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 Pump 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 Pump Industry End-of-Year Inventory .......... 12-6
 

Table 12.3.4 Full Production Capacity 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........................................................................................... 12-7
 
 

 

CHAPTER 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 analysis, the U.S. Department of Energy (DOE) 

considers a wide range of quantitative and qualitative industry impacts that might occur due to an 

amended energy conservation standard. For example, a particular standard 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 standards 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 stage (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 competition, market shares, industry consolidation, 

and cumulative regulatory information. DOE solicited 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 Phase 1, DOE creates an industry profile to 

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

require consideration. Section 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 manufacturers. In Phase 3, DOE interviews manufacturers 

and assesses the impacts of amended energy conservation standards both quantitatively and 

qualitatively. DOE assesses industry and subgroup cash flow impacts and industry net present 

value (INPV) using the Government Regulatory Impact Model (GRIM). DOE then assesses 

impacts on competition, manufacturing capacity, employment, and regulatory burden based on 

manufacturer interviews and discussions. DOE will 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. 

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12.2.1 Phase 1: Industry Profile 

In Phase 1 of the MIA, DOE collects pertinent qualitative and quantitative financial and 

market information. This includes wages, employment, industry cost data, and capacity 

utilization rates for manufacturers of central air conditioners and heat pumps. Sources of 

information include reports published by industry groups, trade journals, the U.S. Census 

Bureau, and Securities Exchange Commission (SEC) 10-K filings. In addition, DOE relies on 

information from its market and technology assessment, 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 financial impacts of amended energy conservation 

standards. Amended energy conservation standards may require additional investment, increase 

production costs, and affect revenue through higher 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 effective 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 price forecasts developed in other analyses. The 

financial information is developed from publicly available data and confidentially submitted 

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

in which no amended energy conservation standards are in place. The financial impact of 

amended energy conservation standards is the difference between the two sets of discounted 

annual cash flows. 

12.2.2.2 Interview Guide 

DOE conducts interviews with manufacturers to gather information on the effects of 

amended energy conservation standards on revenues and finances, direct employment, capital 

assets, and industry competitiveness. Before the interviews, which occur in Phase 3, DOE 

distributes an interview guide to help identify the impacts of amended energy conservation 

standards on individual manufacturers or subgroups of manufacturers. Interview guide topics 

include: production costs; shipment projections and market share; product mix; conversion 

costs; markups and profitability; 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 after publication of the preliminary analysis notice of public 

meeting. These activities include manufacturer interviews; revision of the industry cash-flow 

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analysis; 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 standards on sales, direct employment, capital assets, 

and industry competitiveness. Interviews are scheduled well in advance to provide every 

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

questionnaire is acceptable, DOE prefers interactive interviews, which help clarify responses and 

provide the opportunity to identify additional issues not specifically addressed in the interview 

questionnaire. A non-disclosure agreement allows confidential or sensitive 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 industry-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 information about profitability 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 develop an industry cash flow estimate will not 

adequately assess differential impacts among manufacturer subgroups. 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 to group 

manufacturers with similar characteristics. During the interviews, DOE discusses the potential 

subgroups that have been identified for the 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 gather and report firm-specific financial information 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 

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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). 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, including tooling and other investments. The 

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

manufacturing capacity, specifically capacity utilization and plant location decisions in North 

America with and without amended energy conservation 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 assess how domestic employment patterns might be 

affected, the interview will explore current employment 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 conservation standard; differences in workforce 

skills; and employee retraining. 

12.2.3.7 Cumulative Regulatory 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, product-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 conservation 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 and/or other regulatory 

action affecting the same equipment or industry. 

The primary source of information for this analysis was interviews with manufacturers of 

central air conditioning and heat pump products, conducted during the spring of 2009. To 

maintain confidentiality, DOE only reports aggregated information here. DOE does not disclose 

company-specific information, nor does it identify the individual manufacturers that disclosed 

information. 

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12.3.1 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 Classification System (NAICS) code 333415 

(AC, Refrigeration, and Forced Air Heating). 

Table 12.3.1 presents the central air conditioner 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 overall number of employees from 2002 to 2007. 

Table 12.3.1 Employment and Earnings for the 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 materials 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 percent and 16.1 percent, respectively. 

Table 12.3.2 Material and Payroll Costs for the 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 

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12.3.1.2 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 inventory from 2002 to 2007 experienced an overall 

increase when expressed both in dollars and 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 production an establishment could attain under normal operating 

conditions. In the Survey of Plant Capacity report, the full production utilization rate is a ratio of 

the actual level of operations to the full production level. 

Table 12.3.4 Full Production Capacity Utilization Rates for the Central Air Conditioner 

and Heat Pump Industry 

Year AC and Warm Air Heating and Commercial/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 the central air conditioner and heat pump 

industry, as taken from Standard and Poor Annual Reports and manufacturer 10-K reports. 

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Table 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 conditioner and heat pump industry data 

detailing the industry tax rate, real weighted average cost of capital, and manufacturer markup. 

The manufacturer markup is a factor that raises 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 standards 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 questions 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 result in disproportionate economic or performance penalties for 

particular consumer or user subgroups. Manufacturers were also asked if amended energy 

12-7
 
 

 

 

conservation standards could result in products that would be more or less desirable to 

consumers due to changes in product functionality, 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 energy conservation standard. One manufacturer said 

that, under a new standard, some of their competitors 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 compared 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 industry 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 amended 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 could harm manufacturers in part because this 

financing cannot be accounted for until the actual 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 what they perceived to be the possible 

impact of energy conservation standards on profitability. For instance, the capital and product 

conversion outlays needed to upgrade or redesign products before they have reached the end of 

their useful life may create significant conversion costs, resulting in reduced cash flow and 

stranded investments. Higher energy 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 amended 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 air conditioners and heat 

pumps would still allow for cost-effective, premium-efficiency products to be developed. One 

manufacturer said that a high energy conservation standard could result in a change in their 

product mix such that they may only offer products at the energy conservation standard. For that 

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manufacturer, a high energy conservation standard might result in the loss of the opportunity to 

create up-sells, because consumers may not choose 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 takes 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 market, 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 Regulatory Burden 

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

combined effects of several impending regulations may have serious consequences for some 

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

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory 

burden analysis, DOE describes other significant product-specific regulations that could affect 

central air conditioner and heat pump manufacturers 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 hydrochlorofluorocarbon (HCFC) refrigerants 

 DOE’s gas furnace rulemaking 

 Other DOE regulations 

Refrigerant: Due to the phase-out of HCFCs, the 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-based) 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 expressed concern about existing legislative 

proposals that would eliminate the use of HFCs. It said that this would require additional 

significant redesigns. See section 12.3.3.1 for additional details. 

Other Appliance Standards: Several central air conditioning and furnace 

manufacturers also produce other appliances that have existing or upcoming DOE energy 

conservation standards rulemakings. Some of these other appliances include residential furnaces, 

furnace fans, and direct heating equipment. Manufacturers stated that if these standards 

12-9
 
 

rulemakings for other appliances result in modifications 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, several 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 preliminary 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 refrigerant to HFC R-410A refrigerant was a major 

concern. Manufacturers said that HFC refrigerants 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 requirements, 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 that amended energy conservation 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, which 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 expressed concerns about the potential adoption of regional 

standards. Manufacturers indicated that distribution channels and shipping would become more 

complicated and costly with regional standards. Manufacturers stated said that regional standards 

could potentially lower sales and increase requirements for testing, rating, labeling, etc. Some 

manufacturers stated that regional standards may cause 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 complicated. 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. This manufacturer was concerned about the five 

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regions that have been previously suggested. Manufacturers 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 the 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 were concerned that enforcement of regional 

standards could be difficult, and 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 conditioners 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 pointed 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 factor 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 energy conservation standard, several manufacturers 

believed shipments would decrease 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. 

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Some 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 demand 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 potential 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 available; and that having time to adjust to the 

standard is their only main outlook concern. 

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