Memorandum

**To:** Suzie Kocchi, U.S. EPA

**From:** Nimmi Damodaran, Betsy David, and Joanna Pratt, Stratus
Consulting Inc.;

Robert Russell, RJR Consulting; Mike Cartmell, Independent Consultant

**Date:** June 14, 2004

**Subject:** Economic impacts on small businesses in the spray foam
industry due to a use ban on HCFC-141b

The Regulatory Flexibility Act as amended by the Small Business
Regulatory Enforcement Fairness Act (RFA/SBREFA) requires EPA to
carefully consider the economic impacts of its rules on small entities.
The RFA/SBREFA requires the agency to determine, to the extent feasible,
the rule's economic impact on small entities, explore regulatory options
for reducing any significant economic impact on a substantial number of
such entities, and explain its ultimate choice of regulatory approach.
It does not require agencies to minimize a rule's impact on small
entities if there are legal, policy, factual, or other reasons for not
doing so. Since its enactment in 1980, the RFA/SBREFA has required every
federal agency to prepare a regulatory flexibility analysis for any rule
for which the agency is required to issue a notice of proposed
rulemaking under the Administrative Procedure Act or any other statute.
This requirement is not necessary if the agency certifies that the rule
"will not, if promulgated, have a significant economic impact on a
substantial number of small entities." A small entity is defined as (1)
a small business that has fewer than 500 employees; (2) a small
governmental jurisdiction that is a government of a city, county, town,
school district or special district with a population of less than
50,000; or (3) a small organization that is any not-for-profit
enterprise which is independently owned and operated and is not dominant
in its field.

This memorandum examines whether there is a significant economic impact
on a substantial number of small entities in the spray polyurethane foam
industry due to a ban on the use of HCFC-141b according to the type of
business. Two types of businesses may be affected by an HCFC-141b use
ban in the spray foam sector:

1.  businesses that manufacture polyurethane/polyisocyanurate foam
    systems (NAICS 326150), hereafter referred to as "systems houses"

2.  businesses that use polyurethane/polyisocyanurate systems to apply
    insulation to buildings, roofs, pipes, etc. (NAICS 326150),
    hereafter referred to as "spray foam contractors."

Systems Houses

The majority of spray foam systems houses are currently making
significant technical progress toward conversions in essentially all
applications (see memorandum dated February 23, 2004 on the status of
HCFC-141b requirements based on 2004 petitions, available stockpile, and
conversion to alternatives, found in EPA docket OAR-2003-0228-009). The
primary zero ozone depletion potential (ODP) blowing agents are
HFC-245fa, HFC-134a, water, and hydrocarbon-based systems. Of these
three, HFC-134a is not readily suited to use in spray foam due to its
very low boiling point. There are fewer than 20 spray foam systems
houses in the United States. Nine of these systems houses petitioned for
an exemption allowance for the production of HCFC-141b to meet their
stated needs for 2004. At least three of these petitioners have already
developed systems with alternative blowing agents.

With respect to the RFA/SBREFA, there is no significant economic impact
on a substantial number of small businesses in this type of business.
The section of the EPA's guidelines relevant to impacts on systems
houses indicates that if fewer than 100 businesses experience an
economic impact, then the rule is presumed not to have a significant
economic impact on a substantial number of small entities (details are
found in Chapter 2 of *Revised Interim Guidance for EPA Rulewriters:
Regulatory Flexibility Act as amended by the Small Business Regulatory
Enforcement Fairness Act*, March 29, 1999,
<http://www.epa.gov/sbrefa/documents/iguid99.pdf>). Since there are
fewer than 20 spray foam systems houses in total and a smaller number
that may not have developed systems with alternative blowing agents, we
can reasonably assume that there is no significant economic impact on a
substantial number of small entities.

Spray Foam Contractors

According to information provided by the Spray Polyurethane Foam
Alliance (SPFA), the U.S.spray foam industry comprises more than 3,000
suppliers, distributors, and contractors. A majority of these are small
businesses employing fewer than 50 people. Over the past 12 years, the
spray polyurethane industry has faced two major disruptions relating to
changes in the blowing agent used in the systems. The first occurred at
the end of 1993 after the EPA banned the use of CFC-11. Although
supplies of the new replacement blowing agent, HCFC-141b, were available
before the forced switch, the development and testing of proven non-CFC
systems did not proceed in a totally smooth fashion. Some field-related
problems surfaced after the spray foam insulation with HCFC-141b had
been applied. The second disruption is the transition away from
HCFC-141b to new zero ODP blowing agents. The spray foam industry has
sought to avoid a similar experience with this second transition and has
committed to following a structured approach to ensure products are
fully tested before their introduction.

To gauge the potential impacts of an HCFC-141b use ban on small
businesses, we conducted telephone interviews with seven distributors
and contractors between May 14 and May 24, 2004. To obtain a
geographical representation, we selected companies located in all the
main regions of the country. Following is a brief summary of the issues
identified by each respondent:

1.  Montana Urethane Systems Supply (MUSS), located in Bozeman, Montana,
    is a distributor of spray polyurethane systems and equipment and has
    three employees. It serves the roofing and wall sectors of
    residential, light commercial, and agricultural construction. The
    products it supplies compete with other insulation materials,
    including fiberglass, cellulose, and polyiso and polystyrene
    boardstock.

MUSS has first-hand experience with each of the three replacement
blowing agents under development for use in spray foam \[i.e.,
hydrocarbon, water (CO~2~), and HFC-245fa\]. However, it is concerned
about safety issues associated with hydrocarbons and does not feel that
the water blown systems will provide adequate properties for the Rocky
Mountain region. Therefore, contractors in Montana are focusing on
HFC-245fa as the preferred alternative to HCFC-141b. To date, MUSS
estimates that approximately 25% of the systems being sold today are
based on HFC-245fa, with the rest using HCFC-141b. Costs for newer
systems were said to be 20% to 22% higher, although some of these
increases are the result of higher steel costs for the thicker gauge
drums required with HFC-245fa systems. MUSS believes, however, that some
of the chemical cost increases will decline over time. Products from
several systems houses have been evaluated in the field and all seem to
have more cold weather problems than the HCFC-141b based systems. The
most common complaint is that the current HFC-245fa systems cannot be
applied at temperatures below 40°F, which will affect the length of the
spraying season.

Another issue is that because the new systems are higher in viscosity,
many of the older spray foam machines are not totally suitable and
should be refurbished. The cost of a new machine is approximately
\$15,000-\$20,000; alternatively, new heaters can be installed for
\$2,500-\$3,000. Finally, because of the lower boiling point of
HFC-245fa, the newer systems have a higher vapor pressure and drums
arrive in Bozeman, Montana, severely bulged because of the region's high
elevation.

According to MUSS, the installed price of foam from HCFC-141b systems
today is about 300% higher than the price for competing insulation
materials. This gives some idea of the additional features and benefits
provided by spray polyurethane foam. However, MUSS is not sure how much
of an additional premium the market in Montana can bear. MUSS believes
that up to 20% of the contractors that apply other insulation materials
in addition to spray foam may drop out of the spray market primarily
because of the expected shorter spraying season.

2.  Central Coatings Inc. is a spray foam roofing contractor located in
    Madera, California with between 30 and 35 employees. The company has
    been in business since 1967. It has tested each of the alternative
    technologies and has concluded that HFC-245fa offers the best
    combination of properties, safety, and performance. One of its
    systems house suppliers has switched entirely to HFC-245fa blown
    products and another is in the process of completing all the
    testing.

Although some problems still exist due to the higher vapor pressure and
lower boiling point of HFC-245fa, Central Coatings is being advised by
systems houses that these will become less of an issue over time and the
operating window with the new blowing agent will eventually be wider
than with HCFC-141b. Central Coatings' current costs for systems based
on HFC-245fa are approximately 5% higher than those based on HCFC-141b.
Overall, Central Coatings thinks the transition out of HCFC-141b will go
fairly smoothly and the company does not anticipate any competitive
issues with other insulation materials.

3.  RPC Industries, in business for over 20 years, has operations in
    Hampton and Charlottesville, Virginia and employs approximately 30
    people. The company is involved in wall and roofing applications
    with spray foam and other single ply products and has gained some
    experience with new systems based on HFC-245fa. Generally these
    experiences have been positive, although there has been a need to
    pay more attention to heat settings and to protect the drums from
    high temperatures. RPC Industries indicated that it is too early to
    tell whether water (CO~2~) blowing will provide the ease of use
    provided with HFC-245fa and is very concerned about the flammability
    issues associated with the hydrocarbons.

As long as HCFC-141b based systems are still available, RPC does not
expect the new HFC-245fa based products to be widely introduced since
they are currently about 15% more expensive. After the transition has
been completed, RPC thinks there will be some disruption but does not
believe that this level of cost increase will be a catastrophe for the
industry because spray foam provides many additional features for the
price.

4.  West Roofing Systems Inc. is based in LaGrange, Ohio and has been in
    business since 1979. The company focuses on the roofing sector.
    Initially, West Roofing Systems was concerned about the transition
    to the new blowing agents. However, after working with three
    different systems house suppliers, it is now very comfortable with
    the new HFC-245fa based products, which it says are better and more
    controlled than systems based on HCFC-141b. Since their current
    overall cost increase with HFC-245fa is approximately 5%, West
    Roofing does not expect any negative impacts from the transition,
    especially given that the cost of asphalt based roofing materials is
    rising quickly.

5.  The Phoenix, Arizona based division of D.C. Taylor Co employs 25-30
    people and is the only division in the entire company that
    participates in the spray foam sector. The company is a
    full-spectrum roofing contractor and works with a variety of
    alternative insulation types, including those used with single ply
    and ethylene-propylene diene monomer (EPDM) membranes. D.C. Taylor
    has reviewed each of the new blowing agent technologies and
    concluded that despite some difficulties associated with handling
    HFC-245fa in the desert Southwest, it offers the best combination of
    cost, ease of use, and performance. The cost increase of going to
    HFC-245fa is expected to be in the range of 5 to 10% and once
    everyone has switched out of HCFC-141b, the company does not expect
    to see any major impacts or competitive disadvantages.

6.  Another Arizona based contractor, Spray Foam Southwest, Inc. (SFS)
    of Tempe, stated that none of the alternatives are adequately
    developed at this point and believes strongly that the industry
    needs more time to resolve all the existing problems. These problems
    include foam dimensional stability, issues related to the low
    boiling point and high cost of HFC-245fa, and the flammability of
    hydrocarbons. In addition, none of the alternatives has worked
    sufficiently well for SFS in a wall application. Another major
    concern is how well the new systems will perform in the very high
    ambient temperatures of summer, since all of the company's
    experience to date has been gathered in the winter and spring.

> In an effort to narrow the choices and determine the preferred type of
> system under summer conditions, Spray Foam Southwest has ordered a
> multifunctional spray foam machine that will be able to spray
> off-ratio water-blown systems and flammable hydrocarbons, and even
> meter HFC-245fa as a third stream. Such a piece of equipment will cost
> more than \$30,000, but the company feels such an investment is
> critical to making the right decision.
>
> With between 50-60 employees and having been established in 1971,
> Spray Foam Southwest is one of the larger, more experienced
> contractors in the desert Southwest. The company is optimistic that
> the basic characteristics of spray polyurethane foam (such as the
> absence of thermal bridging and the ability to prevent air
> infiltration and leaks by virtue of the seamless, homogeneous foam
> structure) will ensure a continued strong market position in extreme
> climatic regions. It feels that despite its current increased costs of
> approximately 20%, HFC-245fa will be the eventual first choice among
> the new blowing agents.

7.  Specified Urethane Systems Co, Inc. (SUSCO) is based in Dallas,
    Texas and employs between 75 and 85 people. Their business is
    entirely spray polyurethane foam, split 70% roofing and 30% walls.
    The company is focusing on water (CO~2~) blowing for wall systems
    but is encountering problems with low foam densities resulting in
    open cells. If possible, the density should be over 1.5 pcf
    installed with closed cells to provide better thermal insulation
    performance. SUSCO prefers HFC-245fa for roofing.

> The main issue the company sees currently is that full testing and
> code approvals have not been finalized and therefore it feels that
> more time should be allowed to consume the entire stockpile HCFC-141b
> and complete all the necessary testing. Water-blown systems are
> expected to be equal in cost to current HCFC-141b systems, although
> some investment in new pumps and heaters will be required to handle
> the off ratios and higher viscosity of water blown formulations. They
> believe the cost is likely to be 15% to 25% higher for HFC-245fa
> products.

The contractors interviewed for this memorandum generally view HFC-245fa
as the preferred new blowing agent, especially for roofing. Despite some
handling issues, most of these contractors do not expect the conversion
from HCFC-141b to create any major concerns in California or east of the
Mississippi. The two areas where contractors believe they may encounter
problems are the Rocky Mountain states, because of the high elevation
and the colder temperatures, and the desert Southwest, where extreme
summer conditions may cause problems not yet foreseen. It is our
understanding that Honeywell, the supplier of HFC-245fa, is working with
spray foam systems houses to address problems as they surface.

Initial cost increases for HFC-245fa systems are expected to be about 5%
to 25% higher than the costs for current HCFC-141b based products. The
range reflects the price differences among the different systems houses.
However, alternative water-blown formulations may offer some protection
against higher cost if density and other application issues can be
overcome. There was general agreement that the benefits and features of
spray polyurethane foam will protect the product against a major market
downturn and the consequent direct impact on the livelihoods of
contractors. Those contractors whose current suppliers do not have
approved systems based on non-ODP blowing agents will need to identify
other suppliers with approved systems if they want to use this material.
It also seems likely that increased costs incurred by the spray foam
contractors will be passed on to the customers. Additionally, since all
contractors will face the same increased input costs, there will be no
competitive disadvantages due to such increases. Based on information
obtained in these telephone interviews, one would not expect a
significant economic impact on a significant number of small entities.