Viewpoint -- Rewarding Energy Efficiency

Dec. 21, 2004
A proposal to give appliance makers tax credit for improvements benefits everyone.

You've got to give appliance makers credit. They've reduced their products' energy consumption substantially over the years -- and will do so more. The U.S. government ought to give them credit, too. Tax credit, that is. It's an idea up for consideration that makes sense for everyone concerned. In July makers of refrigerators, guided by federal regulations, will have to ensure all of their products operate at energy-efficiency levels 30% better than the previous standard. Starting in 2004 clothes-washer-efficiency mandates will tighten by 35%. One might think such standards could hurt companies such as Maytag Corp., Whirlpool Corp., Frigidaire (part of Sweden's AB Electrolux), and GE Appliances, part of General Electric. To the contrary. The concepts and components necessary to accomplish this are known and readily available. There will be some added component cost, but what can't be offset by economies of scale and process improvement is expected to be recouped with correlating hikes in retail prices for units. The appliance industry is ready to move and is proposing tax credits for efforts to produce -- and sell -- appliances that surpass the energy-efficiency regulations. While accelerating the transition to highest-efficiency white goods, such government assistance would help appliance makers operationally, and perhaps improve earnings for shareholders Appliance makers, state officials, energy-efficiency advocates, environmentalists, and utilities worked jointly to come up with the washing-machine energy regulation, which awaits review by the Dept. of Energy. The same group proposes manufacturers receive $50 to $100 per unit sold up to $35 million annually in tax credits based on the number of products they sell to consumers that exceed the already noteworthy energy reductions -- by 10% to 15% in the case of refrigerators and by a greater percentage for washing machines. "Manufacturers may be at different stages along the way in designing and producing these super-efficient units," Assn. of Home Appliance Manufacturers President Joe McGuire said. "The tax credit would give incentive to manufacturers to get these units and those that exceed these standards out before required." Manufacturers would be allowed to apply the credits the best way they see fit to hasten and enlarge delivery of energy-efficient appliances to the marketplace. "All these companies, for the most part, are the subject of many different appliance-efficiency standards, and this cumulative effect on their costs is quite significant," McGuire says. Justin Mauer, a Merrill Lynch director who covers the appliance sector, sees both the regulations and the potential tax credit as positives for the industry. "Although it is certainly costing appliance manufacturers more money for the research, development, and - ultimately -- implementation of stricter standards, I don't necessarily view it as an entirely bad thing," Mauer says. "The further away you can push people from making the decision to buy these appliances purely on price, the better off, in general, the manufacturers are. The fact that large kitchen appliances have become so commoditized led to a lot of the problems that have happened this year in the business." And, Mauer says, a $30 million tax credit could prove significant in the scheme of appliance makers' annual results. In the likely case of the money from the credit being applied to capital expenditures, it could help margins and, possibly, even give shareholders a penny or two along the way. "Whirlpool's capital expenditure budget, for example, is approximately $450 million per year. So I wouldn't call a $30 million tax credit insignificant." Some argue that the tax credit is vital because manufacturers will be greatly limited to how much they can recoup through higher retail prices. Compounding this problem is the fact that manufacturers have a history of expanding their capacity when a new energy standard is enacted. They do this to increase the economies of scale and help offset the higher cost of new components and production systems. But if the U.S. marketplace demand doesn't increase at the same pace as manufacturing capacity expands, the industry could end up with utilization rates in the 60% to 70% range instead of 80% to 90%. Also consider that the tax credit conceivably could be applied by the manufacturer to keep consumer prices down. It's unclear at this point how the tax credit proposal will be received in the next congressional session, but AHAM's McGuire is rather confident of its passage. "We received very positive feedback from people within the administration, and we got an enormous amount of bipartisan support in the House and Senate," McGuire says. "We feel real good that we've laid the groundwork for next year."

Rich Dzierwa writes for BridgeNews.

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