CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

13.1 INTRODUCTION

......................................................................................................... 13-1 13.2 METHODOLOGY

........................................................................................................ 13-1 13.2.1 Phase I: Industry Profile

..................................................................................... 13-2 13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

............................ 13-2 13.2.2.1 Industry Cash-Flow Analysis

............................................................... 13-2 13.2.2.2 Interview Guide

................................................................................... 13-3 13.2.3 Phase III: Sub-Group Analysis

.......................................................................... 13-3 13.2.3.1 Manufacturer Interviews

...................................................................... 13-3 13.2.3.2 Revised Industry Cash-Flow Analysis

................................................. 13-4 13.2.3.3 Manufacturer Sub-Group Analysis

...................................................... 13-4 13.2.3.4 Small-Business Manufacturer Sub-Group

........................................... 13-4 13.2.3.5 Manufacturing Capacity Impact

.......................................................... 13-5 13.2.3.6 Employment Impact

............................................................................. 13-5 13.2.3.7 Cumulative Regulatory Burden

........................................................... 13-5 13.3 MANUFACTURER IMPACT ANA LYSIS KEY ISSUES

.......................................... 13-6 13.3.1 Equipment Class Separation

.............................................................................. 13-6 13.3.2 Reduced Cleaning Performance and Cons umer Dissatisfaction for Top-Loading Washers

........................................................................................................................ .. 13-6 13.3.3 Test Procedure Implications

.............................................................................. 13-6 13.4 GRIM INPUTS AND ASSUMPTIONS

........................................................................ 13-7 13.4.1 Overview of the GRIM

...................................................................................... 13-7 13.4.2 Sources for GRIM Inputs

................................................................................... 13-8 13.4.2.1 Corporate Annual Reports

................................................................... 13-8 13.4.2.2 Standard & Poor Credit Ratings

.......................................................... 13-8 13.4.2.3 Dun & Bradstreet Reports

.................................................................... 13-8 13.4.2.4 Shipment Model

................................................................................... 13-9 13.4.2.5 Engineering Analysis

........................................................................... 13-9 13.4.2.6 Manufacturer Interviews

...................................................................... 13-9 13.4.3 Financial Parameters

.......................................................................................... 13-9 13.4.4 Corporate Discount Rate

.................................................................................. 13-10 13.4.5 Trial Standard Levels

....................................................................................... 13-12 13.4.6 NES-Shipments Forecast

................................................................................. 13-12 13.4.6.1 Base-Case Shipments Forecast

.......................................................... 13-13 13.4.6.2 Standards-Case Shipments Forecast

.................................................. 13-13 13.4.6.3 Price Elasticity of Demand Shipments Scenario

............................... 13-14 13.4.6.4 Economic Growth Shipments Scenario

............................................. 13-14 13.4.6.5 Shipment Sensitivity Scenario

........................................................... 13-15 13.4.7 Production Costs

.............................................................................................. 13-15 13.4.8 Conversion Costs

............................................................................................. 13-16 13.4.8.1 Capital Conversion Costs

................................................................... 13-16 13.4.8.2 Equipment Conversion Costs

............................................................. 13-17

13-i13.4.9 Markups

........................................................................................................... 13-17 13.4.10 Federal Production Tax Credits

.................................................................. 13-18 13.5 COMMERCIAL CLOTHES WASHER INDU STRY FINANCIAL IMPACTS

....... 13-18 13.5.1 Impacts on Industry Net Present Value

........................................................... 13-18 13.5.2 Impacts on Annual Cash Flow

......................................................................... 13-20 13.6 IMPACTS ON THE LOW-VOLUME COMMERCIAL CLOTHES WASHER MANUFACTURER

................................................................................................................ 13- 24 13.6.1 Introduction

...................................................................................................... 13-24 13.6.2 Low-Volume Manufacturer Competitiveness

.................................................. 13-25 13.6.3 Effects of a Transition to Front-Loading Platforms

......................................... 13-25 13.6.4 Fixed Cost Impacts on a Lo w-Volume Manufacturer

..................................... 13-26 13.6.5 Financial Position of the LVM

........................................................................ 13-29 13.6.6 Additional Impacts on the Low-Volume Manufacturer

................................... 13-30 13.6.7 Consequences of Higher Energy Conservation Standards on the LVM

.......... 13-31 13.7 OTHER IMPACTS

...................................................................................................... 13-32 13.7.1 Employme nt

..................................................................................................... 13-32 13.7.1.1 Methodology

...................................................................................... 13-32 13.7.1.2 Results

................................................................................................ 13-34 13.7.2 Production Capacity

......................................................................................... 13-37 13.7.3 Cumulative Regulatory Burden

....................................................................... 13-38 13.7.3.1 Additional Federal Energy Conservation Standards

.......................... 13-38 13.7.3.2 State Energy and Water Conservation Standards

.............................. 13-40 13.7.3.3 International Energy Cons ervation Standards

................................... 13-42 13.7.3.4 International Test Procedures

............................................................ 13-42 13.8 CONCLUSIONS

.......................................................................................................... 13-42

LIST OF TABLES

Table 13.4.1 GRIM Financial Parameters Based on 1999–2006 Weighted Company Financial Data

.................................................................................................................. 13-10

Table 13.4.6 Base-Case Distributi on of Efficiencies for Top- Loading Commercial Clothes

Table 13.4.7 Base-Case Distribu tion of Efficiencies for Fr ont-Loading Commercial Clothes

Table 13.4.8 Distribution of T op-Loading Commercial Clothes Washer Shipments in the

Table 13.4.9 Distribution of Front-Loading Comm ercial Clothes Washer Shipments in the

Table 13.4.10 Base-Case Producti on Costs (2008$) used in the GRIM for Top-Loading Table 13.4.2 Cost of Equity Calculation

.................................................................................. 13-11 Table 13.4.3 Cost of Debt Calculation

..................................................................................... 13-12 Table 13.4.4 Commercial Clothes Washer Base line Efficiency Levels and TSLs

.................. 13-12 Table 13.4.5 Total NES-Shipments Forecast in 2013

.............................................................. 13-13

Washers in 2013 Estimated in the NES

........................................................... 13-13

Washers in 2013 Estimated in the NES

........................................................... 13-13

Standards Case in 2013 – Roll-Up Scenario

.................................................... 13-14

Standards Case in 2013 – Roll-Up Scenario

.................................................... 13-14

Commercial Clothes Washers

.......................................................................... 13-15

13-iiTable 13.4.11 Base-Case Producti on Costs (2008$) used in the GRIM for Front-Loading Commercial Clothes Washers

.......................................................................... 13-15 Table 13.4.12 Capital Conversion Costs for Co mmercial Clothes Washers by TSL

.............. 13-16 Table 13.4.13 Equipment Conversion Costs for Commercial Clothes Washers by TSL

........ 13-17 Table 13.5.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Marg in Percentage Markup – Base-Case Shipments)

....................................................................................................... 13-19 Table 13.5.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

......................................................................................... 13-19 Table 13.5.3 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Marg in Percentage Markup – Base-Case Shipments)

....................................................................................................... 13-19 Table 13.5.4 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

......................................................................................... 13-19 Table 13.5.5 Changes in Industry Net Presen t Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservati on of Gross Margin Percentage Markup

–Base-Case Shipments)

.................................................................................. 13-20 Table 13.5.6 Changes in Industry Net Presen t Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservati on of Gross Margin Percentage Markup

–Price Elasticity of Demand Shipments)

........................................................ 13-20 Table 13.6.1 DOE Estimate of LVM Clothes Wa sher Sales and Unit Shipments in 2006

..... 13-25 Table 13.6.2 Capital Costs to Build a Green-F ield Manufacturing Faci lity to Produce 100,000 units Per Year

................................................................................................... 13-27 Table 13.6.3 Capital Costs to Build a Green-F ield Manufacturing Faci lity to Produce 1,500,000

Table 13.6.4 Depreciation Lifetim e Assumptions for a Low- and High-Volume Manufacturer ..... units Per Year

................................................................................................... 13-27

.......................................................................................................................... 13-27 Table 13.6.5 Per Unit Depreciation Costs for a Low- and High-Volume Manufacturer

......... 13-28

.......................................................................................................................... 13-28 Table 13.6.6 Per-Unit Impacts of a $10 Million R&D Expense at Various Equipment Lifetimes

Table 13.6.7 Total Per-Unit Profit for an LVM af ter Depreciation and R&D Disadvantage

.. 13-29 Table 13.6.8 Comparison of the LVM’s 2008 Financ ials with DOE’s Green-Field Assumptions

.......................................................................................................................... 13-29

.......................................................................................................................... 13-34 Table 13.7.1 Commercial Clothes Washer Indust ry Estimated Employment Impacts in 2013 .......

Table 13.7.2 Other DOE Energy Conservation St andards Affecting the CCW Industry

........ 13-39 Table 13.7.3 State Commercial Clothes Washer Regulations Similar to EPACT 2005

.......... 13-40 Table 13.7.4 California State Energy and Water C onservation Standards fo r Commercial Clothes Washers

............................................................................................................ 13-41 Table 13.7.5 California Water Cons ervation Standards for Residential Clothes Washers

...... 13-41

13-iiiLIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow

............................................................ 13-7 Figure 13.5.1 Annual Net Cash Flows for T op-Loading Commercial Clothes Washers (Preservation of Gross Margin Percen tage Markup – Base-Case Shipments) 13-21 Figure 13.5.2 Annual Net Cash Flows for T op-Loading Commercial Clothes Washers (Preservation of Gross Margin Percenta ge Markup – Price Elasticity of Demand Shipments)

....................................................................................................... 13-21 Figure 13.5.3 Annual Net Cash Flows for Fr ont-Loading Commercial Clothes Washers (Preservation of Gross Margin Percen tage Markup – Base-Case Shipments) 13-22 Figure 13.5.4 Annual Net Cash Flows for Fr ont-Loading Commercial Clothes Washers (Preservation of Gross Margin Percenta ge Markup – Price Elasticity of Demand Shipments)

....................................................................................................... 13-22 Figure 13.5.5 Annual Net Cash Flows for Top-Load ing and Front-Loading Commercial Clothes Washers (Preservation of Gross Marg in Percentage Markup – Base-Case Shipments)

....................................................................................................... 13-23 Figure 13.5.6 Annual Net Cash Flows for Top-Load ing and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

......................................................................................... 13-23 Figure 13.7.1 Commercial Cl othes Washer Industry Cost Structure

....................................... 13-33 Figure 13.7.2 Total Commercial Clothes Washer Industry Domestic Employment by Year . 13-35

13-ivCHAPTER 13. MANUFACTUR ER IMPACT ANALYSIS

13.1 INTRODUCTION

In determining whether a standard is econom ically justified, the U.S Department of Energy (DOE) is required to consider “the econo mic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i)) The law also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id. DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of higher ener gy conservation standard s on manufacturers of commercial clothes washers (CCW), and to assess the impact of such standards on employment and manufacturing capacity. The MIA has both quantitative and qualitative aspects.

The quantitative part of the MIA primarily relies on the Government Regulatory Impact Models (GRIM), an industry-cash-flow model adapted for this rulemaking. The GRIM inputs include information on industry co st structure, shipments, and pricing strategies. The GRIM’s key output is the industry net present value (INPV) . The model estimates the financial impact of higher energy conservation standards by compari ng changes in INPV between a base case and the various trial standard levels (TSLs) in th e standards case. The qualitative part of the MIA addresses factors such as equipment characteristic s, characteristics of particular manufacturers, and market and equipment trends. It also as sesses the impact of st andards on subgroups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Ph ase I, “Industry Profile,” consisted of preparing an industry ch aracterization for the CCW industry, including data on market share, sales volumes and trends, pricing, employment, and financial structure. Phase II, “Industry Cash Flow,” focused on the CCW industry individually.

Using publicly available information devel oped in Phase I, DOE adapted the GRIM’s generic structure to faci litate analysis of amended standards for CCWs.

In Phase III, “Sub-Group Impact Analysis,” DOE interviewed manufacturers representing approximately 100 percent of CCW sales. This group included a range of manufacturers with varying capabilities to provide a representativ e cross-section of the industries. During these interviews, DOE discussed financial topics sp ecific to each manufacturer and obtained each manufacturer’s view of the indus try as a whole. The interviews provided valuable information that DOE used to evaluate the impacts of amended energy conservation standards on manufacturers’ cash flows, i nvestment requirements, and employment levels. The following subsections describe more specifically the steps DOE took in developing the information on which it based the MIA.

13-113.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a pr ofile of the CCW industries that built upon the market and technology assessment prepared for this rulemaking (see chapter 3 of this Technical Support Document (TSD)). Before initiating th e detailed impact studies, DOE collected qualitative and quantitative financ ial information and past and present market data. This included estimated market shares, corporate operating ratios, wages, employment, and production cost ratios for several home appliance manufacturers. The industry profile included a top-down cost analysis of CCW manufacturers that DOE used to derive cost and preliminary financial inputs for the GRIMs ( e.g ., revenues; material; labor; overh ead; depreciation; selling, general and administrative expenses (SG&A); and resear ch and development (R&D) expenses).

DOE also used public information to further calibrate its initial characterization of the CCW industry, including U.S. Securities a nd Exchange Commission (SEC) 10–K and 10–Q reports, Standard & Poor’s (S&P ) stock reports, corporate annual reports, and U.S. Census Bureau’s 2006 Annual Survey of Manufactures ( 2006 ASM ). In addition, DOE relied on information from its engineering analysis, life-cyc le cost analysis, and analysis of markups to determine product prices to characterize thes e industries. DOE also interviewed three manufacturers of CCWs that collectively represent approxim ately 100 percent of U.S. CCW sales. These preliminary interviews were designed to solicit key concerns, industry structure, and other data points for th e subsequent analysis.

13.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

In Phase II, DOE performed industry cash-flow analyses and prepared written guidelines for interviewing manufacturers. Phase II focused on the financial impacts of amended standards on the CCW industry. Amended standards can affect manufacturers in thr ee distinct ways: (1) require additional investment, (2 ) raise production costs, and (3) impact revenues through higher prices and possibly lower shipments. The analyti cal tool DOE uses for calculating the financial impacts of amended energy conservation sta ndards on manufacturers is the GRIM. DOE performed a cash flow analysis for the CC W industry to quantify these impacts.

13.2.2.1 Industry Cash-Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows for the year standards become effective and several years after implementation. These factors include annual expected revenues; costs of sale s; SG&A expenses; taxes; and capital expenditures related to new standards. Inputs to the GRIM include manuf acturing costs, shipments forecasts, and prices developed in other analyses. DOE derived the manufacturing costs from the engineering analysis and information provided by the industry, and estimated typical manufacturer markups from public financial reports and interviews with manu facturers. DOE’s shipments analysis, presented in chapter 10 of this TSD, provided the basis for the shipments projection under each TSL in the GRIM. The financial parameters were developed using publicly available data of manufacturers of equipment covered by this rulemaking. Thes e parameters were revised with information submitted confidentially during manufacturer interviews. The results of the GRIM are compared against base case projections equi valent to current Federal ener gy conservation standard levels

13-2for CCWs. The financial impact of amended en ergy conservation standards is the difference between the baseline and the standards-impact ed sets of discounted annual cash flows.

13.2.2.2 Interview Guide

During Phase III of the MIA, DOE conducted interviews with CCW manufacturers to gather information on the effects of amende d energy conservation standards on revenues and finances, direct employment, capital assets, and on industry competitiveness. Prior to the interviews, DOE distributed a standard interview guide that provided a st arting point to identify relevant issues and help identify the impact s of amended energy conservation standards on individual manufacturers or sub- groups of manufacturer s. The interview gui de covered current organizational characteristics, industry infras tructure, manufacturer cash-flow analysis, a competitive impacts assessment, an employment impacts assessment, and a manufacturing capacity impacts assessment.

13.2.3 Phase III: Sub-Group Analysis

During the course of the MIA, DOE in terviewed manufacturers representing approximately 100 percent of CCWs sales. Many of these same companies also participated in interviews for the engineering analysis. Howeve r, the MIA interviews broadened the discussion from primarily technology-related issues to include business-rela ted topics. One objective was to obtain feedback from industry on the approaches used in the GRIM and to isolate key issues and concerns. During interviews, DOE defined one CCW manufacturer sub- group that could be differentially impacted by amended energy conser vation standards. Due to one manufacturer’s focus on the laundry business, its lower total ship ment volume, and lower revenues compared to its competitors, this manufacturer was identif ied as a “Low-Volume Ma nufacturer” (LVM). The following sections summarize the methodol ogy and findings of this assessment.

13.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the ca sh-flow analysis perfor med in Phase II are supplemented with information gathered during interviews with manufactur ers during Phase III. The interview process has a key role in the manuf acturer impact analyses, since it provides an opportunity for interested partie s to express their views privat ely on important issues, allowing confidential or sensitive info rmation to be considered in the rulemaking process.

DOE used these interviews to tailor th e GRIM to incorporate unique financial characteristics for each sub-group. DOE cont acted companies from its database of manufacturers, which provided a representation of the CCW industr y. Interviews were scheduled well in advance in order to provide every opport unity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE preferred an interactive interview pr ocess because it helped clarify res ponses and provide the opportunity to identify additional issues.

13-3DOE conducted detailed intervie ws with all manufact urers that agreed to participate to gain insight into the range of potential impacts and how this range varies with each TSL. The resulting qualitative and quantitative inform ation are valuable inputs for the GRIMs.

13.2.3.2 Revised Industry Cash-Flow Analysis

In Phase II of the MIA, DOE provided ma nufacturers with preliminary GRIM input financial figures for review and evaluation. Du ring the interviews, DOE requested comment and suggestions regarding the values selected for the parameters. U pon completion of the interviews, DOE revised its industry cash flow models based on the feedback provided through the interviews. More information on how DOE calcula ted the parameters for the industry GRIMs is found in section 13.4.3 of this chapter.

13.2.3.3 Manufacturer Sub-Group Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among s ub-groups of manufacturers. Low-volume manufacturers, or manufacturers ex hibiting a cost structure that differs significantly from the industry average, could be more negatively affected. Ideally, DOE would consider the impact on every manufacturer individually; however, it typically uses the results of the industry characterization to group manufact urers exhibiting similar characteristics. During the interview process, DOE discussed the potential sub-groups and sub-group members that have been identified for the analysis. DOE looked to the manufacturers and other interested parties to suggest what sub-groups or char acteristics are the most appr opriate for the analysis.

13.2.3.4 Small-Business Manufacturer Sub-Group

DOE used the small business size standard s published on August, 22 2008, as amended, by the Small Business Administration (SBA) to de termine whether any small entities would be required to comply with the rule. 13 CFR Pa rt 121. The size standards are listed by North American Industry Classification System (NAICS ) code and industry description. DOE used the SBA limits and NAICS classifications to determin e if any small businesses would be affected by this rulemaking. The SBA bases its small busines s definition on the total number of employees for a business, its subsidiaries, and its parent co mpanies. Whenever an aggregated business entity has fewer than the listed number of employees , it is considered a small business. CCWs are classified under NAICS 333312, for which an entity is considered a small business if the total employment is less than 500. Because most CC W manufacturers also manufacture residential laundry equipment, DOE also determined if any CCW manufacturer wa s considered a small business for its residential products. Residentia l washers are classified under NAICS 335224, for which a manufacturer is considered a small business if it has fewer than 1,000 employees.

DOE surveyed the Association of Home Appliance Manufacturers (AHAM) member directory to identify manufactur ers of CCWs. DOE also asked interested parties and AHAM representatives within the CCW industry if they were aware of a ny other small business manufacturers. DOE then consulted publicly av ailable data, purchased company reports from

13-4vendors including Dun & Bradstreet (D&B), and contacted manufacturers, where needed, to determine if they meet the SBA’s definition of a small business manufacturing facility and have their manufacturing facilities loca ted within the United States.

DOE could not identify any small CCW manufa cturers. However, one category-focused manufacturer of laundry equipmen t has significant CCW market sh are, features much smaller revenues than its diversified competitors, but is not a small business per the definition of the SBA for either residential or commercial laundry equipment. DOE subsequently assigned this manufacturer its own sub-category, the LVM, to evaluate the disproportio nate impacts of any CCW rulemaking on this manufact urer. The impacts on this sub- group are found in section 13.6.

13.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards could be the consequential obsolescence of existing manufactur ing assets, including to oling and investment. The manufacturer interview guide has a series of questions to help identify impacts on manufacturing capacity, specifica lly capacity utilization and pl ant location decisions in the United States and North America with and withou t a standard; the ability of manufacturers to upgrade or remodel existing facilities to accomm odate the new requirements due to an amended energy conservation standard; the na ture and value of stranded asse ts, if any; and estimates for any one-time restructuring and ot her charges, where applicable.

13.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic employment patterns might be affected, the interviews explored current empl oyment trends in the CCW industry. In addition, the interviews solicited manufactures’ views on changes in employment patterns that may result from more stringent standard levels. The employment impacts section of the interview guide focused on current employment leve ls associated with manufacture rs at each of their production facilities, expected future em ployment levels with and with out amended energy conservation standards, and differences in workforce skills an d issues related to the retraining of employees.

13.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the ove rlapping effects on ma nufacturers due to amended energy conservation standards and othe r regulatory actions affecting the same equipment. DOE analyzed and considered th e impact on manufacturers of multiple, productspecific regulatory actions. Based on its own rese arch and discussions with manufacturers, DOE identified several regulations relevant to CCW manufacturers includ ing: Federal energy conservation standards for other products and eq uipment manufactured by CCW manufacturers, and other environmental regulations.

13-513.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

Each MIA starts by asking: “What are the key issues for your company regarding the energy conservation standard rulemaking?” Th is open question initiates dialogue with the manufacturers, enabling them to identify the i ssues that they feel DOE should explore and discuss further during the interview. The followi ng section describes key issues mentioned for CCW manufacturers. Manufacturers i ndicated that, for the most part , the risks associated with these issues increase with more stringent TSLs.

13.3.1 Equipment Class Separation

All interviewed manufacturers stated that the CCWs should be separated into two equipment classes: top-loading washers and front-l oading washers. All manufacturers stated that the mode of access and the orientation of the wash basket inside the washer have unique utilities for end-users and therefore should be subject to separate energy conservation standards.

13.3.2 Reduced Cleaning Performance and Consumer Dissatisfaction for Top-Loading Washers

All manufacturers stated that the impl ementation of design options due to the conformance to energy conservation standards for top-loading CCW can potentially cause reduction in the cleaning performance and hen ce consumer dissatisfaction. All manufacturers stated that consumer satisfaction is of high prio rity and that disruptions can be detrimental to their market share.

All manufacturers stated that overloading th e washers is common practice for consumers and that some technologies found in residential wa shers are inapplicable because of that. Another consideration is cycle length, whic h owners and end-users prefer to be as short as possible. a According to all manufacturers, cycle time is cr itical for both consumers and customers. For customers, the longer the cycle, the less time there is available fo r consumers to use washers, and the smaller number of consumers equate to decr eased revenues for CCW owners. For consumers, the longer the cycle time, the less practical or desirable it is to use the machines.

13.3.3 Test Procedure Implications

One manufacturer stated that using the residential clothes washer test procedure for CCWs is inappropriate due to the very different usage patterns for residential versus commercial clothes washers. All manufacturers agree that most , if not all, CCW cycles will feature full loads unlike the residential test proce dure, which assumes a mix of load sizes. Features such as loadsize switches and adaptive fill that boost test results per the current test procedure (which assumes variable load sizes) are thus unlikely to have any noticeable impact on actual CCW enduse energy consumption. While one manufacturer supported the continued use of the residential

a In stock configuration, CCWs typically run on a 26-minute cycle. Higher efficiency residential clothes washers can run for more than an hour per cycle.

13-6clothes washer test procedure in the absence of better data, another manufacturer expressed support for a test procedure change which would change the test procedure load size to be 100 percent full for every wash. According to mu ltiple manufacturers, R&D dollars should be focused on improvements that re present concrete energy saving s and not on technology that provide efficiency credits per the test procedure, but whic h provide no energy savings under actual operating conditions.

13.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for asse ssing the impacts on the CCW industry due to amended energy conservation standards. DOE relie s on several sources to obtain inputs for the GRIM. Data and assumptions from these source s are then fed into an accounting model that details the cash flow on a baseline basis, as well as calculates the im pacts on manufacturers due to energy conservation standards.

13.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1, is an annual cash flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of regulatory conditions such as changes in costs, investments, and shipments. The GRIM spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning with the ba se year of the analysis, 2009, and continuing explicitly through 2043. The model calculates the INPV by summing the stream of annual discounted cash flows during this period. 1

Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using sta ndard accounting principles and compares changes in INPV between the ba se-case scenario and the standa rds-case scenario, evaluating changes induced by the amended energy conser vation standards. The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy conservation standards on ma nufacturers. Appendix 13B provides more technical details and user information for the GRIM.

13-713.4.2 Sources for GRIM Inputs

The GRIM uses several different sources for da ta inputs in determini ng the cash flows for the industry, including corporate annual reports, company profile s, U.S. Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer interviews.

13.4.2.1 Corporate Annual Reports
Corporate annual reports to th e SEC (10-Ks) provided many of the financial inputs to the GRIM. 2 These reports exist for publicly held compan ies and are freely avai lable to the general public. DOE developed average financial inputs to the GRIM by examining the annual SEC 10

- K reports filed by publicly traded manufacturers primarily engaged in ap pliance manufacturing and whose combined product range includes commercial clothes washers. Because these companies are typically diversified, producing a range of different appliances, an industry average was assumed by DOE to be representative for the manufacture of each type of appliance. Since these companies do not provide detailed info rmation about their individual product lines, DOE had to use the financial information for th e entire companies to represent the financial parameters in the CCW GRIM. In determining financial parameters for the industries, DOE weighted corporate financial in formation contained in the SEC 10-K reports by each company’s estimated market share to arrive at industry- weighted averages. DOE used corporate annual reports to derive the fo llowing GRIM inputs:

• Tax rate;

• Working capital;

• SG&A;

• R&D expenses;

• Depreciation;

• Capital expenditures; and

• Net property, plant, and equipment (PPE).

DOE also used information from company SEC 10-K reports to calibrate the GRIM’s operating profit margin against th e industry-weighted average.

13.4.2.2 Standard & Poor Credit Ratings

S&P provides independent credit ratings, re search, and financial information. S&P reports are available for a nominal fee. DOE re lied on S&P reports to determine the industry’s average cost of debt for th e cost of capital calculation.

13.4.2.3 Dun & Bradstreet Reports

D&B provides independent research rega rding company cash flows, revenues, employees, and credit-worthiness. Besides cond ucting manufacturer interviews, DOE used D&B reports to profile several manufacturers whic h could potentially be small businesses.

13-813.4.2.4 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the national impact analysis (NIA). The model reli ed on historical shipments data for CCWs from AHAM for the analysis. Chapter 10 of this TSD describes the methodology and analytical model DOE used to forecast shipments.

13.4.2.5 Engineering Analysis

During the engineering analysis, DOE used data submitted from AHAM and manufacturer interviews to de velop manufacturing cost esti mates for CCWs. The analysis provided labor, materials, and overhead production costs which ar e representative of the CCW industry. The input costs used for CCWs were obtained from information submitted by AHAM and from manufacturer interviews.

13.4.2.6 Manufacturer Interviews
During the course of the MIA, DOE c onducted interviews with manufacturers representing approximately 100 percent of the CCWs industry. During these discussions, DOE obtained information, which it used to determin e and verify GRIM input assumptions for the industry. Key topics discussed during the interv iews and reflected in the GRIM include:

• Capital conversion costs (one-time investments in property, plant, and equipment);

• Equipment conversion costs (one- time investments in research, product development, testing, and marketing);

• The portion of the capital conversion co sts that companies use to replace stranded assets;

• Product cost structure: the portion of the manufacturer production costs related to materials, labor, overhead, and depreciation costs;

• Projected total shipment and shipment distribution mix; and

• Engineering analysis-estimated manufacturer production costs.

13.4.3 Financial Parameters

Table 13.4.1 provides financial parameters for three public companies engaged in manufacturing and selling CCWs. The values listed are averages over an 8-year period (1999– 2006).

13-9Table 13.4.1 GRIM Financial Parameters Based on 1999

– 2006 Weighted Company Financial Data

Parameter IndustryWeighted Average Manufacturer

A B C

Tax Rate (% of Taxable Income) 33.9 6.6 34.1 34.5 Working Capital (% of Revenue) 2.9 9.6 5.6 2.0 SG&A (% of Revenue) 12.5 12.7 12.3 13.2 R&D (% of Revenues) 2.2 2.3 2.0 2.4 Depreciation (% of Revenues) 3.4 3.9 3.4 3.3 Capital Expenditures (% of Revenues) 3.5 1.9 3.4 3.6 Net Property, Plant, and Equipment (% of Revenues) 19.9 17.3 21.6 19.4

These companies constitute a significan t portion of the CCW industry. For other companies in the industry, public data is not available and was not us ed to calculate the parameters. The values used in the GRIMs, ther efore, represent the indus try’s weighted-average estimates using financial data from three public ly traded manufacturers. During manufacturer interviews, CCW manufacturers were asked to review the parame ters listed in Table 13.4.1 and comment on how the parameters related to th eir specific industry. Where applicable, the parameters were then adjusted for the GRIM.

13.4.4 Corporate Discount Rate

DOE used the weighted-average cost of capital (WACC) for the industry as the discount rate to calculate the INPV. A co mpany’s assets are financed by a combination of debt and equity. The WACC is the total cost of de bt and equity weighted by their respective proportions in the capital structure of the industry. 1 DOE estimated the WACC for the CCW industry based on several representative companies, using the following formula:

WACC = After-Tax Cost of Debt x (Debt Ra tio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return th at equity investors (including, potentially, the company) expect to earn on a company’s stock. Th ese expectations are reflected in the market price of the company’s stock. Th e capital asset pricing model (C APM) provides one widely used means to estimate the cost of equity. Accordi ng to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “safe” benchmark investment, typically considered the short-te rm Treasury Bill (T-Bill) yield.

Risk premium is the difference between the expected return on stocks and the riskless rate.

13-10Beta ( β ) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated with the S&P 500 market index. A Beta lower than one means the stock is less volatile th an the market index.

DOE determined that the industry average cost of equity for the CCW industry is 17.9 percent as calculated in Table 13.4.2.

Table 13.4.2 Cost of Equity Calculation Industry- Manufacturer Parameter Weighted Average (%) A B C (1) Average Beta (2002–2006 year) 1.31 1.0* 1.77 1.17
(2) Yield on 10-Year T-Bill (1990

– 2006) 5.9

- - - (3) Market Risk Premium (1926

– 1999) 9.2

- - - Cost of Equity (2)+[(1)*(3)] 17.9

- - - Equity/Total Capital 37.2 23.7 -49.8 64.6 * Estimated Beta

Bond ratings are a tool to meas ure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. On e way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis point s) over the risk-free rate. DOE used this method to calculate the cost of debt for all three manufacturers. S& P had bond ratings for all three manufacturers, so DOE used these ratings to estimate the manufacturers’ cost of debt by adding the relevant spread to the risk-free rate.

In practice, investors use a variety of diffe rent maturity Treasury bonds to estimate the risk-free rate. DOE used a long-term Treasur y bond return (10-year bond return) because it captures long-term inflation expectat ions and is less volatile than s hort-term rates. The risk free rate is estimated to be approximately 6 per cent, which is the aver age 10-year Treasury bond return over the period of 1990 to 2006.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate bonds for the three public manufacturers ove r the period 2002–2006. To this, DOE added the industry-weighted average spread to the av erage T-Bill yield over the same period. Since proceeds from debt issuance are tax deductible, DO E adjusted the gross cost of debt by the industry-average tax rate to determine the net cost of debt for the industry. Table 13.4.3 presents the derivation of the cost of debt. Also s hown is the capital structure of the industry, i.e. the debt ratio (debt/total capital).

13-11Table 13.4.3 Cost of Debt Calculation

Parameter IndustryWeighted Average (%) Manufacturer

A B C S&P Bond Rating

-- B- BBB BBB (1) Yield on 10

- Year T-Bill (1990

– 2002) 5.9

- - -
(2) Gross Cost of Debt 8.2 13.9 8.1 8.1 (3) Tax Rate 34 6.6 34.1 34.5 Net Cost of Debt (2)x((1)

- (3)) 5.4

- - -
Debt/Total Capital 62.8 76.3 149.8 35.4

DOE estimated CCW industry’s WACC to be a pproximately 10.1 percent. Subtracting an inflation rate of 2.9 percent between 1990 a nd 2006, the inflation adjusted WACC, and the corporate discount rate used in the GRIM, is 7.2 percent.

13.4.5 Trial Standard Levels

DOE developed TSLs for CCWs. Chapter 9 of the TSD describes the methodology DOE used to determine each TSL for the GRIM. The efficiency levels used in the GRIMs are presented in Table 13.4.4.

Table 13.4.4 Commercial Clothes Washer Base line Efficiency Levels and TSLs Equipment Class Efficiency Metric Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Top-Loading MEF 1.26 1.42 1.42 1.60 1.60 1.60 WF 9.5 9.5 9.5 8.5 8.5 8.5 Front-Loading MEF 1.72 1.80 2.00 2.00 2.20 2.35 WF 8.0 7.5 5.5 5.5 5.1 4.4

13.4.6 NES-Shipments Forecast

The GRIM estimates manufacturer revenues ba sed on total-unit-shipment forecasts and the distribution of these values by efficiency le vel. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this analys is, the GRIM used the national energy savings (NES) shipments forecas ts from 2009 to 2043. Further explanation of approaches and calculations of total shipments can be found in the shipment analysis section of this TSD (chapter 10). Total shipments forecasted in the shipment analysis for all efficiency levels in 2013 are shown in Table 13. 4.5 and are further detailed below.

13-12Table 13.4.5 Total NES-Shipments Forecast in 2013 Equipment Class Total Industry Shipments* Top-Loading Commercial Clothes Washers 125,700 Front-Loading Commercial Clothes Washers 55,700

* Estimates rounded to the nearest hundred

13.4.6.1 Base-Case Shipments Forecast
As part of the shipment analysis, DOE estimated the shipment distribution by efficiency level. Table 13.4.6 through Table 13.4.7 show the base-case distributions of shipments by TSL estimated in the NES for various equipment classes for 2013.

Table 13.4.6 Base-Case Distribution of Efficien cies for Top-Loading Commercial Clothes Washers in 2013 Estimated in the NES Shipments Efficiency Level (MEF/WF) Baseline 1.26/9.5 TSL 1, 2 1.42/9.5 TSL 3, 4, 5 1.60/8.5

Baseline 1.26/9.5 64.8% 33.8% 1.4%

Table 13.4.7 Base-Case Distribution of Efficien cies for Front-Loading Commercial Clothes Washers in 2013 Estimated in the NES Shipments Efficiency Level (MEF/WF) Baseline 1.72/8.0 TSL 1 1.80/7.5 TSL 2, 3 2.00/5.5 TSL 4 2.20/5.1 TSL 5 2.35/4.4

Baseline 1.72/8.0 3.5% 0.0% 73.7% 22.8% 0.0%

13.4.6.2 Standards-Case Shipments Forecast
To examine the effects of amended energy conservation standards on shipments, which affect the INPV, DOE used the base-case shipments described in the previous section. For the standards case, DOE assumed shipments at lower efficiencies were most likely to roll up into higher efficiency levels in response to an in crease in energy conserva tion standards. This scenario assumes that demand for high effici ency equipment is a function of its price independent of the standard level. Table 13.4.8 through Table 13.4.9 show the distributions of efficiencies for the various equipment cl asses in 2013 under the roll-up scenario.

13-13Table 13.4.8 Distribution of Top-Loading Comme rcial Clothes Washer Shipments in the Standards Case in 2013 – Roll-Up Scenario TSL (MEF/WF) Baseline 1.26/9.5 TSL 1, 2 1.42/9.5 TSL 3, 4, 5 1.60/8.5 Baseline 1.26/9.5 64.8% 33.8% 1.4%

TSL 1 1.42/9.5 98.6% 1.4%

TSL 2 1.60/8.5 100.0%

Table 13.4.9 Distribution of Front-Loading Comme rcial Clothes Washer Shipments in the Standards Case in 2013 – Roll-Up Scenario TSL (MEF/WF) Baseline 1.72/8.0 TSL 1 1.80/7.5 TSL 2, 3 2.00/5.5 TSL 4 2.20/5.1 TSL 5 2.35/4.4 Baseline 1.72/8.0 3.5% 0.0% 73.7% 22.8 0.0%

TSL 1 1.80/7.5 3.5% 73.7% 22.8% 0.0%
TSL 2, 3 2.00/5.5 77.2% 22.8% 0.0%

TSL 4 2.20/5.1 100.0% 0.0%

TSL 5 2.35/4.4 100.0%

13.4.6.3 Price Elasticity of Demand Shipments Scenario

In the CCW GRIM, DOE modeled a shipment scenario that considers the impacts of changes in relative prices on consumer demand. As described in the purchase price, operating cost, and household income impact s sections found in the shipments model in chapter 10 of this TSD, the price elasticity of demand shipment s cenario estimates how the combined effects of increases in purchase price and decreases in ope rating costs due to amended energy conservation standards affect shipments. DOE estimated the relative price elasticity of demand over time to determine how shipments would likely change after a standard sets a higher initial purchase price and lower operating costs. For shipments under the “price elasticity scenario,” the effects from the increase in purchase prices offset the effects from decreased operating costs, resulting in a net decrease in shipments. See chapter 10 for mo re details on the shipment scenarios.

13.4.6.4 Economic Growth Shipments Scenario

In the GRIM, DOE modeled three shipment scenarios that consider the impacts of changes in the overall U.S economy. These sh ipment scenarios are based on the Energy Information Administration’s (EIA) 2009 Annual Energy Outlook Report (

AEO 2009 ) for the period 1990–2030. AEO 2009 provides three scenarios: the Reference case, the High Economic Growth case, and the Low Economic Growth case. DOE does not present the GRIM results for the economic growth shipment scenarios. However, these scenarios are provided as an option for

13-14the user to select in the GRIM. It is also possi ble for the user to combine the price elasticity scenario with an economic scenario in the GRIM. See chapter 10 for more details on the economic growth shipment scenarios.

13.4.6.5 Shipment Sensitivity Scenario

In the GRIM, DOE modeled a sensitivity case th at considers an alternative split of CCW shipments among laundromats, multi-family housing, and on-premises laundry applications. See appendix 11C for a description of how DOE modele d the shipment sensitivity scenario and the impacts on INPV in the sensitivity case.

13.4.7 Production Costs

Changes in production costs impact revenue s and gross profits. As shown in the engineering analysis (chapter 5 of this TSD), equipment that is more efficient usually costs more to produce than baseline equipment. For the MI A, DOE used the manufacturing production costs (MPCs) derived in the engineering analysis. The costs of CCWs were calculated using data supplied by AHAM and interviews with manufactu rers. The GRIM included the proportion of costs devoted to labor, materials, overhead, and depreciation that make up the full cost of production or MPCs. DOE estimated the proportion of costs associated with each cost category by using information provided by AHAM 3 and U.S. Census Bureau’s Current Industry Reports ( CIR ) 4 and 2006 ASM for CCWs (see section 13.7.1.1 for derivation of the industry cost structure). Table 13.4.10 through Table 13.4.11 provide the MPC resu lts used in the GRIM for CCWs.

Table 13.4.10 Base-Case Production Costs (2008$) used in the GRIM for Top-Loading Commercial Clothes Washers TSL (MEF/WF) Labor Material Overhead Depreciation MPC

Baseline (1.26/9.5) $33.76 $228.47 $21.39 $12.69 $296.30 TSL 1, 2 (1.42/9.5) $42.60 $288.29 $26.99 $16.02 $373.90 TSL 3, 4, 5 (1.60/8.5) $49,14 $332.54 $31.13 $18.48 $431.29

Table 13.4.11 Base-Case Production Costs (2008$) used in the GRIM for Front-Loading Commercial Clothes Washers TSL (MEF/WF) Labor Material Overhead Depreciation MPC

Baseline (1.72/8.0) $69.62 $471.11 $44.11 $26.18 $611.12 TSL 1 (1.80/7.5) $69.62 $471.11 $44.11 $26.18 $611.12 TSL 2, 3 (2.00/5.5) $71.24 $482.07 $45.13 $26.78 $625.23 TSL 4 (2.20/5.1) $74.10 $501.45 $46.95 $27.86 $650.36 TSL 5 (2.35/4.4) $77.16 $522.12 $48.88 $29.01 $677.18

13-1513.4.8 Conversion Costs

Amended energy conservation standards typica lly cause manufacturers to incur one-time conversion costs to bring their production facilities and equipment designs into compliance with new regulations. For the purpose of the MIA, DOE classified these one-time conversion costs into two major groups: capital conversion cost s and equipment convers ion costs. Capital conversion costs are one-time investments in prope rty, plant, and equipment to adapt or change existing production facilities so that new equipment designs can be fabricated and assembled under the new regulation. Equipment conversion co sts are one-time investments in research, development, testing, and marketing focuse d on making equipment designs comply with amended energy conservation standards. The follow ing sections describe in greater detail the inputs DOE used in the GRIM.

13.4.8.1 Capital Conversion Costs

DOE evaluated the level of cap ital investment needed to comply with amended energy conservation standards at each TSL. For each TS L, DOE estimated the proportion of equipment on the market will have to be redesigned to meet that TSL efficiency level. The higher the TSL, the greater the proportion of the equipment on the market that will require a redesign.

DOE used a platform approach to estimate the capital conversion costs for top-loading and front-loading CCWs. DOE used conversations w ith industry experts a nd equipment catalogs to estimate the number of platforms at each TSL that would require tooling changes to accommodate newly redesigned washers. Manufacture rs that did not produce any equipment that met or exceeded a given TSL are expected to ma ke substantial tooling changes, either through modifying existing tooling or ordering new sets. For equipment that almost met or which exceeded the efficiency requirements of a give n TSL, DOE lowered the cost of the tooling changes because such washers are not expected to be significantly redesigned, nor would substantial changes to manufacturing asse ts be required. Table 13.4.12 summarizes the breakdown of conversion capital expe nditure by TSL for the CCW industry.

Table 13.4.12 Capital Conversion Costs for Commercial Clothes Washers by TSL

TSL Total Industry Conversion Capital Costs (2008$ million) by Equipment Class

Top-Loading CCWs Front-Loading CCWs

Baseline $0 $0 TSL 1 $0 $0 TSL 2 $0 $0.6 TSL 3 $1.0 $0.6 TSL 4 $1.0 $1.4 TSL 5 $1.0 $4.1

13-1613.4.8.2 Equipment Conversion Costs

DOE conducted interviews with manuf acturers to better understand the product development process that manufacturers typica lly go through before they release new or improved equipment. The magnitude of the require d investments varies by manufacturer and the TSL analyzed. For example, multiple manufacturers estimated that the time and resources spent on R&D, testing, and certification of equipment would depend significantly on the design path chosen to achieve higher efficiency, the energy co nservation standard that would have to be met, capital resources, and other considerations.

DOE also used a platform approach to es timate the equipment conversion costs for toploading and front-loading CCWs. DOE used conversations with industry experts and equipment catalogs to estimate the number platforms at each TSL that would require a redesign to meet new energy conservation standards. Ma nufacturers that did not produce any equipment platforms that met or exceeded a given TSL were expected to redesign, test, and certify a new equipment platform. For equipment that almost met or wh ich exceeded the efficiency requirements of a given TSL, DOE lowered the cost of the produc t development costs as such washers are not expected to be significantly redesigned. Table 13.4.13 summari zes the breakdown of equipment conversion costs by TSL for the CCW industry.

Table 13.4.13 Equipment Conversion Costs fo r Commercial Clothes Washers by TSL

TSL Total Industry E quipment Conversion Costs (2008$ million) by Equipment Class

Top-Loading CCWs Front-Loading CCWs

Baseline $0 $0
TSL 1 $0 $0
TSL 2 $0 $3.1
TSL 3 $15.6 $3.1
TSL 4 $15.6 $7.0
TSL 5 $15.6 $20.3

13.4.9 Markups

To understand how baseline and more efficient equipment are differentiated, DOE reviewed manufacturer catalogs and utilized in formation gathered from manufacturers. To estimate the prices at which ma nufacturers sell their equipment, DOE applied markups to the production costs it had developed earlier.

DOE applied a single uniform “gross margin percentage” markup to manufacturing production costs across all efficien cy levels. As production costs in crease by efficiency level, this scenario implies that the absolute do llar markup will increase also. DOE used a non

13-17production cost markup of 1.26, which includes SG &A expenses; R&D expenses; interest; and profit. This markup is consistent with the one DOE assumed in the base case for the GRIM.

13.4.10 Federal Production Tax Credits

In the GRIM, DOE includes a scenario that allo ws the user to include the estimates of the benefit of the Federal production tax credits found in title I sec tion 1334 (c)(1)(B) of the Energy Policy Act of 2005 (EPACT 2005) and updated by Energy Improvement and Extension Act of 2008 (Public Law 110-343). See appendix 13C for a description of how DOE estimated the Federal production tax credits and its impacts on INPV results.

13.5 COMMERCIAL CLOTHES WASHER IN DUSTRY FINANCIAL IMPACTS

Using the inputs described in the previous sections, the GRIM pr oduced indicators of financial impacts on the CCW industry. The following sections detail additional inputs and assumptions relating only to CC Ws, including the MIA results for two key financial metrics: INPV, and annual cash flows.

13.5.1 Impacts on Industry Net Present Value

As previously stated, the INPV measures the industry value and is used in the MIA to compare the economic impacts of different TS Ls. For the CCW industry, the GRIM estimated cash flows between 2009 and 2043, consistent with the forecast period used in the NIA (chapter 11).

In the MIA, DOE compares the INPV of th e base case (no amended energy conservation standards) to that of each TSL in the standard s case. The difference between the base-case INPV and a standards-case INPV is an estimate of the economic impacts that implementing that particular TSL would have on the entire indus try. For the CCW industry, DOE examined a scenario where manufacturers will be able main tain gross margins as a percentage of revenues and unit shipments will not be impacted regard less of new energy conservation standards. DOE also considered a scenario where manufacturers w ill maintain their gross margin as a percentage of revenues, but total industry shipments will decrease yearly due the combined effects of increases in purchase price and decreases in ope rating costs due to amended energy conservation standards. These scenarios were chosen because all CCW manufacturers th at were interviewed expressed little concern about pr eserving gross margin after the e ffective date of the standard, regardless of efficiency level. Rather, manufact urers were concerned a bout the potential of increased selling prices to shrink the size of the CCW market and the potentially large investments necessary to meet standards. The price-elasticity scenario takes both of these concerns into consideration. Table 13.5.1 throug h Table 13.5.6 provide th e INPV estimates for the CCW industry under these two scenarios.

13-18Table 13.5.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 33 37 37 29 29 29

Change in INPV (2008 $ millions) - 4.0 4.0 (4.0) (4.0) (4.0)
(%)

- 11.15 11.15 -10.91 -10.91 -10.91

Table 13.5.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Perce ntage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Ma rkup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 33 36 36 27 27 27

Change in INPV (2008 $ millions) - 3 3 (6) (6) (6)
(%)

- 8.40% 8.40% -17.61% -17.61% -17.61%

Table 13.5.3 Changes in Industry Net Pres ent Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 29 29 26 26 24 12

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17)
(%)

- 0.00 -8.01 -8.01 -15.83 -58.61

Table 13.5.4 Changes in Industry Net Pres ent Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Ma rkup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 29 29 26 26 24 11

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17)

(%)

- 0.00% -8.02% -8.02% - 16.39% -59.97%

13-19Table 13.5.5 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation ofGross Margin Percentage Markup – BaseCase Shipments) Preservation of Gross Margin Percentag e Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 62 65 63 57 54 41

Change in INPV (2008 $ millions) - 4 1 (5) (8) (20)
(%)

- 5.97 2.24 -7.81 -12.73 -33.09

Table 13.5.6 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Ma rkup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 62 64 62 55 51 39

Change in INPV (2008 $ millions) - 3 0 (7) (10) (23)
(%)

- 4.50% 0.76% -11.39% -16.57% -37.30%

13.5.2 Impacts on Annual Cash Flow

To get an idea of the behavi or of annual net cash flows, DOE reports the annual net or free cash flows from 2009 through 2043 for th e different TSL levels. Figure 13.5.1 through Figure 13.5.6 present the annual net cash flows for the base case and each of the five TSLs for the CCW industry assuming the different shipments scenarios.

13-20Figure 13.5.1 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments)

Figure 13.5.2 Annual Net Cash Flows for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

13-21Figure 13.5.3 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments)

Figure 13.5.4 Annual Net Cash Flows for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

13-22Figure 13.5.5 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments)

Figure 13.5.6 Annual Net Cash Flows for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)

13-23Prior to the effective date of an amended energy conservation sta ndard, cash flows are driven by the level of capital and equipment conversion costs and the proportion of these investments spent every year. After the standard announcement date, industry cash flows begin to decline as manufacturers use th eir financial resources to prepar e for the new standard. Because higher TSLs require more expensive redesign s and tooling to accommodate newly redesigned washers, more stringent energy conservation standards have a gr eater impact on industry cash flows in the years prior to the effective date for both top-loading and front-loading washers.

While the impact on cash flows from the necessary investments does not appear prohibitively burdensome in the previous graphs, standards do greatly alte r the industry cash flows. For top-loading washers, the maximum technologically feasible (max-tech) efficiency reduces cash flow by 272 percent comp ared to the base case in the year prior to the effective date of the standard. For front-loading washers, the max-tech efficiency reduces cash flow by 481 percent compared to the base case in the year prio r to the effective date of the standard. Based on conversations with manufacturers, DOE modele d that redesigned washers would be based on existing washers, and hence no capital assets would be stranded due to standards. Consequently, there is no one-time injection of cash in the year of the standards from an asset write-down. In the years following the standard, the impact on cash flow depends on the operating revenue. Companies receive positive cash flows from operati ng profit after taxes. However, since higher TSLs do not have a significant impact on net prof it, standards do not signif icantly alter cash flow in the years after the effec tive date of the standard.

13.6 IMPACTS ON THE LOW-VOLUME COMMERCIAL CLOTHES WASHER MANUFACTURER

13.6.1 Introduction

The U.S. CCW market has three principal manufacturers. While two of them are welldiversified appliance manufactur ers, the third is an LVM. In addition to being focused exclusively on laundry equipment, the LVM histor ically derived over 85 pe rcent of its clothes washer revenues from sales to commercial market segments. Prior to 1999, the LVM manufactured over 300,000 residential wash ers and 100,000 CCWs annually. Due to a restructuring of its business, the LVM was contr actually barred from ma nufacturing residential clothes washers from 1999 until 2004. While its s ubsequent SEC 10-K filings show significant growth in the residential market segment, Tabl e 13.6.1 shows commercial sales still comprise the overwhelming majority of its clothes washer ship ments. As a result, the LVM will be affected disproportionately by any change s to the CCW energy conservation standards compared to its larger competitors, which are more diversifie d and for whom CCW sales amount to less than 2 percent of their total clothes washer sales. A ppendix 13A of today’s TSD further details the importance of the CCW business to the LVM.

13-24Table 13.6.1 DOE Estimate of LVM Clothes Washer Sales and Unit Shipments in 2006

Market Segment Equipment Class Estimated

Revenue ($MM) Percentage Revenue of Clothes Washer Business Unit Shipment Volume by Sales Channel Commercial Top-Loading $42.5 59.9% 81,502 Front-Loading $19.2 27.0% 22,234 Residential Top-Loading $8.7 12.3% 19,586 Front-Loading $0.6 0.8% 707 Total Clothes Washer Shipments 124,028

13.6.2 Low-Volume Manufacturer Competitiveness

The financial reasons that LVM has been ab le to stay competitive in the commercial laundry business range from its well-depreciated machinery and legacy design to its successful customer and service networks. The LVM does not currently face a si gnificant, inherent disadvantage in top-loading washers because th ese washers are based on legacy platforms for models originally produced at much higher volu mes. Decades of production experience at higher volumes and a legacy design that has evolved gradually translates into lower per-unit R&D expenses. As a result, the LVM’s depreciation cost for top-loading washers is in line with those of manufacturers which produce athigher volumes. Finally, the large installed base of toploading machines and stock of repair parts ensu re a large market for replacement machines. The LVM sells its products to route operators and di stributors who sell laundry services to end-users and who typically service the machines. Route op erators’ and distributor s’ large inventory of service parts and repair knowle dge represent a significant switc hing cost, discouraging customers from adopting competing platforms when a washer is replaced. A market disruption, such as the wholesale adoption of front-loading CC Ws, could place the LVM at risk of losing market share.

13.6.3 Effects of a Transition to Front-Loading Platforms

In comments submitted in response to th e advance notice of proposed rulemaking (ANOPR), the LVM stated that its most efficient top-loading washer reaches an MEF of 1.50. However, this washer uses a “partial drain” rinse which has not been fully embraced by the market. Consequently, the LVM stated that a ny standard above a 1.42 MEF (TSL 3 through TSL 5) would require it to only manufacture front-loa ding washers. The LVM also stated that toploading CCWs with an MEF greater than 1.42 w ould have to be base d on non-traditional technologies (technologies that do not use a traditiona l agitator). The LVM st ated that these non

traditional washers employ technologies that ar e proprietary and whic h would require an unjustifiable investment for the LVM to develop due to the size of the CCW market. Finally, the LVM stated that there have been issues with the performance of thes e products which have caused consumers to reject them.

DOE based the efficiency levels for top- loading washers on exis ting CCWs. Since the ANOPR, the LVM has introduced more effici ent top-loading CCWs . The LVM currently markets a top-loading CCW with an efficiency rating of 1.55 MEF/8.6 WF. This efficiency is very close to the top-loadi ng energy conservation standard s at TSL3 through TSL 5 (1.6 MEF/8.5 WF). DOE notes that the max-tech CCW on the market appears to meet the TSL 3

13-25energy conservation standards with out the use of proprietary tec hnologies, which suggests that modifications to the LVM’s most efficient t op-loading CCW could be made to meet TSL 3 through TSL 5. If the entire industry transitioned to only front-loading CCWs due to poor rinse or wash quality, the LVM would be placed in di sadvantaged situation. While the current product offerings of the LVM and its competitors make it less likely that the industry will be forced to produce exclusively front-loading CCWs at any TSL, DOE is sensitive to consumer utility issues for higher efficiency top-loading CCWs, as cons umers may have concerns about rinse or wash quality, for example.

Though the LVM has current equipment that nearly meets the max-tech top-loading efficiency, the effects of a tran sition to front-loading CCWs could have significant implications for the LVM. Were the LVM to transition to only offering front-loa ding washers, the LVM would have to make significant investments in capital and engineering to redesign its frontloading machines to lower cost and to e xpand production. Depending on CCW unit demand, the LVM’s competitors may or may not need to undert ake similar line expansions of their combined residential and commercial clothes washer fabr ication and assembly lines if they also transitioned to only offering fr ont-loading CCWs. The need for an expansion would depend on the amount of spare capacity that their current manuf acturing facilities have . For example, the LVM’s principal competitor ships about 7.5 million cl othes washers domestically per year, so its share of the U.S. CCW market represents approx imately 1.5 percent of it s total domestic clothes washer shipments.

Assuming that this larger competitor produ ces 70 percent top-loading and 30 percent front-loading clothes washers, a marginal transfer of 100,000 CCWs to the front-loading manufacturing line would repres ent approximately a 5-percent front-loading manufacturing line expansion. By comparison, the LVM would have to more than double its front-loading clothes washer production to reach the same volumes. Furthermore, unlike the LVM, these larger competitors can base their front-loading CCW desi gns on high-volume residential platforms that have already benefited from years of refinement, cost reduction efforts, and production at high volumes.

13.6.4 Fixed Cost Impacts on a Low-Volume Manufacturer

In order to determine how a lower producti on volume can disproportionately affect a manufacturer, DOE determined the costs needed to build a “green-field” manufacturing facility to produce a new line of front-loa ding CCWs. To represent a ma nufacturer with low production volume, DOE determined the upfront capital and e ngineering costs to build a facility to produce 100,000 units annually. For a manufacturer with a high production volume (1.5 million units annually), DOE assumed that the same line w ould be used to build both residential and commercial clothes washers, allowing the upfront and depreciation costs to be spread over the entire production volume. DOE used inform ation provided by manufacturers, AHAM, and industry experts to estimate the total costs of a green-field manufacturing facility. Table 13.6.2 and Table 13.6.3 show the upfront co sts to build the faci lity for the manufacturers with low and high production volumes.

13-26Table 13.6.2 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 100,000 units Per Year.
Total Equipment Investment

($MM) Total Conveyer Investment

($MM) Total Tooling Investment

($MM) Total Building Cost ($MM) Total Capital Investment

($MM)

Manufacturer with

Low Production Volume $13.53 $1.51 $17.65 $21.43 $54.12

Table 13.6.3 Capital Costs to Build a Green-Field Manufacturing Facility to Produce 1,500,000 units Per Year.
Total Equipment Investment

($MM) Total Conveyer Investment

($MM) Total Tooling Investment

($MM) Total Building Cost ($MM) Total Capital Investment

($MM)

Manufacturer with

High Production Volume $76.6 $10.4 $39.6 $100 $226.8

After determining the total costs needed to design a new line of equipment and build a new facility, DOE depreciated the equipment, tooling, and building to examine how these upfront costs would impact the cost of each un it for a low- and high-vol ume manufacturer. In order to determine the depreciation costs, DOE es timated depreciation over the useful lives of the equipment, building, and tooling using the st raight line method. The assumptions used for the lifetime of the equipment, build ing, and tooling for a low- an d high-volume production facility are shown in Table 13.6.4.

Table 13.6.4 Depreciation Lifetime Assumptions for a Low- and High-Volume Manufacturer Average Equipment Life (Years) Average Tooling

Life (Years) Building Life (Years) Average Plant Depreciation Life (Years) Manufacturer with Low

Production Volume (100,000 units per year) 10.17 7.53 25 15.2

Manufacturer with High Production Volume (1,500,000 units per year) 10.77 2.99 25 15.69

Table 13.6.5 shows depreciation expenses per unit for a low- and high-volume manufacturer, as well as the cost disadvantage for an LVM. If a redesigned front-l oading washer were built in a low volume, green-field manufactu ring facility, an LVM would incur a significant depreciation cost disadvantage. In comparison to a manufactur er with a high production volume, DOE estimated that this disadvantage w ould be approximately $40.07 per unit.

13-27Table 13.6.5 Per Unit Depreciation Costs fo r a Low- and High-Volume Manufacturer

Equipment Building Tooling Total Depreciation Cost Per Unit Manufacturer with Low

Production Volume (100,000 units per year) $17.56 $11.97 $32.79 $62.32

Manufacturer with High Production Volume (1,500,000 units per year) $6.27 $3.91 $12.07 $22.25

Low Volume Per Unit Disadvantage $11.29 $8.06 $20.72 $40.07

In addition to a depreciation cost disadva ntage, a low-volume ma nufacturer would also incur a per-unit R&D cost disadvantage. To qua ntify the R&D cost disadvantage, DOE assumed that both types of manufacturers would have the same engineeri ng costs to design a new line of front-loading washers. Based on information provided by manufact urers and industry experts, DOE estimated it would cost $10 million to re design a front-loading washer from the ground up. If the equipment lifetime is assumed to be 7 years, an LVM would incur a R&D cost disadvantage of approximately $13.33 per unit. Th e impacts at other equipment lifetimes are shown in Table 13.6.6.
Table 13.6.6 Per-Unit Impacts of a $10 Mil lion R&D Expense at Various Equipment Lifetimes Equipment Lifetime (years)
7 10 20 Low-Volume Per-Unit R&D

(100,000 units per year) $14.29 $10 $5
High-Volume Per-Unit R&D

(1,500,000 units per year) $0.95 $.67 $0.33

Low-Volume Per-Unit Disadvantage $13.33 9.33 $4.67

In summary, if a new standard forces an LVM to invest in a green-field manufacturing facility to make front-loading units, the LVM would incur a combined depreciation and R&D cost disadvantage of $53.40, $49.40, or $44.74 per un it, depending on the assumed equipment lifetime. Based on a review of SEC 10-K forms and data provided by industry, DOE estimates that the earnings before interest and taxes for a front-loading wash er is $47 per unit under present market conditions.

The per-unit cost impacts of R&D and capital investments suggest that an LVM would most likely not invest in such an extensive proj ect. It would not be economically justified to make the necessary investment for the green-fie ld manufacturing plant because the depreciation and R&D cost disadvantages after the investment are severe enough to completely erode profits, assuming that front-loading CCWs remain as profitable as they have been traditionally. Manufacturers have stated that if the CCW industry were to tr ansition to front-loading CCWs, commoditization and lower prices are likely to follow. Either effect would put even greater pressure on earnings before interest, taxes, and amortization (EBITA) per unit. Table 13.6.7 summarizes the estimated profit per unit after the disadvantag e from depreciation and R&D

13-28expenses that a manufacturer with low produc tion volume will incur at various equipment lifetimes.

Table 13.6.7 Total Per-Unit Profit for an LV M after Depreciation and R&D Disadvantage Equipment Lifetime (Years)
5 7 10 20 Estimated Industry

Average Profit from Front-loading Washer $47.00

Low-Volume PerUnit Profit after Depreciation and R&D Cost Disadvantage -$11.73 -$6.40 -$3.60 $2.27

Based on this analysis, it is likely that any standard that necessitates a departure from current designs would have substantial negative impacts on a LVM and could cause it to cease the production of CCWs.

13.6.5 Financial Position of the LVM

If the LVM in the CCW industry were required to build the green-field site described in 13.6.4 to comply with a front-loading standard, the investments would represent a significant hardship. The LVM would devote almost all of its planned R&D expenses to the project and would have to spend approximately 6 times the planned annual capital expenses. Table 13.6.8 below compares the LVM’s 2008 expenditures on capital and R&D with the amounts DOE assumed would be needed to build a green-field f acility for a new line of front-loading washers. Even though the necessary R&D expenses are lower than capital, R&D will have a significant impact on the profitability of the company th e years in which they are incurred. R&D costs cannot be amortized so every additional dolla r spent on R&D directly lowers profit.

Table 13.6.8 Comparison of the LVM’s 2008 Financials with DOE’s Green-Field Assumptions LVM’s 2008 Expense* DOE’s Expected Expense for a Green-Field site DOE’s Expected Expense as a Percentage of the LVM’s 2008 Expense DOE’s Expected Expense as a Percentage of the LVM’s 2008 Operating Income DOE’s Expected Expense as a Percentage of the LVM’s 2008 Net Income Capital Expenditures $8.8 Million $54.12 Million 615% 103% 348%

R&D Expenditures $11.3 Million $10.0 Million 89% 19% 64%

*Source: LVM 2008 SEC Form 10-K

The current financial positi on of the LVM makes these one -time expenses even more costly. Its indebtedness and current schedule of payments may make it more difficult to raise the additional capital needed to make the necessary changes to accommodate an exclusively front

13-29loading line, as the firm is highly leveraged. According to the LVM’s 2008 SEC Form 10-K filed on December 31, 2008, the LVM had $310.7 million of long-term debt and capital lease obligation or 4.3 times the adjusted EBITA. The re port also stated that the indebtedness has the potential to put the LVM at a disadvantage comp ared to other manufacturers that do not carry significant long-term liab ilities. The debt can also affect current operations by requiring a substantial portion of the cash flow from operations to make payments on the debt, reducing the available cash to fund working capital, capital ex penditures, acquisitions, R&D, and planned expansion into consumer laundry. Due to this highly leveraged financial structure, interest represents a significant expense. The interest expense was al most double the net income, or $30.7 million in 2008.

Due to the current structure of the LVM’s debt , it is unlikely that current credit lines could pay for the up-front costs of constructi ng a new front-loading ma nufacturing facility. The LVM’s 2008 10-K report stated that because of th e covenants on the principal line of credit, only an additional $16.2 million could be borrowed. The LVM would likely have to seek a new line of credit to finance the changes needed to build a green-field f acility and design a new line of washers. This would further incr ease the interest expense and strain the availability of cash for working capital, capital expenditures, and R&D. Finally, the timing of these expenditures would come at a particularly bad time for the LVM. According to its 2008 SEC 10-K report, in 2012, the LVM has $156.7 million of its long-term debt due . Because it will most likely be refinancing a large portion of its debt at that time, it is likel y that the credit and interest terms will be more stringent.

13.6.6 Additional Impacts on the Low-Volume Manufacturer

The lower overall production volumes make it li kely that the LVM will continue to face higher purchased parts costs and lower pr oductivity, putting more upward pressure on manufacturing cost. The LVM is not projected to be able to pr oduce CCWs at a scale that would allow it to overcome these disadvantages sinc e it would have to increase its production volume by multiples to do so. As mentioned above, the LVM expects commoditization and lower profits if the CCW market were to transition to excl usively front-loading CCWs . The LVM noted that baseline top-loading CCWs have a long histor y of price competiti on and commoditization. Should the CCW market shift to ex clusive use of front-loading CC Ws due to concerns about the wash quality of top-loading CCWs, a similar co mmoditization is likely to occur for front-loading CCWs, causing margin pressure.

Thus, on top of a line expansion to cove r the two-fold increase front-loading CCW demand (if demand is not impacted), expected ma rgin pressure would require a redesign of the current front-loading CCWs to be more cost co mpetitive. Given the high costs of such a redesign, the required manufacturi ng investments, the low expect ed returns, and the probable cost disadvantages discussed in section 13.6.4, the LV M has stated that it would most likely exit the CCW industry under such circumstances. Even if the LVM decided to stay in the CCW market, it could be capacity-constrained due to th e investment and line expansion requirements, and, hence, its market share could shrink as competitors supply what the LVM cannot.

13-30As previously stated, the well-depreciated m achinery and legacy top-loading design helps mitigate a natural cost disadvantage in depreciati on and R&D that would be incurred if the LVM had to shift a significant propor tion of its production to front-lo ading washers. In addition, the LVM maintains a competitive advantage through its successful customer and service network. Lastly, a market disruption, such as a rapid tr ansition to front-loading CCWs would put the LVM at a greater disadvantage than its competitors since the LVM doesn’t have the scale to quickly deliver cost-effective front-loading cl othes washers for the CCW market.

13.6.7 Consequences of Higher Energy Conservation Standards on the LVM

Due to its manufacturing scale and focus on the CCW industry, any energy conservation standard affecting the CCW industry will impact the LVM disproportionately compared to its more diversified competitors that derive less th an 2 percent of their revenues from the CCW market. The LVM has stated that any large-scal e investments without adequate returns would likely force it to exit the residential-style CCW business, which would cause it material harm and damage CCW-market competition. As shown in sect ion 13.6.4, an investment of that scale will still put the firm at a deprecia tion and R&D cost disadvantage that significantly erodes profits. A wholesale plant refit could become sufficiently ex pensive as to justify th e construction of a new facility or to outsource production entirely.

The LVM stated that its U.S. facility woul d no longer be viable if washer production ceased. The domestic washer production (both residential and commercial) equates to approximately 22 percent of the LVM’s total revenue. Howe ver, the roughly 150,000 total annual clothes washer shipments ar e vital to the facil ity as they give the facility minimum manufacturing scale: To remain competitive with larger companies, the LVM must spread its overhead, equipment, tooling, raw material, a nd purchased parts purchases over as large a volume as possible. Though extractors and tumbler dryers are important to overall revenue at the facility, the higher volume of the washer line s is critical to reduci ng overhead. In addition, the LVM believes that it has remained successful by o ffering a complete line of commercial laundry equipment. It expects that the volume of all ot her equipment would fall if it no longer offered the most basic laundry equipment. The volume of dr yers would be especially impacted because many clothes washer sales are coupled with cl othes dryer sales in bot h the residential and commercial segments.

Based on the CCW revenues reported in appendix 13A and using the employment assumptions in section 13.7.1, DOE estimates there are approximately 150 production workers at the LVM manufacturing products directly c overed by this rulemaking. In addition, DOE estimates that there are 20 non-production employees attributable to CCWs at the facility. The domestic facility also manufactures residential top- and front-loading wash ers, standard dryers, washer-extractors, and tumbler dryers. If th e LVM decided to no longer produce any soft-mount washers or standard dryers at the facility because it could not sell dryers without selling washers, approximately 292 production and 40 non-produc tion jobs would be lost. Including all production workers involved in covered and no n-covered products, the closure of the LVM domestic manufacturing plant equates to a loss of approximately 600 factory employees.

13-3113.7 OTHER IMPACTS

13.7.1 Employment

13.7.1.1 Methodology

To quantitatively assess th e impacts of energy cons ervation standards on CCW manufacturing employment, DOE used the GRIM to estimate the domestic labor expenditures and number of employees in the base case and at each TSL from 2009 through 2043 for CCW industry. DOE used statistical data from the 2006 ASM and 2006 CIR , the results of the engineering analysis, and interv iews with manufacturers to es timate the inputs necessary to calculate industry-wide labor expenditu res and domestic employment levels.

DOE constructed the industry cost structure us ing publicly available information from the 2006 ASM and SEC 10-K reports filed by publicly ow ned manufacturers. The labor percentage of the industry cost structure is calculated by dividing total production worker wages by the total value of shipments. For CCWs, DOE used th e industry cost struct ure for household laundry equipment manufacturing (NAICS 335224) because it most closely al igns with the cost structure of the CCW industry. CCW ma nufacturing is classified under NAICS 333312, but the 2006 ASM only provides data for the higher-level NAI CS 33331 (commercial and service industry machinery manufacturing). The data for this br oad code does not provide the level of detail necessary for calculating employment in the smaller CCW industry.

The labor percentage and other components of the industry cost structure for CCWs are shown in Figure 13.7.1 below.

13-32Income from

Labor (production

workers), 9.0%

R&D, 2.2%

SG&A, 12.5% Materials, 61.2% Overhead, 5.7%

Depreciation, 3.4% Operations, 5.9%

Figure 13.7.1 Commercial Clothes Was her Industry Cost Structure

To determine the total annua l labor expenditure on production labor, the value of production labor in the industry cost structure was converted to a pe rcentage of the cost of goods sold (COGS). In the GRIMs, the labor expenditures in each year are calculated by multiplying the COGS or MPCs by the labor percentage of COGS. As a result, higher TSLs have greater direct labor costs because more ef ficient equipment has higher MPCs.

To calculate the annual domestic labor expenditures, DOE used the 2006 CIR to estimate the percentage of domestic production in each industry. Census data was not available for CCW production; therefore, DOE used the residential clothes washer domestic production percentage (approximately 81 percent) to estimate th e domestic production percentage for CCWs. Manufacturer interviews confirmed that the dom estic production of CCWs closely mirrors that for residential clothes washers.

DOE multiplied the total annual labor expenditures in the GRIM by the percentage of U.S. production for domestic consumption to calculate domestic la bor expenditures for production labor in each industry. The domestic annual labor expenditures in the GRIMs were converted to domestic production employment le vels by dividing producti on labor expenditures by the annual payment per production worker (p roduction worker hours times the labor rate

13-33found in the 2006 ASM ). b The number of non-production employees was calculated by multiplying the number of production workers by the ratio of non-production workers to production workers calculated usi ng the employment data in the 2006 ASM

. The domestic annual labor expenditures and empl oyment levels were calculated for the base case and at each TSL. The impacts on dom estic employment due to standards can be assessed by comparing the employment results in th e base case to the results at each TSL. In all GRIMs, the employment results represent U.S. production workers that are impacted by this rulemaking. U.S. workers involved in manufacturi ng or supporting equipment for export would not be impacted and are not included in the analysis of the labor impacts.

13.7.1.2 Results

The GRIM calculates that the CCW industry’ s domestic labor expe nditure for production workers in 2013 is approximately $7 million (tot al COGS in 2013 times the production labor percentage of COGS times the percentage of U.S production). Using the $19.75 wage rate and 1,890 production hours per year per employee found in the 2006 ASM , the GRIM estimates there are approximately 188 U.S. production employ ees involved in manufacturing CCW products covered by this rulemaking. The employment sp readsheet of the GRIM shows the annual employment impacts in further detail.

Table 13.7.1 illustrates the impact of am ended energy conservation standards on employment levels at each TSL for the CCW industry, as calculated by the GRIM.

Table 13.7.1 Commercial Clothes Washer Industr y Estimated Employment Impacts in 2013 Trial Standard Level Base Case TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Total Number of Domestic CCW Production Employees in 2013 188 204 204 222 224 228 Change in Total Number of Domestic CCW Production Employees in 2013 Due to Standards - 16 16 33 36 40

Total Number of Domestic CCW NonProduction Employees in 2013 26 28 28 30 31 31

Figure 13.7.2 shows annual domestic employment levels for each TSL calculated by the GRIM.

b 2006 ASM labor rates and production hours per year per employee are very similar to figures reported in the engineering analysis. DOE used 2006 ASM figures to ensure that a consistent set of publicly available data is used for the manufacturing employment analysis.

13-340 50 100 150 200 250 300 350Total Domestic Employment (# of workers)

Year Total Domestic Direct Employment

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 Energy Conservation Standards Effective Date January 2013

Figure 13.7.2 Total Commercial Clothes Wash er Industry Domestic Employment by Year

Because employment expenditures are assumed to be a fixed percentage of COGS, and the MPCs increase with more efficient equipment, the GRIM predicts an in crease in employment after amended standards become effective. As di scussed in manufacturing interviews, there are a variety of manufacturers with diffe rent capabilities. Sin ce two out of the three manufacturers are large, diversified manufacturers that treat CCWs as an extension of their re sidential washer lines, the domestic employment in the GRIM would onl y include those production workers involved in making CCWs for U.S. consumption. The third manuf acturer is an LVM with the majority of its production focused on CCWs and other commercial laundry equipment rather than residential clothes washers. The domestic employment fi gures in the GRIM would only include those production workers directly invol ved in CCW manufacturing.

Due to the uncertainty in the business deci sions of where to manufacture washers after amended standards become effective, DOE presen ts a range of potential employment impacts if the potential for relocation is c onsidered. If all manufacturer s do not change sourcing and production facility locations in response to amended energy conservation standards, such standards have the potential to increase the number of U.S. production workers as shown in Table 13.4.1. Conversely, amended standards could re sult in the loss of 188 production jobs if all U.S. manufacturers source standards-compliant CCWs or shift U.S. production abroad.

At each TSL, manufacturers face different pre ssures that could impact their employment decisions. Currently, all top-lo ading CCWs are produced in th e United States, whereas frontloading CCWs are produced both domestically and abroad. At TSL 1 and TSL 2, the GRIM predicts that there will be pos itive direct employment impact s. Efficiency improvements are likely to require an increase in the labor conten t of top-loading CCWs. A ll manufacturers already make top-loading CCWs that either meet or ex ceed the efficiency requirements of TSL 1 and TSL 2. Similarly, two of the three CCW manufact urers have existing front-loading CCWs that meet the efficiency levels of TSL 1, whereas the remaining CCW manufa cturer would have to

13-35modify a front-loading CCW at TSL 2. Alt hough there are capital and conversion costs associated with the modifications for one of the manufacturers, it is likely that the higher labor content needed for the more efficient CCWs w ould increase employment, as predicted in the GRIM. Manufacturers stated they ar e not likely to relocate produc tion at either TSL 1 or TSL 2. Manufacturers have stated that they are not likely to relo cate production because capital and conversion investments at these TSLs are small.

At TSL 3 and higher (for which the efficiency levels for top-loading CCWs remain the same), two CCW manufacturers woul d have to update a top-loadi ng CCW platform to meet the energy conservation standards. DOE research sugge sts that the revised max-tech level for toploading CCWs should be attainable using existing CCW platforms th at nearly meet the max-tech level. While several manufacturers currently mark et top-loading CCWs at or near the max-tech efficiency level, multiple manufacturers have stat ed that the technologies used to achieve these efficiency levels are not embraced by all customers.

Two out of three CCW manu facturers currently produce front-loading CCWs at the energy conservation standards at TSL 3. The rema ining manufacturer would have to modify an existing platform or source a different one to meet these energy conservation standards. Though there are capital and conversion costs associat ed with the modifications for one of the manufacturers, it is likely that the higher labor cont ent needed for the more efficient washers would increase employment, as predicted in the GRIM.

Two of the three major CCW manufacturers currently produce a front-loading CCW that can meet the energy conservation standards of TSL 4. The remaining manufacturer would have to modify an existing residentia l front-loading clothes washer plat form it already sources, or find a new supplier for its front-loading CCWs.

Only one major CCW manufacturer currently makes a front-loading CCW which meets the energy conservation standard s at TSL 5. The remaining two manufacturers would have to develop new CCW platforms, modi fy existing ones, or source them from other manufacturers.

Any TSL above TSL 3 is likely to impact manu facturers significantly, since these TSLs require manufacturers to upda te two product platforms ( i.e. front-loading and t op-loading) rather than just one. For example, the LVM is unlikely to be able to afford two concurrent equipment development cycles, since doing so would require more manpower, investment, etc. than the LVM has funds for. Thus, such a scenario coul d cause the LVM to aban don one or both of its CCW platforms, causing it material harm and potentially having an adverse impact on the competitiveness of the CCW industry.

Because CCW production is treated as an extens ion of residential washer production, it is difficult to estimate the number of domestic ma nufacturing jobs that w ould be eliminated if either high-volume manufact urer decreased CCW production at TSL 4 through TSL 5. The severity of the impact would depend upon how much domestic production remained after the amended standards became effective.

Finally, the LVM’s sourcing decision will have a large impact on the employment impacts for the industry. The LVM stated that st andards could force it to exit the CCW industry

13-36if the necessary investments could not be ju stified. The LVM also st ated that it cannot manufacture top-loading CCWs above TSL 2. The LVM’s most efficient top-loading CCW nearly meets the max-tech level. However, th e LVM has stated that it would not manufacture a top-loading CCW higher than 1.42 MEF, and woul d likely exit the CCW market if higher standards were adopted.

Using the employment assumptions and the revenues reported in appendix 13A, DOE estimates that if the LVM exited the CCW market in response to standa rds, it would directly impact 150 production workers. However, the LVM also stated that its U.S. facility would no longer be viable if residential and commercial washer production ceased. Washer sales are vital to the facility because they add substantial sc ale for spreading overhead, lead to coupled dryer sales, and allow them to offer a full range of laundry equipment to th eir customers. If all residential and commercial soft mount washers a nd standard dryers production ceased at the facility, approximately 292 production jobs would be lost. If the entire facility were closed, approximately 600 employees would be impacted. The employment impacts for the LVM are discussed individually in section 13.6.7.

13.7.2 Production Capacity

According to the majority of CCW ma nufacturers, amended energy conservation standards could potentially im pact manufacturers’ producti on capacity depending on the efficiency level required. Necessa ry redesigns of front-loading and top-loading CCWs would not change the fundamental assembly of the equipm ent or cause a drastic increase in the volume requirements of either front-l oading or top-loading CCW. T hus, DOE believes manufacturers will be able to maintain manu facturing capacity levels and continue to meet market demand under amended energy conservation standards.

However, a very high energy conservation standard for top-loading CCWs could cause a manufacturer to abandon further manufacture of top-loading CCWs after the effective date (if end-users reject the wash perfor mance of higher efficiency top- loading CCWs due to concerns about wash quality, for example). Instead of manufacturing t op-loading CCWs, the manufacturers could elect to switch their enti re production over to fr ont-loading CCWs. Since top-loading and front-loading clothes washers shar e few, if any parts, are built on completely separate assembly lines, and are built at very different production volum es, a manufacturer may not be able to make a platform switch from top-loading to front-loading CCWs without significant impacts on equipment development and capital expenses, along with capacity constraints.

For example, multiple manufacturers stated during interviews that front-loading CCWs represent a relatively small se gment of their total production vol umes. Thus, their front-loading production capacity may need to be substantiall y expanded to meet the demand that their topproduction lines used to meet. This expansi on could possibly affect capacity until new production lines come on-line to service demand. In addition, manufactur ers stated that the higher prices of front-loading washer s could lead to a decrease in sh ipments. This could lead to a permanently lower production capacity as machin es are repaired and th e equipment lifetime of existing washers is extended.

13-3713.7.3 Cumulative Regulatory Burden

While any one regulation may not impose a si gnificant burden on manufacturers, the combined effects of several im pending regulations may have se rious consequences for some manufacturers, groups of manufact urers, or an entire industry. Assessing the impact of a single regulation may overlook this cumulative regu latory burden. For the cumulative regulatory burden analysis, DOE describes other significant product-specific regulati ons that could affect CCW manufacturers that will take effect 3 years befo re or 3 years after the effective date of any amended energy conservation standards for these products. c

Companies which produce a wide range of regulated products and equipment may be faced with more capital and equipment development expenditu res than competitors with a narrower scope of products. Regulatory burdens can prompt companies to exit the market or reduce their equipment offerings, potentially re ducing competition. Smaller companies can be disproportionately impacted by regu latory costs, since such comp anies have lower sales volumes over which they can amortize the costs of m eeting new regulations. DOE considers that a standard is not economically just ified if it contributes to an unacceptable level of cumulative regulatory burden.

In addition to the energy conservation re gulations for CCWs, several other Federal regulations and pending regulati ons apply to these products and other equipment produced by the same manufacturers. DOE recognizes that each regulation can significantly impact manufacturers’ financial operations. Multiple re gulations affecting the same manufacturer can quickly strain manufacturers’ pr ofits and possibly cause an exit from the market. The following sections provide a qualitative discussion of so me of these regulations and standards.

13.7.3.1 Additional Federal Energy Conservation Standards
Table 13.7.2 lists the Federal regulations that c ould also affect manufac turers of CCWs in the 3 years before and the 3 years after the e ffective date of any amended energy conservation standards for this equipment. It must be not ed that while the list of products is long, the cumulative burden on any particular firm is vari able, since the range of products and equipment for each company is different.

c The effective date for any amended CC W energy conservation standards is approximately 3 years from the date of publication of the final rule.

13-38Table 13.7.2 Other DOE Energy Conservation Standards Affecting the CCW Industry

Regulation Approximate Effective Date* Number of Impacted Companies from the Market & Technology Assessment Estimated Total Conversion Expenses** Residential Clothes Washers 2015* 6 N/A †
Residential Refrigerators and Freezers 2014* 5 N/A †

Dishwashers 2012 4 N/A † Packaged Terminal Air Conditioners and Heat Pumps 2012 4 $17.3(2007$) d

Room Air Conditioners 2014* 3 N/A † Cooking Products 2012 3 $22.6(2006$) e Battery Chargers 2014* 2 N/A †
Dehumidifiers 2012 2 N/A †
Residential Furnaces 2015 2 $97 (2006$) f External Power Supplies 2014* 2 N/A †
Residential Fluorescent and Incandescent Lamps 2012* 1 $351.1 (2008$) g

Residential Water Heaters 2015* 1 N/A †
Commercial Beverage Vending Machines 2012* 1 N/A †
*The dates listed are an approximation. The exact dates are pending final DOE action ** Total conversion expenses include both capital and equipment conversion expenses. † For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not have finalized estimated total industry conversion expense. For minimum performance requirements prescribed by EPACT 2005, DOE did not estimate total industry conversion expenses because an MIA was not completed as part of a rulemaking. 42 U.S.C. 6291-6317. For minimum performance requirements prescribed by EISA 2007, DOE did not estimate total industry conversion expenses because an MIA was not completed as part of a rulemaking. Pub. L. 110-140.

d Estimated industry conversion expenses were published in the TSD for the October 2 008 packaged terminal air – conditioners and heat pumps final rule. 73 FR 58808. The TSD for the 2008 PTAC and PTHP final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_st andards/commercial/ptacs_pthps_final_rule.html

e Estimated industry conversion expenses were published in the TSD for the April 2009 cooking products final rule. 74 FR 16072. The TSD for the 2009 cooking products final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/cooking_products.html
f Estimated industry conversion expenses were publis hed in the TSD for the Nove mber 2007 residential furnace final rule. 72 FR 65136. The TSD for the 2007 residential furn ace final rule can be found at: http://www1.eere.energy.gov/buildings/applianc e_standards/residential/furnace_boiler_fr.html

g Estimated industry conversion expenses were published in the TSD for the July 2009 general service fluorescent lamps and incandescent reflector lamps final rule. 74 FR 34080. The TSD for the 2009 general service fluorescent lamps and incandescent reflector lamps final rule can be found at: http://www1.eere.energy.gov/buildings/appliance_standards/ residential/incandescent_lamps_standards_final_rule_ts d.html

13-39Additional investments necessary to meet these potential energy conservation standards could have significant impacts on manufacturers of the covere d products and equipment. However, DOE has limited data on the importance of these other regulated products for manufacturers of CCWs. Differences in market shares and manufacturing processes of other regulated products and equipment for each manufact urer could cause varyi ng degrees of burdens on these manufacturers. Therefore, DOE only estim ated the cost of compliance to meet other energy conservation standards for regulated pr oducts and equipment if DOE had published a final rule.

While any company that manufactures products covered in pending rulemakings has the potential to incur overlapping investments to co mply with other standards, manufacturers of CCWs could be greatly impacted by the upcomi ng rule covering residential clothes washers. Manufacturers of CCWs typically manufacture much of this equipment on the same assembly lines as their residential clothes washers. Any changes that are needed to comply with this rule would have potential interacti ons with the production of resi dential washers. Depending on the standard levels that are adopt ed for residential washers, th e production lines for both products may have to be significantly altered.

13.7.3.2 State Energy and Water Conservation Standards

In addition to Federal regulations, CCW manu facturers are also s ubject to State energy and water conservation standards. CCWs are c overed by the State standards listed in Table 13.7.3.

Table 13.7.3 State Commercial Clothes Washer Regulations Similar to EPACT 2005

State Effective Date Difference from EPACT 2005 Arizona MEF and WF: 1/1/08 Standards e ffective one year later than EPACT 2005
California MEF: 1/1/05 WF: 1/1/07 MEF standard effective two years earlier than EPACT 2005

Connecticut MEF and WF: 7/1/06 Standards effective six months earlier than EPACT 2005 Maryland MEF and WF: 3/1/07 Standards effective two months later than EPACT 2005
New Jersey MEF: 1/1/07 WF: 1/1/10 Water factor standard effective three years later than EPACT 2005 Oregon MEF and WF: 1/1/08 Standards effective one year later than EPACT 2005 Rhode Island MEF and WF: 1/1/07 Identical to EPACT 2005
Washington MEF - For Sale: 1/1/07 MEF – Installation: 1/1/08 Does not address water factor

As presented in the table above, the State of California mandates energy and water conservation standards for commercial front-l oading and commercial top-loading automatic clothes washers. Table 13.7.4 provides the State’ s CCW energy conservation standards, which are dependent on clothes containe r capacity, and the water conservation standards, which became effective two years after the MEF standards.

13-40Table 13.7.4 California State Energy and Water Conservation Standards for Commercial Clothes Washers
Clothes Washer Classification Clothes Container Compartment Capacity (cu. ft.) Minimum MEF Effective January 1, 2005 Maximum Water Factor Effective January 1, 2007

Front-loading < 3.5 1.26 9.5

Top-loading < 1.6 ≥ 1.6 and < 4.0 0.65 1.26 9.5 9.5

In addition to the efficiency standards disc ussed above, the State of California requires that commercial top-loading semi-automatic clothes washers and commercial suds-saving clothes washers manufactured on or after Janua ry 1, 2005 have an unheated rinse water option.

Additionally, California issued minimum water conserva tion standards for residential clothes washers. While this does not directly a ffect equipment covered by the rulemakings, DOE is aware that this standard may have impact s on manufacturers of CC Ws and other household appliances. Although Federal standa rds exist for the energy consum ption of residential clothes washers, no such standard exists for the water efficiency. On September 16, 2005, the California Energy Commission (CEC) issued a petition for an exemption from Federal preemption to seek to apply its own State regulation. DOE accepted wr itten comments regarding this California petition until April 7, 2006. Table 13.7.5 provides th e State’s proposed residential clothes washer water conservation standards and th eir respective effective dates.

Table 13.7.5 California Water Conservation Sta ndards for Residential Clothes Washers
Clothes Washer Maximum Water Factor (gallons/cu. ft.)
Classification Effective January 1, 2007 Effective January 1, 2010 Top-loading 8.5 6.0 Front-loading 8.5 6.0

On December 28, 2006, DOE issued a decisi on denying the California petition. 71 FR 78157. The denial of the petition was based on three factors. First, DOE determined that it does not have the statutory authority to prescribe a rule for Californi a that would become effective by January 1, 2007, the first of two compliance date s contained in title 20, section 1605.2(p)(1) of the California Code of Regulations. Second, DO E ruled that CEC had not established by a preponderance of the evidence that the State of California has unusual and compelling water interests, a condition required by the Energy and Policy Conser vation Act for DOE to grant California a waiver from Federal preemption. 42 USC 6297(d)(1)(B). Finally, a preponderance of evidence showed that the Calif ornia regulation would likely resu lt in the unavailability of a class of residential clothes washers, specifically top-loader machines, in California. The State submitted to DOE a request for reconsideration. 5 On October 28, 2009, the Ninth Circuit Court issued a decision reversing DOE’s denial of th e CEC petition for exemption from existing energy efficiency standards for RCWs and remanding the petition for further review. 6

13-4113.7.3.3 International Energy Conservation Standards

DOE is not aware of any foreign energy conservation standards covering CCWs. However, several foreign energy conservation sta ndards cover residential clothes washers, and DOE understands that this rulemaking may still impact some North American manufacturers in the home appliance industry.

The Canadian government regulates the efficien cy of residential clothes washers. This standard applies to standard or compact electrically operated hous ehold clothes washers that are top- or front-loaded, and th at have an internal control system that regulates the water temperature without the need for user interv ention subsequent to initiation of machine operation. The current standards went into effect Janua ry 1, 2007, with increases in th e standards for some equipment classes compared to the previous standards which had been in effect since January 1, 2004.

Mexico mandates energy conser vation standards for residentia l clothes washers sold in the country. The standard does not apply to clothes washers that do not use el ectricity or are used for commercial or industrial applications.

13.7.3.4 International Test Procedures

Currently, manufacturers of CCWs are principally impacted by foreign regulation due to the need to use a separate test procedure fo r foreign markets. Depending on the country where the regulation is from, manufactur ers must use a separate test pr ocedure for exported equipment. For example, CCWs are subject to a different test procedure when sh ipped to Australia. Manufacturers often have to contract foreign laboratories to conduct tests at the foreign locations.

13.8 CONCLUSIONS

The following section summarizes the differe nt impacts for the scenarios DOE believes are most likely to capture the range of impact s on CCW manufacturers as a result of amended energy conservation standards. DOE also notes that while these scen arios bound the range of most plausible impacts on manufacturers, there potentially could be circumstances which cause manufacturers to experience imp acts outside of this range.

The major source of uncertainty voiced by CCW manufacturer s during the interviews is the impact of higher energy conservation stan dards on the number of CCWs sold. Future equipment sales are particularly important, consid ering the high capital co sts (particularly design costs) compared to the small volume of equipm ent sold. In light of the concern over future shipments, DOE modeled two MIA scenarios, base d on two shipment projections from the NIA.

To assess the lower end of the range of potential impacts for the CCW industry, DOE considered a scenario wherein unit shipments will not be impacted regardless of amended energy conservation standards – this scen ario is called the base-case shipments scenario. To assess the higher end of the range of potential impacts for th e CCW industry, DOE considered a scenario in which total industry shipments woul d decrease due the combined e ffects of increases in purchase

13-42price and decreases in operating costs due to amended energy conservation standards – this scenario is called the price elas ticity of demand scenario. In bo th scenarios it is assumed that manufacturers will be able maintain the same gross margins (as a percentage of revenues) that are currently obtained in the base case.

At TSL 1, the impact on INPV and cash fl ow varies depending on the manufacturers’ ability to maintain revenues as shipments decr ease due to the price elasticity. DOE estimated the impacts in INPV at TSL 1 to range from positive $3.7 million to positive $2.8 million, or a change in INPV of 5.97 percent to 4.50 percent. At this level, the industry cash flow does not decrease from the base-case value of $3.8 million in the year leading up to the standards. Since all manufacturers currently make or source to p-loading and front-loa ding CCWs that meet efficiency levels above this level, DOE assume d that there would be no equipment or capital conversion costs.

At TSL 2, DOE estimated the impacts in IN PV to range from positive $1.4 million to positive $0.5 million, or a change in INPV of 2.24 percent to 0.76 percent. At this level, the industry cash flow decreases by approximately 27.7 percent, to $2.8 million, compared to the base-case value of $3.8 million in the year leading up to the standards. Since all manufacturers of top-loading washers already sell equipment that ex ceeds the efficiency requirements at this TSL, DOE assumed that there would be no equipment or capital conversion costs for top-loading washers at this TSL. Over 95 percent of all currently sold front-loading CCW SKUs have efficiency levels that achieve or exceed th is level, and all manuf acturers sell front-loading washers that achieve or exceed this level. A ccordingly, DOE estimated that the industry would incur relatively small equipment and capital conversion costs at this TSL.

At TSL 3, DOE estimated the impacts in IN PV to range from negative $4.8 million to negative $7.0 million, or a change in INPV of -7. 81 percent to -11.39 percent. At this level, the industry cash flow decreases by approximately 158 percent, to -$2.2 million, compared to the base-case value of $3.8 million in the year leadin g up to the standards. Only one manufacturer currently markets a single top-loading CCW SKU at this TSL. DOE estimates that at least one manufacturer will need to redesign and retool a line of top-loading CCWs to meet the max-tech efficiency requirements of TSL 3. For top-load ing CCWs, multiple manufacturers stated that customers could see a reduction in wash quality or reject new designs based on a perceived reduction in wash quality or rinse performance at TSL 3. Over 95 percent ofcurrently sold frontloading CCW SKUs have efficiency ratings th at meet or exceed this level. Hence, DOE estimated relatively small equipment and cap ital conversion costs for these washers.

At TSL 4, DOE estimated the impacts in IN PV at TSL 4 to range from negative $7.8 million to negative $10.2 million, or a change in INPV of -12.73 percent to -16.57 percent. At this level, the industry cash flow decreases by approximately 206 percent, to -$4.1 million, compared to the base-case value of $3.8 million in the year leading up to the standards. As with TSL 3, the top-loading standard remains at max-t ech at TSL 4, and the impacts previously stated for this equipment class remain. Currently, 77 percent of front-loading washers shipped do not meet TSL 4, resulting in multiple manufactur ers having to redesign existing front-loading equipment to conform cost-effectively to the st andard. The $8.4 million in equipment and capital conversion costs estimated for this TSL to rede sign and retool for the front-loading standard,

13-43while not appearing substantial on a nominal basi s, are significant for manufacturers due to low volumes of front-loading CCWs . Adjusting for shipment volum es, investing $8.4 million in front-loading CCWs is equivalent to invest ing over $18.5 million in top-loading CCWs. These investment costs are also high compared to the industry value of $29 million for front-loading CCWs. Consequently, it could be difficult for ma nufacturers to justify th e investments necessary to reach TSL 4 for front-loading CCWs.

At TSL 5, DOE estimated the impacts in IN PV to range from negative $20.4 million to negative $23.0 million, or a change in INPV of - 33.09 percent to -37.30 percent. At this level, the industry cash flow decreases by approximately 371 percent, to -$10.3 million, compared to the base-case value of $3.8 million in the year leading up to the standards. The top-loading standard remains at max-tech at TSL 5. DOE estim ates for TSL 5 that ma nufacturers would have to invest $24.4 million in front-loading CCWs in an industry valued at $29 million. It likely would be difficult for manufacturers to justify th e investments necessary to reach max-tech for both top-loading and front-loading washers.

13-44REFERENCES

1 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Companies , 3 rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.

2 U.S. Securities and Exchange Commission, Annual 10-K Reports , Various Years, Washington D.C., available online at: www.sec.gov

.

3 Association of Home Appliance Manufacturers. AHAM 2005 Fact Book , 2005. Washington, DC.

4 “Table 2 – Quantity and Value of Ship ments of Refrigeration, Air-Conditioning, and Warm Air Heating Equipment: 2005 and 2004.” 2000 - 2005 Current Industrial Reports (CIR). U.S. Census Bureau, July 2006.

5 DOE Docket No. EE-RM-PET-100, subm itted by the California Energy Commission January 29, 2007.

6 California Energy Commission versus DOE , Case No. 07-71576 (October 28, 2009).

13-45