CHAPTER 12 : PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

......................................................................................................... 12-1

12.2 METHODOLOGY

........................................................................................................ 12-1

12.2.1 Phase 1: Industry Profile

.................................................................................... 12-2

12.2.2 Phase 2: Industry Cash-Flow Analysis and Interview Guide

............................ 12-2

12.2.3 Phase 3: Subgroup Analysis

............................................................................... 12-2

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

................... 12-4

12.3.1 Industry Overview

............................................................................................. 12-5

12.3.2 Interview Topics and Preliminary Findings

....................................................... 12-7

12.3.3 Overall Key Issues

........................................................................................... 12-10

LIST OF TABLES

Table 12.3.1 Central Air Conditioner and Heat Pu mp Industry Employment and Earnings

.... 12-5 Table 12.3.2 Central Air Conditioner and Heat Pump Industry Material and Payroll Costs

.... 12-5

Table 12.3.3 Central Air Conditioner and Heat Pu mp Industry End-of-Year Inventory

.......... 12-6 Table 12.3.4 Full Production Capaci ty Utilization Rates

.......................................................... 12-6 Table 12.3.5 Central Air Conditioner and Heat Pump Industry Year 2007 Data as a Percentage of

Revenue

....................................................................................................................... ..... 12-7

Table 12.3.6 Other 2007 Financials

........................................................................................... 12 -7CHAPTER 12: PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the likely impacts of amended energy conservation standards on manufacturers. In the Notice of Proposed Rulemaking (NOPR) stage of analys is, the U.S. Department of Energy (DOE) considers a wide range of quan titative and qualitative industry impacts that might occur due to an amended energy conservation standard. For exampl e, a particular standa rd level could require changes in manufacturing practices. DOE identifies and analyzes these impacts during the NOPR stage. To the extent that it is appropriate for this rulemaking, DOE applies this methodology to evaluate amended energy conservation standard s for central air conditioners and heat pumps.

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.” 1 Previously, DOE did not report any MIA results until the notice of proposed rulemaking st age (NOPR). However, under this new format, DOE collects, evaluates, and reports preliminary information and data in the preliminary analysis. Such preliminary information includes efficiency and market data, key issues, production mixes, conversion costs, foreign compe tition, market shares, industry consolidation, and cumulative regulatory information. DOE so licited this information during the preliminary manufacturer interviews and reports the results in this chapter. Appendix 12A includes a copy of the interview guide that DOE distributed to manufacturers.

12.2 METHODOLOGY

DOE conducts the MIA in three phases. In Ph ase 1, DOE creates an industry profile to characterize the industry and conducts a prelimin ary MIA to identify important issues that require consideration. Se ction 12.3 of this chapter presents initial findings of the Phase 1 analysis. In Phase 2, DOE prepares an industry cash flow model and an interview questionnaire to guide subsequent discussions with manufactur ers. In Phase 3, DOE interviews manufacturers and assesses the impacts of amended energy conservation standards both quantitatively and qualitatively. DOE assesses industry and subgro up cash flow impacts and industry net present value (INPV) using the Government Regulatory Impact Model (GRIM). DOE then assesses impacts on competition, manufacturing capacity, em ployment, and regulatory burden based on

manufacturer interviews and discussions. DOE wi ll conduct Phase 2 and 3 for the NOPR stage of the rulemaking.

1 This report is available on the DOE website at www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html

.

12-112.2.1 Phase 1: Industry Profile

In Phase 1 of the MIA, DOE collects pertinent qualitative and quantitative financial and market information. This includes wages, em ployment, industry cost data, and capacity utilization rates for manufacturers of central air conditioners and heat pumps. Sources of information include reports published by indus try groups, trade journals, the U.S. Census Bureau, and Securities Exchange Commission (S EC) 10-K filings. In addition, DOE relies on information from its market and technology asse ssment, engineering analysis, life-cycle cost analysis, and consumer price analysis to characterize the central air conditioner and heat pump manufacturing industry.

12.2.2 Phase 2: Industry Cash-Flow Analysis and Interview Guide

In Phase 2, DOE performs a preliminary industry cash-flow analysis and prepares written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash-Flow Analysis

DOE uses the GRIM to analyze the financia l impacts of amended energy conservation standards. Amended energy conservation standard s may require additional investment, increase production costs, and affect revenue through high er prices and possibly lower shipments. The

GRIM uses several factors to determine a series of annual cash flows for the year that amended energy conservation standards become effectiv e and for several years after implementation. These factors include annual expected revenues, costs of sales, selling and general administration costs, taxes, and capital expenditures. Inputs to the GRIM include financial information, manufacturing costs, shipment forecasts, and pr ice forecasts developed in other analyses. The financial information is developed from publicly available data and confidentially submitted manufacturer information. DOE compares the resu lts of the GRIM against baseline projections in which no amended energy conservation standa rds are in place. The financial impact of amended energy conservation standards is the di fference between the two sets of discounted

annual cash flows.

12.2.2.2 Interview Guide

DOE conducts interviews with manufacturers to gather in formation on the effects of amended energy conservation standards on revenu es and finances, direct employment, capital assets, and industry competitiven ess. Before the interviews, which occur in Phase 3, DOE distributes an interview guide to help identif y the impacts of amended energy conservation

standards on individual manufactur ers or subgroups of manufacturers. Interview guide topics include: production costs; ship ment projections and market share; product mix; conversion costs; markups and profitab ility; assessment of the impact on competition, manufacturing capacity, and other topics that are relevant to assessing the impacts of amended energy

conservation standards on the central air conditioner and heat pump industry.

12.2.3 Phase 3: Subgroup Analysis

Phase 3 activities take place afte r publication of the preliminary analysis notice of public meeting. These activities include manufacturer in terviews; revision of the industry cash-flow

12-2analysis; a manufacturer subgroup analysis; an assessment of the impacts on industry competition, manufacturing capacity, direct employment and the cumulative regulatory burden; and other qualitative impacts.

12.2.3.1 Manufacturer Interviews

DOE conducts detailed interviews with manufacturers to gain insight into the potential impacts of amended energy conservation standard s on sales, direct empl oyment, capital assets, and industry competitiveness. Interviews are scheduled well in advance to provide every opportunity for key individuals to be availabl e for comment. Although a written response to the questionnaire is acceptable, DOE prefers interactiv e interviews, which help clarify responses and provide the opportunity to identify additional issu es not specifically addressed in the interview questionnaire. A non-disclosure agreement allows confidential or sensitiv e information to be considered in DOE’s decision-making process. However, confidential information will not be made available in the public record. At most, sensitive or confidential information may be aggregated and presented in i ndustry-wide representations.

DOE supplements the information gathered in Phase 1 and the cash flow analysis performed in Phase 2 with information gathered during manufacturer interviews. The interview process is critical to the MIA because it provides an opportunity for interested parties to privately express their views on important issues.

12.2.3.2 Revised Industry Cash-Flow Analysis

During the interviews, DOE requests inform ation about profitabilit y impacts, necessary plant changes, and other manufacturing impacts. Following the interview process, DOE revises its industry cash flow model based on the feedback it receives.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to devel op an industry cash flow estimate will not adequately assess differential impacts among ma nufacturer subgroups. Smaller manufacturers, niche players, and manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected. Id eally, DOE would consider the impact on every firm individually; however, it typically uses the results of the industry characterization to group manufacturers with similar characteristics. During the interviews, DOE discusses the potential subgroups that have been identified for th e analysis. DOE asks manufacturers and other interested parties to suggest what subgroups or characteristics are most appropriate for the analysis.

12.2.3.4 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 imposition of standards. EPCA further directs the U.S. Attorney General to determine the impacts, if any, of any decrease in competition. DOE attempts to gath er and report firm-specific fi nancial informa tion and impacts. The competitive impact assessment will be based on manufacturer cost data and information collected from interviews. The interviews will focus on assessing asymmetrical cost increases to

12-3some manufacturers, the potential increase in business risks from an increased proportion of fixed costs, and potential barriers to market entry ( e.g ., proprietary technologies). The competitive analysis will also focus on assessing any differential impacts to smaller

manufacturers.

12.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards can be the obsolescence of existing manufacturing assets, in cluding tooling and other investments. The manufacturer interview guide will have a seri es of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in North America with and without amended energy conser vation standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of stranded assets, if any; and estimates for any one-time restructuring or other charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To as sess how domestic employ ment patterns might be affected, the interview will explore current employ ment trends in the central air conditioner and heat pump industry and solicit manufacturer views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide will focus on current employment levels at production facilities; expected future employment levels with and without an amended energy c onservation standard; differences in workforce skills; and employee retraining.

12.2.3.7 Cumulative Regu latory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to energy conservation standards and other regulatory actions. If possible, DOE will consider the impact on manufacturers of multiple, pr oduct-specific regulatory actions.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

For the preliminary analysis, DOE conducted a preliminary evaluation of the impact of potential amended energy conser vation standards on the central air conditioning and heat pump industry. A primary focus was to identify the cumulative burden that the industry faces from the overlapping effect of new or recent DOE energy conservation standards a nd/or other regulatory action affecting the same equipment or industry.

The primary source of information for this an alysis was interviews with manufacturers of central air conditioning and heat pump produc ts, conducted during the spring of 2009. To maintain confidentiality, DOE only reports aggreg ated information here. DOE does not disclose company-specific information, nor does it identif y the individual manufact urers that disclosed

information.

12-412.3.1 Industry Overview

The following section summarizes publicly available industry data.

12.3.1.1 Industry Cost Structure

DOE developed the central air conditioner and heat pump industry cost structure from the

U.S. Census Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and

Industries from 2002-2007. Residential Central Air Conditioner and Heat Pump manufacturing

is classified under the North American Industry Classifica tion System (NAICS) code 333415 ( AC, Refrigeration, and Forced Air Heating ).

Table 12.3.1 presents the central air conditione r and heat pump employment levels and earnings from 2002 to 2007. The statistics illustrate approximately an 8-percent decrease in the number of production workers and in the ov erall number of employees from 2002 to 2007.

Table 12.3.1 Employment and Earnings for th e Central Air Conditioner and Heat Pump Industry

Year Production Workers All Employees Annual Payroll (thousand $)

2002 80,400 108,252 3,815,129

2003 77,471 104,646 3,775,799

2004 73,559 99,669 3,707,969

2005 76,011 102,354 3,942,808

2006 74,909 98,097 4,019,813

2007 73,993 100,284 3,975,785

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

Table 12.3.2 presents the costs of materials and industry payroll as a percentage of shipment value from 2002 to 2007. The cost of mate rials as a percentage of shipment value has steadily increased from 2002 to 2007. The cost of payroll for production workers and the cost of total payroll have declined by 17.3 pe rcent and 16.1 percent, respectively.

Table 12.3.2 Material and Payroll Costs for th e Central Air Conditioner and Heat Pump Industry

Year Cost of Materials (percent of shipment value) Cost of Payroll

for Production Workers (percent of shipment value) Cost of Total Payroll (percent of shipment value)

2002 49.36 9.83 15.85

2003 50.59 9.53 15.39

2004 51.81 8.99 14.57

2005 53.78 8.52 13.78

2006 53.17 8.87 13.80

2007 55.52 8.12 13.29

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

12-512.3.1.2 Inventory Levels

Table 12.3.3 shows the end-of-year inventory for the central air conditioner and heat pump industry obtained from the U.S. Census Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries from 2002 to 2007. The end-of-year inventory is defined as the The industry’s end-of-year i nventory from 2002 to 2007 experienced an overall increase when expressed both in dollars a nd as a percentage of shipment value.

Table 12.3.3 End-of-Year Inventory for the Central Air Conditioner and Heat Pump Industry

Year End-of-Year Inventory (thousand $) End-of-Year Inventory (percent of shipment value)

2002 2,302,012 9.57

2003 2,376,827 9.69

2004 2,473,932 9.72

2005 2,687,441 9.39

2006 2,887,139 9.91

2007 3,011,358 10.07

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

DOE obtained full production capacity utilization rates from the U.S. Census Bureau, “Current Industrial Reports,” Survey of Plant Capacity from 2002 to 2006. Table 12.3.4 presents production capacity utilization rates for NAICS code 333415. Full production capacity is defined as the maximum level of produc tion an establishment could attain under normal operating

conditions. In the Survey of Plant Capacity report, the full production utili zation rate is a ratio of the actual level of operations to the full production level.

Table 12.3.4 Full Production Capacity Utilizatio n Rates for the Central Air Conditioner and Heat Pump Industry

Year AC and Warm Air Heating and Comm ercial/Industrial Refrigeration Equipment Manufacturing (%)

2002 60

2003 62

2004 60

2005 66

2006 63

Source: U.S. Census Bureau. 2007 Current Industrial Reports: Table 1a - Full Production Capacity Utilization Rates by Industry: Fourth Quarters 2002 through 2006. November 2007

12.3.1.3 Other Industry Data

Table 12.3.5 shows various 2007 statistics for th e central air conditioner and heat pump industry, as taken from Standard and Poor Annual Reports and ma nufacturer 10-K reports.

12-6Table 12.3.5 2007 Financial Data as a Percentage of Revenue for the Central Air Conditioner and Heat Pump Industry

Measure Amount as a Percentage of Revenue
Property, Plant, & Equipment, Net 20.0%
Depreciation 1.7%

R&D 2.5%

Capex 2.2%
Selling, General & Admin. Expense 13.2%

Working Capital 6.6%

Current Assets 34.0%

EBIT 6.8%

Source: Standard & Poor Annual Reports, 10Ks

Table 12.3.6 presents the 2007 central air c onditioner and heat pump industry data detailing the industry tax rate, real weighted av erage cost of capital, and manufacturer markup. The manufacturer markup is a factor that rais es the manufacturer production cost (MPC) to the manufacturer selling price (MSP). It accounts for non-production costs such as SG&A, R&D, as well as profit.

Table 12.3.6 Other 2007 Financials

Tax Rate as a % of Earnings before Tax 26.4%

Real WACC 10.3%

Markup 1.32

12.3.2 Interview Topics and Preliminary Findings

The following section summarizes information gathered during interviews held during the first and second quarters of 2009 for the preliminary MIA.

12.3.2.1 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the marketplace, prompting companies to enter the market, exit the market, or merge with other companies. During preliminary MIA interviews, manufacturers were asked to share their perspectives on industry consolidation both in the absence of amended energy conservation standards and assuming amended st andards at various efficiency levels. The need to assess anticompetitive effects of proposed amended energy conservation standards comes from the need to protect consumer interests. The interview que stions focused on gathering information that

assessed:

 disproportionate cost increases to some manufacturers;

 increased proportion of fixed costs potentially increasing business risks; and

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

During the interviews, DOE solicited information to determine whether amended energy

conservation standards could re sult in disproportionate economic or performance penalties for particular consumer or user subgroups. Manufacturers were also asked if amended energy

12-7conservation standards could re sult in products that would be more or less desirable to consumers due to changes in product func tionality, utility, or other features.

Market Shares: DOE inquired about current market shares of manufacturers in the central air conditioning and heat pump industry. DOE also asked how manufacturers expect their market share to change after an amended ener gy conservation standard. One manufacturer said that, under a new standard, some of their competit ors may elect to only participate in a certain product segment, which would lower their overall market share. According to this manufacturer, some companies may choose to exit some regions or product categories due to a lower return on

investment under the amended standards when co mpared to a potentially smaller market that could result from higher prices after amended standards. Another manufacturer said that standards favor larger companies, and the market share of smaller firms would not increase. Other manufacturers said that they expect no significant change in market share due to the adoption of the new standard, and that they see this market as a relatively level playing field.

Industry Consolidation: DOE inquired about the potential for industry consolidation in

the manufacturer interviews. One manufacturer said that industry consolidation is likely even in

the absence of amended standards because the in dustry is currently too small to support seven major manufacturers. Most manufacturers indicated that amended energy conservation standards could accelerate this trend. Some manufacturers said that, depending on the complexities of products required after the adoption of the amende d energy conservation standard, there could be

some consolidation. Manufacturers stated that a continued decline in shipments and a relatively high level of financing to comply with the amended standard would harm the industry. Large capital required to comply with the standard c ould harm manufacturers in part because this financing cannot be accounted for until the act ual standard level is public. Finally, one manufacturer indicated that if industry shipments are reduced due to higher prices of standardscompliant products, the industry would require less overall capacity. A lower diminished capacity could come through plant consolidation or company consolidation, but which one is unclear. They also claim that the greatest threat of consolidation comes from Asian firms, which would be potentially interested in buying an American manufacturer for increased access to

distribution channels.

12.3.2.2 Production and Product Mix

DOE requested manufacturers’ feedback on wh at they perceived to be the possible impact of energy conservation standards on profita bility. For instance, the capital and product conversion outlays needed to upgrade or redesign products before they ha ve reached the end of their useful life may create significant convers ion costs, resulting in reduced cash flow and stranded investments. Higher en ergy conservation standards could also result in higher per-unit

cost that could cause consumers to shift to less expensive products.

Product Mix: Manufacturers indicated that amen ded energy conservation standards would affect the product mix of central air conditioners and heat pumps. According to manufacturers, a reasonable energy conservation standard for central ai r conditioners and heat pumps would still allow for cost-effective, premium-efficiency products to be developed. One manufacturer said that a high energy conservatio n standard could result in a change in their product mix such that they may only offer products at the energy conservation standard. For that

12-8manufacturer, a high energy conservation standard might result in the loss of the opportunity to create up-sells, because consumers may not choos e a slightly more efficient unit. This manufacturer said that a high energy conservation standard increases the chances of market entrants, as producing a full range of products ta kes significant capital expenditures and entrants could focus only on the baseline level. The manufacturer also said that a more limited range of product offerings would create a commoditized ma rket, which would hurt their profitability.

Product Utility: Certain manufacturers expressed concern that amended energy conservation standards might require changes in product functionality, utility , and other features that would make products less desirable to consumers. Some manufacturers were concerned about the product size increases that would be associated with higher energy conservation standards. Due to the complexity and potential large size of central air conditioners and heat pumps at higher efficiency levels, manufacturers are concerned that installations will be far more difficult and could force many consumers to pay substantially higher installed costs if their replacement unit does not fit into their existing space.

12.3.2.3 Cumulative Regu latory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulatio ns may have serious consequences for some manufacturers, groups of manufacturers, or an enti re industry. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. For the cumulative regulatory burden analysis, DOE describes other significant product-specific regulations that could affect central air conditioner and heat pump manuf acturers or their parent companies.

Based on its own research and discussions with manufacturers, DOE identified several regulations relevant to central air conditioners and heat pumps, including:

 Phase-out of hydrochlorofluor ocarbon (HCFC) refrigerants

 DOE’s gas furnace rulemaking

 Other DOE regulations

Refrigerant: Due to the phase-out of HCFCs, th e central air conditioning and heat pump industry must transition to non-ozone-depleting refrigerants. As a result, the industry is transitioning to hydrofluorocarbon-based (HFC-bas ed) refrigerants in central air conditioners and heat pumps. Several manufacturers noted that the transition from HCFC R-22 to HFC R-410A has resulted in the complete redesign of all central air conditioners and heat pumps. Some manufacturers stated that some business was lost due to the refrigerant switch. In addition to the switch from R-22 to R-410A, a manufacturer expr essed concern about existing legislative proposals that would eliminate the use of HFCs. It said that this would require additional significant redesigns. See s ection 12.3.3.1 for additional details.

Other Appliance Standards: Several central air conditioning and furnace manufacturers also produce other appliances th at have existing or upcoming DOE energy conservation standards rulemakings. Some of these other appliances include residential furnaces, furnace fans, and direct heatin g equipment. Manufacturers stated that if these standards

12-9rulemakings for other appliances result in modi fications to their product designs or product offerings, then they could result in additional cumulative regulatory burdens.

Other Regulatory Concerns: Potential changes to the DOE test procedure are a major concern for manufacturers. Additionally, severa l manufacturers said that commercial standards affect their overall regulatory burden because of the switch to HFC R-410A refrigerant for those commercial products, potentially increasing its price. Another manufacturer expects the total impact of those other regulations to be higher product costs for customers, reduced profitability for manufacturers, and further reduced domestic manufacturing employment.

12.3.3 Overall Key Issues

Perhaps the most important aspect of the pr eliminary MIA is the opportunity it creates for DOE to identify key manufacturer issues early in the development of amended energy conservation standards. During preliminary interviews, manufacturers identified several major issues that are detailed in the following sections.

12.3.3.1 Refrigerant Switch

The EPA has mandated a phase- out of HCFC refrigerants (i.e., R-22) for use in new equipment in January 2010. DOE is basing its engineering analysis on HFC-based refrigerants that comply with the EPA phase-out of HCFCs. During interviews, manufacturers discussed the possible impact of these new refrigerants on their existing central air conditioners and heat pump designs. The switch from HCFC R-22 refriger ant to HFC R-410A refrigerant was a major concern. Manufacturers said that HFC refrigerant s would be significantly more expensive after the refrigerant switch because there would be no other viable alternatives. In addition, manufacturers pointed out that with higher SEER re quirements, more refrigerant is needed due to larger coil sizes. Because of the need for more HFC refrigerants at higher SEER ratings and the lack of alternatives, manufacturers stated th at amended energy cons ervation standards could cause a dramatic increase in the price of R-410A refrigerant. Manufacturers also noted that any alternative refrigerants to R-410A are unknown, whic h raises potential issues with uncertainty in the design of future systems, the research and development required, and the questionable availability of the necessary refrigerants.

12.3.3.2 Regional Standards

Several manufacturers expresse d concerns about the potential adoption of regional

standards. Manufacturers indicated that distribution channels a nd shipping would become more complicated and costly with regional standards. Ma nufacturers stated said that regional standards could potentially lower sales and increase requirements for testing, rating, labeling, etc. Some manufacturers stated that regional standards may ca use dealers to stop buying certain products in certain regions.

Most manufacturers indicated that they would prefer a single national standard, because regional standards could become very complicat ed. One manufacturer said that if a regional standard were set, then only two regions should be used because the distribution complexity greatly increases for each additional region. Th is manufacturer was concerned about the five

12-10regions that have been previously suggested. Manu facturers also stated that if regional standards are set, the regions should be identical to the regions used for furnaces, contiguous, and use the same rating method for each region.

During the interviews, DOE asked manufacturers whether regional standards would cause them to exit certain markets. Manufacturers said that the decision to offer products in a region depends on the stringency of the standards, market size, and profitability of offering those specific products in the region. Manufacturers said that it is highly unlikely that all manufacturers would participate in all regions, even if prices stabilized at a higher level. Also, manufacturers stated that they may elect not to offer products in certain regions if regional standards resulted in a significant change from th e baseline product. Manufacturers stated that if regional standards are effective in an area with low market share relative to the return on investment required to meet the amended standards, manufacturers would be more likely to exit that region.

Several manufacturers stated that their working capital, overhead costs, and research and development costs would have to be higher under regional standards. They said that there is also the potential for distribution consolidation. Some manufacturers stated that regional standards could cause transportation costs to increase, as they pay shipping as part of their factory distribution expenses. Finally, manufacturers we re concerned that enforcement of regional standards could be difficult, a nd asserted that building codes would have to be the enforcement

vehicle.

12.3.3.3 Product Repairs versus Product Replacement

Several manufacturers noted that an amended energy conservation standard could cause a trend to repair central air conditi oners and heat pumps rather than replace them. Higher prices of new products after the effective date of the amended standard may make the repair option relatively more attractive to consumers. Additionally, some manufacturers stated that lower income households would be more likely to repair failed units or substitute room air conditioners

for central air conditioners or heat pumps. These manufacturers poi nted to the results of the switch from the 10 SEER to the 13 SEER standard, which increased repairs relative to replacements and decreased shipments.

12.3.3.4 Shipments

Shipment projections can be a significant f actor in determining the impacts of amended energy conservation standards. The interviews provide an opportunity for manufacturers to share information that can help DOE quantify the magnitude of any changes in shipments resulting from amended energy conservation standards. In response to DOE inquiries about the potential change in shipments under a more stringent ener gy conservation standar d, several manufacturers believed shipments would d ecrease at higher standard levels . These manufacturers said that one example of a decline in shipments was shown by the switch to the 13 SEER standard in their industry from the previous standard. Manufacturers stated that 2009 shipments were down more than 50 percent from 2005.

12-11Some manufacturers said that based on the effects seen from the previous standard, the sales of room air conditioners would increase as a substitute. One manufacturer pointed out that higher efficiency products require more material, and higher material dema nd raises raw material

cost. This would in turn increase the cost of the consumer products. Following this logic, the manufacturer said that this increase in the central air conditioner and heat pump prices would dampen demand.

12.3.3.5 Impact on Manufacturer Outlook

DOE interviewed manufacturers about any poten tial change in outlook that could arise from the new standard. One manufacturer said that there is a significant risk with higher minimum efficiency standards coupled with potential regional standards. They also said that the higher the standards are and the more complex the distribution is, the less affordable the units

will become. Another manufacturer said that their outlook would not change with higher standard levels; that the necessary technology is av ailable; and that having time to adjust to the standard is their only main outlook concern.

12-12