12-i

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY . . . . . . . . . . . . . . . . 12-1

12.1.1 Phase 1: Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2

12.1.2 Phase 2: Industry Cash-Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2

12.1.3 Phase 3: Subgroup Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 12-3

12.1.3.1 Major Manufacturer Subgroups - Superclasses . . . . . . . . . . . . . . . . 12-4

12.1.3.2 Small-Business Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-5

12.2 MANUFACTURER KEY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-6

12.3 GRIM INPUTS AND ASSUMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.1 Overview of GRIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.2 Financial Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

12.3.3 Corporate Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-10

12.3.4 Shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-12

12.3.5 Production Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.6 Conversion Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.7 Markup Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

12.3.7.1 Preservation-of-Gross-Margin-Percentage Scenario . . . . . . . . . . . . 12-14

12.3.7.2 Preservation-of-Operating-Profit Scenario . . . . . . . . . . . . . . . . . . . 12-14

12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED . . . . . . 12-15

12.4.1 Conversion Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-15

12.4.2 Product Conversion Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-21

12.4.3 Industry Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.1 Trial Standard Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.2 Impacts on Industry Net Present Value . . . . . . . . . . . . . . . . . . . . . . 12-22

12.4.3.3 Impacts on Annual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-24

12.4.4 Other Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-26

12.4.4.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-26

12.4.4.2 Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-27

12.4.4.3 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-27

12.4.4.4 Cumulative Regulatory Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-28

12.4.4.5 Impacts on Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.4.4.6 Worker Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.4.4.7 Other Engineering Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-29

12.4.5 Summary of Impacts for Liquid-Immersed Superclass . . . . . . . . . . . . 12-30

12.5 MANUFACTURER IMPACT ANALYSIS - MEDIUM-VOLTAGE, DRY-TYPE

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-33

12.5.1 Conversion Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-33

12.5.2 Product Conversion Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-39

12.5.3 Industry Financial Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-40

12.5.3.1 Trial Standard Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-40

12.5.3.2 Impacts on Industry Net Present Value . . . . . . . . . . . . . . . . . . . . . . 12-40

12.5.3.3 Impacts on Annual Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-41
12-ii

12.5.4 Other Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-43

12.5.4.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-43

12.5.4.2 Production Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-44

12.5.4.3 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-44

12.5.4.4 Cumulative Regulatory Burden . . . . . . . . . . . . . . . . . . 12-44

12.5.4.5 Impacts on Small Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-45

12.5.5 Summary of Impacts for Medium-Voltage, Dry-Type Superclass . . . . . . . . . 12-46

LIST OF TABLES

Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry . . . . . . . 12-10

Table 12.3.2 Non-Production Cost Markups for the Preservation-of-Operating-Profit Scenario

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-14

Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional Annealing

Furnace Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-17

Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous Annealing

Furnace Capital Expenditures . . . . . . . . . . . . . . . . . . 12-17

Table 12.4.3 Summary of Additional Core-Cutting Machine Estimate for Liquid-Immersed

Superclass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-19

Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional CoreCutting Equipment Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20

Table 12.4.5 Summary of Liquid-Immersed Distribution Transformer Amorphous Core-Cutting

Equipment Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20

Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-21

Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product Conversion

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-22

Table 12.4.8 Changes in Liquid-Immersed Industry Net Present Value, Preservation-of-GrossMargin-Percentage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-23

Table 12.4.9 Changes in Liquid-Immersed Industry Net Present Value, Preservation-ofOperating-Profit Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-23

Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010) . . . . . . . 12-26

Table 12.5.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 9 . . . . . . 12-35

Table 12.5.2 Calculation of Core-Mitering Machines Needed for Design Line 9 . . . . . . . 12-36

Table 12.5.3 Calculation of Core-Mitering Machines Needed for Design Line 10 . . . . . . 12-36

Table 12.5.4 Calculation of Core-Mitering Machines Needed for Design Line 11 . . . . . . 12-37

Table 12.5.5 Calculation of Core-Mitering Machines Needed for Design Line 12 . . . . . . 12-37

Table 12.5.6 Calculation of Core-Mitering Machines Needed for Design Line 13 . . . . . . 12-38

Table 12.5.7 Summary of MV, Dry-Type Distribution Transformer Core-Cutting Equipment

Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-38

Table 12.5.8 Summary of MV, Dry-Type Distribution Transformer Conversion Capital

Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-39
12-iii

Table 12.5.9 Summary of MV, Dry-Type Distribution Transformer Product Conversion

Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-39

Table 12.5.10 Changes in MV, Dry-Type Industry Net Present Value, Preservation-of-GrossMargin-Percentage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-40

Table 12.5.11 Changes in MV, Dry-Type Industry Net Present Value, Preservation-ofOperating-Profit Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-41

Table 12.5.12 Projected Change in Labor Expenditures, MV, Dry-Type (2010) . . . . . . . . . 12-43

LIST OF FIGURES

Figure 12.3.1 Using the GRIM to Calculate Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-8

Figure 12.4.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage Scenario,

Liquid-Immersed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-24

Figure 12.4.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, LiquidImmersed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-25

Figure 12.5.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage Scenario,

MV, Dry-type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-42

Figure 12.5.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, MV, Drytype . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-42
a

 The Department of Energy’s standards program for commercial equipment is conducted under Title III, Part C of the

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

12-1

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 MANUFACTURER IMPACT ANALYSIS METHODOLOGY

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

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

consumers of the products subject to such a standard.”a The legislation also calls for an

assessment of the impact of any lessening of competition as determined in writing by the

Attorney General. The Department conducted the manufacturer impact analysis (MIA) to

estimate the financial impact of efficiency standards on manufacturers of distribution

transformers and to assess the impact of such standards on employment and manufacturing

capacity. The MIA has both quantitative and qualitative components. The quantitative part of

the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an industrycash-flow model adapted for this rulemaking. The key GRIM inputs relate to industry cost

structure, shipments, and pricing strategies. The GRIM’s key output is the industry net present

value (INPV). The model estimates the financial impact of higher efficiency standards by

comparing changes in INPV between the base case and the various trial standard levels (TSLs). 

The qualitative part of the MIA addresses factors such as the material supply chain,

manufacturing techniques and equipment, and market and product trends, and includes a

subgroup assessment of the impacts on small manufacturers.

In the Department’s Framework Document published on November 1, 2000, DOE

outlined the procedural and analytical approaches for the MIA. As outlined, the Department

conducted the MIA in three phases. Phase 1, “Industry Profile,” consisted of preparing an

industry characterization, including data on market shares, sales volumes and trends, pricing,

employment, and financial structure. Phase 2, “Industry Cash Flow,” focused on the industry as

a whole. Using publicly available information developed in Phase 1, the Department adapted the

GRIM’s generic structure to perform an analysis of the impact of distribution transformer energy

conservation standards on the industry cash flow. In Phase 3, the “Sub-Group Impact Analysis,”

DOE conducted interviews with several manufacturers. Those interviewed included small,

medium, and large manufacturers providing a representative cross-section of the U.S. distribution

transformer industry. During these interviews, the Department discussed engineering,

manufacturing, procurement, and financial topics specific to each company, and also obtained

each manufacturer’s view of the potential impacts of standards on the industry as a whole. The

interviews provided valuable information that the Department used to evaluate the impacts of a

standard on manufacturers’ cash flows, manufacturing capacities, and employment levels. 

This chapter provides details on the approach the Department followed in developing the

MIA for this rulemaking.
12-2

12.1.1 Phase 1: Industry Profile 

In Phase 1 of the MIA, the Department prepared a profile of the distribution transformer

industry that built on the market and technology assessments prepared for the advance notice of

proposed rulemaking (ANOPR) analysis. Prior to initiating the detailed impact studies, DOE

collected information about the present and past industry structure and market characteristics for

distribution transformers—including information on national shipments, market leaders, and cost

structures for a range of manufacturers. In creating the industry profile, the Department gathered

information about product construction, product characteristics, manufacturing techniques, trends

in the number of firms, and market characteristics.

The industry profile included a topdown cost analysis of the distribution transformer

industry that DOE used to derive initial cost and financial inputs for the GRIM, e.g., revenues;

material; labor; overhead; depreciation; selling, general, and administrative (SG&A) expenses;

and research and development (R&D) expenses. The Department used public sources of

information to calibrate its initial characterization of the industry, including Securities and

Exchange Commission (SEC) 10-K reports, corporate annual reports, the U.S. Census Bureau’s

Economic Census, Dun & Bradstreet reports, and industry analysis from Ibbotson Associates.

12.1.2 Phase 2: Industry Cash-Flow Analysis

Phase 2 of the MIA focused on the industry-wide financial impacts of standards. Energy

conservation standards can affect distribution transformer manufacturers in three distinct ways. 

They can: 1) require additional investment, 2) raise production costs, and 3) impact revenues

through higher prices and, possibly, lower shipments. The analytical tool DOE uses for

calculating the financial impacts of standards on manufacturers is the GRIM. To quantify these

impacts in Phase 2 of the MIA, the Department performed a distribution transformer industry

cash-flow analysis using the GRIM.

For the industry cash-flow analysis, DOE prepared a set of financial parameters for use in

the GRIM. The Department originally based these financial parameters on its topdown financial

analysis but, following discussions with transformer manufacturers, it adjusted them to be more

representative of the industry. The Department used a similar process during the ANOPR phase

of the analysis (i.e., public financial reports and manufacturer discussions) to derive the

manufacturer markups it used to establish manufacturer selling prices in the engineering analysis. 

The MIA production costs and manufacturer selling prices are consistent with the life-cycle cost

(LCC) analysis, as well as with the engineering analysis, on which DOE based the LCC pricing. 

The Department established this consistency by using the mean values for production costs and

selling prices in the GRIM, as selected by the LCC’s Monte Carlo algorithm. Finally, the

Department’s shipments analysis (Chapter 9) provided the basis for the shipments projection

under each of the TSLs in the GRIM.
12-3

12.1.3 Phase 3: Subgroup Impact Analysis

Using average cost and financial assumptions to develop an industry cash-flow model is

not adequate for assessing differential impacts among subgroups of manufacturers. Smaller

manufacturers, niche players, or manufacturers exhibiting a cost structure that differs largely

from the industry average could be more negatively impacted. The Department used the results

of the industry characterization to group together manufacturers exhibiting similar

characteristics. It established two distinct subgroups of distribution transformer manufacturers

that could be impacted by efficiency standards: (1) liquid-immersed, and (2) medium-voltage,

dry-type. A discussion of these superclasses follows in section 12.1.3.1.

Within each of these superclasses, the Department contacted companies from its database

of manufacturers (see Chapter 3), which provided a representation of each superclass. The

Department interviewed small and large companies, subsidiaries and independent firms, public

and private corporations, and a mix of National Electrical Manufacturers Association (NEMA)

members and non-NEMA members. It also made an effort to interview companies that had been

interviewed for the engineering analysis in 2002, as well as those that had previously participated

in the rulemaking process. The purpose of the meetings was to enhance the Department’s

understanding of how manufacturer impacts change with each of the TSLs. A copy of the

interview guides for each of the two superclasses can be found in Appendix 12.A.

The Department also evaluated the impact of the energy conservation standards on small

businesses. Small businesses, as defined by the Small Business Administration (SBA) for the

distribution transformer manufacturing industry, are manufacturing enterprises with 750 or fewer

employees. The Department conducted telephone interviews with four small businesses, to

determine if the standard could result in differential impacts on these companies. A copy of the

interview guide for these interviews can be found in Appendix 12.B. Discussion of the purpose

of the small-business interviews and the small-business subgroup methodology follows in section

12.1.3.2. Two of the manufacturers interviewed in the lengthier, face-to-face interviews are also

categorized as small businesses. 

The Department contacted material and equipment suppliers to the distribution

transformer industry to enhance its understanding of the context in which transformer

manufacturers operate and to assist in quantifying conversion costs. The Department conducted

interviews with the two domestic suppliers of electrical core steel and with two core steel

distributors. The domestic suppliers of core steel are large corporations that sell a broad range of

steel products, one of which is electrical core steel. The core steel distributors offer

manufacturers a varying degree of processing, ranging from basic slit-to-width rolls to

prefabricated cores (both stacked and wound-core configurations). The Department also spoke

with four equipment suppliers, including manufacturers of both distributed gap and mitered core

processing machines, and two manufacturers of annealing furnaces. The information from these

discussions was helpful in understanding comments and concerns expressed by manufacturers, as

well as in estimating the conversion capital expenditures used in the GRIM. 
12-4

To prepare the liquid-immersed industry conversion costs for switching to amorphous

material at TSLs 5 and 6, the Department spoke with the only domestic supplier of amorphous

ribbon and several transformer manufacturers who had experience working with amorphous

material. Through this dialogue, the Department gained a better understanding of manufacturing

amorphous core transformers, including issues surrounding core processing equipment, annealing

furnaces, and material handling. 

12.1.3.1 Major Manufacturer Subgroups - Superclasses

The Department subdivided the distribution transformer industry into two ‘superclasses’: 

liquid-immersed and medium-voltage, dry-type. (The low-voltage, dry-type superclass has been

removed since the ANOPR was published, because the Energy Policy Act of 2005, enacted in

August 2005, prescribed standards for these types of transformers.) These superclasses take into

account differences among the manufacturers, including the equipment and tooling used, product

designs, customer types, and the characteristics of the markets in which the manufacturers

operate. The Department believes that modeling the industry in two separate subgroups offers a

robust analytical approach, for three reasons:

1. Customer profiles and market mechanisms - Generally, the profiles of the majority of

customers purchasing transformers and the manner in which they are built and sold within

each of the two superclasses are distinct. Discussion of customer profiles and distribution

chains can be found in the LCC analysis (Chapter 8). 

2. Manufacturing equipment and transformer design - The equipment necessary for

production and the methods by which manufacturers build transformers are different for

each of the superclasses. For example, in the liquid-immersed superclass, transformer

cores tend to be wound, requiring distributed-gap core-winding machines, annealing

furnaces, tanking machines, and other equipment that is only used in this superclass. 

Accordingly, the capital equipment investment necessary for compliance with a particular

TSL typically differs between the two superclasses. 

3. Industry structure - Reviewing the database of transformer manufacturers, the Department

observed that many companies operate and specialize in one of the distribution

transformer superclasses. For large companies that operate in both superclasses, each

manufacturing facility tends to be dedicated to producing transformers from one of the

superclasses. Thus, the industry naturally breaks down into two superclasses (actually,

three superclasses, if low-voltage, dry-type is considered).

The Department conducted structured, detailed, face-to-face interviews with six

manufacturers, one of which produces transformers in both superclasses. Two of the six

manufacturers are small businesses. Three of the manufacturers produce medium-voltage, drytype transformers, collectively representing more than an estimated 70 percent of the U.S.

medium-voltage, dry-type market. Four of the manufacturers produce liquid-immersed

transformers, collectively representing more than an estimated 70 percent of the U.S. liquidimmersed market.
b

 Small Business Administration - www.sba.gov/size/indextableofsize.html

12-5

12.1.3.2 Small-Business Subgroup

The Department undertook a small-business subgroup analysis to assess the importance

of small businesses within the distribution transformer industry and to understand how the

impacts of standards on small business might be different from those on large manufacturers. 

Small businesses, as defined by the SBA for the distribution transformer manufacturing industry,

are manufacturing enterprises with 750 employees or fewer.b

 To prepare a list of eligible

companies, the Department constructed a transformer manufacturers database containing

available data from 11 sources, including the Department’s stakeholder contact list for this

rulemaking, the Oak Ridge National Laboratory determination analysis database, the

Underwriters Laboratory (UL) certification database, the NEMA membership list, and the

Transformer Association membership list. (Details about the compilation of this database and

the sources used are discussed in the market and technology assessment, Chapter 3.) The

Department then selected small businesses and contacted them to assess their interest in

participating in an interview. If a small business was interested, the Department sent them a

short questionnaire and scheduled a date for discussion. A copy of the small-business interview

guide can be found in Appendix 12.B. 

In addition to the two small businesses that underwent detailed, structured, face-to-face

interviews, DOE interviewed four additional small businesses by telephone. Three of the small

businesses interviewed by telephone produce medium-voltage, dry-type transformers, and one of

them produces liquid-immersed transformers.

The Department’s database of transformer manufacturers includes approximately 28

small businesses affected by this rulemaking, most of which have fewer than 100 employees. 

Small businesses operate in both superclasses. The database identifies 15 small businesses that

sell liquid-immersed distribution transformers and 20 that sell medium-voltage, dry-type units. 

The total of these two groups exceeds 28, because some small businesses operate in more than

one superclass. Upon reviewing the material provided by the small businesses interviewed, the

Department concluded that using the GRIM was not the best way to capture and represent the

differential impacts on small business. Instead, the differential impacts on small business are

discussed qualitatively for each of the two superclasses in this chapter. 
12-6

12.2 MANUFACTURER KEY ISSUES

The first question in each MIA interview guide asks, “What are the key issues for your

company regarding the distribution transformer energy conservation standard rulemaking?” This

open question initiated the dialogue with the manufacturers, enabling them to identify key points

that the Department would explore and discuss during the interview. This section lists those

issues that the manufacturers interviewed raised most often. 

Manufacturers indicated that, for the most part, the risks associated with these issues

increase with increasing TSL. Many of these issues are discussed later in this chapter. 

• Core steel availability - Manufacturers expressed concern over whether sufficient

quantities of high-grade core steels needed for the construction of energy-efficient

distribution transformers would be available. This concern is amplified by recent core

steel availability problems in the U.S. market. Not only will the standard drive the

market to use higher grades of steel (which are thinner, and therefore take more time for

steel companies to manufacture), but the quantities (pounds of steel) per transformer also

will increase. Transformer manufacturers are concerned that these compounding factors

may further limit the availability of core steel.

• Core steel price volatility and uncertainty - Starting in late 2003, core steel prices started

to increase, and increased dramatically after mid-2004. For some manufacturers, core

steel prices have doubled since 2003. In response to these and other material input cost

increases, transformer manufacturers have been raising their own prices. However,

manufacturers reported that they have not passed all input cost increases through to

customers. Furthermore, manufacturers questioned the cost-effectiveness of energy

conservation standards under higher steel prices. They commented that higher

transformer selling prices (driven by the higher material inputs prices), would erode

customer cost savings and lengthen the payback periods of transformers under standards. 

The Department’s core steel market analysis is contained in Appendix 3A of this

technical support document (TSD). Core steel price uncertainty is addressed in the

Department’s core steel price scenarios as part of the engineering analysis (see Chapter 5

of this TSD, including Appendix 5C). 

• Dimensional and physical constraints - Manufacturers expressed concern over meeting

the Department’s efficiency standard and their customers’ dimensional and physical

constraints simultaneously. In particular, manufacturers voiced concern regarding retrofit

applications, mining applications, telephone pole capacities, and other installations where

transformers have to comply with dimensional or physical constraints. 

• Enforcement of efficiency standard - Manufacturers expressed concern over how the

Department intends to enforce the standards, to make sure all manufacturers, particularly

importers, comply with the regulations.
12-7

• Definition loopholes - Manufacturers cautioned that, if the standard is set above a certain

level, some customers may start looking for standards relief by specifying transformers

from the Department’s exemption list and using them in general purpose applications. 

• Amorphous material - Liquid-immersed transformer manufacturers expressed concern

that the Department is considering amorphous material at some of its TSLs. In particular,

they discussed concerns about: 1) the ease of access to the technology, 2) the availability

of amorphous-core material at quantities necessary to meet industry demand, 3) the level

of capital equipment investment, 4) increased complexity associated with material

processing and handling during manufacturing, and 5) the consequent obsolescence of

existing core fabrication and annealing capacity within the industry.

• Backsliding - Liquid-immersed transformer manufacturers identified two impacts related

to backsliding. First, manufacturers reported that they are currently beginning to

experience these impacts as a result of State standards. Manufacturers reported that, in

the State that has enacted NEMA’s TP-1 standard for liquid-immersed transformers,

some utility customers have ceased evaluating their purchases (i.e., selecting transformers

based on the capitalized cost per watt of no-load and load losses, using A and B factors),

and are simply purchasing standards-compliant transformers. According to

manufacturers, while the minimum efficiency of transformers sold in this State has

increased, the average efficiency has decreased. The first impact of such backsliding is

that liquid-immersed manufacturers may experience lower revenue. Second, the liquidimmersed market may move from a highly customized market, where U.S. manufacturers

enjoy a competitive advantage over foreign manufacturers because of their flexibility and

shorter lead times, to a homogenized, commoditized market. In such a market,

backsliding in efficiency would be likely to occur as customized designs become less

common. Ultimately, liquid-immersed manufacturers suggest that this may lead to a

deterioration in the U.S. manufacturing base of liquid-immersed distribution

transformers.
12-8

12.3 GRIM INPUTS AND ASSUMPTIONS

12.3.1 Overview of GRIM

The GRIM serves as the main tool for assessing the impact on industry of implementing

efficiency standards. The GRIM is a financial model of the industry that captures the impact of

efficiency standards on industry value. The GRIM, illustrated in Figure 12.3.1, carries out a

standard annual cash-flow analysis, using manufacturer prices, manufacturing costs, shipments,

and industry financial information as inputs, and accepts a set of regulatory conditions, such as

changes in costs, investments, and associated margins. The GRIM spreadsheet calculates a series

of annual cash flows, beginning with the base year of the analysis, 2004, and continuing

explicitly to 2038. The model calculates the INPV by summing the stream of annual discounted

cash flows during this period.1

The Department used the GRIM to project cash flows based on standard accounting

principles and compared changes in INPV between a base case (no mandatory standard) and

different TSLs for the energy conservation standard (the standard case). The difference in INPV

between the base case and the standard case(s) represents the financial impact of the standard on

manufacturers. Appendix 12.C provides more technical detail and user information for the

GRIM.

12.3.2 Financial Parameters

The Department relied on several sources to obtain financial inputs and assumptions for

the GRIM, including corporate annual reports and the manufacturer interviews. Corporate

annual reports to the SEC (SEC 10-Ks) provided many of the draft financial inputs to the GRIM.2

These reports exist for publicly held companies, and are freely available to the general public. 

The Department used these annual reports to derive the following draft GRIM inputs:

GRIM

Manufacturing Costs

Financial Parameters

Manufacturer Selling 

Prices

Shipment Forecasts

Cash Flow

Spreadsheet Model

Manufacturing Costs

Financial Parameters

Manufacturer Selling 

Prices

Shipment Forecasts

Cash Flow

Spreadsheet Model

Figure 12.3.1 Using the GRIM to Calculate Cash Flow
12-9

• Tax rate,

• Working capital,

• Selling, general, and administrative expenses,

• Research and development expenses,

• Depreciation,

• Capital expenditures, and

• Net property, plant, and equipment (i.e., net of accumulated depreciation).

The Department then revised its own estimates of financial parameters through interviews

with manufacturers during both the ANOPR and notice of proposed rulemaking (NOPR) phases

of the rulemaking. It relied on manufacturer input for these revisions for two reasons. First,

many distribution transformer manufacturers, both large and small, are not public corporations,

so industry-wide financial data are not readily available. Second, many manufacturers of

distribution transformers are diverse businesses that participate in markets that are substantially

different from distribution transformer markets; therefore, the available financial information is

not clearly representative of the distribution transformer market. Table 12.3.1 provides the

representative financial parameters that DOE used for both superclasses in the distribution

transformer GRIM.

The Department also used information from the SEC 10-K reports to calibrate the

GRIM’s base case operating profit margin to be representative for the industry. Operating

margin is defined as earnings before interest and taxes, as a percentage of net revenue. The

Department calibrated the GRIM to have a 4.9 percent operating margin in the base case. 
12-10

Table 12.3.1 GRIM Financial Parameters for Distribution Transformer Industry

Parameter

Representative Value

for Liquid-Immersed

Representative Value

for MV, Dry-Type

Tax Rate

 (% of Taxable Income)

30.0% 33.9%

Net Working Capital 

(% of Revenues)

15.4% 10.6%

SG&A 

(% of Revenues)

13.5% 14.0%

R&D 

(% of Revenues)

1.6% 1.1%

Depreciation 

(% of Revenues)

1.6% 1.8%

Capital Expenditures

 (% of Revenues)

1.9% 2.1%

Net Property, Plant, and

Equipment (% of Revenues)

16.6% 16.1%

Source: SEC, 10-K Reports, Fiscal Years 1999–2004. Revised based on discussion with manufacturers.

12.3.3 Corporate Discount Rate

The Department used the weighted-average cost of capital (WACC) for the industry as

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

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

proportions in the capital structure of the industry.1

 The Department estimated the WACC for

the industry based on a few representative companies, using the following formula:

 WACC = After-Tax Cost of Debt x (Debt ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors expect to earn on a company’s

stock. These expectations are reflected in the market price of the company’s stock. The capital

asset pricing model (CAPM) provides one widely used means to estimate the cost of equity. 

According to the CAPM, the cost of equity (expected return) is:

Cost of equity = risk free rate of return + Beta * risk premium

where:

Risk free rate of return = rate of return on a “safe” benchmark investment. In

practice, investors use a variety of different-maturity
c

 In previous rulemakings, DOE based the debt ratio on book value; in this rulemaking a slightly more accurate debt

ratio is based on market value of equity rather than book value. However, DOE used the book value of long-term debt

to estimate the debt ratio. 

12-11

Treasury notes to estimate the risk-free rate. The

Department used a long-term Treasury note return (10-year

bond return) because this captures long-term inflation

expectations and is less volatile than short-term rates in the

GRIM. It estimated the risk-free rate to be 6.2 percent,

which is the average 10-year Treasury note return from

1990 to 2003,

Risk premium = the difference between the expected return on stocks and

the riskless rate, assumed to be 9.2 percent, and 

Beta = the covariance of a stock with the market as a fraction of

the market’s variance. The Beta equals one if the stock is

perfectly correlated with the Standard and Poor’s (S&P)

500 market index. A Beta lower than one means the stock

is less volatile than the market index. For this analysis,

DOE assumed Beta to be equal to 0.8.

Using these inputs, the Department estimated the cost of equity (expected return) to be

13.6 percent.

The Department estimated the cost of debt for each company based on the average

interest rate reported on each company’s SEC 10-K report. It estimated the average cost of debt

to be 6.6 percent. Assuming a marginal tax rate of 35 percent, the after-tax cost of debt is 4.3

percent. The Department estimated the debt ratio (debt/total capital) of the industry to be 26

percent.c

 The equity ratio estimate is therefore 74 percent.

Using the formula for the WACC, the Department estimated the industry’s WACC to be

11.2 percent. Subtracting an estimated inflation rate of 2.3 percent (assumed in the LCC

analysis), the inflation-adjusted WACC is 8.9 percent.

For validation, Ibbotson Associates3 provided a WACC for a set of companies in the

electric transmission and distribution equipment industry, which the Department assumed to be a

good surrogate for the distribution transformer industry. The Ibbotson nominal WACC is 12.5

percent, which corresponds to an inflation-adjusted WACC of 10.3 percent. This is close to the

Department’s calculated value of 8.9 percent. 

During the manufacturer interviews, no manufacturer expressed disagreement with the

industry-wide, inflation-adjusted WACC estimate of 8.9 percent (although some individual

companies have substantially different costs of capital). 

For the reasons discussed above, the GRIM uses an 8.9 percent discount rate for

calculating the INPV of the distribution transformer industry.
12-12

12.3.4 Shipments

In the national impact analysis, the GRIM used shipment projections derived from the

Department's shipments model. The shipments model provides an estimate of the annual sales

and in-service stock of distribution transformers for each year of the forecast period. The

estimate includes both the age distribution of transformers for each type (according to product

class) and each transformer size. The Department selected an accounting model method to

prepare shipment scenarios for the base case and the six trial standard levels. Chapter 9 of this

TSD provides a description of the methodology and analytical model DOE used to forecast

distribution transformer shipments.

In its shipments analysis, the Department determined that the demand for distribution

transformers is relatively inelastic. Therefore, in the long-run, more expensive standardscompliant transformers are not expected to trigger substantial reductions in shipments. 

Transformers are understood to be a ‘must-have;’ thus, DOE modeled the shipments analysis

with a small price-elasticity. During the MIA interviews, several manufacturers expressed their

view that shipments are subject to a greater price elasticity of demand than the Department

estimated. 

The manufacturers informed the Department of three mechanisms by which higher

standards could reduce shipments. First, manufacturers commented that transformer budgets are

often finite line items in a utility’s overall budget, and as costs per unit increase, it is unlikely that

utilities’ transformer budgets will increase proportionately. Thus, proactive maintenance

programs that replace and/or upgrade transformers nearing the end of their useful life will be

reduced (on a unit basis), resulting in more failures and outages, and lower system reliability. 

The installed capital of the distribution network will be worked harder, and transformers will

only be fixed upon failure. Second, utilities may increase their purchase of multi-voltage

(primary) distribution transformers, enabling them to reduce inventories. Multi-voltage primary

transformers are able to operate at more than one primary voltage, enabling utilities to reduce the

number of transformers kept in stock for emergencies and upgrades. Third, engineers who

specify transformer orders may look at an application and select a slightly lower kVA rating than

they ordinarily would have because of the higher (standards-compliant) price. For example, a

customer who would have purchased a 50 kVA unit for an application may select a 37.5 kVA

unit because of the cost increase for a standards-compliant 50 kVA transformer. Working a

lower kVA unit with a higher average load reduces its operating life (compared to the larger kVA

operating the same load); however, on a first-cost basis, the specifier will have saved money. In

the shipments analysis, DOE did not model this risk of derating transformers. Furthermore, if

lower kVA ratings are specified, the actual per-unit loading may move away from the assumed

50 percent for liquid-immersed and medium-voltage, dry-type transformers, resulting in greater

load losses and lower system efficiency than DOE modeled in the national impact analysis.

Finally, the Department’s shipments analysis did not take into account any constraints on

the availability of materials for manufacturing transformers. As noted in section 12.2,

manufacturers expressed concern during the interviews about the availability of core steel. The

transformer materials supply chain has been experiencing consolidation over the years, such that
12-13

now, manufacturers would be vulnerable to changes in price or availability of wire, copper sheet,

electrical paper, mineral oil, and other critical materials for building a transformer. Such input

price changes would be passed through and would impact transformer prices. Since the

Department’s engineering analysis assumed flat equipment prices in real terms over time, its

shipments analysis could not capture such second-order impacts for any given set of equipment

prices.

12.3.5 Production Costs

During the engineering analysis, the Department used transformer design software to

create a database of designs spanning a broad range of efficiencies for each of the representative

units. This design software generated a bill of materials, with information including pounds of

core steel, pounds of conductor, insulation, ducting, and tank size. The software also provided

information pertaining to the labor necessary to construct the transformer, including the number

of turns in the windings, and core dimensions, including stack height. All the components from

this bill of materials and labor estimate were combined with fixed hardware costs, such as

bushings, busbar, and terminals. The Department then applied manufacturer markups to allow

for scrap, handling, factory overhead, and non-production markups to estimate the manufacturer

selling price. Details on the derivation of the manufacturer selling prices and discussion of

manufacturer markups are in Chapter 5. The Department derived the manufacturer’s production

cost inputs for the GRIM from the engineering analysis databases.

12.3.6 Conversion Costs

Efficiency standards typically cause manufacturers to incur conversion costs prior to the

standard effective date to bring their production facilities and product designs into compliance

with the standard. For the purpose of the MIA, DOE classified these conversion costs into two

major categories. Conversion capital expenditures are investments in property, plant, and

equipment to adapt or change existing production facilities so that new product designs can be

fabricated and assembled under the standard. Product conversion expenses relate to research,

development, testing, and marketing that aims to make product designs comply with the new

efficiency standard. Conversion costs specific to each superclass are discussed separately in

sections 12.4 and 12.5.

12.3.7 Markup Scenarios

To estimate the manufacturer selling price of distribution transformers, the Department

applied markups to the production costs. In an effort to gather information on industry pricing

scenarios, DOE invited manufacturers to discuss how standards might change the industry’s

profits. In discussions on issues such as the impact of higher core steel prices and transformer

pricing scenarios, DOE sought manufacturers’ insights regarding how increased production costs

under standards might be passed through to their customers. All of the manufacturers

interviewed had applied one or more price increases within the last two years to recover some of

the production cost increases resulting from higher commodity prices. A few of the larger

manufacturers had recently established with their customers pricing contracts that had a base
12-14

price and a variable “surcharge.” The surcharge is adjusted on a periodic (e.g., monthly or

quarterly) basis, and is calculated based on the costs of the transformer manufacturer’s major

materials (e.g., core steel). All manufacturers discussed the recent material price increases within

the context of the Department’s questions about markups.

For the MIA, the Department considered two distinct markup scenarios, which are

discussed in the following sections.

12.3.7.1 Preservation-of-Gross-Margin-Percentage Scenario

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

uniform “gross margin percentage” markup across all efficiency levels. As production cost

increases with efficiency, this scenario implies that the absolute dollar markup will increase. The

Department assumed the non-production cost markup—which includes SG&A expenses;

research and development expenses; interest; and profit—to be 1.25. This markup is consistent

with the one the Department assumed in the engineering analysis and the base case of the GRIM. 

Manufacturers believe it is optimistic to assume that as their production costs increase in

response to an efficiency standard, they would be able to maintain the same gross margin

percentage markup. Therefore, the Department assumes that this scenario represents a high

bound to industry profitability under an energy-conservation standard. 

12.3.7.2 Preservation-of-Operating-Profit Scenario

Operating profit is defined as earnings before interest and taxes. The implicit assumption

behind this markup scenario is that the industry can maintain its operating profit (in absolute

dollars) after the standard. The industry would do so by passing through its increased costs to

customers without increasing its operating profits in absolute dollars. The Department

implemented this scenario in the GRIM by setting the non-production cost markups for each TSL

to yield approximately the same operating profit in the standards cases in the year after standard

implementation (2011) as is yielded in the base case. This scenario is less optimistic than the

preservation-of-gross-margin-percentage scenario. For this scenario, the financial metrics of

return on sales (percent) and return on invested capital (ROIC) decline with increasing TSL,

indicating reduced industry profitability. The non-production cost markups under this scenario

are summarized in Table 12.3.2. 

Table 12.3.2 Non-Production Cost Markups for the Preservation-of-Operating-Profit

Scenario

Superclass

Trial Standard Level

Base

Case 1 2 3 4 5 6

Liquid-Immersed 1.250 1.248 1.246 1.241 1.239 1.224 1.209

MV, Dry-Type 1.250 1.248 1.247 1.245 1.240 1.223 1.223
12-15

12.4 MANUFACTURER IMPACT ANALYSIS - LIQUID-IMMERSED

The liquid-immersed transformer industry is characterized by a high degree of flexibility,

total ownership cost evaluation, and sophisticated customers. Liquid-immersed customers

typically use a Total Owning Cost evaluation (see the Total Owning Cost section of Chapter 3),

which minimizes the sum of first cost and the present value of future core and coil losses that a

given transformer will experience over its lifetime. Because these evaluation formulae vary from

customer to customer, and because material prices fluctuate on a daily basis, the liquid-immersed

industry evolved to be inherently flexible and responsive to customer needs. 

As the Department understands it, there are approximately 25 companies active in the

liquid-immersed market in the U.S., some of which are branding units manufactured by another

company. The Department estimated that the nine or so largest liquid-immersed transformer

manufacturing companies collectively control 90 percent of the market or more. They are (in

alphabetical order): ABB, Central Maloney, Cooper Power, ERMCO, GE Prolec, Howard

Industries, Kuhlman Electric, Pauwels, and Power Partners. Of these, the Department estimated

that the top three companies supply approximately 60 percent of the liquid-immersed market. 

For more information on the transformer market, refer to the market and technology assessment

(Chapter 3).

12.4.1 Conversion Capital Expenditures

Through its interviews with manufacturers, the Department learned that the conversion

capital expenditures that liquid-immersed transformer manufacturers would have to make in

response to an energy-conservation standard fall into three major categories: 1) annealing furnace

capacity, 2) core-cutting and core-winding equipment, and 3) miscellaneous, including buildings

and coil winding equipment. Manufacturers of liquid-immersed transformers provided capital

cost estimates for each of these capital expenditure categories. The Department used the

estimates provided by industry for comparative purposes and prepared its own bottom-up

estimates of conversion capital expenditures. It based the bottom-up estimates on the

Department’s understanding of typical manufacturing processes at liquid-immersed transformer

facilities. This understanding is based on manufacturer interviews and discussions with suppliers

of equipment to the industry. The Department obtained typical equipment throughput and cost

information directly from equipment suppliers and reconciled it with information provided by

manufacturers. Furthermore, it obtained transformer design parameters that vary with efficiency

level (e.g., core weight) from the engineering analysis and used them to estimate the equipment

capacity increases associated with increasing efficiency.

In the liquid-immersed superclass, TSLs 1 through 4 would require only conventional

electrical steels. In contrast, TSL6 would require all of the liquid-immersed design lines to

convert to amorphous core technology. TSL5 would require three of the five liquid-immersed

design lines (DL3–DL5) to convert to amorphous core technology. During the interviews,

manufacturers discussed several reasons why, though technologically feasible, amorphous

material is, in their opinion, not a good technology option for regulatory consideration: 
12-16

1. Possible difficulty of access to the technology, including very limited sourcing

options, 

2. Concerns over availability of amorphous-core material at quantities necessary to meet

industry demand,

3. The high level of capital equipment investment required (and the stranding of existing

assets, particularly core-cutting equipment and annealing furnaces), and

4. Increased complexity associated with material processing and handling.

The Department recognizes that the manufacturing process for amorphous core

transformers is completely different from that for silicon steel transformers. TSL6 would render

obsolete a large portion of the liquid-immersed manufacturing equipment, primarily the corecutting equipment and the annealing furnaces. The Department estimates that the industry’s

stranded assets at TSL6 would represent a loss of approximately $59 million. TSL5 would not

render obsolete as much equipment as TSL6, because TSL5 would require only a conversion to

amorphous core technology for three of the five design lines. The Department estimates that the

industry’s stranded assets at TSL5 would represent a loss of approximately $16 million. The

Department’s stranded asset estimates represent lower bounds to the book values of obsolete

core-cutting equipment, annealing furnaces, and miscellaneous equipment such as conveyers,

cranes, and other capital equipment at each TSL.

The Department recognizes that TSL5 has the potential to severely distort and disturb

both liquid-immersed product purchase decisions across design lines and manufacturers’

operations. These distortions would arise because some design lines would necessarily be

constructed with amorphous cores but some would still be designed with conventional grainoriented electrical steels. A significant burden, which is difficult to quantify using the GRIM,

would be placed on industry if it had to maintain parallel manufacturing operations for both

conventional and amorphous core technology. 

Based on the manufacturer interviews, TSLs 5 and 6 would cause liquid-immersed

transformer manufacturers to decide whether they would tool for amorphous technology, attempt

to purchase assembled amorphous cores, or exit the industry. Manufacturers indicated that those

who chose to produce amorphous cores themselves would face a critical decision about whether

or not to relocate outside of the U.S., since much of their equipment would become obsolete.

The additional annealing furnace capacity that the industry would need at TSLs 1 through

4 is directly related to the increase in wound core mass that would be processed by the industry at

each TSL. The Department assumed that a typical, conventional annealing furnace that can

process 6,000 tons of core steel per year has an installed cost of $2.2 million. Based on the

engineering analysis and those designs selected by the LCC analysis customer choice model, the

Department estimated increases in wound-core mass processed at TSLs 1 through 4 to be two

percent, four percent, eight percent, and nine percent, respectively. For TSL5, no additional

conventional annealing furnace capacity would be necessary because some of the annealing
12-17

furnaces currently used for DL3–DL5 would become available for use in DL1–DL2. (This

transfer of capacity is also accounted for in the Department’s stranded asset estimate above, to

avoid overestimation of stranded assets.) For TSL6, no additional conventional annealing

furnace capacity would be necessary because all production would convert to amorphous core

technology. The Department estimated that conventional annealing furnace capital expenditures

for the industry would be $2.2 million, $4.4 million, $6.6 million, and $6.6 million for TSLs 1

through 4, respectively, as shown in Table 12.4.1. 

Table 12.4.1 Summary of Liquid-Immersed Distribution Transformer Conventional

Annealing Furnace Capital Expenditures

Trial Standard Level

TSL1 TSL2 TSL3 TSL4

Additional Wound-Core Mass (Tons/yr) 3,359 8,555 15,090 17,458

Additional Annealing Furnaces Needed by

Industry 1 2 3 3

Annealing Furnace Conversion Capital

Expenditure (2004$, Millions) 2.2 4.4 6.6 6.6

The new amorphous annealing furnace capacity that the industry would need at TSLs 5

and 6 is directly related to the amorphous core mass that would be processed by the industry at

each TSL. Based on information obtained from liquid-immersed transformer manufacturers and

annealing furnace suppliers, the Department estimated that a typical amorphous annealing

furnace, which can process 1,005 tons of core steel per year, has an installed cost of $0.54

million. The Department estimated that amorphous annealing furnace capital expenditures for

the industry would be $52.4 million and $149.6 million for TSLs 5 and 6, respectively, as shown

in Table 12.4.2. 

Table 12.4.2 Summary of Liquid-Immersed Distribution Transformer Amorphous

Annealing Furnace Capital Expenditures

Trial Standard Level

TSL5 TSL6

Amorphous Core Steel Mass (Tons/yr) 96,700 278,101

Amorphous Annealing Furnaces Needed by Industry 97 277

Amorphous Annealing Furnace Conversion Capital

Expenditure (2004$, Millions) 52.4 149.6
12-18

The Department assumed that the additional conventional core-cutting equipment

required by the industry for TSLs 1 through 4 is directly related to the increase in core weight at

each TSL. Based on discussions with a leading supplier of wound-core-cutting equipment to the

liquid-immersed superclass, the Department calculated the processing capacity of a distributedgap core-winding machine. This equipment supplier estimated that a new machine can process

150 feet per minute (ft/min) of M6 core steel, which translates into 2,510 pounds per hour

(lbs/hr) of core steel. Allowing for set-up time, wound-core removal, and down-time, the

Department applied a 75 percent utilization factor to this processing speed; as a result, DOE

estimated that a single core-cutting machine would be capable of processing about 1,883 lbs/hr of

core steel. Furthermore, the Department assumed that the core-cutting machines operate two

shifts per day, 250 days per year. One of these core-cutting and winding machines costs

approximately $200,000 installed. 

The Department’s based its assumption—that the increase in conventional core-cutting

capacity required at each of TSLs 1 through 4 is best approximated using the increases in core

weight at each TSL—on dialogue with the aforementioned leading equipment supplier. Standard

core-cutting equipment used by liquid-immersed manufacturers operates at varying linear rates,

depending on lamination thickness and strip width. The machines maintain approximately a

constant processing throughput in terms of weight, irrespective of thickness and strip width. For

each design line, the Department estimated the increases in core steel weight processed at each

TSL using the engineering analysis and the designs selected by the LCC analysis customer choice

model. Table 12.4.3 provides detail explaining the estimate of additional core-cutting machines

needed at each TSL. 
12-19

Table 12.4.3 Summary of Additional Core-Cutting Machine Estimate for LiquidImmersed Superclass

Design Line DL1 DL2 DL3 DL4 DL5

Additional CoreCutting

Machines, 

Liquid-Immersed

Approximate

Number of CoreCutting Machines

in Base Case

11.3 19.3 0.9 6.5 8.9 0

Ratio of TSL1 Core

Weight to Base

Case Core Weight

1.009 1.006 1.008 1.040 1.031 1

Ratio of TSL2 Core

Weight to Base

Case Core Weight

1.009 1.016 1.026 1.120 1.072 2

Ratio of TSL3 Core

Weight to Base

Case Core Weight

1.009 1.026 1.110 1.220 1.120 4

Ratio of TSL4 Core

Weight to Base

Case Core Weight

1.065 1.026 1.183 1.220 1.132 5

Notes: The Department used the above matrix to estimate the number of core-cutting machines required for TSLs

1–4. The additional machines (above the 47 machines required for the base case) are obtained by difference. For

example, at TSL1: (1.009×11.3) + (1.006×19.3) + (1.008×0.9) + (1.040×6.5) + (1.031×8.9) - 47 = 1 machine

(rounded up).

The Department estimated that core-cutting equipment capital expenditures for the

superclass would be $0.2 million, $0.4 million, $0.8 million, and $1.0 million for TSL1 through

TSL4, respectively. These capital outlays are relatively small compared to those the industry

would incur to expand annealing furnace capacity. The core-cutting equipment estimates are

summarized in Table 12.4.4. 
12-20

Table 12.4.4 Summary of Liquid-Immersed Distribution Transformer Conventional

Core-Cutting Equipment Capital Expenditures

Trial Standard Level

TSL1 TSL2 TSL3 TSL4

Additional Core-Cutting Machines

Needed by Industry 1 2 4 5

Core-Cutting Conversion Capital

Expenditure (2004$, Millions) 0.2 0.4 0.8 1.0

The Department estimated the amorphous core-cutting capacity at TSLs 5 and 6 based on

the total weight of amorphous core steel projected to be processed at each TSL. Based on

discussions with amorphous core-cutting equipment suppliers and transformer manufacturers, the

Department estimated that a typical amorphous core-cutting machine can process 1,250 lbs/hr of

core steel. The Department applied a 75 percent utilization factor to this processing speed; as a

result, DOE estimated that a single core-cutting machine would be capable of processing about

938 lbs/hr of core steel. Furthermore, the Department assumed that the core-cutting machines

would operate two shifts per day, 250 days per year. One of these amorphous core-cutting

machines costs approximately $500,000 installed. The Department estimated that amorphous

core-cutting equipment capital expenditures for the superclass would be $26.0 million and $74.5

million for TSL5 and TSL6, respectively. The amorphous core-cutting equipment estimates are

summarized in Table 12.4.5.

Table 12.4.5 Summary of Liquid-Immersed Distribution Transformer Amorphous CoreCutting Equipment Capital Expenditures

Trial Standard Level

TSL5 TSL6

Number of Amorphous Core-Cutting Machines Needed by

Industry 52 149

Amorphous Core-Cutting Conversion Capital Expenditure

(2004$, Millions) 26.0 74.5

For TSLs 1 through 4, the Department estimated miscellaneous capital investments,

primarily buildings and coil-winding equipment, based on a multiplier approach. With respect to

buildings, the manufacturers indicated that additional building space will be necessary in some

cases to accommodate expanded annealing furnace capacity. With respect to coil winding

equipment, the Department understands that, as transformers become more energy efficient,

manufacturers may switch from winding coils with aluminum conductor to winding coils with

copper. Copper has a higher conductivity, allowing for smaller cross-sectional areas and

transformer cores. However, copper requires more torque when winding to ensure the same

winding quality. The higher torque can be met by slowing existing machines or winding fewer

coils simultaneously. In both scenarios, additional coil-winding capacity is required. To
12-21

estimate the total conversion capital investments, including those required for buildings and coilwinding equipment, the Department applied a multiplier of 1.05 to the sum of the explicitly

estimated core-cutting and annealing furnace capital expenditures. It based the 1.05 multiplier on

information submitted by industry. 

For TSLs 5 and 6, before applying a multiplier to the explicitly estimated amorphous

core-cutting and annealing furnace capital expenditures, the Department estimated the costs

required for the portion of the liquid-immersed industry that uses shell designs to convert to

using core form designs (affects design lines 1 and 2). For TSL5, since design lines 1 and 2

would not have to convert to amorphous core technology, the costs of converting to core form

designs would be zero. For TSL6, the Department estimated the costs of converting the liquidimmersed industry fully to core form designs to be $48 million. This estimate included $6

million for lacing tables and $42 million for coil-winding equipment. After adding these costs of

converting to core form designs to the previously tabulated amorphous core-cutting and

annealing furnace estimates, the Department applied an assumed multiplier of 1.2 at TSL5 and

TSL6 to account for the cost of conveyers, cranes, tank washers, hangers, buildings, etc. The

total conversion capital expenditures for the liquid-immersed superclass are summarized in Table

12.4.6.

Table 12.4.6 Summary of Liquid-Immersed Distribution Transformer Conversion Capital

Expenditures

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 TSL6

Annealing Furnace Conversion Capital

Expenditure (2004$, Millions) 2.2 4.4 6.6 6.6 52.4 149.6

Core-Cutting Conversion Capital

Expenditure (2004$, Millions) 0.2 0.4 0.8 1.0 26.0 74.5

Miscellaneous incl. Buildings and Coil

Winding Equipment 0.1 0.2 0.4 0.4 15.7 102.4*

Total Conversion Capital Expenditure

(2004$, Millions) 2.5 5.0 7.8 8.0 94.1 326.5

* Includes $48 million to fully convert industry from shell to core form designs.

12.4.2 Product Conversion Expenses

Product conversion expenses include engineering, prototyping, testing, and marketing

expenses incurred by a manufacturer as it prepares to come into compliance with a standard. The

Department assumed that product conversion expenses for liquid-immersed transformer

manufacturers at TSLs 5 and 6 will require total additional expenses equivalent to 100 percent of

the industry’s R&D budget for three years. Since manufacturers already produce liquidimmersed transformers that would comply with TSLs 1 through 4, product conversion expenses
12-22

are expected to be negligible for these TSLs. Product conversion expenses are summarized in

Table 12.4.7.

Table 12.4.7 Summary of Liquid-Immersed Distribution Transformer Product

Conversion Expenses

Trial Standard Level

TSL1-4 TSL5 TSL6

Basis Industry makes these

designs today.

Amount equivalent to

100% of industry

R&D budget for 3

years.

Amount equivalent to

100% of industry

R&D budget for 3

years.

Product Conversion

Expenses 

(2004$, Millions)

0 109.2 161.2

12.4.3 Industry Financial Impacts

 The Department used the GRIM and the inputs and assumptions described in the

previous sections to produce indicators of financial impacts on the liquid-immersed distribution

transformer superclass at each TSL. This document reports the results of the MIA using two key

financial metrics: INPV and annual net cash flow to the industry. 

12.4.3.1 Trial Standard Levels

The Department developed six TSLs for the liquid-immersed distribution transformer

superclass. TSL1 is the NEMA TP-1 standard. TSL6 represents the maximum TSL that is

technologically feasible. TSLs 2 through 5 are bundles of various candidate standard levels as

described in Chapter 10 (section 10.2.2.3) of this TSD. TSL6 would require all liquid-immersed

design lines to convert to amorphous core technology. TSL5 would require design lines 3

through 5 to convert to amorphous core technology.

12.4.3.2 Impacts on Industry Net Present Value

The INPV measures the industry value and was used in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the net present value

(NPV) that the Department estimates for the whole U.S. economy. The INPV is the sum of all

net cash flows discounted at the industry’s cost of capital, or discount rate. The Department used

the GRIM to estimate cash flows between 2004 and 2038, consistent with the forecast period

used in the national impact analysis. 

In the MIA, the Department compared the INPV of the base case (no efficiency standard)

to that of each TSL. The difference in INPV is an estimate of the economic impacts that

implementing each particular TSL would have on the entire industry. To evaluate the range of
12-23

cash-flow impacts on the industry, the Department constructed two MIA analyses based on the

two markup scenarios discussed in section 12.3.7. In the first scenario, the gross margin

percentage is held constant at all TSLs (and equal to the base case gross margin percentage). In

the second scenario, DOE assumed that the industry could preserve its operating profit at all

TSLs. Tables 12.4.8 and 12.4.9 provide the INPV estimates under the two scenarios.

Table 12.4.8 Changes in Liquid-Immersed Industry Net Present Value, Preservation-ofGross-Margin-Percentage Scenario

Units

Trial Standard Level

Base

Case 1 2 3 4 5 6

INPV 2004$, Millions 526 532 537 553 561 549 552

Change in

INPV from

Base Case

% - 1.1 2.0 5.1 6.6 4.2 4.9

2004$, Millions - 5.8 10.7 27.0 34.9 22.3 25.8

Table 12.4.9 Changes in Liquid-Immersed Industry Net Present Value, Preservation-ofOperating-Profit Scenario

Units

Trial Standard Level

Base

Case 1 2 3 4 5 6

INPV 2004$,

Millions

526 521 513 496 490 323 27

Change in

INPV

from Base

Case

% - -1.1 -2.4 -5.7 -7.0 -38.7 -94.9

2004$,

Millions

- (5.7) (12.9) (30.0) (36.9) (203.8) (499.6)

The results from the preservation-of-gross-margin-percentage scenario provide a more

favorable projection than do the results from the preservation-of-operating-profit scenario. 

Industry value would increase if manufacturers could sustain their gross margin percentage as

their production costs increase in response to a standard. However, as previously mentioned, the

preservation-of-gross-margin-percentage assumption may be optimistic, particularly at higher

TSLs. 

The preservation-of-operating-profit markup scenario provides a low bound for INPV

under a standard. The decrease in industry value under this scenario comes from the inability of

industry to fully recoup the capital investments required for standard compliance, including

investments in working capital. The negative impacts on INPV are much greater at TSL5 and
12-24

TSL6, which are the two TSLs that would require partial or full conversion of the industry to

amorphous core technology. 

12.4.3.3 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long-term effects of standards, short-term

changes in net cash flow are also important and indicative of the impacts on industry during the

years between final rule publication and the standard effective date. For example, a large

investment over a period of a few years could strain the industry’s access to capital. 

Consequently, the sharp drop in net cash flow might lead to additional borrowing; changes in

leverage, interest coverage ratios, and/or bond ratings; and possibly increased concern among

investors. Thus, a short-term disturbance can have long-term effects that the INPV cannot

capture. To get an idea of the behavior of annual net cash flows, the Department reports the

annual net or free cash flows from 2004 through 2020 for the different TSL levels. Figures

12.4.1 and 12.4.2 present the annual net cash flows for the base case and each of the six TSLs

evaluated for the two different markup scenarios.

$(200.00)

$(150.00)

$(100.00)

$(50.00)

$-

$50.00

$100.00

$150.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5

Standard becomes effective in 2010 TSL6

Figure 12.4.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage

Scenario, Liquid-Immersed
12-25

Prior to the final rule publication date, the cash flows are identical for all TSLs in both

scenarios. After final rule publication, cash flows are driven by the level of capital investments

and product conversion expenses and the proportion of these investments spent every year. In

addition, in the year of the standard, a relatively large investment in working capital is required. 

The incremental investments in working capital are about $7 million, $13 million, $30 million,

$38 million, $123 million, and $284 million for TSLs 1 through 6, respectively (with about 5–6

percent variation at each TSL between markup scenarios). After final rule publication, industry

cash flows begin to decline as industry uses its financial resources to prepare for the standard. In

the year the standard becomes effective, new capital equipment goes into production.

While the behavior of cash flows for each TSL varies between the two markup scenarios,

there are three observations that are common across the two scenarios. First, the net annual cash

flows do not go negative for TSL1 through TSL4. Second, for TSL3 and TSL4, net annual cash

flows dip close to zero in 2010, the year of standard implementation. The dip in cash flow in

2010 is due to a relatively large investment in working capital that would be required to finance

increased inventories, accounts receivable, etc. Third, net annual cash flows go negative during

the compliance period for TSL5 and TSL6, which are the two TSLs that would require a partial

or full conversion to amorphous core technology. 

$(250.00)

$(200.00)

$(150.00)

$(100.00)

$(50.00)

$-

$50.00

$100.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5

TSL6

Standard becomes effective in 2010

Figure 12.4.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario,

Liquid-Immersed
12-26

12.4.4 Other Impacts

12.4.4.1 Employment

The Department estimated industry-wide labor expenditures based on the engineering

analysis. Winding of the primary and secondary coils; cutting, forming, and annealing of the

core; core assembly; testing; and packing of the completed transformer represent the bulk of the

labor. The Department incorporated these assumptions into the GRIM, which projects labor

expenditures annually. Labor expenditures are a function of the labor intensity of the product,

the sales volume, and an implicit wage assumption that remains fixed in real terms over time. 

Table 12.4.10 provides the changes in labor measured as the change in labor expenditures for

liquid-immersed transformers in 2010, the standard effective date, versus the base case.

Table 12.4.10 Projected Change in Labor Expenditures, Liquid-Immersed (2010)

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 TSL6

3.1% 3.2% 0.8% 1.2% 34.9% 98.8%

 Based on the GRIM and the assumption that 95 percent of liquid-immersed transformers

sold in the U.S. are manufactured in the U.S., the Department estimated that there are currently

4,247 production employees in the U.S. liquid-immersed distribution transformer industry. This

estimate excludes non-production workers and assumes a level annual production rate. In

practice, including non-production workers and seasonal effects, the actual number of employees

in the liquid-immersed superclass would be higher. Due to the fact that labor content does not

vary between the markup scenarios, projected labor expenditures are equivalent for both. Based

on these results, DOE expects no significant discernable direct employment impacts among

transformer manufacturers for TSL1 through TSL4, but potentially large increases in

employment for TSL5 and TSL6. These conclusions are independent of any conclusions

regarding employment impacts from the broader U.S. economy, which are documented in

Chapter 14 of this TSD. These conclusions also ignore the possible relocation of domestic

employment to lower-labor-cost countries, such as Mexico. Also, for TSLs 5 and 6, this

conclusion ignores the possibility of outsourcing amorphous core production to companies in

other countries, such as India.

Manufacturers expressed concern during the MIA interviews that establishing an energy

conservation standard would ‘commoditize’ the distribution transformer market, making it easier

for foreign manufacturers who specialize in low-cost mass production of one design to enter the

U.S. market. Today's liquid-immersed market is characterized by total owning cost evaluation

formulae and customer design requirements and specifications. U.S. manufacturers differentiate

themselves in the market by employing rapid turn-around times and demonstrating

responsiveness to their customer needs. According to some manufacturers, in Massachusetts

where a State standard of NEMA TP-1 was passed for both liquid-immersed and dry-type
12-27

transformers, several utilities have abandoned their evaluation formulae and simply ordered

standards-compliant transformers. In many cases, according to manufacturers, these standardscompliant units are less efficient than those that were purchased before the State standard took

effect. In other words, according to manufacturers, there has been a backsliding in average

efficiency in this market, and an associated ‘commoditization’ of the product offering which has

opened the door to foreign competition. Industry fears this situation will worsen under a Federal

standard. This concern was independently raised by several liquid-immersed manufacturers

during the MIA interviews and represents a critical concern in the industry.

U.S. manufacturers believe that they could be affected by‘commoditization’ in several

ways. Less efficient transformers are smaller and less costly; therefore, ‘commoditization’ could

result in reduced capacity utilization and lower revenues. Increased competition from foreign

manufacturers could result from U.S. manufacturers’ loss of competitive advantage, which today

is derived from the flexibility of U.S. manufacturing processes and product customization

capabilities. Finally, manufacturers believe they may have no alternative other than to relocate

their facilities outside of the U.S. to compete on an equal basis with lower-labor-cost foreign

producers. In essence, after an energy-conservation standard takes effect, manufacturers believe

that the liquid-immersed distribution transformer industry will begin to more closely resemble

today’s low-voltage, dry-type industry.

12.4.4.2 Production Capacity

The Department believes that there are only minor production capacity implications for

the standard at TSL4 and below. At TSL6, all liquid-immersed design lines would have to

convert to amorphous core technology. At TSL5, three design lines would have to convert to

amorphous core designs. Conversion to amorphous core designs would render obsolete a large

portion of the equipment used in the liquid-immersed industry (e.g., annealing furnaces, and

core-cutting and winding equipment). 

12.4.4.3 Exports

Domestic manufacturers produce and export liquid-immersed transformers around the

world. Due to the inherent manufacturing flexibility built into their production lines,

manufacturers can readily retool and build export units (even 50 Hz fundamental frequency). 

Once the standard takes effect, transformer manufacturers would still be able to produce and

export units that are below the Department’s minimum efficiency standard, since the standard

only applies to transformers for use in the United States.

During the MIA interviews, one manufacturer expressed concern that an existing volume

discount enjoyed on a low-grade, grain-oriented steel that the manufacturer uses to build

transformers for export may no longer be available if the Department’s standard drives the

minimum efficiency to a point where M3 and M2 core steel become the primary steels used by

the U.S. transformer industry. In this way, exported transformers that have lower-quality steel

may become slightly more expensive and therefore less competitive globally. The Department
12-28

recognizes this concern, but does not expect its impact to significantly degrade the existing

export market. 

12.4.4.4 Cumulative Regulatory Burden

While any single regulation may not impose a significant burden on manufacturers, the

combined effects of several regulations, existing or pending, may have serious consequences for

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

single regulation may overlook this cumulative regulatory burden.

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

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, potentially reducing competition.

Smaller companies can be especially impacted since they have lower sales volumes over which

to amortize the costs of meeting new regulations. The Department considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3)

other regulations and standards.

1. Federal Regulations on Distribution Transformer Manufacturers - In addition to

potential efficiency regulations on distribution transformers, the National Energy Code

(NFPA 70) places additional restrictions on liquid-immersed transformers, requiring that

indoor liquid-immersed transformers be located in separate transformer vaults. 

Furthermore, the code provides stipulations for fire walls, doors, ventilation, and oil

containment, increasing the installed cost of these types of transformers. The impetus for

this section of the National Energy Code is to prevent fires associated with flammable

insulating fluids; however, this mandate applies to all indoor liquid-immersed

transformers, including those containing non-flammable liquid products.

2. Regulations and Pending Regulations at the State Level - Manufacturers also discussed

the recent trend of State governments to implement NEMA TP-1 as a mandatory standard

for transformers sold within State borders. At this time, the Department knows of one

State that requires this minimum efficiency standard for liquid-immersed distribution

transformers. These standards, when preempted by Federal energy-efficiency regulation,

will not create a cumulative burden on domestic manufacturers.

3. Other Regulations and Standards - Manufacturers were not aware of other regulations or

standards, in effect or pending, which affect liquid-immersed distribution transformers.
12-29

12.4.4.5 Impacts on Small Businesses

The SBA defines a small business, for the distribution transformer industry, as a business

that has 750 or fewer employees. The Department estimated that, of the approximately 25 U.S.

manufacturers that make liquid-immersed distribution transformers, about 15 of them are small

businesses. About one-third of the small businesses have fewer than 100 employees. 

Because the liquid-immersed distribution transformer superclass largely produces

customized transformers, small businesses can compete because each unique design is produced

in relatively small volumes for a given order. Implementation of an energy-conservation

standard would have a relatively minor differential impact on small manufacturers of liquidimmersed distribution transformers. Disadvantages to small businesses, such as having little

leverage over suppliers (e.g., core steel suppliers), are present with or without an energyconservation standard.

12.4.4.6 Worker Safety

During the interviews, manufacturers expressed concern for their workers, who handle

heavy material and equipment on a daily basis while producing transformers. For manufacturing

industries like those that produce distribution transformers, the Occupational Safety and Health

Administration (OSHA) established a maximum handling weight of 70 pounds per worker. As

transformers become larger and more energy efficient, the core material will get heavier, coils

will become heavier, and tanks and enclosures will increase in size. Bearing this in mind, plant

managers are concerned about the fact that, as weights increase, so do accident frequencies. 

12.4.4.7 Other Engineering Issues

Manufacturers are concerned that the dimensionally constrained transformers they

produce today may be difficult or perhaps impossible to build to meet standards. For example,

for round-tank, liquid-immersed transformers (design line 3), they indicated that going above

TSL3 would be problematic due to the size of the transformer exceeding the capacity of the

industry-standard, pole-mounting brackets. According to manufacturers, these transformers hit

their maximum height at TSL2 (between the power lines overhead and the telephone and cable

lines underneath), and thus all size expansion at higher TSLs is in the diameter of the tank. 

Approximately 80 percent of overhead transformers sold are for replacement installations, so this

issue of a pre-existing space limit will cause problems for utilities and may increase outage

times.

Manufacturers also expressed concern over a second dimensionally constrained liquidimmersed transformer—subsurface retrofit transformers. These liquid-immersed units are

designed to be installed within an existing concrete vault to service an underground distribution

network. If the efficiency standard is significantly different from the levels being built today, it

may require substantial (extremely expensive) rework of these vaults, increasing downtime or

stress on the local distribution network while a failed unit is replaced. 
12-30

12.4.5 Summary of Impacts for Liquid-Immersed Superclass

The electric utility industry appears to be making mostly evaluated transformer purchase

decisions. However, in the State that has adopted an energy-conservation standard for liquidimmersed distribution transformers (Massachusetts), the average efficiency of the purchased

transformers is reported by manufacturers to be in decline. The explanation for this

counterintuitive trend, as reported by several manufacturers, is that after the efficiency standards

were implemented, electric utilities abandoned their evaluation formulae and simply have

purchased the least-expensive standards-compliant transformers. This backsliding may result in

‘commoditization’ of liquid-immersed transformers, ultimately making it easier for foreign

competition to compete in the U.S. liquid-immersed market. Manufacturers fear that this

situation may worsen under a Federal standard.

TSL6 would require all liquid-immersed design lines to convert to amorphous core

technology. TSL5 would require three of the five liquid-immersed design lines to convert to

amorphous core technology. Since the manufacturing process for amorphous core transformers

is completely different from that for conventional transformers, TSLs 5 and 6 would obsolete a

significant portion of U.S. industry’s equipment. The Department estimated the stranded assets

for TSL5 and TSL6 to be $16 million and $59 million, respectively. In addition, manufacturers

detailed many technical reasons why amorphous core material is difficult and potentially

hazardous for workers. 

TSL4 can be met without using amorphous core technology. However, manufacturers

expressed concerns over meeting TSL4 while simultaneously being able to meet customer

specifications, including size and weight limitations. 

Conversion capital expenditures in the liquid-immersed distribution transformer

superclass include, primarily, expanded annealing furnace capacity, but also additional corecutting equipment, coil-winding equipment, and building construction. The need for additional

annealing furnace capacity and core-cutting equipment is driven by the increase in core weights

that would be experienced at higher TSLs. Conversion capital expenditures would be relatively

modest for TSL1 through TSL4, ranging from $2.5 million (TSL1) to $8.0 million (TSL4) in an

industry with projected revenue of $1.4 billion in 2007. The industry would experience

negligible product conversion expenses in the TSL1 to TSL4 range because products meeting

these efficiency levels are produced in significant quantities today. Conversion capital

expenditures and product conversion expenses would be substantially higher for TSL5 and TSL6,

the standard levels that would require partial or full conversion to amorphous core technology. 

The Department estimated that conversion capital expenditures would be $94.1 million and

$326.5 million for TSL5 and TSL6, respectively. The Department estimated the corresponding

product conversion expenses to be $109 million and $161 million, respectively. 

The impact on INPV at TSL6 ranges between -94.9 percent and +4.9 percent, depending

on the assumed markup scenario. There is a great deal of uncertainty in these impact estimates,

primarily due to uncertainty around transformer pricing at high TSLs. At TSL6, the magnitude
12-31

of the peak negative net annual cash flow would be more than three times that of the positive

base case cash flow.

The impact on INPV at TSL5 ranges between -38.7 percent and +4.2 percent, depending

on the assumed markup scenario. There is a great deal of uncertainty in these impact estimates,

primarily due to uncertainty around transformer pricing at high TSLs. At TSL5, the magnitude

of the peak negative net annual cash flow would be about equal to that of the positive base case

cash flow. A significant burden, which is difficult to quantify using the GRIM, would be placed

on industry if it had to maintain parallel manufacturing operations for both conventional and

amorphous core technology under TSL5. 

The impact on INPV at TSL4 ranges between -7.0 percent and +6.6 percent, depending

on which markup scenario is assumed. The impact on annual net cash flow would be significant

at TSL4, bringing net cash flow nearly to zero in 2010 in a low markup scenario. The 2010

impacts would largely be driven by the need to invest in working capital. Although cash-flow

impacts would be significant at TSL4, the industry would likely recover from them in the years

following standard implementation. 

The impact on INPV at TSL3 ranges between -5.7 percent and +5.1 percent, depending

on which markup scenario is assumed. The impact on annual net cash flow would be significant

at TSL3, bringing net cash flow nearly to zero in 2010 in a low markup scenario. The 2010

impacts would largely be driven by the need to invest in working capital. Although cash-flow

impacts would be significant at TSL3, the industry would likely recover from them in the years

following standard implementation. 

At TSL2, the impact on INPV ranges between -2.4 percent and +2.0 percent. The impact

on annual net cash flow would be small.

At TSL1, the impact on INPV ranges between -1.1 percent and +1.1 percent. The impact

on annual net cash flow would be negligible.

Finally, there are several additional factors to be considered from the standpoint of

manufacturers in selecting the proposed standard:

1. If the liquid-immersed standard is high relative to the standard for medium-voltage,

dry-type transformers, there could be a switch to medium-voltage, dry-type

transformers for certain products where there is substitutability between the

superclasses. For reasons related to the properties inherent in their operation, for

equivalent kVA ratings and TSLs, the efficiency levels of medium-voltage, dry-type

transformers are lower than those of liquid-immersed transformers.

2. If the standard is set above a certain level, some customers may look for loop-holes in

the Department’s definition of a distribution transformer through which they can

circumvent the standard. If a speciality or niche application transformer exempted

from standards is less expensive than a standards-compliant distribution transformer,
12-32

these customers may purchase a standards-exempt transformer that is also capable of

serving a distribution function.

3. Several manufacturers expressed concern about enforcement. Many manufacturers

urged the Department to make enforcement a top priority to ensure an effective

standard.

4. At TSL2 and higher, certain liquid-immersed designs that incorporate less-flammable

cooling fluids (also called ‘high fire-point’ fluids) may become uncompetitive. These

transformers incorporate a substitute fluid to cool the core-coil assembly, but is lessflammable than mineral oil, enabling the transformers to be used indoors. Designs

using less-flammable cooling fluids that were cost-optimized around NEMA TP 1,

may become uncompetitive at higher efficiency levels.

5. Differential impacts on small businesses do not appear to be important for the liquidimmersed distribution transformer superclass.

6. Manufacturers mentioned maximum practical efficiencies based on dimensional,

weight, and other practical limitations. The practical maxima reported to the

Department fell in the range of 99.4 to 99.5 percent for liquid-immersed transformers.

7. Manufacturers relayed concerns about utility capital budgets. If standards go above a

certain level, the capital budgets for distribution transformers might not be able to

accommodate the transformer price increases, thereby creating downward pressure on

manufacturer profit margins.
12-33

12.5 MANUFACTURER IMPACT ANALYSIS - MEDIUM-VOLTAGE, DRY-TYPE

The medium-voltage, dry-type transformer market is characterized by large commercial

and industrial users, some of which evaluate and are concerned about losses when making

transformer purchase decisions. This superclass has substantially lower shipments and revenue

than the liquid-immersed superclass. In recent years, there has been some consolidation in the

medium-voltage, dry-type industry, with a medium-voltage, dry-type production facility closing

in North Carolina, and the associated business being taken over by a competitor in Virginia.

The Department estimated that there are approximately 25 companies active in the

medium-voltage, dry-type market in the United States. Of these, the seven largest companies

retailing medium-voltage, dry-type distribution transformers are (in alphabetical order): ABB,

Federal Pacific, General Electric, Hammond, MGM, Olsun, and Square D. Of the two

distribution transformer superclasses, the medium-voltage, dry-type superclass is the more

concentrated; The top three companies manufacture over 75 percent of all transformers in this

superclass. For more information on the transformer market in general, and medium-voltage,

dry-type transformers in particular, see the market and technology assessment (Chapter 3). 

12.5.1 Conversion Capital Expenditures

Through its MIA interviews, the Department gained an understanding of the conversion

capital expenditures that medium-voltage, dry-type transformer manufacturers would have to

make in response to a standard. These are: 1) investments in additional core-cutting equipment

capable of making mitered cuts, and 2) investments in miscellaneous tooling and equipment,

including equipment used for conductor winding. Core-cutting equipment capable of making

mitered cuts is a key component of the medium-voltage, dry-type analysis. Mitered and

cruciform core construction techniques are often used to reduce no-load losses in mediumvoltage, dry-type transformers. Mitered joints have lower destruction factors and are more

efficient than butt-lap joints.

Reviewing the shipments analysis, the Department estimated that the equivalent of five

full-time, mitered, core-cutting machines are currently being used by the medium-voltage, drytype industry. The Department estimates that about 85 percent of the medium-voltage, dry-type

transformers produced today have mitered cores. At TSL1, the Department assumed that 95

percent of the medium-voltage, dry-type transformers would be manufactured using mitered

cores. At TSL2 and above, the Department assumed that 100 percent of the medium-voltage,

dry-type transformers would be manufactured using core-cutting equipment capable of making

mitered cuts. 

The Department provided a few core designs from the medium-voltage, dry-type

engineering database to the primary supplier of core-cutting equipment. This equipment

manufacturer then prepared processing time estimates based on the core dimensions. The

manufacturer’s assumptions are applicable for processing M6 core steel in batches of one. The

assumption of single-unit batches is appropriate for the medium-voltage, dry-type superclass

because there is often a high degree of customization associated with customer orders. Based on
12-34

the core-cutting equipment manufacturer’s processing time estimates, the Department derived the

following production assumptions: For design lines 9–13, the number of cores produced per

machine per year are estimated to be 1,400; 700; 1,400; 700; and 525, respectively. A

representative core-mitering machine is projected to cost the medium-voltage, dry-type

distribution transformer industry about $2.4 million installed, plus $0.3 million for expanded

building capacity. Because of the large amount of core steel that needs to be processed for a

typical medium-voltage, dry-type transformer, and the increased cutting requirements at higher

efficiency due to greater stack height (or piece length) and thinner laminations, industry indicated

that additional core-stacking equipment would be necessary to optimize production at higher

TSLs. The Department recognizes the potential for this automatic core-stacking machine

expenditure and accounted for it by assuming that the core-mitering equipment purchased by the

medium-voltage, dry-type industry would include automatic core-stacking capability. Coremitering equipment in the medium-voltage, dry-type industry typically includes such corestacking capability.

At TSL1 and higher, the processing time per core is higher than for the base case,

increasing the number of mitered-core cutting machines required by the superclass. The

processing time per core increases for two reasons: 1) More core-cutting time is required as core

size increases with higher efficiencies, and 2) the processing time increases in inverse proportion

to lamination thickness, and more efficient grades of steel typically are thinner (e.g., lamination

thickness changes from 0.011" for M4 to 0.009" for M3, representing a 22-percent increase in

core-mitering time for M3). Some manufacturers report that their core-mitering equipment

operates poorly with thinner steels, which would require them to operate at lower speeds,

exacerbating the capacity impacts. The Department based its estimates of the core size increases

and lamination thickness changes on the engineering analysis. It accounted for these two factors

in estimating the increases in core-mitering equipment required at each TSL. Table 12.5.1 shows

an example calculation for the core-mitering capacity multiplier at each TSL for design line 9,

not accounting for the fraction of transformers that are mitered at each TSL.
12-35

Table 12.5.1 Calculation of Core-Mitering Capacity Multiplier for Design Line 9

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Typical Core Weight (lbs) 1,251 1,221 1,230 1,235 1,238 1,588

Typical Stack Height (in.) 6.94 6.89 7.06 7.80 8.19 10.20

Typical Lamination

Thickness (in.) 0.0114 0.0109 0.0092 0.0090 0.0090 0.0090

Typical Number of

Laminations per Inch (in-1)

87.4 91.5 109 111 111 111

*Multiplier for Increased

Core-Mitering Capacity 1.00 1.04 1.26 1.43 1.50 1.93

* For TSL1–TSL4, the multiplier is based on the ratios of stack heights and number of laminations per inch,

normalized to the base case. For example, at TSL3, the multiplier is calculated as (7.80/6.94)×(111/87.4) = 1.43. 

For TSL5 and TSL6, the multiplier is based on the ratios of core weight and number of laminations per

inch, normalized to TSL4. At TSL5 and TSL6, the multiplier is calculated as (1,588/1,238)×(111/111)×1.50 = 1.93. 

The multiplier at TSL5 and TSL6 is calculated differently because, for some medium-voltage, dry-type design lines,

particularly DL12 which is high volume and therefore critical for the analysis, the designs in the engineering

database involve longer pieces of core steel above TSL4 and therefore the required increased cutting time is better

captured through core weight increases than through stack height increases (in the Department's engineering analysis

stack height increases are not significant for DL12 above TSL4). After speaking with the primary supplier of

core-mitering equipment and reviewing equipment performance curves, the Department confirmed the assumption

that core steel piece length (and consequently weight when stack height and piece width are relatively fixed) is an

important determinant of mitering time.

Base case 2010 unit shipments projections for DL9 through DL13 are 372, 592, 423,

2,761, and 260, respectively. Using these shipments projections, the assumed core production

rates per core-mitering machine for each design line (discussed above), and the multipliers for

increased core-mitering capacity, the Department estimated the number of core-mitering

machines needed at each TSL. Table 12.5.2 through Table 12.5.6 provide the calculations for the

estimated number of core-mitering machines needed at each TSL for DL9 through DL13,

respectively. 
12-36

Table 12.5.2 Calculation of Core-Mitering Machines Needed for Design Line 9

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Multiplier for Increased CoreMitering Capacity 1.00 1.04 1.26 1.43 1.50 1.93

Number of Core-Mitering

Machines if all Transformers are

Mitered

0.27* 0.28 0.34 0.38 0.40 0.51

Fraction of Transformers that are

Mitered 0.85 0.95 1.0 1.0 1.0 1.0

Number of Core-Mitering

Machines 0.23 0.26 0.34 0.38 0.40 0.51

* (372 units shipped)/(1,400 units per machine per year) = 0.27 core mitering machines

Table 12.5.3 Calculation of Core-Mitering Machines Needed for Design Line 10

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Multiplier for Increased CoreMitering Capacity 1.00 1.09 1.11 1.21 1.23 1.71

Number of Core-Mitering

Machines if all Transformers are

Mitered

0.85* 0.92 0.94 1.02 1.04 1.44

Fraction of Transformers that are

Mitered 0.85 0.95 1.0 1.0 1.0 1.0

Number of Core-Mitering

Machines 0.72 0.87 0.94 1.02 1.04 1.44

* (592 units shipped)/(700 units per machine per year) = 0.85 core mitering machines
12-37

Table 12.5.4 Calculation of Core-Mitering Machines Needed for Design Line 11

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Multiplier for Increased CoreMitering Capacity 1.00 1.28 1.31 1.38 1.32 1.54

Number of Core-Mitering

Machines if all Transformers are

Mitered

0.30* 0.39 0.40 0.42 0.40 0.46

Fraction of Transformers that are

Mitered 0.85 0.95 1.0 1.0 1.0 1.0

Number of Core-Mitering

Machines 0.26 0.37 0.40 0.42 0.40 0.46

* (423 units shipped)/(1,400 units per machine per year) = 0.30 core mitering machines

Table 12.5.5 Calculation of Core-Mitering Machines Needed for Design Line 12

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Multiplier for Increased CoreMitering Capacity 1.00 1.10 1.22 1.30 1.32 1.76

Number of Core-Mitering

Machines if all Transformers are

Mitered

3.94* 4.35 4.81 5.14 5.19 6.96

Fraction of Transformers that are

Mitered 0.85 0.95 1.0 1.0 1.0 1.0

Number of Core-Mitering

Machines 3.35 4.13 4.81 5.14 5.19 6.96

* (2,761 units shipped)/(700 units per machine per year) = 3.94 core mitering machines
12-38

Table 12.5.6 Calculation of Core-Mitering Machines Needed for Design Line 13

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Multiplier for Increased CoreMitering Capacity 1.00 1.01 1.11 1.17 1.17 1.67

Number of Core-Mitering

Machines if all Transformers are

Mitered

0.50* 0.50 0.55 0.58 0.58 0.83

Fraction of Transformers that are

Mitered 0.85 0.95 1.0 1.0 1.0 1.0

Number of Core-Mitering

Machines 0.42 0.47 0.55 0.58 0.58 0.83

* (260 units shipped)/(525 units per machine per year) = 0.50 core mitering machines

Based on the assumption that each core-mitering machine for the medium-voltage, drytype industry would cost $2.7 million installed (including $0.3 million for the building adder),

the Department estimated that core-mitering equipment capital expenditures for the industry

would be $3.1 million, $5.6 million, $6.9 million, $7.1 million, $14.1 million, and $14.1 million

for TSL1 through TSL6, respectively. The core-cutting equipment estimates are summarized in

Table 12.5.7. 

Table 12.5.7 Summary of MV, Dry-Type Distribution Transformer Core-Cutting

Equipment Capital Expenditures

Trial Standard Level

Base

Case

TSL1 TSL2 TSL3 TSL4 TSL5/6

Mitered Core-Cutting Machines

Needed by Industry 5.0 6.1 7.0 7.5 7.6 10.2

Incremental Mitered Core-Cutting

Machines Needed by Industry - 1.1 2.0 2.5 2.6 5.2

Core-Mitering Conversion Capital

Expenditure (2004$, Millions) - 3.1 5.6 6.9 7.1 14.1

The Department estimated total conversion capital expenditures, including capital

investments for additional miscellaneous equipment such as coil-winding equipment, based on

multipliers applied to the core-cutting equipment capital investment. Based on information

submitted by industry, DOE estimated this multiplier was estimated to be 1.06. The conversion

capital expenditures are summarized in Table 12.5.8.
12-39

Table 12.5.8 Summary of MV, Dry-Type Distribution Transformer Conversion Capital

Expenditures

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5/6

Core-Cutting Conversion Capital

Expenditure (2004$, Millions) 3.1 5.6 6.9 7.1 14.1

Multiplier for Miscellaneous Tooling

Including Coil Winding Equipment 1.06

Total Conversion Capital Expenditure

(2004$, Millions) 3.2 5.9 7.3 7.5 15.0

12.5.2 Product Conversion Expenses

Product conversion expenses include engineering, prototyping, testing, and marketing

expenses incurred by a manufacturer as it prepares to come into compliance with a standard. The

Department assumed that product conversion expenses for medium-voltage, dry-type transformer

manufacturers at TSLs 3 through 6 will require total additional expenses equivalent to 100

percent of the industry’s R&D budget for three years. At TSL3 and above, manufacturers

indicated that R&D engineers would be fully utilized (both electrical and mechanical engineers),

as would production design engineers and mechanical drafters, during the conversion and

compliance period. Since manufacturers already produce relatively large volumes of

transformers that would comply with TSL1 and TSL2, product conversion expenses are expected

to be negligible for these lower TSLs. Product conversion expenses are summarized in Table

12.5.9. 

Table 12.5.9 Summary of MV, Dry-Type Distribution Transformer Product Conversion

Expenses

Trial Standard Level

TSL1-2 TSL3 TSL4 TSL5/6

Basis Industry makes

relatively large

volumes of these

transformers

today.

Amount equal to

100% of industry

R&D budget for

3 years.

Amount equal to

100% of industry

R&D budget for

3 years.

Amount equal to

100% of industry

R&D budget for

3 years.

Product

Conversion

Expenses 

(2004$,

Millions)

0 3.3 3.6 5.0
12-40

12.5.3 Industry Financial Impacts

Using the inputs and assumptions described in the previous sections, the GRIM produced

indicators of financial impacts on the medium-voltage, dry-type distribution transformer industry

at each TSL. This document reports the results of the MIA using two key financial metrics: 

INPV and annual net cash flow to the industry. 

12.5.3.1 Trial Standard Levels

The Department developed six TSLs for medium-voltage, dry-type distribution

transformers. TSL1 is the NEMA TP-1 standard. TSL6 represents the maximum TSL that is

technologically feasible. TSL5 is the highest TSL that yields national NPV greater than zero. 

For dry-type transformers, TSL5 and TSL6 are the same. TSL4 results in the maximum LCC

savings. TSL2 and TSL3 are spaced equally between TSL1 and TSL4. 

12.5.3.2 Impacts on Industry Net Present Value

The INPV measures the industry value; DOE used it in the MIA to compare the industrywide economic impacts of different TSLs. The INPV is different from the NPV that DOE

applied to the whole U.S. economy. The INPV is the sum of all net cash flows discounted at the

industry’s cost of capital, or discount rate. The GRIM estimated cash flows between 2004 and

2038, consistent with the forecast period used in the national impact analysis. 

In the MIA, the Department compared the INPV of the base case (no efficiency standard)

to that of each TSL. The difference in INPV is an estimate of the economic impacts that

implementing each particular TSL would have on the entire industry. To evaluate the range of

cash-flow impacts on the industry, the Department constructed two MIA analyses based on the

two markup scenarios discussed above. In the first scenario, the gross margin percentage is held

constant at all TSLs (and equal to the base case). In the second scenario, it is assumed that the

industry could preserve its operating profit at all TSLs. Tables 12.5.10 and 12.5.11 provide the

net present value estimates for the industry under the two scenarios.

Table 12.5.10 Changes in MV, Dry-Type Industry Net Present Value, Preservation-ofGross-Margin-Percentage Scenario

Units Trial Standard Level

Base

Case 1 2 3 4 5/6

INPV 2004$, Millions 32 30 29 27 28 30

Change in INPV

from Base Case

% - -5.5 -10.1 -15.7 -11.8 -6.1

2004$, Millions - (1.8) (3.3) (5.1) (3.8) (2.0)
12-41

Table 12.5.11 Changes in MV, Dry-Type Industry Net Present Value, Preservation-ofOperating-Profit Scenario

Units Trial Standard Level

Base

Case 1 2 3 4 5/6

INPV 2004$, Millions 32 30 28 25 24 15

Change in INPV

from Base Case

% - -7.7 -13.4 -21.5 -24.3 -52.8

2004$, Millions - (2.5) (4.3) (6.9) (7.8) (17.0)

The results from the preservation-of-gross-margin-percentage scenario provide a more

favorable projection than do the results from the preservation-of-operating-profit scenario. 

Industry value would not decrease as much if manufacturers could sustain a constant gross

margin percentage as their production costs increase in response to a standard. However, as

previously mentioned, the preservation-of-gross-margin-percentage assumption may be

optimistic. In this scenario, impacts above TSL3 decline with increasing TSL, because the

incremental conversion costs above TSL3 are small relative to the revenue gains under the

preservation-of-gross-margin-percentage scenario. The preservation-of-operating-profit scenario

provides a lower bound for INPV under a standard. The decrease in industry value under both

scenarios comes from the inability of industry to fully recoup the capital investments required for

standard compliance, including investments in working capital. 

12.5.3.3 Impacts on Annual Cash Flow

While INPV is useful for evaluating the long-term effects of standards, short-term

changes in net cash flow are also important and indicative of the impacts on industry during the

years between final rule publication and the effective date of the standard. For example, a large

investment over a period of a few years could strain the industry’s access to capital. 

Consequently, the sharp drop in net cash flow might lead to additional borrowing; changes in

leverage, interest coverage ratios, and/or bond ratings; and possibly increased concern among

investors. Thus, a short-term disturbance can have long-term effects that the INPV cannot

capture. To get an idea of the behavior of annual net cash flows, the Department reports the

annual net or free cash flows from 2004 through 2020 for the different TSL levels. Figures

12.5.1 and 12.5.2 present the annual net cash flows for the base case and each of the six TSLs

evaluated for the two different markup scenarios. 
12-42

Prior to the final rule publication date, the cash flows are identical for all TSLs in both 

$(6.00)

$(4.00)

$(2.00)

$-

$2.00

$4.00

$6.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

TSL5 & 6

Standard becomes effective in 2010

Figure 12.5.1 Industry Net Cash Flow for Preservation-of-Gross-Margin-Percentage

Scenario, MV, Dry-type

$(6.00)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

2004 2006 2008 2010 2012 2014 2016 2018 2020

Year

Net Cash Flow, 2004$, Millions .

Base

TSL1

TSL2

TSL3

TSL4

Standard becomes effective in 2010 TSL5 & 6

Figure 12.5.2 Industry Net Cash Flow for Preservation-of-Operating-Profit Scenario, MV,

Dry-type
12-43

scenarios. After final rule publication, cash flows are driven by the level of capital investments

and the proportion of these investments spent every year. In addition, in the year of the standard,

investment in working capital is required. The incremental investments in working capital are

about $0.20 million, $0.34 million, $0.66 million, $1.56 million, $5.90 million, and $5.90

million for TSL1 through TSL6, respectively (with about 5–6 percent variation at each TSL

between markup scenarios). These investments in working capital are relatively insignificant,

except those at TSL5 and TSL6. After final rule publication, industry cash flows begin to decline

as industry uses its financial resources to prepare for the standard. In the year the standard

becomes effective, new capital equipment goes into production. The Department assumed that

no assets are stranded for the TSLs evaluated. 

While the behavior of cash flows for each TSL varies between the two markup scenarios,

there are two observations that are common across the two scenarios. First, the net annual cash

flows go negative at TSL3 and above. Second, net annual cash flows go nearly to zero during the

compliance period at TSL2 but not at TSL1.

12.5.4 Other Impacts

12.5.4.1 Employment

The Department estimated industry-wide labor expenditures based on the engineering

analysis. Winding of the primary and secondary coils, stacking and assembly of the core,

enclosure manufacturing, testing, and packing of the completed transformer represent the bulk of

the labor. The Department incorporated these assumptions into the GRIM, which projects labor

expenditures annually. Labor expenditures are a function of the labor intensity of the product,

the sales volume, and an implicit wage assumption that remains fixed over time. Table 12.5.12

provides the changes in labor measured as the change in labor expenditures for medium-voltage,

dry-type transformers in 2010 (the standard effective date) versus the base case.

Table 12.5.12 Projected Change in Labor Expenditures, MV, Dry-Type (2010)

Trial Standard Level

TSL1 TSL2 TSL3 TSL4 TSL5 & 6

2.1% -1.0% -1.4% -1.6% -0.1%

Based on the GRIM and the assumption that 100 percent of medium-voltage, dry-type

transformers sold in the U.S. are manufactured in the U.S., the Department estimated that there

are currently 252 production employees in the U.S. medium-voltage, dry-type distribution

transformer industry. The Department recognizes that this estimate is somewhat low, perhaps by

30 percent. This estimate excludes non-production workers and assumes a level annual

production rate. In practice, including non-production workers and seasonal effects, the actual

number of employees in the medium-voltage, dry-type superclass would be higher. Because

labor content does not vary between the markup scenarios, projected labor expenditures are

equivalent for both. Based on these results, DOE expects no significant discernable employment
12-44

impacts among medium-voltage, dry-type transformer manufacturers for any TSL compared to

the base case. Increased employment levels are not expected at higher TSLs because the

Department assumed that the core-cutting equipment typically purchased by the medium-voltage,

dry-type industry is highly automated and includes core-stacking equipment. This conclusion is

independent of any conclusions regarding employment impacts from the broader U.S. economy.

Another concern relayed by some manufacturers during the interviews is the potential

impact from the competitiveness of cast-coil designs at higher TSLs. These manufacturers claim

that setting a standard above a certain threshold may trigger a market switch from open-wound

transformers to cast-coil transformers. Manufacturers suggested that this cross-over point likely

occurs at TSL3 and higher. If the market does shift to cast-coil, there is a risk of imported prefabricated cast-coils dominating the market in the long term. This would have a significant effect

on domestic industry value and domestic employment. 

Some manufacturers feel that regulation at any level will decrease the diversity of

transformer designs, which will make it easier for foreign production to compete in the U.S.

market. These manufacturers claim that designs may cluster around the standard, allowing

foreign competition to produce large quantities of common-kVA-rated transformers at lower

labor costs. 

12.5.4.2 Production Capacity

Energy conservation standards will impact the industry’s manufacturing capacity because

the core stack heights (or core steel piece length) will increase and laminations will become

thinner. Thinner laminations require more cuts and are more cumbersome to handle. Therefore,

manufacturers would have to invest in additional core-mitering machinery or modifications and

improvements to recover any losses in productivity, and these factors might also contribute to a

need for more plant floor space. Because more-efficient transformers tend to be larger, this could

also contribute to the need for additional floor space.

12.5.4.3 Exports

Distribution transformer exports comprise a small fraction of distribution transformer

sales. However, domestic manufacturers do sell to countries that do not currently require

products to meet minimum efficiency requirements for distribution transformers. Since the

medium-voltage, dry-type industry is largely a customized industry, the impact of a standard on

U.S. exports will be minimal.

12.5.4.4 Cumulative Regulatory Burden

While any single regulation may not impose a significant burden on manufacturers, the

combined effects of several regulations, existing or pending, may have serious consequences for

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

single regulation may overlook this cumulative regulatory burden.
12-45

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

capital and product development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their product offerings, potentially reducing competition.

Smaller companies can be especially impacted since they have lower sales volumes over which

to amortize the costs of meeting new regulations. The Department considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

The Department looked at three areas of regulatory burden: 1) Federal, 2) State, and 3)

other regulations and standards.

1. Federal Regulations on Distribution Transformer Manufacturers - Manufacturers were

not aware of any Federal regulations on medium-voltage, dry-type distribution

transformer manufacturers that would cause a cumulative regulatory burden in

conjunction with the proposed efficiency regulations on distribution transformers.

2. Regulations and Pending Regulations at the State Level - manufacturers discussed the

recent trend of State governments in instituting NEMA TP-1 as a mandatory standard for

transformers sold within their State’s borders. At this time, three States and one city

require this minimum efficiency standard for medium-voltage, dry-type distribution

transformers. The States requiring TP-1 are Massachusetts, Minnesota, and Oregon. The

city requiring TP-1 is Burlington, Vermont. Federal regulation would preempt these

standards, so no cumulative burden would be imposed.

3. Other Regulations and Standards - Manufacturers were not aware of other regulations or

standards, in effect or pending, that pertain to medium-voltage, dry-type distribution

transformers.

12.5.4.5 Impacts on Small Businesses

The SBA defines a small business, for the distribution transformer industry, as a business

that has 750 or fewer employees. The Department estimated that, of the 25 U.S. manufacturers

that make medium-voltage, dry-type distribution transformers, about 20 of them are small

businesses. About one-half of the small businesses have fewer than 100 employees. 

At TSL3 and above, net cash flows for the medium-voltage, dry-type industry will go

negative during the compliance period. At TSL3 and above, the impacts on the industry as a

whole are large and affect businesses of all sizes, but there would be some differential impacts on

small businesses. For example, at these levels, the use of M3 core steel will be needed. Cutting

M3 core steel on the core-mitering equipment typically purchased by smaller businesses can be

problematic because of the extremely thin laminations. Small businesses would also be at a

relative disadvantage at TSL3 and higher because R&D efforts would be on the same scale as

those for larger companies, but these expenses would be recouped over lower sales volumes by

small businesses. Product redesign costs tend to be fixed and do not scale with sales volume.
12-46

At TSL2, all designs would have to be mitered. This could constrain the core-mitering

resources of small businesses that share core-cutting capacity between low-voltage, dry-type and

medium-voltage, dry-type transformers. At TSL1, many kVA ratings could still be constructed

using butt-lap joints, alleviating the constraint on core-mitering resources. Thus, TSL1 is less

capital-intensive for small businesses than TSL2. In an industry such as the medium-voltage,

dry-type transformer industry, which is heavily consolidated already, there is the risk that TSL2

could lead to further advantage for the largest manufacturers and thus further concentrate the

industry’s production. However, the differential impact on small businesses is expected to be

less in moving from TSL1 to TSL2 (as opposed to moving from TSL2 to TSL3). Today, the

market currently demands significant quantities of medium-voltage, dry-type transformers that

meet TSL2.

12.5.5 Summary of Impacts for Medium-Voltage, Dry-Type Superclass

More than one-half of the customers for medium-voltage, dry-type transformers consider

efficiency when purchasing transformers. A sizeable portion of the market is evaluating losses

and making rational economic judgements in purchasing transformer products. With this in

mind, it is significant to note that about one percent or less of the market chooses to purchase

transformers that meet TSL3 or above.

Conversion capital expenditures in the medium-voltage, dry-type distribution transformer

superclass include primarily core-mitering equipment, but some additional expenditures would

be necessary to upgrade coil-winding equipment and miscellaneous tooling. Today, about five

full-time equivalent core-mitering machines are required by the medium-voltage, dry-type

superclass. At TSL1, the Department estimates that 95 percent of the medium-voltage, dry-type

transformers would be manufactured using core-cutting equipment capable of making mitered

cuts. At TSL2 and above, 100 percent of medium-voltage, dry-type transformers would be

produced with core-mitering equipment.

The core-cutting time per transformer, and consequently the number of core-mitering

machines required by the industry, increases with increasing TSL because of two factors. First,

more core-cutting time is required in proportion to increases in core size at higher efficiencies. 

Second, the shift to thinner core steel laminations at higher efficiencies implies increases in corecutting time that are inversely proportional to lamination thickness. The Department accounted

for these two factors in estimating the increases in core-cutting equipment required at each TSL. 

It estimated that total equipment capital expenditures for the industry would be $3.2 million, $5.9

million, $7.4 million, $7.5 million, $15.0 million, and $15.0 million for TSL1 through TSL6,

respectively. Product conversion expenses for the medium-voltage, dry-type superclass would be

negligible at TSL1 and TSL2 because products meeting these levels are produced in relatively

large volumes today. Above TSL2, product conversion expenses would become more

significant.

The impact on INPV at TSL5 and TSL6 would range between -53 percent and -6 percent. 

The impact on INPV at TSL4 would range between -24 percent and -12 percent. The impact on

INPV at TSL3 would range between -22 percent and -16 percent. In the preservation-of-gross-
12-47

margin-percentage scenario, impacts above TSL3 decline with increasing TSL. This is because

the incremental conversion costs above TSL3 are small relative to the revenue gains under the

preservation-of-gross-margin-percentage scenario. This counterintuitive trend does not exist for

the low-markup scenario, the preservation-of-operating-profit scenario. Net annual cash flows

would go negative during the compliance period, irrespective of the markup scenario, for TSLs 3

through 6. For TSLs 3 and 4, the magnitude of the peak negative net annual cash flow would be

about half that of the positive base case cash flow. For TSLs 5 and 6, the magnitude of the peak

negative net annual cash flow would be more than twice that of the positive base case cash flow.

For some of the medium-voltage, dry-type design lines, the cost-effective designs at TSL4

would require laser-scribed, domain-refined, H-O core steel. In the U.S., this steel is only

manufactured by one company. H-O is also manufactured in Japan, but steel imports from Japan

are subject to import duties, providing a production cost advantage to foreign transformer

manufacturers. The cost-effective designs at TSL3 would likely rely on M3 core steel and copper

windings. TSL3 would therefore not have the same supply chain constraints as TSL4.

At TSL2, the impact on INPV would range between -13 percent and -10 percent. At

TSL1, the impact on INPV would range between -8 percent and -6 percent. The impact on

annual net cash flow from capital expenditures during the compliance period would be greater

for TSL2 than for TSL1. At TSL2, the net annual cash flows would go nearly to zero during the

compliance period. The primary difference between TSL1 and TSL2 from the manufacturers’

viewpoint is that TSL1 preserves more design pathways, each trading off material for capital. 

Butt-lap designs would be cost-effective at TSL1 for some kVA ratings, which would allow

small businesses to remain more competitive because they would not necessarily have to make

large capital outlays. TSL2 cannot be met cost-effectively with butt-lap designs; thus, TSL2

could hurt the margins or decrease the market share of small businesses in the long term. 

Finally, there are three additional factors to be considered from the standpoint of

manufacturers in selecting the proposed standard:

1. If the medium-voltage, dry-type standard is set low relative to that for liquidimmersed transformers, there could be a switch to medium-voltage, dry-type

transformers for certain products where there is substitutability between the two

superclasses. For otherwise equivalent transformers, the TSLs are less stringent

for medium-voltage, dry-type transformers.

2. According to some manufacturers, pushing the medium-voltage, dry-type standard

above TSL2 could trigger a market switch from open-wound to cast-coil designs. 

If the market does shift to cast-coil, there is a risk of prefabricated Chinese

imported cast-coils dominating the market in the long term.

3. The medium-voltage, dry-type superclass is already heavily consolidated. If the

standard is set above TSL1, it will likely increase consolidation because the

largest manufacturers are better equipped to produce transformers at TSL2 or

TSL3.
12-48

1. McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of

Companies, 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons,

2000.

2. Securities and Exchange Commission, Annual 10-K Reports, Various Years, Washington

D.C., <www.sec.gov>.

3. Ibbotson Associates, Ibbotson Beta Book, 2003, Chicago, IL.

<http://www.ibbotson.com>.

REFERENCES