California Space Heaters, Inc. - Case

California Space Heaters had developed a line of unvented, convection
kerosene space heaters using a new technology and was
making preparations to sell them. For a modest purchase price
the heaters could heat a room economically, without requiring
a central heating system. A particular advantage of the heaters
was that they allowed the consumer to focus the heat where and
when it was needed. Because of high energy prices in the early
1980s, the demand for the heaters was expected to be brisk.
Demand was anticipated to be particularly strong among low income
consumers and homeowners who had electric heating
systems, especially in the East where electricity prices were
very high. The heaters would also inevitably be used by people
whose electricity had been cut off.

Although the heaters were very economical, there were
safety hazards associated with their use, ranging from the
risk of fire to adverse health effects from their emissions.
The hazards were functions of the heater’s design, its maintenance,
and the conditions of use, including the fuel used. The
company could incorporate a variety of safety features in the
heaters, but safer heaters had a significantly higher cost and
somewhat lower efficiency, requiring more fuel for the “effective
warmth” produced.

In terms of hazards, a heater could cause a fire if it were
placed too near curtains or furniture. The heaters could be
designed so that the temperature could be as low as 320 degrees
or as high as 500 degrees. The higher the temperature, the more
efficient the heating but the greater the fire hazard, and the
greater the risk that small children and others could be burned
by touching the heater. The temperature in the heater depended
in part on the wick adjustment, which could be controlled manually
or by a thermostat. Fires could also occur from “flare up.”
Should that happen, closing the shutoff valve would extinguish
the flame.

Ignition also posed a fire hazard. Electric spark ignition
of the wick was safer than match ignition. Fires were a
risk each time the fuel tank was refilled, particularly if the
unit was already hot. This risk could be reduced by incorporating
a removable fuel tank that could be filled outside the
house. A siphon could also be incorporated into the tank to
lessen the risk of spills when using a funnel. Because kerosene
expands when warmed, the tank should never be completely
filled; instead, some air space should be maintained to allow
for expansion. Kerosene itself was difficult to burn without a
wick, but if spilled, a carpet or curtains could act as a wick. The
units with electric spark ignition—a battery-operated ignition
device—could be equipped with an automatic cutoff system
that instantly stopped combustion if the heater were tipped over
or jarred. These units could also be equipped with a powerloss
shutoff system that stopped combustion if the batteries lost
power.

In addition to the risk of fire, toxic emissions from the
heaters posed a potential hazard because the heaters were
not vented to the outside as were central heating systems and
fireplaces. Inhaling noxious fumes could be harmful, particularly
if substandard kerosene were burned or combustion were
incomplete. Kerosene came in two grades: 1K, which had a
low sulfur content and was appropriate for the heaters, and 2K,
which had a higher sulfur content and was inappropriate. Grade
2K kerosene was used in diesel automobiles and trucks and was
available at many gasoline stations, whereas 1K kerosene usually
had to be purchased at a hardware or specialty store. Since
the two grades of kerosene could not be distinguished without
conducting a chemical test, consumers could not easily verify
which grade they had purchased and had to rely on the supplier.
Gasoline should never be used in the heater, nor should fuel oil,
which has a significantly higher sulfur content than kerosene.
Proper ignition involved raising the wick, igniting it, and
lowering it until the flame burned cleanly. Some consumers
might attempt to regulate the heat by adjusting the height of
the wick. If the wick were set too low, combustion was less
complete and emissions were increased. A wick stop could be
incorporated into the heater to prevent the wick from being
lowered too far. Because the heater rested on the floor, it could
be difficult to adjust the wick properly, requiring the consumer
to bend low to see the flame.

The hazard from improper combustion and the burning
of the wrong kerosene centered on carbon monoxide and nitrogen
dioxide emissions, which posed particular problems for
asthmatics, children, the elderly, and pregnant women. EPA
standards for outside air were nine parts per million (ppm) for
carbon monoxide and 0.05 ppm for nitrogen dioxide.51 U.S.
Navy standards for submarines were 15 and 0.5 ppm respectively,
and NASA’s standards for the space shuttle were 25 and
0.5 ppm. The company’s studies indicated that its heaters
would not meet the EPA standards but would meet the Navy
and NASA standards by a comfortable margin. The EPA had
not issued standards for indoor air nor was it expected to do so
within the next few years.

The risk associated with emissions could be reduced by
using a kerosene additive that improved clean burning. The
wick should be replaced each year, since the cleanliness of
the burn depended on wick quality. Even if combustion were
complete and the proper grade of kerosene were used, however,
injury or asphyxiation could occur if the room were inadequately
ventilated and the heater consumed too much of the
oxygen in the room. A window should be left open to prevent
oxygen depletion.

Kerosene heaters using old technologies had been banned
by several states and municipalities, but most state legislatures
had decided to allow the new-technology heaters because of the
savings in fuel costs they provided. No federal safety standards
for kerosene heaters had been promulgated, but such standards
could be forthcoming if injuries resulted from the heaters.
The cognizant regulatory agency was the Consumer Products
Safety Commission (CPSC), but the CPSC had been immobilized
recently and was unlikely to mandate standards, at least
for several years.

The design alternatives available to California Space
Heaters centered on the safety features that could be incorporated
into the heaters. Table 14-1 lists the potential hazards and
the design steps, beyond the least expensive model, the company
could take to respond to the hazards. Each safety feature
was expected to be effective in reducing the specific hazard.
The production process for the heaters involved standard technologies
and methods, so the chance of a manufacturing defect
was slight.

Consumers could also take care to reduce the likelihood
of accidents and injury, such as making sure the room was
properly ventilated. They could purchase the proper grade of
kerosene and could use the “clean burn” additive that sold for
$3.99 per 12-ounce bottle. The heater should be cleaned and the
wick changed at least at the beginning of each heating season.
The consumer should, of course, purchase the appropriate wick.
The least expensive model of kerosene space heater with
match ignition could be manufactured for $44, and the standard
markup was 100 percent for a discount store and slightly higher
in an appliance store. With proper use, the least expensive model
was safe. The demand for the low-end heaters was expected to
be strong and price elastic. At a price of $88 sales could reach
2 million units per year. The safest and most expensive model
the company could make would include all the safety features
listed in Table 14-1. It could be manufactured for $189. The
demand for the safest heater was expected to be limited. The
venture capitalist backing the company commented, only partly
in jest, that at a price of $378 the only sales would be to the
wealthy for use in their ski cabins.

To indicate the savings attainable from use of the heaters,
a marketing analyst compared the cost of heating a house to
68 degrees with heating it to 55 degrees and using a kerosene
space heater to bring the living room up to 68 degrees. The estimated
savings was $470 a year for a house in New England that
used fuel oil; if the house had electric heat, the savings would
be $685 per year. Smaller savings could be attained with a portable
electric heater, which cost less than a kerosene heater.
The heaters could be marketed through various channels
of distribution, ranging from discount stores to appliance stores
to heating and air-conditioning shops. Appliance stores might
be interested in carrying a full line of heaters, but discount
stores were expected to be interested in only the least expensive
model. Heating and air-conditioning stores were not expected
to stock the heaters but would order them for customers. Their
customers were likely to be interested in the more expensive
models. The channels of distribution differed significantly in
their ability to provide consumers with information on safety
features and proper use.

The company consulted a lawyer who indicated that
products liability lawsuits were probable should there be injuries
or adverse health consequences associated with the use
of the heaters. Strict liability in tort would in all likelihood be
the applicable liability standard, so the company could be held
liable even if an injury were due to foreseeable misuse by a
consumer. The costs to the company included the cost of liability
insurance, legal and court costs, and the management time
required by the cases. These costs could be reduced by adding
more safety features to the model. The lawyer had investigated
the cost of insurance and roughly estimated that insurance costs
plus legal fees might be as much as $55 per unit for the lowest
priced model and $10 per unit for the safest model given the
estimated sales. The lawyer also estimated that the purchasers
of the lowest-cost heaters were less likely to file lawsuits in the
event of an injury because they were less familiar with the legal
process.

The likelihood of an injury associated with a heater was
difficult to estimate, but the company’s engineers gave a ballpark
estimate of one in a million of a manufacturing defect
resulting in a death or a permanent disability from a fire. They
estimated that the likelihood of a fire death from misuse was
approximately 5 in 100,000 with the least expensive model over
the life of the heater and 4 in a million with the most expensive
model. The lawyer asked the engineers for estimates associated
with each safety feature, but so far they had provided only two
estimates. They estimated that adding electric spark ignition to
the least expensive model would reduce the probability of a
death by 50 percent, whereas electric wick adjustment would
reduce the probability of a death by less than 2.5 percent.

Preparation Questions
“California Space Heaters, Inc.”
1) Is this heater a socially useful product? Should it be produced at all?
2) Under what legal standards will consumer injuries be dealt with?
3) What framework should the company use to make decisions about which product safety features to add? Given that framework, which particular product safety features should they add?
4) Should the company offer a line of products with various safety features/price combinations from which customers can choose? How should the product be priced?