APPENDIX 12A MANUFACTURER IMPACT ANALYSIS INTERVIEW GUIDES

AND GOVERNMENT REGULATORY IMPACT MODEL OVERVIEW

TABLE OF CONTENTS

12A.1 STORAGE­TYPE RESIDENTIAL WATER HEATERS MANUFACTURER IMPACT
 

ANALYSIS INTERVIEW GUIDE................................................................................................ 1
 

12A.2 INSTANTANEOUS GAS­FIRED WATER HEATERS MANUFACTURER IMPACT
 

ANALYSIS INTERVIEW GUIDE.............................................................................................. 31
 

12A.3 DIRECT HEATING EQUIPMENT MANUFACTURER IMPACT ANALYSIS
 

GUIDE ........................................................................................................................................ 46
 

12A.4 RESIDENTIAL HEARTH PRODUCTS MANUFACTURER IMPACT ANALYSIS
 

GUIDE ........................................................................................................................................ 66
 

12A.5 GAS­FIRED POOL HEATERS MANUFACTURER IMPACT ANALYSIS
 

INTERVIEW GUIDE................................................................................................................... 80
 

12A.6 GOVERNMENT REGULATORY IMPACT MODEL (GRIM) OVERVIEW............ 94
 

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12A.1 STORAGE­TYPE RESIDENTIAL WATER HEATERS MANUFACTURER
 

IMPACT ANALYSIS INTERVIEW GUIDE
 

April 6, 2009
 

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As part of the rulemaking process for amended energy conservation standards for storage­type

residential water heaters, the Department of Energy (DOE) conducts the manufacturer impact

analysis (MIA). In this analysis, DOE uses publicly available information and information

provided by manufacturers during interviews to assess possible impacts on manufacturers due to

amended energy conservation standards. DOE is currently considering 7 efficiency levels (EL)

for both electric and oil­fired storage­type water heaters and 6 ELs for gas­fired storage­type

water heaters. In responding to this questionnaire, please refer to the efficiency levels in the table

below. DOE analyzed one representative rated storage volume for each product class, including

50 gallons for electric, 40 gallons for gas­fired, and 30 gallons for oil­fired storage­type water

heaters. DOE extrapolated the results to other rated storage volumes using energy­efficiency

equations (see section 16 for additional information).

Efficiency Levels Under Consideration for Storage­Type Residential Water Heaters

Product Class

(Representative

Rated Volume)

Efficiency

Metric

Baseline

Efficiency

Level

EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7

Electric

Storage­Type

(50 Gallons

Rated Storage

Volume)

Energy

Factor

(EF)

0.90 0.91 0.92 0.93 0.94 0.95 2.0 2.2

Gas­Fired

Storage­Type

(40 Gallons

Rates Storage

Volume)

Energy

Factor

(EF)

0.59 0.62 0.63 0.64 0.65 0.67 0.80

Oil­Fired

Storage­Type

(30 Gallons

Rated Storage

Volume)

Energy

Factor

(EF)

0.53 0.54 0.56 0.58 0.60 0.62 0.66 0.68

1 KEY ISSUES

1.1	 In general, what are the key issues for your company regarding amended energy

conservation standards for storage­type residential water heaters and this rulemaking?

1.2 For the issues identified, how significant are they at each listed efficiency level?

1.3 How can we most effectively incorporate these issues in the MIA?
 

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2 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impacts at the plant or profit center level

directly pertinent to storage­type residential water heaters production. However, the context

within which the plant operates and the details of plant production and costs are not readily

available from the published literature. Therefore, DOE invites you to provide these details

confidentially in your own words to the extent possible and practical. Understanding the

organizational setting around the residential water heater industry profit center will help DOE

understand the probable future of the manufacturing activity with and without amended energy

conservation standards.

2.1 Do you have a parent company, and/or any subsidiaries relevant to the storage­type

residential water heater industry?

2.2 Do you manufacture any products other than storage­type residential water heaters? If so,

what other products do you manufacture?

2.3 What percentage of your total manufacturing corresponds to electric, gas­fired, and oilfired storage­type residential water heaters?

2.4 Where are your production facilities located, and what type of product is manufactured at

each location? Could you provide figures for your company’s manufacturing at each location by

product type (i.e., electric, gas­fired, and oil­fired storage­type residential water heaters), size,

and efficiency?

2.5 At your manufacturing facilities, would potential storage­type residential water heater

redesigns be difficult to implement? If so, would your company modify the existing facility or

develop a new facility?

2.6 What are your employment levels at each of these facilities?
 

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2.7 What are your product lines, niches, and relative strengths in the residential storage­type

water heater market?

2.8 What is your company’s approximate market share in the electric, gas­fired, and oil­fired

storage­type residential storage­type water heater industry?

2.9 Would you expect your market share to change once amended energy conservation

standards become effective?

3 MANUFACTURER PRODUCTION COSTS AND SELLING PRICES

DOE estimated the manufacturer production costs of three­types of residential water heaters at

various rated storage volumes. DOE defines manufacturer production cost as all direct costs

associated with manufacturing a product. It includes direct labor, direct materials, and overhead

(which includes depreciation costs). The breakdown of manufacturer production cost has

implications for the quantitative impacts on electric, gas­fired, and oil­fired storage­type

residential water heater manufacturers. The per unit production costs are necessary for DOE to

estimate labor expenditures and other cash flow calculations.

Manufacturer selling price is the average cost manufacturers charge their first consumers, but

does not include all of the costs along the distribution channels. The manufacturer selling price

includes a per unit research and development cost; selling, general, and administrative expense;

shipping cost; and profit. The manufacturer markup is a multiplier applied to manufacturer

production cost to cover the per unit research and development, selling, general, and

administrative expense, and profit. For residential, storage­type water heaters, the manufacturer

markup does not cover shipping costs. Shipping costs are calculated separately and are shown

for each efficiency level in Table 3­1 through Table 3­3. Section 15 contains additional questions

about the shipping assumptions and costs.

DOE estimated an industry­wide markup of 1.27 for electric storage­type water heaters, 1.30 for

gas­fired storage­type water heaters, and 1.35 for oil­fired storage­type water heaters at baseline

efficiency levels. DOE asks a series of questions about the manufacturer markup associated with

premium products at higher efficiencies in section 4. As shown in Equation 3­1 below, the

manufacturer production cost multiplied by the manufacturer markup would cover all costs in the

manufacturer selling price of baseline products except for shipping costs.

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Equation 3­1. Calculation of Manufacturer Selling Price
 

3.1 Is there a significant difference between baseline markups DOE calculated and your

company’s baseline markups for electric storage­type water heaters, gas­fired storage­type water

heaters, and oil­fired storage­type water heaters?

3.2 Table 3­1 through Table 3­3 provide DOE’s estimates of the manufacturer production

costs and manufacturer selling prices for storage­type residential water heaters at the

representative rated storage volume and each efficiency level being considered. Could you please

provide any comments on the estimated values?

Table 3­1 Estimated Manufacturer Production Costs, Shipping Costs, and Manufacturer

Selling Prices for Electric Storage­Type Residential Water Heaters (50 Gallons Rated

Storage Volume)

Efficiency

Level

(Energy

Factor)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s per Unit

Shipping Cost

Estimates

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(EF = 0.90) $156 $17 $198

EL 1

(EF = 0.91) $162 $17 $208

EL 2

(EF = 0.92) $166 $17 $213

EL 3

(EF = 0.93) $170 $17 $219

EL 4

(EF =0.94) $177 $25 $221

EL 5

(EF = 0.95) $195 $25 $246

EL 6

(EF = 2.0) TBD TBD TBD

EL 7

(EF = 2.2) $490 $33 $523

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

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Table 3­2 Estimated Manufacturer Production Costs, Shipping Costs, and Manufacturer

Selling Prices for Gas­Fired Storage­Type Residential Water Heaters (40 Gallons Rated

Storage Volume)

Efficiency

Level

(Energy Factor)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s per Unit

Shipping Cost

Estimates

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(EF = 0.59) $179 $17 $233

EL 1

(EF = 0.62) $186 $25 $234

EL 2

(EF = 0.63) $193 $25 $245

EL 3

(EF = 0.64) $304 $50 $377

EL 4

(EF = 0.65) $312 $50 $388

EL 5

(EF = 0.67) $326 $50 $407

EL 6

(EF = 0.80) $433 $50 $558

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material prices

spanning 2004 to 2008.

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Table 3­3 Estimated Manufacturer Production Costs, Shipping Costs, and Manufacturer

Selling Prices for Oil­Fired Storage­Type Residential Water Heaters (30 Gallons Rated

Storage Volume)

Efficiency

Level

(Energy Factor)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s Shipping

Cost Estimates

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(EF = 0.53) $524 $17 $707

EL 1

(EF = 0.54) $532 $17 $718

EL 2

(EF = 0.56) $544 $17 $734

EL 3

(EF = 0.58) $554 $25 $740

EL 4

(EF = 0.60) $549 $17 $741

EL 5

(EF = 0.62) $562 $25 $751

EL 6

(EF = 0.66) $555 $17 $749

EL 7

(EF = 0.68) $567 $17 $765

* DOE’s manufacturer production cost estimates for oil­fired storage water heaters were developed using a

five­year average of raw material prices spanning 2003 to 2007 and shown in 2008$.

3.3 Please compare your manufacturer production cost percentages1 to the estimates

tabulated below. The manufacturer production cost breakdown is used to calculate the total cost

of goods sold (COGS) for the industry. Having an accurate estimate of the production costs for

the industry allows DOE to better examine impacts on profitability and employment due to

amended energy conservation standards. Are the different percentages of each cost representative

of your company or the electric, gas­fired, and oil­fired storage­type residential water heater

industry? Please explain any differences.

1 The manufacturer production cost percentages shown in Table 3­4 through Table 16­7 are the values that make up

COGS. These are percentages of total COGS.

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Table 3­4 Breakdown of Manufacturer Production Costs for Baseline Electric StorageType Residential Water Heaters (50 Gallons Rated Storage Volume)

Components of

Manufacturer Production

Costs

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 79.5%

Labor 11.5%

Overhead 5.9%

Depreciation 3.1%

Table 3­5 Breakdown of Manufacturer Production Costs for Baseline Gas­Fired StorageType Residential Water Heaters (40 Gallons Rated Storage Volume)

Components of

Manufacturer Production

Costs

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 82.8%

Labor 9.8%

Overhead 5.4%

Depreciation 2.1%

Table 3­6 Breakdown of Manufacturer Production Costs for Baseline Oil­Fired StorageType Residential Water Heaters (30 Gallons Rated Storage Volume)

Components of

Manufacturer Production

Costs

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 66.2%

Labor 6.1%

Overhead 13.4%

Depreciation 14.1%

4 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of amended energy

conservation standards on industry profitability. In this section, DOE would like to understand

the current markup structure of the industry and how setting an amended energy conservation

standard would impact your company’s markup structure and profitability. As discussed in

Section 3, the manufacturer markup is a multiplier applied to manufacturer production cost to

cover per unit research and development, selling, general, and administrative expenses, and

profit. For the residential, storage­type water heaters analysis, the manufacturer markup does not

cover shipping costs. The manufacturer production cost multiplied by the manufacturer markup

along with shipping costs would cover all costs involved in manufacturing the product.

4.1 Do profit levels currently vary by product class? Do profit levels vary by efficiency

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level? Please explain why or why not.
 

4.2 Within each product class, do profit levels vary by storage capacities?

4.3 Do profit levels change with longer warranties?

4.4 DOE would like to understand how the baseline manufacturer markup changes at higher

efficiency levels. Could you provide your company’s markup for any products that meet the

efficiency levels shown below?

Table 4­1 Electric Storage­Type Water Heater Manufacturer Markups

Electric Storage­Type Residential Water Heaters

(50 Gallons Rated Storage Volume)

Efficiency Level

(Energy Factor) Estimated Manufacturer Markup

Baseline (EF = 0.90)

EL 1 (EF = 0.91)

EL 2 (EF = 0.92)

EL 3 (EF = 0.93)

EL 4 (EF = 0.94)

EL 5 (EF = 0.95)

EL 6 (EF = 2.0)

EL 7 (EF = 2.2)

Table 4­2 Gas­Fired Storage­Type Water Heater Manufacturer Markups
 

Gas­Fired Storage­Type Residential Water Heaters

(40 Gallons Rated Storage Volume)

Efficiency Level

(Energy Factor) Estimated Manufacturer Markup

Baseline (EF = 0.59)

EL 1 (EF = 0.62)

EL 2 (EF = 0.63)

EL 3 (EF = 0.64)

EL 4 (EF = 0.65)

EL 5 (EF = 0.67)

EL 6 (EF = 0.80)

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Table 4­3 Oil­Fired Storage­Type Water Heater Manufacturer Markups
 

Oil­Fired Storage­Type Residential Water Heaters

(30 Gallons Rated Storage Volume)

Efficiency Level

(Energy Factor) Estimated Manufacturer Markup

Baseline (EF =0.53)

EL 1 (EF = 0.54)

EL 2 (EF = 0.56)

EL 3 (EF = 0.58)

EL 4 (EF = 0.60)

EL 5 (EF = 0.62)

EL 6 (EF = 0.66)

EL 7 (EF = 0.68)

4.5 Would you expect changes in your estimated profitability following an amended energy

conservation standard? If so, please explain why.

5 SHIPMENT PROJECTIONS AND MARKET SHARES

An amended energy conservation standard can change overall shipments by altering product

attributes, marketing approaches, product availability, and price. The industry revenue

calculations are based on the shipment projections developed by DOE’s shipments model. The

shipments model includes forecasts for the base case shipments (i.e., total industry shipments

absent amended energy conservation standards) and the standards case shipments (i.e., total

industry shipments with amended energy conservation standards).

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5.1 Please compare DOE’s projections of annual industry­wide shipments for electric, gasfired, and oil­fired storage­type residential water heaters with your company’s projections of

industry­wide shipments.

Table 5­1 Annual Industry­Wide Shipment Projections for Electric Storage­Type

Residential Water Heaters Absent Amended Energy Conservation Standards

2007

Total

IndustryWide

Shipments

2008

Total

IndustryWide

Shipments

Projected Total

Industry­Wide

Shipments in

2015*

Projected Total

Industry­Wide

Shipments in

2025

Projected Total

Industry­Wide

Shipments in

2035

DOE’s Estimate for

Total Industry

Shipments

(Millions)**

4.470 4.189 5.224 5.459 6.176

Manufacturer

Feedback

* 2015 is estimated effective date of amended energy conservation standards for water heaters.
 

** For gas­fired and electric water heaters 2007 data was provided by AHRI (March 3, 2008) and 2008 data was
 

provided by AHRI (March 17, 2009). Projections were updated using: (1) AEO2009 New Housing Forecast; (2)
 

AHRI 2008 Data; and (3) AHS 2007 Historical Market Shares.
 

Table 5­2 Annual Industry­Wide Shipment Projections for Gas­Fired Storage­Type

Residential Water Heaters Absent Amended Energy Conservation Standards

2007

Total

Industry­Wide

Shipments

2008

Total

Industry­Wide

Shipments

Projected Total

Industry­Wide

Shipments in

2015*

Projected Total

Industry­Wide

Shipments in

2025

Projected Total

Industry­Wide

Shipments in

2035

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

4.384 4.001 4.391 3.966 4.474

Manufacturer

Feedback

* 2015 is estimated effective date of amended energy conservation standards for water heaters.
 

** For gas­fired and electric water heaters 2007 data was provided by AHRI (March 3, 2008) and 2008 data was
 

provided by AHRI (March 17, 2009). Projections were updated using: (1) AEO2009 New Housing Forecast; (2)
 

AHRI 2008 Data; and (3) AHS 2007 Historical Market Shares.
 

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Table 5­3 Annual Industry­Wide Shipment Projections for Oil­Fired Storage­Type

Residential Water Heaters Absent Amended Energy Conservation Standards

2007

Total

Industry­Wide

Shipments

2008

Total

Industry­Wide

Shipments

Projected Total

Industry­Wide

Shipments in

2015*

Projected Total

Industry­Wide

Shipments in

2025

Projected Total

Industry­Wide

Shipments in

2035

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

0.036 0.038 0.042 0.047 0.053

Manufacturer

Feedback

* 2015 is estimated effective date of amended energy conservation standards for water heaters.

** For oil­fired water heaters 2007 value is from Oil Heating Journal and 2008 value is modeled.

5.2 Are the 2007 and 2008 industry wide­shipments shown in Table 5­1 through Table 18­3

consistent with historic trends? Do you expect total shipment levels to return to their previous

levels (i.e., those levels prior to 2007)?

5.3 DOE’s shipments analysis estimates industry­wide shipments in 2015 would continue to

increase even as amended energy conservation standards become effective due to new housing

starts and increases in replacements, and voluntary programs such as ENERGY STAR. Could

you provide any qualitative information on expected changes in total industry shipments shown

in Table 5­1 through Table 18­3?

6 PRODUCT MIX

Product mix describes the distribution of current shipments by efficiency level. Changes in the

product mix due to amended energy conservation standards can have a large impact on industry

revenues. Having an accurate estimate of the current product mix allows DOE to better estimate

how revenues might change due to amended energy conservation standards.

6.1 Does your company offer multiple product lines at different efficiency levels? Could you

provide a description of your company’s product lines and their respective efficiency levels?

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6.2 Table 6­1 through Table 19­3 show DOE’s estimate for the current mix of shipments by

efficiency today and in 2015, the anticipated effective date of amended energy conservation

standards. Could you provide feedback on DOE’s estimates based on your knowledge of the

industry?

Table 6­1 Percentage of Industry­Wide Shipments by Efficiency Level for Electric StorageType Residential Water Heaters Today and in 2015

Percentage of

Total

Shipments at

Each

Efficiency

Baseline

Level

(EF = 0.90)

EL 1

(EF = 0.91)

EL 2

(EF = 0.92)

EL 3

(EF = 0.93)

EL 4

(EF = 0.94)

EL 5

(EF = 0.95)

EL 6

(EF = 2.0)

EL 7

(EF = 2.2)

DOE’s

Estimate

(2008)

38.2% 24.4% 7.1% 19.6% 4.8% 6.0% 0.0% 0.0%

Manufacturer

Feedback

DOE’s

Estimate

(2015)

36.3% 23.2% 6.7% 18.6% 4.6% 5.7% 5.0% 0.0%

Manufacturer

Feedback

Table 6­2 Percentage of Industry­Wide Shipments by Efficiency Level for Gas­Fired

Storage­Type Residential Water Heaters Today and in 2015

Percentage of Total

Shipments at Each

Efficiency

Baseline

Level

(EF = 0.59)

EL 1

(EF = 0.62)

EL 2

(EF = 0.63)

EL 3

(EF = 0.64)

EL 4

(EF = 0.65)

EL 5

(EF = 0.67)

EL 6

(EF = 0.80)

DOE’s Estimate

(2008) 86.9% 7.8% 2.4% 1.3% 1.5% 0.2% 0.0%

Manufacturer

Feedback

DOE’s Estimate

(2015) 81.6% 7.3% 2.2% 1.2% 1.4% 5.3% 1.0%

Manufacturer

Feedback

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Table 6­3 Percentage of Industry­Wide Shipments by Efficiency Level for Oil­Fired

Storage­Type Residential Water Heaters Today and in 2015

Percentage of

Total

Shipments at

each

Efficiency

Baseline

Level

(EF = 0.53)

EL 1

(EF = 0.54)

EL 2

(EF = 0.56)

EL 3

(EF = 0.58)

EL 4

(EF = 0.60)

EL 5

(EF = 0.62)

EL 6

(EF = 0.66)

EL 7

(EF = 0.68)

DOE’s

Estimate

(2008)

22.2% 0.0% 0.0% 0.0% 11.1% 16.7% 25.0% 25.0%

Manufacturer

Feedback

DOE’s

Estimate

(2015)

22.2% 0.0% 0.0% 0.0% 11.1% 16.7% 25.0% 25.0%

Manufacturer

Feedback

6.3 Do you expect the product mix to change over time? If so, please explain why.

6.4 An amended energy conservation standard affects the product mix by eliminating the sale

of products below the minimum efficiency level. DOE assumes that all products that fall below

the standard would roll­up to the efficiency level set by an amended energy conservation

standard. DOE assumes the distribution of efficiencies above the efficiency level set by the

energy conservation standard will not change. In other words, those customers already

purchasing more­efficient products will continue to do so irrespective of amended energy

conservation standards. How do you think amended energy conservation standards will impact

the sales of more efficient products? For example, would customers continue to buy products

that exceed the energy conservation standard level? Would your response change at higher

efficiency levels?

7 FINANCIAL PARAMETERS

Navigant Consulting, Inc. (NCI) has developed a “strawman” model of the electric, gas­fired,

and oil­fired storage­type residential water heater industry financial performance called the

Government Regulatory Impact Model (GRIM) using publicly available data. This section

attempts to understand how your company’s financial situation differs from our industry

aggregate picture.

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7.1 Please compare your financial parameters to the GRIM parameters tabulated below.

Table 7­1 Financial Parameters for Storage­Type Residential Water Heater Manufacturers

GRIM Input Definition Industry

Estimated

Value

Your Actual (If

Significantly

Different from

DOE’s Estimate)

Income Tax Rate Corporate effective income tax

paid (percentage of earnings

before taxes, EBT)

27.5%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

8.5%

Working Capital Current assets less current

liabilities (percentage of

revenues)

11.4%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

20.9%

R&D Research and development

expenses (percentage of

revenues)

1.5%

Depreciation Amortization of fixed assets

(percentage of revenues) 2.2%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

2.2%

Cost of Goods Sold Includes material, labor,

overhead, and depreciation

(percentage of revenues)

71.3%

7.2 If your company manufacturers multiple product classes of storage­type residential water

heaters, do any of the financial parameters in Table 7­1 change based on fuel­type? Please

describe any differences.

7.3 How would you expect an amended energy conservation standard to impact any of the

financial parameters for the industry?

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8 CONVERSION COSTS

Amended energy conservation standards may cause your company to incur capital and product

conversion costs to redesign existing products and make changes to existing production lines to

be compliant with the amended energy conservation standard. Capital conversion costs are onetime investments in plant, property, and equipment (PPE) necessitated by an amended energy

conservation standard. These may be incremental changes to existing PPE or the replacement of

existing PPE. Replacing existing PPE could strand existing assets before the end of their useful

lives. In addition to capital conversion costs, product conversion costs are costs related research,

product development, testing, marketing and other costs for redesigning products necessitated by

an amended energy conservation standard.

8.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels DOE is considering? Refer to the tables below to provide your company’s estimates.

Please provide additional qualitative information to help DOE understand the types and nature of

your investments.

Table 8­1 Electric Storage­Type Residential Water Heater Conversion Costs

Efficiency Electric Storage­Type Residential Water Heaters

Level

(Energy

Factor)

Capital

Conversion

Costs (2009$)

Product

Conversion

Costs (2009$)

Stranded Assets

(2009$)

Baseline

(EF = 0.90)

EL 1

(EF = 0.91)

EL 2

(EF = 0.92)

EL 3

(EF = 0.93)

EL 4

(EF = 0.94)

EL 5

(EF = 0.95)

EL 6

(EF = 2.0)

EL 7

(EF = 2.2)

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Table 8­2 Gas­Fired Storage­Type Residential Water Heater Conversion Costs
 

Efficiency Gas­Fired Storage­Type Residential Water Heaters

Level

(Energy

Factor)

Capital

Conversion

Costs (2009$)

Product

Conversion

Costs (2009$)

Stranded Assets

(2009$)

Baseline

(EF = 0.59)

EL 1

(EF = 0.62)

EL 2

(EF = 0.63)

EL 3

(EF = 0.64)

EL 4

(EF = 0.65)

EL 5

(EF = 0.67)

EL 6

(EF = 0.80)

Table 8­3 Oil­Fired Storage­Type Residential Water Heater Conversion Costs
 

Efficiency Gas­Fired Storage­Type Residential Water Heater

Level

(Energy

Factor)

Capital

Conversion

Costs (2009$)

Product

Conversion

Costs (2009$)

Stranded Assets

(2009$)

Baseline

(EF = 0.53)

EL 1

(EF = 0.54)

EL 2

(EF = 0.56)

EL 3

(EF = 0.58)

EL 4

(EF = 0.60)

EL 5

(EF = 0.62)

EL 6

(EF = 0.66)

EL 7

(EF = 0.68)

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9 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards, voluntary standards, and/or other regulatory actions affecting the

same product or industry.

9.1 Are there other recent or impending regulations that electric, gas­fired, and oil­fired

storage­type residential water heater manufacturers face (from DOE or otherwise)? If so, could

you identify the regulation and the corresponding possible effective dates for those regulations?

Below is a list of regulations that could possibly affect manufacturers of electric, gas­fired, and

oil­fired storage­type residential water heaters. Please provide any comments on the listed

regulations in addition to other regulations.

Table 9­1 Other Regulations Identified by DOE

Regulation Estimated or Actual Effective

Date(s) Comments

DOE’s Amended Energy Conservation

Standards for Other Products

International Energy­Efficiency Standards

State Emission Requirements and Other

State Regulations

South Coast Air Quality Management

District (SCAQMD) Ultra­Low NOx

Requirements

Uniform Plumbing, Building, and Safety

Codes

9.2 What level of expense are you expecting to incur as a result of these regulations?

9.3 Under what circumstances would you be able to coordinate any expenditures related to

these other regulations with an amended energy conservation standard, thereby lessening the

cumulative burden?

10 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to explore

current trends in electric, gas­fired, and oil­fired storage­type residential water heater production

employment and solicit manufacturer views on how domestic employment patterns might be

affected by amended energy conservation standards.

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10.1 Would your domestic employment levels be expected to change significantly under

amended energy conservation standards? If so, please explain how they would change if higher

efficiency levels are required.

10.2 Would the workforce skills necessary under amended energy conservation standards

require extensive retraining or replacement of employees at your manufacturing facilities?

10.3 Would amended energy conservation standards require extensive retraining of your

service/field technicians? If so, could you expand on how your service infrastructure would be

impacted in general as a result of amended energy conservation standards?

11 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from amended energy conservation

standards, may impact sourcing decisions.

11.1 What percentage of your company’s electric, gas­fired, and oil­fired storage­type

residential water heater sales is domestic? Absent amended energy conservation standards, are

production facilities being relocated to foreign countries? Would amended energy conservation

standards impact your domestic vs. foreign manufacturing decision?

11.2 If applicable, to what foreign countries or regions do you export your products? What

percentage of sales can be attributed to each?

11.3 Would an amended energy conservation standard be expected to affect your export sales?

What would the resulting impact be, if any, on your manufacturing operations and profitability?

11.4 Are your foreign exports affected by amended energy conservation standards in other

countries?

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11.5 What percentage of the U.S. market for electric, gas­fired, and oil­fired storage­type

residential water heaters is imported? Would amended energy conservation standards have an

impact on foreign competition?

11.6 What is your outlook for electric, gas­fired, and oil­fired storage­type residential water

heater exports?

12 CONSOLIDATION

Amended energy conservation standards can alter the competitive dynamics of the market. This

can include prompting companies to enter or exit the market, or to merge. DOE and the

Department of Justice are both interested in any potential reduction in competition that would

result from an amended energy conservation standard.

12.1 Please comment on industry consolidation and related trends over the last 5 years.

12.2 In the absence of amended energy conservation standards, do you expect any further

industry consolidation? Please describe your expectations.

12.3 How would amended energy conservation standards affect your ability to compete?

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13 IMPACTS ON SMALL BUSINESS

13.1 The Small Business Association (SBA) denotes a small business in the electric, gas­fired,

and oil­fired storage­type residential water heater industry as having less than 500 employees.2

By this definition, is your company considered a small business?

13.2 Are there any reasons that a small business might be at a disadvantage relative to a larger

business under amended energy conservation standards? Please consider such factors as

technical expertise, access to capital, bulk purchasing power for materials/components,

engineering resources, and any other relevant issues.

13.3 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of amended energy conservation standards would have a severe impact?

If so, would manufacturers of these products have different incremental impacts from

implemented amended energy conservation standards than from the rest of the industry?

14 ULTRA­LOW NOX WATER HEATERS

As part of the rulemaking analyses, DOE is reviewing gas­fired, storage­type water heaters that

are manufactured and shipped to locations where ultra­low nitrogen oxide (NOx) emissions

requirements are in place, such as the South Coast Air Quality Management District (SCAQMD)

of California. DOE has identified markets in California and Texas where ultra­low NOx

emissions requirements exists. For example, Rule 1121 (Control of Nitrogen Oxides from

Residential Type, Natural Gas­fired Water Heaters) limits NOx emissions to 10 nanograms per

Joule (ng/J) within the SCAQMD. Because DOE is aware that manufacturers typically employ

different burner technologies in order comply with these emissions requirements, DOE would

like to better understand how NOx requirements change gas­fired residential water heater

manufacturing.

14.1 What States or regions currently have ultra­low NOx emissions requirements? What are

those requirements?

2 DOE uses the small business size standards published on August 22, 2008, as amended, by the SBA to determine

whether a company is a small business. To be categorized as a small business, a water heater manufacturer and its

affiliates may employ a maximum of 500 employees. The 500 employee threshold includes all employees in a

business’s parent company and any other subsidiaries.

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14.2 What percentage of your products are shipped to regions with ultra­low NOx

requirements? Do you expect those percentages to change over time?

14.3 Are you aware of any new emissions requirements being considered by State or regionial

governments?

14.4 What States or regions do you anticipate having emissions requirements in the future and

what is the timing of any future requirements?

DOE identified ultra­low NOx gas­fired storage water heaters on the market with rated storage

volumes between 28 and 65 gallons. These products range in energy efficiency from DOE’s

baseline efficiency levels (0.59 EF for 40 gallon models) to 0.62 EF (for models with rated

storage volumes between 28 and 50 gallons). DOE noted that these products typically include

both pilot and electronic ignition, ultra­low NOx burner manifolds, and atmospheric venting

configurations. DOE also noted that manufacturers typically improve energy efficiency by

increasing the amount of insulation around the storage tank at the baseline efficiency level.

14.5 Does your company plan on expanding current ultra­low NOx offerings? If so, what

efficiency levels and rated storage volumes will you offer?

14.6 How would the strategies used by manufacturers to increase the efficiency of a

conventional gas­fired water heater differ from the strategies used to increase an ultra­low NOx

water heater? Could you please explain any differences?

14.7 If manufacturers use different strategies to increase the efficiency of an ultra­low NOx

water heater, how would the incremental cost between efficiency levels change?

14.8 Do you currently have an ultra­low NOx prototype that uses power vent technology to

improve energy efficiency? At what efficiency level would you incorporate power vent

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technologies to increase the efficiency of an ultra­low NOx water heater? For comparison, a

conventional gas­fired water heater with a 40 gallon rated storage volume includes a power vent

at 0.64 EF. Can a power vent be paired with a standard burner manifold instead of the ultra­low

NOx burner to achieve ultra­low NOx emission levels?

14.9 Would designs to meet flammable vapor ignition requirements impact the design of

models that meet ultra­low NOx requirements, both with and without power venting?

14.10 Please explain any barriers to improving energy efficiency for ultra­low NOx gas­fired

storage water heaters.

15 UNIT SHIPPING METHODS AND ASSOCIATED COSTS

An amended energy conservation standard can change overall shipments by altering product

attributes, product size, amount of shipments, and price. Having an accurate estimate of the

shipping costs for the industry allows DOE to better examine impacts on profitability and

employment due to amended energy conservation standards. DOE has based their shipment costs

off of average industry cost per trailer and the number of units per trailer. In the analysis, DOE

assumed standard pallets were used, the trailer size had dimensions of 10’ by 8’ by 53’, and total

shipping cost per trailer was $3,000.

15.1 What is the average size and cost of the trailer used to ship residential storage­type water

heaters?

15.2 When packing and loading water heaters onto trailers, what methods are applied? For

example, are pallets, crates, and forklifts used? Please specify the type of crate used, dimensions,

and number of water heaters per crate, if applicable.

15.3 Table 15­1 through Table 15­3 provide DOE’s estimates of the shipping costs for

storage­type residential water heaters at each efficiency level being considered. Could you please

provide any comments on the estimated values?

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Table 15­1. Estimated Shipping Costs for Electric Storage­Type Residential Water Heaters

(50 Gallons Rated Storage Volume)

Efficiency Levels

(Energy Factor)

Outer Packaging Dimensions per

Water Heater ­ h x w x l (in.)

Number of Water

Heaters per Trailer

Unit Shipping Cost

DOE’s Estimate Manufacturer

Feedback

DOE’s

Estimate

Manufacturer

Feedback

DOE’s

Estimate

(2008$)

Manufacturer

Feedback

Baseline (EF = 0.90) 52 x 25 x22 180 $17

EL 1 (EF = 0.91) 52 x 26 x 23 180 $17

EL 2 (EF = 0.92) 53 x 27 x 24 180 $17

EL 3 (EF = 0.93) 53 x 27 x 24 180 $17

EL 4 (EF = 0.94) 53 x 28 x 25 120 $25

EL 5 (EF = 0.95) 54 x 30 x 27 120 $25

EL 6 (EF = 2.0) 67 x 26 x 23 90 $33

EL 7 (EF = 2.2) 67 x 26 x 23 90 $33

Table 15­2. Estimated Shipping Costs for Gas­Fired Storage­Type Residential Water

Heaters (40 Gallons Rated Storage Volume)

Efficiency Levels

(Energy Factor)

Outer Packaging Dimensions per

Water Heater ­ h x w x l (in.)

Number of Water

Heaters per Trailer

Unit Shipping Cost

DOE’s Estimate Manufacturer

Feedback

DOE’s

Estimate

Manufacturer

Feedback

DOE’s

Estimate

(2008$)

Manufacturer

Feedback

Baseline (EF = 0.59) 54 x 23 x 24 180 $17

EL 1 (EF = 0.62) 54.5 x 24 x 25 120 $25

EL 2 (EF = 0.63) 55 x 25 x 26 120 $25

EL 3 (EF = 0.64) 69.5 x 23.5 x 24.5 60 $50

EL 4 (EF = 0.65) 70 x 24 x 25 60 $50

EL 5 (EF = 0.67) 70.6 x 25 x 26 60 $50

EL 6 (EF = 0.80) 73.3 x 27.5 x 32 60 $50

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Table 15­3. Estimated Shipping Costs for Oil­Fired Storage­Type Residential Water

Heaters (30 Gallons Rated Storage Volume)

Efficiency Levels

(Energy Factor)

Outer Packaging Dimensions per

Water Heater ­ h x w x l (in.)

Number of Water

Heaters per Trailer

Unit Shipping Cost

DOE Estimate Manufacturer

Feedback

DOE

Estimate

Manufacturer

Feedback

DOE

Estimate

(2008$)

Manufacturer

Feedback

Baseline (EF = 0.53) 53.5 x 20.5 x 21.5 180 $17

EL 1 (EF = 054) 54 x 21.5 x 22.5 180 $17

EL 2 (EF = 0.56) 55.5 x 22.5 x 23.5 180 $17

EL 3 (EF = 0.58) 56 x 23.5 x 24.5 120 $25

EL 4 (EF = 0.60) 54.5 x 22.5 x 23.5 180 $17

EL 5 (EF = 0.62) 55 x 23.5 x 24.5 120 $25

EL 6 (EF = 0.66) 53.5x20.5 x 21.5 180 $17

EL 7 (EF = 0.68) 53.5x20.5 x 21.5 180 $17

16	 ALTERNATIVE ENERGY­EFFICIENCY EQUATIONS FOR STORAGE­TYPE

WATER HEATERS

In response to a request from the Air Conditioning, Heating, and Refrigeration Institute (AHRI)

and several manufacturers, DOE is considering revisions to the energy­efficiency equations that

define the existing Federal energy conservation standards for gas­fired and electric storage water

heaters. The energy­efficiency equations allow DOE to expand the analysis on the representative

rated storage volume to the full range of storage volumes covered under the existing Federal

energy conservation standard. In the preliminary analysis, DOE determined that the current

Federal energy­efficiency equations may not represent the current gas­fired and electric storage

water heater markets. Additionally, amended energy conservation standards may eliminate

certain rated storage volume ranges from the market or require manufacturers to use different

technologies for different rated storage volume ranges (e.g., with the current slopes, low volume

models may require heat pump or condensing technologies to meet an amended standard).

For the existing Federal energy conservation standards, the slope and the intercept of each

energy­efficiency equation are constant for each product class. Table 16­1 shows the energyefficiency equations of the existing Federal energy conservation standards for gas­fired and

electric storage water heaters.

Table 16­1. Existing Federal Energy Conservation Standards for Residential Gas­Fired

and Electric Storage Water Heaters

Residential Water Heater Class Minimum Energy Factor (EF)

Gas­Fired Storage­Type 0.67 – (0.0019 × Rated Storage Volume in Gallons)

Electric Storage­Type 0.97 – (0.00132 × Rated Storage Volume in Gallons)

DOE developed alternative energy­efficiency equations by both analyzing market data and
 

12A­25
 

EE-2006-STD-0129 COMMENT 56.10
through testing of water heaters selected from a variety of manufacturers covering a range of 

efficiency levels and rated storage volumes. The alternative energy­efficiency equations DOE 

developed for gas­fired storage water heaters and the gas­fired storage water heaters currently 

available to the market are presented in Figure 16­1. The horizontal axis represents the rated 

storage volume and the vertical axis represents the energy factor. The points correspond to the 

models that DOE identified that are currently available to the market, and the efficiency levels 

are shown as lines spanning the rated volume range, which is 20 to 100 gallons for gas­fired 

storage water heaters. Please note that the max­tech efficiency level (i.e., condensing technology) 

is not shown in this figure. The max­tech efficiency level corresponds to 0.80 EF at 40 gallons. 

DOE proposes a flat line to represent the max­tech efficiency level, where the energy factor 

would be 0.80 EF for the entire 20 to 100 gallon rated volume range.  

Federal 0.70 EL1

EL2

EL3

EL 4

0.65 EL5

0.60

0.55

0.50

0.45

0.40
 

15 35 55 75 95 115
 

Rated Volume (Gallons)

Figure 16­1. Alternative Energy­Efficiency Equations for Gas­Fired Storage Water Heaters 

(max­tech not shown)  Energy Factor

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Table 16­2. Alternative Energy­Efficiency Equations for Gas­Fired Storage Water Heaters
 

Efficiency Level 20 to 100 Gallons

Baseline Energy­Efficiency Equation EF = ­0.00190(VR)+0.670

EL 1 Energy­Efficiency Equation EF = ­0.00150(VR)+0.675

EL 2 Energy­Efficiency Equation EF = ­0.00120(VR)+0.675

EL 3 Energy­Efficiency Equation EF = ­0.00100(VR)+0.680

EL 4 Energy­Efficiency Equation EF = ­0.00090(VR)+0.690

EL 5 Energy­Efficiency Equation EF = ­0.00078(VR)+0.700

EL 6 Energy­Efficiency Equation EF = 0.80

16.1 Please provide any qualitative and quantitative feedback on the alternative energyefficiency equations for gas­fired storage­type water heaters.

Similarly, DOE developed alternative energy­efficiency equations for electric storage water

heaters. The alternative energy­efficiency equations for electric storage water heaters and the

electric storage water heaters currently available to the market are shown in Figure 16­2. The

efficiency levels that DOE is considering span the rated volume range, which is 20 to 120

gallons for electric storage water heaters. Please note that efficiency level 6 and the max­tech

efficiency level (i.e., those efficiency levels utilizing heat pump technology) are not shown in

this figure. Efficiency level 6 corresponds to a 2.0 EF at 50 gallons, and the max­tech efficiency

level corresponds to a 2.2 EF at 50 gallons. Similarly, to the gas­fired storage water heater maxtech efficiency level, DOE proposes a flat line to represent efficiency level 6 and the max­tech

for electric storage water heaters, where the energy factor would be 2.0 and 2.2, respectively, for

the entire 20 to 120 gallon rated volume range.

DOE proposes a two­slope approach for electric storage water heaters. After reviewing market

data and conducting testing of various models, DOE determined that the relationship between

energy factor and rated volume is different for electric storage water heaters with small and large

rated volumes. Based on available data, DOE determined that the relationship changes at 80

gallons, as shown in Figure 16­2.

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Energy Factor

Federal

EL1

0.98 EL2

EL3

0.96 EL 4

EL5

0.94

0.92

0.90

0.88

0.86

0.84

0.82

0.80

15 35 55 75 95 115

Rated Volume (Gallons)

Figure 16­2. Alternative Energy­Efficiency Equations for Electric Storage Water Heaters

Table 16­3. Alternative Energy­Efficiency Equations for Gas­Fired Storage Water Heaters

Efficiency Level 20 to 80 Gallons Over 80 and up to 120

Gallons

Baseline Energy­Efficiency Equation EF = ­0.00190(VR)+0.670

EL 1 Energy­Efficiency Equation EF = ­0.00150(VR)+0.675 EF = ­0.00149(VR)+0.999

EL 2 Energy­Efficiency Equation EF = ­0.00120(VR)+0.675 EF = ­0.00153(VR)+1.013

EL 3 Energy­Efficiency Equation EF = ­0.00100(VR)+0.680 EF = ­0.00155(VR)+1.026

EL 4 Energy­Efficiency Equation EF = ­0.00090(VR)+0.690 EF = ­0.00168(VR)+1.051

EL 5 Energy­Efficiency Equation EF = ­0.00078(VR)+0.700 EF = ­0.00190(VR)+1.088

EL 6 Energy­Efficiency Equation EF = 2.0

EL 7 Energy­Efficiency Equation EF = 2.2

16.2 Please provide any qualitative and quantitative feedback on the alternative energyefficiency equations for electric storage­type water heaters.

16.3 DOE reviewed the 2009 AHRI directory and manufacturers’ literature to determine the

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maximum efficiency levels for various rated storage volumes currently available to the market.

Do the maximum efficiency levels offered on the market identified correspond to the maximum

achievement in energy efficiency that is possible for electric storage water heaters at these rated

volume sizes, using conventional technologies (i.e., insulation improvements)?

Table 16­4. Energy­Efficiency Levels at various Rated Storage Volumes for Electric

Storage Water Heaters

Rated Storage

Volume

Maximum Energy Factor Available

to the Market

Maximum Achievable Energy

Factor (Manufacturer Feedback)

30 Gallons 0.95 EF

40 Gallons 0.95 EF

50 Gallons 0.95 EF

66 Gallons 0.95 EF

80 Gallons 0.95 EF

100 Gallons 0.91 EF

120 Gallons 0.86 EF

16.4 Are the slopes appropriate for each efficiency level?

16.5 Do you agree with a two­slope approach for electric storage water heaters? Should this

change of slope occur at 80 gallons?

DOE did not develop alternative energy­efficiency equations for oil­fired storage water heaters.

Figure 16­3 shows the oil­fired storage water heaters currently available to the market and the

energy­efficiency equations DOE is considering for the rulemaking analysis.

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Energy Factor

0.75 Federal

0.70

0.65

0.60

0.55

0.50

0.45

0 10 20 30 40 50

EL 1

EL 2

EL 3

EL 4

EL 5

EL 6

EL 7

Rated Volume (Gallons)

Figure 16­3 Energy­Efficiency Equations for Oil­Fired Storage Water Heaters

16.6 Is the slope of the current Federal energy­efficiency equation for oil­fired storage water

heaters representative of the current market?

16.7 Should DOE consider an alternative energy­efficiency equation for oil­fired storage water

heaters?

16.8 Currently, the slope for the oil­fired storage water heaters is the same as the slope for the

gas­fired storage water heaters. If DOE is revising the slope for gas­fired storage water heaters as

described above, should DOE consider similarly revising the oil­fired storage water heater slope?

Please provide any quantitative data or qualitative reasons behind your preference.

12A­30
 

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12A.2 INSTANTANEOUS GAS­FIRED WATER HEATERS MANUFACTURER

IMPACT ANALYSIS INTERVIEW GUIDE

April 6, 2009

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As part of the rulemaking process for amended energy conservation standards for instantaneous

gas­fired water heaters, the Department of Energy (DOE) conducts the manufacturer impact

analysis (MIA). In this analysis, DOE uses publicly available information and information

provided by manufacturers during interviews to assess possible impacts due to amended energy

conservation standards on manufacturers. DOE is currently considering 8 efficiency levels (EL)

for instantaneous gas­fired water heaters. DOE analyzed one representative input capacity for

instantaneous gas­fired water heaters of 199,000 Btu/h.

Efficiency Levels Under Consideration for Instantaneous Gas­Fired Water Heaters

Product Class

(representative input

capacity)

Efficiency

Metric

Baseline

Efficiency

Level

EL

1

EL

2

EL

3

EL

4

EL

5

EL

6

EL

7

EL

8

Instantaneous Gas­Fired

Water Heaters

(199 kBtu/h)

Energy

Factor (EF) 0.62 0.69 0.78 0.80 0.82 0.84 0.85 0.92 0.95

1 KEY ISSUES

1.4	 In general, what are the key issues for your company regarding amended energy

conservation standards for instantaneous gas­fired water heaters and this rulemaking?

1.5	 For the issues identified, how significant are they at each listed efficiency level?

1.6	 How can we most effectively incorporate these issues in the MIA?

2 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impacts at the plant or profit center level

directly pertinent to instantaneous gas­fired water heater production. However, the context

within which the plant operates and the details of plant production and costs are not readily

available from the published literature. Therefore, DOE invites you to provide these details

confidentially in your own words to the extent possible and practical. Understanding the

organizational setting around the instantaneous gas­fired water heater industry profit center will

help DOE understand the probable future of the instantaneous gas­fired water heater

manufacturing activity with and without amended energy conservation standards.

2.1 Do you have a parent company, and/or any subsidiaries relevant to the instantaneous gas12A­32
 

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fired water heater industry?
 

2.2 Do you manufacture any products other than instantaneous gas­fired water heaters? If so,

what other products do you manufacture?

2.3 What percentage of your total manufacturing corresponds to instantaneous gas­fired

water heaters?

2.4 Where are your production facilities located, and what type of product is manufactured at

each location? Could you provide figures for your company’s manufacturing at each location by

efficiency?

2.5 At your manufacturing facilities, would potential instantaneous gas­fired water heater

redesigns be difficult to implement? If so, would your company modify the existing facility or

develop a new facility?

2.6 What are your employment levels at each of these facilities?

2.7 What are your product lines, niches, and relative strengths in the instantaneous gas­fired

water heater market?

2.8 What is your company’s approximate market share of the instantaneous gas­fired water

heater industry?

2.9 Would you expect your market share to change once amended energy conservation

standards become effective?

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3 MANUFACTURER PRODUCTION COSTS AND SELLING PRICES

DOE estimated the manufacturer production costs of instantaneous gas­fired water heaters. DOE

defines manufacturer production cost as all direct costs associated with manufacturing a product.

It includes direct labor, direct materials, and overhead (which includes depreciation costs). The

breakdown of manufacturer production cost has implications for the quantitative impacts on

instantaneous gas­fired water heater manufacturers. The per unit production costs are necessary

for DOE to estimate labor expenditures and other cash flow calculations.

Manufacturer selling price is the average cost manufacturers charge their first consumers, but

does not include costs along distribution channels. The manufacturer selling price includes a per

unit research and development cost; selling, general, and administrative expense; shipping cost;

and profit. For the instantaneous gas­fired MIA, the manufacturer markup is a multiplier applied

to manufacturer production cost to cover the per unit research and development, selling, general,

and administrative expense, shipping costs, and profit.

DOE estimated an industry­wide baseline markup of 1.45 for instantaneous gas­fired water

heaters. DOE asks a series of questions about the manufacturer markup associated with

premium products at higher efficiencies in Section 4. As shown in Equation 3­1 below, the

manufacturer production cost multiplied by the manufacturer markup would cover all costs in the

manufacturer selling price of baseline products.

Equation 3­1. Calculation of Manufacturer Selling Price

3.1 Is there a significant difference between the baseline markups DOE calculated and your

company’s baseline markups for instantaneous gas­fired water heaters?

3.2 Table 3­1 provides DOE’s estimates of the manufacturer production costs and

manufacturer selling prices for instantaneous gas­fired water heaters at each efficiency level

being considered. Could you please provide any comments on the estimated values?

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Table 3­1 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Instantaneous Gas­Fired Water Heaters

Efficiency

Level

(Energy

Factor)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(EF = 0.62) $231 $335

EL 1

(EF = 0.69) $242 $350

EL 2

(EF = 0.78) $278 $403

EL 3

(EF = 0.80) $353 $511

EL 4

(EF = 0.82) $371 $538

EL 5

(EF = 0.84) $390** $565**

EL 6

(EF = 0.85) $399** $578**

EL 7

(EF = 0.92) $661 $959

EL 8

(EF = 0.95) TBD TBD

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material
 

prices (i.e., spanning 2003 to 2007, shown in 2008$).
 

** DOE plans to revise the MPC of EL 5 and EL 6 to reflect a design associated with near­condensing
 

operation.
 

3.3 Please compare your manufacturer production cost percentages3 to the estimates

tabulated below. The manufacturer production cost breakdown is used to calculate the total cost

of goods sold (COGS) for the industry. Having an accurate estimate of the production costs for

the industry allows DOE to better examine impacts on profitability and employment due to

amended energy conservation standards. Are the different percentages of each cost

representative of your company or the instantaneous gas­fired residential water heater industry?

Please explain any differences.

3 The manufacturer production cost percentages shown in Table 3­2 are the values that make up COGS. These are

percentages of total COGS.

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Table 3­2 Breakdown of Manufacturer Production Costs for Baseline Instantaneous GasFired Water Heater Residential Water Heaters

Components of

Manufacturer Production

Costs

Estimated Percentage of

Manufacturer Production Cost

Your Actual

(if different from our estimate)

Materials 64.2%

Labor 23.4%

Overhead 9.2%

Depreciation 3.2%

4 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of efficiency levels on industry

profitability. In this section, DOE would like to understand the current markup structure of the

industry and how setting an energy conservation standard would impact your company’s markup

structure and profitability. As discussed in Section 3, the manufacturer markup is a multiplier

applied to manufacturer production cost to cover per unit research and development, selling,

general, and administrative expenses, shipping costs, and profit. The manufacturer production

cost multiplied by the manufacturer markup along with shipping costs would cover all costs

involved in manufacturing the product.

4.1 Do profit levels currently vary by efficiency level? Please explain why or why not.

4.2 Do profit levels vary by input capacity?

4.3 DOE would like to understand how the baseline manufacturer markup changes at higher

efficiency levels. Could you provide your company’s markup for any products that meet the

efficiency levels shown below?

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Table 4­1 Manufacturer Markups for Instantaneous Gas­fired Water Heaters
 

Instantaneous Gas­Fired Water Heaters

(199 kBtu/h Input Capacity)

Efficiency Level

(Energy Factor) Estimated Manufacturer Markup

Baseline Level (EF = 0.62)

EL 1 (EF = 0.69)

EL 2 (EF = 0.78)

EL 3 (EF = 0.80)

EL 4 (EF = 0.82)

EL 5 (EF = 0.84)

EL 6 (EF = 0.85)

EL 7 (EF = 0.92)

EL 8 (EF = 0.95)

4.4 Would you expect changes in your estimated profitability following an amended energy

conservation standard? If so, please explain why.

5 SHIPMENT PROJECTIONS AND MARKET SHARES

An amended energy conservation standard can change overall shipments by altering product

attributes, marketing approaches, product availability, and price. The industry revenue

calculations are based on the shipment projections developed by DOE’s shipments model. The

shipments model includes forecasts for the base case shipments (i.e., total industry shipments

absent amended energy conservation standards) and the standards case shipments (i.e., total

industry shipments with amended energy conservation standards).

5.1 Please compare DOE’s projections of annual industry­wide shipments for instantaneous

gas­fired water heaters with your company’s projections of industry­wide shipments.

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Table 5­1 Annual Industry­Wide Shipment Projections for Instantaneous Gas­fired Water

Heaters Absent Amended Energy Conservation Standards

2007

Total IndustryWide

Shipments

2008

Total IndustryWide

Shipments

Projected Total

Industry­Wide

Shipments in

2015*

Projected Total

Industry­Wide

Shipments in

2025

Projected Total

Industry­Wide

Shipments in

2035

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

0.322 0.533 1.657 1.504 1.697

Manufacturer

Feedback

* 2015 is estimated effective date of amended energy conservation standards for water heaters

**2007 Data was provided by AHRI (March 3, 2008) and 2008 value is modeled (AHRI plans to submit 2008

shipment data)

5.2 Are the 2007 and 2008 industry wide­shipments shown in Table 5­1 consistent with

historic trends? Do you expect total shipment levels to return to their previous levels (i.e., those

levels prior to 2007)?

5.3 DOE’s shipments analysis estimated industry­wide shipments in 2015 would continue to

increase even as amended energy conservation standards become effective due to increased

demand for instantaneous water heaters and voluntary programs. Could you provide any

qualitative information on expected changes in total industry shipments shown in Table 5­1?

6 PRODUCT MIX

Product mix describes the distribution of current shipments by efficiency level. Changes in the

product mix due to amended energy conservation standards can have a large impact on industry

revenues. Having an accurate estimate of the current product mix allows DOE to better estimate

how revenues might change due to amended energy conservation standards.

6.1 Does your company offer multiple product lines at different efficiency levels? Could you

provide a description of your company’s product lines and their respective efficiency levels?

6.2 Table 6­1 shows DOE’s estimate for the current mix of shipments by efficiency today

and in 2015, the anticipated effective date of amended energy conservation standards. Could you

provide feedback on DOE’s estimates based on your knowledge of the industry?

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Table 6­1 Percentage of Industry­Wide Shipments by Efficiency Level for Instantaneous

Gas­fired Water Heaters Today and in 2015

Percentage of Total

Shipments at each

Efficiency

Baseline

Level

(EF =

0.62)

EL 1

(EF =

0.69)

EL 2

( EF =

0.78)

EL 3

(EF =

0.80)

EL 4

(EF =

0.82)

EL 5

(EF =

0.84)

EL 6

(EF =

0.85)

EL 7

(EF =

0.92)

EL 8

(EF =

0.95)

DOE’s Estimate

(2008) 0.0% 0.0% 0.6% 13.1% 57.0% 14.6% 11.7% 2.9% 0.0%

Manufacturer

Feedback

DOE’s Estimate

(2015) 0.0% 0.0% 0.6% 12.8% 55.8% 14.3% 11.4% 4.0% 1.0%

Manufacturer

Feedback

6.3 Is the projected distribution of efficiencies representative of the instantaneous gas­fired

water heater shipments? Do you expect the product mix to change over time? If so, please

explain why.

6.4 An amended energy conservation standard affects the product mix by eliminating the sale

of products below the minimum efficiency level. DOE assumes that all products that fall below

the standard would roll­up to the efficiency level set by an amended energy conservation

standard. DOE assumes the distribution of efficiencies above the efficiency level set by the

energy conservation standard will not change. In other words, those customers already

purchasing more­efficient products will continue to do so irrespective of amended energy

conservation standards. How do you think amended energy conservation standards will impact

the sales of more efficient products? For example, would customers continue to buy products

that exceed the energy conservation standard level? Would your response change at higher

efficiency levels?

7 FINANCIAL PARAMETERS

Navigant Consulting, Inc. (NCI) has developed a “strawman” model of the instantaneous gasfired water heaters industry financial performance called the Government Regulatory Impact

Model (GRIM) using publicly available data. This section attempts to understand how your

company’s financial situation differs from our industry aggregate picture.

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7.1 Please compare your financial parameters to the GRIM parameters tabulated below.

Table 7­1 Financial Parameters for Instantaneous Gas­Fired Water Heaters

Manufacturers

GRIM Input Definition Industry

Estimated

Value

Your Actual (if

significantly

different from our

estimate)

Income Tax Rate Corporate effective income tax

paid (percentage of earnings

before taxes, EBT)

27.5%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

8.5%

Working Capital Current assets less current

liabilities (percentage of

revenues)

11.4%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

20.9%

R&D Research and development

expenses (percentage of

revenues)

1.5%

Depreciation Amortization of fixed assets

(percentage of revenues) 2.2%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

2.2%

Cost of Goods Sold Includes material, labor,

overhead, and depreciation

(percentage of revenues)

71.3%

7.2 How would you expect an amended energy conservation standard to impact any of the

financial parameters for the industry?

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8 CONVERSION COSTS

Amended energy conservation standards may cause your company to incur capital and product

conversion costs to redesign existing products and make changes to existing production lines to

be compliant with the amended energy conservation standard. Capital conversion costs are onetime investments in plant, property, and equipment (PPE) necessitated by an amended energy

conservation standard. These may be incremental changes to existing PPE or the replacement of

existing PPE. Replacing existing PPE could strand existing assets before the end of their useful

lives. In addition to capital conversion costs, product conversion costs are costs related to

research, product development, testing, marketing and other costs for redesigning products

necessitated by an amended energy conservation standard.

8.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels DOE is considering? Refer to the tables below to provide your company’s estimates.

Please provide additional qualitative information to help DOE understand the types and nature of

your investments.

Table 8­1 Instantaneous Gas­Fired Water Heaters Conversion Costs

Efficiency

Level

Instantaneous Gas­Fired Water Heaters

(Energy Factor) Capital Conversion Costs

(2009$)

Product Conversion Costs

(2009$)

Stranded Assets

(2009$)

Baseline Level (EF = 0.62)

EL 1 (EF = 0.69)

EL 2 (EF = 0.78)

EL 3 (EF = 0.80)

EL 4 (EF = 0.82)

EL 5 (EF = 0.84)

EL 6 (EF = 0.85)

EL 7 (EF = 0.92)

EL 8 (EF = 0.95)

9 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards, voluntary standards, and/or other regulatory actions affecting the

same product or industry.

9.1 Are there other recent or impending regulations that instantaneous gas­fired water heater

manufacturers face (from DOE or otherwise)? If so, could you identify the regulation and the

corresponding possible effective dates for those regulations? Below is a list of regulations and

estimated effective dates that could possibly affect manufacturers of instantaneous gas­fired

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water heater. Please provide any comments on the listed regulations in addition to other

regulations.

Table 9­1 Other Regulations Identified by DOE

Regulation Estimated or Actual Effective

Date(s) Comments

DOE’s Amended Energy Conservation

Standards for Other Products

International Energy­Efficiency Standards

State Emission Requirements and Other

State Regulations

South Coast Air Quality Management

District (SCAQMD) Ultra­Low NOx

Requirements

Uniform Plumbing, Building, and Safety

Codes

9.2 What level of expense are you expecting to incur as a result of these regulations?

9.3 Under what circumstances would you be able to coordinate any expenditures related to

these other regulations with an amended energy conservation standard, thereby lessening the

cumulative burden?

10 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to explore

current trends in instantaneous gas­fired water heater production employment and solicit

manufacturer views on how domestic employment patterns might be affected by amended energy

conservation standards.

10.1 Would your domestic employment levels be expected to change significantly under

amended energy conservation standards? If so, please explain how they would change if higher

efficiency levels are required.

10.2 Would the workforce skills necessary under amended energy conservation standards

require extensive retraining or replacement of employees at your manufacturing facilities?

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10.3 Would amended energy conservation standards require extensive retraining of your

service/field technicians? If so, could you expand on how your service infrastructure would be

impacted in general as a result of amended energy conservation standards?

11 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from amended energy conservation

standards, may impact sourcing decisions.

11.1 What percentage of your company’s instantaneous gas­fired water heater sales is

domestic? Absent amended energy conservation standards, are production facilities being

relocated to foreign countries? Would amended energy conservation standards impact your

domestic vs. foreign manufacturing decision?

11.2 If applicable, to what foreign countries or regions do you export your products? What

percentage of sales can be attributed to each?

11.3 Would an amended energy conservation standard be expected to affect your export sales?

What would the resulting impact be, if any, on your manufacturing operations and profitability?

11.4 Are your foreign exports affected by amended energy conservation standards in other

countries?

11.5 What percentage of the U.S. market for instantaneous gas­fired water heater has been

captured by foreign competition? Would amended energy conservation standards have an

impact on foreign competition?

11.6 What is your outlook for the future operation of your company and the instantaneous gasfired water heater industry with regard to exports?

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12 CONSOLIDATION

Amended energy conservation standards can alter the competitive dynamics of the market. This

can include prompting companies to enter or exit the market, or to merge. DOE and the

Department of Justice are both interested in any potential reduction in competition that would

result from an amended energy conservation standard.

12.1 Please comment on industry consolidation and related trends over the last 5 years.

12.2 In the absence of amended energy conservation standards, do you expect any further

industry consolidation? Please describe your expectations.

12.3 How would amended energy conservation standards affect your ability to compete?

13 IMPACTS ON SMALL BUSINESS

13.1 The Small Business Association (SBA) denotes a small business in the instantaneous gasfired water heater water heater industry as having less than 500 employees2

. By this definition,

is your company considered a small business?

13.2 Are there any reasons that a small business might be at a disadvantage relative to a larger

business under amended energy conservation standards? Please consider such factors as

technical expertise, access to capital, bulk purchasing power for materials/components,

engineering resources, and any other relevant issues.

13.3 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of amended energy conservation standards would have a severe impact?

2 DOE uses the small business size standards published on August 22, 2008, as amended, by the Small Business

Administration (SBA) to determine whether a company is a small business. To be categorized as a small business, a

water heater manufacturer and its affiliates may employ a maximum of 500 employees. The 500 employee

threshold includes all employees in a business’s parent company and any other subsidiaries.

12A­44
 

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If so, would manufacturers of these products have different incremental impacts from

implemented amended energy conservation standards than from the rest of the industry?

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EE-2006-STD-0129 COMMENT 56.10
       

     

12A.3 DIRECT HEATING EQUIPMENT MANUFACTURER IMPACT ANALYSIS

GUIDE

April 6, 2009

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As part of the rulemaking process for amended energy conservation standards for direct heating

equipment, the Department of Energy (DOE) conducts the manufacturer impact analysis (MIA).

In this analysis, DOE uses publicly available information and information provided by

manufacturers during interviews to assess possible impacts on manufacturers due to amended

energy conservation standards. DOE is currently considering 4 efficiency levels (ELs) for gas

wall fan­type units and gas wall gravity­type units, 1 EL for gas floor­type units, and 5 ELs for

gas room­type units . In responding to this questionnaire, please refer to the efficiency levels in

the table below. DOE analyzed one representative input capacity range for each product class,

including over 42,000 Btu/H for gas fan­type units, 27,000 – 46,000 Btu/H for gas wall gravitytype units, over 37,000 Btu/H for gas floor­type units, and 27,000 – 46,000 for gas room­type

units.

Efficiency Levels under Consideration for Direct Heating Equipment

Product Class (Representative

Input Capacity)

Efficiency

Metric

Baseline

Efficiency

Level

EL 1 EL 2 EL 3 EL 4 EL 5

Gas Wall Fan­Type Units with

Input Capacity Over 42,000

Btu/h

Annual Fuel

Utilization

Efficiency

(AFUE)

74 75 76 77 80

Gas Wall Gravity­Type Units

with Input Capacity Between

27,000 Btu/h and 46,000 Btu/h

Input Capacity

Annual Fuel

Utilization

Efficiency

(AFUE)

64 66 68 71 72

Gas Floor­Type Units with

Input Capacity Over 37,000

Btu/h

Annual Fuel

Utilization

Efficiency

(AFUE)

57 58

Gas Room­Type Units with

Input Capacity Between 27,000

Btu/h and 46,000 Btu/h

Annual Fuel

Utilization

Efficiency

(AFUE)

64 65 66 67 68 83

14 KEY ISSUES

1.7	 In general, what are the key issues for your company regarding amended energy

conservation standards for direct heating equipment and this rulemaking?

1.8 For the issues identified, how significant are they at each listed efficiency level?

1.9 How can we most effectively incorporate these issues in the MIA?

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15 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impacts at the plant or profit center level

directly pertinent to direct heating equipment production. However, the context within which the

plant operates and the details of plant production and costs are not readily available from the

published literature. Therefore, DOE invites you to provide these details confidentially in your

own words to the extent possible and practical. Understanding the organizational setting around

the direct heating equipment industry profit center will help DOE understand the probable future

of the manufacturing activity with and without amended energy conservation standards.

15.1 Do you have a parent company, and/or any subsidiaries relevant to the direct heating

equipment industry?

15.2 Do you manufacture any products other than direct heating equipment? If so, what other

products do you manufacture?

15.3 What percentage of your total manufacturing corresponds to gas wall fan­type units, gas

wall gravity­type units, gas floor­type units, and gas room­type units?

15.4 Where are your production facilities located, and what type of product is manufactured at

each location? Could you provide figures for your company’s manufacturing at each location by

product type (i.e., gas wall fan­type units, gas wall gravity­type units, gas floor­type units, and

gas room­type units), input capacity, and efficiency?

15.5 At your manufacturing facilities, would potential direct heating equipment redesigns be

difficult to implement? If so, would your company modify the existing facility or develop a new

facility?

15.6 What are your employment levels at each of these facilities?

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15.7 What are your product lines, niches, and relative strengths in the direct heating equipment

market?

15.8 What is your company’s approximate market share for gas wall fan­type units, gas wall

gravity­type units, gas floor­type units, and gas room­type units?

15.9 Would you expect your market share to change once amended energy conservation

standards become effective?

16 MANUFACTURER PRODUCTION COSTS AND SELLING PRICES

DOE estimated the manufacturer production costs of four­types of direct heating equipment.

DOE defines manufacturer production cost as all direct costs associated with manufacturing a

product. It includes direct labor, direct materials, and overhead (which includes depreciation

costs). The breakdown of manufacturer production cost has implications for the quantitative

impacts on direct heating equipment manufacturers. The per unit production costs are necessary

for DOE to estimate labor expenditures and other cash flow calculations.

Manufacturer selling price is the average cost manufacturers charge their first consumers, but

does not include costs along distribution channels. The manufacturer selling price includes a per

unit research and development cost; selling, general, and administrative expense; shipping cost;

and profit. The manufacturer markup is a multiplier applied to manufacturer production cost to

cover the per unit research and development, selling, general, and administrative expense,

shipping, and profit.

For its preliminary analysis, DOE estimated an industry­wide markup of 1.38 for direct heating

equipment at baseline efficiency levels. DOE asks a series of questions about markups at higher

efficiencies in section 4. As shown in Equation 3­1 below, the manufacturer production cost

multiplied by the manufacturer markup would cover all costs in the manufacturer selling price of

baseline products.

Equation 16­1. Calculation of Manufacturer Selling Price

16.1 Is there a significant difference between the 1.38 baseline markup DOE calculated and

your company’s baseline markup?

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16.2 Table 3­1 through Table 16­4 provide DOE’s estimates of the manufacturer production

costs and manufacturer selling prices for direct heating equipment at the representative input

capacity and each efficiency level being considered. Could you please provide any comments on

the estimated values?

Table 16­1 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Gas Wall Fan­Type Units with Input Capacity Over 42,000 Btu/h

Efficiency Level

(Annual Fuel

Utilization

Efficiency)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(AFUE = 74) $358 $494

EL 1

(AFUE = 75) $374 $516

EL 2

(AFUE = 76) $388 $535

EL 3

(AFUE = 77) $408 $563

EL 4

(AFUE = 80) $466 $643

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

Table 16­2 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Gas Wall Gravity­Type Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h

Efficiency

Level

(Annual Fuel

Utilization

Efficiency)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(AFUE = 64) $199 $275

EL 1

(AFUE = 66) $226 $312

EL 2

(AFUE = 68) $250 $345

EL 3

(AFUE = 71) $289 $399

EL 4

(AFUE = 72) $299 $413

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

12A­50

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Table 16­3 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Gas Floor­Type Units with Input Capacity Over 37,000 Btu/h

Efficiency DOE’s DOE’s Manufacturer

Level Manufacturer Manufacturer Comments or

(Annual Fuel Production Cost Selling Price Revised Estimates

Utilization Estimates* Estimates

Efficiency) (2008$) (2008$)

Baseline Level

(AFUE = 57) $353 $487

EL 1

(AFUE = 58) $377 $520

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

Table 16­4 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Gas Room­Type Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h

Efficiency

Level

(Annual Fuel

Utilization

Efficiency)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(AFUE = 64) $226 $312

EL 1

(AFUE = 65) $241 $333

EL 2

(AFUE = 66) $257 $355

EL 3

(AFUE = 67) $269 $371

EL 4

(AFUE = 68) $279 $358

EL 5

(AFUE = 83) $382 $527

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

16.3 Please compare your manufacturer production cost percentages4 to the estimates

tabulated below. The manufacturer production cost breakdown is used to calculate the total cost

of goods sold (COGS) for the industry. Having an accurate estimate of the production costs for

the industry allows DOE to better examine impacts on profitability and employment due to

amended energy conservation standards. Are the different percentages of each cost representative

of your company or the direct heating equipment industry? Please explain any differences.

4 The manufacture production cost percentages shown in Table 16­5 through Table 16­8 are the values that make up

COGS. These are percentages of total COGS.

12A­51
 

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Table 16­5 Breakdown of Manufacturer Production Costs for Baseline Gas Wall Fan­Type

Units with Input Capacity Over 42,000 Btu/h

Components of

Manufacturer Production

Cost

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 48.8%

Labor 24.1%

Overhead 11.4%

Depreciation 15.6%

Table 16­6 Breakdown of Manufacturer Production Costs for Baseline Gas Wall GravityType Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h

Components of

Manufacturer Production

Cost

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 52.1%

Labor 17.3%

Overhead 12.0%

Depreciation 18.5%

Table 16­7 Breakdown of Manufacturer Production Costs for Baseline Gas Floor­Type

Units with Input Capacity Over 37,000 Btu/h

Components of

Manufacturer Production

Cost

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 48.1%

Labor 28.9%

Overhead 9.9%

Depreciation 13.0%

Table 16­8 Breakdown of Manufacturer Production Costs for Baseline Gas Room­Type

Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h

Components of

Manufacturer Production

Cost

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 48.7%

Labor 19.3%

Overhead 13.1%

Depreciation 18.8%

12A­52
 

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17 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of amended energy

conservation standards on industry profitability. In this section, DOE would like to understand

the current markup structure of the industry and how setting an amended energy conservation

standard would impact your company’s markup structure and profitability. As discussed in

Section 3, the manufacturer markup is a multiplier applied to manufacturer production cost to

cover per unit research and development, selling, general, and administrative expenses, shipping

costs, and profit.

17.1 Do profit levels currently vary by product class? Do profit levels vary by efficiency

level? Please explain why or why not.

17.2 Within each product class, do profit levels vary by input capacity?

17.3 DOE would like to understand how the baseline manufacturer markup changes at higher

efficiency levels. Could you provide your company’s markup for any products that meet the

efficiency levels shown below?

Table 17­1 Manufacturer Markups for Gas Wall Fan­Type Units with Input Capacity Over

42,000 Btu/h

Gas Wall Fan­Type Units with Input

Capacity Over 42,000 Btu/h

Efficiency Level

(Annual Fuel Utilization Efficiency) Estimated Manufacturer Markup

Baseline (AFUE = 74)

EL 1 (AFUE = 75)

EL 2 (AFUE = 76)

EL 3 (AFUE = 77)

EL 4 (AFUE = 80)

12A­53
 

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Table 17­2 Manufacturer Markups for Gas Wall Gravity­Type Units with Input Capacity

Between 27,000 Btu/h and 46,000 Btu/h

Gas Wall Gravity­Type Units with Input

Capacity Between 27,000 Btu/h and

46,000 Btu/h

Efficiency Level

(Annual Fuel Utilization Efficiency) Estimated Manufacturer Markup

Baseline (AFUE = 64)

EL 1 (AFUE = 66)

EL 2 (AFUE = 68)

EL 3 (AFUE = 71)

EL 4 (AFUE = 72)

Table 17­3 Manufacturer Markups for Gas Floor­Type Units with Input Capacity Over

37,000 Btu/h

Gas Floor­Type Units with Input Capacity

Over 37,000 Btu/h)

Efficiency Level

(Annual Fuel Utilization

Efficiency)

Estimated Manufacturer Markup

Baseline (AFUE = 57)

EL 1 (AFUE = 58)

Table 17­4 Manufacturer Markups for Gas Room­Type Units with Input Capacity

Between 27,000 Btu/h and 46,000 Btu/h

Gas Room­Type Units with Input Capacity Between 27,000

Btu/h and 46,000 Btu/h

Efficiency Level

(Annual Fuel Utilization Efficiency) Estimated Manufacturer Markup

Baseline (AFUE = 64)

EL 1 (AFUE = 65)

EL 2 (AFUE = 66)

EL 3 (AFUE = 67)

EL 4 (AFUE = 68)

EL 5 (AFUE = 83)

17.4 Would you expect changes in your estimated profitability following an amended energy

conservation standard? If so, please explain why.

18 SHIPMENT PROJECTIONS AND MARKET SHARES

An amended energy conservation standard can change overall shipments by altering product

attributes, marketing approaches, product availability, and price. The industry revenue

calculations are based on the shipment projections developed by DOE’s shipments model. The

shipments model includes forecasts for the base case shipments (i.e., total industry shipments

12A­54
 

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absent amended energy conservation standards) and the standards case shipments (i.e., total

industry shipments with amended energy conservation standards).

18.1 Please compare DOE’s projections of annual industry­wide shipments for direct heating

equipment with your company’s projections of industry­wide shipments.

Table 18­1 Annual Industry­Wide Shipment Projections for Gas Wall Fan­Type Units with

Input Capacity Over 42,000 Btu/h Absent Amended Energy Conservation Standards

2007

Total

IndustryWide

Shipments

2008

Total

IndustryWide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate for

Total Industry

Shipments

(Millions)**

0.037 0.040 0.050 0.071 0.092

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for direct heating equipment.

** For gas wall fan­type units, 2007 and 2008 values are based on data provided by AHRI (March and May 2008)

Table 18­2 Annual Industry­Wide Shipment Projections for Gas Wall Gravity­Type Units

with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h Absent Amended Energy

Conservation Standards

2007

Total

Industry­Wide

Shipments

2008

Total

Industry­Wide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

0.108 0.106 0.096 0.074 0.053

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for direct heating equipment.

** For gas gravity fan­type units, 2007 and 2008 values are based on data provided by AHRI (March and May

2008).

12A­55
 

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Table 18­3 Annual Industry­Wide Shipment Projections for Gas Floor­Type Units with

Input Capacity Over 37,000 Btu/h Absent Amended Energy Conservation Standards

2007

Total

Industry­Wide

Shipments

2008

Total

Industry­Wide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

0.003 0.003 0.002 0.001 0.000

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for direct heating equipment.

** For gas floor­type units 2007 Data provided by AHRI (March 3, 2008). 2008 values are based on DOE

projections.

Table 18­4 Annual Industry­Wide Shipment Projections for Gas Room­Type Units with

Input Capacity Between 27,000 Btu/h and 46,000 Btu/h Absent Amended Energy

Conservation Standards

2007

Total

Industry­Wide

Shipments

2008

Total

Industry­Wide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate

for Total Industry

Shipments

(Millions)**

0.021 0.021 0.021 0.021 0.021

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for direct heating equipment.

** For gas room­type units 2007 and 2008 values are based on data provided by AHRI (March and May 2008)

18.2 Are the 2007 and 2008 industry wide­shipments shown in Table 5­1 through Table 18­4

consistent with historic trends? Do you expect total shipment levels to return to their previous

levels (i.e., those levels prior to 2007)?

18.3 DOE’s shipments analysis estimates industry­wide shipments in 2015 would remain at

their current levels irrespective of higher standard levels (i.e., industry­wide shipments remain

constant regardless of the standard level set by DOE). Could you provide any qualitative

information on expected changes in total industry shipments shown in Table 5­1 through Table

18­4?

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19 PRODUCT MIX

Product mix describes the distribution of current shipments by efficiency level. Changes in the

product mix due to amended energy conservation standards can have a large impact on industry

revenues. Having an accurate estimate of the current product mix allows DOE to better estimate

how revenues might change due to amended energy conservation standards.

19.1 Does your company offer multiple product lines at different efficiency levels? Could you

provide a description of your company’s product lines and their respective efficiency levels?

19.2 Table 6­1 through Table 19­4 show DOE’s estimate for the current mix of shipments by

efficiency today and in 2013, the anticipated effective date of amended energy conservation

standards. Could you provide feedback on DOE’s estimates based on your knowledge of the

industry?

Table 19­1 Percentage of Industry­Wide Shipments by Efficiency Level for Gas Wall FanType Units with Input Capacity Over 42,000 Btu/h Today and in 2013

Percentage of Total

Shipments at Each

Efficiency

Baseline

(AFUE = 74)

EL 1

(AFUE = 75)

El 2

(AFUE = 76)

EL 3

(AFUE = 77)

EL 4

(AFUE = 80)

DOE’s Estimate (2008) 48% 12% 19% 19% 2%

Manufacturer Feedback

DOE’s Estimate (2013) 48% 12% 19% 19% 2%

Manufacturer Feedback

12A­57
 

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Table 19­2 Percentage of Industry­Wide Shipments by Efficiency Level for Gas Wall

Gravity­Type Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h Today

and in 2013

Percentage of

Total Shipments

at Each

Efficiency

Baseline

(AFUE = 64)

EL 1

(AFUE = 66)

EL 2

(AFUE = 68)

EL 3

(AFUE = 71)

EL 4

(AFUE = 72)

DOE’s Estimate

(2008) 45% 20% 35% 0% 0%

Manufacturer

Feedback

DOE’s Estimate

(2013) 45% 20% 35% 0% 0%

Manufacturer

Feedback

Table 19­3 Percentage of Industry­Wide Shipments by Efficiency Level for Gas Floor­Type

Units with Input Capacity Over 37,000 Btu/h Today and in 2013

Percentage of Total

Shipments at each

Efficiency

Baseline

(AFUE = 57)

EL 1

(AFUE = 58)

DOE’s Estimate (2008) 22% 78%

Manufacturer Feedback

DOE’s Estimate (2013) 22% 78%

Manufacturer Feedback

Table 19­4 Percentage of Industry­Wide Shipments by Efficiency Level for Gas RoomType Units with Input Capacity Between 27,000 Btu/h and 46,000 Btu/h Absent Amended

Energy Conservation Standards Today and in 2013

Percentage of

Total Shipments

at Each

Efficiency

Baseline

(AFUE =

64)

EL 1

(AFUE =

65)

EL 2

(AFUE =

66)

EL 3

(AFUE =

67)

EL 4

(AFUE =

68)

EL 5

(AFUE =

83)

DOE’s Estimate

(2008) 20% 40% 40% 0% 0% 0%

Manufacturer

Feedback

DOE’s Estimate

(2013) 20% 40% 40% 0% 0% 0%

Manufacturer

Feedback

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19.3 Are the projected distributions of efficiencies representative of direct heating equipment

shipments by product class? Do you expect the product mix to change over time? If so, please

explain why.

19.4 An amended energy conservation standard affects the product mix by eliminating the sale

of products below the minimum efficiency level. DOE assumes that all products that fall below

the standard would roll­up to the efficiency level set by an amended energy conservation

standard. DOE assumes the distribution of efficiencies above the efficiency level set by the

energy conservation standard will not change. In other words, those customers already

purchasing more­efficient products will continue to do so irrespective of amended energy

conservation standards. How do you think amended energy conservation standards will impact

the sales of more efficient products? For example, would customers continue to buy products

that exceed the energy conservation standard level? Would your response change at higher

efficiency levels?

20 FINANCIAL PARAMETERS

Navigant Consulting, Inc. (NCI) has developed a “strawman” model of the direct heating

equipment industry financial performance called the Government Regulatory Impact Model

(GRIM) using publicly available data. This section attempts to understand how your company’s

financial situation differs from our industry aggregate picture.

12A­59
 

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20.1 Please compare your financial parameters to the GRIM parameters tabulated below.

Table 20­1 Financial Parameters for Direct Heating Equipment Manufacturers

GRIM Input Definition Industry

Estimated

Value

Your Actual (If

Significantly

Different from

DOE’s Estimate)

Income Tax Rate Corporate effective income tax

paid (percentage of earnings

before taxes, EBT)

27.5%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

8.5%

Working Capital Current assets less current

liabilities (percentage of

revenues)

11.4%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

20.9%

R&D Research and development

expenses (percentage of

revenues)

1.5%

Depreciation Amortization of fixed assets

(percentage of revenues) 2.2%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

2.2%

Cost of Goods Sold Includes material, labor,

overhead, and depreciation

(percentage of revenues)

71.3%

20.2 How would you expect an amended energy conservation standard to impact any of the

financial parameters for the industry?

21 CONVERSION COSTS

Amended energy conservation standards may cause your company to incur capital and product

conversion costs to redesign existing products and make changes to existing production lines to

be compliant with the amended energy conservation standard. Capital conversion costs are onetime investments in plant, property, and equipment (PPE) necessitated by an amended energy

conservation standard. These may be incremental changes to existing PPE or the replacement of

existing PPE. Replacing existing PPE could strand existing assets before the end of their useful

lives. In addition to capital conversion costs, product conversion costs are costs related research,

12A­60
 

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product development, testing, marketing and other costs for redesigning products necessitated by

an amended energy conservation standard.

21.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels DOE is considering? Refer to the tables below to provide your company’s estimates.

Please provide additional qualitative information to help DOE understand the types and nature of

your investments.

Table 21­1 Gas Wall Fan­Type Units Conversion Costs

Efficiency Level Gas Wall Fan­Type Units

(Annual Fuel

Utilization

Efficiency)

Capital

Conversion

Costs

(2009$)

Product

Conversion

Costs

(2009$)

Stranded

Assets

(2009$)

Baseline

(AFUE = 74)

EL 1

(AFUE = 75)

EL 2

(AFUE = 76)

EL 3

(AFUE = 77)

EL 4

(AFUE = 80)

Table 21­2 Gas Wall Gravity­Type Units Conversion Costs
 

Efficiency Level Gas Wall Gravity­Type Units

(Annual Fuel

Utilization

Efficiency)

Capital

Conversion

Costs

(2009$)

Product

Conversion

Costs

(2009$)

Stranded

Assets

(2009$)

Baseline

(AFUE = 64)

EL 1

(AFUE = 66)

EL 2

(AFUE = 68)

EL 3

(AFUE = 71)

EL 4

(AFUE = 72)

12A­61
 

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Table 21­3 Gas Floor­Type Units Conversion Costs
 

Efficiency Level Gas Floor­Type Units

(Annual Fuel

Utilization

Efficiency)

Capital

Conversion

Costs

(2009$)

Product

Conversion

Costs

(2009$)

Stranded

Assets

(2009$)

Baseline

(AFUE = 57)

EL 1

(AFUE = 58)

Table 21­4 Gas Room­Type Units with Input Capacity Conversion Costs
 

Efficiency Level Gas Room­Type Units

(Annual Fuel

Utilization

Efficiency)

Capital

Conversion

Costs (2009$)

Product

Conversion

Costs

(2009$)

Stranded

Assets

(2009$)

Baseline

(AFUE = 64)

EL 1

(AFUE = 65)

EL 2

(AFUE = 66)

EL 3

(AFUE = 67)

EL 4

(AFUE = 68)

EL 5

(AFUE = 83)

22 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards, voluntary standards, and/or other regulatory actions affecting the

same product or industry.

22.1 Are there other recent or impending regulations that direct heating equipment

manufacturers face (from DOE or otherwise)? If so, could you identify the regulation and the

corresponding possible effective dates for those regulations? Below is a list of regulations that

could possibly affect manufacturers of direct heating equipment. Please provide any comments

on the listed regulations in addition to other regulations.

12A­62
 

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Table 22­1 Other Regulations Identified by DOE
 

Regulation Possible Effective Date(s) Comments

DOE’s Amended Energy Conservation

Standards for Other Products

International Energy Efficiency Standards

State Emission Requirements and Other

State Regulations

Uniform Plumbing, Building, and Safety

Codes

22.2 What level of expense are you expecting to incur as a result of these regulations?

22.3 Under what circumstances would you be able to coordinate any expenditures related to

these other regulations with an amended energy conservation standard, thereby lessening the

cumulative burden?

23 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to explore

current trends in direct heating equipment production employment and solicit manufacturer

views on how domestic employment patterns might be affected by amended energy conservation

standards.

23.1 Would your domestic employment levels be expected to change significantly under

amended energy conservation standards? If so, please explain how they would change if higher

efficiency levels are required.

23.2 Would the workforce skills necessary under amended energy conservation standards

require extensive retraining or replacement of employees at your manufacturing facilities?

23.3 Would amended energy conservation standards require extensive retraining of your

service/field technicians? If so, could you expand on how your service infrastructure would be

impacted in general as a result of amended energy conservation standards?

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24 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from amended energy conservation

standards, may impact sourcing decisions.

24.1 What percentage of your company’s direct heating equipment sales is domestic? Absent

amended energy conservation standards, are production facilities being relocated to foreign

countries? Would amended energy conservation standards impact your domestic vs. foreign

manufacturing decision?

24.2 If applicable, to what foreign countries or regions do you export your products? What

percentage of sales can be attributed to each?

24.3 Would an amended energy conservation standard be expected to affect your export sales?

What would the resulting impact be, if any, on your manufacturing operations and profitability?

24.4 Are your foreign exports affected by amended energy conservation standards in other

countries?

24.5 What percentage of the U.S. market for direct heating equipment is imported? Would

amended energy conservation standards have an impact on foreign competition?

24.6 What is your outlook for direct heating equipment exports?

25 CONSOLIDATION

Amended energy conservation standards can alter the competitive dynamics of the market. This

can include prompting companies to enter or exit the market, or to merge. DOE and the

Department of Justice are both interested in any potential reduction in competition that would

result from an amended energy conservation standard.

12A­64
 

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25.1 Please comment on industry consolidation and related trends over the last 5 years.

25.2 In the absence of amended energy conservation standards, do you expect any further

industry consolidation? Please describe your expectations.

25.3 How would amended energy conservation standards affect your ability to compete?

26 IMPACTS ON SMALL BUSINESS

26.1 The Small Business Association (SBA) denotes a small business in the direct heating

equipment industry as having less than 500 employees5

. By this definition, is your company

considered a small business?

26.2 Are there any reasons that a small business might be at a disadvantage relative to a larger

business under amended energy conservation standards? Please consider such factors as

technical expertise, access to capital, bulk purchasing power for materials/components,

engineering resources, and any other relevant issues.

26.3 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of amended energy conservation standards would have a severe impact?

If so, would manufacturers of these products have different incremental impacts from

implemented amended energy conservation standards than from the rest of the industry?

5 DOE uses the small business size standards published on August 22, 2008, as amended, by the Small Business

Administration (SBA) to determine whether a company is a small business. To be categorized as a small business, a

direct heating equipment manufacturer and its affiliates may employ a maximum of 500 employees. The 500

employee threshold includes all employees in a business’s parent company and any other subsidiaries.

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12A.4 RESIDENTIAL HEARTH PRODUCTS MANUFACTURER IMPACT ANALYSIS

GUIDE

April 6, 2009

12A­66
 

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As part of the rulemaking process for amended energy conservation standards for residential

hearth products, the Department of Energy (DOE) conducts the manufacturer impact analysis

(MIA). In this analysis, DOE uses publicly available information and information provided by

manufacturers during interviews to assess possible impacts on manufacturers due to amended

energy conservation standards. DOE is currently considering 8 efficiency levels (EL) for hearth

products. In responding to this questionnaire, please refer to the efficiency levels in the table

below. DOE analyzed one representative rated input capacity range for residential hearth

products and extrapolated the results to other rated input capacity ranges.

Efficiency Levels under Consideration for Residential Hearth Products

Product Class

(Representative

Input Capacity

Range)

Efficiency

Metric

Baseline

Efficiency

Level

EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 EL 8

Residential

Hearth Products

(Between

27,000 and

46,000 Btu/h)

Annual

Fuel

Utilization

Efficiency

(AFUE)

64% 65% 66% 67% 68% 70% 72% 77% 93%

1 KEY ISSUES

1.10	 In general, what are the key issues for your company regarding amended energy

conservation standards for residential hearth products and this rulemaking?

1.11 For the issues identified, how significant are they at each listed efficiency level?

1.12 How can we most effectively incorporate these issues in the MIA?

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2 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impacts at the plant or profit center level

directly pertinent to residential hearth products production. However, the context within which

the plant operates and the details of plant production and costs are not readily available from the

published literature. Therefore, DOE invites you to provide these details confidentially in your

own words to the extent possible and practical. Understanding the organizational setting around

the residential hearth products industry profit center will help DOE understand the probable

future of the manufacturing activity with and without amended energy conservation standards.

2.1 Do you have a parent company, and/or any subsidiaries relevant to the residential

products industry?

2.2 Do you manufacture any products other than residential hearth products? If so, what

other products do you manufacture?

2.3 What percentage of your total manufacturing corresponds to residential hearth products?

2.4 Where are your production facilities located, and what type of product is manufactured at

each location? Could you provide figures for your company’s manufacturing at each location by

product type (residential hearth products or other) and efficiency?

2.5 At your manufacturing facilities, would potential residential hearth product redesigns be

difficult to implement? If so, would your company modify the existing facility or develop a new

facility?

2.6 What are your employment levels at each of these facilities?

2.7 What are your product lines, niches, and relative strengths in the residential hearth

products market?

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2.8 What is your company’s approximate market share in the residential hearth products

industry?

2.9 Would you expect your market share to change once amended energy conservation

standards become effective?

3 MANUFACTURER PRODUCTION COSTS AND SELLING PRICES

DOE estimated the manufacturer production costs of residential hearth products. DOE defines

manufacturer production cost as all direct costs associated with manufacturing a product. It

includes direct labor, direct materials, and overhead (which includes depreciation costs). The

breakdown of manufacturer production cost has implications for the quantitative impacts on

residential hearth products manufacturers. The per unit production costs are necessary for DOE

to estimate labor expenditures and other cash flow calculations.

Manufacturer selling price is the average cost manufacturers charge their first consumers, but

does not include costs along distribution channels. The manufacturer selling price includes a per

unit research and development cost; selling, general, and administrative expense; shipping cost;

and profit. The manufacturer markup is a multiplier applied to manufacturer production cost to

cover the per unit research and development; selling, general, and administrative expense;

shipping; and profit.

DOE estimated an industry­wide markup of 1.38 for residential hearth products at baseline

efficiency levels. DOE asks a series of questions about markups at higher efficiencies in section

4. As shown in Equation 3­1 below, the manufacturer production cost multiplied by the

manufacturer markup would cover all costs in the manufacturer selling price of baseline

products.

Equation 3­1. Calculation of Manufacturer Selling Price

3.1 Is there a significant difference between the 1.38 baseline markup DOE calculated and

your company’s baseline markup for residential hearth products?

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3.2 Table 3­1 provides DOE’s estimates of the manufacturer production costs and

manufacturer selling prices for residential hearth products at the representative rated input

capacity range and each efficiency level being considered. Could you please provide any

comments on the estimated values?

Table 3­1 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Residential Hearth Products (Representative Input Capacity Range: Between 27,000 and

46,000 Btu/h)

Efficiency

Level

(AFUE)

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(AFUE = 64) TBD

EL 1

(AFUE = 65) TBD

EL 2

(AFUE = 66) TBD

EL 3

(AFUE = 67) TBD

EL 4

(AFUE = 68) TBD

EL 5

(AFUE = 70) TBD

EL 6

(AFUE = 72) TBD

EL 7

(AFUE = 77) TBD

EL 8

(AFUE = 93) TBD

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

3.3 Please compare your manufacturer production cost percentages6 to the estimates

tabulated below. The manufacturer production cost breakdown is used to calculate the total cost

of goods sold (COGS) for the industry. Having an accurate estimate of the production costs for

the industry allows DOE to better examine impacts on profitability and employment due to

amended energy conservation standards. Are the different percentages of each cost

representative of your company or the residential hearth products industry? Please explain any

differences.

6 The manufacturer production cost percentages shown in Table 3­2 are the values that make up COGS. These are

percentages of total COGS.

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Table 3­2 Breakdown of Manufacturer Production Costs for Residential Hearth Products
 

Components of

Manufacturer Production

Costs

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials TBD

Labor TBD

Overhead TBD

Depreciation TBD

4 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of amended energy

conservation standards on industry profitability. In this section, DOE would like to understand

the current markup structure of the industry and how setting an amended energy conservation

standard would impact your company’s markup structure and profitability. As discussed in

Section 3, the manufacturer markup is a multiplier applied to manufacturer production cost to

cover per unit research and development, selling, general, and administrative expenses, shipping,

and profit. The manufacturer production cost multiplied by the manufacturer markup would

cover all costs involved in manufacturing the product.

4.1 Do profit levels currently vary by input capacity or other characteristic? Do profit levels

vary by efficiency level? Please explain why or why not.

4.2 DOE would like to understand how the baseline manufacturer markup changes at higher

efficiency levels. Could you provide your company’s markup for any products that meet the

efficiency levels shown below?

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Table 4­1 Residential Hearth Products (Representative Input Capacity Range: Between

27,000 and 46,000 Btu/h) Manufacturer Markups

Hearth Units

(Between 27,000 and 46,000 Btu/h)

Efficiency Level (Energy Factor) Estimated Manufacturer Markup

Baseline Level (AFUE = 64)

EL 1 (AFUE = 65)

EL 2 (AFUE = 66)

EL 3 (AFUE = 67)

EL 4 (AFUE = 68)

EL 5 (AFUE = 70)

EL 6 (AFUE = 72)

EL 7 (AFUE = 77)

EL 8 (AFUE = 93)

4.3 Would you expect changes in your estimated profitability following an amended energy

conservation standard? If so, please explain why.

5 SHIPMENT PROJECTIONS AND MARKET SHARES

An amended energy conservation standard can change overall shipments by altering product

attributes, marketing approaches, product availability, and price. The industry revenue

calculations are based on the shipment projections developed by DOE’s shipments model. The

shipments model includes forecasts for the base case shipments (i.e., total industry shipments

absent amended energy conservation standards) and the standards case shipments (i.e., total

industry shipments with amended energy conservation standards).

5.1 Please compare DOE’s projections of annual industry­wide shipments for residential

hearth products with your company’s projections of industry­wide shipments.

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Table 5­1 Annual Industry­Wide Shipment Projections for Residential Hearth Products

Absent Amended Energy Conservation Standards

2007

Total

IndustryWide

Shipments

2008

Total

IndustryWide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate for

Total Industry

Shipments

(Millions)**

0.240 0.240 0.240 0.240 0.240

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for hearth products.
 

** For hearth products, data was based on an average of shipments data provided by AHRI for 2001 to 2004 for
 

fireplaces and other vented gas heaters.
 

5.2 Are the 2007 and 2008 industry wide­shipments shown in Table 5­1 consistent with

historic trends? Do you expect total shipment levels to return to their previous levels (i.e., those

levels prior to 2007)?

5.3 DOE’s shipments analysis estimates industry­wide shipments in 2013 would continue to

remain the same. Could you provide any qualitative information on expected changes in total

industry shipments shown in Table 5­1?

6 PRODUCT MIX

Product mix describes the distribution of current shipments by efficiency level. Changes in the

product mix due to amended energy conservation standards can have a large impact on industry

revenues. Having an accurate estimate of the current product mix allows DOE to better estimate

how revenues might change due to amended energy conservation standards.

6.1 Does your company offer multiple product lines at different efficiency levels? Could you

provide a description of your company’s product lines and their respective efficiency levels?

6.2 Table 6­1 shows DOE’s estimate for the current mix of shipments by efficiency today

and in 2013, the anticipated effective date of amended energy conservation standards. Could you

provide feedback on DOE’s estimates based on your knowledge of the industry?

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Table 6­1 Percentage of Industry­Wide Shipments by Efficiency Level for Residential

Hearth Products Today and in 2013

Percentage of

Total

Shipments at

each

Efficiency

Baseline

Level

(AFUE

= 64)

EL 1

(AFUE

= 65)

EL 2

(AFUE

= 66)

EL 3

(AFUE

= 67)

EL 4

(AFUE

= 68)

EL 5

(AFUE

= 70)

EL 6

(AFUE

= 72)

EL 7

(AFUE

= 77)

EL 8

(AFUE

= 93)

DOE’s

Estimate

(2008)

21% 19% 8% 19% 8% 8% 8% 8% 1%

Manufacturer

Feedback

DOE’s

Estimate

(2013)

21% 19% 8% 19% 8% 8% 8% 8% 1%

Manufacturer

Feedback

6.3 Do you expect the product mix to change over time? If so, please explain why.

6.4 An amended energy conservation standard affects the product mix by eliminating the sale

of products below the minimum efficiency level. DOE assumes that all products that fall below

the standard would roll­up to the efficiency level set by an amended energy conservation

standard. DOE assumes the distribution of efficiencies above the efficiency level set by the

energy conservation standard will not change. In other words, those customers already

purchasing more­efficient products will continue to do so irrespective of amended energy

conservation standards. How do you think amended energy conservation standards will impact

the sales of more efficient products? For example, would customers continue to buy products

that exceed the energy conservation standard level? Would your response change at higher

efficiency levels?

7 FINANCIAL PARAMETERS

Navigant Consulting, Inc. (NCI) has developed a “strawman” model of the residential hearth

products industry financial performance called the Government Regulatory Impact Model

(GRIM) using publicly available data. This section attempts to understand how your company’s

financial situation differs from our industry aggregate picture.

7.1 Please compare your financial parameters to the GRIM parameters tabulated below.

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Table 7­1 Financial Parameters for Residential Hearth Products Manufacturers
 

GRIM Input Definition Industry

Estimated

Value

Your Actual (If

Significantly

Different from

DOE’s Estimate)

Income Tax Rate Corporate effective income tax

paid (percentage of earnings

before taxes, EBT)

27.5%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

8.5%

Working Capital Current assets less current

liabilities (percentage of

revenues)

11.4%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

20.9%

R&D Research and development

expenses (percentage of

revenues)

1.5%

Depreciation Amortization of fixed assets

(percentage of revenues) 2.2%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

2.2%

Cost of Goods Sold Includes material, labor,

overhead, and depreciation

(percentage of revenues)

71.3%

7.2 How would you expect an amended energy conservation standard to impact any of the

financial parameters for the industry?

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8 CONVERSION COSTS

Amended energy conservation standards may cause your company to incur capital and product

conversion costs to redesign existing products and make changes to existing production lines to

be compliant with the amended energy conservation standard. Capital conversion costs are onetime investments in plant, property, and equipment (PPE) necessitated by an amended energy

conservation standard. These may be incremental changes to existing PPE or the replacement of

existing PPE. Replacing existing PPE could strand existing assets before the end of their useful

lives. In addition to capital conversion costs, product conversion costs are costs related research,

product development, testing, marketing and other costs for redesigning products necessitated by

an amended energy conservation standard.

8.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels DOE is considering? Refer to the tables below to provide your company’s estimates.

Please provide additional qualitative information to help DOE understand the types and nature of

your investments.

Table 8­1 Residential Hearth Products Conversion Costs

Efficiency Level Hearth Units

(AFUE) Capital

Conversion Costs

(2009$)

Product

Conversion Costs

(2009$)

Stranded Assets

(2009$)

Baseline (AFUE = 64)

EL 1 (AFUE = 65)

EL 2 (AFUE = 66)

EL 3 (AFUE = 67)

EL 4 (AFUE = 68)

EL 5 (AFUE = 70)

EL 6 (AFUE = 72)

EL 7 (AFUE = 77)

EL 8 (AFUE = 93)

9 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards, voluntary standards, and/or other regulatory actions affecting the

same product or industry.

9.1 Are there other recent or impending regulations that hearth product manufacturers face

(from DOE or otherwise)? If so, could you identify the regulation and the corresponding possible

effective dates for those regulations? Below is a list of regulations that could possibly affect

manufacturers of residential hearth products. Please provide any comments on the listed

regulations in addition to other regulations.

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Table 9­1 Other Regulations Identified by DOE
 

Regulation Possible Effective Date(s) Comments

DOE’s Amended Energy Conservation

Standards for Other Products

International Energy­Efficiency Standards

State Emission Requirements and Other

State Regulations

Uniform Plumbing, Building, and Safety

Codes

9.2 What level of expense are you expecting to incur as a result of these regulations?

9.3 Under what circumstances would you be able to coordinate any expenditures related to

these other regulations with an amended energy conservation standard, thereby lessening the

cumulative burden?

10 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to explore

current trends in residential hearth products production employment and solicit manufacturer

views on how domestic employment patterns might be affected by amended energy conservation

standards.

10.1 Would your domestic employment levels be expected to change significantly under

amended energy conservation standards? If so, please explain how they would change if higher

efficiency levels are required.

10.2 Would the workforce skills necessary under amended energy conservation standards

require extensive retraining or replacement of employees at your manufacturing facilities?

10.3 Would amended energy conservation standards require extensive retraining of your

service/field technicians? If so, could you expand on how your service infrastructure would be

impacted in general as a result of amended energy conservation standards?

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11 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from amended energy conservation

standards, may impact sourcing decisions.

11.1 What percentage of your company’s residential hearth product sales is domestic? Absent

amended energy conservation standards, are production facilities being relocated to foreign

countries? Would amended energy conservation standards impact your domestic vs. foreign

manufacturing decision?

11.2 If applicable, to what foreign countries or regions do you export your products? What

percentage of sales can be attributed to each?

11.3 Would an amended energy conservation standard be expected to affect your export sales?

What would the resulting impact be, if any, on your manufacturing operations and profitability?

11.4 Are your foreign exports affected by amended energy conservation standards in other

countries?

11.5 What percentage of the U.S. market for residential hearth products is imported? Would

amended energy conservation standards have an impact on foreign competition?

11.6 What is your outlook for residential hearth products exports?

12 CONSOLIDATION

Amended energy conservation standards can alter the competitive dynamics of the market. This

can include prompting companies to enter or exit the market, or to merge. DOE and the

Department of Justice are both interested in any potential reduction in competition that would

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result from an amended energy conservation standard.

12.1 Please comment on industry consolidation and related trends over the last 5 years.

12.2 In the absence of amended energy conservation standards, do you expect any further

industry consolidation? Please describe your expectations.

12.3 How would amended energy conservation standards affect your ability to compete?

13 IMPACTS ON SMALL BUSINESS

13.1 The Small Business Association (SBA) denotes a small business in the residential hearth

products industry as having less than 500 employees7

. By this definition, is your company

considered a small business?

13.2 Are there any reasons that a small business might be at a disadvantage relative to a larger

business under amended energy conservation standards? Please consider such factors as

technical expertise, access to capital, bulk purchasing power for materials/components,

engineering resources, and any other relevant issues.

13.3 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of amended energy conservation standards would have a severe impact?

If so, would manufacturers of these products have different incremental impacts from

implemented amended energy conservation standards than from the rest of the industry?

7 DOE uses the small business size standards published on August 22, 2008, as amended, by the Small Business

Administration (SBA) to determine whether a company is a small business. To be categorized as a small business, a

hearth products manufacturer and its affiliates may employ a maximum of 500 employees. The 500 employee

threshold includes all employees in a business’s parent company and any other subsidiaries.

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12A.5 GAS­FIRED POOL HEATERS MANUFACTURER IMPACT ANALYSIS

INTERVIEW GUIDE

April 6, 2009

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As part of the rulemaking process for amended energy conservation standards for gas­fired

residential pool heaters, the Department of Energy (DOE) conducts the manufacturer impact

analysis (MIA). In this analysis, DOE uses publicly available information and information

provided by manufacturers during interviews to assess possible impacts on manufacturers due to

amended energy conservation standards. DOE is currently considering 8 efficiency levels (EL)

for gas­fired residential pool heaters. In responding to this questionnaire, please refer to the

efficiency levels in the table below. DOE analyzed one representative input capacity of 250,000

British thermal units per hour (Btu/h) for gas­fired residential pool heaters.

Efficiency Levels Under Consideration for Gas­fired Residential Pool Heaters

Product Class

(Representative

Input Capacity)

Efficiency

Metric

Baseline

Efficiency

Level

EL1** EL2** EL3** EL4* EL5* EL6* EL7* EL8*

Gas­Fired

Residential

Pool Heaters

(250,000 Btu/h)

Thermal

Efficiency

(%)

78% 79% 81% 82% 83% 84% 86% 90% 95%

* Models having electronic ignition only.
 

** Models having standing pilot or electronic ignition.
 

1 KEY ISSUES

1.13	 In general, what are the key issues for your company regarding amended energy

conservation standards for gas­fired residential pool heaters and this rulemaking?

1.14 For the issues identified, how significant are they at each listed efficiency level?

1.15 How can we most effectively incorporate these issues in the MIA?

2 COMPANY OVERVIEW AND ORGANIZATIONAL CHARACTERISTICS

DOE is interested in understanding manufacturer impacts at the plant or profit center level

directly pertinent to gas­fired residential pool heaters production. However, the context within

which the plant operates and the details of plant production and costs are not readily available

from the published literature. Therefore, DOE invites you to provide these details confidentially

in your own words to the extent possible and practical. Understanding the organizational setting

around the residential pool heater industry profit center will help DOE understand the probable

future of the manufacturing activity with and without amended energy conservation standards.

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2.1 Do you have a parent company, and/or any subsidiaries relevant to the residential pool

heater industry?

2.2 Do you manufacture any products other than residential pool heaters? If so, what other

products do you manufacture?

2.3 What percentage of your total manufacturing corresponds to gas­fired residential pool

heaters?

2.4 Where are your production facilities located, and what type of product is manufactured at

each location? Could you provide figures for your company’s manufacturing at each location by

efficiency level?

2.5 At your manufacturing facilities, would potential residential pool heater redesigns be

difficult to implement? If so, would your company modify the existing facility or develop a new

facility?

2.6 What are your employment levels at each of these facilities?

2.7 What are your product lines, niches, and relative strengths in the residential pool heater

market?

2.8 What is your company’s approximate market share in the gas­fired residential pool heater

industry?

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2.9 Would you expect your market share to change once amended energy conservation

standards become effective?

3 MANUFACTURER PRODUCTION COSTS AND SELLING PRICES

DOE estimated the manufacturer production costs of gas­fired residential pool heaters at one

input capacity. DOE defines manufacturer production cost as all direct costs associated with

manufacturing a product. It includes direct labor, direct materials, and overhead (which includes

depreciation costs). The breakdown of manufacturer production cost has implications for the

quantitative impacts on gas­fired residential pool heater manufacturers. The per unit production

costs are necessary for DOE to estimate labor expenditures and other cash flow calculations.

Manufacturer selling price is the average cost manufacturers charge their first consumers, but

does not include costs along distribution channels. The manufacturer selling price includes a per

unit research and development cost; selling, general, and administrative expense; shipping cost;

and profit. For residential pool heater MIA, the manufacturer markup is a multiplier applied to

manufacturer production cost to cover the per unit research and development, selling, general,

and administrative expense, shipping costs, and profit.

DOE estimated an industry­wide markup of 1.38 for residential pool heaters at baseline

efficiency levels. DOE asks a series of questions about the manufacturer markups associated

with premium products at higher efficiencies in Section 4. As shown in Equation 3­1 below, the

manufacturer production cost multiplied by the manufacturer markup would cover all costs in the

manufacturer selling price of baseline products.

Equation 3­1. Calculation of Manufacturer Selling Price

3.1 Is there a significant difference between the baseline markup DOE calculated and your

company’s baseline markup for gas­fired residential pool heaters?

3.2 Table 3­1 provides DOE’s estimates of the manufacturer production costs and

manufacturer selling prices for gas­fired residential pool heaters at the representative input

capacity and each efficiency level being considered. Could you please provide any comments on

the estimated values?

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Table 3­1 Estimated Manufacturer Production Costs and Manufacturer Selling Prices for

Gas fired Residential Pool Heaters Utilizing Electronic Ignition (250,000 Btu/h Input

Capacity)

Efficiency

Level

(Thermal

Efficiency

(%))

DOE’s

Manufacturer

Production Cost

Estimates*

(2008$)

DOE’s

Manufacturer

Selling Price

Estimates

(2008$)

Manufacturer

Comments or

Revised Estimates

Baseline Level

(78%) $520 $718

EL 1

(79%) $530 $731

EL 2

(81%) $544 $751

EL 3

(82%) $575 $794

EL 4

(83%) $646 $891

EL 5

(84%) $662 $914

EL 6

(86%) $862 $1,190

EL 7

(90%) $906 $1,250

EL 8

(95%) $965 $1,332

* DOE’s manufacturer production cost estimates were developed using a five­year average of raw material

prices spanning 2004 to 2008.

3.3 Please compare your manufacturer production cost percentages8 to the estimates

tabulated below. The manufacturer production cost breakdown is used to calculate the total cost

of goods sold (COGS) for the industry. Having an accurate estimate of the production costs for

the industry allows DOE to better examine impacts on profitability and employment due to

amended energy conservation standards. Are the different percentages of each cost

representative of your company or the residential pool heater industry? Please explain any

differences.

8 The manufacturer production cost percentages shown in Table 3­2 are the values that make up COGS. These are

percentages of total COGS.

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Table 3­2 Breakdown of Manufacturer Production Costs for Baseline Gas­fired

Residential Pool Heaters (250,000 Btu/h Input Capacity)

Components of

Manufacturer Production

Costs

DOE’s Estimated Percentage of

Manufacturer Production Cost

Manufacturer Feedback

Materials 60.6%

Labor 16.7%

Overhead 11.7%

Depreciation 11.0%

4 MARKUPS AND PROFITABILITY

One of the primary objectives of the MIA is to assess the impact of amended energy

conservation standards on industry profitability. In this section, DOE would like to understand

the current markup structure of the industry and how setting an amended energy conservation

standard would impact your company’s markup structure and profitability. As discussed in

Section 3, the manufacturer markup is a multiplier applied to manufacturer production cost to

cover per unit research and development, selling, general, and administrative expenses, shipping

costs, and profit. The manufacturer production cost multiplied by the manufacturer markup

would cover all costs involved in manufacturing the product.

4.1 Do profit levels currently vary by efficiency level? Please explain why or why not.

4.2 Do profit levels vary by input capacities, and ignition type?

4.3 DOE would like to understand how the baseline manufacturer markup changes at higher

efficiency levels. Could you provide your company’s markup for any products that meet the

efficiency levels shown below?

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Table 4­1 Gas­fired Residential Pool Heaters (250,000 Btu/h Input Capacity)

Manufacturer Markup Changes Due to Amended Energy Conservation Standards

Gas­fired Residential Pool Heaters

(250,000 Btu/h Input Capacity)

Efficiency Level

(Thermal

Efficiency)

Estimated Manufacturer Markup

Baseline (78%)

EL 1 (79%)

EL 2 (81%)

EL 3 (82%)

EL 4 (83%)

EL 5 (84%)

EL 6 (86%)

EL 7 (90%)

EL 8 (95%)

4.4 Would you expect changes in your estimated profitability following an amended energy

conservation standard? If so, please explain why.

5 SHIPMENT PROJECTIONS AND MARKET SHARES

An amended energy conservation standard can change overall shipments by altering product

attributes, marketing approaches, product availability, and price. The industry revenue

calculations are based on the shipment projections developed by DOE’s shipments model. The

shipments model includes forecasts for the base case shipments (i.e., total industry shipments

absent amended energy conservation standards) and the standards case shipments (i.e., total

industry shipments with amended energy conservation standards).

5.1 Please compare DOE’s projections of annual industry­wide shipments for gas­fired

residential pool heaters with your company’s projections of industry­wide shipments.

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Table 5­1 Annual Industry­Wide Shipment Projections for Gas­fired Residential Pool

Heaters absent Amended Energy Conservation Standards

2007

Total

IndustryWide

Shipments

2008

Total

IndustryWide

Shipments

Projected Total

Industry­Wide

Shipments in

2013*

Projected Total

Industry­Wide

Shipments in

2023

Projected Total

Industry­Wide

Shipments in

2033

DOE’s Estimate for

Total Industry

Shipments

(Millions)**

0.242 0.225 0.286 0.316 0.345

Manufacturer

Feedback

* 2013 is estimated effective date of amended energy conservation standards for pool heaters.
 

** For pool heaters, 2007 and 2008 data are estimates from DOE's shipment model (updated March 2009).
 

Projections are updated using (1) AEO2009 New Housing Forecast; (2) New Swimming Pool Shipment Data; (3)
 

historical RECS Data; and (4) Accounted for a fraction for households that do not replace failed pool heaters..
 

5.2 Are the 2007 and 2008 industry wide­shipments shown in Table 5­1 consistent with

historic trends? Do you expect total shipment levels to return to their previous levels (i.e., those

levels prior to 2007)?

5.3 DOE’s shipments analysis estimates industry­wide shipments in 2013 would continue to

increase even as amended energy conservation standards become effective due to new housing

starts. Could you provide any qualitative information on expected changes in total industry

shipments if DOE set the amended energy conservation standard at the efficiency levels shown

in Table 5­1?

6 PRODUCT MIX

Product mix describes the distribution of current shipments by efficiency level. Changes in the

product mix due to amended energy conservation standards can have a large impact on industry

revenues. Having an accurate estimate of the current product mix allows DOE to better estimate

how revenues might change due to amended energy conservation standards.

6.1 Does your company offer multiple product lines at different efficiency levels? Could you

provide a description of your company’s product lines and their respective efficiency levels?

6.2 Table 6­1 show DOE’s estimate for the current mix of shipments by efficiency today and

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in 2013, the anticipated effective date of amended energy conservation standards. Could you

provide feedback on DOE’s estimates based on your knowledge of the industry?

Table 6­1 Percentage of Industry­Wide Shipments by Efficiency Level for Gas­fired

Residential Pool Heaters Today and in 2013

Percentage of

Total

Shipments at

each

Efficiency

Baseline

Level

(78%)

EL 1

(79%)

EL 2

(81%)

EL 3

(82%)

EL 4

(83%)

EL 5

(84%)

EL 6

(86%)

EL 7

(90%)

EL 8

(95%)

DOE’s

Estimate

(2008)

1% 12% 21% 33% 14% 12% 6% 0% 1%

Manufacturer

Feedback

DOE’s

Estimate

(2013)

1% 12% 21% 33% 14% 12% 6% 0% 1%

Manufacturer

Feedback

6.3 Do you expect the product mix to change over time? If so, please explain why.

6.4 An amended energy conservation standard affects the product mix by eliminating the sale

of products below the minimum efficiency level. DOE assumes that all products that fall below

the standard would roll­up to the efficiency level set by an amended energy conservation

standard. DOE assumes the distribution of efficiencies above the efficiency level set by the

energy conservation standard will not change. In other words, those customers already

purchasing more­efficient products will continue to do so irrespective of amended energy

conservation standards. How do you think amended energy conservation standards will impact

the sales of more efficient products? For example, would customers continue to buy products

that exceed the energy conservation standard level? Would your response change at higher

efficiency levels?

7 FINANCIAL PARAMETERS

Navigant Consulting, Inc. (NCI) has developed a “strawman” model of the gas­fired residential

pool heater industry financial performance called the Government Regulatory Impact Model

(GRIM) using publicly available data. This section attempts to understand how your company’s

financial situation differs from our industry aggregate picture.

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7.1 Please compare your financial parameters to the GRIM parameters tabulated below.

Table 7­1 Financial Parameters for Residential Pool Heater Manufacturers

GRIM Input Definition Industry

Estimated

Value

Your Actual (If

Significantly

Different from

DOE’s Estimate)

Income Tax Rate Corporate effective income tax

paid (percentage of earnings

before taxes, EBT)

27.5%

Discount Rate Weighted average cost of capital

(inflation­adjusted weighted

average of corporate cost of debt

and return on equity)

8.5%

Working Capital Current assets less current

liabilities (percentage of

revenues)

11.4%

SG&A Selling, general, and

administrative expenses

(percentage of revenues)

20.9%

R&D Research and development

expenses (percentage of

revenues)

1.5%

Depreciation Amortization of fixed assets

(percentage of revenues) 2.2%

Capital Expenditures Outlay of cash to acquire or

improve capital assets

(percentage of revenues, not

including acquisition or sale of

business units)

2.2%

Cost of Goods Sold Includes material, labor,

overhead, and depreciation

(percentage of revenues)

71.3%

7.2 How would you expect an amended energy conservation standard to impact any of the

financial parameters for the industry?

8 CONVERSION COSTS

Amended energy conservation standards may cause your company to incur capital and product

conversion costs to redesign existing products and make changes to existing production lines to

be compliant with the amended energy conservation standard. Capital conversion costs are onetime investments in plant, property, and equipment (PPE) necessitated by an amended energy

conservation standard. These may be incremental changes to existing PPE or the replacement of

existing PPE. Replacing existing PPE could strand existing assets before the end of their useful

lives. In addition to capital conversion costs, product conversion costs are costs related research,

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product development, testing, marketing and other costs for redesigning products necessitated by

an amended energy conservation standard.

8.1 What level of conversion costs do you anticipate incurring under the different efficiency

levels DOE is considering? Refer to the tables below to provide your company’s estimates.

Please provide additional qualitative information to help DOE understand the types and nature of

your investments.

Table 8­1 Gas­fired Residential Pool Heater Conversion Costs

Efficiency Gas­fired Residential Pool Heater

Level

(Thermal

Efficiency)

Capital

Conversion

Costs (2009$)

Product

Conversion

Costs (2009$)

Stranded Assets

(2009$)

Baseline (78%)

EL 1 (79%)

EL 2 (81%)

EL 3 (82%)

EL 4 (83%)

EL 5 (84%)

EL 6 (86%)

EL 7 (90%)

EL 8 (95%)

9 CUMULATIVE REGULATORY BURDEN

Cumulative regulatory burden refers to the burden that industry faces from overlapping effects of

new or revised DOE standards, voluntary standards, and/or other regulatory actions affecting the

same product or industry.

9.1 Are there other recent or impending regulations that gas­fired residential pool heater

manufacturers face (from DOE or otherwise)? If so, could you identify the regulation and the

corresponding possible effective dates for those regulations? Below is a list of regulations that

could possibly affect manufacturers of gas­fired residential pool heaters. Please provide any

comments on the listed regulations in addition to other regulations.

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Table 9­1 Other Regulations Identified by DOE
 

Regulation Possible Effective Date(s) Comments

DOE’s Amended Energy Conservation

Standards for Other Products

International Energy Efficiency Standards

State Emission Requirements and Other

State Regulations

Uniform Plumbing, Building, and Safety

Codes

South Coast Air Quality Management

District (SCAQMD) Ultra­Low NOx

Requirements

9.2 What level of expense are you expecting to incur as a result of these regulations?

9.3 Under what circumstances would you be able to coordinate any expenditures related to

these other regulations with an amended energy conservation standard, thereby lessening the

cumulative burden?

10 DIRECT EMPLOYMENT IMPACT ASSESSMENT

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. This section of the interview guide seeks to explore

current trends in residential pool heater production employment and solicit manufacturer views

on how domestic employment patterns might be affected by amended energy conservation

standards.

10.1 Would your domestic employment levels be expected to change significantly under

amended energy conservation standards? If so, please explain how they would change if higher

efficiency levels are required.

10.2 Would the workforce skills necessary under amended energy conservation standards

require extensive retraining or replacement of employees at your manufacturing facilities?

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10.3 Would amended energy conservation standards require extensive retraining of your

service/field technicians? If so, could you expand on how your service infrastructure would be

impacted in general as a result of amended energy conservation standards?

11 EXPORTS / FOREIGN COMPETITION / OUTSOURCING

Disparity between domestic and foreign energy conservation standards could impact exports or

imports. Labor content and material changes, resulting from amended energy conservation

standards, may impact sourcing decisions.

11.1 What percentage of your company’s gas­fired residential pool heater sales is domestic?

Absent amended energy conservation standards, are production facilities being relocated to

foreign countries? Would amended energy conservation standards impact your domestic vs.

foreign manufacturing decision?

11.2 If applicable, to what foreign countries or regions do you export your products? What

percentage of sales can be attributed to each?

11.3 Would an amended energy conservation standard be expected to affect your export sales?

What would the resulting impact be, if any, on your manufacturing operations and profitability?

11.4 Are your foreign exports affected by amended energy conservation standards in other

countries?

11.5 What percentage of the U.S. market for gas­fired residential pool heaters is imported?

Would amended energy conservation standards have an impact on foreign competition?

11.6 What is your outlook for gas­fired residential pool heater exports?

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12 CONSOLIDATION

Amended energy conservation standards can alter the competitive dynamics of the market. This

can include prompting companies to enter or exit the market, or to merge. DOE and the

Department of Justice are both interested in any potential reduction in competition that would

result from an amended energy conservation standard.

12.1 Please comment on industry consolidation and related trends over the last 5 years.

12.2 In the absence of amended energy conservation standards, do you expect any further

industry consolidation? Please describe your expectations.

12.3 How would amended energy conservation standards affect your ability to compete?

13 IMPACTS ON SMALL BUSINESS

13.1 The Small Business Association (SBA) denotes a small business in the gas­fired

residential pool heater industry as having less than 500 employees9

. By this definition, is your

company considered a small business?

13.2 Are there any reasons that a small business might be at a disadvantage relative to a larger

business under amended energy conservation standards? Please consider such factors as

technical expertise, access to capital, bulk purchasing power for materials/components,

engineering resources, and any other relevant issues.

13.3 Are there any niche manufacturers, small businesses, and/or component manufacturers

for which the adoption of amended energy conservation standards would have a severe impact?

If so, would manufacturers of these products have different incremental impacts from

implemented amended energy conservation standards than from the rest of the industry?

9 DOE uses the small business size standards published on August 22, 2008, as amended, by the Small Business

Administration (SBA) to determine whether a company is a small business. To be categorized as a small business, a

residential pool heater manufacturer and its affiliates may employ a maximum of 500 employees. The 500

employee threshold includes all employees in a business’s parent company and any other subsidiaries.

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12A.6 GOVERNMENT REGULATORY IMPACT MODEL (GRIM) OVERVIEW

12A.6.1 INTRODUCTION AND PURPOSE

The purpose of the Government Regulatory Impact Model (GRIM) is to help quantify the

impacts of energy conservation standards and other regulations on manufacturers. The basic

mode of analysis is to estimate the change in value of the industry or manufacturers(s) following

a regulation or a series of regulations. The model structure also allows an analysis of multiple

products with regulations taking effect over a period of time, and of multiple regulations on the

same products.

Industry net present value is defined, for the purpose of this analysis, as the discounted

sum of industry free cash flows plus a discounted terminal value. The model calculates the

actual cash flows by year and then determines the present value of those cash flows both without

an energy conservation standard (i.e., the base case) and under different trial standard levels

(TSLs) (i.e., the standards case).

Output from the model consists of summary financial metrics, graphs of major variables,

and, when appropriate, access to the complete cash flow calculation.

12A.6.2 MODEL DESCRIPTION

The basic structure of the GRIM is a standard annual cash flow analysis that uses

manufacturer selling prices, manufacturing costs, a shipments forecast, and financial parameters

as inputs and accepts a set of regulatory conditions as changes in costs and investments. The

cash flow analysis is separated into two major blocks: income and cash flow. The income

calculation determines net operating profit after taxes. The cash flow calculation converts net

operating profit after taxes into an annual cash flow by including investment and non­cash items.

Below are definitions of listed items on the printout of the output sheet (see Section 12A.6.3).

(1)	 Unit Sales: Total annual shipments for the industry were obtained from the National

Impact Analysis Spreadsheet;

(2)	 Revenues: Annual revenues ­ computed by multiplying products’ unit prices at each

efficiency level by the appropriate manufacturer markup;

(3)	 Labor: The portion of cost of goods sold (COGS) that includes direct labor, commissions,

dismissal pay, bonuses, vacation, sick leave, social security contributions, fringe, and

assembly labor up­time;

(4)	 Material: The portion of COGS that includes materials;

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(5)	 Overhead: The portion of COGS that includes indirect labor, indirect material, energy use,

maintenance, depreciation, property taxes, and insurance related to assets. While included

in overhead, the depreciation is shown as a separate line item;

(6)	 Depreciation: The portion of overhead that includes an allowance for the total amount of

fixed assets used to produce that one unit. Annual depreciation computed as a percentage

of COGS. While included in overhead, the depreciation is shown as a separate line item;

(7)	 Stranded Assets: In the year the standard becomes effective, a one time write­off of

stranded assets is accounted for;

(8)	 Standard SG&A: Selling, general, and administrative costs are computed as a percentage

of Revenues (2);

(9)	 R&D: GRIM separately accounts for ordinary research and development (R&D) as a

percentage of Revenues (2);

(10) Product Conversion Costs:	 Product conversion costs are one­time investments in research,

development, testing, marketing, and other costs focused on making products designs

comply with the new energy conservation standard. The GRIM allocates these costs over

the period between the standard’s announcement and compliance dates;

(11) Earnings Before Interest and Taxes (EBIT):	 Includes profits before deductions for

interest paid and taxes;

(12) EBIT as a Percentage of Sales (EBIT/Revenues):	 GRIM calculates EBIT as a percentage

of sales to compare with the industry’s average reported in financial statements;

(13) Taxes:	 Taxes on EBIT (11) are calculated by multiplying the tax rate contained in Major

Assumptions by EBIT (11).

(14) Net Operating Profits After Taxes (NOPAT):	 Computed by subtracting Cost of Goods

Sold ((3) to (6)), SG&A (8), R&D (9), Product Conversion Costs (10), and Taxes (13)

from Revenues (2).

(15) NOPAT repeated: NOPAT is repeated in the Statement of Cash Flows;

(16) Depreciation repeated: Depreciation and Stranded Assets are added back in the Statement

of Cash Flows because they are non­cash expenses;

(17) Change in Working Capital: Change in cash tied up in accounts receivable, inventory, and

other cash investments necessary to support operations is calculated by multiplying

working capital (as a percentage of revenues) by the change in annual revenues.

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(18) Cash Flow From Operations: Calculated by taking NOPAT (15), adding back non­cash

items such as a Depreciation (16), and subtracting the Change in Working Capital (17);

(19) Ordinary Capital Expenditures:	 Ordinary investments in property, plant, and equipment to

maintain and replace existing production assets, computed as a percentage of Revenues (2);

(20) Capital Conversion Costs:	 Capital conversion costs are one­time 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 new regulation; The GRIM allocates

these costs over the period between the standard’s announcement and compliance dates;

(21) Capital Investment:	 Total investments in property, plant, and equipment are computed by

adding Ordinary Capital Expenditures (19) and Capital Conversion Costs (20);

(22) Free Cash Flow:	 Annual cash flow from operations and investments; computed by

subtracting Capital Investment (21) from Cash Flow from Operations (18);

(23) Terminal Value:	 Estimate of the continuing value of the industry after the analysis period.

Computed by growing the Free Cash Flow at the beginning of 2045 at a constant rate in

perpetuity;

(24) Present Value Factor:	 Factor used to calculate an estimate of the present value of an

amount to be received in the future;

(25) Discounted Cash Flow:	 Free Cash Flows (22) multiplied by the Present Value Factor

(24). For the end of 2044, the discounted cash flow includes the discounted Terminal

Value (23); and

(26) Industry Value thru the end of 2044: The sum of Discounted Cash Flows (25).

12A­96
 

EE-2006-STD-0129 COMMENT 56.10
12A.6.3 DETAILED CASH FLOW EXAMPLE

12A­97

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EE-2006-STD-0129 COMMENT 56.10