UNITED STATES DEPARTMENT OF ENERGY MANUFACTURER IMPACT ANALYSES WORKSHOP Room 1E-245 U.S. Department of Energy 1000 Independence Avenue, SW

Washington, D.C. Tuesday, March 11, 1997 9:00 a.m. U.S. Department of Energy DOUGLAS BROOKMAN QUONNIE LAUGHLIN JIM RABA SANDY BEALL MICHAEL McCABE CARL ADAMS DR. BARRY BERLIN EUGENE MARGOLIS MARK FRIEDRICHS

List of Attendees

RANDY BARNES Oak Ridge National Laboratory RICHARD A. BEST Whirlpool Corporation JEFF BROWN Circuit Stores, inc.

JOHN H. CYMBALSKY U.S. Department of Energy

DAN DEMPSEY Carrier Corporation

JIM EISENBEIS Burnham Corporation

DAVID ARNOLD Arthur D. Little, Inc. 

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EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 UNITED STATES DEPARTMENT OF ENERGY MANUFACTURER IMPACT ANALYSES WORKSHOP Room 1E-245 U.S. Department of Energy 1000 IndependenceAvenue, SW Washington, D.C. Tuesday, March II, 1997 9:00 a.m. U.S. Department of Energy DOUGLAS BROOKMAN QUONNIE LAUGHLIN JIMRABA SANDY BEALL MICHAEL McCABE CARL ADAMS DR. BARRY BERLIN EUGENE MARGOLIS MARK FRIEDRICHS List of Attendees RANDY BARNES OakRidge National Laboratory RICHARD A. BEST Whirlpool Corporation JEFF BROWN Circuit Stores, inc. JOHN H. CYMBALSKY U.S. Department of Energy DAN DEMPSEY CarrierCorporation JIM EISENBEIS BurnhamCorporation DAVID ARNOLD Arthur D. Little, Inc. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 12 List of Attendees (Continued)

L. DAN BARZEL Circuit City Stores, Inc.
ERIN BOEDECKER U.S. Department of Energy THOMAS BUDREWICZ, JR. Arthur D. Little SUJIT DAS Oak Ridge National Laboratory TOM ECKMAN Northwest Power Planning Council

BRADFORD W. FLORA Whirlpool Corporation

GENE FOLEY The Alliance to Save Energy

DAVID B. GOLDSTEIN Natural Resources Defense Council JOHN HANKEY Modine Heat Transfer, Inc.

MARK HASKELL Travis & Gooch

LIZ KLUMPP Washington Energy Policy

KIRSTIE KUMMER American Gas Association

DAVID F. LEWIS Lennox Industries, Inc. PATRICIA A. FRANCO Philips Electronics WILBUR L. HAAG, JR. A.O. Smith Water Products Company MARK HARMONIS U.S. Department of Justice EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 List ofAttendees (Continued) L. DAN BARZEL Circuit City Stores, Inc. ERINBOEDECKER U.S. Department of Energy THOMAS BUDREWICZ, JR. ArthurD. Little SUJIT DAS OakRidge National Laboratory TOM ECKMAN Northwest Power Planning Council BRADFORD W. FLORA Whirlpool Corporation GENE FOLEY TheAlliance to Save Energy DAVID B. GOLDSTEIN Natural Resources Defense Council JOHN HANKEY Modine Heat Transfer, Inc. MARK HASKELL Travis 

### &Gooch LIZ KLUMPP WashingtonEnergy Policy KIRSTIE KUMMER AmericanGas Association DAVID F. LEWIS Lennox Industries, Inc. PATRICIAA. FRANCO Philips Electronics WILBUR L. HAAG, JR. A.O. SmithWater Products Company MARK HARMONIS U.S. Department of Justice EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 23 List of Attendees (Continued)

EARL F. JONES General Electric Company MARK E. KREBS Laclede Gas Company

MARK LEVINE Lawrence Berkeley Laboratory DR. QUENTIN LOONEY Policy Research Associates, Inc.

JAMES McMAHON Lawrence Berkeley Laboratory

EDWARD J. McINERNEY General Electric Company

BARBARA MINTZER-McMAHON Center for Transitional Management

R. DEAN MORRISON Rheem Manufacturing company

MICHAEL C. RIVEST Arthur D. Little, Inc.

GLENN R. SCHLEEDE Energy Market & Policy Analysis, Inc.

EVERETT SHOREY Shorey Consulting, Inc.

JOSEPH M. MATTINGLEY Gas Appliance Manufacturers Association, Inc.

MARK MIEFER PNNL
WAYNE E. MORRIS Association of Home Appliance Manufacturers MARK L. PERLIS Dickstein, Shapiro & Morin, L.L.P. CHARLES A. SAMUELS Association of Home Appliance Manufacturers EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 List of Attendees (Continued) EARL F. JONES General Electric Company MARK E. KREBS Laclede Gas Company MARK LEVINE Lawrence BerkeleyLaboratory DR. QUENTIN LOONEY PolicyResearchAssociates, Inc. JAMES McMAHON Lawrence BerkeleyLaboratory EDWARD J. McINERNEY General Electric Company BARBARA MINTZER-McMAHON Center for Transitional Management R. DEAN MORRISON RheemManufacturing company MICHAEL C. RIVEST ArthurD. Little, Inc. GLENN R. SCHLEEDE EnergyMarket 

### &PolicyAnalysis, Inc. EVERETT SHOREY ShoreyConsulting, Inc. JOSEPHM. MATTINGLEY 3

Gas Appliance Manufacturers Association, Inc. MARK MIEFER PNNL WAYNE E. MORRIS Association of Home Appliance Manufacturers MARK L. PERLIS Dickstein, Shapiro 

### &Morin, L.L.P. CHARLES A. SAMUELS Association of Home Appliance Manufacturers EXECUTIVE COURT REPORTERS, INC. (301) 565-00644 List of Attendees (Continued)

STEVE SHANKEL Pacific Northwest National Laboratory CHARLES STEPHENS Oregon Department of Energy

RICHARD E. STILLWELL Maytag Appliances

MICHAEL C. THOMPSON Whirlpool Corporation ISAAC TURIEL Lawrence Berkeley National Laboratory

STEVEN WADE U.S. Department of Energy

BERNIE WARNING York International

LAWRENCE R. WETHJE Air-Conditioning & Refrigeration Institute ROBERT W. WISBEY Advance Transformer Company
TERRY THIELE White Consolidated Industries, Inc. RICHARD F. TOPPING, P.E. Arthur D. Little, Inc. JIM VAN DYKE Oak Ridge National Laboratory

BILL WALTER Carrier Corporation

DOUG WEEKLY Maytag JOHN A. WILSON California Energy Commission

EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 List ofAttendees (Continued) STEVE SHANKEL Pacific Northwest National Laboratory CHARLES STEPHENS OregonDepartment of Energy RICHARD E. STILLWELL MaytagAppliances MICHAEL C. THOMPSON Whirlpool Corporation ISAAC TURIEL Lawrence BerkeleyNational Laboratory STEVEN WADE U.S. Department of Energy BERNIE WARNING York International LAWRENCE R. WETHJE Air-Conditioning 

### &Refrigeration Institute ROBERT W. WISBEY Advance Transformer Company TERRY THIELE White Consolidated Industries, Inc. RICHARD F. TOPPING, P.E. Arthur D. Little, Inc. JIMVAN DYKE OakRidge National Laboratory BILLWALTER Carrier Corporation DOUG WEEKLY Maytag JOHN A. WILSON CaliforniaEnergy Commission

EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 45 A G E N D A

AGENDA ITEM: PAGE: Opening Remarks, Overview, Agenda Review 7 Description of the Review Process 18 Major Objectives of the Process Rule Regarding the Analysis of Manufacturer Impacts Process Description Schedule Analytical Framework Measures of Impact Firms Considered Balance of Qualitative and Quantitative Assessments Description of New Approach

Overview Relationship to Other Standards Analyses Phase 1, Industry Profile Phase 2, Industry Cash Flow Phase 3, Sub-Group Analysis 28

28

Description of the GRIM Model 65 Role and Applicability of the GRIM Model Financial Principles Input Requirements Output Results Open Discussion, Suggested Modification, e.g. inclusion of return on investment

EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064

AGENDA AGENDA ITEM: Opening Remarks, Overview, Agenda Review Description of the Review Process Major Objectives of the Process Rule Regarding theAnalysis of Manufacturer Impacts Process Description Schedule Analytical Framework Measures of Impact Firms Considered Balance of Qualitative and QuantitativeAssessments Description of NewApproach Overview Relationship to Other Standards Analyses Phase 1, Industry Profile Phase 2, Industry Cash Flow Phase 3, Sub-GroupAnalysis Description of the GRIM Model Role andApplicabilityof the GRIM Model Financial Principles Input Requirements Output Results OpenDiscussion, SuggestedModification, e.g. inclusion of return on investment EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 5

PAGE: 7 18

28

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656 A G E N D A
AGENDA ITEM: PAGE: Afternoon Session Preparing the Industry Profiles 132 Industry Characterization Industry Databook Issues in Shipments Forecasts - Panel and 158 Open Discussion Role of Forecasting Models in the Manufacturer Impact Analyses General Description of Models, Including: Input Requirements Outputs Key Assumptions Uncertainty Analysis Track Record Operating Characteristics New Spread Sheet Approach Advantages and Disadvantages of Alternate Approaches to Forecasting Shipments for GRIM Optional Hands-On Computer Training on the Models Adjournment

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AGENDA AGENDA ITEM: Afternoon Session Preparing the Industry Profiles IndustryCharacterization IndustryDatabook PAGE:

132

Issues in Shipments Forecasts

- Panel and 158 OpenDiscussion Role of ForecastingModels in the Manufacturer Impact Analyses General Descriptionof Models, Including: Input Requirements Outputs KeyAssumptions UncertaintyAnalysis Track Record Operating Characteristics New Spread SheetApproach Advantages andDisadvantages of AlternateApproaches to Forecasting Shipments for GRIM Optional Hands-On Computer Training on the Models Adjournment

EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 67

1 P R O C E E D I N G S 2 9:08 a.m. 3 Opening Remarks, Overview, Agenda Review 4 MR. BROOKMAN: Take your seats, please. 5 We're going to begin shortly. 6 (Pause) 7 MR. BROOKMAN: Good morning, and welcome. 8 Welcome to the Manufacturer Impact Analyses Workshop. 9 Are you with us or are you recording? Yes. 10 Great. Okay. 11 The -- this meeting will be taped, and a 12 transcript will be available at some point after -- I 13 guess a week or two after -- yeah -- after this meeting 14 has concluded. 15 My name is Doug Brockman, and I'll be 16 facilitating this meeting today. 17 Let me start off by simply introducing 18 Quonnie Laughlin, who many of you know, for opening 19 remarks. 20 MS. LAUGHLIN: Good morning. I am Quonnie 21 Laughlin, Team Leader for the Manufacturer Impact 22 Analyses Team in the Office of Codes and Standards. 23 The following people are also on the team: 24 Carl Adams and Dr. Barry Berlin from the office of 25 Codes and Standards; Eugene Margolis from the Office of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 7 1 PRO C E EDING S 2 9:08 a.m. 3 OpeningRemarks, Overview, Agenda Review 4 MR. BROOKMAN: Take your seats, please. 5 We're going tobegin shortly. 6 (Pause) 7 MR. BROOKMAN: Goodmorning, andwelcome. 8 Welcome to the Manufacturer Impact Analyses Workshop. 9 Are youwithus or are you recording? Yes. 10 Great. Okay. 11 The

-- this meetingwill be taped, and a 12 transcript will be available at some point after I 13 guess a week or two after

-- yeah

-- after this meeting 14 has concluded. 15 My name is Doug Brookman, and I'll be 16 facilitating this meeting today. 17 Let me start offby simply introducing 18 Quonnie Laughlin, who many of you know, for opening 19 remarks. 20 MS. LAUGHLIN: Goodmorning. I am Quonnie 21 Laughlin, TeamLeader for the Manufacturer Impact 22 Analyses Team in the Office of Codes and Standards. 23 The following people are also on the team: 24 Carl Adams andDr. BarryBerlin from the Office of 25 Codes and Standards; Eugene Margolis from the Office of EXECUTIVE COURT REPORTERS, INC. (301) 565-00648

1 General Counsel; and Mark Friedrichs from the Office of 2 Policy and International Affairs. 3 I would also like to recognize Mike Rivest 4 from Arthur D. Little, who developed the draft work 5 plan. 6 On behalf of the Department of Energy, I 7 would like to thank all of you for taking the time to 8 participate in this public workshop which will help us 9 implement the new process as set forth in the July 15th 10 process rule. 11 The purpose of this workshop is to discuss a 12 new approach to assessing the likely impacts on 13 manufacturers of appliance energy efficiency standards. 14 The department sent a letter on February 15 11th, 1996, to all interested parties that have 16 participated in process improvement activities 17 announcing this workshop. A draft work plan was sent 18 to people who indicated that they were attending the 19 workshop or were interested in receiving material 20 prepared for the workshop. 21 A public notice of this workshop was 22 published in the Federal Register. 23 Anyone attending today's workshop will be 24 added to our mailing list for future mailings. 25 The comments received here today and any EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 8 1 General Counseli andMark Friedrichs from the Office of 2 Policy and International Affairs. 3 I would also like to recognize Mike Rivest 4 fromArthurD. Little, who developed the draft work 5 plan. 6 On behalf of the Department of Energy, I 7 would like to thank all of you for taking the time to 8 participate in this public workshop whichwill help us 9 implement the newprocess as set forth in the July 15th 10 process rule. 11 The purpose of this workshop is to discuss a 12 new approach to assessing the likelyimpacts on 13 manufacturers of appliance energyefficiency standards. 14 The department sent a letteron February 15 11th, 1996, to all interestedparties that have 16 participated inprocess improvement activities 17 announcing this workshop. Adraft workplanwas sent 18 topeople who indicatedthat theywere attending the 19 workshop orwere interested inreceiving material 20 prepared for the workshop. 21 Apublic notice of this workshop was 22 published in the Federal Register. 23 Anyone attending today's workshop will be 24 added to ourmailing list for future mailings. 25 The comments receivedhere today and any EXECUTIVE COURT REPORTERS, INC. (301) 565-00649

1 which are submitted will assist the department in 2 developing the final work plan. 3 Doug Brookman will be facilitating the 4 workshop and will be setting the guidelines for 5 conducting the workshop and providing other pertinent 6 information. 7 Jim Raba of the Codes and Standards Office 8 will be assisting Doug. 9 In approximately two weeks, a complete copy 10 of the transcript will be available for inspection and 11 copying at the Department of Energy's Freedom of 12 Information Reading Room, located in Room 1E-190. 13 Anyone wishing to purchase a copy of the transcript may 14 make arrangements with the court reporter. 15 To provide the department with as much 16 pertinent information and as many views as can be 17 reasonably obtained and to enable interested persons to 18 express their views, the workshop will be conducted in 19 accordance with the following procedures. 20 The purpose of this workshop is for the 21 department to listen to comments pertinent to the draft 22 work plan and presentations. We will begin with 23 introductions, then discuss the agenda, and expand on 24 any of the topics if you feel it is necessary. 25 We will take a lunch -- an hour lunch break EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 9 1 which are submittedwill assist the department in 2 developing the final workplan. 3 Doug Brookmanwill be facilitating the 4 workshop andwill be settingthe guidelines for 5 conducting the workshop andproviding otherpertinent 6 information. 7 JimRaba of the Codes and Standards Office 8 will be assistingDoug. 9 In approximatelytwo weeks, a complete copy 10 of the transcript will be available for inspectionand 11 copying at the Department of Energy's Freedomof 12 InformationReading Room, located inRoom lE-190. 13 Anyone wishing topurchase a copy of the transcript may 14 make arrangements with the court reporter. 15 Toprovide the department with as much 16 pertinent information and as manyviews as canbe 17 reasonablyobtained and to enable interestedpersons to 18 express theirviews, the workshop will be conducted in 19 accordance with the following procedures. 20 Thepurpose of this workshop is for the 21 department to listento comments pertinent to the draft 22 workplan andpresentations. We will beginwith 23 introductions, then discuss the agenda, and expand on 24 anyof the topics ifyou feel it is necessary. 25 We will take a lunch -- anhour lunchbreak EXECUTIVE COURT REPORTERS, INC. (301) 565-006410 1 at a convenient time near 12:00 noon, which is on your 2 own. There is a snack bar one floor below us. There 3 is a DOE cafeteria on the second floor of the West4 Building, and a number of restaurants in the under5 ground mall at L'Enfant Plaza up the street. 6 It will reduce interruptions if everyone who 7 wants to speak waits to be recognized. Please remember 8 to speak into the microphones, especially those in the 9 audience, and state your name and your company name 10 each time before you speak for the court reporter. 11 Side conversations should be kept to a 12 minimum to avoid interrupting the presenter. If a 13 lengthy private discussion is needed, please move to a 14 corner of the room or out of the room. 15 It may be necessary to cut off debate on some 16 topics to maintain the schedule. There will be time at 17 the end of the workshop on the second day for 18 discussion of additional issues. 19 I urge all persons present to participate as 20 much as possible, so that the department may get a full 21 spectrum of opinions on these topics. 22 Today's workshop is scheduled to end at 5:00 23 p.m. or sooner, if all items for today have been 24 discussed. We will commence tomorrow morning at 9 a.m. 25 and finish at 5 p.m. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 10 1 at a convenient time near 12:00 noon, which is onyour 2 own. There is a snackbarone floorbelowus. There 3 is a DOE cafeteria on the second floor of the West 4 Building, and a number of restaurants in the under5 groundmall at L'Enfant Plazaup the street. 6 It will reduce interruptions if everyonewho 7 wants to speakwaits to be recognized. Please remember 8 to speak into the microphones, especiallythose inthe 9 audience, and stateyourname andyour companyname 10 each time before you speak for the court reporter. 11 Side conversations shouldbe kept to a 12 minimum to avoid interrupting the presenter. If a 13 lengthyprivate discussion is needed, please move to a 14 corner of the room or out of the room. 15 It maybe necessaryto cut off debate on some 16 topics to maintainthe schedule. There will be time at 17 the end of the workshop onthe secondday for 18 discussion of additional issues. 19 I urge all persons present toparticipate as 20 much as possible, so that the department may get a full 21 spectrumof opinions onthese topics. 22 Today's workshop is scheduled to end at 5:00 23 p.m. or sooner, if all items for todayhave been 24 discussed. We will commence tomorrowmorning at 9 a.m. 25 and finish at 5 p.m. EXECUTIVE COURT REPORTERS, INC. (301) 565-006411 1 We welcome your written comments. At the end 2 of tomorrow's session, we will jointly agree upon a 3 time for submission of comments. All comments and data 4 submitted will be considered as DOE develops the final 5 draft plan. 6 All written comments and data submissions 7 will be available for public inspection at the DOE 8 Freedom of Information Reading Room. Written comments 9 should be addressed to myself or Sandy Beall at the 10 Department of Energy as noted in the Federal Register 11 Notice for today's workshop or in the letter of 12 invitation. 10 copies of the comments or data are 13 requested. 14 In addition, the department would appreciate 15 an electronic copy of the comments or data. The 16 department is using Word Perfect 6.1. No faxed 17 comments will be accepted. 18 Any person submitting information which he or 19 she believes to be confidential and exempt by law from 20 public disclosure should submit one complete copy and 21 10 copies from which information claimed to be 22 confidential has been deleted. 23 In accordance with the procedures established 24 at 10 C.F.R. 1004.11, the Department of Energy shall 25 make its own determination as to whether the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 11 1 We welcome your written comments. At the end 2 of tomorrow's session, we will jointlyagree upon a 3 time for submissionof comments. All comments and data 4 submittedwill be considered as DOE develops the final 5 draft plan. 6 All written comments and data submissions 7 will be available forpublic inspection at the DOE 8 Freedomof InformationReading Room. Written comments 9 shouldbe addressed to myself or SandyBeall at the 10 Department of Energyas noted in the Federal Register 11 Notice for today's workshop or in the letter of 12 invitation. 10 copies of the comments or data are 13 requested. 14 In addition, the department would appreciate 15 an electronic copy of the comments or data. The 16 department is usingWord Perfect 6.1. No faxed 17 comments will be accepted. 18 Anyperson submitting informationwhichhe or 19 she believes to be confidential and exempt by law from 20 public disclosure should submit one complete copy and 21 10 copies fromwhich information claimed tobe 22 confidential has been deleted. 23 In accordance withtheprocedures established 24 at 10 C.F.R. 1004.11, the Department of Energy shall 25 make its own determination as towhether the EXECUTIVE COURT REPORTERS, INC. (301) 565-006412

1 information shall be exempt from public disclosure. 2 In keeping with the regulations of these 3 facilities, there is no smoking allowed in this room or 4 building. The restrooms are down the hall to your left 5 and right. Phones are located by the elevators. 6 Again, we appreciate the time and effort you 7 have taken in preparing for this workshop and are 8 pleased to receive your comments and opinions. 9 I would like to reiterate the purpose of this 10 workshop is to consider stakeholder input on the new 11 approach to assess the likely impacts on manufacturers 12 of appliance energy efficiency standards that are under 13 consideration by the department. 14 At this time, I would like to turn it over to 15 Doug Brockman to begin the introductions, and then we 16 will do an agenda review. 17 MR. BROOKMAN: Thank you. 18 Boy, that was a lot. It strikes me that 19 there's quite a bit in there about comment periods and 20 the nature of the -- how you'd like to receive the 21 comments, the formats, all that. 22 How many of you worked in this process 23 improvement effort previously? 24 (Show of hands) 25 MR. BROOKMAN: So, at least half of you. So, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 12 1 information shall be exempt frompublic disclosure. 2 Inkeepingwith the regulations of these 3 facilities, there is no smoking allowed inthis roomor 4 building. The restrooms are down the hall to your left 5 and right. Phones are locatedbythe elevators. 6 Again, we appreciate the time and effort you 7 have taken inpreparing for this workshop and are 8 pleased to receiveyour comments and opinions. 9 I would like to reiterate the purpose of this 10 workshop is to consider stakeholder input on the new 11 approach to assess the likelyimpacts onmanufacturers 12 of appliance energyefficiency standards that are under 13 considerationbythe department. 14 At this time, I would like to turn it over to 15 Doug Brookman tobegin the introductions, and thenwe 16 will do an agenda review. 17 MR. BROOKMAN: Thankyou. 18 Boy, that was a lot. It strikes me that 19 there's quite a bit in there about comment periods and 20 the nature of the

-- howyou'd like to receive the 21 comments, the formats, all that. 22 How many of you worked in this process 23 improvement effort previously? 24 (Show of hands) 25 MR. BROOKMAN: So, at least half of you. So, EXECUTIVE COURT REPORTERS, INC. (301) 565-006413 1 -- so, what Quonnie -- what she laid out there, is that 2 familiar for most of you or is that -- familiar to most 3 of you? Is it -- is it -- is it wholly unfamiliar to 4 any of you? 5 (No response) 6 MR. BROOKMAN: No one's raising their hand. 7 Okay. I'd just like to say if you've got additional 8 questions -- the purpose of all this is to hear from 9 you and get the best comment possible on the works in 10 progress by the department and supporting individuals. 11 So, if the format for doing this is difficult for you 12 to understand, I'd encourage you to ask Quonnie, ask 13 Sandy, ask anybody in Michael McCabe's shop for 14 clarification on that subject as we go along. 15 Let me welcome and thank you again for being 16 here. 17 There are a few housekeeping items we should 18 attend to. First and foremost, the Advisory Committee 19 meeting, the date has been changed, and the new date, 20 if you'd make a note of it for those of you that are 21 involved in the Advisory Committee, is going to be June 22 23rd, and apparently the chair and some other 23 individuals had a prior commitment that they could not 24 get out of. So, it will -- also, it will be held at 25 the Embassy Row Hotel here in Washington, D.C. So, the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 13 1

-- SOr what Quonnie

-- what she laidout therer is that 2 familiar for most of you or is that

-- familiar to most 3 of you? Is it

-- is it

-- is it whollyunfamiliar to 4 anyof you? 5 (No response) 6 MR. BROOKMAN: No one's raising theirhand. 7 Okay. I'djust like to say if you've got additional 8 questions

-- thepurpose of all this is to hear from 9 you andget the best comment possible on the works in 10 progress bythe department and supporting individuals. 11 SOr if the format for doing this is difficult for you 12 to understandr I'dencourage you to ask Quonnier ask 13 SandYr ask anybody inMichael McCabe's shop for 14 clarificationon that subject as we go along. 15 Let me welcome and thankyou again for being 16 here. 17 There are a few housekeeping items we should 18 attend to. First and foremostr the Advisory Committee 19 meetingr the date has been changedr and the new dater 20 if you'dmake a note of it for those of you that are 21 involved in the Advisory Committee r is going tobe June 22 23rdr and apparentlythe chair and some other 23 individuals had a prior commitment that they couldnot 24 get out of. SOr it will

-- alsor it will be held at 25 the EmbassyRow Hotel here inWashingtonr D.C. SOr the EXECUTIVE COURT REPORTERS, INC. (301) 565-006414

1 new date is June 23rd. 2 Quonnie, I thought it would be useful if the 3 other members of your team stood up and just -- just -- 4 we're going to -- we're going to have everybody 5 introduce themselves briefly. 6 If other members of the Manufacturer Impact 7 Analyses Team that are in the room, Carl, and, Brian, I 8 thought I saw you. 9 MS. LAUGHLIN: Barry. 10 MR. BROOKMAN: And Barry. I thought I saw 11 Barry. There's Barry. Would you stand up, Barry? 12 MS. LAUGHLIN: And Mark. Mark Friedrichs. 13 MR. BROOKMAN: And, Mark, would you stand up, 14 please? 15 MS. LAUGHLIN: And Gene Margolis. 16 MR. BROOKMAN: And Gene. These are other 17 members of the internal team that are working on this 18 issue. 19 Thank you very much. 20 Hopefully, all of you received the complete 21 packet as you walked in the door. Sandy, by the way, 22 everybody was supposed to give you a business card, 23 correct?
24 25 MS. BEALL: Or sign in. MR. BROOKMAN: And sign in. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 14 1 new date is June 23rd. 2 Quonniet I thought it wouldbe useful if the 3 othermembers of your team stoodup andjust

-- just

-- 4 we're going to

-- we're going to have everybody 5 introduce themselves briefly. 6 If othermembers of the Manufacturer Impact 7 Analyses Team that are in the roomt Carlt andt Briant I 8 thought I sawyou. 9 MS. LAUGHLIN: Barry. 10 MR. BROOKMAN: AndBarry. I thought I saw 11 Barry. There's Barry. Wouldyou stand UPt Barry? 12 MS. LAUGHLIN: AndMark. Mark Friedrichs. 13 MR. BROOKMAN: Andt Markt wouldyou stand UPt 14 please? 15 MS. LAUGHLIN: And Gene Margolis. 16 MR. BROOKMAN: And Gene. These are other 17 members of the internal teamthat are working on this 18 issue. 19 Thankyouverymuch. 20 HopefullYt all of you received the complete 21 packet as youwalked inthe door. SandYt by the waYt 22 everybodywas supposed to give you a business cardt 23 correct? 24 25 MS. BEALL: Or sign in. MR. BROOKMAN: And sign in. EXECUTIVE COURT REPORTERS, INC. (301) 565-006415

1 MS. BEALL: Or. 2 MR. BROOKMAN: Or sign in. Okay. So, if you 3 haven't already done that, please do that, so we get 4 you on the mailing list. 5 The agenda as written lists, I think, rather 6 clearly, and Quonnie in her opening remarks covered 7 both the purpose and the expected outcomes of this 8 workshop. 9 Hopefully, you have received a copy of this 10 agenda. I'd just like to point globally to what's 11 envisioned here. This next two days is an opportunity 12 for an open discussion of the major issues. It's not 13 contemplated that we're going to resolve the bulk of 14 the issues that are embedded in these documents here in 15 the next two days, but if you look at the expected 16 outcomes, we do expect, and the department does expect, 17 that working groups will be composed by tomorrow 18 afternoon, and that additional guidance, further 19 guidance, on the work products to date will be listed 20 for their benefit. 21 So, the basic parameters on today's meeting 22 as listed in the middle of the page of your agenda, on 23 Day 1, March 11th, today is rather an intensive 24 methodological overview and description of the 25 analytical tools. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 15 1 MS. BEALL: Or. 2 MR. BROOKMAN: Or sign in. Okay. So, if you 3 haven't already done that, please do that, so we get 4 you on the mailing list. 5 The agenda as written lists, I think, rather 6 clearly, and Quonnie inher opening remarks covered 7 both the purpose and the expectedoutcomes of this 8 workshop. 9 Hopefully, youhave received a copy of this 10 agenda. I'djust like to point globallyto what's 11 envisionedhere. This next two days is an opportunity 12 for an open discussion of the major issues. It's not 13 contemplated that we're going to resolve the bulkof 14 the issues that are embedded inthese documents here in 15 the next two days, but if you look at the expected 16 outcomes, we do expect, and the department does expect, 17 that workinggroups will be composedby tomorrow 18 afternoon, and that additional guidance, further 19 guidance, on the workproducts to date will be listed 20 for theirbenefit. 21 So, the basicparameters on today's meeting 22 as listed in the middle of thepage of your agenda, on 23 Day I, March 11th, today is rather an intensive 24 methodological overview and description of the 25 analytical tools. EXECUTIVE COURT REPORTERS, INC. (301) 565-006416

1 The basic format's going to be a fairly 2 short, hopefully terse, presentation, followed then by 3 an opportunity for comments and questions. That's the 4 bulk of the day today, and then tomorrow, more issues 5 related to methodology implementation. So, that's 6 going to be another full day of brief presentations 7 followed by discussion and panel discussions. 8 I'm not going to go through this in any great 9 detail, the agenda, in addition to what I've already 10 said. We will have a break in the morning. You're on 11 your own for lunch. Quonnie talked about where the 12 restrooms were and where the telephones are. 13 Let me suggest some very simple ground rules 14 for the meeting today. Please say your name when you 15 speak and your company name as well, and there are 16 microphones. We have handheld microphones that we can 17 hand out, and we'll be passing them around. 18 I'd also like you to speak one at a time, and 19 I'll be trying to recognize you and create a sensible 20 queue so that everybody gets a chance to speak. 21 I really would also like to ask that your 22 critique, when you're critiqueing the existing 23 products, include what's going to make it work better, 24 include what will make it work; that is, we'd like your 25 ideas, in addition to your criticism, we'd like you to EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 16 1 The basic format's going to be a fairly 2 short, hopefullyterse, presentation, followed thenby 3 an opportunity for comments andquestions. That's the 4 bulk of the day today, and then tomorrow, more issues 5 related to methodology implementation. So, that's 6 going tobe another full dayof brief presentations 7 followed by discussion andpanel discussions. 8 I'mnot going to go through this in anygreat 9 detail, the agenda, in addition to what I've already 10 said. We will have a break in the morning. You're on 11 your own for lunch. Quonnie talked about where the 12 restrooms were andwhere the telephones are. 13 Let me suggest some very simple ground rules 14 for the meeting today. Please sayyour name whenyou 15 speak andyour companyname as well, and there are 16 microphones. We have handheldmicrophones that we can 17 hand out, and we'll be passing them around. 18 I'dalso like you to speakone at a time, and 19 I'll be trying to recognize you and create a sensible 20 queue so that everybodygets a chance to speak. 21 I reallywould also like to ask that your 22 critique, whenyou're critiqueingthe existing 23 products, includewhat's going tomake it workbetter, 24 include what will make it work; that is, we'd like your 25 ideas, in additionto your criticism, we'd likeyou to EXECUTIVE COURT REPORTERS, INC. (301) 565-006417

1 be able to say what's going to make this better, what's 2 going to improve it, and also I'd like to encourage 3 every individual in this room to listen as an ally 4 because sometimes that framework alone can make it 5 possible for a lot more to get done. 6 I'm trying to think if there's anything else 7 I have at the outset. 8 (Pause) 9 MR. BROOKMAN: Any questions or additional 10 comments on these kind of housekeeping issues? Did I 11 forget anything, Quonnie? Sandy? Not that you can 12 think of? 13 It's -- we -- the next segment will not get 14 on the record, but as a matter of courtesy and as a 15 matter of common practice, I literally frequently ask 16 everybody to introduce themselves, so everybody knows 17 who's in the room. So, I'd like to do this, even 18 though many of you still know each other, it's not 19 going to be on the record. That's okay. 20 Just so everybody can put a name with a face, 21 if you'll indulge me, please, I think this is common 22 courtesy. I'd like to start here and loop around like 23 this. 24 If you'd stand and please say your name and 25 your organizational affiliation, so that others in the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 17 1 be able to saywhat's going tomake this better, what's 2 going to improve it, and also I'd like to encourage 3 every individual inthis roomto listen as an ally 4 because sometimes that framework alone canmake it 5 possible for a lot more to get done. 6 I'mtrying to think if there's anything else 7 I have at the outset. 8 (Pause) 9 MR. BROOKMAN: Any questions or additional 10 comments onthese kindof housekeeping issues? Did I 11 forget anything, Quonnie? Sandy? Not that you can 12 think of? 13 It's

-- we -- the next segment will not get 14 on the record, but as a matter of courtesy and as a 15 matter of commonpractice, I literally frequently ask 16 everybody to introduce themselves, so everybodyknows 17 who's in the room. So, I'd like to do this, even 18 thoughmany of you still know each other, it's not 19 going to be on the record. That's okay. 20 Just so everybodycanput a name with a face, 21 if you'll indulge me, please, I think this is common 22 courtesy. I'd like to start here and loop around like 23 this. 24 If you'd stand andplease sayyour name and 25 your organizational affiliation, so that others in the EXECUTIVE COURT REPORTERS, INC. (301) 565-006418

1 room know who you are. 2 I'm going to start with you, please. 3 (Introductions) 4 MR. BROOKMAN: Thank you. Thanks to 5 everybody. 6 Did you get a chance to introduce yourself? 7 Thank you. 8 Did anybody not get a chance to introduce 9 themselves? 10 (No response) 11 MR. BROOKMAN: Okay. Thanks again for that. 12 What -- throughout the appliance standards 13 process improvement effort, one thing the department 14 has discovered is the quality of that effort has 15 depended largely on the quality of the input and the 16 quality of the interaction with all the internal and 17 external parties that want to influence this effort. 18 So, thank you again for your participation in 19 this and also in your previous efforts. 20 I guess our first presenter this morning is 21 Michael McCabe. 22 Description of the Review Process 23 MR. McCABE: Good morning. 24 I'd like to welcome everybody here in behalf 25 of myself and Christine Ervin, the Assistant Secretary EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 18 1 roomknowwho you are. 2 I'mgoingto start withyou, please. 3 (Introductions) 4 MR. BROOKMAN: Thankyou. Thanks to 5 everybody. 6 Didyou get a chance to introduce yourself? 7 Thank you. 8 Did anybodynot get a chance to introduce 9 themselves? 10 (No response) 11 MR. BROOKMAN: Okay. Thanks again for that. 12 What

-- throughout the appliance standards 13 process improvement effort, one thing the department 14 has discovered is the qualityof that effort has 15 depended largelyon the quality of the input and the 16 qualityof the interactionwith all the internal and 17 external parties that want to influence this effort. 18 So, thankyou again for yourparticipation in 19 this and also inyourprevious efforts. 20 I guess our first presenter this morning is 21 Michael McCabe. 22 Descriptionof the Review Process 23 MR. McCABE: Goodmorning. 24 I'd like to welcome everybodyhere inbehalf 25 of myself and Christine Ervin, the Assistant Secretary EXECUTIVE COURT REPORTERS, INC. (301) 565-006419

1 for Energy Efficiency and Renewable Energy. 2 It's with the 18 years that I have been 3 associated with the program, I'd say this is probably 4 one of the better environments that we have. I -- 5 looking around, many of the people here were at the Old 6 Post Office Building back in 1980 when we had literally 7 a hundred and some degrees inside the room, and with 8 the early Spring that we're having, I'm certainly 9 enjoying the weather, and I hope that it will put 10 everybody in the mood that we can have some successes. 11 We had -- have been evolving the process for 12 conducting the meetings. Two years ago, typically our 13 meeting was -- meetings were serious talking heads. 14 When Doug had talked about the critique, he was talking 15 about what's taking place during the meeting. 16 I'm particularly interested in that, but also 17 the critique after the fact as to how we can do things 18 better because it's not -- we've had a series of 19 meetings lately that have been very productive, where 20 we have been able to get exchanges not only between DOE 21 and yourselves but also among people who have disparate 22 views on particular issues. It helps to get a full 23 discussion and resolution of some rather contentious 24 issues. 25 So, I would particularly appreciate your EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 19 1 for EnergyEfficiencyandRenewable Energy. 2 It'swiththe 18 years that I have been 3 associatedwith theprogram, I'd say this is probably 4 one of the betterenvironments that we have. I 5 looking around, many of the people here were at the Old 6 Post Office Buildingback in 1980 whenwe had literally 7 a hundred and some degrees inside the room, andwith 8 the early Spring that we're having, I'm certainly 9 enjoying the weather, and I hope that it will put 10 everybody inthe mood that we canhave some successes. 11 We had

-- have beenevolving the process for 12 conducting the meetings. Two years ago, typicallyour 13 meeting was -- meetings were serious talkingheads. 14 When Doughad talked about the critique, he was talking 15 about what's takingplace during the meeting. 16 I'mparticularly interested in that, but also 17 the critique after the fact as tohowwe cando things 18 betterbecause it's not

-- we've had a series of 19 meetings latelythat have beenveryproductive, where 20 we have been able to get exchanges not onlybetweenDOE 21 andyourselves but also amongpeople who have disparate 22 views onparticular issues. It helps to get a full 23 discussion and resolution of some rather contentious 24 issues. 25 So, I wouldparticularlyappreciate your EXECUTIVE COURT REPORTERS, INC. (301) 565-006420

1 thoughts as to meetings such as this, how they can be 2 improved in the process. 3 This process that we're going through is one 4 that started nearly two years ago to look at how to 5 improve the department's appliance standards rule6 making process. 7 We committed through that process to develop 8 a new method of conducting rulemakings, starting with 9 priority-setting, where we would identify what were the 10 priority products for which we would focus our efforts. 11 We also committed to taking many of the 12 elements in the process and improving those. Today, we 13 are focusing on one of those elements, the manufacturer l i 14 mpact ana yses. 15 In our process rule in July of '96, we 16 committed to developing a detailed review of the 17 process and methodologies included. We committed to a 18 process that was flexible, one that could meet the 19 needs of different products which had many different 20 issues associated with them, so that one size does not

i ll 21 f t a . 22 We committed to early stakeholder input, such 23 as what's occurring today. We also committed to 24 utilizing a cash flow analysis approach as one part of 25 that. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 20 1 thoughts as to meetings such as this, how they canbe 2 improved inthe process. 3 This process that we're going through is one 4 that startednearlytwo years ago to look at how to 5 improve the department's appliance standards rule6 makingprocess. 7 We committedthrough that process to develop 8 a newmethod of conductingrulemakings, startingwith 9 priority-setting, where we would identifywhat were the 10 priorityproducts for whichwe would focus our efforts. 11 We also committed to takingmany of the 12 elements in the process and improving those. Today, we 13 are focusing on one of those elements, the manufacturer 14 impact analyses. 15 In ourprocess rule inJulyof '96, we 16 committed to developing a detailedreviewof the 17 process andmethodologies included. We committed to a 18 process that was flexible, one that couldmeet the 19 needs of different products whichhadmany different 20 issues associatedwiththem, so that one size does not 21 fit all. 22 We committedto early stakeholder input, such 23 as what's occurring today. We also committed to 24 utilizing a cash flow analysis approach as one part of 25 that. EXECUTIVE COURT REPORTERS, INC. (301) 565-006421 1 The Government Regulatory Impact Model, which 2 had been developed for three of the major trade 3 associations, AHAM, ARI and GAMA, is going to be 4 focused on today, a review of it, update, as to what 5 it's capable of doing, how -- how to use it, since many 6 of the people, including myself, have not -- not as 7 familiar with it as I would like to be. 8 We've committed to developing estimates of 9 critical variables, drawing on sources within the 10 industry and others in order to come up with both 11 quantitative and qualitative impacts, to report the 12 distribution of impacts on a range of manufacturers, 13 not just the prototypical manufacturer but those that 14 are small, medium and large or possibly other cohorts 15 that have specific and unique interests that we want to 16 focus on, to use models that are easy to understand and 17 account for uncertainty; that is, to get away from the 18 black box and more towards the cube that Christine had 19 presented in earlier meetings, where you could see 20 through the cube. 21 Many took a look at that cube and saw it more 22 as a cube of ice that was melting. If the water's 23 clear, you can see through it. So, hopefully one way 24 or another, you'll be able to see the models, 25 methodologies, and the analysis that we conduct will be EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 21 1 The Government Regulatory Impact Model, which 2 hadbeendeveloped for three of the major trade 3 associations, AHAM, ARI andGAMA, is going to be 4 focused on today, a reviewof it, update, as to what 5 it's capable of doing, how how to use it, sincemany 6 of the people, includingmyself, have not not as 7 familiar with it as I would like to be. 8 We've committed to developing estimates of 9 critical variables, drawing on sources within the 10 industry and others inorder to come up withboth 11 quantitative andqualitative impacts, to report the 12 distributionof impacts on a range of manufacturers, 13 not just theprototypical manufacturerbut those that 14 are small, medium and large orpossiblyother cohorts 15 that have specific andunique interests that we want to 16 focus on, to use models that are easyto understand and 17 account for uncertainty; that is, to get away from the 18 blackbox andmore towards the cube that Christine had 19 presented in earliermeetings, where you could see 20 through the cube. 21 Many took a look at that cube and saw it more 22 as a cube of ice that was melting. If the water's 23 clear, you can see through it. So, hopefully one way 24 or another, you'll be able to see the models, 25 methodologies, and the analysis that we conduct will be EXECUTIVE COURT REPORTERS, INC. (301) 565-006422

1 clear and understandable. 2 We've also committed to consider the 3 cumulative impacts of regulations. That's not to say 4 that a regulation would not go forward because it has 5 cumulative impacts, but to understand what those 6 impacts are, and make a decision based on our under7 standing of those impacts. That decision maybe either 8 to go forward or not or as to what the standard level 9 should be set at. So, we're looking to get that as an 10 integral part of this analysis. 11 Also, and this is -- we're committed to 12 looking at the impacts on manufacturing capacity, plant 13 closures and loss of capital investment. That's 14 particularly important, we found out, when you're 15 looking at standards that push the envelope as to what 16 is available today. 17 We have developed a strawman for the 18 methodology for future manufacture impact analyses. It 19 is that strawman which will be presented at the 20 workshop and discussed. It -- the methodology being 21 developed will add procedures to the process rule. The 22 process rule is an outline of what we are committed to. 23 This will be more the detail. 24 The methodology, as I said, must have 25 flexibility built into it so that it can be adapted to EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 22 1 clear andunderstandable. 2 We've also committedto considerthe 3 cumulative impacts of regulations. That's not to say 4 that a regulationwouldnot go forward because it has 5 cumulative impacts, but tounderstandwhat those 6 impacts are, andmake a decisionbasedon our under7 standing of those impacts. That decisionmaybe either 8 to go forward ornot or as to what the standard level 9 shouldbe set at. So, we're looking to get that as an 10 integral part of this analysis. 11 Also, and this is

-- we're committed to 12 looking at the impacts onmanufacturing capacity, plant 13 closures and loss of capital investment. That's 14 particularly important, we found out, whenyou're 15 looking at standards that push the envelope as to what 16 is available today. 17 We have developed a strawman for the 18 methodology for future manufacture impact analyses. It 19 is that strawmanwhichwill be presented at the 20 workshop and discussed. It the methodologybeing 21 developedwill addprocedures to the process rule. The 22 process rule is an outline of what we are committedto. 23 This will be more the detail. 24 The methodology, as I said, must have 25 flexibilitybuilt into it so that it canbe adapted to EXECUTIVE COURT REPORTERS, INC. (301) 565-006423

1 meet the needs of specific rulemakings. 2 We've had a number of discussions with 3 different industries who said a process that is 4 appropriate for my industry isn't appropriate for this 5 other industry and maybe the reverse would be the way 6 to apply it. What's good for them isn't good for me 7 because they just produce one product, and my industry 8 has a range of products which are covered by the 9 standards, and we need to look at those or the way the 10 manufacturing occurs with my product, we need to have a 11 methodology tailored for -- for my product, and 12 that's -- we hope to be able to capture that with the 13 methodology that we will be developing. 14 The methodology is not going to be a static 15 one. We're committed to -- to constantly evolving it 16 in order to meet the needs of the rulemaking process. 17 It's going to be your input that is going to guide that 18 development of future methodologies. 19 At the conclusion of the workshop, as Doug 20 had indicated, and Quonnie, you'll be invited to 21 participate in a work group or work groups tasked with 22 the development of the future models and methods. We 23 don't expect to answer the questions but rather 24 identify what the issues are and work together to 25 develop the answers. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 23 1 meet the needs of specific rulemakings. 2 We've had a number of discussions with 3 different industries who said a process that is 4 appropriate for my industry isn't appropriate for this 5 other industry andmaybe the reverse wouldbe the way 6 to apply it. What's good for them isn't good for me 7 because theyjustproduce one product/ andmy industry 8 has a range of products which are coveredby the 9 standards/ andwe need to look at those or the way the 10 manufacturing occurs withmy product/ we need to have a 11 methodology tailored for

-- for my product/ and 12 that's

-- we hope tobe able to capture that with the 13 methodology that we will be developing. 14 The methodology is not going to be a static 15 one. We're committed to

-- to constantlyevolving it 16 inorder to meet the needs of the rulemakingprocess. 17 It's going to be your input that is going to guide that 18 development of future methodologies. 19 At the conclusionof the workshop/ as Doug 20 had indicated/ and Quonnie/ you'll be invited to 21 participate ina workgroup orwork groups taskedwith 22 the development of the future models andmethods. We 23 don't expect to answer the questions but rather 24 identifywhat the issues are andwork together to 25 develop the answers. EXECUTIVE COURT REPORTERS, INC. (301) 565-006424

1 As such, the schedule as had been presented 2 at the January 8th Advisory Committee meeting calls for 3 the strawman to be complete on February 14th. I 4 believe we have circulated that. We have copies of 5 that here. Hopefully, people have had an opportunity 6 to review it so that they've come prepared to discuss 7 it in detail at the workshop today and tomorrow, with 8 the work groups being formulated. 9 At the end of the day tomorrow, I expect that 10 there will be people added to, dropped out, but 11 hopefully be added to the work -- working groups over 12 the time, and that we will have products delivered in 13 the next couple of months, but it's -- it will be an 14 on-going process. 15 Again, what we hope to accomplish is to -- 16 with this two-day meeting is to define the role and 17 membership of the working group or working groups, to 18 identify those experts to assist in the review of the 19 methodologies and analyses, and to propose alternatives 20 or modifications to the procedures that are laid out in 21 the strawman. 22 Again, I'd like to thank each and every one 23 of you for your participation and encourage you to 24 participate at the fullest, challenge us, challenge the 25 others in the audience, because that's how we're going EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 24 1 As such, the schedule as hadbeenpresented 2 at the January 8thAdvisory Committee meeting calls for 3 the strawman to be complete on February 14th. I 4 believe we have circulatedthat. We have copies of 5 that here. Hopefully, people have had an opportunity 6 to review it so that they've come prepared to discuss 7 it in detail at the workshop today and tomorrow, with 8 the workgroups being formulated. 9 At the end of the day tomorrow, I expect that 10 there will be people added to, dropped out, but 11 hopefullybe added to the work -- working groups over 12 the time, and that we will haveproducts delivered in 13 the next couple of months, but it's -- it will be an 14 on-goingprocess. 15 Again, what we hope to accomplish is to -- 16 with this two-daymeeting is to define the role and 17 membership of the working group orworking groups, to 18 identify those experts to assist in the review of the 19 methodologies and analyses, and topropose alternatives 20 ormodifications to theprocedures that are laidout in 21 the strawman. 22 Again, I'dlike to thank each and everyone 23 of you for yourparticipationand encourage you to 24 participate at the fullest, challenge us, challenge the 25 others in the audience, because that's howwe're going EXECUTIVE COURT REPORTERS, INC. (301) 565-006425

1 to make progress, I believe, and the next presenter 2 will be Mike Rivest with Arthur D. Little, who will 3 present the overview of the strawman, but before Mike 4 does his presentation, I'd like to ask if there are any 5 questions the audience may have of me. 6 MR. SCHLEEDE: I have a question. Some 7 places in the document -- Glenn Schleede, Vigilante. 8 Some places in the document, you use the term 9 "stakeholders", in other places, you use "interested 10 parties". What are the distinctions you make between 11 those? 12 The second question, if you could address it 13 at the same time, would you tell us where you are in 14 the process of finding ways to determine what the 15 impact or the interests are of real consumers, and how 16 you're taking those into account? 17 MR. McCABE: As far as the first question, 18 Glenn, "interested parties" and "stakeholders", I think 19 that everybody here in the audience may have somewhat 20 of a different definition. To me, they are synonyms. 21 It may be that for stakeholders, some will consider 22 stakeholders to be ones who have money at stake.23 Manufacturers will look at themselves as being stake24 holders because they've got an investment to protect, 25 to help to grow. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 25 1 tomake progress, I believe, and the next presenter 2 will be Mike Rivest withArthurD. Little, who will 3 present the overviewof the strawman, but beforeMike 4 does his presentation, I'dlike to ask if there are any 5 questions the audiencemayhave of me. 6 MR. SCHLEEDE: I have a question. Some 7 places in the document

-- Glenn Schleede, Vigilante. 8 Some places in the document, you use the term 9 "stakeholders", inotherplaces, you use "interested 10 parties". What are the distinctions youmake between 11 those? 12 The secondquestion, ifyou could address it 13 at the same time, wouldyou tell us where you are in 14 the process of finding ways to determine what the 15 impact or the interests are of real consumers, andhow 16 you're taking those into account? 17 MR. McCABE: As far as the first question, 18 Glenn, "interestedparties" and "stakeholders", I think 19 that everybodyhere in the audience mayhave somewhat 20 of a different definition. Tome, they are synonyms. 21 It maybe that for stakeholders, some will consider 22 stakeholders to be ones who have money at stake. 23 Manufacturers will look at themselves as being stake24 holders because they've got an investment toprotect, 25 to help to grow. EXECUTIVE COURT REPORTERS, INC. (301) 565-006426

1 On the other hand, as consumers, taxpayers, 2 I'd have to say that we're also stakeholders because 3 one of the -- the goal of this program is to save 4 energy. One of the reasons for saving energy is 5 because -- to save the nation's and the world's 6 environment, and I think we all have a stake in that. 7 So, I think as far as stakeholders, it's a 8 matter from where you're looking as far as how you want 9 to define it. Interested parties, I'd say, in many 10 respects, is -- is the same. 11 With respect to the second question, as far 12 as to get the input from consumers, at the January 8th 13 Advisory Committee, one of the working groups that was 14 established was to do exactly that. It is not 15 proceeding as quickly as I'd like to see it, and we've 16 had some discussions with the staff as to -- as to 17 see -- see if we can find ways to encourage or help 18 that process along. 19 MR. BROOKMAN: Michael, if I may, may I 20 comment on that briefly? 21 This is Doug Brockman again. 22 I have been working with that group, Glenn, 23 and we had one conference call with -- I can't recall 24 the two individuals' names that participated in the 25 conference call to kind of flesh out or, I should say, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 26 1 On the otherhand, as consumers, taxpayers, 2 I'dhave to saythat we're also stakeholdersbecause 3 one of the -- the goal of this program is to save 4 energy. One of the reasons for saving energy is 5 because -- to save the nation's and the world's 6 environment, and I thinkwe all have a stake in that. 7 So, I think as far as stakeholders, it's a 8 matter fromwhere you're looking as far as howyouwant 9 to define it. Interestedparties, I'd say, inmany 10 respects, is -- is the same. 11 withrespect to the secondquestion, as far 12 as to get the input from consumers, at the January 8th 13 AdvisoryCommittee, one of the working groups that was 14 establishedwas to do exactlythat. It is not 15 proceeding as quickly as I'dlike to see it, andwe've 16 had some discussions with the staff as to -- as to 17 see -- see if we can find ways to encourage orhelp 18 that process along. 19 MR. BROOKMAN: Michael, if I may, may I 20 comment on that briefly? 21 This is Doug Brookman again. 22 I have beenworkingwith that group, Glenn, 23 andwe hadone conference call with -- I can't recall 24 the two individuals' names that participated in the 25 conference call to kind of flesh out or, I should say, EXECUTIVE COURT REPORTERS, INC. (301) 565-006427

1 block out the big chunks of how you would proceed to 2 obtain actual consumer input. 3 We have scheduled an additional -- I should 4 say we are going to schedule an additional conference 5 call after those results get typed up, and if you'd 6 like to be included in that conference call, Glenn, or 7 anybody else would like to be included, if you'd let me 8 know, and we'll include you, rope you into that. 9 So, it is proceeding, and Kathy Epping on 10 your staff has kept track of this and been shepherding 11 it along. 12 So, the goal is, however, let me state the 13 goal, is to come forward to the next Advisory Committee 14 meeting with an actual proposed methodology, although 15 it will be still not detailed. It will be just kind of 16 a broad outline of it, which would be in June. 17 MR. JONES: Earl Jones, General Electric. 18 Michael, just one comment. I think it's 19 actually on your chart, your background chart on the 20 description of the process rule improvements, your 21 next-to-last bullet. See the cumulative impacts of 22 regulation. 23 Actually with the -- if I understand what the 24 rule requires is that you will seek to mitigate them, 25 which I think is rather a different obligation than EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 27 1 block out the big chunks of howyou wouldproceed to 2 obtain actual consumer input. 3 We have scheduled an additional

-- I should 4 saywe are going to schedule an additional conference 5 call after those results get typedup/ and if you'd 6 like tobe included in that conference call/ Glenn/ or 7 anybody else would like tobe included/ if you'd let me 8 know/ andwe'll include you/ rope you into that. 9 So/ it is proceeding/ and KathyEpping on 10 your staff has kept track of this andbeen shepherding 11 it along. 12 So/ the goal is/ however/ let me state the 13 goal/ is to come forward to the next Advisory Committee 14 meetingwith an actual proposedmethodology/ although 15 it will be still not detailed. It will bejust kind of 16 a broad outline of it/ whichwouldbe inJune. 17 MR. JONES: Earl Jones/ General Electric. 18 Michael/ just one comment. I think it's 19 actuallyonyour chart/ yourbackground chart on the 20 description of theprocess rule improvements/ your 21 next-to-Iast bullet. See the cumulative impacts of 22 regulation. 23 Actuallywiththe

-- if I understandwhat the 24 rule requires is that you will seek to mitigate them/ 25 which I think is rather a different obligationthan EXECUTIVE COURT REPORTERS, INC. (301) 565-006428

1 simply considering them. 2 MR. McCABE: Well, in order to mitigate them 3 as far as -- at this point, I'm looking to -- to 4 develop a methodology, that we can develop a 5 methodology in which we can identify what those 6 cumulative impacts are. 7 Any further questions? If not, turn it over 8 to Mike Rivest. 9 Analytical Framework and 10 Description of New Approach 11 MR. RIVEST: This presentation -- I don't 12 know. Does this work well? I -- this presentation was 13 initially prepared for the Advisory Committee meeting 14 that was held in January. 15 I feel it's a fairly good overview of the 16 approach that we're developing currently. So, I'll ask 17 those who have seen this presentation to -- to -- to -- 18 to excuse me if it's somewhat repetitious. I'll try to 19 highlight some of the improvements that have been made 20 to the approach since the last meeting. 21 In that regard, I'd like to thank all the 22 people that provided input to date, and a special 23 mention to the ballast industry, whose input has been 24 valuable to primarily the qualitative assessment 25 approaches that were developed. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 28 1 simply considering them. 2 MR. McCABE: Well, inorder to mitigate them 3 as far as -- at this point, 11m looking to to 4 develop a methodology, that we can develop a 5 methodology inwhichwe can identifywhat those 6 cumulative impacts are. 7 Any further questions? If not, turn it over 8 toMike Rivest. 9 Analytical Framework and 10 Description ofNew Approach 11 MR. RIVEST: This presentation

-- I donlt 12 know. Does this workwell? I

-- this presentationwas 13 initiallyprepared for theAdvisory Committee meeting 14 that was held inJanuary. 15 I feel itls a fairly good overviewof the 16 approach that welre developing currently. So, 1111 ask 17 those who have seen this presentationto

-- to

-- to 18 to excuse me if itls somewhat repetitious. 1111 tryto 19 highlight some of the improvements that have beenmade 20 to the approach since the last meeting. 21 In that regard, lId like to thank all the 22 people that provided input to date, and a special 23 mention to the ballast industry, whose input has been 24 valuable toprimarilythe qualitative assessment 25 approaches that were developed. EXECUTIVE COURT REPORTERS, INC. (301) 565-006429

1 My presentation will be divided into five 2 segments. The first segment is a description of the 3 analytical framework. What I'm doing in the first 4 section is trying to demonstrate how the interpretative 5 rule has really changed the way we think about 6 manufacturer impact. So, it's really a holistic view, 7 if you will, and we're going to contrast the past 8 approach to the new approach. 9 Sections 2, 3 and 4 are description of three 10 phases of the analysis that will be described in 11 greater detail. It's been broken down in three phases, 12 so that we can have linkages with other segments of the 13 rule-making analysis. 14 So, one of the primary changes, I would say, 15 from this approach to past approach is that it begins 16 at the very early stages of the rulemaking, and it 17 doesn't await the impact analysis -- the economic 18 impact analysis stage, which usually came after the 19 ANOPR. 20 Finally, I'd like to look at the workshop 21 agenda with you. My perspective on the agenda, how it 22 tries to fit all the pieces of the analysis, and at the 23 same time, I'd like to introduce some of the people who 24 contributed to developing the draft, introduce them and 25 maybe talk a little bit about -- along the way how the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 29 1 My presentationwill be divided into five 2 segments. The first segment is a description of the 3 analytical framework. What I'mdoing in the first 4 section is trying to demonstrate how the interpretative 5 rule has really changed the waywe think about 6 manufacturer impact. So, it's really a holistic view, 7 if you will, andwe're going to contrast the past 8 approach to the new approach. 9 Sections 2, 3 and 4 are description of three 10 phases of the analysis that will be described in 11 greater detail. It's beenbroken down in three phases, 12 so that we canhave linkages with other segments of the 13 rule-making analysis. 14 So, one of the primary changes, I would say, 15 from this approach topast approach is that it begins 16 at the very early stages of the rulemaking, and it 17 doesn't await the impact analysis -- the economic 18 impact analysis stage, whichusually came after the 19 ANOPR. 20 Finally, I'd like to look at the workshop 21 agenda withyou. My perspective on the agenda, how it 22 tries to fit all the pieces of the analysis, and at the 23 same time, I'd like to introduce some of the people who 24 contributed to developing the draft, introduce them and 25 maybe talk a little bit about -- along the wayhow the EXECUTIVE COURT REPORTERS, INC. (301) 565-006430

1 concept fits in with the different blocks. 2 Why are we doing manufacturer's impact at 3 all? Is it something that's even doable? Why are we 4 bothering? 5 It's clear from the law that -- and there are 6 two statements made about manufacturer impacts and the 7 law. The first being that the department is to 8 consider the economic impact of the standard on 9 manufacturers and on the consumers of the products 10 subject to such a standard. 11 Two key words here are the words "impact" and 12 the word "manufacturers". You'll notice that there's 13 not a whole lot of definition and certainly there's no 14 or very little additional definition in the law per se. 15 So, what this process rule has done is to a 16 great extent try and define what -- what was meant or 17 what is meant by impacts and by manufacturers. 18 Second consideration. The department -- the 19 impact of any lessening of competition has to be 20 determined in writing by the Attorney General. I'm 21 very happy to see that the Department of Justice has 22 sent a couple people representing them. They've 23 already provided input. 24 We've held meetings with them, and although 25 it's clear that the competitive assessment is a DOJ EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 30 1 concept fits inwith the different blocks. 2 Why are we doingmanufacturer's impact at 3 all? Is it something that's even doable? Why are we 4 bothering? 5 It's clear from the law that

-- and there are 6 two statements made about manufacturer impacts and the 7 law. The first being that the department is to 8 consider the economic impact of the standardon 9 manufacturers and onthe consumers of the products 10 subject to such a standard. 11 Two keywords here are the words "impact" and 12 the word "manufacturers". You'll notice that there's 13 not a whole lot of definition and certainlythere's no 14 orvery little additional definition inthe lawper se. 15 SOl what this process rule has done is to a 16 great extent try and define what

-- what was meant or 17 what ismeant by impacts andbymanufacturers. 18 Second consideration. The department the 19 impact of any lessening of competitionhas to be 20 determined inwritingbytheAttorneyGeneral. I'm 21 veryhappy to see that the Department of Justice has 22 sent a couple people representing them. They've 23 alreadyprovided input. 24 We've heldmeetings with 

### theml and although 25 it's clear that the competitive assessment is a DOJ EXECUTIVE COURT REPORTERS, INC. (301) 565-006431

1 function, we have been asked throughout the process 2 improvement to try and link our analyses, at least to 3 be in sync, and to the extent that we can assist the 4 department in conducting its evaluation, we should try 5 and gather the information required for them and give 6 them more time to conduct that analysis. 7 If I were to summarize what the process 8 improvement did, the way I -- the way I summarize it is 9 it answered -- tried to answer three questions relative 10 to manufacturers impact. 11 What impact should be considered? You'll -- 12 the -- the framework before was to look at the 13 financial impact, and I would say that focuses 14 primarily on long-term financial impacts. 15 How can manufacturers be described? Did -- 16 did Congress mean the manufacturers that are making the 17 products as the regulation comes into effect? Are they 18 talking about an industry as something that -- that -- 19 that changes over time, and where -- where, you know, 20 the manufacturers in five years or 10 years may be 21 different from the manufacturers today? 22 So, once again, the process rule has brought 23 some light on to that question, and, finally, there's 24 not a lot of guidance in the law as to how one goes 25 about evaluating the impacts. There's specific mention EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 31 1 function, we have been asked throughout the process 2 improvement to tryand link our analyses, at least to 3 be in sync, and to the extent that we can assist the 4 department in conducting its evaluation, we shouldtry 5 andgather the informationrequired for them andgive 6 themmore time to conduct that analysis. 7 If I were to summarize what the process 8 improvement did, the way I -- the way I summarize it is 9 it answered -- tried to answer three questions relative 10 to manufacturers impact. 11 What impact shouldbe considered? You'll 12 the -- the frameworkbefore was to look at the 13 financial impact, and I would saythat focuses 14 primarilyon long-term financial impacts. 15 How canmanufacturers be described? Did-- 16 did Congress mean the manufacturers that are making the 17 products as the regulation comes into effect? Are they 18 talking about an industry as something that that-- 19 that changes over time, andwhere -- where, youknow, 20 the manufacturers in five years or 10 years maybe 21 different from the manufacturers today? 22 So, once again, the process rule has brought 23 some light on to that question, and, finally, there's 24 not a lot of guidance inthe law as to how one goes 25 about evaluating the impacts. There's specificmention EXECUTIVE COURT REPORTERS, INC. (301) 565-006432

1 to public comment, but there's no analytical framework 2 per se. 3 So, looking at the past methodology and the 4 three questions of impact, manufacturer type and 5 analysis method, this is how I'd characterize the past 6 framework. 7 Most people found it -- found that it was too 8 narrow. It was too confining. The past analysis was 9 concerned with long-run financial impacts. Such 10 industry effects like employment, dislocation, plant 11 closures and the like were not directly addressed. 12 It was felt that if our long-term financial 13 impact assessment showed serious deterioration in the 14 average profitability of the industry, that would be a 15 sort of indirect indicator of other things going on, 16 but there was no -- no sense of trying to understand 17 what it was that was going on. 18 The past analysis model, the hypothetical 19 prototypical firm, it is very hard to get data, good 20 data on -- that would -- good financial data on to what 21 -- on to different firms. So, what was done was to try 22 and simulate a firm based on industry average values. 23 So, assuming a full-line manufacturer that 24 produced the exact product mix of the industry. So, as 25 such, there was no attempt at differentiating the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 32 1 topublic comment, but there's no analytical framework 2 per se. 3 So, looking at thepast methodology and the 4 three questions of impact, manufacturer type and 5 analysis method, this is how I'd characterize thepast 6 framework. 7 Most people found it

-- found that it was too 8 narrow. It was too confining. The past analysis was 9 concernedwith long-run financial impacts. Such 10 industryeffects like employment, dislocation, plant 11 closures and the like were not directly addressed. 12 It was felt that if our long-term financial 13 impact assessment showed serious deterioration inthe 14 average profitabilityof the industry, that wouldbe a 15 sort of indirect indicator of other things going on, 16 but there was no -- no sense of trying to understand 17 what it was that was going on. 18 The past analysis model, the hypothetical 19 prototypical firm, it is veryhard to get data, good 20 data on -- that would good financial data on to what 21

-- on to different firms. So, what was done was to try 22 and simulate a firmbased on industry average values. 23 So, assuming a full-line manufacturer that 24 producedthe exact product mix of the industry. 25 such, there was no attempt at differentiating the EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 So, as33

1 impacts on different subgroups of manufacturers. 2 I'd just like to footnote here that in the 3 earlier analyses of the early -- the early '80s, there 4 had been an attempt at categorizing manufacturers in 5 three groups, small, medium and large, and trying to 6 identify the various impacts on those three groups. 7 So, to an extent, we're coming back to that 8 paradigm, but we will be -- we'll try to be more 9 flexible than that. 10 Finally, the past analysis framework was 11 extremely quantitative. A model had been built, and it 12 was assumed that within one model, you could capture 13 all the intricacies -- intricacies -- intricacies -- 14 help me out, Doug. 15 MR. BROOKMAN: Intricacies. 16 MR. RIVEST: Intricacies. I was reverting to 17 French. I'm sorry. 18 So, the analyst's job basically was to gather 19 all of the data that was required to run the model, and 20 then to examine the outputs of the models, and -- and, 21 so, really that's -- you know, the core of the analysis 22 was just the model itself. 23 Looking at what the interpretative rule has 24 done to the framework, it's taken us out of a box. We 25 were looking at a prototypical firm, looking at EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 33 1 impacts on different subgroups of manufacturers. 2 I'djust like to footnote here that in the 3 earlier analyses of the early

-- the early '80st there 4 hadbeen an attempt at categorizing manufacturers in 5 three groupst smallt medium and larget and trying to 6 identifythe various impacts on those three groups. 7 SOt to an extentt we're comingback to that 8 paradigmt but we will be

-- we'll tryto be more 9 flexible than that. 10 FinallYt the past analysis framework was 11 extremelyquantitative. 

### Amodel hadbeenbuiltt and it 12 was assumed that within one modelt you could capture 13 all the intricacies

-- intricacies

-- intricacies

-- 14 helpme outt Doug. 15 MR. BROOKMAN: Intricacies. 16 MR. RIVEST: Intricacies. I was reverting to 17 French. I'm sorry. 18 SOt the analyst's jobbasicallywas to gather 19 all of the data that was requiredto run the modelt and 20 then to examine the outputs of the modelst and

-- andt 21 SOt really that's

-- you knowt the core of the analysis 22 was just the model itself. 23 Looking at what the interpretative rule has 24 done to the frameworkt it's takenus out of a box. We 25 were looking at a prototypical firmt looking at EXECUTIVE COURT REPORTERS, INC. (301) 565-006434

1 financial impacts, primarily long-term, and now we're 2 going to look at different types of manufacturers. 3 We're going to, you know, not necessarily do 4 small, medium and large because that may not be the 5 relevant thing to look at, but try and identify through 6 an industry characterization phase what is relevant? 7 What are the relevant groupings of manufacturers we 8 should consider? 9 Also, we're expanding the types of impacts 10 that we're going to try to capture within our analysis. 11 So, looking at things such as employment, competitive 12 impacts and capacity impacts. 13 In terms of the changes to the analysis 14 itself, we're -- we're -- we're leaving the models. 15 We're not -- we -- instead of considering the model as 16 being something that drives the analysis, the models 17 will become sometimes useful tools that we have to -- 18 to -- to select for the appropriate task. 19 So, before we worry about how much, we should 20 try and understand what it is we need to measure, and 21 if it's relevant or necessary to go about those 22 measurements. 23 Going about -- despite the flexibility, we'd 24 certainly like to have some structure as well, and, so, 25 for that reason, we're trying to develop tools that EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 34 1 financial impacts, primarilylong-term, andnowwe're 2 going to look at different types of manufacturers. 3 We're going to, you know, not necessarilydo 4 small, medium and large because that maynot be the 5 relevant thing to look at, but try and identifythrough 6 an industrycharacterizationphase what is relevant? 7 What are the relevant groupings of manufacturers we 8 should consider? 9 Also, we're expanding the types of impacts 10 that we're going to tryto capture within our analysis. 11 So, looking at things such as employment, competitive 12 impacts and capacity impacts. 13 In terms of the changes to the analysis 14 itself, we're -- we're -- we're leaving the models. 15 We're not -- we -- insteadof considering the model as 16 being something that drives the analysis, the models 17 will become sometimes useful tools that we have to -- 18 to -- to select for the appropriate task. 19 So, before we worry about howmuch, we should 20 try andunderstandwhat it is we need to measure, and 21 if it's relevant ornecessaryto go about those 22 measurements. 23 Going about -- despite the flexibility, we'd 24 certainlylike tohave some structure as well, and, so, 25 for that reason, we're trying to develop tools that EXECUTIVE COURT REPORTERS, INC. (301) 565-006435 1 will -- that will -- will be well documented, that will 2 be maintained over time, and that will be able to 3 establish a public record. 4 So, our qualitative assessments will draw on 5 multiple types of stakeholder inputs. You'll see in 6 the approach, there's discussion of having voluntary 7 manufacture interviews and facilities visits. The 8 process is described towards the end with the strawman 9 where we try to lay out a process by which we'll go 10 about conducting these interviews. 11 Stakeholders as well will be consulted 12 through interviews, workshops, surveys, and any other 13 means to develop some of the key variables that we'll 14 be looking at. Some of the variables are needed for 15 input into the GRIM Model. Others are simply 16 information that we may not even think of asking. 17 In terms of the modeling itself, our primary 18 focus is the Government Regulatory Impact Model, which 19 will be presented just after my talk. 20 MR. BROOKMAN: Can't hear, Glenn? 21 (Pause) 22 MR. RIVEST: Can you hear me now? 23 MR. SCHLEEDE: No, I cannot. 24 MR. BROOKMAN: Thanks for letting us know. 25 Can you hear this? Yes? No? Can you hear this? Oh, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 35 1 will

-- that will

-- will be well documented, that will 2 be maintained over time, and that will be able to 3 establish a public record. 4 So, ourqualitative assessments will draw on 5 multiple types of stakeholder inputs. You'll see in 6 the approach, there's discussion of havingvoluntary 7 manufacture interviews and facilities visits. The 8 process is describedtowards the endwith the strawman 9 where we tryto layout a processbywhichwe'll go 10 about conducting these interviews. 11 Stakeholders as well will be consulted 12 through interviews, workshops, surveys, and any other 13 means to develop some of the keyvariables that we'll 14 be looking at. Some of the variables are needed for 15 input into the GRIM Model. Others are simply 16 information that we maynot eventhink of asking. 17 In terms of the modeling itself, ourprimary 18 focus is the Government Regulatory Impact Model, which 19 will be presentedjust aftermy talk. 20 MR. BROOKMAN: Can't hear, Glenn? 21 (Pause) 22 MR. RIVEST: Canyou hear me now? 23 MR. SCHLEEDE: No, I cannot. 24 MR. BROOKMAN: Thanks for lettingus know. 25 Canyou hear this? Yes? No? Canyou hear this? Oh, EXECUTIVE COURT REPORTERS, INC. (301) 565-006436

1 maybe we got a problem with the speaker system. Can 2 you hear this? No. Do we have a volume control in the 3 room? No? Are you picking this up? 4 COURT REPORTER: Yes. 5 MR. BROOKMAN: Try that one, Michael. 6 MR. RIVEST: I can't take that off, though. 7 MS. LAUGHLIN: This is on. 8 MR. BROOKMAN: How about this one? 9 MS. LAUGHLIN: That's hers, I guess. 10 MR. BROOKMAN: Is that yours, too? Do I get 11 one? If he speaks real loud, can you hear him? 12 Mike, speak loudly. You're still picking him 13 up on the record, right?
14 COURT REPORTER: Yes. 15 MR. BROOKMAN: Speak loudly. 16 MS. LAUGHLIN: They'll call. 17 MR. BROOKMAN: Well, - 18 MR. RIVEST: Let me get closer and get lots 19 of water. 20 MS. LAUGHLIN: It came back on. 21 MR. BROOKMAN: It's back on? Okay. 22 MR. RIVEST: Our primary modeling tool is the 23 Government Regulatory Impact Model. The model will be 24 presented after the break. It's based on differential 25 cash flow analysis. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 36 1 maybe we got a problemwiththe speaker system. Can 2 you hear this? No. Do we have a volume control in the 3 room? No? Are youpicking this up? 4 COURT REPORTER: Yes. 5 MR. BROOKMAN: Trythat one, Michael. 6 MR. RIVEST: I can't take that off, though. 7 MS. LAUGHLIN: This is on. 8 MR. BROOKMAN: How about this one? 9 MS. LAUGHLIN: That's hers, I guess. 10 MR. BROOKMAN: Is that yours, too? Do I get 11 one? If he speaks real loud, canyouhearhim? 12 Mike, speak loudly. You're still pickinghim 13 up on the record, right? 14 COURT REPORTER: Yes. 15 MR. BROOKMAN: Speak loudly. 16 MS. LAUGHLIN: They'll call. 17 MR. BROOKMAN: Well,

-- 18 MR. RIVEST: Let me get closer andget lots 19 of water. 20 MS. LAUGHLIN: It came backon. 21 MR. BROOKMAN: It'sbackon? Okay. 22 MR. RIVEST: Ourprimarymodeling tool is the 23 Government Regulatory Impact Model. The model will be 24 presented after the break. It'sbasedon differential 25 cash flow analysis. EXECUTIVE COURT REPORTERS, INC. (301) 565-006437

1 I believe it meets all the requirements of 2 the interpretative rule in terms of clarity of inputs 3 and transparency, but certainly one of the key jobs of 4 the working group is going to be to use the current 5 version of the GRIM as a stepping stone towards any 6 enhancements that are required. 7 Also, Quonnie, we're looking at the 8 possibility of developing a spread sheet tool to help 9 us in determining prices. So, if this spread -- this 10 tool would have -- would be built on an economic core 11 that tries to bring the best economic test to offer and 12 price determination. So, that is not developed yet. 13 We are putting together a proposal to the stakeholders 14 on that. 15 Jim McMahon of LB&L tomorrow, I believe 16 tomorrow, will be presenting shortly the overall 17 concepts that might be founded on. 18 Mr. Lennox? 19 MR. LEWIS: Yeah. Dave Lewis with Lennox. 20 Is that a new idea? 21 MR. RIVEST: If that's a new idea? 22 MR. BROOKMAN: Did you pick that up? 23 MR. RIVEST: Dave, say it again, please. 24 MR. BROOKMAN: We're going to have -- this is 25 going to be awkward. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 37 1 I believe it meets all the requirements of 2 the interpretative rule in terms of clarityof inputs 3 and transparency, but certainlyone of the keyjobs of 4 the workinggroup is going tobe to use the current 5 version of the GRIM as a stepping stone towards any 6 enhancements that are required. 7 Also, Quonnie, we're looking at the 8 possibilityof developing a spread sheet tool to help 9 us in determiningprices. So, if this spread this 10 tool wouldhave

-- wouldbe built on an economic core 11 that tries to bring the best economic test to offer and 12 price determination. So, that is not developedyet. 13 We are putting together a proposal to the stakeholders 14 on that. 15 JimMcMahon of LB&L tomorrow, I believe 16 tomorrow, will be presenting shortlythe overall 17 concepts that might be founded on. 18 Mr. Lennox? 19 MR. LEWIS: Yeah. Dave Lewis withLennox. 20 Is that a new idea? 21 MR. RIVEST: If that's a new idea? 22 MR. BROOKMAN: Didyoupick that up? 23 MR. RIVEST: Dave, say it again, please. 24 MR. BROOKMAN: We're going to have

-- this is 25 going to be awkward. EXECUTIVE COURT REPORTERS, INC. (301) 565-006438

1 MR. LEWIS: Dave Lewis with Lennox. 2 I just wondered if this -- this spread sheet 3 tool was a new idea that was coming forth or had this
4 5 MR. RIVEST: No. Actually, it's in the 6 interpretative rule that we would be developing a price 7 forecasting tool, and it would be only one of several 8 methods of arriving at prices. 9 So, we'll see tomorrow a couple methods that 10 are being described. One is a method used by the 11 Department of Transportation. They will be present 12 tomorrow when I present their mark-up methodology. 13 An economic forecasting tool is another tool. 14 We'll go into stakeholder interview surveys as well. 15 So, we're trying to bound the price quantity 16 forecasting within the GRIM. 17 MR. BROOKMAN: I want to encourage these 18 questions, these clarifying questions as we go along. 19 Part of the goal here is to make this as dynamic as 20 possible, given the nature of the presentation. 21 MR. RIVEST: So, as we envision it now, the 22 manufacturer impact analysis would be conducted in 23 three phases. 24 The first phase will be done -- would be done 25 concurrent with the screening analysis very early in EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 38 1 MR. LEWIS: Dave Lewis withLennox. 2 I just wondered if this

-- this spread sheet 3 tool was a new idea that was coming forth orhad this 4 5 MR. RIVEST: No. Actually, it's in the 6 interpretative rule that we wouldbe developing a price 7 forecasting tool, and it wouldbe onlyone of several 8 methods of arriving at prices. 9 So, we'll see tomorrow a couple methods that 10 are being described. One is a methodusedby the 11 Department of Transportation. Theywill be present 12 tomorrowwhen I present theirmark-up methodology. 13 An economic forecasting tool is another tool. 14 We'll go into stakeholder interview surveys as well. 15 So, we're trying tobound the price quantity 16 forecasting within the GRIM. 17 MR. BROOKMAN: I want to encourage these 18 questions, these clarifying questions as we go along. 19 Part of the goal here is tomake this as dynamic as 20 possible, given the nature of the presentation. 21 MR. RIVEST: So, as we envision it now, the 22 manufacturer impact analysis wouldbe conducted in 23 three phases. 24 The first phase will be done

-- wouldbe done 25 concurrent with the screening analysis very early in EXECUTIVE COURT REPORTERS, INC. (301) 565-006439

1 the rulemaking, and what we're trying to do at this 2 stage is identify the major issues and also prepare a 3 road map or, if you will, do a preliminary selection of 4 the tools and methodologies that will be used during 5 Phase 2 and Phase 3 of the analysis. 6 So, we're trying to lay out the whole process 7 within Phase 1, and at the same time, assemble the 8 databook on the industry that can help us, you know, 9 estimate some of the variables later on in the 10 analysis. 11 Phase 2. The industry cash flow analysis is 12 what resembles the most -- the past manufacturer impact 13 analysis, and that here we are modeling a 14 prototypical -- sure. She touched the tape. 15 Somebody's fault. 16 MR. BROOKMAN: Can you hear this one back 17 there? Try this one. 18 MS. LAUGHLIN: Well, the guy's here. 19 MR. BROOKMAN: Yeah. I know. Keep going. 20 You let us know if -- try it, Mike. Go. 21 MR. RIVEST: So, the Phase 2 analysis is 22 essentially using the GRIM Model to try and estimate 23 the financial impacts of the -- of the standard levels 24 on the industry, and it would only be attempting to 25 model a prototypical firm, if you will, or the -- you EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 39 1 the rulemaking, andwhat we're trying to do at this 2 stage is identifythe major issues and alsoprepare a 3 roadmap or, if you will, do a preliminary selectionof 4 the tools andmethodologies that will be used during 5 Phase 2 and Phase 3 of the analysis. 6 So, we're trying to layout the whole process 7 within Phase I, and at the same time, assemble the 8 databook on the industrythat canhelpus, youknow, 9 estimate some of thevariables later on in the 10 analysis. 11 Phase 2. The industry cash flow analysis is 12 what resembles the most the past manufacturer impact 13 analysis, and that here we are modeling a 14 prototypical

-- sure. She touched the tape. 15 Somebody's fault. 16 MR. BROOKMAN: Canyou hear this one back 17 there? Try this one. 18 MS. LAUGHLIN: Well, the guy's here. 19 MR. BROOKMAN: Yeah. I know. Keep going. 20 You let us know if

-- try it, Mike. Go. 21 MR. RIVEST: So, the Phase 2 analysis is 22 essentiallyusing the GRIM Model to try and estimate 23 the financial impacts of the

-- of the standard levels 24 onthe industry, and it would onlybe attempting to 25 model a prototypical firm, if you will, or the

-- you EXECUTIVE COURT REPORTERS, INC. (301) 565-006440

1 can't hear me? 2 MR. BROOKMAN: He's back there now? Bear 3 with us. We'll get this -- can you hear this one back 4 there? You can? Here. Try this one. Speak loudly, 5 Mike. 6 MR. RIVEST: So, the cash flow analysis, this 7 Phase 2 analysis, would be done. What we discussed at 8 the Advisory Committee is that perhaps that first cash 9 flow analysis for the industry would be prepared for 10 the ANOPR. 11 The Phase 3 analysis is done after the ANOPR, 12 and here we're going to look -- it -- it incorporates 13 most of the new -- most of the new features of the 14 manufacturer impact analysis.15 Here, we'd be looking at the different sub16 groups of manufacturers, doing subgroup-specific cash 17 flow analyses, and also evaluating the additional 18 impacts, such as employment capacity and 19 competitiveness. 20 We tried to lay out the process here and show 21 the relationships with other segments of the rulemaking 22 analysis. Phase 1, as I mentioned earlier, would 23 happen very early, perhaps concurrently with the 24 screening analysis. 25 The industry cash flow would incorporate -- EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 40 1 can't hearme? 2 MR. BROOKMAN: He's back there now? Bear 3 withus. We'll get this

-- canyou hear this one back 4 there? You can? Here. Try this one. Speak loudly, 5 Mike. 6 MR. RIVEST: So, the cash flow analysis, this 7 Phase 2 analysis, wouldbe done. What we discussed at 8 the Advisory Committee is that perhaps that first cash 9 flow analysis for the industrywouldbe prepared for 10 theANOPR. 11 The Phase 3 analysis is done after theANOPR, 12 andhere we're going to look

-- it

-- it incorporates 13 most of the new -- most of the new features of the 14 manufacturer impact analysis. 15 Here, we'dbe looking at the different sub16 groups of manufacturers, doing subgroup-specific cash 17 flow analyses, and also evaluating the additional 18 impacts, such as employment capacityand 19 competitiveness. 20 We tried to layout theprocess here and show 21 the relationships withother segments of the rulemaking 22 analysis. Phase I, as I mentioned earlier, would 23 happenvery early, perhaps concurrentlywiththe 24 screening analysis. 25 The industrycash flow would incorporate EXECUTIVE COURT REPORTERS, INC. (301) 565-006441

1 since to do the cash flow, we need to have costs -- 2 costs, manufacturing costs, price forecasts and 3 shipment forecasts, we see a lot of synergy between the 4 engineering analysis to generate the manufacturing 5 costs, for instance. 6 The life cycle cost analysis for price 7 forecasts. Of course, for life cycle costing, we're 8 interested in consumer pricing, whereas for the GRIM 9 Model, we're interested in manufacture prices. But 10 there is a relationship. Maybe. 11 The models that are currently being used to 12 forecast national energy benefits, such as net present 13 value and quads of energy saving, do derive some 14 shipment forecasts. They -- those shipment forecasts 15 can be used as one source of input to the quantities 16 needed to run the cash flow analysis. 17 Tomorrow, during the afternoon, we'll be 18 discussing other ways of generating forecasts for 19 shipments that can be incorporated in this industry 20 cash flow.21 The other elements of the standards rule22 making analysis which are done after the ANOPR have 23 perhaps less synergy with the manufacturer impact 24 analysis. The impacts on the consumers, indirect 25 employment impacts. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 41 1 since to do the cash flow, we need tohave costs 2 costs, manufacturing costs, price forecasts and 3 shipment forecasts, we see a lot of synergybetweenthe 4 engineering analysis to generate the manufacturing 5 costs, for instance. 6 The life cycle cost analysis for price 7 forecasts. Of course, for life cycle costing, we're 8 interested in consumerpricing, whereas for the GRIM 9 Model, we're interested inmanufacture prices. But 10 there is a relationship. Maybe. 11 The models that are currentlybeing used to 12 forecast national energybenefits, such as net present 13 value and quads of energy saving, do derive some 14 shipment forecasts. They those shipment forecasts 15 canbe used as one source of input to the quantities 16 needed to run the cash flow analysis. 17 Tomorrow, during the afternoon, we'll be 18 discussing otherways of generating forecasts for 19 shipments that canbe incorporated in this industry 20 cash flow. 21 The other elements of the standards rule22 making analysis which are done after theANOPR have 23 perhaps less synergywith the manufacturer impact 24 analysis. The impacts on the consumers, indirect 25 employment impacts. EXECUTIVE COURT REPORTERS, INC. (301) 565-006442

1 Direct employment impacts will be done in the 2 subgroup analysis through the qualitative assessments,3 and the indirect employment impacts are more macro4 economic in nature and would be done, you know, within 5 the economic analysis itself, and the impacts on 6 utilities and impacts on the environment and energy 7 security are other elements of the rulemaking analysis. 8 The Sub-3 -- the Phase 3 subgroup analysis 9 has, as I mentioned earlier, the cash flow analysis for 10 each of the subgroups and the evaluation of impacts on 11 competition, impacts on employment, and impacts on 12 manufacturing capacity. 13 I put together quickly yesterday a structure 14 of the analyses sections. It's on three pages. It was 15 a separate hand-out. I don't know. Did you get a 16 copy? Does everybody have a copy? 17 So, what I've done here essentially is taken 18 that over -- that -- that overhead and expanded it on 19 to three pages and tried to identify the type of 20 analyses that is going on at the various stages. 21 The plan of the workshop is to take you 22 through the right-hand column here, which is all the 23 elements that we call manufacturing impact elements, 24 and the elements on the left are other rulemaking 25 elements. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 42 1 Direct employment impacts will be done in the 2 subgroup analysis through the qualitative assessments, 3 and the indirect employment impacts are more macro4 economic innature andwouldbe done, youknow, within 5 the economic analysis itself, and the impacts on 6 utilities and impacts on the environment and energy 7 securityare other elements of the rulemaking analysis. 8 The Sub-3

-- the phase 3 subgroup analysis 9 has, as I mentioned earlier, the cash flow analysis for 10 each of the subgroups and the evaluationof impacts on 11 competition, impacts on employment, and impacts on 12 manufacturing capacity. 13 I put together quicklyyesterday a structure 14 of the analyses sections. It's on three pages. It was 15 a separate hand-out. I don't know. Didyou get a 16 copy? Does everybodyhave a copy? 17 So, what I've done here essentially is taken 18 that over -- that

-- that overhead and expanded it on 19 to three pages and tried to identifythe type of 20 analyses that is going on at the various stages. 21 The planof the workshop is to take you 22 through the right-hand columnhere, which is all the 23 elements that we call manufacturing impact elements, 24 and the elements on the left are other rulemaking 25 elements. EXECUTIVE COURT REPORTERS, INC. (301) 565-006443

1 There's obviously a lot of synergy, and it's 2 a somewhat arbitrary distinction. 3 You can just go on to the next slide. 4 MS. LAUGHLIN: The next slide? This or -- 5 MR. RIVEST: No. 6 MS. LAUGHLIN: The whole next slide? 7 MR. RIVEST: Right. I -- I won't walk 8 through those three slides as that's what we'll be 9 doing in the next couple days. 10 The Phase 1 analysis, which is done 11 concurrent with the screening analysis, is called the 12 industry profile. That's composed of two segments. 13 There's a background industry characterization where 14 what we're trying to do is put together a databook on 15 the industry. 16 So, all information that is available, we 17 would like to put together and incorporate within one 18 bound document and have it made available to all people 19 participating in the rulemaking. 20 The type of information that could be 21 contained in there, the databook would identify the 22 producers, key market participants, identify the23 manufacturer characteristics towards an eventual sub24 group analysis. 25 It would show time series on shipments, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 43 1 There's obviously a lot of synergy, and it's 2 a somewhat arbitrarydistinction. 3 You canjust go on to the next slide. 4 MS. LAUGHLIN: The next slide? This or 5 MR. RIVEST: No. 6 MS. LAUGHLIN: The whole next slide? 7 MR. RIVEST: Right. I

-- I won't walk 8 through those three slides as that's what we'll be 9 doing in the next couple days. 10 The Phase 1 analysis, which is done 11 concurrent with the screening analysis, is calledthe 12 industryprofile. That's composed of two segments. 13 There's a background industrycharacterizationwhere 14 what we're trying to do isput together a databookon 15 the industry. 16 So, all information that is available, we 17 would like toput together and incorporate within one 18 bound document andhave it made available to all people 19 participating inthe rulemaking. 20 The type of informationthat couldbe 21 contained inthere, the databookwould identifythe 22 producers, keymarket participants, identifythe 23 manufacturer characteristics towards an eventual sub24 group analysis. 25 It would show time series on shipments, EXECUTIVE COURT REPORTERS, INC. (301) 565-006444

1 prices, features. These types of information -- this 2 type of information might be useful later on for trying 3 to come to grips with our price and quantity forecasts, 4 for example. 5 It would show time series on productivity of 6 labor capital. That could be used in a macro-economic 7 model to develop the forecasts of employment impacts. 8 It would list firms and their historical market shares. 9 That could be useful information for -- for the 10 competitive impacts assessment. 11 Does this work? Before we get into the -- 12 the -- continuing the rulemaking, past the screening 13 analysis and the industry characterization, we'd like 14 to hold a workshop. During that workshop, we could 15 review the results of the screening analysis and review 16 the contents of the databook. 17 During this workshop, participants would be 18 invited to comment on the subgroups of manufacturers, 19 how we might structure the analysis for Phase 3. 20 We'd like to identify any issues, access to 21 technology that could be useful for the competitive 22 impacts assessments. We'd like to review information 23 requirements and information-gathering methods. 24 As we move on to Phase 2, we'll need to come 25 to agreement as to how we're going to collect EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 44 1 prices, features. These types of information

-- this 2 type of informationmight be useful lateron for trying 3 to come to grips withourprice and quantity forecasts, 4 for example. 5 It would show time series onproductivityof 6 labor capital. That couldbe used in a macro-economic 7 model to develop the forecasts of employment impacts. 8 It would list firms and theirhistorical market shares. 9 That couldbe useful information for

-- for the 10 competitive impacts assessment. 11 Does this work? Before we get into the

-- 12 the

-- continuing the rulemaking, past the screening 13 analysis and the industry characterization, we'd like 14 to hold a workshop. During that workshop, we could 15 review the results of the screening analysis and review 16 the contents of the databook. 17 During this workshop, participants wouldbe 18 invited to comment on the subgroups of manufacturers, 19 howwe might structure the analysis for Phase 3. 20 We'd like to identifyany issues, access to 21 technology that couldbe useful for the competitive 22 impacts assessments. We'd like to review information 23 requirements and information-gatheringmethods. 24 As we move on to Phase 2, we'll need to come 25 to agreement as to how we're going to collect EXECUTIVE COURT REPORTERS, INC. (301) 565-006445

1 engineering analysis cost data, for example. 2 We'd like to identify any special analytical 3 tools needed to perform the analysis. Would the GRIM 4 need to be supplemented by some thing? Would the GRIM 5 need to be modified? Are there other tools that would 6 be useful for this particular rulemaking? 7 We'll adapt the generic methodology. You'll 8 see that the methodology really has a -- a -- a number 9 of choices or -- or approaches that are given to 10 generating some of the variables and the inputs to the 11 model, and if -- to the extent that up front we can try 12 and come to agreement as to which approaches we will 13 use within the approaches that were developed or 14 develop new approaches for the rulemaking, that -- we 15 will try to do that up front. 16 We'd like to establish the time line for 17 conducting the analysis, and we'd like to try and get 18 together a group for consultation for doing such things 19 like devising a survey of manufacturers or interested 20 parties. 21 So, -- thanks. 22 Phase 2 is the industry cash flow. A few 23 words about the GRIM Model. The cash flow would be 24 used with -- would be performed by the GRIM Model. 25 It's a standard financial model, based on a pro forma EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 45 1 engineering analysis cost data, for example. 2 We'd like to identifyany special analytical 3 tools needed to performthe analysis. Would the GRIM 4 need tobe supplementedby some thing? Would the GRIM 5 need tobe modified? Are there other tools that would 6 be useful for this particularrulemaking? 7 We'll adapt the generic methodology. You'll 8 see that the methodologyreallyhas a -- a -- a number 9 of choices or -- or approaches that are given to 10 generating some of the variables and the inputs to the 11 model, and if

-- to the extent that up front we cantry 12 and come to agreement as to which approaches we will 13 use within the approaches that were developed or 14 develop new approaches for the rulemaking, that

-- we 15 will tryto do that up front. 16 We'd like to establishthe time line for 17 conducting the analysis, andwe'd like to try andget 18 together a group for consultation for doing such things 19 like devising a surveyof manufacturers or interested 20 parties. 21 So,

-- thanks. 22 Phase 2 is the industrycash flow. A few 23 words about the GRIM Model. The cash flow wouldbe 24 usedwith

-- wouldbeperformedbythe GRIM Model. 25 It's a standard financial model, basedon a pro forma EXECUTIVE COURT REPORTERS, INC. (301) 565-006446

1 income statement. 2 It does require externally-supplied price and 3 quantity forecasts. That's a subject of tomorrow's 4 workshop, how we would go about generating those 5 inputs. Also, we need to have manufacturing costs that 6 are inputted into the GRIM, and also as a starting 7 point of the firm, as we want to understand what 8 happens to the firm, after standards or without 9 standards, we need to sort of common size, if you will, 10 looking at financial information and try to understand 11 the starting position of the firm, its mix of fixed 12 variable costs or, you know, cost of capital, that type 13 of financial information, to be used as a starting 14 point. 15 That's my simplistic description of the GRIM 16 Model. So, from a starting financial position here, we 17 input variable -- variable -- well, you know, 18 incremental values for achieving energy efficiency 19 designs through incorporating manufacturing costs, 20 prices and quantities externally, and deriving a cash 21 flow. 22 Dave Arnold of ADL, after the break, will be 23 talking about -- will be describing the GRIM Model in 24 some detail. We have got it hooked up here on the 25 overhead, and I would like to walk you through. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 46 1 income statement. 2 It does require externally-suppliedprice and 3 quantity forecasts. That's a subject of tomorrow's 4 workshop, howwe wouldgo about generating those 5 inputs. Also, we need to have manufacturing costs that 6 are inputted into the GRIM, and also as a starting 7 point of the firm, as we want to understandwhat 8 happens to the firm, after standards orwithout 9 standards, we need to sort of common size, if you will, 10 looking at financial information and try to understand 11 the startingpositionof the firm, itsmixof fixed 12 variable costs or, youknow, cost of capital, that type 13 of financial information, to be used as a starting 14 point. 15 That's my simplistic description of the GRIM 16 Model. So, from a starting financial positionhere, we 17 input variable

-- variable

-- well, you know, 18 incremental values for achieving energy efficiency 19 designs through incorporatingmanufacturing costs, 20 prices and quantities externally, and deriving a cash 21 flow. 22 DaveArnold ofADL, after the break, will be 23 talking about will be describing the GRIM Model in 24 some detail. We have got it hooked up here on the 25 overhead, and I would like to walkyou through. EXECUTIVE COURT REPORTERS, INC. (301) 565-006447

1 The model of the -- the version of the GRIM 2 you'll be looking at, what we've done is we've taken 3 the DOS-based version, which was developed in 1993, and 4 we've brought it on to Windows interface and Excel. 5 So, what you'll be seeing is a Beta version. I'm not 6 sure it has all the original functionality built in, 7 but we just wanted to give you a flavor of what the 8 interface might look like. 9 A couple of key questions. How should DOE go 10 about forecasting shipments? How should DOE go about 11 forecasting, and that should say, manufacturer prices? 12 That -- those are the topics of a couple of hour-long 13 workshops tomorrow. 14 Phase 3, the subgroup impact analysis. We 15 see seven tasks associated with performing this segment 16 of the analysis. The first three tasks involve running 17 the GRIM Model for those specific subgroups of 18 manufacturers that would have been determined at the 19 issues analysis workshop. 20 We have to estimate competitive impacts, 21 employment impacts, and impacts on manufacturing 22 capacity. Tomorrow afternoon, the more qualitative 23 assessments or how we envision that they may be 24 happening will be described. 25 Finally, I think one key issue, and this has EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 47 1 The model of the -- the version of the GRIM 2 you'll be looking at, what we've done is we've taken 3 the DOS-basedversion, whichwas developed in 1993, and 4 we've brought it on toWindows interface and Excel. 5 So, what you'll be seeing is a Betaversion. I'mnot 6 sure it has all the original functionalitybuilt in, 7 but we just wanted to give you a flavor of what the 8 interface might look like. 9 A couple of key questions. How shouldDOE go 10 about forecasting shipments? How shouldDOE go about 11 forecasting, and that should say, manufacturerprices? 12 That -- those are the topics of a couple of hour-long 13 workshops tomorrow. 14 Phase 3, the subgroup impact analysis. We 15 see seven tasks associatedwithperforming this segment 16 of the analysis. The first three tasks involve running 17 the GRIM Model for those specific subgroups of 18 manufacturers that wouldhave beendetermined at the 19 issues analysis workshop. 20 We have to estimate competitive impacts, 21 employment impacts, and impacts onmanufacturing 22 capacity. Tomorrow afternoon, the more qualitative 23 assessments orhowwe envision that theymaybe 24 happeningwill be described. 25 Finally, I think one key issue, and this has EXECUTIVE COURT REPORTERS, INC. (301) 565-006448

1 not been approached in the work -- you know, not very 2 -- not very much and not very well, is how we'll 3 present the data. 4 A lot of the data that will be brought -- you 5 know, that will be obtained through the interview 6 process will be highly confidential, and we have to 7 find a way of aggregating that data to maintain 8 confidentiality but still make sure that we establish a 9 good public record. 10 A couple of tasks I just want to highlight. 11 Manufacturing costs. There's a lot of synergies 12 between the engineering analysis and the manufacturing 13 impact analyses as far as with regards to gathering 14 manufacturing cost data. 15 There are differences, however, and the main 16 differences being when you're doing an engineering 17 analysis, at least in the past, we've been looking at 18 design options and the cost of achieving those design 19 options. 20 We also tend -- so, we tend to look at a lot 21 of designs, and we tend to look at designs that may not 22 be cost effective; whereas, when we're looking at a 23 manufacturer impact, and we're looking at the GRIM 24 Model specifically, we're more concerned with the cost 25 of achieving a certain efficiency level. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 48 1 not been approached in the work

-- you know, not very 2

-- not verymuch and not verywell, is howwe'll 3 present the data. 4 Alot of the data that will be brought

-- you 5 know, that will be obtainedthrough the interview 6 process will be highly confidential, andwe have to 7 find a way of aggregating that data to maintain 8 confidentialitybut still make sure that we establisha 9 goodpublic record. 10 Acouple of tasks I just want to highlight. 11 Manufacturing costs. There's a lot of synergies 12 between the engineering analysis and the manufacturing 13 impact analyses as far as with regards to gathering 14 manufacturing cost data. 15 There are differences, however, and the main 16 differences beingwhenyou're doing an engineering 17 analysis, at least in the past, we've been looking at 18 design options and the cost of achieving those design 19 options. 20 We also tend

-- so, we tend to look at a lot 21 of designs, andwe tend to look at designs that maynot 22 be cost effective; whereas, whenwe're looking at a 23 manufacturer impact, andwe're looking at the GRIM 24 Model specifically, we're more concernedwith the cost 25 of achieving a certainefficiencylevel. EXECUTIVE COURT REPORTERS, INC. (301) 565-006449

1 So, whereas in the engineering analysis, we 2 may derive a full curve, and we -- we are bound by the 3 design option specified, when we do a Phase 3 analysis, 4 for example, we will want to know the costs of that 5 firm, of achieving those energy savings, regardless of 6 the design options that were specified at the 7 engineering analysis. So, we need to be more specific. 8 In the best of all worlds, we'd like to 9 capture all those differences in the engineering 10 analysis right at the beginning. I don't think we 11 should try and lock ourselves into that paradigm. That 12 may need to be specific to the -- to the rulemaking. 13 But certainly in all instances, we will need14 to look at manufacturing costs in detail at the sub15 group analysis because there are significant 16 differences based on efficiency level versus design 17 option types of information. Based also on the types 18 of burdens or costs which don't necessarily get 19 captured very well in the survey where you're asking 20 them to cost -- you're asking the manufacturers to cost 21 the design option, and also cumulative burden. It may 22 not reflect itself very well in unit costs once again. 23 We had meetings with the Department of 24 Justice, very enlightening. We are -- what we're 25 trying to do with DOJ is structure our analysis in a EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 49 1 So, whereas in the engineering analysis, we 2 may derive a full curve, andwe -- we are boundbythe 3 design option specified, whenwe do a Phase 3 analysis, 4 for example, we will want to know the costs of that 5 firm, of achieving those energy savings, regardless of 6 the design options that were specified at the 7 engineering analysis. So, we need to be more specific. 8 In the best of all worlds, we'd like to 9 capture all those differences in the engineering 10 analysis right at the beginning. I don't thinkwe 11 should try and lockourselves into that paradigm. That 12 mayneed tobe specific to the

-- to the rulemaking. 13 But certainly in all instances, we will need 14 to look at manufacturing costs indetail at the sub15 group analysis because there are significant 16 differences basedon efficiencylevel versus design 17 option types of information. Based also on the types 18 of burdens or costs which don't necessarilyget 19 capturedverywell in the surveywhere you're asking 20 them to cost

-- you're asking the manufacturers to cost 21 the design option, and also cumulative burden. Itmay 22 not reflect itselfverywell inunit costs once again. 23 We hadmeetings with the Department of 24 Justice, very enlightening. We are -- what we're 25 trying to do withDOJ is structure our analysis in a EXECUTIVE COURT REPORTERS, INC. (301) 565-006450

1 way that we can capture the information that is needed 2 for them to make their determination. 3 It also sheds a lot of light. Their 4 experience and methodology also adds a lot to our own 5 understanding. So, we will be able to better 6 coordinate our efforts. The types of -- they're here. 7 So, I better watch out what I say. 8 The type of information they would be looking 9 at through the questionnaires that we'll develop, the 10 surveys will develop for the Phase 3 analysis is any 11 asymmetrical cost increases to some manufacturers. The 12 increased proportion of fixed costs which could 13 increase business risk. This is an important issue, 14 particularly with smaller manufacturers, and also any 15 barriers to market entry. 16 The focus of the DOJ analysis -- the DOJ 17 analysis is the production -- is the protection of the 18 consumer, but that leads us right to an evaluation of 19 that market and the manufacturers in that market. 20 Questions so far? 21 MR. BROOKMAN: Are you all staying with him 22 and tracking? Yes? Glenn? 23 MR. SCHLEEDE: Just one question. 24 MR. BROOKMAN: Glenn, use the mike. 25 MR. SCHLEEDE: Glenn Schleede. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 50 1 way that we can capture the information that is needed 2 for themtomake their determination. 3 It also sheds a lot of light. Their 4 experience andmethodology also adds a lot to our own 5 understanding. So, we will be able to better 6 coordinate our efforts. The types of

-- they're here. 7 So, I betterwatch out what I say. 8 The type of informationtheywouldbe looking 9 at through the questionnaires that we'll develop, the 10 surveys will develop for the Phase 3 analysis is any 11 asymmetrical cost increases to some manufacturers. The 12 increasedproportionof fixed costs which could 13 increasebusiness risk. This is an important issue, 14 particularlywith smallermanufacturers, and also any 15 barriers to market entry. 16 The focus of the DOJ analysis

-- the DOJ 17 analysis is the production

-- is the protectionof the 18 consumer, but that leads us right to an evaluationof 19 that market and the manufacturers in that market. 20 Questions so far? 21 MR. BROOKMAN: Are you all stayingwithhim 22 and tracking? Yes? Glenn? 23 24 25 MR. SCHLEEDE: Just one question. MR. BROOKMAN: Glenn, use the mike. MR. SCHLEEDE: Glenn Schleede. EXECUTIVE COURT REPORTERS, INC. (301) 565-006451

1 Where -- the overhead costs, the indirect 2 costs, that's what you're referring to on this Chart 4 3 under the term "Burden"? Is that where they come in? 4 MR. RIVEST: I'm sorry. Indirect? 5 MR. SCHLEEDE: Indirect costs. Everything 6 from advertising, overhead costs, for a manufacturer, 7 where do those come in to the model? 8 MR. RIVEST: They come in -- there -- there's 9 a -- they come in as one-time costs of meeting 10 regulation. So, for example, if you have to redo your 11 product literature, there are two types of costs. 12 There are capital conversion costs, and there are 13 capital -- product -- is it product conversion? 14 So, there are expensible costs, and there are 15 costs that will be capitalized, and those are inputted 16 in to the model. 17 MR. SCHLEEDE: I mean the costs of -- like 18 the costs of everybody in this room, who -- who -- that 19 -- 20 MR. RIVEST: There's no -- the cost benefit 21 analysis, I don't believe includes the cost of 22 attending meetings or developing the regulations. 23 MR. SCHLEEDE: No. I'm being facetious. The 24 cost of -- normal overhead -- 25 MR. RIVEST: I know you are. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 51 1 Where

-- the overhead costs, the indirect 2 costs, that's what you're referring to on this Chart 4 3 under the term "Burden"? Is that where they come in? 4 MR. RIVEST: I'm sorry. Indirect? 5 MR. SCHLEEDE: Indirect costs. Everything 6 from advertising, overheadcosts, for a manufacturer, 7 where do those come into the model? 8 MR. RIVEST: They come in there

-- there's 9 a

-- they come in as one-time costs of meeting 10 regulation. So, for example, ifyou have to redoyour 11 product literature, there are two types of costs. 12 There are capital conversioncosts, and there are 13 capital

-- product

-- is itproduct conversion? 14 So, there are expensible costs, and there are 15 costs that will be capitalized, and those are inputted 16 in to the model. 17 MR. SCHLEEDE: I mean the costs of

-- like 18 the costs of everybody in this room, who

-- who

-- that 19 20 MR. RIVEST: There's no -- the cost benefit 21 analysis, I don't believe includes the cost of 22 attendingmeetings ordeveloping the regulations. 23 MR. SCHLEEDE: No. I'mbeing facetious. The 24 cost of

-- normal overhead

-- 25 MR. RIVEST: I knowyou are. EXECUTIVE COURT REPORTERS, INC. (301) 565-006452

1 MR. SCHLEEDE: -- costs in -- in the 2 organization. It seems up to this point, you've talked 3 only about the direct costs, and I'm wondering have I 4 missed something or where do the indirect costs come 5 in? Where is the cost of the office of General 6 Counsel, advertising, all the rest? 7 AUDIENCE MEMBER: Mike, that may be 8 considered in your other model. 9 MR. SCHLEEDE: Okay. But if it comes up 10 later, fine. 11 MR. RIVEST: Okay. 12 MR. BROOKMAN: Any more questions at this 13 point? 14 MR. PERLIS: Hi. I'm Mike Perlis. 15 I have two quick questions. First is, are 16 you suggesting -- did you just suggest recently that 17 the prices that you forecast for the GRIM Model will 18 not necessarily be the same prices that we're going to 19 use in the consumer impact analysis? 20 MR. RIVEST: Very good question. In the 21 Phase -- in the Phase 2 industry cash flow, the prices 22 forecast -- the prices used for the life cycle cost 23 curves are consumer prices. 24 In the case of the ballast, they arrived 25 through a market survey. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 52 1 MR. SCHLEEDE:

-- costs in

-- in the 2 organization. It seems up to this point, you've talked 3 only about the direct costs, and I'mwonderinghave I 4 missed something orwhere do the indirect costs come 5 in? Where is the cost of the Office of General 6 Counsel, advertising, all the rest? 7 AUDIENCE MEMBER: Mike, that maybe 8 considered inyour othermodel. 9 MR. SCHLEEDE: Okay. But if it comes up 10 later, fine. 11 MR. RIVEST: Okay. 12 MR. BROOKMAN: Anymore questions at this 13 point? 14 MR. PERLIS: Hi. I'mMike Perlis. 15 I have two quick questions. First is, are 16 you suggesting

-- didyoujust suggest recently that 17 the prices that you forecast for the GRIM Model will 18 not necessarilybe the same prices that we're going to 19 use in the consumer impact analysis? 20 MR. RIVEST: Verygood question. In the 21 Phase

-- in the Phase 2 industry cash flow, the prices 22 forecast theprices used for the life cycle cost 23 curves are consumerprices. 24 In the case of the ballast, they arrived 25 through a market survey. EXECUTIVE COURT REPORTERS, INC. (301) 565-006453 1 Now, the prices that the GRIM uses are prices 2 to establish the revenue of the firm. So, it would 3 be -- it would be, if you will, the same price less a 4 mark-up from manufacturer to retail, for example. 5 MR. PERLIS: Well, in theory, you might think 6 that there's that relationship, but if the prices are 7 actually developed through two alternate analyses at 8 two different stages of the DOE process, you're going 9 to have to do a reconciliation at the end; otherwise, 10 you're going to have a basic inconsistency, and I 11 suggest a court would never accept a lengthy 12 quantitative analysis that doesn't reconcile prices 13 used in the consumer impact analysis with prices used 14 in the GRIM Model. That's Point Number 1. 15 My second question is -- and I'm not sure 16 you're going to want to answer this now but perhaps 17 defer it till later, but GRIM produces a cash flow 18 analysis. I've looked through all the materials. I 19 don't ascertain anything in the materials that 20 indicates how you evaluate the cash flow detriment that 21 is determined at the end of the day. 22 I mean you do all this complicated analysis, 23 but basically all GRIM is doing is estimating the 24 increase in costs to comply with the standards, and in 25 almost all cases, it's assumed that those are going to EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 53 1 Now l the prices that the GRIM uses areprices 2 to establishthe revenue of the firm. SOl it would 3 be

-- it would bel ifyou willi the same price less a 4 mark-up frommanufacturer to retaill for example. 5 MR. PERLIS: WeIll in theorYI youmight think 6 that there's that relationshipi but if the prices are 7 actuallydeveloped through two alternate analyses at 8 two different stages of the DOE processl you're going 9 to have to do a reconciliation at the endi otherwisel 10 you're going to have a basic inconsistencYI and I 11 suggest a court wouldnever accept a lengthy 12 quantitative analysis that doesn't reconcile prices 13 used in the consumer impact analysis withprices used 14 in the GRIM Model. That's Point Number 1. 15 My secondquestion is

-- and I'mnot sure 16 you're going to want to answer this nowbut perhaps 17 defer it till laterl but GRIM produces a cash flow 18 analysis. I've looked through all the materials. I 19 don't ascertain anything in the materials that 20 indicates howyou evaluate the cash flow detriment that 21 is determined at the end of the day. 22 I meanyou do all this complicated analysisl 23 but basically all GRIM is doing is estimating the 24 increase incosts to complywith the standardsI and in 25 almost all casesl it's assumed that those are going to EXECUTIVE COURT REPORTERS, INC. (301) 565-006454

1 be increases in costs. 2 There may be a price forecast to allow you to 3 raise your prices to recoup some of those costs. The 4 end of the day, you're probably going to have a cash 5 flow detriment. 6 If you have a cash flow detriment, how do you 7 evaluate it? When does it become significant? How do 8 you determine what the manufacturer impact means? 9 MR. RIVEST: The -- I'll try to differentiate 10 between coming up with a good estimate of what that 11 cash -- that negative cash flow might be, and then 12 separating, you know, that analytical exercise with the 13 -- the exercise then of trying to trade off that, you 14 know, that cash flow with energy savings, for example. 15 So, that second order policy decision, if you 16 will, is very important, and I recognize that, but it's 17 not something that -- that -- that my -- the approach 18 here is trying to -- you know, to -- to quantify or to 19 balance. We're just trying to come up and say there 20 are a thousand jobs lost, we think, plus or minus. 21 There are -- there's a negative cash flow of $200 22 million, plus or minus, and then present that to the 23 policy-maker and let the policy-maker weigh that 24 against the benefits that consumers might have or that 25 a portion of consumers might have, and weigh that EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 54 1 be increases in costs. 2 There maybe a price forecast to allowyou to 3 raise yourprices to recoup some of those costs. The 4 end of the day, you're probablygoing to have a cash 5 flow detriment. 6 If you have a cash flow detriment, how do you 7 evaluate it? When does itbecome significant? How do 8 you determine what the manufacturer impact means? 9 MR. RIVEST: The

-- I'll tryto differentiate 10 between comingup with a good estimate of what that 11 cash

-- that negative cash flowmight be, and then 12 separating, you know, that analytical exercise withthe 13

-- the exercise then of trying to trade off that, you 14 know, that cash flow with energy savings, for example. 15 So, that second orderpolicydecision, ifyou 16 will, is very important, and I recognize that, but it's 17 not something that

-- that

-- that my -- the approach 18 here is trying to

-- youknow, to

-- to quantifyor to 19 balance. We're just trying to come up and saythere 20 are a thousandjobs lost, we think, plus orminus. 21 There are -- there's a negative cash flow of $200 22 million, plus orminus, and thenpresent that to the 23 policy-maker and let thepolicy-makerweigh that 24 against the benefits that consumers might have or that 25 a portionof consumers might have, andweigh that EXECUTIVE COURT REPORTERS, INC. (301) 565-006455

1 against quads in energy savings for the nation. 2 Does that answer your -- did I dance around 3 it or did I answer it? 4 MR. PERLIS: Well, I think what you basically 5 said is that the manufacturer's impact analysis segment 6 of the DOE process doesn't answer how we take 7 manufacturer's impact into account. 8 For example, there's no metric provided for 9 saying, okay, we have it -- a -- a net discounted 10 present value cash flow effect, I think that's the 11 bottom line in the GRIM Model, of X dollars. 12 What do we measure that against? Do we 13 measure it against total capitalization? Do we measure 14 it against some measure of energy savings that we're 15 producing, so that we want to have a ratio of 16 manufacturers hit to energy savings that justifies it? 17 What we have in the consumer impact analysis 18 from the consumer perspective is -- is the development 19 of several matrix, such as the pay-back, life cycle 20 cost, etc., and it strikes me that for all this work 21 that's being done on the manufacturer's impact 22 analysis, just from the quantitative side, leaving 23 aside the qualitative, which I acknowledge is a 24 substantial improvement and will just muddy the waters, 25 but just on the quantitative side, it seems to me you EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 55 1 against quads in energy savings for the nation. 2 Does that answeryour -- did I dance around 3 it or did I answer it? 4 MR. PERLIS: Well, I thinkwhat you basically 5 said is that the manufacturer's impact analysis segment 6 of the DOE process doesn't answerhowwe take 7 manufacturer's impact into account. 8 For example, there's no metric provided for 9 saying, okay, we have it -- a -- a net discounted 10 present value cash flow effect, I think that's the 11 bottomline in the GRIM Model, of Xdollars. 12 What do we measure that against? Do we 13 measure it against total capitalization? Do we measure 14 it against some measure of energy savings that we're 15 producing, so that we want tohave a ratio of 16 manufacturers hit to energy savings that justifies it? 17 What we have in the consumer impact analysis 18 from the consumerperspective is -- is the development 19 of several matrix, such as the pay-back, life cycle 20 cost, etc., and it strikes me that for all this work 21 that's being done on the manufacturer's impact 22 analysis, just from the quantitative side, leaving 23 aside the qualitative, which I acknowledge is a 24 substantial improvement andwill justmuddy the waters, 25 but just on the quantitative side, it seems tome you EXECUTIVE COURT REPORTERS, INC. (301) 565-006456

1 should be going a step further and figuring out what 2 you're going to do with the number when you get it, and 3 how you're going to be able to evaluate it, and -- and d 4 I -- an I -- 5 MR. RIVEST: I'll just make a short answer, 6 and I'll -- you're certainly right in terms of the net 7 present value not giving a good -- a good measure of 8 what's -- what does a million dollars -- a hundred 9 million dollars mean to this industry? So, it depends 10 tr 's si e

th i d n y z . on e us 11 So, certainly one of the enhancements to the 12 GRIM we've talked about is bringing that back into, if 13 you will, a relative measure, like return on equity or 14 return on investment. So, that's something that we 15 ill be able to do.

w 16 In terms of establishing, you know, certain 17 hurdles or -- or barriers that we won't exceed in terms 18 of manufacturer impact, that -- that's not something 19 I'm qualified -- that's not something I'm qualified -- 20 something I'm qualified to -- to comment on.

21 MR. BROOKMAN: Mr. Thiele? 22 MR. THIELE: Terry Thiele, WCI. 23 This is more of a comment than a question in 24 regard to the -- the dialogue. 25 I would make the observation that the value EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 56 1 shouldbe going a step further and figuring out what 2 you're going to do with the numberwhenyouget it l and 3 howyou're going to be able to evaluate it l and

-- and 4 I

-- and I 5 MR. RIVEST: I'lljustmake a short answerl 6 and I'll

-- you're certainlyright in terms of the net 7 present value not giving a good

-- a goodmeasure of 8 what's

-- what does a milliondollars

-- a hundred 9 milliondollars mean to this industry? SOl it depends 10 on the industry's size. 11 SOl certainlyone of the enhancements to the 12 GRIM we've talked about is bringing that back into l if 13 you willI a relativemeasureI like return on equityor 14 return on investment. SOl that's something that we 15 will be able to do. 16 In terms of establishing l you knowI certain 17 hurdles or -- orbarriers that we won't exceed in terms 18 of manufacturer impactI that

-- that's not something 19 I'mqualified

-- that's not something I'mqualified 20 something I'mqualified to

-- to comment on. 21 MR. BROOKMAN: Mr. Thiele? 22 MR. THIELE: TerryThiele l WeI. 23 This is more of a comment than a question in 24 regard to the

-- the dialogue. 25 I wouldmake the observation that the value EXECUTIVE COURT REPORTERS, INC. (301) 565-006457

1 of the proposal, the GRIM, as we are discussing it, is 2 that for the first time, it will give us the 3 opportunity to debate what the appropriate standard 4 impact consequence should be on an apples-to-apples 5 basis, that we will have some measures to look at to 6 then engage in that policy debate as how much is 7 enough. 8 For example, you could make the -- the 9 argument that no regulation should require an industry 10 to lose value. Whether or not that's the appropriate 11 policy criteria, though, is a separate debate, and I 12 think what's important and we need to recognize is that 13 this analysis gives us the basis for that argument. 14 Before, we were simply talking past each other. 15 MR. BROOKMAN: Mark, did you have anything 16 specific that you wanted to say that could address your 17 last point, in addition to the comments you made 18 already? 19 MR. FRIEDRICHS: No. 20 MR. BROOKMAN: Okay. Not for now. 21 Okay. Additional questions before we move 22 back to the presentation? 23 MR. RIVEST: As far as your first issue about 24 reconciling the prices that will be used for consumer 25 impact and manufacturer impact, I entirely agree that EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 57 1 of the proposalr the GRIMr as we are discussing itr is 2 that for the first timer it will give us the 3 opportunity to debate what the appropriate standard 4 impact consequence shouldbe on an apples-to-apples 5 basisr that we will have some measures to look at to 6 then engage in that policydebate as howmuch is 7 enough. 8 For exampler you couldmake the

-- the 9 argument that no regulation should require an industry 10 to losevalue. Whether ornot that's the appropriate 11 policy criteriar thoughr is a separate debater and I 12 thinkwhat's important andwe need to recognize is that 13 this analysis gives us the basis for that argument. 14 Beforer we were simplytalkingpast each other. 15 MR. BROOKMAN: Markr didyou have anything 16 specific that youwanted to say that could address your 17 last pointr in addition to the comments youmade 18 already? 19 MR. FRIEDRICHS: No. 20 MR. BROOKMAN: Okay. Not for now. 21 Okay. Additional questions before we move 22 back to thepresentation? 23 MR. RIVEST: As far as your first issue about 24 reconciling the prices that will be used for consumer 25 impact andmanufacturer impactr I entirelyagree that EXECUTIVE COURT REPORTERS, INC. (301) 565-006458

1 we have to be consistent. 2 However, there have been a lot of comments 3 along the way that there -- there is -- it's very 4 difficult to know what, you know, what that mark-up is 5 from one price to the next. 6 So, we'll try to do that through uncertainty 7 analysis, and both the consumer analysis and the 8 manufacturer impact analysis will -- and -- and this is 9 something I -- this is something we can add right now, 10 should have that same uncertainty range that's 11 captured. So, thanks. 12 I'd like to walk through the agenda of the 13 meeting simply to try and put every piece in its 14 perspective. 15 Right after the break, Dave Arnold will be 16 describing the GRIM Model, walking through it, doing a 17 short presentation on the concepts, the underlying 18 financial concept of cash flow analysis, and we can 19 maybe try to start identifying some of the enhancements 20 that -- that might be needed and certainly the return 21 on equity or the absolute metric would be a useful one. 22 This afternoon, Steve Shankel of PNNL, who 23 contributed to the segment, the Phase 1 analysis 24 segment, will describe how we envision that the 25 industry characterization and the production of the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 58 1 we have tobe consistent. 2 However, there have been a lot of comments 3 along the way that there there is

-- it's very 4 difficult to knowwhat, youknow, what that mark-up is 5 from one price to the next. 6 So, we'll tryto do that throughuncertainty 7 analysis, andboth the consumer analysis and the 8 manufacturer impact analysis will

-- and and this is 9 something I

-- this is somethingwe can addright now, 10 shouldhave that same uncertaintyrange that's 11 captured. So, thanks. 12 I'd like to walk through the agenda of the 13 meeting simply to try andput everypiece in its 14 perspective. 15 Right after the break, DaveArnoldwill be 16 describing the GRIM Model, walking through it, doing a 17 short presentationon the concepts, the underlying 18 financial concept of cash flow analysis, andwe can 19 maybe tryto start identifying some of the enhancements 20 that

-- that might be needed and certainlythe return 21 on equityor the absolute metric wouldbe a useful one. 22 This afternoon, Steve Shankel of PNNL, who 23 contributed to the segment, the Phase 1 analysis 24 segment, will describe howwe envision that the 25 industrycharacterization and the productionof the EXECUTIVE COURT REPORTERS, INC. (301) 565-006459

1 databook might -- might proceed. 2 So, he's -- he's essentially got a strawman 3 approach to industry characterization that includes an 4 initial review, a quantitative analysis, which is based 5 -- statistics-based, historical in nature, a 6 qualitative analysis which will seek a lot of public 7 input, and finally a stakeholder review through that 8 workshop that we identified which might be concurrent 9 with the screening analysis workshop. 10 We've talked -- we will have talked about one 11 of our tools, which is the GRIM Model. The GRIM 12 integrates and calculates. We do need inputs into that 13 -- into the GRIM for manufacturing costs, for prices 14 and quantities. 15 As you mentioned before, we have to reconcile 16 prices from one segment of the analysis, which is the 17 consumer life cycle, and with the manufacturer price 18 for -- for GRIM. 19 We also have to reconcile the shipment values 20 that we'll use for the industry Phase 2 cash flow with 21 the national benefit forecast of savings. So, one way 22 to picture this is that we can run the models and 23 generate a series of forecasts for a base case and for 24 several efficiency levels, use those as one of several 25 inputs in determining future shipments for the GRIM, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 59 1 databookmight

-- might proceed. 2 So, he's

-- he's essentiallygot a strawman 3 approach to industrycharacterizationthat includes an 4 initial review, a quantitative analysis, which is based 5

-- statistics-based, historical innature, a 6 qualitative analysis whichwill seek a lot of public 7 input, and finally a stakeholderreview through that 8 workshop that we identifiedwhichmight be concurrent 9 with the screening analysis workshop. 10 We've talked

-- we will have talked about one 11 of our tools, which is the GRIM Model. The GRIM 12 integrates and calculates. We do need inputs into that 13

-- into the GRIM for manufacturing costs, for prices 14 and quantities. 15 As youmentionedbefore, we have to reconcile 16 prices from one segment of the analysis, which is the 17 consumer life cycle, andwith the manufacturerprice 18 for

-- for GRIM. 19 We also have to reconcile the shipment values 20 that we'll use for the industry Phase 2 cash flow with 21 the national benefit forecast of savings. So, one way 22 topicture this is that we can run the models and 23 generate a series of forecasts for a base case and for 24 several efficiency levels, use those as one of several 25 inputs indetermining future shipments for the GRIM, EXECUTIVE COURT REPORTERS, INC. (301) 565-006460

1 and once we have characterized the range of shipments 2 for GRIM, then we need to put those back into the net 3 national benefit models to make sure that we're in sync 4 on both analyses sections. 5 So, that's what Jim McMahon at LB&L will be 6 talking about. LB&L has been running the net national 7 benefits segment, the RIM model, for numerous years. 8 He'll also be talking about other approaches to 9 forecasting the national benefits and the quantity 10 forecasts, talking a little bit about other models that 11 are available. 12 We have people here from EIA who will talk a 13 little -- or will be available to answer questions 14 about the NEMS model. Steve Shankel is going to -- 15 from PNNL is going to -- to -- yes? Doesn't work? 16 MR. BROOKMAN: Here, use this one. 17 MR. RIVEST: I'm almost over. 18 Steve Shankel of PNNL will talk about the 19 NEMS model, using the application for water heating, 20 and, finally, the whole purpose of this segment is to 21 try and narrow -- or try to identify what are the 22 critical variables in forecasting shipments for the 23 GRIM, and see if we could begin to scope out, if you 24 will, a simple spread sheet model which could identify 25 those and consider those key variables. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 60 1 and once we have characterizedthe range of shipments 2 for GRIM, thenwe need to put those back into the net 3 national benefit models tomake sure that we're in sync 4 onboth analyses sections. 5 So, that's what JimMcMahon at LB&L will be 6 talking about. LB&L has been running the net national 7 benefits segment, the RIM model, for numerous years. 8 He'll also be talking about other approaches to 9 forecasting the national benefits and the quantity 10 forecasts, talking a littlebit about othermodels that 11 are available. 12 We havepeople here fromEIAwho will talk a 13 little

-- orwill be available to answer questions 14 about the NEMS model. Steve Shankel is going to

-- 15 from PNNL is going to to

-- yes? Doesn't work? 16 MR. BROOKMAN: Here, use this one. 17 MR. RIVEST: I'malmost over. 18 Steve Shankel of PNNL will talk about the 19 NEMS model, using the application for waterheating, 20 and, finally, the wholepurpose of this segment is to 21 try andnarrow -- or tryto identifywhat are the 22 critical variables in forecasting shipments for the 23 GRIM, and see if we couldbeginto scope out, ifyou 24 will, a simple spread sheet model which could identify 25 those and consider those keyvariables. EXECUTIVE COURT REPORTERS, INC. (301) 565-006461

1 So, leading from huge models that forecast 30 2 years in the future to simplified models that only 3 consider what's important in, say, five- to eight-year 4 horizon, which is what the GRIM Model will consider. 5 MR. BROOKMAN: Mike's just laid out the rest 6 of the day's work. As you look at it, are there any 7 major gaps that -- that jump out at you at this point? 8 AUDIENCE MEMBER: We will have an afternoon 9 break. 10 MR. BROOKMAN: We will have an afternoon 11 break. Thank you, Deborah. 12 This is -- let me ask you the larger 13 question. We've gone from some fairly -- some overview 14 this morning. We're going to get into some detail 15 after the break. 16 Is -- so far, is this working? Is this -- is 17 this the level of presentation that suits your needs? 18 I'm seeing some heads go up and down yes. Yeah. So 19 far so good. Okay. 20 My goal is to make this as dynamic as at all 21 possible, given that there's a dense bit of 22 presentation going on. So, if you have questions, 23 comments as we go along, we're going to try and 24 entertain them rapidly and keep this moving. Okay. 25 MR. RIVEST: Go on to Day 2. Oh, just -- I'm EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 61 1 So, leading fromhuge models that forecast 30 2 years inthe future to simplifiedmodels that only 3 considerwhat's important in, say, five- to eight-year 4 horizon, which is what the GRIM Model will consider. 5 MR. BROOKMAN: Mike'sjust laidout the rest 6 of the day's work. As you look at it, are there any 7 major gaps that

-- that jump out at you at this point? 8 AUDIENCE MEMBER: We will have an afternoon 9 break. 10 MR. BROOKMAN: We will have an afternoon 11 break. Thankyou, Deborah. 12 This is

-- let me askyou the larger 13 question. We've gone from some fairly

-- some overview 14 this morning. We're going to get into some detail 15 after the break. 16 Is

-- so far, is this working? Is this

-- is 17 this the level of presentationthat suitsyour needs? 18 I'm seeing some heads go up anddownyes. Yeah. So 19 far so good. Okay. 20 My goal is tomake this as dynamic as at all 21 possible, given that there's a dense bit of 22 presentationgoing on. So, ifyouhave questions, 23 comments as we go along, we're going to try and 24 entertainthemrapidly and keep this moving. Okay. 25 MR. RIVEST: Go on toDay 2. Oh, just

-- I'm EXECUTIVE COURT REPORTERS, INC. (301) 565-006462

1 sorry. From -- we'll try to finish early and have some 2 of the models up and running on several laptops and on 3 a couple of overheads. We'll have the GRIM Model. I 4 believe we have the -- the EPRI REEPS model. We also 5 have Commend. Just to give you a flavor of data entry, 6 the types of variables that are considered. So, 7 they'll be available from 3:30 to 5. 8 In the second day, we're looking at four 9 things. We're looking at the three major inputs to 10 GRIM, which are the prices, the quantities and the 11 costs, and we're going to describe some of the 12 approaches that are laid out in the strawman as to how 13 we might derive those various variables. 14 The morning session looks at estimating 15 manufacturer costs. Several -- several approaches are 16 described. One is essentially looking at what we've17 done in the past, which is design option-based, survey18 based, looking at what was done much earlier, which is 19 a more of a cost modeling approach, doing a bottoms-up 20 assessment of costs, and also we'll be looking at the 21 ASHRAE methodology that was used within the ASHRAE 22 Committees, and I've got it here within the block 23 called "Manufacturing Costs", but the ASHRAE 24 methodology goes further in that the way it's designed, 25 it -- it can -- it's designed to capture manufacturing EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 62 1 sorry. From

-- we'll try to finish earlyand have some 2 of the models up and running on several laptops and on 3 a couple of overheads. We'll have the GRIM Model. I 4 believe we have the the EPRI REEPS model. We also 5 have Commend. Just to give you a flavor of data entry, 6 the types of variables that are considered. So, 7 they'll be available from 3:30 to 5. 8 In the secondday, we're looking at four 9 things. We're looking at the three major inputs to 10 GRIM, which are theprices, the quantities and the 11 costs, andwe're going to describe some of the 12 approaches that are laidout in the strawman as to how 13 we might derive those various variables. 14 The morning session looks at estimating 15 manufacturer costs. Several

-- several approaches are 16 described. One is essentiallylooking at what we've 17 done in the past, which is design option-based, survey18 based, looking at what was done much earlier, which is 19 a more of a cost modeling approach, doing a bottoms-up 20 assessment of costs, and also we'll be looking at the 21 ASHRAE methodology that was usedwithin theASHRAE 22 Committees, and I've got it here within the block 23 called "Manufacturing Costs", but theASHRAE 24 methodologygoes further in that the way it's designed, 25 it

-- it can -- it's designed to capture manufacturing EXECUTIVE COURT REPORTERS, INC. (301) 565-006463

1 costs as well in the way that the data is reported. 2 So, Larry Wethje of ARI and Ron Jurnigan of 3 PNNL will describe the methodology, and we might begin 4 initiating a discussion of how we might try to -- to at 5 least try to start to look at if we can reconcile the 6 approaches, and how that approach could be used in one 7 specific rulemaking or several. 8 So, the idea here is not to lock ourselves 9 into any specific approach but just make sure that each 10 approach could be consistent in a larger framework. 11 The afternoon session -- one afternoon 12 session will deal with price determination for input 13 into the GRIM. We'll be looking at a survey data 14 approach, which is a survey of manufacturers. I've got 15 copies of a survey of manufacturers from the 1982 TSD 16 just to give an idea of how that might happen. 17 The Department of Transportation methodology 18 for price determination, which is, I would say, 19 accounting-based, looking at available 10-ks. So, that 20 will be described, and the gentleman from the 21 Department of Transportation will be here to -- to 22 answer any questions on that methodology. 23 An economic mark-up approach, Mr. Lewis. 24 That's the spread sheet we talked about, how that might 25 be used, so that will just be a skeletal outline for EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 63 1 costs as well in the waythat the data is reported. 2 So, LarryWethje ofARI andRon Jurniganof 3 PNNL will describe the methodology, andwe might begin 4 initiating a discussion of howwe might tryto

-- to at 5 least tryto start to look at ifwe can reconcile the 6 approaches, and how that approach couldbe used inone 7 specific rulemaking or several. 8 So, the idea here is not to lock ourselves 9 into any specific approachbut just make sure that each 10 approach couldbe consistent in a larger framework. 11 The afternoon session

-- one afternoon 12 sessionwill deal withprice determination for input 13 into the GRIM. We'll be looking at a surveydata 14 approach, which is a surveyof manufacturers. I've got 15 copies of a surveyof manufacturers from the 1982 TSD 16 just to give an idea of how that might happen. 17 The Department of Transportationmethodology 18 for price determination, which is, I would say, 19 accounting-based, looking at available 10-ks. So, that 20 will be described, and the gentleman from the 21 Department of Transportationwill be here to

-- to 22 answer any questions on that methodology. 23 An economic mark-up approach, Mr. Lewis. 24 That's the spread sheet we talked about, how that might 25 be used, so that will justbe a skeletal outline for EXECUTIVE COURT REPORTERS, INC. (301) 565-006464

1 now. 2 And then talk about scenario analysis. How 3 are we going to combine all of those different 4 forecasts into some sort of meaningful way within the 5 GRIM? 6 In the afternoon, shipment inputs to the 7 GRIM. We will have looked at the energy forecasting 8 models and -- and see how they may -- may or may not be 9 suitable for that task. Also looking at how we might 10 conduct -- use information developed in the industry 11 characterization databook to try and come up with 12 forecasts. 13 Finally, looking at the methodology for 14 trying to get a handle on the other impact elements 15 through interviews, more qualitative-type assessments, 16 mostly trying to understand the process by which we 17 might gather that information, and, finally, try to at 18 that point make sure that we have working group or 19 groups, try to identify the missions of those groups, 20 and try to establish a time line from here on. 21 MR. BROOKMAN: So, that's one of the things 22 we'd like all of you to consider as we're going through 23 this, is what the shape of that group or groups might 24 be that we can establish by tomorrow afternoon. 25 Questions, comments before we go to break? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 64 1 now. 2 And then talk about scenario analysis. How 3 are we going to combine all of those different 4 forecasts into some sort of meaningful waywithin the 5 GRIM? 6 Inthe afternoon, shipment inputs to the 7 GRIM. We will have looked at the energy forecasting 8 models and

-- and see how theymay -- mayormaynot be 9 suitable for that task. Also looking at howwe might 10 conduct

-- use informationdeveloped in the industry 11 characterizationdatabook to try and come up with 12 forecasts. 13 Finally, looking at the methodology for 14 trying to get a handle on the other impact elements 15 through interviews, more qualitative-type assessments, 16 mostlytrying to understandtheprocess bywhichwe 17 might gather that information, and, finally, tryto at 18 that point make sure that we have working group or 19 groups, tryto identifythe missions of those groups, 20 and try to establish a time line fromhere on. 21 MR. BROOKMAN: So, that's one of the things 22 we'd like all of you to consider as we're going through 23 this, is what the shape of that group orgroups might 24 be that we canestablishbytomorrow afternoon. 25 Questions, comments before we go to break? EXECUTIVE COURT REPORTERS, INC. (301) 565-006465

1 (No response) 2 MR. BROOKMAN: I see none. Let's take a 3 break. Let's start up at -- let's try to start up at 4 quarter of. There is a snack bar one floor beneath us. 5 There's stairs right down here this way to the left out 6 the door, and it's right beneath us and across the 7 hall, there's a snack bar where you can get some coffee 8 and tea and things. 9 (Whereupon, a recess was taken.) 10 MR. BROOKMAN: I think we're ready to go. 11 Our next presenter is David Arnold, Arnold, 12 also from Arthur D. Little, and he's been working on 13 the GRIM Model, and, so, you've got -- I'll turn off 14 the lights, and you're going to walk us through your 15 screens, right? 16 Description of the GRIM Model 17 MR. ARNOLD: Yes, of which there are many, 18 but also by way of introduction, I would also like to 19 point out that Tom Budrewicz is joining us from Arthur 20 D. Little as well. 21 MR. BROOKMAN: Tom, will you stand up? 22 MR. ARNOLD: Who is, among his many 23 responsibilities as part of this process, the prime 24 programmer of the GRIM Model about which we will be 25 talking in a few moments. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 65 1 (No response) 2 MR. BROOKMAN: I see none. Let's take a 3 break. Let's start up at

-- let's tryto start up at 4 quarter of. There is a snackbarone floor beneathus. 5 There's stairs right down here this way to the left out 6 the door, and it's right beneathus and across the 7 hall, there's a snackbarwhere you canget some coffee 8 and tea and things. 9 (Whereupon, a recess was taken.) 10 MR. BROOKMAN: I thinkwe're ready to go. 11 Our next presenter is DavidArnold, Arnold, 12 also fromArthurD. Little, andhe's beenworking on 13 the GRIM Model, and, so, you've got

-- I'll turn off 14 the lights, andyou're going to walkus throughyour 15 screens, right? 16 Descriptionof the GRIM Model 17 MR. ARNOLD: Yes, of which there are many, 18 but also byway of introduction, I would also like to 19 point out that Tom Budrewicz isjoiningus fromArthur 20 D. Little as well. 21 MR. BROOKMAN: Tom, will you standup? 22 MR. ARNOLD: Who is, among his many 23 responsibilities as part of this process, the prime 24 programmer of the GRIM Model about whichwe will be 25 talking in a few moments. EXECUTIVE COURT REPORTERS, INC. (301) 565-006466 1 MR. BROOKMAN: Dave, before you -- can you 2 see okay in the back of the room if we keep it lighted 3 like this? Yeah. This is good. I like it like this. 4 Okay. 5 MR. ARNOLD: But, in any event, with respect 6 to the programming of the GRIM Model, Tom, of course, 7 will take full credit if your reaction is favorable; if 8 not, he has vowed to shift that elsewhere, and my 9 suspicion is that yours truly would -- would bear the 10 -- the brunt of that. 11 But it is my pleasure today to be able to 12 stand before you and speak to the virtues of such an 13 uplifting concept as the GRIM, the Government 14 Regulatory Impact Model. The acronym itself, of 15 course, is -- is the only thing that we chose not to 16 change in this most recent update. I guess going back 17 to the old Smuckers commercials and tag line, with a 18 name like GRIM, it has to be good. So, we'll leave it 19 at that for now, but by the same token, as a part of 20 our later discussions, if there's some suggestions for 21 change in an acronym, those would be most welcomed. 22 What I'd like to do today is to focus largely 23 upon the GRIM Model itself and also doing a few slides 24 up front that will provide overviews in terms of its 25 goals and applicability to this process that will give EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 66 1 MR. BROOKMAN: Dave, before you -- canyou 2 see okay in the backof the room if we keep it lighted 3 like this? Yeah. This is good. I like it like this. 4 Okay. 5 MR. ARNOLD: But, in any event, withrespect 6 to the programming of the GRIM Model, Tom, of course, 7 will take full credit ifyour reaction is favorable; if 8 not, he has vowed to shift that elsewhere, andmy 9 suspicion is that yours trulywould

-- wouldbear the 10

-- the brunt of that. 11 But it ismy pleasure today tobe able to 12 standbeforeyou and speak to the virtues of such an 13 uplifting concept as the GRIM, the Government 14 Regulatory Impact Model. The acronym itself, of 15 course, is

-- is the only thing that we chose not to 16 change in this most recent update. I guess goingback 17 to the old Smuckers commercials and tag line, with a 18 name like GRIM, it has to be good. So, we'll leave it 19 at that for now, but bythe same token, as a part of 20 our later discussions, if there's some suggestions for 21 change in an acronym, those wouldbe most welcomed. 22 What I'dlike to do today is to focus largely 23 upon the GRIM Model itself and also doing a few slides 24 up front that will provide overviews in terms of its 25 goals and applicabilityto this process that will give EXECUTIVE COURT REPORTERS, INC. (301) 565-006467

1 you a bit of a high-level view as to what changes have 2 been made for the purposes of new GRIM versus old. 3 We'll walk through a few slides on the 4 discounted cash flow analysis for the benefit of those 5 of you who either do not have a tremendous amount of 6 familiarity with the concept or would like a quick 7 update. 8 Those of you who are enormously familiar may 9 very well like to leave the room for a quick -- for a 10 quick refreshment, but that in itself, I promise, will 11 only take about 10 minutes or so, and then followed 12 immediately thereafter by a physical walk-through of 13 the GRIM Model itself, and then we'll open it up for 14 questions and discussions at the end. 15 The -- the GRIM Model itself, whether we're 16 talking old versus new, is very basic in its 17 functionality. It is simply a tool, one of -- one of 18 several, but a tool which helps to identify the 19 financial effects of regulations, be they efficiency or 20 otherwise. 21 It does so based upon a very conventional 22 analysis of discounted cash flows. There's not a 23 tremendous amount of rocket science here. It's 24 basically just a simple matter of laying out the cash 25 flows that are anticipated with and without regulation EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 67 

### 1 you a bit of a high-level view as towhat changes have 2 beenmade for the purposes of newGRIM versus old. 3 We'll walkthrough a few slides on the 4 discounted cash flow analysis for the benefit of those 5 of you who eitherdo not have a tremendous amount of 6 familiaritywiththe concept orwould like a quick 7 update. 8 Those of youwho are enormously familiar may 9 verywell like to leave the room for a quick -- for a 10 quick refreshment, but that in itself, I promise, will 11 onlytake about 10 minutes or so, and then followed 12 immediatelythereafterby a physical walk-throughof 13 the GRIM Model itself, andthenwe'll open it up for 14 questions anddiscussions at the end. 15 The -- the GRIM Model itself, whetherwe're 16 talking oldversus new, isverybasic in its 17 

### functionality. It is simplya tool, one of one of 18 several, but a tool which helps to identifythe 19 financial effects of regulations, be theyefficiencyor 20 otherwise. 21 It does sobasedupon a very conventional 22 analysis of discounted cash flows. There's not a 23 tremendous amount of rocket science here. It's 24 basicallyjust a simple matterof laying out the cash 25 flows that are anticipatedwith andwithout regulation EXECUTIVE COURT REPORTERS, INC. (301) 565-006468

1 and creating comparisons of the effects between two 2 scenarios in this case. 3 It also provides a net present value 4 analysis, which we term for the purposes of this model 5 "industry value", however the industry might be defined 6 in the given scenario, and, lastly, it offers a 7 mechanism by which you can make comparisons, either 8 numerical in spread sheet form or through graphical 9 comparisons. 10 The 1997 update, the new model year, if you 11 will, -- incidentally, just out of curiosity, could I 12 see a show of hands of those who had some exposure to 13 old GRIM, the DOS GRIM? 14 (Show of hands) 15 MR. ARNOLD: And the same show of hands for 16 those of you who enjoyed that interaction? Not all 17 together unanticipated. 18 What we basically have done here is brought 19 the GRIM Model forward from 1993 to vintage 1997, most 20 significantly through a modernization of the platform. 21 Old GRIM was built in an earlier version -- a much 22 earlier version of Lotus in DOS platform. This one 23 moves it up to not the most recent version of Excel but 24 Excel Version 5, which is fairly commonplace, we 25 believe, throughout the business world, and Excel EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 68 1 and creating comparisons of the effects between two 2 scenarios inthis case. 3 It alsoprovides a net present value 4 analysis, whichwe term for thepurposes of this model 5 "industryvalue", however the industrymight be defined 6 in the given scenario, and, lastly, it offers a 7 mechanismbywhichyou canmake comparisons, either 8 numerical in spread sheet form or throughgraphical 9 comparisons. 10 The 1997 update, the newmodel year, ifyou 11 will, incidentally, just out of curiosity, could I 12 see a showof hands of those who had some exposure to 13 oldGRIM, the DOS GRIM? 14 (Show of hands) 15 MR. ARNOLD: And the same show of hands for 16 those of youwho enjoyedthat interaction? Not all 17 togetherunanticipated. 18 What we basicallyhave done here is brought 19 the GRIM Model forward from 1993 to vintage 1997, most 20 significantlythrough a modernization of the platform. 21 OldGRIM was built in an earlierversion

-- a much 22 earlierversion of Lotus inDOS platform. This one 23 moves it up to not the most recent version of Excel but 24 Excel Version 5, which is fairly commonplace, we 25 believe, throughout the business world, and Excel EXECUTIVE COURT REPORTERS, INC. (301) 565-006469

1 Version 5, by the way, can't be migrated across to 2 other platforms, for example, Lotus for Windows. 3 In terms of user-friendliness, this is the 4 key area of improvement, mainly by virtue of just 5 shifting it to the Windows platform as opposed to the 6 DOS platform. 7 What you will see today is a mode of 8 operation very different from old GRIM. Old GRIM was 9 largely an encapsulation of almost a thousand lines of 10 macro and coding within a Lotus spread sheet; whereas, 11 the GRIM Model you will see today in Excel features 12 zero lines of programming. It's all very intuitive 13 linkages in a pure spread sheet form. 14 The input process has been streamlined quite 15 significantly. It will be possible for you to 16 integrate simple analysis and put all of your 17 assumptions in a single page and let the GRIM Model 18 take it from there. 19 There are some capabilities built in for 20 overrides in case you're trying to get a bit more 21 specific than the cash flow pages themselves, but in 22 large part, whereas in the old GRIM, you may have found 23 yourself searching throughout the model just to locate 24 the areas that will require GRIM, but it should be 25 very straightforward and intuitive here. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 69 1 Version 5, bythe way, can't be migrated across to 2 otherplatforms, for example, Lotus for Windows. 3 In terms of user-friendliness, this is the 4 key area of improvement, mainlybyvirtue of just 5 shifting it to the Windows platform as opposedto the 6 DOS platform. 7 What youwill see today is a mode of 8 operationvery different from oldGRIM. Old GRIM was 9 largely an encapsulationof almost a thousand lines of 10 macro and codingwithin a Lotus spread sheet; whereas, 11 the GRIM Model youwill see today inExcel features 12 zero lines of programming. It's all very intuitive 13 linkages in a pure spread sheet form. 14 The input process has been streamlinedquite 15 significantly. It will be possible for you to 16 integrate simple analysis andput all of your 17 assumptions ina singlepage and let the GRIM Model 18 take it from there. 19 There are some capabilities built in for 20 overrides in case you're trying to get a bit more 21 specific than the cash flowpages themselves, but ln 22 large part, whereas inthe oldGRIM, youmayhave found 23 yourself searching throughout the model just to locate 24 the areas that will require GRIM, but it shouldbe 25 very straightforwardand intuitive here. EXECUTIVE COURT REPORTERS, INC. (301) 565-006470

1 And the last primary area of improvement, 2 graphs are now available for you on the screen as 3 opposed to having to -- to print those out using
4 macros. 5 Before moving into the GRIM, though, a few 6 slides, general commentary on the notion of discounted7 cash flow analysis, which is the theoretical under8 pinning of everything that is happening within the GRIM 9 Model itself. 10 Discounted cash flow is still among the most 11 widely-accepted and commonly-used valuation techniques. 12 It is by no means the only one, and I do know that 13 there are going to be several recommendations put 14 forward to add in such other representations of values, 15 such as return on investment and internal rate of 16 return, all of which can be performed relatively easily 17 once the cash flows -- the projected cash flows are 18 established. 19 However, it is important to keep in mind that 20 the results themselves of such an analysis are only as 21 good as the assumptions that are incorporated therein, 22 and, of course, the bulk of this two-day session is 23 oriented towards just that, the quality of the data 24 that's going to be going into the model. 25 Another point on discounted cash flow is EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 70 1 And the lastprimary area of improvement, 2 graphs are now available for you on the screen as 3 opposed to having to

-- toprint those out using 4 macros. 5 Before moving into the GRIM, though, a few 6 slides, general commentaryonthe notion of discounted 7 cash flow analysis, which is the theoretical under8 pinning of everything that is happeningwithinthe GRIM 9 Model itself. 10 Discounted cash flow is still among the most 11 widely-accepted and commonly-usedvaluation techniques. 12 It is byno means the onlyone, and I do know that 13 there are going to be several recommendations put 14 forward to add in such otherrepresentations of values, 15 such as returnon investment and internal rate of 16 return, all of which canbeperformed relativelyeasily 17 once the cash flows

-- the projected cash flows are 18 established. 19 However, it is important to keep inmind that 20 the results themselves of such an analysis are only as 21 good as the assumptions that are incorporated therein, 22 and, of course, the bulk of this two-day session is 23 orientedtowards just that, the quality of the data 24 that's going to be going into the model. 25 Anotherpoint on discounted cash flow is EXECUTIVE COURT REPORTERS, INC. (301) 565-006471

1 there was this notion of terminal value. Discounted 2 cash flows in and of themselves cover a finite time 3 frame. In the case of the GRIM Model, we're going to 4 be looking at 15 years in detail, and then at the final 5 year of cash flows, we establish the terminal value 6 that would theoretically reflect for the on-going value 7 past year. 8 This can and does in most analyses, including 9 those which you will be performing with the GRIM, 10 comprise a substantial portion of total value. 11 The basic format for discounted cash flow 12 analysis is -- is twofold. Number 1, to establish the 13 cash flow. Number 2, discount the cash flow back to 14 the present. 15 This slide deals with the mechanics of 16 determining cash flow in any given year, using a very 17 conventional methodology, starting with the net income 18 that is reported by the company or companies that 19 comprise an industry in total. Then working forward 20 from this net income to an amount known as a cash flow 21 from operations. 22 In order to get there, two key changes have 23 to be made. Number 1, you have to add back any sort of 24 changes in your working capital structure that would be 25 commensurate with changes in the size of the industry, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 71 1 there was this notion of terminal value. Discounted 2 cash flows in and of themselves cover a finite time 3 frame. In the case of the GRIM Model, we're going to 4 be looking at 15 years in detail, and then at the final 5 year of cash flows, we establishthe terminal value 6 that would theoreticallyreflect for the on-goingvalue 7 past year. 8 This can anddoes inmost analyses, including 9 those whichyou will be performingwith the GRIM, 10 comprise a substantial portionof total value. 11 The basic format for discounted cash flow 12 analysis is -- is twofold. Number I, to establishthe 13 cash flow. Number 2, discount the cash flowbackto 14 the present. 15 This slide deals withthe mechanics of 16 determining cash flow in anygivenyear, using a very 17 conventional methodology, startingwith the net income 18 that is reportedbythe companyor companies that 19 comprise an industry in total. Thenworking forward 20 from this net income to an amount known as a cash flow 21 from operations. 22 In order to get there, two key changes have 23 to be made. Number I, you have to addback any sort of 24 changes inyour working capital structure that wouldbe 25 commensurate with changes in the size of the industry, EXECUTIVE COURT REPORTERS, INC. (301) 565-006472

1 the volume and the like. 2 Also, it's necessary to add back any sort of 3 non-cash items that are reflected in net income, most 4 significant of which, most common, without question, 5 depreciation, which is not -- not cash in the year that 6 it's recorded; it is cash -- it is a cash transaction 7 in the year that capital expenditures are made. 8 From cash flow and from operations, there's a 9 second category of total cash in any given year termed 10 "cash flow from investments", and that essentially is a 11 recordation of any sort of investment activity you 12 might be making in terms of capital expenditures, which 13 is in all cases a reduction of cash. 14 I'm also showing on this slide that we need 15 to consider the net effect of any sort of other 16 investments that might be non-capital-related, but for 17 the purposes of the GRIM in its current simple form, 18 there's -- there's no such consideration built in for 19 other -- other investments. 20 But at the end of the day, considering cash 21 flow from operations, cash flow from investments, we 22 come to an annual amount known as "net cash flow", 23 which is the central indication of value that's been 24 created in a single year. 25 One of the most misunderstood elements of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 72 1 the volume and the like. 2 Also, it's necessaryto addback any sort of 3 non-cash items that are reflected innet income, most 4 significant of which, most common, without question, 5 depreciation, which is not

-- not cash in the year that 6 it's recorded; it is cash

-- it is a cash transaction 7 in the year that capital expenditures are made. 8 Fromcash flow and from operations, there's a 9 second category of total cash in anygivenyear termed 10 IIcash flow from investments ll

, and that essentiallyis a 11 recordation of any sort of investment activityyou 12 might be making in terms of capital expenditures, which 13 is in all cases a reduction of cash. 14 I'malso showing on this slide that we need 15 to consider the net effect of any sort of other 16 investments that might be non-capital-related, but for 17 the purposes of the GRIM in its current simple form, 18 there's

-- there's no such considerationbuilt in for 19 other

-- other investments. 20 But at the end of the day, considering cash 21 flow from operations, cash flow from investments, we 22 come to an annual amount known as IInet cash flowlI

, 23 which is the central indicationofvalue that's been 24 created in a singleyear. 25 One of the most misunderstood elements of EXECUTIVE COURT REPORTERS, INC. (301) 565-006473 1 such an analysis is the working capital considerations. 2 In the GRIM Model itself, you'll be provided with an 3 opportunity to make a simplistic assumption of what the 4 working capital requirements are stated as a percentage 5 of revenues, but just to provide you with an indication 6 of the philosophical underpinnings of that, working 7 capital is expressed in terms of the net of current 8 assets and current liabilities. 9 So, in essence, these are the assets that 10 would be required on a net basis in the near-term to 11 support the business, irrespective of any financing 12 considerations. 13 Changes in working capital over the course of 14 any given year can either be used as a source -- acts 15 as a source of cash or a use of cash. If inventory, 16 for example, increases over the course of any given 17 year, the assumption is made that in essence cash is 18 being used to finance that inventory. The same holds 19 true for other elements on the asset side, accounts 20 receivable, and any sort of near-term accounts payable, 21 current liabilities being termed -- being determined as 22 anything that would be expected to transpire within a 23 single year, that can have the opposite effect. 24 The key take-away from this slide is that any 25 sort of growth is -- is -- will -- on an annual basis EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 73 1 such an analysis is the working capital considerations. 2 In the GRIM Model itself, you'll be providedwith an 3 opportunity to make a simplistic assumption of what the 4 working capital requirements are stated as a percentage 5 of revenues, but just toprovideyouwith an indication 6 of the philosophical underpinnings of that, working 7 capital is expressed in terms of the net of current 8 assets and current liabilities. 9 So, inessence, these are the assets that 10 wouldbe required on a net basis in the near-termto 11 support the business, irrespective of any financing 12 considerations. 13 Changes inworking capital over the course of 14 anygivenyear caneitherbe used as a source -- acts 15 as a source of cash or a use of cash. If inventory, 16 for example, increases over the course of any given 17 year, the assumption is made that in essence cash is 18 being used to finance that inventory. The same holds 19 true for other elements on the asset side, accounts 20 receivable, and any sort of near-termaccounts payable, 21 current liabilitiesbeing termed

-- being determined as 22 anything that wouldbe expectedto transpire within a 23 single year, that canhave the opposite effect. 24 The key take-away from this slide is that any 25 sort of growth is

-- is

-- will

-- on an annual basis EXECUTIVE COURT REPORTERS, INC. (301) 565-006474 1 will require an increase in -- in working capital. If 2 business is headed the other way, the opposite will be 3 true. 4 For the -- for the purposes of the GRIM 5 Model, the general going assumption is that we are in a 6 growth mode, and that -- and as revenues increase, our 7 working capital requirements will increase along with 8 it. 9 Once cash flows are established, it is 10 necessary to -- to discount back to present value, and 11 this all boils back to a concept basic in explanation 12 and yet sometimes very -- 13 MR. BROOKMAN: Dave, one question. Gene? 14 MR. FOLEY: I'm sorry. Gene Foley, The 15 Alliance to Save Energy. 16 Just real quick. Can you sort of go into a 17 little bit more detail on the assumption about where 18 the industry or industries, as they might be, are in 19 terms of requiring cash or generating cash? 20 MR. ARNOLD: The assumption for the purposes 21 of -- of GRIM, you're actually able to -- to interject 22 any sort of growth assumptions that you would like, but 23 the default position that we're using in the GRIM Model 24 is -- is for growth over the long-term. 25 MR. FOLEY: As opposed to? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 74 1 will require an increase in inworking capital. If 2 business is headed the otherway, the opposite will be 3 true. 4 For the -- for the purposes of the GRIM 5 Model, the general going assumption is that we are ina 6 growthmode, and that -- and as revenues increase, our 7 working capital requirements will increase alongwith 8 it. 9 Once cash flows are established, it is 10 necessaryto -- to discount back to present value, and 11 this all boils backto a concept basic in explanation 12 andyet sometimes very 13 MR. BROOKMAN: Dave, one question. Gene? 14 MR. FOLEY: I'm sorry. Gene Foley, The 15 Alliance to Save Energy. 16 Just real quick. Canyou sort of go into a 17 littlebit more detail on the assumption about where 18 the industryor industries, as theymight be, are in 19 terms of requiring cash orgenerating cash? 20 MR. ARNOLD: The assumption for the purposes 21 of -- of GRIM, you're actually able to -- to interject 22 any sort of growth assumptions that youwould like, but 23 the default position that we're using in the GRIM Model 24 is -- is for growth over the long-term. 25 MR. FOLEY: As opposedto? EXECUTIVE COURT REPORTERS, INC. (301) 565-006475 1 MR. ARNOLD: A shrinking industry. 2 MR. FOLEY: Okay. Because then I -- from the 3 arguments I've heard, there are a number of people - 4 number of the industry representatives that would argue 5 that they are part of a shrinking industry. 6 MR. ARNOLD: That -- that functionality -- 7 you're free to put in any sort of growth assumptions 8 that you like into -- into the model. 9 MR. BROOKMAN: Did you describe what level of 10 aggregation you're using? 11 MR. ARNOLD: It's dependent upon whatever is 12 being reflected in the GRIM Model itself. 13 The time value of money essentially relates 14 to two basic concepts of finance. Number 1 is the 15 notion that dollars received today are worth more than 16 the dollars received tomorrow. This is known as a 17 positive time preference, merely a reflection of the 18 fact that you can take a dollar that's in your pocket 19 today and -- and reinvest it and presumably have more, 20 if certainly invested in the right vehicles, one year, 21 two years down the road as opposed to putting it in 22 your mattress. 23 The second fundamental notion of time value 24 of money is what's known as risk aversion, the fact 25 that a dollar in hand is secure while a dollar to be EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 75 1 MR. ARNOLD: A shrinking industry. 2 MR. FOLEY: Okay. Because then I from the 3 arguments I'veheard, there are a number of people

-- 4 number of the industryrepresentatives that would argue 5 that they are part of a shrinking industry. 6 MR. ARNOLD: That

-- that functionality 7 you're free toput in any sort of growth assumptions 8 that you like into into the model. 9 MR. BROOKMAN: Didyou describe what level of 10 aggregationyou're using? 11 MR. ARNOLD: It's dependent uponwhatever is 12 being reflected in the GRIM Model itself. 13 The time value of money essentiallyrelates 14 to two basic concepts of finance. Number 1 is the 15 notion that dollars received today are worthmore than 16 the dollars receivedtomorrow. This is known as a 17 positive time preference, merely a reflection of the 18 fact that you cantake a dollar that's inyourpocket 19 today and and reinvest it andpresumablyhave more, 20 if certainly invested inthe right vehicles, one year, 21 two years down the road as opposedtoputting it in 22 yourmattress. 23 The second fundamental notion of time value 24 of money is what's known as risk aversion, the fact 25 that a dollar inhand is secure while a dollar tobe EXECUTIVE COURT REPORTERS, INC. (301) 565-006476

1 received in the future from other parties is -- is 2 somewhat risky. 3 The way time value is typically expressed is 4 either in terms of -- of discount rate, inflation rate, 5 interest rate. There's a number of different terms 6 that can be attached to it, but the whole premise being 7 that discounted cash flows in the future can look very 8 different in a real return sense from those which might 9 be present today. 10 Here on this slide are two points of 11 comparison, using different inflation rates and yet 12 viewing the effects of -- of the current value as 13 opposed to a value from a year out. The top effect is 14 the five-percent rate of inflation. The formula for 15 determining what a dollar earned one year from now in 16 comparison to today is simply one divided by -- or the 17 amount at -- at risk, one dollar, divided by one plus 18 the inflation rate. 19 In reality, the formula is dependent upon the 20 number of periods to which you're discounting. In this 21 case, we're doing it as a single year. So, it would be 22 one plus inflation rate raised to the power of one. If 23 we were going two years out, we would have to raise it 24 to two and the like. 25 But at the bottom, using simply different EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 76 1 received in the future from otherparties is is 2 somewhat risky. 3 The way time value is typicallyexpressed is 4 either in terms of

-- of discount rate, inflationrate, 5 interest rate. There's a number of different terms 6 that canbe attached to it, but the whole premisebeing 7 that discounted cash flows inthe future can lookvery 8 different in a real return sense from those whichmight 9 be present today. 10 Here on this slide are two points of 11 comparison, using different inflationrates andyet 12 viewing the effects of

-- of the current value as 13 opposed to a value from a year out. The top effect is 14 the five-percent rate of inflation. The formula for 15 determining what a dollar earnedone year fromnow ln 16 comparison to today is simplyone dividedby

-- or the 17 amount at

-- at risk, one dollar, dividedbyone plus 18 the inflationrate. 19 Inreality, the formula is dependent upon the 20 number ofperiods to whichyou're discounting. Inthis 21 case, we're doing it as a singleyear. So, it wouldbe 22 one plus inflationrate raised to the power of one. If 23 we were going two years out, we wouldhave to raise it 24 to two and the like. 25 But at the bottom, using simplydifferent EXECUTIVE COURT REPORTERS, INC. (301) 565-006477

1 discount rates, still keeping the one-year time frame 2 intact, we experience a decrease in present value of -- 3 substantially different from that which is associated 4 with five-percent effect. 5 So, again, this slide just shows the 6 comparison, keeping time the same, and yet varying the 7 discount rate. 8 The next slide takes a slightly different 9 tack, this time keeping the interest rate intact at 10 10 percent, which is actually quite a reasonable rate of 11 return that we would experience in -- in many aspects 12 of business. In fact, 10 percent on a real basis, not 13 terribly different from that which we would expect to 14 be seeing in the industries that are represented in 15 this room. Perhaps something a little higher. 16 In fact, just for the purposes of -- of 17 representation, the GRIM Model in a default posture 18 assumes a discount rate of -- of 12 percent. But again 19 you're free to change that to the specifics of any 20 given industry or subset thereof. 21 But, here, noting that $500 in current terms 22 rapidly depreciates over the course of a three-year 23 time frame, using this modest discount rate to $376, 24 and we'll point out that the GRIM Model itself runs out 25 to 15 years, using discount rates comparable to these. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 77 1 discount rates, still keeping the one-year time frame 2 intact, we experience a decrease inpresent value of -- 3 substantiallydifferent from that which is associated 4 with five-percent effect. 5 So, again, this slidejust shows the 6 comparison, keeping time the same, andyet varying the 7 discount rate. 8 The next slide takes a slightlydifferent 9 tack, this time keeping the interest rate intact at 10 10 percent, which is actuallyquite a reasonable rate of 11 return that we would experience in -- inmany aspects 12 of business. In fact, 10 percent on a real basis, not 13 terriblydifferent from that whichwe would expect to 14 be seeing in the industries that are represented in 15 this room. Perhaps something a littlehigher. 16 In fact, just for thepurposes of of 17 representation, the GRIM Model ina default posture 18 assumes a discount rate of of 12 percent. But again 19 you're free to change that to the specifics of any 20 given industryor subset thereof. 21 But, here, noting that $500 In current terms 22 rapidly depreciates over the course of a three-year 23 time frame, using this modest discount rate to $376, 24 andwe'll point out that the GRIM Model itself runs out 25 to 15 years, using discount rates comparable to these. EXECUTIVE COURT REPORTERS, INC. (301) 565-006478

1 So, clearly the notion of cash some 2 substantial period out, for example, the time when 3 we're considering terminal value of discount, it does 4 have a significant effect. 5 Discount rate computations themselves, when 6 they're -- when they're built up on a theoretical 7 basis, reflect these two elements. Number 1, the -- 8 what's known as a risk-free rate of return. This goes 9 back to that positive time frame preference that we 10 were mentioning on an earlier slide. 11 For the purposes of a general rule of thumb, 12 most of the financial academics recognize risk-free 13 rate of return to correlate quite closely to long-term 14 Treasury bill rates. 15 So, again, this is the component of the 16 discount rate that is associated just purely with the 17 timing differentials. 18 The second component of the discount rate is 19 a risk premium, which again accounts for uncertainty of 20 receiving dollars in the future as opposed to current. 21 When you sum total those two elements, you 22 can derive a wide variety of -- of discount rates. 23 This scale gives you some idea of the spectrum of 24 discount rates that are commonly used in analyses such 25 as these. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 78 1 So, clearlythe notionof cash some 2 substantial period out, for example, the time when 3 we're considering terminal value of discount, it does 4 have a significant effect. 5 Discount rate computations themselves, when 6 they're -- when they're built up on a theoretical 7 basis, reflect these two elements. Number I, the 8 what's known as a risk-free rate of return. This goes 9 back to that positive time frame preference that we 10 were mentioning on an earlier slide. 11 For the purposes of a general rule of thumb, 12 most of the financial academics recognize risk-free 13 rate of return to correlate quite closely to long-term 14 Treasurybill rates. 15 So, again, this is the component of the 16 discount rate that is associatedjustpurelywiththe 17 timing differentials. 18 The secondcomponent of the discount rate is 19 a riskpremium, which again accounts for uncertainty of 20 receiving dollars in the future as opposedto current. 21 When you sum total those two elements, you 22 can derive a wide variety of -- of discount rates. 23 This scale gives you some idea of the spectrumof 24 discount rates that are commonlyused in analyses such 25 as these. EXECUTIVE COURT REPORTERS, INC. (301) 565-006479

1 Starting at the bottom, four percent is our 2 risk-free rate of return for Treasury bills. Moving up 3 the scale slightly, regulated industries, although 4 becoming riskier by the day, by virtue of deregulation, 5 still being valued using discount rates in the 6 approximately eight-percent range. 7 The average for stock market in recent times, 8 given our current era of relatively low inflation, 9 roughly 15 percent, and then, of course, moving on up 10 to venture capital rates of return, 25 percent and 11 above. 12 Again, for the purposes of the GRIM, the 13 default position is that we'll use a discount rate 14 generally in the 12-percent range. That is perceived 15 to be somewhat lower than the average level of risk 16 associated with the economy as a whole, which can be 17 justified at least in a very broad form, based upon the 18 relatively stable nature of your industries and lower 19 level of risk associated therewith. 20 MR. BROOKMAN: Question here in the front. 21 Jim? 22 MR. McMAHON: The discount rates that you've 23 shown there are nominal rates. You'd have to take out 24 inflation to get the real rates? 25 MR. ARNOLD: Yes. Yes, purely in a nominal EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 79 1 Starting at the bottom, four percent is our 2 risk-free rate of return for Treasurybills. Moving up 3 the scale slightly, regulated industries, although 4 becoming riskierbythe day, byvirtue of deregulation, 5 still beingvaluedusing discount rates in the 6 approximately eight-percent range. 7 The average for stockmarket inrecent times, 8 given our current era of relatively low inflation, 9 roughly 15 percent, and then, of course, moving onup 10 to venture capital rates of return, 25 percent and 11 above. 12 Again, for thepurposes of the GRIM, the 13 default position is that we'll use a discount rate 14 generally in the 12-percent range. That is perceived 15 to be somewhat lower than the average level of risk 16 associatedwith the economy as a whole, which canbe 17 justifiedat least ina verybroad form, basedupon the 18 relatively stable nature of your industries and lower 19 level of risk associated therewith. 20 MR. BROOKMAN: Questionhere in the front. 21 Jim? 22 MR. McMAHON: The discount rates that you've 23 shown there are nominal rates. You'dhave to take out 24 inflationto get the real rates? 25 MR. ARNOLD: Yes. Yes, purely in a nominal EXECUTIVE COURT REPORTERS, INC. (301) 565-006480

1 sense. This would be built on the notion of, for 2 example, about a four-percent rate of inflation. 3 Last slide on the discounted cash flow deals 4 with this issue of -- of terminal value, which you'll 5 see reflected in the GRIM Model for both scenarios, 6 base case and -- and with standards. 7 This is simply a mathematical accommodation 8 of the time horizon that's employed in discounted cash 9 flows, which allows us to place a value upon the future 10 beyond the final year of the analysis. The formula 11 that the GRIM Model uses is a discounted perpetuity, 12 which takes the cash flows in the final year, Year 15 13 of the analysis, divides it by the discount rate that's 14 employed therein. 15 Do we have any other -- any questions on -- 16 we're about to move into the GRIM Model itself. I just 17 wanted to take any questions now on the discounted cash 18 flow analysis. 19 MR. BROOKMAN: Please state your name for the 20 record. 21 MR. VAN DYKE: Jim Van Dyke, Oak Ridge 22 National Laboratory. 23 Your -- on that one slide, you have Treasury 24 bills at four percent, and you're saying that your 25 inflation assumption is also four percent, and you said EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 80 1 sense. This wouldbe built on the notion of, for 2 example, about a four-percent rate of inflation. 3 Last slide onthe discounted cash flow deals 4 with this issue of

-- of terminal value, whichyou'll 5 see reflected in the GRIM Model for both scenarios, 6 base case and andwith standards. 7 This is simplya mathematical accommodation 8 of the time horizon that's employed indiscounted cash 9 flows, which allows us to place a value upon the future 10 beyond the final year of the analysis. The formula 11 that the GRIM Model uses is a discountedperpetuity, 12 which takes the cash flows in the final year, Year 15 13 of the analysis, divides it bythe discount rate that's 14 employed therein. 15 Do we have anyother

-- any questions on 16 we're about tomove into the GRIM Model itself. I just 17 wanted to take any questions now on the discounted cash 18 flow analysis. 19 MR. BROOKMAN: Please stateyour name for the 20 record. 21 MR. VAN DYKE: JimVanDyke, OakRidge 22 National Laboratory. 23 Your

-- on that one slide, you have Treasury 24 bills at four percent, andyou're saying that your 25 inflationassumption is also fourpercent, andyou said EXECUTIVE COURT REPORTERS, INC. (301) 565-006481

1 these were nominal? 2 MR. ARNOLD: Yes. 3 MR. VAN DYKE: So, are you saying that the 4 real return on Treasury bills is zero? 5 MR. ARNOLD: Is approximately net zero, yes. 6 Very close to level of inflation. 7 MR. BROOKMAN: Let me ask the group 8 generally. This is background. These -- these 9 fundamentals, these building blocks, is this useful for 10 you as a starting point? Yes, keep going. 11 MR. ARNOLD: Moving on in to the -- the GRIM 12 Model itself, this is again -- I'll give you a quick 13 overview of the lay-out. This is presented in Excel 14 Version 5, which I believe in itself is a program about 15 four years old. So, should be very much in keeping 16 with the level of software that's in use throughout the 17 Department of Energy as well as most of the industry. 18 The model itself is laid out as a multi-tier 19 workbook, multiple worksheets within a single work 20 book. When you open up the model, you'll come, first 21 of all, to a cover sheet. I'm going to flip, first of 22 all, through the sheets themselves. You're free to 23 follow along with me in the package, if you like, but I 24 just wanted to give you a visual of the overall lay-out 25 of the model, and we'll come back and discuss EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 81 1 these were nominal? 2 MR. ARNOLD: Yes. 3 MR. VAN DYKE: So, are you saying that the 4 real return onTreasurybills is zero? 5 MR. ARNOLD: Is approximatelynet zero, yes. 6 Very close to level of inflation. 7 MR. BROOKMAN: Let me ask the group 8 generally. This is background. These

-- these 9 fundamentals, these buildingblocks, is this useful for 10 you as a startingpoint? Yes, keep going. 11 MR. ARNOLD: Moving on in to the

-- the GRIM 12 Model itself, this is again

-- I'll give you a quick 13 overviewof the lay-out. This ispresented inExcel 14 Version 5, which I believe in itself is a programabout 15 four years old. So, shouldbe verymuch inkeeping 16 with the level of software that's inuse throughout the 17 Department of Energy as well as most of the industry. 18 The model itself is laidout as a multi-tier 19 workbook, multiple worksheets within a single work 20 book. When you openup the model, you'll come, first 21 of all, to a cover sheet. I'mgoing to flip, first of 22 all, through the sheets themselves. You're free to 23 follow along withme inthe package, if you like, but I 24 just wanted to give you a visual of the overall lay-out 25 of the model, andwe'll come back and discuss EXECUTIVE COURT REPORTERS, INC. (301) 565-006482

1 individual sheets as we -- 2 MR. BROOKMAN: Yes? 3 MR. SAMUELS: This is Chuck Samuels from
4 AHAM. 5 I just wanted to say that for some reason,
6 your slide has AHAM on there. It is true that ARAM, 7 along with other associations, contracted for the work 8 that was done for the original GRIM, but we have 9 essentially given it to the department, placed it in 10 the public domain.
11 It's no longer an ARAM model. We don't have 12 any legal rights to it that we've retained, and I just 13 want to make clear to everybody that this is now 14 something for the department and the public generally 15 to use and to revise in whatever way is -- is 16 appropriate, and the version of it that's used should 17 not particularly mention AHAM in the future, and it 18 should be clear that this is something to be used by 19 the department and others. 20 MR. ARNOLD: Point well taken. That was just 21 purely a reflection of the original GRIM Model, which 22 did include such sponsorship, but we'll be happy to 23 delete the reference.. 24 Okay. The second tab of the worksheet is a 25 single sheet of assumptions, about 25 or so of them in EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 82 1 individual sheets as we 2 MR. BROOKMAN: Yes? 3 MR. SAMUELS: This is Chuck Samuels from 4 AHAM. 5 I just wanted to saythat for some reason, 6 your slide hasAHAM onthere. It is true that AHAM, 7 along with other associations, contracted for the work 8 that was done for the original GRIM, but we have 9 essentiallygiven it to the department, placed it ln 10 the public domain. 11 It's no longer anAHAM model. We don't have 12 any legal rights to it that we've retained, and I just 13 want to make clear to everybodythat this is now 14 something for the department and the public generally 15 to use and to revise inwhateverway is

-- is 16 appropriate, and the version of it that's used should 17 not particularlymentionAHAM in the future, and it 18 shouldbe clear that this is something tobe usedby 19 the department and others. 20 MR. ARNOLD: Point well taken. That was just 21 purelya reflection of the original GRIM Model, which 22 did include such sponsorship, but we'll be happy to 23 delete the reference

.. 24 Okay. The second tab of the worksheet is a 25 single sheet of assumptions, about 25 or so of them in EXECUTIVE COURT REPORTERS, INC. (301) 565-006483

1 total, and we'll come back and look at these 2 individually, but I -- I want to point out that it is 3 technically possible for one to work through a complete 4 GRIM analysis by filling in this assumption page and 5 this assumption page alone, which we do view as a major 6 improvement over original GRIM, wherein these 7 assumptions were -- were largely intact but spread all 8 over the place. 9 The next tab is what we term the "base case 10 scenario", which is a complete lay-out of the as-is do 11 nothing scenario, no standards employed, built purely 12 upon the assumptions that are laid out on the 13 assumptions page. 14 However, I will point out that this 15 particular cash flow analysis as -- as does the next 16 cash flow analysis does allow the user the flexibility 17 to come in to this area, both the price unit portion as 18 well as unit sales, to the extent that we have any sort 19 of modifications that we want to make over and above 20 those which are being formula-driven off of the 21 assumptions page. You do have the flexibility to make 22 those changes here. It's purely on an optional basis.23 The standard case, of course, similar in lay24 out, look and feel to the base case, and yet this 25 reflects the impacts on cash flows of the decision to EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 83 1 total, andwe'll come back and look at these 2 individually, but I

-- I want topoint out that it is 3 technicallypossible for one to work through a complete 4 GRIM analysis by filling in this assumptionpage and 5 this assumptionpage alone, whichwe do view as a major 6 improvement over original GRIM, wherein these 7 assumptions were -- were largely intact but spread all 8 over the place. 9 The next tab is what we term the "base case 10 scenario", which is a complete lay-out of the as-is do 11 nothing scenario, no standards employed, built purely 12 upon the assumptions that are laidout onthe 13 assumptions page. 14 However, I will point out that this 15 particular cash flow analysis as -- as does the next 16 cash flow analysis does allowthe user the flexibility 17 to come in to this area, both the priceunit portion as 18 well as unit sales, to the extent that we have any sort 19 of modifications that we want tomake over and above 20 those which are being formula-driven off of the 21 assumptions page. You do have the flexibility tomake 22 those changes here. It's purelyon an optional basis. 23 The standard case, of course, similar in lay24 out, look and feel to the base case, andyet this 25 reflects the impacts on cash flows of the decision to EXECUTIVE COURT REPORTERS, INC. (301) 565-006484

1 implement a regulation versus -- versus the as-is 2 condition. 3 So, those two schedules comprise the bulk of 4 the cash flow portion. Another report, summary 5 information on a separate tab, which -- on -- on a 6 single sheet provides indications of many of the key 7 elements of both analyses. This is a replication of 8 the summary in the original GRIM, and then from there, 9 you can move immediately into a series of graphs which 10 are driven directly by the cash flows themselves. 11 They're about a half a dozen or so of them in 12 -- in basic form. We'll flip through them individually 13 after we work through the entire model, but just to say 14 that everything from this portion of the work book back 15 is purely -- purely graphical representations of items 16 that are presented elsewhere. 17 Going back now to the assumptions page, work 18 through each of the -- the 25 or so items that are 19 allowed to change in form, the first one is just simply 20 a scenario description, which you can play as you like. 21 We have example text in here, but this will print on 22 every single page, be it quantitative or graphical, to 23 provide you with a permanent record of which scenario 24 you're analyzing at the time. 25 Next section very simply -- let me adjust EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 84 1 implement a regulationversus -- versus the as-is 2 condition. 3 So/ those two schedules comprise the bulkof 4 the cash flowportion. Another report/ summary 5 informationon a separate tab/ which on -- on a 6 single sheet provides indications of many of the key 7 elements of both analyses. This is a replicationof 8 the summary inthe original GRIM/ and then from there/ 9 you canmove immediatelyinto a series of graphs which 10 are driven directlybythe cash flows themselves. 11 They're about a half a dozen or so of themin 12 inbasic form. We'll flip through them individually 13 afterwe work throughthe entiremodel/ but just to say 14 that everything from this portionof the workbookback 15 ispurely

-- purelygraphical representations of items 16 that are presented elsewhere. 17 Going backnow to the assumptions page/ work 18 through eachof the

-- the 25 or so items that are 19 allowed to change in form/ the first one isjust simply 20 a scenario description/ whichyou canplayas you like. 21 We have example text inhere/ but this will print on 22 every singlepage/ be it quantitative orgraphical/ to 23 provide youwith a permanent record of which scenario 24 you're analyzing at the time. 25 Next sectionvery simply

-- let me adjust EXECUTIVE COURT REPORTERS, INC. (301) 565-006485

1 down the size here somewhat so you can see a bit more 2 of it in the same frame. 3 Indications of the years that we want to 4 reflect as starting points. The base year is -- will 5 generally be the current year for the purposes of these 6 analyses. Announcement year is the year in which we 7 expect regulation announcement to be made. Standard 8 year is the effective date of the regulation. 9 These two years are important in that there 10 are certain cells in the standard scenario which are 11 time-sensitive to the differential between standard 12 year and announcement year. You do have flexibility to 13 make this announcement -- the period between 14 announcement year and standard year as long or short as 15 you like. 16 I believe current version allows you to have 17 up to eight years between announcement date and -- and 18 standard year. 19 Then a section of general financial inputs 20 that will drive both scenarios. First of all, the tax 21 rate, and what you're seeing here is defaults that 22 we're placing in the model. We can certainly change 23 these defaults as a result of these discussions, and, 24 of course, the user will be able to change them at any 25 time to tailor the model to specific circumstances. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 85 1 down the size here somewhat soyou can see a bit more 2 of it inthe same frame. 3 Indications of the years that we want to 4 reflect as startingpoints. The base year is

-- will 5 generallybe the current year for the purposes of these 6 analyses. Announcement year is the year inwhichwe 7 expect regulation announcement tobe made. Standard 8 year is the effective date of the regulation. 9 These two years are important in that there 10 are certain cells inthe standard scenariowhich are 11 time-sensitive to the differential between standard 12 year and announcement year. You do have flexibility to 13 make this announcement

-- the periodbetween 14 announcement year and standardyear as long or short as 15 you like. 16 I believe current version allows you to have 17 up to eight years between announcement date and

-- and 18 standardyear. 19 Then a sectionof general financial inputs 20 that will drive both scenarios. First of all, the tax 21 rate, andwhat you're seeinghere is defaults that 22 we're placing in the model. We can certainly change 23 these defaults as a result of these discussions, and, 24 of course, the userwill be able to change them at any 25 time to tailor the model to specific circumstances. EXECUTIVE COURT REPORTERS, INC. (301) 565-006486 1 Discount rate again, which we are using in a 2 default, is 12 percent. This is used purely for the 3 net present value purposes. 4 We're also building in to the new GRIM the 5 ability to add in an inflation rate, which the model 6 will apply to both prices and cost under both 7 scenarios. 8 MR. WEEKLY: I have one question. 9 MR. ARNOLD: Yes? 10 MR. WEEKLY: Will those be -- raise your 11 costs four percent and raise your prices a different 12 percent or does your model assume that both increase at 13 the same amount? 14 MR. ARNOLD: As it stands now in this Beta 15 version, the same inflation rate is being used for both 16 cost and price. But I'll also point out that you do 17 have the flexibility by virtue of these input areas as 18 it stands now on base case and scenario. You could 19 affect price differently through a manual override in 20 the other tabs. 21 MR. BROOKMAN: Please restate your name and 22 the first half of the question. 23 MR. WEEKLY: My name is Doug Weekly, and my 24 only question was is the model as it's set up assumes 25 that the price and the cost rise with inflation, and EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 86 1 Discount rate again, whichwe are using in a 2 default, is 12 percent. This is usedpurely for the 3 net present value purposes. 4 We're alsobuilding in to the new GRIM the 5 ability to add in an inflationrate, which the model 6 will apply to bothprices and cost underboth 7 scenarios. 8 MR. WEEKLY: I have one question. 9 MR. ARNOLD: Yes? 10 MR. WEEKLY: Will those be

-- raise your 11 costs four percent and raise yourprices a different 12 percent ordoes yourmodel assume that both increase at 13 the same amount? 14 MR. ARNOLD: As it stands now in this Beta 15 version, the same inflationrate is beingused for both 16 cost andprice. But I'll alsopoint out that you do 17 have the flexibilitybyvirtue of these input areas as 18 it stands now onbase case and scenario. You could 19 affect price differentlythrough a manual override in 20 the other tabs. 21 MR. BROOKMAN: Please restate your name and 22 the first half of the question. 23 MR. WEEKLY: My name is DougWeekly, andmy 24 onlyquestionwas is the model as it's set up assumes 25 that the price and the cost rise with inflation, and EXECUTIVE COURT REPORTERS, INC. (301) 565-006487

1 they may operate independently. 2 MR. BROOKMAN: Thanks. 3 MR. ARNOLD: The next is for working capital, 4 which is expressed as a percentage of revenues, and 5 this percentage is expected as a part of the model to 6 remain constant over the life of either scenario. 7 Next series of inputs, you have the ability 8 to input base or unit price, base year or unit sales 9 expressed in millions, and unit sales growth, which is 10 used to formulate the increase of sales under both base 11 case and standard case going forward. So, a unit 12 increase as opposed to any sort of an inflationary 13 increase with respect to price. 14 Standard SG&A. This -- I believe this is 15 where we have the answer to the earlier question on 16 where the cost of everyone in this room is placed. You 17 appear here as a fixed element of the model which is 18 expected to remain constant, except for any sort of 19 inflationary effect going forward. 20 Also, research and development assumed as a 21 percentage of revenues. This, too, remains constant in 22 relative terms over the life of the model. 23 Depreciation assumptions are twofold. First 24 of all, you are allowed to input an expected beginning 25 depreciation amount expressed in -- as a percentage of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 87 1 theymay operate independently. 2 MR. BROOKMAN: Thanks. 3 MR. ARNOLD: The next is for working capital, 4 which is expressed as a percentage of revenues, and 5 this percentage is expected as a part of the model to 6 remain constant over the life of either scenario. 7 Next series of inputs, you have the ability 8 to input base orunit price, base year orunit sales 9 expressed inmillions, andunit sales growth, which is 10 used to formulate the increase of sales under bothbase 11 case and standard case going forward. So, a unit 12 increase as opposed to any sort of an inflationary 13 increase with respect toprice. 14 Standard SG&A. This

-- I believe this is 15 where we have the answer to the earlierquestion on 16 where the cost of everyone inthis room is placed. You 17 appearhere as a fixed element of the model which is 18 expected to remain constant, except for any sort of 19 inflationaryeffect going forward. 20 Also, research anddevelopment assumed as a 21 percentage of revenues. This, too, remains constant in 22 relative terms over the life of the model. 23 Depreciationassumptions are twofold. First 24 of all, you are allowed to input an expectedbeginning 25 depreciation amount expressed in as a percentage of EXECUTIVE COURT REPORTERS, INC. (301) 565-006488

1 revenues in the base year. This, too, will remain -- 2 once established for the base year, it remains constant 3 over the life of the model. The same holds true for 4 ordinary capital expenditures. 5 We're terming these ordinary depreciation and 6 ordinary capital expenditures in that this would be one 7 of the -- the as-is -- this drives the as-is scenario 8 as opposed to considering any sort of direct changes as 9 a result of the regulation. That appears below -- that 10 element of the assumption appears below. 11 And, lastly, in the conventional sense, with 12 respect to manufacturing overhead, you're allowed to 13 input an assumption as to what portion of that would be 14 variable as opposed to fixed. 15 MR. FLORA: Excuse me. 16 MR. BROOKMAN: Please state your name. 17 MR. FLORA: Yeah. Brad Flora, Whirlpool 18 Corporation. 19 I just want to make sure just for 20 clarification. So, your base year, your unit price 21 then is driven by your inflation assumption as you move 22 out? 23 MR. ARNOLD: Well, yes. Let's take a look at 24 that. 25 MR. FLORA: And then the volume is driven by EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 88 1 revenues in the base year. Thisl tOOl will remain 2 once established for the baseyearl it remains constant 3 over the life of the model. The same holds true for 4 ordinarycapital expenditures. 5 We're terming these ordinarydepreciation and 6 ordinarycapital expenditures in that this wouldbe one 7 of the

-- the as-is

-- this drives the as-is scenario 8 as opposed to considering any sort of direct changes as 9 a result of the regulation. That appears below

-- that 10 element of the assumption appears below. 11 AndI lastlYI in the conventional senseI with 12 respect to manufacturing overheadI you're allowed to 13 input an assumption as to what portion of that wouldbe 14 variable as opposed to fixed. 15 MR. FLORA: Excuseme. 16 MR. BROOKMAN: Please state your name. 17 MR. FLORA: Yeah. Brad Floral Whirlpool 18 Corporation. 19 I just want tomake surejust for 20 clarification. SOl yourbaseyearl your unit price 21 then is drivenbyyour inflation assumption as youmove 22 out? 23 24 that. 25 MR. ARNOLD: WeIll yes. Let's take a look at

MR. FLORA: And then the volume is drivenby EXECUTIVE COURT REPORTERS, INC. (301) 565-006489

1 the -- the unit sales growth? 2 MR. ARNOLD: Yes. 3 MR. FLORA: Okay. 4 MR. ARNOLD: So, they're operating 5 independently. 6 MR. FLORA: So, -- okay. So, -- so, we have 7 a lot of issues around the price volume relationships. 8 We'd have to go in and manually override those in the 9 standard case, I think, huh? 10 MR. ARNOLD: Well, actually, as it stands 11 now, base case and standard case make the same 12 assumptions -- 13 MR. FLORA: Yeah. I saw that in the graph. 14 MR. ARNOLD: -- with respect to both price 15 and volume, unless you override, but, you, for example, 16 can keep base case fixed and choose to override 17 standard, but the default position coming off of this 18 assumption table is a series of formulas that -- that 19 raise both just in percentage terms. 20 MR. FLORA: Right. It's driven by inflation 21 and by your growth -- 22 MR. ARNOLD: Right. 23 MR. FLORA: -- rate. Okay. Thank you. 24 MR. ARNOLD: But, again, you're free to -- to 25 override either. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 89 1 the

-- the unit sales growth? 2 MR. ARNOLD: Yes. 3 MR. FLORA: Okay. 4 MR. ARNOLD: So, they're operating 5 independently. 6 MR. FLORA: So,

-- okay. So,

-- so, we have 7 a lot of issues around the pricevolume relationships. 8 We'dhave to go in andmanuallyoverride those inthe 9 standard case, I think, huh? 10 MR. ARNOLD: Well, actually, as it stands 11 now, base case and standard case make the same 12 assumptions

-- 13 MR. FLORA: Yeah. I saw that in the graph. 14 MR. ARNOLD:

-- with respect to bothprice 15 andvolume, unless you override, but, you, for example, 16 cankeep base case fixed and choose to override 17 standard, but the default position coming off of this 18 assumption table is a series of formulas that that 19 raise bothjust inpercentage terms. 20 MR. FLORA: Right. It's drivenby inflation 21 andbyyourgrowth

-- 22 MR. ARNOLD: Right. 23 MR. FLORA:

-- rate. Okay. Thankyou. 24 MR. ARNOLD: But, again, you're free to

-- to 25 override either. EXECUTIVE COURT REPORTERS, INC. (301) 565-006490

1 The last elements of the assumptions page, 2 and, of course, quite a bit of the discussion going 3 into the derivation of these rather simple dollar 4 amounts in the final analysis, but you're allowed to 5 input manufacturing costs on a unit basis in base year, 6 both for materials, labor and overhead, and then you're 7 allowed to reflect for the purposes of this standard 8 case analysis any sort of incremental effect due to 9 implementation of the standard. 10 So, for example, here, not including any sort 11 of inflationary effects, which are also employed as a 12 part of the -- the cash flow analysis, if materials is 13 $80 in base year, the assumption is that with standard 14 it would increase to 100. 15 MR. BROOKMAN: Mark? 16 MR. PERLIS: Could you explain why there's no 17 charge for interest to cover the incremental capital 18 expenditures? 19 MR. ARNOLD: This is actually a general 20 element of all cash flow analyses. Any sort of 21 financing costs that would be associated with -- with 22 the scenarios under consideration are captured in the 23 discount rate itself. 24 So, -- so, in other words, you need to lay 25 out the -- this cash flow analysis lays out cash flow, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 90 1 The last elements of the assumptions page, 2 and, of course, quite a bit of the discussion going 3 into the derivationof these rather simple dollar 4 amounts in the final analysis, but you're allowed to 5 input manufacturing costs on a unit basis inbaseyear, 6 both for materials, labor and overhead, and thenyou're 7 allowed to reflect for the purposes of this standard 8 case analysis any sort of incremental effect due to 9 implementationof the standard. 10 So, for example, here, not including any sort 11 of inflationary effects, which are also employed as a 12 part of the

-- the cash flow analysis, ifmaterials is 13 $80 inbase year, the assumption is that with standard 14 it would increase to 100. 15 MR. BROOKMAN: Mark? 16 MR. PERLIS: Couldyou explainwhy there's no 17 charge for interest to cover the incremental capital 18 expenditures? 19 MR. ARNOLD: This is actually a general 20 element of all cash flow analyses. Any sort of 21 financing costs that wouldbe associatedwith

-- with 22 the scenarios under consideration are captured in the 23 discount rate itself. 24 25 out the So,

-- so, inotherwords, you need to lay this cash flow analysis lays out cash flow,

EXECUTIVE COURT REPORTERS, INC. (301) 565-006491 1 excluding any sort of financing considerations, on the 2 grounds that when they are discounted, that will in 3 essence capture the -- the financing effect. 4 MR. PERLIS: I still don't understand that. 5 Is another way of saying what you're saying that you're 6 just assuming that the costs are financed out of 7 working capital? 8 MR. ARNOLD: No, not that they're financed 9 out of any sort of mechanism per se. It's just that 10 they're -- they're financed as an effective rate equal 11 to the discount rate that's being used for the 12 analysis. 13 MR. PERLIS: Okay. 14 MR. ARNOLD: So, -- so, in other words, as a 15 part of the default GRIM, the assumption is that all of 16 the negative cash flows is being financed at a 12- 17 percent rate, which is the discount rate that's 18 employed. 19 The last element of the assumptions is the 20 conversion costs themselves. In this example, 21 conversion costs are expressed in two forms -- 22 actually, for all GRIM exercises, there's two elements 23 of conversion costs. That portion which is 24 capitalizable, so any sort of incremental fixed assets 25 associated with -- with conforming to the regulation. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 91 1 excluding any sort of financing considerations, on the 2 grounds that when they are discounted, that will in 3 essence capture the

-- the financing effect. 4 MR. PERLIS: I still don't understand that. 5 Is anotherway of sayingwhat you're saying that you're 6 just assuming that the costs are financed out of 7 working capital? 8 MR. ARNOLD: No, not that they're financed 9 out of any sort of mechanismper se. It'sjust that 10 they're

-- they're financed as an effective rate equal 11 to the discount rate that's beingused for the 12 analysis. 13 MR. PERLIS: Okay. 14 MR. ARNOLD: So, so, inotherwords, as a 15 part of the default GRIM, the assumption is that all of 16 the negative cash flows is being financed at a 12- 17 percent rate, which is the discount rate that's 18 employed. 19 The last element of the assumptions is the 20 conversion costs themselves. In this example, 21 conversion costs are expressed in two forms

-- 22 actually, for all GRIM exercises, there'S two elements 23 of conversion costs. That portionwhich is 24 capitalizable, so any sort of incremental fixed assets 25 associatedwith

-- with conforming to the regulation. EXECUTIVE COURT REPORTERS, INC. (301) 565-006492

1 Here, we -- 2 MR. BROOKMAN: Question? Yes? Question? 3 MS. KLUMPP: Thanks. Liz Klumpp, Washington 4 State. 5 My question is you could clarify for me, you 6 know, it's a lengthy process, the standard-setting 7 process, and, so, you have the ANOPR and then the NOPR, 8 and I'm wondering at what point are you considering it 9 final with regards to what the base case is, and 10 therefore it affects incremental price to the consumer, 11 incremental savings to the consumer, because I'm 12 assuming the base case -- the base year represents the 13 marketplace and not the last code. 14 So, as you go from the ANOPR to the NOPR, are 15 you revising these numbers? Am I being clear? 16 MR. ARNOLD: The -- 17 MS. KLUMPP: I'm assuming the market is 18 evolving each year. 19 MR. McCABE: Dave? Dave? I'm looking at 20 Mike McCabe here, which I don't see anything wrong, but 21 my understanding is that we would do one set of 22 analyses for the ANOPR and revise them at the NOPR. 23 MR. BROOKMAN: Yes? Additional question? 24 MR. DEMPSEY: Dan Dempsey with Carrier. 25 On the conversion costs, the fixed capital EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 92 1 Here, we -- 2 MR. BROOKMAN: Question? Yes? Question? 3 MS. KLUMPP: Thanks. Liz Klumpp, Washington 4 State. 5 My question isyou could clarify for me, you 6 know, it's a lengthyprocess, the standard-setting 7 process, and, so, youhave theANOPR and then the NOPR, 8 and I'mwondering at what point are you considering it 9 final with regards to what the base case is, and 10 therefore it affects incremental price to the consumer, 11 incremental savings to the consumer, because I'm 12 assuming the base case -- the base year represents the 13 marketplace and not the last code. 14 So, as you go from theANOPR to the NOPR, are 15 you revising these numbers? Am I being clear? 16 MR. ARNOLD: The 17 MS. KLUMPP: I'massuming the market is 18 evolving eachyear. 19 MR. McCABE: Dave? Dave? I'mlooking at 20 Mike McCabe here, which I don't see anything wrong, but 21 my understanding is that we would do one set of 22 analyses for the ANOPR and revise them at the NOPR. 23 24 25 MR. BROOKMAN: Yes? Additional question? MR. DEMPSEY: DanDempseywith Carrier. On the conversioncosts, the fixed capital EXECUTIVE COURT REPORTERS, INC. (301) 565-006493

1 expenditures and the expenses, does the model assume a 2 particular year in which they're incurred or -- or do 3 you have to go in and override and spread those out? 4 MR. ARNOLD: The model does have some 5 assumptions built in. Actually, there's a table which 6 is built up off of historical experiences in terms of 7 the portion that's experienced in a given year versus 8 another. 9 So, for example, if there were a five-year 10 time frame between the announcement date and the date 11 that the regulation took effect, there is a table -- 12 actually the -- very back in the -- in one of the 13 corners of the spread sheet, that establishes a pro 14 ration of those charges over a broader time frame. 15 MR. DEMPSEY: All right. Thanks. 16 MR. ARNOLD: You'll see the effects of that 17 as we work through the standard case, but in any event, 18 conversion costs again separated out in terms of 19 capital expenditures, here assuming 500 million in 20 total capital, for the purposes of depreciating those 21 incremental capital expenditures, are asked to provide 22 a useful life, here 15 years of default position, and, 23 lastly, what we're terming design and marketing 24 expenses. These would be basically everything else 25 that might be associated with converting to accommodate EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 93 1 expenditures and the expenses, does the model assume a 2 particularyear inwhich they're incurred or -- ordo 3 you have to go in andoverride and spread those out? 4 MR. ARNOLD: The model does have some 5 assumptions built in. Actually, there's a table which 6 is built up off of historical experiences in terms of 7 the portion that's experienced ina givenyearversus 8 another. 9 So, for example, if there were a five-year 10 time frame between the announcement date and the date 11 that the regulation took effect, there is a table 12 actuallythe

-- veryback in the

-- inone of the 13 corners of the spread sheet, that establishes a pro 14 ration of those charges over a broader time frame. 15 MR. DEMPSEY: All right. Thanks. 16 MR. ARNOLD: You'll see the effects of that 17 as we work through the standardcase, but in any event, 18 conversioncosts again separatedout in terms of 19 capital expenditures, here assuming 500 million in 20 total capital, for thepurposes of depreciating those 21 incremental capital expenditures, are asked toprovide 22 a useful life, here 15 years of default position, and, 23 lastly, what we're terming design andmarketing 24 expenses. These wouldbe basicallyeverything else 25 that might be associatedwith converting to accommodate EXECUTIVE COURT REPORTERS, INC. (301) 565-006494

1 a new standard. They would not be capitalizable. They 2 could only be expensed in the current year. 3 So, again, after moving through the major 4 assumptions area of the worksheet, it is possible to 5 just go ahead and start trending and analyzing the 6 scenarios that are provided or if you'd like to get 7 more sophisticated with respect to varying price units 8 and unit sales, you can do that as well. 9 But, here, let's just walk through very 10 briefly the output, and I'll -- I'll cursor through the 11 first couple of cells of each line item. The formulas 12 themselves aren't all the way out to the end of the 15- 13 year time period, but here, briefly, price per unit 14 begins with the $200 that we'd implemented to execute 15 it as a base year assumption and then starts inflating 16 it by four percent. 17 MR. RIVEST: Dave, if I can just make a 18 comment. This is Mike Rivest. 19 If -- in a nutshell, if I were to make -- you 20 know, try to illustrate the difference between this 21 model and the previous model, is that in the previous 22 model, you were -- you would input the manufacturing 23 costs, and the model would determine both the price and 24 the quantity. 25 Now, it's possible to go back and use the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 94 1 a new standard. Theywouldnot be capitalizable. They 2 could onlybe expensed in the current year. 3 So, again, aftermoving through the major 4 assumptions area of the worksheet, it is possible to 5 just go ahead and start trending and analyzing the 6 scenarios that are provided or if you'd like to get 7 more sophisticatedwithrespect tovaryingpriceunits 8 andunit sales, you cando that as well. 9 But, here, let'sjust walk throughvery 10 brieflythe output, and I'll

-- I'll cursor through the 11 first couple of cells of each line item. The formulas 12 themselves aren't all the way out to the end of the 15- 13 year time period, but here, briefly, priceperunit 14 begins with the $200 that we'd implemented to execute 15 it as a base year assumption and then starts inflating 16 it by four percent. 17 MR. RIVEST: Dave, if I canjustmake a 18 comment. This is Mike Rivest. 19 If

-- ina nutshell, if I were tomake

-- you 20 know, tryto illustrate the difference between this 21 model and the previous model, is that in the previous 22 model, youwere -- youwould input the manufacturing 23 costs, and the model woulddetermine both the price and 24 the quantity. 25 Now, it'spossible to go back anduse the EXECUTIVE COURT REPORTERS, INC. (301) 565-006495

1 same economics and derive what those -- what economics 2 say the prices and quantities might be, and to use 3 those as one input to the spread sheet. 4 What we've done, though, is allow now for 5 other forecasts to be integrated in the analysis. 6 MR. ARNOLD: Questions? 7 (No response) 8 MR. ARNOLD: The next line item being unit 9 sales, which again starts with the base case 10 assumption, 5.61 million in 1998, and then begins 11 inflating not in accordance with the inflation rate 12 but, rather, in this unit -- unit growth rate, which is 13 also expressed as an assumption. 14 Simple multiply the two up to provide total 15 revenues. The cost of sales looks back also to the 16 assumptions page, multiplying unit sales in any given 17 year by the per-unit charges, either for labor or 18 material or overhead, although you'll notice in this 19 analysis that we actually go so far as to break down 20 overhead into both the fixed and variable component in 21 accordance with the percentages established on the 22 assumptions page. So, you can cull that out 23 separately. 24 The fixed portion of overhead, for example, 25 you'll see starting at 60 percent of the total for the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 95 1 same economics and derive what those -- what economics 2 say the prices and quantities might be, and touse 3 those as one input to the spread sheet. 4 What we've done, though, is allownow for 5 other forecasts tobe integrated in the analysis. 6 MR. ARNOLD: Questions? 7 (No response) 8 MR. ARNOLD: The next line itembeingunit 9 sales, which again starts withthe base case 10 assumption, 5.61 million in 1998, and thenbegins 11 inflatingnot in accordance with the inflationrate 12 but, rather, in this unit -- unit growth rate, which is 13 also expressed as an assumption. 14 Simple mUltiply the two up toprovide total 15 revenues. The cost of sales looks back also to the 16 assumptions page, mUltiplyingunit sales in anygiven 17 yearbythe per-unit charges, either for labor or 18 material or overhead, althoughyou'll notice in this 19 analysis that we actuallygo so far as tobreakdown 20 overhead intoboth the fixed andvariable component in 21 accordance with thepercentages establishedon the 22 assumptions page. So, you can cull that out 23 separately. 24 The fixedportionof overhead, for example, 25 you'll see starting at 60 percent of the total for the EXECUTIVE COURT REPORTERS, INC. (301) 565-006496

1 year, but it, too, inflates in accordance with the rate 2 established in the model. 3 Lastly, under cost of sales, depreciation. 4 This number 36 million is derived from the depreciation 5 as a percentage of revenues on the assumptions page. 6 It, unlike most other elements of the model does -- 7 does not inflate on the assumption that it's just 8 simply a recurring charge. 9 Moving down to SG&A expenses, we have the 10 standard component, which comes straight from the 11 assumption page and then inflates. We have research 12 and development, which maintains relationship as two 13 percent of revenues. 14 Product conversion expenses, a line item 15 which is not used in the base case, you'll see it 16 taking effect in the standard case, and then from 17 there, just some very simple computation of net income, 18 profit before tax equals revenues minus expenses. We 19 apply 46-percent tax rate to come to net income before 20 financing. 21 Having completed the income statement 22 portion, the analysis moves to cash flow, which takes 23 the net income derived above, and then, first of all, 24 adds back non-cash items that were reflected in income, 25 namely depreciation, takes into account any sort of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 96 1 year, but it, too, inflates in accordance with the rate 2 established inthe model. 3 Lastly, under cost of sales, depreciation. 4 This number 36 million is derived from the depreciation 5 as a percentage of revenues onthe assumptions page. 6 It, unlike most other elements of the model does

-- 7 does not inflate on the assumption that it'sjust 8 simply a recurring charge. 9 Moving down to SG&A expenses, we have the 10 standard component, which comes straight from the 11 assumptionpage and then inflates. We have research 12 and development, whichmaintains relationship as two 13 percent of revenues. 14 Product conversionexpenses, a line item 15 which is not used in the base case, you'll see it 16 taking effect in the standard case, and then from 17 there, just some very simple computationof net income, 18 profit before tax equals revenues minus expenses. We 19 apply46-percent taxrate to come to net income before 20 financing. 21 Having completed the income statement 22 portion, the analysis moves to cash flow, which takes 23 the net income derived above, and then, first of all, 24 adds backnon-cash items that were reflected in income, 25 namely depreciation, takes into account any sort of EXECUTIVE COURT REPORTERS, INC. (301) 565-006497

1 changes in working capital, which are again purely a 2 function of the -- the changes in revenues. 3 Working capital, you'll recall from the 4 assumptions page, was fixed at 18 percent of revenues. 5 This provides indication of cash flow from 6 operations, the sum total of the above. 7 Next, for the purposes of cash used in 8 investments, there are two points of consideration in 9 this model, both of which are capital-related.10 Ordinary capital expenditures is just the expected on11 going run rate in the as-is scenario, assuming no 12 additional investment for -- for conformity to the 13 regulations. This, too, was expressed as a percentage 14 of revenues on the assumptions page. Four percent, I 15 believe it was. 16 The sum total and cash flow from operations 17 with cash used in investments. We get net cash flow 18 for any given year. 19 I'll come back to the terminal value line as 20 we move out to the far right, but all that's necessary 21 to perform a discounted cash flow analysis now that we 22 have the cash flows in hand is to simply apply a 23 present value effect factors which state the cash flows 24 of any given year in -- in present terms. So, notice 25 we begin with -- with non-discounting in the base year, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 97 1 changes inworking capital, which are againpurelya 2 function of the

-- the changes inrevenues. 3 Working capital, you'll recall from the 4 assumptions page, was fixed at 18 percent of revenues. 5 This provides indicationof cash flow from 6 operations, the sumtotal of the above. 7 Next, for the purposes of cashused in 8 investments, there are two points of consideration in 9 this model, bothof which are capital-related. 10 Ordinary capital expenditures isjust the expectedon11 going run rate inthe as-is scenario, assuming no 12 additional investment for

-- for conformityto the 13 regulations. This, too, was expressed as a percentage 14 of revenues on the assumptions page. Fourpercent, I 15 believe it was. 16 The sumtotal and cash flow from operations 17 with cashused in investments. We get net cash flow 18 for anygivenyear. 19 I'll come backto the terminal value line as 20 we move out to the far right, but all that's necessary 21 to performa discounted cash flow analysis now that we 22 have the cash flows inhand is to simply apply a 23 present value effect factors which state the cash flows 24 of anygivenyear in

-- inpresent terms. So, notice 25 we beginwith

-- withnon-discounting inthe base year, EXECUTIVE COURT REPORTERS, INC. (301) 565-006498

1 and then with the application of this 12-percent rate, 2 the effective factor lowers over time. 3 In Year 2012, Year 15 of the analysis, you'll 4 notice the reflection of a terminal value, which 5 conceptually represents the value of -- of all of the 6 cash flows going out into the -- into perpetuity, and 7 this again is based upon the perpetuity formula of 8 final year cash flows divided by the discount rate. 9 Sum total -- 10 MR. BROOKMAN: Questions? 11 MR. MORRIS: Wayne Morris, AHAM. 12 Just a question on that. So, the discounted 13 cash flow shown in the Year 2012 is essentially the 14 terminal value discounted by the present value factor 15 to give you that essentially cumulative discounted cash 16 flow, is that right? 17 MR. ARNOLD: It's cumulative discounted cash 18 flow, but it's -- but it's looking forward. It's -- 19 it's standing in the Year 2012 looking out into -- into 20 infinity. So, it provides -- the $965,000 is -- is 21 what the value of the future cash flows will be in -- 22 in 2012, and then this present value factor is -- is 23 applied to bring that back to 1998. 24 So, then sum totaling up all of the 25 discounted cash flows, including -- including terminal EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 98 1 and thenwith the application of this 12-percent rate, 2 the effective factor lowers over time. 3 InYear 2012, Year 15 of the analysis, you'll 4 notice the reflection of a terminal value, which 5 conceptuallyrepresents the value of

-- of all of the 6 cash flows going out into the

-- intoperpetuity, and 7 this again isbasedupon theperpetuityformula of 8 final year cash flows dividedbythe discount rate. 9 Sum total

-- 10 MR. BROOKMAN: Questions? 11 MR. MORRIS: Wayne Morris, AHAM. 12 Just a question on that. So, the discounted 13 cash flow shown inthe Year 2012 is essentiallythe 14 terminal value discountedbythepresent value factor 15 to give you that essentiallycumulative discounted cash 16 flow, is that right? 17 MR. ARNOLD: It's cumulative discounted cash 18 flow, but it's

-- but it's looking forward. It's 19 it's standing in the Year 2012 looking out into

-- into 20 infinity. So, itprovides

-- the $965,000 is

-- is 21 what the value of the future cash flows will be in

-- 22 in 2012, and then this present value factor is

-- is 23 applied to bring that back to 1998. 24 So, then sumtotalingup all of the 25 discounted cash flows, including

-- including terminal EXECUTIVE COURT REPORTERS, INC. (301) 565-006499

1 value, we're able to derive a conceptual industry value 2 or net present value of $425 million. So, that will be 3 a reference point for the base case. 4 Moving now to the standard case, I won't go 5 through each individual line item. We'll -- and if 6 they do remain consistent one scenario to the next, but 7 we'll highlight items that change as a part of the 8 standards. 9 In general, they're concentrated in -- in 10 three areas. First of all, cost of sales, you'll 11 notice remaining essentially mirror image as compared 12 to base case, until we get to the announcement year, 13 wherein the incremental effects that were indicated in 14 the assumptions page take effect. 15 So, you'll see that change for labor, 16 materials, and in this model, the overhead differential 17 is -- is assumed to be only affecting variable overhead 18 costs as opposed to fixed -- to fixed costs. This 19 might also -- this is the logic that was used in the 20 original GRIM. It's also a topic that's -- that could 21 be a point of discussion for future versions. 22 Depreciation, you'll also notice increasing 23 dramatically in the standard year. This is purely a 24 function of -- of taking our -- our base depreciation 25 coming in, but suddenly in the standard year, all of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 99 1 value, we're able to derive a conceptual industryvalue 2 or net present value of $425 million. So, that will be 3 a reference point for the base case. 4 Moving now to the standard case, I won't go 5 through each individual line item. We'll and if 6 theydo remain consistent one scenario to the next, but 7 we'll highlight items that change as a part of the 8 standards. 9 Ingeneral, they're concentrated in in 10 three areas. First of all, cost of sales, you'll 11 notice remaining essentiallymirror image as compared 12 to base case, until we get to the announcement year, 13 wherein the incremental effects that were indicated in 14 the assumptions page take effect. 15 So, you'll see that change for labor, 16 materials, and in this model, the overhead differential 17 is -- is assumed tobe only affectingvariable overhead 18 costs as opposedto fixed -- to fixed costs. This 19 might also -- this is the logic that was used in the 20 original GRIM. It's also a topic that's -- that could 21 be a point of discussion for future versions. 22 Depreciation, you'll also notice increasing 23 dramatically in the standardyear. This is purelya 24 function of -- of taking our -- ourbase depreciation 25 coming in, but suddenly in the standardyear, all of EXECUTIVE COURT REPORTERS, INC. (301) 565-0064100 1 the capital expenditures that were involved as part of 2 the conversion will suddenly become assets of record 3 appreciable, and there is a reflection in this case of 4 an almost doubling of the depreciation. 5 MR. BROOKMAN: Yes? Mark Perlis. Why do you 6 assume that the depreciation doesn't take place until 7 the -- 8 MR. PERLIS: Until the standard takes effect? 9 MR. BROOKMAN: Yes. 10 MR. ARNOLD: The reason being -- and this is 11 more in conformity with generally accepted accounting 12 principles. The assumption is that these conversion 13 expenditures are -- are being built as -- as a capital 14 project in process that does not become used until the 15 regulations take effect. 16 So, although the cash outflow is occurring 17 for some several years prior to the point of 18 initiation, the assumption is that the assets are not 19 placed in service until the standard is -- becomes 20 effective. 21 MR. BROOKMAN: Quick question here, and 22 then -- 23 MR. WADE: Steve Wade, EIA. 24 Is that standard accounting principles? I'm 25 not familiar with those, but -- EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 100 1 the capital expenditures that were involved as part of 2 the conversionwill suddenlybecome assets of record 3 appreciable, and there is a reflection in this case of 4 an almost doubling of the depreciation. 5 MR. BROOKMAN: Yes? Mark Perlis. Why do you 6 assume that the depreciation doesn't take place until 7 the

-- 8 MR. PERLIS: Until the standard takes effect? 9 MR. BROOKMAN: Yes. 10 MR. ARNOLD: The reasonbeing

-- and this is 11 more in conformitywithgenerally accepted accounting 12 principles. The assumption is that these conversion 13 expenditures are -- are beingbuilt as -- as a capital 14 project inprocess that does not become useduntil the 15 regulations take effect. 16 So, although the cash outflow is occurring 17 for some several years prior to the point of 18 initiation, the assumption is that the assets are not 19 placed in serviceuntil the standard is

-- becomes 20 effective. 21 MR. BROOKMAN: Quickquestionhere, and 22 then

-- 23 MR. WADE: SteveWade, EIA. 24 Is that standard accountingprinciples? I'm 25 not familiar with those, but

-- EXECUTIVE COURT REPORTERS, INC. (301) 565-0064101

1 MR. ARNOLD: Yes, it's very similar to 2 construction process. 3 MR. WADE: I know they do that. It's 4 regulatory -- regulated utilities, you know, have that 5 type of -- 6 MR. RIVEST: Dave, if I remember from my 7 accounting course, it's called the matching principle, 8 match expense with revenue. 9 MR. BROOKMAN: Charlie? Can we hand this 10 over? 11 MR. STEPHENS: Charlie Stephens, Oregon 12 Energy Office. 13 Does that mean that if you were to run a case 14 where you had a -- sort of a diversified industry 15 situation facing a standard where you had one company 16 that was already -- had already had production in 17 process producing the equipment that would meet the 18 standard five years or three years or whatever before 19 the standard took effect, that that would be included 20 in the base case for that company and then any 21 incremental production that was required after the 22 standard took effect would be what would be included in 23 your analysis of the standard, quote unquote? 24 MR. ARNOLD: For the purposes of -- of the 25 GRIM, which again is in many ways a simplification of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 101 1 MR. ARNOLD: Yes, it'svery similar to 2 constructionprocess. 3 MR. WADE: I know they do that. It's 4 regulatory regulatedutilities, you know, have that 5 type of 6 MR. RIVEST: Dave, if I remember frommy 7 accounting course, it's calledthe matchingprinciple, 8 match expense withrevenue. 9 MR. BROOKMAN: Charlie? Canwe hand this 10 over? 11 MR. STEPHENS: Charlie Stephens, Oregon 12 EnergyOffice. 13 Does that mean that if you were to run a case 14 where youhad a -- sort of a diversified industry 15 situation facing a standardwhere youhad one company 16 that was already

-- had alreadyhadproduction in 17 process producing the equipment that wouldmeet the 18 standard five years or three years orwhateverbefore 19 the standard took effect, that that wouldbe included 20 in the base case for that company and then any 21 incremental productionthat was required after the 22 standard took effect wouldbe what wouldbe included in 23 your analysis of the standard, quote unquote? 24 MR. ARNOLD: For the purposes of

-- of the 25 GRIM, which again is inmanyways a simplificationof EXECUTIVE COURT REPORTERS, INC. (301) 565-0064102 1 the overall dynamics here, the assumption would be that 2 that one -- that one instance where you had a company 3 that was already in conformity, there's -- there's no 4 specific accommodation for certain elements of them 5 being ahead of -- ahead of the game as opposed to the 6 remainder of the industry. 7 The assumption here is that everyone -- 8 everyone changes at once. 9 MR. RIVEST: My understanding is -- 10 MR. STEPHENS: Yeah. I was just going to 11 say, we're going to need to -- to fix that if that is 12 -- or -- or do the analysis in a way, I think, that can 13 account for that. 14 MR. BROOKMAN: Wait a second, everyone. Let 15 me capture -- let me have the mike back. We want this 16 on the record. This is useful. This is what we're 17 here for. Can I have that, please? You also had a 18 question, did you? Yeah. Okay. Come to the dais. 19 Everett Shorey. 20 MR. SHOREY: Hi. I'm Everett Shorey. 21 I probably have the dubious distinction of 22 being the original author of the GRIM. So, the -- the 23 GRIM analyzes, and David's right, it treats as a 24 unified group everybody that we're analyzing, but we 25 can analyze any subsegment that we want to. So, for EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 102 1 the overall dynamics here l the assumptionwouldbe that 2 that one that one instance where youhad a company 3 that was already in conformitYI there's -- there's no 4 specific accommodation for certain elements of them 5 being ahead of -- ahead of the game as opposed to the 6 remainder of the industry. 7 The assumptionhere is that everyone -- 8 everyone changes at once. 9 MR. RIVEST: My understanding is 10 MR. STEPHENS: Yeah. I was just going to 11 saYI we're going to need to to fix that if that is 12 -- or -- ordo the analysis in a waYI I thinkl that can 13 account for that. 14 MR. BROOKMAN: Wait a secondl everyone. Let 15 me capture -- let me have the mike back. We want this 16 on the record. This is useful. This is what we're 17 here for. Can I have that l please? You also had a 18 questionl didyou? Yeah. Okay. Come to the dais. 19 Everett Shorey. 20 MR. SHOREY: Hi. I'mEverett Shorey. 21 I probablyhave the dubious distinctionof 22 being the original author of the GRIM. SOl the -- the 23 GRIM analyzesI andDavid's rightI it treats as a 24 unifiedgroup everybodythat we're analyzingl but we 25 can analyze any subsegment that we want to. SOl for EXECUTIVE COURT REPORTERS, INC. (301) 565-0064103

1 the purposes of an industry where some people are in 2 compliance and some people aren't or some people are 3 large companies and some people are small or any set of 4 -- of subsegments, you can run a GRIM analysis for that 5 subsegment. 6 So, if you have people who aren't in -- who 7 are already in compliance, then all of those costs are 8 already in the base case and won't come -- and -- and 9 don't show up as incremental costs. 10 If you have people with very different cost 11 situations, I think part of -- part of what DOE is --12 is -- is talking about by looking at different sub13 groups is trying in fact to capture those differences, 14 and you can use the GRIM as a calculator. It really is 15 nothing more than a calculator to capture those 16 different situations. 17 But David's right. For whatever group -- set 18 of -- set of people you're analyzing, they're all 19 treated as -- as one, but you can analyze any -- any 20 subsegment you want to. 21 MR. BROOKMAN: I believe this gentleman here. 22 Did you also have a question or comment? 23 MR. FLORA: Yes. Brad Flora, Whirlpool. 24 The only point I would make is in our 25 experience, I think we've got four or five year lead EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 103 1 the purposes of an industrywhere some people are in 2 compliance and somepeople aren't or some people are 3 large companies and some people are small or any set of 4

-- of subsegments, you canrun a GRIM analysis for that 5 subsegment. 6 So, if youhave people who aren't in

-- who 7 are already in compliance, then all of those costs are 8 already in the base case andwon't come -- and

-- and 9 don't showup as incremental costs. 10 If youhave people withvery different cost 11 situations, I thinkpart of

-- part of what DOE is

-- 12 is

-- is talking about by looking at different sub13 groups is trying in fact to capture those differences, 14 andyou canuse the GRIM as a calculator. It really is 15 nothingmore than a calculator to capture those 16 different situations. 17 But David's right. Forwhatever group -- set 18 of

-- set of people you're analyzing, they're all 19 treated as -- as one, but you can analyze any -- any 20 subsegment youwant to. 21 MR. BROOKMAN: I believe this gentlemanhere. 22 Didyou also have a question or comment? 23 MR. FLORA: Yes. BradFlora, Whirlpool. 24 The onlypoint I wouldmake is inour 25 experience, I thinkwe've got four or five year lead EXECUTIVE COURT REPORTERS, INC. (301) 565-0064104

1 time built into your model example, and we see more 2 like two or three. That's the only -- I mean it's just 3 a minor thing, I think. 4 MR. BROOKMAN: Additional questions or 5 comments? I thought I saw one more. 6 (No response) 7 MR. BROOKMAN: No? Okay. 8 MR. ARNOLD: Moving into the SG&A category, 9 again on the standard case, no changes for standard 10 SG&A. No changes for research and development, but 11 here you begin to see the effect of product conversion 12 expenses, and again these are those expenses which 13 would not be capitalizable by any sort of -- I guess 14 more commonly referred to as design and marketing-type 15 expenses as prime examples. 16 What you see happening here is with respect 17 to the dollar amount that was input originally back on 18 the assumptions page at $300,000 -- $300 million in 19 assumed total design and marketing expenses. 20 On this line, the -- the model spreads these 21 expenses in the years between year of announcement and 22 year of -- of standard, and this again is referring to 23 a table that maps out general experiences with 24 regulatory implementation over various time frames. 25 But over the course of this five-year period, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 104 1 time built into yourmodel example, andwe seemore 2 like two or three. That's the only

-- I mean it'sjust 3 a minor thing, I think. 4 MR. BROOKMAN: Additional questions or 5 comments? I thought I saw one more. 6 (No response) 7 MR. BROOKMAN: No? Okay. 8 MR. ARNOLD: Moving into the SG&A category, 9 again onthe standard case, no changes for standard 10 SG&A. No changes for research and development, but 11 here youbegin to see the effect of product conversion 12 expenses, and again these are those expenses which 13 would not be capitalizableby any sort of

-- I guess 14 more commonlyreferred to as design andmarketing-type 15 expenses as prime examples. 16 What you see happeninghere is with respect 17 to the dollar amount that was input originallybackon 18 the assumptions page at $300,000

-- $300 million in 19 assumed total design andmarketing expenses. 20 On this line, the

-- the model spreads these 21 expenses in the years betweenyear of announcement and 22 year of

-- of standard, and this again is referring to 23 a table that maps out general experiences with 24 regulatory implementationovervarious time frames. 25 But over the course of this five-yearperiod, EXECUTIVE COURT REPORTERS, INC. (301) 565-0064105

1 I believe you should see the entire $300 million 2 reflected. 3 Formulas, of course, remain the same for 4 profit, taxes, net income. 5 Moving down to cash flow, the formulas also 6 remain intact. The only change as you see here is 7 again the offset, the add-back increases in association 8 with the increase in depreciation we saw above. 9 The capital expenditures line. First of all, 10 on the conversion side, you'll see a representation of 11 the $500 million that was assumed as total 12 capitalizable cost. That, too, is spread over the time 13 frame between announcement and implementation of the 14 standard. 15 And the only other change that occurs with 16 respect to capital expenditures is that there is an 17 assumption made that in the year that the standard is 18 implemented, you will -- by virtue of the fact that you 19 now have a significant increase in your total capital 20 basis by having implemented this regulation, that you 21 will begin replenishing it at a much higher rate than 22 would have been the case with -- in the absence of the 23 standard. 24 The differential between the 44 million 25 coming in and the 78 million that's reflected in the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 105 1 I believeyou should see the entire $300 million 2 reflected. 3 Formulas, of course, remain the same for 4 profit, taxes, net income. 5 Moving down to cash flow, the formulas also 6 remain intact. The onlychange as you see here is 7 again the offset, the add-back increases in association 8 with the increase indepreciationwe saw above. 9 The capital expenditures line. First of all, 10 on the conversion side, you'll see a representation of 11 the $500 million that was assumed as total 12 capitalizable cost. That, too, is spreadover the time 13 frame between announcement and implementation of the 14 standard. 15 And the onlyother change that occurs with 16 respect to capital expenditures is that there is an 17 assumptionmade that inthe year that the standard is 18 implemented, you will

-- byvirtue of the fact that you 19 now have a significant increase inyour total capital 20 basis byhaving implemented this regulation, that you 21 will beginreplenishing it at a muchhigher rate than 22 wouldhave been the case with

-- in the absence of the 23 standard. 24 The differential between the 44 million 25 coming in and the 78 millionthat's reflected inthe EXECUTIVE COURT REPORTERS, INC. (301) 565-0064106

1 standard here. That essentially provides for a 2 replenishment of the capital associated with conversion 3 over a 15-year time frame. 4 Otherwise, all computations remain the same, 5 and we now see what we don't see. The new net present 6 value. We locked down the spread sheet? Oh. Backed 7 it down to 100 percent. There we are. Minus one 8 million -- one billion, 95 million. 9 So, essentially, by -- by virtue of 10 implementing the standards, we have experienced in 11 financial terms a degradation in our net present value 12 from positive 425 million in the base case to negative 13 one billion with standard. So, that is how the output 14 is to be interpreted. 15 MR. BROOKMAN: Question? 16 MR. PERLIS: I have one more question. Mark 17 Perlis. 18 The terminal value is supposed to be a 19 perpetuity calculation from 2012 values on out. The 20 2012 values reflect the amortization of the conversion 21 capital expenditures. 22 Are you assuming that those conversion 23 capital expenditures continue on into perpetuity or is 24 there some incremental capital expenditure increase 25 that ought to be reflected in terminal value? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 106 1 standardhere. That essentiallyprovides for a 2 replenishment of the capital associatedwith conversion 3 over a 15-yeartime frame. 4 Otherwiset all computations remain the samet 5 andwe now see what we don't see. The newnet present 6 value. We lockeddown the spread sheet? Oh. Backed 7 it down to 100 percent. There we are. Minus one 8 million one billiont 95 million. 9 SOt essentiallYt by

-- byvirtue of 10 implementing the standardst we have experienced in 11 financial terms a degradation inournet present value 12 frompositive 425 million inthe base case to negative 13 one billionwith standard. SOt that is how the output 14 is tobe interpreted. 15 MR. BROOKMAN: Question? 16 MR. PERLIS: I have one more question. Mark 17 Perlis. 18 The terminal value is supposed to be a 19 perpetuitycalculation from 2012 values on out. The 20 2012 values reflect the amortization of the conversion 21 capital expenditures. 22 Are you assuming that those conversion 23 capital expenditures continue on intoperpetuityor is 24 there some incremental capital expenditure increase 25 that ought tobe reflected in terminal value? EXECUTIVE COURT REPORTERS, INC. (301) 565-0064107 1 MR. ARNOLD: The assumption is that going out 2 into the future, you will continue -- you will be 3 incurring capital expenditures in association with your 4 new and enhanced capital base by virtue of having 5 implemented the regulation. 6 So, in other words, $78 million that you see 7 reflected above the terminal value, that is -- that is 8 the assumption for on-going capital replenishment 9 that's built in to the terminal value that's reflected. 10 MR. PERLIS: Let me just follow up. So, I 11 interpret that as saying that there is going to be a 12 continued higher level of capital expenditure required 13 in the standards than in the base case in perpetuity, 14 not just a one-time amortized conversion effect but a 15 permanent capital effect. 16 MR. ARNOLD: Yes, by virtue of -- of -- 17 MR. PERLIS: Now, is that -- is that 18 permanent capital effect equal to the conversion cost, 19 which is what it appears in this example, or shouldn't 20 it be something that stands by itself as a permanent 21 capital conversion cost? 22 MR. ARNOLD: The assumption for -- that's 23 reflected here is that beginning in the year of 24 standard, you suddenly find yourself in a -- in a new 25 environment with respect to the total capital EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 107 1 MR. ARNOLD: The assumption is that going out 2 into the future, youwill continue

-- you will be 3 incurring capital expenditures in association withyour 4 new and enhanced capital base byvirtue of having 5 implemented the regulation. 6 So, inotherwords, $78 million that you see 7 reflected above the terminal value, that is

-- that is 8 the assumption for on-going capital replenishment 9 that's built in to the terminal value that's reflected. 10 MR. PERLIS: Let me just follow up. So, I 11 interpret that as saying that there is going tobe a 12 continuedhigher level of capital expenditure required 13 in the standards than in the base case inperpetuity, 14 not just a one-time amortized conversion effect but a 15 permanent capital effect. 16 MR. ARNOLD: Yes, byvirtue of

-- of 17 MR. PERLIS: Now, is that

-- is that 18 permanent capital effect equal to the conversion cost, 19 which is what it appears inthis example, or shouldn't 20 it be something that standsby itself as a permanent 21 capital conversion cost? 22 MR. ARNOLD: The assumption for

-- that's 23 reflectedhere is that beginning in the year of 24 standard, you suddenly find yourself in a -- in a new 25 environment with respect to the total capital EXECUTIVE COURT REPORTERS, INC. (301) 565-0064108

1 investment that is required as part of the business, 2 and that that -- that continues on in to perpetuity. 3 MR. BROOKMAN: We have several perhaps 4 follow-on comments, and then, Glenn, is yours a related 5 question or is it a different question? 6 MR. SCHLEEDE: Glenn Schleede. 7 Does this basically assume that the standards 8 remain constant for the next 15 years or what happens 9 if the standards change five years out? 10 MR. ARNOLD: The -- the assumption in -- in 11 GRIM is that once the standards take effect, they 12 remain in effect. So, no incremental change in 13 standard or new standards. 14 If -- if there were to be a need to consider, 15 for example, the effects of multiple regulations or 16 multiple changes over time, then that is something that 17 could be best served by using the multiple GRIMs and 18 sum totaling up the results. 19 MR. FOLEY: I'm still a little confused. I'm 20 sorry. Gene Foley, Alliance to Save Energy. 21 On the assumption where it goes from the 44.9 22 million to the 78.2 million, why that in fact would be 23 in perpetuity. Can you elaborate that just a little 24 bit more? 25 The logic would be that it wouldn't -- it EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 108 1 investment that is required as part of the business, 2 and that that

-- that continues on in to perpetuity. 3 MR. BROOKMAN: We have several perhaps 4 follow-on comments, and then, Glenn, is yours a related 5 question or is it a different question? 6 MR. SCHLEEDE: Glenn Schleede. 7 Does this basicallyassume that the standards 8 remain constant for the next 15 years orwhat happens 9 if the standards change five years out? 10 MR. ARNOLD: The

-- the assumption in in 11 GRIM is that once the standards take effect, they 12 remain in effect. So, no incremental change in 13 standardornew standards. 14 If if there were tobe a need to consider, 15 for example, the effects of multiple regulations or 16 mUltiple changes over time, then that is something that 17 couldbe best servedbyusing the multiple GRIMs and 18 sumtotalingup the results. 19 MR. FOLEY: I'm still a little confused. I'm 20 sorry. Gene Foley, Alliance to Save Energy. 21 On the assumptionwhere it goes from the 44.9 22 million to the 78.2 million, why that in fact wouldbe 23 inperpetuity. Canyou elaborate that just a little 24 bit more? 25 The logic wouldbe that it wouldn't

-- it EXECUTIVE COURT REPORTERS, INC. (301) 565-0064109

1 would go up and then would come back down again, at 2 least from my perspective. 3 MR. ARNOLD: Again, what's driving the up 4 tick that you see there in capital expenditures is the 5 fundamental assumption that in the year the standard is 6 implemented, you do, of course, have this increase in 7 -- in cash flow to conversion expenditures that appears 8 in four to five years preceding that, but once that 9 standard is -- is implemented, the assumption is that 10 you have a -- an increase, a permanent increase in the 11 amount of fixed assets that are associated with the 12 industry going forward, and hence the increase in level 13 of capital expenditures required to simply -- 14 MR. FOLEY: I'm sorry. As opposed to just a 15 change in the manufacturing practices? So, the base 16 case assumption is you have to make everything in the 17 plant more expensive and replacing everything will 18 continue to be more expensive as opposed to just 19 changing what you've got? 20 MR. ARNOLD: The assumption here is that 21 there's -- that it's not just merely a one-time effect 22 of -- of new capital, but, rather, that once that new 23 capital is employed, it remains as an incremental part 24 of the business in to perpetuity. 25 MR. FOLEY: Can we get a little specific on EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 109 1 would go up and thenwould come backdown again, at 2 least frommy perspective. 3 MR. ARNOLD: Again, what's driving the up 4 tick that you see there in capital expenditures is the 5 fundamental assumption that in the year the standard is 6 implemented, you do, of course, have this increase in 7 in cash flow to conversion expenditures that appears 8 in four to five years preceding that, but once that 9 standard is

-- is implemented, the assumption is that 10 you have a -- an increase, a permanent increase in the 11 amount of fixed assets that are associatedwith the 12 industrygoing forward, andhence the increase in level 13 of capital expenditures required to simply

-- 14 MR. FOLEY: I'm sorry. As opposed tojust a 15 change in the manufacturingpractices? So, the base 16 case assumption is youhave tomake everything inthe 17 plant more expensive and replacing everything will 18 continue tobemore expensive as opposed tojust 19 changingwhat you've got? 20 MR. ARNOLD: The assumptionhere is that 21 there's

-- that it's not justmerely a one-time effect 22 of

-- of new capital, but, rather, that once that new 23 capital is employed, it remains as an incremental part 24 of the business in toperpetuity. 25 MR. FOLEY: Canwe get a little specific on EXECUTIVE COURT REPORTERS, INC. (301) 565-0064110

1 this in questioning that? I mean the capital 2 expenditure is to change making an F-40 Cool White to 3 an F-40 Super Saver, you make the change, but basically 4 everything else stays relatively the same. It's not 5 any more expensive in perpetuity to make the lamp after 6 you make that one-time change. 7 MR. BROOKMAN: Follow-on comment, and then 8 over to Charlie. 9 MR. SHOREY: For the purposes of -- of this 10 morning, it's probably useful to separate a discussion 11 of how does the model work from the numbers that David 12 has plugged in there because there, I think they're 13 there as an example of how the analysis works, and it's 14 exactly those kinds of questions of what is in fact a 15 right number that is at the heart of much of the rest 16 of the process, and in some circumstances, you will 17 perhaps see large capital investments, in some 18 circumstances you won't. 19 The purpose of the model is to be able to 20 understand the effects. So, -- so, I think that there 21 really -- you know, this page is some data that came 22 from -- from some earlier analyses, but its principal 23 purpose today is to show how the thing works rather 24 than to say it is a -- it is a regulatory analysis. 25 MR. BROOKMAN: It's good to note the issues EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 110 1 this inquestioning that? I mean the capital 2 expenditure is to changemaking an F-40 Cool White to 3 an F-40 Super Saver, youmake the change, but basically 4 everything else stays relativelythe same. It's not 5 anymore expensive inperpetuityto make the lamp after 6 youmake that one-time change. 7 MR. BROOKMAN: Follow-on comment, and then 8 over to Charlie. 9 MR. SHOREY: For thepurposes of

-- of this 10 morning, it'sprobablyuseful to separate a discussion 11 of how does the model work from the numbers that David 12 has plugged in there because there, I thinkthey're 13 there as an example of how the analysis works, and it's 14 exactlythose kinds of questions of what is in fact a 15 right number that is at the heart of much of the rest 16 of the process, and in some circumstances, youwill 17 perhaps see large capital investments, in some 18 circumstances youwon't. 19 The purpose of the model is to be able to 20 understandthe effects. So,

-- so, I thinkthat there 21 really

-- you know, this page is some data that came 22 from

-- from some earlier analyses, but its principal 23 purpose today is to showhow the thing works rather 24 than to say it is a -- it is a regulatory analysis. 25 MR. BROOKMAN: It's good to note the issues EXECUTIVE COURT REPORTERS, INC. (301) 565-0064111

1 like this that are important, and Jim Raba here in the 2 front of the room is capturing these questions as we go 3 along. 4 Can you hand this over to Charlie, please? 5 MR. STEPHENS: Charlie Stephens, Oregon 6 Energy office again. 7 I guess my question is about how it works, 8 and -- and what that value is being calculated on. 9 That sort of implies that all of your capital 10 investments in a corporate enterprise maintain their 11 value and ever-increasing value forever. 12 Shouldn't that be -- shouldn't that be 13 calculated on the basis of the depreciated base? I 14 mean otherwise, you know, over 50 years, your company 15 could come to have what would be considered infinite 16 capital assets at the time you put money in. 17 It seems like for tax purposes, for 18 accounting purposes, that base is being depreciated, 19 and that's the base upon which you determine your -- 20 your new capital requirements

. Is that -- am I off 21 base here?
22 MR. ARNOLD: Not at all
. I mean it is -- it 23 is very important to maintain synchronization in the 24 model between what we're showing as capital 25 expenditures on an on-going basis and what we're EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 111 1 like this that are important, andJimRaba here inthe 2 front of the room is capturing these questions as we go 3 along. 4 Canyou hand this over to Charlie, please? 5 MR. STEPHENS: Charlie Stephens, Oregon 6 EnergyOffice again. 7 I guess my question is about how it works, 8 and

-- andwhat that value is being calculatedon. 9 That sort of implies that all of your capital 10 investments in a corporate enterprisemaintain their 11 value and ever-increasingvalue forever. 12 Shouldn't that be

-- shouldn't that be 13 calculatedon the basis of the depreciatedbase? I 14 mean otherwise, you know, over 50 years, your company 15 could come to have what wouldbe considered infinite 16 capital assets at the time youput money in. 17 It seems like for taxpurposes, for 18 accountingpurposes, that base is beingdepreciated, 19 and that's the base uponwhichyou determine your -- 20 your new capital requirements. Is that

-- am I off 21 base here? 22 MR. ARNOLD: Not at all. I mean it is

-- it 23 is very important to maintain synchronization in the 24 model betweenwhat we're showing as capital 25 expenditures on an on-goingbasis andwhat we're EXECUTIVE COURT REPORTERS, INC. (301) 565-0064112

1 showing as depreciation. 2 So, you'll notice that -- that, for example, 3 here, the assumption is that our capital expenditures 4 on an on-going basis increase dramatically in standard 5 year and beyond. 6 You'll also notice an offsetting effect in 7 depreciation. 8 MR. BROOKMAN: It's an equivalent offset? 9 MR. STEPHENS: It's the constant value. 10 MR. ARNOLD: On both the depreciation side 11 and the -- and the capitalization side? 12 MR. BROOKMAN: We can get into the nuance of 13 this right at the point of further analysis, but we're 14 trying to understand what's -- what collectively -- 15 we're trying to understand what is actually happening 16 with these different lines. 17 So, we understand at least now, irrespective 18 of whether we like the quantities or not. 19 Yes? 20 MR. FOLEY: The line and how -- what -- how 21 does this -- 22 MR. BROOKMAN: Gene, have we captured it? We 23 captured the key concern? 24 Mark? 25 MR. PERLIS: This isn't about numbers. It is EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 112 1 showing as depreciation. 2 So, you'll notice that

-- that, for example, 3 here, the assumption is that our capital expenditures 4 on an on-goingbasis increase dramatically in standard 5 year andbeyond. 6 You'll also notice an offsetting effect in 7 depreciation. 8 MR. BROOKMAN: It's an equivalent offset? 9 MR. STEPHENS: It's the constant value. 10 MR. ARNOLD: On boththe depreciation side 11 and the

-- and the capitalization side? 12 MR. BROOKMAN: We canget into the nuance of 13 this right at the point of further analysis, but we're 14 trying tounderstandwhat's

-- what collectively 15 we're trying to understandwhat is actuallyhappening 16 with these different lines. 17 So, we understand at least now, irrespective 18 of whetherwe like the quantities ornot. 19 Yes? 20 MR. FOLEY: The line andhow

-- what

-- how 21 does this 22 MR. BROOKMAN: Gene, have we captured it? We 23 captured the key concern? 24 Mark? 25 MR. PERLIS: This isn't about numbers. It is EXECUTIVE COURT REPORTERS, INC. (301) 565-0064113

1 about concepts. Perhaps one way that you might 2 consider, if anyone's going to be considering making 3 modifications to the GRIM, is to make the -- the 4 terminal value -- maybe have another column for 5 terminal value, so that you could have two lines for 6 capital expenditures in perpetuity, and one line would 7 be for -- that would capture the permanent increase in 8 costs, and the other one would weed out those which are 9 one-time increases in capital costs, and different 10 products will be weighted differently within that 11 category. 12 Some will be close to permanent, and others 13 might be more one-time conversion costs and relatively 14 less in terms of -- of -- of permanently increasing 15 their capital costs, and I -- I think it might help if 16 you're going to rely on the concept of terminal value 17 that you separate out the two components of capital 18 cost so that you can make the distinctions between the 19 different product classes right in the model, in the 20 lines of the model. 21 MR. BROOKMAN: Yes? An additional comment. 22 MS. KLUMPP: Liz Klumpp, Washington State. 23 I have one more point of clarification before 24 you move on. When I asked my first question, I thought 25 base case and consequently all the data that we're EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 113 1 about concepts. Perhaps one way that youmight 2 considerr if anyone's going tobe considering making 3 modifications to the GRIMr is tomake the

-- the 4 terminal value

-- maybe have another column for 5 terminal valuer so that you couldhave two lines for 6 capital expenditures inperpetuitYr and one line would 7 be for

-- that would capture thepermanent increase in 8 costsr and the otherone wouldweed out those which are 9 one-time increases incapital costsr and different 10 products will be weighted differentlywithin that 11 category. 12 Some will be close topermanentr and others 13 might be more one-time conversion costs and relatively 14 less in terms of

-- of

-- of permanently increasing 15 their capital costsr and I

-- I think it might help if 16 you're going to relyon the concept of terminal value 17 that you separate out the two components of capital 18 cost so that you canmake the distinctions betweenthe 19 different product classes right in the modelr in the 20 lines of the model. 21 MR. BROOKMAN: Yes? An additional comment. 22 MS. KLUMPP: Liz KlumpPr Washington State. 23 I have onemore point of clarificationbefore 24 youmove on. When I askedmy first questionr I thought 25 base case and consequently all the data that we're EXECUTIVE COURT REPORTERS, INC. (301) 565-0064114

1 looking at was going to be an amalgam of all the 2 manufacturers represented in the marketplace at the 3 point in time you did the analysis, and, so, if -- and 4 the comment was that no, you're really kind of making 5 some generalizations that most of the manufacturers are 6 just starting point, and, so, we'll do the analysis 7 there, and then we'll do a subgroup analysis. 8 My concern is if you had a subgroup analysis, 9 and there was only one manufacturer with a large 10 production in that, would you be able to release that? 11 I mean I thought that was sort of proprietary on an 12 individual manufacturer basis. 13 So, I'm wondering logistically how do you 14 capture the amount, you know, what the net effect is in 15 the market if -- if you can actually do an amalgam in 16 this analysis. 17 Someone over here made it sound like if you 18 had some manufacturers that were in a unique 19 production, perhaps producing products on a different20 efficiency level, that they would have to be in a sub21 group analysis and wouldn't just be doing one that 22 represented manufacturing in the country at that time. 23 So, maybe I don't understand the model. 24 MR. RIVEST: Ideally, you would want to run 25 the GRIM with each manufacturer and understand then EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 114 1 looking at was going tobe an amalgamof all the 2 manufacturers represented in the marketplace at the 3 point in time you did the analysis, and, so, if

-- and 4 the comment was that no, youlre reallykind of making 5 some generalizations that most of the manufacturers are 6 just startingpoint, and, so, weIll do the analysis 7 there, and thenweIll do a subgroup analysis. 8 My concern is ifyouhad a subgroup analysis, 9 and there was onlyone manufacturer with a large 10 production inthat, wouldyoube able to release that? 11 I mean I thought that was sort of proprietary on an 12 individual manufacturerbasis. 13 So, 11mwondering logisticallyhow do you 14 capture the amount, you know, what the net effect is in 15 the market if

-- if you can actuallydo an amalgam in 16 this analysis. 17 Someone overhere made it sound like ifyou 18 had some manufacturers that were in a unique 19 production, perhaps producingproducts on a different 20 efficiencylevel, that theywouldhave to be ina sub21 group analysis andwouldnlt justbe doing one that 22 representedmanufacturing in the country at that time. 23 So, maybe I donlt understand the model. 24 MR. RIVEST: Ideally, you wouldwant to run 25 the GRIM with eachmanufacturer and understandthen EXECUTIVE COURT REPORTERS, INC. (301) 565-0064115

1 find a way of reporting the information that keeps 2 confidentiality. 3 Another way you might do it, for example, for 4 capital conversion costs, you could make a few 5 assumptions about where they are in terms of -- if we 6 know that to -- to raise the manufacturing production 7 facilities to the standards level will cost a billion 8 dollars, but that different manufacturers are in 9 different stages, you can assume, you know, that some 10 of it's -- 20 percent or 50 percent of those capital 11 costs already and then run the GRIM on those 12 assumptions. 13 So, 14 MR. BROOKMAN: Terry? 15 MR. THIELE: Terry Thiele with White 16 Consolidated. 17 To that exact point, one of the problems that 18 we historically have had is the ability to use 19 individual manufacturer data in a constructive manner, 20 and as soon as you clump it into average numbers, it 21 loses a lot of its critical ability to discriminate the 22 effects between very large manufacturers and very small 23 manufacturers. 24 The strength and the vigor of the GRIM is 25 that it allows you -- and most of our discussion over EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 115 1 find a wayof reporting the information that keeps 2 confidentiality. 3 Anotherwayyoumight do it, for example, for 4 capital conversion costs, you couldmake a few 5 assumptions about where they are in terms of

-- if we 6 know that to

-- to raise the manufacturingproduction 7 facilities to the standards level will cost a billion 8 dollars, but that different manufacturers are in 9 different stages, you can assume, youknow, that some 10 of it's

-- 20 percent or 50 percent of those capital 11 costs already and thenrun the GRIM on those 12 assumptions. 13 So, 14 MR. BROOKMAN: Terry? 15 MR. THIELE: TerryThiele withWhite 16 Consolidated. 17 To that exact point, one of the problems that 18 we historicallyhave had is the abilityto use 19 individual manufacturerdata in a constructivemanner, 20 and as soon as you clump it into average numbers, it 21 loses a lot of its critical abilityto discriminate the 22 effects betweenvery largemanufacturers andvery small 23 manufacturers. 24 The strengthand the vigor of the GRIM is 25 that it allows you -- and most of ourdiscussion over EXECUTIVE COURT REPORTERS, INC. (301) 565-0064116 1 the past hour has been over assumptions. The strength 2 of the model is that it allows you to, as an individual 3 manufacturer, to run your own analysis and submit it on 4 a confidential basis to DOE to demonstrate the impact 5 of a proposed standard level on you as an individual 6 manufacturer. 7 The confidentiality issues, though, are the 8 same whether you would have submitted that data in 9 historic paper format or whether you'd do it with the 10 model. It's still going to be an issue. 11 You can with this model, however, run so many 12 different variables, groupings of manufacturers, 13 perhaps get a critical level of data where you can 14 aggregate it, that demonstrates trends or impacts. You 15 can play with the variables and make your arguments 16 accordingly, and again I'm repeating my earlier 17 comment, but what makes this so important for us is 18 that it gives us a common ground upon which to have 19 those arguments. 20 So that when we argue what the appropriate 21 discount rate should be, we can see the consequences of 22 those different positions by simply running different 23 analyses, and -- and people shouldn't confuse what this 24 model does. The assumptions built into it are all 25 subject to change, but it gives you a methodology for EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 116 1 the past hourhas beenover assumptions. The strength 2 of the model is that it allows you to, as an individual 3 manufacturer, to runyour own analysis and submit it on 4 a confidential basis toDOE to demonstrate the impact 5 of a proposed standard level onyou as an individual 6 manufacturer. 7 The confidentialityissues, though, are the 8 same whetheryouwouldhave submitted that data in 9 historic paper format orwhetheryou'd do it with the 10 model. It's still going tobe an issue. 11 You canwith this model, however, run somany 12 different variables, groupings of manufacturers, 13 perhaps get a critical level of data where you can 14 aggregate it, that demonstrates trends or impacts. You 15 canplaywith the variables andmake your arguments 16 accordingly, and again I'mrepeatingmy earlier 17 comment, but what makes this so important for us is 18 that it gives us a common grounduponwhich to have 19 those arguments. 20 So that whenwe argue what the appropriate 21 discount rate shouldbe, we can see the consequences of 22 those different positions by simply running different 23 analyses, and

-- andpeople shouldn't confuse what this 24 model does. The assumptions built into it are all 25 subject to change, but it gives you a methodology for EXECUTIVE COURT REPORTERS, INC. (301) 565-0064117

1 bracketing those assumptions and then comparing the 2 consequences. 3 MR. BROOKMAN: And as I understand the nature 4 of the invitation from the department and the support 5 team, it is for those of you that have specific ways 6 that you would like to see this model niggled or 7 recalibrated for you to join these working groups and 8 work them, roll up your sleeves and help to recalibrate 9 them, make them all the more on point. 10 Earl Jones? 11 MR. JONES: Thanks. Earl Jones, GE. 12 Mike, if I could ask you, please, to -- 13 because I think again you're sort of near the 14 conclusion of this portion of the program. 15 Could you just characterize for us then -- 16 because I think those who not have had the same 17 experience in working with the standard-setting 18 process, using whatever model, using the models which 19 are in existence prior to the one which we're now 20 considering today, can you characterize what the 21 benefits are of this approach and the output of this 22 analysis in contrast to that which we have worked 23 with -- the department, rather, has used in the past? 24 And if you can sort of somehow give us a qualitative 25 view of the value of the output with this approach EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 117 1 bracketing those assumptions and then comparing the 2 consequences. 3 MR. BROOKMAN: And as I understand the nature 4 of the invitation from the department and the support 5 team, it is for those of you that have specific ways 6 that youwould like to see this model niggled or 7 recalibrated for you tojointhese working groups and 8 work them, roll upyour sleeves and help to recalibrate 9 them, make them all the more onpoint. 10 Earl Jones? 11 MR. JONES: Thanks. Earl Jones, GE. 12 Mike, if I could askyou, please, to 13 because I think againyou're sort of near the 14 conclusionof this portionof theprogram. 15 Couldyoujust characterize for us then 16 because I think those who not have had the same 17 experience inworkingwiththe standard-setting 18 process, usingwhatevermodel, using the models which 19 are in existence prior to the one whichwe're now 20 considering today, canyou characterize what the 21 benefits are of this approach and the output of this 22 analysis in contrast to that whichwe have worked 23 with

-- the department, rather, has used in the past? 24 And if you can sort of somehowgive us a qualitative 25 view of the value of the output with this approach EXECUTIVE COURT REPORTERS, INC. (301) 565-0064118

1 versus the other. 2 MR. RIVEST: Well, as I mentioned before, the 3 driving assumptions of the other model were that 4 manufacturing costs -- the variable portion of 5 manufacturing costs would be marked up, and there were 6 some moderating circumstances, such as increases in 7 price, which may vary that mark-up, but essentially 8 costs would be marked up, and the -- the way you could 9 get a negative outcome from the previous model was if 10 there was very large capital investment required 11 because the model assumed that you could not mark up 12 one-time costs, and, you know, I'll ask anybody from 13 LBL to interject if I'm off pace here, but -- 14 MR. McMAHON: That's correct. 15 MR. RIVEST: So, essentially, the price and 16 quantities were determined by the costs that were 17 input, and there was no room for discussion of what the 18 prices might be and the quantities might be. The 19 discussion was on such things as what is the elasticity 20 value of refrigerators in the market. 21 So, the advantage of this process is that we 22 can talk about, you know, what will happen to the price 23 if our costs go up 20 percent. Also, what will be 24 the -- what will happen to shipments. The model tried 25 to capture a lot of things, but it certainly can't EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 118 1 versus the other. 2 MR. RIVEST: Well, as I mentionedbefore, the 3 driving assumptions of the othermodel were that 4 manufacturing costs the variable portionof 5 manufacturing costs wouldbemarked up, and there were 6 some moderating circumstances, such as increases in 7 price, whichmayvarythat mark-up, but essentially 8 costs wouldbe markedup, and the

-- the wayyou could 9 get a negative outcome from the previous model was if 10 there was very large capital investment required 11 because the model assumed that you couldnot markup 12 one-time costs, and, you know, I'll ask anybody from 13 LBL to interject if I'moff pace here, but 14 MR. McMAHON: That's correct. 15 MR. RIVEST: So, essentially, the price and 16 quantities were determinedbythe costs that were 17 input, and there was no room for discussion of what the 18 prices might be and the quantities might be. The 19 discussionwas on suchthings as what is the elasticity 20 value of refrigerators in the market. 21 So, the advantage of this process is that we 22 can talk about, youknow, what will happen to theprice 23 if our costs go up 20 percent. Also, what will be 24 the

-- what will happen to shipments. The model tried 25 to capture a lot of things, but it certainlycan't EXECUTIVE COURT REPORTERS, INC. (301) 565-0064119

1 capture marketing criteria. It can't -- you know, a 2 lot of the consumer behavior modeling that was done, 3 you know, couldn't capture all the nuances. 4 So, I think here we're allowing a lot of 5 external expertise to guide us in generating those 6 critical variables, and I want to repeat. We still 7 have those models or -- or -- not models, but we still 8 have those economic principles that can help us derive 9 some inputs, and sometimes they'll be good and 10 sometimes they'll be suspect, but at lesat we can 11 debate them now. 12 MR. BROOKMAN: Dave, I want to make sure. 13 You've gone through the bulk of your presentation? 14 MR. ARNOLD: Yes, at this point, the -- 15 everything that remains from here is just simply a 16 summary report and/or graphs that are derived from the 17 two schedules that were most recently presented, either 18 the base case or the standard case. 19 MR. BROOKMAN: Why don't you proceed to 20 those, and then we'll take final questions before we go 21 to lunch? You have a few more to show? 22 MR. ARNOLD: Yes. 23 MR. BROOKMAN: Yes. 24 MR. ARNOLD: And in fact, we could -- we can 25 just rush through these in that there's no analysis EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 119 1 capture marketing criteria. It can't

-- youknow, a 2 lot of the consumerbehaviormodeling that was done, 3 you know, couldn't capture all the nuances. 4 So, I thinkhere we're allowing a lot of 5 external expertise to guide us ingenerating those 6 critical variables, and I want to repeat. We still 7 have those models or -- or -- not models, but we still 8 have those economic principles that canhelpus derive 9 some inputs, and sometimes they'll be good and 10 sometimes they'll be suspect, but at lesat we can 11 debate themnow. 12 MR. BROOKMAN: Dave, I want tomake sure. 13 You've gone through the bulkof yourpresentation? 14 MR. ARNOLD: Yes, at this point, the

-- 15 everything that remains fromhere is just simply a 16 summaryreport and/orgraphs that are derived from the 17 two schedules that were most recentlypresented, either 18 the base case or the standard case. 19 MR. BROOKMAN: Why don't youproceed to 20 those, and thenwe'll take final questions before we go 21 to lunch? Youhave a few more to show? 22 MR. ARNOLD: Yes. 23 MR. BROOKMAN: Yes. 24 MR. ARNOLD: And in fact, we could

-- we can 25 just rush through these in that there's no analysis EXECUTIVE COURT REPORTERS, INC. (301) 565-0064120 1 involved in -- in these schedules going forward. Just 2 simply reports that are based upon the cash flow 3 analysis themselves. 4 Summary report that compares total industry 5 values as well as the state of the -- state of affairs 6 with respect to various line items in both the base 7 year and the year of implementation of standard. 8 This is nothing more than a reapplication of 9 a schedule that was in original GRIM for this purpose, 10 and then from there, we -- we move on to graphs that 11 are driven exclusively by the cash flow analyses 12 themselves for comparative purposes. 13 Cash flow. Single graph showing relative 14 size of net present value. The differential between 15 these two, by the way, is the conceptual net total cost 16 of the regulation to the industry. 17 A graph for -- 18 MR. BROOKMAN: Jim McMahon? 19 MR. McMAHON: Before you move to the graphs, 20 this is Jim McMahon at Lawrence Berkeley National Lab. 21 You're comparing a pre-regulation case in 22 1998 to a post-regulation case in Year 2005. I would 23 just point out that the price per unit, the shipments 24 and the total revenues are the same in the Year 2005 25 for the pre-regulation and post-regulation case. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 120 1 involved in

-- in these schedules going forward. Just 2 simplyreports that are basedupon the cash flow 3 analysis themselves. 4 Summaryreport that compares total industry 5 values as well as the state of the state of affairs 6 with respect to various line items inboth the base 7 year and the year of implementation of standard. 8 This is nothing more than a reapplication of 9 a schedule that was inoriginal GRIM for this purposet 10 and then from theret we -- we move onto graphs that 11 are driven exclusivelyby the cash flow analyses 12 themselves for comparativepurposes. 13 Cash flow. Single graph showing relative 14 size of net present value. The differential between 15 these twot by the waYt is the conceptual net total cost 16 of the regulation to the industry. 17 Agraph for

-- 18 MR. BROOKMAN: JimMcMahon? 19 MR. McMAHON: Before youmove to the graphst 20 this is JimMcMahon at Lawrence BerkeleyNational Lab. 21 You're comparing a pre-regulation case in 22 1998 to a post-regulation case inYear 2005. I would 23 justpoint out that the priceperunitt the shipments 24 and the total revenues are the same in the Year 2005 25 for the pre-regulationandpost-regulation case. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064121

1 So, I don't want there to be any mis2 impression here about what is due to standards and what 3 is due to the time frame. You might want to include a 4 pre-regulation Year 2005 for a fairer comparison. 5 MR. BROOKMAN: Your comment -- that's not a 6 rate on this sheet presently. The pre-regulation. 7 Yeah. Right? Yes. Okay. 8 MR. ARNOLD: So, comparison between base case 9 and standard case in the year that the regulation is 10 implemented, yes. 11 Remaining graphs are a comparison of revenues 12 by year. As it stands now, you'll notice both cases 13 the same only because we have identical assumptions for 14 unit sales as well as -- as well as price, but to the 15 extent again you were inclined to modify either of 16 those, you would begin to see a line separation here. 17 Income after tax. Shipments, also the same 18 under either case due to the identical nature of the 19 two under default position. Price, same way, and last 20 graph just indicating cash used in investments. 21 These were all graphs that were presented in 22 original GRIM, and we're certainly free to add more in 23 accordance with the line items as we see fit. 24 MR. BROOKMAN: Streamed through those. 25 Questions based on that stream? Yes? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 121 1 So, I don't want there to be anymis2 impressionhere about what is due to standards andwhat 3 is due to the time frame. You might want to include a 4 pre-regulationYear 2005 for a fairer comparison. 5 MR. BROOKMAN: Your comment

-- that's not a 6 rate on this sheetpresently. The pre-regulation. 7 Yeah. Right? Yes. Okay. 8 MR. ARNOLD: So, comparisonbetweenbase case 9 and standard case in the year that the regulation is 10 implemented, yes. 11 Remaining graphs are a comparison of revenues 12 byyear. As it stands now, you'll notice both cases 13 the same onlybecause we have identical assumptions for 14 unit sales as well as as well as price, but to the 15 extent againyou were inclined to modify either of 16 those, youwouldbeginto see a line separationhere. 17 Income after tax. Shipments, also the same 18 under either case due to the identical nature of the 19 two under default position. Price, same way, and last 20 graphjust indicating cashused in investments. 21 These were all graphs that were presented in 22 original GRIM, andwe're certainly free to addmore in 23 accordance with the line items as we see fit. 24 MR. BROOKMAN: Streamedthrough those. 25 Questions based on that stream? Yes? EXECUTIVE COURT REPORTERS, INC. (301) 565-0064122

1 MR. THIELE: Terry Thiele, WCI. 2 One final comment. The -- the additional 3 value that I neglected to mention earlier to this 4 approach is that because it is transparent and each 5 participant in the process can argue his or her own 6 assumptions, those analyses can run simultaneously, 7 instantaneously, and I would hope that the use of this 8 sort of modeling approach would greatly accelerate the 9 speed of the rulemaking process. 10 Historically, we've had to send data off, 11 wait for it to be mulched, and then come back to us, 12 and then argue about what that data means because we 13 don't understand what's in the black box, and then as 14 we change variables, send it back for additional 15 mulching. That time line becomes very long. 16 This model allows you to do those cycles 17 through assumptions in a matter of minutes because 18 you're simply changing your data entries to argue 19 obviously garbage-in/garbage-out, but the speed of the 20 process should be greatly accelerated. 21 MR. BROOKMAN: Before I -- I want to make 22 sure before we go to lunch, though, any other 23 significant comments you would like to make about -- 24 based on this presentation, things you've noted that 25 modify the approach, just to note them for the record EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 122 1 MR. THIELE: TerryThiele, weI. 2 One final comment. The the additional 3 value that I neglectedto mention earlier to this 4 approach is that because it is transparent and each 5 participant in the process can argue his orher own 6 assumptions, those analyses can run simultaneously, 7 instantaneously, and I wouldhope that the use of this 8 sort of modeling approachwouldgreatly accelerate the 9 speed of the rulemakingprocess. 10 Historically, we've had to send data off, 11 wait for it to be mulched, and then come back to us, 12 and then argue about what that data means because we 13 don't understandwhat's inthe blackbox, and then as 14 we change variables, send itback for additional 15 mulching. That time line becomes very long. 16 This model allows you to do those cycles 17 through assumptions ina matter of minutes because 18 you're simplychangingyour data entries to argue 19 obviouslygarbage-in/garbage-out, but the speed of the 20 process shouldbe greatly accelerated. 21 MR. BROOKMAN: Before I

-- I want tomake 22 sure before we go to lunch, though, anyother 23 significant comments youwould like tomake about 24 based on this presentation, things you've noted that 25 modify the approach, just to note them for the record EXECUTIVE COURT REPORTERS, INC. (301) 565-0064123

1 before we move on. 2 I'm going to see if we can capture those 3 before we go to lunch. 4 MR. SHOREY: Dave, as the model is currently 5 structured, it does one regulation, sort of one 6 appliance at a time. 7 How difficult would it be to -- to modify 8 or -- or build an accumulator or something that would 9 allow you to look at multiple regulations and 10 cumulative burden? 11 MR. ARNOLD: Oh, it's quite easy to develop a 12 consolidation mechanism that would pull multiple GRIM 13 Models together on a menu basis. 14 Of course, it certainly behooves us to settle 15 in on the GRIM Model in a simple form before moving on 16 to the consolidation process. 17 MR. GOLDSTEIN: Yeah. David Goldstein, NIDC. 18 I have two suggestions for changes in the 19 model that are minor structural changes as opposed to 20 suggestions for changes in assumption which I won't 21 burden everyone with listening to right now. 22 First is you should extend the number of 23 years beyond what you've got. The end effects can be 24 very big. It's not necessarily clear that everything's 25 going to be constant for the years beyond when your EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 123 1 before we move on. 2 I'mgoing to see ifwe can capture those 3 before we go to lunch. 4 MR. SHOREY: Dave, as the model is currently 5 structured, it does one regulation, sort of one 6 appliance at a time. 7 How difficult would it be to

-- to modify 8 or -- orbuildan accumulator or something that would 9 allowyou to look at multiple regulations and 10 cumulativeburden? 11 MR. ARNOLD: Oh, it's quite easyto develop a 12 consolidationmechanismthat wouldpull multiple GRIM 13 Models together on a menu basis. 14 Of course, it certainlybehooves us to settle 15 inon the GRIM Model ina simple formbefore moving on 16 to the consolidationprocess. 17 MR. GOLDSTEIN: Yeah. David Goldstein, NIDC. 18 I have two suggestions for changes in the 19 model that are minor structural changes as opposed to 20 suggestions for changes in assumptionwhich I won't 21 burdeneveryone with listening to right now. 22 First isyou should extend the number of 23 years beyondwhat you've got. The end effects canbe 24 verybig. It's not necessarilyclear that everything's 25 going to be constant for the years beyondwhenyour EXECUTIVE COURT REPORTERS, INC. (301) 565-0064124

1 spread sheet runs out, and as it is in the example 2 you've got, there's only eight years of the standard, 3 which may not be that much. So, it would be pretty 4 easy to extend it another five or 10 years, and 5 everything else stays the same. 6 Secondly, following up on a comment that a 7 gentleman made behind me, you should separate the cost 8 of borrowing from the discount rate because with a 46- 9 percent tax rate, the cost of debt is a lot lower than 10 12 percent because it's tax deductible. In fact, most 11 corporations, I think, can issue debt below 12 percent 12 nominal and then deduct the interest rates. 13 So, that's a very different effect than an 14 incremental investment that they couldn't make in 15 something else. 16 MR. BROOKMAN: Would you wish to comment on 17 that? 18 MR. ARNOLD: No, no. Just to note it. 19 Certainly the structural considerations up front does 20 make sense to maximize the time frame under 21 consideration to -- to the extent possible. 22 The main reason, by the way, that 15 years 23 was selected was for printing purposes and single page, 24 but if you don't mind using a little extra paper, I can 25 certainly make that accommodation. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 124 1 spread sheet runs out, and as it is in the example 2 you've got, there's onlyeight years of the standard, 3 whichmaynot be that much. So, it wouldbepretty 4 easy to extend it another five or 10 years, and 5 everything else stays the same. 6 Secondly, following up on a comment that a 7 gentlemanmade behindme, you should separate the cost 8 of borrowing from the discount rate because with a 46- 9 percent tax rate, the cost of debt is a lot lower than 10 12 percent because it's taxdeductible. In fact, most 11 corporations, I think, can issue debt below 12 percent 12 nominal and then deduct the interest rates. 13 So, that's a verydifferent effect than an 14 incremental investment that they couldn't make in 15 something else. 16 MR. BROOKMAN: Wouldyouwish to comment on 17 that? 18 MR. ARNOLD: No, no. Just to note it. 19 Certainlythe structural considerations up front does 20 make sense to maximize the time frame under 21 consideration to

-- to the extentpossible. 22 The mainreason, bythe way, that 15 years 23 was selectedwas for printingpurposes and singlepage, 24 but if you don't mindusing a little extrapaper, I can 25 certainlymake that accommodation. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064125

1 MR. BROOKMAN: Additional comments on kind of 2 the broad stroke of this? Kind of, you know, the 3 approach that's being used, as being suggested here, 4 notations about issues to be taken up in more detail 5 later. 6 Yes? 7 MR. WARNING: I'm Bernie Warning with York 8 International. 9 Your base year unit price and base year unit 10 sales, how did you determine those? 11 MR. ARNOLD: The ones that are in here just 12 reflected for purposes of example. 13 MR. WARNING: Is it an average? If you've 14 got a wide range of products, say you're making 15 furnaces, and you got 18 different models involved, is 16 that an average for the -- for the base price? I'm a 17 little bit lost as to how you would determine that. 18 MR. RIVEST: I'm looking at Everett right 19 now. Every product is -- is on the analysis. So, if 20 you're -- if you're doing -- if you have six regulated 21 products, you would do six analyses. 22 MR. BROOKMAN: Follow-on comment? We'll hear 23 from Larry, and then from -- Larry? 24 MR. ECKMAN: I'd just like to interpret the 25 question. I think what he's saying is if you've got 10 EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 125 1 MR. BROOKMAN: Additional comments onkind of 2 the broad stroke of this? Kind of, youknow, the 3 approach that's beingused, as being suggestedhere, 4 notations about issues to be takenup inmore detail 5 later. 6 Yes? 7 MR. WARNING: I'mBernieWarningwithYork 8 International. 9 Yourbase yearunit price andbase yearunit 10 sales, how didyou determine those? 11 MR. ARNOLD: The ones that are inherejust 12 reflected forpurposes of example. 13 MR. WARNING: Is it an average? If you've 14 got a wide range of products, sayyou're making 15 furnaces, andyougot 18 different models involved, lS 16 that an average for the

-- for the base price? I'ma 17 little bit lost as to howyouwould determine that. 18 MR. RIVEST: I'm looking at Everett right 19 now. Everyproduct is is on the analysis. So, if 20 you're

-- ifyou're doing ifyou have sixregulated 21 products, youwould do sixanalyses. 22 MR. BROOKMAN: Follow-on comment? We'll hear 23 fromLarry, and then from

-- Larry? 24 MR. ECKMAN: I'djust like to interpret the 25 question. I think what he's saying is if you've got 10 EXECUTIVE COURT REPORTERS, INC. (301) 565-0064126 1 models that all meet the base efficiency level of, say, 2 for furnace 78 percent AFUE, and they all cost, you 3 know, differently, what are you using for the cost? 4 That's the question. 5 MR. BROOKMAN: And, so, who answers it then? 6 Jim? 7 MR. McMAHON: It is the average. One of the 8 differences between this approach and the old 9 methodology is that this is an average. The old 10 methodology had specific values for each design option, 11 had a lot more detail. So, it had the different 12 product classes. It had the different design options 13 within the product classes, not model-by-model. Okay. 14 So, -- but it's a relevant question about the 15 level of aggregation. This is an average unit price 16 for the manufacturer or whatever economic -- 17 (Multiple conversations) 18 MR. BROOKMAN: Let's try to be -- 19 MR. RIVEST: I -- I still think my answer was 20 correct. 21 MR. BROOKMAN: State -- let -- Mike, state 22 the answer again, and then we'll sort through this. 23 MR. RIVEST: I still think the answer I gave 24 was correct. In other words, if you are -- this is a 25 differential cash flow analyses. So, if you're EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 126 1 models that all meet the base efficiency level of, say, 2 for furnace 78 percent AFUE, and they all cost, you 3 know, differently, what areyouusing for the cost? 4 That's the question. 5 MR. BROOKMAN: And, so, who answers it then? 6 Jim? 7 MR. McMAHON: It is the average. One of the 8 differences between this approach and the old 9 methodology is that this is an average. The old 10 methodologyhad specificvalues for each designoption, 11 had a lot more detail. So, ithad the different 12 product classes. It had the different design options 13 within the product classes, not model-by-model. Okay. 14 So,

-- but it's a relevant question about the 15 level of aggregation. This is an average unit price 16 for the manufacturer orwhatever economic 17 (Multiple conversations) 18 MR. BROOKMAN: Let's trytobe

-- 19 MR. RIVEST: I

-- I still thinkmy answerwas 20 correct. 21 MR. BROOKMAN: State

-- let

-- Mike, state 22 the answer again, and thenwe'll sort through this. 23 MR. RIVEST: I still think the answer I gave 24 was correct. In otherwords, ifyou are -- this is a 25 differential cash flow analyses. So, if you're EXECUTIVE COURT REPORTERS, INC. (301) 565-0064127

1 analyzing the impact of regulations on one of your 2 products, then the units you're considering are your 3 shipments of that product and the differential costs of 4 that product. 5 So, if you want to do the impact of 6 regulations on your company, you would do -- look at 7 every product one-by-one. So, there's -- the 8 flexibility is there. It's just -- 9 MR. BROOKMAN: I see Everett. 10 MR. RIVEST: It depends what you're 11 analyzing. 12 MR. BROOKMAN: I see Everett, our former 13 modeler, shaking his head yes. Do you have an 14 additional -- 15 MR. WARNING: In other -- Bernie Warning with 16 York. 17 If I had 10 models that were affected, I have 18 to go through this process 10 times? 19 MR. SHOREY: It depends on what the basis for 20 analysis is. 21 MR. BROOKMAN: Everett Shorey says it depends 22 on what the basis for the analysis is. 23 Let's pass this over to Charlie. 24 MR. STEPHENS: Charlie Stephens, Oregon 25 Energy Office. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 127 1 analyzing the impact of regulations on one of your 2 productsI then the units you're considering are your 3 shipments of that product and the differential costs of 4 that product. 5 SOl if youwant to do the impact of 6 regulations onyour companyI youwould do

-- look at 7 everyproduct one-by-one. SOl there's the 8 flexibility is there. It'sjust

-- 9 MR. BROOKMAN: I see Everett. 10 MR. RIVEST: It depends what you're 11 analyzing. 12 MR. BROOKMAN: I see EverettI our former 13 modelerl shakinghis headyes. Do you have an 14 additional

-- 15 MR. WARNING: In other

-- BernieWarningwith 16 York. 17 If I had 10 models that were affectedI I have 18 to go through this process 10 times? 19 MR. SHOREY: It depends onwhat the basis for 20 analysis is. 21 MR. BROOKMAN: Everett Shorey says it depends 22 onwhat the basis for the analysis is. 23 Let's pass this over to Charlie. 24 MR. STEPHENS: Charlie StephensI Oregon 25 EnergyOffice. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064128

1 I think I understand his question exactly. 2 He's -- if he's talking about furnaces, you're looking 3 at furnaces that are anywhere in capacity 40,000 to a 4 180,000 BTU per hour. There may be a dozen models in 5 there. They're all affected. They all have to meet 6 the same minimum standard. 7 I think in that case, you could shipment 8 weight the price or the cost or whatever for that line 9 that had to meet that one standard. 10 MR. WARNING: That would be impracticable. 11 MR. STEPHENS: I think that will work, at 12 least that's how we do some of the analyses, the other 13 analyses now. But that's how I would approach it. 14 MR. RIVEST: You either shipment weight it or 15 you do 10 analyses. I don't think it's that long to do 16 10 analyses. 17 MR. FOLEY: What about ballasts? I mean 18 you're talking a thousand analyses. 19 MR. BROOKMAN: Gene Foley says what about 20 ballasts? You're talking about a thousand analyses. 21 Wait a second. Wait a second. Everybody's 22 hungry, but we need to stay disciplined, otherwise this 23 doesn't get on the record. 24 So, here's Everett Shorey. 25 MR. SHOREY: It depends on how people choose EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 128 1 I think I understandhis question exactly. 2 He's

-- if he's talking about furnaces, you're looking 3 at furnaces that are anywhere in capacity40,000 to a 4 180,000 BTU per hour. There maybe a dozenmodels in 5 there. They're all affected. They all have tomeet 6 the same minimum standard. 7 I think inthat case, you could shipment 8 weight theprice or the cost orwhatever for that line 9 that had to meet that one standard. 10 MR. WARNING: That wouldbe impracticable. 11 MR. STEPHENS: I thinkthat will work, at 12 least that's howwe do some of the analyses, the other 13 analyses now. But that's how I would approach it. 14 MR. RIVEST: You either shipment weight it or 15 you do 10 analyses. I don't think it's that long to do 16 10 analyses. 17 MR. FOLEY: What about ballasts? I mean 18 you're talking a thousand analyses. 19 MR. BROOKMAN: Gene Foley says what about 20 ballasts? You're talking about a thousand analyses. 21 Wait a second. Wait a second. Everybody's 22 hungry, but we need to staydisciplined, otherwise this 23 doesn't get on the record. 24 So, here's Everett Shorey. 25 MR. SHOREY: It depends onhowpeople choose EXECUTIVE COURT REPORTERS, INC. (301) 565-0064129 1 to do -- to do the process. So, this data that you're 2 looking at came out of refrigerators. As people 3 started to go through that, there was some aggregation 4 that said we would look at -- and I'm not going to 5 remember the -- the product classes, but basically 6 there was one analysis that was done on top-mounted 7 refrigerators. There was another that at one point was 8 done on side-by-sides. There was another that was done 9 on a shipment-weighted average for all refrigerators. 10 Now, when people brought in data at various 11 times, they brought them in depending on how the class 12 of analysis was done. If you -- if you had -- for some 13 reason, you wanted to do a thousand analyses on 14 ballasts, you could do a thousand analyses. 15 If, for some reason, you wanted to look at16 all ballasts as one class, then you do a shipment17 weighted average. 18 What we have is a calculator. The decision 19 on what it is that we're going to calculate is in fact 20 the essence of how the regulatory scenarios are going 21 to get put together. 22 This calculator as it's set up can do every 23 class if you want to in the way that the old GRIM does. 24 It can aggregate them up in a fashion. It's really a 25 question of how you want to use the tool. The tool can EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 129 1 to do

-- to do the process. So, this data that you're 2 looking at came out of refrigerators. As people 3 startedto go through that, there was some aggregation 4 that saidwe would look at

-- and I'mnot going to 5 remember the

-- the product classes, but basically 6 there was one analysis that was done on top-mounted 7 refrigerators. There was another that at one point was 8 done on side-by-sides. There was another that was done 9 on a shipment-weighted average for all refrigerators. 10 Now, whenpeople brought indata at various 11 times, theybrought them independing onhow the class 12 of analysis was done. If you -- if you had

-- for some 13 reason, youwanted to do a thousand analyses on 14 ballasts, you coulddo a thousand analyses. 15 If, for some reason, youwanted to look at 16 all ballasts as one class, thenyou do a shipment17 weighted average. 18 What we have is a calculator. The decision 19 onwhat it is that we're going to calculate is in fact 20 the essence of how the regulatory scenarios are going 21 to get put together. 22 This calculator as it's set up cando every 23 class ifyouwant to inthe way that the oldGRIM does. 24 It can aggregate themup ina fashion. It's really a 25 question of howyouwant touse the tool. The tool can EXECUTIVE COURT REPORTERS, INC. (301) 565-0064130

1 be used at any level of aggregation. 2 So, when I sat there and nodded and said you 3 could do all of them, yeah, you can do all of them. If 4 you want to shipment weight average and do only one 5 class for your company, you can do that. 6 The point is what makes sense for that 7 regulation, and -- or for that scenario, and how can we 8 now have a discussion on defining those -- those 9 companies so that we can work through the process? 10 MR. BROOKMAN: So, -- and, of course, the 11 purpose of this morning's discussion is to begin to 12 understand the tool that primarily -- but your note -- 13 your comment is that some -- from your perspective as a 14 manufacturer, it needs to be practical as well. 15 MR. SHOREY: Right. 16 MR. BROOKMAN: Okay. Let's capture that for 17 the record. 18 Additional comments, broad stroke, before we 19 head off to lunch? 20 (No response) 21 MR. ARNOLD: I could also point out that 22 although this concludes the formal presentation, we do 23 have this session coming up at 3:30 this afternoon 24 wherein those who are so inclined could step forward 25 and experience the wonders of the GRIM firsthand. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 130 1 be used at any level of aggregation. 2 So, when I sat there andnodded and saidyou 3 could do all of them, yeah, you can do all of them. If 4 youwant to shipment weight average and do onlyone 5 class for your company, you cando that. 6 The point is what makes sense for that 7 regulation, and

-- or for that scenario, andhow canwe 8 nowhave a discussionon defining those

-- those 9 companies so that we canwork through the process? 10 MR. BROOKMAN: So,

-- and, of course, the 11 purpose of this morning's discussion is tobegin to 12 understandthe tool that primarily

-- but your note 13 your comment is that some fromyourperspective as a 14 manufacturer, it needs to be practical as well. 15 MR. SHOREY: Right. 16 MR. BROOKMAN: Okay. Let's capture that for 17 the record. 18 Additional comments, broad stroke, before we 19 head off to lunch? 20 (No response) 21 MR. ARNOLD: I could also point out that 22 although this concludes the formal presentation, we do 23 have this sessioncomingup at 3:30 this afternoon 24 wherein those who are so inclinedcould step forward 25 and experience the wonders of the GRIM firsthand. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064131

1 MR. BROOKMAN: After lunch. Please pay 2 attention for one more second. Just one moment. 3 After lunch, let's say at 1:15, we'll 4 reconvene. Let's -- they're talking about the -- the 5 group is going to talk about preparing industry 6 profiles and then talk about shipments forecasts and 7 have a panel and an open discussion on that, and then 8 there will be hands-on computer-based GRIM 9 investigation in the late afternoon time frame. 10 Let's -- let's offer a round of applause to 11 our presenter. 12 (Applause) 13 MR. BROOKMAN: Let's start back up at 1:15. 14 Thank you. Good start this morning. 15 (Whereupon, at 12:15 p.m., the meeting was 16 recessed, to reconvene this same day, Tuesday, March 17 11th, 1997, at 1:15 p.m.) 18 19 20 21 22 23 24 25 EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 131 1 MR. BROOKMAN: After lunch. Please pay 2 attention for one more second. Just one moment. 3 After lunch, let's say at 1:15, we'll 4 reconvene. Let's

-- they're talking about the

-- the 5 group is going to talk about preparing industry 6 profiles and then talk about shipments forecasts and 7 have a panel and an opendiscussion on that, and then 8 there will be hands-on computer-basedGRIM 9 investigation in the late afternoon time frame. 10 Let's

-- let's offer a round of applause to 11 ourpresenter. 12 (Applause) 13 MR. BROOKMAN: Let's start backup at 1:15. 14 Thank you. Good start this morning. 15 (Whereupon, at 12:15p.m., the meetingwas 16 recessed, to reconvene this same day, Tuesday, March 17 11th, 1997, at 1:15p.m.) 18 19 20 21 22 23 24 25 EXECUTIVE COURT REPORTERS, INC. (301) 565-00641 A F T E R N O O N S E S S I O N 132

2 1:20 p.m. 3 MR. BROOKMAN: Welcome back. 4 As a way of rewarding those of you that have 5 been punctual, we're going to start. 6 Our first presenter this afternoon to talk 7 about industry profiles is Steve Shankel from PNNL. 8 So, Steve, take it away. 9 Preparing the Industry Profiles 10 MR. SHANKEL: Okay. I'm going to be talking 11 about the -- the section in the draft methodology on 12 industry profiles. 13 This is still, you know, very much a work in 14 progress, and I'm going to lay out what my thoughts are 15 or what the thoughts of a number of people involved in 16 this are, but I'm really soliciting here a feedback 17 from you guys on whether this is appropriate or whether 18 there can be a better way of doing this. 19 The industry profiles or the industry 20 characterization will result in -- is intended to 21 result in a databook that should provide a common 22 reference for all the tasks and everybody involved, all 23 the stakeholders involved, in the -- in the 24 manufacturer's impact assessment. 25 A number of -- one of the places that's EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 132 1 AFT ERN0 0 N S E S S ION 2 1:20p.m. 3 MR. BROOKMAN: Welcome back. 4 As a way of rewarding those of you that have 5 beenpunctual, we're going to start. 6 Our first presenter this afternoonto talk 7 about industryprofiles is Steve Shankel from PNNL. 8 So, Steve, take it away. 9 Preparing the Industry Profiles 10 MR. SHANKEL: Okay. I'mgoing tobe talking 11 about the

-- the section inthe draft methodologyon 12 industryprofiles. 13 This is still, youknow, verymuch a work in 14 progress, and I'mgoing to layout what my thoughts are 15 orwhat the thoughts of a number of people involved in 16 this are, but I'mreally solicitinghere a feedback 17 fromyouguys onwhether this is appropriate orwhether 18 there canbe a betterway of doing this. 19 The industryprofiles or the industry 20 characterizationwill result in is intended to 21 result ina databook that shouldprovide a common 22 reference for all the tasks and everybody involved, all 23 the stakeholders involved, in the

-- in the 24 manufacturer's impact assessment. 25 Anumber of

-- one of the places that's EXECUTIVE COURT REPORTERS, INC. (301) 565-0064133

1 probably most relevant is on the -- looking at the 2 impacts on competition. 3 The databook i ll d f i ti t d b or or s ca e s mo va e y 4 the interpretive rule, which requires DOE to seek input 5 on the present and past industry structure and market 6 characteristics prior to the initiation of impact 7 studies . So, it's fairly soon in the whole -- in the 8 time frame. 9 The way we're talking about fulfilling the 10 interpretive rule requirement is to do a databook 11 profiling the impacted industries. 12 The items that the databook is projected to 13 -- to contain would be, first off, simply the 14 identification of who the manufacturers are. To the 15 extent that we can get some of this information, things 16 like their market shares, something that I think would 17 be really useful, there's a lot of concern over the 18 issue of cumulative impacts, which is somewhat of a 19 complex issue. 20 It seems like this sort of a format would be 21 a good place to try to identify some of those 22 cumulative impacts and where they -- where they are an 23 issue, and where they are not. 24 The financial situation of manufacturers 25 would be useful. The degree -- this is related to the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 133 1 probablymost relevant is on the

-- looking at the 2 impacts on competition. 3 The databook is called for or is motivatedby 4 the interpretive rule, which requires DOE to seek input 5 on the present andpast industry structure andmarket 6 characteristicspriorto the initiationof impact 7 studies. So, it's fairly soon in the whole

-- in the 8 time frame. 9 The waywe're talking about fulfilling the 10 interpretive rule requirement is to do a databook 11 profiling the impacted industries. 12 The items that the databook is projectedto 13

-- to containwouldbe, first off, simply the 14 identificationof who the manufacturers are. To the 15 extent that we canget some of this information, things 16 like theirmarket shares, something that I thinkwould 17 be reallyuseful, there's a lot of concernover the 18 issue of cumulative impacts, which is somewhat of a 19 complex issue. 20 It seems like this sort of a format wouldbe 21 a goodplace to tryto identify some of those 22 cumulative impacts andwhere they where they are an 23 issue, andwhere they are not. 24 The financial situationof manufacturers 25 wouldbe useful. The degree

-- this is related to the EXECUTIVE COURT REPORTERS, INC. (301) 565-0064134

1 market shares, the degree of concentration in the 2 industry. Is it an industry with a lot of small 3 manufacturers or is it a few large manufacturers? And 4 for each of the manufacturers, what their degree of 5 market coverage is. Is it a particular -- do they 6 carry a whole suite of products across all the lines? 7 This is related also to the cumulative 8 impacts. Do they carry a lot of products all of which 9 are subject to regulation or is a particular 10 manufacturer dealing with a specific niche? 11 That is sort of snapshot in time kind of 12 data, but we also have to look at -- at tasks data. 13 So, we'll also try to collect trends data, looking at 14 trends in product characterizations, product 15 characteristics in retail markets, trends in 16 concentrations, trends in financial characteristics. 17 We've already had some discussion on this 18 today as to whether it's an expanding or contracting 19 industry. This is the kind of data that we would hope 20 to -- hope to be able to characterize. 21 It's a four-stage -- we anticipate or propose 22 a four-stage approach. First off is an initial review, 23 followed by a quantitative analysis and a qualitative 24 analysis, and the last phase would be the stakeholder 25 review. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 134 1 market sharest the degree of concentration in the 2 industry. Is it an industrywith a lot of small 3 manufacturers or is it a few large manufacturers? And 4 for eachof the manufacturerst what their degree of 5 market coverage is. Is it a particular

-- do they 6 carry a whole suite ofproducts across all the lines? 7 This is related also to the cumulative 8 impacts. Do they carrya lot ofproducts all of which 9 are subject to regulation or is a particular 10 manufacturer dealingwith a specific niche? 11 That is sort of snapshot intime kind of 12 datat but we also have to look at

-- at tasks data. 13 SOt we'll also tryto collect trends datat looking at 14 trends inproduct characterizationst product 15 characteristics inretail marketst trends in 16 concentrationst trends in financial characteristics. 17 We've alreadyhad some discussion on this 18 today as to whether it's an expanding or contracting 19 industry. This is the kindof data that we wouldhope 20 to

-- hope tobe able to characterize. 21 It's a four-stage

-- we anticipate orpropose 22 a four-stage approach. First off is an initial reviewt 23 followed by a quantitative analysis and a qualitative 24 analysist and the last phase wouldbe the stakeholder 25 review. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064135

1 That's not exactly accurate. The stakeholder 2 review occurs throughout, starting with things like 3 today. 4 In the initial review, we simply identify the 5 firms that are subject to -- to the standards, where we 6 will need to establish contacts in these firms, figure 7 out who is the right person to talk to. We need basic 8 information about the product lines carried by each 9 firm, and have to define what we mean by the market. 10 If we're going to do any sort of analysis of market 11 shares or concentration, you have to first define your 12 market. That actually gets somewhat tricky. 13 For the quantitative analysis, here's where 14 we're proposing to look at firm level data, such as is 15 available in the census manufacturers -- excuse me -- 16 such as is collected in the census manufacturers, and 17 then from that and some other sources, construct 18 measures of -- of market structure and do some time 19 series analysis to try to assess the determinants of 20 firm share. 21 What we're talking about there is if you 22 can -- if you can separate out some of the impacts on 23 firm share, and if you can assess the effect of 24 standards, that seems like that would be useful 25 information for something like this to contain, if EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 135 1 That's not exactly accurate. The stakeholder 2 review occurs throughout, startingwith things like 3 today. 4 Inthe initial review, we simply identifythe 5 firms that are subject to

-- to the standards, where we 6 will need to establish contacts in these firms, figure 7 out who is the right person to talk to. We needbasic 8 information about the product lines carriedbyeach 9 firm, andhave to define what we meanby the market. 10 If we're going to do any sort of analysis of market 11 shares or concentration, you have to first define your 12 market. That actuallygets somewhat tricky. 13 For the quantitative analysis, here's where 14 we're proposing to look at firm level data, such as is 15 available in the census manufacturers

-- excuse me -- 16 such as is collected in the census manufacturers, and 17 then from that and some other sources, construct 18 measures of

-- of market structure and do some time 19 series analysis to tryto assess the determinants of 20 firm share. 21 What we're talking about there is ifyou 22 can -- ifyou can separate out some of the impacts on 23 firm share, and ifyou can assess the effect of 24 standards, that seems like that wouldbe useful 25 information for something like this to contain, if EXECUTIVE COURT REPORTERS, INC. (301) 565-0064136

1 that's possible. 2 The quantitative analysis focuses on the 3 entire market. These -- these estimates of market 4 share and market industry concentration. These are 5 snapshots of the entire market in one broad swoop. 6 By contrast, the qualitative analysis, which 7 is a more survey-based approach, lets you look in more 8 depth at particular firms or particular categories of 9 firms that you're interested in, and here we can try to 10 get some of the information that -- that doesn't come 11 through on the quantitative analysis. 12 Stakeholder review. The databook, a draft 13 version, would be distributed for comment and comments 14 would be collected and incorporated. 15 Okay. So, that's what -- that's what we 16 thought of. Then what I'm -- what I'm interested in 17 hearing from -- from you is, is this the type of 18 information that would be useful for the databook or 19 are there other types? How -- what's the best way to 20 get it? Is quantitative analysis, things like census 21 data, supplemented with survey data of firms the right 22 way, or -- or is other approaches better? 23 We -- I've mentioned financial data a couple 24 of times. I'm not sure on how much of that is actually 25 available, and I'd appreciate any feedback I could get EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 136 1 that'spossible. 2 The quantitative analysis focuses onthe 3 entiremarket. These

-- these estimates of market 4 share andmarket industry concentration. These are 5 snapshots of the entiremarket inone broad swoop. 6 By contrast, the qualitative analysis, which 7 is a more survey-basedapproach, lets you look inmore 8 depth at particular firms orparticular categories of 9 firms that you're interested in, andhere we cantryto 10 get some of the information that

-- that doesn't come 11 through on the quantitative analysis. 12 Stakeholderreview. The databook, a draft 13 version, wouldbe distributed for comment and comments 14 wouldbe collectedand incorporated. 15 Okay. So, that's what

-- that's what we 16 thought of. Thenwhat I'm

-- what I'm interested in 17 hearing from

-- fromyou is, is this the type of 18 informationthat wouldbe useful for the databook or 19 are there other types? How

-- what's the best way to 20 get it? Is quantitative analysis, things like census 21 data, supplementedwith surveydata of firms the right 22 way, or -- or is otherapproaches better? 23 We

-- I've mentioned financial data a couple 24 of times. I'mnot sure onhowmuch of that is actually 25 available, and I'd appreciate any feedback I couldget EXECUTIVE COURT REPORTERS, INC. (301) 565-0064137

1 on that, and what issues did I miss? 2 MR. BROOKMAN: You want to start with the 3 first one first, Gene, or you can take them -- 4 MR. FOLEY: I just have a question on your 5 Page -- 6 MR. BROOKMAN: This is Gene Foley. 7 MR. FOLEY: -- 8. I'm sorry. On Page 8, the 8 time series analysis to assess determinants of firm 9 share. Could you review that just a little bit more 10 thoroughly as to what is involved there? 11 My concern is the databook should be 12 something not subject to debate, at least it ought to 13 be a start, and any time you get that kind of analysis 14 in there, it sounds to me like it becomes much more 15 open for debate. 16 MR. SHANKEL: That's a good point. I do want 17 the databook to be a reference that people can 18 reference without having other people go oh, yeah, but 19 that's the databook. We disagree with the fundamentals 20 there. Maybe this is -- maybe this is an inappropriate 21 over-reach of that. 22 What I was thinking of was taking the data -- 23 taking historical data that we have on firm 24 characteristics and -- and generating time series. Let 25 us see how past standards -- what sort of effects past EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 137 1 on that t andwhat issues did I miss? 2 MR. BROOKMAN: You want to start withthe 3 first one first t Genet oryou cantake them

-- 4 MR. FOLEY: I just have a question onyour 5 Page

-- 6 MR. BROOKMAN: This is Gene Foley. 7 MR. FOLEY: 8. I'm sorry. On Page 8t the 8 time series analysis to assess determinants of firm 9 share. Couldyou review that just a littlebit more 10 thoroughly as to what is involved there? 11 My concern is the databook shouldbe 12 somethingnot subject to debate t at least it ought to 13 be a start t and any time you get that kind of analysis 14 in 

### there t it sounds tome like itbecomes muchmore 15 open for debate. 16 MR. SHANKEL: That's a goodpoint. I do want 17 the databook to be a reference that people can 18 reference without having otherpeople go 

### oht 

### yeaht but 19 that's the databook. We disagree with the fundamentals 20 there. Maybe this is maybe this is an inappropriate 21 over-reachof that. 22 What I was thinking of was taking the data

-- 23 taking historical data that we have on firm 24 characteristics and

-- andgenerating time series. Let 25 us see howpast standards

-- what sort of effectspast EXECUTIVE COURT REPORTERS, INC. (301) 565-0064138

1 standards have had. 2 But you may be right. That may well be an 3 over-reach of it. 4 MR. BROOKMAN: Charlie, additional overview 5 comments before we move to the specific questions. 6 Let's try and answer some of them. 7 MR. STEPHENS: Charlie Stephens, Oregon 8 Energy Office. 9 I -- I would like to echo a little bit what 10 Gene said because I think you may find, even if you 11 have past standards, there may only be one cycle, if 12 any, for a lot of these products that we're going to be 13 looking at, and what you'll have is an anecdote or an 14 anecdotal situation, and you really won't have the 15 determinants you're looking for. 16 MR. SHANKEL: Thanks. That's true. 17 MR. BROOKMAN: Comments before we get back to 18 the questions? 19 (No response) 20 MR. BROOKMAN: You largely endorse the broad 21 approach that's outlined here? 22 MR. LEWIS: No. 23 MR. BROOKMAN: No? Say so then. You get the 24 mike. You can comment later. Okay. But we want to 25 hear it. That's what the purpose of this is. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 138 1 standards have had. 2 But youmaybe right. That maywell be an 3 over-reachof it. 4 MR. BROOKMAN: Charlier additional overview 5 comments before we move to the specific questions. 6 Let's try and answer some of them. 7 MR. STEPHENS: Charlie Stephensr Oregon 8 EnergyOffice. 9 I

-- I would like to echo a littlebit what 10 Gene saidbecause I thinkyoumay findr even ifyou 11 have past standardsr theremay onlybe one cycler if 12 anYr for a lot of these products that we're going to be 13 looking atr andwhat you'll have is an anecdote or an 14 anecdotal situationr andyou reallywon't have the 15 determinants you're looking for. 16 MR. SHANKEL: Thanks. That's true. 17 MR. BROOKMAN: Comments before we get back to 18 the questions? 19 (No response) 20 MR. BROOKMAN: You largelyendorse the broad 21 approach that's outlinedhere? 22 MR. LEWIS: No. 23 MR. BROOKMAN: No? Say so then. You get the 24 mike. You can comment later. Okay. But we want to 25 hear it. That's what the purpose of this is. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064139 1 You want to put the questions back up there? 2 MR. SHANKEL: Sure. 3 MR. BROOKMAN: Can you read it from the back 4 of the room? What types of information would be most 5 useful in profiling these industries? 6 Yes, Charlie? 7 MR. STEPHENS: Charlie Stephens, Oregon 8 Energy Office. 9 Again, this is a question more for the whole 10 group, I guess. Does anybody think that retailing 11 channels and distribution, the nature of the 12 distribution or the way the products are sold, is 13 important? 14 MR. BROOKMAN: Who can respond to that? 15 MR. SHANKEL: I think it's a neat idea. 16 MR. BROOKMAN: Charlie says how big is this 17 box? 18 MR. STEPHENS: Pricing. Certain products 19 move through certain channels in certain ways, certain 20 people make decisions. 21 MR. ECKMAN: Tom Eckman, Northwest Power 22 Planning Council. 23 In response, it's more a question to 24 Charlie's proposal or proposition. Presumptively at 25 least that there are different retail margins EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 139 1 You want toput the questions backup there? 2 MR. SHANKEL: Sure. 3 MR. BROOKMAN: Canyou read it from the back 4 of the room? What types of informationwouldbe most 5 useful inprofiling these industries? 6 Yes, Charlie? 7 MR. STEPHENS: Charlie Stephens, Oregon 8 Energy Office. 9 Again, this is a questionmore for the whole 10 group, I guess. Does anybody think that retailing 11 channels and distribution, the nature of the 12 distribution or the way the products are sold, is 13 important? 14 MR. BROOKMAN: Who can respond to that? 15 MR. SHANKEL: I think it's a neat idea. 16 MR. BROOKMAN: Charlie says howbig is this 17 box? 18 MR. STEPHENS: Pricing. Certainproducts 19 move through certain channels in certainways, certain 20 people make decisions. 21 MR. ECKMAN: Tom Eckman, Northwest Power 22 Planning Council. 23 In response, it'smore a questionto 24 Charlie'sproposal orproposition. Presumptively at 25 least that there are different retail margins EXECUTIVE COURT REPORTERS, INC. (301) 565-0064140 1 associated with different distribution networks, and to 2 the extent that one manufacturer distributes one way or 3 another distributes another or product lines are 4 distributed different ways, the margins that are 5 affected here may be different, and you might want to 6 track on that. 7 MR. SHANKEL: That -- that's a good point. 8 This methodology is being developed for all of the 9 activities of the Office of Codes and Standards. This 10 includes both residential equipment and commercial 11 equipment. There's very different distribution 12 channels there, you know, from a contractor-provided 13 versus a retail outlet, and -- and that may well be a 14 useful thing to attach to each of the pieces of 15 equipment, so you will understand that going into it. 16 MR. STEPHENS: Charlie Stephens again. 17 The thing I had in mind as I was thinking 18 about this was like the difference between a white 19 goods appliance and ballasts, for instance. 20 MR. SHANKEL: That's a good point. The 21 ballasts are incorporated already as a -- 22 MR. STEPHENS: Many times in a product or 23 not, and the decision-makers are -- are quite different 24 and use different criteria. 25 MR. SHANKEL: Right. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 140 1 associatedwith different distributionnetworks, and to 2 the extent that one manufacturer distributes one way or 3 another distributes another orproduct lines are 4 distributed different ways, the margins that are 5 affectedhere maybe different, and youmight want to 6 track onthat. 7 MR. SHANKEL: That

-- that's a goodpoint. 8 This methodology isbeing developed for all of the 9 activities of the Office of Codes and Standards. This 10 includes bothresidential equipment and commercial 11 equipment. There's verydifferent distribution 12 channels there, youknow, from a contractor-provided 13 versus a retail outlet, and

-- and that maywell be a 14 useful thing to attach to each of the pieces of 15 equipment, soyouwill understand that going into it. 16 MR. STEPHENS: Charlie Stephens again. 17 The thing I had inmind as I was thinking 18 about this was like the difference between a white 19 goods appliance andballasts, for instance. 20 MR. SHANKEL: That's a goodpoint. The 21 ballasts are incorporated already as a 22 MR. STEPHENS: Many times in a product or 23 not, and the decision-makers are -- are quite different 24 anduse different criteria. 25 MR. SHANKEL: Right. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064141

1 MR. RIVEST: The reason I think it might be 2 useful as well is that in the interpretive rule, we're 3 supposed to consider the employment impacts on -- on 4 the related industries. So, certainly we'd have to 5 identify what they are before we could measure the 6 impacts. 7 Also, there are questions of sometimes if the 8 technology overreaches, there may be structural changes 9 to the distribution channels or -- or the servicing 10 channels in this case. So, it seems relevant. 11 MR. LEWIS: Dave Lewis with Lennox. 12 I can only think of a parallel, and in our 13 office, we oftentimes have people come in and provide 14 research for us, and in those meetings when research is 15 provided, oftentimes the result is, boy, that's 16 interesting, and I guess the concern I have is some of 17 the data that you're saying is going to be created, 18 it's going to be put in nice volumes. There will 19 probably be several copies made of them. They will be 20 circulated to a lot of people. People will read 21 through them, and the comment could be, gee, that's 22 interesting. 23 I'm a little bit -- I have a little bit of a 24 disconnect as far as how this -- because each industry 25 that you're dealing with here under NICA standards is EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 141 1 MR. RIVEST: The reason I think it might be 2 useful as well is that in the interpretive rule, we're 3 supposed to considerthe employment impacts on -- on 4 the related industries. So, certainlywe'dhave to 5 identifywhat they are beforewe couldmeasure the 6 impacts. 7 Also, there are questions of sometimes if the 8 technologyoverreaches, there maybe structural changes 9 to the distribution channels or -- or the servicing 10 channels in this case. So, it seems relevant. 11 MR. LEWIS: Dave Lewis withLennox. 12 I canonlythink of a parallel, and inour 13 office, we oftentimes have people come in andprovide 14 research for us, and in those meetings when research is 15 provided, oftentimes the result is, boy, that's 16 interesting, and I guess the concern I have is some of 17 the data that you're saying is going to be created, 18 it's going to be put innicevolumes. There will 19 probablybe several copies made of them. Theywill be 20 circulatedto a lot ofpeople. People will read 21 through them, and the comment couldbe, gee, that's 22 interesting. 23 I'ma littlebit

-- I have a little bit of a 24 disconnect as far as how this

-- because each industry 25 that you're dealingwithhere underNICA standards is EXECUTIVE COURT REPORTERS, INC. (301) 565-0064142

1 so different, it's hard for me to see how one 2 particular template would be able to really meet the 3 needs of the varied industries that are represented, 4 other than filling volumes with information and people 5 saying, gee, that's interesting. 6 MR. SHANKEL: Let me respond to that for a 7 second. Having people say, gee, that's interesting, 8 and that be the end of it is certainly not a desired 9 outcome. 10 There's -- I guess I have two comments. One 11 is to some extent, you know, we want everything to be 12 geared towards being as relevant and as useful as 13 possible. But there's also some requirement that some 14 things happen. 15 So, the interpretative rule does require some 16 sort of characteristic of -- of industry 17 characterizations and market characteristics. Now, how 18 you meet that, of course, is -- is wide open. 19 MR. MATTINGLEY: Joe Mattingley from GAMA. 20 I guess I would be concerned that during a 21 screening analysis, I can imagine coming in and making 22 some comments about some potential proposals and 23 saying, well, a problem there is this -- you know, our 24 products are contractor-installed, and you really have 25 some serious installation issues with -- that would be EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 142 1 so different, it'shard for me to see how one 2 particulartemplate wouldbe able to reallymeet the 3 needs of the varied industries that are represented, 4 other than fillingvolumes with information andpeople 5 saying, gee, that's interesting. 6 MR. SHANKEL: Let me respond to that for a 7 second. Having people say, gee, that's interesting, 8 and that be the end of it is certainlynot a desired 9 outcome. 10 There's -- I guess I have two comments. One 11 is to some extent, youknow, we want everything to be 12 geared towards being as relevant and as useful as 13 possible. But there's also some requirement that some 14 things happen. 15 So, the interpretative rule does require some 16 sort of characteristic of -- of industry 17 characterizations andmarket characteristics. Now, how 18 youmeet that, of course, is -- is wide open. 19 MR. MATTINGLEY: Joe Mattingley fromGAMA. 20 I guess I wouldbe concerned that during a 21 screening analysis, I can imagine coming in andmaking 22 some comments about some potential proposals and 23 saying, well, a problemthere is this -- you know, our 24 products are contractor-installed, andyou reallyhave 25 some serious installation issues with -- that wouldbe EXECUTIVE COURT REPORTERS, INC. (301) 565-0064143

1 raised by a standard, if you think about a standard 2 around that level, and, so, I'd wonder if that kind of 3 information goes -- would go in the industry profile. 4 But the bigger question is, in order to make 5 an argument during the screening analysis, is it 6 something that has to be covered in the industry 7 profile or otherwise is it considered to be out of 8 bounds? 9 MR. McCABE: I did not -- I just -- 10 MR. BROOKMAN: Mike Rivest just stepped up to 11 the mike. Michael McCabe. Mike Rivest leaned forward 12 as if he was going to say something, and then Michael 13 McCabe stepped forward. 14 Michael? 15 MR. McCABE: Michael McCabe. 16 As far as other items, they would certainly 17 be open to be considered in the process during the 18 screening. So, it would not be limited to this, and, 19 of course, in developing a template as we said, we're 20 trying to develop something that is flexible, so that 21 there may be certain elements that we would determine 22 in advance are not appropriate for particular industry 23 or product. 24 MR. BROOKMAN: John? 25 MR. WILSON: John Wilson. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 143 1 raisedby a standard, ifyou think about a standard 2 around that level, and, so, I'dwonder if that kindof 3 informationgoes -- wouldgo in the industryprofile. 4 But the biggerquestion is, inorder tomake 5 an argument during the screening analysis, is it 6 something that has tobe covered in the industry 7 profile or otherwise is it considered to be out of 8 bounds? 9 MR. McCABE: I didnot

-- I just

-- 10 MR. BROOKMAN: Mike Rivest just steppedup to 11 the mike. Michael McCabe. Mike Rivest leaned forward 12 as if he was going to say something, and thenMichael 13 McCabe stepped forward. 14 Michael? 15 MR. McCABE: Michael McCabe. 16 As far as other items, theywould certainly 17 be open tobe considered in the process during the 18 screening. So, it wouldnot be limited to this, and, 19 of course, indeveloping a template as we said, we're 20 trying to develop something that is flexible, so that 21 there maybe certainelements that we would determine 22 in advance are not appropriate for particular industry 23 orproduct. 24 25 MR. BROOKMAN: John? MR. WILSON: JohnWilson. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064144 1 I wonder if you should include information on 2 international firms who might sell product into this 3 market. 4 MR. SHANKEL: Yeah. One issue that we've 5 identified that's -- that would need to be covered in 6 here is the -- is the whole question of exports and 7 imports, and imported equipment would be -- is subject 8 to the standards, and, so, you need to know something 9 about those; whereas exported equipment is not covered 10 by the standards. So, that's -- there's an issue there 11 as to how the U.S. manufacturers are going to handle 12 differential regulations on their equipment. 13 MR. DEMPSEY: Dan Dempsey with Carrier. 14 I have a comment and a question. The first 15 comment is considering many of the companies in this 16 room are multi-national global companies with multiple 17 divisions, I -- I think you have a significant 18 challenge in trying to boil it down to a by-product 19 level. I mean that's -- that's information that's very 20 highly guarded, at least within the manufacturing 21 community, assuming they know what that is themselves. 22 The second one is a question. If you do a 23 retrospective, how are you going to separate out the 24 impact of the standard versus just the general health 25 and well-being in the economy? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 144 1 I wonder ifyou should include informationon 2 international firms who might sell product into this 3 market. 4 MR. SHANKEL: Yeah. One issue that we1ve 5 identifiedthat1s

-- that wouldneed to be covered in 6 here is the

-- is the whole question of exports and 7 imports, and importedequipment wouldbe

-- is subject 8 to the standards, and, so, you need to know something 9 about those; whereas exportedequipment is not covered 10 bythe standards. So, that1s there1s an issue there 11 as to how the u.S. manufacturers are going to handle 12 differential regulations on their equipment. 13 MR. DEMPSEY: DanDempseywith Carrier. 14 I have a comment and a question. The first 15 comment is consideringmanyof the companies in this 16 room are multi-national global companies withmUltiple 17 divisions, I

-- I thinkyouhave a significant 18 challenge in trying toboil it down to a by-product 19 level. I mean that1s

-- that1s information that1s very 20 highly guarded, at least within the manufacturing 21 community, assuming theyknowwhat that is themselves. 22 The secondone is a question. If you do a 23 retrospective, how areyougoing to separate out the 24 impact of the standardversus just the general health 25 andwell-being inthe economy? EXECUTIVE COURT REPORTERS, INC. (301) 565-0064145 1 MR. SHANKEL: Well, that, of course, would be 2 the -- the magic of a full-blown statistical analysis, 3 to try to tease out those impacts, and I don't -- and I 4 don't actually propose doing that for the databook. 5 What I was talking about were the time series 6 analysis for the databook would be something simpler, 7 and say here's characteristic of -- of the industry 8 health, and then there's some -- there's some impacts. 9 There's the overall well-being of the economy. There's 10 a standard, and then for each individual firm, there 11 are other sets of exogenous factors, and all I would 12 propose doing in the databook is to try to shed some 13 early light on that kind of -- on those kinds of 14 issues. 15 MR. BROOKMAN: Dave? 16 MR. SHANKEL: And that may not be 17 appropriate. 18 MR. LEWIS: Yeah. Dave Lewis with Lennox. 19 Just a follow-up on Dan's comment. I heard 20 earlier that you said that you would be taking a look 21 at potentially how maybe a standard historically 22 affected an industry, but you couple that with Dan's 23 question, if you're not doing that kind of an analysis, 24 taking into account the economic impacts that were 25 occurring in the -- in the overall society at that EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 145 1 MR. SHANKEL: Well, that, of course, wouldbe 2 the

-- the magic of a full-blown statistical analysis, 3 to tryto tease out those impacts, and I don't

-- and I 4 don't actuallypropose doing that for the databook. 5 What I was talking about were the time series 6 analysis for the databookwouldbe something simpler, 7 and sayhere's characteristic of

-- of the industry 8 health, and then there's some there's some impacts. 9 There's the overall well-being of the economy_ There's 10 a standard, and then for each individual firm, there 11 are other sets of exogenous factors, and all I would 12 propose doing in the databook is to tryto shed some 13 early light onthat kind of

-- on those kinds of 14 issues. 15 MR. BROOKMAN: Dave? 16 MR. SHANKEL: And that maynot be 17 appropriate. 18 MR. LEWIS: Yeah. Dave Lewis withLennox. 19 Just a follow-up onDan's comment. I heard 20 earlierthat you said that youwouldbe taking a look 21 at potentiallyhowmaybe a standardhistorically 22 affected an industry, but you couple that withDan's 23 question, if you're not doing that kind of an analysis, 24 taking into account the economic impacts that were 25 occurring in the

-- in the overall society at that EXECUTIVE COURT REPORTERS, INC. (301) 565-0064146

1 time, you'd have a difficult time saying or concluding 2 that a standard had this or that effect on a given 3 industry or a given manufacturer. 4 MR. SHANKEL: Yes. 5 MR. BROOKMAN: I see a few of Dave's industry 6 counterparts nodding their head yes. Point taken. 7 David Goldstein? 8 MR. GOLDSTEIN: David Goldstein, NIDC. 9 I think there are a few other time trends you 10 need to look at for the kind of impact analysis that 11 would come later because impacts implies a difference 12 from base case, and we need to know what the base case 13 is, particularly issues like productivity. 14 What's the cost structure of the industry 15 been like? Has it been the same for 10 years or are 16 they making productivity gains? Employment. Is this 17 an industry that's maintaining the same employment for 18 constant production or is employment dropping? Are 19 plants closing? For plant closings, we ought to know 20 how many plants have already been closed. Maybe that's 21 because you're consolidating things in bigger plants or 22 maybe it's because employment goes down, but it's a 23 separate time trend, and we ought to know it. 24 Out-sourcing. If there's some component, say 25 a compressor in a refrigeration system that used to be EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 146 1 time, you'dhave a difficult time saying or concluding 2 that a standardhad this or that effect on a given 3 industryor a givenmanufacturer. 4 MR. SHANKEL: Yes. 5 MR. BROOKMAN: I see a few of Dave's industry 6 counterparts nodding theirheadyes. Point taken. 7 David Goldstein? 8 MR. GOLDSTEIN: DavidGoldstein, NIDC. 9 I thinkthere are a few other time trends you 10 need to look at for the kind of impact analysis that 11 would come laterbecause impacts implies a difference 12 frombase case, andwe need to know what the base case 13 is, particularly issues likeproductivity. 14 What's the cost structure of the industry 15 been like? Has itbeen the same for 10 years or are 16 theymakingproductivitygains? Employment. Is this 17 an industrythat's maintaining the same employment for 18 constant productionor is employment dropping? Are 19 plants closing? Forplant closings, we ought to know 20 howmanyplants have alreadybeen closed. Maybe that's 21 because you're consolidating things inbiggerplants or 22 maybe it'sbecause employment goes down, but it's a 23 separate time trend, andwe ought to know it. 24 Out-sourcing. If there's some component, say 25 a compressor in a refrigeration systemthat used tobe EXECUTIVE COURT REPORTERS, INC. (301) 565-0064147

1 made in the plant and is now being made some place 2 else, maybe overseas, that's something we ought to know 3 because otherwise we're going to get all these impacts, 4 and we don't know compared to what. 5 MR. BROOKMAN: Additional comments? Are we 6 -- have we answered fully the first question, what 7 types of information would be most useful in profiling 8 these industries? 9 MR. SHANKEL: Provided a lot of input on the 10 first question, yes. 11 MR. BROOKMAN: Maybe we should move on to the 12 second one. Can you see it? What method of acquiring 13 information would be most productive? 14 MR. LEWIS: Dave Lewis, Lennox. 15 My suggestion would be that the trade 16 associations be kept in close communication as this 17 process develops. Not that they are necessarily the 18 sole participant as far as providing information, but I 19 think in -- at one spot, they generally know what is 20 occurring and where it's occurring, and therefore it 21 seems like there would be a lot of time saved rather 22 than conducting individual-by-individual interviews 23 across a given industry. 24 It scares me just a little bit about the 25 comment you made earlier in your presentation, where EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 147 1 made inthe plant and is nowbeingmade some place 2 else, maybe overseas, that's somethingwe ought to know 3 because otherwise we're going to get all these impacts, 4 andwe don't know comparedto what. 5 MR. BROOKMAN: Additional comments? Are we 6

-- have we answered fully the first question, what 7 types of informationwouldbemost useful inprofiling 8 these industries? 9 MR. SHANKEL: Provided a lot of input on the 10 first question, yes. 11 MR. BROOKMAN: Maybe we shouldmove onto the 12 second one. Canyou see it? What method of acquiring 13 informationwouldbe most productive? 14 MR. LEWIS: Dave Lewis, Lennox. 15 My suggestionwouldbe that the trade 16 associations be kept in close communication as this 17 process develops. Not that they are necessarilythe 18 soleparticipant as far as providing information, but I 19 think in

-- at one spot, theygenerallyknowwhat is 20 occurring andwhere it's occurring, and therefore it 21 seems like there wouldbe a lot of time saved rather 22 than conducting individual-by-individual interviews 23 across a given industry. 24 It scares me just a littlebit about the 25 comment youmade earlier inyourpresentation, where EXECUTIVE COURT REPORTERS, INC. (301) 565-0064148

1 you said you want to gather a list of names of those 2 people to go and conduct interviews with. Somewhere 3 along the line, rather than just accumulating a bunch 4 of names to go interview, it seems like there needs to 5 be kind of a top-level suggestion to your efforts 6 directed through the trade associations. 7 MR. BROOKMAN: Joe Mattingley? 8 MR. MATTINGLEY: Thank you for that comment, 9 David, but -- but you'd have a whole lot of trouble 10 getting market share information out of my trade 11 association. Okay. We wouldn't be able to provide 12 that. 13 MR. BROOKMAN: Maybe we can note some other 14 limitations. What would be some other limitations on 15 the scheme that Steve's suggesting? 16 Yes, Gene? 17 MR. FOLEY: Gene Foley, The Alliance to Save 18 Energy. 19 The dilemma with trade associations is that 20 they represent a large group of manufacturers. They by 21 no means represent all manufacturers and especially in 22 industries that are changing, they may represent 23 increasingly shrinking portions of the industry. 24 So, I would be really leery of just limiting 25 this to working with trade associations. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 148 1 you saidyouwant to gather a list of names of those 2 people to go and conduct interviews with. Somewhere 3 along the line, rather thanjust accumulating a bunch 4 of names to go interview, it seems like there needs to 5 be kind of a top-level suggestionto your efforts 6 directed through the trade associations. 7 MR. BROOKMAN: Joe Mattingley? 8 MR. MATTINGLEY: Thankyou for that comment, 9 David, but

-- but you'dhave a whole lot of trouble 10 gettingmarket share informationout of my trade 11 association. Okay. We wouldn't be able toprovide 12 that. 13 MR. BROOKMAN: Maybe we cannote some other 14 limitations. What wouldbe some other limitations on 15 the scheme that Steve's suggesting? 16 Yes, Gene? 17 MR. FOLEY: Gene Foley, The Alliance to Save 18 Energy. 19 The dilemma withtrade associations is that 20 theyrepresent a large group of manufacturers. Theyby 21 no means represent all manufacturers and especially in 22 industries that are changing, theymayrepresent 23 increasingly shrinkingportions of the industry. 24 So, I wouldbe really leeryof just limiting 25 this toworking with trade associations. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064149 1 MR. LEWIS: That wasn't my intention. 2 MR. BROOKMAN: Well, maybe it gets to the 3 second -- the third question, which are suggested data 4 sources and methods of acquisition? 5 Are there others that exist that would be 6 useful? 7 MR. SHANKEL: I would propose that the trade 8 associations would probably be our first point of 9 contact. Historically, we've typically gone there 10 first, and what I was thinking here, if I didn't make 11 it clear, is the trade associations might be our first 12 point of contact, but there is a number of types of -- 13 there are a number of types of information that we 14 can't get there, and -- and we were thinking then of 15 approaching individual firms for supplemental 16 information. 17 MR. BROOKMAN: Are there additional data 18 sources and methods that should be considered? 19 MR. McMAHON: Jim McMahon from LBL. 20 There's a number of public data sources that 21 are available. You can start with the trade 22 publications. Appliance Magazine will give you market 23 shares every year. There's a number of government 24 surveys that are useful. You mentioned census earlier, 25 but there are other government surveys that you can EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 149 1 MR. LEWIS: That wasn't my intention. 2 MR. BROOKMAN: Wellr maybe it gets to the 3 second

-- the thirdquestionr which are suggesteddata 4 sources andmethods of acquisition? 5 Are there others that exist that wouldbe 6 useful? 7 MR. SHANKEL: I wouldpropose that the trade 8 associations wouldprobablybe our first point of 9 contact. HistoricallYr we've typicallygone there 10 firstr andwhat I was thinking here r if I didn't make 11 it clearr is the trade associations might be our first 12 point of contactr but there is a number of types of 13 there are a number of types of information that we 14 can't get therer and

-- andwe were thinking then of 15 approaching individual firms for supplemental 16 information. 17 MR. BROOKMAN: Are there additional data 18 sources andmethods that shouldbe considered? 19 MR. McMAHON: JimMcMahon fromLBL. 20 There's a number of public data sources that 21 are available. You can start with the trade 22 publications. Appliance Magazine will give youmarket 23 shares everyyear. There's a number of government 24 surveys that are useful. You mentioned census earlierr 25 but there are othergovernment surveys that you can EXECUTIVE COURT REPORTERS, INC. (301) 565-0064150

1 find. 2 I think starting with the trade associations 3 is great. There's the AHAM Fact Book, for example, 4 which has a lot of the information that you're looking 5 for. There are issues of levels of aggregation and so 6 forth that you will have to deal with, but there's 7 quite a bit to start with. 8 One self-serving comment. There's a number 9 of Lawrence Berkeley Laboratory reports. We have a 10 baseline data report on residential products that 11 includes historical shipments for all the products by 12 field type. There's efficiency data in there. There's 13 a whole lot of things that are readily available, 14 already published. 15 MR. SHANKEL: Thanks. 16 MR. MATTINGLEY: And you don't need me to 17 tell you this, but if you're working with the Justice 18 Department, this would be an area where they could 19 really help you out because I was in antitrust 20 enforcement for awhile myself, and all the information 21 that you want for industry profile is what you 22 routinely do in a merger investigation or an antitrust 23 investigation. I'm sure that can be a big help to you. 24 25 MR. SHANKEL: Thanks. MR. BROOKMAN: So, in addition to the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 150 1 find. 2 I think startingwith the trade associations 3 is great. There's theAHAM Fact Book, for example, 4 whichhas a lot of the information that you're looking 5 for. There are issues of levels of aggregation and so 6 forth that youwill have to deal with, but there's 7 quite a bit to start with. 8 One self-serving comment. There's a number 9 of Lawrence BerkeleyLaboratoryreports. We have a 10 baseline data report onresidential products that 11 includes historical shipments for all the products by 12 field type. There's efficiencydata inthere. There's 13 a whole lot of things that are readily available, 14 alreadypublished. 15 MR. SHANKEL: Thanks. 16 MR. MATTINGLEY: Andyou don't needme to 17 tell you this, but ifyou're working with the Justice 18 Department, this wouldbe an areawhere they could 19 reallyhelpyou out because I was in antitrust 20 enforcement for awhilemyself, and all the information 21 that youwant for industryprofile is what you 22 routinelydo in a merger investigationor an antitrust 23 24 25 investigation. I'm sure that canbe a bighelp toyou. MR. SHANKEL: Thanks. MR. BROOKMAN: So, in addition to the EXECUTIVE COURT REPORTERS, INC. (301) 565-0064151

1 question about suggested data sources and methods of 2 acquisition, what financial data are available and 3 useful? 4 (Laughter) 5 MR. BROOKMAN: Does the tape pick up 6 laughter? Okay. We've noted that. 7 No comments on that question? 8 (No response) 9 MR. BROOKMAN: The trade associations 10 wouldn't -- 11 MR. MATTINGLEY: You can't get them to pay 12 their dues. 13 MR. BROOKMAN: Financial data. Okay. And 14 the final question is, other issues you -- are there 15 other issues that you feel this databook should address 16 or I mean speak about this in kind of the larger 17 picture, in the aggregate. Dave and others started 18 talking about that. What a task it is, for example. 19 Other kind of broader comments on this or the 20 approach to it? 21 (No response) 22 MR. BROOKMAN: I see none. Mike Rivest? 23 MR. RIVEST: I might just want to get your 24 comments on the timing of this phase of the analysis. 25 I have it down as being concurrent with the screening EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 151 1 question about suggesteddata sources andmethods of 2 acquisition, what financial data are available and 3 useful? 4 (Laughter) 5 MR. BROOKMAN: Does the tape pickup 6 laughter? Okay. We've noted that. 7 No comments on that question? 8 (No response) 9 MR. BROOKMAN: The trade associations 10 wouldn't 11 MR. MATTINGLEY: You can't get them topay 12 their dues. 13 MR. BROOKMAN: Financial data. Okay. And 14 the final question is, other issues you -- are there 15 other issues that you feel this databook should address 16 or I mean speak about this inkind of the larger 17 picture, inthe aggregate. Dave and others started 18 talking about that. What a task it is, for example. 19 Other kind of broader comments on this or the 20 approach to it? 21 (No response) 22 MR. BROOKMAN: I see none. Mike Rivest? 23 MR. RIVEST: I might just want to get your 24 comments on the timing of this phase of the analysis. 25 I have it down as being concurrent with the screening EXECUTIVE COURT REPORTERS, INC. (301) 565-0064152

1 analysis. 2 Do you feel that this is the appropriate time 3 to be doing this, and when should we be completing this 4 analysis? Should it be ready after -- you know, ready 5 before we start the engineering analysis? 6 If there are no comments, it stays where it 7 is. 8 MR. BROOKMAN: I see one or two heads saying 9 yes. Can you say a little more about your rationale 10 for structuring it the way you have? 11 MR. RIVEST: Well, I hadn't realized this, 12 but certainly some of that information in the databook 13 might have been useful to -- for the screening process 14 itself. I hadn't thought of that when we drafted that 15 flow chart, flow diagram initially. 16 The rationale was simply that as soon as the 17 rule -- as soon as the priority listing states that 18 this product is a priority product, we want to initiate 19 the work as quickly as possible, and I -- I saw those 20 two tasks as being possibly concurrent. 21 MR. WARNING: Bernie Warning with York. 22 I'm thinking about two things. One is on 23 stakeholder review, what is your definition of 24 stakeholder? 25 MR. SHANKEL: My definition of stakeholder is EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 152 1 analysis. 2 Do you feel that this is the appropriate time 3 to be doing this, andwhen shouldwe be completing this 4 analysis? Should itbe ready after

-- youknow, ready 5 before we start the engineering analysis? 6 If there are no comments, it stays where it 7 is. 8 MR. BROOKMAN: I see one or two heads saying 9 yes. Canyou saya littlemore about your rationale 10 for structuring it the wayyouhave? 11 MR. RIVEST: Well, I hadn't realizedthis, 12 but certainly some of that information inthe databook 13 might have beenuseful to for the screeningprocess 14 itself. I hadn't thought of that whenwe draftedthat 15 flow chart, flow diagram initially. 16 The rationale was simplythat as soon as the 17 rule as soon as the prioritylisting states that 18 this product is a priorityproduct, we want to initiate 19 the work as quickly as possible, and I I sawthose 20 two tasks as beingpossiblyconcurrent. 21 MR. WARNING: BernieWarningwithYork. 22 I'mthinking about two things. One is on 23 stakeholderreview, what isyour definitionof 24 stakeholder? 25 MR. SHANKEL: My definitionof stakeholder is EXECUTIVE COURT REPORTERS, INC. (301) 565-0064153 1 -- well, I would draw on the interpretive rule and -- 2 and go back to the folks that were involved in drafting 3 that, involved in that.4 I guess I feel stakeholder is somewhat self5 defined. Stakeholders are people who feel they're 6 stakeholders. 7 My definition, though, I'm not sure is the 8 most relevant one. The department has -- Mike might be 9 willing to speak to this or he might not. 10 MR. McCABE: Glenn asked the question 11 earlier. I'll attempt to answer it. This is Michael 12 McCabe, DOE. 13 Within this process as well as other steps 14 that there may be subsets of the body of people 15 involved that would be looking at to -- if we -- but in 16 this case when we're -- as I see this data-gathering 17 exercise, the databook, concurrent with the screening, 18 is to give some -- some qualified input as to the 19 significance of particular design options, particularly 20 where you're going well beyond -- where you get into an 21 area where there may be some significant impacts or 22 significant changes that are occurring within the 23 industry, and I don't see the stakeholders being just 24 manufacturers, but a broader set of parties who can 25 bring in some knowledge and information that deals with EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 153 1

-- well, I would drawonthe interpretive rule and 2 andgo backto the folks that were involved indrafting 3 that, involved in that. 4 I guess I feel stakeholder is somewhat self5 defined. Stakeholders are people who feel they're 6 stakeholders. 7 My definition, though, I'mnot sure is the 8 most relevant one. The department has

-- Mike might be 9 willing to speak to this orhe might not. 10 MR. McCABE: Glenn asked the question 11 earlier. I'll attempt to answer it. This is Michael 12 McCabe, DOE. 13 Within this process as well as other steps 14 that there maybe subsets of the bodyofpeople 15 involved that wouldbe looking at to

-- if we -- but in 16 this case whenwe're

-- as I see this data-gathering 17 exercise, the databook, concurrent with the screening, 18 is to give some -- some qualified input as to the 19 significance of particulardesign options, particularly 20 where you're goingwell beyond

-- where youget into an 21 area where there maybe some significant impacts or 22 significant changes that are occurringwithin the 23 industry, and I don't see the stakeholders beingjust 24 manufacturers, but a broader set of parties who can 25 bring in some knowledge and information that deals with EXECUTIVE COURT REPORTERS, INC. (301) 565-0064154

1 what is happening. 2 But I see that each one, particularly the 3 manufacturers, may have more information or different 4 types of information to provide than some of the others 5 who are not manufacturers. 6 So, I see this as being -- the stakeholders 7 here being -- including manufacturers and others, 8 researchers, efficiency advocates, policy-makers, but 9 that the type of input and review that I would expect 10 would be different, and it would be commensurate with 11 their background and their expertise. 12 MR. WARNING: I thought I heard earlier this 13 morning that the DOE would assemble a databook, no 14 problem, and that it would be available to anyone. 15 MR. McCABE: The difference between -- those 16 who participate or those who want to participate -- 17 MR. WARNING: I guess what I'm looking for 18 are the participant would be the one who would 19 interview and so forth, that actually gave you the data 20 to put in to the databook. 21 MR. McCABE: It -- the data -- it will be an 22 open process. However, recognizing that there -- there 23 is a fair amount of highly-proprietary information, 24 that that -- if it's proprietary information, that 25 would certainly not be shared. It will look -- if we EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 154 1 what is happening. 2 But I see that eachone, particularlythe 3 manufacturers, mayhave more information ordifferent 4 types of informationtoprovide than some of the others 5 who are not manufacturers. 6 So, I see this as being

-- the stakeholders 7 here being

-- includingmanufacturers and others, 8 researchers, efficiencyadvocates, policy-makers, but 9 that the type of input andreview that I would expect 10 wouldbe different, and it wouldbe commensurate with 11 theirbackground and their expertise. 12 MR. WARNING: I thought I heard earlierthis 13 morning that the DOE would assemble a databook, no 14 problem, and that it wouldbe available to anyone. 15 MR. McCABE: The difference between

-- those 16 who participate or those who want toparticipate 17 MR. WARNING: I guess what I'mlooking for 18 are the participant wouldbe the one who would 19 interviewand so forth, that actuallygave you the data 20 toput into the databook. 21 MR. McCABE: It

-- the data

-- it will be an 22 openprocess. However, recognizing that there

-- there 23 is a fair amount of highly-proprietary information, 24 that that

-- if it'sproprietaryinformation, that 25 would certainlynot be shared. It will look

-- ifwe EXECUTIVE COURT REPORTERS, INC. (301) 565-0064155 1 have it, we either look to take an -- aggregate it in a 2 way that it can be used, but I would not -- if it's 3 something that we collect some proprietary information 4 from a particular manufacturer, and we use it to make 5 some judgments on, that those data would not be made 6 available. They would be protected under the 7 procedures that we have for protecting proprietary 8 information. 9 MR. SHANKEL: My anticipation is that the 10 databook -- 11 MR. BROOKMAN: Before you answer the 12 question, let me back up, because the question that 13 Michael answered was not on the record, and the 14 question relates to who receives this data, and what is 15 the level -- with the way he responded, the level of 16 aggregation. 17 To just complete the record, it was, it was 18 implied earlier that those that participated in the 19 survey and giving the data, that they should -- they 20 might receive it back, but your re-interpretation of 21 what you heard was that maybe everybody would receive 22 it back. 23 So, Mike -- Michael hopefully answered that 24 question. 25 Okay. I'll try and get better at this. Go EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 155 1 have it, we either look to take an -- aggregate it ina 2 way that it canbe used, but I would not -- if it's 3 something that we collect some proprietary information 4 from a particularmanufacturer, andwe use it tomake 5 some judgments on, that those data wouldnot be made 6 available. Theywouldbe protectedunder the 7 procedures that we have forprotectingproprietary 8 information. 9 MR. SHANKEL: My anticipation is that the 10 databook 11 MR. BROOKMAN: Before you answer the 12 question, let me backup, because the questionthat 13 Michael answeredwas not on the record, and the 14 question relates to who receives this data, andwhat is 15 the level -- with the way he responded, the level of 16 aggregation. 17 Tojust complete the record, it was, it was 18 impliedearlier that those that participated inthe 19 survey andgiving the data, that they should they 20 might receive itback, but your re-interpretationof 21 what you heardwas that maybe everybodywould receive 22 itback. 23 So, Mike -- Michael hopefully answered that 24 question. 25 Okay. 

### I'll try andget better at this. Go EXECUTIVE COURT REPORTERS, INC. (301) 565-0064156

1 ahead. 2 MR. SHANKEL: I was -- I was going to 3 probably echo what Michael said, that I anticipate the 4 databook being a fairly publicly-available reference. 5 So, to the extent that there's proprietary data, it 6 wouldn't -- it wouldn't be in there. 7 MR. BROOKMAN: Dave? 8 MR. LEWIS: Based on the -- Dave Lewis, 9 Lennox. 10 Based on the last discussion, you can see how 11 the next-to-the-last bullet point on your slide can be 12 very difficult as far as any individual manufacturer 13 providing exhaustive data to you that you would find so 14 helpful. 15 MR. SHANKEL: I know. 16 MR. BROOKMAN: Additional questions or, I 17 should say, comments and advice on the issues that are 18 listed up there by Steve? 19 (No response) 20 MR. SHANKEL: Thank you very much. 21 MR. BROOKMAN: Thank you, Steve. 22 Our next presenter -- 23 MR. FOLEY: Follow-up question? 24 MR. BROOKMAN: Yes. By all means, let's get 25 you on the record, Gene. Is this for Steve or for EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 156 1 ahead. 2 MR. SHANKEL: I was -- I was going to 3 probablyecho what Michael said, that I anticipate the 4 databookbeing a fairlypublicly-available reference. 5 So, to the extent that there's proprietarydata, it 6 wouldn't

-- it wouldn't be in there. 7 MR. BROOKMAN: Dave? 8 MR. LEWIS: Basedon the

-- Dave Lewis, 9 Lennox. 10 Based on the last discussion, you can see how 11 the next-to-the-Iast bullet point onyour slide canbe 12 very difficult as far as any individual manufacturer 13 providing exhaustive data toyou that youwould find so 14 helpful. 15 MR. SHANKEL: I know. 16 MR. BROOKMAN: Additional questions or, I 17 should say, comments and advice onthe issues that are 18 listedup there by Steve? 19 (No response) 20 21 22 23 24 25 MR. SHANKEL: Thankyouverymuch. MR. BROOKMAN: Thankyou, Steve. Our next presenter

-- MR. FOLEY: Follow-up question? MR. BROOKMAN: Yes. By all means, let's get you on the record, Gene. Is this for Steve or for EXECUTIVE COURT REPORTERS, INC. (301) 565-0064157

1 whom? 2 MR. FOLEY: It's for Steve. Just in terms of 3 process, is there a databook currently being produced, 4 talked about being produced? Is there one -- an order 5 in which you think you're going to be producing these, 6 and what's the time table at this point? 7 MR. SHANKEL: At this point, we are -- at 8 this point, we are doing our initial thinking about 9 what a databook should be and what it should contain 10 and how we get it, year up-to-date on -- on the 11 process. 12 There's not one being produced right now that 13 I'm aware of. The -- what the databook is and what it 14 contains will be part of the manufacturer impact 15 assessment methodology, the document being put together 16 under Arthur D. Little. 17 What I have talked to you about is a section 18 of that document that says one part of the assessed 19 manufacturers impacts is produce this databook. So, 20 we're still drafting that section. 21 MR. BROOKMAN: Let me give you a choice. Do 22 you want to take a real short break now or do you want 23 to go another half an hour, then take a break? Go. 24 Keep going now. Yeah. This is a pretty tough bunch. 25 Have you noticed? There's been hardly anybody fading, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 157 1 whom? 2 MR. FOLEY: It's for Steve. Just interms of 3 process, is there a databook currentlybeingproduced, 4 talked about beingproduced? Is there one -- anorder 5 inwhichyou thinkyou're going tobe producing these, 6 andwhat's the time table at this point? 7 MR. SHANKEL: At this point, we are -- at 8 this point, we are doing our initial thinking about 9 what a databook shouldbe andwhat it should contain 10 and howwe get it, yearup-to-date on -- on the 11 process. 12 There's not one beingproduced right now that 13 I'maware of. The

-- what the databook is andwhat it 14 contains will be part of the manufacturer impact 15 assessment methodology, the document beingput together 16 underArthur D. Little. 17 What I have talked toyou about is a section 18 of that document that says one part of the assessed 19 manufacturers impacts isproduce this databook. So, 20 we're still drafting that section. 21 MR. BROOKMAN: Let me give you a choice. Do 22 youwant to take a real short breaknow or do youwant 23 to go anotherhalf anhour, then take a break? Go. 24 Keep goingnow. Yeah. This is a prettytoughbunch. 25 Have younoticed? There's beenhardly anybody fading, EXECUTIVE COURT REPORTERS, INC. (301) 565-0064158

1 but we have another day. 2 Okay. Jim McMahon from Lawrence Berkeley 3 National Laboratory is going to be our next presenter, 4 and do you need time to set up? 5 MR. McMAHON: I'll be very quick. 6 MR. BROOKMAN: Okay. 7 (Pause) 8 Issues in Shipments Forecasts 9 MR. McMAHON: Good afternoon. It's a 10 pleasure to be here. 11 MR. BROOKMAN: Would you like to use the 12 microphone? Are we working? Yes. Okay. 13 MR. McMAHON: It's a pleasure to be here. I 14 appreciate the opportunity to continue to collaborate 15 on the development of analysis for appliance standards. 16 The topic in this session is the manufacturer 17 impact analysis issues in shipments forecasts, and as 18 was indicated this morning, the intention here today is 19 not to get quantitative but to be qualitative and 20 discuss the important issues that are necessary to 21 consider in estimating shipments in the standards 22 rulemakings. 23 One of the topics that I'm going to discuss 24 is the role of forecasting models. So, while I talk to 25 you, with my other hand, I'm going to start up REEPS, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 158 1 but we have another day. 2 Okay. JimMcMahon fromLawrence Berkeley 3 National Laboratory is going tobe ournext presenter, 4 and do you need time to set up? 5 MR. McMAHON: I'll be very quick. 6 MR. BROOKMAN: Okay. 7 (Pause) 8 Issues in Shipments Forecasts 9 MR. McMAHON: Good afternoon. It's a 10 pleasure tobe here. 11 MR. BROOKMAN: Wouldyou like to use the 12 microphone? Are we working? Yes. Okay. 13 MR. McMAHON: It's a pleasure tobe here. I 14 appreciate the opportunityto continue to collaborate 15 on the development of analysis for appliance standards. 16 The topic inthis session is the manufacturer 17 impact analysis issues in shipments forecasts, and as 18 was indicatedthis morning, the intentionhere today is 19 not to get quantitative but tobe qualitative and 20 discuss the important issues that are necessaryto 21 consider inestimating shipments in the standards 22 rulemakings. 23 One of the topics that I'mgoing to discuss 24 is the role of forecasting models. So, while I talk to 25 you, withmy otherhand, I'mgoing to start up REEPS, EXECUTIVE COURT REPORTERS, INC. (301) 565-0064159

1 which I brought with me, as an example of an end-use 2 forecasting model, and we'll have a forecast for you to 3 look at in the session after this. 4 Why use forecasting models? Projected 5 shipments of appliances and lighting equipment are 6 necessary inputs to the manufacturer impact analysis. 7 As you saw in the GRIM presentation, the 8 shipments numbers for the future are exogenous inputs. 9 So, it's a separate task to figure out what the 10 shipments will be in the future. 11 As you also saw in the GRIM presentation, in 12 its present form, the shipments in the base case and 13 the standards case are assumed to be the same. If any 14 of you challenge that assumption, we need to figure out 15 what the difference will be. 16 Is there anybody who thinks that they won't 17 be the same? 18 (No response) 19 MR. McMAHON: Okay. So, we should continue. 20 There's a number of ways to estimate the shipments in 21 the future. A number of spread sheet analyses have22 been done by various interested parties in recent rule23 makings that assume constant shipments in the future. 24 That has the beauty of simplicity, but it has problems 25 with picking the right number that's going to be true EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 159 1 which I brought with mel as an example of an end-use 2 forecasting model l andwe'll have a forecast foryou to 3 look at in the session after this. 4 Why use forecasting models? Projected 5 shipments of appliances and lighting equipment are 6 necessary inputs to the manufacturer impact analysis. 7 As you saw inthe GRIM presentationl the 8 shipments numbers for the future are exogenous inputs. 9 SOl it's a separate taskto figure out what the 10 shipments will be in the future. 11 As you also saw in the GRIM presentationl in 12 itspresent form l the shipments inthe base case and 13 the standards case are assumed tobe the same. If any 14 of you challenge that assumptionl we need to figure out 15 what the difference will be. 16 Is there anybodywho thinks that theywon't 17 be the same? 18 (No response) 19 MR. McMAHON: Okay. SOl we should continue. 20 There's a number of ways to estimate the shipments in 21 the future. Anumber of spread sheet analyses have 22 beendone byvarious interestedparties inrecent rule23 makings that assume constant shipments in the future. 24 That has the beautyof simplicitYI but it has problems 25 withpicking the right number that's going to be true EXECUTIVE COURT REPORTERS, INC. (301) 565-0064160

1 for end years in the future. 2 One can also extrapolate historical trends. 3 That's simple, easy to explain, transparent, not 4 necessarily accurate, but we can discuss that. There 5 are more detailed forecasting models, and today, I will 6 review a few of those very quickly and give you an idea 7 of what those are about. 8 Why go into detail forecasting models? 9 Because obviously you lose simplicity. Things get more 10 complicated. The reason that's worth doing or worth 11 considering is demographics for starters. For 12 appliances, the number of households is an important 13 driver. The number of new houses built in a given year 14 is an important driver. 15 If you assume constant shipments or 16 extrapolation from an historical trend, you need to 17 ignore demographics. 18 Another reason is economics and market 19 behavior. It's true that energy prices change and are 20 expected to change. It's true that product prices 21 change and are expected to change, and it's true that 22 consumers change what they want to buy. Without a more 23 complicated model, you need to ignore those things. 24 Engineering. Technologies are changing all 25 the time. I have to say that I'm very encouraged EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 160 1 for endyears inthe future. 2 One can also extrapolate historical trends. 3 That's simple, easyto explain, transparent, not 4 necessarily accurate, but we candiscuss that. There 5 are more detailed forecasting models, and today, I will 6 review a few of those veryquickly andgive you an idea 7 of what those are about. 8 Why go into detail forecasting models? 9 Because obviouslyyou lose simplicity. Things get more 10 complicated. The reasonthat's worth doing orworth 11 considering is demographics for starters. For 12 appliances, the number of households is an important 13 driver. The number of newhouses built in a givenyear 14 is an important driver. 15 Ifyou assume constant shipments or 16 extrapolation from anhistorical trend, you need to 17 ignore demographics. 18 Another reason is economics andmarket 19 behavior. It's true that energyprices change and are 20 expected to change. It's true that product prices 21 change and are expected to change, and it's true that 22 consumers change what theywant tobuy. Without a more 23 complicatedmodel, youneed to ignore those things. 24 25 the time. Engineering. Technologies are changing all I have to saythat I'mveryencouraged

EXECUTIVE COURT REPORTERS, INC. (301) 565-0064161 1 having been doing this for a long time at the state of 2 the art of the technology and the software as 3 illustrated by the GRIM presentation earlier today. 4 I know there's the issue of the black boxes. 5 When I started, there were computer programs, 20,000 6 lines of FORTRAN code, and only those people who knew 7 FORTRAN were capable of really getting into the models 8 to understanding them. 9 When I first started the forecasting models, 10 I brought over Oak Ridge's model, and I would say it 11 took me about a year to be sure that I had been through 12 every nook and cranny of those 20,000 lines of code, so 13 that I really knew everything that this model might be 14 capable of doing in various circumstances, and I'm 15 really pleased that now we have spread sheets. 16 We all -- not all but most of us have laptops 17 or at least someone else who knows how to use one. My 18 kids teach me a lot these days about how to use 19 computers. So, we're at a place where we can 20 communicate a lot more clearly and get into these 21 issues. 22 As Terry Thiele said earlier, we can 23 communicate these results instantaneously. A lot of 24 our stuff these days is done by e-mail, and, so, we can 25 pass the spread sheets around, critique them fairly EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 161 1 havingbeendoing this for a long time at the state of 2 the art of the technology and the software as 3 illustratedbythe GRIM presentationearliertoday. 4 I know there's the issue of the blackboxes. 5 When I started, therewere computerprograms, 20,000 6 lines of FORTRAN code, and onlythose people who knew 7 FORTRAN were capable of reallygetting into the models 8 to understanding them. 9 When I first startedthe forecasting models, 10 I brought overOakRidge's model, and I would say it 11 tookme about a year to be sure that I hadbeen through 12 everynook and crannyof those 20,000 lines of code, so 13 that I reallyknew everything that this model might be 14 capable of doing invarious circumstances, and I'm 15 reallypleased that nowwe have spread sheets. 16 We all

-- not all but most of us have laptops 17 or at least someone else who knows how to use one. My 18 kids teachme a lot these days about how touse 19 computers. So, we're at a place where we can 20 communicate a lot more clearlyandget into these 21 issues. 22 As TerryThiele saidearlier, we can 23 communicate these results instantaneously. A lot of 24 our stuff these days is done bye-mail, and, so, we can 25 pass the spread sheets around, critique them fairly EXECUTIVE COURT REPORTERS, INC. (301) 565-0064162 1 quickly, and have a real open discussion, and I'm very 2 encouraged by that. 3 Okay. Engineering. Besides computers, lots 4 of other things are changing. The way that appliances 5 are built, the way that lighting is built is very 6 different, and that sometimes affects the price and 7 sometimes affects the demand for these products, and we 8 need to consider those things, and there are other 9 programs going on. 10 One of the important things in the change in 11 the new process is to consider other regulations, and I 12 would add to that regulations and other market forces. 13 I've mentioned some of these factors. I 14 don't think this is an exhaustive list, and I would 15 welcome your comments for other things that we should 16 add on here. 17 Clearly replacement of existing equipment in 18 the United States in the appliance markets is extremely 19 important. In fact, it dominates sales because it's a 20 very mature market. Virtually every home in the 21 country has a refrigerator or two or three, and most of 22 the sales are to replace those as they age. 23 New construction is important because new 24 houses need appliances and lighting, also. There is 25 competition among fuels for some of the products, and EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 162 1 quickly, andhave a real open discussion, and I'mvery 2 encouragedbythat. 3 Okay. Engineering. Besides computers, lots 4 of other things are changing. The way that appliances 5 are built, the way that lighting is built is very 6 different, and that sometimes affects the price and 7 sometimes affects the demand for these products, andwe 8 need to consider those things, and there are other 9 programs going on. 10 One of the important things in the change in 11 the newprocess is to considerother regulations, and I 12 would add to that regulations andothermarket forces. 13 I've mentioned some of these factors. I 14 don't think this is an exhaustive list, and I would 15 welcome your comments for other things that we should 16 add onhere. 17 Clearlyreplacement of existing equipment in 18 the United States inthe appliance markets is extremely 19 important. In fact, it dominates sales because it's a 20 verymature market. Virtuallyeveryhome in the 21 countryhas a refrigerator or two or three, andmost of 22 the sales are to replace those as they age. 23 New construction is important because new 24 houses need appliances and lighting, also. There is 25 competitionamong fuels for some of the products, and EXECUTIVE COURT REPORTERS, INC. (301) 565-0064163

1 clearly that's an issue that needs to be considered 2 when you're considering a policy that may change the 3 characteristics or price of competing products. 4 There's other market and regulatory factors. 5 Again, not an exhaustive list. The EPA green lights 6 program is something that comes to mind that's had an 7 impact on the sales of efficient lighting equipment. 8 There are incentives by utilities. There are fewer of 9 those programs now and projected to be fewer, but they 10 have had a major impact in the past, and some are 11 probably going to continue in the future. 12 There are building codes. The prices of 13 appliances and equipment are changing. So are the 14 features. Clearly the price is related to the 15 features, and we need consider those things. 16 I've told you why forecasting models. Now, 17 what do they do for us? I've boiled it down to 18 basically four calculations that they do for us or four 19 projections that they do for the future. 20 The first one is pretty much accounting. 21 It's the stock turnover. We can find out fairly well 22 from the Department of Energy surveys and other surveys 23 how many appliances or how much lighting is in place 24 right now. 25 We also know that that equipment will age and EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 163 1 clearlythat's an issue that needs tobe considered 2 whenyou're considering a policythat may change the 3 characteristics orprice of competingproducts. 4 There's othermarket and regulatory factors. 5 Again, not an exhaustive list. The EPA green lights 6 program is something that comes tomind that's had an 7 impact on the sales of efficient lighting equipment. 8 There are incentives byutilities. There are fewer of 9 those programs now andprojectedto be fewer, but they 10 have had a major impact inthe past, and some are 11 probablygoing to continue in the future. 12 There are building codes. The prices of 13 appliances and equipment are changing. So are the 14 features. Clearlytheprice is relatedto the 15 features, andwe need consider those things. 16 I've toldyouwhy forecasting models. Now, 17 what do they do for us? I'veboiled it down to 18 basicallyfour calculations that they do for us or four 19 projections that they do for the future. 20 The first one isprettymuch accounting. 21 It's the stock turnover. We can find out fairlywell 22 from the Department of Energy surveys and other surveys 23 howmany appliances orhowmuch lighting is inplace 24 right now. 25 We also know that that equipment will age and EXECUTIVE COURT REPORTERS, INC. (301) 565-0064164

1 be replaced over time, and we can do a fairly decent 2 job of projecting the turnover. 3 As I've indicated in the earlier slide, 4 that's a major driver of future purchases. So, that's 5 an important piece to have. 6 The second piece is fuel choice. Clearly for 7 those products where there's a fuel choice, let's say 8 furnaces or water heaters or clothes dryers, one needs 9 to consider that. The prices of the fuels don't always 10 change together. Electricity and gas don't always go 11 together, and, so, we need to think a little bit about 12 how to account for projected changes in those things. 13 Technology choice. This has to do with the 14 choice of efficiency as well as the choice between 15 different technologies. Even if they use the same 16 fuel, you have different options. As the technologies 17 mature, their prices may change, and this is a way to 18 nt for that.

accou 19 Usage behavior. One of the things that -- 20 that the most detailed models account for is what's 21 been called a rebound or take-back effect. If we make 22 appliances more efficient, consumers may use them more 23 because they're now cheaper to operate, and most of the 24 models that are reviewed today take account of those. 25 Okay. I'm going to get into the alternative EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 164 1 be replaced over time, andwe cando a fairly decent 2 job of projecting the turnover. 3 As I've indicated inthe earlier slide, 4 that's a major driver of future purchases. So, that's 5 an important piece tohave. 6 The secondpiece is fuel choice. Clearlyfor 7 those products where there's a fuel choice, let's say 8 furnaces orwaterheaters or clothes dryers, one needs 9 to consider that. Theprices of the fuels don't always 10 change together. Electricityandgas don't always go 11 together, and, so, we need to think a littlebit about 12 how to account forprojected changes in those things. 13 Technology choice. This has to do with the 14 choice of efficiencyas well as the choice between 15 different technologies. Even if theyuse the same 16 fuel, you have different options. As the technologies 17 mature, theirprices may change, and this is a way to 18 account for that. 19 Usage behavior. One of the things that

-- 20 that the most detailedmodels account for is what's 21 been called a rebound or take-back effect. If we make 22 appliances more efficient, consumers mayuse themmore 23 because they're now cheaper to operate, andmost of the 24 models that are reviewed today take account of those. 25 Okay. I'mgoing to get into the alternative EXECUTIVE COURT REPORTERS, INC. (301) 565-0064165

1 forecasting models. If anyone has any comments or 2 questions along the way, please put up your hand, I'll 3 be happy to take them as we go along here. 4 MR. LEWIS: Will we have time for questions 5 afterwards? 6 MR. McMAHON: Absolutely. There will be time 7 for questions after. 8 okay. So, the alternative forecasting 9 models, I've grouped these by the sectors. So, 10 residential and commercial. Historically, the 11 appliances have been modeled by residential models, and 12 lighting has been done in commercial because the major 13 focus is fluorescent lighting, which is mostly in the 14 commercial sector. 15 Footnote. That's commercial/industrial. We 16 do account for lighting in industrial buildings. 17 I've listed four major models here, maybe 18 three major models in a spread sheet for residential. 19 The EIA National Energy Modeling System is a complete 20 energy sector model, and it has a residential module. 21 So, it has one piece that forecasts residential energy 22 consumption in the U.S. But that's connected to other 23 models that calculate the predicted energy consumption 24 for commercial, transportation, industrial, and hook it 25 all up to the energy supply. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 165 1 forecasting models. If anyone has any comments or 2 questions along the way, pleaseput up your hand, I'll 3 be happy to take themas we go along here. 4 MR. LEWIS: Will we have time for questions 5 afterwards? 6 MR. McMAHON: Absolutely. There will be time 7 for questions after. 8 Okay. So, the alternative forecasting 9 models, I've groupedthese by the sectors. So, 10 residential and commercial. Historically, the 11 appliances have beenmodeledbyresidential models, and 12 lightinghas beendone in commercial because the major 13 focus is fluorescent lighting, which is mostly in the 14 commercial sector. 15 Footnote. That's commercial/industrial. We 16 do account for lighting in industrial buildings. 17 I've listed four majormodels here, maybe 18 three majormodels ina spread sheet for residential. 19 The EIANational EnergyModeling System is a complete 20 energy sectormodel, and it has a residential module. 21 So, it has one piece that forecasts residential energy 22 consumption inthe u.S. But that's connected to other 23 models that calculate the predicted energyconsumption 24 for commercial, transportation, industrial, andhook it 25 all up to the energy supply. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064166

1 So, it's a -- it's an integrated model of the 2 entire energy sector. That's the model that's used for 3 the annual -- the official U.S. Department of Energy 4 Annual Energy outlook every year. It's been used since 5 1994. 6 The second one is the LBL Residential Energy 7 Model. That got its origins at Oak Ridge in the 1970s, 8 and I've been the keeper of that model and developer of 9 that model ever since, and we'll talk about that more 10 in a minute. 11 The Electric Power Research Institute 12 developed a residential end-use model in the 1980s 13 that's been used by a variety of utilities. That model 14 is not typically used for national forecasts. It's 15 typically used for an individual utility company, but 16 if you give it national data, it certainly is capable 17 of doing national forecasts, and we have used it to do 18 that at LBL. 19 The fourth one is under development. In the 20 idea of making things more transparent and as a 21 teaching tool, getting away from the more complicated 22 models, we found it useful to develop some spread 23 sheets that lay out the assumptions in a clear way that 24 we can share with a lot of people. 25 So, I have some examples of spread sheets EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 166 1 SOl it's a -- it's an integratedmodel of the 2 entire energy sector. That's the model that's used for 3 the annual

-- the official u.S. Department of Energy 4 Annual EnergyOutlook everyyear. It'sbeenused since 5 1994. 6 The secondone is the LBL Residential Energy 7 Model. That got its origins at Oak Ridge in the 1970s 1 8 and I'vebeen the keeper of that model and developer of 9 that model ever since l andwe'll talk about that more 10 ina minute. 11 The Electric Power Research Institute 12 developed a residential end-usemodel in the 1980s 13 that's beenusedby a varietyof utilities. That model 14 is not typicallyused for national forecasts. It's 15 typicallyused for an individual utilitycompanyI but 16 if you give it national datal it certainly is capable 17 of doing national forecastsl andwe have used it to do 18 that at LBL. 19 The fourth one is under development. In the 20 idea of making things more transparent and as a 21 teaching tooll getting away from the more complicated 22 modelsl we found it useful to develop some spread 23 sheets that layout the assumptions in a clearway that 24 we can share with a lot of people. 25 SOl I have some examples of spread sheets EXECUTIVE COURT REPORTERS, INC. (301) 565-0064167 1 that I can show you later on, but clearly this is work 2 under development, and I hope that that will continue. 3 On the commercial side, again EIA on a 4 different part of the NEMS module, the Electric Power 5 Research Institute has a commercial model called 6 Commend that has been used at LBL to do lighting 7 studies for quite awhile. In fact, I will comment that 8 both REEPS and Commend, the two EPRI models, were done 9 in collaboration between EPRI and its contractors and 10 the Lawrence Berkeley Laboratory. We tried to 11 incorporate the best features of all our forecasting 12 models into theirs, and finally, another spread sheet 13 for commercial. 14 Let me say something about track record. The 15 oldest model is REM. As I said, that came from an Oak 16 Ridge model that's even older. That's been used by the 17 Codes and -- the Department -- the Office of Codes and 18 Standards at DOE for 18 years. It's in the public 19 domain. Anybody who wants a copy of it can tell me, 20 and I'll be happy to give it to you. 21 REEPS has been around about 15 years. It's 22 used primarily by member utilities. It is a commercial 23 product. I imagine you can buy it if you approach 24 EPRI. You'll have to negotiate with them about the 25 price. It's normally used by their member utilities, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 167 1 that I can showyou later on, but clearlythis is work 2 under development, and I hope that that will continue. 3 On the commercial side, againEIAon a 4 different part of the NEMS module, the Electric Power 5 Research Institutehas a commercial model called 6 Commend that has beenused at LBL to do lighting 7 studies for quite awhile. In fact, I will comment that 8 bothREEPS and Commend, the two EPRI models, were done 9 in collaborationbetweenEPRI and its contractors and 10 the Lawrence BerkeleyLaboratory. We tried to 11 incorporate the best features of all our forecasting 12 models into theirs, and finally, another spread sheet 13 for commercial. 14 Let me say something about track record. The 15 oldest model is REM. As I said, that came from an Oak 16 Ridge model that's evenolder. That's beenusedbythe 17 Codes and the Department

-- the Office of Codes and 18 Standards at DOE for 18 years. It's in the public 19 domain. Anybodywho wants a copyof it cantell me, 20 and I'll be happy to give it toyou. 21 REEPS has been around about 15 years. It's 22 usedprimarilybymember utilities. It is a commercial 23 product. I imagine you canbuy it ifyou approach 24 EPRI. You'll have to negotiate with them about the 25 price. It's normallyusedbytheirmemberutilities, EXECUTIVE COURT REPORTERS, INC. (301) 565-0064168

1 but I do know that they market it internationally, and 2 I imagine they wouldn't mind selling copies of it.3 Commend, same situation. NEMS is a publicly4 available model. You can get it here in the building 5 from EIA, and -- anyone from EIA here currently? Back 6 there. Okay. So, I'll pass the buck on questions 7 about that to folks from EIA. 8 Spread sheet will be developed in the public 9 domain and available to anybody. 10 Operating characteristics. The REM model 11 works on a work station. It's written in FORTRAN. A 12 personal computer version is certainly possible. 10 13 years ago, we put one up on a personal computer, and 14 there's no reason we couldn't do that again, but back15 then, there weren't things like Windows and user16 friendly interfaces and that kind of stuff. So, you're 17 still dealing with tables of numbers and very 18 rudimentary graphics. 19 So, if we wanted to make that friendlier, I 20 would suggest that we rewrite it in a more modern 21 language with all the bells and whistles that are 22 available to us today. 23 REEPS and Commend are available on the 24 personal computer. I have copies here and be happy to 25 show you a demo in the next session. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 

### 168 1 but I do know that theymarket it internationally, and 2 I imagine theywouldn't mind selling copies of it. 3 

### Commend, same situation. NEMS is a publicly4 available model. You canget it here inthe building 5 

### from EIA, and anyone fromEIAhere currently? Back 6 there. Okay. So, I'll pass the buckonquestions 7 about that to folks fromEIA. 8 Spread sheet will be developed inthe public 9 domain and available to anybody. 10 Operating characteristics. The REM model 11 works on a work station. It'swritten inFORTRAN. A 12 personal computerversion is certainlypossible. 10 13 years ago, we put one up ona personal computer, and 14 there's no reasonwe couldn't do that again, but back 15 then, there weren't things likeWindows anduser16 friendly interfaces and that kind of stuff. So, you're 17 still dealingwithtables of numbers andvery 18 rudimentarygraphics. 19 

### So, if we wanted tomake that friendlier, I 20 would suggest that we rewrite it in a more modern 21 language with all the bells andwhistles that are 22 available tous today. 23 REEPS and Commend are available on the 24 personal computer. I have copies here andbe happyto 25 showyou a demo inthe next session. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064169

1 NEMS is developed as a mean frame model. In 2 fact, it's -- you're fairly limited in the computer you 3 can run it on. We just bought a $100,000 IBM last year 4 to run this model at LBL, and it uses a specific math 5 package. So, it's not as accessible as some of the 6 others. 7 A personal computer version was available, 8 but I understood from the January workshop that that's 9 no longer going to be supported, is that correct? 10 STAFF MEMBER: That's true. 11 MR. McMAHON: That's true. Okay. Okay. And 12 the spread sheet obviously will be available to 13 anybody. So, let's come back to this issue of black 14 boxes. What can we do so that we never again have a 15 black box? And let's hope we even get beyond making 16 them gray boxes, and we get to our pristine transparent 17 cube that we can all see through and understand. 18 First, let's make the models as simple as 19 possible. Now, I've just given you all the reasons why 20 we have to use complex models, right, the demographics 21 and the economics and the engineering. So, how are we 22 going to make them simple? 23 The answer to that is you want to segment 24 this into tractable problems. So, let's deal with the 25 issue of shipments as a separate issue. It will depend EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 169 1 NEMS is developed as a mean frame model. In 2 fact, it's

-- you're fairly limited in the computeryou 3 can run it on. We just bought a $100,000 IBM last year 4 to run this model at LBL, and it uses a specific math 5 package. So, it's not as accessible as some of the 6 others. 7 Apersonal computerversionwas available, 8 but I understood from the Januaryworkshop that that's 9 no longer going tobe supported, is that correct? 10 STAFF MEMBER: That's true. 11 MR. McMAHON: That's true. Okay. Okay. And 12 the spread sheet obviouslywill be available to 13 anybody. So, let's come back to this issue of black 14 boxes. What canwe do so that we never again have a 15 blackbox? And let's hope we evenget beyondmaking 16 themgrayboxes, andwe get to ourpristine transparent 17 cube that we can all see through andunderstand. 18 First, let'smake the models as simple as 19 possible. Now, I'vejust givenyou all the reasons why 20 we have touse complexmodels, right, the demographics 21 and the economics and the engineering. So, how are we 22 going tomake them simple? 23 The answer to that is you want to segment 24 this into tractable problems. So, let's deal with the 25 issue of shipments as a separate issue. It will depend EXECUTIVE COURT REPORTERS, INC. (301) 565-0064170

1 upon prices, but then we deal with prices as a working 2 group, a small number of people who are knowledgeable 3 to work on that issue. 4 So, that's how we make it tractable, is by 5 breaking it down into the components and having those 6 available in simple forms, spread sheets or whatever 7 works. 8 Secondly, we need to make it accessible. LBL 9 has a Web site. There are a number of things available 10 there. A lot of the data in our baseline databook, 11 Steve Shankel will be available there shortly, so that 12 you can pick up all the historical shipments and 13 efficiency data that has been published and lots of 14 other things. 15 That's one way to go. Copies could be 16 provided through DOE or through a contractor to DOE. 17 There's lots of ways to do this. So, I think that's 18 something that today, we're much more capable of doing 19 than we were some years ago. 20 Developing detailed documentation. One of 21 the flaws in the approach in the past was that the 22 effort was not to provide documentation for the 23 interested parties, but to provide mostly documentation 24 for DOE, and I think we're beyond that now, and we need 25 to be at a place where by breaking this down into EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 170 1 uponprices, but thenwe deal withprices as a working 2 group, a small number ofpeople who are knowledgeable 3 to work on that issue. 4 So, that's howwe make it tractable, is by 5 breaking it down into the components andhaving those 6 available in simple forms, spread sheets orwhatever 7 works. 8 Secondly, we need tomake it accessible. LBL 9 has a Web site. There are a number of things available 10 there. A lot of the data inourbaseline databook, 11 Steve Shankel will be available there shortly, so that 12 you canpickup all the historical shipments and 13 efficiencydata that has beenpublishedand lots of 14 other things. 15 That's oneway to go. Copies couldbe 16 providedthroughDOE or through a contractorto DOE. 17 There's lots of ways to do this. So, I think that's 18 something that today, we're muchmore capable of doing 19 thanwe were some years ago. 20 Developing detaileddocumentation. One of 21 the flaws in the approach inthepast was that the 22 effort was not toprovide documentation for the 23 interestedparties, but toprovide mostlydocumentation 24 for DOE, and I thinkwe're beyondthat now, andwe need 25 tobe at a place where bybreaking this down into EXECUTIVE COURT REPORTERS, INC. (301) 565-0064171

1 smaller pieces and documenting it well internally, 2 everyone will be able to understand what's going on 3 there, not these 500-page technical support documents 4 that everybody hates. 5 Training workshops. We've done a little bit 6 of training. LBL has a record of doing training 7 workshops in other areas of research. We can do that 8 in a central location. Other contractors can do this. 9 This can be done on your location. We can send someone 10 to show you how to work models. Things can be done by 11 video conferences. Lots of ways to work that. 12 The point is we're going to try and make the 13 information much more accessible and much more 14 responsive. 15 The last major element that I wanted to touch 16 on is the uncertainty analysis. Clearly we want to 17 identify key uncertainties. Just saying something is 18 uncertain is not enough. We then want to estimate the 19 ranges around that. So, let's say that we have a 20 concern about the prices in the future. Even though we 21 might not be able to predict exactly what the price is, 22 we might be able to agree that it's between $10 and 23 $100. 24 There are things that we can do to narrow the 25 range, and that helps a lot with the analysis because EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 171 1 smallerpieces anddocumenting it well internally, 2 everyone will be able tounderstand what's going on 3 there, not these 500-page technical support documents 4 that everybodyhates. 5 Trainingworkshops. We've done a littlebit 6 of training. LBL has a record of doing training 7 workshops inother areas of research. We can do that 8 ina central location. Other contractors cando this. 9 This canbe done onyour location. We can send someone 10 to showyou how to workmodels. Things canbe done by 11 video conferences. Lots of ways to work that. 12 The point is we're going to try and make the 13 informationmuchmore accessible andmuchmore 14 responsive. 15 The last major element that I wanted to touch 16 on is the uncertainty analysis. Clearlywe want to 17 identifykeyuncertainties. Just saying something is 18 uncertain is not enough. We thenwant to estimate the 19 ranges around that. So, let's saythat we have a 20 concern about the prices in the future. Even thoughwe 21 might not be able topredict exactlywhat the price is, 22 we might be able to agree that it'sbetween $10 and 23 $100. 24 There are things that we cando to narrow the 25 range, and that helps a lot withthe analysis because EXECUTIVE COURT REPORTERS, INC. (301) 565-0064172 1 you can then do the low and high bounds and find out if 2 it matters. 3 We'd like to express the output as ranges. 4 This is a point that Chuck Samuels made at a previous 5 workshop, that although the uncertainty was analyzed in 6 manufacturer analysis before, and if you look at the 7 old TSDs, you'll find the output with a standard 8 deviation next to it. That wasn't carried through 9 downstream to the impacts of the standards in other 10 areas, and we would like to carry that all the way 11 through so that the policy-makers here at DOE see not 12 just a point answer, this saves so many quads of 13 energy, but it saves so many quads of energy with this 14 probability of saving only one or more than 10. 15 Lastly, we want to conduct scenario analyses 16 or what-if analyses. Clearly, any single scenario is 17 going to be wrong. Mike Rothkoff, who at one time was 18 the head of the Energy Analysis Program at LBL, when he 19 first joined, came in, walked into my office, 20 introduced himself and said I'm here to tell you that 21 your forecasts are wrong, and I said, hello, Mike, you 22 know, why do you say that, and he said because all 23 forecasts are wrong. Don't ever think that your 24 forecasts are right. 25 But you have to be able to think about the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 172 1 you can then do the lowandhighbounds and find out if 2 it matters. 3 We'd like to express the output as ranges. 4 This is a point that Chuck Samuels made at a previous 5 workshop, that although the uncertaintywas analyzed in 6 manufacturer analysis before, and if you look at the 7 oldTSDs, you'll find the output with a standard 8 deviationnext to it. That wasn't carriedthrough 9 downstream to the impacts of the standards in other 10 areas, andwe would like to carrythat all the way 11 through so that the policy-makers here at DOE see not 12 just a point answer, this saves somany quads of 13 energy, but it saves somany quads of energywith this 14 probabilityof saving onlyone ormore than 10. 15 Lastly, we want to conduct scenario analyses 16 orwhat-if analyses. Clearly, any single scenario is 17 going tobe wrong. Mike Rothkoff, who at one time was 18 the head of the EnergyAnalysis Programat LBL, whenhe 19 first joined, came in, walked intomy office, 20 introducedhimself and said I'mhere to tell you that 21 your forecasts are wrong, and I said, hello, Mike, you 22 know, whydo you saythat, andhe saidbecause all 23 forecasts are wrong. Don't ever think that your 24 forecasts are right. 25 But youhave to be able to think about the EXECUTIVE COURT REPORTERS, INC. (301) 565-0064173

1 importance of that. What's the impact of this forecast 2 being a little bit this way or that way? So, it's 3 useful to do the what-if scenarios. 4 I want to conclude with a cartoon. There's a 5 problem with forecasting, so you always have to go back 6 to the databook and to historical experience and make 7 sure that these things are in context, and they make 8 sense. 9 (Laughter) 10 MR. McMAHON: Thank you for your attention. 11 I'll take any questions. 12 MR. BROOKMAN: Questions for Jim McMahon? 13 John? 14 MR. WILSON: John Wilson. 15 Jim, how would you deal with imports and 16 exports in shipments? 17 MR. McMAHON: The historical data is there to 18 a large extent about what imports and exports are. In 19 terms of the impacts on manufacturers, this is -- this 20 is the issue of where you draw the boundary. 21 As was indicated, most of the manufacturers 22 are international corporations with appliance 23 divisions, and some thought has to go into the smallest 24 set of information that we can gather that is 25 available. You know, we don't want to do the entire EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 173 1 importance of that. What's the impact of this forecast 2 being a littlebit this way or that way? So, it's 3 useful to do the what-if scenarios. 4 I want to conclude with a cartoon. There's a 5 problemwith forecasting, soyou always have to goback 6 to the databook and tohistorical experience andmake 7 sure that these things are incontext, and theymake 8 sense. 9 (Laughter) 10 MR. McMAHON: Thankyou for your attention. 11 I'll take any questions. 12 MR. BROOKMAN: Questions for JimMcMahon? 13 John? 14 MR. WILSON: JohnWilson. 15 Jim, howwouldyou deal with imports and 16 exports in shipments? 17 MR. McMAHON: The historical data is there to 18 a large extent about what imports and exports are. In 19 terms of the impacts onmanufacturers, this is

-- this 20 is the issue of where you draw the boundary. 21 As was indicated, most of the manufacturers 22 are international corporations with appliance 23 divisions, and some thought has to go into the smallest 24 set of informationthat we cangather that is 25 available. You know, we don't want to do the entire EXECUTIVE COURT REPORTERS, INC. (301) 565-0064174 1 international economy, but we want relevant information 2 that we can gather. 3 I think it is going to be difficult to deal 4 with competition on an international level with a 5 quantitative model, and I think that's going to wind up 6 falling back on the opinions of experts through 7 interviews with knowledgeable people in the industry 8 and observers of the industry to try and deal with 9 that. 10 MR. BROOKMAN: That's okay. We're taping 11 this. So, please say your name. 12 MR. KREBS: Hi. My name's Mark Krebs, and I13 was wondering in your opinion, what are the short14 comings of off-the-shelf spread sheets as opposed to 15 the more traditional FORTRAN black box? 16 MR. McMAHON: It's a good question. Spread 17 sheets are good for simple things. However, if any of 18 you have used a complicated spread sheet, it's easy to 19 put something in there that you don't want and not know 20 you did it. 21 FORTRAN codes and other high-level languages 22 are useful where you want to write an equation and have 23 it iterate over the next 30 years. So, here's how 24 prices respond to whatever, and you have a formula, and 25 then you can feed in a vector of driving variables EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 174 1 international economy, but we want relevant information 2 that we cangather. 3 I think it is going to be difficult to deal 4 with competitionon an international level with a 5 quantitative model, and I think that's going to windup 6 falling backon the opinions of experts through 7 interviews withknowledgeable people inthe industry 8 and observers of the industryto try and deal with 9 that. 10 MR. BROOKMAN: That's okay. We're taping 11 this. So, please sayyour name. 12 MR. KREBS: Hi. My name's Mark Krebs, and I 13 was wondering inyour opinion, what are the short14 comings of off-the-shelf spread sheets as opposedto 15 the more traditional FORTRAN blackbox? 16 MR. McMAHON: It's a good question. Spread 17 sheets are good for simple things. However, if anyof 18 youhave used a complicated spread sheet, it's easyto 19 put something in there that you don't want andnot know 20 you did it. 21 FORTRAN codes and otherhigh-level languages 22 are useful where youwant to write an equation andhave 23 it iterate over the next 30 years. So, here's how 24 prices respond to whatever, andyou have a formula, and 25 thenyou can feed in a vectorof drivingvariables EXECUTIVE COURT REPORTERS, INC. (301) 565-0064175

1 later on. 2 In a spread sheet sometimes manually, you 3 have to do a lot more work to do that than just doing 4 it in code. 5 Does that answer your question? It's a short 6 answer. I could go on longer, but I think that's the 7 fundamental difference. 8 MR. LEWIS: Dave Lewis with Lennox. 9 How will this current effort that you are 10 undertaking now produce a result that is more credible 11 than what the past NEMS model did? 12 MR. McMAHON: I think the important element 13 in making it more credible is workshops like this. 14 It's forming a working group or a set of working groups 15 with people who have knowledge and are involved from 16 the beginning in an open process to develop this all 17 the way through. 18 In the past, I think DOE felt that it had an 19 obligation to take the first shot and produce something 20 out there and then get comments on it, and I think that 21 that sometimes led to problems, and I think that 22 starting from the beginning, all of this stuff is open 23 to discussion right now. There's no locked-in model. 24 That we can get a lot of information and a lot of 25 expertise brought to bear and narrow the areas of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 175 1 lateron. 2 In a spread sheet sometimes manually, you 3 have to do a lot more work to do that thanjust doing 4 it in code. 5 Does that answeryour question? It's a short 6 answer. I couldgo on longer, but I thinkthat's the 7 fundamental difference. 8 MR. LEWIS: Dave Lewis withLennox. 9 How will this current effort that you are 10 undertakingnowproduce a result that is more credible 11 thanwhat the pastNEMS model did? 12 MR. McMAHON: I think the important element 13 inmaking itmore credible is workshops like this. 14 It's forming a working group or a set of working groups 15 withpeople who have knowledge and are involved from 16 the beginning inan openprocess to develop this all 17 the way through. 18 In the past, I thinkDOE felt that it had an 19 obligationto take the first shot andproduce something 20 out there and thenget comments on it, and I think that 21 that sometimes ledtoproblems, and I think that 22 starting from the beginning, all of this stuff is open 23 to discussion right now. There's no locked-inmodel. 24 That we canget a lot of information and a lot of 25 expertisebrought to bear andnarrowthe areas of EXECUTIVE COURT REPORTERS, INC. (301) 565-0064176

1 disagreement. 2 By analogy, when we did the consensus process 3 for refrigerators in 1992 to 1994, when we came into 4 the first meetings, there was a lot of issues on the 5 table between the different interested parties, the 6 environmental groups and the manufacturers, about what 7 they thought was true and was not true or the ranges of 8 values for different things. 9 Even within the engineering analysis, there 10 was disagreement among manufacturers about what was 11 possible at what cost. 12 Over the course of time, through discussion 13 and quantifying those differences, we wound up saying 14 okay, we can't be sure about the effect of a heat 15 exchanger in this particular application, but it's only 16 a five-percent effect. Okay. 17 So, I think we'll work through identifying 18 the issues, trying to quantify how important they are, 19 and although in the end, not everybody will agree on an 20 exact number, we can come to some closure on a lot of 21 the issues and bring it down to the things that really 22 matter. 23 MR. MORRIS: Wayne Morris with AHAM. 24 I guess with all deference to the work that 25 you're doing, Jim, in terms of trying to make this EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 176 1 disagreement. 2 By analogy, whenwe did the consensus process 3 for refrigerators in 1992 to 1994, whenwe came into 4 the first meetings, there was a lot of issues on the 5 table between the different interestedparties, the 6 environmental groups and the manufacturers, about what 7 theythought was true andwas not true or the ranges of 8 values for different things. 9 Evenwithinthe engineering analysis, there 10 was disagreement amongmanufacturers about what was 11 possible at what cost. 12 Over the course of time, through discussion 13 and quantifying those differences, we woundup saying 14 okay, we can't be sure about the effect of a heat 15 exchanger in this particular application, but it's only 16 a five-percent effect. Okay. 17 So, I thinkwe'll work through identifying 18 the issues, trying to quantifyhow important they are, 19 and although inthe end, not everybodywill agree on an 20 exact number, we can come to some closure on a lot of 21 the issues andbring it down to the things that really 22 matter. 23 MR. MORRIS: Wayne Morris withAHAM. 24 I guess with all deference to the work that 25 you're doing, Jim, in terms of trying to make this EXECUTIVE COURT REPORTERS, INC. (301) 565-0064177 1 forecasting model better than it was, and certainly I 2 think we all feel that it -- that it -- it does 3 definitely deserve that attention. 4 I guess I would urge the department not to do 5 a forecasting of shipments on a total basis but rather 6 to -- to look at the shipments forecasting on an 7 individual product-by-product rulemaking basis, to do 8 it as the first stage of assumptions of the -- of the 9 rulemaking. 10 I don't think that necessarily the forecasts 11 that we're looking at here, that the same assumptions 12 and the same variables would be true from one industry 13 to another, and I think that -- that certainly the work 14 that you're doing in developing this could be useful to 15 use as a check-back, as NEMS has been for other such16 situations. So that we look at the numbers of house17 holds and all of that type of thing, and I think that's 18 very valuable. 19 But as an actual number to plug in to the -- 20 the -- the GRIM analysis of the shipments, I would urge21 the department to do that on an individual product-by22 product basis as we -- as we go forward with each of 23 the rulemakings rather than do it on a universal basis. 24 MR. McMAHON: I agree. I don't know if 25 anyone from DOE wants to comment on that. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 177 1 forecasting model betterthan it was, and certainly I 2 think we all feel that it

-- that it

-- it does 3 definitelydeserve that attention. 4 I guess I wouldurge the department not to do 5 a forecasting of shipments on a total basis but rather 6 to

-- to look at the shipments forecasting on an 7 individual product-by-product rulemakingbasis, to do 8 it as the first stage of assumptions of the

-- of the 9 rulemaking. 10 I don't think that necessarilythe forecasts 11 that we're looking at here, that the same assumptions 12 and the same variables wouldbe true from one industry 13 to another, and I thinkthat that certainlythe work 14 that you're doing indeveloping this couldbe useful to 15 use as a check-back, as NEMS has been for other such 16 situations. So that we look at the numbers of house17 holds and all of that type of thing, and I thinkthat's 18 veryvaluable. 19 But as an actual number toplug in to the

-- 20 the the GRIM analysis of the shipments, I wouldurge 21 the department to do that on an individual product-by22 product basis as we -- as we go forward with each of 23 the rulemakings rather than do it on a universal basis. 24 MR. McMAHON: I agree. I don't know if 25 anyone fromDOE wants to comment on that. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064178

1 MR. McCABE: This is Michael McCabe. 2 I would agree as well. 3 MR. BROOKMAN: He loves the easy ones.
4 MR. SHOREY: Everett Shorey. 5 I -- I would like to commend Jim for a great 6 statement of how to make models as simple as possible, 7 and I think it's -- if I can quote you, breaking it 8 into tractable problems, and a large part of what 9 we've, I think, had in the past is we've tried to do 10 everything all at once, and we've lost -- you can't 11 really tell what's going on. 12 I've been as guilty of that as anybody has, 13 and I think that if we can start it early in the 14 process and say what matters, and what are the 15 tractable problems, that they will become a lot easier 16 to solve because in many cases, what we're trying to 17 understand is the incremental change caused by 18 regulation, and a lot of the things that -- that you've 19 talked about modeling are very important for getting 20 the absolute numbers, but may have very little effect 21 on the incremental change, and a lot of what we need to 22 do is make sure we understand what that incremental 23 change is, and it may be only two or three factors, and 24 we may have a much easier time getting to those, and I 25 think that's going to be a terrific step forward. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 178 1 MR. McCABE: This is Michael McCabe. 2 I would agree as well. 3 MR. BROOKMAN: He loves the easyones. 4 MR. SHOREY: Everett Shorey. 5 I

-- I would like to commendJim for a great 6 statement of how tomake models as simple as possible, 7 and I think it's if I canquote you, breaking it 8 into tractable problems, and a large part of what 9 we've, I think, had in thepast is we've tried to do 10 everything all at once, andwe've lost

-- you can't 11 reallytell what's going on. 12 I'vebeen as guiltyof that as anybodyhas, 13 and I think that if we can start it early in the 14 process and saywhat matters, andwhat are the 15 tractable problems, that theywill become a lot easier 16 to solvebecause inmany cases, what we're trying to 17 understand is the incremental change causedby 18 regulation, and a lot of the things that that you've 19 talked about modeling are very important for getting 20 the absolute numbers, but mayhave very little effect 21 on the incremental change, and a lot of what we need to 22 do is make sure we understandwhat that incremental 23 change is, and it maybe onlytwo or three factors, and 24 we mayhave a much easier time getting to those, and I 25 think that's going tobe a terrific step forward. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064179 1 MR. BROOKMAN: Any other comments? Global 2 comments like that on what's being suggested, you know, 3 as approaches, methodologies? Or any other specific 4 questions at this point? Yes, Dave? 5 MR. LEWIS: Dave Lewis, Lennox. 6 What -- what is your plan concerning the 7 issue of utility deregulation? It seems like the 8 impact of that on the consumer is tremendous 9 potentially, and it seems very likely that we'll see a 10 lot of change in that over the next five years. 11 What -- what -- what process will you put in 12 place to identify that as -- as an issue? 13 MR. McMAHON: That's a very major problem. 14 That's a good question. I understand that EIA has a 15 study underway to try and get a handle on what utility 16 restructuring will do to energy prices, which I think 17 is the key thing here. 18 I'm not sure in the realm of forecasting 19 whether anyone will successfully forecast exactly the 20 future of energy prices. So, what I would propose as a 21 simple immediate solution is to do sensitivity 22 analyses. 23 I think we should start with what's the 24 marginal price for residential electricity. How low 25 could it possibly go, and, secondly, how fast might it EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 179 1 MR. BROOKMAN: Any other comments? Global 2 comments like that onwhat's being suggested, you know, 3 as approaches, methodologies? Or any other specific 4 questions at this point? Yes, Dave? 5 MR. LEWIS: Dave Lewis, Lennox. 6 What

-- what is yourplan concerning the 7 issue of utilityderegulation? It seems like the 8 impact of that onthe consumer is tremendous 9 potentially, and it seems very likelythat we'll see a 10 lot of change in that over the next five years. 11 What

-- what what process will youput in 12 place to identifythat as -- as an issue? 13 MR. McMAHON: That's a verymajorproblem. 14 That's a goodquestion. I understand that EIAhas a 15 studyunderway to try and get a handle onwhat utility 16 restructuringwill do to energyprices, which I think 17 is the key thing here. 18 I'mnot sure in the realmof forecasting 19 whether anyone will successfullyforecast exactlythe 20 future of energyprices. So, what I wouldpropose as a 21 simple immediate solution is to do sensitivity 22 analyses. 23 I thinkwe should start withwhat's the 24 marginal price for residential electricity. How low 25 could itpossiblygo, and, secondly, how fast might it EXECUTIVE COURT REPORTERS, INC. (301) 565-0064180

1 decline to get from where we are now to where it's 2 going to go, and use that as kind of the bounds of 3 uncertainty. 4 Beyond that, to try and come up with a more 5 rigorous forecast, we can rely on EIA to do some good 6 work. There's a utility policy and planning group at 7 LBL that tracks this very closely, and they're also 8 trying to figure this out. There's a number of efforts 9 at the state levels. 10 So, yeah, it's a real problem. We're doing a 11 workshop next week with the ballast data in which we've 12 done an uncertainty analysis on electricity prices, and 13 one of the things that we did was take the current 14 range of prices among utilities in the U.S. So, we 15 took the EIA survey utility-by-utility of commercial 16 electricity rates today, and they range from one cent a 17 kilowatt hour to 14 cents a kilowatt hour, and we did 18 the sensitivity saying if that were the range of 19 prices, how many people would benefit or suffer from a 20 particular regulation. 21 So, we can do those kind of studies for the 22 future in terms of where the prices are going to go. 23 I think there's general agreement that the 24 high electricity price regions will come down. There's 25 concern at the same time that some of the low price EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 180 1 decline to get fromwhere we are now to where it's 2 going to go, anduse that as kind of the bounds of 3 uncertainty. 4 Beyondthat, to try and come up with a more 5 rigorous forecast, we can rely onEIA to do some good 6 work. There's a utilitypolicyandplanninggroup at 7 LBL that tracks this very closely, and they're also 8 trying to figure this out. There's a number of efforts 9 at the state levels. 10 So, yeah, it's a real problem. We're doing a 11 workshop next weekwiththe ballast data inwhichwe've 12 done anuncertainty analysis on electricityprices, and 13 one of the things that we didwas take the current 14 range of prices among utilities in the u.S. So, we 15 took the EIA surveyutility-by-utilityof commercial 16 electricityrates today, and theyrange from one cent a 17 kilowatt hour to 14 cents a kilowatt hour, andwe did 18 the sensitivity saying if that were the range of 19 prices, howmanypeople wouldbenefit or suffer from a 20 particularregulation. 21 So, we cando those kind of studies for the 22 future in terms of where theprices are going to go. 23 I think there's general agreement that the 24 high electricityprice regions will come down. There's 25 concern at the same time that some of the lowprice EXECUTIVE COURT REPORTERS, INC. (301) 565-0064181

1 regions, the price will come up because they'll be able 2 to sell cheap electricity at a higher price to a 3 different market. Okay. 4 So, where we wind up in the end is going to 5 be really tough to call, and I think we're going to 6 wind up doing, you know, the best sensitivities that we 7 can do to account for it. 8 MR. BROOKMAN: I wanted to give the audience 9 generally a chance to follow up on comments to what you 10 suggested. I saw several people in the audience, maybe 11 three or four, kind of going like this with nodding yes 12 to the thrust of your comments. 13 Are there any other comments about this 14 critical and pretty complicated issue? And then we've 15 got one question in the back. 16 Glenn, he actually was first. Is yours 17 different or is it a follow-on? Yeah. So, let me 18 ask -- 19 MR. SCHLEEDE: I don't think this is the 20 right place to put it in, but I don't want to miss an i h 21 opportun ere. ty 22 Glenn Schleede again. 23 I think that the use of the total price of 24 electricity -- I've recorded this point several times, 25 and it keeps getting ignored by DOE. The use of the EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 181 1 regions, the price will come upbecause they'll be able 2 to sell cheap electricity at a higherprice to a 3 different market. Okay. 4 So, where we windup in the end is going to 5 be really tough to call, and I thinkwe're going to 6 windup doing, youknow, the best sensitivities that we 7 can do to account for it. 8 MR. BROOKMAN: I wanted to give the audience 9 generallya chance to followup on comments towhat you 10 suggested. I saw several people in the audience, maybe 11 three or four, kindof going like this withnoddingyes 12 to the thrust of your comments. 13 Are there anyother comments about this 14 critical andprettycomplicated issue? And thenwe've 15 got one question in the back. 16 Glenn, he actuallywas first. Is yours 17 different or is it a follow-on? Yeah. So, let me 18 ask

-- 19 MR. SCHLEEDE: I don't think this is the 20 right place toput it in, but I don't want to miss an 21 opportunityhere. 22 Glenn Schleede again. 23 I think that the use of the total price of 24 electricity

-- I've recordedthis point several times, 25 and it keeps getting ignoredbyDOE. The use of the EXECUTIVE COURT REPORTERS, INC. (301) 565-0064182

1 total price of electricity rather than the variable 2 cost -- rather, yes, the variable cost is just a 3 fundamental error in the way the analysis is done. 4 I just wanted to get it on the record. I 5 suspect if we took a vote in the room, I might be all 6 by myself. 7 MR. McMAHON: Glenn, I have seen your 8 letters, and I thank you for the comment. 9 Frankly, I think you're wrong, and I think a 10 response will come to you about that, but I do 11 appreciate the concern. 12 The reason -- it's a matter of perspective. 13 I think you're thinking from the perspective of the 14 utility and their costs, and we're thinking from the 15 perspective of the consumer. What matters to the 16 consumer is the retail price that they're going to pay, 17 and there are issues about how much that's going to 18 change under restructuring and -- and other things that 19 may come down closer to the margin. 20 MR. BROOKMAN: And noting that this is 21 important but not the focus of this discussion, we're 22 going to let you take that one off line, okay, when 23 this concludes. 24 Yes? Next question. 25 MR. KREBS: Mark Krebs again. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 182 1 total price of electricityrather thanthe variable 2 cost

-- rather, yes, the variable cost isjust a 3 fundamental error in the way the analysis is done. 4 I justwantedto get it on the record. I 5 suspect if we took a vote in the room, I might be all 6 bymyself. 7 MR. McMAHON: Glenn, I have seenyour 8 letters, and I thankyou for the comment. 9 Frankly, I thinkyou're wrong, and I think a 10 response will come toyou about that, but I do 11 appreciate the concern. 12 The reason -- it's a matter ofperspective. 13 I thinkyou're thinking from the perspective of the 14 utilityand their costs, andwe're thinking from the 15 perspective of the consumer. What matters to the 16 consumer is the retail price that they're going topay, 17 and there are issues about howmuch that's going to 18 change under restructuring and

-- and otherthings that 19 may come down closerto the margin. 20 MR. BROOKMAN: Andnoting that this is 21 important but not the focus of this discussion, we're 22 going to letyou take that one off line, okay, when 23 this concludes. 24 25 Yes? Next question. MR. KREBS: Mark Krebs again. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064183

1 Actually, I have two. First of all, when you 2 talk about the total cost, there ought to at least be a3 variable to estimate the impacts of monetizing so4 called environmental externalities. 5 I know that's one that nobody really wants to 6 touch, but, you know, to not touch it, I think, is -- 7 is a conscious decision. 8 Second of all, I would strongly suggest that 9 to use spread sheets unless you prove that they're 10 inadequacy rather than the traditional so-called black 11 box. 12 MR. McMAHON: If I can respond to -- I'm not 13 going to respond to the first part because that's not 14 my call. My understanding is that a decision has been 15 made not to monetize externalities, but I'll pass that 16 buck to DOE. 17 With regard to the second part, I'm not 18 suggesting that we abandon the more complex models. 19 I'm suggesting that we develop the spread sheets in 20 order to serve as a teaching tool and a way to get 21 input from a larger audience, and then we can decide 22 whether they are adequate, close enough, take account 23 of everything enough that we can abandon the complex 24 models. I think we need to make that decision later. 25 MR. BROOKMAN: Additional questions or EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 183 1 Actually, I have two. First of all, whenyou 2 talk about the total cost, there ought to at least be a 3 variable to estimate the impacts of monetizing so4 calledenvironmental externalities. 5 I know that's one that nobodyreallywants to 6 touch, but, you know, to not touch it, I think, is

-- 7 is a conscious decision. 8 Secondof all, I would strongly suggest that 9 to use spread sheets unless youprove that they're 10 inadequacyrather than the traditional so-calledblack 11 box. 12 MR. McMAHON: If I can respond to

-- I'mnot 13 going to respond to the first part because that's not 14 my call. My understanding is that a decisionhas been 15 made not to monetize externalities, but I'll pass that 16 buck toDOE. 17 With regard to the secondpart, I'mnot 18 suggesting that we abandon the more complexmodels. 19 I'm suggesting that we develop the spread sheets in 20 order to serve as a teaching tool and a way to get 21 input from a larger audience, and thenwe can decide 22 whether they are adequate, close enough, take account 23 of everything enoughthat we can abandon the complex 24 models. I thinkwe need tomake that decision later. 25 MR. BROOKMAN: Additional questions or EXECUTIVE COURT REPORTERS, INC. (301) 565-0064184

1 comments? Yes? Can you pass this over to Everett? 2 MR. SHOREY: Everett Shorey again. 3 On the modeling question, I think it's also 4 important to distinguish between when we're doing an 5 overall energy impact analysis and doing an impact 6 analysis on manufacturers because they may be two very 7 different things that have very different questions 8 involved, and at least it's hard for me to imagine how 9 to do an overall energy impact analysis without going 10 through a lot of the kinds of steps that Jim has 11 described. 12 But they may not necessarily be relevant or 13 important in -- in a manufacturer's impact analysis, 14 and part of what -- what we may want to do is to -- to 15 keep those decoupled. They can't -- as we said about a 16 number of other things, they can't diverge. You can't 17 use one set of assumptions in one place and another set 18 of assumptions someplace else. 19 But -- but you may not need the same tools 20 for -- for analyzing different questions because they 21 may be fundamentally different questions, and there may 22 be simpler ways to get at issues, and I think that's 23 really what Jim is talking about in terms of decoupling 24 or -- or breaking down into tractable problems. 25 MR. McMAHON: I agree that we need to make EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 184 1 comments? Yes? Canyoupass this over to Everett? 2 MR. SHOREY: Everett Shorey again. 3 On the modeling question, I think it's also 4 important to distinguishbetweenwhenwe're doing an 5 overall energy impact analysis and doing an impact 6 analysis onmanufacturers because theymaybe twovery 7 different things that havevery different questions 8 involved, and at least it'shard for me to imagine how 9 to do an overall energy impact analysis without going 10 through a lot of the kinds of steps that Jimhas 11 described. 12 But theymaynot necessarilybe relevant or 13 important in

-- in a manufacturer's impact analysis, 14 andpart of what

-- what we maywant to do is to

-- to 15 keep those decoupled. They can't

-- as we saidabout a 16 number of other things, they can't diverge. You can't 17 use one set of assumptions inoneplace and another set 18 of assumptions someplace else. 19 But

-- but youmaynot need the same tools 20 for for analyzing different questions because they 21 maybe fundamentally different questions, and there may 22 be simplerways to get at issues, and I think that's 23 reallywhat Jim is talking about in terms of decoupling 24 or -- orbreaking down into tractable problems. 25 MR. McMAHON: I agree that we need tomake EXECUTIVE COURT REPORTERS, INC. (301) 565-0064185

1 the distinctions all the way through about what we 2 need. 3 For the manufacturer analysis, we need 4 shipments, okay, and I agree with your earlier comment 5 that a lot of the things will wash out; that is, if in 6 a particular year, the economy is down and shipments go 7 down or up a certain percentage, that's going to happen 8 in both the standards case and the base case, and what 9 we really care about is the difference between the two, 10 which isn't going to be affected so much. 11 However, the other side of that is the 12 revenues to the manufacturers will be determined by 13 absolute shipments, and, so, if there's a significant 14 effect going on for whatever reason, that's important 15 to bring into the manufacturer analysis. 16 MR. BROOKMAN: Additional questions? 17 Comments? 18 (No response) 19 MR. BROOKMAN: Did you conclude your 20 presentation? 21 MR. McMAHON: I have concluded my 22 presentation. 23 MR. BROOKMAN: Wow. And so terse. 24 Noting that Jim has concluded his 25 presentation, additional comments at this point? Yes, EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 185 1 the distinctions all the way through about what we 2 need. 3 For the manufacturer analysis, we need 4 shipments, okay, and I agree withyour earliercomment 5 that a lot of the things will wash out; that is, if in 6 a particularyear, the economy is down and shipments go 7 down orup a certainpercentage, that's going to happen 8 inboth the standards case and the base case, andwhat 9 we reallycare about is the difference between the two, 10 which isn't going tobe affected so much. 11 However, the other side of that is the 12 revenues to the manufacturers will be determinedby 13 absolute shipments, and, so, if there's a significant 14 effect going on for whatever reason, that's important 15 to bring into the manufacturer analysis. 16 MR. BROOKMAN: Additional questions? 17 Comments? 18 (No response) 19 MR. BROOKMAN: Didyou conclude your 20 presentation? 21 MR. McMAHON: I have concludedmy 22 presentation. 23 MR. BROOKMAN: Wow. And so terse. 24 Noting that Jimhas concludedhis 25 presentation, additional comments at this point? Yes, EXECUTIVE COURT REPORTERS, INC. (301) 565-0064186
1 Dave? 2 MR. LEWIS: Could you refresh our -- our 3 minds as to how this particular segment is folded into 4 the overall decision process? 5 MR. BROOKMAN: We'll have Mike Rivest take 6 that one up first. 7 MR. RIVEST: I think it's a question of 8 consistency. We have to come up with the -- a shipment 9 forecast for the GRIM Model, and in calculating the 10 benefits of standards, it's important also to get -- to 11 have the forecast of what will be shipped. 12 In other words, what -- in absence of 13 standards, what is the base case? What products will 14 you be selling at what efficiency levels? That becomes 15 the base case, and with standards, assuming an increase 16 in price, what does economics have to say about what 17 will be the shipments based on standards? 18 So, for example, within the model, there are 19 elasticity values, which would consider that a 10- 20 percent increase in price of -- of a water heater would 21 result in a two-percent decrease in sales. That would 22 be taken into account in the REM model, for example. 23 So, from our prices that we determine for the 24 life cycle costs, we would take those -- okay. if 25 the -- if the new standard level is a 12 air EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 186 1 Dave? 2 MR. LEWIS: Couldyou refresh our -- our 3 minds as to how this particular segment is folded into 4 the overall decisionprocess? 5 MR. BROOKMAN: We'll have Mike Rivest take 6 that one up first. 7 MR. RIVEST: I think it's a question of 8 consistency. We have to come up with the

-- a shipment 9 forecast for the GRIM Model, and in calculatingthe 10 benefits of standards, it's important also to get

-- to 11 have the forecast of what will be shipped. 12 In otherwords, what in absence of 13 standards, what is the base case? What products will 14 yoube selling at what efficiencylevels? That becomes 15 the base case, andwith standards, assuming an increase 16 inprice, what does economics have to say about what 17 will be the shipments basedon standards? 18 So, for example, within the model, there are 19 elasticityvalues, whichwould consider that a 10- 20 percent increase inprice of

-- of a waterheaterwould 21 result in a two-percent decrease in sales. That would 22 be taken into account in the REM model, for example. 23 So, from ourprices that we determine for the 24 life cycle costs, we would take those okay. If 25 the

-- if the new standard level is a 12 air EXECUTIVE COURT REPORTERS, INC. (301) 565-0064187

1 conditioner instead of a 10, will we sell fewer air 2 conditioners? And there would be a cost increase which 3 may or may not be passed on to consumers, and in the 4 assumption that it's passed on, that price increase may 5 result in few air conditioners being sold. 6 The net national -- the benefits -- the 7 National Benefits Model, the REM, the REEPs, the 8 Commend, would take that price increase with an 9 elasticity value and reduce the shipments, and, so, 10 that would give us one input to the GRIM shipments 11 inputs, for example. That would give us one of several 12 ways of forecasting shipments. 13 MR. BROOKMAN: List them again. What were 14 the other inputs to the GRIM Model? 15 MR. RIVEST: The prices, the quantities, and 16 the costs. 17 MR. BROOKMAN: Questions? That's the best 18 question. Did that answer your question? 19 MR. LEWIS: I'll come back to it. 20 MR. BROOKMAN: Okay. You seem satisfied for 21 the moment. Okay. 22 Additional questions at this point? 23 (No response) 24 MR. BROOKMAN: Okay. Jim, thank you for a 25 nice, clear presentation. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 187 1 conditioner insteadof a 10, will we sell fewer air 2 conditioners? And there wouldbe a cost increase which 3 mayormaynot bepassedon to consumers, and in the 4 assumption that it'spassedon, that price increase may 5 result in few air conditioners being sold. 6 The net national

-- the benefits

-- the 7 National BenefitsModel, the REM, the REEPs, the 8 Commend, would take that price increase with an 9 elasticityvalue and reduce the shipments, and, so, 10 that wouldgive us one input to the GRIM shipments 11 inputs, for example. That wouldgive us one of several 12 ways of forecasting shipments. 13 MR. BROOKMAN: List them again. What were 14 the other inputs to the GRIM Model? 15 MR. RIVEST: Theprices, the quantities, and 16 the costs. 17 MR. BROOKMAN: Questions? That's the best 18 question. Didthat answeryour question? 19 MR. LEWIS: I'll come back to it. 20 MR. BROOKMAN: Okay. You seem satisfied for 21 the moment. Okay. 22 Additional questions at this point? 23 (No response) 24 MR. BROOKMAN: Okay. Jim, thankyou for a 25 nice, clearpresentation. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064188

1 (Applause) 2 MR. BROOKMAN: As I understand it, we now 3 will have several models -- 4 MR. RIVEST: I believe Steve Shankel will 5 give a short presentation. 6 MR. BROOKMAN: Oh, you're going to give an 7 additional one? Okay. 8 MR. SHANKEL: Maybe -- 9 MR. BROOKMAN: By all means. I'm sorry. I 10 didn't note this on my agenda. 11 MR. SHANKEL: Maybe I can ask Steve Wade to 12 come up front from EIA. 13 MR. LEWIS: Break? 14 MR. BROOKMAN: As soon as Steve is finished, 15 and then we're going to -- and then we're going to come 16 back and those of you -- you can play with these models 17 and -- and the PCs that are up here. Laptops. 18 Steve, this is how long? 19 MR. SHANKEL: This is short. 20 21 22 MR. BROOKMAN: There's the microphone there. (Pause) MR. BROOKMAN: This is Steve Wade from EIA, 23 who is going to be our first presenter. He's got the 24 microphone. 25 MR. WADE: Yes. Maybe I'll spend just about EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 188 1 (Applause) 2 MR. BROOKMAN: As I understand it, we now 3 will have several models 4 MR. RIVEST: I believe Steve Shankel will 5 give a short presentation. 6 MR. BROOKMAN: Oh, you're going to give an 7 additional one? Okay. 8 MR. SHANKEL: Maybe-- 9 MR. BROOKMAN: By all means. I'm sorry. I 10 didn't note this onmy agenda. 11 MR. SHANKEL: Maybe I can ask Steve Wade to 12 come up front fromEIA. 13 MR. LEWIS: Break? 14 MR. BROOKMAN: As soon as Steve is finished, 15 and thenwe're going to

-- and thenwe're going to come 16 back and those of you -- you canplaywith these models 17 and

-- and the PCs that are up here. Laptops. 18 Steve, this is how long? 19 MR. SHANKEL: This is short. 20 MR. BROOKMAN: There's the microphone there. 21 (Pause) 22 MR. BROOKMAN: This is SteveWade fromEIA, 23 who is going to be our first presenter. He's got the 24 microphone. 25 MR. WADE: Yes. Maybe I'll spendjust about EXECUTIVE COURT REPORTERS, INC. (301) 565-0064189

1 five to 10 minutes giving you a quick overview of the 2 residential and commercial models in NEMS. 3 NEMS is a large model. I think it's up 4 around a 150,000 lines of FORTRAN code. So, it's got 5 some of the black box aspects big time. It's got 6 regional detail, and it runs on -- basically you need a 7 risk machine to run it these days. You can run some of 8 the individual modules on a personal computer, but 9 we're not producing them routinely like we used to. 10 So, right now, NEMS is not a widely-available model. 11 It does represent all the energy supply 12 conversion and consumption activities in the U.S. in an 13 integrated fashion. So, it determines prices and 14 quantities of energy consumption simultaneously as it 15 develops its forecasts. 16 It has a lot of technology data in it, both 17 on the supply and the demand side, and it has many 18 policy levels, and for the purpose of this discussion, 19 things pertaining to standards and, say, electric 20 utility deregulation would be relevant, and the 21 documentation is publicly available, but it's of the 22 500-page variety. 23 Here's a picture of -- this is just a real 24 rough overview of the sectors that NEMS considers, and 25 the buildings models are over with the demand EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 189 1 five to 10 minutes givingyou a quickoverviewof the 2 residential and commercial models inNEMS. 3 NEMS is a large model. I think it'sup 4 around a 150,000 lines of FORTRAN code. So, it's got 5 some of the blackboxaspects big time. It's got 6 regional detail, and it runs on -- basicallyyou need a 7 riskmachine to run it these days. You canrun some of 8 the individual modules on a personal computer, but 9 we're not producing themroutinely like we usedto. 10 So, right now, NEMS is not a widely-available model. 11 It does represent all the energy supply 12 conversion and consumption activities inthe u.S. in an 13 integrated fashion. So, it determines prices and 14 quantities of energyconsumption simultaneouslyas it 15 develops its forecasts. 16 It has a lot of technologydata in it, both 17 on the supplyand the demand side, and it has many 18 policy levels, and for thepurpose of this discussion, 19 things pertaining to standards and, say, electric 20 utilityderegulationwouldbe relevant, and the 21 documentation is publicly available, but it's of the 22 500-pagevariety. 23 Here's a picture of

-- this isjust a real 24 rough overviewof the sectors that NEMS considers, and 25 the buildings models are overwith the demand EXECUTIVE COURT REPORTERS, INC. (301) 565-0064190

1 components on the right here. They receive 2 demographics, macro economic information, and prices 3 from the NEMS integrated module, and once they run 4 through their algorithms, they send back quantities of 5 energy consumption back to the integrated model as part 6 of the iterative solution for prices and quantities. 7 I -- I guess one of the primary questions to 8 deal with is, you know, why are there two buildings 9 modules in NEMS, and the reason is -- is that they're 10 different enough in -- the data that are available are 11 different enough that it makes sense to split buildings 12 out into residential buildings and commercial 13 buildings. 14 MR. BROOKMAN: Steve, pardon me for 15 interrupting. 16 MR. WADE: Yes. 17 MR. BROOKMAN: Your slides are not in the 18 packet. 19 MR. WADE: I'm sorry. They're -- they're 20 not. 21 MR. BROOKMAN: So, can you make copies 22 available either through you or through Michael 23 McCabe's shop or how -- what's the best way -- 24 MR. WADE: Certainly. Yeah. I have some -- 25 I have like two spares with me. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 190 1 components on the right here. They receive 2 demographics, macro economic information, andprices 3 from theNEMS integratedmodule, and once theyrun 4 through their algorithms, they sendbackquantities of 5 energyconsumptionback to the integratedmodel as part 6 of the iterative solution for prices and quantities. 7 I

-- I guess one of the primaryquestions to 8 deal with is, youknow, why are there twobuildings 9 modules inNEMS, and the reason is

-- is that they're 10 different enough in

-- the data that are available are 11 different enoughthat itmakes sense to split buildings 12 out into residential buildings and commercial 13 buildings. 14 MR. BROOKMAN: Steve, pardonme for 15 interrupting. 16 MR. WADE: Yes. 17 MR. BROOKMAN: Your slides are not inthe 18 packet. 19 MR. WADE: I'm sorry. They're

-- they're 20 not. 21 MR. BROOKMAN: So, canyoumake copies 22 available either throughyou or throughMichael 23 McCabe's shop orhow

-- what's the best way -- 24 MR. WADE: Certainly. Yeah. I have some -- 25 I have like two spares withme. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064191

1 MR. BROOKMAN: Okay. 2 MR. WADE: But they can serve as a basis for 3 making a copy. 4 MR. BROOKMAN: Anybody who wishes to have a 5 copy of this presentation can sign up with Sandy or 6 shall we just send it to everybody or how should we 7 work this? We'll bring it tomorrow. Okay. Great. 8 MR. WADE: Okay. So, first of all, the 9 buildings differ in size and complexity. Residential10 buildings are more homogenous, and we've got single11 family, multi-family and mobile homes versus 11 types 12 of commercial buildings. 13 Residential heating and cooling loads are 14 more shell driven. In the commercial sector for 15 cooling, you've got to worry about internal loads. 16 Between the sectors, the factors affecting 17 the choice of equipment may vary. In the commercial 18 sector, you'll have investors. In the residential 19 sector, you'll have homeowners, builders, renters, all 20 making decisions about appliance efficiency and 21 purchase. 22 In the commercial sector, the complexity of 23 equipment that's available is greater. There's a wide 24 variety of capacities, and the costs of -- of equipment 25 tend to vary with capacity. That's a difficult issue EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 191 1 MR. BROOKMAN: Okay. 2 MR. WADE: But theycan serve as a basis for 3 making a copy. 4 MR. BROOKMAN: Anybodywho wishes to have a 5 copy of this presentation can signup with Sandyor 6 shall we just send it to everybody orhow shouldwe 7 work this? We'll bring it tomorrow. Okay. Great. 8 MR. WADE: Okay. So, first of all, the 9 buildings differ in size and complexity. Residential 10 buildings aremore homogenous, andwe've got single11 family, multi-familyandmobile homes versus 11 types 12 of commercial buildings. 13 Residential heating and cooling loads are 14 more shell driven. Inthe commercial sector for 15 cooling, you've got to worry about internal loads. 16 Between the sectors, the factors affecting 17 the choice of equipment mayvary. In the commercial 18 sector, you'll have investors. Inthe residential 19 sector, you'll have homeowners, builders, renters, all 20 making decisions about appliance efficiencyand 21 purchase. 22 In the commercial sector, the complexityof 23 equipment that's available is greater. There's a wide 24 varietyof capacities, and the costs of

-- of equipment 25 tend tovarywith capacity. That's a difficult issue EXECUTIVE COURT REPORTERS, INC. (301) 565-0064192

1 for us to deal with actually. 2 Data availability. The residential model 3 actually uses historical shipment data that are gotten 4 from many of the associations represented here, track 5 over a period of time, and then retire on kind of a -- 6 what is it -- first-in/first-out type of a basis, so 7 that the retiring equipment efficiency varies over time 8 in the model, based on this historical shipment 9 information. 10 In the commercial sector, that will happen, 11 also, but it -- we don't draw on the historical 12 shipment data. We -- we don't use it. We don't have 13 it. I think it's generally not available. 14 In terms of just the size of the problem, 15 given that there's more flavors of equipment and more 16 building types, computational limitations kind of drove 17 decisions on how the model would account for equipment. 18 In the residential model, we can just add it 19 up, and it directly will provide information like 20 shipment data. In the commercial model, the forecasts 21 are in terms of service demand. Thousands of BTUs of 22 service demand met by a particular technology. They're 23 not in terms of units, and that's a difference, and 24 that's something that would need to be worried about as 25 you get to GRIM, and I think Steve Shankel will follow EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 192 1 

### for us to deal with actually. 2 Data availability. The residential model 3 actuallyuses historical shipment data that are gotten 4 frommany of the associations representedhere, track 5 over a periodof time, and thenretire onkind of a -- 6 what is it

-- first-in/first-out type of a basis, so 7 that the retiring equipment efficiencyvaries overtime 8 inthe model, basedonthis historical shipment 9 information. 10 

### Inthe commercial sector, that will happen, 11 

### also, but it we donlt drawon the historical 12 

### shipment data. We

-- we donlt use it. We don1t have 13 

### it. I think it1s generallynot available. 14 

### In terms ofjust the size of the problem, 15 

### given that there1s more flavors of equipment andmore 16 

### building types, computational limitations kind of drove 17 

### decisions onhow the model would account for equipment. 18 

### In the residential model, we canjust add it 19 

### up, and it directlywill provide information like 20 shipment data. In the commercial model, the forecasts 21 

### are in terms of service demand. Thousands of BTUs of 22 service demandmet bya particulartechnology. Theylre 23 not in terms of units, and that1s a difference, and 24 that1s something that wouldneed to be worried about as 25 you get to GRIM, and I think Steve Shankel will follow EXECUTIVE COURT REPORTERS, INC. (301) 565-0064193

1 up with some of that in his application. 2 There might be an issue. Maybe GRIM could 3 accept numbers in service demands unit. So, -- or at 4 least convert it to capacity still without specific 5 dimensions of shipments. 6 In terms of the issues, they're going to be a 7 little different for residential and commercial. 8 There's a shipments versus service demand. The 9 residential model includes fuel switching costs on a 10 firm technology A to technology B basis. 11 The commercial model doesn't have that. 12 There are just too many technologies in the model to -- 13 to track each one individually like that. 14 The electricity price for the commercial 15 sector is an average price, and it kind of ignores 16 the -- the -- the fact that demand charges are 17 important in some of the equipment purchased decisions. 18 Down the road, electric utility deregulation. 19 NEMS is doing an effort to model electricity prices by 20 time of day, and there's a load-shaped model inside of 21 NEMS that can pass, say, weighted average prices back 22 to the demand sectors for their use in equipment 23 purchase decisions. 24 So, we're expecting some richness of the 25 model in being able to analyze, you know, what might EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 193 1 up with some of that inhis application. 2 There might be an issue. Maybe GRIM could 3 accept numbers in service demands unit. So,

-- or at 4 least convert it to capacity still without specific 5 dimensions of shipments. 6 In terms of the issues, they're going tobe a 7 little different for residential and commercial. 8 There's a shipments versus service demand. The 9 residential model includes fuel switching costs on a 10 firm technologyAto technologyBbasis. 11 The commercial model doesn't have that. 12 There arejust toomany technologies in the model to

-- 13 to track eachone individuallylike that. 14 The electricityprice for the commercial 15 sector is an averageprice, and it kind of ignores 16 the

-- the

-- the fact that demand charges are 17 important in some of the equipment purchaseddecisions. 18 Down the road, electric utilityderegulation. 19 NEMS is doing an effort tomodel electricityprices by 20 time of day, and there's a load-shapedmodel inside of 21 NEMS that canpass, say, weighted average prices back 22 to the demand sectors for theiruse in equipment 23 purchase decisions. 24 So, we're expecting some richness of the 25 model inbeing able to analyze, you know, what might EXECUTIVE COURT REPORTERS, INC. (301) 565-0064194 1 happen to purchasing behavior under deregulation, but 2 that's under development now. 3 About five more minutes? Okay. Just briefly 4 go through the two models individually. In the 5 residential model, equipment choices are made from a 6 menu of technologies that are available to serve a 7 given end use in a particular year. So, the -- to 8 serve heating demand, there will be gas furnaces. 9 There will be electric resistance. There will be heat 10 pumps. There will be ground source heat pumps, and 11 they will -- each technology will be -- will have a 12 window of availability associated with it. 13 Some of the technologies get phased out as14 would be required by a standard. If it was a low15 efficiency technology, you could just terminate it in 16 1995 or whenever. Other technologies come in in the 17 future with different cost and performance information 18 that basically represents technological progress. 19 The end use. Each end use is served by 20 multiple technologies, and within a technology, several 21 efficiency levels are possible. Generally, there's two 22 to four in the residential model. 23 If you have a standard like I mentioned, you 24 can just remove the substandard equipment from the menu 25 by making it unavailable after a particular year. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 

### 194 1 happen topurchasingbehaviorunder deregulation, but 2 that's under development now. 3 

### About five more minutes? Okay. Just briefly 4 go through the two models individually. In the 5 residential model, equipment choices are made from a 6 menu of technologies that are available to serve a 7 given enduse ina particularyear. So, the

-- to 8 serve heating demand, there will be gas furnaces. 9 There will be electric resistance. There will be heat 10 pumps. There will be ground source heat pumps, and 11 theywill

-- each technologywill be

-- will have a 12 windowof availabilityassociatedwith it. 13 Some of the technologies get phased out as 14 wouldbe requiredbya standard. If itwas a low15 efficiencytechnology, you couldjust terminate it in 16 1995 orwhenever. Othertechnologies come in inthe 17 future withdifferent cost andperformance information 18 that basicallyrepresents technological progress. 19 The enduse. Eachenduse is servedby 20 mUltiple technologies, andwithina technology, several 21 efficiencylevels are possible. Generally, there's two 22 to four inthe residential model. 23 Ifyouhave a standardlike I mentioned, you 24 canjust remove the substandardequipment from the menu 25 bymaking it unavailable after a particularyear. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064195

1 The technology data. A lot of it was 2 developed for us by ADL a couple of years ago. We try 3 to keep it updated. We haven't got to that stage with 4 most of the ADL data yet, but every year, we tend to 5 look at some piece of the model in terms of the 6 equipment cost and performance data and try to make 7 improvements. 8 In terms of the choices, the model runs by 9 census division and building type, and it considers 10 choices for new equipment versus replacement equipment, 11 and for replacement equipment, certain amount of the 12 purchases will be replaced with the same technology, be 13 at a different efficiency level, but same technology, 14 and another fraction of the purchases will be based on 15 potential fuel switching, and as I mentioned, the costs 16 of the fuel switching are considered. 17 Technology choices are modeled as a two-step 18 process. There's a fuel and general technology choice 19 that's done based on life cycle costs, and there's 20 another efficiency level choice that is done that 21 weights first cost and operating cost to the
22 computation. 23 The result is, is that the penetration of new 24 technologies is going to be dependent on cost and 25 performance of equipment. Each equipment category in EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 195 1 The technologydata. Alot of it was 2 developed for us byADL a couple of years ago. We try 3 to keep itupdated. We haven't got to that stage with 4 most of theADL data yet, but everyyear, we tend to 5 look at some piece of the model interms of the 6 equipment cost andperformance data and trytomake 7 improvements. 8 In terms of the choices, the model runs by 9 census division andbuilding type, and it considers 10 choices for new equipment versus replacement equipment, 11 and for replacement equipment, certain amount of the 12 purchases will be replacedwith the same technology, be 13 at a different efficiency level, but same technology, 14 and another fraction of the purchases will be basedon 15 potential fuel switching, and as I mentioned, the costs 16 of the fuel switching are considered. 17 Technology choices are modeled as a two-step 18 process. There's a fuel andgeneral technology choice 19 that's done basedon life cycle costs, and there's 20 another efficiencylevel choice that is done that 21 weights first cost andoperating cost to the 22 computation. 23 The result is, is that the penetrationof new 24 technologies is going tobe dependent on cost and 25 performance of equipment. Each equipment category in EXECUTIVE COURT REPORTERS, INC. (301) 565-0064196

1 NEMS is characterized by a hurdle rate, which varies 2 between 15 and a 150 percent, depending on equipment 3 type, and those are often called implicit discount 4 rates as opposed to financial discount rates, and they 5 have been set so that the model will simulate the most 6 recent shipment data that we have available when it is 7 available. So, those are -- those calibrate the model 8 to real world behavior. 9 Let's see. And when the equipment is 10 purchased, the market shares can vary by housing type 11 and census division. That's -- I guess I mentioned 12 that. 13 But choices do vary based on that because you 14 have different -- different insulation properties in 15 the different types of housing units. You have 16 different average sizes of units, which imply an 17 intensity of use of the equipment that varies. So, all 18 those factors kind of come into play. 19 Two more slides. I'll talk about the 20 commercial model briefly. Again, the choices are made 21 from a menu, and, by the way, we -- we have these data 22 available if anyone's interested in seeing what the 23 menus look like. We keep them in spread sheets, so 24 that they can be passed around. 25 For the commercial model, the menu has EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 196 1 NEMS is characterizedby a hurdle rate, whichvaries 2 between 15 and a 150 percent, depending on equipment 3 type, and those are often called implicit discount 4 rates as opposed to financial discount rates, and they 5 have been set so that the model will simulate the most 6 recent shipment data that we have available when it is 7 available. So, those are those calibrate the model 8 to real worldbehavior. 9 Let's see. Andwhen the equipment is 10 purchased, the market shares canvarybyhousing type 11 and census division. That's

-- I guess I mentioned 12 that. 13 But choices do varybased on that becauseyou 14 have different

-- different insulationproperties in 15 the different types of housingunits. You have 16 different average sizes of units, which imply an 17 intensityof use of the equipment that varies. So, all 18 those factors kindof come intoplay. 19 Two more slides. I'll talk about the 20 commercial model briefly. Again, the choices aremade 21 from a menu, and, bythe way, we we have these data 22 available if anyone's interested in seeingwhat the 23 menus look like. We keep them in spread sheets, so 24 that they canbe passed around. 25 For the commercial model, the menu has EXECUTIVE COURT REPORTERS, INC. (301) 565-0064197

1 nomenclature of technologies and models. The 2 technology is a broad class of equipment, like a heat 3 pump or four-foot fluorescent lights or gas water 4 heaters, and a model is a specific version of the 5 technology with its own cost and performance data. So, 6 it could be just 11 different flavors of efficiency 7 with different costs would be one possibility. 8 We recently expanded it up to 11. It takes 9 more computer resources to do that, and I think the 10 current model would have trouble running in the -- on 11 the PC like the old one did with the same resources 12 available on a PC. So, you'd have to upgrade to really 13 port this down at this stage just because we've added 14 details mainly. 15 Same weight. Model standards and the 16 commercial model as a residential model. And 17 technologies change over time. 18 Equipment purchases are required for new 19 construction. Equipment retirement and also for 20 retrofitting. Replacement of economically-obsolete 21 equipment. That's different than the residential 22 model. We don't retrofit in residential, but in 23 commercial, for example, to model something like EPA's 24 green lights program, that has a major retrofitting 25 target to that program, and that's behavior that we -- EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 197 1 nomenclature of technologies andmodels. The 2 technology is a broadclass of equipment, like a heat 3 pump or four-foot fluorescent lights orgas water 4 heaters, and a model is a specific versionof the 5 technologywith its own cost andperformance data. So, 6 it couldbejust 11 different flavors of efficiency 7 with different costs wouldbe one possibility. 8 We recentlyexpanded itup to 11. It takes 9 more computerresources to do that, and I thinkthe 10 current model wouldhave trouble running inthe

-- on 11 the PC like the oldone didwiththe same resources 12 available on a 

### pc. So, you'dhave to upgrade to really 13 port this down at this stagejustbecause we've added 14 details mainly. 15 Same weight. Model standards and the 16 commercial model as a residential model. And 17 technologies change over time. 18 Equipment purchases are required for new 19 construction. Equipment retirement and also for 20 retrofitting. Replacement of economically-obsolete 21 equipment. That's different thanthe residential 22 model. We don't retrofit inresidential, but in 23 commercial, for example, tomodel something like EPA's 24 green lightsprogram, that has a major retrofitting 25 target to that program, and that'sbehavior that we EXECUTIVE COURT REPORTERS, INC. (301) 565-0064198

1 we do allow in the model. 2 The -- the choices among equipment types are 3 determined by minimizing annualized life cycle costs 4 within a decision set, and there's considerable 5 segmentation of the floor space which kind of keeps one 6 technology from taking over the forecast. 7 Segmentation is by census division, building 8 type. There is a menu of discount rates, some going up 9 very high so that really only the first costs of 10 equipment are considered in the purchase decision. 11 You've got the new replacement and retrofit decisions, 12 and restrictions on whether or not fuel switching is 13 permitted or whether or not technology switching is 14 permitted are also used. 15 That's just a real quick overview of kind of 16 some of the considerations in NEMS, and I think, like I 17 say, the -- the issues for the two models are a little 18 bit different in terms of the -- the subject of, you 19 know, obtaining shipment forecasts for the standards 20 program, and we'll have a real world example here. 21 MR. McCABE: Thank you, Steve. 22 I'd like to add -- this is Michael McCabe -- 23 a few comments. Based on some of the questions which 24 have been made, comments made, I would like to 25 reiterate something for clarity purposes, since we've EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 

### 198 1 we do allow inthe model. 2 The

-- the choices among equipment types are 3 

### determinedbyminimizing annualized life cycle costs 4 

### within a decision set, andthere's considerable 5 

### segmentationof the floor space whichkind of keeps one 6 

### technology from taking overthe forecast. 7 

### Segmentation is bycensus division, building 8 

### type. There is a menu of discount rates, some goingup 9 veryhigh so that reallyonlythe first costs of 10 equipment are considered inthe purchase decision. 11 You've got the newreplacement and retrofit decisions, 12 and restrictions onwhether ornot fuel switching is 13 permittedorwhether ornot technology switching is 14 permitted are alsoused. 15 That'sjust a real quick overviewof kind of 16 some of the considerations inNEMS, and I think, like I 17 say, the

-- the issues for the two models are a little 18 bit different interms of the

-- the subject of, you 19 know, obtaining shipment forecasts for the standards 20 program, andwe'll have a real world example here. 21 MR. McCABE: Thankyou, Steve. 22 I'dlike to add this is Michael McCabe

-- 23 a few comments. Basedon some of the questions which 24 have beenmade, comments made, I would like to 25 reiterate something for claritypurposes, since we've EXECUTIVE COURT REPORTERS, INC. (301) 565-0064199

1 been talking about energy forecasting, and there have 2 been questions raised about that. 3 In the previous analyses, we had used the 4 manufacturer impact model to forecast shipments which 5 was then used -- that output was then used for the 6 residential energy model as well as for the 7 manufacturer impact calculation. Actually the 8 shipments forecasts and the impact calculation went on 9 together. 10 But now that we have committed to using a 11 cash flow analysis, the question is where to get the 12 shipments from, and since the shipments are used both 13 energy forecasting and manufacturer impacts, we felt 14 that it was important to add that on the agenda today 15 because if we're going to get forecasts somewhere to 16 drive a GRIM analysis, for example, DOE, speaking for 17 the department and for myself, if you'll recall that 18 the -- this morning, we looked at the GRIM with the 19 two-percent increase in shipments per year, that as a 20 default doesn't make a lot of sense because, as Jim had 21 pointed out, there are a lot of factors that can affect 22 shipments. 23 The GRIM allows you to go in and put in 24 shipments for the individual years, and we can do it in 25 a number of different ways. We have gone through some EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 199 1 been talking about energy forecasting, and there have 2 beenquestions raised about that. 3 Inthe previous analyses, we hadusedthe 4 manufacturer impact model to forecast shipments which 5 was thenused

-- that output was thenused for the 6 residential energymodel as well as for the 7 manufacturer impact calculation. Actuallythe 8 shipments forecasts and the impact calculationwent on 9 together. 10 But now that we have committed to using a 11 cash flow analysis, the question is where to get the 12 shipments from, and since the shipments are usedboth 13 energy forecasting andmanufacturer impacts, we felt 14 that it was important to add that on the agenda today 15 because ifwe're going to get forecasts somewhere to 16 drive a GRIM analysis, for example, DOE, speaking for 17 the department and formyself, if you'll recall that 18 the

-- this morning, we looked at the GRIM withthe 19 two-percent increase in shipmentsperyear, that as a 20 default doesn't make a lot of sense because, as Jimhad 21 pointedout, there are a lot of factors that can affect 22 shipments. 23 The GRIM allows you to go in andput in 24 shipments for the individual years, andwe cando it in 25 a number of different ways. We have gone through some EXECUTIVE COURT REPORTERS, INC. (301) 565-0064200

1 of those here. There are other approaches for 2 estimating shipments, some including just getting 3 people to sit around a table and talk about them. 4 The purpose for this discussion was to 5 recognize that we have to get shipments for both energy 6 forecasting and manufacturer impact analysis, and get 7 some of your input and thoughts as to where should 8 those come from. 9 Mark Perlis? 10 MR. PERLIS: I wondered if I could ask Steve 11 a couple of questions about one of the slides you had 12 up there. 13 You said that in your model, you assume life 14 cycle costs in the analysis for, I presume, the demand, 15 the consumer demand in the residential model? 16 MR. WADE: That was the commercial model that 17 was doing the life cycle costs. Oh, I'm sorry. 18 MR. PERLIS: I think it's the residential 19 one. 20 MR. WADE: The first stage of the choice of 21 equipment, yes. 22 MR. PERLIS: And you've used 20 percent as 23 the discount rate that the consumers bring to bear. 24 MR. WADE: That's right, yes. 25 MR. PERLIS: That -- that's a very specific EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 200 1 of those here. There are other approaches for 2 estimating shipments, some includingjust getting 3 people to sit around a table and talk about them. 4 The purpose for this discussionwas to 5 recognize that we have to get shipments for bothenergy 6 forecasting and manufacturer impact analysis, andget 7 some of your input and thoughts as to where should 8 those come from. 9 Mark Perlis? 10 MR. PERLIS: I wondered if I could ask Steve 11 a couple of questions about one of the slides youhad 12 up there. 13 You saidthat inyourmodel, you assume life 14 cycle costs inthe analysis for, I presume, the demand, 15 the consumerdemand inthe residential model? 16 MR. WADE: That was the commercial model that 17 was doing the life cycle costs. Oh, I'm sorry. 18 MR. PERLIS: I think it's the residential 19 one. 20 MR. WADE: The first stage of the choice of 21 equipment, yes. 22 MR. PERLIS: Andyou've used 20 percent as 23 the discount rate that the consumers bring to bear. 24 25 MR. WADE: That's right, yes. MR. PERLIS: That

-- that's a very specific EXECUTIVE COURT REPORTERS, INC. (301) 565-0064201

1 rate that's -- I wonder if you'd explain where that 2 came from. 3 MR. WADE: That came from some analysis that 4 we did where we did not have a rich enough data set to 5 separately enter first costs and operating costs. So, 6 we had to roll them together, and in that analysis, we 7 used 20 percent. 8 MR. PERLIS: And my next question is you -- 9 just underneath that, you talked about hurdle rates 10 between 15 and a 150 -- 11 MR. WADE: Exactly. 12 MR. PERLIS: -- percent. Who is hurdling, 13 and for what? I don't understand that. 14 MR. WADE: The -- I went pretty fast. The 15 hurdle rates are used to simulate the purchases of 16 different efficiency levels that actually have 17 occurred. So, for example, with refrigerators. To go 18 from a not-so-efficient refrigerator to a pretty 19 efficient refrigerator might only cost $50. Correct me 20 if I'm out of the ball park, but I think maybe around 21 that, and those efficient refrigerators -- that's a 22 pretty fast payback given the price of electricity, and 23 those refrigerators do not penetrate the market at a 24 high enough level to -- or because they don't take over 25 the market, that means consumers are using a discount EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 201 1 rate that's

-- I wonder if you'd explainwhere that 2 came from. 3 MR. WADE: That came from some analysis that 4 we didwhere we didnot have a rich enough data set to 5 separatelyenter first costs andoperating costs. So, 6 we had to roll themtogether, and in that analysis, we 7 used 20 percent. 8 MR. PERLIS: Andmy next question is you -- 9 just underneath that, you talked about hurdle rates 10 between 15 and a 150 11 MR. WADE: Exactly. 12 MR. PERLIS:

-- percent. Who is hurdling, 13 and for what? I don't understand that. 14 MR. WADE: The

-- I went pretty fast. The 15 hurdle rates are used to simulate the purchases of 16 different efficiencylevels that actuallyhave 17 occurred. So, for example, with refrigerators. To go 18 from a not-so-efficient refrigerator to a pretty 19 efficient refrigeratormight onlycost $50. Correct me 20 if I'mout of the ball park, but I thinkmaybe around 21 that, and those efficient refrigerators

-- that's a 22 prettyfast paybackgiven the price of electricity, and 23 those refrigerators do not penetrate the market at a 24 high enough level to

-- orbecause theydon't take over 25 the market, that means consumers are using a discount EXECUTIVE COURT REPORTERS, INC. (301) 565-0064202

1 rate higher than just a financial rate to base their 2 decision on or they're looking at other 3 characteristics. 4 MR. PERLIS: So, you would characterize these 5 hurdle rates as the rates that consumers are looking at 6 in evaluating whether or not to move to different 7 levels of efficiency? 8 MR. WADE: Exactly. 9 MR. PERLIS: Okay. And, finally, you talked 10 about floor space market segmentation. 11 MR. WADE: Right. 12 MR. PERLIS: And you said that the reason 13 that you've done that is to prevent one technology from 14 dominating. That's very interesting given that the 15 whole focus of the standard-setting methodology is to 16 specify a single -- not necessarily a single technology 17 as you said it, but certainly a single technology level 18 as a minimum, and there may be technology levels above 19 the minimum, and there's -- how -- do you have any 20 thoughts as to how that analysis could take account of 21 segmentation that you so rightly include in your 22 Department of Energy model? 23 MR. WADE: I'm not sure I exactly understand 24 the last part of the question, but -- 25 MR. PERLIS: Well, let me give you a concrete EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 202 1 rate higher thanjust a financial rate tobase their 2 decisionon or they're looking at other 3 characteristics. 4 MR. PERLIS: So, youwould characterize these 5 hurdle rates as the rates that consumers are looking at 6 in evaluatingwhether ornot tomove to different 7 levels of efficiency? 8 MR. WADE: Exactly. 9 MR. PERLIS: Okay. And, finally, you talked 10 about floor space market segmentation. 11 MR. WADE: Right. 12 MR. PERLIS: Andyou said that the reason 13 that you've done that is toprevent one technology from 14 dominating. That's very interestinggiven that the 15 whole focus of the standard-settingmethodology is to 16 specify a single

-- not necessarily a single technology 17 as you said it, but certainlya single technology level 18 as a minimum, and there maybe technology levels above 19 the minimum, and there's

-- how

-- do youhave any 20 thoughts as tohow that analysis could take account of 21 segmentationthat you so rightly include inyour 22 Department of Energymodel? 23 MR. WADE: I'mnot sure I exactlyunderstand 24 the last part of the question, but

-- 25 MR. PERLIS: Well, let me give you a concrete EXECUTIVE COURT REPORTERS, INC. (301) 565-0064203

1 example. 2 MR. WADE: Okay. 3 MR. PERLIS: You say you have maybe nine or 4 11 building types. 5 MR. WADE: Right. 6 MR. PERLIS: And then within those buildings, 7 you want to segment the floor space. 8 MR. WADE: Exactly. 9 MR. PERLIS: So, you want to in effect 10 present the consumer with options because for each 11 building type and each segmented floor unit, there may 12 be a different value assigned energy efficiency. I 13 assume that's the reason why you're doing the 14 segmentation analysis. 15 MR. WADE: That is. There's a different 16 intensity of use for the various end uses that varies 17 by building type or by census division or climate zone. 18 So, the payback varies by those segments. 19 MR. PERLIS: I guess my -- my question is, 20 since you're able to do that at the level of trying to 21 forecast shipments, how can we bring that level of 22 detail to bear or should we try to, to bring that to 23 bear to do the very basic engineering analysis that is 24 the guts of at least half of the Department of Energy's 25 standard-setting? EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 203 1 example. 2 MR. WADE: Okay. 3 MR. PERLIS: You sayyouhave maybe nine or 4 11 building types. 5 MR. WADE: Right. 6 MR. PERLIS: And thenwithin those buildings, 7 youwant to segment the floor space. 8 MR. WADE: Exactly. 9 MR. PERLIS: So, youwant to in effect 10 present the consumerwith options because for each 11 building type and each segmented floor unit, there may 12 be a different value assigned energyefficiency. I 13 assume that's the reasonwhyyou're doing the 14 segmentation analysis. 15 MR. WADE: That is. There's a different 16 intensityof use for the various enduses that varies 17 bybuilding type orby census division or climate zone. 18 So, the paybackvaries by those segments. 19 MR. PERLIS: I guess my -- my question is, 20 since you're able to do that at the level of trying to 21 forecast shipments, how canwe bring that level of 22 detail tobear or shouldwe tryto, to bring that to 23 bear to do the verybasic engineering analysis that is 24 the guts of at least half of the Department of Energy's 25 standard-setting? EXECUTIVE COURT REPORTERS, INC. (301) 565-0064204 1 MR. WADE: I don't think I can really answer 2 that question, but I -- I know I saw a presentation 3 that Jim McMahon had done. I -- on, I think it was, 4 air conditioner equipment or heat pumps, where a 5 geographic information system was incorporated in the 6 analysis to highlight for the -- on the consumer side, 7 not the manufacturing side, kind of the winners and 8 losers. Is that pretty accurate, Jim? 9 MR. McMAHON: Yes. 10 MR. WADE: For the manufacturing side, I mean 11 the segmentation will impact the shipment forecast, you 12 know. If you didn't have a segmented model, it would 13 be possible that kind of a middle line efficiency air 14 conditioner would be chosen a hundred percent of the 15 time by the model which would be above the proposed 16 standard. 17 So, without the segmentation, it would be, 18 you know, it would be difficult to use that model for 19 before and after shipments forecasts or something. So, 20 I don't think I'm getting to the direct meat of your 21 question, though. 22 Jim? 23 MR. BROOKMAN: Jim, can you respond to it? 24 MR. McMAHON: Mark, as you know, there's a 25 ballast workshop on the 18th, one week from today, and EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 204 1 MR. WADE: I don't think I canreally answer 2 that question, but I

-- I know I saw a presentation 3 that JimMcMahon haddone. I

-- on, I think it was, 4 air conditioner equipment orheat pumps, where a 5 geographic information systemwas incorporated in the 6 analysis to highlight for the on the consumer side, 7 not the manufacturing side, kind of the winners and 8 losers. Is that prettyaccurate, Jim? 9 MR. McMAHON: Yes. 10 MR. WADE: For the manufacturing side, I mean 11 the segmentationwill impact the shipment forecast, you 12 know. Ifyou didn't have a segmentedmodel, it would 13 be possible that kind of a middle line efficiencyair 14 conditionerwouldbe chosen a hundredpercent of the 15 time bythe model whichwouldbe above the proposed 16 standard. 17 So, without the segmentation, it wouldbe, 18 youknow, it wouldbe difficult touse that model for 19 before and after shipments forecasts or something. So, 20 I don't think I'mgetting to the direct meat of your 21 question, though. 22 Jim? 23 MR. BROOKMAN: Jim, canyou respond to it? 24 MR. McMAHON: Mark, as youknow, there's a 25 ballast workshop on the 18th, one week from today, and EXECUTIVE COURT REPORTERS, INC. (301) 565-0064205 1 we'll be presenting a detailed variability analysis for 2 ballasts specifically. 3 MR. BROOKMAN: Additional questions? Yes, I 4 saw Glenn first. 5 MR. SCHLEEDE: A procedural question. Is -- 6 it is the case that you have decided to use the NEMS 7 model for forecasting shipments? That's the first part 8 of it. And the second part of it is, if so, is this 9 the sole opportunity to ask questions about the NEMS 10 model and its appropriateness for this use? 11 MR. McCABE: This is not the only forum to 12 ask questions about models such as the NEMS that we 13 would be using since there will be a separate session 14 which we'll be looking at energy forecasting and other 15 economic issues. There will be the meeting -- let's 16 see. Today is Thursday. Over at AHAM, which is going 17 to be examining some of these same -- it's 7th and 18 Pennsylvania Avenue, 9th Floor, starting at what time? 19 8:30 in the morning. That will be another forum to 20 deal with specifically this issue and energy 21 forecasting. 22 MR. SHOREY: Hi. This is Everett Shorey. 23 I'd like to reiterate some comments I've made 24 in other forums. I think it's important to recognize 25 that in some of the energy forecasting models, we're EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 205 1 we'll be presenting a detailedvariabilityanalysis for 2 ballasts specifically. 3 MR. BROOKMAN: Additional questions? Yes, I 4 sawGlenn first. 5 MR. SCHLEEDE: Aprocedural question. Is-- 6 it is the case that youhave decided touse theNEMS 7 model for forecasting shipments? That's the first part 8 of it. And the secondpart of it is, if so, is this 9 the sole opportunityto ask questions about the NEMS 10 model and its appropriateness for this use? 11 MR. McCABE: This is not the only forum to 12 ask questions about models such as theNEMS that we 13 wouldbe using since there will be a separate session 14 whichwe'll be looking at energy forecasting andother 15 economic issues. There will be the meeting

-- let's 16 see. Today is Thursday. Over atAHAM, which is going 17 to be examining some of these same -- it's 7th and 18 PennsylvaniaAvenue, 9thFloor, starting at what time? 19 8:30 inthe morning. That will be another forum to 20 deal with specificallythis issue and energy 21 forecasting. 22 MR. SHOREY: Hi. This is Everett Shorey. 23 I'd like to reiterate some comments I'vemade 24 in other forums. I think it's important to recognize 25 that in some of the energy forecasting models, we're EXECUTIVE COURT REPORTERS, INC. (301) 565-0064206

1 dealing with large numbers and many cells, and the 2 opportunity for getting to overall energy forecasting 3 accuracy can be high, even if we're off even reasonably 4 large amounts on any given cell because there's an 5 awful lot of cells, and they can -- and -- and in some 6 ways, they can offset each other. 7 If we try and use some of those same 8 techniques to actually forecast shipments, we -- we may 9 be in fact measuring our error, and, so, we need to be 10 very careful that we're not trying to use a tool that's 11 designed for -- for kind of big things to some ways to 12 look at little things because it may run us back into 13 some of the same questions that I've raised in the past 14 about are implicit discount rates or hurdle rates 15 really measuring consumer behavior or are we in fact by 16 having large discount rates just demonstrating that 17 economics are not what's driving consumer decisions, 18 and something else is going on. 19 So, we need to be careful about whether we're 20 using tools in fashions that they're designed for, and 21 again I'd like to reiterate that we may be better off 22 separating analysis, and we may have one tool that 23 works terrifically for doing national energy 24 forecasting, but it -- it may not be the best path to 25 do manufacture impact analysis or shipments from that EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 206 1 dealingwith large numbers andmany cells, and the 2 opportunity for getting to overall energy forecasting 3 accuracy canbe high, even if we're off even reasonably 4 large amounts on anygiven cell because there's an 5 awful lot of cells, and theycan -- and

-- and in some 6 ways, they can offset eachother. 7 If we try anduse some of those same 8 techniques to actually forecast shipments, we -- we may 9 be in fact measuring our error, and, so, we needtobe 10 verycareful that we're not trying to use a tool that's 11 designed for

-- for kind of big things to some ways to 12 look at little things because itmayrunus back into 13 some of the same questions that I've raised inthe past 14 about are implicit discount rates orhurdle rates 15 reallymeasuring consumer behavioror are we in fact by 16 having large discount ratesjust demonstrating that 17 economics are not what's driving consumer decisions, 18 and something else is going on. 19 So, we needtobe careful about whetherwe're 20 using tools in fashions that they're designed for, and 21 again I'd like to reiterate that we maybe betteroff 22 separating analysis, andwe mayhave one tool that 23 works terrificallyfor doing national energy 24 forecasting, but it

-- it maynot be the best path to 25 do manufacture impact analysis or shipments from that EXECUTIVE COURT REPORTERS, INC. (301) 565-0064207

1 standpoint. 2 MR. BROOKMAN: Final questions? 3 (No response) 4 MR. BROOKMAN: Thank you, Steve. Thanks very 5 much. 6 Let's take a break now. Yes, let's take a 7 15-minute break, and then we'll come back, and we'll 8 have a final presentation from Steve, and then we'll 9 have -- which one? REEPS is set to go, and also we'll 10 be able to play with -- the GRIM will be over here? 11 Okay. 12 We'll have several computers available to be 13 used. So, let's come back at 3:15 for a short 14 presentation, and then you get to play with the models. 15 (Whereupon, a recess was taken.) 16 MR. BROOKMAN: Our next and final presenter 17 for the day is Steve Shankel from PNNL to talk about 18 NEMS. 19 MR. SHANKEL: I just wanted to follow up 20 Steve Wade's discussion of NEMS. We actually used it 21 in sort of an impact assessment analysis, and I wanted 22 to illustrate how that -- how that was done, provide a 23 little -- a little more concreteness to how -- how this 24 applies. 25 Again, you know, the NEMS is just one of many EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 207 1 standpoint. 2 MR. BROOKMAN: Final questions? 3 (No response) 4 MR. BROOKMAN: Thankyou, Steve. Thanks very 5 much. 6 Let's take a breaknow. Yes, let's take a 7 15-minutebreak, and thenwe'll come back, andwe'll 8 have a final presentation from Steve, and thenwe'll 9 have which one? REEPS is set to go, and also we'll 10 be able toplaywith

-- the GRIM will be over here? 11 Okay. 12 We'll have several computers available tobe 13 used. So, let's come back at 3:15 for a short 14 presentation, and thenyouget toplaywith the models. 15 (Whereupon, a recess was taken.) 16 MR. BROOKMAN: Ournext and final presenter 17 for the day is Steve Shankel from PNNL to talk about 18 NEMS. 19 MR. SHANKEL: I just wanted to followup 20 Steve Wade's discussionofNEMS. We actuallyused it 21 in sort of an impact assessment analysis, and I wanted 22 to illustratehow that

-- how that was done, provide a 23 little

-- a littlemore concreteness to how

-- how this 24 applies. 25 Again, youknow, theNEMS isjust one of many EXECUTIVE COURT REPORTERS, INC. (301) 565-0064208

1 models. It's -- it's been -- it's been lumped into the 2 black box category, and the documentation is hundreds 3 of pages long. So, I guess that's part of how you 4 define the color of the box. 5 We used it -- the equipment -- the commercial 6 equipment standards process that's dictated by the 7 Energy Policy Act requires DOE to support ASHRAE and 8 its efforts to set voluntary standards for commercial 9 equipment, and ASHRAE issued a draft standard 90.1 10 and -- for public comment, and DOE provided public 11 comment to that draft report. 12 As part of the public comment, we used NEMS, 13 the commercial model, on one of the proposed water 14 heater standards to illustrate to ASHRAE how DOE may do 15 some analysis in hte standard-setting process, 16 recognizing it's one of many models, etc. 17 What I'm going to talk about today is I'm 18 going to go through pretty briefly how we did that, 19 ending up with how we -- how we translate the NEMS 20 outputs into shipments. 21 The NEMS does not put -- does not out -- the 22 commercial model does not output shipments. It outputs 23 something called service demand, and the purpose of our 24 analysis was not to derive shipments. We didn't carry 25 it through to the manufacturer impact assessment, but EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 208 1 models. It's

-- it'sbeen

-- it'sbeen lumped into the 2 blackboxcategory, and the documentation is hundreds 3 ofpages long. So, I guess that's part of howyou 4 define the color of the box. 5 We used it

-- the equipment

-- the commercial 6 equipment standards process that's dictatedbythe 7 Energy PolicyAct requires DOE to support ASHRAE and 8 its efforts to set voluntary standards for commercial 9 equipment, andASHRAE issued a draft standard 90.1 10 and

-- for public comment, andDOE providedpublic 11 comment to that draft report. 12 As part of the public comment, we usedNEMS, 13 the commercial model, on one of the proposedwater 14 heater standards to illustrate toASHRAE howDOE may do 15 some analysis inhte standard-settingprocess, 16 recognizing it's one of manymodels, etc. 17 What I'mgoing to talk about today is I'm 18 going to go throughprettybrieflyhowwe did that, 19 ending up withhowwe -- howwe translate the NEMS 20 outputs into shipments. 21 The NEMS does not put

-- does not out

-- the 22 commercial model does not output shipments. It outputs 23 something called service demand, and the purpose of our 24 analysis was not to derive shipments. We didn't carry 25 it through to the manufacturer impact assessment, but EXECUTIVE COURT REPORTERS, INC. (301) 565-0064209

1 what you heard -- the context that these models have 2 been discussed in is providing shipments to GRIM. NEMS 3 is capable of doing that. 4 We start with the annual energy outlook 5 baseline inputs. We used the last PC model version, 6 which is from the actually 1995 version of NEMS, but we 7 used the '96 inputs to it. 8 We applied it to the potential water heater 9 standards, and I just want to -- I just want to note 10 that we got extensive help from EIA, and we couldn't i i h h d h k 11 t w

ave one t out -- t an you. 12 The first step is to generate the baseline 13 data, and again we started with the AEO '96, but then 14 we needed to modify the technology description, so that 15 it matched up with the ASHRAE description, and then 16 after we did that, we needed to then calibrate it so we 17 were still with AEO '96 baseline. 18 What we ended up then -- what we end up with 19 then is a -- is a baseline to use for the standards 20 process with an emphasis being on being able to clearly 21 describe how it related to the '96 AEO, as sort of an

h 22 anc or. 23 Once you've got the baseline data in there, 24 you then model the impact of standards, and NEMS has a 25 policy handle in there that lets you do that. You --

EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 209 1 what you heard the context that these models have 2 been discussed in isproviding shipments to GRIM. NEMS 3 is capable of doing that. 4 We start withthe annual energyoutlook 5 baseline inputs. We used the last PC model version, 6 which is from the actually 1995 version of NEMS, but we 7 used the '96 inputs to it. 8 We applied it to the potential waterheater 9 standards, and I just want to

-- I just want to note 10 that we got extensive help fromEIA, andwe couldn't 11 have done it without

-- thankyou. 12 The first step is to generate the baseline 13 data, and againwe startedwith theAEO '96, but then 14 we needed to modify the technologydescription, so that 15 it matchedup with theASHRAE description, and then 16 afterwe did that, we needed to then calibrate it sowe 17 were still withAEO '96 baseline. 18 What we endedup then

-- what we endup with 19 then is a is a baseline touse for the standards 20 process with an emphasis being onbeing able to clearly 21 describe how it relatedto the '96 AEO, as sort of an 22 anchor. 23 Once you've got the baseline data in there, 24 you thenmodel the impact of standards, andNEMS has a 25 policyhandle in there that letsyou do that. You-- EXECUTIVE COURT REPORTERS, INC. (301) 565-0064210

1 you simply go in and make all equipment -- all the 2 affected equipment with efficiency below your proposed 3 standard unavailable as of the year of the standard. 4 Every piece of equipment has a last year of 5 availability as part of its descriptor. We -- we ran a 6 number of cases, each one with different standards. 7 You then -- you run the baseline, and you run 8 -- and you run the standards case, and what you get out9 is service demand. So, it has to get fed into a post10 processor, unless you're interested in service demand. 11 The service demand is then -- is in trillions 12 of BTU per year by technology, by region, and that is 13 converted into the capacity number using efficiencies 14 for each of the pieces of equipment. That's a required 15 capacity. So, that's sort of a capacity if you 16 perfectly load match. 17 We then took the capacity factors which are a 18 HEMS input and used them to generate sort of the actual 19 capacity that we would assume would be purchased to 20 meet the service demand. You then have to translate 21 that into shipments, and the only way to do that is 22 with some information on the average passage per 23 equipment. So, we used an average -- excuse me. We 24 didn't do this, but if we had done it, we talked about 25 doing it, we were going to use an average number. EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 210 1 you simplygo inandmake all equipment

-- all the 2 affectedequipment withefficiencybelowyourproposed 3 standardunavailable as of the year of the standard. 4 Everypiece of equipment has a last year of 5 availabilityas part of its descriptor. We

-- we ran a 6 number of cases, eachone with different standards. 7 You then you run the baseline, andyou run 8 andyou run the standards case, andwhat you get out 9 is service demand. So, ithas to get fed into a post10 processor, unless you're interested in service demand. 11 The service demand is then

-- is in trillions 12 of BTUperyearbytechnology, byregion, and that is 13 converted into the capacitynumber using efficiencies 14 for eachof the pieces of equipment. That's a required 15 capacity. So, that's sort of a capacity ifyou 16 perfectlyloadmatch. 17 We then took the capacity factors which are a 18 HEMS input andusedthemto generate sort of the actual 19 capacitythat we would assume wouldbe purchased to 20 meet the service demand. You thenhave to translate 21 that into shipments, and the onlyway to do that is 22 with some informationon the average passageper 23 equipment. So, we used an average -- excuse me. We 24 didn't do this, but ifwe haddone it, we talked about 25 doing it, we were going touse an average number. EXECUTIVE COURT REPORTERS, INC. (301) 565-0064211

1 You could also use a distribution. You'd 2 still end up using an average and then taking your 3 distribution and distributing it. I don't know if that 4 makes any sense at all. 5 A couple of issues. The standards are 6 written in terms of specific equipment size categories. 7 There are standard for specific size of -- specific 8 range of water heater capacities. 9 NEMS doesn't do things explicitly in terms of 10 equipment size. It does everything on a per unit of 11 service demand level. So, it essentially assumes this 12 infinitely-variable capacity. 13 So, you have to -- it's a little tricky then 14 to go in and -- and translate standards into -- into 15 the technology description of the NEMS. What we did is 16 set up as -- you heard about how you can have 11 17 different models of equipment. We added size 18 descriptors to that. It's imperfect, but it's one way 19 to do it. 20 Competition between size categories within a 21 technology type is difficult to model. Actually, 22 that's not quite right. The model allows perfect 23 competition between size categories. The way we did 24 it, if you have each size category as a different 25 model, a different model of the technology, they're all EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 211 1 You could alsouse a distribution. You'd 2 still endup using an average and then takingyour 3 distribution and distributing it. I don't know if that 4 makes any sense at all. 5 Acouple of issues. The standards are 6 written in terms of specific equipment size categories. 7 There are standard for specific size of

-- specific 8 range of waterheater capacities. 9 NEMS doesn't do things explicitly interms of 10 equipment size. It does everything on a perunit of 11 service demand level. So, it essentiallyassumes this 12 infinitely-variable capacity. 13 So, youhave to

-- it's a little tricky then 14 to go in and

-- and translate standards into

-- into 15 the technologydescriptionof the NEMS. What we did is 16 set up as -- youheard about howyou canhave 11 17 different models of equipment. We added size 18 descriptors to that. It's imperfect, but it's one way 19 to do it. 20 Competitionbetween size categories within a 21 technologytype is difficult tomodel. Actually, 22 that's not quite right. Themodel allows perfect 23 competitionbetween size categories. The waywe did 24 it, if youhave each size category as a different 25 model, a different model of the technology, they're all EXECUTIVE COURT REPORTERS, INC. (301) 565-0064212

1 available for competition. 2 To the extent that you believe that's 3 unrealistic, you have to try to eliminate, say, big 4 pieces of equipment from competing in small spaces. As 5 far as NEMS is concerned, each one is competing for a 6 specific unit, a small unit of service demand. So, the 7 biggest units can compete for any -- any end use. 8 The only way to adjust that is you can switch 9 off specific building types, but this is here as a -- 10 as an issue that makes this a little tricky. 11 And, finally, as another issue, working 12 against us in our effort or against us in -- in the 13 efforts to develop very simple models, even these very 14 complex models don't entirely model the kinds of things 15 that determine consumer choice. Availability of fuel 16 types is an issue. Within these models, all fuel types 17 are available and can be -- can be selected. 18 Although the current availability of fuel 19 type is reflected in your baseline description, in your 20 beginning year description, the -- the model uses a 21 single melded rate for electricity. I believe my -- 22 and we don't -- demand charges may also be a factor in 23 there, and it doesn't allow for one-time -- actually, I 24 may be wrong on this last one. One-time cost of fuel 25 switching. I believe there is a factor for fuel EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 

### 212 1 available for competition. 2 To the extent that youbelieve that's 3 unrealistict youhave to tryto eliminatet saYt 

### big 4 pieces of equipment from competing in small spaces. As 5 far as NEMS is concernedt 

### eachone is competing for a 6 

### specific unitt 

### a small unit of service demand. SOt 

### the 7 biggest units cancompete for any -- anyenduse. 8 The onlyway to adjust that isyou can switch 9 off specificbuilding types t 

### but this is here as a -- 10 as an issue that makes this a little tricky. 11 Andt finallYt as another issuet working 12 against us inour effort or against us in

-- inthe 13 efforts to developvery simplemodelst eventhesevery 14 complexmodels don't entirelymodel the kinds of things 15 that determine consumer choice. Availabilityof fuel 16 types is an issue. Withinthese modelst all fuel types 17 are available and canbe

-- canbe selected. 18 Although the current availabilityof fuel 19 type is reflected inyour baseline descriptiont inyour 20 beginningyear descriptiont the

-- the model uses a 21 singlemelded rate for electricity. I believemy 22 andwe don't

-- demand chargesmay alsobe a factor in 23 there t 

### and it doesn't allow for one-time

-- actuallYt I 24 maybe wrong on this last one. One-time cost of fuel 25 

### switching. I believe there is a factor for fuel EXECUTIVE COURT REPORTERS, INC. (301) 565-0064213

1 switching in there. 2 That concludes my presentation. 3 MR. BROOKMAN: Questions for Steve? 4 (No response) 5 MR. BROOKMAN: Is it -- did you get from this 6 presentation how his -- how this fits? Charlie, you 7 got it at least. Anybody else? Yes? 8 MR. RIVEST: It sounds like it doesn't fit

ll 9 very we . 10 MR. BROOKMAN: Okay. 11 MR. RIVEST: It sounds like it doesn't fit 12 ll

very we . 13 MR. SHANKEL: Yeah. There's a lot of models 14 being considered for how you get shipments. This is an 15 example of one of them. 16 MR. BROOKMAN: Any additional questions? 17 Yes? 18 MS. KLUMPP: Liz Klumpp, Washington. 19 Just trying to put things into perspective, 20 where does it come into play if ever the added benefits 21 to certain products that might drive sales?
22 MR. SHANKEL: You mean like through -- like 23 in-door ice dispensing, that kind of thing, in a 24 erator?

refrig 25 MS. KLUMPP: Well, I was thinking of EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 213 1 switching in there. 2 That concludes my presentation. 3 MR. BROOKMAN: Questions for Steve? 4 (No response) 5 MR. BROOKMAN: Is it

-- didyou get from this 6 presentationhowhis

-- how this fits? Charlie, you 7 got it at least. Anybody else? Yes? 8 MR. RIVEST: It sounds like it doesn't fit 9 verywell. 10 MR. BROOKMAN: Okay. 11 MR. RIVEST: It sounds like it doesn't fit 12 verywell. 13 MR. SHANKEL: Yeah. There's a lot of models 14 being considered for howyou get shipments. This is an 15 example of one of them. 16 MR. BROOKMAN: Any additional questions? 17 Yes? 18 MS. KLUMPP: Liz Klumpp, Washington. 19 Just trying toput things intoperspective, 20 where does it come intoplay if ever the addedbenefits 21 to certainproducts that might drive sales? 22 MR. SHANKEL: Youmean like through 23 in-door ice dispensing, that kind of thing, ina 24 refrigerator? 25 MS. KLUMPP: Well, I was thinking of EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 like214 1 something a little more subtle to the eye, such as we 2 have a lot of communities who are planning on fully 3 promoting something like an efficient clothes washer 4 because of their sewage treatment problems or they're 5 on septic and clay and they're just really anxious 6 about the water-saving opportunities. 7 So, does this ever -- does that kind of 8 component -- 9 MR. SHANKEL: Only indirectly. Something 10 like NEMS -- 11 MR. BROOKMAN: Mike, Steve. 12 MR. SHANKEL: With something like NEMS, you 13 have a maintenance cost as part of your description of 14 your technology. So, you might be able to put some of 15 the non-energy costs in there. If you have something 16 that is not -- not explicitly a cost, if you have a 17 benefit that you can't explicitly recognize as a cost, 18 you need to incorporate that in some way other than 19 through one of these models. 20 I don't think any of them could handle that. 21 Jim has a comment here. 22 MS. KLUMPP: If you can quantify it, is that 23 something DOE will quantify as part of a process? 24 MR. SHANKEL: I'll let DOE answer. 25 MR. BROOKMAN: I think Steve -- EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 

### 214 1 something a littlemore subtle to the eye, such as we 2 have a lot of communities who are planning on fully 3 promoting something like an efficient clothes washer 4 because of their sewage treatment problems or they're 5 on septic and clayand they'rejust really anxious 6 about the water-saving opportunities. 7 

### So, does this ever -- does that kind of 8 component 9 

### MR. SHANKEL: Only indirectly. Something 10 likeNEMS 11 MR. BROOKMAN: Mike, Steve. 12 MR. SHANKEL: With something likeNEMS, you 13 have a maintenance cost as part of your descriptionof 14 your technology. So, you might be able toput some of 15 the non-energycosts inthere. If youhave something 16 that is not

-- not explicitlya cost, ifyouhave a 17 benefit that you can't explicitlyrecognize as a cost, 18 you need to incorporate that in some way other than 19 through one of these models. 20 I don't think anyof them couldhandle that. 21 Jimhas a comment here. 22 MS. KLUMPP: If you canquantify it, is that 23 somethingDOE will quantify as part of a process? 24 25 

### MR. SHANKEL: I'll let DOE answer. MR. BROOKMAN: I think Steve EXECUTIVE COURT REPORTERS, INC. (301) 565-0064215

1 MR. McMAHON: I think Steve over-stated his 2 case a little bit. In REEPS or REM, you can account 3 for attributes and put them in an equation with 4 whatever weight, and you can solve for the wage 5 empirically. So, if, you know, the -- if you can 6 somehow put in a quantitative way whatever units, 7 doesn't have to be dollars, what the benefit of this 8 is, whether it's gallons of water or whatever it is, 9 then you can solve for a parameter and use it in the 10 future. 11 In REM, we do use water costs, but we don't 12 have any quantification of the value of reducing water 13 consumption other than that, but it can be done in 14 these models. 15 MR. BROOKMAN: Michael? 16 MR. McCABE: I don't have anything to add to 17 that. We did do it for -- as Jim said, for some of the 18 laundry -- for the clothes washers, some previous 19 analyses. There are other attributes which may not be 20 as quantifiable, and then that would be appropriate as 21 just to identify, and those attributes may be both 22 positive and negative, and they would be identified and 23 carried along as separate factors and considered with 24 the rest of the results. 25 MR. BROOKMAN: Additional questions or EXECUTIVE COURT REPORTERS, INC.

(301) 565-0064 215 1 MR. McMAHON: I think Steve over-statedhis 2 case a littlebit. InREEPS orREM, you can account 3 for attributes andput them in an equationwith 4 whateverweight, andyou can solve for the wage 5 empirically. So, if, you know, the

-- if you can 6 somehowput in a quantitative waywhateverunits, 7 doesn't have to be dollars, what the benefit of this 8 is, whether it's gallons of water orwhatever it is, 9 thenyou can solve for a parameter anduse it inthe 10 future. 11 InREM, we do use water costs, but we don't 12 have anyquantificationof the value of reducingwater 13 consumption other than that, but it canbe done in 14 these models. 15 MR. BROOKMAN: Michael? 16 MR. McCABE: I don't have anything to add to 17 that. We did do it for

-- as Jim said, for some of the 18 laundry

-- for the clothes washers, some previous 19 analyses. There are other attributes whichmaynot be 20 as quantifiable, and then that wouldbe appropriate as 21 just to identify, and those attributes maybe both 22 positive andnegative, and theywouldbe identifiedand 23 carriedalong as separate factors and consideredwith 24 the rest of the results. 25 MR. BROOKMAN: Additional questions or EXECUTIVE COURT REPORTERS, INC. (301) 565-0064216

1 comments at this point? 2 (No response) 3 MR. BROOKMAN: Thank you, Steve, and thanks. 4 We didn't recognize the other presenters this 5 afternoon. Thank you. 6 (Applause) 7 MR. BROOKMAN: Explain how these machines are 8 set up. We have several of them. How are they going 9 to be deployed around this room? 10 (Whereupon, at 3:37 p.m., the meeting was 11 adjourned into the optional hands-on computer training 12 on the models, to be reconvened tomorrow morning, 13 Wednesday, March 12th, 1997, at 8:30 a.m.)
14 15 16 17 18 19 20 21 22 23 24 25 EXECUTIVE COURT REPORTERS, INC. (301) 565-0064 216 1 comments at this point? 2 (No response) 3 MR. BROOKMAN: Thankyou, Steve, and thanks. 4 We didn't recognize the otherpresenters this 5 afternoon. Thankyou. 6 (Applause) 7 MR. BROOKMAN: Explainhow these machines are 8 set up. We have several of them. How are theygoing 9 to be deployed around this room? 10 (Whereupon, at 3:37 p.m., the meetingwas 11 adjourned into the optional hands-on computer training 12 on the models, tobe reconvened tomorrowmorning, 13 Wednesday, March 12th, 1997, at 8:30 a.m.) 14 15 16 17 18 19 20 21 22 23 24 25 EXECUTIVE COURT REPORTERS, INC. (301) 565-0064217/218

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 REPORTER'S CERTIFICATE

This is to certify that the attached proceedings before: DOE

In the Matter of: MANUFACTURES IMPACT ANALYSIS WORKSHOP

were held as herein appears and that this is the original transcript thereof for the file of the Department, Commission, Administrative Law Judge or the Agency.

Official Reporter.

Dated: 3/11/97

EXECUTIVE COURT REPORTERS (301) 565-0064 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 217/218

REPORTER'S CERTIFICATE

This is to certify that the attached

. proceedings before: DOE

In the Matter of:**tL~NUFACTURES** IMPACT ANALYSIS 'WORKSHOP

were held as herein appears and that this is the original transcript thereof for the file of the Department, Commission, Administrative Law Judge

or the Agency.

Official Reporter.

20 Dated: 3/11/97 21 22 23 24 25

EXECUTIVE COURT REPORTERS (301) 565-0064