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PUMPS WEBINAR OF THE

COMMERCIAL/INDUSTRIAL PUMPS WORKING GROUP AT

DEPARTMENT OF ENERGY OFFICE OF HEARING AND APPEALS

950 L'ENFANT PLAZA SW

WASHINGTON, DC 20585

6th FLOOR

ROOM NO.: 6080

June 4, 2014



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1 A P P E A R A N C E S

2

3 JOHN CYMBALSKY

4 CHRIS LAU

5 MIKE RIVEST

6 GARY FERNSTROM

7 AL HUBER

8 JAY SIVIGNY

9 GREG CASE

10 JOHN MIERSMA

11 PAUL RUZICKA

12 ALISON WILLIAMS

13

14

15

16

17

18

19

20

21

22



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1 P R O C E E D I N G S

2 MR. CYMBALSKY: Okay. Welcome to

3 the Pumps webinar. This is John Cymbalsky of DOE.

4 So first just to start off, to give everybody the

5 news, I think you saw Ashley's e

- m ail that Lucas

6 and his wife had their baby. So all are doing

7 well and that's the up side. The down side is

8 you're stuck with me running the Pumps webinar

9 here for the moment.

10 The purpose of today's webinar is to go

11 over the manufacturer impact analys is that people

12 have been asking for through the negotiations. So

13 I'm mostly going to turn it over to the technical

14 team at Navigant to walk us through the PowerPoint

15 slides that we'll, we'll show today. And of

16 course we'll take questions through the w ebinar.

17 The system, I think, if you haven't been

18 familiar with it, is you have to raise your hand

19 and we will unmute you. We will recognize you and

20 unmute you at that time. So hopefully this

21 system's going to work pretty good. We've got a

22 few people here in the room. We have the court



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1 reporter creating a transcript for us as well.

2 So with that, let me turn it over to

3 Chris or Mike Rivest, whoever is going to run it.

4 MR. LAU: Thank you, John. My name

5 is Chris Lau with Navigant. Thank you, eve ryone,

6 for participating today. This is a presentation

7 of the manufacturer impact analysis for Commercial

8

-- Commercial/Industrial Pumps Working Group. As

9 John said last Thursday, the working group

10 attendees asked for a session regards the MIA

11 analys is. I hope the audience finds this

12 elucidating

.

13 The goal for today

-- the goal s for today

14 are to present the updated industry net present

15 value results for the pump industry, to review

16 cash flow models we used to arrive at those

17 results, and then to answer any questions there

18 are about how to interpret the results or the

19 processes to arrive at the results

.

20 The manufacturer impact analysis is the

21 portion of the rulemaking where DOE assesses the

22 impact of standards on manufacturers. In a



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1 tra ditional rulemaking, the MIA has to come at the

2 end of the process, and it's because we use

3 inputs from multiple upstream analyses. We rely

4 on the market technology assessment, engineering

5 analysis, shipments analyses as input into our

6 analytic model

-- the government regulatory impact

7 model, or as we affectionately know it

-- the

8 GRIM. Very ominous and foreboding, I know.

9 The GRIM is a discounted cash flow model

10 representing the industry as a whole. So what

11 we're trying to model are industry prof its

,

12 industry expenses, industry conversion costs

, industry

13 cash flow in general.

14 The idea is that we calculate a cash

15 flow value for the industry on an annual basis,

16 and then we discount those values over the

17 analysis period to come up with single v alues that

18 represent that succintly quantif y

19 industry value

. B y comparing the base case INPV (

20 that industry net present value ) to the standard

21 case I N PV

, DOE is able to estimate impact on

22 manufacturers due to a standard

.



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1 So the base case INPV i s the

2 industry value without energy standards, and in

3 the standard case I N PV represents the standard

--

4 represents industry value at various standard

5 levels, whether that be PER 10, PER 25, PER 40.

6 In addition to that, we do a sensitivity around

7 pric ing or markups. In fact, we modeled two

8 different markup scenarios to establish an upper

9 and lower bound.

10 There is a flat markup and the cost

11 recovery markup. These two scenarios were chosen

12 based on information we received from industry

13 about how th ey expect the standard to affect

14 pricing. So here it's a little bit overwhelming,

15 but it's simply a screenshot of the model we used,

16 the income statement, and the cash flow.

17 We'll go into each of these inputs in

18 excruciating detail later. I just give

-- want to

19 give people a sense of where we're going. The

20 goal is to use these models to produce these

21 results. What you see here is that INPV value.

22 From left to right you're going from the base case



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1 to PER 10, to PER 25, to PER 40. And then the

2 yellow line represents the cost recovery market

3 scenario, and the green line represents the flat

4 markup scenario. And you can see they tend to

5 diverge as standards get more stringent. And we'll

6 talk about that later.

7 Here are the same values shown as a

8 percent change from the base case. As you can

9 see, in one scenario industry value tends to grow

10 and then contract s as the standard increases. In

11 another scenario, industry values simply dropped

12 off with the standard. And once again, we'll go

13 thr ough those results toward the end.

14 So the key inputs in the GRIM, and we'll go

15 through each of these, are the manufacturer

16 selling price, manufacturer production cost,

17 annual shipments over the analysis perio d

18 from 2014 to 2048, financial metric s

, whi ch we'll

19 review, conversion costs for the industry and the

20 markups I previously mentioned.

21 So the first key input is the

22 manufacturer selling price. That's the



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1 manufacture

-- the price to the manufacturer's

2 first customer. The MSP templates were based off

3 HI, primarily based off HI survey data, as well as

4 data collected by Navigant in confidential

5 interviews. This information was presented on

6 5/14.

7 What you'll see, though, is MSPs here

8 have changed from last time I talked to folks in

9 the W orking Group. When we first discussed the

10 MIA results last Wednesday, the GRIM was based off

11 of shipment prices without motors, and you can see

12 in that table, that first row after shipment price

13 without motors (inaudible) and especially closed

14 couple (inaudible). I'm sorry. That's the

15 abbreviation (inaudible). End suction, frame

16 mount, inline, and then the submersible.

17 Since then we've updated MSPs to use

18 average shipment price with a weighted motor

19 price. And so you can see in the one, two, third

20 row of that table we assumed a certain percentage

21 of units were shipped with motors, 70%, 95%, 70%.

22 And then based on that we came up with the average



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1 selling price based on weighted motor pricing. In

2 other words, we took 70% of the motor price and

3 added that to the

-- essential motor price and add

4 that to (inaudible) to arrive at the bottom row.

5 MR. CYMBALSKY: Okay, so

--

6 MR. LAU: What it does is

7 better represents industry revenue and better

8 represents industry value because we do underst and

9 that a large portion of pumps sold are coupled

10 with motors by the manufacturer.

11 MR. CYMBALSKY: Okay. So Chris, we

12 have a question from Amanda Gonzalez. We'll

13 unmute her phone.

14 MR. LAU: Hi, Amanda.

15 MR. CYMBALSKY: Amanda? Amanda?

16 MR. LAU: You may need to unmute on

17 your end also, Amanda.

18 MR. CYMBALSKY: Okay. Amanda. You

19 can

--

20 MR. FERNSTROM: I'm sorry. This is

21 Gary. I think I may have assumed Amanda's

22 identity, and I was on mute. So I have a quick



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1 generalized question about the cost re covery

2 model. And that would be, at the last in

- person

3 meeting we discussed the notion that any

4 individual manufacturer may only be able to

5 recover additional costs to the extent that the

6 manufacturer in the best position in the industry

7 already has.

8 That is to say, if someone else already

9 has a qualifying product, manufacturers needing to

10 invest in redesign may only be able to raise their

11 price to the extent where already qualifying

12 products in the market lie with respect to price.

13 So my genera lized question is, when you

14 consider the cost recovery model in both cases,

15 full cost recovery and no cost recovery, how do

16 you account for, if at all, the extent to which

17 cost recovery might be limited by where existing

18 products lie with respect to t heir performance and

19 cost? Thank you.

20 MR. LAU: Thank you, Gary. Two

21 thoughts there. First, I think there are

22 scenarios in which the end user purchases a pump



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1 based on more than just price, whether it be

2 replacing the currently installed brand, replacing it with

3 something that's the same size and configuration.

4 However, what I would say is that in the cost

5 recovery model, we do not look at competitive

6 issues. It's one of the reasons why we do two

7 markups.

8 We do a flat markup, meaning

9 manuf acturers aren't going to be able to raise the

10 price on any pump whether they

-- no matter

-- no

11 matter what the redesign cost. And then we look

12 at a cost recovery model where we assume they make

13 back that full investment. And so we know the

14 true answe r lies somewhere between those two

15 bounds. How closely to one or the other it lies I

16 think is more difficult for us to determine

17 because there are a range of a factors that

18 ultimately affect end user selection of pumps.

19 From the industry, you know, we 've heard

20 two things. One, that they do need to make an R O I

21

-- they do need to recover their investment, and

22 we'll go into the timeframes for that a little bit



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1 later. We've also heard that they will have trouble

2 due to these

3 federal standard s

. And so hopefully the

4 two markup scenarios fully address those competing

5 statements.

6 What I've provided here today on this

7 slide is selling price based off of actual sales

8 data from manufacturers today. I would consider

9 these base case selling price. For our model we

10 need to back into the manufacturer production

11 cost. How much does it cost the manufacturer to

12 make the units sold at those prices?

13 In our model, the manufacturer selling price

14 equal s manufacturer production cost times markup.

15 Since we know the manufacturer's selling price, we

16

-- and we're able to determine the base case

17 M arku p t hrough manufacturer surveys, we were able

18 to back into the manufacturer production costs.

19 If we look at that table, we have different

20 equipment classes.

21 We have the manufacturer selling price

22 that I discussed in the previous slide. Next are



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1 what we think are industry average markups for

2 each of those equipment classes on average. And

3 then we were able to back into average production

4 cost.

5 So i n order to estimate industry

6 revenues, industry expenses, we need to know how

7 many of these units they're selling. Our

8 shipments are based off of the (inaudible) value

9 shipped in 2013. It's an estimate provided by HI.

10 LB&L previously presented a shipm ents model where

11 they take that 420,000 units per year number and

12 then use it to derive shipments for

-- for over

13 the 30

-- over a 30 year analysis period.

14 And so here I have an example of that

15 breakdown. One thing to note is that the GRIM, as

16 it sta nds today, accounts for the end suction

17 closed couple, end suction frame mount, inline,

18 and the V TS. It does not account, account for the

19 radially split, the RSV equipment class. And so

20 if you look at the totals here for 2012, it adds

21 up to about 370, 000 units. The remaining 50,000

22 units are the RS V units that are not accounted for



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1 in the analysis today.

2 Continuing with assumptions used in the

3 GRIM, we have a range of financial metrics that

4 are employed in the model. We were able to

5 estimat e these financial metrics based off of

6 public information; however, we did then take our

7 estimates and then review them with manufacturers

8 on a few separate occasions. And these are the

9 current metrics we're using in the model.

10 You know we need tax ra te, for example,

11 to get net operating profit after taxes. We need

12 a discount

-- we need a discount rate to do our

13 discounting. We need the working capital

14 percentage to help with our cash flow estimate,

15 and so on and so forth. And we'll very soon see

16 how all these pieces tie together.

17 The next key input was the total

18 conversion cost. So conversion costs are upfront

19 investments necessitated by a standard. They are

20 a major driver of impact on industry. The key

21 fact being these are upfront investmen ts that

22 happen before the standard year.



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1 So really, for example, if DOE were to

2 announce the standard in 2015, that standard goes

3 into effect until 2019, these conversion costs are

4 made between 2015 and 2019. And because they

5 occur so early in the analysis period, which runs

6 until 2048, they occur before discounting really

7 escalates , it causes the m to have a powerful negative

8 impact on cash flow.

9 If you think about it from a

10 manufacturer's perspective, I mean you're making

11 an upfront inves tment and it is a straight cash

12 drain on your business that for the most part

13 would not be there outside of the standard, but

14 it's necessitated by the regulation.

15 This slide

-- the next slide just

16 basically explains how we break conversion costs

17 out into product conversion costs and capital

18 conversion costs. Capital conversion costs being

19 one

- time investments, plant, property, and

20 equipment, including the pattern and tooling,

21 which is a major concern for the industry. It

22 also includes the product conversion costs. So



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1 this is the R & D effort, the product development

2 time, the testing required, the literature and

3 marketing updates.

4 Based off of HI survey and our

5 interpretation of the results, roughly 69% of the

6

-- of the

-- of the convers ion costs are product

7 related, are product conversion costs. They're

8 roughly 31% are (inaudible). So as Gary alluded

9 to earlier, we look at two very different market

10 scenarios. I think most people on the call have

11 seen these slides before.

12 There's a lower bound that represents a

13 flat markup. This means there's minimal cost

14 return. It basically means manufacturers will not

15 be able to raise the price at all because of

16 market factors. And so there's no change in end

17 user price.

18 At the upper bound w e're looking at the

19 highest cost recovery option where they recover

20 their entire up front investment, the

21 manufacturers. The manufacturers recover their

22 entire up front investment by increasing their



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1 sales price on selling the units. And this

2 rep resents a markup increase and end

- user

3 price increase.

4 In the prior meeting folks had asked,

5 you know, what do those markups look like? So if

6 you look at the table here, the flat markup stair

7 shows up

-- well, on the far left there's the base

8 case ma rkup. It's what we think the markups are

9 today in the industry. In the flat markup

10 scenario, those do not change at all.

11 In the cost recovery scenario, as the

12 standard increases from PER 10 to PER 70, and

13 above even, a greater

-- an increasing portion of

14 models on the market need to be redesigned, and so

15 there's an increasing conversion cost. That

16 increasing conversion cost results in a higher

17 dollar amount that needs to be recovered and a

18 higher markup value, because remember, markup is

19 sales pr ice, MSP divided by production costs.

20 This is based off of

-- this assumes

21 recovered conversion cost of analysis over the

22 entire analysis period with discounting. I know



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1 that manufacturers have asked, well, what does

2 that

-- what does that mean in terms of pay back

3 period? And I think most

-- when folks said that

4 they were referring to simple payback period. In

5 other words, if I'm investing 3 million dollars up

6 front, you know, with this model, when do I make

7 the 3 million dollars back? Righ t? So when do I

8 make it

-- when do I make that

-- when do I

9 recover that 3 million dollars increased revenue?

10 And so if we look at that, at PER 10

11 we're talking about a four year simple payback

12 period. PER 25, we're talking about a six year

13 simple pa yoff period. PER 40 you're talking about

14 (inaudible) simple payback period

-- 40, at PER 40

15 we're looking at seven years simple payback.

16 So here we are looking at the actual

17 GRIM again. You can start to see how, as I

18 mentioned, it starts to fit in. GR IM starts with

19 an income statement. So to get industry revenues,

20 we take those shipment functions, right, number of

21 units sold in each product class, and multipl y

22 them by sales price of units each. So we get



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1 industry sale times industry sales pr ice equals

2 industry revenue.

3 The next four items

- materials, labor,

4 equipment, depreciation

- these are actually just

5 the components of the manufacturer production

6 costs. SG&A and R&D, if you recall one of the

7 financial metrics, we asked industry wh at was your

8 SG&A as a percentage of revenue? What's your R&D

9 as a percentage of revenue? Here we're able to

10 use those metrics to estimate these operating

11 expenses. And then we have the conversion costs.

12 And so we take those revenues, subtract

13 off the COGS, subtract off operating expenses,

14 subtract off the product conversion costs, and

15 stranded assets. We end up with earnings

16 before taxes. That's it. And then we use

17 that estimate tax rate to subtract off taxes.

18 We're basically net

-- end up with n et profit. So

19 net operating as an average.

20 To go from NOPAT to cash flow, we add

21 back in the non

- cash items. We subtract off

22 increases in capex and capital conversion costs

. That

would



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1 give us cash flow on an annual basis, free cash

2 flow.

3 Then we look at this present value

4 factor. Using that discount rate, I think it was

5 11.8%, we calculate this present value factor. So

6 the present value factor is 1 in 2014 because that's

7 the year we're discounting back to. It decreases

8 every year going ou t. If you multiple the free

9 cash flow by that present value factor, it gives

10 you discounted cash flow.

11 And so we have

-- look at the bottom.

12 Discounted cash flow going out over the analysis

13 period. We sum those

-- the sum of discounted

14 cash flows is the industry net present value with

15 a standard valuation.

16 The one thing that may not be obvious is

17 terminal value. Terminal value is actually

18 irrelevant until the last year of the analysis period.

It's

19 basically a financial mechanism that discounts all

20 future cash flows beyond the final year of the

21 analysis period assuming that same cash flow

22 growth rate. In this case we assume that, you



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1 know, the industry cash flow grows at 1% a year in

2 perpetuity, and so that provides these terminal

3 values

.

4 So it's based on the value of industry

5 for a longer period of time than just that

6 analysis period. It's a little bit irrelevant

7 because we use it in the base case and standards

8 case.

9 Hence we compare the two, they kind of

10 (inaudible). We are looki ng at this with numbers

11 plugged in. So look at the conclusions. I mean

12 they're pretty high level, but generally

13 conversion costs really drive this model. They

14 are a cash drain. The markups generally reflect

15 the industry's variability to recover conver sion

16 costs. And what you'll see in the next few slides

17

-- in fact, I'm probably going to skip ahead to

18 the chart. That (inaudible) increases. The two

19 markups diverge, representing increase in

20 uncertainty.

21 Here I have the numeric values. I'm

22 going to skip ahead and then backtrack. All



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1 right. In the flat markup scenario, flat markup,

2 flat pricing, manufacturers are not changing their

3 price at all regardless of where the standard is

4 set. Not surprisingly, what happens if you look

5 from left to right in row two, INPV drops steadily

6 as conversion costs increase. Nothing is

7 recovering that cash drain.

8 So row three shows the dollar amount

9 drop. Row four shows the percentage drop, percent

10 change. And row five shows that conversion cost.

11 What y ou'll see is that conversion cost does not,

12 doesn't grow linearly. It ramps up pretty

13 steeply. We'll see a visual illustration of that

14 later.

15 On the cost recovery markup, your

16 increasing prices offset the drain of conversion

17 costs. There are two thin gs here. What you'll

18 see is kind of not necessarily intuitive

. The first

19 is that industry value goes up a little bit at PER

20 10 and PER 25, and then it starts dropping off at

21 PER 40 and PER 55.

22 So we can see that. (Inaudible) here.



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1 It kind of ma rches up just a little bit. There

2 are two things happening here. When we calculated

3 the cost recovery markup, it was based

-- so to

4 simply the calculation, it's based off the

5 assumption that the conversion costs and the price

6 increases occur at the sa me time, but in reality

7 that doesn't happen. There's sort of an offset.

8 Like I said, the standard is announced

9 in 2015, and the standard goes into effect in

10 2019. 2015, 2016, 2017, 2018, 2019, you're making

11 those conversion cost investments, but th e

12 standard hasn't gone into effect yet. So

13 manufacturers are not raising their prices. They

14 don't raise their price until 2019.

15 And so those are the timing issues. So

16 those conversion costs are occurring before

17 manufacturers raise their prices. And t o do

18 discounting, those, those cash outflows, those

19 upper investments are not being discounted as much

20 as the future revenue gain. That's one thing.

21 And so that's why you see, especially towards the

22 end, when conversion costs are high. Well, say



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1 PER 40, PER 55, INPV goes downward. At PER 10, at

2 PER 25, you're seeing a slight increase. Our cost

3 recovery model is based off

-- was based off of

4 the 420,000 units shipped.

5 However, over time we assume the

6 industry has some level of growth. The sh ipment

7 model assumes a nominal amount of growth in the

8 industry over the, over the analysis period. And

9 so because shipments are greater than 420,000

10 units per year, you're seeing this small increase

11 in revenue and small increase in profit. So these

12 are two competing factors.

13 One is the increased profit due to

14 increased markups and increased shipment, and

15 that's competing against the drain of conversion

16 costs, which are very early in the analysis

17 period. Therefore (inaudible).

18 So here's, once ag ain for reference,

19 it's the slide that gives you a side

- by

- side of

20 the two scenarios. Here we see that obviously the

21 flat markup scenario where you have no cost

22 recovery is much more negative. I like to overlay



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1 the conversion costs. So that's us ing the

2 secondary axis on the right to show that as

3 conversion costs escalate, you kind of see how it

4 has a fairly significant impact on both scenarios.

5 The conversion costs are non

- trivial.

6 We're talking an industry that does about 300

7 million dolla rs in sales a year, and at PER 40,

8 you know, conversion costs are roughly half of

9 revenue. PER 55, roughly equal to annual revenue.

10 The standard

-- as the standard is being

11 analyzed, increases in the conversion costs

12 escalate quite significantly. You are looking at

13 INPV impact as a percentage change from the

14 baseline. And here we just illustrate the free

15 cash flow values. As you can see in the model,

16 you know, we modeled the announcement in 2015 and

17 started going into effect in

18 2019.

19 And so in that period, that's when the

20 manufacturers are making those conversion cost

21 investments. So you can see as you go up, project

22 those up, those investments act as the cash drain



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1 on the industry. In the flat market scenario they

2 don't have an oppor tunity to recover that. In a

3 cost recovery market scenario you see that annual

4 cash flow goes up, and that's the price increase

5 recovered those conversion costs.

6 One thing I did earlier today was I

--

7 there had been some prior discussion about

--

8 the re was some prior discussion about moving out

9 the, within negotiation about the actual standards

10 year. I don't know where the discussions are, but

11 I did take a look at what would happen if you

12 moved the effective year

- - the standards year

13 out throug h 2019, which is 2023.

14 So rather than just a four year

15 compliance period, an eight year compliance

16 period. Let me see if I can pull that up. I'm

17 going to try to pull this up. And so what we have

18 h e re are INPV values. T h e green represents the

19 2 0 23 effective date. A n d the blue represents the

20 2 0 19 effective date.

21 And so what happens is, as you push out

22 the effective date, the conversion costs are



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1 spread out over a longer period of time with the

2 bulk, you know, occurring just before 2023.

3 Because they're further out, they're discounted a

4 little bit more, and so it makes them look a

5 little bit less negative. And that's why that

6 flat markup line isn't quite as steep. The green

7 flat markup line is not quite as steep as the blue

8 fl at markup line.

9 And so that takes us through really the

10 machinations of the GRIM, as well as the INPV

11 results of discussion. At this point, I'll make

12 myself available for questions from the audience.

13 MR. CYMBALSKY: Okay. I don't see

14 any hands raised yet. But Chris, just stand by.

15 We'll see if anyone comes in. Al? All right. Al

16 Huber, we'll unmute you. You're first.

17 MR. HUBER: Thank you. Chris, my

18 question is, on your charts where you're showing

19 the no price basis

- yes, that chart. And at PER

20 70 it takes a dog leg upward. What causes that?

21 MR. LAU: Sure. So what's happening

22 is we're doing this cost recovery model. There's



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1 a huge conversion cost at PER 70. And so there's

2 a very significant price increase. It's actually

3 a

-- let me see. Markups increase by roughly 50%.

4 So end suction closed couple, which is a very high

5 volume equipment class, you know, the markup is

6 2.4. So you're essentially, you're more than

7 doubling your manufacturing your production costs

8 to reach, to get your sal es price. Right?

9 And as I said before, there's sort of

10 this small growth in shipment over the analysis

11 period. But that small increase, plus the large

12 increase in markup is resulting in significantly

13 more revenue. And so that

-- and results in more

14 r evenue, as well as more profit. And so that's

15 why there's sort of the dog leg up.

16 What I would say at the same time,

17 you'll see there's a very significant spread down

18 to the lower case scenario. Right? So as the

19 standard increases, there's a lot more

20 uncertainty about where the industry will

21 land. Now in the best case, clearly you'd be

22 where you are today. At PER 10, there's sort of



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1 this smaller range of where we think the industry

2 w i ll b e

. You know?

3 Will it be right at 50%? Probabl y not.

4 Will it be close to the yellow line or the green

5 line? I don't know. If you go up to PER 70, you

6 know, there's a very, very

-- there's a large

7 amount of uncertainty as to what the impact on

8 industry will be.

9 MR. HUBER: Thank you.

10 M R

. CYM BALSKY: Okay. Jay, you're

11 next.

12 M R

. SIVIGNY: Hi, Chris. Good

13 afternoon. Jay Sivigny with Flowserve. I have a

14 couple of questions that are linked to each other.

15 In the presentation that was given last week, the

16 revenues for the base case wa s 223 million and

17 it's now 295 million in the new model.

18 MR. LAU: Right.

19 MR. SIVIGNY: Am I clear that that's

20 from the motors, the motor revenue?

21 MR. LAU: That's right. That's

22 right. I think industry value was around 55 or 60



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1 million in the las t version, and it's closer to 75

2 million here.

3 MR. SIVIGNY: Okay. So the follow up

4 to that is what markup did you use for those

5 motors?

6 MR. LAU: So we didn't actually

7 derive a motor price. In the HI survey, we took

8 the information on industry revenu e with motors

9 and without motors. Right? And we took the

10 industry revenue. We took

-- we basically used

11 that industry revenue with motors and applied a

12 single

-- let me find this slide. A single base

13 case markup.

14 We applied the same markup across the

15 products. We didn't break out motor revenue from

16 pump revenue. We took it in aggregate.

17 MR. SIVIGNY: Okay. So the motor

18 markup in this model is the same as the pump

19 markup in your analysis?

20 MR. LAU: That's right. That's

21 right. We used a single average markup.

22 MR. SIVIGNY: Okay. Thanks for that



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1 clarification.

2 MR. LAU: No problem. If you have

3 any recommendations, if you think, you know

-- I

4 think part of this is a two

- way discussion. So if

5 you have a way you think

-- if there ar e things

6 you'd like to see implemented differently, please

7 make those suggestions. We will probably ask you

8 for a little bit more information either right now

9 or perhaps we'd call offline.

10 Additionally, I can probably make some

11 sort of, I can probabl y make some sort of

-- I can

12 help you draw conclusions as to whether that makes

13 a significant difference in the results

.

14 MR. SIVIGNY: Okay. I don't think

15 this forum is the appropriate place, but we can

16 have that offline.

17 MR. LAU: Okay.

18 MR. CYMBALSKY : Okay. I'm not seeing

19 any other hands raised at the moment. Okay.

20 Greg, you're on. Greg Case.

21 MR. CASE: Yeah. Chris, my question

22 is, what did you assume as a price increase for



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1 your cost recovery model? What was the price

2 increase to the pumps ?

3 MR. LAU: So hold on. Let me do some

4 arithmetic. At what PER? It varied for me.

5 MR. CASE: Okay. So your price

6 increase varied by PER? I guess it would be nice

7 for us to know what that model, what you used to

8 model that so we would have any idea if w e thought

9 that was at all feasible.

10 MR. LAU: Sure. So here what you're

11 seeing is a

-- can you guys see? Are you seeing

12 the markups slide?

13 MR. CASE: Yes.

14 MR. LAU: Okay. On the left is the

15 base case markup, and then at each column is the

16 new markup i n the cost recovery scenario. So I

17 think if you do a shipment weighted average

-- obviously

there's

18 different shipment levels reached, but we're

19 talking about roughly a 10% price increase at PER

20 10, an 18% price increase at PER 25, and a 22%

21 price inc rease at PER 40, and a 35% price increase

22 at PER 55. But that's a shipment weighted average



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1 price.

2 MR. CASE: Okay.

3 MR. CYMBALSKY: Okay. Any other

4 questions? Comments? John?

5 MR. MIERSMA: Yes. It's John Miersma

6 from Iwaki. I'm new to this dialog

. So one

7 question I have is what's the next step in the

8 process, and what's the timing of that?

9 MR. CYMBALSKY: Okay. So I guess

10 I'll take that question. Okay. So we have three

11 days' worth of meetings set up starting Ju ne 17th

12

-- 17th, 18th, and 19th I believe. And we are

13 hoping that these three days really will start the

14 negotiation of the standards level. I think

-- I

15 think we've come to that point.

16 MR. MIERSMA: Thank you.

17 MR. CYMBALSKY: Any other questions

18 or comments? Okay. Paul, you're on.

19 MR. RUZICKA: Yes. This is Paul

20 Ruzicka from Xylem. I have a question. Do we

21 have financial impact slotted versus energy costs

22 yet at this point in time? Or is it too



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1 premature?

2 MR. CYMBALSKY: So is your question

3 you want to see the relative, I don't know, energy

4 cost savings and how much investment on

5 manufacturers? Is that what we're

-- is that what

6 your question is?

7 MR. RUZICKA: That's my question.

8 And also, you know, price impact to the end user

9 if we assume you're, that you're able to mark up

10 to cover the development costs.

11 MR. CYMBALSKY: Right. So I think

12 those tables have been

-- the first

-- the prices

13 have been generated. I think Chris showed on his

14 first slide the manufacturers selling price. You

15 know, so the next

-- the next step is to throw all

16 this stuff through the rest of the analysis with

17 the national energy savings and get all the

18 consumer impacts. I think maybe Alison can speak

19 to where we are on that, or someone on the team.

20 MS. WILLIAMS: Yeah. Am I on?

21 MR. CYMB ALSKY: You're on.

22 MS. WILLIAMS: Okay. So we presented



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1 a national impact analysis at the last meeting.

2 So the slides that are available from that show

3 the national net present value under the cost

4 recovery scenario, which is the highest impact

5 ( inaudible) look at those increased prices. So

6 those are already available. They're not on the

7 same slide or anything as the manufacturing

8 impact. But we have presented those.

9 MR. RUZICKA: Is it possible to show

10 that slide here today?

11 MR. RIVEST: Hell o. This is Mike

12 Rivest.

13 MR. CYMBALSKY: Go ahead, Mike.

14 MR. RIVEST: Can I

-- can I recommend

15 that the analysis team put together a summary of

16 the analysis to date in one compact, single format

17 that has all the most recent analysis in a

18 consistent for mat so that stakeholders can review

19 it, so they don't have to go back from

20 presentation to presentation?

21 MR. CYMBALSKY: I think that's a good

--

22 MR. RIVEST: Did anyone hear me?



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1 MR. CYMBALSKY: Yeah. No, I think

2 that's a good recommendation. So l et me talk to

3 the team after, after this, and we'll strategize

4 what that might look like. I have a few ideas

5 there.

6 MR. RIVEST: Yeah. I'm thinking

7 something like the analysis summary from NOPR,

8 something like that.

9 MR: CYMBALSKY: Yeah. Sort of like

10 what we've been looking at, you and I have been

11 looking at in the last couple of days maybe, for a

12 different product?

13 MR. RIVEST: Yeah.

14 MR. CYMBALSKY: Yeah. Okay. Yeah,

15 that's, that's what I had in mind. Okay. I think

16 the team is well

- versed in crea ting those decks by

17 now. Okay. Anything else? I'm seeing no hands

18 raised. Okay. So I'd just like to conclude by

19 thanking everyone for joining in on the webinar.

20 I hope everyone found this useful and can go back

21 to their desks and seriously think about showing

22 up in the next couple of weeks ready to wheel and



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1 deal.

2 And hopefully by the end of the 19th,

3 we'll have a really firm idea of where things

4 stand with this negotiation and with this

5 rulemaking. In the meantime, we will work on

6 getting out to you a summary slide deck that puts

7 kind of everything in perspective. It will allow

8 everyone to see the results of the analysis sort

9 of in an easy to read 10 or 12 pages, hopefully.

10 And then, you know, we'll go from there in a

11 couple of weeks.

12 And so with that, thanks to the team.

13 Thanks especially for Chris for walking us through

14 this. And we'll see everybody in a couple weeks'

15 time.

16 MR. LAU: Thank you, everyone, for

17 your time.

18

19

20

21

22



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1 CERTIFICATE OF NOTARY PUBLIC

2 I, Chaz Bennett, the officer before whom the

3 foregoing deposition was taken, do hereby certify

4 that the witness whose testimony appears in the

5 foregoing deposition was duly sworn by me; that

6 the testimony of said witness was recorded by me

7 and thereafter reduced to typewriting under my

8 direction; that said deposition is a true record

9 of the testimony given by said witness; that I am

10 neither counsel for, related to, nor employed by

11 any of the parties to the action in which this

12 deposition was taken; and, further, that I am not

13 a relative or employee of any counsel or attorney

14 employed by the parties hereto, nor financially or

15 otherwise interested in the outcome of this

16 action.

17

18

19

20

21

22 Chaz Bennett

Notary Public in and for the

District of Columbia

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3 

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CERTIFICATE OF TRANSCRIPTION

4 I, Penny Knight, hereby certify that I am not

5 the Court Reporter who reported the following

6 proceeding and that I have typed the transcript of

7 this proceeding using the Court Reporter's notes

8 and recordings.

9

10 The foregoing/attached transcript is a true,

11 correct, and complete transcription of said

12 proceeding.

13

14

15

16

17

18

19

20

21

22

# ~!!}J_t

June 6, 2014

Transcriptionist

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Page 1

1

1% 21:1

1/2014 20:6

10 6:5 7:1 17:12

18:10 22:20

24:1 28:22

3 2:20 37:9

10% 32:19

11.8% 20:5

12 37:9

17th 33:11,12

18% 32:20

18th 33:12

19th 33:12 37:2

2

2.4 28:6

2012 13:20

2013 13:9

2014 1:18 7:18

39:15

2015 15:2,4

23:9,10 25:16

2016 23:10

2017 23:10

2018 23:10

2019 15:3,4

23:10,14 25:18

26:13,20

2023 26:13,19

27: 2

2048 7:18 15:6

20585 1:12

22% 32:20

223 29:16

25 6:5 7:1 18:12 22:20 24:2

32:20

295 29:17

3

3 18:5,7,9

30 13:13

300 25:6

31% 16:8

35% 32:21

370,000 13:21

4

4 1:18

40 6:5 7:1

18:13,14 22:21

24:1 25:7 32:21

420,000 13:11

24:4,9

5

5/14 8:6

50% 28:3 29:3

50,000 13:21

55 22:21 24:1 25:9

29:22 32:22

6

6 39:15

60 29:22

6080 1:14

69% 16:5

6th 1:13

7

70 17:12 27:20

28:1 29:5 70% 8:21 9:2

75 30:1

9

95% 8:21

950 1:11

A

abbreviation 8:15

able 5:21 10:4,10

11:9 12:16,17

13:3 14:4 16:15

19:9 34:9

account 10:1 6

13:18

accounted 13:22

accounts 13:16

across 30:14

act 25:22

action 38:11,16

actual 12:7 18:16

26:9

actually 19:4

20:17 28:2 30:6

add 9:3 19:20

added 9:3

addition 6:6

additional 10:5

Additionally

31:10

address 12:4

adds 13:20

affect 6:13 11:18

affectionat ely 5:7

afternoon 29:13

against 24:15 aggregate 30:16

ahead 21:17,22

35:13

Al 2:7 27:15

Alison 2:12 34:18

allow 37:7

alluded 16:8

already 10:7,8,11

35:6

am 29:19 34:20

38:9,12 39:4

Amanda

9:12,14,15,17,1

8

Amanda's 9:21

amount 17:17

22:8 24:7 29:7

analyses 5:3,5

analysis 3:11

4:7,11,20 5:5,17

7:17 13:13 14:1

15:5 17:21,22

20:12,18,21

21:6 24:8,16

28:10 30:19

34:16

35:1,15,16,17

36:7 37:8

analytic 5:6

analyzed 25:11

announce 15:2

announced 23:8

announcement

25:16

annual 5:15 7:17

20:1 25:9 26:3

answer 4:17 1 1:14

anyone 27:15



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anything 35:7

36:17

APPEALS 1:9

appears 38:4

applied 30:11,14

appropriate 31:15

aren't 11:9

arithmetic 32:4

arrive 4:16,19 9:4

Ashley's 3:5

assesses 4:21

assessment 5:4

assets 19:15

assume 11:12

20:22 24:5

31:22 34 :9

assumed 8:20

9:21

assumes 17:20

24:7

assuming 20:21

assumption 23:5

assumptions 14:2

attendees 4:10

attorney 38:13

audience 4:11

27:12

available 27:12

35:2,6

average 8:18,22

13:1,2,3 19:19

30:21 32:22

axis 25:2

B baby 3:6

backtrack 21:22

base 5:19 6 :1,22

7:8 12:9,16 17:7

21:7 29:16

30:12 32:15

based 6:12

8:2,3,10,22 11:1

12:7 13:8 14:5

16:4 17:20 21:4

23:3,4 24:3

baseline 25:14

basically 15:16

16:14 19:18

20:19 30:10

basis 5:15 20:1

27:19

believe 33:12

Bennett 38:2,19

best 10:6 28:21

better 9:7

beyon d 20:20

bit 6:14 11:22

21:6 22:19 23:1

27:4,5 31:8

blue 26:19 27:7

bottom 9:4 20:11

bound 6:9

16:12,18

bounds 11:15

brand 11:2

break 15:16 30:15

breakdown 13:15

BTS 13:18

bulk 27:2

business 15:12 C

calculate 5:14

20:5

calculated 23:2

calculation 23:4

cap 19:22

capital 14:13

15:17,18 19:22

case 2:9 5:19,21

6:1,3,22 7:8

12:9,16 17:8

20:22 21:7,8

28:18,21 29:16

30:13 31:20,21

32:5,13,15 33:2

cases 10:14

cash 4:16

5:9,13,14 6:16

14:14 15:8,11

19:20

20:1,9,10,12,14,

20,21 21:1,14

22:7 23:18

25:15,22 26:4

cause s 27:20

certain 8:20

CERTIFICATE

38:1 39:1

certify 38:3 39:4

change 7:8 16:16

17:10 22:10

25:13

changed 8:8

changing 22:2

chart 21:18 27:19

charts 27:18

Chaz 38:2,19 chosen 6:11

Chris 2:4 4:3,5

9:11 27:14,17

29:12 31:21

34:13 37:13

clarification 31:1

class 13:19 18:21

28:5

classes 12:20 13:2

clear 29:19

clearly 28:21

close 29:4

closed 8:13 13:17

28:4

closely 11:15

closer 30:1

COGS 19:13

collected 8:4

Columbia 38:20

column 32:15

comes 27:15

coming 20:7

comments 33:4,18

Commercial 4:7

Commercial/

Industrial 1 :5

4:8

compact 35:16

compare 21:9

comparing 5:19

competing 12:4

24:12,15

competitive 11:5

complete 39:11

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components 19:5

concern 15:21

conclude 36:18

conclusions 21:11

31:12

confidential 8:4

configuration

11:3

consider 10:14

12:8

cons istent 35:18

consumer 34:18

Continuing 14:2

contract 7:10

conversion 7:19

14:18

15:3,16,17,18,2

2 16:6,7

17:15,16,21

19:11,14

21:13,15

22:6,10,11,16

23:5,11,16,22

24:15

25:1,3,5,8,11,20

26:5,22 28:1

correct 39:11

cost 6:10 7:2,16

10:1,14,15,17,1

9 11:4,11, 12

12:11,14 13:4

14:18 16:13,19

17:11,15,16,21

22:10,11,15

23:3,11 24:2,21

25:20 26:3

27:22 28:1

32:1,16 34:4

35:3

costs 7:19 10:5 12:18 14:18

15:3,16,17,18,2

2 16:6,7 17:19

19:6,11,14

21:13,16

22:6,17

23:5,16,22

24:16

25:1,3,5,8,11

26:5,22 28:7

33:21 34:1 0

counsel 38:10,13

couple 8:14 13:17

28:4 29:14

36:11,22

37:11,14

coupled 9:9

course 3:16

court 3:22 39:5,7

cover 34:10

creating 4:1 36:16

current 14:9

customer 8:2

Cymbalsky 2:3

3:2,3

9:5,11,15,18

27:13 29:10

31:18 33:3,9,17

34:2,11,21

35:13,21

36:1,9,14

D

data 8:3,4 12:8

date 26:19,20,22

35:16

days 33:11,13

36:11

DC 1:12 deal 37:1

deck 37:6

decks 36:16

decreases 20:7

DEPARTMENT

1:9

deposition

38:3,5,8,12

depreciation 19:4

derive 13:12 30:7

desks 36:21

detail 6:18

determine 11:16

12:16

development 16: 1

34:10

dialog 33:6

difference 31:13

different 6:8

12:19 16:9

32:18 36:12

differently 31:6

difficult 11:16

12:2

direction 38:8

discount 5:16

14:12 20:4

discounted 5:9

20:10,12,13

23:19 27:3

discounting 14:13

15:6 17:22

23:18

discounts 20:19

discussed 8:9 1 0:3

12:22

discussion 26:7,8 27:11 31:4

discussions 26:10

distinctly 5:18

District 38:20

diverge 7:5 21:19

divided 17:19

DOE 3:3 4:21

5:21 15:1

dog 27:20 28:15

dollar 17:17 22:8

dollars 18:5,7,9

25:7

doubling 28:7

downward 24:1

drain 15:12 21:14

22:7,16 24: 15

25:22

draw 31:12

drive 21:13

driver 14:20

drop 22:9

dropped 7:11

dropping 22:20

drops 22:5

due 12:2 24:13

duly 38:5

E

earlier 16:9 26:6

early 15:5 24:16

earnings 19:15

easy 37:9

effect 15:3 23:9,12

25:17

effective



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effort 16:1

eight 26:15

either 31:8

else 10:8 36:17

e

- mail 3:5

employed 14:4

38:10,14

employee 38:13

energy 1:9 6:2

33:21 34:3,17

engineering 5:4

entire 16:20,22

17:22

equal 12:14 25:9

equals 19:1

equipment 12:20

13:2,19 15:20

19:4 28:5

escalate 25:3,12

escalates 15:7

espe cially 8:13

23:21 37:13

essential 9:3

essentially 28:6

establish 6:8

estimate 5:21

13:5,9 14:5,14

19:10,17

estimates 14:7

everybody 3:4

37:14

everyone 4:5

36:19,20

37:8,16

everything 37:7 example 13:14

14:10 15:1

excruciating 6:18

existing 10:17

expect 6:1 3

expenses 5:12

13:6 19:11,13

explains 15:16

export 19:22

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11:19 12:1

33:15 36:10

wheel 36:22

whether 6:5

11:1,10 31:12

wh oever 4:3

whole 5:10

whom 38:2

whose 38:4

wife 3:6

WILLIAMS 2:12

34:20,22

witness 38:4,6,9

work 3:21 37:5

working 1:5 4:8,9



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