SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

# APPENDIX D

Socioeconomic Analysis for Revised Proposed Amendments to Rule 4682 (Polystyrene Foam, Polyethylene, and Polypropylene Manufacturing)

September 20, 2007SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 D- 2 

## FINAL DRAFT SOCIOECONOMIC ANALYSIS
PROPOSED AMENDMENTS TO RULE 4682:
POLYSTYRENE

20 September 2007

Prepared for
San Joaquin Valley Unified Air Pollution Control District 1990 E. Gettysburg AvenueSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 D- 3 Fresno, CA 93726

Prepared by
Applied Development Economics 100 Pringle Avenue, Suite 560 • Walnut Creek, California • (925) 934-8712 1029 J Street, Suite 310 • Sacram ento, California • (916) 441-0323 www.adeusa.comSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D- 4 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## CONTENTS

1. Executive Summary ........................................................................ 5

2. Introduction .................................................................................... 6 3. Description of Proposed Amendments to Rule 4682 ............... 8 4. Methodology ................................................................................. 10 5. Socioeconomic Impacts ............................................................... 12

.......... 12 5.1 Economic Trends: San Joaquin Valley 1996-2006

................................................... 14 5.2 compliance cost estimates

............................ 14 5.3 business responses to compliance costs 5.4 Impacts on Affected Industries .......................................... 15 5.5 Impacts on Small Businesses ............................................... 17

......................................... 18 Definition Of A Small BusinessSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

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Applied Development Economics D- 5 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## 1. EXECUTIVE SUMMARY

The San Joaquin Valley Unified Air Pollution Control District (“District”) seeks to adopt pr oposed amendments to Rule
4683 to meet certain United States Environmental Protection Agency (US EPA) mandates and timelines with regards to improved air quality in the region. This section of the report summarizes the findings of the socioeconomic analysis of the proposed amendments to Rule 4682. This report is based on the version of Draft Rule 4682 that was published on July 19,
2007.

Up to 12 facilities are potentially subject to the proposed amendments to Rule 4682. These facilities employ over 1,300 workers and generate annually over $325 million in revenues, off of which is earned $18 million in net profits.

At $5.1 million, the estimated annual compliance cost amounts to 28.1 percent of net profits, which is significantly above the ten-percent threshold of significance employed to evaluate socioeconomic impacts of proposed amendments to existing rules or new rules. If annual compliance costs are translated into direct employment losses, facilities impacted by the proposed amendments could reduce their workforce by 17.1 to 26.6 jobs, or 1.3 pe rcent to 2.0 percent of the total workforce of 1,300 workers. The analysis concludes by indicating that small businesses are disproportionately impacted by the proposed amendments.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D- 6 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## 2. INTRODUCTION

This report describes the soci oeconomic impacts of proposed amendments to Rule 4682 (Polystyrene). Following this introduction, the report summarizes the proposed amendments and describes the methodology for the socioeconomic analysis. In Section 5, the report describes the economic characteristics of sources affected by the proposed amendments to Rule 4682. This section also analyzes the socioeconomic impacts of compliance costs on the affected sources and the regional economy. This report is based on the version of Draft Rule 4682 that was published on July 19,
2007.

The report is prepared pursuant to the provisions of AB2051 (Section 40728.5 of the California Health and Safety Code), which requires an assessment of socioeconomic impacts of proposed air quality rules. The findings in this report can assist District staff in understanding the socioeconomic impacts of the proposed amendments to Rule 4682, and can assist staff in preparing a refined version of the rule. Figure 1 is a map of the eight-county region that comprises the San Joaquin Valley Air Basin. As indicated in the map, Kern County is not completely in the District.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D- 7 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 FIGURE 1 San Joaquin Valley Unified Air Pollution Co ntrol District (SJVUAPCD) Air BasinSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D- 8 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## 3. DESCRIPTION OF PROPOSED AMENDMENTS TO RULE 4682 (POLYSTYRENE)

The San Joaquin Valley Unified Air Pollution Control District (“District”) adopted Rule 4682 on May 21, 1992, and subsequently amended the rule on December 17, 1992, and June 16, 1994. Through Rule 4682, the District seeks to limit VOC and chlorofluorocarbon (CFC) emissions from manufacturing and processing of polystyrene foam, polyethylene, and polypropylene and from the storage of VOC blowing agents. The rule applies to any polystyrene foam, polyethylene, and polypropylene manufacturing and processing operations, but only for selected operations and equipment within the process. Those selected operations are currently defined as controllable VOC emission sources. Through the proposed amendments, the District seeks to expand the rule to include VOC emission reduction or control from all manufacturing processes including product curing areas and general product storage areas, similar to those employed by several of the existing sources.

Following are the major changes proposed for Rule 4682. In establishing proposed VOC emission limits, District staff considered the limits that have been achieved in practice, as well as limits achievable by feasible control technologies. District staff evaluated BACT determinations established by the District, other California air districts, other states, including those that are recommended by control technology manufacturers and stakeholders. These changes are based on
similar rules from other California air districts and BACT
determinations with the District.

 Affected operators would have to comply with one of four rule requirements:

1. Demonstrate that they emit no more than 2.4 lb of VOC for each 100 pounds of total material processed, or

2. Use a non-VOC blowing agent, or

3. Control all manufacturing emissions with an approved system and store the finished product in a controlled warehouse for 24 or 48 hours, orSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D- 9 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 4. Demonstrate that they release no more emissions than would have occurred if complying with option 3.

 Definitions and rule language was added or modified to clarify and strengthen rule compliance.
The District also updated and or added record-keeping, testing and compliance dates for the new requirements.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

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Applied Development Economics D - 10 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## 4. METHODOLOGY

The socioeconomic analysis involves the use of information provided directly by affected so urces and the District, as well as secondary data used to describe the industries affected by the proposed provisions of Draf t Rule 4682. The approach is briefly described below.

Applied Development Economics (ADE) began the analysis by preparing a statistical description of the industry groups of which the affected sources are a part, analyzing data on the number of jobs, sales levels, the typical profit ratios and other economic indicators for each industry.

This report relies heavily on the most current data available from a variety of sources, such as the State of California’s Employment Development Department (EDD) Labor Market Information Division, Minnesota IMPLAN Group, and 2002 Economic Census. For purposes of estimating revenues generated by oil producers in the region, we turned to the State of California Depa rtment of Conservation, whose monthly report called “Monthly Oil and Gas Production and Injection Report” includes data on amount of barrels of oil and per unit sales price. For purposes of estimating profits, ADE relied on a mixture of sources, such as Dun and Bradstreet, United States Internal Revenues Service, and CCH, Incorporated. In addition, we reviewed a select number of corporate annual reports of California-based oil producers.

With the above information, ADE was able to estimate aftertax net profit ratios for sources affected by the draft rule. Since the initial net profit ratio was based on national sources, we adjusted this profit rate to account for higher costs involved in producing petroleum in California relative to producing on-shore oil in other states. ADE calculated ratios of profit per dollar of revenue for affected industries. The
result of the socioeconomic an alysis shows what proportion of profits the compliance costs represent. Based on assumed thresholds of significance, ADE discusses in the report
whether the affected sources ar e likely to reduce jobs as a means of recouping the cost of rule compliance or as a resultSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 11 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 of reducing business operations. To the extent that such job losses appear likely, the indirect multiplier effects of the jobs losses are estimated using a regional IMPLAN input-output
model.

When analyzing the socioeconomic impacts of proposed new rules and amendments, ADE works closely within the parameters of accepted methodologies discussed in a 1995 California Air Resources Board report called “Development of a Methodology to Assess the Economic Impact Required by SB513/AB969” (by Peter Berck, PhD, UC Berkeley Department of Agricultural and Resources Economics, Contract No. 93-314, August, 1995). The author of this report reviewed a methodology to assess the impact that California Environmental Protection Agency proposed regulations would have on the ability of California businesses to compete. The California Air Resources Board (ARB) has incorporated the methodologies described in this report in its own assessment of socioeconomic impacts of rules generated by ARB. One methodology relates to determining a level
above or below which a rule and its associated costs is deemed to have significant impacts. When analyzing the degree to which its rules are significant or insignificant, ARB employs a threshold of significance that ADE follows. Berck reviewed the threshold in his analysis and wrote, “The Air Resources Board’s (ARB) use of a 10 percent change in [Return on Equity] ROE (i.e. a change in ROE from 10 percent to a ROE of 9 percent) as a threshold for a finding of no significant, adverse impact on either competitiveness or jobs seems reasonable or even conservative.”SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

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Applied Development Economics D - 12 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

## 5. SOCIOECONOMIC IMPACTS

This section of the report compares the economic characteristics of affected industries against the compliance costs. The first part sheds light on the economic context under which proposed amendments to Rule 4682 are promulgated. The second part of this section discusses annual compliance costs. Section 5.3 discusses general business responses to compliance costs. Section 5.4 analyzes the socioeconomic impacts of amendments to Rule 4682.



### 5.1 ECONOMIC TRENDS: SAN JOAQUIN
VALLEY REGION 1996-2006

Economic development practitioners and planners have traditionally divided economies into two broad industrial categories—the economic base and local support industries. Economic base industries are the drivers of local and regional
economies in that these industries draw income into a local economy by selling products outside of the local economy, much like the export industries of a national economy. Accrued earnings then circulate throughout the local area in the form of wages and salaries; investments; purchases of fixed assets, goods, and services; and generation of more jobs
and wealth.

The economic base is typically comprised of industries within the manufacturing, minerals-resource extraction, and agricultural sectors. There are also the “local support industries” such as retail or service sectors, the progress of which is a function of the economic base and demographic changes, and more so the latter than the former. As population increases in a given area, demand for services– such as realtors, teachers, and healthcare–increases, as does demand for basic retail items like groceries, gas for commuting, or clothing at the local apparel shops.

Agriculture is the economic base of the San Joaquin Valley region by virtue of the amount of goods this sector produces and exports throughout the nation and globe. Fourteen percent of all workers in the region are employed bySAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 13 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 industries within agriculture, as Table 1 shows. However, in 2000 almost 18 percent of all workers worked in agriculture, and in 2001 15 percent of all workers worked in this sector. In fact, over the five-year period between 2001 and 2006, employment in agriculture incr eased by a slight 0.3 percent per year, or by 1.3 percent over five years.

Between 2001 and 2006, local support industries gained inprominence within the San Joaquin Valley region. Servicerendering industries employed the most workers as a proportion of total employment in the region. As Table 1 shows, excluding wholesale, retail, and transportation, service-rendering industries comprise the largest employment sector in the region, at 738,369 or 56 percent of all jobs. With retail, transportation and wholes ale, services accounting for almost 73 percent of all jobs. In 2001, service-rendering industries represented 55 percent of all jobs, and when including retail, wholesale, and transportation in the mix, 72 percent. Increases in employment in service-rendering industries are consistent with regional population growth. In the region, local support industries of construction, education and health, and financial activities increased annually by 6.7 percent, 2.8 percent, and 2 .3 percent respectively between
2001 and 2006.

TABLE 1 Employment Profile Of The San Joaquin Valley Region 2001 – 2006

MAJOR SECTORS San Joaquin Valley Region Employment 2001 San Joaquin Valley Region

Employment 2006 San Joaquin Valley Region Employment Distribution, 2006 Annual Percent Change Region 2001 to 2006 California Employment Distribution, 2006 Annual Percent Change California 2001 to 2006 A g riculture 181,460 183,876 13. 9% 0.3% 2.4% -0.2% Mining 9,360 9,833 0.7% 1.0% 0.2% 0.3% Construction 63,841 88,184 6.6% 6.7% 6.0% 3.8% Manufacturing 111,722 113,689 8.6% 0.3% 9.6% -3.4% Utilities 4,661 5,453 0. 4% 3.2% 0.4% 0.7% Wholesale 36,514 43,184 3. 3% 3.4% 4.5% 1.4% Retail 129,663 144,300 10.9% 2.2% 10.8% 1.3% Transportation 35,924 40,243 3.0% 2.3% 2.7% -0.9% Information 15,316 15,376 1. 2% 0.1% 3.0% -2.3% Financial Activities 44,014 49,302 3.7% 2.3% 6.0% 2.3% Professional and Business Services 95,708 105,876 8.0% 2. 0% 14.3% 0.1% Education (private) and Health 111,175 127,732 9.6% 2. 8% 10.2% 2.2% Leisure and Hospitality 86,979 99,989 7.5% 2.8% 9.8% 2.2% Other Services 43,065 50,541 3.8% 3.3% 4.5% 3.6% Unclassified 83 31 0.0% -17.9% 0.2% -13.6% Public sector 235,467 249,279 18.8% 1.1% 15.3% 0.5%SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 14 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 Total Em p lo y ment 1,204,952 1,326,888 100.0% 1.9% 100.0% 0.7% Source: Applied Development Economics, based on data from California Employment Development Department LMID


### 5.2 COMPLIANCE COST ESTIMATES

The District issued a summary of costs associated with the rule in a separate report called “Appendix C: Cost Effectiveness for Proposed Amendments to Rule 4682 (Polystyrene Foam, Polyethylene, and Polypropylene Manufacturing)” (August, 2007). In that report, the District placed annual rule amendments costs at $5,124,415.

In analyzing costs, the District used data from information submitted by stakeholders. For this analysis, the District evaluated three different compliance options:

 Modify or add more control to a manufacturing process;

 Vent the air from an exis ting warehouse to a new regenerative/recuperative thermal oxidizer (RTO);

 Build a new warehouse that vents to a new regenerative/recuperative thermal oxidizer.

District staff then estimated how the affected facilities would comply with the proposed rule provisions. The District calculated that for a facility to vent the air from an existing warehouse to a new regenerative/recuperative thermal oxidizer would cost $574,050 per year. Building a new
warehouse that vents to a n ew regenerative/recuperative thermal oxidizer would cost an additional $220,000, or $795,263 per year. In total, these costs amount to an aggregate annual expense of $5,124,415.



### 5.3 BUSINESS RESPONSES TO COMPLIANCE
COSTS

Industries impacted by the proposed amendments to Rule 4682 may respond in a variety of ways when faced with new regulatory costs. These responses may range from simply absorbing the costs and accepting a lower rate of return, to shutting down the affected business operation altogether. Some have voiced concerns about moving facilities to other regions. While affected sources may also seek to renew efforts to increase productivity and reduce costs elsewhere in their operation in order to recoup the regulatory costs and maintain profit levels, many stated that they are as lean asSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 15 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 possible, meaning that there is little room to squeeze even more productivity out of the respective operations. Some also voice difficulty in passing costs on to businesses and consumers, particularly those impacted entities that interact closely with agricultural ind ustries such as grape growers.



### 5.4 IMPACTS ON AFFECTED INDUSTRIES
This section of the report analyzes estimated after tax net profits of affected industries against anticipated costs associated with implementation of the proposed amendments. The estimated annual compliance costs used in this analysis were provided to ADE by District staff and
stakeholders.

In calculating impacts on profits, ADE used net profit data analyzed from corporate annual reports for several publicly traded companies whose Central Valley facilities are subject to the rule amendments. In addition, ADE reviewed net profit ratios based on data issued by the US Internal Revenue Service (IRS) for the larger industry group under which impacted facilities are categorized.

Table 2 below identifies the businesses operating in the San Joaquin Valley region that will be subject to rule amendments to Rule 4682. Four are part of larger, publicly traded corporations.

TABLE 2 Businesses Whose Facilities Are Subject to Proposed Amendments to Rule 4682

Dart Container (Lodi, CA) Epic Plastics (Lodi, CA) Pactiv Corporation (Fresno, CA) TKV Containers (Fresno, CA) Polycell Packaging (Biola, CA) Pregis Innovating Packaging (Visalia, CA) Agri-Cel Inc. (Delano, CA) Pactiv Corporation (Bakersfield, CA) Tempo Plastic Comp any (Visalia, CA) Styrotek Inc. (Delano, CA)
Foam Fabricators Inc. (Modesto, CA) Sealed Air Corp. (Madera, CA) Source: San Joaquin Valley Unified Air Pollution Control DistrictSAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 16 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 Table 3 below includes estimates on revenues and profits generated by facilities impacted by Rule 4682. For the four facilities that are part of larger, public traded corporations, revenue estimates are based on corporate annual reports. In addition, we use corporate annual reports to estimate typical industry after-tax net profits, which on a weighted averaged basis amounts to 5.61 percent. For the remaining facilities, we use 2002 Economic Census to derive a revenue per worker average for SIC 3086, which is multiplied against number of workers at various sites. Overall, the 12 facilities that are subject to Rule 4682 as amended employ over 1,300 workers and generate over $325 million in revenues, off of which is earned an estimated $18.3 million in after-tax net profits.

TABLE 3 Economic Profile of Facilities Subject to Rule 4682

Facilities Employment Revenue Ne t Profit Rate Net Profit

12 1,335 $325,274,561 5.61% $18,253,306 Source: Applied Development Economics, based on San Joaquin Air Pollution Control District, US Economic Census, US Securities and Exchange Commission

Table 4 examines the socioeconomic impacts of proposed amendments to Rule 4682. At $5,124,415, the estimated annual compliance cost amounts to 28.1 percent of net profits of impacted facilities, which is significantly above the ten-percent threshold of significance employed to evaluate socioeconomic impacts of propos ed amendments to existing rules and or new rules. If translated into direct employment impacts, costs in excess of the ten-percent threshold (i.e. $3,299,084) or total annual compliance costs (i.e. $5,124,415) amount to loss of 17.1 to 26.6 jobs, or 1.3 to 2.0 percent of the workforce employed by facilities subject to Rule 4682.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

Appendix D: Socioeconomic Analysis September 20, 2007

Applied Development Economics D - 17 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 TABLE 4 Socioeconomic Impacts Analysis of Proposed Amendments to Rule 4682

Number of Impacted Businesses 12

Revenues $325,274,561

Net Profits $18,253,306 Annual Compliance Cost $5,124,415 Annual Compliance Cost Percent of Net Profits 28.1% Annual Compliance Cost Above 10% Significance Threshold $3,299,084 Direct Employment Impacts 17.1 to 26.6 Indirect Employment Impacts 8.6 to 13.4 Induced Employment Impacts 8.2 to 12.7 Total Employment Impacts 33.9 to 52.7
Source: Applied Development Economics

Impacted facilities will also reduce purchases from local businesses, which, indirectly would force these suppliers to reduce their respective workforce by 8.6 to 13.4 workers. The loss of consumer spending associated with the direct loss of 17.1 to 26.6 jobs and indirect loss of 8.6 to 13.4 jobs would induce the loss of another 8.2 to 12.7 jobs in retail and personal services, as households directly and indirectly affected by cost-cutting measures reduce their own discretionary spending. Altog ether, total job losses stemming from the proposed amendments to Rule 4682 range from 33.9 to 52.7 jobs, or less than one percent of all jobs in the region or all manufacturing jobs in the region.



### 5.5 IMPACT ON SMALL BUSINESSES
In addition to analyzing the employment impacts of the proposed amendments to Rule 4682, state legislation requires that the socioeconomic analysis assess whether small businesses are disproportionately affected by air quality rules. This section begins by briefly summarizing how the state government defines small businesses for the purposes of qualifying certain businesses for various programs. This
section concludes with a discussion as to whether the affected
industries include small businesses and assesses whether those small businesses are dispr oportionately impacted by the
new rules.SAN JOAQUIN VALLEY UNIFIED AIR POLLUTION CONTROL DISTRICT

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Applied Development Economics D - 18 Final Staff Report with Appendices For Revised Proposed Amendments to Rule 4682 

### D EFINITION 

### O F 

### A S MALL 

### B USINESS For purposes of qualifying small businesses for bid preferences on state contracts and other benefits, the State of California defines small businesses in the following manner 1

. To be eligible for small business certification, a business:

 Must be independently owned and operated;

 Cannot be dominant in its field of operation;

 Must have its principal office located in California

 Must have its owners (or officers in the case of a corporation) domiciled in California; and

 Together with its affiliates, be either:

• A business with 100 or fewer employees, and an average gross receipts of $10 million or less over the previous tax years, or

• A manufacturer with 100 or fewer employees

Of the 12 facilities that are potentially subject to proposed amendments to Rule 4682, six employ less than 100 workers, and, of these, three generate less than $10 million in annual sales. In other words, three facilities fit the small business criteria. Based on a review of data from the District, these
facilities will incur costs amount ing to $1.6 million, or 31 percent of the anticipated $5.2 million in annual costs. Thus, the analysis concludes that small businesses are disproportionately impacted by the proposed amendments, as these businesses represent 25 percent of all facilities that are subject to Rule 4682 and employ three percent of all
workers. 2

1 State of California. Department of General Services. “California Sm all Business Certification” (http: www.pd.dgs.ca.gov/sm bus/sbcert.htm)

2 three percent = 49 workers in 3 small business es divided by 1,330 workers in all businesses