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 ANALYSIS 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 Employment..................................................................................................... 13-31 

13.6.2 Production Capacity......................................................................................... 13-34 

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

13.6.4 Cumulative Regulatory Burden ....................................................................... 13-35 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
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 Levels and Trial Standard Levels...................................... 13-12 

Table 13.4.3 Industry-Wide Shipments Forecast in 2012....................................................... 13-13 

Table 13.4.4 Distribution of VOP.RC.M by Efficiency 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 Efficiency Level in 2012 for Different Trial 

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

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

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

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

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

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

Table 13.4.17 Distribution of HZO.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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EERE-2006-BT-STD-0126 COMMENT 52.2 
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 Expenditures by Trial Standard Level (2007$ millions) 13-

22 

Table 13.4.36 Stranded Assets by Trial Standard Level (2007$ millions).............................. 13-23 

Table 13.4.37 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.M.... 13-24 

Table 13.4.38 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VOP.RC.L..... 13-24 

Table 13.4.39 Preservation-of-Gross-Margin (Absolute Dollars)Markup for VOP.SC.M ..... 13-25 

Table 13.4.40 Preservation-of-Gross-Margin (Absolute Dollars) Markup for VCT.RC.M.... 13-25 

Table 13.4.41 Preservation-of-Gross-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-Gross-Margin (Absolute Dollars) Markup for VCS.SC.I....... 13-25 

Table 13.4.44 Preservation-of-Gross-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-Gross-Margin (Absolute Dollars) Markup for SOC.RC.M .... 13-26 

Table 13.4.47 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.M.... 13-26 

Table 13.4.48 Preservation-of-Gross-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 (Absolute 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 Value (Preservation-of-Gross-Margin-Percentage 

Markup Scenario)............................................................................................. 13-28 

Table 13.5.2 Changes in Industry Net Present Value (Preservation-of-Gross-Margin (Absolute 

Dollars) Markup Scenario) .............................................................................. 13-28 

Figure 13.6.1 CRE Products Industry Cost Structure..............................................................13-31 

Table 13.6.1 Commercial Refrigeration Equipment Industry Estimated 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 Affecting 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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EERE-2006-BT-STD-0126 COMMENT 52.2 
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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EERE-2006-BT-STD-0126 COMMENT 52.2 
 

CHAPTER 13. MANUFACTURER IMPACT ANALYSIS 

13.1 INTRODUCTION 

In determining whether a standard is economically justified, the Secretary of Energy is 

required to consider "the economic impact of the standard on the manufacturers and on the 

consumers of the 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 standards 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 primarily relies on the Government Regulatory 

Impact Model (GRIM), an industry cash-flow model adapted for this rulemaking. GRIM inputs 

are industry cost structure, shipments, and pricing 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 factors 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. Phase I, Industry Profile, consisted of the 

preparation of an industry characterization including data on market share, sales volumes and 

trends, pricing, employment, and financial structure. 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 the national impact analysis (NIA) and the lifecycle cost (LCC) analysis. Because these 15 product classes represent 98 percent of covered 

equipment, the reported results are representative of the entire CRE industry. In this phase DOE 

also used publicly available information developed 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 several manufacturers comprising over 90 percent of the CRE 

industry. During these interviews, DOE discussed financial topics specific to each company and 

obtained each manufacturer’s view of the industry as a whole. The 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 conducted under Title III, Part C of the Energy Policy and 

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

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EERE-2006-BT-STD-0126 COMMENT 52.2 
13.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE prepared a profile 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 collected information on the past and present 

structure and market characteristics of the CRE industry. This included estimated market shares 

of CRE manufacturers, corporate operating ratios, wages, employment, and production cost 

ratios. The industry profile included a top-down cost analysis of the CRE manufacturing industry 

that DOE used to derive cost and financial inputs for the GRIM (e.g., revenues; material; labor; 

overhead; depreciation; sales, general, and administration expenses (SG&A); and research and 

development (R&D) expenses). DOE used additional sources of information to further calibrate 

its characterization of the industry, including company Securities and Exchange Commission 

(SEC) 10–K reports, Standard & Poor’s (S&P) stock reports, and corporate annual reports. DOE 

also relied on information from its engineering analysis, LCC analysis, NIA, and analysis of 

markups to characterize the 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 conservation standards can affect CRE manufacturers in 

three distinct ways: (1) require additional investment, (2) raise production costs, and (3) affect 

revenues through variations in prices and shipments. 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 using the GRIM on the CRE industry to quantify 

these impacts. 

13.2.2.2 Interview Guide 

During Phase III of the MIA, DOE conducted interviews with manufacturers to gather 

information on the effects of new energy conservation standards on revenues and finances, direct 

employment, capital assets, and industry competitiveness. Before the interviews, DOE 

distributed an interview guide to help identify the impacts of new energy conservation standards 

on individual manufacturers or sub-groups of manufacturers. Manufacturers 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 organizational characteristics, industry 

infrastructure, manufacturer cash flow, competitive impacts, employment impacts, and 

manufacturing capacity impacts. The interview guide used to conduct 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. However, the MIA interviews broadened the discussion 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
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-groups that could be affected by the new energy conservation 

standards: major manufacturers and small businesses. 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 interested parties to express their views privately on important 

issues, allowing confidential or sensitive information 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 and private corporations, and Air-Conditioning and 

Refrigeration Institute (ARI) and non-ARI members. DOE scheduled interviews well in advance 

in order to provide every opportunity for key individuals to be available for comment. Although 

a written response to the questionnaire was acceptable, DOE prefers interactive interviews 

because they help clarify responses and provide the opportunity to identify additional issues. 

DOE conducted detailed interviews with all manufacturers, who agreed to participate to 

gain insight into the range of potential impacts and how these impacts vary with each TSL. 

During the interviews, DOE solicited information 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 interviews 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 manufacturers with preliminary financial input 

figures from the GRIM for review and evaluation. During the interviews, DOE requested 

comments on the values DOE selected for the parameters. 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 estimate is not adequate 

for assessing differential impacts among sub-groups of manufacturers. Smaller manufacturers, 

niche players, or manufacturers exhibiting a cost structure that differs significantly from the 

industry average could be more negatively affected. Ideally, DOE would consider the impact on 

every manufacturer individually; however, it typically uses the results of the industry 

characterization to group manufacturers 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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EERE-2006-BT-STD-0126 COMMENT 52.2 
looked to the manufacturers and other 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 determine 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 equipment 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 and surveyed the industry to develop a list 

of every manufacturer. DOE also asked stakeholders and ARI representatives within the CRE 

industry if they were aware of other small business 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 business 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 determine if the standards could 

result in differential impacts on these companies. 

DOE found that small business manufacturers generally have the same concerns as large 

manufacturers regarding energy conservation standards. DOE also found no significant 

differences in the R&D emphasis or marketing strategies between small and large manufacturers. 

Therefore, DOE believes the GRIM analysis, which models each equipment class separately and 

aggregates the results to produce an industry-wide impact, is representative of the small business 

manufacturers that would be affected by standards. 

13.2.3.5 Manufacturing Capacity Impact 

One of the significant outcomes of new energy conservation standards could be the 

obsolescence of existing manufacturing assets, including tooling and investment. The 

manufacturer interview guide helped identify impacts on manufacturing capacity, specifically 

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

without an energy conservation standard; the ability of manufacturers to upgrade or remodel 

existing facilities to accommodate the new requirements due to new energy conservation 

standards; the nature and value of stranded assets, 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 standards 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 employment impacts at each TSL. During interviews, 

DOE explored current employment trends in the CRE industry. In addition, DOE solicited 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
 

manufacture views on changes in employment patterns that may result from more stringent 

standard levels. The employment impacts section 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 new 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 regulatory 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 with manufacturers, DOE identified several 

regulations relevant to CRE, including the hydrochlorofluorocarbon (HCFC) phaseout, foam 

insulation blowing agent phaseout and standards 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 energy conservation standards for commercial 

refrigeration equipment and this rulemaking?” This open question initiated dialogue with 

manufacturers, prompting them to identify key points that DOE could explore during the 

interview. This section describes the issues that the manufacturers raised most oftenb

. 

•	 Meeting Standards⎯Manufacturers expressed concern that they would have difficulty 

meeting certain efficiency levels for some equipment classes. First, some manufacturers 

stated that they could not meet or would have extreme difficulty meeting the efficiency 

levels for self-contained equipment (e.g., horizontal open units). One manufacturer stated 

the small number of parts in self-contained equipment limits the potential opportunities 

for efficiency improvements. The same manufacturer 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 equipment represents only a small portion of their 

business. They manufacture more remote condensing equipment and simply convert the 

design of remote condensing units into self-contained units. Second, some manufacturers 

stated that they could not meet efficiency 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 achieve 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 functionality, utility, and customizability. The 

CRE industry focuses meeting its customers’ need to merchandise products, and 

b

 Manufacturers indicated that the risks associated with these issues generally increase with increasing TSL. 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
customers place a higher priority on marketing 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 functionality or utility in their 

equipment, such as display area, that would affect their ability to merchandise products. 

Often, the customer’s desire for easy consumer access requires equipment that is less 

energy efficient. They also do not want to lose any flexibility in design choices, such as 

lighting options. For example, some customers 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 choosing design options, which they expect would 

commoditize the industry and reduce profit margins. Having some allowance in the 

efficiency thresholds would allow tradeoffs in design options, which would ease the 

reconciliation of energy savings 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 decisions. The supermarket industry is a lowmargin industry, where much emphasis is placed 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. Manufacturers stated that customers with a fixed 

capital budget would tend to extend refurbishment periods and cut back on equipment 

growth in response to higher equipment prices, 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 with 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 with cases that are 30-50 percent higher in 

price. Manufacturers stated that lower sales would reduce employment because labor is 

proportional to the number of units sold, not the equipment price. Manufacturers also 

stated that customers have usually been unwilling to adopt energy efficiency 

improvements unless there is a 12-month payback period or less. 

•	 Equipment Classes⎯Manufacturers expressed concern about how their equipment would 

be classified according to the equipment classes DOE established. Manufacturers stated 

that certain low-volume equipment does not easily 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 more than one category. A self-contained case 

with a service-over-counter upper 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 consumption, and therefore do not have 

meaningful energy consumption levels when normalized to TDA. Some manufacturers 

stated that low-volume equipment that cannot meet energy conservation standards may 

be discontinued, because the cost to increase efficiency will not be worth the benefit 

gained. Manufacturers also expressed concern about secondary coolant systems, which 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
could provide a loop hole. Manufacturers estimate that secondary coolant systems 

represent about 10 percent of the market currently and consume about 5 percent more 

energy than their direct expansion equivalent. Some manufacturers stated that customers 

might purchase these less-efficient secondary coolant systems instead of the direct 

expansion equipment that is subject to standards. This concerns manufacturers by 

defeating the purpose of regulatory action. 

•	 Component Manufacturers⎯Manufacturers expressed concern that they have little 

control over the options available to them and the price of components used to 

manufacture commercial refrigeration equipment. CRE manufacturers purchase many of 

the components needed to build the equipment and rely heavily on component 

manufacturers to deliver parts such as compressors, coils, doors, motors, fans, and lights. 

However, CRE manufacturers stated that more-efficient components may not be readily 

available to meet standards. For self-contained equipment, for example, high-efficiency 

compressors may not be readily available. Manufacturers stated that the compressors they 

purchase for commercial refrigeration are left over from the higher volume white goods 

industry. According to manufacturers, the compressor industry has little or no incentive 

to invest in improving efficiency due to the lower volume of shipments to the CRE 

industry. Manufacturers also stated that they have no control over the prices set by their 

component suppliers. Manufacturers are concerned about the future prices for moreefficient components. 

•	 Possible Margin Impacts⎯Manufacturers expressed concern that standards could impact 

profitability. Higher efficiency equipment adds pricing pressures because of 

commoditization of premium equipment and the 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 potential 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 assessing 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 sources 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 manufacturer prices, manufacturing costs, shipments, and industry 

financial information as inputs. The GRIM estimates the effects of regulatory conditions caused 

by changes in costs, investments, and associated margins. The GRIM spreadsheet uses several 

inputs to arrive at a series of annual cash flows, 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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EERE-2006-BT-STD-0126 COMMENT 52.2 
Figure 13.4.1 Using the GRIM to Calculate Cash Flow 

The GRIM projected cash flows using standard accounting principles. The model 

compared changes in INPV between the baseline equipment information (the base-case scenario) 

and different TSLs (the standards-case scenario). The difference in INPV between the base case 

and the standards case(s) represents the estimated financial impact of the new energy 

conservation standard on manufacturers. Appendix 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, company profiles, credit ratings, Census data, the 

shipments model, the engineering analysis, and manufacturer interviews. 

13.4.2.1 Corporate Annual Reports 

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the financial inputs 

to the GRIM.1

 These reports exist for publicly held companies and are freely available to the 

public. The SEC 10-Ks provide consistent 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 determining financial parameters for the 

industry, DOE weighted corporate financial information contained in the SEC 10-Ks by each 

company’s market share in the CRE industry to arrive at industry-weighted averages. DOE used 

corporate annual reports to derive 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) 

13-8
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
DOE also used information from company SEC 10-K reports to calibrate the GRIM’s 

operating profit margin against the 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 average cost of debt for the cost of capital 

calculation. 

13.4.2.3 Shipments Model 

The GRIM used shipment projections derived 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) analysis2

. 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 calibrated the reverse-engineering 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 interviews and reflected in the GRIM include 

•	 Conversion capital expenditures (one-time investments in property, plant, and 

equipment); 

•	 Equipment conversion expenses (one-time investments in research, equipment 

development, testing, and marketing); 

•	 The portion of the conversion capital expenditures that companies use to replace stranded 

assets; 

•	 Equipment cost structure (the portion of manufacturer production 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 estimates of the CRE industry by examining 

several major CRE manufacturers’ financial information from annual reports and SEC 10-K 

13-9
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

reports. Each company DOE analyzed is a subsidiary of a more diversified parent company that 

manufactures equipment other than commercial refrigeration equipment. 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 manufacturers 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 these values, DOE calibrated its original estimates 

to develop financial parameters that it considers representative of the CRE industry. An 

aggregation of the MIA interview 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 capital (WACC) for the industry as the discount 

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

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

capital structure of the industry. DOE estimated the WACC for the CRE industry based on 

several representative companies using the following formula: 

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

The cost of equity is the rate of return that equity investors (including, potentially, the 

company) expect to earn on a company’s stock. These expectations are reflected in the market 

price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used 

means to estimate the cost of equity. According to the CAPM, the cost of equity (expected 

return) is: 

13-10
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 “safe” 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 measure default risk and arrive at a cost of debt. Each bond 

rating is associated with a particular spread. One way of estimating a company’s cost of debt is 

to treat it as a spread (usually expressed in basis points) over the risk-free rate. DOE used this 

method to calculate the cost of debt for all the 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 relevant spread to the risk-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 different 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 approximately 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 average tax rate to determine the 

net cost of debt for the industry. 

13.4.5 Trial Standard Levels 

DOE developed five TSLs that include combinations 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 metric used for remote condensing equipment is 

calculated daily energy consumption (CDEC) in kWh per day. The metric used for self-contained 

equipment is total daily energy consumption (TDEC) in kWh per day. 

13-11
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
Table 13.4.2 Baseline Efficiency Levels 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 model (Chapter 10 of this TSD). The shipment analysis is a key 

driver of manufacturer finances because changes in the efficiency mix at the various trial 

standard levels are tied to shipments. Further explanation 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. 

13-12
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 efficiency distribution in the standards year followed by a 

gradual improvement in efficiency, which mimics the growth in efficiency observed in historical 

data (parallel growth trend). Under the parallel growth trend, the equipment mix moves to higher 

efficiency levels until the maximum efficiency 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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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% 

13-13
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

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

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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% 

13-14
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

 

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

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/V - kWh/day/ft3

) 

TSL 

(TDEC/V - kWh/day/ft3) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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% 

13-15
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

 

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

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(CDEC/TDA - kWh/day/ft2

) 

TSL 

(CDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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% 

13-16
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
Table 13.4.17 Distribution of HZO.SC.L by Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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 Efficiency Level in 2012 for Different Trial 

Standard Levels 

Shipments Efficiency by TSL 

(TDEC/TDA - kWh/day/ft2

) 

TSL 

(TDEC/TDA - kWh/day/ft2) 

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 efficient costs more to produce than baseline 

equipment. For the MIA, DOE used the production costs derived in the engineering analysis and 

the production volume assumptions from the shipment projections in the NES. Since moreefficient equipment is manufactured at lower production volumes than standard efficiency 

equipment, enacting energy conservation standards will increase production volumes for moreefficient units. 

The GRIM included the proportion of costs devoted to labor, materials, depreciation, and 

overhead that make up the manufacturer 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) and information provided by manufacturers of 

CRE. Table 13.4.19 through Table 13.4.33 provide the production cost assumptions at the 

various TSLs used in the GRIM for the equipment classes analyzed in the engineering analysis. 

13-17
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 

13-18
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 

13-19
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 for 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 for 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 industry. DOE developed this manufacturer markup 

13-20 

EERE-2006-BT-STD-0126 COMMENT 52.2 
for the ANOPR by examining several major CRE manufacturers’ 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 level, the estimated markups represent the average markups that the 

parent company applies over its entire range of equipment offerings and does not necessarily 

represent the manufacturer markup of the subsidiary. The result of the ANOPR analysis showed 

that the average manufacturer markup was 1.39. Following the interviews with manufacturers, 

DOE adjusted the markups to be more representative of the industry. An aggregation of the MIA 

interview responses gave a market-share-weighted average manufacturer markup value of 1.32. 

DOE used this updated manufacturer markup with the manufacturing production costs (MPCs) 

from the engineering analysis to arrive at the manufacturer selling prices (MSPs) used in the 

GRIM. DOE kept the 1.32 markup for the final rule. 

13.4.8 Conversion Costs 

New efficiency standards typically 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 costs into three major 

groups. Equipment conversion expenditures are one-time investments in research, development, 

testing, and marketing focused on making equipment 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 equipment or tooling that 

become obsolete as a result of new regulation. 

During the MIA interviews, DOE asked manufacturers to estimate the conversion costs 

they would incur due to new energy conservation standards. DOE then used the costs 

manufacturers provided and their 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 layout. Equipment conversion expenditures include 

R&D, certification and testing, marketing, and other costs required to bring more efficient 

equipment into the market. Since some manufacturers do not manufacture high efficiency 

equipment, as required efficiencies increase with higher TSLs the industry must convert more 

equipment and thus incur higher conversion costs. Table 13.4.34 through Table 13.4.36 

summarize these estimates. 

13-21
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 

13-22
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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-efficient equipment are differentiated, DOE 

reviewed manufacturer catalogs and utilized information gathered from manufacturers. To 

estimate the manufacturer price of the equipment sold, DOE applied markups to the production 

costs. For the analysis, DOE considered different markup scenarios based on manufacturer input 

for commercial refrigeration equipment. Scenarios were used to bound the range of expected 

equipment prices following new energy conservation standards. For each equipment class, DOE 

used the markup scenarios that best characterized the prevailing markup conditions and 

described the range of market responses manufacturers 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-percentage scenario and the preservation-of-grossmargin (absolute dollars) scenario. 

13.4.9.1 Preservation-of-Gross-Margin-Percentage Scenario 

Under the preservation-of-gross-margin-percentage scenario, DOE applied a single 

uniform “gross margin percentage” markup across all efficiency levels. In this scenario, DOE 

assumed that as production costs increase in response to energy conservation standards, 

manufacturers would be able to maintain the same gross margin percentage markup. As 

production costs increase with efficiency, 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. 

13-23
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
During interviews, manufacturers expressed a range of opinions on how selling prices 

would be impacted by new energy conservation standards. 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 assumes that this scenario 

represents a high bound to industry 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 standard. The industry would do so by 

passing through part of its increased production costs to customers 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 approximately 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 production 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-production 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/ft2

) 

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/ft2

) 

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 

13-24
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
Table 13.4.39 Preservation-of-Gross-Margin (Absolute Dollars)Markup for VOP.SC.M 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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/ft2

) 

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/ft2

) 

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/ft2

) 

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/ft2

) 

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 

13-25
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
Table 13.4.44 Preservation-of-Gross-Margin (Absolute Dollars) Markup for SVO.RC.M 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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 (Absolute Dollars) Markup for SVO.SC.M 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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/ft2

) 

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/ft2

) 

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 

13-26
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
Table 13.4.48 Preservation-of-Gross-Margin (Absolute Dollars) Markup for HZO.RC.L 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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 (Absolute Dollars) Markup for HZO.SC.M 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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/ft2

) 

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 (Absolute Dollars) Markup for HCT.SC.I 

TSL 

(CDEC/TDA -

kWh/day/ft2

) 

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 section and consist of two key financial metrics: 

INPV and annual cash flows. 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
 

 

 

 

 

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 particular TSL would have on the entire industry. For the CRE industry, 

DOE examined two markup scenarios as described 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 Present 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 Present Value (Preservation-of-Gross-Margin 

(Absolute Dollars) Markup Scenario) 

Preservation-of-Operating-Profit Markup Scenario 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 long-term effects of new energy conservation 

standards, short-term changes in cash flow are 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 

EERE-2006-BT-STD-0126 COMMENT 52.2 
the industry’s access to capital. Consequently, the sharp drop in financial performance could 

cause investors to flee, even though recovery may 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 annual 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 annual net cash flows 

for the base case and each of the five TSLs for the CRE industry assuming the different markups 

scenarios. 

NET CASH FLOW TOTALS
 

Markup Scenario: Preservation of Gross Margin Percentage Shipment Scenario: Rollup
 

$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) 

13-29
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

NET CASH FLOW TOTALS 

Markup Scenario: Preservation of Gross Margin Absolute Shipment Scenario: Rollup 

D ll 

2007$ 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 standard, cash flows are 

driven by the level of capital investments and equipment conversion 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 financial 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 effective. In this year, manufacturers write down the 

part of the value of existing tooling, equipment, and intellectual property 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 this 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 base case under the preservation of gross margin 

percentage markup scenario because manufacturers are able to fully pass along costs to 

customers. Under this scenario, free cash flow is restored to baseline level for all TSLs the year 

the standard becomes effective. Prior to 2012, higher TSLs have a greater improvement on the 

industry’s cash position because the higher prices 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 the 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 recouped, eroding operating cash flow. 

13-30
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
13.6 OTHER IMPACTS 

13.6.1 Employment 

To quantitatively assess the impacts of energy conservation 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 Bureau’s 2006 Annual Survey of Manufactures (2006 

ASM) the results of the engineering analysis, and interviews with manufacturers to estimate the 

inputs necessary to calculate industry-wide labor expenditures and domestic employment levels. 

DOE constructed the industry cost structure using 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 industry 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, the value of production 

labor in the industry cost structure was converted to a percentage 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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EERE-2006-BT-STD-0126 COMMENT 52.2 
 

 

 

 

 

COGS by the production labor percentage. As a result, 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 partially finished CRE that are shipped to the U.S. for final 

assembly. Therefore, DOE assumed that the annual total labor expenditure represented U.S. 

labor expenditures. 

The domestic annual labor expenditures in the GRIMs were converted to domestic 

production employment levels by dividing production labor expenditures by the annual payment 

per production worker (production worker hours times 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 employment levels were calculated for the 

base case and at each TSL. The impacts on domestic 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 represent U.S. production workers that are impacted 

by this rulemaking. U.S. workers involved in manufacturing or supporting products for exports 

would not be impacted and are not included 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 million (total COGS in 2012 times the production 

labor percentage of COGS times the percentage of U.S production). 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 total 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 shows the annual domestic employment impacts in 

further detail. 

Table 13.6.1 illustrates the impact of new energy 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, processing, assembling, inspecting, receiving, 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, collection, 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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EERE-2006-BT-STD-0126 COMMENT 52.2 
 

 

 

 

Table 13.6.1 Commercial Refrigeration Equipment 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 employment levels for each TSL calculated by 

the GRIM. 

0 

1, 000 

2, 000 

3, 000 

4, 000 

5, 000 

6, 000 

2006 

2008 

2010 

2012 

2014 

2016 

2018 

2020 

2022 

2024 

2026 

2028 

2030 

2032 

2034 

2036 

2038 

2040 

2042 

Year 

Total 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 increase in employment 

after standards. As discussed in manufacturing interviews, there are a variety of manufacturers 

with different capabilities. Larger, 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 would most likely not alter 

employment levels because inserting a more efficient component does not necessarily require 

more labor (e.g., purchasing a more compressor only increases material costs). For assemblers, 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
the greater labor expenditures for more efficient components are born by their suppliers. For 

smaller manufacturers that assemble final products, labor is more a function of units shipped, not 

production costs. Since the GRIM predicts an increase 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 employment in existing facilities would remain 

constant or increase as long as shipments do not decrease. 

Currently the vast majority of commercial refrigeration equipment is manufactured in the 

U.S. DOE expects that there would be positive direct employment impacts among domestic 

commercial refrigeration equipment manufacturers for TSL 1 through TSL 5. This conclusion 

ignores the possible relocation of domestic jobs to lower-labor-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 the GRIM do not take relocation 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 manufacturers stated that they would likely modify 

existing facilities to manufacturer standards-compliant CRE. Manufacturers 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 manufacturers, 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 anticipate some minor changes 

to tooling. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity 

levels and continue to meet market demand under new energy conservation standards. During 

interviews manufacturers stated that they would be able to modify their existing production 

facilities to meet demand. 

13.6.3 Exports 

CRE exports comprise a small fraction of CRE sales. Manufacturers interviewed estimate 

that exports account for 10 to15 percent of total sales. Approximately 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 standards in other countries are 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 the U.S. standard takes effect, commercial 

refrigeration equipment manufacturers would still be able to produce and export units that do not 

13-34
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

meet DOE’s efficiency standard, since the standard only applies to equipment for use in the 

United States. 

Some manufacturers stated that in the absence of standards, production facilities are 

being relocated to other countries, particularly Mexico, due to lower labor rates. This activity is 

associated with internal operational and economic decisions and is not expected to accelerate due 

to energy conservation standards. Other manufacturers stated that they have no future plans to 

move production facilities outside the United States 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, because of the high cost of transportation by ocean freight, foreign 

manufacturers have begun transitioning from importing 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 significant burden on manufacturers, the 

combined effects of several impending regulations may have serious consequences for some 

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory 

burden analysis, DOE describes other significant product-specific regulations 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 energy conservation standards for these products.d 

Companies that produce a wider range of regulated equipment may be faced with more 

capital and equipment development expenditures than their competitors. Regulatory burdens can 

prompt companies to exit the market or reduce 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 proposed 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 manufacturers. DOE recognizes that each regulation can 

significantly impact manufacturers’ 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). 

13-35
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

recognizes that each regulation can significantly impact manufacturers’ financial operations. 

Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits 

and possibly cause an exit from the market. Table 13.6.2 lists the Federal regulations that could 

also affect manufacturers of the 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 different. 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 standards 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. Differences in market 

shares and manufacturing processes of other regulated products for each manufacture could 

cause varying degrees of burdens on these manufactures. Therefore, DOE only estimated the cost 

of compliance to meet other energy conservation 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 mandated federal restrictions that could 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. obligations under the Montreal Protocol requires the 

United States to phase out the production and use of HCFC blowing 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 hydrofluorocarbon-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_standards/commercial/ptacs_pthps_final_rule.html. f

 Estimated industry conversion expenses were published in the TSD for the November 2007 residential furnace 

final rule. 72 FR 65136. The TSD for the 2007 residential furnace final rule can be found at: 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/furnace_boiler_fr.html. 

13-36
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
 

with the EPA phaseout of HCFCs. During interviews 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 Hazardous Substance Directive3

 (RoHS) will have some global impact 

on manufacturing of electrical and electronic equipment. Under the directive, all manufacturers 

are banned from placing on the European Union market new electrical and electronic equipment 

containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, 

polybrominated biphenyl, and polybrominated diphenyl ether flame retardants. Though 

manufacturers typically do not export CRE to the European Union, manufacturers stated this 

directive could potentially 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 hazardous 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 equipment are incorporated into the design. However, 

manufacturers do not anticipate RoHS will significantly affect the CRE industry as a whole. 

13.6.4.3 Other Regulations for Commercial Refrigeration Equipment 

Following the August 2008 NOPR, public comments 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 NSF 7 is not a Federal regulation, the commercial refrigeration 

equipment industry in general already tests their equipment using this procedure to meet food 

safety requirements. 

In addition to Federal energy conservation standards, manufacturers also must comply 

with regulations imposed on equipment shipped to States and foreign countries. 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 study to establish an Energy Using Products 

(EuP) directive for a standard on commercial refrigerators and freezers is in its final stages. 

13.7 CONCLUSIONS 

The following section summarizes the different 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 that while these two scenarios bound the range of 

most plausible impacts on manufacturers, there potentially could be circumstances which cause 

manufacturers to experience impacts 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 

13-37
 

EERE-2006-BT-STD-0126 COMMENT 52.2 
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 additional costs due to standards and maintain the 

percentage margin between COGS and MSP. Thus, 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 reflecting the preservation of industry gross margin in absolute dollars. 

Under this scenario, DOE assumed that the industry 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 result, 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 relatively 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 range from approximately no impact to -$7 million, 

or a change in INPV of 0.02 percent to -1.27 percent. At this level, 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 than 80 percent of the equipment being sold is 

already at or above this level, those manufacturers that do not fall below TSL 1 will not have to 

make additional modifications to their equipment lines to conform to the energy conservation 

standards. The tight range of small impacts indicates that industry revenues and costs are not 

significantly negatively affected 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 modify their equipment lines to conform to the 

energy conservation standards. At this TSL, revenues and costs are not substantially affected if 

manufacturers can fully recover the increase in manufacturer production cost from customers. 

Standards lead to a positive INPV 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 able 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 increases 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 this 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 manufacturers would require a complete redesign of 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
their equipment. The relatively large conversion costs to redesign 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 increases 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 this level, the industry cash flow decreases by approximately 85 

percent to $8.2 million, compared to the base-case value of $54.1 million in the year leading up 

to the standards. TSL 4 was created as a combination 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 impacts at this TSL by looking at responses at the 

efficiency levels on which this TSL is based. Because a large portion of the equipment is at max 

tech, the conversion costs manufacturers require to meet TSL 4 are substantially greater than 

TSL 3. Even if manufacturers are able to fully pass along costs to customers, the investments are 

large enough to drive INPV negative. In addition to large forced investments, there are 

substantial increases in production costs for standards-compliant equipment at TSL 4. The large 

increases in production costs drive INPV largely negative if manufacturers cannot fully pass 

along these increased costs to customers. 

At TSL 5 (max-tech), DOE estimated the impacts 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 leading 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 available for all equipment classes, manufacturers 

expressed great concern at the 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 negative impacts if margins are reduced due to 

manufacturers’ inability to pass cost increases to customers. 

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EERE-2006-BT-STD-0126 COMMENT 52.2 
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/Commercial-Refrigeration-Equipment.html 

3

 Further information about RoHS can be found at 

http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf. 

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EERE-2006-BT-STD-0126 COMMENT 52.2