1 August 14, 2012

MEMORANDUM

SUBJECT: Economic Impact Analysis for Risk and Technology Review: Chromium

Electroplating and Chromium Anodizing Source Categories

FROM: Robin Langdon and Tom Walton

Economists

AEG (C439

‐ 02)

TO: Phil Mulrine

Environmental Engineer

MICG (D243

‐ 02)

This document addresses the economic impacts of the Risk and Technology Review for

Chromium Electroplating and Anodizing source categories. The total capital and total

annualized costs for the final amendments are estimated to be $9.1 million and $2.6

million/year, respectively. The cost estimates are provided in “Revised Procedures for

Determining Control Costs and Cost Effectiveness for Chromium Electroplating and

Anodizing” and “Revised Estimated Costs for Proposed Housekeeping Requirements for

Chromium Electroplating NESHAP”, which are available in the docket. Also available in

the docket is “Revised Profile of Chromium Electroplating Processes and Emissions”,

which includes information used in this analysis regarding number of employees and

other industry statistics.

Small Business Impacts Analysis

The Small Business Administration defines a small entity in the chromium electroplating

industry 1 as an entity with fewer than 500 employees. 2 In addition, the U.S. Census

Bureau’s 2009 Statistics of U.S. Businesses indicate there were 2,434 firms in NAICS

code category 332813 and 31 firms, or 1.27 percent, had more than 500 employees. 3

Based on this information, we conclude that more than 98 percent of the entities in the

chromium electroplating industry are considered small entities. As such, for the small

business impacts analysis we included all of the affected entities.

1 The chromium electroplating industry falls within the North American Industry Classification System

code 332813

– electroplating, plating, polishing, anodizing, and coloring.

2 Refer to http://www.sba.gov/sites/default /files/Size_Standards_Table.pdf for more information on SBA

small business size standards.

3 U.S. Census Bureau, Statistics of U.S. Businesses

‐‐ http://www2.census.gov/econ/susb/da ta/2009/us_6digi tnaics_2009.xls

. NAICS code category 332813

also includes firm types not affected by this rulemaking.2 Approximately 1,343 facilities, or entities, are in the chromium electroplating industry

and the rule requirements will affect approximately 1,014 facilities. 4 EPA performed a

screening analysis for impacts on all affected small entities by comparing compliance

costs to average sales revenues by employment size category. This is known as the cost

‐

to

‐ revenue or cost

‐ to

‐ sales ratio, or the “sales test.” The “sales test” is the impact

methodology EPA primarily employs in analyzing small entity impacts as opposed to a

“profits test,” in which annualized compliance costs are calculated as a share of profits.

The sales test is frequently used because revenues or sales data are commonly available

for entities impacted by EPA regulations, and profits data normally made available are

often not the true profit earned by firms because of accounting and tax considerations.

The use of a “sales test” for estimating small business impacts for a rulemaking is

consistent with guidance offered by EPA on compliance with SBREFA 5 and is consistent

with guidance published by the U.S. SBA’s Office of Advocacy that suggests that cost as a

percentage of total revenues is a metric for evaluating cost increases on small entities in

relation to increases on large entities (U.S. SBA, 2010). 6

Table 1 below presents the results of the cost

‐ to

‐ sales screening analysis; the table

reflects a cost per plant increase of 15 percent to reflect estimated additional costs for

using WAFS that do not contain perfluorooctyl sulfonates (PFOS). 7 Table 2 provides the

numbers of Facilities Subject to the Requirements, by Industry Subcategory and

Employment Size Category.

4 Approximately 1,343 chromium electroplating facilities are located in the U.S. Of these, approximately

198 are located in California and the remaining 1,145 are outside of California. Of the 1,145 located

outside of California, this rule affects 1,014 facilities. The remaining 131 facilities are new small hard

chromium facilities (i.e., built or reconstructed after 1994) and are not included in this analysis because

they will not incur any costs. This information can be found in the “Revised Procedures for Determining

Control Costs and Cost Effectiveness for Chromium Electroplating and Anodizing.”

5 The SBREFA compliance guidance to EPA rulewriters regarding the types of small business analysis that

should be considered can be found at http://www.epa.gov/sbrefa/documents/Guidance

‐ RegFlexAct.pdf

.

See Table 2 on page 36 for guidance on interpretations of the magnitude of the cost

‐ to

‐ sales numbers.

6 U.S. SBA, Office of Advocacy. A Guide for Government Agencies, How to Comply with the Regulatory

Flexibility Act, Implementing the President’s Small Business Agenda and Executive Order 13272, June

2010.

7 Although the costs for non

‐ PFOS WAFS are comparable to the costs of PFOS

‐ based WAFS, non

‐ PFOS

WAFS may be depleted more quickly in the electroplating bath. For plants that regularly electroplate, the

depletion of non

‐ PFOS WAFS is negated by drag

‐ out. However, for plants that do not electroplate

regularly (i.e., do not electroplate daily for several hours per day), the depletion rate can be up to 20

percent. Estimating increased WAFS costs of 15 percent across the board for all electroplating plants that

use WAFS provides estimated costs for non

‐ PFOS WAFS that are biased high. For additional information,

refer to the “Revised Procedures for Determining Control Costs and Cost Effectiveness for Chromium

Electroplating and Anodizing.”3 Table 1. Summary of the Screening Analysis Results Based on Cost

‐ to

‐ Sales Ratios, by Industry

Subcategory and Employment Size Category

Employment Size Category <20 Employees 20

‐ 99 Employees >100 Employees

Average Sales by Employment Size Category 8 $708,132 $4,330,616 $10,827,407

Total Number

of Affected

Facilities Annualized Costs,

by Compliance

Option

Decorative Chromium

Electroplating 423

Test Only 7 $1,306 .18% 0.03% 0.012%

WAFS Only 9 299 $429 .06% 0.01% 0.004%

WAFS & Test 7 $4,163 .59% 0.10% 0.038%

Retrofit APCD 9 & Test

‐‐  ‐‐  ‐‐  ‐‐  ‐‐

Chromium Anodizing 140

Test Only 10 $1,262 0.18% 0.03% 0.012%

WAFS Only 54 $207 0.03% 0.00% 0.002%

WAFS & Test 10 $2,638 0.37% 0.06% 0.024%

Retrofit APCD & Test

‐‐  ‐‐ ‐‐ ‐‐  ‐‐

Small Hard Chromium

Electroplating 263

Test Only 35 $1,484 0.21% 0.03% 0.01%

WAFS Only 23 $1,198 0.17% 0.03% 0.01%

WAFS & Test 26 $9,467 1.34% 0.22% 0.09%

Retrofit CMP 9 & Test 6 $20,887 2.95% 0.48% 0.19%

Retrofit HEPA 9 & Test 1 $24,131 3.41% 0.56% 0.22%

Large Hard Chromium

Electroplating 188

Test Only 22 $1,907 0.27% 0.04% 0.02%

WAFS Only 3 $8,327 1.18% 0.19% 0.08%

WAFS & Test 3 $57,420 8.11% 1.33% 0.53%

Retrofit CMP & Test 23 $45,519 6.43% 1.05% 0.42%

Retrofit HEPA & Test 6 $66,226 9.35% 1.53% 0.61%

8 By NAICS code, the average sales receipts by employment size category are from the U.S. Census Bureau,

2008, “Firm Size Data from the Statistics of U.S. Businesses: U.S. Detail Employment Sizes: 2007” and can

be found < http://www.census.gov/econ/susb /data/download_susb2007.html>

. 9 WAFS is wetting agent fume suppressant; APCD is air pollution control device; CMP is composite mesh

pad; and HEPA is a High

‐ Efficiency Particulate Arresting filter.4 Table 2. Number of Facilities Subject to the Requirements, by Industry Subcategory and Employment

Size Category 10

Employment Size Category 11 <20 Employees 20

‐ 99 Employees >100 Employees

Total Number of

Affected Facilities 12

Decorative Chromium Electroplating 423 108 217 100

No Requirements 110 28 56 26

Test Only 7 2 4 2

WAFS Only 299 76 153 70

WAFS & Test 7 2 4 2

Retrofit APCD & Test

‐‐  ‐‐  ‐‐  ‐‐

Chromium Anodizing 140 13 101 26

No Requirements 66 6 48 12

Test Only 10 1 7 2

WAFS Only 54 5 39 10

WAFS & Test 10 1 7 2

Retrofit APCD & Test

‐‐ ‐‐ ‐‐  ‐‐

Small Hard Chromium Electroplating 263 88 88 88

No Requirements 172 57 57 57

Test Only 35 12 12 12

WAFS Only 23 8 8 8

WAFS & Test 26 9 9 9

Retrofit CMP & Test 6 2 2 2

Retrofit HEPA & Test 1 1 1 1

Large Hard Chromium Electroplating 188 33 87 63

No Requirements 131 23 63 45

Test Only 22 4 11 8

10 Some totals may not add due to rounding.

11 By potential requirement, we allocated the facilities among the employment size categories according

to percentages in the “Revised Profile of Chromium Electroplating Processes and Emissions.” For

example, for decorative chromium electroplating, we allocated 25.6 percent of facilities to the

employment size category of fewer than 20 employees; allocated 51.2 percent of facilities to the

employment size category of between 20 and 99 employees; and allocated 23.3 percent of facilities to the

employment size category of more than 100 employees.

12 The affected facilities located outside of California were allocated among the industry subcategories in

this table based on the methodology described in the following document available in the docket:

“Revised Simulation of Actual and Allowable Emissions for Chromium Electroplating Facilities”.5 WAFS Only 3 1 1 1

WAFS & Test 3 1 1 1

Retrofit CMP & Test 23 4 11 8

Retrofit HEPA & Test 6 1 3 2

See Appendix A (Methodology Used to Determine Number of Plants Subject to the

Requirements of the Proposed Amendments for Chromium Electroplating) to the

“Revised Procedures for Determining Control Costs and Cost Effectiveness for Chromium

Electroplating and Anodizing” document for a discussion of the methodologies used to

calculate the number of facilities by potential requirement.

From the screening analysis, we estimated that approximately 97% of all affected

facilities would have a cost

‐ to

‐ sales ratio less than 1% (i.e., only about 3% would have

cost

‐ to

‐ sales greater than 1%). We also estimated that about 1% of all affected facilities,

or 9 facilities with fewer than 20 employees, may have cost

‐ to

‐ sales ratios between 3

and 9 percent. All of these facilities are in the hard chromium category, with three of the

facilities in the small hard chromium category and six in the large hard chromium

category.

Additional Small Business Impacts Analysis

– Large and Small Hard

Chromium

We examined the large and small hard chromium categories in more detail and

determined that the cost

‐ to

‐ sales impact estimated in the screening analysis may be

overstated for one or both of the following reasons:

 The American Business Directory includes employment and sales data by firm.

We reviewed the American Business Directory and located some sales data for

the employment size category of fewer than 20 employees in the large and small

hard chromium categories; this data suggests that sales receipts for these

entities may be as much as two times the average sales receipts data used in

the screening analysis.

 If the small and large hard chromium electroplating facilities affected by the

proposed rule have higher production than the facility production rates reflected

in the average sales receipts data, using the average sales receipts data may

result in an overestimate of the cost

‐ to

‐ sales impact.

Profits Test

If market conditions limit the ability to pass compliance costs to customers, the

establishment could bear more of the economic burden through reduced profits. As

such, we calculated a “profits test” to assess the compliance costs relative to firm

profits.6 To better understand industry profitability thresholds, we collected average industry

‐

level net income after taxes and total net sales reported by the U.S. Bureau of Census.

After dividing net income after taxes by total net sales, the statistics suggest that each

$1,000 of sales produced $40 to $60 of after tax accounting profits (4 to 6 percent of

sales) (see Table 3). As a result, sales tests results exceeding 3 percent would eliminate

a significant portion of net income if firms cannot pass on compliance costs to

customers in the form of higher market prices. To further understand the issue, we

evaluated how existing market demand conditions influence ability to pass compliance

costs to customers.

Table 3. Quarterly Financial Reports for NAICS 332 Fabricated Metal Products

Year Ratio of Net Income After Taxes

to Total Net Sales

2010 6.2

2009 3.6

2008 6.2

2005 6.0

U.S. Census Bureau. Quarterly Financial Reports http://www.census.gov/econ/qfr/

.

Market Demand Characteristics

In markets with perfect competition, the economic burden of compliance costs will fall

more heavily on the side of the market that is more sensitive to market price changes.

The relationship between pass through and elasticities can be expressed as:

Percentage of cost pass through

= Supply Elasticity/(Supply Elasticity

‐ Demand Elasticity)

On the demand

‐ side, we found several factors suggesting that the demand for hard

chromium electroplating services is highly inelastic, which means when market prices

change there is little change in the quantity of services that customers demand. 13 All

other things equal, these factors suggests the industry may have the ability to pass on

compliance costs to customers.

First, business customers using hard chromium electroplating services have limited

alternative technologies available that provide the desirable properties for their

products. 14 For example, thermal spraying is one possible replacement for hard

chromium electroplating, but it is more technically challenging and has much higher

13 A p revious economic impact analysis shows demand elasticity values around

‐ 0.25, which suggests that

a one percent increase in price would result in 0.25 percent reduction in the quantity of services demand

(EPA, 1993). Using this value and the above equation, 80 percent of the costs could be passed to

customers

‐‐ 80% = 1/[1

‐ (

‐ 0.25)]

14 Hard Chrome Plating... Its Past, Present and Future < http://66.192.79.183/articles/web120301.html >7 capital costs. Thermal spraying also does not coat the crevasses of the equipment as

well. Therefore, thermal spraying is not a perfect substitute and would not replace

most hard chromium facilities. Industry reports suggest adopting alternative

technologies in some industries has stalled as sectors, such as the airline industry, weigh

the costs and benefits of adopting new technologies. 15

Second, hard chromium electroplating tends to be used in highly segmented and

specialized end products with limited product substitutes and customers appear

uninterested in giving up chrome. 16 For example, EPA review of industry survey

responses suggests one facility supplies hard chrome plating services for exotic objects

for the aviation industry; plated tubes and hydraulic rods; and large extrusion screws

and rolls for paper industries. Another facility works with specialized aerospace,

defense, industrial, recreational and electronics markets. Airline companies have used

plating operations provided by the facility.

Lastly, anecdotal evidence suggests that customers who wish to have a piece of

equipment electroplated generally take it to a local job shop. Large objects that require

electroplating are expensive to transport over long distances, so job shop proximity is an

important economic factor that customers consider.

Conclusions

Employing the sales test screening methodology produced the following results

‐‐ approximately 97% of all affected facilities will experience minimal impact, or a cost

‐ to

‐

sales ratio of less than 1%. In addition, for approximately 1% of all affected facilities, or

9 facilities with fewer than 20 employees, the potential for cost

‐ to

‐ sales impacts may be

between 3 and 9 percent. All of these facilities are in the hard chromium category, with

three of the facilities in the small hard chromium category and six in the large hard

chromium category. For these categories, because the average sales receipts used for

the analysis likely understate sales for a number of facilities and because these facilities

are likely to be able to pass cost increases through to their customers, we don’t

anticipate the regulatory amendments to result in firm closures, significant price

increases, or substantial profit loss. We conclude that these amendments will not have a

significant economic impact on a substantial number of small entities.

15 Chrome Plating Alternatives: Thermal Spray, Electroless Plating, and Others

http://www.thintri.com/chrome

‐ plating

‐ report.htm

. 16 Chrome Plating Alternatives: Thermal Spray, Electroless Plating, and Others

http://www.thintri.com/chrome

‐ plating

‐ report.htm

.