7-i

CHAPTER

7. MARK

UPS FO R EQUIPM

ENT PRIC E DETERMIN ATION

TABLE OF CO NTENTS
7.1 INTRODUCTI ON

..................................................... 7-1 7.2 OVERVIEW OF MARKUP EQUATIONS

................................. 7-1 7.3 ESTIM

ATIO N OF I NSTALLED PR

ICE

................................... 7-2 7.3.1 Estimation

of Trans former We ights an d Pole Costs

..................... 7-3 7.3.2 Overhead and Profit for I nstallation Expenses

......................... 7-4 7.3.3 Dry-Ty

pe Transformer I

nstalled Price Equation

........................ 7-5 7.3.4 Liquid-I

mmersed Transformer I

nstalled Price Equation

.................. 7-57-1

CHAPTER 7. MARKU PS FOR EQUIPME NT PRIC E DETERMIN ATION

7.1 INTRODUC TION This chapter of the technical support document (TSD) pre sents the Department's method for der iving tr ansform er pric es. The o

bjective of the eq uipment pr

ice dete rmination is to estimate the price paid by the customer/purchaser for an installed transfor mer. Purchase price and insta llation co st are ne cessar

y in puts to the

life-cy cle cost (LCC)and pay

back pe riod (PB P) analyses. Chapter

8 presents the LCC calculations; section 8.2.1 descr ibes how the LCC uses purchas e price

and insta llation co st as inputs

. Purchase prices for distribution transformers are not g enerally know n. Transformers are specialty items, often custom-built with unlisted prices. The e ngineering analy

sis (Chapter 5) provided the manufacturer selling price s for the units analyzed by the LCC. The Department derived a set of prices for eac h transformer design produced by the engineering analy

sis by apply ing mar kups to the

manufacturer se lling pr

ice in the form of ma

rkup equations. These markups represent all the costs associated with bringing a manufactured transformer into service as an installed piece of electrical equipment at a customer’s site.
7.2 OVERVIEW OF MARKUP EQUATIONS Depending on the purchasing e nvironment, the Department used different markup equations to capture the various markups in the supply chain between the manufacturer a nd the customer . For exa

mple, ele ctric uti lities (e xcept for the rura l electr ic coope ratives) typ ically purchase liquid-immersed transformers through ma nufacturer representatives or distributors. The manufacturer selling price plus the small distributor markup is generally the utilities’ price for transformers. Dry

-type transf

ormers go through severa l additional marketing and/or handling steps before they

are installed by the

end-use purchaser. The Depa rtment ad justed the advanc e notice

of propos ed rulemaking ( ANOPR) distributor markup assumptions based on stakeholder feedback. Liquid-type distribution transformers have a seven perc ent markup, accounting for distributor markup. The manuf acturer selling prices for dry

-type transf

ormers include two price markups: a distributor markup of 15 percent and a contractor mater ials markup of 10 percent. The Department base d these markups (expressed as average multipliers) on RS Means Electrical Cost Data 2002. 1 The distributor markup converts the manufacturer selling price to the distributor price, the price paid by the electri cal cont

ractor . This distr

ibutor mar

kup cove rs the co sts of the d

istributio n business , including sales labor, warehousing, over head, and profit. Then the contractor applies a markup to the distr

ibutor pr ice to co ver cont

ractor overhea d and pro fit. For both liquid-immersed and dry-type transf ormers, the Department added shipping costs , sale s tax , an in stall ation labor and eq uipm ent ma rkup, and wei gh t-de pendent installation costs. Dis tribution t

ransfor mers ca n be very heavy (some we igh more

than a ton

) and cos tly t

o7-2

ship. It is common practice for transf ormers to be shipped directly to a construction site with no intermed iate war ehousing . The Dep artment e stimated shipping c osts by collecti ng a sma ll sample of quotations for transporting transformers. B ased on an average shipping distance of 1,000 miles, the Department estimated shipping costs of $0.20/pound for large shipments. Using RS Means Electrical Cost Data 2002, DOE estimated an installation labor and equipment markup of 52 percent. By weighting the sales tax for each individual State by its population, the Department calculated a national aver age sales tax of 5.6 percent. Finally , the Department added installation costs. The installation cost is the cost of labor, equipment, and materials (other than the transformer itself) needed to install a distribution transformer. The D epartment developed severa l empiric al equat

ions for e stimating

installat ion costs a s a funct

ion of tra nsforme r weig ht.

7.3 ESTIMATION OF INSTALLED PRICE The Department estimated the installation costs and contractor markups on tra nsformers by fitting a linea

r cost function to the RS Means electrical cost data. The RS Means data break down the t

otal insta lled cost f or trans formers

in terms of

four cos t compone

nts: 1. Materials: transformer purchase price , including mounting hardware.
2. Labor: labor cost require d for installation, including unloading and uncrating, ha uling within 200 feet of the loading dock, setting in place, c onnecting to the distribution netwo rk, an d test ing.
3. Equipment: equipment rentals necessary for completion of the installation.
4. Overhead and Profit: installation overhead and profit expenses for the c ontractor (for dry-ty pe transformers only

).
The Department disaggre gated its installation costs into these four cost components. RS Means lists the tr

ansform er pric e as a “material ” cost. The Depar tment per formed a regre ssion to disaggrega

te the overhead and profit associated with installation labor and equipment r ental from the overhead and profit associated with the transfor mer (material) cost. The regr ession equation is:
O&P = a × Mat + b × L&E + c Eq. 7.1

where:
O&P = the overhead and profit expense ( 2001$), Mat = the material cost (i.e., transformer and ha rdware) (2001$) , L&E = the direct labor and equipment costs of installation (2001$), and7-3

a, b, and c = the com puted line ar reg

ression c oeffic ients.
The Department fitted the labor and equipment costs as a func tion of transformer weight. This relationship is justified because transformer weight (a nd its correlated size) is a significant factor in determining installation costs for labor and equipment. For pole -mounted transfo rmers, the Depa rtment as sumed pole

costs did n

ot vary with chan

ges in e fficien

cy but reco gnized that, in some cases, a more efficient, heavier transformer could require a strong er pole. Because the RS Means data do no t specify transfo rmer we ight, the

Department infe

rred the approxima

te weight of a transformer from its kVA (kilovolt-amper e) capacity , as described below. For use in the LCC analy sis, the Department adjusted these 2001$ to 2004$ using the gross domestic product (GDP) price deflator from the Energy

Information Administration (EI A)’s Annual Energy Outlook 2005 ( AEO2005)

. 7.3.1 Estimation of Transformer Weights and Pole Costs The Department derived the weight- versus-capacity relationship for typica

l transformers from the d

esign da ta produc ed by

the eng ineerin

g analy sis. I t used the weight-versus -capac ity relation ship to esti

mate the t ransfor mer weig ht corre sponding

to the tra nsforme r costs re ported in RS Means . The Department estimated a scaling re lationship between transformer weight and direct installation labor and equipment costs by fitting the correlation between weig ht and installation costs to a power-law equation. In evaluating de sign options and the impact of potential standard levels, the Department examined the potential for new standards for distribution transformers to lessen the utility or performance of these products. Stakeholders mentioned in their comments to the Department that hea vy, more-e fficien

t transformers co

uld have l essened

utility due to impa

cts on utili

ty p ole requirements for overhead transfor mers. For single-phase, pole-mounted, liquid-immersed transformers, the Department estimated the additional installation costs for those desig ns that would require an upgrade to the pole ba sed on cost data provided by stakeholders. For the NOPR analy sis, the Department added a pole-replace ment cost function to the installat ion cost e quation f

or desig n line 2, w

hich cove rs pole- mounted tr

ansform ers. This analysis assumed that a pole change-out cost of $2,000 occurs for up to 25 percent of pole-mounted transformers when the weight of the transformer exceeds 1,000 pounds. The Department also included a transformer pole support cost of $0.12/lb to ac count for the cost of a sturdier pole. The pole cost equation is included in the LCC sprea dsheet tool for DL2 so that stakehol ders ca

n conduc t sensitivi

ty a naly ses reg arding

pole rep laceme

nt costs. B ecause

not all transfo rmer inst

allations require a chang e-out of

existing e quipment e

ven in the most extrem e case, the Department assumed a maximum change- out fraction. The Department selected 25 percen t as the ma

ximum chang e-out fr

action e stimate ba sed on sta keholder input. 27-4

The method for deriving the weight-ve rsus-capacity

relationship uses a typical transformer weight from the engineering analysis. The Department defined the typical weight as the minimum weight plus 20 percent times the weight rang e, where the weight rang e is the differe nce betw een the m

inimum and maximum tran sformer weight for the s electe d design s. From these data, the Department obtained the following power-law relationship for transformer weight as a function of c apacity a nd basic impulse insulation level (BIL ) ratin g: Weight = 13.13× kVA 0.765 × BIL 0.244 Eq. 7.2 where: Weig

ht = the weight of the transformer (lbs), kVA = the capacity of the transformer (kVA), and BIL = the BIL rating of the transformer (kV).
Alth ough RS Means does not provide transformer weights, it does provide transf ormer capaci ty a nd primar y vo ltage. The Depa

rtment es timated w eight f rom capa city and BI L, wh ich it estimated using primary

voltage. The Department then compare d the weight to the direct installation costs from the labor and equipment to obtain a power-law relationship.
The firs t regr

ession pe rformed was the in stallatio n direct labor an d equipme

nt costs a s a function of transformer weight. Data a nalyzed included all 115 distribution transformer kV A ratings spanning the three RS Means electrical equipment categorie s: “dry ty pe transformer” (16270-200), “oil-filled transformer” (16270-600), a nd “transformer, liquid-filled” (16270-610). The resu lting correlati on equati on is:
L&E = 42.08 × Weight 0.46 Eq. 7.3 where:
L&E = the installation, direct labor, and equipment costs (2001$), and Weig ht = the transformer weight (lbs). The regression, performed a s a power-law trend line fit in Excel, resulted in an R-square of 0.95, indicating a good fit to the data.
7.3.2 Overhead and Profit for Installation Expenses The next regression targeted c ontractor overhead and purchase profit expenses in terms of a markup on materials (i.e., the transformer), a nd labor and equipment (i.e., direct installation). Initially , the Department performed a linear r egression with a constant term. When it found that the constant term was not significantly different from zero, it ran the regr ession again. The resulting equation is:
O&P = 0 .1 0 × Ma t + 0. 52 × L &E Eq. 7.47-5

The Department used equation 7.4 to allocate overhe ad and profit expenses to a markup on the distributor price and a separate markup on the dire ct labor and equipment costs for the installation.
7.3.3 Dry-Type Transformer Installed Price Equation For dry -ty pe trans formers , the res

ult of thes e analy

tical ste ps is a tota

l installe d cost equation as a func tion of the

manufacturer se lling pr

ice and t ransfor mer weig ht:
Installed _Price = M

tax × (M

L&E × L &E + M Mat × (M

Ship × Weight + M Dist × ManPr ice)) Eq. 7.5 where: Installed_Price = the final installed price of the transformer (2004$), M tax = the factor that accounts for sales tax, estimated as 1.054, M L&E = the factor that accounts for the markup on direc t installation labor and equipment costs, estimated as 1.52, L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ us ing the G

DP price deflato r from AEO2005 , M Mat = the fac tor that a ccounts f or the contracto r markup

on the pur

chase of the transformer from the distributor, estimated as 1.10, M Ship = the shipping cost, estimated as $0.20/lb, Weig ht = the transformer weight (lbs), M Dist = the average distributor markup fac tor, estimated as 1.15, and ManPrice = the manufacturer's selling pr ice (2004$)

. The Department applied the installed cost equation by using the manufacturer price a nd weight from the engineering analysis. For e

xample, the engineering analy sis estimated that the design line 9 (three-phase, 300 kVA) tra nsformer with the minimum manufacturer price weig hs 491 pounds and has a manufacturer price of $4838.17. For this transformer, the Department estimated the installed cost to be $8935.41, where $2082.73 is the installation cost, and $6852.68 is the tra nsforme r retail price, i ncluding shipping costs, sa les tax, an

d markups

. 7.3.4 Liquid-Immersed Transformer Installed Price Equation For liquid-immersed transformers, the Department re moved the contractor markup from the cost e quation to

obtain :
Installed _Price = M

tax × (M

L&E × L&E × (M Ship × Weight + M Dist × ManPr ice)) Eq. 7.6 where:7-6

Installed_Price = the final installed price of the transformer (2004$), M tax = the factor that accounts for sales tax, estimated as 1.054, M L&E = the factor that accounts for the markup on direc t installation labor and equipment costs, estimated as 1.52, L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ us ing the G

DP price deflato r from AEO2005 , M Ship = the shipping cost, estimated as $0.20/lb, Weig ht = the transformer weight (lbs.), M Dist = the average distributor markup fac tor, estimated as 1.07, and ManPrice = the manufacturer's selling pr ice (2004$). As with the dry-ty

pe transformers, the Department applied the installed cost equa tion by using the manufacturer price a nd weight from the engineering analysis. For e

xample, the engineering analy

sis estimated that the design line 1 (single-phase, 50 kVA) tr ansformer with the minimum manufacturer price weighs 646 pounds and has a manufacturer price of $818.00. For this trans former, the Depa rtment es timated th e installe d cost to be $2381.42, where $ 1322.72 is the instal lation co st, and $10 58.70 is the transfo rmer pri ce for t

he utility , includin g shippin g cost, sales tax, a

nd markup s.7-7 REFEREN CES
1. RS Means Company I nc. Electrical Cost Data: 26th Annual Edition . 2003. ed. J.H. Chiang. Kingston, MA.
2. Rosenstock, S. ANOPR for Distribution Transformers, Docket # EE-RM/STD-00-550, RIN #1904-AB08, comment No. 63. November 8, 2004. Edison Electric I nstitute.