CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION ......................................................................................................... 12-1

12.2 METHODOLOGY ........................................................................................................ 12-1

12.2.1 Phase 1: Industry Profile.................................................................................... 12-2

12.2.2 Phase 2: Industry Cash-Flow Analysis and Interview Guide ............................ 12-2

12.2.2.1 Industry Cash-Flow Analysis................................................................. 12-2

12.2.2.2 Interview Guide ..................................................................................... 12-2

12.2.3 Phase 3: Sub-Group Analysis ............................................................................ 12-3

12.2.3.1 Manufacturer Interviews........................................................................ 12-3

12.2.3.2 Revised Industry Cash-Flow Analysis................................................... 12-3

12.2.3.3 Manufacturer Sub-Group Analysis........................................................ 12-3

12.2.3.4 Competitive Impact Assessment............................................................ 12-4

12.2.3.5 Manufacturing Capacity Impact ............................................................ 12-4

12.2.3.6 Employment Impact............................................................................... 12-4

12.2.3.7 Cumulative Regulatory Burden ............................................................. 12-4

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS ..................................... 12-5

12.3.1 Industry Overview ............................................................................................. 12-5

12.3.1.1 Industry Cost Structure .......................................................................... 12-5

12.3.1.2 Inventory Levels .................................................................................... 12-6

12.3.2 General Interview Structure and Preliminary Findings..................................... 12-8

12.3.2.1 Key Issues.............................................................................................. 12-8

12.3.2.2 Shipment Projections............................................................................. 12-9

12.3.2.3 Profitability .......................................................................................... 12-10

12.3.2.4 Equipment Mix .................................................................................... 12-10

12.3.2.5 Conversion Costs, Manufacturing Capacity, and Employment Levels12-11

12.3.2.6 Market Shares and Industry Consolidation.......................................... 12-12

12.3.2.7 Impact on Small Manufacturers........................................................... 12-13

12.3.2.8 Cumulative Regulatory Burden ........................................................... 12-14

LIST OF TABLES

Table 12.3.1 Employment and Earnings for the Heating Equipment (except Warm Air Furnaces) 

Manufacturing Industry ................................................................................................ 12-6

Table 12.3.2 Heating Equipment (except Warm Air Furnaces) Manufacturing Industry Material 

and Payroll Costs........................................................................................................... 12-6

Table 12.3.3 End-of-Year Inventory for the Heating Equipment (except Warm Air Furnaces) 

Manufacturing Industry ................................................................................................. 12-7

Table 12.3.4 Heating Equipment (except Warm Air Furnaces) Manufacturing Industry Full 

Production Capacity Utilization Rates........................................................................... 12-7

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CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify the likely 

impacts of amended energy conservation standards on manufacturers. The U.S. 

Department of Energy (DOE) will conduct this analysis with input from manufacturers 

and other interested parties and will apply the methodology detailed in the following 

sections to its evaluation of amended energy conservation standards for commercial 

packaged boilers. In this analysis, DOE will consider financial impacts on the industry, as 

well as a wide range of quantitative and qualitative impacts that might occur as a result of

amended energy conservation standards. For example, if DOE were to adopt a particular 

standard level for commercial packaged boilers, manufacturers may have to change their 

manufacturing practices, causing them to reexamine their financial and investment 

strategies, personnel decisions, product mixes, among other aspects of their businesses 

that could be impacted. DOE will identify and seek to understand these impacts through 

interviews with manufacturers and other interested parties.

DOE announced changes to the MIA format through a report issued to Congress 

on January 31, 2006, (as required by section 141 of the Energy Policy Act of 2005 

(EPACT 2005) which amended the Energy Policy and Conservation Act of 1975), 

entitled “Energy Conservation Standards Activities”.

1 Previously, DOE did not report 

any MIA results until the notice of proposed rulemaking (NOPR) phase; however, under 

the format prescribed by EPACT 2005, DOE collects, evaluates, and reports preliminary 

information and data during the preliminary analysis phase (the phase preceding the 

NOPR) of this rulemaking. 

12.2 METHODOLOGY

DOE conducts the MIA in three phases and tailors its analytical framework based 

on comments from interested parties. In phase 1, DOE creates an industry profile to 

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

that require consideration. The preliminary technical support document (TSD) presents 

the results of the phase 1 analysis. In phase 2, DOE prepares an industry cash-flow model 

and an interview guide to help steer subsequent discussions with manufacturers. In phase 

3, DOE interviews manufacturers and assesses the impacts of amended energy 

conservation standards both quantitatively and qualitatively. Using the government 

regulatory impact model (GRIM), DOE assesses industry and sub-group cash flow and 

industry net present value. DOE then assesses impacts on competition, manufacturing 

capacity, employment, and cumulative regulatory burden based on feedback received 

during manufacturer interviews. The NOPR TSD presents the results of the phase 2 and 3 

analyses.

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12.2.1 Phase 1: Industry Profile

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

financial and market information. This includes commercial packaged boiler 

manufacturer market shares, corporate operating ratios, wages, employment levels, and 

production cost ratios. Sources of information include reports published by industry 

groups, trade journals, the U.S. Census Bureau, copies of Securities Exchange 

Commission (SEC) 10-K filings, and interviews with manufacturers. DOE also relies on 

information from its market and technology assessment, engineering analysis, life-cycle 

cost analysis, markup analysis, and analysis of capital expenditure requirements.

12.2.2 Phase 2: Industry Cash-Flow Analysis and Interview Guide

In phase 2 of the MIA, DOE performs a preliminary industry cash-flow analysis 

and prepares interview guides for its discussions with manufacturers.

12.2.2.1 Industry Cash-Flow Analysis

DOE uses the GRIM to analyze the financial impacts of amended energy 

conservation standards on the commercial packaged boiler industry. Standards will 

potentially require additional investments, raise production costs, and affect revenue 

through higher prices and, possibly, lower sales. The GRIM is designed to take into 

account several factors as it calculates a series of annual cash flows for the year standards 

take effect and for several years after implementation. These factors include annual 

expected revenues, costs of sales, selling and general administration costs, and taxes, as 

well as capital expenditures, depreciation and maintenance related to new standards. 

Inputs to the GRIM include manufacturing costs, shipments forecasts, and price forecasts 

developed in other analyses. DOE also uses industry financial parameters as inputs for 

the GRIM analysis, which it develops by collecting and analyzing publically available 

industry financial information. DOE refines these analyses with manufacturer feedback 

obtained confidentially during interviews. DOE compares the standards-case results of 

the GRIM against baseline projections where standards are not amended. The financial 

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

of discounted annual cash flows.

12.2.2.2 Interview Guide

DOE conducts interviews with manufacturers to gather information on the 

anticipated effects of standards on revenues and finances, direct employment, capital 

assets, and industry competitiveness. Before the interviews, DOE distributes an interview 

guide that serves as an outline for its discussions with manufacturers and that helps 

identify relevant issues and possible impacts of standards on individual manufacturers or 

sub-groups of manufacturers. DOE’s interview guide covers current organizational 

characteristics, industry infrastructure, manufacturer cash-flow analysis, a competitive 

impacts assessment, an employment impacts assessment, and a manufacturing capacity 

impacts assessment.

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12.2.3 Phase 3: Sub-Group Analysis

In phase 3 of the MIA, DOE conducts manufacturer interviews and revises the 

industry cash-flow analysis based on manufacturer feedback. DOE also assesses the 

impacts amended standards may have on manufacturer sub-group cash-flows, industry 

competition, manufacturing capacity, employment, and cumulative regulatory burden. 

12.2.3.1 Manufacturer Interviews

The information gathered in phase 1 and the preliminary cash-flow analysis 

performed in phase 2 is supplemented with information gathered during interviews with 

manufacturers during phase 3. The interview process plays an important role in the 

manufacturer impact analysis, as it provides an opportunity for interested parties to 

express their views confidentially on important issues, allowing sensitive information to 

be considered in the rulemaking process.

DOE conducts detailed interviews with as many manufacturers as possible to gain 

insight into the range of potential impacts of standards. During the interviews, DOE 

solicits both quantitative and qualitative information on the expected impacts of standards 

on sales, direct employment, capital assets, and industry competitiveness. Interviews are 

scheduled well in advance to provide every opportunity for key individuals to be 

available for comment. DOE accepts written responses to the interview guide prepared in 

phase 2, however prefers interactive interviews because they help clarify responses and 

provide the opportunity to identify additional issues.

All information gained in interviews is considered, where appropriate, in DOE’s 

decision-making process. DOE asks interview participants to identify the information 

(provided orally or in writing) that they wish to keep confidential; no confidential 

information will be made available in the public record.

12.2.3.2 Revised Industry Cash-Flow Analysis

During the interviews, DOE seeks comments and suggestions regarding the 

financial parameters developed in phase 1. Upon completion of the interviews, DOE 

revises its industry cash-flow model based on manufacturer feedback. 

12.2.3.3 Manufacturer Sub-Group Analysis

DOE acknowledges that using average cost assumptions to develop an industry 

cash-flow estimate is not adequate for assessing differential impacts on sub-groups of 

manufacturers. Smaller manufacturers, niche players, or manufacturers exhibiting a cost 

structure that differs largely from the industry average could be more negatively affected. 

Ideally, DOE would consider the impact on every firm individually; however, it typically 

uses the results of the industry characterization to group manufacturers exhibiting similar 

characteristics. During the interview process, DOE discusses potential sub-groups and 

sub-group members that have been identified for the analysis. DOE asks manufacturers 

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and other interested parties to suggest what sub-groups or characteristics are most 

appropriate for the analysis.

12.2.3.4 Competitive Impact Assessment

Section 342(a)(6)(B)(i)(V) of EPCA, 42 U.S.C. 6313(a)(6)(B)(i)(V), directs DOE 

to consider any lessening of competition likely to result from imposition of standards. It 

further directs the U.S. Attorney General to determine the impacts, if any, of a decrease 

in competition. As such, DOE makes every effort to gather and report firm-specific 

financial information and potential impacts. The competitive analysis focuses on 

assessing the impacts on smaller, yet significant, manufacturers. The assessment is based 

on manufacturing cost data and information collected from interviews with 

manufacturers. The manufacturer interviews focus on gathering information that would 

help in assessing asymmetrical cost increases to some manufacturers, the potential 

increase in business risks from an increased proportion of fixed costs, and potential 

barriers to market entry (e.g., proprietary technologies).

12.2.3.5 Manufacturing Capacity Impact

Amended standards could cause the obsolescence of existing manufacturing 

assets, including tooling and investments in production equipment. DOE includes a series 

of questions in the interview guide to help identify impacts on manufacturing capacity. 

The questions address capacity utilization and plant location decisions in North America 

with and without a standard; the ability of manufacturers to upgrade or remodel existing 

facilities to accommodate the new requirements; the nature and value of any stranded 

assets; and estimates for any one-time restructuring charges, where applicable.

12.2.3.6 Employment Impact

The impact of amended energy conservation standards on employment is an 

important consideration in the rulemaking process. To assess how domestic employment 

patterns might be affected, DOE asks manufacturers about current employment trends in 

the commercial packaged boiler industry. DOE also solicits manufacturers’ views about 

changes in employment patterns that may result from amended standards. In the 

employment impacts section of the interview guide, DOE particularly asks manufacturers 

about the current employment levels at each of their production facilities, expected future 

employment levels with and without amended standards, and any differences in 

workforce skills or retraining that might be necessitated by amended standards.

12.2.3.7 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of 

amended energy conservation standards and other regulatory actions affecting the same 

equipment. DOE examines and considers the impact on manufacturers of multiple, 

equipment-specific regulatory actions. In view of its research and discussions with 

manufacturers, DOE has identified regulations relevant to commercial packaged boiler 

manufacturers, such as: Environmental Protection Agency emissions regulations; energy 

conservation standards for residential boilers and the test procedures for commercial 

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packaged boilers under Title 10 of the Code of Federal Regulations, Part 431; and 

ENERGY STAR requirements, among others. DOE examines the potential impacts of 

cumulative regulatory burden in greater detail during the NOPR phase.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

As part of this preliminary analysis, DOE puts together an industry profile and 

conducts a preliminary evaluation of the impact of potential energy conservation 

standards on the commercial packaged boiler industry. The primary sources of 

information for this analysis are U.S. Census Bureau data, industry reports, and 

interviews with manufacturers of commercial packaged boilers which were conducted 

during early 2014. During these interviews, DOE collected information about 

manufacturer financial performance, manufacturing capacity, industry employment 

levels, and equipment utility and innovation. In addition, DOE asked manufacturers to 

identify major concerns regarding potential amended standards for commercial packaged 

boilers. 

To maintain confidentiality, DOE reports only aggregated information from 

manufacturer interviews. DOE does not disclose company-specific information, nor does 

it identify the individual manufacturers that disclose information.

For the preliminary MIA, DOE uses public comments and interview feedback 

primarily to identify key issues and gain insight into the qualitative impacts of energy 

conservation standards. 

12.3.1 Industry Overview

The following section summarizes publicly available industry data.

12.3.1.1 Industry Cost Structure

DOE is not aware of any publicly available industry-wide cost data specific to 

manufacturers of commercial packaged boilers. As such, DOE conducted a keyword 

search of the North American Industry Classification System (NAICS) codes database 

and determined that commercial packaged boilers manufacturing is most closely 

associated with NAICS code 333414 (Heating Equipment (except Warm Air Furnaces) 

Manufacturing).2 DOE used this NAICS code for obtaining the data presented in this 

industry overview. DOE presents this data as a broader industry proxy for the commercial 

packaged boiler industry, which, in combination with information gained in interviews, 

inform DOE’s analysis of the industry cost structure. 

DOE obtained the below data from the U.S. Census Bureau, Annual Survey of 

Manufacturers, Statistics for Industry Groups and Industries from 2005-2011.3

 

Table 12.3.1 presents the industry employment levels and earnings from 2005 to 

2011. The statistics illustrate approximately a 29.2-percent decrease in production 

workers and 23-percent decrease in overall number of employees from 2005 to 2011.

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Table 12.3.1 Employment and Earnings for the Heating Equipment (except Warm 

Air Furnaces) Manufacturing Industry 

Year Production 

Workers All Employees Annual Payroll($000s)

2005 13,425 20,779 815,116 

2006 13,757 20,951 836,066 

2007 12,239 19,935 856,552 

2008 12,605 20,619 910,149 

2009 9,182 16,539 771,250 

2010 8,801 16,054 802,471

2011 9,497 15,925 803,254

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2005-2011

Table 12.3.2 presents the costs of materials and industry payroll as a percentage 

of shipment value from 2005 to 2011. The cost of materials as a percentage of shipment 

value has increased from 2005 to 2011 by 3.1-percent. The cost of payroll for production 

workers and the cost of total payroll have increased by approximately 4.9-percent and 

20.2-percent, respectively.

Table 12.3.2 Heating Equipment (except Warm Air Furnaces) Manufacturing 

Industry Material and Payroll Costs 

Year

Cost of Materials

(percent of 

shipment value)

Cost of Payroll

for Production 

Workers

(percent of 

shipment value)

Cost of Total 

Payroll

(percent of 

shipment value)

2005 45.7 8.0 16.1 

2006 44.0 7.4 15.3 

2007 44.8 7.3 16.7 

2008 46.5 7.7 17.2 

2009 47.6 8.4 20.4 

2010 47.9 8.0 20.8

2011 47.1 8.3 19.3

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2005-2011

12.3.1.2 Inventory Levels

Table 12.3.3 shows the year-end inventory for the Air-Conditioning and Warm 

Air Heating Equipment and Commercial and Industrial Refrigeration Equipment 

Manufacturing industry obtained from the U.S. Census Bureau, Annual Survey of 

Manufacturers, Statistics for Industry Groups and Industries from 2005 to 2011. Yearend inventory refers to the amount of inventory a manufacturer has on hand at year end, 

which includes work-in-progress and finished goods. Again, DOE presents these data as a 

broader measure of the commercial packaged boiler industry. The industry’s end-of-year 

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inventory from 2005 to 2011 increased when expressed as a percentage of shipment 

value.

Table 12.3.3 End-of-Year Inventory for the Heating Equipment (except Warm Air 

Furnaces) Manufacturing Industry 

Year

End-of-Year 

Inventory

($000s)

End-of-Year Inventory

(percent of shipment 

value)

2005 648,457 12.8 

2006 730,820 13.4

2007 677,137 13.2 

2008 726,489 13.7 

2009 552,847 14.6 

2010 557,767 14.4 

2011 608,981 14.7

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 

2005-2011

DOE obtains full production capacity utilization rates from the U.S. Census 

Bureau, “Current Industrial Reports,” Survey of Plant Capacity from 2006 to 2013. Table 

12.3.4 presents production capacity utilization rates for NAICS code 333414. Full 

production capacity is defined as the maximum level of production an establishment 

could attain under normal operating conditions. In the Survey of Plant Capacity report, 

the full production utilization rate is a ratio of the actual level of operations to the full 

production level.

Table 12.3.4 Heating Equipment (except Warm Air Furnaces) Manufacturing

Industry Full Production Capacity Utilization Rates

Year Heating Equipment (except Warm Air Furnaces) 

Manufacturing (%)

2006 63

2007 58

2008 64

2009 57

2010 60 

2011 54

2012 54 

2013 53

Source: U.S. Census Bureau. 2013 Current Industrial Reports: Table 1a -

Full Production Capacity Utilization Rates by Industry: Fourth Quarters 

2006 through 20134

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12.3.2 General Interview Structure and Preliminary Findings

The preliminary interview guide includes questions relating to the topics outlined 

in sections 12.3.1.1 through 12.3.2.8. These sections summarize information received via 

interviews and public comments from various stakeholders during the preliminary 

analysis phase of this rulemaking.

12.3.2.1 Key Issues

DOE begins its interviews with manufacturers by asking manufacturers to identify 

any key issues DOE should consider while reviewing energy conservation standards for 

commercial packaged boilers. This enables DOE to identify important issues early in the 

evaluation of amended standards and to delve more deeply into these issues throughout 

the interview process. During preliminary interviews, manufacturers identified four major 

areas of concern: (1) the testing burden associated with amended standards; (2) 

condensing boilers are not appropriate for many commercial applications; (3) not many 

American companies produce condensing heat exchangers; and (4) amended standards 

could reduce product durability and reliability. DOE will explore these issues and will 

carefully consider them throughout the rulemaking process. The issues identified by 

manufacturers are explained in more detail below.

Testing Burden

Several manufacturers expressed concern about the testing burden associated with 

amended energy conservation standards. Manufacturers noted that amended standards 

and an altered test procedure will result in them having to retest all of their equipment, 

which they pointed out is a costly and logistically challenging process due to the large 

size of the equipment and the fact that many commercial packaged boilers are custombuilt for certain customers. Manufacturers stated that retesting all of their models would 

put a strain on their laboratory resources and would cause undue financial burden. 

Condensing Boilers are Not Appropriate for Many Commercial Applications

Several manufacturers expressed concern that they would only be able to meet 

certain efficiency levels with condensing technology in gas-fired hot water equipment. 

They argued that this technology would not be effective in many commercial 

applications. Several manufacturers pointed out that condensing boilers will not operate 

in condensing mode in larger applications, and that users would not realize any efficiency 

gains where buildings and heat distribution systems are not designed around condensing 

technology. Manufacturers noted that it is very difficult to sell condensing boilers in the 

replacement market (which, according to manufacturers, comprises about 90 percent of 

boiler sales) because commercial customers would have to make expensive retrofit 

changes to venting and distribution systems. 

Manufacturers also pointed out that condensing boilers may not save energy in 

commercial applications, even if they were to operate in condensing mode. Several 

manufacturers argued that condensing equipment requires higher pump force power and 

higher horsepower blower motors, and thus would consume more electricity. They noted 

12-8
that even if a boiler were operating in condensing mode, the fuel savings could be 

partially offset by higher electricity use.

Not Many American Companies Produce Condensing Heat Exchangers

Several manufacturers expressed concern that if DOE were to mandate efficiency 

levels that could only be achieved with condensing technology for gas-fired hot water 

equipment, companies would likely face high conversion costs. While many companies 

in the U.S. currently produce condensing equipment, most condensing heat exchangers 

are sourced from European or Asian companies. American companies would have to 

decide whether to develop their own condensing heat exchanger production capacity or 

assemble a baseline product around a condensing heat exchanger. Developing condensing 

heat exchanger production capacity would require large capital investments in new 

production lines and new equipment to handle the different metals that are required. 

Companies that are currently heavily invested in lower-efficiency equipment may not be 

able to make such investments. The other option would be for companies to drop their 

noncondensing equipment and assemble equipment around a sourced heat exchanger. In 

this scenario, companies would lose a significant piece of the value chain.

Reduced Product Durability and Reliability

Several manufacturers commented that higher-efficiency condensing boilers on 

the market have not demonstrated the same level of durability and reliability as lowerefficiency products. Manufacturers stated that condensing equipment requires more 

maintenance and generally does not last as long as non-condensing equipment. Several 

manufacturers pointed out that they incur large after-sale costs with their condensing 

equipment because of additional warranty claims. Maintenance calls for these boilers 

require more skilled technicians and occur more frequently than with non-condensing 

boilers.

12.3.2.2 Shipment Projections

DOE’s shipments analysis is a significant factor in estimating the impacts of 

amended energy conservation standards on manufacturers. The framework comment 

period and preliminary interviews provide an opportunity for manufacturers and other 

interested parties to share information that can help DOE quantify the magnitude of any 

changes in shipments resulting from amended energy conservation standards. DOE is 

interested in information relating to the current number of product shipments, broken 

down by equipment class and efficiency level. DOE also seeks input on the forecast of 

future shipments absent amended energy conservation standards. 

DOE asks manufacturers how they would expect shipments to change for the 

industry as a whole as a function of amended efficiency standard levels and why they 

expect these changes might occur. More specific questions aim to derive a price elasticity 

estimate for use in the national impact analysis (NIA) spreadsheet. DOE also asks 

individual manufacturers how a reduction in shipments would impact their businesses.

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According to manufacturers, shipments of condensing commercial packaged 

boilers have been increasing quickly in recent years and they expect that trend to 

continue. Some estimated that condensing equipment shipments could continue to 

increase at a rate of 10- to 20-percent annually. Most manufacturers also agreed that the 

commercial packaged boiler market is currently trending away from oil-fired and natural 

draft equipment and expected the shipments of equipment with these characteristics to 

continue to decline. DOE will continue to investigate the impact of amended standards on 

shipment projections in the NOPR phase.

12.3.2.3 Profitability

DOE solicits information from manufacturers about the impact of potential 

amended energy conservation standards on their future profitability. Amended energy 

conservation standards could affect financial performance in several different ways. For 

example, commercial packaged boiler manufacturers may have to incur significant 

product and capital conversion costs to upgrade their equipment designs and their 

production processes to produce more-efficient equipment. This would result in reduced 

cash flow and possible stranded investments if production equipment that had not fully 

depreciated had to be replaced. Higher energy efficiency standards also can result in 

higher per-unit costs that may deter some customers from purchasing the equipment or 

cause some customers to delay purchase or seek to purchase used equipment, thereby 

reducing shipments. 

Commercial packaged boiler manufacturers expressed varying opinions about 

whether amended standards would affect profitability. Some manufacturers already 

produce equipment that performs at efficiency levels well above the current standard. 

These manufacturers stated that it is unlikely that amended standards would greatly affect 

their profitability. Other manufacturers stated, however, that even an incremental increase 

in standards could cause them to have to drop equipment that account for a large 

percentage of their revenues. These manufacturers argued that this would greatly harm 

profitability, as they would have to expend significant resources to design new 

equipment. Some said their businesses would not withstand such an effort and standards 

that were too stringent could cause them to exit the market.

12.3.2.4 Equipment Mix

DOE understands that more-stringent energy conservation standards could affect 

a manufacturer’s ability to differentiate and market its premium equipment that typically 

earns higher profit margins. As a result, DOE is interested in understanding whether 

amended energy conservation standards would change a manufacturer’s equipment mix 

and if this change would affect profits. DOE also seeks to ascertain how amended energy 

conservation standards might affect a manufacturer’s customer mix, distribution 

channels, and profitability. 

Manufacturers expressed varying opinions about whether amended standards 

would affect their equipment mixes. Several manufacturers in the industry are already 

heavily invested in high-efficiency and condensing equipment. DOE believes that it is 

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unlikely that these manufacturers would need to greatly alter their equipment mixes. 

Others manufacturers expressed concern that amended standards could eliminate 

equipment that comprises a large percentage of their sales volumes. 

12.3.2.5 Conversion Costs, Manufacturing Capacity, and Employment Levels

During the preliminary interviews, DOE asks manufacturers to quantify and 

explain both the capital and product conversion costs necessary to raise the energy 

efficiency of their equipment to the proposed standard levels. In some instances, 

manufacturers may be able to meet proposed standard levels by making slight 

modifications to existing equipment. In other cases, manufacturers may have to 

completely redesign their equipment and/or production processes. In these situations, 

amended standards may cause manufacturers to incur one-time capital and product 

conversion expenses. Capital conversion expenditures are one-time investments in 

property, plant, and equipment. Product conversion expenses include one-time 

investments in research, product development, testing, and marketing.

In interviews, manufacturers expressed varying opinions about conversion costs at 

various efficiency levels. Several manufacturers do not anticipate they would incur high 

conversion costs, even if the standard were set at an efficiency level where condensing 

technology was necessary, as much of the equipment they currently sell is condensing 

equipment. Others are concerned that a standard that necessitated condensing technology 

would be overly burdensome, as they would have to design new equipment and construct 

new production lines, as well as reevaluate testing facilities and incur large testing 

expenses.

Amended energy conservation standards could also impact manufacturing 

capacity by causing the obsolescence of existing manufacturing assets (i.e., tooling) 

before these assets are fully depreciated. DOE includes questions to identify impacts on 

manufacturing capacity in the interview guide. DOE develops these questions to elicit 

manufacturer feedback on the impact of potential amended standards on:

• North American manufacturing capacity;

• capacity utilization and plant location decisions in North America both with and 

without standards;

• the ability of manufacturers to upgrade or remodel existing facilities to 

accommodate a new product mix; and

• the nature and value of any stranded assets.

Most manufacturers agreed that the industry is running at approximately 50- to 

70-percent capacity and therefore did not foresee any capacity constraints, assuming 

standards were set at a level that would not change manufacturing practices significantly. 

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Several manufacturers did point out, however, that a standard level that necessitated the 

use of condensing technology could cause capacity issues. Some manufacturers stated 

that they would have to eliminate several of their equipment lines and use a different 

manufacturing process in such a scenario and, therefore, would face significant stranded 

production assets. Manufacturers also pointed out that most companies that produce 

commercial packaged boilers in the United States do not produce condensing heat 

exchangers; rather, they source them from Europe or Asia. Several pointed out that if 

standards necessitated condensing technology, manufacturers would have to decide 

whether to continue to source the heat exchanger, which is an important part of the value 

chain for commercial packaged boilers, or try to develop their own production capacity. 

The latter strategy could cause capacity issues, as many manufacturers would be starting 

from scratch and would have to expend significant time and resources developing new 

production processes. Several manufacturers believe that a standard that necessitates 

condensing technology for gas-fired hot water equipment could significantly change the 

industry in the U.S., as many manufacturers would become more assembly-oriented and 

choose not to develop any production capacity for condensing heat exchangers.

Another important consideration in the rulemaking process is the impact of 

amended energy conservation standards on employment. In interviews, DOE asks 

manufacturers about current trends in production employment and whether amended 

energy conservation standards would result in changes in employment patterns. These 

questions about employment impacts help DOE gain perspective on:

• current employment levels associated with manufacturing at each production 

facility;

• expected future employment levels both with and without amended standards; and

• differences in workforce skills and issues related to retraining employees.

Most manufacturers agreed that a small increase in efficiency would not greatly 

impact employment levels in the industry. Some manufacturers who already primarily 

produce high-efficiency equipment stated that their employment levels would not 

significantly change, even if the amended standards necessitated condensing technology. 

Other manufacturers, however, stated that if the amended standards necessitated 

condensing technology, they would have to drop all of their copper, carbon steel, and cast 

iron gas-fired hot water equipment production lines. They would subsequently have to 

lay off workers who are currently involved in the manufacturing of the noncondensing 

heat exchangers, as well some who are involved with manufacturing other components 

and assembling the equipment.

12.3.2.6 Market Shares and Industry Consolidation

Amended energy conservation standards can alter the competitive dynamics of the 

marketplace by prompting companies to enter or exit the market, or merge with other 

companies. In preliminary interviews, DOE asks manufacturers to share their 

perspectives on industry consolidation both in the absence of amended standards and 

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various efficiency levels, assuming standards were amended. DOE designed these

questions to help gather information that helps in assessing:

• disproportionate cost increases to some manufacturers;

• increased proportion of fixed costs potentially increasing business risks; and

• potential barriers to market entry (e.g., proprietary technologies).

DOE evaluates the potential of anti-competitive effects arising from proposed 

standards to protect the interests of the customer. During interviews, DOE solicits 

information about whether amended standards could result in disproportionate economic 

or performance penalties for particular consumer/user sub-groups.

Through market research and input from interested parties, DOE believes there 

has been little entry and exit in the commercial packaged boiler industry since the 2009 

standards rulemaking. In interviews, several manufacturers pointed out that the industry 

is surprisingly fragmented for how small it is. Some manufacturers argued that an 

increase in standards could lead to some industry consolidation, as condensing equipment 

becomes more of a commodity. Some manufacturers suggested that some companies 

heavily invested in cast iron commercial packaged boiler equipment could be bought up 

by companies with higher-efficiency offerings. Other manufacturers, however, pointed 

out that many companies in the industry have reliable brands and a large legacy base of 

installed equipment that customers need maintained and replaced, and would therefore 

resist consolidation.

12.3.2.7 Impact on Small Manufacturers

DOE will consider the possibility of small businesses being disproportionately 

affected by amended energy conservation standards for commercial packaged boilers. 

DOE will study the potential impacts on the small businesses it has identified in greater 

detail during the NOPR phase of the MIA.

To identify small businesses for this analysis, DOE applies the small business size 

standards published by the Small Business Administration (SBA) to determine whether a 

company is considered a small business. 65 FR 30836, 30848 (May 15, 2000), as 

amended at 65 FR 53533, 53544 (Sept. 5, 2000) and codified at 13 CFR part 121. To be 

categorized as a small business under North American Industry Classification System 

(NAICS) code 333414, “Heating Equipment (except Warm Air Furnaces) 

Manufacturing,” a commercial packaged boiler manufacturer and its affiliates may 

employ a maximum of 500 employees. The 500-employee threshold includes all 

employees in a business’s parent company and any other subsidiaries. Based on this 

classification, DOE has preliminarily identified 21 small business commercial packaged 

boiler manufacturers.

DOE has asked manufacturers about reasons small businesses may be at a 

disadvantage relative to a larger manufacturer under amended energy efficiency standards 

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for commercial packaged boilers. Manufacturers have commented that small business 

manufacturers typically have fewer human and financial resources than their larger 

counterparts, which could make converting their equipment and updating production 

processes relatively more burdensome. Several manufacturers have commented that small 

businesses have fewer testing resources and typically do not have testing facilities, which 

could put them at a disadvantage. DOE will consider these impacts in its NOPR analysis.

12.3.2.8 Cumulative Regulatory Burden

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

the combined effects of several impending regulations may have serious consequences 

for some manufacturers, groups of manufacturers, or entire industries. Assessing the 

impact of a single regulation may overlook this cumulative regulatory burden.

Expenditures associated with meeting other regulations are an important aspect of 

DOE’s consideration of the “cumulative regulatory burden” the industry faces. 

Manufacturer interviews help DOE identify the level and timing of investments 

manufacturers are expecting to incur as a result of these regulations. DOE asks 

manufacturers under what circumstances they might be able to coordinate expenditures 

related to these regulations and efficiency standards.

In addition to the amended energy conservation standards, several other Federal 

regulations may apply to commercial packaged boilers and other products and equipment 

that these manufacturers make. DOE investigates the cumulative regulatory burden in 

greater detail during the NOPR phase of the rulemaking.

Based on its own research and discussions with manufacturers, DOE has 

identified several regulations relevant to commercial packaged boilers, including: 

• Environmental Protection Agency (EPA) emissions regulations,

• DOE residential boiler regulations, and

• ENERGY STAR.

Complying with such regulations requires corporations to invest both human and 

capital resources. The following subsections discuss in greater detail regulations affecting 

the commercial packaged boiler industry.

EPA Emissions Regulations

In 2012, EPA issued changes to the Clean Air Act standards for major area and 

source boilers in order to reduce the emission of pollutants such as mercury, particle 

pollution, sulfur dioxide, dioxin, lead, and nitrogen dioxide. Several manufacturers 

commented in interviews that it is difficult to devote resources to making equipment 

more efficient while simultaneously trying to comply with EPA emissions regulations. 

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DOE Residential Boiler Regulations

Several manufacturers of commercial packaged boilers also manufacture a wide 

array of residential boilers which are impacted by DOE’s energy conservation standards. 

Amended standards for residential boilers went into effect in 2012 and DOE is in the 

process of reviewing those standards and the test procedures for residential boilers. 

Manufacturers expressed concern that if there is overlap between the compliance periods 

for these regulations, the resources they have to convert their equipment and production 

processes would be stretched.

ENERGY STAR

Some interested parties have also expressed concern about potential conflicts with 

other compliance certification programs, in particular EPA’s ENERGY STAR 

requirements.5 However, DOE notes that certain standards, such as ENERGY STAR, are 

voluntary for manufacturers. As such, they are not part of DOE’s consideration of 

cumulative regulatory burden.

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REFERENCES

1. Department of Energy’s Energy Conservation Standards Activities, 2006. 

(Available at: 

www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html

).

2. This search tool is available on the NAICS Association website at: 

http://www.naics.com/search/

3. U.S. Census Bureau, Annual Survey of Manufacturers: General Statistics: 

Statistics for Industry Groups and Industries (2011) (Available at: 

http://factfinder2.census.gov/faces/nav/jsf/pages/searchresults.xhtml?refresh=t).

4. U.S. Census Bureau, Current Industrial Reports: Survey of Plant Capacity 

Utilization (2013) (Available at: 

https://www.census.gov/manufacturing/capacity/historical_data/index.html

5. ENERGY STAR is a U.S. Environmental Protection Agency (EPA) voluntary 

program to identify and promote energy–efficient products and buildings in order 

to reduce energy consumption, improve energy security, and reduce pollution 

through voluntary labeling of or other forms of communication about products 

and buildings. For more information link to http://www.energystar.gov/

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