Carrier blames job cuts on new federal rules, but regulatory burden is tough to measure

When Vice President-elect Mike Pence first tried to keep Carrier Corp. in Indianapolis, the company told him federal regulations had made it impossible to stay.

Pence met with officials from Carrier's parent company, United Technologies Corp., in March after it announced plans to close factories in Indianapolis and Huntington and move a combined 2,100 jobs to Mexico. Pence asked what Indiana could do to retain the jobs. Company executives dismissed the question.

"They said don't even bother," Pence said during a recent appearance on ABC's "This Week." "They said we — the avalanche of regulations coming out of Washington, D.C., the taxation, it just — they said we can't make it happen."

A lot has changed since March. Donald Trump became president-elect in November, with Pence as his running mate, and the incoming administration quickly reached an agreement with Carrier to save up to 800 jobs. United Technologies officials say Trump's pledge to cut through the Obama administration's red tape gave them confidence to keep building furnaces in Indianapolis.

That assertion, promoted by Trump and Pence, raises questions about how many federal rules are affecting manufacturers such as Carrier and how great of a burden they pose. There are no simple answers.

Experts say regulations do indeed impose billions of dollars of costs on heating and cooling manufacturers — but not necessarily enough financial hardship to cause those companies to shut down plants.

Carrier declined to comment on regulations. Trump, citing numbers often used by Carrier, offered at least a partial explanation during his Dec. 1 visit to celebrate the Carrier deal.

“Since about six years ago, 260 new federal regulations have passed, 53 of which affect this plant," Trump said while standing in Carrier's west-side factory. "Fifty-three new regulations. Massively expensive and probably none of them amount to anything in terms of safety or the things that you’d have regulations for.”

The numbers Trump cited have been circulating since United Technologies announced it would shutter its Indiana factories. Jim Schellinger, the president of the Indiana Economic Development Corp., used them in a letter he wrote to U.S. Sen. Joe Donnelly in March. Schellinger relayed concerns that Robert McDonough, the president of UTC Climate, Controls & Security, had expressed to Pence about those 53 regulations.

McDonough, while meeting with Pence in March, "began his comments by telling the Governor that federal regulations were the significant driver of the board’s decision to relocate 2,100 jobs to Mexico," Schellinger said in his letter.

A few paragraphs later, Schellinger drove home the point.

"Please forgive me for being redundant," he said, "but Mr. McDonough stated several times that, in fact, extensive federal regulations were the leading factor" in the company's move.

IndyStar could not find 53 regulations that would have driven United Technologies to relocate Indiana jobs to Mexico. An IEDC spokeswoman referred questions about a possible list of regulations to the company, which did not provide one.

The complexity of United Technologies opens several interpretations of which regulations could be considered burdensome. United Technologies is a massive Connecticut-based company with nearly 200,000 employees. It does business in a wide range of industries, including aerospace and defense. It receives $5.6 billion per year in federal contracts, which accounts for about 10 percent of its revenue.

Carrier, though, has a comparatively narrow focus. It manufactures heating and air conditioning products. The company's Indianapolis factory is even more focused, producing furnaces. The regulations affecting Carrier would be the same ones that broadly apply to heating, ventilation and air conditioning manufacturers.

A Washington, D.C.-area trade group has attempted to compile a definitive list of regulations affecting companies such as Carrier. The Air-Conditioning, Heating & Refrigeration Institute provided IndyStar with 55 regulations that it says have gone into effect since 2009 — during the Obama administration — and made it more expensive for manufacturers to do business.

The majority of those are U.S. Department of Energy rules that require manufacturers to build more efficient products, such as heaters that use less energy.

Francis Dietz, the vice president of public affairs for AHRI, said a furnace factory would not have to comply with most regulations on that list. For instance, a 2015 rule that sets efficiency standards for commercial ice makers does not apply to Carrier. A list of Obama administration rules that pertain to Carrier's Indianapolis plant would include far fewer than 53 items, Dietz said.

But, he added, determining the exact number of regulations relevant to Carrier isn't necessarily a valuable exercise.

"A lot of people get caught up in the numbers, but it's really a matter of how much these regulations affect these companies," Dietz said. "If it was 53 or it was five, the fact is complying with them does take a lot of time and money."

Sofie Miller, a senior policy analyst for George Washington University's Regulatory Studies Center, has used Energy Department data to quantify that cost, albeit imperfectly. She found that energy efficiency regulations that went into effect between 2007 and 2014 have added $8 billion a year to the prices of household and commercial appliances — the types of products made by HVAC manufacturers such as Carrier.

While that number doesn't specify the total costs of regulations to companies that make appliances, Miller said it's a valuable guide because companies tend to pass on expenses to consumers.

"Ultimately, we all end up bearing the cost of these regulations," she said.

Miller reviewed AHRI's list of Obama-era regulations for IndyStar and found 13 that impose significant costs on HVAC manufacturers. Most of those do not apply to Carrier's heater-making operations in Indianapolis.

One example of a regulation that does affect Carrier, though, is a 2011 set of rules mandating improved efficiency for furnaces. The Energy Department estimated that the new efficiency standards would save consumers hundreds of dollars on energy, but they would cost manufacturers between $480 million and $900 million to implement. It's unclear how much money Carrier would have to spend to comply with such a regulation.

The Energy Department writes rules for three basic reasons: to create environmental benefits, provide more information for consumers and require manufacturers to build products that use less energy.

Miller's research provides fuel for critics who argue many, if not most, recent Energy Department regulations are unnecessary. The agency essentially is removing inefficient products from the market and forcing consumers to buy more expensive products based on assumed benefits of long-term energy savings, Miller said.

"DEO estimates really large net benefits for every single one of these regulations I've ever read," Miller said. "My concern with that is their argument is when you ban products from the marketplace, consumers are better off."

The Energy Department counters that many of the regulations it writes are mandated by Congress, and some recent rules have saved manufacturers money by making it easier to test products.

“The Energy Department continues to develop efficiency standards, including standards for HVAC equipment, as directed by the law," an Energy Department spokeswoman said. "Heating and air conditioning account for the single largest area of energy use in American homes today. It is part of the reason why Congress has charged DOE with actively engaging with industry and other stakeholders, including through collaborations such as negotiated rule-makings, to put in place energy conservation standards that are delivering hundreds of billions of dollars due to lower energy bills to American consumers and businesses.”

Even if the Energy Department is writing rules that inflate appliance costs in return for questionable benefits, that doesn't explain why United Technologies decided to close two Indiana factories. Carrier has said it expected to save $65 million a year by moving its Indianapolis operations to Mexico, where workers would be paid $3 an hour. That's likely far more money than Carrier is spending in Indianapolis to comply with federal regulations, Ball State University economist Michael Hicks said.

"I don’t think the regulatory savings were $65 million for that plant, though it is surely that high across all their operations," Hicks said. "But, if they can leverage staying in the U.S. to getting a real voice in regulatory reforms, that’d certainly be worth the $15 million or so I expect they are losing by choosing to automate here rather than move production to Mexico."

Several sources have told IndyStar that United Technologies chose to keep some Carrier jobs in Indianapolis so the company could maintain a strong relationship with the federal government and influence federal policy. Greg Hayes, the company's CEO, suggested as much in an interview with CNBC, but he also emphasized Trump's promise to eliminate regulations.

"I was born at night, but not last night," Hayes told the cable news network. "I also know that about 10 percent of our revenue comes from the U.S. government. And I know that a better regulatory environment, a lower tax rate can eventually help UTC in the long run. And so we weighed all of those things in making the decision with the board."

Although Miller said Energy Department regulations have accelerated during the Obama administration — including some that are yet to come in what she referred to as "midnight regulations" — she said it's not a given that the incoming Trump administration will drastically overhaul rules that affect HVAC manufacturers.

Trump has proposed a broad range of policies that appeal to United Technologies, including a corporate tax cut. But if history is a guide, Miller said United Technologies might never get the regulatory relief that the company credited for helping it stay in Indianapolis.

"Energy efficiency has always been a very bipartisan topic," Miller said. "I would be generally surprised to see anybody want to do anything about it, but I've got no predictions at all."

Call IndyStar reporter James Briggs at (317) 444-6307. Follow him on Twitter: @JamesEBriggs.