12

- i CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANLAYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

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

- 1 12.2 METHODOLO GY

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

- 1 12.2.1 Phase 1: Industry Profile

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

- 2 12.2.2 Phase 2: Industry Cash

- Flow Analysis and Interview Guide

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

- 2 12.2.2.1 Industry Cash

- Flow Analysis

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

- 2 12.2.2.2 Interview Guide

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

- 2 12.2. 3 Phase 3: Sub

- Group Analysis

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

- 3 12.2.3.1 Manufacturer Interviews

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

- 3 12.2.3.2 Revised Industry Cash

- Flow Analysis

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

- 3 12.2.3.3 Manufacturer Sub

- Group Analysis

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

- 3 12.2.3.4 Competitive Impact Assessment

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

- 4 12.2.3.5 Manufacturing Capacity Impact

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

- 4 12.2.3.6 Employment Impact

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

- 4 12.2.3.7 Cumulative Regulatory Burden

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

- 4 12.3 PRELIMINARY MANUFACT URER IMPACT ANALYSIS

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

- 5 12.3.1 General Interview Structure

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

- 5 12.3.1.1 Key Issues

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

- 5 12.3.1.2 Shipment Trends and Projections

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

- 5 12.3.1.3 Profitabi lity

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

- 6 12.3.1.4 Product Mix

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

- 6 12.3.1.5 Conversion Costs

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

- 6 12.3.1.6 Market Shares and Industry Consolidation

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

- 6 12.3.1.7 Product Utility and Innovation

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

- 7 12.3.1.8 Impact on Small Manufacturers

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

- 7 12.3.1.9 Cumulative Regulatory Burden

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

- 7 12.4 MISCELLANEOUS REFRIG ERATION PRODUCT PREL IMINARY MIA RESULTS 12

- 8 12.4.1 Key Issues

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

- 8 12.4.2 Shipments and Profitability

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

- 8 12.4.3 Product Mix

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

- 9 12.4.4 Conversion Costs, Manufacturing Capacity, and Employment Levels

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

- 10 12.4.5 Impact on Innovat ion and Product Utility

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

- 11 12.4.6 Cumulative Burdens

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

- 12 12.4.6.1 Standards for Other Products Made by Miscellaneous Refrig eration Product Manufacturers

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

- 12 12.1.1.1 Refrigerants

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

- 12 12.4.6.2 Materials

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

- 13 12.4.7 Impact on Small Manufacturers

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

- 1312

- 1 CHAPTER 12. PRELIMINARY MANUFACT URER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify the likely impacts of new or a mended energy conservation standards on manufacturers. The U.S. Department of Energy ( DOE ) will conduct this analysis with input from manufacturers and other interested parties and will apply this methodology to its evaluation of new energy conservation st andards for miscellaneous refrigeration products

. DOE will also consider the financial impacts and a wide range of quantitative and qualitative industry impacts that might occur following the implementation of a n energy conservation standard. For example, a particular energy conservation standard level, if adopted by DOE, could require changes to practices used in manufacturing miscellaneous refrigeration products

. DOE will identify and come to understand these impacts through interviews with manufacturers and other interested parties during the Notice of Proposed Rulemaking ( NOPR ) stage of its analysis.

DOE announced changes to the MIA format through a report issued to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 ( EPACT 2005 ) ), entitled “Energy Conservation Standards Activities.” a Previously, DOE did not report any MIA results until the N otice of P roposed R ulemaking ( NOPR ) phase; however, under this new format, DOE has collect ed , evaluate d , and report ed preliminar y information and data during the preliminary phase (the phase preceding the NOPR) of this rulemaking

. Such preliminary manufacturer information includes the anticipated conversion capital expenditures and impacts on profitability and market share

. DOE sol icited this information during the engineering analysis manufacturer interviews and reported the results below.

12.2 METHODOLOGY

DOE conduct s the MIA in three phases and further tailor s the analytical framework based
on comments received from interested parties

. In Phase 1

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

. In Phase 2

, DOE prepares an industry cash

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

, DOE interviews manufacturers, and assesses the impacts of new or amended energy conservati on standards both quantitatively and qualitatively. U s ing the g overnment r egulatory i mpact m odel (GRIM) , DOE assesses i ndustry and sub

- group cash flow s and net present values

. Then

, DOE

assesses impacts on competition, manufacturing capacity, employment, a nd regulatory burden

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

.12

- 2 based on feedback received during manufacturer interview s and subsequent discussions. The NOPR TSD presents the r esults of Phase 2 and Phase 3 analyses.

12.2.1 Phase 1 : Industry Profile

In Phase 1 of the manufacturer impact analysis, DOE coll ect s pertinent qualitative and quantitative financial and market information. This includes miscellaneous refrigeration product manufacturer market share s , corporate operating ratios, wages, employment levels , and production cost ratios. Sources of informa tion may include reports published by industry groups, trade journals, the U.S. Census Bureau, copies of Securities Exchange Commission (SEC) 10

- K filings , and interviews with manufacturers

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

- cycle cost analysis, and markup analysis

.
12.2.2 Phase 2 : Industry Cash

- Flow Analysis and Interview Guide

In Phase 2

, DOE will perform a preliminary industry cash

- flow analysis and prepare written guidelines for interviewing ma nufacturers.

12.2.2.1 Industry Cash

- Flow Analysis

DOE will use the GRIM to analyze the financial impacts of new energy conservation standards on the miscellaneous refrigeration product industr y

. Standards will likely require additional investment, raise production costs, and affect revenue s through higher prices and, possibly, lower sales. T he GRIM uses several factors to determine a series of annual cash flows starting with the year standards are announced and extending through several years after implementation. T hese factors include annual e xpected revenues, costs of sales, selling a nd general administration costs, and taxes, a s well as capital expenditures, depreciation and maintenance related to new standards

. Inputs to the GRIM include manufacturing costs, ship ments forecasts, and price forecasts developed in other analyses. F inancial parameters for the industry will be developed based on publicly available data and confidentially submitted manufacturer information. DOE compares t he results of the GRIM against b aseline projections where no standards are in place

. The financial impact of new energy conservation standards is the difference between the two sets o f discounted annual cash flows.

12.2.2.2 Interview Guide

DOE will conduct interviews with manufacturer s to gather information on the effects of standard s on revenues and finances, direct employment, capital assets, and industry competitiveness. Before the interviews, DOE will distribute an interview guide that will provide a starting point to identify relevant issues and help identify the impacts of standards on individual manufacturers or sub

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

c ash

- flow analysis, a c ompetitive impacts assessment, an employment impacts assessment, a nd a manufacturing capacity impacts assessment.12

- 3 12.2.3 Phase 3 : Sub

- G roup Analysis

Phase 3 activities will include manufacturer interviews, revision of the industry cash

- flow analysis, manufacturer sub

- group cash

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

12.2.3.1 Manufacturer Interviews

The information gathered in Phase 1 and the cash

- flow analysis performed in Phase 2 w ill be supplemented with information gathered during interviews with manufacturers during Phase 3

. The interview process has a key role in the manufacturer impact analys i s, since it provides an opportunity for interested parties to express their views priv ately on important issues, allowing confidential or sensitive information to be considered in the rulemaking decision.

DOE will conduct detailed interviews with as many manufacturers as necessary to gain insight into the range of potential impacts of stand ards. During the interviews, DOE will solicit information on the possible impacts of standards on sales, direct employment, capital assets, and industry competitiveness. Both qualitative and quantitative information are valuable. Interviews will be schedul ed well in advance in order to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire is acceptable, DOE prefers an interactive interview process because it helps clarify responses and pr ovides the opportunity to identify additional issues.

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

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

, but do not want to have associated with their interview. This information wil l be incorporated into the public record

, but reported without attribution.

12.2.3.2 Revised Industry Cash

- Flow Analysis

In Phase 2 of the MIA, DOE will provide manufacturers with a preliminary GRIM for review and evaluation

. During the interviews, DOE will seek co mment and suggestions regarding the values selected for the parameters. Upon completion of the interviews, DOE will revise its industry cash

- flow model based on manufacturer feedback.

12.2.3.3 Manufacturer Sub

- Group Analysis

Using average cost assumptions to devel op an industry cash

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

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

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

- groups and sub

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

- groups or characteristics are most appropriate for the analysis.12

- 4 12.2.3.4 Comp etitive Impact Assessment

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

- specific financial information and impacts. The competitive analysis will focus on assessing the impacts on smaller, yet significant, manufacturers. The assessment wi ll be based on manufacturing cost data and information collected from interviews with manufacturers. The manufacturer interviews will focus on gathering information that would help in assessing asymmetrical cost increases to some manufacturers, the potenti al increase in business risks from an increased proportion of fixed costs, and potential barriers to market entry ( e.g. , proprietary technologies).

12.2.3.5 Manufacturing Capacity Impact

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

- time restructuring and other charges, wher e applicable.

12.2.3.6 Employment Impact

The impact of new energy conservation standards on employment is an important consideration in the rulemaking process. T o assess how domestic employment patterns might be affected, the interview will explore current employme nt trends in the miscellaneous refrigeration product industry. T he interview will also solicit manufacture r views on changes in employment patterns that may result from new standards

. The employment impacts section of the interview guide will focus on curr ent employment levels associated with manufacturers at each of their production facilities, expected future employment levels with and without a standard, and differences in workforce skills and issues related to the retraining of employees.

12.2.3.7 Cumulative Reg ulatory Burden

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

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

- specific regulatory actions. Based on its own research and discussions with manufacturers, DOE identified regulations relevant to miscellaneous refrigeration product manufacturers including standards for other products made by miscellaneous refr igeration product manufacturers, as well as restrictions

on the use and recovery of certain refrigerants and materials. DOE will study the potential impacts of these cumulative burdens in greater detail during the MIA conducted during the NOPR phase.12

- 5 12.3 PRELI MINARY MANUFACTURER IMPACT ANALYSIS

For the pre liminary analysis rulemaking phase, DOE conducted on

- site or telephone interviews with manufacturers of miscellaneous refrigeration products in April and May of 2013

. T o maintain confidentiality, DOE did not identify the individual manufacturers that disclosed information . The subsequent analysis only reports aggregated information and does not disclose sensitive or company

- specific information.

These interviews primarily served to identify key issues and gain insights into the qualitative effects of new energy conservation standards including the impact on manufacturer market share and financial performance, industry consolidation, manufacturing capacity, as well

as product utility and innovation. The intervie ws also served as an opportunity to get feedback from manufacturers relating to the other overlapping regulatory burdens they may face. Appendix 12

- A contains a copy of the interview guide DOE used to gather responses from multiple manufacturers.

12.3.1 General I nterview Structure

The manufacturer interviews included questions relating to the following topics. DOE received responses to most, if not all, of these topics from various manufacturers.

12.3.1.1 Key Issues

The most important aspect of the preliminary MIA is the opportunity to identify key manufacturer issues early in the development of energy conservation standards. During the interviews, DOE engaged manufacturers in a discussion about what they perceive to be the key issues in the rulemaking. Key issues, once id entified, are added to the list of topics explored during NOPR

- phase interviews. For example, key issues identified in other rulemakings have included the ability to pass cost increases on to consumers and space constraints which limit the range of technol ogically feasible design options

.
12.3.1.2 Shipment Trends and Projections

Shipment projections play a critical role in de termining the impacts of new energy conservation standards. The interviews provide d an opportunity for manufacturers to share information that can help DOE quantify the magnitude of any changes in shipments resulting from new energy conservation standards

. DOE sought information relating to the historical and current number of product shipments, broken down by product class

, capacity rating

, and efficiency level. DOE also solicited input on the forecas t of future shipments absent energy conservation standards. Manufacturers are asked how they would expect shipments to change for the industry as a whole as a function of standard levels and why they expect these changes might

occur. More specific questions aim ed to inform an estimate of price elasticity for use in the

n ational i mpact a nalysis (NIA). Yet another goal of the shipments discussion is to better understand the impacts of a potential reducti on in shipments on individual manufacturers of miscellaneous refrigeration products

.12

- 6 12.3.1.3 Profitability

DOE requested manufacturers’ views on the perceive d possible impact s of potential energy conservation standards on their future profitability. E nergy conser vation standards could affect financial performance in several different ways. Several of these impacts are captured in previous sections. For instance

, the outlays of capital to upgrade manufacturing equipment and the investment in product development to redesign products to comply with standards can incur significant conversion costs

, resulting in reduced cash flow and stranded assets

. More stringent energy efficiency standards may also contribute to higher per

- unit costs that for some consumers, may dete r them from purchasing the products

, or cause them to choose less efficient products

, thereby reducing shipments. Alternatively, if manufacturers wish to maintain a cost competitive product offering on minimally compliant products , the inability to pass

- th rough increased per

unit costs to the consumer may decrease the manufacturers’ gross margin (as a percentage).

12.3.1.4 Product Mix

During the interviews, DOE asked manufacturers if new energy conservation standards might change a manufacturer’s product mix and if this change affects profits. For example

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

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

, and how in turn this might change profitability.

12.3.1.5 Conversion Costs

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

- line redesign. In these situations, new efficiency standards will cause manufacturers to incur one

- time conversion capital expenditures and product conversion
expenses. C apital c onversion cost s are one

- time investments in property, plant, and equipment. Product conversion costs include one

- time investments in research, product development, testing

, and marketing.

12.3.1.6 Market Shares and Industry Consolidation

New energy conservation standards can alter the competitive dynamics of the marketplace. This can include prompting companies to enter the market, exit the market, or merge with other companies. The preliminary MIA interview questions ask ed manufacturers to share their perspectives on industry consolidation both in the abs ence of new standards and assuming new standards at various efficiency levels. The interview questions focus ed on gathering information that helps in assessing :12

- 7 • disproportionate cost increases to some manufacturers;

• increased proportion of fixed costs pote ntially increasing business risks; and

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

12.3.1.7 Product Utility and Innovation

DOE conducts an assessment of anti

- competitive effects of proposed standards in order to protect the interests of the consumer. During the interviews, DOE solicited information to understand if new standards could result in disproportionate economic or performance penalties for particular consumer/user sub

- groups.

DOE also asked manufacturers if new energy conservation s tandards could result in products that will be more or less desirable to consumers due to changes in product functionality, utility, or other features.

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

- consuming features from their products. During the interview s, DOE request s information on the effect of proposed standard s on innovation

.
12.3.1.8 Impact on Small Manufacturers

DOE will consider the possibility of small businesses being affected by the promulgation of new energy conservation standards for misc ellaneous refrigeration products

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

12.3.1.9 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 entire industries. Assessing the impact of a single regulation may overlook this c umulative regulatory burden.

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

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

In addition to the new en ergy conservation standards for miscellaneous refrigeration products , several other Federal regulations and pending regulations apply to t hese products. DOE will investigate these cumulative regulatory burdens in greater detail during the NOPR phase of the rulemaking.12

- 8 12.4 MISCELLANEOUS REFRIG ERATION PRODUCT P RELIMINARY MIA R ESULTS

During the preliminary MIA interview, m anufacturers identified key issues surrounding DOE’s rulemaking for miscellaneous refrigeration products and provided feedback regarding the
po tential impact of new energy conservation standards

. DOE summarized the feedback below

.
12.4.1 Key Issues

One of the central questions of the preliminary analysis manufacturer interview guide i s : “What are the key issues for your company regarding the miscellane ous refrigeration product energy conservation standard s rulemaking?” This open question initiated dialogue with manufacturers, enabling them to identify key points that DOE would explore and discuss during the interview. T his section describes the key issu es manufacturers felt were of the highest importance and that would have the most significant impact on the industry. Manufacturers indicated that, for the most part, the risks associated with these issues increase with more stringent energy conservation s tandards. The issues are overall concerns that many manufacturers expressed and in some cases, are specific to a given product class.

Miscellaneous refrigeration product manufacturers cited concerns regarding a number of issues that are covered in greater detail elsewhere in this chapter

. Detailed descriptions of these manufacturer concerns are provided in the appropriate sections that follow; only brief descriptions are provided here.

• Impacts of higher selling prices

– A number of manufacturers cited that the higher selling prices necessitated by increased manufacturing costs would be detrimental to the industry , and could dissuade consumers from purchasing miscellaneous refrigeration products across all price point s

.

• Impacts on consumer utility

– Manufact urers of miscellaneous refrigeration products believe that increased product efficiency will come at a cost to consumer

- valued features such as temperature stability, accurate humidity control, as well as product appearance for cooled cabinets, and product size and the quality of ice for ice makers.

• Timing of standard

– Several manufacturers emphasized that, given the large capital investments currently being made to comply with 2014 refrigerator and freezer standards, the timing of this new standard is pa rticularly burdensome

. The other issues of key importance to manufacturers are the conversion costs associated with new efficiency standards and disproportionate impacts on small businesses

.
12.4.2 Shipments and Profitability

DOE asked manufacturers during the preliminary manufacturer interviews about how

new energy conservation standards would affect their overall shipments and profitability

. Nearly all manufacturers stated that new energy conservation standards would have a negative impact on total industry shipments and profitability , although the magnitude of the12

- 9 decrease would depend on the efficiency levels chosen. The majority of manufacturers expressed concerns about the elasticity of the market for miscellaneous refrigeration products

. These manufactur ers affirmed that increased production c osts can only be passed through to a certain point, after which demand would decline.

Some manufacturers discussed the impacts of new conservation standards on shipments in terms of the different price point categor ies of their products. Manufacturers of both cooled cabinets and ice makers commented that consumers of low

- end products are relatively intolerant of price increases, meaning that demand for low

- end products will decline as manufacturers attempt to recoup higher costs by raising prices for low

- end product offerings . One manufacturer believes that a 5 percent increase in efficiency for its low

- end cooled cabinet product would impart cost increases that, if passed through, could have large adverse consequence s for sales. If price points for low

- end products must remain relatively fixed in order to maintain shipments level, manufacturer profit margins will be squeezed.

Regarding high

- end products , several manufacturers noted that, although consumers of these pr oducts may be better financially equipped to deal with increases in purchase price, these products are still highly discretionary

. As such, like lower

- end products, demand is also elastic in the high

- end product segment. Coupled with the low

- volume nature of this segment, manufacturers insist that new energy conservation standards could have a detrimental impact on shipments of high

- end products . One manufacturer predicted that an increase in product cost of 25 percent or more would drastically reduce sales in this segment. However, contrasting this view, two manufacturers believe that because high

- end products are luxury goods, price impacts on shipments and profitability would be less severe for this segment than for low

- end products. One of these manufact urers suggested that a 10 percent to 15 percent increase in price would not affect shipments.

Manufacturers also commented on price effects of new energy conservation standards in terms of their product mix . One manufacturer asserted that higher prices w ill first cause its full

sized cooled cabinets to be “priced out” of the market, followed then by its under

- counter product s. I ce maker manufacturers also emphasized the elasticity of the ice maker market. One manufacturer suggested that a 5 to 10 percent increase in product cost would lead to decreased shipments whereas two manufacturers suggested that a price increase of 20 to 50 percent c ould eliminate the ice maker market altogether.

Finally, one manufacturer noted that increased efficiency mandated b y new energy conservation standards for miscellaneous refrigeration products will come at the cost of product utility from the consumer standpoint

, further dampen ing demand for these products. Product utility is discussed in more detail in section 12.4.5.

12.4.3 Product Mix

DOE asked manufacturers what changes to their current product mixes they would expect if new energy conservation standards are established. Due to the relative inefficiency of thermoelectric cooled cabinets, one manufacturer noted that conserva tion standards for cooled cabinets may effectively eliminate thermoelectric cooling technology from the market.12

- 10 Several manufacturers predicted that they may be forced to stop producing lower

- end miscellaneous refrigeration products because targeted consu mer subgroups will not be able to tolerate the pass

- through of increased costs associated with meeting new energy conservation standards (as described above)

. This would lead to fewer options for customers of miscellaneous refrigeration products , as some m anufacturers reorient their production towards higher

- end products or simply exit the market

. Additionally, one ice maker manufacturer indicated that it may choose to shift all ice maker production to the commercial side, as the price differential between residential ice makers and commercial ice

- makers decreases. Still another manufacturer of ice maker s commented that small business customers and individuals may opt to buy a freezer with built

- in ice maker as the price of ice makers increases.

12.4.4 Conversio n Costs, Manufacturing Capacity, and Employment Levels

DOE asked manufacturers what level of conversion costs they anticipate if new energy conservation standards were to take effect

. Several manufacturers stressed that they had recently made large capital investments in response to the 2014 DOE standards for refrigerators and freezers. Consequently, these manufacturers emphasize d the unfortunate timing of new conservation standards for miscellaneous refrigeration products

. Relatedly, o ne small manufacturer emphasized the fact that its cooled cabinets share the same platforms as its refrigerator and freezer products, and that a new standard for cooled cabinets that required a new platform would equate to a very large capital investment that may not be justif iable based on their volume of shipments.

Most manufacturers said that conversion costs would be significant if standards require new product platforms

. One manufacturer estimated that a reduction in energy efficiency greater than 10 percent above their c urrent baseline would require a platform switch, and a 30 to 40 percent or higher reduction would cause the manufacturer to exit the U.S. market altogether. One manufacturer noted that it takes on a portion of the capital conversion costs of its OEM suppli er based on the portion of the OEM’s production that it sources. This manufacturer indicated potential conversion costs could range from 15 million to 20 million dollars, if the standard requires changing internal dimensions of its cooled cabinets

.
Relati ng to ice makers, one manufacturer suggested that conversion costs are more worrisome for ice makers than for cooled cabinets. This manufacturer noted that ice makers are low

- cost products that are not as suited to alternative refrigerants, and have a high er degree of mechanical and electrical components, all which result in making energy efficiency upgrades more financially challenging. An other ice maker manufacturer noted that an increase in efficiency above 5 percent would require them to redesign their current product, and an increase of 15 percent or more, would require a platform change. I ce maker manufacturers estimated that standards compliance would require capital expenditures in the range of $ 250,000 to $4 million

, depending on the standard level chosen.12

- 11 12.4.5 Impact on Innovation and Product Utility

Several m anufacturers expressed concerns that energy efficiency standards c ould have a negative impact on product characteristics and performance attributes valued by the consumer

. Relating to cooled cabi net s, most manufacturers expressed the belief that energy efficiency is not valued by consumers and conflicts with other innovations in product performance. In this regard, certain manufacturers of higher

- end cooled cabinets stress ed the difference between a true “wine storage” product and the lower price point “wine cooler.” They defined a wine storage unit as a specialized, high

- end product providing distinct utility and performance in the form of temperature consistency, accurate monitoring of humidity, and physically separate d temperature zones

. These manufacturers went on to note that all of these features require more componentry than a simple cooler. These manufacturers fear that the combined treatment of these distinct product types will have a dispr oportionately negative impact on product utility and innovation for higher

- end products.

Other cooled cabinet manufacturers cited multiple points of impact brought about by stricter standards including the inability to maintain a dual zone offering at lowe r price points

, increased wall thickness ( which would decrease the internal capacity of the cooled cabinet ), and potential elimination of the glass door

. Regarding the glass door, most cooled cabinet manufacturers agree d that this feature is essential to c onsumer utility, yet it provides the greatest challenge in increasing product efficiency.

Finally, two manufacturers noted that they pool research and development resources for cool ed cabinets and other refrigeration and freezer product lines. They mainta ined that an energy conservation standard for cooled cabinets would reduce the ir ability to innovate in the more traditional refrigerator and freezer segments, despite the fact that these segments likely account for a much greater share of total revenues.

One manufacturer of cooled cabinets noted that a n energy conservation standard could improve consumer utility if it leads to the elimination of thermoelectric cooling technology from the market . This manufacturer affirms that thermoelectric cooled cabinets cannot achieve stabilized, low temperatures. Additionally, this manufacturer suggested a standard may provide consumers with some valuable clarity regarding the benefits of energy efficiency.

In terms of ice makers, manufacturers affirm that

, for a certa in segment of the market

, consumer utility is tied to the production of clear (wet) ice. They asserted that ice maker s capable of producing clear ice typically have more componentry and use more energy than ice makers incapable of producing clear ice

. They noted that a standar d that do es not take into account the utility provided by clear ice production would force manufacturers to compromise utility for increased efficiency

. Additionally, ice maker manufacturers noted that they are also constrained by pro duct size, as consumers frequently value a small product that can be placed under a counter. A n energy conservation standard will likely require manufacturers to increase the size of their products in certain dimensions

.12

- 12 12.4.6 Cumulative Burden s

Based on its ow n research and discussions with manufacturers, DOE identified the following regulations relevant to miscellaneous refrigeration products , including:

• S tandards for other products made by miscellaneous refrigeration product manufacturers ;

• Federal

- and sta te

- level regulations of refrigerants; and

• Domestic and international materials and sourcing requirements

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

resources. The following subsections discuss in greater detail regulations affec ting the miscellaneous refrigeration products industry.

12.4.6.1 Standards for Other Products Made by Miscellaneous Refrigeration Product Manufacturers

In addition to the efficiency regulations for miscellaneous refrigeration products

, several othe r Federal regulations and pending regulations apply to other products manufactured by the

same companies that manufacture miscellaneous refrigeration products

. Several of these companies also manufacture residential and commercial air

- conditioning, refrige ration and laundry equipment

. In July of 2013, DOE published a notice of proposed determination regarding portable air conditioners

. If DOE issues a final determination that portable air

conditioner s are a covered product, DOE may prescribe test procedures and energy conservation standards for portable air

- conditioner s. Compliance with standards for residential clothes washers will be required in 2015 and 2018 . Additionally

, new energy conservation standards for commercial refrigeration equipment and automa tic ice makers will take effect in late 2015 and 2017, respectively.

Other federal energy conservation standards that may impact manufacturers of miscellaneous refrigeration products include the standard for r esidential dehumidifiers

, the standard for micr owave ovens standby and off mode, the standard for packaged terminal air conditioners and heat pumps , and the amended test procedure for conventional cooking products.

12.4.6.2 Refrigerants

The subject of refrigerant regulation and the availability of refrigerants was another point of concern raised by the manufacturers interviewed. Manufacturers in this industry expressed general concern with the potential of future refrigerant regulations. With

c hlorofluorocarbon s ( CFC s ) and h ydrochlorofluorocarbons (HCFCs) having already been phased out, the variety of available refrigerants for use in consumer refrigeration equipment has decreased in recent years. This serves to amplify the effect of refrigerant cost fluctuations on manufacturers.

Manufacturers ex pect a climate change bill that regulates the use and emissions of GHGs to be passed by Congress in the near future. As a result, use of hydrofluorocarbons (HFCs), the12

- 13 most commonly used refrigerants and foam

- blowing agents, would become restricted. These substances would eventually be phased out, or their use capped at a restricted level. Conversion of the currently

- used refrigerant, HFC

- 134a, to the most likely alternative, R

- 600a, would require product redesign, and causes issues associated with safety c ertification compliance under UL regulations. Proposed legislation presents uncertainty for manufacturers as to how hydrocarbon refrigerants and foam

- blowing agents would be regulated for safety within the U.S.

Additionally, two manufacturers cited incre ased state

- level recycling requirements pertaining to the proper recovery of refrigerants from their appliances as an additional source of regulatory burden.

12.4.6.3 Materials

Several m anufacturers stated that there are a number of domestic and international
stan dards relating to the sourcing and types of materials used in their refrigeration products. One manufacturer noted that European standards such as the Restriction on the use of Hazardous Substances (RoHS) create additional compliance costs for manufacturer s that compete in Europe. Manufacturers indicated that California and some other states ha ve programs similar to these that are either already in place or are currently in development.

One manufacturer expressed concerns about the conflict minerals direc tive included in the Dodd

- Frank Act of 2010 (H.R. 4173, section 1502) b . When promulgated, this rule will require that U.S. companies report and make public available their use of certain minerals from the Democratic Republic of the Congo and adjoining coun tries. This may require manufacturers to make investments in new tracking systems to ensure visibility throughout their supply chain

. DOE will investigate these cumulative regulatory burdens in greater detail during the MIA in the NOPR phase of this rule making

.
12.4.7 Impact on Small Manufacturers

The manufacturers of the products covered in this rulemaking have a primary NAICS code of 335222: Household Refrigerator and Home Freezer manufacturing or 333415: Air

Conditioning and Warm Air Heating Equipment and Com mercial and Industrial Refrigeration Equipment Manufacturing. The Small Business Association defines a small business as a company that has fewer than 750 employees and fewer than 1,000 employees for NAICS codes 335222 and 333415, respectively. At this tim e, DOE has identified five small business manufacturers which are based in the U.S. and produce one or more of the covered products.

Initial research and manufacturer in terviews indicated that

, due to the more limited product offerings of small miscellane ous refrigeration product manufacturers relative to larger,

b http://www.sec.gov/rules/proposed/2010/34

- 63547fr.pdf

.12

- 14 more diversified appliance manufacturers and the low

- volume nature of the niche cooled cabinet and ice maker market, some manufacturers believe that DOE efficiency standards will place a dispropor tionate burden on these businesses.

DOE will study the potential impacts to these small businesses in greater detail during the NOPR phase of this energy conservation standards rulemaking for miscellaneous refrigeration products

.