### CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

CHAPTER 13. MANUFACTURER IMPACT ANALYSIS .....................................................13-i 13.1 INTRODUCTION

......................................................................................................... 13-1 13.2 METHODOLOGY

........................................................................................................ 13-1 13.2.1 Phase I: Industry Profile

..................................................................................... 13-2 13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

............................ 13-2 13.2.2.1 Industry Cash-Flow Analysis

............................................................... 13-2 13.2.2.2 Interview Guide

................................................................................... 13-2 13.2.3 Phase III: Sub-Group Impact Analysis

.............................................................. 13-2 13.2.3.1 Manufacturer Interviews

...................................................................... 13-3 13.2.3.2 Revised Industry Cash-Flow Analysis

................................................. 13-3 13.2.3.3 Manufacturer Sub-Group Analysis

...................................................... 13-3 13.2.3.4 Small-Business Manufacturer Sub-Group

........................................... 13-4 13.2.3.5 Manufacturing Capacity Impact

.......................................................... 13-4 13.2.3.6 Employment Impact

............................................................................. 13-4 13.2.3.7 Cumulative Regulatory Burden

........................................................... 13-5 13.3 MANUFACTURING IMPACT A NALYSIS KEY ISSUES

........................................ 13-5 13.4 GRIM INPUTS AND ASSUMPTIONS

........................................................................ 13-7 13.4.1 Overview of the GRIM

...................................................................................... 13-7 13.4.2 Sources of GRIM Inputs

.................................................................................... 13-8 13.4.2.1 Corporate Annual Reports

................................................................... 13-8 13.4.2.2 Standard and Poor Credit Ratings

........................................................ 13-9 13.4.2.3 Shipments Model

................................................................................. 13-9 13.4.2.4 Engineering Analysis

........................................................................... 13-9 13.4.2.5 Manufacturer Interviews

...................................................................... 13-9 13.4.3 Financial Parameters

.......................................................................................... 13-9 13.4.4 Corporate Discount Rate

.................................................................................. 13-10 13.4.5 Trial Standard Levels

....................................................................................... 13-11 13.4.6 Shipments

......................................................................................................... 13-12 13.4.7 Production Costs

.............................................................................................. 13-17 13.4.8 Conversion Costs

............................................................................................. 13-21 13.4.9 Markup Scenarios

............................................................................................ 13-23 13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario

......................... 13-23 13.4.9.2 Preservation-of-Gross-Margin (Absolute Dollars) Scenario

............. 13-24 13.5 INDUSTRY FINANCIAL IMPACTS

........................................................................ 13-27 13.5.1 Impacts on Industry Net Present Value

........................................................... 13-28 13.5.2 Impacts on Annual Cash Flow

......................................................................... 13-28 13.6 OTHER IMPACTS

...................................................................................................... 13-31 13.6.1 Employme nt

..................................................................................................... 13-31 13.6.2 Production Capacity

......................................................................................... 13-34 13.6.3 Exports

............................................................................................................. 13-3 4 13.6.4 Cumulative Regulatory Burden

....................................................................... 13-35

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### 13.6.4.1 Federal Regulations on Commercial Refrigeration Equipment and Other Equipment Produced by the Same Manufacturers

............................ 13-35 13.6.4.2 Restriction of Hazardous Substances Directive

................................. 13-37 13.6.4.3 Other Regulations for Commercial Refrigeration Equipment

........... 13-37 13.7 CONCLUSIONS

.......................................................................................................... 13-37 REFERENCES

..................................................................................................................... ... 13-40

LIST OF TABLES

Table 13.4.1 GRIM Financial Parameters

.............................................................................. 13-10 Table 13.4.2 Baseline Efficiency Leve ls and Trial Standard Levels

...................................... 13-12 Table 13.4.3 Industry-Wide Ship ments Forecast in 2012

....................................................... 13-13 Table 13.4.4 Distribution of VOP.RC.M by Ef ficiency Level in 2012 for Different Trial Standard Levels

................................................................................................ 13-13 Table 13.4.5 Distribution of VOP. RC.L by Efficiency Level in 2012 for Different Trial Standard

Table 13.4.6 Distribution of VOP.SC.M by Ef ficiency Level in 2012 for Different Trial

Table 13.4.7 Distribution of VCT.RC.M by Ef ficiency Level in 2012 for Different Trial

Table 13.4.8 Distribution of VCT. RC.L by Efficiency Level in 2012 for Different Trial Standard

Table 13.4.9 Distribution of VCT. SC.I by Efficiency Level in 2012 for Different Trial Standard

Table 13.4.10 Distribution of VCS.SC .I by Efficiency Level in 2012 for Different Trial Standard

Table 13.4.11 Distribution of SVO.RC.M by Effi ciency Level in 2012 for Different Trial

Table 13.4.12 Distribution of SVO.SC.M by Effi ciency Level in 2012 for Different Trial

Table 13.4.13 Distribution of SOC.RC.M by Effi ciency Level in 2012 for Different Trial

Table 13.4.14 Distribution of HZO.RC.M by Effi ciency Level in 2012 for Different Trial

Table 13.4.15 Distribution of HZ O.RC.L by Efficiency Level in 2012 for Different Trial

Table 13.4.16 Distribution of HZO.SC.M by Effi ciency Level in 2012 for Different Trial

Table 13.4.17 Distribution of HZ O.SC.L by Efficiency Level in 2012 for Different Trial

Table 13.4.18 Distribution of HCT.SC .I by Efficiency Level in 2012 for Different Trial Standard Levels

............................................................................................................... 13-14

Standard Levels

................................................................................................ 13-14

Standard Levels

................................................................................................ 13-14

Levels

............................................................................................................... 13-14

Levels

............................................................................................................... 13-15

Levels

............................................................................................................... 13-15

Standard Levels

................................................................................................ 13-15

Standard Levels

................................................................................................ 13-15

Standard Levels

................................................................................................ 13-16

Standard Levels

................................................................................................ 13-16

Standard Levels

................................................................................................ 13-16

Standard Levels

................................................................................................ 13-16

Standard Levels

................................................................................................ 13-17

Levels

............................................................................................................... 13-17 Table 13.4.19 Production Cost Breakdown for VOP.RC.M Equipment Class (2007$)

.......... 13-18 Table 13.4.20 Production Cost Breakdown for VOP.RC.L Equipment Class (2007$)

........... 13-18 Table 13.4.21 Production Cost Breakdown for VOP.SC.M Equipment Class (2007$)

.......... 13-18

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### Table 13.4.22 Production Cost Breakdown for VCT.RC.M Equipment Class (2007$).......... 13-18 Table 13.4.23 Production Cost Breakdown for VCT.RC.L Equipment Class (2007$)........... 13-18 Table 13.4.24 Production Cost Breakdown for VCT.SC.I Equipment Class (2007$) ............ 13-19 Table 13.4.25 Production Cost Breakdown for VCS.SC.I Equipment Class (2007$)............. 13-19 Table 13.4.26 Production Cost Breakdown for SVO.RC.M Equipment Class (2007$).......... 13-19 Table 13.4.27 Production Cost Breakdown for SVO.SC.M Equipment Class (2007$) .......... 13-19 Table 13.4.28 Production Cost Breakdown for SOC.RC.M Equipment Class (2007$).......... 13-19 Table 13.4.29 Production Cost Breakdown for HZO.RC.M Equipment Class (2007$) ......... 13-20 Table 13.4.30 Production Cost Breakdown for HZO.RC.L Equipment Class (2007$)........... 13-20 Table 13.4.31 Production Cost Breakdown for HZO.SC.M Equipment Class (2007$).......... 13-20 Table 13.4.32 Production Cost Breakdown for HZO.SC.L Equipment Class (2007$)........... 13-20 Table 13.4.33 Production Cost Breakdown for HCT.SC.I Equipment Class (2007$) ............ 13-20 Table 13.4.34 Capital Conversion Expenditures by Trial Standard Level (2007$ millions) .. 13-22 Table 13.4.35 Equipment Conversion Expenditure s by Trial Standard Level (2007$ millions) 13

- 22 Table 13.4.36 Stranded Assets by Trial St andard Level (2007$ millions).............................. 13-23 Table 13.4.37 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for VOP.RC.M.... 13-24 Table 13.4.38 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for VOP.RC.L..... 13-24 Table 13.4.39 Preservation-of-Gro ss-Margin (Absolute Dollar s)Markup for VOP.SC.M ..... 13-25 Table 13.4.40 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for VCT.RC.M.... 13-25 Table 13.4.41 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for VCT.RC.L..... 13-25 Table 13.4.42 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.SC.I....... 13-25 Table 13.4.43 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for VCS.SC.I....... 13-25 Table 13.4.44 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for SVO.RC.M.... 13-26 Table 13.4.45 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.SC.M .... 13-26 Table 13.4.46 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for SOC.RC.M .... 13-26 Table 13.4.47 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for HZO.RC.M.... 13-26 Table 13.4.48 Preservation-of-Gro ss-Margin (Absolute Dollars) Markup for HZO.RC.L..... 13-27 Table 13.4.49 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.M .... 13-27 Table 13.4.50 P Preservation-of-Gross-Margin (A bsolute Dollars) Markup for HZO.SC.L.. 13-27 Table 13.4.51 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HCT.SC.I....... 13-27 Table 13.5.1 Changes in Industry Net Present Va lue (Preservation-of-G ross-Margin-Percentage Markup Scenario)............................................................................................. 13-28 Table 13.5.2 Changes in Industry Net Present Va lue (Preservation-of-Gross-Margin (Absolute Dollars) Markup Scenario) .............................................................................. 13-28 Figure 13.6.1 CRE Products Indus try Cost Structure..............................................................13-31 Table 13.6.1 Commercial Refriger ation Equipment Industry Estimat ed Employment Impacts in 2012.................................................................................................................. 13-33 Figure 13.6.2 Total Commercial Refrigeration Equipment Industry Domestic Employment by Year.................................................................................................................. 13-33 Table 13.6.2 Other DOE Actions Af fecting the CRE Industry ............................................... 13-36

LIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow............................................................ 13-8

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### Figure 13.5.1 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin-Percentage Markup Scenario)............................................................................................. 13-29 Figure 13.5.2 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin (Absolute Dollars) Markup Scenario) .............................................................................. 13-30

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### CHAPTER 13. MANUFACTUR ER IMPACT ANALYSIS

13.1 INTRODUCTION

In determining whether a standard is economi cally justified, the Secretary of Energy is required to consider "the economic impact of the standard on the manufacturers and on the consumers of the equipment 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 U.S. Department of Energy (DOE) conducted a manufacturer impact analysis (MIA) to estimate the financial impact of higher efficiency st andards on manufacturers of commercial refrigeration equipment (CRE) and to assess the impact of such standards on employment and manufacturing capacity. The MIA has both quantitative and qualitative aspects.

The quantitative portion of the MIA primar ily relies on the Government Regulatory Impact Model (GRIM), an industry cash-flow m odel adapted for this rulemaking. GRIM inputs are industry cost structure, shipments, and pric ing strategies. The GRIM’s key output is industry net present value (INPV). The model estimates the financial impact of higher efficiency standards by comparing changes in INPV between a base case and various trial standard levels (TSLs).

The qualitative portion of the MIA addresses fa ctors such as equipment characteristics, characteristics of particular firms, and market and equipment trends, and includes an assessment of the impacts of standards on sub-groups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Ph ase I, Industry Profile, consisted of the preparation of an industry charac terization including data on ma rket share, sales volumes and trends, pricing, employment, and financial struct ure. Phase II, Industry Cash-Flow Analysis and Interview Guide, focused on the industry as a whole. In this phase, DOE used the GRIM to prepare an industry cash-flow analysis. For the quantitative portion of the MIA analysis, DOE analyzed the same 15 product classes used in th e national impact analysis (NIA) and the lifecycle cost (LCC) analysis. Because these 15 pr oduct classes represent 98 percent of covered equipment, the reported results are representative of the entire CRE indus try. In this phase DOE also used publicly available information develope d in Phase I to adapt the GRIM’s structure to facilitate analysis of new CRE standards. In Phase III, Sub-Group Impact Analysis, DOE conducted interviews with seve ral manufacturers comprising over 90 percent of the CRE industry. During these interviews, DOE discussed fi nancial topics specific to each company and obtained each manufacturer’s view of the industry as a whole. Th e interviews provided valuable information that DOE used to evaluate the impacts of a new standard on manufacturer cash flows, manufacturing capacities , and employment levels. The following subsections describe more specifically the steps DOE took in developing information for the MIA.

a DOE’s standards program for commercial equipment is co nducted under Title III, Part C of the Energy Policy and Conservation Act (EPCA), 42 U.S.C. 6311-6317.

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### 13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a pr ofile of the CRE industry that built on the market and technology assessments prepared for this rulemaking (Chapter 3 of this TSD). Before initiating the detailed impact studies, DOE co llected information on the past and present structure and market characterist ics of the CRE industry. This included estimated market shares of CRE manufacturers, corpor ate operating ratios, wages, em ployment, and production cost ratios. The industry profile incl uded a top-down cost analysis of the CRE manufacturing industry that DOE used to derive cost a nd financial inputs for the GRIM ( e.g., revenues; material; labor; overhead; depreciation; sales, general, and admi nistration expenses (SG&A); and research and development (R&D) expenses). DOE used additiona l sources of information to further calibrate its characterization of the industry, including company Secu rities and Exchange Commission (SEC) 10–K reports, Standard & Poor’s (S&P) st ock reports, and corporate annual reports. DOE also relied on information from its engineeri ng analysis, LCC analysis, NIA, and analysis of markups to characterize th e CRE manufacturing industry.

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

In Phase II, DOE performed a preliminary industry cash-flow analysis and prepared written guidelines for interviewing manufacturers.

13.2.2.1 Industry Cash-Flow Analysis

The industry cash-flow analysis focused on the financial impacts of new standards on the CRE industry as a whole. New energy conservati on standards can affect CRE manufacturers in three distinct ways: (1) require additional investment, (2) raise pr oduction costs, and (3) affect revenues through variations in prices and ship ments. The analytical tool DOE uses for calculating the financial impacts of new energy conservation standards on manufacturers is the GRIM. DOE performed a cash-flow analysis us ing the GRIM on the CRE industry to quantify these impacts.

13.2.2.2 Interview Guide

During Phase III of the MIA, DOE conducted in terviews with manufacturers to gather information on the effects of new energy conserva tion standards on revenues and finances, direct employment, capital assets, and industry comp etitiveness. Before the interviews, DOE distributed an interview guide to help identify the impacts of new energy conservation standards on individual manufacturers or su b-groups of manufacturers. Ma nufacturers received the guide before the interviews to allow them to prepare their responses in advance. The interview guide led interviewers through a series of questions on current or ganizational characte ristics, industry infrastructure, manufacturer cash flow, comp etitive impacts, employment impacts, and manufacturing capacity impacts. The intervie w guide used to conduc t the manufacturer interviews is found in Appendix J of this TSD.

13.2.3 Phase III: Sub-Group Impact Analysis

Many of the same companies that participated in the MIA interviews also participated in interviews for the engineering analysis. Howeve r, the MIA interviews broadened the discussion

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### from primarily technology-related issues to business-related topics . The objectives were to obtain feedback from industry on the GRIM’s assumptions and to isolate key issues and concerns. DOE defined two distinctive sub-gr oups that could be affected by the new energy conservation standards: major manufacturers and small busin esses. The following sections summarize the methodology and findings of this assessment.

13.2.3.1 Manufacturer Interviews

DOE supplemented the information gathered in Phase I and the cash-flow analysis performed in Phase II with information gathered during interviews with manufacturers during Phase III. The interview process has a key role in the manufacturer impact analyses since it provides an opportunity for intere sted parties to express thei r views privately on important issues, allowing confidential or sensitive informati on to be considered in the rulemaking process.

DOE contacted companies from its database of manufacturers, which provided names of manufacturers across the CRE industry. DOE interviewed small and large companies, subsidiaries and independent firms, public a nd private corporations, and Air-Conditioning and Refrigeration Institute (ARI) a nd non-ARI members. DOE scheduled interviews well in advance in order to provide every opportunity for key i ndividuals to be available for comment. Although a written response to the questionnaire was accep table, DOE prefers interactive interviews because they help clarify responses and provide the opportunity to identify additional issues.

DOE conducted detailed intervie ws with all manufacturers, w ho agreed to participate to gain insight into the range of potential impact s and how these impacts vary with each TSL. During the interviews, DOE solicited informati on on the possible impacts of energy conservation standards on sales, direct employment, capital assets, and industry competitiveness. Both qualitative and quantitative information are valuable to the interview process. DOE then used the information gathered during manufacturer intervie ws to tailor the GRIM to incorporate unique financial characteristics from each equipment class.

13.2.3.2 Revised Industry Cash-Flow Analysis

In Phase II of the MIA, DOE provided manu facturers with preliminary financial input figures from the GRIM for review and eval uation. During the interviews, DOE requested comments on the values DOE selected for the pa rameters. Upon completion of the interviews, DOE revised its industry cash-flow model where applicable.

13.2.3.3 Manufacturer Sub-Group Analysis

Using average cost assumptions to develop an industry cash-flow estim ate is not adequate for assessing differential impacts among sub-groups of manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost structure that differs significantly from the industry average could be more negatively affect ed. Ideally, DOE would consider the impact on every manufacturer individually; however, it typically uses the results of the industry characterization to group manufactur ers exhibiting similar characteristics. During the interviews, DOE discussed the potential sub-groups and sub-group members identified for the analysis. DOE

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### looked to the manufacturers and ot her stakeholders to suggest what sub-groups or characteristics are most appropriate for the analysis.

13.2.3.4 Small-Business Manufacturer Sub-Group

DOE used the small business size standards published on January 31, 1996, as amended, by the Small Business Administration (SBA) to de termine whether any small entities would be required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The North American Industry Classification System (NAICS ) code lists the size standards for various industries. CRE manufacturing is classified under NAICS 333415 (air conditioning, forced air heating, and refrigeration equipm ent manufacturing). To be categorized as a small business, a CRE manufacturer and its affiliates may employ a maximum of 750 employees.

DOE reviewed ARI’s listing of CRE members a nd surveyed the industry to develop a list of every manufacturer. DOE also asked stakehol ders and ARI representatives within the CRE industry if they were aware of other small busin ess manufacturers. DOE then examined publicly available data and contacted manufacturers, when needed, to determine if they meet the SBA’s definition of a small business manufacturer and if their manufacturing facilities are located in the United States. Based on this analysis, DOE estimates that there are nine small CRE manufacturers. DOE contacted all nine small bus iness manufacturers to request interviews. Out of the nine possible small business manufacturers identified, two agreed to be interviewed. DOE conducted on-site interviews with the two manufacturers to dete rmine if the standards could result in differential im pacts on these companies.

DOE found that small business manufacturers gene rally have the same concerns as large manufacturers regarding ener gy conservation standards. DOE also found no significant differences in the R&D emphasis or marketing st rategies between small and large manufacturers. Therefore, DOE believes the GRIM analysis, whic h models each equipment class separately and aggregates the results to produce an industry-wide impact, is repr esentative of th e small business manufacturers that would be affected by standards.

13.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of new en ergy conservation standards could be the obsolescence of existing manufacturing asse ts, including tooling and investment. The manufacturer interview guide he lped identify impacts on manufact uring capacity, specifically capacity utilization and pl ant location decisions in the United States and North America with and without an energy conservation standard; the ab ility of manufacturers to upgrade or remodel existing facilities to accommodate the new re quirements due to new energy conservation standards; the nature and value of stranded a ssets, if any; and estimates for any one-time restructuring and other charges, where applicable.

13.2.3.6 Employment Impact

The impact of new energy conservation st andards on employment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, DOE used the GRIM to calculate empl oyment impacts at each TSL. During interviews, DOE explored current employment trends in the CRE industry. In addition, DOE solicited

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### manufacture views on changes in employment patte rns that may result from more stringent standard levels. The employment impacts sectio n of the interview guide focused on current employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without ne w energy conservation standards, and differences in workforce skills and issues related to employee retraining.

13.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of new energy conservation standards and other re gulatory actions affecting the same equipment. DOE analyzed and considered the impact on manufacturers of multiple equipment-specific regulatory actions.

Based on its own research and discussions w ith manufacturers, DOE identified several regulations relevant to CRE, including th e hydrochlorofluorocarbon (HCFC) phaseout, foam insulation blowing agent phaseout and sta ndards for other equipment made by CRE manufacturers.

13.3 MANUFACTURING IMPACT ANALYSIS KEY ISSUES

The first question each of the MIA interview guides asks is the following: “What are the key issues for your company regarding ener gy conservation standards for commercial refrigeration equipment and this rulemaking? ” This open question in itiated dialogue with manufacturers, prompting them to identify ke y points that DOE could explore during the interview. This section describes the issues that the manufacturers raised most often b



### .

• Meeting Standards

⎯ Manufacturers expressed concern th at they would have difficulty meeting certain efficiency levels for some equipment classes. First, some manufacturers stated that they could not meet or would ha ve extreme difficulty meeting the efficiency levels for self-contained equipment ( e.g., horizontal open units). On e manufacturer stated the small number of parts in self-contained equipment lim its the potential opportunities for efficiency improvements. The same manufactu rer stated that it already uses the most efficient options available on the market that fall within the company’s price range. For some manufacturers, self-contained equipmen t represents only a small portion of their business. They manufacture more remote c ondensing equipment and simply convert the design of remote condensing units into self -contained units. Second, some manufacturers stated that they could not meet efficien cy levels 3 and 4 for medium-temperature equipment ( e.g., SOC.RC.M, VCT.RC.M, VOP.RC.M), and that they would need technological innovation to achie ve these levels by 2012. One manufacturer stated that none of the equipment it manufactures in the VOP.RC.M equipment class meets DOE’s baseline level.

• Customer Needs

⎯ Manufacturers are concerned that equipment efficiency improvements will come at the expense of equipment func tionality, utility, and customizability. The CRE industry focuses meeting its customer s’ need to merchandise products, and

b Manufacturers indicated that the ri sks associated with these issues ge nerally increase with increasing TSL.

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### customers place a higher priority on marketi ng and displaying their goods than on energy efficiency. Customers demand high levels of customization to differentiate themselves from other retail stores. They do not want to lose any func tionality or utility in their equipment, such as display area, that would affect their ability to merchandise products. Often, the customer’s desire for easy consum er access requires equipment that is less energy efficient. They also do not want to lo se any flexibility in design choices, such as lighting options. For example, some customer s specify certain lighting configurations ( e.g., color rendering, color temperature, light distribution) to maximize the sale of products like fresh meat, produce, or dairy items. Manufacturers believe that setting standards at the maximum level will affect their customers’ ability to merchandise products by limiting the flexibility in choosi ng design options, which they expect would commoditize the industry and reduce profit margins. Having some allowance in the efficiency thresholds would allow tradeo ffs in design options, which would ease the reconciliation of energy sa vings with the ability to merchandise products.

• Customer Awareness

⎯ Manufacturers expressed concern that their customers are not sufficiently aware of pending energy conservation standards and the impacts these standards could have on their purchasing deci sions. The supermarket industry is a lowmargin industry, where much emphasis is plac ed on low first cost. Manufacturers believe that many customers may not be able to afford more expensive, more efficient equipment since they operate within a fixed budget. Manuf acturers stated that customers with a fixed capital budget would tend to extend refurbis hment periods and cut back on equipment growth in response to higher equipment pr ices, both of which will reduce annual CRE sales. Manufacturers expect that smaller stores and even small regional chains will feel significant financial pressure when faced w ith higher prices for higher efficiency equipment. In fact, single family-owned stores and local stores in large cities may have no capital budget to replace existing cases w ith cases that are 30-50 percent higher in price. Manufacturers stated that lower sale s would reduce employment because labor is proportional to the number of units sold, not the equipment price. Manufacturers also stated that customers have usually b een unwilling to adopt energy efficiency improvements unless there is a 12-month payback period or less.

• Equipment Classes

⎯ Manufacturers expressed concern a bout how their equipment would be classified according to the equipment classes DOE established. Manufacturers stated that certain low-volume equipment does not eas ily fit into DOE’s equipment classes, and other equipment is excluded from coverage. For example, custom pieces of equipment, especially hybrid or combination units, do not easily fall within the DOE equipment classes since they could be classified in mo re than one category. A self-contained case with a service-over-counter uppe r portion and an open lower portion could be classified as a self-contained service- over-counter unit as well as a self-contained open unit. Wedges and transition pieces at the corners of a case lineup have a disproportionate relationship between TDA and energy c onsumption, and therefore do not have meaningful energy consumption levels when normalized to TDA. Some manufacturers stated that low-volume equipment that ca nnot meet energy conservation standards may be discontinued, because the cost to increase efficiency will not be worth the benefit gained. Manufacturers also expressed concer n about secondary coolant systems, which

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### could provide a loop hole. Manufacturers es timate that secondary coolant systems represent about 10 percent of the market cu rrently and consume about 5 percent more energy than their direct expans ion equivalent. Some manufactu rers stated that customers might purchase these less-efficient secondary coolant systems instead of the direct expansion equipment that is subject to st andards. This concerns manufacturers by defeating the purpose of regulatory action.

• Component Manufacturers

⎯ Manufacturers expressed concer n that they have little control over the options available to them and the price of components used to manufacture commercial refrig eration equipment. CRE manu facturers purchase many of the components needed to build the e quipment and rely heavily on component manufacturers to deliver parts such as compressors, coils, doors, motors, fans, and lights. However, CRE manufacturers stated that mo re-efficient components may not be readily available to meet standards. For self-contai ned equipment, for example, high-efficiency compressors may not be readily available. Ma nufacturers stated that the compressors they purchase for commercial refrigeration are le ft over from the higher volume white goods industry. According to manufacturers, the comp ressor industry has litt le or no incentive to invest in improving efficiency due to the lower volume of shipments to the CRE industry. Manufacturers also stat ed that they have no contro l over the prices set by their component suppliers. Manufactur ers are concerned about the future prices for moreefficient components.

• Possible Margin Impacts

⎯ Manufacturers expressed concern that standards could impact profitability. Higher efficiency equipmen t adds pricing pressures because of commoditization of premium equipment and th e potential that production cost increases could not be fully passed on to customers. Though different manufacturers stated that they have had different experiences passing through increased material costs, most expressed concern about the po tential for lower margins due to higher production costs of higher efficiency equipment.

13.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for asse ssing the impact on the CRE industry due to the imposition of new efficiency standards. DOE relied on several sources to obtain inputs for the GRIM. Data and assumptions from these sour ces are then fed into an accounting model that details the cash flow on a base case basis, as well as calculates the impacts on manufacturers due to new energy conservation standards.

13.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1, is a standard annual cashflow analysis that uses manu facturer prices, manufacturing co sts, shipments, and industry financial information as inputs. The GRIM estimat es the effects of regul atory conditions caused by changes in costs, investments, and associated margins. The GRIM sp readsheet uses several inputs to arrive at a series of annual cash flow s, beginning with the base year of the analysis, 2007, and continuing to 2042. The model calculates the INPV by summing the stream of annual discounted cash flows during this period.

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### Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projected cash flows using st andard accounting principles. The model compared changes in INPV between the baseline equipment information (the base-case scenario) and different TSLs (the standard s-case scenario). The difference in INPV between the base case and the standards case(s) represents the es timated financial impact of the new energy conservation standard on manufacturers. Appendi x J provides more technical details and user information for the GRIM.

13.4.2 Sources of GRIM Inputs

The GRIM used several different sources for data inputs to determine cash flows for the industry, including corporate annual reports, compa ny profiles, credit ratings, Census data, the shipments model, the engi neering analysis, and ma nufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to th e SEC (SEC 10-Ks) provided many of the financial inputs to the GRIM. 1 

### These reports exist for pub licly held companies and ar e freely available to the public. The SEC 10-Ks provide cons istent financial data for the consolidated corporation but do not provide detailed financial information for the company’s CRE lines. Some SEC 10-Ks are therefore more relevant than others to the CRE industry analysis, depending on the prominence that business has in the company’ s overall operations. In determini ng financial parameters for the industry, DOE weighted corporate financial in formation contained in the SEC 10-Ks by each company’s market share in the CRE industry to a rrive at industry-weight ed averages. DOE used corporate annual reports to deri ve the following GRIM inputs:

• tax rate

• working capital

• SG&A expenses

• research and development (R&D) expenses

• depreciation

• capital expenditures

• net property, plant, and equipment (PPE)

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### DOE also used information from company SEC 10-K reports to calibrate the GRIM’s operating profit margin against th e industry-weighted average.

13.4.2.2 Standard and Poor Credit Ratings

S&P provides independent credit ratings, research, and financial information. DOE relied on S&P reports to determine the industry’s aver age cost of debt for the cost of capital calculation.

13.4.2.3 Shipments Model

The GRIM used shipment projections deri ved from DOE's shipments model in the national impact analysis. The model relied on historical shipments data for commercial refrigeration equipment from a study by Freedonia Inc. for the Advanced Notice of Proposed Rulemaking (ANOPR) analysis 2 

### . However, DOE updated the shipments analysis using ARI aggregated shipments data for the final analysis . Chapter 10 of the TSD is exclusively dedicated to describing the methodology and analytical model DOE used to forecast shipments.

13.4.2.4 Engineering Analysis

During the engineering analysis, DOE used a reverse-engineering methodology supplemented by a design-option approach to develop manufacturing cost estimates for commercial refrigeration equipment. DOE calibra ted the reverse-engineer ing cost model with individual manufacturers’ cost data, and aggregated the costs for individual manufacturers to create cost-efficiency curves for the industry. The GRIM manufacturing costs are derived from the engineering analysis curves.

13.4.2.5 Manufacturer Interviews

Key topics discussed during the intervie ws and reflected in the GRIM include

• Conversion capital expenditures (one-tim e investments in property, plant, and equipment);

• Equipment conversion expenses (one-time investments in research, equipment development, testing, and marketing);

• The portion of the conversion cap ital expenditures that compan ies use to replace stranded assets;

• Equipment cost structure (the portion of manufacturer producti on costs related to materials, labor, overhead, and depreciation costs);

• Projected total shipment and shipment distribution mix;

• Estimated profit margins characteristic of the industry; and

• Engineering analysis information.

13.4.3 Financial Parameters

For the ANOPR, DOE developed financial es timates of the CRE industry by examining several major CRE manufacturer s’ financial information from annual reports and SEC 10-K

13-9

### reports. Each company DOE analyzed is a subsidia ry of a more diversified parent company that manufactures equipment other th an commercial refrigeration e quipment. Because the SEC 10-K reports did not provide financial information at the subsidiary level, the financial parameters DOE calculated represented averages of the parent companies applied over the entire range of their equipment offerings; these parameters did not necessarily represent the CRE industry alone.

DOE presented these values to manufacturer s during the interviews for comment. While most manufacturers were unable to provide estimates for the CRE industry, they were able to provide their own financial parameters. Using thes e values, DOE calibrated its original estimates to develop financial parameters that it cons iders representative of the CRE industry. An aggregation of the MIA interv iew responses yielded the market-share-weighted financial parameters shown in Table 13.4.1. These aggregated values were the financial parameter inputs DOE used in the GRIM analysis for the final rule.

Table 13.4.1 GRIM Financial Parameters

Parameter Industry Weighted Average

Tax Rate (% of Taxable Income) 22.1 Working Capital (% of Revenues) 8.6

SG&A (% of Revenues) 13.5

R&D (% of Revenues) 1.9 Depreciation (% of Revenues) 1.1 Capital Expenditures (% of Revenues) 1.2 Net Property, Plant, and Equipment (% of Revenues) 12.1



### 13.4.4 Corporate Discount Rate

DOE used the weighted average cost of capita l (WACC) for the indus try as the discount rate to calculate the INPV. A co mpany’s assets are financed by a combination of debt and equity. The WACC is the total cost of de bt and equity weighted by their respective proportions in the capital structure of the industry. DOE estim ated the WACC for the CRE industry based on several representative companies using the following formula:

WACC = after-tax cost of debt x (debt ra tio) + cost of equity x (equity ratio)

The cost of equity is the rate of return th at equity investors (including, potentially, the company) expect to earn on a company’s stock. Th ese expectations are reflected in the market price of the company’s stock. Th e capital asset pricing model (C APM) provides one widely used means to estimate the cost of equity. Accordi ng to the CAPM, the cost of equity (expected return) is:

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### Cost of equity = risk-free rate of return + β x risk premium

where:

Risk-free rate of return is the rate of return on a “saf e” benchmark investment, typically considered the short-term Treasury Bill (T-Bill) yield.

Risk premium is the difference between the expected return on stocks and the risk-free
rate.

Beta ( β ) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated with the S&P 500 market index. A Beta lower than one means the stock is less volatile than the market index.

Bond ratings are a tool to meas ure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. On e way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis point s) over the risk-free rate. DOE used this method to calculate the cost of debt for all th e manufacturers with public financial information. S&P had bond ratings for most manufacturers, so DOE used these ratings to estimate the manufacturers’ cost of debt by adding the rele vant spread to the ri sk-free rate. An S&P bond rating was not available for one manufacturer. In this case, DOE used the company’s size and interest coverage ratio to arrive at the spread of corporate debt over risk-free securities. The interest coverage ratio measures a company’s ability to service its debt-financing obligation through its earnings.

In practice, investors use a variety of differe nt maturity Treasury Bonds to estimate the risk-free rate. DOE used a long-term Treasury Bond return (10-year bond return) because it captures long-term inflation expectations and is less volatile than short-term rates in the GRIM. The risk-free rate is estimated as approximate ly six percent, which is the average 10-year Treasury Bond return over the period of 1990 to 2006.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for manufacturers from 2002 to 2006. DOE added the industry-weighted average spread to the average T-Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry aver age tax rate to determine the net cost of debt for the industry.

13.4.5 Trial Standard Levels

DOE developed five TSLs that include co mbinations of energy efficiency levels representing comparable stringency for CRE equipment classes. Table 13.4.2 presents the efficiency levels DOE used in the GRIM. The me tric used for remote condensing equipment is calculated daily energy consumpti on (CDEC) in kWh per day. The metric used for self-contained equipment is total daily energy cons umption (TDEC) in kWh per day.

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### Table 13.4.2 Baseline Efficiency Leve ls and Trial Standard Levels

Equipment

Class Test Metric Trial Standard Levels for Primary Equipment Classes Analyzed
Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

VOP.RC.M CDEC kWh/day 1.01 x TDA + 4.07 0.9 x TDA + 4.07 0.87 x TDA + 4.07 0.82 x TDA + 4.07 0.82 x TDA + 4.07 0.74 x TDA + 4.07

VOP.RC.L CDEC kWh/day 2.84 x TDA + 6.85 2.5 x TDA + 6.85 2.38 x TDA + 6.85 2.35 x TDA + 6.85 2.27 x TDA + 6.85 2.27 x TDA + 6.85

VOP.SC.M TDEC kWh/day 2.34 x TDA + 4.71 2.09 x TDA + 4.71 1.92 x TDA + 4.71 1.74 x TDA + 4.71 1.74 x TDA + 4.71 1.65 x TDA + 4.71

VCT.RC.M CDEC kWh/day 0.48 x TDA + 1.95 0.46 x TDA + 1.95 0.43 x TDA + 1.95 0.22 x TDA + 1.95 0.22 x TDA + 1.95 0.22 x TDA + 1.95

VCT.RC.L CDEC kWh/day 1.03 x TDA + 2.61 0.97 x TDA + 2.61 0.68 x TDA + 2.61 0.57 x TDA + 2.61 0.56 x TDA + 2.61 0.56 x TDA + 2.61

VCT.SC.I TDEC kWh/day 1.63 x TDA + 3.29 1.16 x TDA + 3.29 0.77 x TDA + 3.29 0.69 x TDA + 3.29 0.67 x TDA + 3.29 0.67 x TDA + 3.29

VCS.SC.I TDEC kWh/day 0.55 x V + 0.88 0.49 x V + 0.88 0.43 x V + 0.88 0.38 x V + 0.88 0.38 x V + 0.88 0.38 x V + 0.88

SVO.RC.M CDEC kWh/day 1.01 x TDA + 3.18 0.91 x TDA + 3.18 0.89 x TDA + 3.18 0.83 x TDA + 3.18 0.83 x TDA + 3.18 0.76 x TDA + 3.18

SVO.SC.M TDEC kWh/day 2.23 x TDA + 4.59 2.04 x TDA + 4.59 1.9 x TDA + 4.59 1.73 x TDA + 4.59 1.73 x TDA + 4.59 1.65 x TDA + 4.59

SOC.RC.M CDEC kWh/day 0.62 x TDA + 0.11 0.59 x TDA + 0.11 0.55 x TDA + 0.11 0.51 x TDA + 0.11 0.51 x TDA + 0.11 0.4 x TDA + 0.11

HZO.RC.M CDEC kWh/day 0.51 x TDA + 2.88 0.45 x TDA + 2.88 0.39 x TDA + 2.88 0.36 x TDA + 2.88 0.35 x TDA + 2.88 0.35 x TDA + 2.88

HZO.RC.L CDEC kWh/day 0.68 x TDA + 6.88 0.62 x TDA + 6.88 0.58 x TDA + 6.88 0.57 x TDA + 6.88 0.57 x TDA + 6.88 0.57 x TDA + 6.88

HZO.SC.M TDEC kWh/day 1.14 x TDA + 5.55 1.03 x TDA + 5.55 0.91 x TDA + 5.55 0.78 x TDA + 5.55 0.77 x TDA + 5.55 0.77 x TDA + 5.55

HZO.SC.L TDEC kWh/day 2.63 x TDA + 7.08 2.41 x TDA + 7.08 2.2 x TDA + 7.08 1.94 x TDA + 7.08 1.92 x TDA + 7.08 1.92 x TDA + 7.08

HCT.SC.I TDEC kWh/day 1.33 x TDA + 0.43 1.16 x TDA + 0.43 0.64 x TDA + 0.43 0.6 x TDA + 0.43 0.56 x TDA + 0.43 0.56 x TDA + 0.43



### 13.4.6 Shipments

The GRIM estimated yearly revenues using the shipment forecasts and average efficiency values produced by the NES mode l (Chapter 10 of this TSD). Th e shipment analysis is a key driver of manufacturer finances because change s in the efficiency mix at the various trial standard levels are tied to shipments. Further ex planation of assumptions and calculations of total shipments can be found in Chapter 10 of this TSD. Total shipments forecasted in the shipment analysis for all efficiency levels in 2012 are shown in Table 13.4.3 and discussed below.

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### Table 13.4.3 Industry-Wide Shipments Forecast in 2012 Equipment Class Total Industry Shipments (Number of Units) VOP.RC.M 37,774 VOP.RC.L 1,889 VOP.SC.M 7,619 VCT.RC.M 2,544 VCT.RC.L 35,342 VCT.SC.I 2,582 VCS.SC.I 639 SVO.RC.M 28,813 SVO.SC.M 11,407 SOC.RC.M 7,263 HZO.RC.M 4,427 HZO.RC.L 13,921 HZO.SC.M 980 HZO.SC.L 2,033 HCT.SC.I 10,534



### DOE assumed a roll-up of ef ficiency distribution in the standards year followed by a gradual improvement in efficiency, which mimics th e growth in efficiency observed in historical data (parallel growth trend). U nder the parallel growth trend, th e equipment mix moves to higher efficiency levels until the maximum efficien cy level is reached. Table 13.4.4 through Table 13.4.18 show the distributions of shipments by TSL estimated in the NES for various equipment classes in 2012.

Table 13.4.4 Distribution of VOP.RC.M by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(1.09) TSL 1 (0.98) TSL 2 (0.95) TSL 3, 4 (0.89) TSL 5 (0.82) Baseline (1.09) 17.4% 36.5% 16.9% 14.6% 14.6% TSL 1 (0.98) 53.9% 16.9% 14.6% 14.6% TSL 2 (0.95) 70.9% 14.6% 14.6% TSL 3, 4 (0.89) 85.4% 14.6% TSL 5 (0.82) 100.0%

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### Table 13.4.5 Distribution of VOP.RC.L by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(2.99) TSL 1 (2.65) TSL 2 (2.54) TSL 3 (2.51) TSL 4, 5 (2.43) Baseline (2.99) 15.2% 32.5% 15.0% 29.1% 8.2% TSL 1 (2.65) 47.8% 15.0% 29.1% 8.2% TSL 2 (2.54) 62.8% 29.1% 8.2% TSL 3 (2.51) 91.8% 8.2% TSL 4, 5 (2.43) 100.0%



### Table 13.4.6 Distribution of VOP.SC.M by Ef ficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(2.65) TSL 1 (2.41) TSL 2 (2.24) TSL 3, 4 (2.06) TSL 5 (1.96) Baseline (2.65) 16.1% 33.9% 29.3% 10.0% 10.6% TSL 1 (2.41) 50.0% 29.3% 10.0% 10.6% TSL 2 (2.24) 79.3% 10.0% 10.6% TSL 3, 4 (2.06) 89.4% 10.6% TSL 5 (1.96) 100.0%



### Table 13.4.7 Distribution of VCT.RC.M by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(0.51) TSL 1 (0.49) TSL 2 (0.46) TSL 3 (0.37) TSL 4, 5 (0.25) Baseline (0.51) 19.9% 20.0% 19.7% 14.8% 25.6% TSL 1 (0.49) 39.9% 19.7% 14.8% 25.6% TSL 2 (0.46) 59.6% 14.8% 25.6% TSL 3 (0.37) 74.4% 25.6% TSL 4, 5 (0.25) 100.0%



### Table 13.4.8 Distribution of VCT .RC.L by Efficiency Leve l in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(1.07) TSL 1 (1.01) TSL 2 (0.72) TSL 3 (0.62) TSL 4, 5 (0.60) Baseline (1.07) 19.2% 38.3% 12.0% 10.5% 20.1% TSL 1 (1.01) 57.4% 12.0% 10.5% 20.1% TSL 2 (0.72) 69.4% 10.5% 20.1% TSL 3 (0.62) 79.9% 20.1% TSL 4 and TSL 5 (0.60) 100.0%

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### Table 13.4.9 Distribution of VCT.SC.I by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(1.75) TSL 1 (1.28) TSL 2 (0.90) TSL 3 (0.81) TSL 4, 5 (0.80) Baseline (1.75) 14.3% 44.3% 11.3% 20.6% 9.5% TSL 1 (1.28) 58.7% 11.3% 20.6% 9.5% TSL 2 (0.90) 69.9% 20.6% 9.5% TSL 3 (0.81) 90.5% 9.5% TSL 4 and TSL 5 (0.80)* 100.0%



### Table 13.4.10 Distribution of VCS.SC.I by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/V - kWh/day/ft 3 ) TSL (TDEC/V - kWh/day/ft 3 ) Baseline

(0.57) TSL 1 (0.51) TSL 2 (0.45) TSL 3, 4, 5 (0.40) Baseline (0.57) 11.7% 25.2% 27.2% 36.0% TSL 1 (0.51) 36.9% 27.2% 36.0% TSL 2 (0.45) 64.0% 36.0% TSL 3, 4, 5(0.40) 100.0%



### Table 13.4.11 Distribution of SVO.RC.M by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(1.09) TSL 1 (0.99) TSL 2 (0.96) TSL 3, 4 (0.91) TSL 5 (0.84) Baseline (1.09) 17.1% 35.7% 16.9% 15.1% 15.2% TSL 1 (0.99) 52.8% 16.9% 15.1% 15.2% TSL 2 (0.96) 69.7% 15.1% 15.2% TSL 3, 4 (0.91) 84.8% 15.2% TSL 5 (0.84) 100.0%



### Table 13.4.12 Distribution of SVO.SC.M by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(2.59) TSL 1 (2.40) TSL 2 (2.26) TSL 3, 4 (2.09) TSL 5 (2.01) Baseline (2.59) 15.5% 33.0% 29.6% 10.6% 11.3% TSL 1 (2.40) 48.5% 29.6% 10.6% 11.3% TSL 2 (2.26) 78.1% 10.6% 11.3% TSL 3, 4 (2.09) 88.7% 11.3% TSL 5 (2.01) 100.0%

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### Table 13.4.13 Distribution of SOC.RC.M by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(0.62) TSL 1 (0.59) TSL 2 (0.55) TSL 3, 4 (0.51) TSL 5 (0.40) Baseline (0.62) 17.6% 18.0% 18.2% 34.5% 11.7% TSL 1 (0.59) 35.6% 18.2% 34.5% 11.7% TSL 2 (0.55) 53.8% 34.5% 11.7% TSL 3,4 (0.51) 88.3% 11.7% TSL 5 (0.40) 100.0%



### Table 13.4.14 Distribution of HZO.RC.M by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(0.59) TSL 1 (0.54) TSL 2 (0.48) TSL 3 (0.45) TSL 4, 5 (0.44) Baseline (0.59) 19.6% 20.5% 21.0% 20.0% 18.9% TSL 1 (0.54) 40.1% 21.0% 20.0% 18.9% TSL 2 (0.48) 61.1% 20.0% 18.9% TSL 3 (0.45) 81.1% 18.9% TSL 4 and TSL 5 (0.44)* 100.0%



### Table 13.4.15 Distribution of HZO.RC.L by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (CDEC/TDA - kWh/day/ft 2 ) TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline

(0.83) TSL 1 (0.77) TSL 2 (0.73) TSL 3, 4, 5 (0.72) Baseline (0.83) 20.1% 41.0% 19.9% 19.1% TSL 1 (0.77) 61.1% 19.9% 19.1% TSL 2 (0.73) 80.9% 19.1% TSL 3, 4, 5 (0.72) 100.0%



### Table 13.4.16 Distribution of HZO.SC.M by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(1.60) TSL 1 (1.49) TSL 2 (1.38) TSL 3 (1.24) TSL 4, 5 (1.23) Baseline (1.60) 13.0% 27.8% 27.2% 22.3% 9.7% TSL 1 (1.49) 40.8% 27.2% 22.3% 9.7% TSL 2 (1.38) 68.0% 22.3% 9.7% TSL 3 (1.24) 90.3% 9.7% TSL 4, 5 (1.23) 100.0%

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### Table 13.4.17 Distribution of HZO.SC.L by Effi ciency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(3.22) TSL 1 (3.00) TSL 2 (2.79) TSL 3 (2.53) TSL 4, 5 (2.51) Baseline (3.22) 12.8% 27.9% 27.2% 22.1% 10.0% TSL 1 (3.00) 40.7% 27.2% 22.1% 10.0% TSL 2 (2.79) 67.9% 22.1% 10.0% TSL 3 (2.53) 90.0% 10.0% TSL 4, 5 (2.51) 100.0%



### Table 13.4.18 Distribution of HCT.SC.I by E fficiency Level in 2012 for Different Trial Standard Levels Shipments Efficiency by TSL (TDEC/TDA - kWh/day/ft 2 ) TSL (TDEC/TDA - kWh/day/ft 2 ) Baseline

(1.42) TSL 1 (1.24) TSL 2 (0.72) TSL 3 (0.69) TSL 4, 5 (0.65) Baseline (1.42) 17.3% 35.8% 16.8% 16.3% 13.8% TSL 1 (1.24) 53.1% 16.8% 16.3% 13.8% TSL 2 (0.72) 69.9% 16.3% 13.8% TSL 3 (0.69) 86.2% 13.8% TSL 4, 5 (0.65) 100.0%



### 13.4.7 Production Costs

Changes in equipment costs affect revenues and gross profits. As the engineering analysis (Chapter 5) shows, equipment that is more ef ficient costs more to produce than baseline equipment. For the MIA, DOE used the production co sts derived in the engi neering analysis and the production volume assumptions from the shipme nt projections in the NES. Since moreefficient equipment is manufactured at lower production volumes than standard efficiencyequipment, enacting energy conservation standards will increase production volumes for moreefficient units.

The GRIM included the proportion of costs devot ed to labor, materi als, depreciation, and overhead that make up the manuf acturer production cost of the equipment. DOE estimated the proportion of costs associated with each cost category by using the U.S. Census Bureau’s 2006 Annual Survey of Manufactures (2006 ASM) a nd information provided by manufacturers of CRE. Table 13.4.19 through Table 13.4.33 provide th e production cost assumptions at the various TSLs used in the GRIM for the equipment classes analyzed in the engineering analysis.

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### Table 13.4.19 Production Cost Breakdown for VOP.RC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $378.89 $2,271.76 $541.16 $44.86 $3,236.66 TSL 1 $389.34 $2,334.44 $556.09 $46.10 $3,325.97 TSL 2 $397.01 $2,380.44 $567.05 $47.01 $3,391.50 TSL 3 $419.44 $2,514.94 $599.09 $49.66 $3,583.13 TSL 4 $419.44 $2,514.94 $599.09 $49.66 $3,583.13 TSL 5 $760.04 $4,557.12 $1,085.56 $89.99 $6,492.71


### Table 13.4.20 Production Cost Breakdown for VOP.RC.L Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $575.98 $3,453.49 $822.66 $68.20 $4,920.32 TSL 1 $600.37 $3,599.74 $857.50 $71.08 $5,128.70 TSL 2 $626.78 $3,758.10 $895.22 $74.21 $5,354.31 TSL 3 $634.84 $3,806.46 $906.74 $75.17 $5,423.21 TSL 4 $723.15 $4,335.92 $1,032.87 $85.62 $6,177.56 TSL 5 $723.15 $4,335.92 $1,032.87 $85.62 $6,177.56


### Table 13.4.21 Production Cost Breakdown for VOP.SC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $195.40 $1,171.59 $279.09 $23.14 $1,669.22 TSL 1 $201.53 $1,208.34 $287.84 $23.86 $1,721.57 TSL 2 $215.59 $1,292.63 $307.92 $25.53 $1,841.66 TSL 3 $240.27 $1,440.64 $343.18 $28.45 $2,052.53 TSL 4 $240.27 $1,440.64 $343.18 $28.45 $2,052.53 TSL 5 $355.87 $2,133.74 $508.28 $42.13 $3,040.02



### Table 13.4.22 Production Cost Breakdown for VCT.RC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $602.90 $3,614.90 $861.11 $71.38 $5,150.29 TSL 1 $605.45 $3,630.21 $864.76 $71.69 $5,172.10 TSL 2 $611.61 $3,667.13 $873.55 $72.41 $5,224.71 TSL 3 $662.68 $3,973.34 $946.50 $78.46 $5,660.98 TSL 4 $764.26 $4,582.40 $1,091.58 $90.49 $6,528.73 TSL 5 $764.26 $4,582.40 $1,091.58 $90.49 $6,528.73



### Table 13.4.23 Production Cost Breakdown for VCT.RC.L Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $660.96 $3,963.04 $944.04 $78.26 $5,646.30 TSL 1 $669.67 $4,015.28 $956.49 $79.29 $5,720.73 TSL 2 $785.03 $4,706.94 $1,121.25 $92.95 $6,706.16 TSL 3 $836.10 $5,013.15 $1,194.19 $98.99 $7,142.43 TSL 4 $850.92 $5,102.03 $1,215.36 $100.75 $7,269.07 TSL 5 $850.92 $5,102.03 $1,215.36 $100.75 $7,269.07

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### Table 13.4.24 Production Cost Breakdown for VCT.SC.I Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $314.81 $1,887.58 $449.64 $37.27 $2,689.30 TSL 1 $343.23 $2,057.94 $490.23 $40.64 $2,932.03 TSL 2 $389.37 $2,334.60 $556.13 $46.10 $3,326.20 TSL 3 $408.18 $2,447.41 $583.00 $48.33 $3,486.93 TSL 4 $412.96 $2,476.06 $589.83 $48.89 $3,527.74 TSL 5 $412.96 $2,476.06 $589.83 $48.89 $3,527.74



### Table 13.4.25 Production Cost Breakdown for VCS.SC.I Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $187.08 $1,121.68 $267.20 $22.15 $1,598.10 TSL 1 $189.37 $1,135.44 $270.48 $22.42 $1,617.71 TSL 2 $194.20 $1,164.41 $277.38 $22.99 $1,658.98 TSL 3 $210.19 $1,260.27 $300.21 $24.89 $1,795.56 TSL 4 $210.19 $1,260.27 $300.21 $24.89 $1,795.56 TSL 5 $210.19 $1,260.27 $300.21 $24.89 $1,795.56


### Table 13.4.26 Production Cost Breakdown for SVO.RC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $341.78 $2,049.27 $488.16 $40.47 $2,919.67 TSL 1 $348.75 $2,091.05 $498.11 $41.29 $2,979.21 TSL 2 $354.23 $2,123.91 $505.94 $41.94 $3,026.02 TSL 3 $369.87 $2,217.68 $528.28 $43.79 $3,159.61 TSL 4 $369.87 $2,217.68 $528.28 $43.79 $3,159.61 TSL 5 $619.15 $3,712.35 $884.33 $73.31 $5,289.14


### Table 13.4.27 Production Cost Breakdown for SVO.SC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $159.76 $957.92 $228.19 $18.92 $1,364.79 TSL 1 $163.06 $977.70 $232.90 $19.31 $1,392.97 TSL 2 $172.02 $1,031.42 $245.70 $20.37 $1,469.51 TSL 3 $190.89 $1,144.54 $272.64 $22.60 $1,630.67 TSL 4 $190.89 $1,144.54 $272.64 $22.60 $1,630.67 TSL 5 $276.61 $1,658.50 $395.07 $32.75 $2,362.93



### Table 13.4.28 Production Cost Breakdown for SOC.RC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $670.69 $4,021.36 $957.94 $79.41 $5,729.39 TSL 1 $672.73 $4,033.61 $960.85 $79.65 $5,746.84 TSL 2 $677.66 $4,063.15 $967.89 $80.23 $5,788.93 TSL 3 $688.85 $4,130.26 $983.88 $81.56 $5,884.55 TSL 4 $688.85 $4,130.26 $983.88 $81.56 $5,884.55 TSL 5 $900.64 $5,400.15 $1,286.38 $106.64 $7,693.80

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### Table 13.4.29 Production Cost Breakdown for HZO.RC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $383.17 $2,297.42 $547.27 $45.37 $3,273.23 TSL 1 $385.21 $2,309.67 $550.19 $45.61 $3,290.68 TSL 2 $390.14 $2,339.21 $557.23 $46.19 $3,332.76 TSL 3 $397.15 $2,381.28 $567.25 $47.02 $3,392.71 TSL 4 $401.93 $2,409.93 $574.07 $47.59 $3,433.52 TSL 5 $401.93 $2,409.93 $574.07 $47.59 $3,433.52


### Table 13.4.30 Production Cost Breakdown for HZO.RC.L Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $386.96 $2,320.19 $552.70 $45.82 $3,305.67 TSL 1 $393.93 $2,361.98 $562.65 $46.64 $3,365.21 TSL 2 $402.57 $2,413.78 $574.99 $47.66 $3,439.01 TSL 3 $407.35 $2,442.43 $581.82 $48.23 $3,479.82 TSL 4 $407.35 $2,442.43 $581.82 $48.23 $3,479.82 TSL 5 $407.35 $2,442.43 $581.82 $48.23 $3,479.82


### Table 13.4.31 Production Cost Breakdown for HZO.SC.M Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $142.52 $854.55 $203.56 $16.87 $1,217.51 TSL 1 $143.77 $862.01 $205.34 $17.02 $1,228.14 TSL 2 $148.60 $891.00 $212.25 $17.59 $1,269.44 TSL 3 $159.93 $958.90 $228.42 $18.94 $1,366.18 TSL 4 $164.70 $987.55 $235.25 $19.50 $1,407.00 TSL 5 $164.70 $987.55 $235.25 $19.50 $1,407.00



### Table 13.4.32 Production Cost Breakdown fo r HZO.SC.L Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $166.09 $995.85 $237.22 $19.66 $1,418.83 TSL 1 $168.04 $1,007.52 $240.00 $19.90 $1,435.46 TSL 2 $175.15 $1,050.16 $250.16 $20.74 $1,496.20 TSL 3 $193.89 $1,162.55 $276.93 $22.96 $1,656.34 TSL 4 $198.67 $1,191.20 $283.76 $23.52 $1,697.15 TSL 5 $198.67 $1,191.20 $283.76 $23.52 $1,697.15



### Table 13.4.33 Production Cost Breakdown fo r HCT.SC.I Equipment Class (2007$)
TSL Labor Cost Material Cost Overhead Cost Depreciation Cost Total Cost

Baseline $93.06 $557.98 $132.92 $11.02 $794.98 TSL 1 $94.32 $565.55 $134.72 $11.17 $805.76 TSL 2 $103.94 $623.19 $148.45 $12.31 $887.88 TSL 3 $105.17 $630.57 $150.21 $12.45 $898.40 TSL 4 $109.95 $659.22 $157.03 $13.02 $939.21 TSL 5 $109.95 $659.22 $157.03 $13.02 $939.21


### As the engineering analysis explains, DOE calculated the manufacturer markup as the market-share-weighted average value for the indu stry. DOE developed this manufacturer markup

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### for the ANOPR by examining several major CRE ma nufacturers’ gross margin information from annual reports and SEC 10-K reports. Because the 10-K reports do not provide gross margin information at the subsidiary le vel, the estimated markups repres ent the average markups that the parent company applies over its entire range of equipment offe rings and does not necessarily represent the manufacturer mar kup of the subsidiary. The result of the ANOPR analysis showed that the average manufacturer markup was 1.39. Fo llowing the interviews with manufacturers, DOE adjusted the markups to be more representa tive of the industry. An aggregation of the MIA interview responses gave a market-share-weight ed average manufacturer markup value of 1.32. DOE used this updated manufacturer markup wi th the manufacturing production costs (MPCs) from the engineering analysis to arrive at the manufacturer selling pri ces (MSPs) used in the GRIM. DOE kept the 1.32 markup for the final rule.

13.4.8 Conversion Costs

New efficiency standards t ypically cause manufacturers to incur one-time conversion costs to bring their production facilities and product designs in compliance with the new regulation. For the MIA, DOE classified these one-time conversion co sts into three major groups. Equipment conversion expenditures are one-time investments in research, development, testing, and marketing focused on making equipmen t designs comply with the new efficiency standard. Capital conversion expenditures 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 new regulation. Stranded assets are equi pment or tooling that become obsolete as a result of new regulation.

During the MIA interviews, DOE asked manuf acturers to estimate the conversion costs they would incur due to new energy conserva tion standards. DOE then used the costs manufacturers provided and thei r respective market shares to develop estimates for the conversion costs of the entire CRE industry at each TSLs. Capital conversion expenditures include replacing foam fixtures for various models, retooling machinery for redesigned components, and possible changes to factory la yout. Equipment conversio n expenditures include R&D, certification and testing, marketing, and ot her costs required to bring more efficient equipment into the market. Since some manuf acturers do not manufacture high efficiency equipment, as required efficiencies increase w ith higher TSLs the indus try must convert more equipment and thus incur higher conversi on costs. Table 13.4.34 through Table 13.4.36 summarize these estimates.

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### Table 13.4.34 Capital Conversion Expenditures by Trial Standard Level (2007$ millions) Equipment Class Trial Standard Level TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 VOP.RC.M 0.06 0.39 2.85 2.85 7.13 VOP.RC.L 0.06 0.39 2.85 7.13 7.13 VOP.SC.M 0.07 0.42 3.11 3.11 7.78 VCT.RC.M 0.06 0.39 2.85 7.13 7.13 VCT.RC.L 0.06 0.39 2.85 7.13 7.13 VCT.SC.I 0.03 0.16 1.18 2.96 2.96 VCS.SC.I 0.03 0.16 1.18 2.96 2.96 SVO.RC.M 0.06 0.34 2.47 2.47 6.17 SVO.SC.M 0.06 0.37 2.73 2.73 6.81 SOC.RC.M 0.04 0.26 1.93 1.93 4.83 HZO.RC.M 0.06 0.39 2.85 7.13 7.13 HZO.RC.L 0.06 0.39 2.85 7.13 7.13 HZO.SC.M 0.06 0.39 2.85 7.13 7.13 HZO.SC.L 0.06 0.39 2.85 7.13 7.13 HCT.SC.I 0.02 0.13 0.92 2.31 2.31

TOTAL 0.83 4.95 36.33 71.19 90.82



### Table 13.4.35 Equipment Conversion Expenditures by Trial Standard Level (2007$ millions)

Equipment Class Trial Standard Level TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 VOP.RC.M 0.04 0.22 1.62 1.62 4.05 VOP.RC.L 0.04 0.22 1.62 4.05 4.05 VOP.SC.M 0.04 0.24 1.77 1.77 4.42 VCT.RC.M 0.04 0.22 1.62 4.05 4.05 VCT.RC.L 0.04 0.22 1.62 4.05 4.05 VCT.SC.I 0.02 0.09 0.67 1.68 1.68 VCS.SC.I 0.02 0.09 0.67 1.68 1.68 SVO.RC.M 0.03 0.19 1.40 1.40 3.50 SVO.SC.M 0.04 0.21 1.55 1.55 3.87 SOC.RC.M 0.02 0.15 1.10 1.10 2.74 HZO.RC.M 0.04 0.22 1.62 4.05 4.05 HZO.RC.L 0.04 0.22 1.62 4.05 4.05 HZO.SC.M 0.04 0.22 1.62 4.05 4.05 HZO.SC.L 0.04 0.22 1.62 4.05 4.05 HCT.SC.I 0.01 0.07 0.52 1.31 1.31

TOTAL 0.47 2.81 20.64 40.44 51.59

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### Table 13.4.36 Stranded Assets by Trial Standard Level (2007$ millions)

Equipment Class Trial Standard Level TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 VOP.RC.M 0.04 0.24 1.73 1.73 4.32 VOP.RC.L 0.04 0.24 1.73 4.32 4.32 VOP.SC.M 0.04 0.26 1.88 1.88 4.71 VCT.RC.M 0.04 0.24 1.73 4.32 4.32 VCT.RC.L 0.04 0.24 1.73 4.32 4.32 VCT.SC.I 0.02 0.10 0.72 1.79 1.79 VCS.SC.I 0.02 0.10 0.72 1.79 1.79 SVO.RC.M 0.03 0.20 1.49 1.49 3.73 SVO.SC.M 0.04 0.23 1.65 1.65 4.13 SOC.RC.M 0.03 0.16 1.17 1.17 2.92 HZO.RC.M 0.04 0.24 1.73 4.32 4.32 HZO.RC.L 0.04 0.24 1.73 4.32 4.32 HZO.SC.M 0.04 0.24 1.73 4.32 4.32 HZO.SC.L 0.04 0.24 1.73 4.32 4.32 HCT.SC.I 0.01 0.08 0.56 1.40 1.40

TOTAL 0.50 2.99 21.96 43.00 54.89



### 13.4.9 Markup Scenarios

To understand how baseline and more-effici ent equipment are differentiated, DOE reviewed manufacturer catalogs and utilized in formation gathered from manufacturers. To estimate the manufacturer price of the equipment sold, DOE applied markups to the production costs. For the analysis, DOE considered differe nt markup scenarios based on manufacturer input for commercial refrigeration eq uipment. Scenarios were used to bound the range of expected equipment prices following new energy conserva tion standards. For each equipment class, DOE used the markup scenarios that best characterized the prevailing markup conditions and described the range of market responses manuf acturers expect as a result of new energy conservation standards.

After discussions with manufacturers and market research, DOE modeled two markup scenarios: The preservation-of-gross-margin-per centage scenario and the preservation-of-gross

margin (absolute dollars) scenario.

13.4.9.1 Preservation-of-Gross-Marg in-Percentage Scenario

Under the preservation-of-gross-margin-p ercentage scenario, DOE applied a single uniform “gross margin percentage” markup across a ll efficiency levels. In this scenario, DOE assumed that as production costs increase in response to energy conservation standards, manufacturers would be able to maintain th e same gross margin percentage markup. As production costs increase with effi ciency, this scenario implies that the absolute dollar markup would increase. DOE assumed the non-production cost markup—which includes SG&A expenses; research and development expenses; interest; and profit—to be 1.32. This markup is consistent with the one DOE assumed in the base case for the GRIM.

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### During interviews, manufacturers expressed a range of opinions on how selling prices would be impacted by new energy conservation st andards. While some manufacturers stated it has been difficult passing along any increase in material or component costs on to customers, others stated that that these cost increases have had a minimal affect on their margins. Due to the uncertainty in how market prices will response to standards, DOE assume s that this scenario represents a high bound to industr y profitability after a new energy conservation standard.

13.4.9.2 Preservation-of-Gross-Margin (Absolute Dollars) Scenario

The implicit assumption behind this markup scenario is that the industry could only maintain its gross margin in absolute dollars after the sta ndard. The industry would do so by passing through part of its increas ed production costs to customer s without increasing its gross margin in absolute dollars. DOE implemented this scenario in the GRIM by setting the nonproduction cost markups for each TSL to yield ap proximately the same gross margin in the standards cases in the year after standard implementation (2012) as is yielded in the base case. In this scenario manufacturers do not recoup all of the increase costs of pro duction in response to new energy conservation standards, lowering the prices they earn from their customers and decreasing operating cash flow. Because the gross margin percentage decreases at each TSL, DOES assumes that this scenario represents a low bound to industry profitability after a new energy conservation standard. The non-producti on cost markups under this scenario are summarized in Table 13.4.37 through Table 13.4.51.

Table 13.4.37 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.M TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.09) 1.32

- - - - - TSL 1 (0.98) 1.32 1.31

- - - - TSL 2 (0.95) 1.32 1.32 1.31

- - - TSL 3, 4 (0.89) 1.32 1.32 1.32 1.29 1.29

- TSL 5 (0.76) 1.32 1.32 1.32 1.32 1.32 1.16



### Table 13.4.38 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.L TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (2.99) 1.32

- - - - - TSL 1 (2.65) 1.32 1.31

- - - - TSL 2 (2.54) 1.32 1.32 1.29

- - - TSL 3 (2.51) 1.32 1.32 1.32 1.29

- - TSL 4, 5 (2.43) 1.32 1.32 1.32 1.32 1.25 1.25

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### Table 13.4.39 Preservation-of-Gross-Margin (Absolute Dollars)Markup for VOP.SC.M

TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (2.65) 1.32

- - - - - TSL 1 (2.41) 1.32 1.31

- - - - TSL 2 (2.24) 1.32 1.32 1.29

- - - TSL 3, 4 (2.06) 1.32 1.32 1.32 1.26 1.26

- TSL 5 (1.96) 1.32 1.32 1.32 1.32 1.32 1.18



### Table 13.4.40 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.M TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (0.51) 1.32

- - - - - TSL 1 (0.49) 1.32 1.32

- - - - TSL 2 (0.46) 1.32 1.32 1.32

- - - TSL 3 (0.37) 1.32 1.32 1.32 1.29 1.29

- TSL 4, 5 (0.25) 1.32 1.32 1.32 1.32 1.32 1.25



### Table 13.4.41 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.L TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.07) 1.32

- - - - - TSL 1 (1.01) 1.32 1.32

- - - - TSL 2 (0.72) 1.32 1.32 1.27

- - - TSL 3 (0.62) 1.32 1.32 1.32 1.25

- - TSL 4, 5 (0.60) 1.32 1.32 1.32 1.32 1.25 1.25



### Table 13.4.42 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.SC.I

TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.75) 1.32

- - - - - TSL 1 (1.28) 1.32 1.29

- - - - TSL 2 (0.90) 1.32 1.32 1.26

- - - TSL 3 (0.81) 1.32 1.32 1.32 1.25

- - TSL 4, 5 (0.80) 1.32 1.32 1.32 1.32 1.24 1.24



### Table 13.4.43 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCS.SC.I TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3, 4, 5

Baseline (0.57) 1.32

- - - TSL 1 (0.51) 1.32 1.32

- - TSL 2 (0.45) 1.32 1.32 1.31

- TSL 3, 4, 5 (0.40) 1.32 1.32 1.32 1.28

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### Table 13.4.44 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.RC.M TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.09) 1.32

- - - - - TSL 1 (0.99) 1.32 1.31

- - - - TSL 2 (0.96) 1.32 1.32 1.31

- - - TSL 3, 4 (0.91) 1.32 1.32 1.32 1.30 1.30

- TSL 5 (0.84) 1.32 1.32 1.32 1.32 1.32 1.18



### Table 13.4.45 Preservation-of-Gross-Margin (A bsolute Dollars) Markup for SVO.SC.M
TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (2.59) 1.32

- - - - - TSL 1 (2.40) 1.32 1.31

- - - - TSL 2 (2.26) 1.32 1.32 1.30

- - - TSL 3, 4 (2.09) 1.32 1.32 1.32 1.27 1.27

- TSL 5 (2.01) 1.32 1.32 1.32 1.32 1.32 1.18



### Table 13.4.46 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SOC.RC.M TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (0.62) 1.32

- - - - - TSL 1 (0.59) 1.32 1.32

- - - - TSL 2 (0.55) 1.32 1.32 1.32

- - - TSL 3, 4 (0.51) 1.32 1.32 1.32 1.31 1.31

- TSL 5 (0.40) 1.32 1.32 1.32 1.32 1.32 1.24



### Table 13.4.47 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.M TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (0.59) 1.32

- - - - - TSL 1 (0.54) 1.32 1.32

- - - - TSL 2 (0.48) 1.32 1.32 1.31

- - - TSL 3 (0.45) 1.32 1.32 1.32 1.31

- - TSL 4, 5 (0.44) 1.32 1.32 1.32 1.32 1.31 1.31

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### Table 13.4.48 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.L TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3, 4, 5

Baseline (0.83) 1.32

- - - TSL 1 (0.77) 1.32 1.31

- - TSL 2 (0.73) 1.32 1.32 1.31

- TSL 3, 4, 5 (0.72) 1.32 1.32 1.32 1.30



### Table 13.4.49 Preservation-of-Gross-Margin (A bsolute Dollars) Markup for HZO.SC.M
TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.60) 1.32

- - - - - TSL 1 (1.49) 1.32 1.32

- - - - TSL 2 (1.38) 1.32 1.32 1.31

- - - TSL 3 (1.24) 1.32 1.32 1.32 1.29

- - TSL 4, 5 (1.23) 1.32 1.32 1.32 1.32 1.28 1.28



### Table 13.4.50 P Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.SC.L TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (3.22) 1.32

- - - - - TSL 1 (3.00) 1.32 1.32

- - - - TSL 2 (2.79) 1.32 1.32 1.30

- - - TSL 3 (2.53) 1.32 1.32 1.32 1.27

- - TSL 4, 5 (2.51) 1.32 1.32 1.32 1.32 1.27 1.27



### Table 13.4.51 Preservation-of-Gross-Margin (A bsolute Dollars) Markup for HCT.SC.I TSL (CDEC/TDA - kWh/day/ft 2 ) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline (1.42) 1.32

- - - - - TSL 1 (1.24) 1.32 1.32

- - - - TSL 2 (0.72) 1.32 1.32 1.29

- - - TSL 3 (0.69) 1.32 1.32 1.32 1.28

- - TSL 4, 5 (0.65) 1.32 1.32 1.32 1.32 1.27 1.27



### 13.5 INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated financial impacts on the CRE industry due to new energy conservation standards. The main results of the MIA are also reported in this se ction and consist of two key financial metrics: INPV and annual cash flows.

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### 13.5.1 Impacts on Industry Net Present Value

In the MIA, DOE compared the INPV of the base case (no energy conservation standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts that implementing that particul ar TSL would have on the entire industry. For the CRE industry, DOE examined two markup scenarios as desc ribed in the markup section above. Table 13.5.1 and Table 13.5.2 provide the INPV estimates for the CRE industry under the different scenarios.

Table 13.5.1 Changes in Industry Net Presen t Value (Preservation-of-Gross-MarginPercentage Markup Scenario) Preservation-of-Gross-Margin-Percentage Markup Scenario with a Rollup Shipment Scenario

Units Base Case Efficiency Level 1 2 3 4 5 INPV 2007$ millions 540 540 548 530 501 560
Change in INPV 2007$ millions

- 0 8 (11) (39) 20 %

- 0.02% 1.42% -1.95% -7.29% 3.73% Energy Conservation Standards Equipment Conversion Expenses 2007$ millions

- 0.5 2.8 20.6 40.4 51.6

Energy Conservation Standards Capital Investments 2007$ millions

- 0.8 5.0 36.3 71.2 90.8

Total Investment Required 2007$ millions

- 1.3 7.8 57.0 111.6 142.4



### Table 13.5.2 Changes in Industry Net Presen t Value (Preservation-of-Gross-Margin (Absolute Dollars) Markup Scenario) Preservation-of-Operating-Profit Markup S cenario with a Rollup Shipment Scenario

Units Base Case Efficiency Level 1 2 3 4 5 INPV 2007$ millions 540 533 502 442 392 200
Change in INPV 2007$ millions

- (7) (39) (99) (148) (340) %

- -1.27% -7.16% -18.26% -27.35% -63.01% Energy Conservation Standards Equipment Conversion Expenses 2007$ millions

- 0.5 2.8 20.6 40.4 51.6

Energy Conservation Standards Capital Investments 2007$ millions

- 0.8 5.0 36.3 71.2 90.8

Total Investment Required 2007$ millions

- 1.3 7.8 57.0 111.6 142.4



### 13.5.2 Impacts on Annual Cash Flow

While INPV is useful for evaluating the l ong-term effects of new energy conservation standards, short-term changes in cash flow ar e also important indicators of the industry’s financial situation. For example, a large investment over a period of one or two years could strain

13-28

### the industry’s access to capital. Consequently, the sharp drop in financial performance could cause investors to flee, even though recovery ma y be possible. 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, DOE presents the a nnual net or free cash flows from 2007 through 2020 for the different TSL levels. Figure 13.5.1 and Figure 13.5.2 present the a nnual net cash flows for the base case and each of the five TSLs fo r the CRE industry assuming the different markups scenarios.

NET CASH FLOW TOTALS

Markup Scenario: Preservation of Gross Margin Percentage Shipment Scenario: Rollu p $80

$70

$60

$50

$40

$30

$20

$10

$

-
$(10)

$(20)2007$ Millions Energy Conservation Standards Effective Date January 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

### Figure 13.5.1 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin-Percentage Markup Scenario)

13-29NET CASH FLOW TOTALS

Markup Scenario: Preservation of Gross Margin Absolute Shipment Scenario: Rollu p D ll2007$ Millions $80

$70

$60

$50

$40

$30

$20

$10

$

-
$(10)

$(20) Energy Conservation Standards Effective Date January 2012

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 

### Figure 13.5.2 Annual Industry Net Cash Flows (Preservation-of-Gross-Margin (Absolute Dollars) Markup Scenario)

Prior to the effective date of the amended energy conservation sta ndard, cash flows are driven by the level of capital investments and equipment conve rsion expenses and the proportion of these investments spent every year. After the standard announcement date, industry cash flows begin to decline as companies use their financia l resources to prepare for the new standard. The more stringent the energy conservation standard, the greater the impact on industry cash flows in the years running up to the effective date, as capital expenditures and equipment development costs depress cash flows from operations. Free cash flow begins to improve during the year the new energy conservation standard becomes effectiv e. In this year, manufacturers write down the part of the value of existing tooling, equipm ent, and intellectual pr operty whose value is impacted by the new efficiency standard. This one time write down acts as a tax shield that increases the cash flow from operations for th is one year only. In the years following the standard, the impact on cash flow depends on the operating revenue. Higher TSLs have a positive impact on cash flows relative to the ba se case under the preservation of gross margin percentage markup scenario be cause manufacturers are able to fully pass along costs to customers. Under this scenario, fr ee cash flow is restored to base line level for all TSLs the year the standard becomes effective. Prior to 2012, hi gher TSLs have a greater improvement on the industry’s cash position because the higher pric es improve revenue brought in by standards compliant equipment and increase operating cash flows. All higher TSLs have a negative impact on free cash flow relative to th e base case under the preservation of gross margin in absolute dollars markup scenario. In this scenario, higher TSLs squeeze the gross margin percentages as higher incremental price increases of standards compliant equipment lead to a greater proportion of those costs not being recoupe d, eroding operating cash flow.

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### 13.6 OTHER IMPACTS

13.6.1 Employment

To quantitatively assess th e impacts of energy cons ervation standards on CRE manufacturing employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL from 2007 through 2042. DOE used statistical data from the U.S. Census Bur eau’s 2006 Annual Survey of Manufactures (2006 ASM) the results of the engineer ing analysis, and interviews with manufacturers to estimate the inputs necessary to calculate i ndustry-wide labor expenditures a nd domestic employment levels.

DOE constructed the industry cost structure us ing publicly available information from the 2006 ASM and SEC 10-K reports filed by publicly owned manufacturers. The labor percentage of the industry cost structure is calculated by dividing total production worker wages by the total value of shipments. For CRE, DOE used the indu stry cost structure constructed from 2006 ASM data classified under NAICS 333415 (AC, forced air heating, and refrigeration equipment manufacturing). The labor percentage and other components of the industry cost structure are show in Figure 13.6.1 below.

CRE Industry Cost Structure as a Percentage of Revenues

Income from Operations, 8.9% Depreciation, 1.1%

Overhead, 12.7%

Labor (production Materials, 53.2%

workers), 8.9%
R&D, 1.9%

SG&A, 13.5%



### Figure 13.6.1 CRE Products Industry Cost Structure

To calculate the annual labor expenditure on production labor, th e value of production labor in the industry cost struct ure was converted to a percenta ge of the cost of goods sold (COGS). In the GRIM, the labor expenditures in each year are calculated by multiplying the

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### COGS by the production labor percentage. As a re sult, higher TSLs have greater direct labor costs because more efficient products have higher MPCs. Based on interviews with manufacturers, the vast majority of CRE sold in the U.S. are fully manufactured or assembled domestically. Though some manufacturers have production facilities abroad, these plants manufacturer components and part ially finished CRE that are sh ipped to the U.S. for final assembly. Therefore, DOE assumed that the annu al total labor expenditu re represented U.S. labor expenditures.

The domestic annual labor expenditures in the GRIMs were converted to domestic production employment levels by dividing production labor expend itures by the annual payment per production worker (production worker hours tim es the labor rate found in the 2006 ASM). The number of non-production employees was calculated by multiplying the number of production workers by the ratio of non-production workers to production workers calculated using the employment data in the 2006 ASM.

The domestic annual labor expenditures and empl oyment levels were calculated for the base case and at each TSL. The impacts on dom estic employment due to standards can be assessed by comparing the employment results in the base case to the results at each TSL. The employment results presented in the GRIM repr esent U.S. production work ers that are impacted by this rulemaking. U.S. workers involved in ma nufacturing or supporting products for exports would not be impacted and are not include d as part of the labor impacts.

The GRIM calculates that the CRE industry’ s base case domestic labor expenditure for production labor in 2012 is approximately $76 m illion (total COGS in 2012 times the production labor percentage of COGS times the percentage of U.S produc tion). Using the $17.16 wage rate and 2,009 production hours per year per employee found in the 2006 ASM, the GRIM estimates there are approximately 2,199 tota l commercial refrigeration equipment production employees involved in manufacturing products covered by this rulemaking. In addition, DOE estimates that 681 non-production employees in the U.S. support CRE production. c 

### The employment spreadsheet of the convention CRE GRIM show s the annual domestic employment impacts in further detail.

Table 13.6.1 illustrates the impact of new en ergy conservation standards on domestic employment levels at each TSL for the CRE industry calculated by the GRIM.

c As defined in the 2006 ASM, production workers number include “workers (up through the line-supervisor level) engaged in fabricating, pro cessing, assembling, inspecting, recei ving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product development, auxiliary production for plant's own use (e .g., power plant), recordkeeping, and other services closely associated with these production operations at the establishment covered by the report. Employees above the working-supervisor level are excluded from this item.” Non-production workers are defined as“employees of the manufacturing establishment including those engaged in factory supervision above the linesupervisor level. It includes sales (including driver-salespersons), sales delivery (highway truck drivers and their helpers), advertising, credit, co llection, installation and servicing of own products, clerical and routine office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), professional, and technical employees. Also included are employees on the payroll of the manufacturing establishment engaged in the construction of major additions or alterations utilized as a separate work force.”

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### Table 13.6.1 Commercial Refrigeration Equi pment Industry Estimated Employment Impacts in 2012 Trial Standard Level Base Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Total Number of Domestic CRE Production Employees in 2012 2,199 2,205 2,291 2,371 2,396 2,978 Change in Total Number of Domestic CRE Production Employees in 2012 Due to Standards - 6 92 172 197 779

Total Number of Domestic CRE NonProduction Employees in 2012 681 683 709 734 742 922

Total Number of Domestic CRE Employees in 2012 2,880 2,888 3,000 3,105 3,137 3,900



### Figure 13.6.2 shows total annual domestic empl oyment levels for each TSL calculated by the GRIM.

0 1, 000 2, 000 3, 000 4, 000 5, 000 6, 000

20

06 2008 20 10 2012 20 14 20 16 2018 20 20 2022 20 24 20 26 2028 20 30 2032 2034 20 36 2038 20 40 2042

YearTotal Domestic Employment (# of workers)

Ba s e l i n e TS L 1 TS L 2 TS L 3 TS L 4 TS L 5 E n e r gy C o n s er v a t i o n St a n d a r d s Ef f e c t i v e Da t e J a nu ar y 2 0 1 2



### Figure 13.6.2 Total Commercial Refrigeration Equipment Industry Domestic Employment by Year

Because employment expenditures are assumed to be a fixed percentage of COGS and the MPCs increase with more efficient equipment, the GRIM predicts an in crease in employment after standards. As discussed in manufacturing interviews, there are a variety of manufacturers with different capabilities. Larg er, more vertically integrated companies typically manufacture more of the final product. Hence, an increase in the complexity of the products shipped would result in higher employment, as predicted in the GRIM. Smaller manufacturers are more typically assemblers. In response to standards, these manufacturers woul d most likely not alter employment levels because inserting a more ef ficient component does not necessarily require more labor (e.g., purchasing a more compressor only increases material costs). For assemblers,

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### the greater labor expenditures for more effici ent components are born by their suppliers. For smaller manufacturers that assemb le final products, labor is more a function of units shipped, not production costs. Since the GRIM predicts an increas e in shipments, it is unlikely that assemblers will lower employment in response to standards. Manufacturers agreed that the more efficient equipment would require more labor and that em ployment in existing facilities would remain constant or increase as long as shipments do not decrease.

Currently the vast majority of commercial re frigeration equipment is manufactured in the U.S. DOE expects that there would be posit ive direct employment impacts among domestic commercial refrigeration equipment manufactur ers for TSL 1 through TSL 5. This conclusion ignores the possible relocation of domestic jobs to lower-labo r-cost countries which may occur independently of new standards or may be influenced by the level of investments required by new standards. Because the labor impacts in th e GRIM do not take relo cation into account, the labor impacts would be different if manufacturers chose to relocate to lower cost countries. Some manufactures stated that there would be increasing pressure to cut costs at higher TSLs, which could result in relocation. However, most manuf acturers stated that they would likely modify existing facilities to manufactur er standards-compliant CRE. Ma nufacturers stated that their sourcing decisions would not be greatly influenced by this rulemaking so long as shipments do not drastically change.

13.6.2 Production Capacity

According to the majority of CRE manufactur ers, new energy conservation standards will not significantly affect production capacity. Since DOE based the design options on more efficient components, manufacturing redesigned equipment will not necessarily change the fundamental assembly of the equipment. However, manufacturers anticipa te some minor changes to tooling. Thus, DOE believes manufacturers w ill be able to maintain manufacturing capacity levels and continue to meet market demand under new energy conservation standards. During interviews manufacturers stated that they woul d be able to modify their existing production facilities to meet demand.

13.6.3 Exports

CRE exports comprise a small fraction of CR E sales. Manufacturers interviewed estimate that exports account for 10 to15 pe rcent of total sales. Approxim ately one-third of exports are sold to Canada, approximately two-thirds to Mexico, and a very small percentage to some Caribbean and a few South American countries. Exports to Europe and Asia are rare because of the high cost of transporting commercial refrigeration equipment by ocean freight. Manufacturers also stated that their foreign exports are not generally affected by energy efficiency standards in other countries, except for Canada. The Canadian requirements are similar to California’s requirements so standard s in other countries ar e currently not a great concern for manufacturers.

Most manufacturers interviewed stated that they do not expect much change to their export strategies following standards. Once th e U.S. standard takes effect, commercial refrigeration equipment manufacturers would still be able to produce and export units that do not

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### meet DOE’s efficiency standard, since the sta ndard only applies to equipment for use in the United States.

Some manufacturers stated that in the abse nce of standards, production facilities are being relocated to other countries, particularly Mexico, due to lowe r labor rates. This activity is associated with internal operat ional and economic decisions and is not expected to accelerate due to energy conservation standards. Other manufacturer s stated that they have no future plans to move production facilities outside the United Stat es and that standards will not impact this decision.

Manufacturers also estimated that foreign competition has captured only a small portion of the CRE market. However, beca use of the high cost of transportation by ocean freight, foreign manufacturers have begun transitioning from im porting equipment to establishing production facilities in or near the United States.

13.6.4 Cumulative Regulatory Burden

While any one regulation may not impose a si gnificant burden on manufacturers, the combined effects of several im pending regulations may have se rious consequences for some manufacturers, groups of manufact urers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regu latory burden. For the cumulative regulatory burden analysis, DOE describes other significant product-specific regulati ons that could affect CRE manufactures or their parent company that will take effect three years before or three years after the effective date of the amended en ergy conservation standards for these products. d



### Companies that produce a wider range of regul ated equipment may be faced with more capital and equipment development expenditures than their competitors. Regulatory burdens can prompt companies to exit the market or re duce their equipment offerings, possibly reducing competition. Smaller companies may be especially affected since they have lower sales volumes over which to amortize the costs of meeting new regulations. A propos ed standard is not economically justified if it contributes to an unacceptable level of cumulative regulatory burden.

In addition to the energy conservation regulations on commercial refrigeration equipment, several other Federal regulations and pending regulations apply to these products and other equipment produced by the same manufacture rs. DOE recognizes that each regulation can significantly impact manufactur ers’ financial operations. The following sections provide a qualitative discussion of some of these regulations and standards.

13.6.4.1 Federal Regulations on Commercial Refrigeration Equipment and Other Equipment Produced by the Same Manufacturers

Besides the energy conservation regulations on CRE, several other Federal regulations and pending regulations apply to other equipment produced by the same manufacturers. DOE

d The effective date for commercial refrigeration equipment is three years from the date of publication of the final rule (approximately December 2012).

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### recognizes that each regulation can significantly impact manufacturers’ financial operations. Multiple regulations affecting the same manufactu rer can quickly strain manufacturers’ profits and possibly cause an exit from the market. Tabl e 13.6.2 lists the Federal re gulations that could also affect manufacturers of th e CRE industry in the three years leading up to and the three years preceding the effective date of the amended energy conservation standards for this equipment. It must be noted that the amount of cumulative burden on any particular firm is extremely variable since the product scope of each company is diffe rent. Table 13.6.2 also provides the timetables for these regulations.

Table 13.6.2 Other DOE Actions Affecting the CRE Industry Regulation Approximate Effective Date* Number of Impacted Companies from the MTA Estimated Total Conversion Expenses** Packaged Terminal Air Conditioners and Heat Pumps (PTAC and PTHP) 2012 2 $17.3 (2007$) e

Room Air Conditioners 2014* 1 N/A †
Residential Furnaces 2015 2 $97 (2006$) f
Walk-in Freezers and Coolers 2015* 6 N/A †
*The dates listed are an approximation. The exact dates are pending final DOE action ** Total conversion expenses include both capital and equipment conversion expenses. † For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not have finalized estimated total industry conversion expense.



### Additional investments necessary to meet these potential sta ndards could have significant impacts on manufacturers of the covered products. However, DOE has limited data on the importance of these other regulated products for manufacturers of CRE. Di fferences in market shares and manufacturing processes of other regulated products for each manufacture could cause varying degrees of burdens on these manufact ures. Therefore, DOE only estimated the cost of compliance to meet other energy conservatio n standards for regulated products if DOE had published a final rule.

In addition to other rulemakings setting minimum energy conservation standards, DOE recognizes that there are mandate d federal restrictions that c ould impact CRE manufacturers. Production of foam insulation uses a blowing agent. The U.S. Environmental Protection Agency’s (EPA’s) strategy for meeting U.S. obliga tions under the Montreal Protocol requires the United States to phase out the production a nd use of HCFC blowi ng agents. HCFC-22 and HCFC-142b will be phased out on January 1, 2010, when manufacturers will have to switch to blowing agents with zero ozone depletion potential. The EPA has also mandated a phaseout of HCFC refrigerants. DOE based its analysis on hy drofluorocarbon-based refrigerants that comply

e Estimated industry conversion expenses were published in the TSD for the October 2008 PTAC and PTHP final rule. 73 FR 58772. The TSD for the 2008 PTAC and PTHP final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_sta ndards/commercial/ptacs_pthps_final_rule.html

. f Estimated industry conversion expenses were publis hed in the TSD for the Nove mber 2007 residential furnace final rule. 72 FR 65136. The TSD for the 2007 re sidential furnace final ru le can be found at: http://www1.eere.energy.gov/buildings/appliance_st andards/residential/fur nace_boiler_fr.html

.

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### with the EPA phaseout of HCFCs. During interv iews manufacturers indicated that they had already begun using other non-HCFC refrigerants and blowing agents.

13.6.4.2 Restriction of Hazardous Substances Directive

The Restriction of Hazar dous Substance Directive 3 

### (RoHS) will have some global impact on manufacturing of electrical a nd electronic equipment. Under th e directive, all manufacturers are banned from placing on the European Union ma rket new electrical an d electronic equipment containing more than agreed levels of l ead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl, and polybrominated diphenyl ether flame retardants. Though manufacturers typically do not export CRE to th e European Union, manufacturers stated this directive could potentia lly impact their business. Although there is no Federal regulation on RoHS, California has passed SB 20: Electronic Waste Recycling Act of 2003. Under this law, California limits the amount of h azardous substances included in the RoHS directive that can be sold in California. CRE manufacturers said that RoHS could affect the way electronic components in commercial refrigeration equipmen t are incorporated into the design. However, manufacturers do not anticipate RoHS will signif icantly affect the CRE industry as a whole.

13.6.4.3 Other Regulations for Commerc ial Refrigeration Equipment

Following the August 2008 NOPR, public comment s made DOE aware that commercial refrigeration equipment manufacturers must test equipment using the NSF 7 test procedure in addition to the DOE test procedure. NSF 7 measures product temperature for food safety requirements, while the DOE test procedure measures energy consumption for energy conservation standards. Although N SF 7 is not a Federal regulati on, the commercial refrigeration equipment industry in general already tests thei r equipment using this procedure to meet food safety requirements.

In addition to Federal energy conservation st andards, manufacturers also must comply with regulations imposed on equipment shipped to States and foreign countr ies. Certain types of commercial refrigeration equipment are regulated by Title 20 of the California Energy Commission (CEC) and the Energy Efficiency Regulations of Natural Resources Canada (NRCan). Also, a European Union Eco-Design st udy to establish an Energy Using Products (EuP) directive for a standard on commercial refrigerators and fr eezers is in its final stages.

13.7 CONCLUSIONS

The following section summarizes the diffe rent impacts for the two scenarios DOE believes are most likely to capture the range of impacts on CRE manufacturers as a result of new energy conservation standards. DOE also notes th at while these two scen arios bound the range of most plausible impacts on manufacturers, there potentially could be circumstances which cause manufacturers to experience im pacts outside of this range.

To assess the lower end of the range of potential impacts on the CRE industry, DOE considered a scenario in which the industry gross margin percentage in the base case is preserved

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### in the standards case ( i.e. , the markup is held constant for all products at all TSLs). Thus, a manufacturer is able to fully pass on any additi onal costs due to standards and maintain the percentage margin between COGS and MSP. T hus, if unit sales remain constant, the gross margin in absolute dollars will increase after a standard comes into effect.

To assess the higher end of the range of potential impacts on the CRE industry, DOE considered the scenario reflecti ng the preservation of industry gross margin in absolute dollars. Under this scenario, DOE assumed that the i ndustry cannot pass on all additional costs due to efficiency-related changes ( i.e. , the markup decreases for all TSLs in the standards case.) Thus, the absolute gross margin in dollar terms is held constant. This means the percentage difference between MPC and MSP will decrease in the standards case compared to the base case and the gross margin percentage will be lower. As a resu lt, the industry will make the same gross margin in absolute dollars post-standard in a scenario with constant shipments but the industry will also have a lower INPV since the gross margin percentage is eroding.

The impacts on INPV and cash flow are re latively minor at TSL 1 because minimal investments are required and the MSPs earned by manufacturers are nearly the same as the base case even under the preservation of gross margin (absolute dollars) markup scenario. DOE estimated the impacts in INPV at TSL 1 to ra nge from approximately no impact to -$7 million, or a change in INPV of 0.02 per cent to -1.27 percent. At this le vel, the industry cash flow is $53.6 million, or nearly the same as the base-case value of $54.1 million in the year leading up to the standards. Since DOE estimates that more th an 80 percent of the equipment being sold is already at or above this level, those manufactur ers that do not fall below TSL 1 will not have to make additional modifications to their equipmen t lines to conform to the energy conservation standards. The tight range of small impacts indica tes that industry revenues and costs are not significantly negatively aff ected due to new energy conservation standards.

DOE estimated the impacts in INPV at TSL 2 to range from approximately $8 million to -$39 million, or a change in INPV of 1.42 percent to -7.16 percent. At this level, the industry cash flow decreases by approximately 6 percent, to $50.9 million, compared to the base-case value of $54.1 million in the year leading up to the standards. DOE estimates that roughly 45 percent of the equipment being sold is already at or above this level. The required higher level of efficiency will cause some manufactures to modi fy their equipment lines to conform to the energy conservation standards. At this TSL, reve nues and costs are not subs tantially affected if manufacturers can fully recover the increase in manufacturer pr oduction cost from customers. Standards lead to a positive IN PV if manufacturers raise MSP due to the higher costs of the equipment, so that manufacturers fully recover and even surpass the investments needed to achieve this level. The relatively small range of INPV impacts indicate that manufacturers are not significantly impacted even if they are not ab le to fully pass along costs to their customers.

At TSL 3, the impact on INPV and cash flow varies depending on the manufacturers and their ability to pass on MPC incr eases to the customer. DOE estimated the impacts in INPV at TSL 3 to range from approximately -$11 million to -$99 million, or a change in INPV of -1.95 percent to -18.26 percent. At th is level, the industry cash flow decreases by approximately 43 percent, to $30.7 million, compared to the base -case value of $54.1 million in the year leading up to the standards. At TSL 3, the majority of ma nufacturers would require a complete redesign of

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### their equipment. The relatively large conversion costs to rede sign equipment and make plant changes drive INPV negative even if manufactures are fully able to pass along equipment cost increases to customers.

At TSL 4, the impact on INPV and cash flow varies depending on the manufacturers and their ability to pass on MPC incr eases to the customer. DOE estimated the impacts on INPV at TSL 4 to range from -$39 million to -$148 million, or a change in INPV of approximately -7.29 percent to -27.35 percent. At th is level, the industry cash flow decreases by approximately 85 percent to $8.2 million, compared to the base-cas e value of $54.1 million in the year leading up to the standards. TSL 4 was created as a co mbination of TSL 3 (minimum LCC) and TSL 5 (max-tech). Manufacturers were not directly asked about this combination TSL during interviews. However, DOE estimated the impact s at this TSL by looking at responses at the efficiency levels on which this TSL is based. Be cause a large portion of the equipment is at max tech, the conversion costs manufacturers require to meet TSL 4 are subs tantially greater than TSL 3. Even if manufacturers are able to fully pa ss along costs to customers, the investments are large enough to drive INPV nega tive. In addition to large forced investments, there are substantial increases in production costs for stan dards-compliant equipment at TSL 4. The large increases in production costs drive INPV largel y negative if manufacturers cannot fully pass along these increased costs to customers.

At TSL 5 (max-tech), DOE estimated the impa cts in INPV to range from $20 million to

- $340 million, or a change in INPV of approximately 3.73 percent to -63.01 percent. At this level, the industry cash flow decreases by approximately 108 percent to -$4.5 million, compared to the base-case value of $54.1 million in the year leadin g up to the standards. Currently, there is only one model being manufactured at these efficiency levels for most equipment classes, and some equipment classes have no equipment at these levels. Even though DOE created the max-tech TSL using components that are currently availa ble for all equipment classes, manufacturers expressed great concern at th e possibility of requiring an entire equipment line to be manufactured at the max- tech levels. In addition, at higher TSLs it is more likely that manufacturers would have greater difficulty fully passing on larger MPC increases to customers. At TSL 5, there is a risk of very large ne gative impacts if margin s are reduced due to manufacturers’ inability to pass cost increases to customers.

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### REFERENCES

1 

### Securities and Exchange Commission, Annual 10-K Reports , Various Years,

Washington D.C., www.sec.gov

.

2 

### Freedonia. 2004. Commercial Refrigeration Equipment to 2008. Study 1849. Freedonia Group,

Inc, Cleveland, Ohio, October 2004, 204 pp. available at http://www.freedoniagroup.com/Commercia l-Refrigeration-Equipment.html

3 

### Further information about RoHS can be found at

http://eur-lex.europa.eu/LexUriSe rv/site/en/oj/20 03/l_037/l_03720030213en00190023.pdf

.

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