Wood Heaters NSPS  -  Draft Technical Support Document - by EPA/OAQPS technical staff
                        March 6, 2020

An Assessment of Impacts of Not Including a Sell-Through for Wood Heating Devices  
      This document is a qualitative discussion of impacts to the wood heating devices manufacturing industry resulting from compliance with Step 2 of the residential wood heaters New Source Performance Standards (NSPS), which was finalized by EPA in March 2015.  The EPA proposed a sell-through for hydronic heaters and forced-air furnaces in November 2018.  The EPA does not intend to promulgate a sell-through in the final rule based on reasons presented in the preamble and Response to Comment (RTC) document for this action. 
      Some manufacturers and retailers believe a sell-through of Step 1 compliant units is necessary in order to avoid stranded assets, recoup costs of developing Step 2 compliant units, and clear space for Step 2 compliant units.  The EPA proposed allowing the sell-through of Step 1 compliant units for two years beyond the compliance date of May 15, 2020, for hydronic heaters and forced air furnaces and requested comment on a similar sell-through for wood stoves.  Manufacturers and retailers have argued in comments on the proposed rule that the current Step 2 compliance date of May 15, 2020 and existing market conditions do not allow them to have the sales needed to adequately fund development and building of Step 2 compliant units.  For more details on these comments, please refer to the RTC document for this final action. 
      The EPA notes that recent information from a relatively large number of wood heater manufacturers appears to show that this manufacturing industry may largely be able to bear the impacts from Step 2 compliance.  An article in the Hearth and Home magazine, a major source of information on manufacturers and retailers of wood heating devices, from November 25, 2019 presents the results from interviews with officials from several different manufacturers, who commented not only on their situation but also those of the retailers who market their products.  Officials with 11 manufacturers answered questions from Hearth and Home, with three of these producing fireplaces.  Sales for the 2019-2020 selling season were expected to be "good," and were better than expected due to concerns about how successful retailers would be in selling Step 1 compliant products (or, "pre-2020" products).   Sales for the 2018-2019 selling season were expected to be below normal given the coming compliance date for the NSPS, but most manufacturers were surprised by the level of sales.  Few expressed concerns that they would be in a poor position during this selling season.  
      As part of their argument for a sell-through, retailers have indicated, separately or as part of comments by the Hearth, Patio & Barbecue Association (HPBA), that it is not unusual to have wood heating devices on their floors for 1 to 2 years, or even longer.  The retailers did not make a firm connection in these comments on the proposal between this "stranded inventory" and the impacts of the NSPS, whether those impacts are from compliance with the NSPS or relief if a sell-through takes place.  In fact, stranded inventory may be a normal part of their business circumstances.  A comment by HPBA in 2014 on the proposed NSPS, which is attached to the comments HPBA offered on the sell-through proposal, includes a report done for HPBA by Charles Page in which surveyed retailers presented information showing that as much as 25% of wood stoves in retail stores may stay on the floor for more than 1 year.  The results included in this report for HPBA reflect sales for the 2013-2014 selling season.  With a selling season for these retailers running typically from October to March, this selling season includes several months of activity prior to the proposal of the NSPS (February 2014).  Thus, this survey data provides information that preceded the final rule and any implementation (even for Step 1 compliant units) of the NSPS.  One can reasonably interpret this information as reflecting a state of retail without impact from the NSPS.  Given that such stranded inventory is a normal part of business circumstances, and with no firm connection provided on the impact of compliance with the NSPS on stranded inventory, one cannot determine from data provided by retailers and manufacturers on the proposed sell-through that this stranded inventory will increase due to the Step 2 compliance requirement.
      Finally, a number of manufacturers expressed concerns about the potential for consolidation in their industry if firms are unable to produce or sell Step 2 compliant units.  In the Hearth and Home article mentioned earlier in this document, Blaze King's president mentioned concerns that the high costs of manufacturing Step 2 compliant units (or "2020 units") may reduce the number of manufacturers in the industry.  Jotul North America's president also expressed the possibility of consolidation in this industry as a result of Step 2 compliance.  None of those interviewed, however, provided any indication of the amount of consolidation that could take place.  No commenter on the November 2018 proposal provided such information, either. 
      Given that the great majority of the manufacturers subject to this NSPS will be small (perhaps as many as 90%) according to Small Business Administration (SBA) size standards, as shown in the 2015 Residential Wood Heaters NSPS RIA, such concerns are not unlikely.  Certainly, manufacturers may reduce their number of model lines if they face large costs from building Step 2 compliant units.  However, it is not a certainty that a lack of sell-through for Step 1 compliant units necessarily will lead to consolidation or reduction in the number of manufacturers and retailers.  Consolidation of companies is a common part of the life cycle of many industries, even including the effect of regulation.  The effect of different factors, including regulation, may lead to mergers of several individual firms through "horizontal consolidation".  In addition, an increasing amount of economic literature concludes that concentration of firms in U.S manufacturing industries has been rising since 2000.  A paper by Grullion, Larkin, and Michely shows that the Herfindahl-Hirshmman index (HHI), a standard metric by which to estimate firm concentration within manufacturing industries, has increased in 80% of the industries reviewed since 2000, with a median increase of 41% and a mean increase of 90%. 
      Thus, while there is a possibility that firms in the wood heating devices industry may consolidate as a reaction to Step 2 compliance, this possibility should be weighed against the continuing and long-term trend toward consolidation in U.S. manufacturing industries as a whole.  In addition, the commenters' positions on the impact of Step 2 compliance are not supported by relevant data, and in fact run counter to recent public statements by the business leaders of several manufacturers.  The potential impact of Step 2 compliance, and thus the impact to manufacturers and retailers from having or not having a sell-through, should be considered carefully against the information and discussion included in this document.  
