CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

......................................................................................................... 12­1

12.2 METHODOLOGY

........................................................................................................ 12­1

12.2.1 Phase I: Industry Profile.................................................................................... 12­2

12.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide........................... 12­2

12.2.2.1 Industry Cash­Flow Analysis............................................................... 12­2

12.2.2.2 Interview Guide

................................................................................... 12­2

12.2.3 Phase III: Manufacturer Sub­Group Analysis................................................... 12­2

12.2.3.1 Manufacturer Interviews...................................................................... 12­3

12.2.3.2 Revised Industry Cash­Flow Analysis................................................. 12­3

12.2.3.3 Sub­Group Analysis............................................................................. 12­3

12.2.3.4 Competitive Impact Assessment.......................................................... 12­4

12.2.3.5 Manufacturing Capacity Impact

.......................................................... 12­4

12.2.3.6 Employment Impact............................................................................. 12­4

12.2.3.7 Cumulative Regulatory Burden

........................................................... 12­4

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS................... 12­5

12.3.1 Impact on Financial Performance

...................................................................... 12­5

12.3.1.1 Conversion Costs

................................................................................. 12­5

12.3.1.2 Equipment Mix and Profitability

......................................................... 12­6

12.3.1.3 Customer Mix

...................................................................................... 12­6

12.3.2 Impact on U.S. Production and Jobs.................................................................. 12­6

12.3.2.1 Foreign Labor....................................................................................... 12­6

12.3.2.2 Industry Consolidation......................................................................... 12­6

12.3.3 Impact on Equipment Utility and Innovation

.................................................... 12­7

12.3.4 Cumulative Burdens........................................................................................... 12­7

12.3.4.1 Phaseout of Hydrochlorofluorocarbon­Based Refrigerants and Foam

Insulation Blowing Agents

................................................................................ 12­8

12.3.4.2 Standards for Other Equipment Made by Beverage Vending Machine

Manufacturers

.................................................................................................... 12­8

12.3.4.3 State Energy Conservation Standards.................................................. 12­9

12.3.4.4 International Energy Conservation Standards

..................................... 12­9

12.3.4.5 Impact of Cumulative Burden on Small Manufacturers

...................... 12­9

12­i12­iiCHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify the likely

impacts of energy conservation standards on manufacturers. The U.S. Department of

Energy (DOE) will conduct this analysis with input from manufacturers and other

interested parties and will apply this methodology to its evaluation of energy

conservation standards. DOE will also consider financial impacts and a wide range of

quantitative and qualitative industry impacts that might occur following the adoption of a

standard. For example, adoption of a particular energy conservation standard could

require changes to beverage vending machine (BVM) manufacturing practices. DOE will

identify and document these impacts through interviews with manufacturers and other

stakeholders during the Notice of Proposed Rulemaking (NOPR) stage of its analysis.

Recently, DOE announced changes to the MIA format through a report issued to

Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of

2005 (EPACT 2005)), entitled “Energy Conservation Standards Activities.” a Previously,

DOE did not report any MIA results during the Advance Notice of Proposed Rulemaking

(ANOPR) phase. Under this new format, DOE has collected, evaluated, and reported

preliminary information and data in the ANOPR. Such preliminary information includes

the anticipated conversion capital expenditures by energy conservation standard level and

the corresponding anticipated impacts on jobs. DOE solicited this information through

manufacturer interviews conducted during the ANOPR engineering analysis; the results

are reported below.

12.2 METHODOLOGY

DOE conducts the MIA in three phases and then tailors the analytical framework

based on stakeholder comments. In Phase I, DOE creates an industry profile to

characterize the industry and conducts a preliminary MIA to identify issues that require

consideration. Results of the Phase I analysis are presented in this chapter of the ANOPR

Technical Support Document (TSD). In Phase II, DOE prepares an industry cash­flow

model and an interview questionnaire to guide subsequent discussions. In Phase III,

DOE interviews manufacturers and assesses the impacts of standards both quantitatively

and qualitatively. Industry and sub­group cash flow and net present value (NPV) are

assessed through use of the Government Regulatory Impact Model (GRIM). DOE then

assesses impacts on competition, manufacturing capacity, employment, and regulatory

burden based on manufacturer interview feedback and discussions. Results of the Phase

II and III analyses are presented in the NOPR TSD.

a This report is available on the DOE website at http://www.eere.energy.gov/buildings/appliance_standards/

2006_schedule_setting.html.

12­112.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE collects pertinent qualitative and quantitative

financial and market information to characterize the BVM manufacturing industry. This

includes BVM manufacturer market share, corporate operating ratios, wages,

employment, and production cost ratios. Sources of information include reports

published by industry groups, trade journals, the U.S. Census Bureau, and Securities

Exchange Commission 10­K filings. DOE also relies on information from the ANOPR

analyses, including the market and technology assessment, engineering analysis, lifecycle cost analysis, and analysis of markups to determine equipment price.

12.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide

In Phase II, DOE will perform a preliminary industry cash­flow analysis and

prepare written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash­Flow Analysis

DOE uses the GRIM to analyze the financial impacts of proposed energy

conservation standards on the BVM industry. New standards will likely require

additional investment, raise production costs, and affect revenue through higher prices,

and possibly lower sales. The GRIM uses several factors to determine a series of annual

cash flows for the year standards become effective and for several years thereafter.

These factors include: taxes; costs of sales; annual expected revenues; selling and

general administration costs; and capital expenditures related to depreciation, new

standards, and maintenance. Inputs to the GRIM include manufacturing costs, shipments

forecasts, and price forecasts developed in other analyses. Financial information will be

developed based on publicly available data and confidentially submitted manufacturer

information. DOE compares the results of the GRIM against baseline projections where

no standards are in place. The financial impact of new standards is the difference

between the two sets of discounted annual cash flows.

12.2.2.2 Interview Guide

During Phase III of the MIA, DOE will interview manufacturers to gather

information on the effects of standards on revenues and finances, direct employment,

capital assets, and industry competitiveness. Before the interviews, DOE will distribute

an interview guide to identify relevant issues and the impacts of standards on individual

manufacturers or sub­groups of manufacturers. DOE anticipates that the interview guide

will cover current organizational characteristics, industry infrastructure, manufacturer

cash­flow analysis, a competitive impacts assessment, an employment impacts

assessment, and a manufacturing capacity impacts assessment.

12.2.3 Phase III: Manufacturer Sub­Group Analysis

Phase III activities will take place after the publication of the ANOPR and will

include manufacturer interviews, revision of the industry cash­flow analysis,

12­2manufacturer sub­group cash­flow analysis, competitive impact assessment,

manufacturing capacity impact, employment impact, and cumulative regulatory burden.

12.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash­flow analysis performed in

Phase II will be supplemented with information gathered during interviews with

manufacturers in Phase III. The interview process has a key role in the manufacturer

impact analyses since it provides an opportunity for interested parties to express their

views privately on important issues, which allows DOE to consider confidential or

sensitive information in the rulemaking decision.

DOE will conduct detailed interviews with as many manufacturers as necessary to

gain insight into the range of potential impacts of standards. During the interviews, DOE

will solicit information on the possible impacts of standards on sales, direct employment,

capital assets, and industry competitiveness. Both qualitative and quantitative

information are valuable. Interviews will be scheduled well in advance to give key

individuals every opportunity to be available for comment. Although a written response

to the questionnaire will be acceptable, DOE prefers an interactive face­to­face interview,

which help the interviewers clarify responses and identify additional issues.

All information transmitted will be considered in DOE’s decision­making

process. DOE will ask interview participants to identify all confidential information; no

confidential information will be made available in the public record. Participants will

also be asked to identify the information they wish to include in the public record but do

not want to have associated with their interview. This information will be incorporated

into the public record but reported without attribution.

12.2.3.2 Revised Industry Cash­Flow Analysis

In Phase II of the MIA, DOE will provide manufacturers with a preliminary

GRIM for review and evaluation. During the interviews, DOE will seek comments

regarding the values selected for the parameters. Upon completion of the interviews,

DOE will revise its industry cash­flow model based on feedback from the interviews.

12.2.3.3 Sub­Group Analysis

Using average cost assumptions to develop an industry cash­flow estimate is not

adequate for assessing differential impacts among sub­groups of manufacturers. Smaller

manufacturers, niche players, and manufacturers exhibiting a cost structure that differs

largely from the industry average could be more negatively affected. Ideally, DOE

would consider the impact on every firm individually; however, it typically uses the

results of the industry characterization of sub­groups of manufacturers exhibiting similar

characteristics. During the interviews, DOE will discuss with manufacturers the potential

sub­groups and sub­group members identified for the analysis. DOE will ask

manufacturers and other stakeholders to suggest which sub­groups or sub­group

characteristics are the most appropriate for the analysis.

12­312.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE

to consider any lessening of competition likely to result from the imposition of new

standards. It further directs the U.S. Attorney General to determine the impacts, if any, of

any decrease in competition. DOE will make a determined effort to gather and report

firm­specific financial information and impacts. The competitive analysis will focus on

assessing the impacts on smaller, yet significant, manufacturers. The assessment will be

based on manufacturing cost data and on information collected during the interviews.

The interviews will focus on gathering information that will help DOE assess

asymmetrical cost increases to some manufacturers, the potential increase in business

risks from an increased proportion of fixed costs, and potential barriers to market entry

(e.g., proprietary technologies).

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of new standards could be the obsolescence of

existing manufacturing assets, including tooling and investment. The manufacturer

interview guide will include a series of questions to help identify impacts on

manufacturing capacity, specifically capacity utilization and plant location decisions in

the United States and North America with and without a new standard; the ability of

manufacturers to upgrade or remodel existing facilities to accommodate the new

manufacturing requirements; the nature and value of stranded assets, if any; and estimates

for any one­time restructuring and other charges, where applicable.

12.2.3.6 Employment Impact

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

consideration in the rulemaking process. To assess how domestic employment patterns

might be affected, the interview will explore current employment trends in the beverage

vending machine industry. The interview will also solicit manufacturer views on changes

in employment patterns that may result from implementation of energy conservation

standards. The employment impacts section of the interview guide will focus on the

number of employees at each production facility, expected future employment levels with

and without a new standard, differences in workforce skills, and issues related to

retraining.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of new or revised

energy conservation standards and other regulatory actions affecting the same equipment.

DOE will analyze and consider the impact on manufacturers of multiple, equipmentspecific regulatory actions.

Based on its own research and discussions with manufacturers, DOE identified

several regulations relevant to beverage vending machines. These include a

hydrochlorofluorocarbon (HCFC)­based refrigerant phaseout and foam insulation

blowing agent phaseout, manufacturing standards for other equipment made by BVM

12­4manufacturers, existing Federal energy conservation standards for beverage vending

machines, and other State and international energy conservation standards. DOE will

study the potential impacts of these cumulative regulatory burdens in greater detail during

Phase III of the MIA.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

During the ANOPR phase, DOE conducted a preliminary evaluation of the impact

of potential new regulations on BVM manufacturer financial performance, manufacturing

capacity, employment levels, and equipment utility and innovation. A primary focus was

to identify the cumulative burden that industry faces from the overlapping effect of recent

DOE energy conservation standards and other regulatory actions affecting the same

equipment or industry.

The primary sources of information for this analysis were telephone interviews

and site visits with manufacturers of beverage vending machines conducted during spring

2007. To maintain confidentiality, DOE did not identify the individual manufacturers

that disclosed information. The evaluation only reports aggregated information and does

not reveal sensitive information or identify company­specific information.

12.3.1 Impact on Financial Performance

DOE received opinions from manufacturers about what they perceive to be the

possible impact of potential new standards on their future profitability. They stated that a

new energy conservation standard has the potential to affect financial performance in

several ways. The capital investment needed to upgrade or redesign equipment and

manufacturing platforms before they have reached the end of their useful life can be

significant and result in stranded investments. More stringent standards can also result in

higher per­unit costs that may deter some customers from buying higher­margin units

with more features, thereby decreasing manufacturer profitability.

12.3.1.1 Conversion Costs

DOE estimates that a BVM production line would have a life cycle of

approximately 5 to 10 years in the absence of energy conservation standards. During that

period, manufacturers would not make major equipment changes that altered the

underlying platforms. Thus, a standard that took effect and resulted in a major platform

redesign before the end of the platform’s life would cause manufacturers to lose a portion

of their earlier capital investments.

DOE asked manufacturers what level of conversion costs they anticipated if

energy conservation standards were to take effect. In general, manufacturers only

expected conversion costs from redesigning insulation foaming fixtures. Manufacturers

stated that no capital investments would be needed to go from the ENERGY STAR Tier

1 level to the Tier 2 level. One manufacturer estimated that several millions dollars in

retooling would be needed to comply with energy efficiency levels beyond the ENERGY

12­5STAR Tier 2 level. One manufacturer indicated that it would move production facilities

out of the country if standards were too stringent, which would result in stranded assets.

12.3.1.2 Equipment Mix and Profitability

DOE asked manufacturers how a new energy efficiency standard would affect

equipment mix and profitability. Manufacturers replied that energy efficiency standards

would not have a significant impact on the BVM equipment mix because pricing in the

industry is inelastic. One manufacturer stated that standards would lead to lower sales

and decreased profit margins, since this manufacturer does not pass cost increases along

to its customers. Manufacturers also stated that new standards could decrease

profitability because vending machines are only one of the available options for their

customers. For example, instead of purchasing new beverage vending machines,

customers could choose to purchase remanufactured equipment, extend the installed

lifetime of their existing equipment, or switch to reach­in coolers or fountains.

12.3.1.3 Customer Mix

Because manufacturers typically pass on cost increases to the customer, many

manufacturers said that the customer stands to lose the most from a new energy

efficiency standard. Several manufacturers predicted that the increased cost of beverage

vending machines could squeeze smaller BVM operators (i.e., an operator of only 10 to

20 machines) financially, and could cause consolidation within the beverage vending

machine operators’ industry.

12.3.2 Impact on U.S. Production and Jobs

The impact of new energy efficiency standards on employment is an important

consideration in the rulemaking process. DOE posed several questions to manufacturers

to assess how domestic employment patterns might be affected by new energy efficiency

standards for beverage vending machines.

12.3.2.1 Foreign Labor

Some BVM manufacturers have considered moving their production out of the

United States if future energy efficiency standards are too stringent, primarily because of

concerns about profitability and because labor costs may be lower elsewhere. If

manufacturers need to make large capital investments to produce redesigned platforms,

they have a strong financial incentive to invest in a location where labor costs less.

Mexico is the most common location for U.S. manufacturers to establish new production

capacity because of its lower labor rates and proximity to the United States.

12.3.2.2 Industry Consolidation

DOE asked manufacturers to what degree they expect industry would

consolidate in the absence of standards. Manufacturers said that there would be no

industry consolidation in the future. Three companies now account for a large majority

of BVM sales. Historically, the beverage vending machine industry has not seen

12­6extensive consolidation, although there has been a lot of consolidation for bottling

companies in recent years.

Manufacturers had mixed opinions about whether standards would affect their

ability to compete. Some stated that new standards would not disproportionately advance

or harm their competitive positions. Others stated that if a company had more available

access to capital, that company might meet the standard at a lower cost or in less time,

and would thus be more competitive and possibly gain market share.

12.3.3 Impact on Equipment Utility and Innovation

DOE understands that new standards can affect purchasers of beverage vending

machines by increasing or decreasing the utility of such equipment, e.g., the interior

volume or non­energy­related features. Manufacturers said that more stringent energy

efficiency standards could reduce equipment utility. For example, if more stringent

standards caused manufacturers to change or even eliminate lighting in their machines,

their customers could lose the ability to advertise. Therefore, higher standards could

affect utility for customers and affect beverage sales. Any loss of convenience could also

have a major negative impact on their customers.

DOE asked manufacturers how a new energy efficiency standard would affect

innovation. Some manufacturers stated that more stringent standards would require

redesigning some portion of their equipment lines. In turn, this would consume research

and development (R&D) resources, both human and financial, and direct these assets

away from other potential investments that would normally go toward providing

customers with enhanced functionality or developing new equipment. One manufacturer

noted that its customers do not receive any direct electricity cost savings from energy

efficiency improvements since they are not responsible for the electricity bill for the

machines. They pointed out, however, that energy efficiency research now comprises a

larger portion of their R&D budget than it did 5 to 10 years ago.

12.3.4 Cumulative Burdens

Based on its own research and discussions with manufacturers, DOE identified

several regulations relevant to beverage vending machines, including:

• Existing or new standards for beverage vending machines;

• Phaseout of HCFC­based refrigerants and foam insulation blowing agents;

• Standards for other equipment made by BVM manufacturers;

• State energy conservation standards; and

• International energy conservation standards.

Complying with such regulations requires corporations to invest both human and

capital resources. The following subsections discuss in greater detail regulations

affecting the BVM industry.

12­7Also, DOE considers the possibility of small businesses being particularly

affected by new energy efficiency standards for beverage vending machines. In the

market and technology assessment (chapter 3) of the TSD, DOE identified several small

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

DOE will study the potential impacts of these cumulative burdens and impacts on

small businesses in greater detail during the MIA, which DOE will conduct as part of the

NOPR analysis.

12.3.4.1 Phaseout of Hydrochlorofluorocarbon­Based Refrigerants and Foam

Insulation Blowing Agents

Due to the phaseout of chlorofluorocarbons (CFCs) and HCFCs, the industry must

transition to non­ozone­depleting refrigerants. As a result, the refrigeration industry is

transitioning to using hydrofluorocarbon­based (HFC­based) refrigerants in its

equipment. For the BVM equipment covered in this rulemaking, DOE understands that

most of the industry is already using HFC­based refrigerants such as HFC­134a.

Producing foam insulation requires a blowing agent. The Environmental

Protection Agency’s (EPA) strategy for meeting U.S. obligations under the Montreal

Protocol requires the United States to phase out the production and use of HCFC blowing

agents. For example, the United States phased out HCFC­141b on January 1, 2003.

Import of HCFC­141b is also prohibited, and production of HCFC­141b may only

continue in the United States for export to other countries with a later phaseout date, such

as Mexico.

HCFC­22 and HCFC­142b will be phased out on January 1, 2010, so U.S.

manufacturers are switching to blowing agents with zero ozone depletion potential

(ODP). One BVM manufacturer estimated the required investment to be approximately

$90,000 per foaming fixture.

An example of a zero­ODP blowing agent is HFC­245fa. Only one company,

however, produces HFC­245fa for the U.S. market. Switching to HFC­245fa as a

potential blowing agent, therefore, represents a significant challenge to manufacturers

wishing to control equipment costs and avoid future production disruptions. Alternative

blowing agents such as HFC­134a or cyclopentane have other drawbacks, such as lower

thermal resistance or increased implementation costs due to flammability.

12.3.4.2 Standards for Other Equipment Made by Beverage Vending

Machine Manufacturers

In addition to the energy efficiency regulations on beverage vending machines,

several other Federal regulations apply to equipment made by BVM manufacturers. For

example, some manufacturers in the BVM industry are subsidiaries of larger parent

companies that manufacture other commercial equipment, such as reach­in beverage

merchandisers that are subject to Federal regulations. The industry must address the

EPA­mandated phaseout of HCFC­based refrigerants in this equipment as well. DOE

12­8will investigate these cumulative regulatory burdens in greater detail during the MIA

analysis in the NOPR phase of the rulemaking.

12.3.4.3 State Energy Conservation Standards

DOE identified and described regulatory programs at the State level in chapter 3

of the TSD for the equipment covered in this rulemaking. For example, the California

Energy Commission regulates design requirements for beverage vending machines.

Other States have similar requirements.

12.3.4.4 International Energy Conservation Standards

DOE addressed regulatory programs from certain other countries, such as Canada,

in chapter 3 of the TSD for beverage vending machines. Most BVM manufacturers sell a

small portion of their total production to countries outside the United States. In such

cases, the equipment must meet the standards for those countries. Companies may design

some units to meet standards that are more stringent than those imposed by the United

States to minimize the number of equipment variations.

12.3.4.5 Impact of Cumulative Burden on Small Manufacturers

In chapter 3 of the TSD, DOE identified several small businesses that

manufacture beverage vending machines. SBA’s small business size standards are

matched to industries described in the North American Industry Classification System

(NAICS). A size standard is the largest that a for­profit concern can be and still qualify

as a small business for Federal Government programs. Size standards are generally based

on a firm’s average annual receipts or average number of employees. For beverage

vending machines, the size standard is matched to NAICS code 333311, Automatic

Vending Machine Manufacturing, which has a size standard of 500 employees.

The manufacturer interviews indicated that smaller BVM manufacturers typically

have smaller corporate R&D staff than larger manufacturers have. Smaller

manufacturers tend to produce niche or specialty equipment that larger manufacturers do

not produce. Although small manufacturers often have a more limited equipment range

than larger manufacturers, some costs spent on addressing regulations are relatively fixed

and do not scale directly with the number of units or platforms produced. Consequently,

regulations will tend to place more of a burden on smaller manufacturers because of their

more limited resources.

DOE will study the potential impacts to these small businesses in greater detail

during the MIA as part of the NOPR analysis.

12­9