that DOE used for both superclasses in the distribution 

transformer GRIM. 

The Department also used information from the SEC 10-K reports to calibrate the 

GRIM’s base case operating profit margin to be representative for the industry. Operating 

margin is defined as earnings before interest and taxes, as a percentage of net revenue. The 

Department calibrated the GRIM to have a 4.9 percent operating margin in the base case. 

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Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry 

Parameter 

Representative Value 

for Liquid-Immersed 

Representative Value 

for MV, Dry-Type 

Tax Rate

 (% of Taxable Income) 

30.0% 33.9% 

Net Working Capital 

(% of Revenues) 

15.4% 10.6% 

SG&A 

(% of Revenues) 

13.5% 14.0% 

R&D 

(% of Revenues) 

1.6% 1.1% 

Depreciation 

(% of Revenues) 

1.6% 1.8% 

Capital Expenditures

 (% of Revenues) 

1.9% 2.1% 

Net Property, Plant, and 

Equipment (% of Revenues) 

16.6% 16.1% 

Source : SEC, 1 0-K R eports, Fiscal Y ears 199 9–2 004 . Revised b ased on discussion with man ufacturers. 

12.3.3 Corporate Discount Rate 

The Department used the weighted-average cost of capital (WACC) for the industry as 

the discount rate to calculate INPV. A company’s assets are financed by a combination of debt 

and equity. The WACC is the total cost of debt and equity weighted by their respective 

proportions in the capital structure of the industry.1 The Department estimated the WACC for 

the industry based on a few representative companies, using the following formula: 

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

The cost of equity is the rate of return that equity investors 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 = risk free rate of return + Beta * risk premium 

where: 

Risk free rate of return = 	 rate of return on a “safe” benchmark investment. In 

practice, investors use a variety of different-maturity 

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Treasury notes to estimate the risk-free rate. The 

Department used a long-term Treasury note return (10-year 

bond return) because this captures long-term inflation 

expectations and is less volatile than short-term rates in the 

GRIM. It estimated the risk-free rate to be 6.2 percent, 

which is the average 10-year Treasury note return from 

1990 to 2003, 

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

the riskless rate, assumed to be 9.2 percent, and 

Beta = the covariance of a stock with the market as a fraction of 

the market’s variance. The Beta equals one if the stock is 

perfectly correlated with the Standard and Poor’s (S&P) 

500 market index. A Beta lower than one means the stock 

is less volatile than the market index. For this analysis, 

DOE assumed Beta to be equal to 0.8. 

Using these inputs, the Department estimated the cost of equity (expected return) to be 

13.6 percent. 

The Department estimated the cost of debt for each company based on the average 

interest rate reported on each company’s SEC 10-K report. It estimated the average cost of debt 

to be 6.6 percent. Assuming a marginal tax rate of 35 percent, the after-tax cost of debt is 4.3 

percent. The Department estimated the debt ratio (debt/total capital) of the industry to be 26 

percent.c The equity ratio estimate is therefore 74 percent. 

Using the formula for the WACC, the Department estimated the industry’s WACC to be 

11.2 percent. Subtracting an estimated inflation rate of 2.3 percent (assumed in the LCC 

analysis), the inflation-adjusted WACC is 8.9 percent. 

For validation, Ibbotson Associates3

 provided a WACC for a set of companies in the 

electric transmission and distribution equipment industry, which the Department assumed to be a 

good surrogate for the distribution transformer industry. The Ibbotson nominal WACC is 12.5 

percent, which corresponds to an inflation-adjusted WACC of 10.3 percent. This is close to the 

Department’s calculated value of 8.9 percent. 

During the manufacturer interviews, no manufacturer expressed disagreement with the 

industry-wide, inflation-adjusted WACC estimate of 8.9 percent (although some individual 

companies have substantially different costs of capital). 

For the reasons discussed above, the GRIM uses an 8.9 percent discount rate for 

calculating the INPV of the distribution transformer industry. 

 In pre vious r ulema kings, D OE base d the d ebt ratio on b ook value; in th is rulemaking a slightly more accurate debt 

ratio is based on market value of equity rather than book value. However, DOE used the book value of long-term debt 

to estim ate the d ebt ra tio. 

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12.3.4 Shipments 

In the national impact analysis, the GRIM used shipment projections derived from the 

Department's shipments model. The shipments model provides an estimate of the annual sales 

and in-service stock of distribution transformers for each year of the forecast period. The 

estimate includes both the age distribution of transformers for each type (according to product 

class) and each transformer size. The Department selected an accounting model method to 

prepare shipment scenarios for the base case and the all trial standard levels. Chapter 9 of this 

TSD provides a description of the methodology and analytical model DOE used to forecast 

distribution transformer shipments. 

In its shipments analysis, the Department determined that the demand for distribution 

transformers is relatively inelastic. Therefore, in the long-run, more expensive standardscompliant transformers are not expected to trigger substantial reductions in shipments. 

Transformers are understood to be a ‘must-have;’ thus, DOE modeled the shipments analysis 

with a small price-elasticity. During the MIA interviews, several manufacturers expressed their 

view that shipments are subject to a greater price elasticity of demand than the Department 

estimated. 

The manufacturers informed the Department of three mechanisms by which higher 

standards could reduce shipments. First, manufacturers commented that transformer budgets are 

often finite line items in a utility’s overall budget, and as costs per unit increase, it is unlikely that 

utilities’ transformer budgets will increase proportionately. Thus, proactive maintenance 

programs that replace and/or upgrade transformers nearing the end of their useful life will be 

reduced (on a unit basis), resulting in more failures and outages, and lower system reliability. 

The installed capital of the distribution network will be worked harder, and transformers will 

only be fixed upon failure. Second, utilities may increase their purchase of multi-voltage 

(primary) distribution transformers, enabling them to reduce inventories. Multi-voltage primary 

transformers are able to operate at more than one primary voltage, enabling utilities to reduce the 

number of transformers kept in stock for emergencies and upgrades. Third, engineers who 

specify transformer orders may look at an application and select a slightly lower kVA rating than 

they ordinarily would have because of the higher (standards-compliant) price. For example, a 

customer who would have purchased a 50 kVA unit for an application may select a 37.5 kVA 

unit because of the cost increase for a standards-compliant 50 kVA transformer. Working a 

lower kVA unit with a higher average load reduces its operating life (compared to the larger kVA 

operating the same load); however, on a first-cost basis, the specifier will have saved money. In 

the shipments analysis, DOE did not model this risk of derating transformers. Furthermore, if 

lower kVA ratings are specified, the actual per-unit loading may move away from the assumed 

50 percent for liquid-immersed and medium-voltage, dry-type transformers, resulting in greater 

load losses and lower system efficiency than DOE modeled in the national impact analysis. 

Finally, the Department’s shipments analysis did not take into account any constraints on 

the availability of materials for manufacturing transformers. As noted in section 12.2, 

manufacturers expressed concern during the interviews about the availability of core steel. The 

transformer materials supply chain has been experiencing consolidation over the years, such that 

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now, manufacturers would be vulnerable to changes in price or availability of wire, copper sheet, 

electrical paper, mineral oil, and other critical materials for building a transformer. Such input 

price changes would be passed through and would impact transformer prices. Since the 

Department’s engineering analysis assumed flat equipment prices in real terms over time, its 

shipments analysis could not capture such second-order impacts for any given set of equipment 

prices. 

12.3.5 Production Costs 

During the engineering analysis, the Department used transformer design software to 

create a database of designs spanning a broad range of efficiencies for each of the representative 

units. This design software generated a bill of materials, with information including pounds of 

core steel, pounds of conductor, insulation, ducting, and tank or enclosure size. The software 

also provided information pertaining to the labor necessary to construct the transformer, 

including the number of turns in the windings, and core dimensions, including stack height. All 

the components from this bill of materials and labor estimate were combined with fixed hardware 

costs, such as bushings, busbar, and terminals. The Department then applied manufacturer 

markups to allow for scrap, handling, factory overhead, and non-production markups to estimate 

the manufacturer selling price. Details on the derivation of the manufacturer selling prices and 

discussion of manufacturer markups are in Chapter 5. The Department derived the 

manufacturer’s production cost inputs (for the designs selected by the LCC customer choice 

model) for the GRIM from the engineering analysis databases. 

12.3.6 Conversion Costs 

Efficiency standards typically cause manufacturers to incur conversion costs prior to the 

standard effective date to bring their production facilities and product designs into compliance 

with the standard. For the purpose of the MIA, DOE classified these conversion costs into two 

major categories. Conversion capital expenditures are investments in property, plant, and 

equipment to adapt or change existing production facilities so that new product designs can be 

fabricated and assembled under the standard. Product conversion expenses relate to research, 

development, testing, and marketing that aims to make product designs comply with the new 

efficiency standard. Conversion costs specific to each superclass are discussed separately in 

sections 12.4 and 12.5. 

12.3.7 Markup Scenarios 

To estimate the manufacturer selling price of distribution transformers, the Department 

applied markups to the production costs. In an effort to gather information on industry pricing 

scenarios, DOE invited manufacturers to discuss how standards might change the industry’s 

profits. In discussions on issues such as the impact of higher core steel prices and transformer 

pricing scenarios, DOE sought manufacturers’ insights regarding how increased production costs 

under standards might be passed through to their customers. All of the manufacturers 

interviewed had applied one or more price increases within the last several years to recover some 

of the production cost increases resulting from higher commodity prices. A few of the larger 

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manufacturers had recently established with their customers pricing contracts that had a base 

price and a variable “surcharge.” The surcharge is adjusted on a periodic (e.g., monthly or 

quarterly) basis, and is calculated based on the costs of the transformer manufacturer’s major 

materials (e.g., core steel). All manufacturers discussed the recent material price increases within 

the context of the Department’s questions about markups. 

For the MIA, the Department considered two distinct markup scenarios, which are 

discussed in the following sections. 

12.3.7.1 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. As production cost 

increases with efficiency, this scenario implies that the absolute dollar markup will increase. The 

Department assumed the non-production cost markup—which includes SG&A expenses; 

research and development expenses; interest; and profit—to be 1.25. This markup is consistent 

with the one the Department assumed in the engineering analysis and the base case of the GRIM. 

Manufacturers believe it is optimistic to assume that as their production costs increase in 

response to an efficiency standard, they would be able to maintain the same gross margin 

percentage markup. Therefore, the Department assumes that this scenario represents a high 

bound to industry profitability under an energy-conservation standard. 

12.3.7.2 Preservation-of-Operating-Profit Scenario 

Operating profit is defined as earnings before interest and taxes. The implicit assumption 

behind this markup scenario is that the industry can maintain its operating profit (in absolute 

dollars) after the standard. The industry would do so by passing through its increased costs to 

customers without increasing its operating profits in absolute dollars. The Department 

implemented this scenario in the GRIM by setting the non-production cost markups for each TSL 

to yield approximately the same operating profit in the standards cases in the year after standard 

implementation (2011) as is yielded in the base case. This scenario is less optimistic than the 

preservation-of-gross-margin-percentage scenario. For this scenario, the financial metrics of 

return on sales (percent) and return on invested capital (ROIC) decline with increasing TSL, 

indicating reduced industry profitability. The non-production cost markups under this scenario 

are summarized in Table 12.3.2. 

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Table 12.3.2 Non-Production Cost Markups for the Preservation-of-Operating-Profit 

Scenario 

Superclass 

Trial Standard Level 

Base 

Case 1 2 D C B 3 4 A 5 6 

LiquidImmersed 

1.250 1.246 1.244 1.242 1.240 1.239 1.240 1.238 1.230 1.222 1.208 

MV, DryType 

1.250 1.248 1.246 NA NA NA 1.243 1.237 NA 1.219 1.219 

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12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED 

The liquid-immersed transformer industry is characterized by a high degree of flexibility, 

total ownership cost evaluation, and sophisticated customers. Liquid-immersed customers 

typically use a Total Owning Cost evaluation (see the Total Owning Cost section of Chapter 3, 

Section 3.6), which minimizes the sum of first cost and the present value of future core and coil 

losses that a given transformer will experience over its lifetime. Because these evaluation 

formulae vary from customer to customer, and because material prices fluctuate on a daily basis, 

the liquid-immersed industry evolved to be inherently flexible and responsive to customer needs. 

As the Department understands it, there are approximately 25 companies active in the 

liquid-immersed market in the U.S., some of which are branding units manufactured by another 

company. The Department estimated that the nine or so largest liquid-immersed transformer 

manufacturing companies collectively control 90 percent of the market or more. They are (in 

alphabetical order): ABB, Central Maloney, Cooper Power, ERMCO, GE Prolec, Howard 

Industries, Kuhlman Electric, Pauwels, and Power Partners. Of these, the Department estimated 

that the top three companies supply approximately 60 percent of the liquid-immersed market. 

For more information on the transformer market, refer to the market and technology assessment 

(Chapter 3). 

12.4.1 Conversion Capital Expenditures 

Through its interviews with manufacturers, the Department learned that the conversion 

capital expenditures that liquid-immersed transformer manufacturers would have to make in 

response to an energy-conservation standard fall into three major categories: 1) annealing furnace 

capacity, 2) core-cutting and core-winding equipment, and 3) miscellaneous, including buildings 

and coil winding equipment. Manufacturers of liquid-immersed transformers provided capital 

cost estimates for each of these capital expenditure categories. The Department used the 

estimates provided by industry for comparative purposes and prepared its own bottom-up 

estimates of conversion capital expenditures. It based the bottom-up estimates on the 

Department’s understanding of typical manufacturing processes at liquid-immersed transformer 

facilities. This understanding is based on manufacturer interviews and discussions with suppliers 

of equipment to the industry. The Department obtained typical equipment throughput and cost 

information directly from equipment suppliers and reconciled it with information provided by 

manufacturers. Furthermore, it obtained transformer design parameters that vary with efficiency 

level (e.g., core weight) from the engineering analysis and used them to estimate the equipment 

capacity increases associated with increasing efficiency. 

In the liquid-immersed superclass, TSLs 1, 2, D, C, and B would require only 

conventional electrical steels. In contrast, TSL6 would require all of the liquid-immersed design 

lines to convert to amorphous core technology. TSL5 would require three of the five liquidimmersed design lines (DL3–DL5) to convert to amorphous core technology. According to the 

LCC customer choice model, 95 percent of the design line 4 transformers purchased at TSL3 and 

TSL4 would likely be amorphous. Similarly, TSLA would likely trigger partial conversion to 

amorphous technology for both design line 4 (about 50 percent of transformers are amorphous) 

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and design line 5 (about 85 percent of transformers are amorphous). During the interviews, 

manufacturers discussed several reasons why, though technologically feasible, amorphous 

material is, in their opinion, not a good technology option for regulatory consideration: 

1. Possible difficulty of access to the technology, including very limited sourcing 

options, 

2. Concerns over availability of amorphous-core material at quantities necessary to meet 

industry demand, 

3. The high level of capital equipment investment required (and the stranding of existing 

assets, particularly core-cutting equipment and annealing furnaces), and 

4. Increased complexity associated with material processing and handling. 

The Department recognizes that the manufacturing process for amorphous core 

transformers is completely different from that for silicon steel transformers. TSL6 would render 

obsolete a large portion of the liquid-immersed manufacturing equipment, primarily the corecutting equipment and the annealing furnaces. The Department estimates that the industry’s 

stranded assets at TSL6 would represent a loss of approximately $49 million. TSL5 would not 

render obsolete as much equipment as TSL6, because TSL5 would require conversion to 

amorphous core technology for only three of the five design lines. The Department estimates 

that the industry’s stranded assets at TSL5 would represent a loss of approximately $13 million. 

Similarly, the partial conversion to amorphous technology at TSLs 3, 4, and A would strand 

approximately $8.2 million, $8.2 million, and $3.5 million, respectively. The Department’s 

stranded asset estimates represent lower bounds to the book values of obsolete core-cutting 

equipment, annealing furnaces, and miscellaneous equipment such as conveyers, cranes, and 

other capital equipment at each TSL. 

The Department decided to conduct the MIA under a scenario where manufacturers 

would convert their facilities to produce amorphous core transformers for TSLs where the DOE 

customer choice model indicated selection of amorphous core transformers in high volume. The 

Department is not explicitly evaluating the engineering scenario, which would imply, if modeled 

in the MIA, that employment would be shifted overseas to produce amorphous cores. During the 

manufacturer interviews, DOE learned that it was likely that many of the U.S. manufacturers 

would convert their facilities to produce amorphous cores if the standard required or otherwise 

triggered significant volumes of amorphous core transformer purchases - manufacturers indicated 

that production of cores is an important part of the value chain and would likely choose to 

continue to produce them. The Department believes that both transformer production costs and 

transformer pricing would be similar under the two scenarios. The difference between the two 

scenarios would affect only the allocation of the production costs. In the MIA, instead of 

manufacturers buying purchased cores (constructed with foreign labor), paying for trans-oceanic 

shipping, and lowering their labor costs, manufacturers would allocate costs differently by 

purchasing amorphous material and employing domestic labor to manufacture the amorphous 

cores. Since the decision a manufacturer makes between outsourcing amorphous core production 

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and converting its facilities to produce amorphous core transformers depends on multiple 

competing factors, including the tradeoff between labor and trans-oceanic shipping costs, DOE 

believes that transformer production costs (and ultimately pricing) in the two production 

scenarios would be similar. It is not obvious whether manufacturers would purchase amorphous 

cores from abroad or produce them on-site (and manufacturers are not sure which path they 

would follow today) - this further implies that the cost difference between the two scenarios is 

likely not major. For these reasons, it is appropriate (in the MIA) to use the pricing information 

(based on purchased cores) together with appropriate conversion capital cost estimates. 

The Department recognizes that TSLs 3, 4, A, and 5 have the potential to severely distort 

and disturb both liquid-immersed product purchase decisions across design lines and 

manufacturers’ operations. These distortions would arise because some design lines would be 

constructed with amorphous cores but some would still be designed with conventional grainoriented electrical steels (and for TSLs 3, 4, and A, some design lines might be constructed of 

both amorphous and silicon core steels). A significant burden, which is difficult to quantify 

using the GRIM, would be placed on industry if it had to maintain parallel manufacturing 

operations for both conventional and amorphous core technology. 

Based on the manufacturer interviews, TSLs 5 and 6 would cause liquid-immersed 

transformer manufacturers to decide whether they would tool for amorphous technology, attempt 

to purchase assembled amorphous cores, or exit the industry. Manufacturers indicated that those 

who chose to produce amorphous cores themselves would face a critical decision about whether 

or not to relocate outside of the U.S., since much of their equipment would become obsolete. 

This issue of foreign relocation also exists for TSLs 3, 4, and A, to a lesser extent. 

The additional conventional annealing furnace capacity that the industry would need at 

TSLs 1, 2, D, C, and B is directly related to the increase in wound core mass that would be 

processed by the industry at each TSL. The Department assumed that a typical, conventional 

annealing furnace that can process 6,000 tons of core steel per year has an installed cost of $2.3 

million. Based on the engineering analysis and those designs selected by the LCC analysis 

customer choice model, the Department estimated increases in wound-core mass processed at 

TSLs 1, 2, D, C, and B to be three percent, two percent, one percent, seven percent, and six 

percent, respectively. Additional conventional annealing furnace capacity is not necessary at 

TSLs 3, 4, A, 5, and 6 because of the partial or complete conversion to amorphous steel. For 

TSL6, no additional conventional annealing furnace capacity would be necessary because all 

production would convert to amorphous core technology. For TSL5, no additional conventional 

annealing furnace capacity would be necessary because some of the annealing furnaces currently 

used for DL3–DL5 would become available for use in DL1–DL2. (This transfer of capacity is 

also accounted for in the Department’s stranded asset estimate above, to avoid overestimation of 

stranded assets.) Similarly, capacity could be transferred for TSLs 3, 4, and A as design line 4 

(TSLs 3, 4, and A) and design line 5 (TSLA) are partially converted to amorphous technology. 

The Department estimated that conventional annealing furnace capital expenditures for the 

industry would be $4.5 million, $2.3 million, $2.3 million, and $6.8 million, and $4.5 million for 

TSLs 1, 2, D, C, and B, respectively, as shown in Table 12.4.1. 

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Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional 

Annealing Furnace Capital Expenditures 

Trial Standard Level 

TSL1 TSL2 TSLD TSLC TSLB 

Additional Wound-Core Mass (Tons/yr) 6,306 4,162 2,635 12,064 10,167 

Additional Annealing Furnaces Needed by 

Industry 2 1 1 3 2 

Annealing Furnace Conversion Capital 

Expenditure (2006$, Millions) 4.5 2.3 2.3 6.8 4.5 

The new amorphous annealing furnace capacity that the industry would need at TSLs 3, 

4, A, 5, and 6 is directly related to the amorphous core mass that would be processed by the 

industry at each TSL. For the NOPR, based on information obtained from liquid-immersed 

transformer manufacturers and annealing furnace suppliers, the Department estimated that a 

typical amorphous annealing furnace, which can process 1,005 tons of core steel per year, has an 

installed cost of $0.54 million. In response to comments on the proposed rule, DOE 

subcontracted a consultant, Matrix Power, Inc., with expertise in amorphous core transformer 

materials, design, and production. Matrix Power reviewed the amorphous-related conversion 

capital expenditure estimates from the proposed rule and compared them to its own independent 

(previous) estimates. One change in the analysis that came about through this process was to 

model the amorphous annealing furnace capacity (i.e., oven capacity) as a conveyer-type system 

instead of the bell furnace system assumed for the proposed rule. The expert believes that the 

conveyer-type system would be more cost-effective and would likely be employed. The installed 

cost estimate for the final rule is $0.48 million for a 6,000 ton per year system. The Department 

estimated that amorphous annealing furnace capital expenditures for the industry would be $3.3 

million, $3.3 million, $3.3 million, $7.6 million, and $22 million for TSLs 3, 4, A, 5, and 6, 

respectively, as shown in Table 12.4.2. 

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Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous 

Annealing Furnace Capital Expenditures 

Trial Standard Level 

TSL3 TSL4 TSLA TSL5 TSL6 

Amorphous Core Steel Mass 

(Tons/yr) 39,983 39,983 41,715 92,149 278,072 

Amorphous Conveyer-Type 

Ovens Needed by Industry 7 7 7 16 47 

Amorphous Conveyer-Type 

Ovens, Conversion Capital 

Expenditure (2006$, Millions) 

3.3 3.3 3.3 7.6 22 

TSLs 3, 4, A, and 5 do not require additional, conventional core-cutting machines 

because capacity can be transferred from the design lines that are converting to amorphous steel. 

TSL6 does not require additional, conventional core-cutting machines because all design lines 

would convert to amorphous steel. The Department assumed that the additional, conventional 

core-cutting equipment required by the industry for TSLs 1, 2, D, C, and B is directly related to 

the increase in core weight at each TSL. Based on discussions with a leading supplier of woundcore-cutting equipment to the liquid-immersed superclass, the Department calculated the 

processing capacity of a distributed-gap core-winding machine. This equipment supplier 

estimated that a new machine can process 150 feet per minute (ft/min) of M6 core steel, which 

translates into 2,510 pounds per hour (lbs/hr) of core steel. Allowing for set-up time, woundcore removal, and down-time, the Department applied a 75 percent utilization factor to this 

processing speed; as a result, DOE estimated that a single core-cutting machine would be capable 

of processing about 1,882 lbs/hr of core steel. Furthermore, the Department assumed that the 

core-cutting machines operate two shifts per day, 250 days per year. One of these core-cutting 

and winding machines costs approximately $0.21 million installed. 

DOE based its assumption—that the increase in conventional core-cutting capacity 

required at each of TSLs 1, 2, D, C, and B is best approximated using the increases in core 

weight at each TSL—on dialogue with the aforementioned leading equipment supplier. Standard 

core-cutting equipment used by liquid-immersed manufacturers operates at varying linear rates, 

depending on lamination thickness and strip width. The machines maintain approximately a 

constant processing throughput in terms of weight, irrespective of thickness and strip width. For 

each design line, the Department estimated the increases in core steel weight processed at each 

TSL using the engineering analysis and the designs selected by the LCC analysis customer choice 

model. Table 12.4.3 provides detail explaining the estimate of additional core-cutting machines 

needed at each TSL. 

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Table 12.4.3 Summary of Additional Conventional Core-Cutting Machine Requirements 

for Liquid-Immersed Superclass 

Design Line DL1 DL2 DL3 DL4 DL5 

Additional CoreCutting 

Machines, 

Liquid-Immersed 

Approximate 

Number of CoreCutting Machines 

in Base Case 

8.7 20.7 0.7 10.3 8.0 NA 

Ratio of TSL1 Core 

Weight to Base 

Case Core Weight 

0.980 1.032 1.028 1.094 1.045 2 

Ratio of TSL2 Core 

Weight to Base 

Case Core Weight 

0.980 1.026 0.997 1.033 1.059 2 

Ratio of TSLD Core 

Weight to Base 

Case Core Weight 

1.045 1.001 0.997 1.033 1.067 2 

Ratio of TSLC Core 

Weight to Base 

Case Core Weight 

1.067 1.089 1.005 1.033 1.067 4 

Ratio of TSLB Core 

Weight to Base 

Case Core Weight 

1.067 1.089 1.042 1.033 0.996 3 

Notes: The Department used the above matrix to estimate the number of core-cutting machines required for TSLs 1, 

2, D, C, and B. The additional machines (above the 49 machines required for the base case) are obtained by 

difference. For example, at TSL1: (0.98×8.7) + (1.032×20.7) + (1.028×0.7) + (1.094×10.3) + (1.045×8.0) - 48.3 = 

2 machines (rounded up). TSLs 3, 4, A, and 5 do not require additional core-cutting machines because capacity can 

be transferred from the de sign lines tha t are co nverting to am orp hous steel. T SL6 doe s not require add itional, 

conventio nal co re-cutting machines b ecau se all de sign lines w ould conv ert to am orp hous steel. 

The Department estimated that core-cutting equipment capital expenditures for the 

superclass would be $0.4 million, $0.4 million, $0.4 million, $0.8 million, and $0.6 million for 

TSLs 1, 2, D, C, and B, respectively. These capital outlays are relatively small compared to 

those the industry would incur to expand annealing furnace capacity. The core-cutting 

equipment estimates are summarized in Table 12.4.4. 

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Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional 

Core-Cutting Equipment Capital Expenditures 

Trial Standard Level 

TSL1 TSL2 TSLD TSLC TSLB 

Additional Core-Cutting Machines 

Needed by Industry 2 2 2 4 3 

Core-Cutting Conversion Capital 

Expenditure (2006$, Millions) 0.4 0.4 0.4 0.8 0.6 

The Department estimated the amorphous core-cutting capacity at TSLs 3, 4, A, 5, and 6 

based on the total weight of amorphous core steel projected to be processed at each TSL. Based 

on discussions with amorphous core-cutting equipment suppliers and transformer manufacturers, 

the Department estimated that a typical amorphous core-cutting machine can process 1,250 lbs/hr 

of core steel. The Department applied a 75 percent utilization factor to this processing speed; as 

a result, DOE estimated that a single core-cutting machine would be capable of processing about 

938 lbs/hr of core steel. Furthermore, the Department assumed that the core-cutting machines 

would operate two shifts per day, 250 days per year. For the proposed rule, DOE assumed that 

one of these amorphous core-cutting machines costs approximately $0.50 million installed. 

Based on information provided by an expert in amorphous core transformers (Matrix Power, 

Inc.), DOE revised this estimate upwards to $0.59 million. The Department estimated that 

amorphous core-cutting equipment capital expenditures for the superclass would be $13 million, 

$13 million, $14 million, $30 million, and $89 million for TSLs 3, 4, A, 5, and 6, respectively. 

The amorphous core-cutting equipment estimates are summarized in Table 12.4.5. 

Table 12.4.5	Summary of Liquid-Immersed Distribution Transformer Amorphous CoreCutting Equipment Capital Expenditures 

Trial Standard Level 

TSL3 TSL4 TSLA TSL5 TSL6 

Number of Amorphous CoreCutting Machines Needed by 

Industry 

22 22 23 50 149 

Amorphous Core-Cutting 

Conversion Capital Expenditure 

(2006$, Millions) 

13 13 14 30 89 

The Department estimated miscellaneous capital investments, primarily buildings and 

coil-winding equipment, based on a multiplier approach. With respect to buildings, the 

manufacturers indicated that additional building space will be necessary in some cases to 

accommodate expanded annealing furnace capacity. With respect to coil winding equipment, the 

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Department understands that, as transformers become more energy efficient, manufacturers may 

switch from winding coils with aluminum conductor to winding coils with copper. Copper has a 

higher conductivity, allowing for smaller cross-sectional areas and transformer cores. However, 

copper requires more torque when winding to ensure the same winding quality. The higher 

torque can be met by slowing existing machines or winding fewer coils simultaneously. In both 

scenarios, additional coil-winding capacity is required. In order to estimate the total conversion 

capital investments for TSLs 1, 2, D, C, B, 3, 4, and A, including those required for buildings and 

coil-winding equipment, the Department applied a multiplier of 1.05 to the sum of the explicitly 

estimated core-cutting and annealing furnace capital expenditures. It based the 1.05 multiplier on 

information submitted by industry. 

For TSL6, before applying a multiplier to the explicitly estimated amorphous core-cutting 

and annealing furnace capital expenditures, the Department estimated the costs required for the 

portion of the liquid-immersed industry that uses shell designs to convert to using core form 

designs (affects design lines 1 and 2). For TSL5, since design lines 1 and 2 would not have to 

convert to amorphous core technology, the costs of converting to core form designs would be 

zero. For TSL6, the Department estimated the costs of converting the liquid-immersed industry 

fully to core form designs to be $49 million. This estimate included $6 million for lacing tables 

and $43 million for coil-winding equipment. After adding these costs of converting to core form 

designs to the previously tabulated amorphous core-cutting and annealing furnace estimates, the 

Department applied an assumed multiplier of 1.11 at TSL6 to account for miscellaneous capital 

costs. This same multiplier is also assumed for TSL5. In the analysis for the proposed rule, 

DOE had assumed a multiplier of 1.2 - this multiplier has been reduced based on information 

provided by Matrix Power. 

The total conversion capital expenditures for the liquid-immersed superclass are 

summarized in Table 12.4.6. As a result of revisions to the cost assumptions for conversion to 

amorphous core transformer production, the total conversion capital expenditures for TSLs 5 and 

6 are about half of those presented in the proposed rule analysis. These revisions are responsive 

to stakeholder comments and are based on information provided by Matrix Power. 

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Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital 

Expenditures 

Trial Standard Level 

TSL1 TSL2 TSL 

D 

TSL 

C 

TSLB TSL3 TSL4 TSL 

A 

TSL5 TSL6 

Annealing 

Furnace 

Conversion 

Capital 4.5 2.3 2.3 6.8 4.5 3.3 3.3 3.3 7.6 22 

Expenditure 

(2006$, M illions) 

Core-Cutting 

Conversion 

Capital 0.4 0.4 0.4 0.8 0.6 13 13 14 30 89 

Expenditure 

(2006$, M illions) 

M iscellaneous 

incl. Buildings 

and Coil Winding 

Equipment 

0.2 0.1 0.1 0.4 0.3 0.8 0.8 0.8 4.1 67* 

Total Conversion 

Capital 

Expenditure 

(2006$, M illions) 

5.2 2.8 2.8 8.0 5.4 17 17 18 41 178 

* Includes $49 million to fully convert industry from she ll to core form d esigns. 

12.4.2 Product Conversion Expenses 

Product conversion expenses include engineering, prototyping, testing, and marketing 

expenses incurred by a manufacturer as it prepares to come into compliance with a standard. The 

Department assumed that product conversion expenses for liquid-immersed transformer 

manufacturers at TSLs 3, 4, A, 5, and 6 will require total additional expenses equivalent to 100 

percent of the industry’s R&D budget for three years. Since manufacturers already produce 

liquid-immersed transformers that would comply with TSLs 1, 2, D, C, and B, product 

conversion expenses are expected to be negligible for these TSLs. Product conversion expenses 

are summarized in Table 12.4.7. 

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Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product 

Conversion Expenses 

Trial Standard Level 

TSLs TSL3 TSL4 TSLA TSL5 TSL6 

1, 2, D, 

C, B 

Basis Industry 

makes 

these 

designs 

today. 

Amount equivalent to 100% of industry R&D budget for 

3 years. 

Product Conversion 0 87 89 103 120 176 

Expenses 

(2006$, Millions) 

12.4.3 Industry Financial Impacts

 The Department used the GRIM and the inputs and assumptions described in the 

previous sections to produce indicators of financial impacts on the liquid-immersed distribution 

transformer superclass at each TSL. This document reports the results of the MIA using two key 

financial metrics: INPV and annual net cash flow to the industry. 

12.4.3.1 Trial Standard Levels 

For the proposed rule, the Department developed six TSLs for the liquid-immersed 

distribution transformer superclass. TSL1 is the NEMA TP-1 standard. TSL6 represents the 

maximum TSL that is technologically feasible. TSLs 2 through 5 are bundles of various 

candidate standard levels as described in Chapter 10 (section 10.2.2.3) of this TSD. In addition, 

TSLs A, B, C, and D have been added for the final rule. TSL6 would require all liquid-immersed 

design lines to convert to amorphous core technology. TSL5 would require design lines 3 

through 5 to convert to amorphous core technology. According to the LCC customer choice 

model, 95 percent of the design line 4 transformers purchased at TSL3 and TSL4 would likely be 

amorphous. Similarly, TSLA would likely trigger partial conversion to amorphous technology 

for both design line 4 (about 50 percent of transformers would be amorphous) and design line 5 

(about 85 percent of transformers would be amorphous). 

12.4.3.2 Impacts on Industry Net Present Value 

The INPV measures the industry value and was used in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the net present value 

(NPV) that the Department estimates for the whole U.S. economy. The INPV is the sum of all 

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net cash flows discounted at the industry’s cost of capital, or discount rate. The Department used 

the GRIM to estimate cash flows between 2007 and 2038. 

In the MIA, the Department compared the INPV of the base case (no efficiency standard) 

to that of each TSL. The difference in INPV is an estimate of the economic impacts that 

implementing each particular TSL would have on the entire industry. To evaluate the range of 

cash-flow impacts on the industry, the Department constructed two MIA analyses based on the 

two markup scenarios discussed in section 12.3.7. In the first scenario, the gross margin 

percentage is held constant at all TSLs (and equal to the base case gross margin percentage). In 

the second scenario, DOE assumed that the industry could preserve its operating profit at all 

TSLs. Tables 12.4.8 and 12.4.9 provide the INPV estimates under the two scenarios. 

Table 12.4.8	 Changes in Liquid-Immersed Industry Net Present Value, Preservation-ofGross-Margin-Percentage Scenario 

Units 

Trial Standard Level 

Base 

Case 1 2 D C B 3 4 A 5 6 

INPV 2006$, 

Millions 

609 622 637 646 656 662 598 606 657 703 809 

Change 

in 

INPV 

% 

- 2.1 4.6 6.0 7.7 8.8 (1.9) (0.5) 7.9 16 33 

from 

Base 

Case 

2006$, 

Millions 

- 13 28 37 47 53 (11) (2.9) 48 94 200 

Table 12.4.9 Changes in Liquid-Immersed Industry Net Present Value, Preservation-ofOperating-Profit Scenario 

Units 

Trial Standard Level 

Base 

Case 1 2 D C B 3 4 A 5 6 

INPV 2006$, 

Millions 

609 590 587 577 562 558 509 497 440 357 33.3 

Change 

in 

INPV 

% 

-

(3.2) (3.7) (5.2) (7.7) (8.3) (17) (18) (28) (41) (95) 

from 

Base 

Case 

2006$, 

Millions 

-

(19) (22) (32) (47) (51) (100) (112) (169) (252) (576) 

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The results from the preservation-of-gross-margin-percentage scenario provide a more 

favorable projection than do the results from the preservation-of-operating-profit scenario. 

Industry value would generally increase (or not decrease significantly) if manufacturers could 

sustain their gross margin percentage as their production costs increase in response to a standard. 

However, as previously mentioned, the preservation-of-gross-margin-percentage assumption may 

be optimistic, particularly at higher TSLs. 

The preservation-of-operating-profit markup scenario provides a low bound for INPV 

under a standard. The decrease in industry value under this scenario comes from the inability of 

industry to fully recoup the capital investments required for standard compliance, including 

investments in working capital. The negative impacts on INPV are most pronounced at TSL5 

and TSL6, which are the two TSLs that would require partial or full conversion of the industry to 

amorphous core technology. 

12.4.3.3 Impacts on Annual Cash Flow 

While INPV is useful for evaluating the long-term effects of standards, short-term 

changes in net cash flow are also important and indicative of the impacts on industry during the 

years between final rule publication (2007) and the standard effective date (2010). For example, 

a large investment over a period of a few years could strain the industry’s access to capital. 

Consequently, the sharp drop in net cash flow might lead to additional borrowing; changes in 

leverage, interest coverage ratios, and/or bond ratings; and possibly increased concern among 

investors. Thus, a short-term disturbance can have long-term effects that the INPV cannot 

capture. To get an idea of the behavior of annual net cash flows, the Department reports the 

annual net or free cash flows from 2007 through 2023 for the different TSL levels. Figures 

12.4.1 and 12.4.2 present the annual net cash flows for the base case and each of the TSLs 

evaluated for the two different markup scenarios. 

Figure 12.4.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage 

Scenario, Liquid-Immersed 

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Figure 12.4.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, 

Liquid-Immersed 

After final rule publication in 2007, cash flows are driven by the level of capital 

investments and product conversion expenses and the proportion of these investments spent 

every year. In addition, in the year of the standard (2010), a relatively large investment in 

working capital is required. The incremental investments in working capital are about $13 

million (TSL1), $23 million (TSL2), $30 million (TSLD), $41 million (TSLC), $44 million 

(TSLB), $39 million (TSL3), $47 million (TSL4), $93 million (TSLA), $149 million (TSL5), 

and $334 million (TSL6) (with less than 10 percent variation at each TSL between markup 

scenarios). After final rule publication, industry cash flows begin to decline as industry uses its 

financial resources to prepare for the standard. In the year the standard becomes effective, new 

capital equipment goes into production. 

While the behavior of cash flows for each TSL varies between the two markup scenarios, 

there are three observations that are common across the two scenarios. First, the net annual cash 

flows do not go negative for TSLs 1, 2, D, C, B, 3, and 4. Second, for TSLs C, B, 3, and 4, net 

annual cash flows dip by two-thirds or more in 2010, the year of standard implementation. The 

dip in cash flow in 2010 is due to a relatively large investment in working capital that would be 

required to finance increased inventories, accounts receivable, etc. Third, net annual cash flows 

go negative during the compliance period for TSLs A, 5, and 6. 

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12.4.4 Other Impacts 

12.4.4.1 Employment 

The Department estimated industry-wide labor expenditures based on the engineering 

analysis. Winding of the primary and secondary coils; cutting, forming, and annealing of the 

core; core assembly; testing; and packing of the completed transformer represent the bulk of the 

labor. The Department incorporated these assumptions into the GRIM, which projects labor 

expenditures annually. Labor expenditures are a function of the labor intensity of the product, 

the sales volume, and an implicit wage assumption that remains fixed in real terms over time. 

Table 12.4.10 provides the changes in labor measured as the change in labor expenditures for 

liquid-immersed transformers in 2010, the standard effective date, versus the base case. 

Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010) 

Trial Standard Level 

TSL1 TSL2 TSLD TSLC TSLB TSL3 TSL4 TSLA TSL5 TSL6 

5.4% 3.3% 3.1% 6.5% 6.6% 6.3% 6.4% 44% 18% 38%

 Based on the GRIM and the assumption that 95 percent of liquid-immersed transformers 

sold in the U.S. are manufactured in the U.S., the Department estimated that there are 4,241 

production employees in the U.S. liquid-immersed distribution transformer industry. This 

estimate excludes non-production workers and assumes a level annual production rate. In reality, 

including non-production workers and seasonal effects, the actual number of employees in the 

liquid-immersed superclass is higher. Due to the fact that labor content does not vary between 

the markup scenarios, projected labor expenditures are equivalent for both. Based on these 

results, DOE expects no significant discernable direct employment impacts among transformer 

manufacturers for TSLs 1, 2, D, C, B, 3, and 4, but potentially significant changes in employment 

for TSLA (44 percent increase), TSL5 (18 percent increase), and TSL6 (38 percent increase). 

These conclusions are independent of any conclusions regarding employment impacts from the 

broader U.S. economy, which are documented in Chapter 14 of this TSD. These conclusions 

also ignore the possible relocation of domestic employment to lower-labor-cost countries, such as 

Mexico. Also, for TSLs 3, 4, A, 5, and 6, this conclusion ignores the possibility of outsourcing 

amorphous core production to companies in other countries, such as India. 

Manufacturers expressed concern during the MIA interviews that establishing an energy 

conservation standard would ‘commoditize’ the distribution transformer market, making it easier 

for foreign manufacturers who specialize in low-cost mass production of one design to enter the 

U.S. market. Today's liquid-immersed market is characterized by total owning cost evaluation 

formulae and customer design requirements and specifications. U.S. manufacturers differentiate 

themselves in the market by employing rapid turn-around times and demonstrating 

responsiveness to their customer needs. According to some manufacturers, in Massachusetts 

where a State standard of NEMA TP-1 was passed for both liquid-immersed and dry-type 

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transformers, several utilities have abandoned their evaluation formulae and simply ordered 

standards-compliant transformers. In many cases, according to manufacturers, these standardscompliant units are less efficient than those that were purchased before the State standard took 

effect. In other words, according to manufacturers, there has been a backsliding in average 

efficiency in this market, and an associated ‘commoditization’ of the product offering which has 

opened the door to foreign competition. Industry fears this situation will worsen under a Federal 

standard. This concern was independently raised by several liquid-immersed manufacturers 

during the MIA interviews and represents a critical concern in the industry. 

U.S. manufacturers believe that they could be affected by‘commoditization’ in several 

ways. Less efficient transformers are smaller and less costly; therefore, ‘commoditization’ could 

result in reduced capacity utilization and lower revenues. Increased competition from foreign 

manufacturers could result from U.S. manufacturers’ loss of competitive advantage, which today 

is derived from the flexibility of U.S. manufacturing processes and product customization 

capabilities. Finally, manufacturers believe they may have no alternative other than to relocate 

their facilities outside of the U.S. to compete on an equal basis with lower-labor-cost foreign 

producers. In essence, after an energy-conservation standard takes effect, manufacturers believe 

that the liquid-immersed distribution transformer industry will begin to more closely resemble 

today’s low-voltage, dry-type industry. 

12.4.4.2 Production Capacity 

The Department believes that there are only minor production capacity implications for 

the standard at TSLs 1, 2, D, C, and B, and moderate implications at TSLs 3, 4, and A. 

According to the LCC customer choice model, 95 percent of the design line 4 transformers 

purchased at TSL3 and TSL4 would likely be amorphous. Similarly, TSLA would likely trigger 

partial conversion to amorphous technology for both design line 4 (about 50 percent of 

transformers would be amorphous) and design line 5 (about 85 percent of transformers would be 

amorphous). At TSL6, all liquid-immersed design lines would be required to convert to 

amorphous core technology. At TSL5, three design lines would be required to convert to 

amorphous core designs. Conversion to amorphous core designs would render obsolete a large 

portion of the equipment used in the liquid-immersed industry (e.g., annealing furnaces, and 

core-cutting and winding equipment). In summary, production capacity implications would be 

most severe at TSLs 5 and 6 but there would be moderate implications at TSLs 3, 4, and A. 

12.4.4.3 Exports 

Domestic manufacturers produce and export liquid-immersed transformers around the 

world. Due to the inherent manufacturing flexibility built into their production lines, 

manufacturers can readily retool and build export units (even 50 Hz fundamental frequency). 

Once the standard takes effect, transformer manufacturers would still be able to produce and 

export units that are below the Department’s minimum efficiency standard, since the standard 

only applies to transformers for use in the United States. 

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During the MIA interviews, one manufacturer expressed concern that an existing volume 

discount enjoyed on a low-grade, grain-oriented steel that the manufacturer uses to build 

transformers for export may no longer be available if the Department’s standard drives the 

minimum efficiency to a point where M3 and M2 core steel become the primary steels used by 

the U.S. transformer industry. In this way, exported transformers that have lower-quality steel 

may become slightly more expensive and therefore less competitive globally. The Department 

recognizes this concern, but does not expect its impact to significantly degrade the existing 

export market. 

12.4.4.4 Cumulative Regulatory Burden 

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

combined effects of several regulations, existing or pending, 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. 

Companies that produce a wider range of regulated products may be faced with more 

capital and product development expenditures than their competitors. This can prompt those 

companies to exit the market or reduce their product offerings, potentially reducing competition. 

Smaller companies can be especially impacted since they have lower sales volumes over which 

to amortize the costs of meeting new regulations. The Department considers that a proposed 

standard is not economically justified if it contributes to an unacceptable level of cumulative 

regulatory burden. 

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3) 

other regulations and standards. 

1.	 Federal Regulations on Distribution Transformer Manufacturers - In addition to 

potential efficiency regulations on distribution transformers, the National Energy Code 

(NFPA 70) places additional restrictions on liquid-immersed transformers, requiring that 

indoor liquid-immersed transformers be located in separate transformer vaults. 

Furthermore, the code provides stipulations for fire walls, doors, ventilation, and oil 

containment, increasing the installed cost of these types of transformers. The impetus for 

this section of the National Energy Code is to prevent fires associated with flammable 

insulating fluids; however, this mandate applies to all indoor liquid-immersed 

transformers, including those containing non-flammable liquid products. 

2.	 Regulations and Pending Regulations at the State Level - Manufacturers also discussed 

the recent trend of State governments to implement NEMA TP-1 as a mandatory standard 

for transformers sold within State borders. At this time, the Department knows of one 

State that requires this minimum efficiency standard for liquid-immersed distribution 

transformers. These standards, when preempted by Federal energy-efficiency regulation, 

will not create a cumulative burden on domestic manufacturers. 

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3.	 Other Regulations and Standards - Manufacturers were not aware of other regulations or 

standards, in effect or pending, which affect liquid-immersed distribution transformers. 

12.4.4.5 Impacts on Small Businesses 

The SBA defines a small business, for the distribution transformer industry, as a business 

that has 750 or fewer employees. The Department estimated that, of the approximately 25 U.S. 

manufacturers that make liquid-immersed distribution transformers, about 15 of them are small 

businesses. About one-third of the small businesses have fewer than 100 employees. 

Because the liquid-immersed distribution transformer superclass largely produces 

customized transformers, small businesses can compete because each unique design is produced 

in relatively small volumes for a given order. Implementation of an energy-conservation 

standard would have a relatively minor differential impact on small manufacturers of liquidimmersed distribution transformers. Disadvantages to small businesses, such as having little 

leverage over suppliers (e.g., core steel suppliers), are present with or without an energyconservation standard. 

12.4.4.6 Worker Safety 

During the interviews, manufacturers expressed concern for their workers, who handle 

heavy material and equipment on a daily basis while producing transformers. For manufacturing 

industries like those that produce distribution transformers, the Occupational Safety and Health 

Administration (OSHA) established a maximum handling weight of 70 pounds per worker. As 

transformers become larger and more energy efficient, the core material will get heavier, coils 

will become heavier, and tanks and enclosures will increase in size. Bearing this in mind, plant 

managers are concerned about the fact that, as weights increase, so do accident frequencies. 

12.4.4.7 Other Engineering Issues 

Manufacturers are concerned that the dimensionally constrained transformers they 

produce today may be difficult or perhaps impossible to build to meet standards. For example, 

for round-tank, liquid-immersed transformers (design line 3), they indicated that going above 

TSL3 would be problematic due to the size of the transformer exceeding the capacity of the 

industry-standard, pole-mounting brackets. According to manufacturers, these transformers hit 

their maximum height at TSL2 (between the power lines overhead and the telephone and cable 

lines underneath), and thus all size expansion at higher TSLs is in the diameter of the tank. 

Approximately 80 percent of overhead transformers sold are for replacement installations, so this 

issue of a pre-existing space limit will cause problems for utilities and may increase outage 

times. 

Manufacturers also expressed concern over a second dimensionally constrained liquidimmersed transformer—subsurface retrofit transformers. These liquid-immersed units are 

designed to be installed within an existing concrete vault to service an underground distribution 

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network. If the efficiency standard is significantly different from the levels being built today, it 

may require substantial (extremely expensive) rework of these vaults, increasing downtime or 

stress on the local distribution network while a failed unit is replaced. 

12.4.5 Summary of Impacts for Liquid-Immersed Superclass 

The electric utility industry appears to be making mostly evaluated transformer purchase 

decisions. However, in the State that has adopted an energy-conservation standard for liquidimmersed distribution transformers (Massachusetts), the average efficiency of the purchased 

transformers is reported by manufacturers to be in decline. The explanation for this 

counterintuitive trend, as reported by several manufacturers, is that after the efficiency standards 

were implemented, electric utilities abandoned their evaluation formulae and simply have 

purchased the least-expensive standards-compliant transformers. This backsliding may result in 

‘commoditization’ of liquid-immersed transformers, ultimately making it easier for foreign 

competition to compete in the U.S. liquid-immersed market. Manufacturers fear that this 

situation may worsen under a Federal standard. 

TSL6 would require all liquid-immersed design lines to convert to amorphous core 

technology. TSL5 would require three of the five liquid-immersed design lines to convert to 

amorphous core technology. Since the manufacturing process for amorphous core transformers 

is completely different from that for conventional transformers, TSLs 5 and 6 would obsolete a 

significant portion of U.S. industry’s equipment. The Department estimated the stranded assets 

for TSL5 and TSL6 to be $13 million and $49 million, respectively. In addition, manufacturers 

detailed many technical reasons why amorphous core material is difficult and potentially 

hazardous for workers. 

TSLs 3, 4, and A can be met without using amorphous core technology, but the LCC 

customer choice model indicates that partial conversion to amorphous core technology would 

likely occur at these TSLs. For TSLs 3 and 4, DOE expects that about 95 percent of the design 

line 4 transformers would likely be amorphous core transformers. For TSLA, DOE expects that 

about 50 percent and 85 percent of the design line 4 and design line 5 transformers, respectively, 

would likely be amorphous core transformers. DOE estimated the stranded assets for TSLs 3, 4, 

and A to be $8.2 million, $8.2 million, and $3.5 million, respectively. 

Conversion capital expenditures in the liquid-immersed distribution transformer 

superclass include expanded annealing furnace capacity, additional core-cutting equipment, coilwinding equipment, and building construction. The need for additional annealing furnace 

capacity and core-cutting equipment is driven by the increase in core weights that would be 

experienced at higher TSLs. For TSLs 1, 2, D, C, and B, which would be met exclusively with 

silicon core steel, expanded annealing furnace capacity represents the majority of the conversion 

capital expenditures. For TSLs 3, 4, A, 5, and 6 which would trigger or require partial or 

complete conversion to amorphous core technology, core-cutting equipment represents the 

majority of the conversion capital expenditures. Conversion capital expenditures would be 

relatively modest for TSLs 1, 2, D, C, B, 3, 4, and A, ranging from $2.8 million to $18 million in 

an industry with projected revenue of $1.5 billion in 2007. For TSLs 5 and 6, the conversion 

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capital expenditures would be substantially higher. DOE estimated that conversion capital 

expenditures would be $41 million and $178 million for TSL5 and TSL6, respectively. While 

large relative to the other TSLs, these estimates for TSL5 and TSL6 are about half of those 

presented in the proposed rule TSD - DOE revised these estimates based upon guidance from an 

expert in amorphous core transformer materials, design, and production (Matrix Power). 

The industry would experience negligible product conversion expenses for TSLs 1, 2, D, 

C, and B because all products meeting these efficiency levels would be constructed of silicon 

core steel and are widely available today. Product conversion expenses would be substantially 

higher for TSLs 3, 4, A, 5, and 6, which are the standard levels that would trigger or require 

partial or full conversion to amorphous core technology. The Department estimated the 

corresponding product conversion expenses to be $87 million, $89 million, $103 million, $120 

million, and $176 million, respectively. 

The impact on INPV at TSL6 ranges between -95 percent and +33 percent, depending on 

the assumed markup scenario. There is a great deal of uncertainty in these impact estimates, 

primarily due to uncertainty around transformer pricing at high TSLs. At TSL6, the magnitude 

of the peak negative net annual cash flow would be more than four times that of the positive base 

case cash flow. 

The impact on INPV at TSL5 ranges between -41 percent and +16 percent, depending on 

the assumed markup scenario. There is a great deal of uncertainty in these impact estimates, 

primarily due to uncertainty around transformer pricing at high TSLs. At TSL5, the magnitude 

of the peak negative net annual cash flow would be about 50 percent higher than that of the 

positive base case cash flow. The 2010 impacts would largely be driven by the need to invest in 

working capital. A significant burden, which is difficult to quantify using the GRIM, would be 

placed on industry if it was required to maintain parallel manufacturing operations for both 

conventional and amorphous core technology under TSL5. 

The impact on INPV at TSLA ranges between -28 percent and +7.9 percent, depending 

on which markup scenario is assumed. At TSLA, the magnitude of the peak negative net annual 

cash flow would be about 60 percent of the positive base case cash flow. The 2010 impacts 

would largely be driven by the need to invest in working capital. A significant burden, which is 

difficult to quantify using the GRIM, would be placed on industry if it maintained parallel 

manufacturing operations for both conventional and amorphous core technology under TSLA. 

The impact on INPV at TSL4 ranges between -18 percent and -0.5 percent, depending on 

which markup scenario is assumed. The impact on annual net cash flow would be significant at 

TSL4, bringing net cash flow nearly to zero in 2010 in a low markup scenario. A significant 

burden, which is difficult to quantify using the GRIM, would be placed on industry if it 

maintained parallel manufacturing operations for both conventional and amorphous core 

technology under TSL4. 

The impact on INPV at TSL3 ranges between -17 percent and -1.9 percent, depending on 

which markup scenario is assumed. The impact on annual net cash flow would be significant at 

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TSL3, bringing net cash flow under a low markup scenario to about 20 percent of its magnitude 

in the base case in 2010. A significant burden, which is difficult to quantify using the GRIM, 

would be placed on industry if it maintained parallel manufacturing operations for both 

conventional and amorphous core technology under TSL3. 

The impact on INPV at TSLB ranges between -8.3 percent and +8.8 percent, depending 

on which markup scenario is assumed. The impact on annual net cash flow would be significant 

at TSLB, bringing net cash flow nearly to zero under a low markup scenario in 2010. 

The impact on INPV at TSLC ranges between -7.7 percent and +7.7 percent, depending 

on which markup scenario is assumed. The impact on annual net cash flow would be significant 

at TSLC, bringing net cash flow under a low markup scenario to about 15 percent of its 

magnitude in the base case in 2010. 

The impact on INPV at TSLD ranges between -5.2 percent and +6.0 percent, depending 

on which markup scenario is assumed. The impact on annual net cash flow would be moderate 

at TSLD, bringing net cash flow under a low markup scenario to about 40 percent of its 

magnitude in the base case in 2010. 

At TSL2, the impact on INPV ranges between -3.7 percent and +4.6 percent. The impact 

on annual net cash flow would be small to moderate. 

At TSL1, the impact on INPV ranges between -3.2 percent and +2.1 percent. The impact 

on annual net cash flow would be negligible to small. 

Finally, there are several additional factors to be considered from the standpoint of 

manufacturers in selecting the proposed standard: 

1.	 If the liquid-immersed standard is high relative to the standard for medium-voltage, 

dry-type transformers, there could be a switch to medium-voltage, dry-type 

transformers for certain products where there is substitutability between the 

superclasses. For reasons related to the properties inherent in their operation, for 

equivalent kVA ratings and TSLs, the efficiency levels of medium-voltage, dry-type 

transformers are lower than those of liquid-immersed transformers. 

2.	 If the standard is set above a certain level, some customers may look for loop-holes in 

the Department’s definition of a distribution transformer through which they can 

circumvent the standard. If a speciality or niche application transformer exempted 

from standards is less expensive than a standards-compliant distribution transformer, 

these customers may purchase a standards-exempt transformer that is also capable of 

serving a distribution function. 

3. 	 Several manufacturers expressed concern about enforcement. Many manufacturers 

urged the Department to make enforcement a top priority to ensure an effective 

standard. 

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4. 	 At TSL2 and higher, certain liquid-immersed designs that incorporate less-flammable 

cooling fluids (also called ‘high fire-point’ fluids) may become uncompetitive. These 

transformers incorporate a substitute fluid to cool the core-coil assembly, but is lessflammable than mineral oil, enabling the transformers to be used indoors. Designs 

using less-flammable cooling fluids that were cost-optimized around NEMA TP 1, 

may become uncompetitive at higher efficiency levels. 

5. 	 Differential impacts on small businesses do not appear to be important for the liquidimmersed distribution transformer superclass. 

6. 	 Manufacturers mentioned maximum practical efficiencies based on dimensional, 

weight, and other practical limitations. The practical maxima reported to the 

Department fell in the range of 99.4 to 99.5 percent for liquid-immersed transformers. 

7.	 Manufacturers relayed concerns about utility capital budgets. If standards go above a 

certain level, the capital budgets for distribution transformers might not be able to 

accommodate the transformer price increases, thereby creating downward pressure on 

manufacturer profit margins. 

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12.5 MANUFACTURER IMPACT ANALYSIS - MEDIUM-VOLTAGE, DRY-TYPE 

The medium-voltage, dry-type transformer market is characterized by large commercial 

and industrial users, some of which evaluate and are concerned about losses when making 

transformer purchase decisions. This superclass has substantially lower shipments and revenue 

than the liquid-immersed superclass. In recent years, there has been some consolidation in the 

medium-voltage, dry-type industry, with a medium-voltage, dry-type production facility closing 

in North Carolina, and the associated business being taken over by a competitor in Virginia. 

The Department estimated that there are approximately 25 companies active in the 

medium-voltage, dry-type market in the United States. Of these, the seven largest companies 

retailing medium-voltage, dry-type distribution transformers are (in alphabetical order): ABB, 

Federal Pacific, General Electric, Hammond, MGM, Olsun, and Square D. Of the two 

distribution transformer superclasses covered by DOE’s rulemaking, the medium-voltage, drytype superclass is the more concentrated; The top three companies manufacture over 75 percent 

of all transformers in this superclass. For more information on the transformer market in general, 

and medium-voltage, dry-type transformers in particular, see the market and technology 

assessment (Chapter 3). 

12.5.1 Conversion Capital Expenditures 

Through its MIA interviews, the Department gained an understanding of the conversion 

capital expenditures that medium-voltage, dry-type transformer manufacturers would have to 

make in response to a standard. These are: 1) investments in additional core-cutting equipment 

capable of making mitered cuts, and 2) investments in miscellaneous tooling and equipment, 

including equipment used for conductor winding. Core-cutting equipment capable of making 

mitered cuts is a key component of the medium-voltage, dry-type analysis. Mitered and 

cruciform core construction techniques are often used to reduce no-load losses in mediumvoltage, dry-type transformers. Mitered joints have lower destruction factors and are more 

efficient than butt-lap joints. 

Reviewing the shipments analysis, the Department estimated that the equivalent of five 

full-time, mitered, core-cutting machines are currently being used by the medium-voltage, drytype industry. The Department estimates that about 85 percent of the medium-voltage, dry-type 

transformers produced today have mitered cores. At TSL1, the Department assumed that 95 

percent of the medium-voltage, dry-type transformers would be manufactured using mitered 

cores. At TSL2 and above, the Department assumed that 100 percent of the medium-voltage, 

dry-type transformers would be manufactured using core-cutting equipment capable of making 

mitered cuts. 

The Department provided a few core designs from the medium-voltage, dry-type 

engineering database to the primary supplier of core-cutting equipment. This equipment 

manufacturer then prepared processing time estimates based on the core dimensions. The 

manufacturer’s assumptions are applicable for processing M6 core steel in batches of one. The 

assumption of single-unit batches is appropriate for the medium-voltage, dry-type superclass 

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because there is often a high degree of customization associated with customer orders. Based on 

the core-cutting equipment manufacturer’s processing time estimates, the Department derived the 

following production assumptions: For design lines 9–13, the number of cores produced per 

machine per year are estimated to be 1,400; 700; 1,400; 700; and 525, respectively. A 

representative core-mitering machine is projected to cost the medium-voltage, dry-type 

distribution transformer industry about $2.47 million installed, plus $0.31 million for expanded 

building capacity. Because of the large amount of core steel that needs to be processed for a 

typical medium-voltage, dry-type transformer, and the increased cutting requirements at higher 

efficiency due to greater stack height (or piece length) and thinner laminations, industry indicated 

that additional core-stacking equipment would be necessary to optimize production at higher 

TSLs. The Department recognizes the potential for this automatic core-stacking machine 

expenditure and accounted for it by assuming that the core-mitering equipment purchased by the 

medium-voltage, dry-type industry would include automatic core-stacking capability. Coremitering equipment in the medium-voltage, dry-type industry typically includes such corestacking capability. 

At TSL1 and higher, the processing time per core is higher than for the base case, 

increasing the number of mitered-core cutting machines required by the superclass. The 

processing time per core increases for two reasons: 1) More core-cutting time is required as core 

size increases with higher efficiencies, and 2) the processing time increases in inverse proportion 

to lamination thickness, and more efficient grades of steel typically are thinner (e.g., lamination 

thickness changes from 0.011" for M4 to 0.009" for M3, representing a 22-percent increase in 

core-mitering time for M3). Some manufacturers report that their core-mitering equipment 

operates poorly with thinner steels, which would require them to operate at lower speeds, 

exacerbating the capacity impacts. The Department based its estimates of the core size increases 

and lamination thickness changes on the engineering analysis. It accounted for these two factors 

in estimating the increases in core-mitering equipment required at each TSL. Table 12.5.1 shows 

an example calculation for the core-mitering capacity multiplier at each TSL for design line 9, 

not accounting for the fraction of transformers that are mitered at each TSL. 

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Table 12.5.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 9 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Typical Core Weight (lbs) 1,226 1,191 1,216 1,234 1,269 1,585 

Typical Stack Height (in.) 6.83 6.80 7.19 7.80 8.32 10.21 

Typical Lamination 

Thickness (in.) 0.0115 0.0107 0.0099 0.0090 0.0090 0.0090 

Typical Number of 

Laminations per Inch (in-1) 87.0 93.2 101 111 111 111 

*M ultiplier for Increased 

Core-M itering Capacity 1.00 1.07 1.22 1.46 1.55 1.94 

* For TSL1–TSL4, the multiplier is based on the ratios of stack heights and number of laminations per inch, 

normalized to the base case. For example, at T SL3, the multiplier is calculated as (7.80/6.83)×(111/87.0) = 1.46. 

For TSL5 and TSL6, the multiplier is based on the ratios of core weight and number of laminations per 

inch, normalized to TSL4. At TSL5 and TSL6, the multiplier is calculated as (1,585/1,269)×(111/111)×1.55 = 1.94. 

The multiplier at TSL5 and TSL6 is calculated differently because, for some medium-voltage, dry-type design lines, 

particularly DL12 which is high-volume and therefore critical for the analysis, the designs in the engineering 

database involve longer pieces of core steel above TSL4 and therefore the required increased cutting time is better 

captured through core weight increases than through stack height increases (in the Department's engineering analysis 

stack height increases are not significant for DL12 above TSL4). After speaking with the primary supplier of 

core-mitering equipment and reviewing equipment performance curves, the Department confirmed the assumption 

that core steel piece length (and consequently weight when stack height and piece width are relatively fixed) is an 

important determinant of mitering time. 

Base case 2010 unit shipments projections for DL9 through DL13 are 293, 553, 350, 

2,633, and 238, respectively (note: the single-phase shipments are divided by three to achieve 

approximate mass equivalence with the three-phase units). Using these shipments projections, 

the assumed core production rates per core-mitering machine for each design line (discussed 

above), and the multipliers for increased core-mitering capacity, the Department estimated the 

number of core-mitering machines needed at each TSL. Table 12.5.2 through Table 12.5.6 

provide the calculations for the estimated number of core-mitering machines needed at each TSL 

for DL9 through DL13, respectively. 

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Table 12.5.2 Calculation of Core-Mitering Machines Needed for Design Line 9 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Multiplier for Increased CoreMitering Capacity 1.00 1.07 1.22 1.46 1.55 1.94 

Number of Core-Mitering 

Machines if all Transformers are 

Mitered 

0.21* 0.22 0.26 0.30 0.33 0.41 

Fraction of Transformers that are 

Mitered 0.85 0.95 1.0 1.0 1.0 1.0 

Number of Core-Mitering 

Machines 0.18 0.21 0.26 0.30 0.33 0.41 

* (293 units shipped)/(1,400 units per machine per year) = 0.21 core mitering machines 

Table 12.5.3 Calculation of Core-Mitering Machines Needed for Design Line 10 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Multiplier for Increased CoreMitering Capacity 1.00 1.03 1.20 1.36 1.40 2.00 

Number of Core-Mitering 

Machines if all Transformers are 

Mitered 

0.79* 0.81 0.95 1.07 1.10 1.58 

Fraction of Transformers that are 

Mitered 0.85 0.95 1.0 1.0 1.0 1.0 

Number of Core-Mitering 

Machines 0.67 0.77 0.95 1.07 1.10 1.58 

* (553 units shipped)/(700 units per machine per year) = 0.79 core mitering machines 

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Table 12.5.4 Calculation of Core-Mitering Machines Needed for Design Line 11 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Multiplier for Increased CoreMitering Capacity 1.00 1.32 1.35 1.43 1.38 1.61 

Number of Core-Mitering 

Machines if all Transformers are 

Mitered 

0.25* 0.33 0.34 0.36 0.34 0.40 

Fraction of Transformers that are 

Mitered 0.85 0.95 1.0 1.0 1.0 1.0 

Number of Core-Mitering 

Machines 0.21 0.31 0.34 0.36 0.34 0.40 

* (350 units shipped)/(1,400 units per machine per year) = 0.25 core mitering machines 

Table 12.5.5 Calculation of Core-Mitering Machines Needed for Design Line 12 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Multiplier for Increased CoreMitering Capacity 1.00 1.02 1.19 1.23 1.25 1.69 

Number of Core-Mitering 

Machines if all Transformers are 

Mitered 

3.76* 3.82 4.47 4.63 4.71 6.34 

Fraction of Transformers that are 

Mitered 0.85 0.95 1.0 1.0 1.0 1.0 

Number of Core-Mitering 

Machines 3.20 3.63 4.47 4.63 4.71 6.34 

* (2,633 units shipped)/(700 units per machine per year) = 3.76 core mitering machines 

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Table 12.5.6 Calculation of Core-Mitering Machines Needed for Design Line 13 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Multiplier for Increased CoreMitering Capacity 1.00 1.00 1.14 1.27 1.27 1.84 

Number of Core-Mitering 

Machines if all Transformers are 

Mitered 

0.45* 0.45 0.52 0.57 0.83 0.83 

Fraction of Transformers that are 

Mitered 0.85 0.95 1.0 1.0 1.0 1.0 

Number of Core-Mitering 

Machines 0.38 0.43 0.52 0.57 0.58 0.83 

* (238 units shipped)/(525 units per machine per year) = 0.45 core mitering machines 

Based on the assumption that each core-mitering machine for the medium-voltage, drytype industry would cost $2.78 million installed (including $0.31 million for the building adder), 

the Department estimated that core-mitering equipment capital expenditures for the industry 

would be $2.0 million, $5.2 million, $6.4 million, $6.7 million, $13.7 million, and $13.7 million 

for TSL1 through TSL6, respectively. The core-cutting equipment estimates are summarized in 

Table 12.5.7. 

Table 12.5.7	 Summary of MV, Dry-Type Distribution Transformer Core-Cutting 

Equipment Capital Expenditures 

Trial Standard Level 

Base 

Case 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Mitered Core-Cutting M achines 

Needed by Industry 4.6 5.4 6.5 6.9 7.1 9.6 

Incremental Mitered Core-Cutting 

Machines Needed by Industry - 0.7 1.9 2.3 2.4 4.9 

Core-Mitering Conversion Capital 

Expenditure (2006$, M illions) - 2.0 5.2 6.4 6.7 13.7 

The Department estimated total conversion capital expenditures, including capital 

investments for additional miscellaneous equipment such as coil-winding equipment, based on 

multipliers applied to the core-cutting equipment capital investment. Based on information 

submitted by industry, DOE estimated this multiplier was estimated to be 1.06. The conversion 

capital expenditures are summarized in Table 12.5.8. 

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Table 12.5.8 Summary of MV, Dry-Type Distribution Transformer Conversion Capital 

Expenditures 

Trial Standard Level 

TSL1 TSL2 TSL3 TSL4 TSL5/6 

Core-Cutting Conversion Capital 

Expe nditure (200 6$, M illions) 2.0 5.2 6.4 6.7 13.7 

M ultiplier for M iscellaneous Tooling 

Including Coil Winding Equipment 1.06 

Total Conversion Capital Expenditure 

(200 6$, M illions) 2.1 5.5 6.8 7.1 15 

12.5.2 Product Conversion Expenses 

Product conversion expenses include engineering, prototyping, testing, and marketing 

expenses incurred by a manufacturer as it prepares to come into compliance with a standard. The 

Department assumed that product conversion expenses for medium-voltage, dry-type transformer 

manufacturers at TSLs 3 through 6 will require total additional expenses equivalent to 100 

percent of the industry’s R&D budget for three years. At TSL3 and above, manufacturers 

indicated that R&D engineers would be fully utilized (both electrical and mechanical engineers), 

as would production design engineers and mechanical drafters, during the conversion and 

compliance period. Since manufacturers already produce relatively large volumes of 

transformers that would comply with TSL1 and TSL2, product conversion expenses are expected 

to be negligible for these lower TSLs. Product conversion expenses are summarized in Table 

12.5.9. 

Table 12.5.9	Summary of MV, Dry-Type Distribution Transformer Product Conversion 

Expenses 

Trial Standard Level 

TSL1-2 TSL3 TSL4 TSL5/6 

Ba sis Industry makes 

relatively large 

volumes of these 

transformers 

today. 

Amount equal to 

100% of industry 

R&D budget for 

3 years. 

Amount equal to 

100% of industry 

R&D budget for 

3 years. 

Amount equal to 

100% of industry 

R&D budget for 

3 years. 

Product 

Conversion 

Expe nses 0 3.7 4.1 5.8 

(2004$, 

M illions) 

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12.5.3 Industry Financial Impacts 

Using the inputs and assumptions described in the previous sections, the GRIM produced 

indicators of financial impacts on the medium-voltage, dry-type distribution transformer industry 

at each TSL. This document reports the results of the MIA using two key financial metrics: 

INPV and annual net cash flow to the industry. 

12.5.3.1 Trial Standard Levels 

The Department developed six TSLs for medium-voltage, dry-type distribution 

transformers. TSL1 is the NEMA TP-1 standard. TSL6 represents the maximum TSL that is 

technologically feasible. TSL5 is the highest TSL that yields national NPV greater than zero 

(level set based on proposed rule analysis). For dry-type transformers, TSL5 and TSL6 are the 

same. TSL4 results in the maximum LCC savings (for proposed rule analysis). TSL2 and TSL3 

are spaced equally between TSL1 and TSL4. 

12.5.3.2 Impacts on Industry Net Present Value 

The INPV measures the industry value; DOE used it in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the NPV that DOE 

applied to the whole U.S. economy. The INPV is the sum of all net cash flows discounted at the 

industry’s cost of capital, or discount rate. The GRIM estimated cash flows between 2007 and 

2038. 

In the MIA, the Department compared the INPV of the base case (no efficiency standard) 

to that of each TSL. The difference in INPV is an estimate of the economic impacts that 

implementing each particular TSL would have on the entire industry. To evaluate the range of 

cash-flow impacts on the industry, the Department constructed two MIA analyses based on the 

two markup scenarios discussed above. In the first scenario, the gross margin percentage is held 

constant at all TSLs (and equal to the base case). In the second scenario, it is assumed that the 

industry could preserve its operating profit at all TSLs. Tables 12.5.10 and 12.5.11 provide the 

net present value estimates for the industry under the two scenarios. 

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Table 12.5.10 Changes in MV, Dry-Type Industry Net Present Value, Preservation-ofGross-Margin-Percentage Scenario 

Units Trial Standard Level 

Base 

Case 1 2 3 4 5/6 

INPV 2006$, Millions 36 35 33 31 33 37 

Change in INPV 

from Base Case 

% - (3.1) (8.9) (14.5) (8.9) 2.5 

2006$, Millions - (1.1) (3.2) (5.2) (3.2) 0.9 

Table 12.5.11 Changes in MV, Dry-Type Industry Net Present Value, Preservation-ofOperating-Profit Scenario 

Units Trial Standard Level 

Base 

Case 1 2 3 4 5/6 

INPV 2006$, Millions 36 34 31 27 25 12 

Change in INPV 

from Base Case 

% - (5.9) (15) (25) (29) (67) 

2006$, Millions - (2.1) (5.2) (8.8) (11) (24) 

The results from the preservation-of-gross-margin-percentage scenario provide a more 

favorable projection than do the results from the preservation-of-operating-profit scenario. 

Industry value would not decrease as much if manufacturers could sustain a constant gross 

margin percentage as their production costs increase in response to a standard. However, as 

previously mentioned, the preservation-of-gross-margin-percentage assumption may be 

optimistic. In this scenario, impacts above TSL3 decline with increasing TSL, because the 

incremental conversion costs above TSL3 are small relative to the revenue gains under the 

preservation-of-gross-margin-percentage scenario. The preservation-of-operating-profit scenario 

provides a lower bound for INPV under a standard. The decrease in industry value under both 

scenarios comes from the inability of industry to fully recoup the capital investments required for 

standard compliance, including investments in working capital. 

12.5.3.3 Impacts on Annual Cash Flow 

While INPV is useful for evaluating the long-term effects of standards, short-term 

changes in net cash flow are also important and indicative of the impacts on industry during the 

years between final rule publication (2007) and the effective date of the standard (2010). For 

example, a large investment over a period of a few years could strain the industry’s access to 

capital. Consequently, the sharp drop in net cash flow might lead to additional borrowing; 

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changes in leverage, interest coverage ratios, and/or bond ratings; and possibly increased concern 

among investors. Thus, a short-term disturbance can have long-term effects that the INPV 

cannot capture. To get an idea of the behavior of annual net cash flows, the Department reports 

the annual net or free cash flows from 2007 through 2023 for the different TSL levels. Figures 

12.5.1 and 12.5.2 present the annual net cash flows for the base case and each of the six TSLs 

evaluated for the two different markup scenarios. 

Figure 12.5.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage 

Scenario, MV, Dry-type 

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Figure 12.5.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, MV, 

Dry-type 

After final rule publication, cash flows are driven by the level of capital investments and 

the proportion of these investments spent every year. In addition, in the year of the standard, 

investment in working capital is required. The incremental investments in working capital are 

about $0.30 million, $0.68 million, $1.2 million, $2.4 million, $7.9 million, and $7.9 million for 

TSL1 through TSL6, respectively (with less than 10 percent variation at each TSL between 

markup scenarios). These investments in working capital are relatively insignificant, except 

those at TSLs 4, 5, and 6. After final rule publication, industry cash flows decline as industry 

uses its financial resources to prepare for the standard. In the year the standard becomes 

effective, new capital equipment goes into production. The Department assumed that no assets 

are stranded for the TSLs evaluated. 

While the behavior of cash flows for each TSL varies between the two markup scenarios, 

there are two observations that are common across the two scenarios. First, the net annual cash 

flows go negative at TSL3 and above. Second, net annual cash flows go nearly to zero during the 

compliance period at TSL2 but not at TSL1. 

12.5.4 Other Impacts 

12.5.4.1 Employment 

The Department estimated industry-wide labor expenditures based on the engineering 

analysis. Winding of the primary and secondary coils, stacking and assembly of the core, 

enclosure manufacturing, testing, and packing of the completed transformer represent the bulk of 

the labor. The Department incorporated these assumptions into the GRIM, which projects labor 

expenditures annually. Labor expenditures are a function of the labor intensity of the product, 

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the sales volume, and an implicit wage assumption that remains fixed over time. Table 12.5.12 

provides the changes in labor measured as the change in labor expenditures for medium-voltage, 

dry-type transformers in 2010 (the standard effective date) versus the base case. 

Table 12.5.12 Projected Change in Labor Expenditures, MV, Dry-Type (2010) 

Trial Standard Level 

TSL1 TSL2 TSL3 TSL4 TSL5 & 6 

3.0% -1.3% -1.9% -2.0% -1.4% 

Based on the GRIM and the assumption that 100 percent of medium-voltage, dry-type 

transformers sold in the U.S. are manufactured in the U.S., the Department estimated that there 

are currently 257 production employees in the U.S. medium-voltage, dry-type distribution 

transformer industry. The Department recognizes that this estimate is somewhat low, perhaps by 

30 percent. This estimate excludes non-production workers and assumes a level annual 

production rate. In practice, including non-production workers and seasonal effects, the actual 

number of employees in the medium-voltage, dry-type superclass would be higher. Because 

labor content does not vary between the markup scenarios, projected labor expenditures are 

equivalent for both. Based on these results, DOE expects no significant discernable employment 

impacts among medium-voltage, dry-type transformer manufacturers for any TSL compared to 

the base case. Increased employment levels are not expected at higher TSLs because the 

Department assumed that the core-cutting equipment typically purchased by the medium-voltage, 

dry-type industry is highly automated and includes core-stacking equipment. This conclusion is 

independent of any conclusions regarding employment impacts from the broader U.S. economy. 

Another concern relayed by some manufacturers during the interviews is the potential 

impact from the competitiveness of cast-coil designs at higher TSLs. These manufacturers claim 

that setting a standard above a certain threshold may trigger a market switch from open-wound 

transformers to cast-coil transformers. Manufacturers suggested that this cross-over point likely 

occurs at TSL3 and higher. If the market does shift to cast-coil, there is a risk of imported prefabricated cast-coils dominating the market in the long term. This would have a significant effect 

on domestic industry value and domestic employment. 

Some manufacturers feel that regulation at any level will decrease the diversity of 

transformer designs, which will make it easier for foreign production to compete in the U.S. 

market. These manufacturers claim that designs may cluster around the standard, allowing 

foreign competition to produce large quantities of common-kVA-rated transformers at lower 

labor costs. 

12.5.4.2 Production Capacity 

Energy conservation standards will impact the industry’s manufacturing capacity because 

the core stack heights (or core steel piece length) will increase and laminations will become 

thinner. Thinner laminations require more cuts and are more cumbersome to handle. Therefore, 

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manufacturers would have to invest in additional core-mitering machinery or modifications and 

improvements to recover any losses in productivity, and these factors might also contribute to a 

need for more plant floor space. Because more-efficient transformers tend to be larger, this could 

also contribute to the need for additional floor space. 

12.5.4.3 Exports 

Distribution transformer exports comprise a small fraction of distribution transformer 

sales. However, domestic manufacturers do sell to countries that do not currently require 

products to meet minimum efficiency requirements for distribution transformers. Since the 

medium-voltage, dry-type industry is largely a customized industry, the impact of a standard on 

U.S. exports will be minimal. 

12.5.4.4 Cumulative Regulatory Burden 

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

combined effects of several regulations, existing or pending, 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. 

Companies that produce a wider range of regulated products may be faced with more 

capital and product development expenditures than their competitors. This can prompt those 

companies to exit the market or reduce their product offerings, potentially reducing competition. 

Smaller companies can be especially impacted since they have lower sales volumes over which 

to amortize the costs of meeting new regulations. The Department considers that a proposed 

standard is not economically justified if it contributes to an unacceptable level of cumulative 

regulatory burden. 

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3) 

other regulations and standards. 

1.	 Federal Regulations on Distribution Transformer Manufacturers - Manufacturers were 

not aware of any Federal regulations on medium-voltage, dry-type distribution 

transformer manufacturers that would cause a cumulative regulatory burden in 

conjunction with the proposed efficiency regulations on distribution transformers. 

2.	 Regulations and Pending Regulations at the State Level - manufacturers discussed the 

recent trend of State governments in instituting NEMA TP-1 as a mandatory standard for 

transformers sold within their State’s borders. At this time, three States and one city 

require this minimum efficiency standard for medium-voltage, dry-type distribution 

transformers. The States requiring TP-1 are Massachusetts, Minnesota, and Oregon. The 

city requiring TP-1 is Burlington, Vermont. Federal regulation would preempt these 

standards, so no cumulative burden would be imposed. 

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3.	 Other Regulations and Standards - Manufacturers were not aware of other regulations or 

standards, in effect or pending, that pertain to medium-voltage, dry-type distribution 

transformers. 

12.5.4.5 Impacts on Small Businesses 

The SBA defines a small business, for the distribution transformer industry, as a business 

that has 750 or fewer employees. The Department estimated that, of the 25 U.S. manufacturers 

that make medium-voltage, dry-type distribution transformers, about 20 of them are small 

businesses. About one-half of the small businesses have fewer than 100 employees. 

At TSL3 and above, net cash flows for the medium-voltage, dry-type industry will go 

negative during the compliance period. At TSL3 and above, the impacts on the industry as a 

whole are large and affect businesses of all sizes, but there would be some differential impacts on 

small businesses. For example, at these levels, the use of M3 core steel will be needed. Cutting 

M3 core steel on the core-mitering equipment typically purchased by smaller businesses can be 

problematic because of the extremely thin laminations. Small businesses would also be at a 

relative disadvantage at TSL3 and higher because R&D efforts would be on the same scale as 

those for larger companies, but these expenses would be recouped over lower sales volumes by 

small businesses. Product redesign costs tend to be fixed and do not scale with sales volume. 

At TSL2, all designs would have to be mitered. This could constrain the core-mitering 

resources of small businesses that share core-cutting capacity between low-voltage, dry-type and 

medium-voltage, dry-type transformers. At TSL1, many kVA ratings could still be constructed 

using butt-lap joints, alleviating the constraint on core-mitering resources. Thus, TSL1 is less 

capital-intensive for small businesses than TSL2. In an industry such as the medium-voltage, 

dry-type transformer industry, which is heavily consolidated already, there is the risk that TSL2 

could lead to further advantage for the largest manufacturers and thus further concentrate the 

industry’s production. However, the differential impact on small businesses is expected to be 

less in moving from TSL1 to TSL2 (as opposed to moving from TSL2 to TSL3). Today, the 

market currently demands significant quantities of medium-voltage, dry-type transformers that 

meet TSL2. 

12.5.5 Summary of Impacts for Medium-Voltage, Dry-Type Superclass 

More than one-half of the customers for medium-voltage, dry-type transformers consider 

efficiency when purchasing transformers. A sizeable portion of the market is evaluating losses 

and making rational economic judgments in purchasing transformer products. With this in mind, 

it is significant to note that about one percent or less of the market chooses to purchase 

transformers that meet TSL3 or above. 

Conversion capital expenditures in the medium-voltage, dry-type distribution transformer 

superclass include primarily core-mitering equipment, but some additional expenditures would 

be necessary to upgrade coil-winding equipment and miscellaneous tooling. Today, about five 

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full-time equivalent core-mitering machines are required by the medium-voltage, dry-type 

superclass. At TSL1, the Department estimates that 95 percent of the medium-voltage, dry-type 

transformers would be manufactured using core-cutting equipment capable of making mitered 

cuts. At TSL2 and above, 100 percent of medium-voltage, dry-type transformers would be 

produced with core-mitering equipment. 

The core-cutting time per transformer, and consequently the number of core-mitering 

machines required by industry, increases with increasing TSL because of two factors. First, more 

core-cutting time is required in proportion to increases in core size at higher efficiencies. 

Second, the shift to thinner core steel laminations at higher efficiencies implies increases in corecutting time that are inversely proportional to lamination thickness. The Department accounted 

for these two factors in estimating the increases in core-cutting equipment required at each TSL. 

It estimated that total equipment capital expenditures for the industry would be $2.1 million, $5.5 

million, $6.8 million, $7.1 million, $15 million, and $15 million for TSLs 1 through 6, 

respectively. Product conversion expenses for the medium-voltage, dry-type superclass would be 

negligible at TSL1 and TSL2 because products meeting these levels are produced in relatively 

large volumes today. Above TSL2, product conversion expenses would be more significant. 

The impact on INPV at TSL5 and TSL6 would range between -67 percent and +2.5 

percent. The impact on INPV at TSL4 would range between -29 percent and -9 percent. The 

impact on INPV at TSL3 would range between -25 percent and -15 percent. In the preservationof-gross-margin-percentage scenario, impacts above TSL3 decline with increasing TSL. This is 

because the incremental conversion costs above TSL3 are small relative to the revenue gains 

under the preservation-of-gross-margin-percentage scenario. This counterintuitive trend does not 

exist for the low-markup scenario, the preservation-of-operating-profit scenario. Net annual cash 

flows would go negative during the compliance period, irrespective of the markup scenario, for 

TSLs 3 through 6. For TSLs 3 and 4, the magnitude of the peak negative net annual cash flow 

would be about one-third of the positive base case cash flow. For TSLs 5 and 6, the magnitude 

of the peak negative net annual cash flow would be more than 50 percent higher than that of the 

positive base case cash flow. 

At TSL2, the impact on INPV would range between -15 percent and -8.9 percent. At 

TSL1, the impact on INPV would range between -5.9 percent and -3.1 percent. The impact on 

annual net cash flow from capital expenditures during the compliance period would be greater 

for TSL2 than for TSL1. At TSL2, the net annual cash flows would go nearly to zero during the 

compliance period. The primary difference between TSL1 and TSL2 from the manufacturers’ 

viewpoint is that TSL1 preserves more design pathways, each trading off material for capital. 

Butt-lap designs would be cost-effective at TSL1 for some kVA ratings, which would allow 

small businesses to remain more competitive because they would not necessarily have to make 

large capital outlays. TSL2 cannot be met cost-effectively with butt-lap designs; thus, TSL2 

could hurt the margins or decrease the market share of small businesses in the long term. 

Finally, there are three additional factors to be considered from the standpoint of 

manufacturers in selecting the proposed standard: 

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1.	 If the medium-voltage, dry-type standard is set low relative to that for liquidimmersed transformers, there could be a switch to medium-voltage, dry-type 

transformers for certain products where there is substitutability between the two 

superclasses. For otherwise equivalent transformers, the TSLs are less stringent 

for medium-voltage, dry-type transformers. 

2.	 According to some manufacturers, pushing the medium-voltage, dry-type standard 

above TSL2 could trigger a market switch from open-wound to cast-coil designs. 

If the market does shift to cast-coil, there is a risk of prefabricated Chinese 

imported cast-coils dominating the market in the long term. 

3.	 The medium-voltage, dry-type superclass is already heavily consolidated. If the 

standard is set above TSL1, it will likely increase consolidation because the 

largest manufacturers are better equipped to produce transformers at TSL2 or 

TSL3. 

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REFERENCES


1.	 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of 

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 

2000. 

2.	 Securities and Exchange Commission, Annual 10-K Reports, Various Years, Washington 

D.C., <www.sec.gov>. 

3.	 Ibbotson Associates, Ibbotson Beta Book, 2003, Chicago, IL. 

<http://www.ibbotson.com>. 

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