12A-i

APPENDIX 12A. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

OVERVIEW

TABLE OF CONTENTS

12A.1 INTRODUCTION AND PURPOSE.................................................................................. 1

12A.2 MODEL DESCRIPTION ................................................................................................... 1

12A.3 DETAILED CASH FLOW EXAMPLE............................................................................. 4

12A.4 USER INPUT SELECTION............................................................................................... 5
12A-1

APPENDIX 12A. GOVERNMENT REGULATORY IMPACT MODEL (GRIM)

OVERVIEW

12A.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 the 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.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 non-cash 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 up-time; 

(4) Material: The portion of COGS that includes materials;
12A-2

(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 write-off 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 one-time 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 non-cash 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. 

(18) Cash Flow From Operations: Calculated by taking NOPAT (15), adding back non-cash 

items such as a Depreciation (16), and subtracting the Change in Working Capital (17);
12A-3

(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 one-time 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 2043, the discounted cash flow includes the discounted Terminal Value 

(23); and

(26) Industry Value thru the end of 2043: The sum of Discounted Cash Flows (25).
12A-4

12A.3 DETAILED CASH FLOW EXAMPLE

Standards Case Income and Cash Flow Statements

This tab computes key parameters from an income statement based on unit sales, revenues and COGS, and initial financial inputs (parameters as a % of revenue). It also computes an INPV based on a discounted cash flow model.

Base Year

Announcement 

Year Standard Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Industry Income Statement (Base Case)

Unit Sales 9.061 8.990 9.639 10.683 11.356 11.743 9.926 10.637 11.196 11.572 11.966 12.252 12.516 12.708 12.918 13.166 13.400

Revenues $ 4,645.8 $ 4,487.3 $ 4,692.5 $ 5,212.5 $ 5,552.0 $ 5,753.0 $ 7,527.5 $ 8,046.3 $ 8,457.7 $ 8,739.9 $ 9,036.4 $ 9,258.8 $ 9,465.2 $ 9,614.1 $ 9,776.7 $ 9,968.3 $ 10,151.5

Cost of Sales

Labor $ 601.6 $ 583.0 $ 611.7 $ 679.3 $ 723.3 $ 749.3 $ 728.1 $ 777.7 $ 817.1 $ 844.3 $ 872.9 $ 894.6 $ 914.7 $ 929.1 $ 944.9 $ 963.6 $ 981.4

Material $ 2,618.3 $ 2,520.8 $ 2,628.0 $ 2,920.0 $ 3,111.0 $ 3,224.4 $ 4,748.9 $ 5,076.5 $ 5,336.3 $ 5,514.4 $ 5,701.5 $ 5,841.7 $ 5,971.8 $ 6,065.6 $ 6,168.2 $ 6,289.0 $ 6,404.5

Overhead $ 314.0 $ 309.4 $ 329.7 $ 365.7 $ 388.9 $ 402.3 $ 392.9 $ 420.6 $ 442.4 $ 457.3 $ 472.8 $ 484.3 $ 494.9 $ 502.5 $ 510.9 $ 520.9 $ 530.2

Depreciation $ 153.3 $ 148.1 $ 154.9 $ 172.0 $ 183.2 $ 189.8 $ 254.7 $ 272.2 $ 286.2 $ 295.7 $ 305.7 $ 313.3 $ 320.2 $ 325.3 $ 330.8 $ 337.2 $ 343.4

Stranded Assets $ - $ - $ - $ - $ - $ - $ 1,006.5 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Selling, General, & Administrative Expenses

Standard SG&A $ 580.7 $ 560.9 $ 586.6 $ 651.6 $ 694.0 $ 719.1 $ 940.9 $ 1,005.8 $ 1,057.2 $ 1,092.5 $ 1,129.6 $ 1,157.4 $ 1,183.1 $ 1,201.8 $ 1,222.1 $ 1,246.0 $ 1,268.9

R&D $ 102.2 $ 98.7 $ 103.2 $ 114.7 $ 122.1 $ 126.6 $ 165.6 $ 177.0 $ 186.1 $ 192.3 $ 198.8 $ 203.7 $ 208.2 $ 211.5 $ 215.1 $ 219.3 $ 223.3

Product Conversion Costs $ - $ - $ - $ 99.4 $ 139.2 $ 159.1 $ 8.1 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Earnings Before Interest and Taxes (EBIT) $ 275.7 $ 266.3 $ 278.5 $ 209.9 $ 190.3 $ 182.3 $ (718.1) $ 316.5 $ 332.5 $ 343.5 $ 355.1 $ 364.0 $ 372.3 $ 378.2 $ 384.7 $ 392.3 $ 399.7

EBIT/Revenues 5.9% 5.9% 5.9% 4.0% 3.4% 3.2% -9.5% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%

Taxes $ 93.5 $ 90.3 $ 94.4 $ 71.2 $ 64.5 $ 61.8 $ - $ 107.3 $ 112.7 $ 116.5 $ 120.4 $ 123.4 $ 126.2 $ 128.2 $ 130.4 $ 133.0 $ 135.5

Net Operating Profit after Taxes (NOPAT) $ 182.3 $ 176.0 $ 184.1 $ 138.8 $ 125.8 $ 120.5 $ (718.1) $ 209.2 $ 219.8 $ 227.1 $ 234.7 $ 240.6 $ 246.1 $ 250.0 $ 254.3 $ 259.3 $ 264.2

Cash Flow Statement (Base Case)

NOPAT $ 182.3 $ 176.0 $ 184.1 $ 138.8 $ 125.8 $ 120.5 $ (718.1) $ 209.2 $ 219.8 $ 227.1 $ 234.7 $ 240.6 $ 246.1 $ 250.0 $ 254.3 $ 259.3 $ 264.2

Depreciation $ 153.3 $ 148.1 $ 154.9 $ 172.0 $ 183.2 $ 189.8 $ 1,261.1 $ 272.2 $ 286.2 $ 295.7 $ 305.7 $ 313.3 $ 320.2 $ 325.3 $ 330.8 $ 337.2 $ 343.4

Change in Working Capital $ 134.7 $ 4.6 $ (6.0) $ (15.1) $ (9.8) $ (5.8) $ (51.5) $ (15.0) $ (11.9) $ (8.2) $ (8.6) $ (6.4) $ (6.0) $ (4.3) $ (4.7) $ (5.6) $ (5.3)

Cash Flow from Operations $ 470.3 $ 328.7 $ 333.0 $ 295.7 $ 299.1 $ 304.5 $ 491.6 $ 466.4 $ 494.0 $ 514.6 $ 531.9 $ 547.4 $ 560.3 $ 570.9 $ 580.3 $ 591.0 $ 602.3

Ordinary Capital Expenditure $ (167.2) $ (161.5) $ (168.9) $ (187.6) $ (199.9) $ (207.1) $ (271.0) $ (289.7) $ (304.5) $ (314.6) $ (325.3) $ (333.3) $ (340.7) $ (346.1) $ (352.0) $ (358.9) $ (365.5)

Capital Conversion Costs $ - $ - $ - $ (503.2) $ (704.5) $ (805.2) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Capital Investments $ (167.2) $ (161.5) $ (168.9) $ (690.9) $ (904.4) $ (1,012.3) $ (271.0) $ (289.7) $ (304.5) $ (314.6) $ (325.3) $ (333.3) $ (340.7) $ (346.1) $ (352.0) $ (358.9) $ (365.5)

Federal Production Tax Benefit $ 36.56

Free Cash Flow $ 303.0 $ 167.2 $ 200.6 $ (395.2) $ (605.3) $ (707.8) $ 220.6 $ 176.7 $ 189.5 $ 199.9 $ 206.6 $ 214.1 $ 219.6 $ 224.8 $ 228.4 $ 232.1 $ 236.8

Terminal Value $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Present Value Factor 0.00 0.00 1.00 0.93 0.87 0.81 0.76 0.71 0.66 0.61 0.57 0.53 0.50 0.47 0.43 0.41 0.38

Discounted Cash Flow $ - $ - $ 200.6 $ (368.7) $ (526.7) $ (574.5) $ 167.0 $ 124.8 $ 124.9 $ 122.9 $ 118.4 $ 114.5 $ 109.6 $ 104.6 $ 99.1 $ 94.0 $ 89.5

Industry Value through 2043 $ 1,018.29
12A-5

12A.4 USER INPUT SELECTION

The GRIM produces results for a range of industry assumptions. While the model can be 

altered by editing cells in Excel, many scenarios can be achieved with the clickable options in 

the User Inputs section of the GRIM. By selecting different assumptions, the model 

automatically updates calculations. Result summaries can be generated using the blue button in 

the User Inputs section of the GRIM

1. Scenario Selection

In this area of the spreadsheet, users select a set of scenarios to model. The “Active Mode 

Trial Standard Level” dropdown allows users to determine how energy efficiency TSLs impact 

industry value. Seven TSLs and the baseline are available for selection. The “Economic Growth 

Scenario” dropdown allows users to determine how different forecasts of industry growth and 

shipments affect industry value. For the central air conditioner and heat pump and furnace 

rulemaking, only one economic growth scenario (listed as “Reference”) is available. The 

“Markup Scenario” allows users to model different markup assumptions. Three markup 

scenarios are available to represent a range of potential impacts on the industry.

Note that the rulemaking evaluates the impact standby mode and off mode standards and 

energy efficiency standards independently. When active mode standards, please ensure that the 

standby mode and off mode TSL is set to “None” in order to reproduce the values reported in the 

direct final rule documents. See the bullet titled “Standby Mode and Off Mode Selection” below 

for more detail.

2. Financial Parameters
12A-6

In this area of the spreadsheet, users assign the financial parameters applied in the GRIM

calculations. Users can modify the period of analysis, financial metrics, and industry financing 

assumptions. For the rulemaking analysis, the financial parameters are set to the values derived 

in chapter 12 of the TSD. 

3. Product Selection

In this area of the spreadsheet, users can specify the equipments classes being included in 

the GRIM results. The direct final rule notice and the TSD chapters report GRIM results for the 

industry as a whole as well as for sub-groups. The conventional products subgroup includes

split-system air conditioning, split-system heat pumps, single package air conditioning, single 

package heat pumps, and non-weatherized gas furnaces. The niche products subgroup includes 

mobile home furnaces and oil furnaces. 

Note that the electric furnace product class is only intended for use with the standby mode 

and off mode analysis.

4. Standby Mode and Off Mode Selection

In this area of the spreadsheet, users can determine how different standby mode and off 

mode TSLs impact industry value. Three TSLs and no standard (listed as “None”) are available 

for selection. Note that the rulemaking evaluates the impact standby mode and off mode 

standards and energy efficiency standards independently. When evaluating standby mode and off 

mode standards, setting the active mode TSL is set to “Baseline” will reproduce the values 

reported in the direct final rule documents.

5. Summary Table Buttons 

In this area of the spreadsheet, there are two macros available. The first macro populates 

a summary table of INPV results based on the economic scenario, markup scenario, and financial 

parameters for each active mode TSL. The second macro populates a summary table of INPV 

results based on the economic scenario, markup scenario, and financial parameters for each 

standby mode and off mode TSL. 

By clicking the blue button labeled “Calculate INPV results for active mode TSLs for the 

selected markup scenario,” results are populated in the table on the tab labeled “Summary Report 

(RESULTS)”. By clicking the blue button labeled “Calculate INPV results for Standby/Off mode 

TSLs for the selected markup scenario”, results are populated in the table on the tab labeled 

“Offmode Summary.”