12

- i CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT AN A L YSIS

Table of Contents
12.1 INTRODUCTION

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

- 1
12.2 METHODOLOGY

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

- 1
12.2.1 Phase 1: Industry Profile

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

- 1
12.2.2 Phase 2: Industry Cash

- Flow Analysis and Interview Guide

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

- 2
12.2.2.1 Industry Cash

- Flow Analysis

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

- 2
12.2.2.2 Interview Guide

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

- 2
12.2.3 Phase 3: Sub

- Group Analysis

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

- 2
12.2.3.1 Manufacturer Interviews

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

- 2
12.2.3.2 Revised Industry Cash

- Flow Analysis

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

- 3
12.2.3.3 Manufacturer Sub

- Group Analysis

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

- 3
12.2.3.4 Competitive Impact Assessment

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

- 3
12.2.3.5 Manufacturing Capacity Impact

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

- 4
12.2.3.6 Employment Impact

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

- 4
12.2.3.7 Cumulative Regulatory Burden

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

- 4
12.3 PRELIMINARY MANUFACT URER IMPACT ANALYSIS

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

- 4
12.3.1 General Interview Structure

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

- 5
12.3.1.1 Key Issues

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

- 5
12.3.1.2 Shipment Projections

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

- 5
12.3.1.3 Profitability

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

- 5
12.3.1.4 Product Mix

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

- 6
12.3.1.5 Conversion Costs, Manufacturing Capacity, and Employment
Levels

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

- 6
12.3.1.6 Market Shares and Industry Consolidation

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

- 7
12.3.1.7 Product Utility and Innovation

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

- 7
12.3.1.8 Impact on Small Manufacturers

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

- 8
12.3.1.9 Cumulative Burden

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

- 8
12.4 REFRIGERATED BEVERAG E VENDING MACHINE PR ELIMINARY
MANUFACTURER IMPACT ANALYSIS RESULTS

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

- 8
12.4.1 Key Issues

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

- 8
12.4.2 S hipments, Profitability, and Product Mix

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

- 10
12.4.3 Market Share and Industry Consolidation

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

- 11
12.4.4 Conversion Costs, Manufacturing Capacity, and Employment Levels

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

- 11
12.4.5 Impact on Innovation and Consumer Utility

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

- 11
12.4.6 Cumulative Burdens

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

- 12
12.4.6.1 Federal Refrigerant Regulations

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

- 12
12.4.6.2 Standards for Commercial Refrigeration Equipment

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

- 13
12.4.6.3 Federal Health and Nutrition Standards

................................ ................. 1 2

- 13
12.4.6.4 ENERGY STAR

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

- 13
12.4.7 Impact on Small Manufacturers

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

- 1312

- 1 CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify the likely impacts
of new or amended energy conservation standards on manufacturers. The U.S. Department of Energy ( DOE ) will conduct this analysis with input from manufacturers and other interested parties and will apply this methodology to its evaluation of new or amended energy conservation
standards for refrigerated beverage vending machines (BVMs)

. DOE will also consider financial impacts to the industry and a wide range of quantitative and qualitative impacts that might occur following the amendment of a n energy conservation standard. For example, a particular energy conservation standard level, if adopted by DOE, could require changes to refrigerated beverage vending machine manufacturing practices. DO E will identify and come to understand these impacts through interviews with manufacturers and other interested parties during the Notice of Proposed Rulemaking ( NOPR ) stage of its analysis.

DOE announced changes to the MIA format through a report issued to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 ( EPACT 2005 ) ), entitled “Energy Conservation Standards Activities.” a Previously, DOE did not report any MIA
results until the NOPR phase; however, under this new f ormat, DOE has collect ed , evaluate d

, and report ed preliminary information and data during the preliminary phase (the phase preceding the NOPR) of this rulemaking

.

12.2 METHODOLOGY

DOE conduct s the MIA in three phases and further tailor s the analytical framework based

on comments from interested parties

. In Phase 1

, DOE creates an industry profile to characterize the industry and conducts a preliminary MIA to identify important issues that require
consideration. T he preliminary t echnical s upport d ocument ( preliminary TSD ) presents the
results of the Phase 1 analysis

. In Phase 2

, DOE prepares an industry cash

- flow model and an interview questionnaire to guide subsequent discussions. In Phase 3

, DOE interviews
manufacturers and assesses the impacts of amend ed energy conservation standards both quantitatively and qualitatively. U s ing the g overnment r egulatory i mpact m odel (GRIM) , DOE
assesses i ndustry and sub

- group cash flow and net present value ( NPV )

. Then

, DOE assesses impacts on competition, manufacturing capacity, employment, and cumulative regulatory burden
based on feedback received during manufacturer interview s and subsequent discussions. The NOPR TSD presents r esults of the Phase 2 and 3 analyses.

12.2.1 Phase 1 : Industr y Profile

In Phase 1 of the manufacturer impact analysis, DOE collect s pertinent qualitative and quantitative financial and market information. This includes refrigerated beverage vending
machine manufacturer market share s , corporate operating ratios, wage s, employment levels , and

a This report is a vailable on the DOE website at www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html.12

- 2 production cost ratios. Sources of information may include reports published by industry groups, trade journals, the U.S. Census Bureau, copies of Securities Exchange Commission (SEC) 10

- K filings , and interviews with manufacturer s

. DOE also relies on information from its market and technology assessment, engineering analysis, life

- cycle cost analysis, markup analysis, and analysis of capital expenditure requirements

.

12.2.2 Phase 2 : Industry Cash

- Flow Analysis and Interview Guide

In Phase 2

, DOE will perform a preliminary industry cash

- flow analysis and prepare written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash

- Flow Analysis

DOE uses the GRIM to analyze the financial impacts of amended energy conservation
standards on the refrigerated beverage vending machine manufacturing industr y

. Standards will likely require additional investment, raise production costs, and affect revenue through higher prices and, possibly, lower sales. T he GRIM uses several factors to determine a series of annual
cash flows for the year standard s take effect and for several years after implementation. These
factors include annual e xpected revenues, costs of sales, selling a nd general administration costs, and taxes, a s well as capital expenditures, depreciation

, and maintenance related to new
standards

. Inputs to the GRIM include manufacturing costs, shipments forecasts, and price
forecasts developed in other analyses. Another input, f inancial information

, will be developed based on pub licly available data and confidentially submitted manufacturer information. DOE compares t he results of the GRIM against baseline projections where no standards are in place

. The financial impact of amended energy conservation standards is the difference b etween the

two sets o f discounted annual cash flows.

12.2.2.2 Interview Guide

DOE will conduct interviews with manufacturer s to gather information on the anticipated
effects of standard s on revenues and finances, direct employment, capital assets, and industry

comp etitiveness. Before the interviews, DOE will distribute an interview guide that will provide a starting point to identify relevant issues and help identify the impacts of standards on individual manufacturers or sub

- groups of manufacturers. DOE anticipates t hat the interview guide will cover c urrent o rganizational c haracteristics, i ndustry i nfrastructure, manufacturer

c ash

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

12.2.3 Phas e 3 : Sub

- G roup Analysis

Phase 3 activities will take place prior to the publication of the NOPR documents and will include manufacturer interviews, revision of the industry cash

- flow analysis, manufacturer
sub

- group cash

- flow analysis, competitive impact a ssessment, manufacturing capacity impact, employment impact, and cumulative regulatory burden.

12.2.3.1 Manufacturer Interviews

The information gathered in Phase 1 and the preliminary cash

- flow analysis performed in
Phase 2 will be supplemented with information ga thered during interviews with manufacturers12

- 3 during Phase 3

. The interview process plays a key role in the manufacturer impact analyses, as it provides an opportunity for interested parties to express their views privately on important issues, allowing confidential or sensitive information to be considered in the rulemaking process

.

DOE will conduct detailed interviews with as many manufacturers as necessary to gain insight into the range of potential impacts of standards. During the interviews, DOE wil l solicit
information on the expected impacts of standards on sales, direct employment, capital assets, and industry competitiveness. Both qualitative and quantitative information are valuable. Interviews
will be scheduled well in advance in order to provi de every opportunity for key individuals to be
available for comment. Although a written response to the questionnaire will be acceptable, DOE prefers an interactive interview

, because it helps clarify responses and provides the opportunity to identify add itional issues.

All information transmitted will be considered, as appropriate, in DOE’s decision

- making

process. Interview participants will be asked to identify all confidential information provided in writing or orally ; no confidential information will be made available in the public record. Participants will also be asked to identify all information they wish included in the public record

, but do not want to have associated with their interview. This information will be incorporated into the public rec ord

, but reported without attribution.

12.2.3.2 Revised Industry Cash

- Flow Analysis

During the interviews, DOE will seek comment and suggestions regarding the financial parameters developed in Phase 1. Upon completion of the interviews, DOE will revise its industry cash

- flow model based on manufacturer feedback.

12.2.3.3 Manufacturer Sub

- Group Analysis

Using average cost assumptions to develop an industry cash

- flow estimate is not adequate for assessing differential impacts among sub

- groups of manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected

. Ideally, DOE would consider the impact on every firm individually; however, it typically us es the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview process, DOE will discuss the potential sub

- groups and sub

- group members that have been identified for the analysis. DOE
will lo ok to the manufacturers and other stakeholders to suggest what sub

- groups or characteristics are most appropriate for the analysis.

12.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to consider any l essening of competition likely to result from imposition of standards. It further
directs the U.S. Attorney General to determine the impacts, if any, of any decrease in competition. DOE will make a determined effort to gather and report firm

- specific finan cial information and impacts. The competitive analysis will focus on assessing the impacts on smaller, yet significant, manufacturers. The assessment will be based on manufacturing cost data
and information collected from interviews with manufacturers. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some12

- 4 manufacturers, the potential increase in business risks from an increased proportion of fixed costs, and potential barriers to mar ket entry ( e.g. , proprietary technologies).

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of standards could be the obsolescence of existing manufacturing assets, including tooling and investment. The manufacturer interview guide will
have a series of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in North America with and without a standard; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of stranded assets, if any; and estimates for any one

- time restructuring charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. T o assess how domestic employment patterns might be affected, the interview will explore current employment trends in the refrigerated beverage vending machine industry. T he interview will also solicit manufacture r views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide will focus on current employment levels associated with manufacturers at each of their production facilities, exp ected future employment levels with and without a standard, and differences in workforce skills and issues related to the retraining of employees.

12.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of amended energy conservation standards and other regulatory actions affecting the same products

. DOE will analyze and consider the impact on manufacturers of multiple, product

- specific regulatory actions. Based on its own research and discussions with manu facturers, DOE identified several regulations relevant to refrigerated beverage vending machine manufacturers
such as current or potential regulations for refrigerants, DOE’s conservation standard for commercial refrigeration equipment, and standards for f ood health and nutrition. DOE will study the potential impacts of these cumulative burdens in greater detail during the MIA conducted during the NOPR phase.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

During the pre liminary rulemaking phase, DOE conducted a preliminary evaluation of the impact of potential amended energy conservation standards on manufacturer financial performance, manufacturing capacity and employment levels, and product utility and innovation ; the preliminary evaluation will also be used to identify the cumulative burden that industries face from the overlapping effect of new or recent DOE energy conservation standards and/or other regulatory action affectin g the same products or industries

.

The primary sources of information for this ana lysis included an interview with representatives of a manufacturer trade association, public comments from manufacturers and12

- 5 other stakeholders

, and the industry analysis conducted for the 2009 refrigerated beverage vending machine standards rulemaking , su pplemented with updated market research. DOE did

not interview any individual manufacturers for the preliminary analysis. However, DOE will
continue to seek interview s with manufacturers during the NOPR phase of analysis.

For the preliminary MIA, DOE use d public comment s and interview feedback primarily to identify key issues and gain insights into the qualitative impacts of amended energy
conservation standards. Appendix 12

- A contains a copy of the interview guide for refrigerated beverage vending machines.

12.3.1 General Interview Structure

The preliminary interview questionnaire included questions relating to the topics outlined
in sections 12.3.1.1 through 12.3.1.9

. The se sections summarize information received via interviews and public comments from various stakeholders during the preliminary analysis phase
of this rulem aking as well as during the previous rulemaking

.

12.3.1.1 Key Issues

Perhaps the most important aspect of the preliminary MIA is the opportunity to identify key manufacturer issues early in the development of amended energy conservation standards. Key issues, once ide ntified, are added to the list of topics explored during the NOPR phase
interviews.

12.3.1.2 Shipment Projections

Shipment projections can be a significant factor in de termining the impacts of amended energy conservation standards. The framework comment period and preliminary interviews provide an opportunity for manufacturers and other interested parties to share information that can help DOE quantify the magnitude of any changes in shipments resulting from amended energy conservation s tandards

. DOE is interested in information relating to the current number of product shipments, broken down by product class

, capacity rating

, and efficiency level. DOE also seeks input on the forecas t of future shipments absent amended energy conservation
standards.

Manufacturers are asked how they would expect shipments to change for the industry as a whole as a function of standard levels and why they expect these changes might occur. More specific questions aim to derive a price elasticity estimate fo r use in the n ational i mpact a nalysis (NIA) spreadsheet.

Another aspect of the shipments discussion is to understand the impacts of a reduction in shipments on individual manufacturers of refrigerated beverage vending machine s

.

12.3.1.3 Profitability

DOE requests manufacturers’ views on what they perceive to be th e possible impact of potential amended energy conservation standards on their future profitability. Amended energy conservation standards could affect financial performance in several different ways. For instance

,12

- 6 the upfront investment in manufacturing capital and product development needed to upgrade production lines or redesign products before they have reached the end of their useful life can engender significant conversion costs

, resulting in reduced cash flow and stranded investments.

H igher energy efficiency standards also can result in higher per

- unit costs that may deter some

c u s to mer s from purchasing the products

, or cause some customers to delay purchase or seek to purchase used products, thereby reducing shipments.

12.3.1.4 Product Mix

DOE is interested in understanding if amended energy conservation standards might change a manufacturer’s product mix and if this change affects profits. For example

, higher energy efficiency standards might limit a manufa cturer’s ability to differentiate and market premium products that command higher profit margins.

The interview guide also investigates how amended energy conservation standards might
affect a manufacturer’s c onsumer mix and its distribution channels

, an d how in turn this might change profitability.

12.3.1.5 Conversion Costs, Manufacturing Capacity
, and Employment Levels

During the preliminary interviews, DOE asks manufacturers to quantify and explain both the capital and product conversion costs necessary to rais e the energy efficiency of their product lines to the proposed standard levels. In some instances, manufacture r s may be able to meet proposed standard levels by modifying existing products. In other cases, the necessary changes may entail a complete produc t

- line redesign. In these situations, an increase in efficiency
standards may cause manufacturers to incur one

- time conversion capital expenditures and product

- conversion expenses. Conversion capital expenditures are one

- time investments in property, plant , and equipment. Product

- conversion expenses include one

- time investments in research, product development, testing

, and marketing.

Another possible outcome of amended energy conservation standards is the obsolescence of existing manufacturing assets, inc luding tooling and other capital investment. The interview guide includes questions to identify impacts on manufacturing capacity. DOE developed t hese questions to understand the impact of potential amended standards on:

• North American manufacturing capacity;

• capacity utilization and plant location decisions in North America both with and without standards;

• the ability of manufacturers to upgrade or remodel existing facilities to accommodate a new product mix; and

• the nature and value of stranded asse ts, if any.

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. DOE uses the interviews to explore current trends in production employment and solicit manufacturer views on changes in e mployment patterns12

- 7 resulting from amended energy conservation standards. Questions regarding employment impacts help to understand :

• current employment levels associated with manufacturing at each production facility;

• expected future employmen t levels both with and without amended standards; and

• differences in workforce skills and issues related to retraining employees.

12.3.1.6 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the marketplace. Such a lterations can include the prompting of companies to enter the market, exit the market, or merge with other companies. The preliminary interview questions ask manufacturers to share their perspectives on industry consolidation both in the absence of
amende d standards and assuming standards are amended. Manufacturers are asked to consider
these effects at various efficiency levels to assess the full range of potential impacts

. The interview questions focus on gathering information that helps in assessing :

• di sproportionate cost increases to some manufacturers;

• increased proportion of fixed costs potentially increasing business risks; and

• potential barriers to market entry ( e.g. , proprietary technologies).

DOE evaluates the potential of anti

- competitive effects arising from proposed standards
in order to protect the interests of the customer

. During interviews

, DOE solicits information to
understand if amended standards could result in disproportionate economic or performance penalties for particular customer or user sub

- groups.

DOE also asks m anufacturers if amended energy conservation s tandards could result in products that will be more or less desirable to customers due to changes in product functionality, utility, or other features.

12.3.1.7 Product Utility and Innov ation

DOE conducts an assessment of anti

- competitive effects of proposed standards in order to protect the interests of the customer . During the interviews, DOE asks manufacturers if amended energy conservation standards could result in products that will be more or less desirable to

customers due to changes in product functionality, utility, or other features.

Amended energy conservation standards may require significant investment in conversion costs, including research and development (R&D). This required spending may force a manufacturer to reduce funding usually allocated to product innovation. Amended energy conservation standards may also force manufacturers to eliminate innovative energy

- consuming features from their products. During the inter views, DOE requests information on the effect of proposed standards on innovation.12

- 8 12.3.1.8 Impact on Small Manufacturers

DOE will consider the possibility of small businesses being disproportionately affected by amended energy conservation standards for refrigerat ed beverage vending machine

. Should any small business manufacturers be identified, DOE will study the potential impacts on these small businesses in greater detail during the NOPR phase of the MIA.

12.3.1.9 Cumulative Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have serious consequences for some manufacturers, groups of manufacturers, or entire industries. Assessing the impact of a single regulation may overlook this cumulative regulatory burden.

Expenditures associated with meeting other regulations are an important aspect of DOE’s consideration of the “cumulative regulatory burden” the industry faces

. The interviews help DOE identify the level and timing of investm ents manufacturers are expecting to incur as a result of these regulations. Manufacturers are also asked under what circumstances they might be able to coordinate expenditures related to these regulations and efficiency standards.

In addition to the amend ed energy conservation standards , several other Federal regulations may apply to refrigerated beverage vending machines and other products t hese
manufacturers make

. DOE will investigate these cumulative regulatory burdens in greater detail during the NOPR phase of the rulemaking.

12.4 REFRIGERATED BEVERAGE VENDING MACHINE PRELIMINARY

M ANUFACTURER I MPACT A NALYSIS RESULTS

During the preliminary MIA, DOE used public comments and interview feedback (including from the 2009 BVM rulemaking) to identify key issues and gain insights into the qualitative impacts of amended energy conservation standards

. DOE summarized the feedback
below

.

12.4.1 Key Issues

The first question asked in the preliminary interview i s: “What are the key issues regarding th i s amended energy conservation standard s rulemaking for refrigerated beverage vending machines ?” This section describes the key issues associated with the refrigerated beverage vending machine energy conservation standards rulemaking and th ose that would ha ve the most significant impact on the industry.

Refrigerated beverage vending machine manufacturers cited concerns regarding a number of issues that are covere d in greater detail elsewhere in this TSD chapter

. These issues
include concern s about the impact of amended standards on profitability given current market conditions, negative impacts on customer utility, and the cumulative regulatory burden of multiple regulations facing the industry

. Detailed descriptions of these manufacturer co ncerns

are provided in the appropriate sections that follow; only brief descriptions are provided here.12

- 9 • Customer Impacts and Performance Requirements : According to manufacturers, major customers require their own performance specifications. Manufacturers stated
that

, if their major customers do not accept equipment changes due to standards, it is likely that the market would be negatively impacted. A ddition ally

, manufacturers
noted that their customers want improvement s in energy efficiency without signifi cant changes to purchase price. Because manufacturers ideally pass on cost increases to the customer, many manufacturers expect that the ir customer s could be harmed from a new energy conservation standard.

• Current Market Conditions: For the 2009 final rule, manufacturers emphasized that industry shipments had been on a decline since the early 2000s due to overcapacity
and retiring machines not always being replaced

. According to manufacturers, the combination of these factors is causing vending to be unprofitable

, and any increases in manufacturing prices could cause shipments to decline further. Public comments submitted during the preliminary phase of th e current rulemaking echo the sentiment
that DOE should consider the fact that the market for new refrigerated beverage vending machines is still in decline and thus even more vulnerable to increased costs.

• Cumulative Regulatory Burden : Manufacturers expressed concern that the ENERGY STAR efficiency levels are effectively no longer voluntary

, having become a de facto market requirement due to their customers’ specifications . Therefore, meeting the ENERGY STAR efficiency level is a requirement to be competitive. Additionally, one manufacturer commented that, al though technically optional

, UL Safety Lis tings

are a n ecessity for practical purposes

. Other standards and regulations were mentioned in reference to cumulative regulatory burdens and are detailed subsequently

.

• Split Incentive Problem: Manufacturers cited the split incentive problem as a major

o bstacle to improving efficiency. Because bottlers own the vast majority of all beverage vending machines

, but typically do not pay the electric bills to operate the equipment, improvements in the energy efficiency of beverage vending machines
have come fro m efficiency requirements set by bottlers, not from natural incentives. Consequently, manufacturers can receive a premium for design changes that are cost
effective in terms of the servicing cost of the equipment and improving reliability. However, there a re few opportunities to charge premiums for equipment that exceeds the efficiency requirements of the major beverage vending machine purchasers

, because there is little market for those products.

• Profitability : Manufacturers in general are concerned that energy conservation standards could lead to lower profit margins.

• Small Business Impacts : M anufacturer comments indicated that small business
manufacturers of refrigerated beverage vending machines typically have fewer
research and development and engineering resources than larger manufacturers , while
absolute compliance costs are generally comparable

.12

- 10 12.4.2 Shipments, Profitability
, and Product Mix

For the 2009 rulemaking, DOE asked manufacturers during the preliminary manufacturer interviews how amended energy conservation standards would affect their overall shipments

, profitability

, and product mix

.

According to manufacturers, the industry has two main customers (bottling companies
Coca

- Cola and Pepsi Co.) that make the majorit y of all beverage vending machine purchases.

M anufacturers stated at that time that the combined capacity of each major manufacturer was many times larger than the current market demand. The overcapacity has been a result of a significant decline in shipments from the early 2000s through the 2009 rulemaking due to a saturated market. Manufacturers stated that shipments were also in declin e due to a slowing of
the replacement rate for retiring machines.

In addition to the se trends, m anufacturers expressed concerns that h igher selling prices resulting from amended standards could harm profitability within the refrigerated beverage vending industry. Historically, manufacturers have experienced difficulty in passing cost increases along to customers. This relates to what manufacturers referred to as the “split incentive problem.” Because these customers ( bottl ing companies ) own the vast major ity of all beverage vending machines but typically do not pay the electric bills to operate the equipment,
there is little opportunit y to charge premiums for equipment that exceeds the efficiency requirements of these major purchasers

. Manufacturers acknow ledged that

, because all manufacturers would be required to make similar equipment changes, there is a chance that these higher production costs could be passed through.

Manufacturers also stated that the increasing costs associated with amended energy

c onservation standards could decrease profitability

, because vending machines are only one of the available options to their customers. For example, instead of purchasing new beverage vending machines, customers could choose to purchase remanufactured equip ment, extend the lifetime of their installed equipment, or switch to reach

- in coolers or fountains. Additionally, manufacturers are concerned that the existing overcapacity and limited number of high

- volume purchasers could harm profits if their manufactur ing costs increase.

According to manufacturers, the combination of these factors renders vending unprofitable

, and even minimal increases in manufacturing costs could cause shipments to decline further. Manufacturers are concerned that higher selling prices could lead to lower shipments because the limited capital budgets of the major beverage vending machine buyers makes purchase r s sensitive to first costs. Lower production volumes could increase per unit overhead and depreciation, leading to higher p rices and

, in turn

, even lower shipments.

For the current rulemaking, stakeholders maintain that DOE should consider the market trend that indicates a shrinking industry

- wide sales volume for new refrigerated beverage vending machines

, as well as the fact that there are a relatively small number of manufacturers
active in the refrigerated beverage vending machine market. Stakeholders also maintain that profitability for both refrigerated beverage vending machine manufacturers and operators is likely t o be negatively impacted by an amended standard.12

- 11 12.4.3 Market Share and Industry Consolidation

Through market research and stakeholder input, DOE believes there has been little in the way of entry and exit in the refrigerated beverage vending machine industry since the 2009 standards rulemaking. One stakeholder noted that Crane Co.

− the parent company to refrigerated beverage vending machine manufacturer Crane Merchandising

–

recently acquired MEI Conlux, a

company that manufactures and sells electronic bill accep tors, coin mechanisms, and other unattended transaction systems. This stakeholder also noted that it does not expect additional consolidation within the industry in the absence of additional conservation standards.

In the 2009 rulemaking, several manufact urers predicted that the increased cost of beverage vending machines could squeeze smaller beverage vending machine operators and
could cause consolidation within the bev erage vending machine operator industry.

12.4.4 Conversion Costs, Manufacturing Capacity, and Employment Levels

New and amended energy conservation standards typically cause manufacturers to incur

one

- time conversion costs to bring their production facilities and product designs in to compliance with the new standards . For the MIA, DOE classifies t hese one

- time conversion costs into two major groups. Product conversion costs are one

- time investments in research, development, testing, and marketing focused on making equipment designs comply with the amended energy conservation standard. Capital conve rsion costs are one

- time investments in property, plant, and equipment to adapt or change existing production facilities so that new equipment designs can be fabricated and assembled under the amended regulation.

DOE will continue to solicit input from m anufacturers regarding estimated conversion

costs

, as well as impacts on manufacturing capacity and employment during the NOPR phase of this rulemaking.

12.4.5 Impact on Innovation and C usto mer Utility

Amended energy conservation standards can affect purchasers of refrigerated beverage vending machine by increasing or decreasing product innovation and utility

. With regards to innovation impacts in the industry, Wittern

, , a manufacturer, publicly commented that huge
strides have been made in the energy efficiency of refrigerated beverage vending machines compared to 10 years ago, and that now there’s a need to minimize energy

- related regulations in order to maximize innovations in product development.

Regarding consumer utility, Automated Merchandisi ng Systems, Inc. ( AMS ) strongly urged DOE to consider the development of a separate equipment class for glass

- front multi

purpose vending machines. AMS noted that a glass

- front is a product feature that carries with it additional utility. At the same time, glass

- front machines have fewer energy saving options (such
as insulation in the door and zone

- cooling), which places manufacturers of this segment of products at a disadvantage with regards to an amended standard.12

- 12 12.4.6 Cu mulative Burden s
Based on its own research and discussions with manufacturers, DOE identified several regulations relevant to refrigerated beverage vending machines , including:

• current refrigerant regulations ;

• DOE conservation s tandards for commercial ref rigeration equipment ;

• federal health and nutrition standards ; and

• ENERGY STAR.

Complying with such regulations requires corporations to invest both human and capital

resources. The following subsections discuss in greater detail regulations affec ting the refrigerated beverage vending machine s industry.

12.4.6.1 Federal Refrigerant Regulations

M anufacturers urged DOE to consider both current and potential restrictions on refrigerants as part of the cumulative regulatory burden impacting the refrigerated beverage vending machine industry

. It is possible that a climate change bill regulating the use and
emissions of greenhouse gases ( GHGs ) may be passed by Congress in the near future

. S uch a bill may further restrict the use of hydrofluorocarbons (HFCs ) as refrigera nts

, potentially phas ing
them out or capping their use at a restricted level. This presents a problem for manufacturers
because HFC

- 134a is currently the most common refrigerant used in refrigerated beverage vending machines.

In the U nited States , there are a series of national and state regulations applicable to refrigerants. The use of both carbon dioxide and hydrocarbons as refrigerants is currently regulated by multiple federal government agencies, including the U.S. Environmental Protection Agency (E PA) and the U.S. Department of Labor’s Occupational Safety & Health Administration (OSHA).

Refrigerants must first seek the approval of EPA’s Significant New Alternatives Policy ( SNAP ) program for each application in which the alternative refrigerant wil l be used. The purpose of SNAP is to evaluate and regulate substitutes for current Class I (CFC) and Class II (HCFC) ozone

- depleting refrigerants used in U

. S

. industry. b Refrigerants can be approved or denied for use in particular applications, and approval can be conditional on meeting certain conditions prescribed by EPA. Hydrocarbons have not yet obtained SNAP approval for use as a refrigerant in refrigerated beverage v ending machines. For equipment using carbon dioxide

based refrigerant, a fter EPA SNAP approval is secured, equipment must still meet safety

b William Goetzler, Javier Burgos, Hirokazu Hiraiwa , and Timothy Sutherland, “Review of Regulations and Standards for the Use of Refrigerants with GWP Values Less Than 20 in HVAC&R Applications: Final Report,” ARTI Report No. 09001

- 01 , April 2010. http://www.ahrinet.org/App_Content/ahri/files/RESEARCH/Tech nical%20Results/ARTI

- Rpt

- 09001

- 01.pdf12

- 13 standards from OSHA

- approved testing laboratories. Equipment must meet safety standards such

as those set by Underwr iters Laboratories ( UL ) , which prescribe requirements on equipment using certain refrigerants , as deemed appropriate. c

12.4.6.2 Standards for Commercial Refrigeration Equipment

In addition to the efficiency regulations for refrigerated beverage vending machines

, Fe deral efficiency regulations for commercial refrigeration equipment , which includes coverage of refrigerated display cases, will impact one manufacture r. In March 2014, DOE published a
f inal r ule establishing amended energy conservation standard s for comme rcial refrigeration equipment. Compliance with amended standards will be required in 2017. Total industry conversion costs are expected to be approximately $184.0 million

.

12.4.6.3 Federal Health and Nutrition Standards

Manufacturers cited current and potential food health and nutrition standards instituted by
the U.S. Department of Agriculture (USDA) and Federal Food and Drug Administration ( FDA ) as contributing to cumulative regulatory burdens for the refrigerated bever age vending machine industry. In June of 2013, USDA published an interim final rule amending the National School Lunch Program and School Breakfast Program regulations to establish nutrition standards for all
foods sold in schools , including snacks sold i n vending machines. Some manufacturers expressed

concerns that restrictions on what can be sold in vending machines will require a change to manufacturing processes. Similarly, t o implement the vending machine labeling provisions of the
Patient Protection and Affordable Care Act of 2010 (Affordable Care Act), in 2011, the FDA

propos ed requirements for providing calorie information for certain articles of food sold from vending machines. Some manufacturers are concerned that these requirements could require costly upgrades to vending machine screens.

12.4.6.4 ENERGY STAR

Some stakeholders have also expressed concern regarding potential conflicts with other certification programs , in particular EPA ’s ENERGY STAR requirements

. However, DOE notes that certain standards, such as ENERGY STAR, are voluntary for manufacturers. As such, they are not part of DOE’s consideration of cumulative regulatory burden.

12.4.7 Impact on Small Manufacturers

The Small Business Administration ( SBA ) defines small business manufacturing enterprises for North American Industry Classification System (NAICS) code 33 3318

, Other Commercial and Service Industry Machinery Manufacturing

, as companies with 1,000 or less employees

. SBA lists small business size standards that are matched to industries as they are described in the NAICS. The size standard defines the maximum allowable size of a for

- profit small business for Federal Government programs. S ize standards are generally based on the average annual receipts or the average number of employees at a firm.

c Ibid.12

- 14 M anufacturer comments indicated that smaller business manufacturers of refrigerated beverage vending machines typically have fewer human and financial resources than their larger counterparts

. Although small manufacturers often have a more limited produ ct range than larger manufacturers, the effort to address some aspects of regulations are relatively fixed and do not scale directly with the number of products or product platforms produced. Consequently, the
cumulative burden of overlapping regulations w ill tend to place more of a burden on smaller
manufacturers because of their more limited resources.

In its initial research, DOE identified four small business refrigerated beverage vending
machine manufacturers. DOE will study the potential impacts to t hese small businesses in greater detail during the NOPR phase MIA.