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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-i CHAPTER 7: MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS
7.1 INTRODUCTION

..................................................... 7-1 7.2 OVERVIEW OF MARKUP EQUATIONS

................................. 7-1 7.3 ESTIMATION OF INSTALLED PRICE

................................... 7-2 7.3.1 Estimation of Transformer Weights

.................................. 7-3 7.3.2 Overhead and Profit for Installation Expenses

......................... 7-4 7.3.3 Dry-Type Transformer Installed Price Equation

........................ 7-4 7.3.4 Liquid-Immersed Transformer Installed Price Equation

.................. 7-5

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-1 CHAPTER 7: MARKUPS FOR EQUIPMENT PRICE DETERMINATION

7.1 INTRODUCTION This chapter of the Technical Support Document (TSD) presents the Department's method for deriving transformer prices. The objective of the equipment price determination is to estimate the price paid by the customer/purchaser for an installed transformer. Purchase price and installation cost are necessary inputs to the life-cycle cost (LCC) and payback period (PBP) analyses. Chapter 8 presents the LCC calculations; section 8.2.1 describes how the LCC uses purchase price and installation cost as inputs. Purchase prices for distribution transformers are not generally known. Transformers are specialty items, often custom-built with unlisted prices. The engineering analysis (Chapter 5) provides the manufacturer selling prices for the units analyzed by the LCC. The Department derives a set of prices for each transformer design produced by the engineering analysis by applying markups to the manufacturer selling price in the form of markup equations. These markups represent all the costs associated with bringing a manufactured transformer into service as an installed piece of electrical equipment at a customer’s site. 7.2 OVERVIEW OF MARKUP EQUATIONS Depending on the purchasing environment, different markup equations were used to capture the various markups in the supply chain between the manufacturer and the customer. Forexample, electric utilities (except for the rural electric cooperatives) typically purchase liquidimmersed transformers through manufacturer representatives or distributors. The manufacturer selling price plus the small distributor markup is generally the utilities’ price for transformers. Dry-type transformers go through several additional marketing and/or handling steps before they are installed by the end-use purchaser. The Department adjusted the ANOPR (Advance Notice of Proposed Rulemaking) distributor markup assumptions based upon stakeholder feedback. Liquid-type distribution transformers have a seven percent markup accounting for distributor markup. The manufacturer selling prices for dry-type transformers include two price markups: a distributor markup of 15 percent and a contractor materials markup of 10 percent. The Department based these markups (expressed as average multipliers) upon RS Means Electrical Cost Data 2002. 1 The distributor markup converts the manufacturer selling price to the distributor price, the price paid by the electrical contractor. This distributor markup covers the costs of the distribution business, including sales labor, warehousing, overhead, and profit. Then the contractor applies a markup to the distributor price to cover contractor overhead and profit.

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-2 For both liquid-immersed and dry-type transformers, the Department added shipping costs, sales tax, installation labor and equipment markup, and weigh t-de pendent installation costs. Distribution transformers can be very heavy (some over a ton each) and costly to ship. It is common practice for transformers to be shipped directly to a construction site with no intermediate warehousing. The Department estimated shipping costs by collecting a small sample of quotations for transporting transformers. Based on an average shipping distance of 1,000 miles, the Department estimated shipping costs of $0.20/pound for large shipments. Using RS Means Electrical Cost Data 2002, the Department estimated an installation labor and equipment markup of 52 percent. By weighting the sales tax for each individual state by its population, the Department calculated a national average sales tax of 5.6 percent. Finally, the Department added installation costs. The installation cost is the cost of labor, equipment, and materials (other than the transformer itself) needed to install a distribution transformer. The Department developed several empirical equations for estimating installation costs as a function of transformer weight.

7.3 ESTIMATION OF INSTALLED PRICE The Department estimated the installation costs and contractor markups on transformers by fitting a linear cost function to the RS Means electrical cost data. The RS Means data break down the total installed cost for transformers in terms of four cost components:
1. Materials : transformer purchase price, including mounting hardware. 2. Labor : labor cost required for installation, including unloading and uncrating, hauling within 200 feet of the loading dock, setting in place, connecting to the distribution network, and testing. 3. Equipment : equipment rentals necessary for completion of the installation. 4. Overhead and Profit : installation overhead and profit expenses for the contractor (for dry-type transformers only). The Department disaggregated its installation costs into these four cost components. RS Means lists the transformer price as a “material” cost. The Department performed a regression to disaggregate the overhead and profit associated with installation labor and equipment rental from the overhead and profit associated with the transformer (material) cost. The regression equation is: O&P = a × Mat + b × L&E + c Eq. 7.1 where:
O&P = the overhead and profit expense ( 2001$),

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-3 Mat = the material cost (i.e., transformer and hardware) (2001$) , L&E = the direct labor and equipment costs of installation (2001$), and a, b, and c = the computed linear regression coefficients.
The Department fitted the labor and equipment costs as a function of transformer weight. This relationship is justified because transformer weight (and its correlated size) is a significant factor in determining installation costs for labor and equipment. For pole-mounted transformers, the Department assumed pole costs did not vary with changes in efficiency but recognized that in some cases a more efficient, heavier transformer could require a stronger pole. Because the RS Means data do not specify transformer weight, the Department inferred the approximate weight of a transformer from its kVA (kilovolt-ampere) capacity, as described below. For use in the LCC analysis, the Department adjusted these 2001$ to 2004$ using the gross domestic product (GDP) price deflator from AEO2005

. 7.3.1 Estimation of Transformer Weights The Department derived the weight-versus-capacity relationship for typical transformers from the design data produced by the engineering analysis. It used the weight-versus-capacity relationship to estimate the transformer weight corresponding to the transformer costs reported in RS Means . The Department estimated a scaling relationship between transformer weight and direct installation labor and equipment costs by fitting the correlation between weight and installation costs to a power-law equation. The method for deriving the weight-versus-capacity relationship uses a typical transformer weight from the engineering analysis. The Department defined the typical weight as the minimum weight plus 20 percent times the weight range, where the weight range is the difference between the minimum and maximum transformer weight for the selected designs. From these data, the Department obtained the following power-law relationship for transformer weight as a function of capacity and basic impulse insulation level (BIL) rating: Weight = 13.13× kVA 0.765 × BIL 0.244 Eq. 7.2 where: Weight = the weight of the transformer (lbs), kVA = the capacity of the transformer (kVA), and BIL = the BIL rating of the transformer (kV).

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-4 Although RS Means does not provide transformer weights, it does provide transformer capacity and primary voltage. Weight was estimated from capacity and BIL, which was estimated from primary voltage. The Department then compared the weight to the direct installation costs from the labor and equipment to obtain a power-law relationship. The first regression performed is the installation direct labor and equipment costs as a function of transformer weight. Data analyzed included all 115 kVA distribution transformer kVA ratings spanning across the three RS Means electrical equipment categories: “dry type transformer” (16270-200), “oil-filled transformer” (16270-600), and “transformer, liquid-filled” (16270-610). The resulting correlation equation is: L&E = 42.08 × Weight 0.46 Eq. 7.3 where:
L&E = the installation, direct labor, and equipment costs (2001$), and Weight = the transformer weight (lbs). The regression, performed as a power-law trend line fit in Excel, resulted in an R-square of 0.95, indicating a good fit to the data. 7.3.2 Overhead and Profit for Installation Expenses The next regression targeted contractor overhead and purchase profit expenses in terms of a markup on materials (i.e., the transformer), and labor and equipment (i.e., direct installation). Initially, the Department performed a linear regression with a constant term. When it found that the constant term was not significantly different from zero, it ran the regression again. The resulting equation is:
O&P = 0.10 × Mat + 0.52 × L&E Eq. 7.4 The Department used the above equation to allocate overhead and profit expenses to a markup on the distributor price and a separate markup on the direct labor and equipment costs for the installation. 7.3.3 Dry-Type Transformer Installed Price Equation For dry-type transformers, the result of these analytical steps is a total installed cost equation as a function of the manufacturer selling price and transformer weight: Installed_Price = M tax× (M

L&E × L&E + M Mat × (M

Ship × Weight + M Dist × ManPrice)) Eq. 7.5

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-5 where: Installed_Price = the final installed price of the transformer (2004$), M tax = the factor that accounts for sales tax, estimated as 1.054, M L&E = the factor that accounts for the markup on direct installation labor

and equipment costs, estimated as 1.52, L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ using the GDP price deflator from AEO2005

. M Mat = the factor that accounts for the contractor markup on the purchase

of the transformer from the distributor, estimated as 1.10, M Ship = the shipping cost, estimated as $0.20/lb, Weight = the transformer weight (lbs), M Dist = the average distributor markup factor, estimated as 1.15, and ManPrice = the manufacturer's selling price (2004$)

. The Department applied the installed cost equation by using the manufacturer price and weight from the engineering analysis. For example, the engineering analysis estimated that the design line 7 (three-phase, 75 kVA) transformer with the minimum manufacturer price, weighs 491 pounds and has a manufacturer price of $989.27. For this transformer, the Department estimated the installed cost to be $2599.31, where $1166.35 is the installation cost, and $1432.96 is the transformer retail price, including shipping costs, sales tax, and markups. 7.3.4 Liquid-Immersed Transformer Installed Price Equation For liquid-immersed transformers, the Department removed the contractor markup from the cost equation to obtain : Installed_Price = M tax× (M

L&E × L&E × (M Ship × Weight + M Dist × ManPrice)) Eq. 7.6 where: Installed_Price = the final installed price of the transformer (2004$), M tax = the factor that accounts for sales tax, estimated as 1.054, M L&E = the factor that accounts for the markup on direct installation labor

and equipment costs, estimated as 1.52, L&E = the installation, direct labor, and equipment costs (2001$), adjusted

to 2004$ using the GDP price deflator from AEO2005

. M Ship = the shipping cost, estimated as $0.20/lb,

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-6 Weight = the transformer weight (lbs.), M Dist = the average distributor markup factor, estimated as 1.07, and ManPrice = the manufacturer's selling price (2004$). As with the dry-type transformers, the Department applied the installed cost equation by using the manufacturer price and weight from the engineering analysis. For example, the engineering analysis estimated that the design line 1 (single-phase, 50 kVA) transformer with the minimum manufacturer price, weighs 646 pounds and has a manufacturer price of $818.00. For this transformer, the Department estimated the installed cost to be $2381.42, where $1322.72 is the installation cost, and $1058.70 is the transformer price for the utility, including shipping cost, sales tax, and markups.

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Transformer_DRAFT_TSD_Chapter7_version7-31-05_DOE_8/3/05 7-7 REFERENCES
1. RS Means Company Inc. RS Means Electrical Cost Data 2002: 25th Annual Edition

. 2001. ed. J.H. Chiang. Kingston, MA.