CHAPTER 11 . LIFE

- CYCLE COST SUBGROUP ANALYSIS

TABLE OF CONTENTS

11.1 INTRODUCTION ......................................................................................................... 11-1

11.2 SUBGROUPS DEFINITION ........................................................................................ 11-1

11.2.1 Commercial Consumer Sub-group .................................................................... 11-1

11.2.2 Small Business Commercial Discount Rate ...................................................... 11-8

11.2.3 Life -Cycle Cost and Payback Period Results for Small Business Subgroup .................................................................................................................. 11-9

REFERENCES ........................................................................................................................ 11-11

LIST OF TABLES

Table 11.2.1 NAICS Industries by Building Type.................................................................. 11-2

Table 11.2.2 Example of Establishment Categories: Educational Services NAICS 611 ....... 11-3

Table 11.2.3 Maximum Number of Employees in Small Business by Building Type ........... 11-7

Table 11.2.4 Number of Employees by Building Type and Electricity Consumption Category ............................................................................................................. 11-7

Table 11.2.5 Discount Rate Difference between Small Company and Sector Average ......... 11-9

Table 11.2.6 7.5 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.7 15 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.8 7.5 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.9 15 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

LIST OF FIGURES

Figure 11.2.1 Assembly: Relationship between Number of Employees and Value of

Sales ................................................................................................................... 11-4 Figure 11.2.2 Education: Relationship between Number of Employees and Value of

Sales ................................................................................................................... 11-5 Figure 11.2.3 Food Service: Relationship between Number of Employees and Value of

Sales ................................................................................................................... 11-5 Figure 11.2.4 Office: Relationship between Number of Employees and Value of Sales ........ 11-6 Figure 11.2.5 Retail: Relationship between Number of Employees and Value of Sales ......... 11-6

11 -iCHAPTER 11. LIFE

- CYCLE COST SUBGROUP ANALYSIS

11.1 INTRODUCTION

The life

- cycle cost (LCC) sub

- group analysis evaluates impacts on any identifiable groups of commercial consumers of commercial unitary air conditioners (CUAC) who may be disproportionately affected by a national energy

- efficiency standard. DOE accomplished this, in part, by analyzing the LCC and payback period (PBPs) for those comm ercial consumers that fall into any specific sub-groups.

DOE determined the impact on commercial consumer sub -groups using the LCC spreadsheet model. Because DOE conducted the LCC and PBP analysis only for CUAC equipment (i.e., not for commercial unitary heat pumps (CUHPs)), it conducted the LCC subgroup analysis only for CUAC consumers. The standard LCC and PBP analysis (described in Chapter 8) includes various types of commercial buildings that use CUAC equipment. The LCC spreadsheet model allows for the identification of certain sub-groups of commercial buildings which can then be analyzed by sampling only that sub-group. (Chapter 8 explains in detail the inputs to the spreadsheet model used in determining the LCC and PBP.)

This chapter describes the subgroup identification in further detail and gives the results of the LCC and PBP analyses for the considered subgroups.

11.2 SUB G ROUPS DEFINITION

11.2.1 Commercial Consumer Sub -group

DOE identified small businesses as a sub -group that possibly could be disproportionately affected by CUAC efficiency standards. DOE was concerned that increases in the purchase price of equipment could have negative impacts on small businesses (i.e., those with low annual revenues). Only 7.5 ton and 15 ton units are considered in the small business sub-group analysis, as it is unlikely that a smal l business would require a 30 ton unit.

From the building sample used in the LCC and PBP analysis, DOE identified which buildings contain small businesses. To identify buildings used by small businesses, the Department used size standards from the Small B usiness Administration (SBA) to define which business entities are considered to be small. The SBA established size standards for types of economic activity, or industry, under the North American Industry Classification System ( NAICS) 1

. The building sample used in DOE’s LCC and PBP analysis was defined by the building energy use and end-use load characterization analysis (Chapter 6). The building sample consisted of the following six building types: assembly (e.g., performing arts facilities ), education, food services, office, retail, and warehouses (non- refrigerated). For each of these six building types, DOE selected and assigned specific representative economic activities from the NAICS, as summarized in Table 11.2.1.

11 -1Table 11.2.1 NAICS Industries by Building Type

Building Type NAICS Industry

Code Industry Title

Assembly 711

712

713 Performing arts spectator sports & related industries Museums, historical sites, & similar institutions Amusement, gambling, & recreation industries

Education 611 Educational Services

Food Service 722 Food services & drinking places

Office 5222

523

5242

531

532

533

541

621 Nondepository credit intermediation

Securities intermediation & related activities Agencies, brokerages & other insurance related activities

Real estate Rental & leasing services Lessors of intangible assets except copyrighted works Professional, scientific, & technical services Ambulatory health care services

Retail 441

442

443

444

445

446

447

448

451

452

453

811

812 Motor vehicle & parts dealers Furniture & home furnishings stores Electronics & appliance stores Building material & garden equipment & supplies dealers Food & beverage stores Health & personal care stores

Gasoline stations Clothing & clothing accessories stores Sporting goods, hobby, book and music stores

General merchandise stores

Miscellaneous store retailers Repair and maintenance Personal and laundry services

Warehouse 423

424 Merchant wholesalers, durable goods Merchant wholesalers, nondurable goods

The SBA defines a small business by either its annual receipts (i.e., revenues) or its number of employees. Assembly, education, food services, office, and retail businesses are generally defined to be small if annual receipts are $6 million or less. Businesses located in warehouses are considered to be small if they employ 100 or fewer people.

As described in the building energy use and end- load characterization analysis, DOE drew its building sample from the 1995 and 2003 Commercial Building Energy Consumption Surveys (CB ECS)

. 2

, 3 CBECS provides the number of workers employed, but not the annual revenues for each of the records in its building sample. Thus, DOE needed to correlate annual revenues with the number of workers to identify the sub-group of small businesses in the building sample. Because some individual CBECS building records could represent businesses that are part of much larger firms, the small business sub-group identified by DOE could possibly over-represent the actual number of small businesses. However, DOE feels that the

11 -2results from the analysis provide an adequate indication of whether the small business sub-group would be disproportionally advantaged or disadvantaged by a proposed standard.

DOE used Establishment and Firm Size data series from the U.S. Census Bureau 2007 Economic Census to define the relationship between annual revenues and the number of workers

for each of the relevant business activities (assembly, 4 education, 5 food services, 6 office, 7

, 8

, 9

, 10

and retail 11

, 12 ). The Census data series provide annual receipts, the number of paid employees, and the number of establishments by categories of establishments. Esta blishment categories are based on a range of annual receipts (e.g., establishments with receipts of $1 million to less than $2.5 million). Within each establishment category, DOE determined an average value for annual receipts by dividing the annual receipts by the number of establishments. It performed the same type of calculation to arrive at an average number of paid employees for each establishment category. To more clearly demonstrate how DOE used the Census Bureau data, Table 11.2.2 provides a listing of establishment categories for educational services (NAICS code 611). The primary data in Table 11.2.2 are drawn directly from the Education Service Establishment and

Firm Size data series. The derived data (average receipts and average number of employees) are in the two right-hand columns. Note that the upper limit of what is considered a small business ($6 million annual receipts) falls within the establishment category of $5 million to $9.99

million.

Table 11.2.2 Example of Establishment Categories: Educational S ervices NAICS 611 Primary Data from 2007 Economic Census Educational Services, Establishment and Firm Size data series Derived Data

Sales size of

establishment Establishments Receipts ($1000) Employees Average Receipts ($) Average Employees

Establishments with sales less than $10,000 836 $ 5,462 1,075 $6,533 1

Establishments with sales of $10,000 to $24,999 2,166 $36,016 2,529 $16,628 1

Establishments with sales of $25,000 to $50,000 3,506 $129,055 5,759 $36,810 2

Establishments with sales of $50,000 to $99,999 6,609 $489,081 16,392 $74,002 2

Establishments with sales of $100,000 to $249,999 13,331 $2,217,064 58,906 $166,309 4

Establishments with sales of $250,000 to $499,999 9,838 $3,490,316 78,894 $354,779 8

Establishments with sales of $500,000 to $999,999 6,523 $4,542,752 82,984 $696,421 13

Establishments with sales of $1,000,000 to $2,499,999 4,373 $6,596,468 87,150 $1,508,454 20

Establishments with sales of $2,500,000 to $4,999,999 1,467 $5,049,354 53,541 $3,441,959 36

Establishments with sales of $5,000,000 to $9,999,999 781 $5,360,243 46,676 $6,863,307 60

Establishments with sales of $10,000,000 or more 534 $15,227,571 78,633 $28,516,051 147

11 -3By deriving the average receipts and numbers of employees for the establishment categories within each of the NAICS industries listed in Table 11.2.1, DOE was able to create a data set from which to establish a relationship between receipts (revenues) and number of employees (workers) for fi ve of the building types listed in Table 11.2.1. Figures 11.2.1 through 11.2.5 plot the receipt and employee data sets for each of the five building types. Because the SBA generally defines small businesses as those with annual revenues of $6 million or le ss, DOE plotted only data from establishment categories up to and including “establishments with sales of $5 million to $9.99 million” in Figures 11.2.1 through 11.2.5. DOE did not provide a figure for warehouses because, as noted earlier, businesses locat ed in warehouses are considered to be small if they employ 100 or fewer people.

Figure 11.2.1 Assembly: Relationship between Number of Employees and Value of Sales 0 20 40 60 80 100

$0 $1 $2 $3 $4 $5 $6 $7 $8Employees

Sales ($1,000,000)

11 -4Figure 11.2.2 Education: Relationship between Number of Employees and Value of Sales

Figure 11.2.3 Food Service : Relationship between Number of Employees and Value of Sales 0 10 20 30 40 50 60

$0 $1 $2 $3 $4 $5 $6 $7 $8Employees

Sales ($1,000,000)

0 20 40 60 80 100

$0 $1 $2 $3 $4 $5 $6 $7 $8Employees

Sales ($1,000,000)

11 -5Figure 11.2.4 Office : Relationship between Number of Employees and Value of Sales

Figure 11.2.5 Retail : Relationship between Number of Employees and Value of Sales 0 10 20 30 40 50 60

$0 $1 $2 $3 $4 $5 $6 $7 $8Employees

Sales ($1,000,000)

0 10 20 30 40 50 60 70 80

$0 $1 $2 $3 $4 $5 $6 $7 $8Employees

Sales ($1,000,000)

11 -6Using the data in Figures 11.2.1 through 11.2.5, DOE estimated the relationship between annual value of sales and number of employees for each building type through linear regression. Based on the regression parameters, DOE then estimated the number of employees for the assembly, education, food services, office, and retail building types associated with annual sales
of $6 million.

Table 11.2.3 Maximum Number of Employees in Small Business by Building Type

Building Type Maximum Number of Employees Assembly 70

Education 55

Food Service 98

Office 28

Retail 32

Warehouse 100

With small businesses identified by the number of workers for each building type, DOE was able to identify from its building sample which buildings could potentially be occupied by

small businesses. DOE assigned buildings to the small business subgroup by comparing the building electricity con sumption category as defined in the building energy use and load

characterization to the CBECS 2003 average number of em ployees by building type , as presented in Table 11.2.3. CBECS 2003 revealed variation in number of employees across building types and electricity consumption categories (Table 11.2.4).

Table 11.2.4 Number of Employees by Building Type and Electricity Consumption Category

Building Type

and Code Large (>1,000,000 kwh/yr) Medium (100,000 to 1,000,000 kwh/yr) Small (<100,000 kwh/yr)

Assembly (1) 29 29 23 Education (2) 74 76 50
Food Service (4) 15 15 13 Small Office (8) 34 33 32 Retail (9) 29 25 17 Warehouse (10) 90 82 48

DOE determined that the following buildings should be included in the small business subgroup: all assembly, small education, all food service, all small off ice, all retail, all warehouse. The small business subgroup represents approximately 80% of floor space in the full building sample.

11 -711.2.2 Small Business Commercial Discount Rate

The Small Business Administration (SBA) defines a small business by its annual receipts or its number of employees. CUAC are used throughout the U.S. economy, so DOE did not assign a different distribution of CUAC applications or sectors of the economy to this subgroup.

The capital asset pricing model (CAPM) underestimates the cost of capital for small companies. In CAPM, the risk premium β is used to account for the higher returns associated with greater risk. However, for small companies, particularly very small companies, historic returns have been significantly higher than the CAPM equation predicts. This additional return

can be accounted for by adding a size premium to the cost of equity for small firms:



## ( ) S ERP Rk

fe

+×+= β

k

e = Cost of equity,

R

f = Expected return on risk- free assets, β = R isk coefficient of the firm,

ERP = Equity risk premium, and



### S = Size Premium.

DOE obtained size premium data from Ibbotson Associates’ Stocks, Bonds, Bills, and
Inflation 2009 Yearbook

. 13 For the period of 1926-2008 , the average size premium for the smallest companies in all industries is 5.81%, implying that on average, historic performance of small companies has been 5.81 % higher than the CAPM estimate of the small company cost of equity

. a

DOE calculated the real weighted average cost of capital (as described in chapter 8) using the cost of equity including a size premium for small companies instead of the CAPM cost of equity. 14 Table 11.2.5 presents DOE’s estimates of the discount rates for entire sectors, small companies specifically, and the small company discount rate premium.

To estimate the impact of standards specifically on small businesses, the small company

discount rates for each sector were used in the Life -Cycle Cost and Payback Period analysis instead of the sector average discount rates.

a In this calculation , small companies are defined as companies with market capitalization of less than or equal to $218.53 million, the Ibbotson Associates’ definition of Decile 10 companies.

11 -8Table 11.2.5 Discount Rate Difference between Small Company and Sector Average

Sector Discount Rate (%)

Average Std Dev Small Company

Discount Rate

Premium

Retail Entire Sector 4.93 1.98 4.06 Small Companies 8.99 2.93
Property

Owners Entire Sector 5.15 1.20 3.20 Small Companies 8.36 2.17

Medical

Services Entire Sector 4.73 1.66 3.56 Small Companies 8.30 2.47

Industrial Entire Sector 5.17 1.85 3.46 Small Companies 8.64 3.19

Hotels Entire Sector 5.57 1.87 2.77 Small Companies 8.34 3.07

Food

Service Entire Sector 4.67 2.00 3.09 Small Companies 7.76 4.02

Office Entire Sector 4.58 2.05 3.06 Small Companies 7.64 3.18

Public Entire Sector 3.74 1.43 0.00 Small Companies 3.74 1.43

11.2.3 Life

- Cycle Cost and Payback Period Results for Small Business Sub

- group

Tables 11.2.6 - 11.2.7 summarize the LCC results for the small business sub -group for each of the CUAC equipment classes, and compare them to the results for the total sample of buildings used in the overall LCC analysis. Tables 11.2.8 and 11.2.8 summarize the PBP resu lts. Results are provided by trial standard level (TSL). Note that this is an overestimate of the impact on small businesses; many small buildings may be owned by the same company, as is the case

with retail and restaurant chains. As is evident from the LCC and PBP results, the effect of higher CUAC standards on small businesses is very similar to the effect on the full sample of commercial consumers. Thus, small businesses are not substantially disadvantaged by increase d CUAC equipment standards, as compared to the general population of commercial consumers.

11 -9Table 11.2.6 7.5 Ton Units: LCC Results Comparison between Small Business Sub

Group and All Buildings

TSL IEER Small Businesses All Buildings

Mean LCC Mean Decrease

in LCC from

Baseline Percent of

Units with LCC Savings Mean LCC Mean Decrease

in LCC from

Baseline Percent of

Units with LCC Savings

Baseline 11.4 $26,756 $29,547

1 12.9 $25,255 $918 61% $27,759 $1,094 61%

2 14.0 $25,564 $610 65% $27,916 $937 72%

3 14.8 $22,279 $3,881 99% $24,058 $4,779 99%

4 19.9 $20,847 $5,313 99% $22,125 $6,711 100%

Table 11.2.7 15 Ton Units: LCC Results Comparison between Small Business Sub

Group and All Buildings

TSL IEER Small Businesses All Buildings

Mean LCC Mean Decrease

in LCC from

Baseline Percent of Units

with LCC

Savings Mean LCC Mean Decrease

in LCC from

Baseline Percent of Units

with LCC

Savings

Baseline 11.2 $43,887 $48,409

1 12.2 $42,882 $784 72% $47,078 $1,038 74%

2 13.2 $42,099 $1,552 84% $45,880 $2,214 90%

3 14.2 $41,079 $2,569 88% $44,619 $3,469 93%

4 18.4 $37,749 $5,893 96% $40,575 $7,508 98%

Table 11.2.8 7.5 Ton Units: PBP Results Comparison between Small Business Sub

Group and All Buildings

TSL IEER Small Businesses All Buildings

Mean PBP

(years) Median PBP (years) Mean PBP (years) Median PBP (years)

1 12.9 2.4 2.2 2.4 2.2

2 14.0 10.9 8.0 10.9 8.0

3 14.8 4.1 3.9 4.1 3.9

4 19.9 5.1 4.7 5.1 4.7

Table 11.2.9 15 Ton Units: PBP Results Comparison between Small Business Sub

Group and All Buildings

TSL IEER Small Businesses All Buildings

Mean PBP

(years) Median PBP (years) Mean PBP (years) Median PBP (years)

1 12.2 6.7 6.0 6.7 6.0

2 13.2 8.0 7.2 8.0 7.2

3 14.2 7.4 6.6 7.4 6.6

4 18.4 5.6 5.1 5.6 5.1

11

- 10R EFERENCES

1. Title 13, Code of Federal Regulations, Chapter I-Small Business Administration, Part 121-Small Business Administration, Subpart A-Size Eligibility Provisions and Standards

. 2005.

2. U.S. Energy Information Agency, Commercial Buildings Energy Consumption Survey

. 1995. http://www.eia.gov/consumption/commercial/data/1995/index.cfm?view=microdata

3. U.S. Energy Information Agency, Commercial Buildings Energy Consumption Survey

. 2003. http://205.254.135.24/emeu/cbecs/cbecs2003/public_use_2003/cbecs_pudata2003.html

4. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Arts, Entertainment, and Recreation Subject

Series . 2007. https:// www.census.gov/econ/census07/

5. U.S. Census Bureau, Esta blishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Educational Services Subject Series . 2007. https:// www.census.gov/econ/census07/

6. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Accommodation and Food Services Subject

Series . 2007. https:// www.census.gov/econ/census07/

7. U.S. Census Bureau, Establish ment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Finance and Insurance Subject Series . 2007. https:// www.census.gov/econ/census07/

8. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Real Estate and Rental and Leasing Subject

Series . 2007. https:// www.census.gov/econ/census07/

9. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Professional, Scientific, and Technical Services Subject Series . 2007. https:// www.census.gov/econ/census07/

10. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Health Care and Social Assistance Subject

Series . 2007. https:// www.census.gov/econ/census07/

11. U.S . Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 2007 Economic Census, Retail Trade Subject Series . 2007. https:// www.census.gov/econ/census07/

11

- 1112. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of Organization), 1997 Economic Census, Other Services (Except Public Administration)

. 2007. https:// www.census.gov/econ/census07/

13. Ibbotson Associates, SBBI Valuation Edition 2009 Yearbook . 2009. Chicago, IL.

14. Damodaran Online, Data Page: Costs of Capital by Industry Sector, 2013. Damodaran. (Last accessed March 2014 .) < http://pages.stern.nyu.edu/~adamodar/ >

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