United States Office Of Air Quality Environmental Protection P lanning And Standards Agency Research Triangle Park, NC 27711 FINAL REPORT November 2002

Air 

# Economic Impact Analysis of the Plywood

and Composite Wood Products NESHAP
Final ReportSelect List of Acronyms and Abbreviations
BID - Background Inform ation Docum e nt CAA - Clean Air Act CO - Carbon Monoxide C/S- Cost to Sales Ratio EFB - Electrified Filter Beds EO - Executive Order EPA - Environm ental Protection Agency EWP - Engineered Wood Products HAP - Hazardous Air Pollutant HB - Hardboard ICR - Inform ation Collection Request lb - Pound LSL - Lam i nated Strand Lum b er LVL - Lam i nated Veneer Lum b er MACT - Maxim u m Achievable Control Technology MDF - Medium Density Fiber NAAQS - National Am bient Air Quality Standards NAICS - North Am erican Industrial Classification Sy stem NESHAP - National Em ission Standards for Hazardous Air Pollutants NOx- Nitrogen Oxides NPR - Notice of Proposed Rulem a king NSPS - New Source Perform ance Standards NSR - New Source Review OEM- Original Equipm ent Manufacturers OMB - Office of Managem e nt and Budget O&M - Operation and Maintenance OSB- Oriented Strandboard ODT - Oven Dry Tons PB - Particleboard P/E - Partial Equilibrium PM - Particulate Matter PSL - Parallel Strand Lum b er ppbdv - Parts Per Billion, dry volum e ppm - Parts Per Million PRA - Paperwork Reduction Act of 1995 PTE - Perm anent Total Enclosure RCO- Regenerative Cataly tic Oxidizer RTO - Regenerative Therm a l Oxidizer RIA - Regulatory Im pact Analy s is RFA - Regulatory Flexibility Act R/S - Return to Sales Ratio SAB - Science Advisory Board SBA - Sm all Business Adm i nistration


### viSBREFA - Sm all Business Regulatory Enforcem ent Fairness Act of 1996 SIC - Standard Industrial Classification SOA - Secondary Organic Aerosols SO 2 - Sulfur Dioxide SPV - Softwood Ply w ood Veneer TAC - Total Annualized Cost THC - Total Hy drocarbon tpd - Tons Per Day tpy - Tons Per Year UMRA - Unfunded Mandates Reform Act VOS - Value of Shipm e nts VOCs - Volatile Organic Com pounds WESP - Wet Electrostatic Precipitator



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### viii

## T ABLE OF 

## C ONTENTS

E x e c u t i v e S u mm ary ........................................................ E S

- 1
1 I ntroduction

................................................................. 1

- 1 1

. 1 S c o p e an d P u r p o s e o f th e R e p o rt

........................................... 1

- 1 1

. 2 N e e d f o r R e g u l a t o ry A c t i o n
............................................... 1

- 1 1.3 R equirem e nts for the Econom ic Im pact Analy s is

............................... 1

- 2 1

. 4 O th e r F e d e r a l P r o g r a m s
.................................................. 1

- 5 1.5 O rganization of the Econom ic Im pact Analy s is

................................ 1

- 5 1

. 6 R e f e r e n c e s
............................................................. 1

- 6
2 P rofile of the Ply w ood and Com posite Wood Industries

.............................. 2

- 1 2.1 Introduction

............................................................ 2

- 1 2.2 The Supply Side

........................................................ 2

- 3 2

. 3 T h e D e m an d S i d e
...................................................... 2

- 2 0 2.4 Industry Organization

................................................... 2

- 2 9 2

. 5 M ark e t

............................................................... 2

- 4 2 2

. 6 R e f e r e n c e s
............................................................ 2

- 6 0
3 R egulatory Alternatives, Em issions, Em issi on Reductions, and Control and Adm i nistrative Costs 3

. 1 R e g u l a t o ry A l t e rn a t i v e s
.................................................. 3

- 1 3

. 2 E m i s s i o n s an d E m i s s i o n R e du c t i o n s
........................................ 3

- 1 5 3

. 3 C o n tr o l E qu i p m e n t a n d C o s t s
............................................. 3

- 2 6 3

. 4 T e s t i n g , M o n i t o r i n g , R e p o rt i n g , an d R e c o r d k e e p i n g C o s t s
...................... 3

- 3 7 3

. 5 R e f e r e n c e s
............................................................ 3

- 4 0
4 E conom ic Im pact Analy s is

..................................................... 4

- 1 4

. 1 R e s u l t s i n B r i e f

......................................................... 4

- 1 4.2 I ntroduction

............................................................ 4

- 1 4.3 E conom ic Im pact Analy s is Inputs

........................................... 4

- 2 4.4 E conom ic Im pact Analy s is Methodology

..................................... 4

- 4 4.5 E conom ic Im pact Analy s is Results

.......................................... 4

- 6 4.6 A naly sis of Econom ic Im pacts on Engineered Wood Products Sector

.............. 4

- 1 5 4

. 7 R e f e r e n c e s
............................................................ 4

- 2 2
5 S m a ll Business Im pacts

....................................................... 5

- 1 5

. 1 R e s u l t s i n B r i e f

......................................................... 5

- 1 5.2 I ntroduction

............................................................ 5

- 1 5

. 3 S c r e e n i n g A n a l y s i s D a t a S o u r c e s
........................................... 5

- 2 5.4 S creening Analy s is Methodology

........................................... 5

- 2 5

. 5 S c r e e n i n g A n a l y s i s A s s u m p t i o n s
........................................... 5

- 3 5

. 6 S c r e e n i n g A n a l y s i s R e s u l t s
................................................ 5

- 3 5

. 7 S c r e e n i n g A n a l y s i s C o n c l u s i o n s
........................................... 5

- 1 0 5.8 E IA Results for Sm all Businesses

........................................... 5

- 1 5

. 9 R e f e r e n c e s
............................................................ 5

- 1 2A p p e n d i x A S i z e D e t e rm i n a t i o n f o r I n d i v i du a l F i rm s..................................... A

- 1 Appendix B E IA Methodology

...................................................... B

- 1 B.1 I ntroduction

........................................................... B

- 1 B.2 B ackground

........................................................... B

- 1 B.3 M arket Segm ents and Dem a nd Com pounds

.................................. B

- 3 B.4 D ata Inputs

........................................................... B

- 4 B

. 5 A s s u m p t i o n s
.......................................................... B

- 4 B

. 6 A n a l y t i c a l A p p r o a c h

.................................................... B

- 5 B

. 7 N o t a t i o n
.............................................................. B

- 5 B.8 T he Supply Side of the Market

........................................... B

- 6 B

. 9 T h e D e m an d S i d e o f th e M a rk e t

......................................... B

- 1 1 B.10 Market Equilibrium

.................................................... B

- 1 8 B.11 Facility Closures

...................................................... B

- 1 9 B

. 1 2 S o c i a l C o s t o f th e R e g u l a t i o n
............................................ B

- 2 0 B

. 1 3 C o m p u t a t i o n a l T o o l s
................................................... B

- 2 6 B.14 Sensitivity Analy ses
................................................... B

- 2 6 B

. 1 5 E I A R e s u l t s
.......................................................... B

- 2 7 B

. 1 6 R e f e r e n c e s
........................................................... B

- 2 8



## L IST OF 

## E XHIBITS
Exhibit 2-1: SIC & NAICS Codes for the Ply w ood and Wood Com posites Industries

............. 2

- 2 Exhibit 2-2: Other Prim ary SIC Codes fo r the Ply w ood and Wood Com posite Industries

........... 2

- 3 Exhibit 2-3: SIC and NAICS Codes and Products

........................................ 2

- 1 2 Exhibit 2-4: Specialization and Coverage Ratios, 1982 - 1997

.............................. 2

- 1 3 Exhibit 2-5: Summ ary of Annual Costs and Shipm e nts, 1992 -1997

.......................... 2

- 1 4 Exhibit 2-6: Materials Consum ed By Kind for Softwood Ply w ood and Veneer, 1997

............ 2

- 1 7 Exhibit 2-7: Materials Consum ed by Kind for Reconstituted Wood Products, 1997

.............. 2

- 1 8 Exhibit 2-8: Industry Outputs, by SIC Code

............................................. 2

- 2 1 Exhibit 2-9: MDF Shipm e nts by Downstream Market, 1997

................................ 2

- 2 3 Exhibit 2-10: Particleboard Shipm e nts by Downstream Market, 1997

......................... 2

- 2 4 Exhibit 2-11: Housing Market Indicators, 1988 - 1997

..................................... 2

- 2 5 Exhibit 2-12: Trade for Household Furniture (SIC 251), 1989 - 1996

......................... 2

- 2 5 Exhibit 2-13: Use of Wood and Non-wood Products in Residential Construction 1976 - 1995

................................................................ 2

- 2 7 Exhibit 2-14: Dem and Elasticities

..................................................... 2

- 2 9 Exhibit 2-15: Concentration Ratios by SIC Code, 1982-1992

................................ 2

- 3 0 Exhibit 2-16: Facilities with Com p liance Costs

........................................... 2

- 3 1 Exhibit 2-17: Full Production Capacity Utili zation Rates, Fourth Quarters, 1992 - 1997

........... 2

- 3 3 Exhibit 2-18a: 1998 Em ploy m e nt at Facilities with Com p liance Costs

........................ 2

- 3 4 Exhibit 2-18b: 1998 Em ploy m e nt at Facilities with Com p liance Costs

........................ 2

- 3 4 Exhibit 2-19: Num b er of Mills, Average Capacity and Utilization, 1977 - 1997

................. 2

- 3 6 Exhibit 2-20: Summ a ry of Capital Expenditures, 1992 - 1997

............................... 2

- 3 7 Exhibit 2-21: Size Distribution of Firm s Owning Affected Facilities

.......................... 2

- 3 8 Exhibit 2-22: Ty pes of Firm Ownership for Lum b er and Wood Products (SIC 24), 1992

.......... 2

- 3 9 Exhibit 2-23: Indicators of Financial Condition, 1995-1997

................................ 2

- 4 1 E x h i b i t 2

- 2 4 : T r a d e B a l an c e an d S e l e c t e d S t a t i s t i c s
....................................... 2

- 4 4 Exhibit 2-25: Production, Trade and Consum p tion Volum es for Selected Products (1988-1997)

.... 2

- 4 5 Exhibit 2-26: 1997 U.S. Wood Products Im ports by Region and Major Trading Partner

........... 2

- 4 8Exhibit 2-27: 1997 U.S. Wood Product Exports by Region and Major Trading Partner

........... 2

- 5 0 Exhibit 2-28: Lum b er and Wood Pr oducts Producer Price Index, 1988-1997

................... 2

- 5 1 Exhibit 2-29: Producer Price Indices of Ply w ood and Wood Com posite Products

................ 2

- 5 2 Exhibit 2-30: F.O.B. Prices of Southern ply w ood, OSB, and Particleboard

..................... 2

- 5 3 Exhibit 2-31: APA Forecasted Structural Panel Production and Dem a nd

....................... 2

- 5 6 Exhibit 2-32: APA Actual and Forecasted Structural Panel Capacity and Production

............. 2

- 5 7 E x h i b i t 3

- 1 : I l l u s tr a t i o n o f T o t a l H A P C a l c u l a t i o n f o r an E m i s s i o n S o u r c e
...................... 3

- 5 Exhibit 3-2: Summ ary of MACT for PCWP Process Units at New and Existing Sources

........... 3

- 7 Exhibit 3-3: Cost-Effectiveness Analy s is Of Bey ond-The-Floor Control Options

................. 3

- 9 E x h i b i t 3

- 4 : I l l u s tr a t i o n O f T o t a l H A P C a l c u l a t i o n F o r A n E m i s s i o n S o u r c e
................... 3

- 1 7 E x h i b i t 3

- 5 : U n c o n tr o l l e d an d B a s e l i n e H A P E m i s s i o n s E s t i m a t e s
........................... 3

- 2 1 Exhibit 3-6: Speciated Nationwide Uncontrolled HAP Em issions by Product

................... 3

- 2 2 Exhibit 3-7: Speciated Nationwide Baseline HAP Em issions by Product

....................... 3

- 2 3 Exhibit 3-8: Estim ated Num b er of Major Sources By Product

............................... 3

- 2 4 E x h i b i t 3

- 9 : E s t i m a t e d N a t i o n w i d e R e du c t i o n i n T o t a l H A P an d T H C

........................ 3

- 2 5 Exhibit 3-10: Press Enclosure Exhaust Flow Rates and Capital Costs

......................... 3

- 3 3 Exhibit 3-11: Control Equipm ent Costed for Process Units with Controlled MACT Floor

......... 3

- 3 4 E x h i b i t 3

- 1 2 : D e f au l t F l o w R a t e s
..................................................... 3

- 3 6 Exhibit 3-13: Estim ated Nationwide Control Costs for the PCWP Industry

..................... 3

- 3 8 Exhibit 3-14: Dollars (In Total Annualized Costs) Per Ton Of HAP And THC Reduced

.......... 3

- 3 9 Exhibit 4-1: Baseline Characterization of Ply w ood and Com posite Wood Markets: 1997

.......... 4

- 3 E x h i b i t 4

- 2

. M a rk e t

- L e v e l I m p a c t s o f th e P r o p o s e d N E S H A P

............................... 4

- 7 Exhibit 4-3. Industry

- Level Im pacts of the Proposed NESHAP

.............................. 4

- 1 0 Exhibit 4-4: Distribution of Industry

- Level Im pacts of Proposed NESHAP: A f f e c t e d a n d U n a f f e c t e d P r o du c e r s
............................................. 4

- 1 2 E x h i b i t 4

- 5 : D i s tr i b u t i o n o f S o c i a l C o s t s A s s o c i a t e d w i th th e P r o p o s e d N E S H A P

............... 4

- 1 3 Exhibit 4-6: Prim ary Uses and Substitutes for LSL

....................................... 4

- 1 6 Exhibit 4-7: Characteristics of LSL Plants

............................................... 4

- 1 7 Exhibit 4-8: Prim ary Uses and Substitutes for PSL

........................................ 4

- 1 7 Exhibit 4-9: Characteristics of PSL Plants

............................................... 4

- 1 8 Exhibit 4-10: Retail Prices of GL and PSL Beam s Delivered to Los Angeles

................... 4

- 1 8 Exhibit 5-1: Net Profit Margins by Product Ty pe
.......................................... 5

- 3 E x h i b i t 5

- 2 : A f f e c t e d F i rm s b y S i z e
.................................................... 5

- 4 Exhibit 5-3: Affected Firm s by Process Ty pe
............................................. 5

- 5 E x h i b i t 5

- 4 : A f f e c t e d F i rm s w i th C / S R a t i o s o f 3 P e r c e n t o r G r e a t e r
........................... 5

- 6 E x h i b i t 5

- 5 : A f f e c t e d F i rm s w i th C / S R a t i o s o f 1 P e r c e n t o r G r e a t e r
.......................... 5

- 7 E x h i b i t 5

- 6 : C / S t o R / S C o m p a r i s o n f o r F i rm s w i th C / S o f O n e P e r c e n t o r G r e a t e r
................ 5

- 8 Exhibit 5-7: Econom ic Im pacts on Sm all Businesses Associated with P r o j e c t e d M ark e t A d j u s t m e n t s
................................................. 5

- 1 1



## L IST OF 

## F IGURES Figure 2-1: Ply w ood and Veneer Production

.............................................. 2

- 6 Figure 2-2: Softwood Ply w ood and Veneer Va lue of Shipm e nts and Production Costs, 1992 - 1997

................................................................ 2

- 1 5 Figure 2-3: Reconstituted Wood Products Va lue of Shipm e nts and Production Costs, 1992 - 1997

................................................................ 2

- 1 6 Figure 2-4: Materials Consum ed by Softwood Ply w ood and Veneer Products, 1997

.............. 2

- 1 7 Figure 2-5: Materials Consum ed by Reconstituted Wood Product Producers, 1997

............... 2

- 1 9 Figure 2-6 Industry Outputs of So ftwood Ply w ood and Veneer Industry

....................... 2

- 2 2Figure 2-7: Industry Outputs of Reconstituted Wood Products Industry

....................... 2

- 2 3 Figure 2-8: Ply w ood and Wood Com posite Facility Locations

............................... 2

- 3 2 Figure 2-9: Full Production Capacity Utilization, Fourth Quarters, 1992-1997

.................. 2

- 3 3 Figure 2-10: Value of Product Shipm e nts, 1989-1995

..................................... 2

- 4 6 Figure 2-11: Apparent Consum ption, 1989-1995

......................................... 2

- 4 7 Figure 2-12: APA Projected Housing Starts (000)

...................................... 2

- 5 5 Figure 3-1: Variation in RTO Purchased Equipm ent Cost with Flow Rate

...................... 3

- 2 7 F i g u r e 3

- 2 : R e l a t i o n s h i p b e tw e e n R T O E l e c tr i c i ty C o n s u m p t i o n a n d F l o w R a t e
................ 3

- 2 8 F i g u r e 3

- 3 : R e l a t i o n s h i p b e tw e e n R T O N a tu r a l G a s C o n s u m p t i o n an d F l o w R a t e
............... 3

- 2 8 F i g u r e 3

- 4 : V a r i a t i o n i n R T O T o t a l C a p i t a l I n v e s t m e n t w i th F l o w ........................... 3

- 3 0 Figure 3-5: Variation in RTO Total Annualized Cost with Flow

............................. 3

- 3 0 Figure 4-1: Supply Curves for Affected Facilities

......................................... 4

- 5 Figure 4-2: Market Equilibrium Without and With Regulation

............................... 4

- 6

## EXECUTIVE SUMMARY EPA is proposing a rule to reduce hazardous air pollutant (HAPs) em issions from existing and new ply w ood and com posite wood products facilities that are m a jor sources. This rule, scheduled for proposal during 2002, is a National Em ission Standards for Hazardous Air Pollutants (NESHAP), and will reduce HAP em issions by requiring affected pl y w ood and com posite wood products facilities to m eet a level of em issions reductions needed to m eet the Maxim u m Achievable Control Technology (MACT) floor for these sources. This MACT floor level of control is the m i nim u m level these sources m u st m eet to com p ly with the proposed rule. The m a jor HAPs whose em issions will be reduced are form aldehy de, acetaldehy de, acrolein, m e thanol, phenol, and propiona ldehy d e. The proposed rule will also lead to em ission reductions of other pollutants such as vol atile organic com pounds (VOC), particulate m a tter (PM 10 ), carbon m onoxide (CO), and em ission increases in nitrogen oxides (NOx) due to the application of incineration-based controls. Increased electricity use due to application of controls will also lead to general increases in the levels of sulfur dioxide (SO 2 ) and NOx em itted from electric utilities. This proposed rule allows an affected s ource to use a production-based com p liance option, defined in units of m ass of pollutant per unit of production, or any of six control sy stem com p liance options if an affected source is equipped with an add-on control sy stem

. As explained in the Federal Register proposal notice, the options entail HAP reduc tions of 90 percent or lim iting the concentration of HAPs in the exhaust from the control sy stem

. In a ddition, an affected source m a y choose to com p ly with an em issions averaging option that allows the s ources to not control or under-control som e process units while controlling other affected process units. The proposed rule is expected to reduce HAP em i ssions by 11,000 tons per y ear in the third y ear after its issuance. The rule is also expected to reduce VOC em issions, m easured as total hy drocarbon, by 27,000 tons per y ear, PM 10 em issions by 13,000 tons per y ear, and CO em issions by 11,000 tons per y ear in the third y ear. The rule is expected to increase NOx em issions at affected sources by 2,000 tons per y ear in the third y ear. The increased electric ity required to operate the control sy stem s is also expected to increase NOx and SO 2 em issions at electricity generating utilities by 2,000 and 4,000 tons, respectively

. The com p liance costs, which include the costs of control and m onitoring, recordkeeping and reporting requirem e nts, are estim ated at $142 m illion (1999 dollars). As shown in this econom ic im pact analy s is, the total social costs, which account for the behavioral response of consum ers and producers to hi gher pollution control costs, are estim ated at $134.2 m illion (1999 dollars). The other im pacts associated with these costs include price increases nationally of 0.9 to 2.5 percent for products affected by this rule , and a reduction in output of only 0.1 to 0.7 percent nationally for the affected industries. An analy s is of sm all business im pacts shows that there are 17 sm all firm s affected, with 10 of them having annual com p liance costs of 1 percent or greater than their sales, and 3 of these having annual com p liance costs of 3 per cent or greater than their sales. The Agency has certified that there is no significant im pact on a substantial num ber of sm all entities (SISNOSE) associated with this proposed rule. Also, an analy s is of the energy im pacts associated with this proposed rule indicates that there is no significant adverse effect on supply , distribution, or use of energy from im plem entation of the proposal.

ES-1

## 1 I NTRODUCTION Under the authority of Section 112(d) of the Clean Air Act as am ended in 1990, the U.S. Environm ental Protection Agency (EPA or the Agen cy ) is proposing a regulation requiring facilities that m anufacture ply w ood and com posite wood products to re duce their em issions of hazardous air pollutants (HAPs). This regulation, a National Em ission St andard for Hazardous Air Pollutants (NESHAP), will apply to m a jor sources of HAPs in this industry

. This econom ic im pact analy s is (EIA) presents the supporting docum entation and analy ses developed by the Agency that describe and quantify the expected im pacts of the proposed Ply w ood and Com posite Wood Products NESHAP. 1.1 S cope and Purpose of the Report The proposed NESHAP will require the m a nufacturers of ply w ood and com posite wood products to install additional pollution controls to reduce thei r em issions of HAPs to the air. The purpose of this EIA is to present the results of the Agency ’ s evaluation of the cost, econom ic im pacts, and benefits from com p liance with the requirem e nts of the proposed NESHAP. The proposed NESHAP will apply to all new and existing m a jor sources of HAPs that m anufacture ply w ood and com posite wood products. These sources em it HAPs associated with heating of wood and related to their use of resins, adhesiv es, and additives in the pressing and dry i ng stages of the production process. The EPA estim ates that there are 447 facilities that produce ply w ood and com posite wood products. Of these, the EPA determ ined that 223 facilities are m a jor sources of HAPs. 1.2 N eed for RegulatoryAction The purpose of this NESHAP is to protect public health by reducing em issions of HAP from ply w ood and com posite wood products facilities. The au thority for doing this lies in Section 112 of the Clean Air Act (CAA), which requires EPA to list cate gories and subcategories of m a jor and area sources of HAP and to establish NESHAP for the listed sour ce categories and subcategories. The ply w ood and com posite wood products source category was origina lly listed as the ply w ood and particleboard source category on July 16, 1992 (57 FR 31576). The nam e of the source category was changed to ply w ood and com posite wood products on Novem b er 18, 1999 (64 FR 63025) to m o re accurately reflect the ty pes of m a nufacturing facilities covered by the source categor y . A m a jor source of HAP is defined as any stationary source source or group of stationary sources within a continuous area and under comm o n control that em its or has the potential to em it, cons idering controls, in the aggregate, 9.1 Megagram s (Mg)/y ear (10 tons/y r) or m o re of any single HAP or 22.7 Mg/y ear or m o re (25 tons/y r) of m u ltiple HAP. Section 112 of the CAA requires EPA to establish NESHAP for the control of HAP from both existing and new sources. The CAA requires the NESHAP to reflect the m a xim u m degree of reduction in em issions of HAP that is achievable. This leve l of control is comm only referred to as the m a xim u m achievable control technology (MACT). The MACT floor is the m i nim u m level of control allowed for NESHAP and is defined under section 112 (d) (3) of the CAA. In essence, the MACT floor ensures that the standard is set at a level that assures all m a jor sources achieve the control level that is at least as stringent as that already achieved by the better-controlled and lower-em itting sources in eachsource category or subcategory

. For new sources, the MACT floor cannot be less stringent than the em ission control that is achieved in practice by the best-controlled sim ilar source. The MACT sta ndards for existing sources can be less stringent than standards for new sources, but they cannot be less st ringent than the average em ission lim itation achieved by the best-perform ing 12 percent of existing sour ces in the category or subcategory (or, the bestperform ing 5 sources for categories or subcategories with fewer than 30 sources.)

1-1In the course of rule developm ent, we m a y also consider control options that are m o re stringent than the floor. EPA m ay establish standards m o re stringent than the floor based on the consideration of cost of achieving the em issions reductions, any non-ai r quality health and environm ental im pacts, and energy requirem e nts. 1.3 R equirements for this Economic Impact Analy s is This section describes various legislative and ex ecutive requirem e nts that govern the analy tical requirem e nts for Federal rulem a kings, and describes howeach analy tical requirem e nt is addressed in this RIA.
1.3.1 E xecutive Order 12866 Under Executive Order 12866 (58 FR 51735, Octobe r 4, 1993) as am ended by Executive Order 13258 (67 FR 9385, February 28, 2002), the EPA m u stdeterm ine whether the regulatory action is “significant” and therefore subject to review by the Office of Managem e nt and Budget (OMB) and the requirem e nts of the Executive Order. The Executiv e Order defines “significant regulatory action” as one that is likely to result in a rule that m ay : 1) Have an annual effect on the economy of $100 m illion or m o re or adversely affect in a m a terial way the economy , a sector of the economy , productivity , com p etition, jobs, the environm ent, public health or safety , or state, local, or tribal governm e nts or comm unities; 2) Create a serious inconsistency or otherwise inte rfere with an action take n or planned by another agency ; 3) Materially alter the budgetary im pact of entitlem e nts, grants, user fees, or loan program s, or the rights and obligation of recipients thereof; 4) Raise novel legal or policy issues arising out of legal m a ndates, the President’s priorities, or the principles set forth in the Executive Order. Pursuant to the term s of Executive Order 12866 as am ended by Executive Order 13258, it has been determ ined that this rule is a “significant regulat ory action” because the annual costs of com p ly ing with the rule are expected to exceed $100 m illion. C onsequently , this action was subm itted to OMB for review under Executive Order 12866 as am ended by Executive Order 13258.
1.3.2 R egulatory Flexibility Act and Small Busi ness Regulatory Enforcement Fairness Act of 1996 The Regulatory Flexibility Act (RFA) of 1980 (PL 96-354) generally requires that agencies conduct a screening analy s is to determ ine whethe r a regulation adopted through notice-and-comm e nt rulem a king will have a significant im pact on a subs tantial num ber of sm all entities (SISNOSE), including sm all businesses, governm e nts, and organizations. If a regulation will have such an im pact, agencies m

u st prepare an Initial Regulatory Flexibility Analy s is, and com p ly with a num ber of procedural requirem e nts to solicit and consider flexible regulat ory options that m i nim i ze adverse econom ic im pacts on sm all entities. Agencies m u st then prepare a Fi nal Regulatory Flexibility Analy s is that provides an analy s is of the effect on sm all entities from consider ation of flexible regulatory options. The RFA’s analy tical and procedural requirem e nts were strengt hened by the Sm all Business Regulatory Enforcem ent Fairness Act (SBREFA) of 1996 to include the form ation of a panel if a proposed rule was determ ined to have a SISNOSE. This panel would be m a de up of representatives of the EPA, the Sm all Business Adm i nistration (SBA), and OMB.

1-2For reasons explained m o re fully in Chapter 5 of this econom ic im pact analy s is for the proposed rule, EPA has determ ined that there is no SISNOSE for this rule. While there are som e im pacts to som e sm all firm s, these im pacts are not sufficient for a SI SNOSE. Therefore, the EPA has not prepared an Initial Regulatory Flexibility Analy s is for this proposed rule. The RFA and SBREFA require the use of definitions of “sm all entities,” including sm all businesses, governm e nts, and organizations such as non-profits, published by the SBA. 1 Screening analy ses of econom ic im pacts presented in Chapter 5 of this report exam ine potential im pacts on sm all entities.
1.3.3 U nfunded Mandates Reform Act of 1995 The Unfunded Mandates Reform Act (UMRA) of 1995 (PL-4) was enacted to focus attention on federal m a ndates that require other governm e nts and private parties to expend resources without federal funding, to ensure that Congress considers those co sts before im posing m a ndates, and to encourage federal financial assistance for intergovernm e ntal m andates. The Act establishes a num ber of procedural requirem e nts. The Congressional Budget Office is required to inform Congressional comm ittees about the presence of federal m andates in legislation, and m u st estim ate the total direct costs of m a ndates in a bill in any of the first five y ears of a m andate , if the total exceeds $50 m illion for intergovernm e ntal m a ndates and $100 m illion for private-sector m a ndates. Section 202 of UMRA directs agencies to provide a qualitative and quantitative assessm ent (or a “written statem ent”) of the anticipated costs and bene fits of a Federal m a ndate that results in annual expenditures of $100 m illion or m o re. The assessm ent s hould include costs and benefits to State, local, and tribal governm e nts and the private sector, and identify any disproportionate budgetary im pacts. Section 205 of the Act requires agencies to identify and consider alternatives, including the least costly , m o st cost-effective, or least burdensom e alternative that achieves the objectives of the rule. Since this proposed rule m ay cause a m a ndate to the private sector of m o re than $100 m illion, EPA did provide an analy s is of the im pacts of this rule on State and local governm e nts to support com p liance with Section 202 of UMRA. A summ a ry of th is analy s is is in Chapter 4 of this EIA. In short, no governm e nt entity is affected by this proposed rule - only businesses.
1.3.4 P aperwork Reduction Act of 1995 The Paperwork Reduction Act of 1995 (PRA) requir es Federal agencies to be responsible and publicly accountable for reducing the burden of Fede ral paperwork on the public. EPA has subm itted an OMB-83I form , along with a supporting statem ent, to the OMB in com p liance with the PRA. The OMB83I and the supporting statem ent explains the need fo r additional inform ation collection requirem e nts and provides respondent burden estim ates for additiona l paperwork requirem e nts to State and local governm e nts associated with this proposed rule.
1.3.5 E xecutive Order 12898 Executive Order 12898, “Federal Actions to Address Environm ental Justice in Minority Populations and Low-Incom e Populations,” requires Fe deral agencies to consider the im pact of program s, policies, and activities on m i nority populations and lo w-incom e populations. Disproportionate adverse im pacts on these populations should be avoided to th e extent possible. According to EPA guidance,

1 W h ere appropriate, agencies can propose and justify alternative definitions of “sm a ll entity.” This RIA and the screening analysis for sm all entities rely on the SBA definitions. 1-3agencies are to assess whether m i nority or low-incom e popul ations face risk or exposure to hazards that is significant (as defined by the National Environm enta l Policy Act) and that “appreciably exceeds or is likely to appreciably exceed the risk or rate to the general population or other appropriate com p arison group.” (EPA, 1996). This guidance outlines EPA’ s Environm ental Justice Strategy and discusses environm ental justice issues, concerns, and goals id entified by EPA and environm ental justice advocates in relation to regulatory actions. The proposed ply w ood and com posite wood pr oducts rule is expected to provide health and welfare benefits to popula tions around the United States, regardless of race or incom e
. 1.3.6 E xecutive Order 13045 Executive Order 13045, “Protection of Children from Environm ental Health Risks and Safety Risks,” directs Federal agencies developing health and safety standards to include an evaluation of the health and safety effects of the regulations on children. Regulatory actions covered under the Executive Order include rulem a kings that are econom ically significant under Executive Order 12866 as am ended by Executive Order 13258, and that concern an environm ental health risk or safety risk that the agency has reason to believe m ay disproportionately affect children. EPA has developed internal guidelines for im plem enting E.O. 13045 (EPA, 1998). The proposed ply w ood and com posite wood products rule is a “significant econom ic action,” because the annual costs are expect ed to exceed $100 m illion. Exposure to the HAPs whose em issions will be reduced by this rule are known to affect the health of children and other sensitive populations. However, this proposed rule is not expected to have a disproportionate im pact on children.
1.3.7 Executive Order 13211 Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply , Distribution, or Use,” was published in the Federal Register on May 22, 2001 (66 FR 28355). This executive order requires Federal Agencies to wei gh and consider the effect of regulations on supply , distribution, and use of energy

. To com p ly with this executive order, Federal Agencies are to prepare and subm it a “Statem e nt of Energy Effects” for “signi ficant energy actions.” The executive order defines “significant energy action” as the following: 1) an action that is a significant regulatory action under Executive Order 12866 or any successor order, and 2) is likely to have a significant adverse effect on the supply , distribution, or use of energy ; or 3) that is designated by the Adm i nistrator of th e Office of Inform ation and Regulatory Affairs as a significant energy action. An analy s is of the effects of this proposed rule on supply , distribution, and use of energy is summ a rized in Chapter 4. 1.4 O ther Federal Programs The only other federal program that m a y have an effect on these sources is the wood building products surface coating NESHAP, a rulem a king scheduled to be proposed later in 2002. However, the overlap of coverage of these rules is expected to be m i nim a l. The wood furniture m a nufacturing operations NESHAP, a rule signed in Decem ber 1995, m ay apply to som e facilities that will be affected

1-4by the proposed ply w ood and com posite wood products rule, but there are no overlapping requirem e nts for individual process units. 1.5 O rganization of the Economic Impact Analy s is This report includes eight chapters that present a description of the industry , the costs associated with the regulatory control options associated w ith the proposed NESHAP, results of the econom ic im pact analy s is, a summ ary of im pacts on sm all bus inesses, a listing of the qualitative benefits associated with both the HAP and non-HAP em ission reductions, and results of the m onetized benefits analy s is.

• C hapter 2 profiles the ply w ood and com posite wood products industries.

• C hapter 3 summ arizes the approach to estim ati ng the costs of the proposed NESHAP, presents the results of the cost analy s is, and provide th e em issions reductions for the proposed alternative.

• C hapter 4 summ arizes the approach to perform i ng the econom ic im pact analy s is of the proposed NESHAP and presents the results of the analy s is. An analy s is of im pacts on energy distribution, supply , or use is also in this chapter.

• C hapter 5 includes the results of the analy ses of the proposed NESHAP’ s im pact on sm all businesses. Throughout this report, a distinction is m a de between “affected” and “unaffected” facilities and firm s. Affected facilities are those that w ill incur com p liance costs (control and m onitoring, recordkeeping, and reporting ) to com p ly with the proposed rule. In general, unaffected facilities and firm s have no com p liance costs. However, of th e group of unaffected facilities, 51 of these will incur costs associated with m onitoring, reporting, and reco rd keeping (MRR). MRR costs are estim ated to be $25,194 per y ear. The distinction between affected and unaffected facilities and firm s will be noted throughout the docum ent. 1.6 R eferences Federal Register, 1993. Executive Order 12866, Regulatory Planning and Review. Vol. 58, October 4, 1993, pg. 51735. U.S. Environm ental Protection Agency , 1996. Guidance for Providing Environmental Justice Concerns in EPA’s NEPA Compliance Analyses (Review Draft). Office of Federal Activities, Washington, D.C., July 12, 1996. U.S. Environm ental Protection Agency , 1996. Me m o randum from Trovato and Kelly to Assistant Adm i nistrators. Subject: “Im p lem e ntation of Executive Order 13045, Protection of Children from Environm ental Health and Safety Risks.” April 21, 1998. Federal Register, 2001. Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. Vol. 66, May 22, 2001, pg. 28355. Federal Register, 2002. Executive Order 13258, Amending Executive Order 12866 - Regulatory Planning and Review. Vol.67 , February 28, 2002, pg. 9385.

1-5

## 2 P ROFILE OF THE PLYWOOD AND COMPOSITE WOOD PRODUCTS INDUSTRIES
2.1 Introduction Through a 1998 inform ation collection request (ICR), the EPA identified plants potentially im pacted by the proposed NESHAP. This profile presen ts inform ation on several industries that com p rise the ply w ood and com posite wood source category becau se they will be im pacted by the regulation in som e way
. These industries fall into three categori es based on their Standard Industrial Classification (SIC) or North Am erican Industry Classification Sy stem (NAICS) classifications.

• S oftwood ply w ood and veneer • R econstituted wood products • S tructural wood m e m b ers The industries are represented by the three SIC codes and four NAICS codes presented in Exhibit 2-1. The NAICS codes replaced SIC codes in federal statistical data beginning in 1997. The SIC code for Structural Wood Mem b ers, Not Elsewhere Cl assified (n.e.c.) was divided into two NAICS codes for Engineered Wood Mem b ers and Truss Manufacturing. The ICR survey ed 416 potentially im pacted facilities (EPA, 1998) , and an additional 15 facilities we re identified that either did not respond to the survey or have comm e nced operation since the date of the survey

. The Agency determ ined that of these 431 facilities, 223 were im pacted facilities, owned by 52 firm s. EPA expects this rule to prim arily im pact certain facilities engaged in the m a nufacturing of softwood ply w ood, reconstituted wood products, and structural wood m e m b ers. Exhibit 2-1 shows, for each of the three industry categories, the num ber of facilities EPA expects will experience com p liance costs as a result of this MACT standard and the to tal num ber of facilities. The total estim ated capital costs associated with the new MACT standard ar e $479 m illion. The annualized costs for affected facilities are $138 m illion on an annual basis, including m onitoring, reporting, and record keeping costs (in 1999 dollars). Som e unaffected facilities will also have m onitoring, reporting, and record keeping costs of approxim a tely $4 m illion per y ear. Therefore, the total annualized com p liance costs are $142 m illion (1999 dollars). Including costs associated with m onitoring, reporting, and record keeping requirem e nts, EPA expects 88 softwood ply w ood and veneer facilities to experience approxim a tely 22 percent of the costs, 38 oriented strandboard facilities to experience appr oxim a tely 18 percent of the costs, 82 other wood com posite (including m e dium density fiber (MDF), particle board (PB), and hardboard (HB)) to experience approxim a tely 58 percent of costs, and engineered wood product facilities to bear the rem a ining 2 percent. Most of the discussions c ontained in this profile will em phasize the softwood ply w ood and reconstituted wood produc ts industries because facilities in these industries will experience the greatest im pacts associated with the new MACT st andard. A discussion of the affected EWP facilities is presented in Section 4.4 of this chapter.

2-1Exhibit 2-1:

SIC Code SIC Description NAICS Code NAICS Description Impacted Facilities* Total Facilities in

Category 2436 Softwood Veneer and Plywood 321212 Softwood Veneer and Plywood 66 155
2493 Reconstituted W ood 321219 Reconstituted Total: 97 317 SIC & NAICS Codes for the Plywood and Composite Wood Industries

Products

2439 Structural W ood Mem b ers, Not Elsewhere Classified 321213

321214 W ood Products OSB: 23 PB/MDF: 56 HB: 18 Engineered W ood Mem b ers (Except Truss) 3

Truss Manufacturing 0 3

992

5

* Does not include num ber of facilities with MRR costs only

. Sources: MRI (1999), U.S. Environmental Protection Agency (1998), Dun & Bradstreet (1999a), U.S. Department of Commerce (1999a). Producers of ply w ood and com posite wood products also engage in additional m anufacturing activities including furniture and wholesale tim ber production. In som e cases, their prim ary SIC code 2 m ay be one other than those listed in Exhibit 2-1. The facilities with a prim ary SIC codes other than for ply w ood and wood com posite m anufacturers are shown inExhibit 2-2. The operations related to these other SIC codes are unlikely to be affected by the MACT standard. In addition, the num ber of facilities identified as potentially affected by this rule relative to the total num ber of establishm ents in all categories is extrem ely sm all (under one percent for all categori es). Therefore, this profile focuses on the SIC and NAICS listed in Exhibit 2-1. In particular, the pr ofile will focus on the softwood ply w ood and veneer and reconstituted wood products industries. All facilities that are im pacted by the MACT standard are included in these analy ses, regardless of their prim ary SIC or NAICS code.

2 See section 2.4.3.1 for a description of how prim ar y SIC codes were assigned to the surveyed facilities. 2-2Exhibit 2-2: Other Primary SIC and NAICS Code s for the Plywood and Wood Composite Industries

SIC D escription NAICS NAICS Title Facilities in ICR I m p a cted Facilities Total Facilities in

Category 2421 Sawm ills and Planning Mills, General 321113 321912 321918 321999 Sawm ills Cut Stock, Resawing Lumber, & Planning Other Millwork (including Flooring) All Other Miscellaneous Wood Product Manufacturing 32 13 5,815

2426 Hardwood Dimension and Flooring Mills 321113 321912 321918 387215 Sawm ills Cut Stock, Resawing Lumber, & Planning Other Millwork (including Flooring) Showcase, Partition, Shelving, and Locker Manufacturing 5 0 833

2448 Wood Pallets and Skids 321920 Wood Container and Pallet Manufacturing 1 0 1,929

2499 Wood Products, Not Elsewhere Cla ssifie d 321920 333414 339999 321999 Wood Container and Pallet Manufacturing Heating Equipment Manufacturing All Other Miscellaneous Manufacturing All Other Miscellaneous Wood Product Manufacturing 4 0 2,760

251 1 Wood Househol d Furniture, Except Upholster ed 33712 2
33721 5 Non-upholstered Wood Household Furniture Manufacturing Showcase, Partition, Shelving, and Locker Manufacturing 1 3 0 2,785

Sources: MRI (1999), U.S. Environm ental Protection Agency (1998), Dun & Bradstreet (1999a), U.S. Departm e nt of Comm e rce (1999a). Section 2.2 of this chapter describes the supply side of the affected industries and characterizes the production process, the products concerned, and the costs of production. Section 2.3 exam ines the dem a nd side of the affected industries, product u ses, and consum ers. Section 2.4 characterizes the facilities and firm s that com p rise the industry , their or ganization, and their financial conditions. Finally , Section 2.5 describes the m a rkets and discusses dom es tic production and consum ption, international trade, and prices. 2.2 The SupplySide The following section contains inform ation c oncerning the supply of ply w ood and com posite wood products. This section describes the production pr ocesses of each of the aforem entioned industries. It then presents the products, by -products, and co-p roducts of each industry

. Lastly , the costs of production for each of the three industries are presented. Factors, such as industry shipm e nts, costs of m a terials, fuels and electricity , pay r oll, capital expe nditures, and m a terials consum ed are all exam ined.

2-32.2.1 Production Process This section discusses three categories of ply w ood and wood com posites production: ply w ood and veneer; particleboard, strand and fiber com posites; and structural wood m e m b ers. The construction of ply w ood, consists basically of com b ining an odd num ber of lay e rs of veneer, with each lay e r having one or m o re plies. Hardwood ply w ood is generally m a de by apply i ng a hardwood veneer to the face and back of a softwood ply w ood, MDF, or particleboard panel. The differences between the hardwood and softwood processes occur because of different inputs a nd m a rkets. Particleboard, oriented strandboard, fiberboard, and hardboard are all processed sim ilarl y . These three ty pes of reconstituted wood products are m a nufactured by com b ining fragm ented pieces of wood and wood fiber into a cohesive m a t of wood particles, fibers, and strands. Structural wood m e m b ers are the products of m u ltiple m a nufacturing techniques. This section describes the production of glue-lam inated tim ber and the three ty pes of structural com posite lum b er: lam i nated veneer lum b er, parallel strand lum b er, and lam i nated strand lum b er. 2.2.1.1 General Considerations for Plywood and Wood Composites Manufacturing Release of hazardous air pollutants (HAPs) is prim arily associated with dry i ng and pressing processes in the m anufacturing of ply w ood and wood com posites. Coating processes are intrinsically related to the m anufacturing process and result infurther em issions through dry i ng and pressing. Conventional wood com posites are generally m a de witha therm o setting or heat-curing resin or adhesive that holds wood fiber together. Comm only used r esin-binder sy stem s include phenol-form aldehy de, ureaform aldehy de, m e lam i ne-form aldehy de, and propionald ehy d e. A num ber of additives are used in the m a nufacturing of wood com posites as well. Most notably , wax is used to provide finished products with resistance to water penetration. Other additives in clude preservatives, fire retardants, and im pregnating resins. While there is a broad range of ply w ood and w ood com posites and m a ny applications for such products, this section of the profile groups the pr oduction processes of these products into three general categories: ply w ood and veneer; particle board, strand and fiber com posites; and structural wood m e m b ers. Further descriptions of the production processes for each of these categories are provided in this section.
2.2.1.2 P lywood and Veneer 3 Construction of ply w ood relies on com b ining an odd num ber of lay e rs of veneer. Lay e rs consist of one or m o re than one ply with the wood grain r unning in the sam e direction. Outside plies are called faces or face and back plies, while the inner plies are called cores or centers. Lay e rs m a y vary in num ber, thickness, species, and grade of wood. To distinguish the num ber of plies (individual sheets of veneer in a panel) from the num ber of lay e rs (num ber of tim es the grain orientation changes), panels are som e tim es described as three-ply , three-lay e r, or four-ply , three-lay e r. As described above, veneer is one of the m a incom ponents of ply w ood. Most softwood plants produce ply w ood veneer for their own use. Of fac ilities reporting dry i ng of veneer, 86 percent of the veneer produced was used for in-facility ply w ood pr oduction. Only approxim a tely 7 percent of the facilities in the ICR survey produced veneer solely for outside sales and non-internal ply w ood use (EPA, 1998).

3 The descriptions contained in this section rely pr im arily on U.S. EPA’s Lum b er and W ood Products Sector Notebook (1995). 2-4The general processes for m a king softwood includes: log debarking, log steam ing and/or soaking, veneer cutting, veneer dry i ng, veneer preparation, glue application, pressing, panel trimm i ng, and panel sanding. Softwood ply w ood is genera lly m a de with relatively thick faces (1/10 inch and thicker) and with exterior or interm ediate glue. This glue provides protection in cons truction and industrial uses where m oderate delay s in providing weather protecti on m i ght be expected or conditions of high hum idity and water leakage m ay exist. Figure 2-1 below presents a diagram of the ply w ood production process. Logs delivered to a plant are sorted, then debarked and cut into peeler blocks. Alm o st all hardwood and m any softwood blocks are heated prior to peeling the veneer to soften the wood. The peeler blocks are heated by steam ing, soaking in hot water, spray i ng with hot water, or com b inations of these m e thods. Heated blocks are then convey e d to a ve neer lathe. The block, gripped at either end and rotated at high speed, is fed against a stationary knife parallel to its length. Veneer is peeled from the block in continuous, uniform sheets. Depending on its intended use, veneer m a y range in thickness from 1/16 to 3/16 (1.6mm to 4.8mm ) for softwood and m u ch thinner for hardwood and decorative ply w ood uses (Youngquist, 1999). Slicing m e thods are also used to produce hardwood decorative veneers generally in thicknesses of 1/24 inch and thinner. After peeling, the continuous sheets of veneer ar e transported by convey o r to a clipping station where it is clipped. In softwood m ills and som e hardwood m ills, high-speed clippers autom a tically chop the veneer ribbons to usable widths and defects ar e rem oved. In m a ny hardwood m ills, clipping m a y be done m a nually to obtain the m a xim u m am ount of clear m a terial. Wet clipped veneer is then dried. Proper dry i ng is necessary to ensure m o isture cont ent is low enough for adhesives to be effective. Dryers Two ty pes of dry e rs are used in softwood veneer m ills: roller resistant dry e rs, heated by forced air; and “platen” dry e rs, heated by steam

. In ol der roller dry e rs, also still widely used for hardwood veneer, air is circulated through a zone parallel to th e veneer. Most plants built in recent y ears use jet dry e rs (also called im pingem e nt dry e rs) that direct a current of air, at a velocity of 2,000 to 4,000 feet per m i nute, through sm all tubes on the surface of the veneer. Veneer dry e rs m a y be heated indirectly with steam , generated by a separate boiler, which is circulat ed through internal coils in contact with dry e r air. Dry e rs m a y also be heated directly by the com busti on gases of a gas- or wood-fired burner. The gas-fired burner is located inside the dry e r, whereas com bustion gases from a wood-fired burner are m i xed with recirculating dry e r air in a blend box outside the dry e r and then transported into the dry e r. Veneer dry e rs tend to release organic aerosols, gaseous organic com pounds, and sm all am ounts of wood fiber into the atm o sphere. Once dried, veneer is sorted and graded for particular uses.

2-5Figure 2-1:

Source: U.S. EPA (1995).

2-6Adhesives Ply w ood m anufacturing begins with the veneer sen t to a lay

- up area for adhesive application. Various adhesive application sy stem s are used includi ng hard rolls, sponge rolls, curtain coaters, spray e rs, and foam extruders. The m o st comm on application for softwood ply w ood is an air or airless spray sy stem , which generally uses a fixed-head applicator capable of a 10-foot wide spray at a nozzle pressure of 300 pounds per square inch (psi). The phenol-form alde hy de (PF) adhesives ty pical in softwood ply w ood m a nufacturing is m a de from resins sy nthesized in regional plants and shipped to individual ply w ood m ills. At the m ills, the resins are com b ined with ex tenders, fillers, cataly s ts, and caustic to m odify the viscosity of the adhesive. This glue m i xing has sev eral additional effects: allowing the adhesive to be com p atible with the glue application m e thod (curta in, roll, spray , foam ); allowing for better adhesive distribution; increasing the cure rate; and lowering cost.
Presses Following the application of glue, the panels m u st be pressed. The purpose of the press is to bring the veneers into close contact so that the glue lay e r is very thin. At this point, resin is heated to the tem p erature required for the glue to bond. Most pl y w ood plants first use a cold press at lower pressure prior to final pressing in the hot press. This allows the wet adhesive to "tack" the veneers together, perm its easier loading of the hot-press, and prevents shifting of the veneers during loading. Pressing is usually perform ed in m u lti-opening presses, which can produce 20 to 40 4x8-foot panels in each two- to seven-m inute pressing cy cle. Finishing After pressing, stationary circular saws trim up to one inch from each side of the pressed ply w ood to produce square-edged sheets. Approxim a tely 20 percent of annual softwood ply w ood production is then sanded. As sheets m ove through enclosed auto m a tic sanders, pneum atic co llectors above and below the ply w ood continuously rem ove the sander dust. Sa wdust in trimm i ng operations is also rem oved by pneum atic collectors. The ply w ood trim and sawdust are burned as fuel or sold to reconstituted panel plants.
2.2.1.3 Particle, Strand, and Fiber Composites 4 This group of products falls into the SIC or NAICS code category of reconstituted wood products. The im pacted facilities in this category m a nufacture the following products (MRI, 1999).

• M edium density fiberboard • O riented stand board • P articleboard • H ardboard All particle, strand and fiber com posites are pr ocessed in sim ilar way s
. Raw m a terial for particleboard, oriented strandboard (O SB), fiberboard, and hardboard is obtained by flaking or chipping wood. The general process then includes wood dry i ng, adhesive application, and form ing a m a t of wood particles, fibers, or strands. The m a t is then pr essed in a platen-ty p e press under heat and pressure until the adhesive is cured. The bonded panel is finally cooled and further processed into specified width,

4 The descriptions in this section rely prim arily on Chapter 10 of the USDA’s Forest Products Laboratory Wood Handbook (Youngquist, 1999). 2-7length, and surface qualities. Specific details re garding the production processes for different products are provided below. Particleboard Generally , particleboard is produced by m ech anically reducing wood m a terials into sm all particles, apply i ng adhesive to the particles, and c onsolidating a loose m a t with heat and pressure into a panel product. Particleboard is ty pi cally m a de in three lay e rs with the faces consisting of finer m a terial and the core using coarser m a terial. Particleboard can also be m a de from a variety of agricultural residues, including kenaf core, jute stick, cereal straw, and rice husks dependi ng on the region. EPA does not expect facilities that produce particleboard m a de from agricultural residues, also called agriboard, to experience com p liance cost im pact s associated with the new MACT standard. EPA expects only one facility that produces m o lded particleboard to experience com p liance cost im pacts (MRI, 1999). The raw m a terials, or "furnish," that are used to m a nufacture reconstituted wood products can be either green or dry wood residues. Green residues include planer shavings from green lum b er and green sawdust. Dry process residues include shavings fro m planing kiln-dried lum b er, sawdust, sander dust, and ply w ood trim

. The wood residues are ground into particles of vary ing sizes using flakers, m echanical refiners, and hamm e rm ills, and are then classified according to their phy sical properties. After classification, the furnish is dried to a low m o isture content (two to seven percent) to allow for m o isture that will be gained by the adding of r esins and other additives during blending. Most dry e rs currently in operation in particle and fiber com pos ite m a nufacturing plants use large volum es of air to convey m a terial of varied size through one or m o re passes within the dry e r. Rotating drum dry e rs requiring one to three passes of the furnish are m o st comm on. The use of triple-pass dry e rs predom inates in the United States. Dry e r tem p eratures m a y be as high as 1,100 - 1,200° F with a wet furnish. However, dry planer shavings require that dry e r tem p eratures be no higher than 500° F because the ignition point of dry wood is 446° F. Many dry e rs are directly heated by dry fuel suspension burners. Others are heated by burning oil or natural gas. Direct-fired rotary drum dry e rs release em issions such as wood dust, com bustion products, fly ash, and organic com pounds evaporated from the extractable portion of the wood. Steam -heated and natural gas-fired dry e rs will have no fly ash. The furnish is then blended with sy nthetic adh esives, wax, and other additives distributed via spray nozzles, sim p le tubes, or atom izers. Resin m a y be added as received (usually as an aqueous solution), or m i xed with water, wax em ulsion, catal y s t, or other additives. Waxes are added to im part water repellency and dim e nsional stability to the boards upon wetting. Particles for particleboard are m i xed with the additive in short retention tim e blenders, through which the furnish passes in seconds. The furnish and resin m i xture is then form ed into m ats using a dry process. This procedure uses air or a m echanical sy stem to distribute the furnish onto a m oving caul (tray ) , belt, or screen. Particleboard m a ts are often form ed of lay e rs of different sized particles, with the larger particles in the core, and the finer particles on the outside of the board. The m a ts are hot pressed to increase their density and to cure the resin. Most plants use m u lti-opening platen presses. Though m o re popular in Europe, the continuous press is currently being used in particleboard plants in the United States. Prim ary finishing steps for all reconstituted wood pa nels include cooling or hot stacking, grading, trimm i ng/cutting, and sanding. Cooling is im portant for UF-resin-cured boards since the resin degrades at high tem p eratures after curing. Boards bonded using PF resins m a y be hot-stacked to provide additional curing tim e. Secondary finishing steps include filling, painting, lam i nating, and edge finishing. The vast m a jority of m anufacturers do not apply secondary finishes to their panels; panels are finished prim arily by end-users such as cabinet and furniture m a nufacturers. Panels are also finished by lam i nators who then sell the finished panels to furniture and cabinet m a nufacturers.

2-8Oriented Strandboard (OSB) OSB is an engineered structural-use panel m anufactured from thin wood strands bonded together with waterproof resin under heat and pressure. OS B m a nufacturing begins with debarked logs usually heated in soaking ponds sliced into wood strands ty pically m easuring 4.5 to 6 inches long (114 to 152mm )

. Green strands are stored in wet bins and th en dried in a traditional triple-pass dry e r, a singlepass dry e r, a com b ination triple–pass/single-pass dry e r, or a three-section dry e r. A recent advance in dry i ng technology is a continuous chain dry e r, in whic h strands are laid between two chain m a ts so the strands are held in place as they m ove through the dry e r. After dry i ng, blending and m a t form ation take pl ace, blending of strands with adhesive and wax takes place in separate rotating blenders for face and core strands. Different resin form ulations are ty pically used for face and core lay e rs. Face resi ns m a y be liquid or powdered phenolics, while core resins m a y be phenolics or isocy antes. Mat form ers take on a num ber of confi gurations to align strands along the length and width of the panel. Oriented lay e rs of strands are dropped sequentially (face, core, face, for exam ple), each by a different form ing head. The m a t is then transported by convey e r belt to the press. Hot pressing involves the com p ression of the loose lay e red m a t of oriented strands under heat and pressure to cure the resin. Most plants utilize m u lti-opening presses that can form as m any as sixteen 12- by 24-ft (3.7- by 7.3m ) panels sim u ltaneously

. Recent developm ent of a continuous press for OSB can consolidate the oriented and lay e r m a t in 3 to 5 m i nutes. Fiber Composites Fiber com posites include hardboard, m e dium -den sity fiberboard (MDF), fiberboard, and insulation board. In order to m a ke fibers for th ese com posites, bonds between the wood fibers m u st be broken. This is generally done through refining of the m a terial, which involves grinding or shearing of the m a terial into wood fibers as it is forced between rotating disks. Refining can be augm ented by water soaking, steam cooking (digesting), or chem ical treatm e nts as well. Fiber com posites are classified by density and can involve either a wet process or a dry process. High and m e dium density boards, such as hardboard and MDF, apply a dry process. Wet processes can be used for high-density hardboardand low-density insulation board (fiberboard). Dry process involves adhesive-coated fibers that are dried in a tube dry e r and air-laid into a m a t for pressing. Wet processes differ from the dry processes. This process involves the utilization of water as a distributing m e dium for fibers in a m a t. Further di fferences lie in the lack of additional binding agents in som e wet processes. The technology is very m u ch like paper m a nufacturing in this pulp-based aspect. Natural bonding in the wood fibers occurs in this pr ocess. Refining in this process relies on developing m a terial that can achieve this binding with a de gree of “freeness” for rem oval from m a ts. The wet process involves a continuously m oving m esh screen, ont o which pulp flows. Water is drawn off through the screen and through a series of press rolls. The wet fiber m a ts are dried in a convey o r-ty p e dry e r as they m ove to the press. Wet process hardboard is then pressed in m u lti-open presses heated by steam

. Fiberboard is not pressed. Manufacturers use several treatm e nts alone or together to increase dim e nsional stability and m echanical perform ance of both wet and dry process hardboards. Heat treatm e nt exposes pressed fiberboard to dry heat, reducing water absorption and im proving fiber bonding. Tem p ering is the heat treatm e nt of pressed boards preceded by the addition of oil. Hum i dification is the addition of water to bring board m o isture content into equilibrium with the air.

2-92.2.1.4 Structural Wood Members 5
Structural wood m e m b ers, such as glue-lam inated tim bers and structural com posite tim ber, are m a nufactured using a num ber of m e thods. Glue-lam inat ed tim ber, or glulam , is an engineered product form ed with two or m o re lay e rs of lum b er glued together in which the grain of all lay e rs, called lam i nations, is oriented parallel to the length of the lum b er. Glulam products also include lum b er glued to panel products, such I-joists and box beam s. Stru ctural com posite lum b er consists of sm all pieces of wood glued together into sizes comm on for solid-sawn lum b er. Glue-Laminated Timber (Glulam) Glulam is a m a terial that is m a de from suitably selected and prepared pieces of wood, either straight or curved, with the grain of all pieces essentia lly parallel to the longitudinal axis of the m e m b er. The m anufacturing process for glulam involves four m a jor steps: (1) dry i ng and grading, (2) end jointing, (3) face bonding, and (4) finishing and fabricating. Structural Composite Lumber The are three m a jor ty pes of structural com pos ite lum b er: lam i nated veneer lum b er, parallel strand lum b er, and lam i nated strand lum b er. Each is described in m o re detail below, however, the general m a nufacturing process for these com posites is sim ilar.
Lam i nated veneer lum b er (LVL) is m a nufactured by lam i nating veneer with all plies parallel to the length. This process utilizes veneer 1/8 to 1/10 inches. (3.2 to 2.5 mm ) thick, which are hot pressed with phenol-form aldehy de adhesive to form lum b er of 8 to 60 feet (2.4 to 18.3 m ) in length. The veneer used for LVL m u st be carefully selected to achieve the proper design characteristics. Ultrasonic testing is often used to sort veneer required for LVL. On ce the veneer has been sel ected, end jointing occurs followed by adhesive application and continuous pressing. Parallel strand lum b er (PSL) is a com posite of wood strand elem ents with wood fibers prim arily oriented along the length of the m e m b er. PSL is m a nuf actured using veneer about 1/8 inch (3 mm ) thick, which is then clipped into 3/4 inch (19 mm ) wide strands. The process can utilize waste m a terial from a ply w ood or LVL operation. Strands are coated with a waterproof structural adhesive, and oriented using special equipm ent to ensure proper placem ent and distribution. The pressing operation results in densification of the m a terial. Adhesives are cure d using m i crowave technology

. As with LVL, the continuous pressing m e thod is used.
Lam i nated strand lum b er (LSL) is produced using an extension of the technology used to produce oriented strandboard structural panels. LSL uses longer strands than those comm only used in OSB m anufacturing. LSL is pressed into a billet several inches thick in a steam -injection press, as opposed to an OSB panel pressed in a m u lti-opening platen press. The product also requires a greater degree of alignm ent of the strands at higher pressures, which result in increased densification.
2.2.2 Products, By-Products, and Co-Products Exhibit 2-3 presents products, corresponding SIC a nd NAICS codes, and product exam ples of the ply w ood and com posite w ood products industry

.

5 The descriptions in this section rely prim arily on Chapter 11 of the USDA’s Forest Products Laboratory Wood Handbook (Moody and Liu, 1999). 2-102-11 The ply w ood and com posite wood products indus tries have unique m a nufacturing processes in their use of waste wood products as an input for add itional products. and other wood by -products are inputs to m a ny wood com posites. e m b ers were developed in response to the increasing dem a nd for hi gh quality lum b er when it becam e difficult to obtain this ty pe of lum b er from forest resources. ore, m a ny of the by - and co-products from one process m a y be used in another.

Exhibit 2-3: Product Description S IC NAICS Example Products Softwood Veneer and Plywood 2436 321212 Panels, softwood plywood Plywood, softwood Softwood plywood com posites Softwood veneer or plywood Veneer m ills, softwood Reconstituted W ood Products 2493 321219 Board, bagasse Flakeboard Hardboard Insulating siding, broad-m itse Insulation board, cellular fiber or hard pressed Lath, fiber Medium density fiberboard (MDF) Particleboard Reconstituted wood panels Strandboard, oriented W a fer-board W a ll tile, fiberboard W a llboard, wood fiber Structural W ood Mem b ers, Not Elsewhere Classified 2439 321213 Arches, glue-lam inated or pre-engineered wood Fabricated structural wood m e m b ers Finger joint lum b er m a nufacturing I-joists, wood Lam i nated structural wood m e m b ers Lam i nated veneer lum b er Parallel strand lum b er Structural wood m e m b ers (except trusses) 321214 Floor trusses, wood, glue-l am inated or pre-engineered Roof trusses, wood, glue-l am inated or pre-engineered Source: U.S. Departm e nt of Labor, OSHA (no date).

Exhibit 2-4 provides ratios of specialization and coverage (product m i x) calculated by the U.S. Census Bureau for the last three Censuses of Manufacturers. ary ” SIC code to each establishm ent which corresponds to the SIC code for the largest (by value) single ty pe of product shipped by the establishm ent. from that establishm ent that are classified in the sam e industry as the establishm ent are considered “p rim a ry ,” and all other products shipped by the establishm ent are considered “secondary .” then calculates various m easures to illustrate the product m i x between prim ary and secondary products in each industry

. The specialization ratio represents the ratio of total prim ary product shipm e nts to total product shipm e nts for all establishm ents classified in the industry

. The coverage ratio repr esents the ratio of prim ary products shipped by the Planer shavings, sawdust, edgings, Structural wood m Theref

SIC and NAICS Codes and Products

The Census assigns a “prim The products shipped The Census2-12 establishm ents classified in the industry to the total shipm e nts of these products shipped by all establishm ents classified in all industries. As Exhibit 2-4 illustrates, all three industries have specialization ratios well above 80 percent and coverage ratios above 90 percent. plies that m o st establishm ents with these SIC codes are highly specialized, and that m o st product shipm e nts of eachty pe originate in establishm ents with these SIC codes. C and NAICS industries provide inform ation on the prim ary production of facilities engaged in ply w ood and wood com posite m a nufacturing. have been stable over tim e.
Exhibit 2-4: SIC NAICS Description 1982 1987 1992 1997 2436 321212 Softwood Veneer and Plywood Prim ary products specialization ratio 87 87 84 88 Coverage ratio 96 95 94 95 2493 321219 Reconstituted Wood Products Prim ary products specialization ratio 96 97 96 97 Coverage ratio 97 95 95 97 2439 321213 Structural Wood Members, N.E.C./Engineered Wood Members Prim ary products specialization ratio 96 97 96 95 Coverage ratio 95 97 97 96 2439 321214 Structural Wood Members, N.E.C./Truss Manufacturing Prim ary products specialization ratio 96 97 96 96 Coverage ratio 95 97 97 94 Source: U.S. Departm e nt of Comm e rce (1999a and 1995b)

. 2.2.3 Costs of Production Exhibit 2-5 provides inform ation on the overall value of shipm e nts (VOS) and production costs (a com ponent of operating expenses) by SIC code as reporte d by the Bureau of the Census. pical of m any interm ediate goods, the cost of m a terials is the largest portion of production costs, with pay r oll constituting 15-20 percent of VOS. be r supply play s a large role in industry costs. this decade, reductions in public tim ber supply , especi ally reductions in National Forest tim ber harvests, com b ined with the economy ’ s continued dem a nds for wood has led to substantial increases in the cost of tim ber (Spelter, 1997). This im Therefore, the Census data on these SI These ratios

Specialization and Coverage Ratios, 1982 - 1997

Ty In particular, tim In2-13 Exhibit 2-5: (Thousands of 1997 Dollars) 1992 1993 1994 1995 1996 1997 % Change Softwood Veneer and Plywood (SIC 2436, NAICS 321212) Industry Shipm e nts 7 ,321,641 6,400,683 6,755,571 7,725,037 6,525, 702 5,748,047 -21.5% Cost of Materials 4,169,048 3,671,638 4,097,921 4,736,984 4,330,167 3,795,985 -8.9% Fuels & Electricity 220,039 178, 592 178,601 183,507 176,759 161,239 -26.7% Payroll 1 ,112,158 897,839 883,819 1,047,092 1,006,792 912,613 -17.9% Ratio of Costs to Shipm e nts 75% 74% 76% 77% 84% 85% Reconstituted Wood Products (SIC 2493, NAICS 321219) Industry Shipm e nts 5 ,350,565 4,951,902 5,517,234 5,827,821 5,561,099 5,278,809 -1.3% Cost of Materials 2,400,670 2,144, 060 2,342,362 2,582,565 2, 697,471 2,633,139 9.7% Fuels & Electricity 327,706 250, 814 268,934 316,876 321,390 350,950 7.1% Payroll 825,718 699,627 707,179 810,753 855,237 798,767 -3.3% Ratio of Costs to Shipm e nts 66% 62% 60% 64% 70% 72% Structural wood members (SIC 2439, NAICS 321213 and 321214) Industry Shipm e nts 3 ,367,525 3,281,578 4,295,002 4,739,339 5, 096,809 5,112,873 51.8% Cost of Materials 1,958,576 1,966, 635 2,584,765 2,863,098 3, 154,297 3,007,103 53.5% Fuels & Electricity 35,486 33,406 34,585 39,595 42,621 42,090 18.6% Payroll 692,377 604,180 740,318 867,510 947,403 954,694 37.9% Ratio of Costs to Shipm e nts 80% 79% 78% 80% 81% 78% All dollars adjusted to 1997 using Producer Price Index for Lum b er and W ood Products (SIC 24). Source: U.S. Departm e nt of Census (1999a).
From these data, one can estim ate the sector-wide ratio of production costs to VOS. The ratio of costs (m aterials, fuels and electricity , and pay r o ll) to the VOS has been increasing over the 1992 to 1997 period for softwood ply w ood and ven eer and reconstituted wood products. The data in Exhibit 2-5 show that 1997 cost to shipm e nt ratios range between 72 percent (reconstituted w ood products) and 85 percent (softwood veneer and ply w ood). easure indi cates the proportion of the revenues received for the goods produced that are associated with production expen ses (m aterials, fuel and electricity , and pay r oll). Figures 2-2 and 2-3 present cost and VOS data for the softwood ply w ood and reconstituted wood products industries, respectively

. Summary of Annual Costs and Shipments, 1992 -1997

This mFigure 2-2: Softwood Plywood and Veneer Value of Shipments and Production Costs, 1992 - 1997

- 2, 000, 000 4, 000, 000 6, 000, 000 8, 000, 000Thousands of Dollars (1997)

1 992 199 3 1994 1995 1996 1 997 

### Y

ear VO S - T o t a l C o s t s

Pa y r o l l

F uel s & E l e c t r i c i t y
C o s t of M a t e r i al s

Source: U.S. Departm e nt of Comm e rce (1999a)

. Note: Total costs in this figure is the sum of payroll, fuels & electricity, and m a terials costs.
Figure 2-3: Reconstituted Wood Products Value of Shipments and Production Costs, 1992 - 1997

- 1 , 00 0, 0 0 0 2 , 00 0, 0 0 0 3 , 00 0, 0 0 0 4 , 00 0, 0 0 0 5 , 00 0, 0 0 0 6 , 00 0, 0 0 0ThousandsofDollars (1997)

1 9 9 2 19 93 1 9 9 4 19 95 19 96 1 9 9 7 Ye a r VO S - T o t a l C o s t s
Pa y r o l l
F u els & E l ec t r ic it y
Cos t of M a t e r i al s

Source: U.S. Departm e nt of Comm e rce (1999a)

. Note: Total costs in this figure is the sum of payroll, fuels & electricity, and m a terials costs.

2-142-15 The cost to shipm e nt ratio does not reflect other operating expenses such as non-pay r oll em ploy m e nt expenses, taxes, interest, or depreciati on. variable or fixed nature. an approxim a te m easure of how m u ch cash, at a gross level, the industries are generating to cover all ope rating expenses, use for capital investm e nt, and provide a return to owners. easure is som e what crude, it indicates that the im pacts of the rule m ay potentially be m o re significant for the softwood ply w ood and veneer industry than for reconstituted wood products. Exhibit 2-6 and Exhibit 2-7 provide inform ati on on m a terials consum ed by kind in 1997 for the three sectors. w ood and veneer m a nufacturing, 81.6 percent of m a terial costs result from tim ber and veneer purchasing. present 5.7 percent of the m a terial costs in the softwood ply w ood and veneer industry

. Exhibit 2-6: Softwood Plywood and Veneer, 1997
Materials Consumed Delivered Cost ($1,000)* % of Total Materials Stum page cost (cost of tim ber, excluding land, cut and consum ed at sam e establishm ent) 346,854 9.4% Hardwood logs and bolts 64,617 1.7% Softwood logs and bolts 2,218,800 60.0% Hardwood veneer 27,355 0.7% Softwood veneer 363,583 9.8% Glues and adhesives 210,105 5.7% All other m a terials 471,717 12.7% TOTAL 3 ,703,031 100% * Excludes costs of resales and contract work. Source: U.S. Departm e nt of Comm e rce (1999a). Figure 2-4 shows the percentage m a terials cons um ed by kind by the softwood ply w ood and veneer industry in 1997. Nor does it indicate whether the expenses are of a However, it does provide While this m

In softwood ply Glues and adhesives re

Materials Consumed By Kind for2-16 Figure 2-4: Materials Consumed by Softwood Plywood and Veneer Products, 1997

S o f t w ood v e neer 9. 8% G l u e s & adh es iv es 5. 7% A

l l ot her m a t e r i als 12. 7 % S o ftw o o d l o g s & bolt s 6 0

. 0 % H ar dwo od v ene er 0. 7%

Har d woo d logs & bo lt s 1. 7 %

S t um pag e c o s t 9. 4 %

Source: e nt of Comm e rce (1999a)

.

Exhibit 2-7: Material Consumed Delivered Cost ($1,000)* % of Total Materials Logs and bolts 80,891 3.2% Pulpwood 400,579 15.7% Chips, slabs, edgings, sawdust, and other wood waste, and planer shavings 399,446 15.7% Hardboard, MDF, and particleboard 346,052 13.6% Paints, varnishes, lacquers, stains, shellacs, enam els, and allied products 69,488 2.7%
Adhesives and resins 548,553 21.5% Petroleum wax 61,173 2.4% Vinyl and paper overlays 101,405 4.0% All other m a terials, com ponents parts, containers and supplies 538,183 21.2%
TOTAL 2 ,545,770 100% * Excludes costs of resales and contract work. Source: U.S. Departm e nt of Comm e rce (1999a). As with the ply w ood industry , tim ber products are the largest portion of costs for the reconstituted wood product industry

. Logs, pulpwood, wood m a terial s, and other wood products account for a com b ined 48.2 percent of m a terial costs. w ood and veneer m a nufacturing, reconstituted wood products have higher m a terial costs for adhesiv es and resins, com p rom i sing 21.5 percent of costs. Figure 2-5 shows the percentage of m a terials c onsum ed by kind by the reconstituted wood products industry for 1997. U.S. Departm

Materials Consumed by Kind for Reconstituted Wood Products, 1997

Unlike plyFigure 2-5: Materials Consumed by Reconstituted Wood Product Producers, 1997

H

ar

d b

oar d,

M DF , & p

a r

t ic le b o

a r

d 13

. 6 % C h i p s, sl ab s, e dg i ng s, s a

w

d us t , &

ot h er w

o

od w

a

s t e , &

pl anner s hav i ngs 15

. 7%

P

a in t s , v a r

n is h e s , l a

cq uer s ,

s t ai ns , s hel l a c

s ,

enam el s , & al l i ed pr o

duc t s 2. 7% A

d h e si v

e

s & r

e

si ns 21. 5% A

l l o

t he r m a

t eri a l s , com p onen t s '

p

a r

t s , con t ai ne r s &

s u p pl i es 21

. 2 % Pu l p w

o

o

d 15

. 7% Log s &

bol t s 3. 2 %

V

i ny l &

paper ov er

l a

y

s 4. 0%

Pe

t r

ol eum w

a

x 2. 4%

Source: U.S. Departm e nt of Comm e rce (1999a). Wood costs for ply w ood and wood com posite m a nufacturing vary according to plant location, wood species, and facility efficiency

. While there m a y be considerable variability in wood prices across regions, the last decade has seen substantial in crease in wood prices across all regions. Wood use efficiency depends on wood species used, log tem p eratur e, speed of cutting, board com p action, and other process variables. Next to wood, adhesives and wax play an im portant role in industry costs, especially for the production of reconstituted wood products such as OSB, particleboard, and MDF (Spelter et al, 1997). In 1995, sixteen percent of the output from the adhesive and sealant industry , SIC 2891, went to the wood products m arket. As such, a MACT standard that greatly reduces the dem a nd for adhesives and sealants (or coatings) could potentially have a signifi cant im pact in the adhesive and sealant industry (Abt Associates Inc., 1997). The response on the part of the softwood ply w ood and veneer and reconstituted wood products industries will depend on the final requirem e nts of the MACT standard and the attractiveness of com p arable resin, adhesive and sealant products that do not contribute to HAP em issions. There will be m any constraints on the ability of the im pacted industries to switch away from current adhesives, as their products generally m u st m eet certain requirem e nts related to building codes. These properties are discussed in the next section. 2.3 The Demand Side The following section contains inform ation c oncerning the dem a nd for ply w ood and veneer, reconstituted wood products, and stru ctural wood m e m b ers. The characteristics of ply w ood and wood com posites are exam ined first, highlighting the num erous uses of these ty pes of wood products. The consum ers and users of ply w ood and wood com posites are then exam ined, specifically analy z ing the distribution of consum ption. Substitution possi bilities are addressed, looking at both wood and non-wood
2-17options. Lastly , the elasticities of dem and of the ply w ood and com posite wood products industries are discussed.
2.3.1 Product Characteristics Ply w ood and com posite wood produc ts provide a m o re stable product over solid wood by reducing the variations between wood species, am ong trees of the sam e species, and even between wood from the sam e tree. Unlike solid wood which is evaluate d at a cellular level, com posite wood is evaluated at fiber, particle, flake, or veneer level. Properties of products can be changed by com b ining, reorganizing, or stratify i ng these different elem ents. Control of the size of particles used in producing com posite wood products provides the chief m ean s by which m a terials can be produced with predeterm i ned properties (Youngquist, 1999). Strength is a crucial factor in determ ining the applicability of ply w ood and wood com posites to structural and other m anufacturing uses. Stiffn ess and strength properties of a wood product depend prim arily on the constituents from which these products are m a de. The basic wood elem ents can be m a de in a great variety of sizes and shapes, and m a y utilize any num ber of wood species. Ply w ood can be m anufactured from over 70 species of wood. The choices available for wood com posites is alm o st unlim ited. Ty pes of adhesives and bonding-agents also play an im portant role in the strength of a com posite wood product. Durability will also determ ine the m a rket for wood com posites. Panels used for exterior applications will have a fully wa terproof bond and are designed for perm anent exposure to weather and m o isture. Interior panels m ay lack the waterproof bond and be m a nufactured w ith glue products designed for interior use. Depending on the wood com posite, a range of sizes and thicknesses are available. The range of structural applications for which these products are used requires production of several standardized sizes as well as custom -m ade pieces. Sizes and thicknesses w ill depend on the ty pe of wood com posite product and the m a rket for which it is prim arily produced. Wood panels and other com posite wood structures are subject to perform ance-ty pe standards as outlined by various industry organizations. A num ber of organizations including Am erican Ply w ood Association - The Engineered Wood Association, Com posite Panel Association (CPA), Am erican Hardboard Association, and others m onitor products produced by their m e m b er firm s to assure highquality production and industry conform ity with testing and perform ance standards.
2.3.2 Consumers and Uses Exhibit 2-8 shows industry output by SIC code. Output of ply w ood and veneer goes m a inly to the construction sector, prim arily to the residential housing and repair industries. Alm o st one third of ply w ood goes to the m a nufacturing sector, part of which is used as an input for other ply w ood production, and part of which goes for furniture a nd other durable goods m a nufacturing. The “Other” category is m a de up of foreign trade, inventor y change, and wholesale trade. The outputs for reconstituted wood products, including particleboard, are m o re evenly split between construction and m a nufacturing, The “Other” category for reconstitute d wood products is m a de up of sales to state and local governm e nt, foreign trade, and services (Gale Business Resources, 1999).

2-18Exhibit 2-8: Consumption of Industry Outputs, by SIC Code SIC S IC Description C onstruction M anufacturing Other 2436 Softwood veneer and plywood 63.5% 27.9% 8.6% 2493 Reconstituted wood products 45.7% 47.6% 6.7% 2439 Structural wood m e m b ers 94.8% 0.6% 4.6% Source: Gale Business Resources (1999).
The m a jor use of structural panel products is for construction activities. Panel products include those products such as ply w ood, OSB, particleboard, and others form ed as a panel. These products m ay be used for floor sy stem s, exterior walls, roofing, and exterior siding. Figure 2-6 shows the industry outputs by percentage for the softwood ply w ood and veneer industry

. Figure 2-6 Industry Outputs of Softwood Plywood and Veneer Industry

Ma n u f a c t u r i n g 27

. 9 %

Ot h e r 8. 6% C o n s tr u c ti o n 63

. 5 %

Source: Gale Business Resources (1999).

2-192-20 Figure 2-7 shows the industry outputs by percenta ge for the reconstitute d wood products industry

. Figure 2-7: Industry Outputs of Reco nstituted Wood Products Industry

M anu f a c t u r i n g 47. 6 %

O t her 6. 7% C ons t r uc t i on 45. 7 %

Source: Gale Business Resources (1999). MDF and particleboard are two produc ts of the reconstituted wood products industry

. Exhibits 2-9 and 2- 10 below show the downstream uses of MDF and particleboard in 1997. 20 percent of the output is used for household furn iture, and the rem a inder is used for construction, shelving, cabinetry and other custom ized applications. Exhibit 2-9: MDF Shipments by Downstream Mark et, 1997 Downstream Use M illion ft 2 Percent Household Furniture 247.8 19% Custom Lam i nators 208.6 16% Stocking Distributors 286.9 22% Kitchen and Bath 65.2 5 % Molding 130.4 10% Millwork 65.2 5 % Partitions and fixtures 65.2 5 % All Other 182.6 14% Other (n.e.c.) 52.2 4 % Total 1 ,304.0 100% Source: Com posite Panel Association (1998). For each of the products, about2-21 Exhibit 2-10: Particleboard Shipments by Downstream Mark et, 1997 Downstream Use M illion ft 2 Percent Household Furniture 889.0 20% Custom Lam i nators 711.2 16% Stocking Distributors 755.7 17% Kitchen and Bath 711.2 16% Flooring Products 400.1 9 % Office Furniture 266.7 6 % Door Core 177.8 4 % All Other 400.1 9 % Other (n.e.c.) 133.4 3 % Total 4 ,445.2 100% Source: Com posite Panel Association (1998).
Construction Activities Over sixty percent of the softwood ply w ood and veneer industry output and approxim a tely 50 percent of the reconstituted wood products industry output goes to the construction sector, prim arily to the construction, rem odeling and repair of single a nd m u ltiple fam ily dwellings. a jority of the work perform ed by the construction sector is associ ated with single fam ily dwellings, and the largest share of their costs is associated with m a terials su ch as wood-based m a terials. housing starts have been quite strong since 1996 and are expected to continue through at least this y ear. Housing start activity is closely linked to general econom ic conditions, em ploy m e nt, incom e , and interest rates. odeling e xpenditures have declined in real term s, as would be expected. Generally , m o re renovation and rem odeling takes place during periods when fewer new houses are being constructed e nt of Comm e rce, 1995a). Exhibit 2-11: Housing Mark et Indicators, 1988 - 1997 Year New Housing Units (thousand) Renovation and Remodeling Expenditures (million current $) Renovation and Remodeling Expenditures (million 1992 $) 1988 1,706 101,117 110,874 1989 1,574 100,891 106,425 1990 1,381 106,773 109,175 1991 1,185 97,528 98,813 1992 1,411 103,734 103,734 1993 1,542 108,304 104,339 1994 1,761 115,030 106,411 1995 1,694 111,683 99,362 1996 1,838 114,919 99,756 1997 1,828 118,423 99,431 Source: Howard (1999).
Because econom ic conditions can vary between regi ons in the U.S., the im pact of housing starts on dem a nd for wood-based construction m a terials can vary

. plified by differing local preferences, housing codes, a nd availability of specific wood-based products. The m As Exhibit 2-11 shows,

Renovation and rem (U.S. Departm

This regional variation is further am2-22 W

ood Furniture Industry The wood furniture industry produces output for a high value added m a rket. shows the value of shipm e nts from the household furn iture sector. of this sector. estic shipm e nts and appare nt consum ption of household wood furniture have experienced m odest growth since 1989, indicating that the shipm e nts from the softwood ply w ood and veneer and reconstituted wood products industries to the furniture sector has had lim ited experience for growth.
Exhibit 2-12: Trade for Househ old Furniture (SIC 251), 1989 -1996 (Millions of 1997 Dollars)*
1989 1990 1991 1992 1993 1994 1995 1996 % Change Value of product shipm e nts 22,477 21,521 21,949 22,823 24,038 24,355 na 6 Value of im ports 3,301 3,200 3,117 3,368 3,723 4,201 4,586 5,047 53 Value of exports 565 884 1,091 1,252 1,298 1,385 1,361 1,342 237 Apparent Consum ption 25,792 24, 793 23,547 24,065 25,248 26,854 27,580 na 7 *Values adjusted to 1997 dollars using PPI for Furniture and Household Durables Source: U.S. Departm e nt of Comm e rce (1999a). Wood furniture m a nufacturers constitute a large porti on of the dem a nd, 20 to 30 percent, of the woodbased products other than structural panels and struct ural m e m b ers. and is being m e t by im ports. This translates into a larg e lost opportunity for dom estic furniture m a nufacturers, as well as for their suppliers, including the industries th at are the subject of this profile. causes for this increase in im ports are lower m a terial and labor costs in exporting countries, and declining availability of tim ber products to dom estic producers (CINTRAFOR, 1999 and Dirks, 1991). The 1992 Census of Manufacturers showed that 21 pe rcent of the delivered cost of m a terials in the m anufacture of wood household furniture is asso ciated with ply w ood and com posite wood products. As a result, significant price changes in the costof ply w ood and com posite wood products have the potential to affect production costs of wood house hold furniture. a nd for wood household furniture is highly elastic with respect to price (see discussion in section 2.3.4), increased input costs could affect both the dem and for wood household furniture and for ply w ood and wood com posites supplied to furniture m anufacturers.
2.3.3 Possibilities The basic substitution in these industries is between different wood products, although non-wood substitutes exist as well for som e applications. m posite wood products were originally m anufactured in response to the growing dem and for wood products as the availability of larger sized tim ber declined. As new wood com posites products were developed, they further replaced sawn lum b er and other ty pes of wood products. w ood and veneer production lost m a rket share during the late 1980s and early 1990s to new products that are categorized as recons tituted wood products, largely as a result of several challenges: legislation protecting federal tim ber lands; recession in the early 1990s; price increases and instability ; and supply shortages. ndication of the structural uses of wood panel products and substitutes, Exhibit 2-13 outlines the use of vari ous products in new single-fam ily and m u lti-fam ily residential construction in the United States. Exhibit 2-12 below Wood household furniture is a portion Dom

23,056

Much of the growth in retail dem The potential

As the dem

Substitution

Co
Ply
To provide an i2-23 Exhibit 2-13: Use of W ood and Non-wood Products 1976 - 1995

Application Incidence of Use (%) Single-family houses Multi-family houses 1976 1988 1995 1976 1988 1995 Floor Sheathing Lum b er 1 5

- 2 6

- Structural Panels 51 56 55 51 52 54 Softwood Plywood 51 48 31 51 46 24 OSB 0 9 2 4 0 7 30 Nonstructural Panels 12 9 9 10 9 7 L i g h tw e i g h t C o n c r e t e 0 Concrete Slab 30 30 35 32 26 36 Exterior Wall Sheathing L u m b e r - 2

- Structural Panels 16 33 52 17 40 43 Softwood Plywood 16 26 19 17 28 10 OSB 0 7 3 3 0 12 33 Fiberboard 13 6 3 2 1 1 5 Foam ed Plastic 7 2 2 2 9 2 18 34 Foil-faced kraft

- 17 3 0 13 1 Gypsum , other 1 8 8 2 18 15 8 N o n e 2 5 3 1 Roof Sheathing L u m b e r 1 4 1 1 Structural Panels 85 91 98 87 94 94 Softwood Plywood 84 70 37 87 78 19 OSB 1 21 61 1 1 6 7 5 O th e r 1 Exterior Siding Lum b er 10 12 7 9 16 2 Structural Panels 22 23 9 3 2 1 5 4 Softwood Plywood 22 23 4 3 2 1 5 2 OSB

- - 5 0

- 2 Hardboard 16 16 6 7 11 5 Non-wood 52 49 77 49 58 89 Vinyl 14 15 29 12 14 41 Masonry, stucco 38 34 48 37 44 48 O th e r 0

- - Source: Spelter et al. (1997). Structural wood panels hold the m a jority of the m a rket share for floor, exterior wall, and roof sheathing in single and m u lti-fam ily housing construction. The m a jo r substitution effect in this m arket has occurred between OSB and softwood ply w ood, with OSB capturing m u ch of the m a rket from softwood ply w ood by 1995. w ood and OSB is due to lower cost for OSB. However, questions of exterior durability with OS B have led m a ny builders to continue ply w ood use despite higher initial costs. in Residential Construction

3 7 5 0 0

- - -

34

8 5 9 5
1 6 1 2

5 4 2 0 3

3 1 0

Much of the trade-off between softwood plyFiberboard has also seen reduction in m a rket sh are for exterior wall sy stem s due to increases in OSB use. Non-wood products, m a inly m asonry , have captured 77 percent of the m a rket for exterior siding, greatly reducing the m arket share of structur al panels in this m a rket. Other m a jor substitutes include concrete slab for floor sheathing and foam ed plastic, which gained m a jor shares of the exterior wall sheathing m arket from wood-based structural panels.
2.3.4 D emand Elasticities The price elasticity of dem and is the percentage change in the quantity of product dem a nded by consum ers divided by the percentage change in price. Dem a nd curves slope downward, signify ing a negative response (less dem and) to an increase in price. If dem a nd is elastic (an absolute value of greater than one) a sm all price increase will lead to a relativ ely large decrease in dem a nd. Conversely , if dem and is inelastic with respect to price, or an absolute value less than one, the quantity dem a nded will change very little relative to a change in price. For the purposes of perform ing an econom ic analy s is, short-term price elasticities are relevant as im pacts of the regulation fall directly on the entities owning facilities faced with com p liance responsibilities. In appropriating com p liance costs to facilities im pacted by this rule, the econom ic analy s is assum es that these facilities have a fixed capita l stock in the short term

. This m e thod allows an evaluation of the severity of im pacts using static m easures of profit and loss. This “non-behavioral” approach differs from other behavioral approaches th at take into account adjustm e nts m a de by producers, such as changing input m i xes, that can generally a ffect the m a rket environm ent in which they operate over the longer term

. In the case of ply w ood and reconstituted wood pr oduction that is going to the construction industry , the overall price elasticity of dem a nd for th ese products is relatively inelastic. This is because the wood product com ponent of constr uction is fixed once the decision to construct has been m a de. The other factors that contribute to the inelastic nature of dem a nd for structural wood panels include local building codes, hom e buy er and hom e owner preferences, and building industry investm e nt in the training and infrastructure required to construct w ith wood panels as opposed to a substitute. The dem and for each individual ty pe of product m a y differ, depending on several factors, including the product’ s own-price elasticity , the ava ilability and price of other wood based and non-wood products with com p arable characteristics, and the ava ilability and price of im ported products. Cross price elasticities are often difficult to identify or estim ate. However, if available, cross price elasticities of substitutes and im ports m i ght be considered when deve loping an approach to the econom ic analy s is. For exam ple, analy s is of the softwood ply w ood m a rket m ay incorporate the cross-price elasticity of OSB, a m a jor substitute for ply w ood. When analy z ing the OSB m a rket, the converse would also be true. Even if such cross price elasticities were available, other considerations would also determ ine whether the econom ic analy s is incorporates the m arket substitution dy nam i c. We exam ined several recent and historical studies of price elasticities of dem a nd. Most of these studies were concerned with the softwood lum b er sect or, m o st likely due to the lim ited availability of relevant price and consum ption inform ation at a di saggregated product level. Our review focused on the 1996 study by Joseph Buongiorno, a forestry econom ist, who noted that previous econom etric studies of the wood products sector have produced estim ates of dem a nd elasticities for softwood lum b er, a product with sim ilar dem and drivers, inputs, input costs, and uses, between zero and -0.9 6

. Buongiorno also reported that other studies have estim ated the cross elasticity of lum b er with respect to the price of ply w ood to be between 0.5 and zero. Buongiorno developed a m odel using a price-endogenous linear

6 The m a jority of studies reviewed estim ated price el asticity of dem a nd as being between -0.15 and -0.4. 2-24programm i ng sy stem (PELPS) that endeavored to address the entire wood products m a rket using a sy stem dy nam i cs approach. The results of this m odel incl uded short-term price elasticities of dem a nd for woodbased products, as shown in Exhibit 2-14.

Exhibit 2-14: Demand Elasticities Product P rice Elasticity of Demand Ply w ood -0.16 Fiberboard -0.10 Particleboard -0.27 Source: Buongiorno (1996). Buongiorno’s results provide the basis for im puti ng price elasticities for the other products that are the subject of this MACT standard. In add ition, further review of identified studies m ay produce inform ation useful in the final determ ination of appr opriate elasticities for use in the econom ic analy s is of the im pacts of a MACT standard on the softw ood ply w ood and reconstituted wood products industries.

In the case of softwood ply w ood and recons tituted wood production going to the furniture industry , the price elasticity of dem and is highly elastic

. This is because the price elasticity of dem a nd for wood furniture is highly elastic itself and the softwood ply w ood and recons tituted wood com ponent of production costs for wood furniture is also quite high, over twenty percent. The EPA’s study of the econom ic im pacts of alternative NESHAPS on the w ood furniture industry estim ated the price elasticity of dem a nd for wood furniture as -3.477 (U.S. EPA, 1992). This result form s the basis for a derived price elasticity of dem and for use in the econom ic analy s is of the im pacts of the MACT standard. 2.4 Industry Organization The following section contains inform ation pert aining to the organization of the ply w ood and veneer, com posite wood , and structural wood m e m b er s industries. This section will provide the basis for understanding the following.

• T he industry structure • T he characteristics of the m anufacturing facilities • T he characteristics of the firm s that own the m a nufacturing facilities A detailed exam ination of these three topics is essen tial, as it provides the basis for m u ch of the approach to estim ating econom ic im pacts of the MACT standard. In addition, this section also provides detailed inform ation about facilities and firm s that are im portant inputs to the analy s is itself as well as to analy s is of how the MACT standard m i ght affect firm s of different sizes.
2.4.1 Industry Structure Exhibit 2-15 shows concentration ratios by SIC code for the three census y ears, 1982, 1987, and 1992. The m -firm concentration ratios are equal to th e sum of the m a rket shares for the largest m num ber of firm s in the industry

. A m arket is generally cons idered highly concentrated if the 4-firm concentration ratio is greater than 50 percent. Exhibit 2-15 also shows the Herfindahl-Hirschm a n (HH) index, which is an alternative m easure of concentration equal to th e sum of the squares of the m a rket shares for the 50 largest firm s in the industry

. The higher the index, th e m o re concentrated the industry is at the top. The

2-252-26 U.S. Justice Departm e nt uses 1,000 as a benchm ark fo r the presence of m a rket concentration, where any industry with a Herfindahl-Hirschm an index less than 1,000 is considered to be unconcentrated (Arnold, 1989). Exhibit 2-15: Concentration Ratios by SIC Code, 1982-1992*

Year Number of Companie s in Industry Percent of value of industry shipments shipped by the largest (in terms of shipment value) Herfindahl

- Hirschman Index** 4 Companies 8 Companie s 20 Companies 50 Companies Softwood Veneer and Plywood (SIC 2436)

1982 135 41 56 74 92 619 1987 131 38 56 74 93 571 1992 123 47 66 82 96 797 Reconstituted Wood Products (SIC 2493)

1982 N/A 1987 158 48 65 82 95 743 1992 193 50 66 81 94 765 Structural wood members (SIC 2439)

1982 649 15 22 35 50 104 1987 831 13 18 30 44 92 1992 830 19 25 34 46 166 *The latest y ear for which data is currently available. **The index is based on the 50 largest com p anies in each SIC code. Source: U.S. Departm e nt of Comm e rce (1992). The concentration ratios presented in Exhib it 2-15 show very little evidence of m a rket concentration in the ply w ood and com posite wood products industries. concentration ratios for the three sectors are below 50 with the exception of reconstituted wood products (classified as “General” in the ICR survey ) which is 50. all SIC codes are well below the benchm ark of 1000. While concentration appears to have increased in general between 1982 and 1992, there is no clear trend as all appear to have been less concentrated in 1987.
2.4.2 Plants Through an ICR, the U.S. Environm ental Protection Agency identified plants potentially affected by this rule. ed facilities according to their production processes and developed estim ates of com p liance costs for each fac ility

. ation on the num ber of potentially im pacted facilities, and thei r corresponding prim ary SIC code. shows the percent of potentially im pacted fac ilities as a percent of total facilities for each SIC. Four-firm The HH indices for

Manufacturing
EPA categorized the survey Exhibit 2-16 below presents inform The exhibit also7 Map developed based on original survey database dated July 23, 1999. 2-27 Exhibit 2-16: Facilities with Compliance Cost Impacts Facilities SIC Code Description I mpacted* Total in SIC % of Total 2436 Softwood Veneer and Ply w ood 66 155 42.6%

2493 Reconstituted Wood Products Total 9 7 317 30.6% OSB 2 3 PB/MDF 56 HB 18 2439 Structural Wood Mem b ers 3 53 5.7% * Does not include num ber of facilities with MRR costs only. Note: Percentages represent survey facilities’ share of total facilities in the category. Sources: U.S. Environm ental Protection Agency ( 1998), U.S. Departm e nt of Comm e rce (1999a), MRI (1999).
2.4.2.1 L ocation Nationally , facilities that produce softwood ply w ood and reconstitute d wood products are clustered in distinct geographic regions of the South, Pacific Northwest, and the upper Mid-West of the U.S. the softwood ply w ood and veneer facilities have the highest em ploy m e nt in Oregon, Washington and Louisi ana. product facilities had the highest em ploy m e nt in Oregon, California, North Carolina, Texas, and Michigan (source: U.S. Departm e nt of Comm e rce, 1999a). Figure 2-8 7 is a m a p of locations of im pacted and total ICR facilities as identified by EPA (MRI, 1999, EPA, 1998). pes of facilities are com b ined. a p shows the state-by -state distribution of the potentially im pacted facilities relative to the total ICR facilities in the state. with the greatest num ber of potentially im pacted facilities are Oregon (36), Louisiana (16), Georgia (8), Mississippi (7), Virginia (10), Texas (8), and North Carolina (7). pacted facilities constitute a significant portion of all facilities in the state include Louisiana (66 percent), Oregon (57 percent), Washington (77 percent), Geor gia (38 percent) and Texas (44 percent). Based on the 1997 Census of Manufacturers, The Census showed that reconstituted wood

For this figure, all ty The m The states Major producing states where im8 of184 of54 of121 of10 of10 of15 of70 of11 of10 of11 of10 of15 of1236of630 of12 of58 of211 of110of133 of252 of126 of200 of60 of30 of57 of417 of163 of114 of132 of616of240 of1710of256 of150 of30 of2ImpactedFacilities01 -910-1819-2728-36StatesFigure 2-8: Plywood and Wood Composite Facility Locations(Potentially Impacted Facilities and Total ICR Facilities by State)Sources: U.S. Environmental Protection Agency (1998), MRI (1999)2-282.4.2.2 P roduction Capacity and Utilization Exhibit 2-17 shows the capacity utilization rates by SIC code and for all m a nufacturing industries for 1992 through 1997. The rates for softwood ply w ood and veneer, and recons tituted wood products are significantly higher than the average for all lum b er and wood products and for a ll industries. Capacity utilization for structural wood m e m b ers is below industry averages but has increased over the 1992 - 1997 period. Exhibit 2-17: Full Production Capacity Ut ilization Rates, Fourth Quarters, 1992 - 1997 SIC S IC Description 1992 1993 1994 1995 1996 1997 Change

2436 Softwood Veneer and Ply w ood 87 92 95 95 86 84 -3.4% 2493 Reconstituted Wood Products 87 92 92 88 86 82 -5.7% 2439 Structural Wood Members 6 5 6 6 6 6 7 4 7 7 7 2 10.8%

24 All Lumber and Wood Products 80 81 80 77 78 75 -6.3% 2000-3999 All Manufacturing Industries 7 7 7 8 8 0 7 6 7 6 7 5

- 2.3% Source: U.S. Department of Commerce (1997). Figure 2-9 presents the capacity utilization rates of softwood ply w ood and ven eer and reconstituted wood products from 1992-1997. Figure 2-9: Full Production Capacity Utiliz ation, Fourth Quarters, 1992-1997

19 92 199 4 19 96 74 76 78 80 82 84 86 88 90 92 94 96Utilization Rate(percent)

Ye a r 

### S o f t w

o od, pl y w

ood & ve n e e r



### R

e c o n s ti tu te dw o o d pr

odu ct s

Source: U.S. Departm e nt of Comm e rce (1997). The capacity utilization for softwood ply w ood and veneer, and reconstituted wood peaked in 1994, consistent with utilization peaks for all m a nufacturi ng industries. Interestingly , utilization rates for reconstituted wood product facilities declined, while softwood ply w ood and veneer was unchanged in

2-292-30 1995, the y ear that shows the highest value of shipm e nts for all (see Exhibit 2-17). a y be explained, in part, by capacity expansions driv en by the increased capital expenditures by softwood ply w ood and veneer producers in 1994 and subsequent y ears. The ICR provided further inform ation on capacity utilization. ple of general facilities responding to questions regarding their production processes reported production and capacity

. this data, capacity utilization for general facilities was 78 pe rcent, slightly below the figures in Exhibit 2-17
2.4.2.3 E mployment Exhibit 2-18 provides inform ation on em ploy m e nt at the softwood ply w ood veneer and reconstituted wood products faciliti es responding to the ICR in 1998. Exhibit 2-18a: 1998 Employment at Facilities with Expected Compliance Cost Impacts Softwood Plywood and Veneer Oriented Strandboard Medium Density Fiberboard/ Particleboard
Number of Employees Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Not reporting 2 3.0% 0 0 .0% 0 0.0% <50 0 0.0% 0 0 .0% 1 1.8% 50 to 99 0 0 .0% 0 0.0% 12 21.4% 100 to 249 18 27.3% 21 91.3% 30 53.6% 250 to 499 34 51.5% 1 4 .3% 2 3.6% 500 to 999 11 16.7% 1 4 .3% 8 14.3% 1,000 to 1,499 1 1 .5% 0 0.0% 2 3 .6% >1,500 0 0 .0% 0 0.0% 1 1 .8% TOTAL 6 6 100% 23 100% 56 100% Sources: U.S. Environm ental Prot ection Agency (1998), MRI (1999). Exhibit 2-18b: 1998 Employment at Facilities with Expected Compliance Cost Impacts
Hardboard Engineered Wood Products Total Facilities
Number of Employees Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Facilities in Size Category % of All Impacted Facilities Not reporting 0 0.0% 0 0 .0% 2 1.2% <50 0 0.0% 0 0 .0% 1 0.6% 50 to 99 1 5 .6% 0 0.0% 13 8.0% 100 to 249 8 44.4% 1 33.3% 77 47.2% 250 to 499 4 22.2% 2 66.7% 41 25.1% 500 to 999 5 27.8% 0 0 .0% 2 5 15.3% 1,000 to 1,499 0 0 .0% 0 0.0% 3 1 .8% >1,500 0 0 .0% 0 0.0% 1 0 .6% TOTAL 1 8 100% 3 100% 166 100% Sources: U.S. Environm ental Prot ection Agency (1998), MRI (1999). This m

A sam FromPotentially im pacted facilities engaged in the production of ply w ood and com posite wood products tend to be sm all- to m e dium -sized. Just over half of the facilities reported having less than 250 em ploy ees. Softwood ply w ood producers tend to have larger facilities, while facilities producing reconstituted wood products tend to be sm aller.
2.4.2.4 F acility Population Trends Plant age m a y be of particular significance to potential regulatory im pacts. Older plants m ay be less efficient as com p ared with newer plants utilizing technological im provem e nts in production efficiency

. One exam ple m e ntioned earlier is the developm ent of the continuous press, enabling recently constructed plants to produce m o re panel products in less tim e than older m a nufacturers. Newer plants m a y utilize better volatile organic com pound em issi on control technologies and have adapted their processes to m eet indoor air quality requirem e nts. While specific age inform ation for all facilities is not available, an analy s is perform ed by Spelter et al. (Spelter, 1997) provides insights into the ch anging nature of ply w ood a nd com posite wood facilities over tim e. In their analy s is, they traced the num ber of m ills, average m ill capacity , and capacity utilization over the course of 20 or m o re y ears. The analy s is does not present inform ation on specific plant closures and openings over tim e, but presents th e total num ber of operating m ills, which reflects the net change resulting from both closures and openings. Exhibit 2-19 provides inform ation on the results of the analy s is for selected y ears from 1977 to 1997, us ing census y ears to provide som e com p arison to overall industry figures presented elsewhere in this chapter.

2-312-32 Exhibit 2-19: Number of Mills, Average Capacity and Utilization, 1977 - 1997 1977 1982 1987 1992 1997 % Change Softwood Plywood Num b er of Mills 62 69 58 56 57 -8% Average Mill Capacity (1000 m 3 ) 110 138 180 201 215 95% Capacity Utilization 9 7 7 9 9 9 9 5 9 7 0 % Oriented Strandboard Num b er of Mills 8 2 1 3 9 4 4 6 6 725% Average Mill Capacity (1000 m 3 ) 8 8 115 148 187 259 194% Capacity Utilization 4 4 9 0 9 9 8 4 91% Particleboard Num b er of Mills 54 43 44 45 45 -17% Average Mill Capacity (1000 m 3 ) 137 151 168 181 196 43% Capacity Utilization 8 6 8 7 8 9 8 9 9 7 13% Medium-density Fiberboard Num b er of Mills 12 13 17 17 26 117% Average Mill Capacity (1000 m 3 ) 9 5 105 122 141 151 59% Capacity Utilization 6 9 6 6 8 7 9 1 8 6 25% Laminated Veneer Lumber Num b er of Mills 2 6 12 17 750% Average Mill Capacity (m illion m 3 ) 0 .078 0.075 0.063 0.085 9% Capacity Utilization 7 3 6 0 7 5 9 3 27% Engineered Joists Num b er of Mills 12 12 18 35 192% Average Mill Capacity (m illion m e ters) 3 200% Capacity Utilization 6 9 7 3 9 0 5 8

- 16% *Inform a tion not available for som e years. figures are from 1996. Source: Spelter et al. (1997). Average facility capacity has shown substantia l increases over the last twenty y ears for all product groups. ber of softwood ply w ood facilities declined by 8 percent between 1977 and 1997, the average m ill capacity increased substan tially , nearly 100 percent. experienced som e capacity growth while the num ber of plants has declined. The OSB industry has shown the largest increase in per facility capacity , 194 percent, along with large net additions of facilities. , ther e were nine m o re OSB plants than softwood ply w ood plants in 1997, whereas in 1977 ply w ood plants outnum be red OSB plants nearly 8 to one. additions for OSB and MDF show these sectors have newer facilities, while the softwood ply w ood and particleboard industries are generally com posed of older facilities. 9 5 4
For softwood plywood, particleboard, and MDF, 1997 For particleboard, 1984 figures are used for 1982.

While the num Particleboard has

Most notably Recent facilityA review of recent capital investm e nt trends provides som e insights into the facility population trends of the softwood ply w ood and reconstituted w ood products industries. Exhibit 2-20 shows capital expenditures by industry sector. Capital expenditur es have seen substantial overall increases in the last five y ears for all three sectors, indicating increasing investm e nt, particularly in the reconstituted wood product and structural wood m e m b ers sectors. However, investm e nt by the softwood ply w ood and veneer and reconstituted wood products sectors declin ed sharply from 1996 to 1997. This trend indicates the connection between declining capital expenditures and the sharp increase in products costs’ share of the value of shipm e nts (as shown in Exhibit 2-5) thatbegan after 1995. If such conditions in the baseline continue into the future, it is possible that certain firm s m a y experience difficulty accessing capital to cover these costs in addition to com p liance costs associated with the MACT standard.

Exhibit 2-20: Summary of Capital Expenditures, 1992 - 1997 (Thousands of 1997 Dollars) 1992 1993 1994 1995 1996 1997 % Change Softwood Plywood & Veneer 110,125 128,490 159,685 192,090 212,277 168,142 52.7% Reconstituted W ood Products 159,330 185,452 353,665 367,057 583,659 329,744 107.0% Structural W ood Mem b ers* 47,420 70,659 220,523 143,523 108,889 138,880 192.9% All dollars adjusted to 1997 using GDP Deflator. * 1997 figure is sum of capital expenditures for NAICS 321213 and 321214. Source: U.S. Departm e nt of Comm e rce (1999a). For softwood ply w ood, the level of capital investm e nt constitutes only 3 percent of the industry ’ s total value of shipm e nts. With the num ber of m ills in decline and average m ill capacity growing, it appears that the m a jority of capital expenditures m a de by the softwood ply w ood industry occur at existing plants. This c onclusion is supported by U.S. Industry & Trade Outlook ‘99 , which reported that only one new softwood ply w ood facility has opened in the last 10 y ears (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). Conversely , results of the growing capital inv estm e nts m a de by the reconstituted wood products industry can be observed in the large increases in the num ber of OSB and MDF plants, and the rising average plant capacities of reconstituted wood products producers. As a group, these producers invested 6 percent of the value of shipm e nts in 1997, twice the investm e nt rate of the softwood ply w ood producers. For exam ple, in Septem ber of 1999, Willam e tte Industries announced that it will build an $85 m illion particleboard plant in South Carolina. The plant will have a capacity of 210 m illion square feet per y ear and will be in operation in late 2001.
2.4.3 Firm Characteristics Several factors will likely be of im portance in de term ining the distribution of im pacts generated by the proposed MACT standard on com p anies. Size m ay play a role in a com p any ’ s ability to absorb an increase in com p liance costs. Ownership is a second factor that m a y play a role. Because firm s have different legal and financial guide lines based on ownership, their approaches to com p ly ing with the MACT standard m ay vary
. Vertical and horizontal integration, or lack there of, in ply w ood and com posite wood product firm s m ay affect the m a nner inwhich they absorb the potential costs of the MACT standard. Lastly , the overall financial cond ition of the ply w ood and com posite wood industries is assessed, attem p ting to determ ine the industry ’ s ability to withstand adverse conditions.

2-332.4.3.1 S ize Distribution Firm size is likely to be a factor in the distribution of the im pacts of the proposed MACT on com p anies. Under the Regulatory Flexibility Act (RFA) and its 1996 am endm ent, SBREFA, SBA definitions are used to designate which businesses are considered to be sm all. The SBA has set size standards under the NAICS sy stem , using various thr esholds for the num ber of em ploy ees or revenues. In determ ining the size of a com p any , the SBA treats a facility that has a substantial portion of its assets and/or liabilities shared with a parent com p any as part of that com p any
. In this analy s is, the com p any ’ s prim ary NAICS code is used to dete rm ine the appropriate SBA threshold. Exhibit 2-21 provides inform ation on firm size for ply w ood and wood com posite firm s owning facilities with expected com p liance cost im pacts. In the ICR, facilities were asked to provide inform ation on em ploy m e nt size for dom estic parent firm s. Many facilities did not report inform ation on the ultimate domestic parent

. For this reason, inform ation on ultim ate dom estic parent prim ary SIC and NAICS code and em ploy m e nt size were obtained from Dun and Brad street’ s DUNS Database. Exhibit 2-21 shows the num ber of firm s and the facilities owned by the firm s in the first two data column s. In the absence of Dun & Bradstreet inform ation on the owner, the f acility ’s prim ary SIC and NAICS code from Dun & Bradstreet was used to determ ine the appropriate SBA threshold. Based on this SIC code, facility em ploy m e nt inform ation from the ICR was used to m a ke a size determ ination. Exhibit 2-21 shows the num ber of firm s and the facilities owned by the firm s in the third and fourth data column s. In the absence of facility prim ary SIC code from DUNS, the standard for lum b er and wood products (all SIC 24 codes) of 500 em ploy ees was used as the threshold. A full list of the facilities and their size determ ination is provided in the econom ic im pact analy s is for this proposed rule.
Exhibit 2-21: Size Distribution of Firms Owning Facilities with Expected Compliance Cost Impacts

Siz e SIC Base d on DUNS S I C Bas e d on I C R Oth er S o u rces Total

Firms F acilities O w ne d by

Firms* Firms F acilities O w ne d by

Firms* Firms F acilities O w ne d by

Firms* Firms % Facilities O w ne d by

Firms* %

Small 8 10 5 5 6 7 1 9 35.2% 22 8.4% Large 2 9 231 4 8 2 2 3 5 64.8% 241 91.6% Total 3 7 241 9 1 3 8 9 5 4 100% 263 100% * Includes all facilities reported, im pacted and non-im pacted. Sources: U.S. Environmental Protection Agency (1998) , MRI (1999). http://www.sba.gov/regul ations/siccodes/. SBA Size Standards from SBA website:
While over 35 percent of firm s in the industry ar e considered sm all, 91 percent of facilities are owned by large firm s. Given the concentration ratio s presented in Exhibit 2-15, there does not appear to be any significant m arket power to these larger firm s. However, the ability of larger firm s to deal with com p liance costs, as com p ared to sm aller firm s, m a y have im pacts on the industry organization. The larger parent firm s have both im pacted and non-im pacted facilities. Firm s such as GeorgiaPacific (43 ICR facilities), Louisiana-Pacific (32 ICR facilities), Willam e tte Industries (23 ICR facilities), Colum b ia Forest Products (13 ICR facilities), Wey e rhaeuser (19 ICR facilities), and Boise-Cascade (12 ICR facilities) m a y be able to m a ke trade-offs be tween facilities and shift production to m o re efficient facilities in response to com p liance cost s associated with the MACT standard.

2-342.4.3.2 Ownership The form of firm ownership has a set of legal and financial characteristics that m a y influence a firm ’ s regulatory com p liance alternatives. The lega l form of ownership im pacts the cost of capital, availability of capital, and effective tax rate faced bythe firm

. Debt-equity issues for these firm ty pes will play a role in financing capital-intensive controls. Firm ownership m a y generally be one of three ty pes.

• S ole proprietorships (com panies with a private single-owner) • P artnerships (non-corporate firm s with m o re than one owner) • C orporations (publically or privately ow ned com p anies form ed through incorporation) Exhibit 2-22 provides inform ation on ownership ty pe for the lum b er and wood products industry

. While specific inform ation by 4-digit SIC or 5-digit NAICS is not available, the table provides a general sense of ownership ty pes in the industry , assum i ng th at ownership structure for the three industries profiled is sim ilar to that of the ove rall lum b er and wood products industry

. Exhibit 2-22: Types of Firm Ownership for Lumber and Wood Products (SIC 24/NAICS 321), 1992 Other/ Proprietorship Partnerships Sole Unk n own Single-Facility Firm s Corporation 1,291 14,909 Multi-Facility Firm s 17,617 61 All Firm s 18,908 10,447 2,336 2,187 Source: U.S. Dept. of Commerce (1992). Over ninety percent of single facility wood and lum b er products firm s are owned by sole proprietorships, partnerships, or som e other/unknown entity

. Nearly all m u lti-facility firm s are owned by corporations. Just over half of a ll lum b er and wood products firm s are a corporation, while the rem a inder are sole proprietorships (30 percent) , partnerships (7 percent), or othe r (6 percent). These data support the conclusion that single-facility firm s owned by sole pr oprietors are m o re likely to be classified as sm all businesses, while m u lti-facility firm s owned by corporations are m o re likely to be classified as large businesses.
2.4.3.3 V ertical and Horizontal Integration The data presented in Section 2.2 on concentration and specialization ratios for the ply w ood and com posite wood industries, com b ined with the in form ation on establishm ent size and ownership ty pe dem onstrate that the m a jority of firm s in the three industries exam ined in this profile are predom inantly not, or m i nim a lly , vertically or horizontally integrated. However, there are several exceptions to this conclusion. The six largest firm s that own m u ltiple facilities are for the m o st part both vertically and horizontally integrated. These firm s, described inm o re detail below, are large m u lti-billion dollar concerns that are vertically integrated through th eir ownership of tim berland, their production facilities, and their involvem e nt in product distribution. Their horizontal integration is attributed to their other product lines, generally pulp and paper. Georgia-Pacific, a large, horizontally and vertically integrated firm , m a nufactures and distributes building products, pulp and paper, and resins. The com p any ’ s wood product line includes wood panels, ply w ood, and hardboard. It also produces lum b er, gy ps um products, chem icals, and packaging. GeorgiaPacific grows and sells tim ber, and participates in sev eral other activities related to forestry m a nagem e nt. Its 1998 net sales revenues exceeded $13 billion, and it has 45,000 em ploy ees at 400 locations. Its building products division reported r ecord profits during the second quarter of 1999. It currently has

2-35plans to build an OSB plant in Arkansas and recen tly m e rged with Unisource, a m a jor distributor of im aging paper and supply sy stem s (Financial Tim es, 1999b; PR NewsWire, 1999b). Louisiana-Pacific is principally a m a nufacturer of building products, but also produces pulp and building insulation, and owns alm o st one m illion acres of tim berland. Its sales of structural lum b er, industrial panels, and exterior bu ilding products m a de up nearly 75 percent of the com p any ’ s revenues, which reached $2.3 billion in 1998. The com p any m a nufactures OSB, I-joists, LVL, MDF, fiberboard, particleboard, hardboard, softwood ply w ood and hardwood veneer. Louisiana-Pacific has been involved in a series of m e rgers and acquisitions that include Le Goupe Forex of Cana da, Evans Forest Products, and ABT Building Products (Louisiana-Pacific, 1999; Financial Tim es, 1999c). Willam e tte Industries, a forest products m a nufacturing com p any , has three m a in lines of business: brown paper, white paper, and building products. The building products division m a nufactures ply w ood, lum b er, particleboard, MDF, OSB, LVL and I-joists, am ong others. Approxim a tely one third of the com p any ’ s $3.7 billion in total revenue is from its building m a terials segm e nt. Most of Willam e tte’s recent m e rger and acquisition activity has been with fi rm s in France and Mexico. It also owns plants in Ireland and 1.8 m illion acres of tim berland in the U. S. (Financial Tim es, 1999d; PR NewsWire, 1999c, 1998, 1997). Colum b ia Forest Products describes itself as North Am erica’ s largest m a nufacturer of hardwood veneer, and lam i nated products. They sell their products through a network of wholesale distributors, m ass m e rchandisers and m a jor original equipm ent m a nufacturers (OEMs). Their products include decorative, interior veneers and panels used in hi gh-end cabinetry , fine furniture, architectural m illwork and comm e rcial fixtures. Colum b ia Forest Products is an em ploy ee-owned com p any with 13 plants in the U.S. and four in Canada (Colum bia Forest Products, 1999). Wey e rhaeuser is an integrated international forest products com p any
. It is involved in growing and harvesting tim ber, and the m anufacturing and distributing of several categories of forest products. Am ong its wood products are ply w ood, OSB, and wood com posites. The com p any bills itself as the world’s largest private owner of saleable softwood tim ber and the country ’s largest producer of softwood lum b er and pulp. In addition, it is the top U. S. exporter of forest products. The com p any has approxim a tely 36,000 U.S. and Canadian em ploy ees and sales of $11 billion, ten percent of which com e s from exports (Wey erhaeuser, 1999). Boise Cascade, an integrated international pape r and forest products com p any , m a nufactures and distributes paper and wood products, distributes office products and building m a terials, and owns and m anages over 2 m illion acres of tim berland. Its building products include lum b er, ply w ood, particleboard, veneer, and engineer ed wood products. Sales of these pr oducts constitute 27 percent of the com p any ’ s $6.2 billion annual revenue (Fin ancial Tim es, 1999a; PR NewsWire, 1999a).
2.4.3.4 F inancial Condition The financial condition of an industry ’ s firm s will affect the incidence of im pacts of the costs associated with com p ly ing with a new MACT standa rd. While inform ation necessary to determ ine which specific firm s m i ght experience adverse im pacts is not available, one can exam ine industry

- wide indicators of financial condition. Each y ear, Dun & Bradstreet (D&B) publishes Industry Norms & Key Business Ratios , which reports certain financial ratios for a sam ple of firm s in the industry

. This section focuses on m easures of profitability and solvency

.

2-36Profitability Ratios The return on sales ratio, also known as the net profit m a rgin, is an indicator of a firm ’s ability to withstand adverse conditions such as falling prices, ri sing costs, and declining sales, and is calculated by dividing net profit after taxes by annual net sales. Return on assets is calculated by dividing a firm ’ s net profit after taxes by its total assets. This ratio is a key indicator of both profitability and operating efficiency by com p aring operating profits to the assets available to earn a return. According to Dun & Bradstreet, com p anies that use their assets efficiently will have a relatively higher return on assets than those firm s that do not use their assets efficiently

. The return on equity shows the profitability of the com p any ’ s operations to owners, after incom e taxes, and is calculated by dividing net profit after taxes by net worth. According to Dun & Bradstreet, this ratio is looked to as a ‘final criterion’ of profitab ility , and a ratio of at least 10 is regarded as desirable for providing dividends plus funds for future growth. Solvency Ratios The current ratio is calculated by dividing a firm ’ s current assets by its current liabilities. This is a m easure of liquidity that gauges the ability of a com p any to cover its short-term liabilities. The standard guideline for financial health is 2. The quick ratio is slightly different than the current ratio, because it does not include inventories, advances on inventories, m a rketable securities, or notes receivables. The quick ratio m easures the protection afforded creditors incash or near-cash assets. Any tim e this ratio is 1 or greater, the firm is said to be in a liquid condition. Exhibit 2-23 shows various m easures of the fi nancial condition of the ply w ood and com posite wood industry over the period 1995 to 1997. The trends shown in Exhibit 2-23 confirm that the softwood ply w ood and reconstituted wood products industries have experienced a profit squeeze due to increasing costs and falling prices in recent y ears.
Exhibit 2-23: *
Indicator Softwood Plywood and Veneer Reconstituted Wood Products Structural Wood Members 1995 1996 1997 1995 1996 1997 1998 Return on Sales 5 .8 3.6 1 .7 3.8 3 .1 3.5 5 .0 Return on Assets 15.7 13.5 6 .0 7.8 5 .9 3.5 13.0 Indicators of Financial Condition, 1995-1997

Return on Equity 28.7 22.9 8 .7 15.2 10.0 2 .6 2.7 2 .8 2.7 1 .3 1.2 1 .8 1.2 5 .7 NA Current Ratio 3.2 1 .7 2.3

Quick Ratio *I ncludes 1998 data for Str u ctur al W ood M em b e r s, the onl ydata r e ported for this sector

. Sour ce: Dun & Br adstr eet ( 1999)

. For SI C 2436, ther e wer e 14 establishm ents in the sam p le in 1995, 15 in 1996, and 11 in 1997. For SI C 2493, ther e wer e 28 establishm ents in the sam p le in 1995, 30 in 1996, and 31 in 1997. For SI C 2439, ther e wer e 135 establishm ents in 1998. 1.3

I ndicator values ar e based on m e dian values of the industr ial sam p le. 1.1 1 .1

The softwood ply w ood and veneer industry has not m a intained its relatively strong degree of financial health, with m a ny of its profitability i ndicators significantly lower in 1997 than in 1995. In particular, the softwood ply w ood and veneer industry experienced 60 to 70 percent declines in all three profitability ratios. The falling profitability of this industry is now at a level that indicates the presence of firm s that are not using their assets efficiently , are not providing the cash needed for future growth, and
2-37m ay m o re acutely experience adverse conditions associat ed with MACT standard com p liance costs. The currently low net profit m a rgin is indicative of an industry that is experiencing increasing production costs as a percentage of its value of shipm e nts a nd falling capacity utilization (Exhibits 2-5 and 2-18). The reconstituted wood products industry also saw fairly dram atic decreases in its financial indicators over the tim e period shown, resulting in a relatively low return on assets and return on equity , as well as a current ratio lower than generally consid ered healthy

. These indicators are consistent with recent trends in the industry associated with in creases in production costs relative to the value of shipm e nts (Exhibit 2-5), rapid expansion of produc tion capacity (Exhibit 2-20) and com p etitive pressures on prices from overseas producers. This industry also includes firm s that are not using their assets efficiently or providing the cash needed for future growth. The reconstitute d wood products industry ’ s profit m argin is also som e what low, but ty pical of all firm s in the lum b er and wood products sector (Dun and Bradstreet, 1999b). In the fall 1999 issue of Engineered Wood Produc ts Journal, industry analy s t Evadna Ly nn discussed investor response to the industry ’ s current financial perform ance (APA, 1999c). Ly nn attributes several recent trends to stockholde r pressure for im proved financial perform ance.

• S eparating tim ber assets • C orporate restructuring • C ost control through consolidation These trends have contributed to a dy nam i c m a rket structure in recent y ears. By selling or otherwise spinning off tim ber assets, forest produc ts com p anies are converting them to cash and im proving financial perform ance. Restructuring ac tivities have focused on gaining higher returns from core business activities through the closure or divestiture of less profitable facilities or products. Som e of the divested facilities, particularly ply w ood m ills, have been reopened by new owners as sawm ills. The industry has seen several m a jor corporate m e rgers and acquisitions in the late 1990s, including: Wey e rhaeuser and MacMillan Bloedel, International Paper and Union Cam p , and Louisiana Pacific and Le Groupe Forex (of Canada). Most post-m e rger co st reductions are gained from stream lining operations, including closure of production facilities (APA, 1999c; International Paper, 1998). 2.5 M arkets This chapter discusses general m a rket conditi ons for the ply w ood and com posite wood products industries. In particular, this chapter discusses m arket structure, provide background on current m a rket volum es, prices, and international trade. It also presents inform ation on future m a rket volum es, prices and international trade. The purpose of this chapter is to describe the current status of the industry and to support the developm ent and im plem entation of the econom ic im pact analy s is that is summ a rized in this RIA.
2.5.1 Market Structure Based on the data, background and analy ses reviewed while preparing this industry profile, it is reasonable to conclude that these industries exhibit clear signs of a com p etitive m a rket for the products that are the subject of this MACT standard. There are several reasons for this conclusion. First, as discussed in section 2.4.2, the ply w ood and com pos ite wood products industries are unconcentrated. There is little concentration of m arket power evid enced by each separate industrial category having a 4- firm concentration ratio of 50 or below (often well below) and HH indices below the 1000 benchm ark. Next, the output of several of the production sectors are substitutes for each other, putting com p etitive pressures on suppliers. There are also com p etitive pr essures from alternative products, either traditional sawn lum b er or non-wood m a terials. This chapter w ill focus on other factors of the com p etitive nature of
2-388 1995 is the latest year for which data is available. 2-39 these industries. o st part, the m a rkets for these goods also experience com p etitive pressures by the presence of im ported products. , several i ndustry experts have observed trends where prices of the products respond negatively to the presence of ex cess capacity

. a inder of this chapter will provide additional details related to these observations on industry com p etitiveness.
2.5.2 M arket Volumes This section will present a discussion of m a rket consum ption and production volum es for the three industrial sectors exam ined in this study

. r the m o st part, this discussion will rely on the data contained in Exhibit 2-24 and Exhibit 2-25. xhibit 2-24 shows the value of product shipm e nts by product class for the period 1989 to 1995 8 as reported by the International Trade Adm i nistration of the U.S. Departm e nt of Comm e rce. e nts data for Structural Wood Mem b ers is not available for inclusion in this table. 2-25 shows the phy sical volum e of output produced, traded and consum ed between 1988 and 1997 for selected produc ts as reported by Spelter et al. in their 1997 statistical report.
Exhibit 2-24: Trade Balance and Select ed Statistics, Thousands of 1997 Dollars

1989 1990 1991 1992 1993 1994 1995 % Change Softwood Veneer and Plywood (SIC 2436, NAICS 321212) Value of product shipm e nts 7 ,125 6,887 6,185 6,422 5,643 5,885 6,671 -6% Value of im ports 81 69 55 79 82 100 111 37% Value of exports 452 509 428 452 391 333 375 -17% Trade Surplus (Deficit) 371 440 373 372 310 234 263 -29% Apparent Consum ption 6 ,755 6, 447 5,812 6,050 5,333 5,651 6,407 -5% Ratio of Im ports to Consum ption 0 .01 0 .01 0 .01 0 .01 0 .02 0 .02 0 .02 45% Ratio of Export to Product Shipm e nts 0 .06 0 .07 0 .07 0 .07 0 .07 0 .06 0 .06

- 11% Ratio of Im ports to Exports 0.18 0.14 0.13 0.18 0.21 0.30 0.30 65% Reconstituted Wood Products (SIC 2493, NAICS 321219) Value of product shipm e nts 5 , 013 4,761 4,743 5,359 4,940 5,511 5,772 15% Value of im ports 461 409 364 540 616 861 1,080 134% Value of exports 261 334 350 328 271 301 345 32% Trade Surplus (Deficit) (200) (75) (14) (212) (345) (560) (735) 268% Apparent Consum ption 5 ,213 4,836 4,757 5,572 5,285 6,070 6,507 25% Ratio of Im ports to Consum ption 0 .09 0 .08 0 .08 0 .10 0 .12 0 .14 0 .17 88% Ratio of Export to Product Shipm e nts 0 .05 0 .07 0 .07 0 .06 0 .05 0 .05 0 .06 15% Ratio of Im ports to Exports 1.76 1.22 1.04 1.65 2.27 2.86 3.13 77% Source: e nt of Comm e rce, International Trade Adm i nistration (1998). For the m Finally The rem

Fo E Note that value of shipm Exhibit International trade is discussed later in the section.

U.S. Departm2-40Exhibit 2-25: Production, Trade and Consumption Volumes for Selected Products (1988-1997)1988198919901991199219931994199519961997%ChangeSoftwood Plywood(M ft3, 3/8 in basis)Product shipments22,08921,38520,91918,65219,33219,31519,36819,36719,18117,963-19%Imports9649382847414760851048%Exports1,0041,4421,6131,3221,4421,4091,2111,2671,2481,54854%Apparent Consumption21,18119,99119,34417,35817,93717,94618,47418,16018,01816,519-22%Other Structural Panels(M ft3, 3/8 in basis)Product shipments4,6045,1055,4185,6136,6537,0027,4867,9039,31410,534129%Imports8151,1111,3139881,5722,1632,5883,2144,4145,272547%Exports5749607882157167193%*Apparent Consumption5,4166,2136,7286,5448,1769,1059,99511,03613,57215,639189%Particleboard/Medium Density Fiberboard(M ft3, 3/4 in basis)Product shipments4,7684,8284,8564,7305,0465,4025,7935,3075,7055,91624%Imports1,634425363293405572775840814963-41%Exports16333337336939431829731915418815%Apparent Consumption6,2394,9204,7464,6545,0575,6566,2715,8286,3656,6917%Hardboard(M ft3, 1/8 in basis)Product shipments5,1185,1965,0254,8955,2735,2485,2064,9305,2804,501-12%Imports6337186895715716391,1191,1521,1831,306106%Exports3224275526068369171,1901,3771,4261,259291%Apparent Consumption5,4295,4875,1624,8605,0084,9705,1354,7055,0374,548-16%Source: Spelter et al. (1997).* since 19912.5.2.1 D omestic Production As Exhibit 2-24 shows, the value of shipm e nts (representing production) of softwood ply w ood and veneer was slightly lower in 1995 than it w as in 1989. During the period, production reached its lowest level in 1993 and then began to clim b, in response to m eeting dem a nd from rising expenditures for renovation and rem odeling and new housing starts. The value of shipm e nts of reconstituted wood products rose 15 percent between 1989 and 1995, linked to the underly i ng growth in the construction sector and the growth in m arket share of structural panel products over softwood ply w ood. Figure 2-10 com p ares the value of product shipm e nts of softwood ply w ood and veneer to reconstituted wood products from 1989-1995. Figure 2-10: Value of Product Shipm ents, 1989-1995

1 989 19 90 199 1 19 92 19 93 19 94 19 95 - 1, 00 0 2, 00 0 3, 00 0 4, 00 0 5, 00 0 6 , 000 7, 000 8, 0001997 Dollars ($1,000,000)

Ye a r 

### Sof t w

o o d ply w oo d & v

ene er



### R

e c o n s ti tuted w o od pr od uc ts

Source: U.S. Departm e nt of Comm e rce, International Trade Adm i nistration (1998). Trends in product shipm e nts by volum e (Exhib it 2-25) have been m i xed for this group of industries. A statistical report produced by the U.S. Forest Service’s Forest Products Laboratory (Spelter et al., 1997) focused on production of softwood ply w ood, Other Structural Panels (OSB and waferboard), particleboard and MDF as a group, a nd hardboard. Production by the Other Structural Panels category experienced high growth during the period, with 1997 production alm o st 130 percent greater than it was in 1988. Most of this increase can be attributed to the rapid increase in OSB’ s share of the structural panel m a rket in recent y ears. Particleboard a nd MDF production grew a m oderate 24 percent, while production of softwood ply w ood and hardboard declined by 19 percent and 12 percent respectively

. Historically , softwood ply w ood production m a de a c ontinuous steady clim b through the late 1980' s. At that point, the product began losing m a rket share to OSB and production leveled off. This trend was accom p anied by a certain am ount of m ill attrition (Spelter et al., 1997).

2-412.5.2.2 D omestic Consumption
Dom estic, or apparent, consum ption is the sum of dom estic production and im ports, less exports. The dollar value of apparent consum ption (Exhibit 2-25) for softwood ply w ood and veneer was slightly lower in 1995 than it was in 1989. During the peri od, dem a nd for softwood ply w ood and veneer dropped slightly in the early 1990s and reached its lowest le vel in 1993 and then began to clim b. The value of dom estic consum ption of recons tituted wood products followed a si m ilar pattern, increasing by 25 percent overall between 1989 and 1995. Drivers of c onsum ption trends described here are the sam e as those presented in the previous section on producti on (increased dem a nd for renovation, rem odeling and new housing starts). Figure 2-11 com p ares the apparent consum ption of softwood ply w ood and veneer to reconstituted wood products from 1989-1995. Figure 2-11: Apparent Consum ption, 1989-1995

19 89 1990 19 91 1992 1993 1994 199 5 0 1, 000 2, 000 3, 000 4, 00 0 5, 0 0 0 6, 000 7, 0001997 Dollars ($1,000,000)

Ye a r S o f t w ood pl y w o od & v e n eer

R e c o n s ti tu te d w o o d pr od u c t s

Source: U.S. Departm e nt of Comm e rce, International Trade Adm i nistration (1998) Further exam ination of consum ption volum es (E xhibit 2-25) shows the following trends for softwood ply w ood, other structural panels, particleboard and MDF as a group, and hardboard.

• B y volum e, apparent consum ption of softwood ply w ood fell by over 20 percent in the last 10 y ears. • A t the sam e tim e, consum ption of other structural panels increased by alm o st 200 percent.

• P articleboard and MDF were consum ed at a sli ghtly higher level in 1997 than they were in 1988, following a decline that ended in 1992.

• H ardboard consum ption has fluctuated during th e sam e 10 y ears, with a 16 percent decline from 1988.

2-422-43 Dem and for softwood ply w ood and OSB com b ined experi enced an annual average growth rate of 2-3 percent from 1970 to 1996 (Spelter et al., 1997). of this dem a nd was m e t by increased production of OSB by both dom estic and im ported producers.
2.5.2.3 I nternational Trade Imports
Im port value trends during the 1989-1995 period (Exhi bit 2-24) show the constant dollar value of softwood ply w ood and veneer im ports grew by 37 percen t, particularly during the later y ears when the price for the comm odity was rising rapidly and supplies of tim ber were declining. ports to consum ption of softwood ply w ood and veneer, while only 0.02, grew by 45 percent. for softwood ply w ood and veneer fell by 37 percent. Im ports of reconstitute d wood products m o re than doubled from 1989 to 1995 and the value of im ports’ shar e of consum ption grew by alm o st 90 percent and the trade deficit nearly quadrupled. Looking at im port volum es (Exhibit 2-25) for so ftwood ply w ood, other structural panels, particleboard and MDF as a group, a nd hardboard, im ports have m a de the biggest gains in the other structural panel category , taking advantage of the overall growth in dem a nd for those products. ports now supply over a third of the other structural panel m a rket. ports of hardboard have also grown, m o re than doubling in volum e since 1988. ports of softwood ply w ood over the 10 y ears, and a decline of 40 percent in im ports of particleboard and MDF. Exhibit 2-26 shows U.S. im ports of m a jor region and trading partner. Exhibit 2-26: 1997 U.S. Wood Products Import s by Region and Major Trading Partner

Trade Areas Value* ($millions) Share NAFTA 8,128 85.1 Latin Am erica 541 5.7 W e stern Europe 234 2.5 Japan/Chinese Econom ic Areas 35 0.4 Other Asia 458 4.8 Rest of W o rld 150 1.6 W o rld Total 9 ,554 100.0
Top 5 Countries Canada 7,991 83.6 Indonesia 340 3.6 Brazil 303 3.2 Mexico 137 1.4 Chile 108 1.1 *Includes Sawm ills (SIC 2421), Softwood Plywood and Veneer (SIC 2436), Reconstituted W ood Products (2435), and Hardwood Plywood and Veneer (SIC 2435). Source: U.S. Departm e nt of Comm e rce, International Trade Adm i nistration (1999). Most

The ratio of im The trade surplus

Im Im There was a slight increase in im byExhibit 2-26 shows that a vast m a jority , 85.1 percent, of U.S. im ported wood products originated in the North Am ericanFree Trade Agreem ent (NAFTA) trade zone, of which only 1.5 percent originates in Mexico. The U.S. is also im porting a significantly greater value of wood products than it is exporting. In 1997 the U.S. exported about $3, 683 m illion of wood products while it im ported $9,554 m illion.
Im ports of softwood ply w ood and veneer grew by 24 percent from 1996 to 1997. Seventy

- seven percent of U.S. softwood ply w ood and veneer im ports are from Canada. This gr owth is consistent with the strong dem and for softwood ply w ood and veneer during this period. The overall penetration of im ports into the U.S. m arket is quite sm all (2 percent) , which is attributed to the efficiency and low costs of U.S. softwood ply w ood and veneer producers (U.S . Departm e nt of Comm e rce, International Trade Adm i nistration, 1999).
Im ports of reconstituted wood products grew by seven percent from 1996 to 1997. Seventy

eight percent of U.S. reconstituted wood products im ports are from Canada. The overall penetration of im ports into the U.S. m arket is significant (18 per cent), which is attributed to recent capacity additions by Canadian reconstituted wood produc ts producers (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). Exports Export trends during the 1989-1995 period (Exhibit 2-24) show the value of softwood ply w ood and veneer exports fell by 17 percent, particular ly during the later y ears when the price for the comm odity was rising rapidly and supplies of tim ber we re declining. Econom ic crises in several Asian econom ies and the falling value of the Canadian dollar relative to the U.S. dollar play ed a role in this trend. The ratio of exports to value of shipm e nt s of softwood ply w ood and veneer fell by 11 percent. Exports of reconstituted wood pr oducts grew by 32 percent from 1989 to 1995 and the proportion of exports to shipm e nts grew by alm o st 15 percent. Export volum es (Exhibit 2-25) of hardboard qua drupled between 1988 to 1997, and constitute a significant portion of the total shipm e nts from this industry

. Exports of softwood ply w ood grew by 50 percent, and have becom e an increasingly im portant part of the sector’ s overall production. While total exports of other structural panels grew signifi cantly , this m a rket still rem a ins a sm all portion of production. Exports of partic leboard and MDF grew significan tly through 1992 but have dropped steadily in recent y ears and are now just 15 percent hi gher than they were seven y ears ago. Exhibit 2-27 shows U.S. exports by m a jo r region and trading partner.

2-442-45 Exhibit 2-27: 1997 U.S. Wood Product Exports by Region and Major Trading Partner

Trade Areas Value* ($millions) Share NAFTA 1,001 27.5 Latin Am erica 203 5.6 W e stern Europe 1,230 33.8 Japan/Chinese Econom ic Areas 837 23.0 Other Asia 205 5.6 Rest of W o rld 161 4.4 W o rld Total 3 ,638 100.0
Top 5 Countries Canada 800 22.0 Japan 636 17.5 Germ any 292 8.0 United Kingdom 244 6.7 Mexico 202 5.5 *Includes Sawm ills (SIC 2421), Softwood Plywood and Veneer (SIC 2436), Reconstituted W ood Products (SIC 2493), and Hardwood Plywood and Veneer (SIC 2435). Source: U.S. Departm e nt of Comm e rce, International Trade Adm i nistration (1999). By region, the U.S. exports its largest share ( 33.8 percent) of wood products to Western Europe. However, no single country in Europe im ports the m o st significant share of U.S. wood products. im ports the largest share, 22 percent, due to two reasons. economy has strengthened. Second, on January 1, 1998 Canada co m p leted its final stage of tariff rem oval as directed under the U.S.- Canada Free Trade Agreem ent. orem entioned reasons, U.S. wood product exports to Canada increased 21 percent to $800 m illion in 1997 (U .S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). Continued growth in U.S. exports of wood products is dependent on an As ian econom ic revival, particularly in Japan’s economy . In 1996, prior to the econom ic crisis, Japan was the largest im porter of U.S. wood products. 1997, Japan’s share of U. S. wood product exports fell to 17 percent, a 24 percent decrease from the previous y ear. exacerbate the problem , U.S. exports to Japan are expected to decline an additional 30 percent in 1998 and 1999. revitalize its economy , such as the im plem entati on of the Enhanced Initiative on Deregulation and Com p etition Policy

. However, an increase in the Jap anese consum ption tax from 3 percent to 5 percent in 1996 is believed to have canceled out the potentia l gains of the Policy , resulting in the expected continuing decline in Japanese dem and for U.S. ply w ood and wood products (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). In 1997, exports of softwood ply w ood and ven eer accounted for about 10.6 percent of wood product exports from the U.S. t increase from the previous y ear, raising the total value of softwood ply w ood and veneer exports to $392 m illion, the highest level in eight y ears. Exports to the United Kingdom , Canada, and Germ any , the t op three im porters of U.S. softwood ply w ood and veneer, experienced strong gains in 1997. lthy European m a rket has increased the dem and for softwood ply w ood and veneer. e construction sector throughout Europe has seen an Canada First, Canada’s For the two af

By To further Japan has undertaken several steps to

This was a 24 percen

A hea In particular, thincrease in activity

. However, the recent strong perform ance of softwood ply w ood and veneer is not expected to continue due to an increasing intern ational acceptance of OSB, and increasing com p etition from Canada, Brazil, and Indonesia (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). Reconstituted wood products account ed for about 9.75 percent of U.S. wood product exports in 1997. Both the value and volum e of reconstitute d wood product exports increased by 15 percent from the previous y ear. Canada, the United Kingdom , Mexi co, and Japan are the largest export m a rkets for U.S. reconstituted wood. The continuing increase in exports is m a inly attributable to a growing international acceptance of OSB. Exports are expected to continue to grow in the upcom ing y ears, but at a slower rate than they did in 1997 (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999).
2.5.3 P rices An index of the change in producer prices fo r lum b er and wood products is shown below in Exhibit 2-28 This index was com p iled by the Bureau of Labor Statistics. Exhibit 2-28: Lumber and Wood Products Producer Price Index, 1988-1997 (1982 = 100)

122.1 125.7 124.6 124.9 144.7 183.4 188.4 173.4 179.8 194.5

2.9% -0.9% 0 .2% 15.9% 26.7% 2.7% -8.0% 3 .7% 88-97

59.3% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Lum b er and wood

products (SIC 24)

Change from 8 .2% Previous year Source: U.S. Bureau of Labor Sta tistics (1999). The biggest annual price increases for lum b er and wood products occurred in 1992 and 1993 and the overall price increase between 1988 and 1997 was near ly 60 percent. Another source, the Forest Products Laboratory (FPL), that is part of the U.S. Departm e nt of Agriculture, provides a statistical report with disaggregated price indices presented in E xhibit 2-29. Note that the base y ear of the BLS index is 1982 while the base y ear for the FPL data is 1992.

2-462-47 Exhibit 2-29: Producer Price Indices of Plywood and Wood Composite Products (1992 =100) Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 88-97 Softwood Plywood 74.2 84.5 81.4 82.2 100.0 115.4 120.3 128.0 118.3 119.3 Change from Previous year 0 1 Particleboard 103.4 106.0 96.7 96. 5 100.0 114.8 128.5 128.4 123.3 117.6 Change from Previous year 0 0 Hardboard 100.9 98.6 96.7 100.0 106.5 109.1 113.2 115.8 119.0 Change from Previous year 0 0 Source: Howard (1999). Softwood ply w ood experienced the biggest price increase, 61 percent over the 1988 to 1997 period, with volatile price changes within the pe riod with the biggest annual increases cam e in 1992 and 1993. have been offset by price declines in the last three y ears presented. 18 percent, with m o stly steady annual price increases from 1994 on. The m arket conditions and the factors that a ffect softwood ply w ood prices, supply and dem and are som e what analogous to those that affect prices fo r softwood lum b er. ple, the cost of tim ber and transportation, foreign supply and dem a nd, inventory levels as well as construction-driven dem and are factors that affect m arket prices for softwood lum b er, as well as softwood ply w ood and other structural panels. A recent study produced by WEFA (Wharton Econom ic Forecast Associates) on trends in the softwood lum b er m a rket provides som e clues about th e future of the three industries exam ined here. Softwood lum b er prices have clim bed steadily sin ce Novem b er of 1998. b included som e higher than expected price increases in the early su mm e r of this y ear. dom estic dem a nd related to hous ing construction as one underly i ng cause of the price increases in softwood lum b er. tially explained by the expectation that housing dem a nd has peaked while rem a ining strong, exports to Asia will increase as those econom ies recover, and im ports from Canada will decrease. For the m o st part, the WEFA report indicates that the construction industry has responded to clim bing prices by switching to “just-in-tim e” buy i ng of products. e rs are hoping that prices will begin falling and are postponing inve ntory build-up during this period of clim bing prices. short-run factor affecting prices during the second quarter of this y ear was a constraint on truck and rail transportation availability

. e m a rket has reached equilibrium for the m o m e nt, although this could change if inventories increase at the sam e tim e that construction-driven dem and levels off or falls (WEFA, 1999). Exhibit 2-30 presents the industry -reported free on board (f.o.b.) prices of southern ply w ood, OSB and particleboard from 1989 to 1996. distributor m ark-ups. ices reflect the trends dem onstrated in the previous exhibit, with large price increases during early 1992, falling back to or below 1989 levels by 1996. 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 100.8 0 0 0 0 0 0 0 0

Overall prices for particleboard rose 14 percent, but the large price increases in 1993 and 1994 Hardboard prices grew by

For exam

This clim The WEFA report cites strong Current price conditions are par

Buy Another WEFA concludes that th

These are the product prices prior to shipping costs and On an adjusted basis, these pr2-48 Exhibit 2-30: F.O.B. Prices of Southern plywood, OSB, and Particleboard ($ per cubic meter) Year Southern plywood OSB P articleboard As Reported Adjusted $1997 As Reported Adjusted $1997 As Reported Adjusted $1997 1989 184 229 166 206 129 160 1990 168 200 124 148 122 145 1991 175 201 144 165 120 138 1992 226 252 208 232 129 144 1993 257 279 227 247 152 165 1994 274 291 252 268 171 182 1995 267 277 242 251 173 180 1996 231 235 184 187 165 168 89-96 2.8% -10.1% 4.5% Prices adjusted by the GDP deflator. Source: Spelter, et al. (1997). Softwood Plywood Long-term price trend data presented in the re port “Review of the Wood Panel Sector in the U.S.” showed a fairly stable price pattern for softwood ply w ood between 1977 and 1991. prices increased steadily from 1992 to their peak in1994. 1994 to 1996. wood ply w ood prices at their current high levels, producers will have a difficult tim e com p eting against the newer, m o re cost effective OSB producers. However, the authors note that softwood ply w ood produ cers m a y be able to hang on to m arket share and justify the higher prices by differentiating their pr oduct as a prem ium construction m a terial (Spelter et al., 1997). Oriented Strand Board The “Review of the Wood Panel Sector in the U.S.” report presents OSB price data over tim e that shows a 27 percent decline in price during 1995 and 1996, after a continuous trend of price increases since 1977. s authors attribute this weak ening to a rapid increase in capacity that contributed to an increase in production, putting downward pressu re on prices. of users to substitute ply w ood for OSB, these low OSB prices have only added to the growing m a rket share enjoy e d by OSB. 1992 to 1995 where the industry enjoy e d excellent cost/pri ce m a rgins, drawing m o re investm e nt to OSB production capacity (Spelter et al., 1997). Particleboard Particleboard price data from 1984 to 1992 presente d in the report, “Review of the Wood Panel Sector in the U.S.” show som e variation within a relatively sm all range, with a substantial price increase in the y ears 1993 to 1995, declining slightly in 1996. The price trend for particleboard from 1977 to 1996 is very sim ilar to that of ply w ood. on for this sim ilarity is the close relationship of particleboard input costs to the ply w ood m a nufact uring industry

. About 25 percent of industry production cost is for wood inputs, which are prim arily m a de up of wastes from lum b er and ply w ood production (Spelter et al., 1997). At that point, Prices declined over 15 percent from The report authors observe that with soft

The report’ Due to the ability Falling prices have cut into the net revenues of OSB producers, after a period from

One reasM e dium Density Fiberboard (M DF) Producer-reported MDF prices were $235 per ton in Septem ber of 1996 and declined by 15 percent to $205 per ton as of April, 1997. Despite th is drop, there continues to be a price gap between MDF and less costly particleboard, although increasingly narrow. The price drop was attributed to MDF production capacity expansions that resulted in an increase in supply , putting pressure on the profits of MDF producers (Spelter et al., 1997). Structural W ood M e mbers Producer-reported prices for I-joists reach a high in 1994 and have been declining since that tim e. Recent price conditions have m a de I-joists m o re com p etitive with traditional 2" by 10" lum b er on an installed cost basis, ty pically for floor fram i ng applications. In particular, I-joists are price com p etitive with lum b er when lum b er prices are high. However, precise estim ates of m a rket prices are difficult to obtain. The authors found that prices varied depending on whether the product was being sold under a brand nam e , on sale, or under a volum e discount. Lam i nated veneer lum b er, presented in the Review at $550/m 3 f.o.b., is generally m o re expensive than 2" by 10" lum b er, and is used m o stly for structural applications or as an input to I-joists (Spelter et al., 1997).
2.5.4 M arket Forecasts Production and Consumption A study published by WEFA in the summ e r of 1999 exam ined housing starts and concluded that housing starts will decline throughout 1999, resulti ng in a decline in lum b er dem a nd (WEFA, 1999). However, housing starts continue to rem a in strong well into 1999, keeping dem a nd for lum b er and other wood products for construction strong as well. The WEFA study also noted that another factor affecting dem and for softwood lum b er is interest rates and c oncluded that rising interest rates could have a dam p ening effect on dem and. Higher interest rat es will not only affect the affordability of new hom es, but also will curtail purchases of existing hom es and m o rtgage refinancing activity , both m a jor sources of dem a nd for m a terials used in hom e rem odeling. Based on the relationship between housing starts, purchases of existing hom es, and rem odeling and renovation (the construction-based dem a nd for ply w ood and other products exam ined in this profile), this decline in dem a nd can be expected to affect the ply w ood and wood com posite industries, as 60 to 70 percent of their output goes to the construction sector. WEFA expects the industry to experience m o st of this decline in 2000 (WEFA, 1999). The m o st recent wood products m a rket outlook published by APA - The Engineered Wood Association (APA) shows U.S. housing starts exceed ing expectations in 1999 (APA, 1999d). Sim ilar to the WEFA study , the forecast expects higher interest rat es in the future to play a role in reducing future housing dem and in the period from 2000 to 2002. The report also forecasts the sam e trends for residential im provem e nts and repairs, but notes the long-term outlook for rem odeling to be good as hom e ownership increases. Figure 2-12 below provides inform ation from the APA on U.S. housing starts. The APA forecast also reports the industr ial outlook is good for other wood-consum ing sectors. The APA expects dem a nd for furniture and fixtures to re m a in healthy , but not at peak levels as existing hom e sales will be declining from the current peak ra tes. Nonresidential construction is forecasted to peak in 1999 and 2000 with declines in 2001 and 2002. Increased school construction will be a driving factor in the upward trend for nonr esidential construction (APA, 1999d).

2-49Figure 2-12: APA Projected Housing Starts (000s)



### 0 50 0 10 00 15 00 20 00

19 97 19 98 199 9 2 000 20 01 20 02
U S S i n g le F a m i ly U S M u lt i- F a m i ly

Source: APA (1999d). In addition to providing overall forecasts for the m a rket dem and, the APA outlook includes detailed forecasts of the dem and for and production of structural panels, specifically softwood ply w ood and OSB. 9 These forecasts, summ a rized in Exhibit 2- 31, show the dem a nd from each of the m a jor m a rkets for structural panels, in order of their sh are of m a rket dem a nd: new residential construction, rem odeling, industrial uses including furniture and m a terials, nonresidential construction, and foreign dem a nd. The industrial use category will have the largest dom estic dem a nd increase over the forecast period, 8 percent. Foreign dem a nd shows significan t increase of 78 percent. However, reductions in U.S. production as im ports gain a large m arket share point to increased pressure from im ports.

9 W h ile the report does not specify whether the forecast is exclusively for softwood plywood or includes hardwood plywood, it is assum e d to cover softwood plywood only, as hardwood plywood is typically not used for structural panels. 2-502-51 Exhibit 2-31: (million sq. ft. 3/8" basis) 1999 2000 2001 2002 % Change New Residential 18,415 17,715 17,585 18,435 0.00 Rem odeling 7 ,440 7,440 7,475 7,550 1% Industrial/Other 6,575 6,720 6,875 7,085 8% Nonresidential 3 ,800 3,800 3,735 3,670 -3% Domestic Demand 36,230 35,675 35,670 36,740 1% Foreign Dem a nd 990 1,275 1,705 1,760 78% Total Demand 37,220.00 36,950.00 37,375.00 38,500.00 3% Im ports (Canada only) (7,345) (7,400) (8,300) (9,330) 27% Total Domestic Production 29,875.00 29,550.00 29,075.00 29,170.00 -2% Plywood 18,135 17,450 16,575 16,295 -10% OSB 11,740 12,100 12,500 12,875 10% Source: APA (1999d). The APA forecasts for panel capacity and producti on provide additional insight into substitution between softwood ply w ood and OSB. below shows these projected trends. ply w ood shows significant decreases in capacity (dow n 24 percent) and production (down 16 percent) from 1992 to 2002. and production and is projected to continue to capture the m arket for structural panels. constant capacity utilization in the ply w ood sector with significant decreases in production supports the forecast of expected plant closures in the future, while the oppos ite is true for OSB with expected increases in the num ber of facilities. APA Forecasted Structural Panel Production and Demand

Exhibit 2-32 Softwood Meanwhile, OSB has shown significant increases in capacity The relatively2-52 Exhibit 2-32: APA Actual and Forecasted Structural Panel Capacity and Production (million Sq Ft, 3/8" Basis) Plywood OSB Capacity Production Utilization C apacity P roduction Utilization
1992 23,700 19,332 82% 7,040 6,653 95%
1993 23,300 19,315 83% 7,560 7,002 93% 1994 21,875 19,638 90% 7,920 7,486 95% 1995 22,070 19,367 88% 8,830 7,903 90% 1996 21,150 19,181 91% 11,285 9,314 83% 1997 19,275 17,965 93% 11,575 10,534 91% 1998 19,075 17,776 93% 12,050 11,227 93% 1999 19,275 18,135 94% 12,250 11,740 96% 2000 18,835 17,450 93% 13,120 12,100 92% 2001 18,260 16,575 91% 13,725 12,500 91% 2002 18,010 16,295 90% 14,380 12,875 90%

% Change -0.24

- 0.16 1.04 0.94 Shaded areas represent estim ated values. Source: APA (1999d). The spring edition of the APA’s on-line EngineeredWood Journal reports that the expectation of overall production of structural panels in 1999 would be roughly the sam e as it was in 1998 (APA, 1999b). prospects for the softwood ply w ood and veneer sector indicates that the industry is in for a difficult tim e. e m b ers are bracing for a battle to preserve m a rket share, a particularly challenging goal in the face of expecteddeclines in housing starts. s spring journal focuses on the m u ltiple pressures on its m a rket share. ary source of pressure is from the expanding sentim ent that wood products are not environm entally sensitive. are concerned that environm ental advocacy groups are becom i ng increasingly successful at convincing m a jor corporations that the use of wood products should be curtailed in order to preserve trees and forested land (APA, 1999b). Shipm e nts of reconstituted wood products are expected to increase 4 percent in 1998 and 1999 according to the U.S. Industry and Trade Outlook 1999. a nd in the furniture m a rket has proved beneficial to particleboard , MDF, and hardboard producers. For reconstituted wood products, the forecast predicts an increase in growth of 3.3 pe rcent per y ear from 1998 to 2003 as furniture m a rkets and residential construction rem a in healthy (U.S . Departm e nt of Comm e rce, International Trade Adm i nistration, 1999). In their article, “A Look at the Road Ahead for Structural Panels, ” authors Spelter and McKeever com p are the situation of the OSB industry in 1996 to that of the MDF industry in the 1970' s. The MDF industry experienced a m a jor upheaval inthe 1970' s when an econom ic slum p hit the U.S. right when the industry had added a significant am ount of capacity

. whether the OSB industry is in danger of experiencing the sam e process. ’ s capacity additions reflect those of the MDF industry , the econom ic conditions in the late 1990' s lead the However, the long term APA m Further, the APA’ A prim They

Strong dem

In this article, Spelter looks at While the OSB industryauthor to conclude that the OSB industry conditi ons probably will not lead to closures like those experienced by the MDF sector in the seventies. However, Spelter does not expect that the OSB producers will continue to enjoy the gains in m a rket share they have experienced over the last 10 to 15 y ears. He cites the near 100 percent m arket share held by OSB in the northeast and the Midwest as the peak of growth opportunity in those m arkets. Furthe r, the m a rket share split in the south and west m ay have stabilized due to the entrenchm e nt of so ftwood ply w ood in those areas (Spelter and McKeever, 1996). At the sam e tim e, m anufacturers of substitutes fo r wood-based construction such as steel, cem ent and plastic, are aggressively pushing their products hard on the construction industry using the argum ent that their products are environm entally friendly , and have advantages in the areas of price stability , quality , and perform ance. In-roads by these com p eti ng non-wood substitutes are expected to continue as overall costs for wood-based products continue to clim b and the underly i ng price advantage that woodproducts have traditionally held is underm ined. Ot her concerns expressed the Engineered Wood Journal include having adequate supply of tim ber in th e long run to m eet producers’ needs (APA, 1999b). International Trade The hope for the ply w ood and com posite wood pr oducts export m a rkets is that declining dom estic prices and econom ic recovery , particularlyof the Asian econom ies, will boost the dem a nd for U.S. produced wood-based products. This is of particular im portance to the softwood ply w ood industry , as they are currently exporting approxim a tely 10 percent of their production. Another international driver of dem a nd for dom estically pr oduced wood-based building products is the effect of regulatory changes in countries such as Japan and Korea to prom ote wood-based housing construction. WEFA attributes m o st of the increases in exports from North Am erica during 1999 to the U.S. rather than Canada. Continued growth in this m a rket is lim ited by expected falling housing starts in Japan (WEFA, 1999). Any future changes in the U.S.-Canad ian exchange rate will likely have a positive effect on exports in the short-term (in the next 2-3 y ears) , as will any m odifications to tariff structures in place for U.S. exports. The APA outlook includes an international fo recast that projects a positive outlook for wood product exports from 2000 to 2002. This projection is based on expectation that the m a rkets in Europe, Mexico, South Am erica, and Japan will pick up in 2000, causing a weaker dollar and better overall clim ate for exports as (APA, 1999d). The strength of the dollar in 1999 placed U.S. wood products at a disadvantage in world m arkets, but APA projects significant increases in exports from 2000 to 2002 (see Exhibit 2-31 for structural panel export forecast). The 1999 fall edition of the APA’ s Engineered Wood Journal pointed to continuing pressures on U.S. exports com i ng from recent increases in European production capacity as posing a sizeable challenge to st ructural wood panel products in the U.S. (APA, 1999c). The U.S. Industry & Trade Outlook notes growth in European m a rkets and rem oval of tariff barriers throughout the world as contributing to m odestgrowth in the wood products industry

. At the sam e tim e, the report cautions that econom ic conditions in Asia, especially Japan, m a y be of som e concern. While OSB is m a king significant strides inresidential construction in Japan and elsewhere, an Asian recession could threaten this progress. Soft wood ply w ood is still considered the m a terial of choice in m any m arkets unfam iliar with OSB. Nontraditional m a rkets such as South Am erica, eastern Europe, and China could provide significant opport unity for growth in the wood products industry , especially softwood ply w ood (U.S. Departm e nt of Comm e rce, International Trade Adm i nistration, 1999).

2-53Prices The recently published WEFA report on softwood lum b er forecasts a 5 percent increase in the price index for those products during the third quarter of 1999 from the previous quarter. Because of the expected leveling off or decline in construction, pr ices are expected to decline during the y ear’ s fourth quarter. Based on WEFA’ s forecast, overall annual pr ices in 1999 are expected to be about 8 percent higher than they were in 1998. Year 2000 prices are forecast to rise only m a rginally over 1999. The “Review of the Wood Panel Sector in the U. S. and Canada” presents a forecast for structural wood panels (softwood ply w ood and OSB com b ined). In the 1997 report, Spelter and his co-authors assum e that the long run average annual growth in dem a nd for softwood ply w ood and OSB com b ined will continue at the historical 3 percent rate. Using that assum p tion, these industries will have excess capacity until 2001, when capacity utilization reaches 95 percent (Spelter et al., 1997). This forecast concluded that current and pl anned production capacity will exceed dem and until 2001. This excess capacity will continue to put dow nward pressure on prices, a trend that began in 1996. The report authors expect that this price pressu re will result in a m a rket correction, requiring both the ply w ood and the OSB sectors to adjust capacity through the closure of som e high cost, low productivity plants.

2-542.6 R eferences Abt Associates Inc. 1997. Market Profile of the Adhesive Industry

. Prepared for Wendy Hoffm an, Regulatory Im pacts Branch, Office of Pollution Prevention and Toxics, U.S. Environm ental Protection Agency , 401 M Street, SW, Washington, DC 20460.
Am erican Ply w ood Association - The Engineered W ood Association. 1999a. Web page inform ation on product characteristics and m anufacturing. Tacom a , WA: APA - The Engineered Wood Association. http://www.apawood.org/
Am erican Ply w ood Association - The Engineered Wood Association. 1999b. Engineered Wood Journal Online

. Tacom a , WA: APA - The Engineered Wood Association. Spring. http://www.apawood.org/news/journal/spring99.htm l
Am erican Ply w ood Association - The Engineered Wood Association. 1999c. Engineered Wood Journal Online

. Tacom a , WA: APA - The Engineered Wood Association. Fall. http://www.apawood.org/news/journal/fall99.htm l
Am erican Ply w ood Association - The Engineered Wood Association. 1999d. Market Outlook. Lumber, Structural Panels, and Engi neered Wood Products: 2000 - 2002. Tacom a , WA: APA - The Engineered Wood Association.
Am erican Ply w ood Association - The Engineered Wood Association. 1998. Engineered Wood Journal Online

. Tacom a , WA: APA - The Engineered Wood Association. Fall. http://www.apawood.org/news/journal/fall98.htm l
Am erican Ply w ood Association - The Engineered Wood Association. 1997. Design/Construction Guide: Residential & Commercial

. Tacom a , WA: APA — The Engineered Wood Association. Bentley , Jerom e T., C. C. Lawson, and D. Crocker (Mathtech, Inc.) 1992. Economic Impacts of Alternative NESHAPS on the W ood Furniture Industry

. Prepared for U.S. Environm ental Protection Agency , Cost and Econom ic Im pact Section, Em issions Standards Division, office of Air Quality Planning and Standards. Septem ber. Buongiorno, Joseph. 1996. “Forest sector m odeling: a sy nthesis of econom etrics, m a them atical programm i ng, and sy stem dy nam i cs m e thods. International Journal of Foresting , 12, pp. 329- 343. CINTRAFOR. 1999. “Asian Crisis Hits PN W: Export Revenues Down 27% Between 1998-1998.” Fact Sheet #29. January

. http://www.cintrafor.org/FS29.htm Colum b ia Forest Products. 1999. “About our Com p any
. ” Portland, OR. www.colum b iaforestproducts.com
Com posite Panel Association. 1998. 1997 Annual Shipments Report & Downstream Market Survey: U.S./Canada Particleboard & M e dium Density Fiberboard Industry

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2-55Dun & Bradstreet. 1999a. D-U-N-S Num b er Database. Murray Hill, NJ: Dun & Bradstreet. May 24. http://www.dnb.com / dunsno/dunsno.htm Dun & Bradstreet. 1999b. Industry Norms & Key Business Ratios 1998-1999 , Inform ation for SIC Codes 2435, 2436, 2439, and 2493. Eastin, Ivan, C. Lane, T. Waggener, R. Fight, J Barbour. 1996. An Assessment of the Market for Softwood Clearwood Lumber Products

. CINTRAFOR Working Paper No. 59. http://www.cintrafor.org/WP59.htm Financial Tim es Lim ited. 1999a. “Boise Cascade Cor poration.” Com p any Briefs/Com pany Financials. http://www.ft.com Financial Tim es Lim ited. 1999b. “Georgia-P acific Corporation.” Com p any Briefs/Com pany Financials. http://www.ft.com Financial Tim es Lim ited. 1999c. “Louisiana-P acific Corporation.” Com p any Briefs/Com pany Financials. http://www.ft.com Financial Tim es Lim ited. 1999d. “Willam e tte Industr ies, Inc.” Com p any Briefs/Com pany Financials. http://www.ft.com Gale Business Resources. 1999. Online business database. Essay s by industry SIC code downloaded from http://www.gale.com

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. International Paper. 1998. “Int ernational Paper, Union Cam p Cor poration Announce Merger.” Release, Novem b er 24. http://www.internationalpaper.com /ca/page /press_releases.cgi?funcs=links&ID=493957&back= archive Louisiana-Pacific Corporation. 1999. “Headquarters: Product Lines Overview” http://www.lpcorp.com /hq/products.htm l “Louisiana-Pacific Corp. Successfully Com p le tes Tender Offer for ABT Building Products Corp.” Release No.: 112-2-9. February 24. http://www.lpcorp.com /pressrel/19990224_gen_pr.htm l “Louisiana-Pacific to Acquire Evans Forest Products, Ltd.” Release No.: 138-8-9. August 24. http://www.lpcorp.com /pressrel/19990824_gen_pr.htm l “Louisiana-Pacific Corp. Successfully Com p letes Tender Offer for Le Groupe Forex.” Release No.: 140-9-9. Septem ber 10. http://www.lpcorp.com /pressrel/19990910_gen_pr.htm l McKeever, Davis B. 1997. Engineered Wood Products: A Response to the Changing Timber Resource

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2-56Moody , Russell C. and J. Y. Liu. 1999. “Chapter 11: Glue Structural Mem b ers,” W ood handbook--Wood as an engineering material

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. 1998. Substitution , Tim b er Processing, March. Spelter, Henry , D. McKeever, and I. Durbak. 1997. Review of W ood-Based Panel Sector in United States and Canada , General Technical Report FPL-GTR-99. Madison, WI: U.S. Departm e nt of Agriculture, Forest Service, Forest Products Laboratory

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. 1996. “Em e rging Nonwood Build ing Materials in Residential Construction.” Forest Products Journal , 46(7/8). Spelter, Henry and T. McKeever. 1996. “A Look at th e Road Ahead for Structural Panels.” C. C. Crow Publications, Inc., 11(5). October. Spelter, Henry

. 1995. “Capacity Changes in U.S. Particleboard, Southern Pine Ply w ood, and Oriented Strandboard Industries.” Canadian Journal of Forest Resources , 25: 614-620. U.S. Bureau of Labor Statistics. 1999. Web site. http://stats.bls.gov/ppihom e.htm

2-57U. S. Departm e nt of Comm e rce. 1999a. 1997 Census of Manufactures, Industry Series : Hardwood Veneer and Plywood , EC97M-3212A Softwood Veneer and Plywood , EC97M-3212B Engineered Wood Member (Except Truss) Manufacturing, 1997 Economic Census, M

anufacturing Industry Series , EC97M-3212C Truss M anufacturing , EC97M-3212D Reconstituted Wood Products Manufacturing , EC97M-3212E U. S. Departm e nt of Comm e rce. 1999b. 1997 Census of Manufactures, Industry Series : Adhesive M anufacturing , EC97M-3255B Wood Office Furniture Manufacturing , EC97M-3372A U.S. Departm e nt of Comm e rce. 1997. Current Industrial Reports, Survey of Plant Capacity, 1997. U.S. Departm e nt of Comm e rce. 1995a. 1992 Census of Construction Industries, Industry Series: General Contractors — Single-Family Houses , Industry 1521. CC92-I-1. Washington, D.C.: U.S. Governm e nt Printing Office. June. U. S. Departm e nt of Comm e rce. 1995b. 1992 Census of Manufactures, Industry Series, Millwork, Plywood, and Structural Wood Members, Not Elsewhere Classified, Industries 2431, 2434, 2435, 2436, and 2439. MC92-I-24B. Washington, D.C.: U.S. Governm e nt Printing Office. U. S. Departm e nt of Comm e rce. 1995c. 1992 Census of Manufactures, Industry Series, Household Furniture, Industries 2511, 2512, 2514, 2515, 2517, and 2519. MC92-I-25A. Washington, D.C.: U.S. Governm e nt Printing Office. U. S. Departm e nt of Comm e rce. 1992. Census of Manufactures, Subject Series: General Summary , MC92-SC-1. U.S. Departm e nt of Comm e rce. No date. Census of M anufactures : Industry 2435, Hardwood Veneer and Ply w ood Industry 2436, Softwood Veneer and Ply w ood Industry 2439, Structural Wood Mem b ers, N.E.C. Industry 2493, Reconstituted Wood Products U.S. Departm e nt of Comm e rce, International Trade Adm i nistration. 1999. U.S. Industry & T rade Outlook. U.S. Departm e nt of Comm e rce, International Trad e Adm i nistration. 1998. “Outlook Trend Tables.” http://www.ita.doc.gov/industry / otea/usito98/tables.htm

. U.S. Departm e nt of Labor, Occupati onal Safety and Health Adm i nistrati on. No date. SIC descriptions. http://www.osha.gov/oshstats/sicser.htm l. U.S. Environm ental Protection Agency . 1998. Industry Specific Information Collection Request (ICR) for the Development of Plywood and Particle board Maximum Achievable Control Technology (M ACT) Standards

. U.S. Environm ental Protection Agency . 1995. Lumber and W ood Products , Office of Com p liance Sector Notebook Project.

2-58U.S. Environm ental Protection Agency . 1992. “Econom ic Im pacts of the Alternative NESHAPS on the Wood Furniture Industry

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. WEFA. 1999. Inform ational Web site on softwood lum b er. http://www.wefa.com /news/stories/99/lum b er.cfm Wey e rhaeuser. 1999a. “Wey erhaeuser Com p letes Ac quisition of MacMillan Bloedel; Haskay ne to Join Wey e rhaeuser Board of Directors. Release. Novem b er 1. http://www.wey e rhaeuser.com /news/m b /default.asp Wey e rhaeuser. 1999b. “Facts About Wey e rhaeuser .” Tacom a , WA: Wey e rhaeuser Com p any
. http://www.wey e rhaeuser.com /facts/wey e r.htm Willam e tte Industries, Inc. 1999. “Willam e tte Industries to Build $85 Million Facility in South Carolina.” Release. http://www.wii.com /newsexp.htm Youngquist, John A. 1999. “Chapter 10: Wood- Based Com posite and Panel Products.” W ood handbook--Wood as an engineering material. Gen. Tech. Rep. FPL-GTR-113. Madison, WI: U.S. Departm e nt of Agriculture, Forest Service, Forest Products Laboratory

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## 3 R EGULATORY ALTERNATIVES, EMISSIONS, EMISSION REDUCTIONS, AND CONTROL AND ADMINISTRATIVE COSTS
3.1 R egulatoryAlternatives
3.1.1 B ackground This chapter provides background inform ation on the regulatory alternatives, em issions, reductions expected from im plem entation of the pr oposed rule, and the costs associated with the regulatory alternatives. Section 112 of the Clean Air Act (CAA) requires that EPA establish NESHAP for the control of hazardous air pollutants (HAP) from both new and existing m a jor sources. A m a jor source of HAP is defined as any stationary source or group of sta tionary sources within a contiguous area and under comm on control that em its or has the potential to em it, considering controls, in the aggregate, 10 tons per y ear or m o re of any single HAP or 25 tons per y ear of com b ined HAP. The CAA requires the NESHAP to reflect the m a xim u m degree of reduction in em issions of HAP that is achievable. This level of control is comm only referred to as the m a xim u m achievable control technology , or MACT. The MACT floor is the m i nim u m control level allowed for NESHAP and is defined in Section 112 (d) (3) of the CAA. The requirem e nts for new sources are potentially m o re stringent than those for existing sources. For new sources, Section 112(d)(3) of the CAA requires EPA to set standards for each category or subcategory that are at least as stringent as “the em i ssion control that is achieved in practice by the best controlled sim ilar source.” For existing sources, S ection 112(d)(3) requires the HAP standards to be no less stringent than “the average em ission lim itation achieved by the best-perform ing 12 percent of the existing sources” for source categories or subcategories with at least 30 sources and “the average em ission lim itation achieved by the best-perform ing five sources” for source categories or subcategories with fewer than 30 sources. 1 In a previous rulem a king, the EPA prom ulgate d a final rule (59 FR 29196) that presented the Agency ’s interpretation of the statutory langua ge regarding the basis of the MACT floor. 2 The EPA’s interpretation of the “average em ission lim itation” is th at it m eans a m easure of central tendency , such as the m e dian. If the m e dian is used when there are at least 30 sources, then the em ission level achievable by the source and its control sy stem that is at th e bottom of the top 6 percent of the best-perform ing sources (i.e., the 94th percentile) then becom es the MA CT floor. For exam ple, assum e that there are 100 sources, and HAP em issions from approxim a tely 15 of these sources (15 percent nationwide) are controlled using therm a l oxidizers and the HAP em issions from the rem a inder of the sources are uncontrolled. In this exam ple, the 94th percentile is represented by the control sy stem applied to the source ranked at num ber 6 (6/100 = 6 percent). Howe ver, in this exam ple, the sam e ty pe of add-on control technology used by the source at the 94th pe rcentile (therm al oxidizer) is used by sources ranked below the 94th percentile. Assum i ng that there are no significant design or operational differences between the different therm a l oxidizers that would affect their perform ance, all 15 sources equipped with therm a l oxidizers would be considered representative of the MACT floor. Thus, when determ ining the perform ance level of the MACT floor technology , EPA w ould evaluate the available data for any and all of the sources equipped with therm a l oxidizers. When there are less than 30 sources, the em ission level achievable by the source and its control sy stem that is the m e dian of the 5 sources represen ts the MACT floor. For exam ple, if there are 10 sources nationwide and the em issions from 2 of these sources are controlled with therm a l oxidizers and the em issions from the rem a ining 8 are uncontrolled, then the MACT floor is “no em ission reduction”

3-1because the top 5 sources include the 2 that are controlle d, plus 3 that are uncontrolled. In this exam ple, the m e dian source (the source ra nked “num ber 3”) is uncontrolled.
3.1.2 Control Technologies and Practices in MACT Floor Determination Control sy stem s in use the PCWP industry include add-on control sy stem s and incineration of process exhaust in an onsite com bustion unit. The pot ential for pollution prevention also exists in the PCWP industry ; however, there are no known and dem onstrated pollution prevention techniques that can be universally applied across the industry

. The em issions from PCWP process units are associated with the wood and/or resin processed. Thus, switching to alternative fuels (e.g., switching from wood fuel to natural gas) would not significantly reduce em issions and would not be econom ical for m a ny facilities that use their wood waste as fuel. Facilities cannot readily switch wood ty pes (e.g., from softwoods to hardwoods) for several reasons: (1) equipm ent at eachfacility is often designed for a particular wood ty pe; (2) product characteristics would change; and (3) PCWP facilities are located near their wood source. Over the past decades, the PCWP industry and its resin suppliers have responded to pressure to reduce the HAP content of resins. It is expected that this trend will continue into the future (e.g., resins with lower HAP content are likely to be developed)

. Resin reform ulation is a slow, trial-and-error process that m u st be com p leted by individual faciliti es and their resin suppliers so that product quality is m a intained. At this tim e, no inform ation is availa ble to determ ine the degree of em ission reduction that can be achieved through resin reform ulation. The achievable em ission reduction would be very facility

specific, and m ay not be com p arable to the em i ssion reduction achievable with add-on control sy stem s because em issions from the wood would rem a in. At th e present tim e, few (if any ) facilities use pollution prevention m easures to achieve an em ission reduction com p arable to that of add-on incineration-based control sy stem s. Therefore, this analy s is focuses on add-on control devices. Available data on control device perform ance were reviewed to determ ine which add-on control sy stem s are best at reducing HAP em issions. Because total hy drocarbons (THC), form aldehy de, and m e thanol are the m o st prevalent pollutants em itted from the PCWP industry and represent the m a jority of the available data on control device perform ance, the control sy stem s were analy zed based on their ability to reduce em issions of these three pollutants. A lthough THC is not a HAP, control sy stem s that are effective in reducing THC em issions are genera lly effective in reducing HAP em issions. The available control device perform ance data fo r the PCWP industry shows that only two ty pes of add-on air pollution control devices consistently and continuously reduce HAP em issions: incinerationbased controls (including regenerative therm a l oxidi zers [RTOs] , regenerative cataly tic oxidizers [RCOs] , and incineration of pollutants in onsite process com bustion equipm ent [process incineration] ) and biofilters. For control sy stem s that use onsite pro cess com bustion equipm ent (e.g., power boilers or fuel cells) to reduce em issions, only those sy stem s that r oute 100 percent of the process unit’ s exhaust to the com bustion equipm ent are included in the “incinerati on-based controls” category

. Several of the process incineration sy stem s are fully integrated sy stem s that com b ine heat/energy recovery with pollution control. Sy stem s that only incinerate a portion of the process unit exhaust stream (e.g., less than 75 percent) are referred to as “sem i-incineration” and are not included in the incineration-based controls category

. Those PCWP facilities that practice sem i-incineration take a portion of the exhaust stream and then route these em issions to a burner for use as combustion air. In those situations, the HAP em issions in the slip stream are actually com busted. However, som e facilities with direct-fired dry e rs (i.e., dry e rs that receive hot exhaust air directly from com bustion source) that practice sem i-incineration m a y also use the dry e r exhaust gas slip stream (or fresh air) to cool the exhaust gas from the burners in “blend cham bers.” 3 When the exhaust gas is routed to the ble nd cham ber, the HAP in the exhaust gas are not com busted in the dry e r, and if the dry e r em issions are uncontrolled, these HAP are ultim ately em itted to

3-2the atm o sphere. The am ount of exhaust gas recy cled e ither to the burner or to the blend cham ber can vary over tim e. Decisions about how m u ch of the recy cled exhaust stream are used as com bustion air and when and how m u ch exhaust air is used in a bl end cham ber generally are m a de by the equipm ent operators and are affected by process conditions su ch as the m o isture content of the incom i ng wood furnish (which affects the target dry e r operating te m p erature) and the desired am ount of water rem oval. 4 Thus, sem i-incineration is used to m a intain the heat balance in the dry i ng sy stem (e.g., com bustion unit and dry e r). There is a lack of detailed inform ation on how the sem i-incineration process works at each facility , and thus, the actual HAP em ission reductions that are achieved at PCWP facilities that practice sem i-incineration cannot be determ ined/verified. Inaddition, it m a y not be possible to retrofit sem iincineration onto existing process units, and therefore, sem i-incineration m a y not be an option for process units that were not originally designed to incorporat e sem i-incineration. For the reasons stated above and for the purpose of establishing MACT floors for the PCWP source category , sem i-incineration is not considered a verified control technique for reduci ng HAP em issions. However, as explained later in Section IV.B of this m e m o randum , there are only two process unit groups (bagasse fiberboard m a t dry e rs and hardwood veneer dry e rs) where sem i-incineration is the only available candidate for the MACT floor technology

. The available control device efficiency data showthat control devices installed for particulate m a tter (PM) abatem ent had no effect on gaseous HAP or THC em issions. 5 These control devices include cy clones, m u lticlones (or m u lticy c lones), baghouses (or fabr ic filters), and electrified filter beds (EFBs). The perform ance data for wet electrostatic precip itators (WESPs) and wet scrubbers installed for PM control also showed no effect on HAP and THC em issions. These wet sy stem s m a y achieve short-term reductions in THC or gaseous HAP em issions, however , the HAP and THC control efficiency data, which range from slightly positive to negative values, indi cate that the ability of these wet sy stem s to absorb water-soluble com pounds (such as form aldehy de) dim i nishes as the recirculating scrubbing liquid becom es saturated with these com pounds. 5 One wet scrubbing sy stem , a com b ination water tray tower/high energy venturi scrubber that uses treated wa ter and is designed to m i nim i ze em issions of both PM and odorous com pounds from a hardboard press, did achieve notable HAP and THC em issions reductions. This sy stem reduces form aldehy de and m e thanol em issions by 65 percent and 50 percent, respectively , and reduces THC em issions by 86 percent. 5 The THC, m e thanol, and form aldehy de contro l device perform ance data for incineration-based control and biofilters are presented in the MA CT floor m e m o included in the public docket. 6 The inform ation in this m e m o was extracted from a sep arate m e m o randum which provides inform ation on the available control device perform ance data for the various ty pes of control devices applied to PCWP process units. The perform ance data for the incinera tion-based controls and bi ofilters showed m e thanol and form aldehy de em ission reductions equal to or gr eater than 90 percent, ex cept in som e cases where the pollutant loadings of the em ission stream entering th e control sy stem s were very low. The perform ance data for THC showed that incineration-based c ontrol sy stem s could achieve THC em ission reductions equal to or greater than 90 percent. The THC em ission reductions achieved with biofilters varied som e what, with THC reductions ranging from 73 percent to 90 percent. Although biofilters are effective in reducing the HAP com pounds em itted from process un its in the PCWP industry , they can be less effective in reducing som e of the less water-solubl e non-HAP com pounds, such as pinenes, that can m a ke up a portion of the THC m easurem e nts. The proposed MACT floor technology for the pr ocess units was either determ ined to be no em ission reduction or equivalent to the em ission re duction achievable with incineration-based control sy stem s or biofilters. Although som e process units are equipped with add-on controls that perform at a level som e where between zero (no control) and the perform ance level achievable with incineration-based controls and biofilters, none of these control sy stem s were identified as MACT floor control technologies because they (1) do not reduce HAP em issions (e.g., bag houses) or (2) do not reduce HAP em issions on

3-3a consistent basis (e.g., wet electrostatic precipitators), or (3) achieve lower HAP em ission reductions than biofilters and incineration-based controls (e .g., sem i-incineration). Therefore, the MACT floor analy s is focused on incineration-based controls and biofilters. For the purpose of establishing the perform ance leve l of the MACT floor control sy stem s, all available data on incineration-based controls and biofilters were grouped together. This “group approach” was used because som e of the control sy stem s treat HAP em issions from m u ltiple ty pes of process units, such as prim ary tube dry e rs, r econstituted panel presses, and board coolers.
Determ inations of the perform ance of the contro l sy stem on em issions from each ty pe of process unit were not possible. Also, for som e process unit groups, lim ited data were available for the control sy stem s applied to the process units in that group. By considering all of the perform ance data for incineration-based controls and biofilters together , the am ount of available data upon which the MACT floor level of perform ance was based was m a xim i zed. The available data for incineration-based contro ls and biofilters (provided in the MACT floor me mo ) 6 shows variability in perform ance from process un it to process unit and over tim e. In som e cases, it was not possible to directly com p are the perform an ce of different control sy stem s because data were not available for the sam e pollutant (i.e., not all testreports included data for THC, m e thanol, and form aldehy de). Com p arison of the perform ance of the different ty pes of incineration-based control sy stem s with other incineration-based controls and with biofilters was also ham p ered by the fact that the uncontrolled em issions being treated by the different control sy stem s varied with respect to pollutant loading (inlet concentration) and pollutant ty pe. Because the control device efficiency is som e what dependent on the am ount of HAP entering the device, the variability in the uncontrolled em issions from process units both within and am ong the different process groups m eant that the control device efficiencies also varied. With a few exceptions, wh en the concentration of m e thanol, form aldehy de, or THC in the uncontrolled em ission stream was greater than 10 parts per m illion dry volum e (ppmvd), the associated HAP em ission reductions ranged from 90 to 99 pe rcent. In general, lower control efficiencies were achieved when the inlet pollutant concentrati ons were below 10 ppmvd; however, in som e cases, the control efficiency exceeded 90 percent ev en at the lower inlet concentrations. To account for the variability in the ty pe and am ount of HAP in the uncontrolled em issions from the various process units and the effect of this variability on control sy stem perform ance, it is recomm e nded that the MACT floor perform ance level be based on all three of the pollutants analy zed and include m a xim u m concentration levels in the outlet of the control sy stem s as an alternative to em ission reductions. The MACT floor perform ance level is a 90 percent reduction in THC or m e thanol or form aldehy de em issions. The m a xim u m concentrati on level in the outlet of the MACT floor control sy stem is 20 ppmvd for THC, or 1 ppmvd for m e thanol, or 1 ppmvd for form aldehy de. The 20 ppmvd is recomm e nded as the alternative m a xim u m concen tration for THC because 20 ppmvd represents the practical lim it of control for THC. The 1 ppmvd is recomm e nded as the m a xim u m outlet concentration for both m e thanol and form aldehy de because this con centration is achievable by the MACT floor control sy stem s and the m e thod detection lim its for these com pounds using the National Council of the Paper Industry for Air and Stream Im provem e nt (NCASI) im pinger/canister em ission test m e thod (NCASI Method IM/CAN/WP-99.01) are less than 1 ppmvd. 7
3.1.3 M ACT Floor Options The six recomm e nded options for representing the MACT floor are shown in Exhibit 3-1. These six options reflect the em ission reductions and m a xim um outlet pollutant concentrations achievable at the MACT floor for all process units with a MACT floor technology represented by incineration-based controls or biofilters. As shown inExhibit 3-1, it is recomm e nded that a restriction be placed on the use

3-4of the outlet concentration options for m e thanol and form aldehy de. The proposed restriction would be that the concentration of the pollutant (m ethanol or form aldehy de) entering the MACT control sy stem m

u st be at least 10 ppmvd for the facility to use th e outlet concentration option. The purpose for this restriction is that som e process units m ay have very low uncontrolled m e thanol or form aldehy de em issions, while still em itting significant quantities of HAP, and facilities with these process units could claim that they are achieving MACT floor levels of control without doing any thing to reduce HAP em issions. All of the MACT floor control sy stem s evaluated can m eet at least one of the six control options for add-on control devices, based on the availa ble data. Only a few of the MACT floor control sy stem s evaluated can m eet all six options; in t hose cases, the control sy stem s tend to be applied to process units with both m oderately high HAP em i ssions and m oderately high THC em issions, which would allow them to m eet the outlet concentration- based options for m e thanol and form aldehy de as well as the percent reduction options. Therefore, it is r ecomm e nded that facilities be required to m eet only one of the six em ission options in Exhibit 3-1.
Exhibit 3-1. MACT FLOOR CONTROL OPTIONS Pollutant Reduce by OR achieve em issions #

m e thanol 90 percent 1 ppm a ...OR... form aldehy de 90 percent 1 ppm a ...OR... THC b 90 percent 20 ppm

a This option would only be applicable to units w ith uncontrolled em issions of that HAP that are $ 10 ppm

. b Mills will be allowed to adjust THC m easurem ents to subtract m e thane.

3.1.4 Summary of MACT for Existing and New Process Units Exhibit 3-2 summ arizes MACT for each ty pe of process unit at new and existing PCWP facilities. The MACT represents the level of control that would be required by the PCWP NESHAP. The technologies listed below achieve that control level.

3-5Exhibit 3-2. SUMMARY OF MACT FOR PCWP PROCESS UNITS AT NEW AND EX ISTING SOURCES

Process unit MACT for process units at existing sources MACT for process units at new sources Tube dryers; Rotary strand dryers; Conveyor strand dryers; Green particle rotary dryers; Hardboard ovens; Softwood veneer dryers; Pressurized refiners Reconstituted wood product presses

Fiberboard m a t dryers (wood); Hardboard press preheat ovens Reconstituted wood product board coolers em ission reduction achievable with incineration-based control a or biofilter em ission reduction achievable with incineration-based control a or biofilter No em ission reduction e m i ssion reduction achievable with incineration-based control a No em ission reduction e m i ssion reduction achievable with incineration-based control a or biofilter Rotary agricultural fiber dryers; Dry particle rotary dryers; Paddle-type particle dryers; Hardboard hum idifiers Fiberboard m a t dryers (bagasse); Veneer kilns; Radio-frequency veneer redryers; Hardwood veneer dryers; Particleboard press m o lds; Particleboard extruders; Engineered wood products presses; Agriboard presses; Plywood presses; Stand-alone digesters; Atm o spheric refiners; Blenders; Form ers; Sanders Saws; Fiber washers; Chippers; Log vats; Lum b er kilns No em ission reduction N o em ission reduction em ission reduction achievable with incineration-based control a em ission reduction achievable with incineration-based control a

a Incineration-based control includes RTOs, RCOs, TCOs, TO s, and incineration of process exhaust in com bustion unit.

3.1.5 B eyond the MACT Floor Options and Related Technologies Because the control devices that represent MACT le vels of control are the sam e for all process units that have a controlled MACT floor for both new and existing units, the only bey ond the floor options considered were for existing process unit gr oups that had MACT floors equal to “no em ission reduction.” The annual total HAP em issions from the following equipm ent are very low com p ared to the em issions from other process units used in the PCWP industry :

C agriboard dry e rs

C dry particle rotary dry e rs

C paddle-ty pe particle dry e rs C

C

C particleboard press m o lds particleboard extruders engineered wood products presses

3-6C hardboard hum idifiers C agriboard presses

C bagasse fiber m a t dry e r C atm o spheric refiners

C veneer kilns C lum b er kilns

C RF veneer redry e rs C resin storage tanks

C hardwood veneer dry e rs C other m i scellaneous equipm ent (form ers, sanders, saws, fiber washers, chippers, and log vats) No bey ond-the-floor control options were c onsidered for these equipm ent because em issions from these process units would not be cost-effective to control. In addition, no bey ond-the-floor analy ses of wastewater operations, wastewater tanks, and m i scellaneous coating ope rations were conducted because sufficient inform ation is not available to m a ke bey ond-the-floor dete rm inations and it is not known (or expected) that em issions from these operations would justify control. Based on a review of the HAP em issions data for process units with MACT floors of no em ission reduction, blenders and stand-alone digesters we re selected for a bey ond-the-MACT-floor analy s is because these equipm ent em it higher levels of HAP em issions relative to other process units. Bey ondthe-floor analy ses were also conducted for process un its with a MACT floor of no em ission reduction for existing units and a MACT floor represented by th e em ission reduction achievable with incinerationbased controls for new units. These process units incl ude fiberboard m a t dry e rs, press preheat ovens, and reconstituted wood products board coolers. This analy s is of bey ond-the-floor options was based on the industry average exhaust flow for each process unit, the ty pical num ber of each process unit per plant, the industry average am ount of HAP em itted from the process units, and assum i ng that an RT O would be used to control em issions from each process unit. The average exhaust flow rates and ty pical num ber of process units per plant were determ ined using the results from EPA’s MACT su rvey
. The average HAP em issions and em ission reductions were determ ined using the m e thodology described in the baseline em issions m e m o
. 9 The annualized RTO cost was calculated based on flow rate using the m e thodology described later in this chapter. The cost per ton values were calculated by divi ding the total annualized cost (TAC) for the RTO by the HAP reduction. This analy s is assum es that f acilities will not be able to route the em issions from process units to an existing control device or to a new control device installed to m eet the PCWP standards (i.e., that a separate RTO m u st be purch ased to handle the additional flow from the process units). Exhibit 3-3 below presents the results of this analy s is.

3-7Exhibit 3-3. Cost-Effectiveness Analysis Of Beyond-The-Floor Control Options

Process Unit Fiberboard m a t dryer at FB plant Fiberb oard m a t dryer at w/d HB plant Fiberboard m a t dryers (average) Press preheat oven - w/d HB plant Board cooler - PB Board cooler - MDF Board cooler (average) Stand-alone digester - FB Stand-alone digester - HB Stand-alone digester (average) Blender - PB Blender - OSB Blender (average) Average flow, dscfm Typical no. per plant RTO TAC Average HAP em itted, tpy Tons HAP reduced, tpy 49,389 1 $471,187 8 7 .6
19,491 1 $370,952 12 11
34,440 1 $421,070 10 9.3
21,812 1 $377,904 15 14
41,423 1 $442,096 5 4 .8 79,483 1 $599,447 3 2 .9 60,453 1 $520,772 4 3 .9 7,587 2 $358,359 14 13 7,587 2 $358,359 14 13 7 ,587 2 $358,359 14 13 13,590 2 $394,486 45 43 13,590 2 $394,486 11 10 13,590 2 $394,486 28 27 Cost effectiveness $/ton (1998

dollars)

$30,076 $26,520

$133,531

$26,944

$14,610

In all cases, the em ission reductions that coul d be achieved from requiring controls for these existing units did not appear to be justified by th e cost. Many of the existing control devices at wellcontrolled facilities would not have the additional cap acity to treat the em issions from these process units, and thus, these facilities would have to install new controls.
For m o re inform ation, refer to the MACT m e m o for this proposed rule and the BID. 8
3.1.6 Considerations of Possible Risk-Based Alternatives to Reduce Impacts to Sources The Agency has m a de every effort in developi ng this proposal to m i nim i ze the cost to the regulated comm unity and allow m a xim u m flexibility in com p liance options consistent with our statutory obligations. However, we recognize that the proposal m a y still require som e facilities to take costly steps to further control em issions even though their em issions m a y not result in exposures which could pose an excess individual lifetim e cancer risk greater than one in one m illion or which exceed thresholds determ ined to provide an am ple m argin of safety fo r protecting public health and the environm ent from the effects of hazardous air pollutants. We are, theref ore, specifically soliciting comm e nt on whether there are further way s to structure the proposed rule to focu s on the facilities which pose significant risks and avoid the im position of high costs on facilities that pose little risk to public health and the environm ent.

Industry representatives provided EPA with descripti ons of three m echanism s that they believed could be used to im plem ent m o re cost-effective reduc tions in risk. The docket for today ’ s proposed rule contains “white papers” prepared by industry th at outline their proposed approaches (see docket num ber A-98-44, Item # II-D-525). The Agency is taking co mm e nt on these approaches. We believe that two of
3-8the three suggested approaches warrant further consider ation. We believe they could be used to focus regulatory controls on facilities with significant risk s and avoid the im position of high costs on facilities that pose little risk to public health or the environm en t. One of the approaches, an applicability cutoff for threshold pollutants, would be im plem ented under the authority of CAA section 112(d)(4); the other approach, subcategorization and delisting, would be im plem ented under the authority of CAA sections 112(c)(1) and 112(c)(9). The EPA requests comm e nt on the technical and legal viability of these approaches, as well as any m odifications to these appr oaches that comm e nters m a y wish to suggest. The m a xim u m achievable control technology , or MACT, pr ogram outlined in CAA section 112(d) is intended to reduce em issions of HAP through the application of MACT to m a jor sources of toxic air pollutants. Section 112(c)(9) is intended to allow EPA to avoid setting MACT standards for categories or subcategories of sources that pose little risk to public health and the environm ent. The EPA requests comm e nt on whether the proposals described here a ppropriately rely on these provisions of CAA section 112. While both approaches focus on assessing the inhalation exposures of HAP em itted by a source, EPA specifically requests comm e nt on the appropriate ness and necessity of extending these approaches to account for non-inhalation exposures of certain HAP wh ich m a y deposit from the atm o sphere after being em itted into the air or to account for adverse envir onm ental im pacts. We are also interested in any inform ation or comm e nt concerning technical lim itati ons, environm ental and cost im pacts, com p liance assurance, legal authority , and im plem entation relevant to the approaches. We also request comm e nt on appropriate practicable and verifiable m e thods to ensure that sources' em issions rem a in below levels that protect public health and the environm ent. We w ill evaluate all comm e nts before determ ining whether either of the two approaches will be included in the final rule.
3.1.6.1 A pplicability Cutoffs for Threshold Po llutants Under Section 112(d)(4) of the CAA The first approach is an “applicability cutoff” for threshold pollutants that is based on EPA’ s authority under CAA section 112(d)(4). A “threshold pollu tant” is one for which there is a concentration or dose below which adverse effects are not expectedto occur over a lifetim e of exposure. For such pollutants, section 112(d)(4) allows EPA to consider th e threshold level, with an am ple m a rgin of safety , when establishing em issions standards. Specifically , section 112(d)(4) allows EPA to establish em ission standards that are not based upon the m a xim u m achievable control technology (MACT) specified under section 112(d)(2) for pollutants for which a health thr eshold has been established. Such standards m ay be less stringent than MACT. Furtherm ore, EPA has in terpreted 112(d)(4) to allow us to avoid further regulation of categories of sources that em it only threshold pollutants, if those em issions result in am bient levels that do not exceed the threshold, with an am ple m a rgin of safety

. 10 A different interpretation would allow us to ex em pt individual facilities within a source category that m eet the section 112(d)(4) requirem e nts. There are three potential scenarios under this interpretation of the section 112(d)(4) provision. One scenario woul d allow an exem ption for individual facilities that em it only threshold pollutants and can dem onstrate that their em issions of threshold pollutants would not result in air concentrations above the threshold levels, with an am ple m a rgin of safety , even if the category is otherwise subject to MACT. A second scenario would allow the section 112(d)(4) provision to be applied to both threshold and non-th reshold pollutants, using the 1 in a m illion cancer risk level for decisionm aking for non-threshold pollutants. A thir d scenario would allow a section 112(d)(4) exem ption at a facility that em its both threshold and non-threshold pollutants. For those em ission points where only threshold pollutants are em itted and where em issions of the threshold pollutants would not result in air concentrations above the threshold levels, with an am ple m a rgin of safety , those em ission points could be exem pt from the MACT standard. The MACT standard would still apply to non-threshold em issions from

1 See 63 FR 18754, 18765-66 (April 15, 1998) (Pul p and Paper Com bustion Sources Proposed NESHAP) 3-9other em ission points at the source. For this third scenario, em ission points that em it a com b ination of threshold and non-threshold pollutants that are co-c ontrolled by MACT would still be subject to the MACT level of control. However, any threshold HAP eligible for exem ption under section 112(d)(4) that are controlled by control devices different from those controlling non-threshold HAP would be able to use the exem ption, and the facility would still be subject to the parts of the standard that control non-threshold pollutants or that control both th reshold and non-threshold pollutants. Under the section 112(d) (4) approach, EPA would have to determ ine that em issions of each of the threshold pollutants em itted by PCWP sources at the facility do not exceed the threshold levels, with an am ple m a rgin of safety

. The comm on approach for evaluating the potential hazard of a threshold air pollutant is to calculate a “hazard quotient” by divi ding the pollutant’ s inhalation exposure concentration (often assum e d to be equivalent to its estim ated c oncentration in air at a location where people could be exposed) by the pollutant’s inhalation Reference Concen tration (RfC). An RfC is defined as an estim ate (with uncertainty spanning perhaps an order of m a gn itude) of a continuous inha lation exposure that, over a lifetim e, likely would not result in the occurrence of adverse health effects in hum ans, including sensitive individuals. The EPA ty pically establishes an RfC by apply i ng uncertainty factors to the critical toxic effect derived from the lowest- or no-observed-adverse-effect level of a pollutant. 11 A hazard quotient less than one m eans that the exposure concentration of th e pollutant is less than the RfC, and, therefore, presum e d to be without appreciable risk of adverse health effects. A hazard quotient greater than one m eans that the exposure concentration of the pollutant is greater than the RfC. Further, EPA guidance for assessing exposures to m i xtures of threshold pollutants recomm e nds calculating a “hazard index” by summ i ng the individual hazard quotients for those polluta nts in the m i xture that affect the sam e target organ or sy stem by the sam e m echanism

. 12 Hazard index (HI) values would be interpreted sim ilarly to hazard quotients; values below one would generally be considered to be without appreciable risk of adverse health effects, and values above one would generally be cause fo r concern. For the determ inations discussed herein, EPA would generally plan to use RfC values contained in EPA’ s toxicology database, the Integrated Risk Inform ation Sy stem (IRIS). Whena pollutant does not have an approved RfC in IRIS, or when a pollutant is a carcinogen, EPA would have to determ ine whether a threshold exists based upon the availability of specific data on the pollutant' s m ode or m echanism of action, potentially using a health threshold value from an alternative source such as the Agency for Toxic Substances and Disease Registry (ATSDR) or the California Environm ental Protection Agency (CalEPA). In the past, EPA routinely treated carcinogens as non-threshold pollutants. The EPA recognizes that advances in risk assessm ent science and policy m a y affect the way EPA differentiates between threshold and non-threshold HAP. The EPA' s draft Guidelines for Carcinogen Risk Assessm ent 13 suggest that carcinogens be assigned non-linear dose-response re lationships where data warrant. Moreover, it is possible that dose-response curves fo r som e pollutants m a y reach zero risk at a dose greater than zero, creating a threshold for carcinogenic effects. It is possible that future evaluations of the carcinogens em itted by this source category would determ ine that one or m o re of the carcinogens in the category is a threshold carcinogen or is a carcinogen that exhib its a non-linear dose-response relationship but does not have a threshold.

11 “ Methods for Derivation of Inhalation Reference C oncentrations and Applications of Inhalation Dosim e try

. ” EPA-600/8-90-066F, Office of Resear ch and Developm ent, USEPA, October 1994.

12 “Supplem entary Guidance for Conducting Health Ri sk Assessm ent of Chem ical Mixtures. Risk Assessm ent Forum Technical Panel,” EPA/630/R-00/002. USEPA, August 2000. http://www.epa.gov/nceawww1/pdfs/chem m i x/chem m i x 08 2001.pdf

13 “Draft Revised Guidelines for Carcinogen Risk Assessm ent.” NCEA-F-0644. USEPA, Risk Assessm ent Forum , July 1999. pp 3-9ff. http://www.epa.gov/ncea/raf/pdfs/cancer_gls.pdf 3-10There are at least several options for establis hing a hazard index lim it for the section 112(d)(4) analy s is that reflect to vary ing degrees total public exposure. One option is to allow the hazard index posed by all threshold HAP em itted by PCWP sources at the facility to be no greater than one. This approach assum es that no additional threshold HAP exposures would be anticipated from other sources in the vicinity or through other routes of exposure (i.e., through ingestion). A second option is to adopt a “default percentage” approach, whereby the hazard index lim it of the HAP em itted by the facility is set at som e percentage of one (e.g., 20% or 0.2). This approach recognizes the fact that the facility in question is only one of m a ny sources of threshold HAP to which people are ty pically exposed every day

. Because noncancer risk assessm ent is predicated on total exposure or dose, and because risk assessm ents to focus only on an indivi dual source, establishing a hazard index lim it of 0.2 would account for an assum p tion that 20% of an indivi dual’ s total exposure is from that individual source. For the purposes of this discussion, we will call all sources of HAP, other than the facility in question, “background” sources. If the facility is allowed to em it HAP such that its own im pacts could result in HI values of one, total exposures to threshold HAP in the vi cinity of the facility could be substantially greater than one due to background sources, and this would not be protective of public health, since only HI values below one are considered “safe” (i.e., without appr eciable risk of harm ful effects). Thus, setting the hazard index lim it for the facility at som e default per centage of one will provide a buffer which would help to ensure that total exposures to threshold HAP near the facility (i.e., in com b ination with exposures due to background sources) will generally not exceed one, and can generally be considered to be without appreciable risk of adverse health effects. Th e EPA requests comm e nt on using the “default percentage” approach and on setting the default hazard index lim it at 0.2. The EPA is also requesting comm e nt on whether an alternative HI lim it, in som e m u ltiple of 1, would be a m o re appropriate applicability cutoff. A third option is to use available data (from scien tific literature or EPA studies, for exam ple) to determ ine background concentrations of HAP, possibly on a national or regional basis. These data would be used to estim ate the exposures to HAP from non-PCWP sources in the vicinity of an individual facility

. For exam ple, the EPA’ s National-scale Air Toxics Assessm ent (NATA) 14 and ATSDR’s Toxicological Profiles 15 contain inform ation about background concentrati ons of som e HAP in the atm o sphere and other m e dia. The com b ined exposures from PCWP sour ces and from other sources (as determ ined from the literature or studies) would then not be a llowed to exceed a hazard index lim it of one. As an alternative to the third option, a fourth option is to allow facilities to estim ate or m easure their own facility -specific background HAP con centrations for use in their analy s is.
3.1.6.3 Subcategory Delisting Under Section 112(c)(9)(B) of the CAA EPA is authorized to establish categories and s ubcategories of sources, as appropriate, pursuant to CAA section 112(c)(1), in order to facilitate the deve lopm ent of MACT standards consistent with section 112 of the CAA. Further, section 112(c)(9)(B) allows EPA to delete a category (or subcategory ) from the list of m a jor sources for which MACT standards are to be developed when the following can be dem onstrated: 1) in the case of carcinogenic pollutants, that "no source in the category . . . em its [ carcinogenic] air pollutants in quantities which m a y cau se a lifetim e risk of cancer greater than one in one m illion to the individual in the population who is m o st exposed to em issions of such pollutants from the source”; 2) in the case of pollutants that cause adver se noncancer health effects, that "em i ssions from no source in the category or subcategory . . . exceed a leve l which is adequate to protect public health with an

14 See http://www.epa.gov/ttn/atw/nata

15 See http://www.atsdr.cdc.gov/toxpro2.htm l 3-11am ple m a rgin of safety " ; and 3) in the case of pollutant s that cause adverse environm ental effects, that “no adverse environm ental effect will result from em issions from any source.” Given these authorities and the suggestions from the white paper prepared by industry representatives (see docket num ber A-98-44, Item # II-D -525), EPA is considering whether it would be possible to establish a subcategory of facilities within the larger PCWP category that would m eet the riskbased criteria for delisting. Since each facility in sucha subcategory would be a low-risk facility (i.e., if each m e t these criteria), the subcategory could be de listed in accordance with section 112(c)(9), thereby lim iting the costs and im pacts of the proposed MACT rule to only those facilities that do not qualify for subcategorization and delisting. Facilities seeking to be included in the delisted subcategory would be responsible for providing all data requi red to determ ine whether they are eligible for inclusion. Facilities that could not dem onstrate that they are eligible to be included in the low-risk subcategory would be subject to MACT and possible future residual risk standards. Establishing that a facility qualifies for the low-risk subcategory under section 112(c)(9) will necessarily involve com b ining estim ates of pollutant em issions with air dispersion m odeling to predict exposures. The EPA envisions that we would prom ote a tiered analy tical approach for these determ inations. A tiered analy s is involves m a ki ng successive refinem e nts in m odeling m e thodologies and input data to derive successively less conservative, m o re realistic estim ates of pollutant concentrations in air and estim ates of risk. As a first tier of analy s is, EPA could develop a series of sim p le look-up tables based on the results of air dispersion m odeling conducted using conser vative input assum p tions. By specify ing a lim ited num ber of input param e ters, such as stack height, di stance to property line, and em ission rate, a facility could use these look-up tables to determ ine easily wh ether the em issions from their sources m i ght cause a hazard index lim it to be exceeded. A facility that does not pass this initial con servative screening analy s is could im plem ent increasingly m o re site-specific but m o re resource-inte nsive tiers of analy s is using EPA-approved m odeling procedures, in an attem p t to dem onstrate that thei r facility does not exceed the hazard index lim it. The EPA’s guidance could provide the basis for conducting such a tiered analy s is. 16 Another approach would be to define a subcate gory of facilities within the PCWP source category based upon technological differences, such as differen ces in production rate, em ission vent flow rates, overall facility size, em issions characteristics, processes, or air pollution control device viability

. If it could then be determ ined that each source in this technologically -defined subcategory presents a low risk to the surrounding comm unity , the subcategory coul d then be delisted in accordance with 112(c)(9). One concern that EPA has with respect to the secti on 112(c)(9) approach is the affect that it could have on the MACT floors. If all of the well-controlled, low-risk facilities are subcategorized, that could m a ke the MACT floor less stringent for the rem a ining facilities. One approach th at has been suggested to m itigate this effect would be to establish the MACT floor now based on controls in place for the category and to allow facilities to becom e part of the low-risk category in the future, after the MACT standard is established. This would allow low risk facilities to use the 112(c)(9) exem ption without affecting the MACT floor calculation. EPA requests comm e nt on this suggested approach.

16 “ A Tiered Modeling Approach for Assessing the Risks due to Sources of Hazardous Air Pollutants.” EPA-450/4-92-001. David E. Guinnup, Office of Air Quality Planning and Standards, USEPA, March 1992. 3-12If this section 112(c)(9) approach were adopted, the rulem a king would likely indicate that the rule does not apply to any source that dem onstrates, b ased on a tiered approach that includes EPA-approved m odeling of the affected source’s em issions, that it be longs in a subcategory which has been delisted under section 112(c)(9). 3.2 E missions and Emission Reductions
As m e ntioned in Chapter 1, the U.S. Envir onm ental Protection Agency (EPA) is developing national em ission standards for hazardous air pollu tants (NESHAP) for the ply w ood and com posite wood products source category

. This part of the RIA presents em ission reductions expected to occur from com p liance with the MACT floor alternative that is being proposed.
3.2.1 S ome Results in Brief The proposed ply w ood and com posite wood produc ts NESHAP will reduce HAP em issions by about 11,000 tons in the third y ear after its issuance. 9 The m a jor HAP reduced, as m e ntioned in the rule pream ble, are acrolein, acetaldehy de, form aldehy de, phenol, propionaldehy d e, and m e thanol. In addition, nearly 27,000 tons of VOC (reported as total hy drocar bon) em issions will be reduced. Nearly 11,000 tons of CO em ission reductions will occur, along with13,000 tons of PM (coarse) em ission reductions. There will also be 5,000 tons of additi onal NOx em issions and 4,000 tons of SO 2 em issions added to the atm o sphere due to the additional incineration-based controls that m a y be necessary for affected facilities to m eet the MACT floor alternative.
3.2.2 G eneral Approach The m e thodology used to estim ate the HAP em i ssion reductions associated with this proposed rule is summ arized in this section. Before the em issions reductions could be estim ated, the baseline em issions level for each pollutant had to be determ in ed. This was conducted by first estim ating em issions without considering current air pollution controls, and then calculating the em issions levels with current controls applied. The first, uncontrolled em ission estim ates, are developed without consideration of air pollution controls currently in use at wood products plants. Baseline estim ates reflect the level of pollution control that is presently used. The rem a inder of this section discusses the general m e thodology used to estim ate uncontrolled and baseline em issions. Estim ating uncontrolled and baseline em issions involves the following four steps: (1) Identification of hazardous air pollutant (HAP) em ission sources, (2) Characterization of em ission sources (e.g., assignm ent of throughput and other characteristics), (3) Application of em ission factors, and (4) Calculation of em issions.
3.2.2.1 I dentifying Emission Sources
Em ission sources were identified based on responses to the EPA’ s m a xim u m achievable control technology (MACT) survey s and available em issions test data. The EPA gathered plant-specific inform ation with three MACT survey s. The results of the three survey s are docum ented in separate me mo r a n d a
. 10,11,12 Available em issions test data include data from nearly 100 test reports collected through EPA’s MACT survey , data from EPA’s Compilation of Air Pollutant Emission Factors, Volume I: Stationary Point and Area Sources (comm only referred to as AP-42), and extensive data from
3-13the industry

- sponsored test program perform ed by th e National Council of the Paper Industry for Air and Stream Im provem e nt (NCASI). Em issions were estim ated for sources that were identified in the EPA’ s MACT survey (e.g., dry e rs, presses, board cooler s) and for additional m i scellaneous sources (e.g., digesters, refiners, fiber washers) for which applicab le em ission test data were available. Process flow diagram s subm itted with the MACT survey s provi ded inform ation about the presence (or absence) of m i scellaneous sources at plants. The EPA’ s MACT survey also provided inform ation on the control devices used for m o st unit operations.
Som e plants have begun operation and other plants have added equipm ent and controls since EPA conducted the MACT survey

. Such changes have been accounted for in the nationwide em ission estim ates. A separate m e m o randum summ a rizes the changes to plants that have occurred following the EPA’ s MACT survey

. 13
3.2.2.2 C haracterizing Emission Sources After the em ission sources were identified, each source was assigned a throughput and further characterized. In m o st cases, plant-specific dry e r and press throughput was provided in EPA’ s MACT survey
. If the dry e r or press throughput was claim e d confidential or was not provided, then a default throughput was assigned. For dry e rs, the default throughput was the average throughput for the sam e ty pe dry e rs for the product m anufactured. 10,11,12 If available, plant production (or capacity if production was unavailable) was used as the default throughputfor presses; otherwise, presses were assigned the average press throughput for the product m a nufactured. Throughput for m i scellaneous equipm ent was based on either dry e r or press throughput, depending on the units of m easure for the applicab le em ission factor (e.g., pounds per oven dry ton [ l b/ODT] or pounds per thousand square feet [ l b/MSF] ). Collective throughputs for digesters, refiners, fiber washers, blenders, and form ers were genera lly approxim a ted as the total dry e r throughput (ODT/y r) for the plant. Board cooler, sander, and saw th roughput was generally approxim a ted as the total press throughput (MSF/y r) for the plant. By assigning either the total dry e r or press throughput to m i scellaneous processes, no assum p tion about the num be r of m i scellaneous opera tions (e.g., num ber of refiners) at each plant was necessary

. Following assignm ent of throughput for each em ission source, sources were further characterized (as necessary for application of em ission factors) based on wood species, resin ty pe, or other characteristics. Further characterization of em issi on sources is discussed in the baseline em issions m e m o for this proposed rule. If characterization of an em ission source was not possible due to claim s of confidentiality or m i ssing inform ation in the survey r esponse, then default characterizations were applied based on practices m o st comm only observed at other plants.
3.2.2.3 A pplying Emission Factors As em ission sources were characterized, the av ailable em ission factors were reviewed for applicability to each em ission source. The em ission factors used in developing the nationwide estim ates are docum ented in a separate m e m o randum

. 14 Em issions were generally estim ated for total hy drocarbon as carbon (THC as C , referred to as “THC” in this RIA) and the following HAP’s: acetaldehy de m e thy l isobuty l ketone (MIBK) acrolein phenol benzene propionaldehy d e
cum e ne sty r ene
3-14form aldehy de toluene
m e thanol m , p-xy lene
m e thy l ene chloride o-xy lene
m e thy l ethy l ketone (MEK)

When used in this docum ent, the term inology “com p lete set” refers to the set of em ission factors for the above list of HAP’ s , THC, and any other add itional HAP’ s that m a y have been m easured at levels above a test m e thod detection lim it. Total HAP was taken to be the sum of the individua l HAP’s. If all test data for a pollutant at a source were below the test m e thod detection lim it (de noted as “BDL” in reference 5), then the em ission factor was treated as zero. For a few specific sources, HAP’ s other than the ones listed above were tested for and detected. These HAP were included in the total HAP estim ate for that source. Exhibit 3-4 illustrates how the total HAP em ission factors were developed.

Exhibit 3-4. ILLUSTRATION OF TOTAL HAP CALCULATION FOR AN EMISSION SOURCE HAP Em ission Factor (from reference 5) acetaldehy de acrolein a benzene
cum e ne form aldehy de

m e thanol

m e thy l ene chloride BDL MEK MIBK phenol propionaldehy d e sty r ene toluene

m , p-xy lene BDL o-xy lene BDL Total HAP 0.0012 + 0.015 +0.076 + 0.0047 = 0.097 0.0012 BDL BDL BDL 0.015 0.076

BDL BDL 0.0047 BDL BDL BDL

a BDL (below detection lim it); all test runs for this polluta nt and this source were below the test m e thod detection lim it. Test data were not available for all of the HAP’ s considered for som e sources (i.e., a com p lete set of em ission factors was not available). In som e cases, it was necessary to apply em ission factors for one source to a sim ilar source for which factors were not available. In other situations, it was necessary to

3-15group em ission factors so that em issions of all the likely pollutants could be estim ated for a particular em ission source. Grouped em ission factors were calculated from em ission test averages using the m e thodology described in the em ission factor m e m o 14 . Specific application of the em ission factors for each unit operation is discussed in the baselin e em issions m e m o for this proposed rule.
3.2.2.4 C alculating Emissions Applicable em ission factors were used to estim ate uncontrolled em issions from each unit operation as follows: E = EF x T / 2000 where: E = annual em issions (ton/y r ) EF = em ission factor (lb/ODT or lb/MSF-specified basis) T = process throughput (ODT/y r or MSF/y r-specified basis) To estim ate baseline em issions, the em ission reduction achieved by air pollution control devices (APCD’ s) in place on unit operations was taken into account. Control devices that achieve significant reduction of HAP and THC include biofilters and inci neration-based controls (e.g., regenerative therm a l oxidizers [RTO’ s ] , regenerative cataly tic oxidizers [RCO’ s ] , therm a l oxidizers [TO’ s] , and therm a l cataly tic oxidizers [TCO’ s ] )

. Em ission factors were available for several, but not all, of the unit operations that are presently controlled with biofilters and incineration-based controls. If a com p lete set of em ission factors based on inlet and outlet test data for a single control device was available, the set of em ission factors was used to estim ate baseline em issi ons. Otherwise, the achievable percent reduction in em issions for the control device was used as follows: E = EF x T / 2000 x (1-R) where: R = percent reduction achievable with the control device (see table below)

Control device HAP reduction T HC reduction Biofilter 95% 80% RTO, RCO, TO, & TCO 95% 95%
If only a portion of an exhaust stream was contro lled (e.g., as with sem i-incineration where only a portion of the exhaust is routed to a com bustion unit) , then controlled em issions were estim ated for the controlled portion of the exhaust and uncontrolled em issions were estim ated for the rem a ining exhaust. Because plant-specific capture effici ency inform ation is not readily available, presses and board coolers without a perm anent total enclosure that are routed to an APCD were assum e d to operate with 50 percent capture efficiency

. Following estim ation of uncontrolled and baselin e em issions for each unit operation, annual em issions for each facility were totaled. If ther e were facilities with no available inform ation was available (e.g., plants that claim e d their entire MACT survey confidential or plants that never responded to the survey ), then the averag e facility -specific em issions for plants m a king the sam e product was used

3-16to approxim a te the em issions from plants with no ava ilable inform ation. The em issions from all facilities were summ e d to obtain nationwide em ission estim ates. 3.2.3 Nationwide HAP Emission Estimates Exhibit 3-5 presents the total nationwide uncontrolled and baseline em ission estim ates for each product ty pe. Uncontrolled em issions are the em issi ons that occur before the application of a HAP em ission control device. Baseline em ission estim ates take into account the HAP em ission controls currently in place on HAP sources in the industry

. Exhibits 3-6 and 3-7 present the nationwide uncontrolled and baseline speciated HAP em ission estim ates for each product ty pe. To estim ate the em issions and em ission reductions associated with com p liance with this proposed rule, it is necessary to determ ine the num ber of m a jor sources that m ay be subject to the rule. Major sources are facilities with the potential to em it 10 or m o re tpy of any single HAP or 25 or m o re tpy of any com b ination of HAP. The num ber of m a jor sour ces was approxim a ted using the uncontrolled em ission estim ates (scaled up to reflect potential to em it) for each facility

. The em ission estim ates presented in this chapte r are based on equipm ent throughput at plant production levels. Plant capacity ty pically exceeds pl ant production. Thus, a facility ’ s potential to em it m ay be greater than the em issions estim ated for each facility at plant production levels. To account for this, an average ratio of plant production to plant capacity was determ ined based on the non-CBI responses to EPA’ s MACT survey

. On average, ply w ood (hardwood and softwood) and reconstituted wood products plants were found to operate at around 75 percent of their plant capacity

. Engineered wood products plants were found, on average, to operate at 60 percent of their capacity

. For purposes of determ ining which facilities m ay be m a jor sources based on potential to em it, the uncontrolled em ission estim ates for each facility were scaled up by 25 or 40 percent before com p arison to the 10- or 25-tpy m a jor source thresholds. Exhibit 3-8 presents the estim ated num ber of m a jor sources by product ty pe. Because of the uncertainty in the em ission estim ates and lack of knowledge about the specific operations at facilities the num bers of m a jor sources pr esented in Exhibit 3-8 are m e rely estim ates. Major source determ inations depend on the ty pes of operations at a facility and facility -specific factors. There m ay be operations and HAP em ission sources at wood pr oducts facilities that have not been accounted for in the em ission estim ates (e.g., plants that m a nufacture furniture in addition to particleboard). Plants with additional onsite operations m ay be m a jor sources regardless of their ply w ood and com posite wood products operations. Then again, there m ay be plants that were determ ined to be m a jor sources in this analy s is that are not m a jor sources due to uncertainty in the em ission estim ates or potential to em it. The purpose of the analy ses discussed in this docum ent is to estim ate – on a nationwide scale – em issions from ply w ood and com posite wood produc ts plants and the num ber of m a jor sources. On a nationwide scale, it is unlikely that the uncerta inties in the em ission estim ates or num ber of m a jor sources will have a significant im pact on the direction of the propo sed ply w ood and com posite wood products rulem a king. The reduction in em issions of total HAP and TH C is the difference between baseline em issions and the em issions expected to rem a in following im plem entation of the MACT floor level of control identified for the PCWP standards. Baseline em issions reflect the level of air pollution control that is currently used at PCWP plants. The MACT floor c ontrol level reflects the level of control that will be used following im plem entation of the PCWP standards. The following assum p tions were used when estim ating em issions at the MACT floor control leve l: (1) plants will install RTO on all process units that require controls to m eet the MACT floor; (2) pr esses at conventional particleboard, MDF, OSB, and hardboard plants will be fully enclosed by a PTE that captures and routes 100 percent of the em issions from the press area to an RTO; and (3) WESP will be installed upstream of RTO for new RTO installations on rotary strand dry e rs. The nati onwide HAP and THC em ission reduction was calculated

3-17by subtracting the em issions rem a ining at the MACT floor control level from the baseline em issions. Exhibit 3-9 presents the nationwide HAP and THC em issions reduction. 14
3.2.4 Nationwide Emission Estimates - Non-HAP Species As m e ntioned earlier in this chapter, there are reductions in pollutants other than HAPs as a result of com p liance with this proposed rule. Ther e are reductions of coarse particulate m a tter (PM 10 ), volatile organic com pounds (VOC), and carbon m onoxide (CO) , and increases in nitrogen oxides (NOx), and sulfur dioxide (SO 2 ). The reductions of PM 10 are estim ated at 13,000 tons, the reductions of VOC (reported as total hy drocarbon) are estim ated at 27,000 tons (see Exhibit 3-9), and the reductions of CO are estim ated at 11,000 tons. The increase of NOx em issions is estim ated at 5,000 tons, and there are potentially as m any as 4,000 tons of additional SO 2 em issions. All em ission estim ates are estim ated for the fifth y ear after the issuance of the proposed rule

. The m e thodology used to prepare these estim ates is contained in the BID for this proposed rule. 15

3-18Exhibit 3-5.UNCONTROLLED AND BASELINE HAP EMISSIONS ESTIMATESNo. ofplantsaUncontrolled emissions, ton/yrbBaseline emissions, ton/yrcProductTotal HAPTHC as CTotal HAPMDF244,0008,2002,400Particleboardd515,70013,0005,400Hardboard183,5005,8003,300Fiberboard77840078OSB377,10019,0003,500Softwood plywood1054,00024,0003,700Hardwood plywood166150640150EWP39310990290Nationwide totale44725,00073,00019,000THC as C4,80013,0005,5004005,40020,00064079050,000aSomeplants make multiple products and are counted once for eachproduct they make (e.g., a particleboard and softwood plywoodplant).bUncontrolled emissions represent the emissions that occurbefore the application of HAP emission control devices.Baseline emissions reflect the application of HAPemission controls in the industry as of April 2000.dIncludes conventional and molded particleboard.eNationwide emission totals may not exactly match sumdue to rounding.3-19cExhibit 3-6.SPECIATED NATIONWIDE UNCONTROLLED HAP EMISSIONSBY PRODUCT TYPEProductEstimated HAP’s emitted, ton/yrAcetaldehydeAcroleinFormaldehydeMethanolPhenolPropionaldehydeOther HAPaTotalfMDF4811,7002,200931274,000Particleboardb230561,3003,80015020160c5,700Hardboard320765802,1009925052d3,500Fiberboard91174510678OSB1,5005408903,50034088280e7,100Softwoodplywood450262802,900150241704,000Hardwoodplywood200118115022150EWP5343614046819e310Totalf2,6007004,80015,00089039073025,000aOther HAP’s include benzene, cumene, methylene chloride,MEK, MIBK, styrene, toluene, m,p-xylene, and o-xylene.bIncludes conventional and molded particleboard.Includes HAPs listed in footnote “a” plus acetophenone, biphenyl, bis-(2-ethylhexyl phthalate), bromomethane, carbon disulfide,carbon tetrachloride,chloroform, chloromethane, di-n-butyl phthalate, ethyl benzene, hydroquinone, n-Hexane, 1,1,1-trichloroethane, and 4-methyl-2-pentanone.dIncludes HAPs listed in footnote “a” plus chloroethane, chloromethane, ethyl benzene,m.p-cresol, and o-cresol.eIncludes HAPs listed in footnote “a” plus MDI.fTotals may not exactly match sumdue to rounding.3-20cExhibit 3-7.SPECIATED NATIONWIDEBASELINE HAP EMISSIONSBY PRODUCTProductEstimated HAP’s emitted, ton/yrAcetaldehydeAcroleinFormaldehydeMethanolPhenolPropionaldehydeOther HAPaTotalfMDF2911,0001,300510172,500Particleboardb200501,2003,70014018150c5,400Hardboard270615702,1009620048d3,300Fiberboard91174510678OSB5702003702,0002103269e3,500Softwoodplywood390202302,700130171503,700Hardwoodplywood200118115022150EWP4743014046716e290Totalf1,5003303,40012,00069027048019,000aOther HAP’s include benzene, cumene, methylene chloride,MEK, MIBK, styrene, toluene, m,p-xylene, and o-xylene.bIncludes conventional and molded particleboard.Includes HAPs listed in footnote “a” plus acetophenone, biphenyl, bis-(2-ethylhexyl phthalate), bromomethane, carbon disulfide,carbon tetrachloride,chloroform, chloromethane, di-n-butyl phthalate, ethyl benzene, hydroquinone, n-Hexane, 1,1,1-trichloroethane, and 4-methyl-2-pentanone.dIncludes HAPs listed in footnote “a” plus chloroethane, chloromethane, ethyl benzene,m.p-cresol, and o-cresol.eIncludes HAPs listed in footnote “a” plus MDI.fTotals may not exactly match sumdue to rounding.3-21cExhibit 3-8.ESTIMATED NUMBER OFMAJOR SOURCESBY PRODUCTProductNo. of plantsaNo. of major sourcesbNo. of potentiallynon-major sourcesbMDF24240Particleboardc51429Hardboard18180Fiberboard734OSB37370Softwood plywood1058718Hardwood plywood1660166EWP391227Total447223224aSomeplants make multiple products and are counted once for eachproduct they make (e.g., a particleboard and softwood plywoodplant).bMajor sources are defined as facilities with the potential to emit10 or more tons per year (tpy) of any single HAP or 25 or more tpy of any combination ofHAP.Sources with HAP emissions estimatedto be below the 10/25 thresholds in this analysis are labeled as potentially non-major sources.The emissionestimation methodology described in this document does not accountfor onsite operations (e.g., furniture manufacture) not included in the plywood andcomposite wood products source category.Includes conventional and molded particleboard.Five of thepotentially non-major particleboard sources manufacture molded particleboard.3-22cExhibit 3-9. ESTIMATED NATIONWIDE REDUCTION IN TOTAL HAP AND THCProduct typeSoftwood plywood/veneerHardwood plywood/veneerMediumdensity fiberboardOriented strandboardParticleboardcHardboardFiberboardEngineered wood productsTOTALTotal HAP (ton/yr)THC (ton/yr)BaselineaMACTfloorReductionBaselineaMACT floorReduction3,7003,04365719,6319,7099,9221611610b6406400b2,4693452,1244,7635724,1913,5137532,7605,3621,7553,6075,3772,7872,59012,6326,7245,9083,2917522,5395,4782,1033,37478780b3983980b2982306879361717618,9338,19610,73749,70622,52927,178aThe baseline emissions presented in this table may differ slightly fromthe values presented in Exhibits 3-4 through 3-6 because of slight differences incalculation procedures (i.e., use of a total HAP emission factor instead of summing speciated HAP emissions) and rounding.bThere is no impact because no plants are impacted bythe PCWPstandards at the MACT floor control level.Includes conventional and molded particleboard.3-23c3.3 C ontrol Equipment and Costs Traditional add-on pollution control devices are expect ed to be the ty pes of control m easures that firm s will choose in order to com p ly with the proposed rule. Add-on air pollution control devices that are m o st likely to be used to com p ly with th e ply w ood and com posite wood products rule include incineration-based controls. Am ong these ty pes of controls are regenerative therm a l oxidizers (RTO), regenerative cataly tic oxidizers (RCO), and process inci neration. Biofilters is another add-on control that m a y be applied. The control device m o st comm only used to control em issions from ply w ood and com posite wood products plants is the RTO. Theref ore, it was assum e d that m o st plants would install RTO’ s to com p ly with the rule. A num ber of RCO’ s and biofilters are also presently used by ply w ood and com posite wood products plants, and plants m a y choose to install these technologies to com p ly with the ply w ood and com posite wood products rule. Th ere m a y be cost advantages to using RCO’s or biofilters instead of RTO’ s for som e plants. Howe ver, the cost analy ses focus on use of RTO’ s for sim p licity (e.g., to m i nim i ze the num ber of cost algor ithm s developed and to avoid judgem e nts regarding which plants m a y choose a particular technology ). Several facilities with large capacity heat energy sy stem s currently use process incineration as a m e thod of em issions control. Facilities m a y elect to use process incineration to com p ly with the rule. However, the applicability of process incineration is lim ite d to those plants that have or m ay later install large onsite heat energy sy stem s. The capital and operating costs of process incineration are expected to be significantly lower than the costs of add-on controls. The ply w ood and com posite wood products rule c ontains em issions averaging provisions and production-based em ission lim its. It m ay be possible for som e plants to reduce their control costs by com p ly ing with either the em issions averaging pr ovisions or production-based em ission lim its. However, because there is no way to predict which plants m i ght use the em issions averaging provisions or production-based em ission lim its, the cost estim ates did not account for these options. Instead, the control cost estim ates were developed assum i ng that all facilities would install RTO(s) to m eet the 90 percent HAP reduction em ission lim it in the ply w ood and com posite wood products rule. Oriented strandboard plants ty pically install we t electrostatic precipitators (WESP’s) upstream of rotary dry e r RTO’s to protect the RTO m e dia from plugging. Thus, the capital and annual costs associated with WESP’ s were m odeled for rotary strand dry e rs. Enclosures m u st be installed around presses in order to ensure capture of the press em issions that are routed to a control device. Thus, the capita l costs of perm anent total enclosures (PTE’s) were included in the costing analy ses. Annual costs associated with PTE’ s (if any ) were assum e d to be m i nim a l and were not included in the cost analy ses. This chapter presents the estim ated nationwide capital and annualized costs for com p liance with the PCWP rule. Com p liance costs include the cost s of installing and operating air pollution control equipm ent and the costs associated with dem ons trating ongoing com p liance (i.e., em issions testing, m onitoring, reporting, and recordkeeping costs). Section 3.3.1 discusses the estim ated air pollution control costs. Cost estim ates associated with tes ting, m onitoring, reporting, and recordkeeping are discussed in the Paperwork Reduction Act subm i ssion for the proposed PCWP standards and are summ a rized in Section 3.4.
3.3.1 Basis For Control Costs As discussed above, add-on air pollution control devices m o st likely to be used to com p ly with the PCWP rule include incineration-based contro ls (e.g., RTO, RCO, and process incineration) or

3-24biofilters. The control device m o st comm only used to control em issions from PCWP plants is the RTO. Therefore, for costing purposes, it was assum e d that m o st plants would install RTO’ s to com p ly with the rule. A num ber of RCO’ s and biofilters are also presently used by PCWP plants. In addition, several plants with large capacity heat energy sy stem s currently use process incineration. However, the applicability of process incineration is lim ited to those plants that have, or m a y later install, large onsite heat energy sy stem s. There m ay be cost advantag es to using RCO’ s , biofilters, process incineration, other add-on control devices, or pollution prevention m easures instead of RTO’ s for som e plants. Plants m ay elect to use any of these technologies to com p ly with the rule, provided the technology lim its HAP em issions to the levels specified in the rule. Howeve r, the cost analy ses describedin this chapter focus on use of RTO’s due to their prevalence in the indus try and to m i nim i ze the num ber of cost algorithm s developed and to avoid judgem e nt s regarding which plants m a y choose a particular technology

. Oriented strandboard plants ty pically install W ESP’s upstream of rotary dry e r RTO’s to protect the RTO m e dia from plugging. Thus, the capital a nd annualized costs associated with WESP’ s were m odeled for rotary strand dry e rs. Available inform ation indicates that WESP’ s are not necessary for protecting RTO’ s installed of other ty pes of dry e rs (e.g., tube dry e rs) or on presses. 16 Therefore, with the noted exception of OSB dry e rs without WESP’ s, the existing particulate abatem ent equipm ent on process units was assum e d to be sufficient for protecting the RTO m e dia. 17
Enclosures m u st be installed around presses to en sure com p lete capture of the press em issions before routing these em issions to a control device. Thus, the capital costs of perm anent total enclosures (PTE’ s) were included in the costing analy ses. Annualized costs associated with PTE’ s were assum e d to be m i nim a l and were not included in the cost analy ses. The following sections discuss the RTO, WESP, and PTE costs. Section 3.3.1.4 describes how plant-by -plant control costs were estim ated, and S ection 3.3.1.5 summ a rizes the nationwide control costs.
3.3.1.1 RTO Costs An RTO cost algorithm was developed based on: (1) inform ation from an RTO vendor with num erous RTO installations at PCWP plants, and (2 ) the costing m e thodology described in the EPA Air Pollution Control Cost Manual. 18,19 The RTO cost algorithm was usedto determ ine RTO total capital investm e nt (TCI) and total annualized cost (TAC) b ased on the exhaust flow to be controlled and annual operating hours. Developm ent of the algorithm is discussed in Sections 3.4.1.1.1 and 3.4.1.1.2.
RTO Total Capital Investment

. 18,19 Equipm ent costs (including equipm ent, installation, and freight) were provided by the RTO vendor for four sizes of RTO’ s. The 1997 equipm en t costs were not escalated because the Vatavuk Air Pollution Control Cost Index (VAPCCI) for 1997 (107.9) was slightly greater than the prelim inary VAPCCI for RTO’s in fourth quarter 1999 (107.8). 20 According to the EPA Air Pollution Control Cost Manual, instrum e ntation is ty pically 10 percent of equipm ent cost (RTO and auxillary equipm ent); sales tax is ty pically 3 percent of the equipm ent cost; and freight is ty pically 5 percent of the equipm ent cost. Figure 3-1 presents the purchased equipm ent costs (PEC) supplied by the RTO vendor (m inus freight), and shows that the equipm ent costs vary linearly w ith gas flow rate. The regression equation presented in Figure 3-1 was included in the RTO cost algorithm to calculate the equipm ent cost for the oxidizer and auxillary equipm ent for various gas flow rates. Instrum e ntation, sales tax, and freight were added to the calculated equipm ent costs to obtain the total PEC.

3-252, 50 0, 0 0 0

2, 00 0, 0 0 0

1, 50 0, 0 0 0

1, 00 0, 0 0 0

50 0, 0 0 0

0 0 5 0, 0 0 0 1 0 0 , 0 0 0 15 0, 00 0 2 0 0 , 0 0 0 25 0, 00 0 y = 8. 51 01 x + 4 9 9 1 9 4 R 2 = 0

. 9 9 1

F l ow r a t e , ds c f m Figure 3-1. Variation in RTO purchased equipment cost with flow rate.
Direct installation costs for handling and erecti on, electrical, and piping were included in the equipm ent cost provided by the RTO vendor. Start-up costs were also included in the equipm ent cost provided by the RTO vendor. These costs are ty pically 22 percent of the PEC. Thus, these costs were subtracted from the PEC before further calculations b ased on the PEC were perform ed. Direct installation costs including foundation and support, insulation for ductwork, and painting were estim ated according to the procedures in the EPA Air Pollution Control CostManual. Because PTE’ s were costed separately , no enclosure building was costed in the RTO algorithm

. S ite preparation costs and indirect installation costs (e.g., engineering, field expense, contractor fees, perform ance tests, and contengencies) were estim ated according to the procedures in the EPA Air Pollution Control Cost Manual. The TCI was calculated by summ i ng the PEC, direct and indirect installation costs, and site preparation cost. RTO Total Annualized Cost Total annualized costs consist of operating and m a in tenance labor and m a terial costs, utility costs, and indirect operating costs (including capital recovery ). Operating and m a intenance labor and m a terial costs were estim ated based on the RTO vendor in form ation because the RTO vendor assum p tions led to higher costs than the EPA Air Pollution Control CostManual and were assum e d to be m o re representative of the PCWP industry

. The operator labor ra te supplied by the RTO vendor was $19.50 per hour. The RTO electricity use and natural gas use was provided by the RTO vendor for the four RTO sizes. Figures 3-2 and 3-3 present the relationships betw een flow rate and electricity and flow rate and natural gas use, respectively

. As shown in the figures, there is a linear relationship between RTO electricity consum ption and flow rate, and an e xponential relationship between RTO fuel consum ption and flow rate.Purchased Equipment Cost, $

3-26y = 0. 1479 e 2E-05x R 2 = 0. 9981

0 2 4 6 8

0 5000 0 100000 150000 200000 250000 Fl ow r a t e , d s c f mMMBTU/HR 

### y = 0. 0052x + 3. 283 R

2 

### = 1 0 500 1000 1500

0 50000 100000 150000 200000 250000 Fl ow r a

t

e , dscf mkW

Figure 3-2. Relationship between RTO electricity consumption and flow rate.

Figure 3-3. Relationship between RTO natural gas consumption and flow rate.

Electricity costs were estim ated by the RTO vendor at $0.045 per kilowatt-hour (kWh). The RTO vendor estim ated natural gas costs at $3 per m illion British therm a l units (MMBtu). Both of these energy prices m a tch closely with currently published nationwide average prices. 21,22 Thus, the electricity and natural gas prices supplied by the RTO vendor were used in the cost algorithm

. Indirect operating costs were estim ated using the m e thodology described in the EPA Air Pollution Control Cost Manual. The capital recove ry cost was estim ating assum i ng an RTO equipm ent life of 15 y ears (based on the RTO vendor inform ation) and a 7-percent interest rate. The TAC was calculated by summ i ng the direct and indirect annual operating costs. Application of the RTO Cost Algorithm to Estimate Capital and Annualized Costs.

3-27The com p lete RTO cost algorithm , which predic ts RTO capital and annualized costs as a function of operating hours and flow rate, was run sever al tim es assum i ng 8,000 operating hours per y ear and various flow rates. survey , which show industry average operating hours of slightly less than 8,000 hr/y r. 10 Although several The 8,000-hr operating tim e was selected based on the results of the EPA’ s MACT plants operate process lines m o re than 8,000 hr/y r, th eir equipm ent and control devices m a y or m ay not be operated for m o re than 8,000 hr/y r. Thus, 8,000 hr /y r was selected as the control device operating tim e for purposes of costing. The TCI and TAC values generated for each fl ow rate using the RTO cost algorithm are presented in the BID for this proposed rule. A re gression equation was developed based on the calculated TCI and TAC for each flow rate. Figures 3-4 and 3- 5 present the relationships between flow rate and RTO capital costs and flow rate and annualized co sts, respectively , and the associated regression equations.
3.3.1.2 W ESP Costs A WESP cost m odel was developed based on: (1) inform ation from a WESP vendor with m any WESP installations at wood products plants, and (2) the costing m e thodology described in the EPA Air Pollution Control Cost Manual for electrostatic precipitators (ESP’s). 19,23 The cost m odel was used to determ ine TCI and TAC for WESP’s used to control pa rticulate em issions from OSB rotary dry e rs. The WESP vendor provided cost inform ation for a WESP sized to treat 27,650 dry standard cubic feet per m i nute (dscfm ) of OSB rotary dry e r exhaust. This flow rate m a tches closely with the flow rates for uncontrolled OSB. Thus, the m odel TCI and TAC could be applied for each dry e r to be controlled (i.e., the m odel need not calculate different costs for vary ing flow rates). The WESP cost m odel is presented in the BID for the proposed rule. Developm ent of the m odel is discussed below. WESP Total Capital Investment. The WESP and auxiliary equipm ent costs (which m a keup the PEC) were provided by the WESP vendor. These PEC include the cost of the WESP; pum ps, piping, and tanks ; ducting (including the quench); fans; and a 1-gallon per m i nute (gpm ) blowdown solids rem oval sy stem

. Instrum e ntation costs were also provided by the WESP vendor. Sales tax and freight were added into the total PEC based on the m e thodology described in the EPA Air Pollution Control Cost Manual.

y = 13. 797x + 809310 R 2 = 1

0 1, 000, 000 2, 000, 000 3, 000, 000 4, 000, 000 5, 000, 000 6, 000, 000

- 50, 000 100, 000 150, 000 200, 000 250, 000 300, 000 350, 000 Flow r a t e , ds c f mTCI ($)

Figure 3-4. Variation in RTO total capital investm e nt with flow.

3-28y = 317394e 8E -0 6x R 2 = 0. 9887

0 500 , 000 1, 00 0, 000 1, 50 0, 000 2, 00 0, 000 2, 50 0, 000 3, 00 0, 000 3, 50 0, 000

- 50, 000 1 00, 00 0 1 50, 0 0 0 200, 000 250, 000 300, 000 350, 000 Fl ow r a t e , ds c f mTAC ($)

Figure 3-5. Variation in RTO total annualiz ed cost with flow.

The direct installation costs such as foundation and support, handling and erection, electrical, piping, insulation for ductwork, and painting were included in the PEC provided by the WESP vendor. It was assum e d that no building would be necessary for th e WESP and that there would be no additional site preparation costs. Several indirect costs were also included in the equipm ent cost supplied by the WESP vendor, including engineering, constr uction and field expense, start-up, and contingencies. Because WESP’ s are already widely used at OSB plants, it was assum e d that no m odel study would be necessary for the WESP although the EPA Air Pollution Control Cost Manual m e ntions m odel-study costs for ESP’s. The cost of a perform ance test was included in th e WESP cost m odel. According to the EPA Air Pollution Control Cost Manual, the perform ance test is ty pically 1 percent of the PEC. Thus, 1 percent of the m odel PEC (m inus the direct and indirect insta llation costs included in the PEC) was used as the cost of the perform ance test. The direct and indirect costs were summ e d to arrive at the WESP TCI.
W

E

SP Total Annualized Cost The direct annualized costs include operating and m a intenance labor and m a terials, utilities, and waste disposal. The operating labor cost was based on 1,146 hr/y r (provided by the WESP vendor) at $19.50/hr (the labor rate used in the RTO cost algorithm )

. The annual cost of operating m a terials, including caustic and defoam er, was provided by th e WESP vendor. The m a intenance labor rate was estim ated as 110 percent of the operating labor rate

. The m a intenance hours per y ear were estim ated based on inform ation supplied WESP vendor. The cost of m a intenance m a terials (including replacem ent of one pum p seal per y ear, and one voltage controlle r every 4 y ears, and m i scellaneous m a terials) was supplied by the WESP vendor. The electricity necessary to power the WESP com ponents (approxim a tely 2,076,000 kWh/y r for all WESP com ponents) was based on inform ation provided by the WESP vendor. An electricity cost of $0.045/kWh was used (the sam e as used in the RTO co st algorithm )

. A $0.20/gal cost for m a keup water

3-29was used based on the EPA Air Pollution Control Co st Manual. The WESP water recirculation rate, m a keup water addition rate, and bl owdown generation rates were pr ovided by the WESP vendor. The EPA Air Pollution Control Cost Manual indicated that wastewater treatm e nt costs m ay range from $1.30 to $2.15 /1,000 gallons. Methods of WESP wastewater treatm e nt and disposal could include evaporation from settling ponds, discharge to a m unicipal water treatm e nt facility , or spray irrigation. The wastewater treatm e nt and disposal cost for the blowdown was assum e d to be $2.15 per gallon. The wastewater percent solids of 7.6 percent was based on the average from the MA CT survey responses. 11 It was assum e d that the solids would ultim ately be dispo sed in a landfill (although they could be burned onsite or used for soil am endm ent). The trucking cost for hauling sludge to landfill was estim ated to be $0.20 y d3-m i

. 22 The landfill was assum e d to be 20 m iles away , and a $20/ton landfill tipping fee was used. 22 The density of the solids was assum e d to be 0.5 ton/y d3 for wet wood particulate (given that the density of water is 0.84 ton/y d3 and the density of wood is from 30 to 50 percent of the density of water). The indirect operating costs were estim ated b ased on the m e thodology described in the EPA Air Pollution Control Cost Manual. The capital recove ry cost was estim ated assum i ng a WESP equipm ent life of 20 y ears (based on the EPA Air Pollution Control Cost Manual and WESP vendor inform ation) and a 7-percent interest rate. The TAC was calcu lated by summ i ng the direct and indirect annual operating costs.
3.3.1.3 P ermanent Total Enclosure (PTE) Costs The capital costs associated with installation of a PTE were based on available inform ation in the project files on the capital cost of PTE’ s for particleboard, MDF, and OSB presses. 24 These costs included the following elem ents:

• i nstalled cost of the PTE (including fan sy stem ) • ductwork • i nstrum entation and wiring • f ire suppression (in som e cases) • s ite supervision • s tart-up and testing Based on the available cost inform ation, the follo wing algorithm was developed to estim ate the PTE costs for various exhaust flowrates:
TCI PTE = 1.2031 x Q dscfm + 425,760 where: TCI PTE = the total capital cost of the perm anent total enclosure, $ Q dscfm = d esign exhaust flow rate from PTE, dr y standard cubic feet per m i nute Available inform ation on actual exhaust flow rates from PTE’s installed around reconstituted wood product presses was used to develop m odel flow rates for the various press applications. 25 Inform ation on press vent flow rates from unenclosed presses was ava ilable, but not used, because unenclosed press flow rates are altered when a PTE is installed around a press. 26 The cost algorithm was then applied to the m odel flow rates to estim ate the capital costs of th e m odel PTE’s as shown in Exhibit 3-10. The costs were rounded to the nearest $1,000. In the case of the particleboard press PTE, the cost was set at $485,000 (instead of $481,000, which is the value derived from the cost algorithm ) because the PTE m odel flow rate was sim ilar to those for the MD F and hardboard presses, and apply i ng the sam e cost to all three ty pes of press PTE’ s sim p lified the costing analy ses. Annualized costs were not developed for

3-30PTE’ s because the annualized cost of the fans is already accounted for in the estim ated costs of the RTO’ s. Exhibit 3-10. PRESS ENCLOSURE EX HAUST FLOW RATES AND CAPITAL COSTS Equipm ent ty pe Flow rate, dscfm PTE capital cost Particleboard press 45,524 $485,000 OSB press 97,509 $543,000 MDF or dry / dry hardboard press 49,413 $485,000 Wet/dry or wet/wet hardboard press 49,209 $485,000
3.3.2 P lant-by-Plant Costing Approach The control costs associated with the PCWP st andards were estim ated for each plant and were summ e d to arrive at a nationwide estim ate of control costs. The PCWP standards apply only to m a jor sources of HAP em issions. Therefore, cost estim ates were developed for only those plants that were assum e d to be m a jor sources. 15 The inform ation used to estim ate the plant-by -plant control costs is described below.
3.3.2.1 A pplication of Control Costs to Process Units The cost m odels discussed in Section 3.3.1 were applied to each plant that would likely need to install air pollution controls in order to m eet the PCWP standards. Plant-specific inform ation on process units (e.g., dry e rs, presses) and controls was taken from the MACT survey responses. 10,11,12 In addition, inform ation about the presence of PTE’ s on presses was taken from the MACT survey responses. 10 If inform ation about press enclosures was not provided in the MACT survey responses, or was claim e d confidential, the press was assum e d to be unenclosedif it was uncontrolled or enclosed if it was controlled for purposes of costing.
Som e plants have begun operation and other plants have added e quipm ent or controls since EPA conducted the MACT survey

. Such changes were acc ounted for in the nationwide cost estim ates. A separate m e m o randum summ arizes the changes to plan ts that have occurred following the EPA’ s MACT 13 survey
. The process units and controls present at each plan t were reviewed to determ ine which of the assum e d what control equipm ent (i.e., RTO, WESP, or PTE) the plant would need to install to m eet the PCWP standards based on the MACT floor control leve ls. The MACT floor control levels are based on the inform ation presented in the BID for this proposed rule. 6 Exhibit 3-2 summ a rizes the process units for which control equipm ent would be required to m eet th e MACT floor and the control equipm ent costed for these process units. At each plant, the exhaust gas flow rates from the applicable uncontrolled process units listed in Exhibit 3-11 were summ e d to y i eld a plant-wide uncontrolled exhaust gas flow rate. Process units already equipped with controls to m eet the MACT floor were not included in the plant-wide uncontrolled gas flow rate estim ates. The procedur es for estim ating the uncontrolled gas flow rates from process units and the application of the cost algorithm s is discussed in the following section.

3-31Exhibit 3-11. CONTROL EQUIPMENT COSTED FOR PROCESS UNITS WITH CONTROLLED MACT FLOOR
Existing process units with control requirem e nts Control equipm ent costed Notes Tube dryers (prim a ry and secondary) RTO T ube dryers are located at particleboard, MDF, and hardboard plants Rotary strand dryers W E SP and RTO R otary strand dryers are located at OSB and LSL plants. Assum e d that the W E SP is not needed for plants that already have an RTO without a W E SP. Assum e d that plants that currently operate an EFB or m u lticlone alone (i.e., with no RTO) would install a W E SP with the RTO. Conveyor-type strand dryers RTO C onveyor strand dryers are located at OSB and LSL plants.
Rotary green particle dryers RTO R otary green pa rticle dryers are located at particleboard, MDF, or hardboard plants and process furnish with >30% (dry basis) inlet m o isture content at dryer inlet tem p erature of >600°F Hardboard ovens RTO I ncludes bake and tem p ering ovens Softwood veneer dryers RTO S oftwood veneer dryers are located at softwood plywood, hardwood plywood, LVL, and PSL plants and dry $ 50% (by volum e, annually) softwood veneer Pressurized refiners None The exhaust from pressurized refiners typically passes through a tube dryer and exits through the tube dryer control device. Therefore, it was not necessary to cost separate control equipm ent for pressurized refiners. Pressurized refiners are located at MDF and hardboard plants. Reconstituted wood products presses PTE and RTO R econstituted wood products presses are located at hardboard, MDF, OSB, and particleboard plants
Exhaust Flow Rate to Be Controlled If provided in the non-confidential MACT surv ey responses, process-unit specific exhaust flow rate, tem p erature, and percent m o isture were used to determ ine the dry standard flow rate for each process unit. If sufficient inform ation was not provided in the MACT survey response to determ ine dry standard flow rates (or the inform ation was claim e d confidential) , then default values were used for the flow rate. The default values were based on the average value for other sim ilar process units at plants that provided enough non-confidential inform ation to calculate the dr y standard flow rate. Exhibit 3-12 summ a rizes the default flow rates used in the costing analy ses. The average flow rates from press enclosures are described in Section 3.3.1 and were used for all presses.

3-32Exhibit 3-12. DEFAULT FLOW RATES
Process line E quipm ent ty pe Flow rate (dscfm ) Particleboard Rotary green particle dry e r 35,731 Tube dry e r 14,955 OSB R otary strand dry e r 32,478 Convey o r-ty p e strand dry e r 37,810 MDF P rim ary tube dry e r (single-stage or first stage of staged dry e r) 79,173
Secondary tube dry e r (second stage of staged dry e r) 18,195
Ply w ood Softwood veneer dry e r 12,062 Hardboard Bake oven 4 ,742
Tem p ering oven 4 ,055 Prim ary tube dry e r (single-stage or first stage of staged dry e r) 37,436
Secondary tube dry e r (second stage of staged dry e r) 31,728
Several plants have m u ltiple process units requi ring controls. The flow rates for these process units were summ e d and divided across control equipm ent as necessary

. In m o st cases, the total dry e r flow was assum e d to be routed to one or m o re RTO’ s dedicated to controlling dry e r exhaust and the total press flow was assum e d to be routed to one or m o re RTO’ s dedicated to controlling press exhaust. Because RTO fuel costs increase exponentially with gas flow rate, RTO sizes were assum e d to rem a in less than about 150,000 dscfm

. (The largest RTO in m e ntioned in the MACT survey responses was around 150,000 dscfm

. )
In som e cases, dry e rs and presses were assum e d to be routed to the sam e RTO, provided that the total dry e r and press flow rem a ined under 150,000 dscfm

. For exam ple, two RTO’ s (103,500 dscfm each) would be costed for a MDF plant with 2 dry e rs (79,000 each) and 1 press (49,000) assum i ng that the flow for both dry e rs and the press could be com b ined and split equally across the two RTO’ s. This approach seem s reasonable given that several MDF plan ts currently route dry e r and press exhaust to the sam e RTO.
Calculation of Nationwide Control Costs The total plant-by -plant control cost was cal culated by summ i ng the control cost associated with each RTO, WESP, and PTE costed for each plant. Th e num ber of control devices at each plant depended on the num ber of process units and the exhaust flow to be controlled at the plant. In som e cases, only one control device was costed, while in other cases, m u ltiple control devices were costed for a plant.

3-33Som e plants claim e d all relevant portions of their MACT survey responses confidential. In addition, a MACT survey response was not available fo r a few plants likely to be im pacted by the PCWP standards. Without a non-confidential MACT survey response, inform ation was not available to develop plant-specific cost estim ates. Therefore, the aver age cost for all other plants m a nufacturing the sam e product was used to approxim a te the costs for pl ants for which there was no non-confidential plantspecific inform ation. The nationwide capital and annualized control cost s were determ ined by summ i ng the total plantspecific costs.
3.3.3 Summary of Nationwide Control Costs Exhibit 3-13 summ arizes the nationwide control costs for different product ty pes. The nationwide total capital cost for control equipm ent is estim ated to be $473 m illion and the nationwide total annual cost for control equipm ent is estim at ed as $136 m illion (1999 dollars). Exhibit 3-14 presents the dollars of total annualized costs per ton of HAP and THC reduced. 3.4 Testing, Monitoring, Reporting, And Recordkeeping Costs
Com p liance with the PCWP standards m u st be dem onstrated through perform ance testing, ongoing m onitoring of process or control device operati ng param e ters or em issions, periodic reporting to the governm e nt agency that im plem ents the PCWP rule, and recordkeeping. There are capital and annualized costs associated with these testing, m onito ring, reporting, and recordkeeping activities. These costs, which are estim ated and docum ented in the supporting statem ent for the Paperwork Reduction Act subm ission, and are summ a rized in this section. 27

3-34Exhibit 3-13.ESTIMATEDNATIONWIDE CONTROL COSTS FOR THE PCWPINDUSTRYProduct typeNo. of plantsaNo. of plantsimpacteda,bSoftwood plywood/veneer10566Hardwood plywood/veneer1660Mediumdensity fiberboard2418Oriented Strandboard3723Particleboard(conventional and molded)5138Particleboard (agriboard)50Hardboard1818Fiberboard70Engineered wood products413Process units impactedControl equipmentTotal capitalcosts, $MMTotal annualcosts, $MMsoftwood veneer dryersRTO$87.1$28.4N/Ano control$0.0$0.0dryers, pressesRTO for dryers andPTE/RTO for presses$71.3$21.5dryers, pressesWESP/RTO for dryers andPTE/RTO for presses$94.6$25.5green rotary particledryers, pressesRTO for dryers andPTE/RTO for presses$125.2$34.2N/Ano control$0.0$0.0tube dryers, presses,ovensRTO for dryers andPTE/RTO for presses$84.4$23.5N/Ano control$0.0$0.0softwood veneer dryers,strand dryersRTO for veneer dryers andWESP/RTO for strand dryers$10.3$3.2TOTAL:454166$473$136aSomeplants manufacture more than one product type.These plants are listed once for each product type manufactured.bThe number of plants impacted may be different fromthe number of plants nationwide for one of the following reasons: (1) someplants are not major sources;(2) someplants already have all of the necessary control equipment; or (3) a few plants are major sources but do not operate any process units for which thereare control requirements (e.g., glu-lamplants).3-35Exhibit 3-14. DOLLARS (IN TOTAL ANNUALIZ ED COSTS) PER TON OF HAP AND THC REDUCED Product type HAP, $/ton T HC, $/ton Softwood plywood/veneer $43,000 $2,900 Hardwood plywood/veneer NA NA Medium density fiberboard $10,000 $5,100 Oriented Strandboard $9,200 $7,100 Particleboard $13,000 $5,800 Hardboard $9,300 $7,000 Fiberboard NA NA Engineered wood products $47,000 $18,000 Overall industry $13,000 $5,000 (all types)

The annual costs associated with testing, m on itoring, reporting, and recordkeeping activities include reporting and recordkeeping labor; annualized cap ital for m onitoring equipm ent, file cabinets, and perform ance tests; and the operation and m a intenance costs associated with m onitoring equipm ent. The capital costs include capital for m onitoring equipm ent, file cabinets and perform ance tests. Perform ance tests are considered to be capital co sts because plants will ty pically hire a testing contractor to conduct the perform ance tests. The total nationwide capital cost associated with testing, m onitoring, reporting, and recordkeeping is estim ated to be $5.8 m illion and the total nationwide annualized cost is estim ated to be $5.6 m illion (1999 dollars). These costs were deve loped based on the inform ation presented in the Paperwork Reduction Act subm ission for the first 3 y ear s following the effective date of the PCWP rule. The costs apply for the 223 PCWP plants that are e xpected to be m a jor sources. There are 57 facilities that incur m onitoring, recordkeeping, and reporting costs but do not incur control costs from com p liance with this proposed rule. 3.5 REFERENCES
1. United States Congress. Clean Air Act, as am ended October 1990. 42 U.S.C. 7401 et seq. Washington, DC. U.S. Governm e nt Printing Office. 2. U. S. Environm ental Protection Agency

. National Em ission Standards for Hazardous Air Pollutants for Source Category : Organic Hazardous Air Pollutants from the Sy nthetic Organic Chem ical Manufacturing Industry and Other Pro cesses Subject to the Negotiated Regulation for Equipm ent Leaks; Determ ination of MACT “Floor.” 59 FR 29196. Washington, DC. U.S. Governm e nt Printing Office. June 6, 1994.
3. Mem o randum from K. Hanks and B. Nicholson, MRI, to P. Lassiter, EPA/ESD. April 16, 1998 (Finalized 5/28/98). Trip report for February 12, 1998 site visit to Tim b er Products Com p any particleboard and hardwood ply w ood plant in Medford, Oregon.

3-364. R. Nicholson, MRI, to D. Word, NCASI. February 17, 2000 (Confirm e d via Em ail on 9/7/00). Contact report to (1) find out if oxy gen m easure m e nt data were available from the NCASI MACT em issions test program , and (2) to get som e inform ation on ty pical oxy gen concentrations in dry e r and press exhaust at ply w ood a nd com posite wood products plants.
5. Mem o randum from R. Nicholson, MRI, to M. Kissell, EPA/ESD. May 26, 2000. Control Device Efficiency Data for Add-on Control Devices at PCWP Plants.
6. Mem o randum from K. Hanks and B. Nicholson, MRI, to M. Kissell, EPA/ESD. July 13, 2000. Determ ination of MACT floors and MACT for the Ply w ood and Com posite Wood Products Industry

. 7. National Council of the Paper Industry for Air and Stream Im provem e nt (NCASI) Method IM/CAN/WP-99.01, Im pinger/Canister Source Sam p ling Method for Speciated HAPs at Wood Products Facilities. 1999.
8. Reference 6.
9. Mem o randum from K. Hanks and D. Bullock, MRI, to M. Kissell, EPA/ESD. June 9, 2000. Baseline Em ission Estim ates for the Ply w ood and Com posite Wood Products Industry

. 10. Mem o randum from D. Bullock, K. Hanks, and B. Nicholson, MRI to M. Kissell, EPA/ESD. April 28, 2000. Summ ary of Responses to the 1998 EPA Inform ation Collection Request (MACT Survey ) -- General Survey

. 11. K. Hanks, B. Threatt, and B. Nicholson, MR I to M. Kissell, EPA/ESD. May 19, 1999. Summ ary of Responses to the 1998 EPA Inform ation Collection Request (MACT Survey ) -- Hardwood Ply w ood and Veneer.
12. K. Hanks, B. Threatt, and B. Nicholson, MRI to M. Kissell, EPA/ESD. January 20, 2000. Summ ary of Responses to the 1998 EPA Inform ation Collection Request (MACT Survey ) -- Engineered Wood Products.
13. Mem o randum from K. Hanks, MRI, to Project Files. April 18, 2000. Changes in the population of existing ply w ood and com posite wood produc ts plants and equipm ent following the inform ation collection request.
14. Mem o randum from D. Bullock and K. Hanks, MR I, to M. Kissell, EPA/ESD. April 27, 2000. Docum e ntation of Em ission Factor Developm ent for the Ply w ood and Com posite Wood Products Manufacturing NESHAP.
15. Background Infom a tion Docum e nt for the Proposed Ply w ood and Com posite Wood Products NESHAP. U.S. EPA/OAQPS, Septem ber 2000.
16. Suchsland, O., and G. Woodson, Fiberboard Manufacturing Practices in the United States , John Wiley & Sons, New York, 1991, pp. 151-153.
17. K. Corrigan, North Dakota Departm e nt of Hea lth, Division of Environm ental Engineering. February 11, 1997. Perform ance Test Report Review: Prim eboard, Inc.

3-3718. Facsim ile from J. Seiwert, Sm ith Environm ental Corporation, to L. Kesari, EPA/OECA. October 31, 1997. Revised em issions abatem ent sy stem s RTO pricing (Sm ith Proposal BO7-95- 156-1, Trinity Consultants)
19. EPA Air Pollution Control Cost Manual (Sixth Edition), U.S. Environm ental Protection Agency , April 26, 2002. EPA -452/B-02-001. Found on the Internet at www.epa.gov/ttn/catc/products.htm l#cccinfo.
20. Vatavuk Air Pollution Control Cost Indexes (VAPCCI), Chemical Engineering , March 2000, p. 150.
21. Energy Inform ation Adm i nistration, Form EIA-826, “Monthly Electric Utility Sales and Revenue Report with State Distributions.”
22. Energy Inform ation Adm i nistration, Natural Gas M onthly , February 2000, p. 60.
23. Letter and attachm e nts from S. Jaasund, Geoenergy International Corporation, to B. Nicholson, MRI. March 28, 2000. Geoenergy WESP Capital and Operating Costs.
24. Mem o randum from B. Nicholson, MRI, to Pl y w ood and Com posite Wood Products Project File. July 31, 2000. Cost of Perm anent Total Enclosures. (Confidential Business Inform ation)
25. Mem o randum from B. Nicholson, MRI, to Pl y w ood and Com posite Wood Products Project File. July 31, 2000. Exhaust Gas Flowrate Inform ation for Enclosed Presses. (Confidential Business Inform ation)
26. Mem o randum from D. Bullock and K. Hanks, MRI, to P. Lassiter, EPA/ESD. October 27, 1998. Trip report for visit to Tem p le-Inland Fo rest Products plant in Diboll, Texas.
27. Paperwork Reduction Act Subm ission, Suppor ting Statem ent, Ply w ood and Com posite Wood Products, 2000.

3-38

## 4 E CONOMIC IMPACT ANALYSIS
4.1 Results in Brief This econom ic im pact analy s is presents the r esults of m odeling the effects of the proposed ply w ood and com posite wood products N ESHAP upon affected facilities, firm s, m a rkets, and industries. The analy s is shows that product prices increase for each of the four industry sectors included in the econom ic m odel, from 0.9 percent for the softwood pl y w ood industry to 2.5 percent for the particleboard and m e dium density fiberboard industry

. Output is expected to decrease from 0.1 percent for the softwood ply w ood industry to 0.7 percent for the partic leboard and m e dium density fiberboard industry

. Exports of these products are expected to decline by no m o re than 0.7 percent for these four industries, while im ports are expected to rise. Only one product line closure at an affected facility is expected, and em ploy m e nt at affected firm s is expected to declin e by only 0.3 percent. In addition, an analy s is of effects of this proposal on the supply , distribution, or use of energy finds that these effects are not significant. 4.2 I ntroduction The U.S. EPA is proposing a rule that addresses the em issions of hazardous air pollutants (HAPs) from facilities that produce ply w ood and com posite w ood products. As described in Chapter 3, the proposed rule will result in som e facilities in this industry incurring costs associated with controlling HAP em issions. The addition of these control costs will di rectly affect the individual facilities because their costs of production will increase. In addition, the add ition of com p liance costs m a y also have an effect on the overall m a rkets for ply w ood and wood com posite pr oducts through m a rket price changes. Depending on m a rket conditions, these changes could occur if facilities with com p liance costs increase their prices, reduce their output, or cease operations altogether. This section presents estim ates of the econom ic changes that are expected to occur as a result of the proposed NESHAP rule for the ply w ood and co m posite wood industry U.S. EPA, 1999a). The goal of the assessm ent is to develop estim ates of the following im pact m easures.

• M arket price changes • M arket quantity changes • I nternational trade effects • S ize and distribution of social costs Chapter 2 presented a profile of the different sectors within the ply w ood and com posite wood industry , which provides m arket inform ation necessary to design and im plem ent the EIA for this industry

. The ply w ood and com posite wood products m a nufactur ing industry affected by the proposed NESHAP rule includes five distinct m arket sectors.

• S oftwood Ply w ood and Veneer (SWPW) • O riented Strandboard (OSB) • O ther Wood Com posites (OWC), including • P articleboard and Medium De nsity Fiberboard (PB/MDF) • H ardboard (HB) • E ngineered Wood Products (EWP) For all but the EWP m arket sector, the Agency applied partial equilibrium (P/E) m odeling techniques to estim ate the econom ic im pacts of the proposed NESHAP rule for ply w ood and wood

4-1com posites. For reasons presented in Section 4.4 be low, developing an estim ate of the econom ic im pacts of the proposed rule on the EWP sector required a qualitative approach. Section 4.3 presents the inputs for the P/E econom ic analy s is, including producer characterization, m arket characterization, and com p lia nce costs of the regulation. Section 4.4 describes the approach to estim ating the econom ic im pacts on the SWPW, OSB, PB/MDF, and HB industry sectors, and Section 4.5 presents the results of the econom ic im pact analy s is. Section 4.6 presents the qualitative analy s is of the EWP m arket sector. 4.3 E conomic Impact Analy s is Inputs The first step of an im pact assessm ent is developi ng inform ation used to characterize the baseline conditions of the industry

. Key inform ation needed for EIA inputs is used to characterize the following.

• I ndividual producers • P roduct m arkets • C om pliance costs
4.3.1 P roducer Characterization The prim ary source of baseline data on individual producers used in the EIA is a database developed using the data collected by 1998 ICR described in Chapter 2 (U.S. EPA, 1998). The inform ation in the facility database allowed the char acterization of facilities according to several features needed for the analy s is, including m a jor products (SWPW, OSB, etc), baseline production volum es, and facility capacity

. The baseline y ear for the analy s is is 1997 as it corresponds to the y ear for which ply w ood and com posite wood producer s provided this inform ation. For certain facilities, production and capacity inform ation was not available, and was supplem ented by additional research. Those faciliti es without specific production and capacity data were assigned an estim ate based on the average production and capacity data for facilities within the sam e m a rket sector and size category (as determ ined by em ploy m e nt).
4.3.2 P lywood and Composite Wood Markets The Ply w ood and Com posite Wood Products industr y is a broad category encom p assing the four distinct m arkets listed above: (1) SWPW, (2) OSB, (3 ) OWC, and (4) EWP. For reasons discussed in the EIA, the OWC sector is decom posed into two m a rk ets: PB/MDF and HB. The Agency developed P/E m odels representing each of these four m a rkets. Market level data used in this EIA are presented in Exhibit 4-1. The m a rket prices and elasticities for each of the four m arkets were obtained from various industry m a rket reports and econom ic literature as described in Chapter 2. Total m arket volum es used in the m odels for each product are the sum of the production of all identified U.S. facilities (from the f acility database) and im ports from foreign producers. Total U.S. production for each m arket is the tota l production of all facilities identified in the EPA’ s facility database. The production was also separated in to two subsets - the total production of affected facilities and the total production of unaffected facilities. 17 The source of foreign trade data on exports and im ports of these products was presented in Chapter 2.

17 As m e ntioned in Chapter 1, som e facilities in the “unaffected” category have m onitoring, reporting, and record keeping costs of $25,194 per year. 4-2Exhibit 4-1: Baseline Characterization of Plywood and Composite Wood Mark ets: 1997 Softwood Plywood Oriented Strandboard “Other Composites” PB/MDF HB Market price (1997$/cubic m e ter) Price Elasticity of Dem a nd Construction Manufacturing/Other Price Elasticity of Supply Market quantity (thousand cubic m e ters) Dom e stic production Affected Unaffected Exports Im ports $235 $185 $169 $1,322

- 0.1034 -0.1034 -0.1149 -0.1149

- 0.2585 n/a

- 0.2872 -0.2872

0 .42 0 .42 0 .42 0 .42 17,568,254 9,595,121 11,646,227 1,768,930 17,568, 162 9,590,456 11,644,523 1,768,545 11,680,778 4,691,645 9,670,639 1,768,545

5,887,384 4,898,811 1,973,884 n/a 1370 148 333 371

92 4,666 1,705 385 Sources: U.S. EPA facility database; Section 2; and Appendix B of the Econom ic Im pact Analy s is.
4.3.3 F acility Compliance Costs As described in Chapter 3, the Agency devel oped com p liance costs estim ates for those facilities that m u st control HAP em issions in accordance with the regulatory requirem e nts of the proposed NESHAP rule. The EIA uses these costs to develop a “with regulation” m a rket equilibrium scenario used to estim ate changes in individual facility production, total m a rket volum es, m a rket price, and social costs. Ty pically , the Agency adjusts th e com p liance cost estim ates from nom inal dollars to baseline dollars using the plant cost indices to be consistent with the baseline industry characterization of the econom ic m odel (U.S. EPA, 1999b). In this case, there was virtually no change in the plant cost indices between the baseline y ear of 1997 and current period, so no adjustm e nt was m a de to the costs used in this analy s is. 4.4 E conomic Impact Analy s is Methodology The following section presents a summ a ry of the approach used to assess the econom ic im pacts of the proposed NESHAP rule. The EIA contains a m o re detailed description of the m e thodology used to analy ze the econom ic im pact of this proposed regula tion on each of the m a rkets analy zed. The purpose of the EIA is to m odel the responses of individual producers and the overall m a rket to the im position of com p liance costs. For this EIA, the agency u sed a m a rket-based econom ic m odel that reflects the production choices producers m a ke in the face of changes in their individual production costs and changes in overall m a rket prices. The econom ic m odel used in this analy s is sim u lates the short run decisions of the producers in response to operating cost and price changes within a given m a rket. For each of the four m a rkets, the m odel used in this analy s is assum es that the m a rk et is perfectly com p etitive, based on the conclusions drawn from the inform ation in the industry profile. In a com p etitive m a rket, each individual facility takes the price as determ ined by the m arket because they do not have the power to set the m a rket price of the product. The approach used for this EIA assum es that the com p etitive m a rket for each of the four products determ ines both prices and quantities (U.S. EPA, 1999b). In the short run, a firm with an existing plan t will decide, based on the m a rket price, how m u ch output to produce with its capital stock (e.g., fixed inv estm e nt in the plant and equipm ent) considered as
4-3constant. In this decision, the firm considers the costs of inputs that vary with output levels, such as m a terials and labor (U.S. EPA, 1999b). When the m a rket price is equal to the average variable (operating) costs, the firm is only recouping the cost of its variable inputs. When the price is less than the firm ’ s variable costs, it will no longer produce output because it cannot recover all of its variable costs in the short run. When the m arket price exceeds variable co sts, the firm can also recover a part of its fixed investm e nt in the plant and equipm ent. In the long r un, the firm m u st cover all of its fixed investm e nt in the plant and equipm ent. Under this m o re stringent condition, the m a rket price m u st exceed its average total costs, which include capital and variable input costs. In this analy s is, which is short-run in tim efram e , the m odel assum es that all firm s wish to m a xim i ze its profits and will produce output using their existing plants as long as the m arket price even m a rginally exceeds their variable costs of producing output. The m a rket m odel developed by the Agency for this EIA is based on a series of equations that represent the m arket supply and dem a nd functions for a given product. The dem a nd functions use baseline price, total dom estic production, im port, and export data, as well as estim ates of the price elasticity of dem a nd for a given product as inputs. The m a rket supply function is based on an estim ated supply function for each ply w ood or wood com posite product at all production facilities. The Agency developed a spreadsheet m odel for each of the four m a rkets to represent the c onceptual m odel described below. The EIA provides a description of this process. Figure 4-1 shows a generalized upward-sloping s upply function that characterizes the production function of each facility included in the analy s is (a ffected and unaffected). In the EIA m odel, this function represents the m a rginal cost curve for eachsupplier of the product within the m a rket. The m i nim u m constraint on this function is zero, and th e m a xim u m constraint is each facility ’ s capacity

. If the m a rket price is above a given facility ’s average variable cost, the facility will produce output up to the point where production equals the f acility ’s production capacity

. If a given facility ’s m a rginal production cost is above the m arket price, it will produce zero output (EPA, 1999b).



### $/lb S

lbs/year Figure 4-1. Supply Curves for Affected Facilities Source: U.S. EPA, 1999b.

4-4The m odel then aggregates the supply functions of the individual facilities within a m arket to represent the m arket level supply curve. Next, the m odel equilibrates the m a rket dem a nd curve and the m arket supply curve according to th e baseline m a rket price and quantity values. Figure 4-2 shows that m arket prices and quantities are set in the baseline acco rding to the intersection of the supply and dem and curves in the baseline (the period prior to the im pos ition of com p liance costs on affected facilities). The baseline scenario equilibrium m arket price and quan tity (P, Q) are the points on the graph’ s axes points where the downward-sloping m arket dem a nd curve (D M ) intersects with the upward-sloping m a rket supply curve (S M ). In the baseline, at price P, the industry produces total output, Q, with affected facilities producing the am ount q aand unaffected facilities producing q u (EPA, 1999b). Next the sam e facility -specific supply functions in the m odel are recalculated after taking into account the increase in production costs associated w ith the im position of annual com p liance costs on som e producers. The costs are expresses in term s of do llars per unit of output in the baseline (in this case per thousand cubic m e ter of product). Figure 4-1(b) s how the effect of the com p liance costs: the supply curve for the affected producers shift upward S ato S a ' . This raises the point at which m a rket price m u st cover variable production costs from p ato p a '

. The supply curve S ufor the unaffected facilities rem a in the sam e. When the supply curves for the affected and unaffected facilities are aggregated to represent the m a rket level supply curve, the m arket supply curve also shifts upward from S M to S M'

. Using the original m arket dem a nd curve, D M , the new equilibrium price increases from P to P' and m a rket output declines from Q to Q'

. This reduction in m arket output is th e net result from reductions at affected facilities and

p S a S u

p 

### + = p S M

D M

q a qu Q Market Affected Facilities Unaffected Facilities

a) Baseline Equilibrium

p ′ S a S ′ a p ′ S u p ′ p 

### + p 

### = p S M ′

D M S M

q ′ a q a qu q ′ u Q ′ Q Market Affected Facilities Unaffected Facilities

b) With Regulation Equilibrium Figure 4-2. Market Equilibrium Without and With Regulation Source: U.S. EPA, 1999b.

4-5increases at unaffected facilities (EPA, 1999b). For m o re inform ation on the econom ic im pact analy s is m e thodology , refer to Appendix B of this report. 4.5 E conomic Impact Analy s is Results The following section presents the results of th e Agency ’ s im plem entation of the EIA m odels described in the previous section. The results are pr esented at three levels: m arket, industry , and societal. The m a rket level results present the im pacts in term s of changes in price and quantity for each of the four m arkets. The industry level im pacts include changes in revenues, production, em ploy m e nt, and num ber of operating production lines.
4.5.1 M arket-Level Results Exhibit 4-2 presents the expected im pacts of th e regulation at the m a rket-level. These changes include the new price and quantity for each product and changes in foreign trade. In each m a rket, prices increase and production quantities decrease due to the im position of com p liance costs on the affected producers. The reduction in m arket quantities of each product reflect reductions in dom estic production (including production for exports) and increases in fore ign im ports. The reduction in dom estic production reflects production decreases by affected producers and increases by unaffected producers (EPA, 1999b). For softwood ply w ood, the m arket price is exp ected to increase by 0.9 percent, while m a rket quantity declines by 0.1 percent, or 26,207 thousand cubic m e ters (or M cubic m e ters) per y ear. For oriented strandboard, the m arket price is expectedto increase by 1.3 percent, while m a rket quantity declines by 0.1 percent, or 12,945 M cubic m e ters per y ear. For particleboard and m e dium density fiberboard, the m a rket price is expected to increase by 2.5 percent, while m a rket quantity declines by 0.7 percent, or 78,595 M cubic m e ters per y ear. Finally , for hardboard, the m a rket price is expected to increase by 1.0 percent, while m arket quantity will d ecline by 0.3 percent, or 4,727 M cubic m e ters per y ear. Generally , increases in m arket price result in ch anges in foreign trade of these products: exports decrease and im ports increase. Exhibit 4-2 shows that exports of softwood ply w ood from the United States are expected to decline by 0.2 percent (or 2 M cubic m e ters per y ear); exports of oriented strandboard are expected to decline by 0.1 percen t (or 0.2 M cubic m e ters per y ear); exports of particleboard and m e dium density fi berboard are expected to decline by 0.7 percent (or 2 M cubic m e ters per y ear); and exports of hardboard are expected to decline by 0.2 percent (or 1 M cubic m e ter per y ear). Im ports of each of these products to the United Stat es are expected to increase as follows: SWPW by 685 percent (or 630 M cubic m e ters per y ear), OSB by 28.82 percent (or 1,345 M cubic m e ters per y ear), PB/MDF by 85 percent (or 1,451 M cubic m e ters pe r y ear), and HB by 100 percent (or 387 M cubic m e ters per y ear).
Exhibit 4-2. Mark et-Level Im pacts of the Proposed NESHAP
Industry Sector Baseline With Regulation Changes from Baseline Absolute Percent Softwood Plywood Market price (1997$/cubic m e ter) $235 $237.20 $2.20 0.9% Market output (M cubic m e ters /yr) 17,568,254 17,542,048 -26,206 -0.1% Dom e stic production 17,568,162 17,541,326 -26,837 -0.2% Affected Facilities 11,680,778 11,629,258 -51,520 -0.4% Unaffected Facilities 5 ,887,384 5,912,067 24,683 0.4%

4-6Exhibit 4-2. Mark et-Level Im pacts of the Proposed NESHAP
Industry Sector Baseline With Regulation Changes from Baseline Absolute Percent Exports 1,370 1,368 -2 -0.2% Im ports 92 722 630 685.1% Oriented Strandboard Market price (1997$/cubic m e ter) $185 $187.43 $2.43 1.3% Market output (M cubic m e ters /yr) 9,595,121 9,582,176 -12,945 -0.1% Dom e stic production 9 ,590,456 9,576,165 -14,291 -0.1% Affected Facilities 4 ,691,645 4,654,117 -37,528 -0.8% Unaffected Facilities 4 ,898,811 4,922,048 23,237 0.5% Exports 147.8 147.6

- 0.2

- 0.1% Im ports 4,666 6,011 1,345 28.8% Particleboard and Medium Density Fiberboard Market price (1997$/cubic m e ter) $169 $173.29 $4.29 2.5% Market output (M cubic m e ters /yr) 11,646,228 11,567,633 -78,595 -0.7% Dom e stic production 11,644,523 11,564,477 -80,046 -0.7% Affected Facilities 9 ,670,639 9,553,510 -117,129 -1.2% Unaffected Facilities 1 ,973,884 2,010,967 37,083 1.9% Exports 333 331 -2 -0.7% Im ports 1,705 3,156 1,451 85.1% Hardboard Market price (1997$/cubic m e ter) $1,322 $1,335.17 $13.17 1.0% Market output (M cubic m e ters /yr) 1,768,930 1,764,203 -4,727 -0.3% Dom e stic production 1 ,768,545 1,763,431 -5,114 -0.3% Affected Facilities 1 ,768,545 1,763,431 -5,114 -0.3% Unaffected Facilities n/a n/a 0 n/a Exports 371 370 -1 -0.2% Im ports 385 772 387 100.5%
4.5.2 I ndustry-Level Results Industry im pacts associated with the proposed NESHAP for the ply w ood and com posite wood industry are presented in Exhibit 4-3. Industry

- le vel im pacts include changes in revenue, production, num bers of operating product-lines, and changes in em ploy m e nt. The estim ates for changes in production lines and em ploy m e nt are described in Section 4.5.3 below. The EIA m odel estim ates the change in prices a nd production levels after the im position of the com p liance costs on the affected facilities. Exhib it 4-3 shows that overall revenues for each industry increase slightly

. Industry revenues increase because de m a nd elasticities for these four m arkets m ean that the change in price (in percentage term s) is great er than the percentage reduction in output. Affected facilities will experience an increase in revenues due to th e increase in the m a rket price, but this effect is likely to be offset by the increase in production costs. Changes in profits, however, could not be estim ated due to lack of inform ation on production costs at the facility level.

4-7Exhibit 4-3. Industry-Level Impacts of the Proposed NESHAP

Baseline W ith Regulation Changes from Baseline Absolute Percent Softwood Plywood Revenues ($ m illion/yr) Production (M cubic m e ters/y r) Operating product lines (#) Em ploym ent* Oriented Strandboard Revenues ($ m illion/yr) Production (M cubic m e ters/yr) Operating product lines (#) Em ploym ent* $4,128.5 $4,161 $32.4 0.78% 17,568162 17,541,326 -26,836 -0.15% 108 107 -1 -0.93% 36,877 36,821 -56 -0.15%
$1,774.2 $1,794.9 $20.7 1.17% 9,590,456 9,576,164 -14,292 -0.15% 3 8 3 8 0 0.00% 6,681 6,671 -10 -0.15% Particleboard & Medium Density Fiberboard Revenues ($ m illion/yr) Production (M cubic m e ters/yr) Operating product lines (#) Em ploym ent* Hardboard Revenues ($ m illion/yr) Production (M cubic m e ters/yr) Operating product lines (#) Em ploym ent* $1,967.9 $2,004.0 $36.1 1.83% 11,644,523 11,564,477 -80,046 -0.69% 8 3 8 3 0 0.00% 20,424 20,284 -140 -0.69%
$2,338.0 $2,354.5 $16.5 0.71% 1,768,545 1,763,431 -5,114 -0.29% 1 8 1 8 0 0.00% 6,271 6,252 -18 -0.29% *Baseline em ploym ent estim ates are based total production and em ploym ent of all facilities in each m a rket as reported in the EPA facility database. Average pr oduction per em ployee was calculated using the sum of facility-specific production and em ploym ent. Because facilities reported em ploym ent as a range, they are assigned an em ploym ent estim ate using the m i d-point of the reported range. Post-regulation em ploym ent was then estim ated by dividing post-regulation production by the baseline production per em ployee.
4.5.3 D istribution of Impacts The distribution of regulatory im pacts is presented in Exhibit 4-4. This table presents the sam e inform ation as in Exhibit 4-3, but provides details on how the rule im pacts affected and unaffected facilities differently

. One im portant result from the EIA m odel is the projection of process line closures that could occur following prom ulgation of the proposed NES HAP rule. The m odel’ s estim ate of process line closures m a y be sensitive to the accuracy of the baselin e characterization of the facilities. Characteristics such as baseline production levels, revenues (as a function of production and price), the underly i ng supply function that represents production costs, and the com p liance cost estim ates are all factors that affect the distribution of the rule’ s im pacts.

4-8Exhibit 4-4: y-Level Impacts of Proposed NESHAP: Affected and Unaffected Producers

Baseline With Regulation Changes From Baseline Absolute Percent Distribution of Industr

Softwood Plywood Affected Process Lines Revenues ($ m illion/yr) $2,745.0 $2,758.5 $13.5 0.49% Production (M cubic m e ters/yr) 11,680,778 11,629,258 -51,520 -0.44% Operating process lines (#) 6 6 6 5

- 1 -1.52% Em ploym ent* 24,519 24,411 -108 -0.44% Unaffected Process Lines Revenues ($ m illion/yr) $1,383.5 $1,402.4 $18.9 1.37% Production 5 ,887,384 5,912,067 24,683 0.42% Operating process lines (#) 4 2 4 2 0 0.00% Em ploym ent* 12,358 12,410 52 0.42% Oriented Strandboard Affected Process Lines Revenues ($ m illion/yr) $868.0 $872.3 $4.4 0.50% Production (M cubic m e ters/yr) 4,691,645 4,654,117 -37,528 -0.80% Operating process lines (#) 2 0 2 0 0 0.00% Em ploym ent* 3,268 3,242 -26 -0.80% Unaffected Process Lines Revenues ($ m illion/yr) $906.3 $922.6 $16.3 1.80% Production 4 ,898,811 4,922,048 23,237 0.47% Operating process lines (#) 1 8 1 8 0 0.00% Em ploym ent* 3,413 3,429 16 0.47% Particleboard & Medium Density Fiberboard Affected Process Lines Revenues ($ m illion/yr) $1,634.3 $1,655.6 $21.2 1.30% Production (M cubic m e ters/yr) 9,670,639 9,553,510 -117,129 -1.21% Operating process lines (#) 5 3 5 3 0 0.00% Em ploym ent* 16,962 16,756 -205 -1.21% Unaffected Process Lines Revenues ($ m illion/yr) $333.6 $348.5 $14.9 4.47% Production 1 ,973,884 2,010,967 37,083 1.88% Operating process lines (#) 3 0 3 0 0 0.00% Em ploym ent* 3,462 3,527 65 1.88%

4-9Exhibit 4-4: y-Level Impacts of Proposed NESHAP: Affected and Unaffected Producers

Baseline With Regulation Changes From Baseline Absolute Percent Distribution of Industr

Hardboard Affected Process Lines Revenues ($ m illion/yr) $2,338.0 $2,354.5 $16.5 0.70% Production (M cubic m e ters/yr) 1,768,545 1,763,431 -5,114 -0.29% Operating process lines (#) 1 8 1 8 0 0.00% Em ploym ent* 6,271 6,252 -18 -0.29% Unaffected Process Lines Revenues ($ m illion/yr) n/a n/a n/a n/a Production n/a n/a n/a n/a Operating process lines (#) n/a n/a n/a n/a Em ploym ent* n/a n/a n/a n/a Total Affected Process Lines Revenues ($ m illion/yr) $7,585.3 $7,640.9 $55.6 0.73% Production (M cubic m e ters/yr) 27,811,607 27,600,316 -211,291 -0.76% Operating process lines (#) 157 156 -1 -0.64% Em ploym ent* 51,020 50,662 -358 -0.70% Unaffected Process Lines Revenues ($ m illion/yr) $2,623.4 $2,673.4 $50.1 1.91% Production 12,760,079 12,845,082 85,003 0.67% Operating process lines (#) 9 0 9 0 0 0.00% Em ploym ent* 19,233 19,366 133 0.69% All Process Lines (net) Revenues ($ m illion/yr) 10,209 10,314 $105.6 1.03% Production 40,571,686 40,445,398 -126,288 -0.31% Operating process lines (#) 247 246 -1 -0.40% Em ploym ent* 70,252 70,028 -225 -0.32% n/a = not applicable *Baseline em ploym ent estim ates are based total production and em ploym ent of all facilities in each m a rket as reported in the EPA facility database. Average pr oduction per em ployee was calculated using the sum of facility-specific production and em ploym ent. Because facilities reported em ploym ent as a range, they are assigned an em ploym ent estim ate using the m i d-point of the reported range. Post-regulation em ploym ent was then estim ated by dividing post-regulation production by the baseline production per em ployee. Exhibit 4-4 shows that one softwood ply w ood production line is expected to prem aturely cease operations. The m odel does not predict any closures in all of the other product m a rkets. The affected entity that closes following adoption of the regulation is a sm all SWPW producer that incurs higher control costs per unit of production than other SWPW production lines. This facility , with one process line, did not respond to the EPA’ s ICR survey

. Therefore, it was necessary to estim ate baseline production and com p liance costs based on very little facility -specific inform ation. Total baseline
4-10production of SWPW by the facility that closes was roughly 9,500 M cubic m e ters per y ear, or less than 0.05 percent of the 17,568,162 M cubic m e ters of SWPW produced by all SWPW facilities during 1997. As a result of the closure and reductions in produc tion at other affected facilities, the EIA m odel estim ates a total net loss in em ploy m e nt of 225 em ploy ees (0.3 percent) attributable to the proposed NESHAP across all four m arket sectors. Affected facilities experience em ploy m e nt loss of 358, which is offset by em ploy m e nt gains at unaffected facilities of 133. Overall the four sectors together experience a 1 percent increase in revenues, and a 0.3 percent decrease in production.
4.5.4 S ocial Costs of the Proposed NESHAP The social costs of a regulation are m easure d according to the im pacts that it has on both consum ers and producers. The proposed NESHAP rule , because it is expected to result in changes in both m arket price and m arket quantity , will im pact the consum ers and producers of softwood ply w ood and com posite wood products. Social costs, also calle d welfare im pacts, are the m easure of overall gains and losses experienced by the two groups that m a y r esult from the im position of costs associated with the regulatory requirem e nts. The econom ic benefits producers experience when participating in a m a rket is called producer surplus. Producers experience im pact s when their revenues change eith er because of a new m arket price, increased production costs, or both. These im pacts change the am ount of producer surplus relative to the baseline. Likewise, the econom ic benefits consum er s experience is called consum er surplus. Consum er surplus changes when consum ers e xperience im pacts when the am ount of product they consum e or the product price changes. The estim ate of the social cost of the proposed N ESHAP rule, presented in Exhibit 4-5, is the sum of the change in producer and consum er surplus. The EIA m odel estim ates the social cost of the proposed NESHAP as $134.2 m illion annually (1999 dollars). These costs are distributed across both consum ers and producers of ply w ood and com pos ite wood products according to projected changes in m a rket price and quantity associated with the proposed NESHAP.
Consum er surplus is reduced by $135.1 m illion annually due to the increase in prices and reductions in consum ption. Consum ers of soft wood ply w ood are worse off by $38.7 m illion annually ; consum ers of oriented strandboard are worse off by $23.3 m illion annually ; c onsum ers of particleboard and m e dium density fiberboard and of hardboard are worse off annually by $49.8 m illion and $23.3 m illion, respectively

. Producers (in aggregate) are slightly better off because of the im position of the proposed NESHAP, with an increase in producer surplus of just under $1 m illion annually

. Essentially all of this is change associated with dom estic producers. Because the m a rket prices for these products increase, certain individual dom estic producers gain at the expen se of their com p etitors. The size of this gain at any given facility depends on how m u ch their produc tion costs change (as a result of new com p liance costs) relative to the change in m arket price and quantity that increases revenues. The benefit to foreign producers associated with higher m arket prices is quite sm all, under $100,000.

4-11Exhibit 4-5: Distribution of Social Co sts Associated with the Proposed NESHAP
Stak eholder Change in Value ($ million -1999 dollars) Social Costs of Regulation $-134.2 (Change in consumer surplus + Change in producer surplus) Total Change in Consumer Surplus $-135.1 SW PW Consum ers $ -38.7 OSB Consum ers $ -23.3 PB/MDF Consum ers $ -49.8 HB Consum ers $ -23.3 Total Change in Producer Surplus $0.9 Softwood Plywood Producer Surplus, total $8.3 Dom e stic producers $8.3 Affected Facilities $ -4.1 Unaffected Facilities $12.4 Foreign producers $0.0 Oriented Strandboard Producer surplus, total $ -1.4 Dom e stic producers $ -1.4 Affected Facilities $ -12.9 Unaffected Facilities $11.5 Foreign producers $0.0 Particleboard & Medium Density Fiberboard Producer surplus, total $ -5.2 Dom e stic producers $ -5.2 Affected Facilities $ -13.5 Unaffected Facilities $8.3 Foreign producers $0.0 Hardboard Producer surplus, total $ -0.8 Dom e stic producers $ -0.8 Affected Facilities $ -0.8 Unaffected Facilities n/a Foreign producers $0.0

4.5.5 E nergy Impact Analysis Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply , Distribution, or Use” (66 FR 28355, May 22, 2001), provides that agencies shall prepare and subm it to the Adm i nistrator of the Office of Inform ation and Regulatory Affairs, Office of Managem e nt
4-12and Budget, a Statem ent of Energy Effects for certa in actions identified as “significant energy actions.” Section 4(b) of Executive Order 13211 defines “signifi cant energy actions” as “any action by an agency (norm a lly published in the Federal Register ) that prom ulgates or is expected to lead to the prom ulgation of a final rule or regulation, including notices of inquiry , advance notices of proposed rulem a king, and notices of proposed rulem a king: (1) (i) that is a significant regulatory action under Executive Order 12866 or any successor order, and (ii) is likely to have a si gnificant adverse effect on the supply , distribution, or use of energy ; or (2) that is designated by the Adm i nistrator of the Office of Inform ation and Regulatory Affairs as a significant energy action.” The proposed rule is not a “significant energy action” because it is not likely to have a significant adverse effect on the s upply , distribution, or use of energy

. The basis for the determ ination is as follows. As stated in Chapter 2, this proposed rule affects m a nufacturers in the softwood veneer and ply w ood (NAICS 321212), reconstituted wood products (NAICS 321219), and engineered wood products (NAICS 321213) industries. There is no crude oil, fuel, or coal production from these industries. Hence, there is no direct effect on such energy pr oduction related to im plem entation of this proposal. In fact, as m e ntioned in section IV.D. of this pream ble, there will be an increase in energy consum ption, and hence an increase in energy production, resulting fro m installation of regenerative therm a l oxidizers (RTOs) and wet electrostatic precipitators (WESPs) lik ely needed for sources to m eet the requirem e nts of the proposed rule. This increase in energy cons um ption is equal to 718 m illion killowatt-hours/y ear (kWh/y r) for electricity and 45 m illion cubic m e ters/y ear (m 3 /y r) for natural gas. These increases are equivalent to 0.012 percent of 1998 U.S electricity production and 0.000001 percent of 1998 U.S. natural gas production. 18 It should be noted, however, that the reduction in dem a nd for product output from these industries m ay lead to a negative indirect effect on such energy production, for the output reduction will lead to less energy use by these industries and thus som e reduction in overall energy production. For fuel production, the result of this indirect effect from reduced product output is a reduction of only about 1 barrel per day nationwide, or a 0.00001 percent reduction nationwide based on 1998 U.S. fuel production data 19

. For coal production, the resulting indirect effect from reduced product output is a reduction of only 2,000 tons per y ear nationwide, or only a 0.00001 percent reduction nationwide based on 1998 U.S. coal production data. For electricity production, the resulting indirect effect from reduced product output is a reduction of 42.8 m illion Kilowatt- hours per y ear (kWh-y r), or only a 0.00013 percent reduction nationwide based on 1998 U.S. electricity pr oduction data. Given that the estim ated price increase for product output from any of the affected indus tries is no m o re than 2.5 percent, there should be no price increase for any energy ty pe by m o re than this am ount. The cost of energy distribution should not be affected by this proposal at all since the rule does not affect energy distribution facilities. Finally , with changes in net exports being a m i nim a l per centage of dom estic output (0.01 percent) from the affected industries, there will be only a negligible ch ange in international trad e, and hence in dependence on foreign energy supplies. No other adverse outco m es are expected to occu r with regards to energy supplies. Thus, the net effect of this proposed rule on energy production is an increase in electricity output of 0.012 percent com p ared to 1998 output data, and a negligible change in output of other energy ty pes. All of the results presented above account fo r the passthrough of costs to consum ers, as well as the cost im pact to producers. These results also account for how energy use is related to product output for

18 U.S. Departm e nt of Energy, Energy Inform ati on Adm i nistration. Annual Energy Review, End-Use Energy Consum ption for 1998. Located on the Internet at http://www.eia.doe.gov/em eu/aer/enduse.htm l

.
19 Ibid. 4-13the affected industries. 20 More detailed inform ation on the estim ated energy effects and the m e thodology em ploy ed to estim ated them are in the background m e m o 21 that provides such details for the proposed rule. Therefore, we conclude that the proposed rule when im plem ented is not likely to have a significant adverse effect on the supply , distribution, or use of energy

. 4.6 A naly s is of Economic Impacts on Engineered Wood Products Sector
4.6.1 O verview The engineered wood products (EWP) sector is m u ch different than the other four sectors exam ined in this analy s is. Due to both the nature of the products and their m a rkets as m e ntioned in Section 4.6.4 below, and the lim ited availability of data, a quantitative analy s is was not perform ed. EWP products are characterized by differentiated structural beam products, although som e can also be used as column s. EWPs are produced by fi rm s using differentiated production sy stem s. There are a num ber of large firm s with m arket power, allowing them to set prices. Although m a ny of the products in this m a rket sector can be substituted for one another to an extent, each product’ s design usually provides it with an advantage over others in the desi gn of final structures. Product differentiation allows each product to dom inate particular m arket niches, but also m a kes m a ny of the products com p lem e nts as well as substitutes. Even when substitution is possi ble, som e large firm s use their m a rket power to influence purchase decisions and persuade consum er s to purchase their products. Consequently , these products are not standard comm odities as are products in the other ply w ood and com posite wood sectors. Therefore, comm odity prices and other standard inform ation that is characteristic of com p etitive m a rkets are not available. These factors lim it the ability of EPA to quantify the im pact of the proposed NESHAP rule on this sector using the sam e quantitative m e thod applied to the other sectors. Three of the fifty

- three EWP facilities in the U.S. will have com p liance costs are a result of the proposed NESHAP rule. This includes the country ’s two LSL plants, and one of the country ’s two PSL plants. Wey e rhaeuser, Inc. purchased these four pl ants when they acquired Trus Joist MacMillan. (Wey erhaeuser-Trus Joist MacMillan will be referred to as W/TJM for the rem a inder of this report.) W/TJM is currently the only m anufacturer of LSL and PSL in the world.
4.6.2 C haracteristics of EWP Products EWPs include lam i nated veneer lum b er (LVL), lam i nated strand lum b er (LSL), parallel strand lum b er (PSL), wood I-joists (I-J), and glue lam i nated tim ber (GL). These are value added lum b er products designed to be used in applications that ar e not suitable for ordinary fram i ng lum b er. The design and com position of each of these products differ, providi ng them with different strength, stiffness, cost, and dim e nsional properties. Strength properties allo w products to carry heavier loads without breaking. Strength is particularly im portant for uses such as carry ing beam s in floors or bridge girders, which are used to support structures. Stiffness prevents m aterials from shaking as objects are m oved over them

. This is particularly im portant in floors and br idge decks where structur e shakes or squeaks are

20 U.S. Departm e nt of Energy, Energy Inform ation Adm i nistration. 1998 Manufacturing Energy Consum ption Survey. Located on the Internet at http://www.eia.doe.gov/em eu/m ecs/m ecs98/ datatables/contents.htm l.

21 U.S. Environm ental Protection Agency. “Ener gy Im pact Analysis of the Proposed Plywood and Com posite W ood Products NESHAP.” July 30, 2001. 4-14uncom fortable or dangerous. Each product’ s stre ngth and stiffness is partially a function of its dim e nsional characteristics. For exam ple, I-J are str ong, stiff and ty pically less expensive than the other products. However, their structural inte grity does not hold bey ond certain lengths. Laminated-Strand Lumber W/TJM introduced LSL in 1992. Its dim e nsional characteristics m a tch nom inal 2x4 and 4x4 fram i ng lum b er, but it provides greater and m o re uniform strength and stiffness properties. 22 Unlike m any of the other EWPs, one of the prim ary uses of LSL is in vertical applications, as a stud or column
. PSL is also used in vertical applications, but its prim ary uses are in horizontal applications, as a beam

. The uses of LSL are summ a rized in Exhibit 4-6. Exhibit 4-6: Primary Uses and Substitutes for LSL Application U ses Substitutes Colum n s or studs W a ll, window, and door fram i ng Fram ing lum b er, PSL, solid sawn lum b er, steel Headers G arage door, other wide span doors and Fram ing lum b er, GL , L V L , PSL , steel windows Beam s L ight applications, low load bearin g S olid sawn lum b er, GL , L V L , PSL , I-J Rim Board F loor system s, nailing surface for Plywood sheathing, decks and siding Source: http://www.trus joist.com Because W/TJM is the sole producer of LSL, very little inform ation is available about their costs or profits. Exhibit 4-7 below identifies the production in form ation that is known. Note that neither plant operates near full capacity

. The two plants com b ined operate at less than 50 percent of their com b ined capacity (EWP survey ). This m ay be due to a decline in dem a nd or an imm a ture m a rket.

Exhibit 4-7: Characteristics of LSL Plants Location Item Deerwood, MN Capacity Production Capacity Em ployees Plant Age Chavies, KY Capacity Production Capacity Em ployees Plant Age 7,900,000 ft 3 /yr 4,900,000 ft 3 /yr 62% 100-249 1992 (estim ate) 14,900,000 ft 3 /yr 5,400,000 ft 3 /yr 36% 250-499 1992 (estim ate) Source: EPA facility survey, 1998.

22 LSL bending strength = 1700psi; stiffness (m odul us of elasticity or MOE) = 1.3-1.5E. 4-15Parallel-Strand Lumber PSL is a slightly older technology than LSL. Itwas introduced to the m arket in the m i d-1980’s by W/TJM. PSL is a high perform ance beam and header product that can also be used as a column
. It is designed with exceptional strength, stiffness character istics that is capable of spanning m u ch longer distances than m o st other EWPs. 23 Only GL can m a tch or beat PSL’ s ability to carry heavy loads over long spans. 24 Furtherm ore, PSL is a balanced beam , which m eans it has no top or bottom

. This property is particularly desirable to the residential fram i ng industry

. Balanced beam s save on labor costs due to lower skill required to install the product, providing PSL with an edge over GL for a num ber of y ears. However, Anthony Forest Products recently develope d a line of balanced GL beam s with com p arable strength and stiffness properties to PSL, and a num be r of other GL m a nufacturers have since done the sam e. This has lead to a com p etitive m o re envir onm ent. However, PSL still m a intains a share of the residential m a rket. Exhibit 4-8 summ arizes the uses of PSL. Exhibit 4-8: Primary Uses and Substitutes for PSL Application U ses Substitutes Colum n s or studs W a ll fram i ng, street li ghts S teel, solid sawn lum b er, steel Headers G arage door, other wide span doors and GL,LVL, steel windows Beam s H eavy applications, high load bearing G L, steel, solid sawn lum b er, LVL Because W/TJM has been the only producer of th is product, very little is known about their production costs and profits. Exhibit 4-9 below iden tifies the production inform ation that is known about the two U.S. PSL production facilities.
Exhibit 4-9: Characteristics of PSL Plants Location Item Colbert, GA (affected by rule)

Buckhannon, W V (not affected by rule) Capacity Production Capacity Factor Em ployees Plant Age Capacity Production Capacity Factor Em ployees Plant Age 3,000,000ft 3 /yr 2,770,000ft 3 /yr 92% 250-499 m i d-1980s (estim ate) 2,500,000ft 3 /yr 1,929,000ft 3 /yr 77% 250-499 m i d-1980s (estim ate) source: EPA facility survey, 1998.
Since PSL does com p ete directly with GL in som e a pplications, there is slightly m o re inform ation available on it than on LSL. There is one published source of EWP prices that includes som e retail PSL delivered prices: Engineered Lum b er Trends produced by The Irland Group in Winsor, ME. Exhibit 4-10 presents a com p arison of retail prices for PSL and GL. However, it is not possible to estim ate firm

23 PSL bending strength = 2900psi; stiffness = 2.0E.

24 GL bending strength = 2400-3000psi; stiffness = 1.8 - 2.1E 4-16revenue using these prices because they are retail pr ices and there is considerable m a rkup from the producer to retail level. The prices listed in the tabl e below show that PSL is m o re expensive than GL.

Exhibit 4-10: Retail Prices of GL and PSL Beams Delivered to Los Angeles Beam* W idth (inches) Depth (inches) Price per linear foot PSL (strength = 2900psi stiffness = 2.0E) GL (strength = 2400psi stiffness = 1.8E) GL ** (strength = 3000psi stiffness = 2.1E) 3-1/2 11-7/8 $8.16

3-1/8 1 2 $5.90

3-1/8 1 2 $7.08 Source: Engineered Lum b er Trends (Decem ber 1999) *Beam bending strength m easured in pounds per square inch and stiffness the beam s m odulus of elasticity or E **Price of the 3000-psi GL is estim ated by m a rking up the 2400psi

GL by 20% based on conversations with GL m a nufacturers
W/TJM has stated that PSL could be m a nufactured using waste m a terial from ply w ood and LVL. Other industry m e m b ers dispute this due to the high quality m a terial required for the product. They feel that there is actually considerable wasted m a terial in the production process in order to acquire the highquality wood fiber. Consequently , there are two c onflicting argum ents why PSL is able to sell their product at the higher price.

• C onsum ers view it as a superior product despite th e availability of substitutes, providing it with a higher profit m argin.

• W /TJM has used strategic behavior to m a intainthe price it requires to provide its product on the mark e t

. 4.6.3 Comparison to Other EWP Products Substitution am ong EWPs is a com p licated dy nam i c. While the products can be viewed as distinct comm odities, they are integral com ponents in the engineering design of a structure. Therefore, it is possible for two EWP products to be both substitutes and com p lem e nts. This is particularly true for W/TJM’ s products because they sell both the individual products and entire fram i ng sy stem s that include either LSL or PSL, or both. LSL is m o re com p arable to fram i ng lum b er and solid sawn lum b er than m o st other engineered wood products. As a header it com p etes with LVL, GL, and PSL. However, as a columnor stud, it is fairly unique. It is also a very new technology , which m a y partially explain why com p eting firm s have not developed com p arable products to date. Furtherm ore, LSL is m a rketed as a com p lem e ntary product to W/TJM’s other engineered wood products (I-J, LV L, PSL) in various structures they design. As an individual product, PSL has m o re direct substitutes than LSL. In shorter spanning applications (such as headers or floor joists) LV L, I-J, GL, or LSL can be substituted for each other

4-17depending on the application. In longer spanning a pplications, PSL com p etes with GL and steel. W/TJM also designed PSL to com p lem e nt their other products in pre-designed fram i ng sy stem s. If an architect or engineer purchases the pre-designed fram i ng sy stem , PSL w ill be specified in the sy stem

. This elim inates the possibility of substitutes in these applications. These characteristics are discussed in greater detail below.
4.6.4 M arket Characterization The EWP sector is characterized by im perfect com p etition am ong firm s, particularly

. In the case of LSL and PSL, W/TJM is a m onopoly producer because it operates all four facilities that produce products affected by the rule. Although a num ber of other products can be substituted for both LSL and PSL at the comm odity level, W/TJM has a m onopoly on these two products. In addition, they have som e ability to control m a terial choice within the resi dential fram i ng m a rket because they produce Com puter Autom a ted Design (CAD) program s used by architects, engineers, and lum b er product distribution com p anies to design structures. The individual using the program is actually purchasing a com p lete architectural design, which com p etes with other arch itectural designs on the basis of total design cost. Other EWP com p anies have not developed such program s to the sam e extent that W/TJM has. By pre-specify ing its products as m a terial i nputs in these design packages, W/TJM assures that they are used in the structure. Moreover, the individual product prices are less im portant to W/TJM because the price the buy er using the program is con cerned with is the price of the whole structure. Further, because W/TJM m a kes all the products usedin the design, they can sell any one of the com ponents at a loss provided the loss is m a de up by pr ofits on the whole structure. In addition, W/TJM also sells pre-designed floor, roof, and wall sy stem s that incorporate its EWP products. Therefore, W/TJM is a price setter in both these m a rkets. The high price of PSL allows producers of com p arable GL a substantial m arkup over its cost s. However, GL m a nufacturers offered the opinion that PSL could not raise its price without suffering a loss in dem a nd . Those sam e producers believe that PSL is already selling at a loss to prom ote the sale of its other products, although this inform ation cannot be confirm e d. Another com p licating factor is the purchase of TJM by Wey e rhaeuser, Inc. Even if TJM had been selling PSL at a loss, Wey e rhaeuser m a y not be willing to do this, particularly if costs increase due to the proposed NESHAP rule.
4.6.5 A ppropriateness of Partial Equilibrium Economic Analysis for the EWP Market It is not appropriate to use a partial equilibrium analy s is to quantify the im pact of the rule on the EWP sector. The EWP facilities that will have com p liance costs due to the rule are not part of a com p etitive m arket. W/TJM has a m onopoly on both PSL and LSL because they are the only com p any in the world producing both these products. Although the pr oducts com p ete to an extent with other EWPs, W/TJM is able to use its m arket power to influe nce consum er purchasing decisions and prices. Also, W/TJM m a y be able to absorb cost incr eases on one product with profits from another.
4.6.6 A nalysis The estim ated total annual com p liance costs fo r the three im pacted EWP facilities are $3.2 m illion, which is only 2.4 percent of the overall cost of the rule of $142 m illion per y ear. Moreover, the costs are incurred by one of the largest wood products com p anies in the world. The costs incurred by W/TJM are less than 1 percent the corporation’ s to tal annual revenues, which now include revenues from the facilities purchased from TJM. Although the specific im pact on W/TJM’ s profitability cannot be determ ined, it is likely that W/TJM can a fford the costs at the corporate level.

4-18The Agency cannot be certain of the im pact th at these cost increases will have on the m a rkets for LSL and PSL. W/TJM could decide use their price setting power to increase the price of PSL and/or LSL. This could lead to a decrease in consum er surplus. However, it is im portant to note the distributional im pact of this potential price increase. EWPs are often used in high end residential and comm e rcial construction. They ty pically provide luxur y features, such as squeak proof floors, large open room s with high ceilings and no support column s. Alternatively , W/TJM m ay choose not to raise the prices of PSL and LSL. For exam ple, PSL is already m o re expensive than GL, a substitute product. A rise in PSL prices could lead to a loss in m arket share. Furtherm ore, production data showed that th e PSL m arket is functioning at about 50 percent of its full capacity

. These factors indicate that a PSL price increase m a y not be favorable to W/TJM. W/TJM could choose to absorb the cost increase with profits fro m its other products in the short run. In the long run they could abandon production of these products. Inorder to m eet the dem a nd for their pre-designed structural sy stem s, they could either produce or buy a substitute product to use in the structural sy stem s. If W/TJM chooses to shut down these plants, ther e m a y be a num ber of unfavorable short run im pacts. First, the closures could m ean the lo ss of 600-1250 jobs, spread over three comm unities. EPA expects that the reduction in em ploy m e nt at these facilities would be offset by an increase in em ploy m e nt at a com p eting firm , but the comm unity im pacts m a y rem a in. The im pact of the proposed NESHAP rule on both consum ers and the individual facilities and firm s will depend upon corporate strategy

. Give n the acquisition of Trus Joist MacMillan by Wey e rhaeuser, corporate decisions and long term strategy are m o re influential than what could be represented in a m odel.
4.6.7 C onclusions Although the specific im pacts to the EWPs sector cannot be determ ined, it is unlikely that substantial econom ic losses will result. The cost burde n of this sector is m i nim a l in com p arison to the other sectors. Furtherm ore, the affected facilities ar e all owned by W/TJM, which has sufficient resources to handle the com p liance costs. Even if W/TJM p asses this cost on to consum ers, the price increase is likely to be m i nim a l as substitute products are available. 4.7 R eferences Abt Associates Inc. 1999. Profile of the Plywood and Wood Composite Industries. Prepared for Larry Sorrels, Innovative Strategies and Econom ic Gr oup, Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. Decem ber Abt Associates Inc. 2000. Economic Analysis M e thodology for the Plywood and W ood Composite Industries. Prepared for Larry Sorrels, Innovative Strategies and Econom ic Group, Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. March. U.S. Environm ental Protection Agency . 1998. Industry Specific Information Collection Request (ICR) for the Development of Plywood and Particleboar d Maximum Achievable Control Technology (M ACT) Standards

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.

4-19U.S. Environm ental Protection Agency

. 1999a. OAQPS Economic Analysis Resource Document

. Air Quality Strategies and Standards Division, Offi ce of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. U.S. Environm ental Protection Agency

. 1999b. Economic Impact Analysis for the Polymers & Resins III NESHAP

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.

4-20

## 5 S MALL BUSINESS IMPACTS Under the requirem e nts of the Regulatory Flex ibility Act (RFA) of 1980, Federal regulatory agencies m u st give special consideration to sm all en tities that are affected by regulatory actions. In 1996, am endm ents to the RFA under the Sm all Busin ess Regulatory Enforcem ent Fairness Act (SBREFA) added certain requirem e nts associated with analy ses and procedures associated with determ ining whether a regulatory action will have a significant im pact on a substantial num ber of sm all entities (U.S. EPA, 1999a, 1999b). 5.1 R esults in Brief The screening analy s is of sm all business im pacts pr esented in this chapter indicates that 17 of the 83 businesses affected by this proposed rule are sm all. Of these 17 sm all firm s, ten have annual com p liance costs of 1 percent or greater of their sales. Of these 10 firm s, three have annual com p liance costs of 3 percent or greater of their sales. Of the 32 facilities owned by these 17 sm all firm s, only one is predicted to close in order to avoid incurring costs associated with com p liance w ith the proposed rule. This analy s is supports a certification of no signifi cant im pact on a substantial num ber of sm all entities (SISNOSE) for this rule because, while a few sm all firm s m ay experience significant im pacts, there will not be a substantial num ber incurring such a burden. 5.2 I ntroduction The proposed NESHAP rule for the ply w ood and com posite wood industries will affect the owners of the facilities that will incur com p liance co sts to control their HAP em issions. The owners, either firm s or individuals, are the entities that w ill bear the financial im pacts associated with these additional operating costs. The proposed rule has the potential to im pact all firm s owning affected facilities, both large and sm all. This section presents the results of EPA’ s sm all business im pact analy s is of the im pact the proposed NESHAP for the Ply w ood and Com posite Wood Industries on sm all businesses. The analy s is was perform ed in two stages: a screening-level analy s is, and an exam ination of im pacts on sm all businesses developed using the m odels described in Chapter 4. The screening analy s is provides EPA with a prelim inary estim ate of the m a gnitude of im pacts the proposed NESHAP m a y have on the ultim ate dom estic parent com p anies that own facilities EPA expects to be im pacted by the standard. The analy s is focused on sm all firm s because they m a y have m o re difficulty com p ly ing with a new regulation or affo rding the costs associated with m eeting the new standard. This section first describes the data sour ces used in the screening analy s is, the m e thodology we applied to develop estim ates of im pacts, the results of the analy s is, and conclusions about the results. The results of the im pact assessm ent specific to sm all bus inesses that own affected facilities follows. Detailed docum entation of the screening analy s is presented in this section is contained in the econom ic im pact analy s is (EIA). 5.3 S creening Analy s is Data Sources The screening analy s is was based on the following inform ation:

• I ndustry Specific Inform ation Request (ICR) fo r the Developm ent of Ply w ood and Particleboard MACT Standards (U.S. EPA, 1998). • P rofile of the Ply w ood and Com posite Wood Produc ts Industries (Abt Associates, January 2000).

• E stim ated Nationwide Costs of Control: Ply w ood and Com posite Wood Products (MRI, April 14, 2000).

5-1• D un & Bradstreet, Ward’ s Business Directory , and Internet research on facility and firm em ploy m e nt and sales. 5.4 S creening Analy s is Methodology Cost Analysis After summ i ng annual com p liance costs for each aff ected facility associated with a given parent firm , EPA developed ratios of firm -level com p liance cost s to firm -level sales. The preparation of cost to sales ratios is a ty pical part of screening analy ses suchas this one. The analy s is incorporated firm level com p liance costs from the m o st recent facility com p lian ce cost estim ates for all affected facilities. The firm sales data for the m a jority of the firm s with affected facilities was obtained through a search of the Dun & Bradstreet (D&B) com p any database. Th e inform ation obtained from D&B was supplem ented with data from firm web sites and several other business databases available through the Internet (e.g., Zapdata, Hoover’s Online, Thom as’ Regi ster, and Ly cos Com p anies Online). Profitability Analysis For the second step in the screening analy s is, EPA reviewed the profitability of only those firm s with affected facilities with a cost to sales ratio (C/S ) greater than 1 percent. Specifically , EPA exam ined a m easure of profitability called the net profit m argin, also known as the return on sales ratio (R/S), calculated by dividing net profit after taxes by annual ne t sales. Profitability data is not publicly available for those affected firm s with cost /sales ratios great er than 1 percent because they are all privately held firm s. EPA estim ated profitability according to i ndustry

- wide average profitability m easures available from public sources. Exhibit 5-1 presents the pr ofitability m easure of R/S by product category

. Exhibit 5-1: Net Profit Margins by Product Type

Product Category 1997 Return on Sales Ratio Softwood, Plywood, and Veneer 1.7 Oriental Strandboard 3.5 Other W ood Com posites 3 .5 Engineered W ood Products* 5 .0 Multiple Processes** 2 .6 Notes: Source: Dun & Bradstreet (1999). Indicator values are based on median values of the industrial sample. *Includes 1998 data for Structur al Wood Members, the only data reported for this sector. **Firm s with mu ltiple product lines were assigned an R/S ratio based on the average of the R/S ratios for firms with Softwood Ply w ood and Other Wood Composite product lines. 5.5 S creening Analy s is Assumptions Because there were certain gaps in the data , EPA had to m a ke assum p tions regarding som e affected firm s’ em ploy m e nt and sales data as follows.

• F or those affected facilities for which no parent com p any data were available, EPA assum e d that the facility represents the ultim ate parent. EPAthen assum e d that the em ploy ees or the sales associated with the facility were the sam e for the parent firm

. 5-2• F or 8 affected firm s for which Dun & Bradstreet, Ward’ s , or Internet sales data was not available at the firm or facility level, EPA applied a sales estim ate based on the average sales for firm s in the sam e product and em ploy ee size category

. • F or one affected firm , EPA obtained em ploy m e nt inform ation for all three of its identified facilities and sales inform ation for two of the thr ee. EPA extrapolated the sales data on a dollar per em ploy ee basis from the two facilities with com p lete data to the facility with only em ploy m e nt data and added those sales to estim ate the firm ’ s total sales. 5.6 S creening Analy s is Results Cost Analysis Based on the results of the C/S ratio test, EPA developed the following summ a ry inform ation.

• T he total num ber and percent of affected firm s with C/S ratios greater than 3 percent. • T he total num ber and percent of affected sm a ll firm s with C/S ratios greater than 3 percent. • T he total num ber and percent of affected firm s with C/S ratios greater than 1 percent. • T he total num ber and percent of affected sm a ll firm s with C/S ratios greater than 1 percent. • T he m e dian and m ean C/S ratios for the following groups of firm s: • A ll firm s. • S m a ll firm s. • F irm s owning affected softwood ply w ood and veneer facilities. • F irm s owning affected oriented strand board facilities. • F irm s owning affected other wood com posite products facilities. 25 • F irm s owning affected engineered wood product facilities. • F irm s owning affected facilities that m a ke m u ltiple products. The screening analy s is showed that of the 52 firm s that own facilities incurring capital and m onitoring, recordkeeping , and reporting (MRR costs), 17 of them (33 percent) are sm all firm s according to the U.S. Sm all Business Adm i nistration’ s “Sm a ll Business Size Standards Matched to NAICS Codes” (U.S. SBA, 2000). Sm all firm s with affected facilities had a m e dian C/S of 1.22 percent. The rem a ining 35 firm s (67 percent) are large, with a m e dian C/S ratio of 0.33 percent. Overall, the weighted m e dian C/S ratio for all firm s is 0.62 percent. Exhibit 5-2 summ a rizes this inform ation, along with the m ean, ma x i mu m an dmi n i mu m C / S b y f i rm s i z e c a t e g o r y .

25 Medium density fiberboard, hardboard, conventi onal particle board and m o lded particleboard. 5-3Exhibit 5-2: Affected Firms by Size

Firm Size 1 Number of Affected Firms 2 Percent of Total Affected Firms Median C/S Ratio Mean C/S Ratio Maximum C/S Ratio Minimum C/S Ratio Sm all 1 7 33.0% 1.2% 2.3% 8.3% 0.53% Large 3 5 67.0% 0.3% 0.6% 5.1% 0.01% Total/ 52 100.0% 0.6% 1.2% 8.3% 0.01% W e ighted Average Notes: 1 For those firm s for which firm size inform ation was not available, EPA assum e d a typical firm size within the product type category. 2 Based on affected facilities only. Includes the firm that has capital costs but no annual costs. When screened by process ty pe, 26 EPA found that the affected softwood ply w ood and veneer firm s (40 percent of all firm s), other com posite w ood firm s (25 percent of all firm s) and firm s with m

u ltiple processes (29 percent of all firm s) m a ke up the m a jority of affected firm s. The firm s owning facilities that produce softwood ply w ood have the highest m e dian C/S ratio, 0.82 percent, followed by the owners of other com posite wood facilities, with a m eanC/S ratio of 0.41 percent. See Exhibit 5-3 for a summ ary of the data by process ty pe, including m ean, m a xim u m and m i nim u m C/S ratios.

Exhibit 5-3: Affected Firms by Process Type

Process Type 1 Nu mb er of Affected Firms 3 Percen t of Total Affected Firms Med ian C/S Ratio Mean C/S Ratio Maximum C/S Ratio Min i mu m C/S Ratio Softwood Plywood/Veneer 21 40.4% 0.8% 1.1% 8.3% 0.01% Oriented Strand Board 3 5.8% 0.2% 0.7% 1.9% 0.01% Other W ood Com posites 2 13 25.0% 0.4% 2.1% 8.2% 0.03% Engineered W ood Products 0 0 .0% n/a n/a n/a n/a Multiple Processes 1 5 28.8% 0.4% 0.6% 2.0% 0.01% Total/W eighted Average 3 52 100.0% 0.6% 1.2% 8.3% 0.01% Notes: 1 Firm s categorized according to the process types associat ed with the affected facilities. Firm s owing facilities with m o re than one process type were assigned to the “Multiple Processes” category. 2 Includes Medium Density Fiberboard, Hardboard , and Particleboard (conventional and m o lded). 3 Based on affected facilities only (facilities incurring capita l and MRR costs). Includes one firm that has capital costs but no annual costs.

26 Firm s categorized according to the process types asso ciated with the affected facilities. Firm s owing facilities with m o re than one process type were assigned to the “Multiple Processes” category. 5-4Of the four firm s with C/S ratios of 3 percent or greater, three are sm all. Ten sm all firm s have C/S ratios of one percent or greater out of 16 in this category

. One large firm has a C/S ratio of 3 percent or greater and six of them have C/S ratios of one percent or greater. The other wood com posite category has the m o st firm s with C/S ratios of 3 percent or greater (three out of the four). The softwood ply w ood has seven firm s followed by other wood com posites w ith five firm s with C/S ratios of one percent or greater (out of 16). The C/S screening results are presented in Exhibits 4 and 5, below. These tables also com p are the num ber of affected firm s (i.e., firm s with facilities incurring only MRR costs as well as those incurring capital and MRR costs) to the estim ated total num ber of firm s nationally

.

Exhibit 5-4: Affected Firms with C/S Ratios of 3 Percent or Greater Category Number of Firms Nationwide* Number of Affected Firms Firms as a Percent of National Firms Firms as a Percent of Affected Firms Firm Size Sm all 3 8 3 7.9% 17.6% Large 4 2 1 2.4% 2.9% Undeterm ined 3 n/a n/a n/a Total/W eighted Average 8 3 4 4.8% 7.7% Process Type Softwood Plywood/Veneer 30 1 3 .3% ? ? Oriented Strand Board 2 0 0 .0% ? ? Other W ood Com posites 1 9 3 15.8% ? ? Engineered W ood Products 11 n/a n/a n/a Multiple Processes 2 1 0 0.0% ? ? Total/W eighted Average 8 3 4 4.8% 7.7% Notes: See notes to Exhibits 5-2 and 5-3 above. * Estim ate.

5-5Exhibit 5-5: Affected Firms with C/S Ratios of 1 Percent or Greater

Category Nu mb er of Firms Nationw i de* Nu mb er of Firms Firms as a Percen t of National Firms Firms as a Percen t of Affected Firms b y Category Firm Size Sm all 3 8 1 0 26.3% 58.8% Large 4 2 6 14.3% 17.1% Undeterm ined 3 n/a n/a n/a Total/W eighted Average 8 3 1 6 19.3% 30.8% Process Type Softwood Plywood/Veneer Oriented Strand Board Other W ood Com posites Engineered W ood Products Multiple Processes Total/W eighted Average 30 7 23.3% ? ? 2 1 50.0% ? ? 1 9 5 26.3% ? ? 11 0 0 .0% n/a 2 1 3 14.3% ? ? 8 3 1 6 19.3% ? ? Notes: See notes to Exhibits 5-2 and 5-3 above. * Estim ate. In a few cases, a firm ’s process type changed when all facilities were taken into account.
Profitability Analysis Based on the results of the profitability analy s is perform ed as described above, EPA developed the following inform ation.

• T he total num ber and percent of affected firm s 27 whose C/S ratio: 1) exceeds their profitability ratio by 50 percent or m o re; 2) is between zero and 50 percent; or 3) is less than or equal to their profitability ratio.

• T he total num ber and percent of affected sm all firm s whose C/S ratio: 1) exceeds their profitability ratio by 50 percent or m o re; 2) is between zero and 50 percent; or 3) is less than or equal to their profitability ratio. When EPA com p ared the C/S ratio to the R/S ratio for those firm s with C/S ratios greater than one percent, EPA found that in 14 of the 16 cases, the C/ S ratio exceeded the R/S by over 50 percent. Two firm s’ C/S ratio exceeded their R/S ratio by betw een zero and 50 percent. Exhibit 5-6 presents these results in tabular form

.

27 That is, firm s with C/S ratios greater than one percent. 5-6Exhibit 5-6: C/S to R/S comparison for firms with C/S of one percent or greater C/S exceed s R/S b y over 50 p ercen t C/S exceed s R/S b y b e tw een 0 an d 50 p ercen t C/S is less than or equal to R/S

Firm S i z e Nu mb er of Firms Percen t of Total Fir m s w i th Costs Number of Firms Percen t of Total Fir m s w i th Costs Number of Firms Percen t of Total Fir m s w i th Costs Sm all 10 ? ? 1 ? ? 0 n/a Large 4 ? ? 1 ? ? 0 n/a Total/ 14 ? ? 2 ? ? 0 n/a W e ighted

Average Notes: See notes to Exhibits 5-2 and 5-3 above.
EPA focused its review of the results for the 16 firm s with C/S ratios greater than one percent. For 4 of the 10 sm all firm s in this category , no sales data were available. EPA developed sales estim ates for these firm s according to the av erage sales for firm s with the sam e num ber of em ploy ees in the sam e product category

. It is possible that in reality , these firm s have parent-level sales that differ from those assum e d in the current analy s is. However, based on extensive research into dom estic parent-level em ploy m e nt and sales data, EPA expects that this in form ation is not publicly available for these firm s. 28 For the rem a ining 6 sm all firm s with C/S ratios great er than one percent, EPA assum e d that the dom estic parent firm sales inform ation obtained from D&B, Wards, or the other Internet sources are reliable for the purpose of this analy s is.
EPA assum e d that the firm size and sales data are reliable for 5 of the 6 large firm s with C/S ratios greater than 1 percent. One firm , Sierra Pine (a California Lim ited Part nership), should be regarded as a special case. Sierra Pine recently purchased three affected facilities from Wey e rhaeuser, greatly increasing the total costs associated with Sierra Pine. However, Sierra Pine’ s sales data is from a query of D&B data perform ed in late 1999. As a result, th e sales associated with recent acquisition of the three plants are not reflected in Sierra Pine’ s sales data. If, for instance, Sierra Pine’ s total com p liance costs were prorated to exclude the costs attributed to the plants previously owned by Wey e rhaeuser, Sierra Pine’s C/S would change from 4.9 percent to 1.7 percent. EPA also tested the sales estim ates applied to la rge firm s. The one large firm for which EPA assum e d sales had a C/S ratio well below one percent. In this case, the firm ’ s actual sales would have to be approxim a tely half of the assum e d sales in order for the firm ’ s C/S ratio to exceed one percent. EPA believes that while the assum e d sales are potentially hi gher than the actual sales of this firm , it is less likely that the firm has actual sales that w ould result in a C/S ratio over one percent.

28 Research indicates that one of the sm all firm s with particularly high im pacts, Dom i nance Industries (d.b.a. Pan Pacific Products) is a single location private corporation owned Philip Ling. However, Dr. Ling is also the owner of a group of com p anies around the world and is the chairm an of Malaysian-based Pan Pacific Asia Berhad, an investm e nt holding com p any that also provides m a nage m e nt services. Pan Pacific Asia’s 1998 sales were $88 m illion (U.S.). The group m a nufactures and distributes tim ber logs and tim ber m o ldings. Other activities of the com p any are stockbroking and investm e nt holding. W h ile th is inform ation is not necessarily applicable to the ultim ate dom estic parent of Dom i nance Industries’ affected facility, is indicates that the facility’s owner has access to financial capital beyond what the sales from the facility generate. 5-7EPA used industry

- wide m easures of profitability because such inform ation is not available for privately held firm s. Because all the affected firm s with C/S ratios above one percent are privately held, firm -specific inform ation regarding R/S is not publicly available. If firm specific profitability m easures were available, it is likely that a com p arison of firm s’ C/S ratio to their R/S ratio would produce significantly different results. It should be noted th at while overall industry return on sales m a y be low, it is not necessarily the case for any given firm

. All ten sm all firm s with C/S ratios of one percen t or greater had a C/S ratio that exceeded the industry profitability m easure of return on sales. Fo r the three sm all firm s whose C/S ratios were three percent or greater, the com p arison of com p liance cost s and profitability m easures showed that their C/S ratios exceeded the industry R/S by over 100 percent. This divergence between the C/S ratios for these firm s and the industry R/S is an indicator that th ese three firm s m a y experience high im pacts as a result of incurring the costs of com p liance asso ciated with the proposed rule. However, the results of the econom ic im pact analy s is show that the affected facilities owned by these firm s will continue to operate after controls have been applied to com p ly with th e proposed rule. Therefore, the im pact on these firm s, while relatively high, are not enough to lead them to cease operations at these facilities. 5.7 S creening Analy s is Conclusions The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a regulatory flexibility analy s is of any rule subject to notice and comm e nt rulem a king requirem e nts under the Adm i nistrative Procedure Act or any other statute unless the agency certifies that the rule will not have a significant econom ic im pact on a substantial num ber of sm all entities. Sm all entities include sm all businesses, sm all organizations, and sm all governm e ntal jurisdictions. For purposes of assessing the im pacts of today ’ s proposed rule on sm all entities, sm all entity is defined as: (1) a sm all business according to Sm all Business Adm i nistration size standards by 5-digit NAICS code of the owning entity (in this case, 500 em ploy ees); (2) a sm all governm e ntal jurisdiction that is a governm e nt of a city , county , town, school district or special district with a population of less than 50,000; and (3) a sm all organization that is any not -for-profit enterprise which is independently owned and operated and is not dom inant in its field. After considering the econom ic im pact of today ’ s proposed rule on sm all entities, we certify that this action will not have a significant im pact on a s ubstantial num ber of sm all entities. In accordance with the RFA, we conducted an assessm ent of the proposedstandard on sm all businesses in the industries affected by the rule. Based on SBA size definitions for the affected industries and reported sales and em ploy m e nt data, the Agency identified 17 of the 52 com p anies, or 32 percent, owning affected facilities as sm all businesses. These facilities incur capital and MRR costs associated with the proposed rule. There 31 other firm s that only incur MRR costs; and all of these firm s are sm all. Although sm all businesses represent 32 percent of the affected com p anies within the source category , they are expected to incur only 6 percent of the total industry com p liance costs of $142 m illion. There are only three sm all firm s with com p liance costs equal to or greater than 3 percent of their sales. In addition, there are seven sm all firm s with cost-to-sales ratios between 1 and 3 percent. We perform ed an econom ic im pact analy s is to estim ate the changes in product price and production quantities for the firm s affected by this pr oposed rule. The analy s is shows that of the 32 facilities owned by affected sm all firm s, only one woul d be expected to shut down rather than incur the cost of com p liance with the proposed rule. Although any facility closure is cause for concern, it should be noted that the baseline econom ic condition of th e facilities predicted to close affects the closure estim ate provided by the econom ic m odel. Faciliti es which are already experiencing adverse econom ic

5-8conditions for reasons unconnected to this rule are m o re vulnerable to the im pact of any new costs than those that are not. This analy s is indicates that the proposed rule should not generate a significant im pact on a substantial num ber of sm all entities for the coati ngs m a nufacturing source category for the following reasons. First, of the 10 sm all firm s that have co m p liance costs greater than 1 percent of sales, only 3 have com p liance costs of greater than 3 percent of sales. Second, the results of the econom ic im pact analy s is show that only 1 facility owned by a sm all firm out of the 32 facilities owned by affected sm all firm s m ay close due to the im plem entation of this rule
. The facility that m a y close rather than incur the cost of com p liance appear to have low profitability le vels currently

. It also should be noted that the estim ate of com p liance costs for this facility is likely to be an overestim ate due to the lack of facility

specific data available to assign a precise control cost inthis case. In sum , this analy s is supports today ’ s certification under the RFA because, while a few sm a ll firm s m a y experience significant im pacts, there will not be a substantial num ber incurring such a burden. Although this proposed rule will not have a signi ficant econom ic im pact on a substantial num ber of sm all entities, we m i nim i zed the im pact of this rule on sm all entities in several way s
. First, we considered subcategorization based on production and throughput level to determ ine whether sm aller process units would have a different MACT floor than larger process units. Our data show that subcategorization based on size would not result in a l ess stringent level of control for the sm aller process units. Second, in light of cost considerations, we chose to set the em ission lim itation at the MACT floor control level and not at a control level m o re stringe nt than the MACT floor control level. Thus, the control level specified in the proposed PCWP rule is the least stringent allowed by the CAA. Third, the proposed rule contains m u ltiple com p liance options to provide facilities with the flexibility to com p ly in the least costly m anner while m a intaining a workab le and enforceable rule. The com p liance options include em issions averaging and production-based em ission lim its which allow inherently low-em itting process units to com p ly without installing add- on control devices and facilities to use innovative technology and pollution prevention m e thods. Fourth, the proposed rule includes m u ltiple test m e thod options for m easuring m e thanol, form aldehy de, and tota l HAP. We continue to be interested in the potential im pacts of the proposed rule on sm all en tities and welcom e comm e nts on issues related to such im pacts. 5.8 E conomic Impact Analy s is Results for Small Businesses Exhibit 5-7 provides a summ ary of the econom ic im pact on sm all businesses associated with the estim ated m arket adjustm e nts due to com p liance w ith the proposed NESHAP. As shown, the Agency ’ s econom ic analy s is indicates that the 17 sm all businesses that own 18 affected process lines will be affected as follows:

5-9Exhibit 5-7: Economic Impacts on Small Businesses Associated with Projected Market Adjustments* Changes Baseline
Baseline W ith Regulation Absolute Percent Revenues ($ thousands/y r)** 394,393 387,229 7,164 -1.82 from

Production (m illion m 3 /y r) Com p liance Costs ($ thousands/y r) Operating Process Lines Em ploy m e nt loss (FTEs) 1,791,408 1,737,969 53,439 -2.98
0 9 ,194 9,194 n/a

18 17 1

- 5.56
3,621 3,513 108 -2.98

Notes: * Does not include sm all businesses that own facilities with MRR costs only

. ** Estim ated using production and price data in econom ic im pact m odel FTEs = full-tim e equivalents The one process line closure predicted by the econom ic im pact m odel is owned by a sm all business. This results in a 5.6 percent decrease inthe num ber of process lines owned by sm all business. Overall, the sm all businesses’ revenues decrease by just under 2 percent, their production decreases by just under 3 percent, and their total em ploy m e nt decreases by just under 3 percent, or 108 FTEs. The estim ate of em ploy m e nt loss assum es that the production per em ploy ee at the affected facilities owned by sm all firm s is the sam e as the industry average. 5.9 R eferences Abt Associates Inc. 2000a. Small Business Screening Analysis for the Plywood and Wood Composite Industries: Revised Draft. Prepared for Larry Sorrels, I nnovative Strategies and Econom ic Group, Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. June. Abt Associates Inc. 2000b. Corporate em ploy m e nt and sales data collected through Internet business inform ation resources, including Dun & Bradstreet , Hoover’ s On-line, Ly cos Com p anies On-line, Thom as’ Register, Ward’ s Business Directory , and Zapdata.com

. Abt Associates Inc. 1999. Profile of the Plywood and Wood Composite Industries. Prepared for Larry Sorrels, Innovative Strategies and Econom ic Gr oup, Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. Decem ber.

5-10Midwest Research Institute. 1999. Mem o randum fro m Becky Nicholson and Melissa Icenhour to Mary Tom Kissell and Larry Sorrels, U.S. EPA: “Prelim inary facility -specific cost estim ates for im plem entation of the ply w ood and com pos ite wood products NESHAP.” October 20. Midwest Research Institute. 2000. “Estim ated Nationwide Costs of Control: Ply w ood and Wood Com posite Products.” April 14. U.S. Environm ental Protection Agency . 1998. Industry Specific Information Collection Request (ICR) for the Development of Plywood and Particleboar d Maximum Achievable Control Technology (M ACT) Standards

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC. U.S. Environm ental Protection Agency

. 1999a. OAQPS Economic Analysis Resource Document

. Air Quality Strategies and Standards Division, Offi ce of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
U.S. Sm all Business Adm i nistration. 2000. “Sm a ll Business Size Standards Matched to NAICS Codes.”

5-11

## Appendix A S ize Determination for Individual Firms

Determ ination of whether a firm is large or sm all is based on each facility ’ s ultim ate dom estic parent, the parent firm ’s SIC code, the parent firm ’s em ploy m e nt or revenue, and the SBA standard threshold for that SIC code. EPA asked facilities to provide their ultim ate dom estic parent firm nam e and em ploy m e nt in the ICR. However, m any faciliti es did not provide this inform ation, or provided inaccurate inform ation for ultim ate parent, and rather provided a subsidiary of another dom estic firm

. For this reason, a DUNS facility search was conducted based on the 416 unique facility nam es specified in the ICR and the additional 15 facilities identified after the survey date. Ultim ate parent nam e , prim ary SIC code, em ploy m e nt, and sales for 302 of the facilities in the ICR database were retrieved from DUNS, resulting in identification of 92 unique ultim ate dom es tic parent firm s. Ultim ate parent em ploy m e nt reported in the DUNS database was com p ared to th e SBA standard threshold for that SIC code to determ ine whether the ultim ate parent was a sm all or large firm . The rem a ining 129 facilities were classified based on inform ation from DUNS and the ICR or through other sources as described below: (1) Facilities with no identifiable ultimate parent. Twenty -nine facilities were listed in the DUNS database without inform ation on an ultim ate parent. These facilities were assum e d not have anot her ultim ate parent and the facility SIC code in DUNS was used as the ultim ate parent’ s SIC as well. For these facilities, the prim ary SIC code for the facility was used to determ ine the appropriate SBA standard. Inform ation provided by facilities on their ultim ate parent’s em ploy m e nt was then used to determ ine the size relative to the SBA standard. (2) Facilities with no DUNS listing

.

• F or those im pacted facilities for which no parent com p any data were available, we assum e d that the facility represents the ultim ate parent. We then assum e d that the em ploy ees or the revenues associated with the facility were the sam e for the parent firm

.

• F or 8 im pacted firm s for which Dun & Bradstreet, Ward' s , or internet revenue data was not available at the firm or facility level, we a pplied a revenue estim ate based on the average revenue for firm s in the sam e product and em ploy ee size category

.

• F or one im pacted firm , we obtained em ploy m e nt inform ation for all three of its idenitified facilities and revenue inform ation for two of the th ree. We extrapolated the revenue data on a dollar per em ploy ee basis from the two facilities w ith com p lete data to the facility with only em ploy m e nt data and added those revenu es to estim ate the firm 's total revenues.
Exhibit A-1 below lists all firm s that own faciliti es projected to have com p liance cost im pacts and relevant inform ation used to m a ke size determ inati ons. The source columnidentifies which of the three sources (DUNS, ICR, or other) was used to m a ke the size determ ination.

A-1Exhibit A-1: Siz e Determination for Individual Impacted Firms Ultimate Domestic Parent Firm Facilities** S tandard Size Source Bassett Furniture Inds Inc 8 500 Large DUNS Bessem e r Plywood Corporation 1 500 Sm all O THER Boise Cascade Corporation 1 2 100 Large DUNS Cham pion International Corp 3 750 Large DUNS Clyde Lang 1 500 Sm all S URVEY Coastal Lum b er Com p any 1 500 Large DUNS Collins Products Llc 3 500 Large DUNS Em erald Forest Products Inc 3 500 Sm all DUNS Fiberesin Industries Inc 1 500 Sm all DUNS Freres Lum b er Com p any, Incorporated 1 500 Sm all DUNS Furniture Brands International 7 500 Large DUNS Georgia-pacific Corporation 4 3 500 Large DUNS Ham b ro Forest Products Inc 1 500 Sm all DUNS Hollingsworth & Vose Com p any 1 750 Large DUNS Hood Industries Inc 2 500 Large DUNS Hunt Forest Products Inc 2 500 Large DUNS Litco International Inc. 1 500 Sm all DUNS International Paper Com p any 1 7 750 Large DUNS J M Huber Corporation 4 750 Large DUNS Jeld-wen Inc 4 500 Large S URVEY Joint Noranda Forest, Inc, & The Mead Corp 1 500 Large S URVEY
Sim p son Investm e nt Co. 1 750 Large O THER Klukwan Inc 1 $17* Large DUNS Langdale Com p any Inc 2 500 Large DUNS Louisiana-pacific Corporation 3 2 500 Large DUNS Macm illan Bloedel Lim ited 1 500 Large DUNS Martco Partnership 2 500 Large DUNS Masco Corporation 1 500 Large DUNS Murphy Com p any 1 500 Sm all DUNS Noranda Inc 2 500 Large DUNS Plum Creek Tim b er Com p any L p 4 100 Large DUNS Potlatch Corporation 6 750 Large DUNS R L C Industries co 6 500 Large DUNS Ron Fallard 1 500 Sm all S URVEY Scotch Plywood Com p any of Alabam a 1 500 Sm all S URVEY Sierra Pine a Cal Ltd Partnr 7 500 Large DUNS Sm urfit-stone 2 750 Large DUNS Sticky Pitch, Incorporated 1 500 Sm all S URVEY

A-2Exhibit A-1: Siz e Determination for Individual Impacted Firms Ultimate Domestic Parent Firm Facilities** S tandard Size Source Stim son Lum b er Com p any 4 500 Large DUNS Superior Lum b er co 1 500 Sm all DUNS Tem p le-inland Inc 1 0 500 Large DUNS Tim b er Pdts Co Ltd Partnershi 6 500 Large DUNS Us Forest Industries, Incorporated 2 500 Large S URVEY W e bb Furniture Enterprises, Inc 1 500 Large S URVEY W e yerhaeuser Com p any 1 9 500 Large DUNS W illam e tte Industries Inc 2 3 500 Large DUNS Ponderosa Products Inc 1 500 Sm all DUNS Dom i nance Industries 1 500 Sm all O THER Sds Lum b er Com p any 1 500 Sm all O THER Canfibre 1 500 Sm all O THER Quality Veneer & Lum b er 1 500 Large O THER Fourply, Inc. 2 500 Sm all O THER W e stbrook W ood Products 1 500 Sm all O THER * Size was determ ined by firm revenues whic h were $71.5 m illion based on DUNS inform ation. ** Includes affected and unaffected facilities owned by firm

. Sources: Dun & Bradstreet DUNS Database (1999), U.S. Environm ental Protection Agency (1998), MRI (1999), Abt Associates (2000).

A-3

## Appendix B E IA Methodology
B.1 I ntroduction This appendix provides a description of the m e thodology EPA used to perform the econom ic im pact assessm ent (EIA) of the proposed NESHAP that will apply to the Ply w ood and Com posite Wood (PWC) Manufacturing Sector. Specifically , the Agency applied this m e thodology to assessing the im pacts of the proposed NESHAP to the m anufacturers of softwood ply w ood (SWPW), oriented strandboard (OSB), particleboard (PB), m e dium density fiberboard (MDF), and har dboard (HB). See Section 4.4 for a discussion of potential im pacts on the m a nufacturers of engineered wood products (EWP). This appendix presents the general background fo r the EIA, describes the m a rket segm e nts and com ponents of dem and associated with PWC m a nufacturing, and summ a rizes the assum p tions and data inputs used in the analy s is. The docum ent then describes the approach to the EIA, including the developm ent of the supply and dem and com ponents of the partial equilibrium m odel, and the com putational tool used to im plem ent the m odel and perform the analy s is. The final section discusses the results produced by the analy s is and the uses of those results.
B.2 B ackground In the process of proposing NESHAPs, the EPA perform s EIA to estim ate the im pacts the proposed rule will have on m arket, facilities, and total social welfare. The fram e work for perform ing this EIA is predicated on m odeling the m arket-based behavioral response of facilities to com p liance costs associated with proposed NESHAP. Specifically , th is fram e work is based on a partial equilibrium analy s is that uses m a them atical representations of supply and dem a nd functions. The fram e work estim ates the short run facility -level, industry

- level, and m a rket-level im pacts that the im position of com p liance costs associated with the NESHAP are expected to have.
At the m arket level, the analy s is em ploy s a partial equilibrium analy s is to estim ate changes in m a rket prices, dom estic production and consum ption, and foreign trade. The partial equilibrium econom ic analy s is exam ines each im pacted m a rket al one, ignoring the possible interactions that the m a rket im pacts being studied m ay have on other m a rkets. Because facility -specific inform ation is available for baseline production levels and com p liance costs estim ated to be incurred as a result of the proposed NESHAP, it is possible to provide estim at es of facility -specific changes in production and revenues. Facility -level com p liance costs vary based on characteristics of the producing facilities. Using this m e thodology , the EIA also estim ates the net social burden of the proposed NESHAP, taking into account m arket adjustm e nts to the rule. The social burden includes:

• the producers’ com p liance costs, • the loss consum ers incur should ply w ood and wood com posite prices rise,

• the loss both consum ers and affected pr oducers incur when ply w ood and wood com posite production decreases, and

• i ncreases in profits for unaffected ply w ood a nd wood com posite producers who enjoy higher m arket prices and/or production without any additional costs.

B-1This social burden or cost is weighed by policy m akers against the social gains associated with the regulation, including the value of reduced adverse im pacts on hum an health and the environm ent, when evaluating regulatory options. Social costs vary based on characteristics of m a rk ets in which these facilities participate. At the m a rket level, the im position of com p liance costs on som e producers adds to the cost of producing ply w ood or com posite wood products, and thus results in an upward shift of the m a rket supply curve. In a perfectly com p etitive m a rket, the supply curve m easures the m a rginal cost of supply i ng ply w ood or com posite wood products to the m a rket as a function of the quantity supplied. The area under the supply curve from 0 to any num ber, Q, m easures the total variable cost of supply i ng Q of ply w ood or com posite wood products. An upward shift in the supply curve m eans that it costs m o re to supply a given quantity of ply w ood or com posite wood products

. This is what would be expected if som e producers have to switch to lower HAP technologies to m eet the requirem e nts of the proposed NESHAP.
The dem and for ply w ood or com posite wood produc ts m easures the quantity of ply w ood or wood com posites consum ers will purchase as a function of the price of the product, assum i ng all else is held constant. The approach used for this EIA assu m es that the dem a nd for ply w ood or com posite wood products at any given price is unchanged by the regulation, unless the quality of the product changes substantially due to required changes in produc t inputs or production processes. Figure 1 below graphically presents the theoretical im pact of the regulation on the m a rket for ply w ood or com posite wood products. Note that the shift in the supply curv e results in an increase in price and a decrease in the quantity of ply w ood or com posite wood products sold. This figure is discussed in detail later in the docum ent.



## P

D S bas e line 

## S pos tco mp l i an c e



## P 1 

## P 0



## Q 1 

## Q 0 

## Q Figure B-1: Market Supply and Demand

B-2B.3 M arket Segments and Demand Components The Ply w ood and Com posite Wood Products Indus try contains two m a in industry sectors expected to experience im pacts associated withthe proposed Ply w ood and Com posite Wood Products NESHAP: Softwood Veneer and Ply w ood (SIC 2436) and Reconstituted W ood Products (SIC 2493). The Reconstituted Wood Products industry sector is fu rther disaggregated into two sectors: oriented strand board (OSB) and other wood com posites. Other wood com posites include particleboard (PB), m e dium density fiberboard (MDF), and hardboard (HB). Each of the three industry sectors has a corresponding m a rket segm e nt. The dom estic facilities that produce output in a given sector are the dom estic suppliers in the corresponding m a rket seg m e nt. EPA analy zed each of these three m a rket segm e nts separately

. Within the third m a rket segm e nt, “other com pos ite wood products,” a further division was m a de. As shown below (see Exhibit B-3), the baseline prices of particleboard and m e dium density fiberboard are very different from the baseline price of hardboard. However, inform ation on the other inputs to the analy s is was available only at the m o re aggregat e level of “other com posite wood products.” In particular, m any data sources present these products together because the facilities have the sam e industrial classification (SIC or NAICS), m a king m a rk et level distinctions am ong the products difficult. Because of the substantially different baseline pri ces, however, PB/MDF and HB were analy zed as two distinct m arkets that share values for all inputs except baseline price.
In three of the four m arket segm e nts (softwood ply w ood, PB/MDF, and HB), there are two m a jor com ponents of dom estic dem and: hous ing construction and m anufacturing. There is only one com ponent of dom estic dem a nd for OSB: housing construction. The EIA m e thodology for these m a rkets takes into account separate dom estic dem and com ponents that m a ke up total dem a nd. Exhibit B-1 lists the m arket segm e nts and dom estic dem and com ponents, along w ith the percent of output from producers going to each source of dem a nd, to the extent that the data is currently available.

Exhibit B-1. Demand Components of th e Plywood and Wood Composite Industries

Product Percent of Domestic Demand Construction Manufacturing Softwood Plywood and Veneer (SW P W ) 64% 36% Oriented Strandboard (OSB) 100% 0% Other Com posite W ood Products: 10% 90% PB/MDF Other Com posite W ood Products: HB 29 10% 90% Source: Abt Associates, 1999.

29 Our research into the dom estic dem a nd com ponents of HB did not produce specific data regarding the share of HB products going to construction and m a nufacturing. For the purpose of this analysis, we will assum e that the dem a nd com ponents for HB are the sam e as for PB and MDF.
B-3B.4 D ata Inputs
The econom ic im pact analy ses required specific data inputs pertaining to supply and dem a nd within each m arket segm e nt. Exhibit B-2 presents the data inputs needed to analy ze the econom ic im pacts resulting from the im position of com p liance costs on the facilities in a given m arket segm e nt (e.g., softwood ply w ood). The data elem ents require d are essentially the sam e for all m a rket segm e nts. Exhibit B-2: Data Inputs for Analyzin g Impacts on a Given Mark et Segment Mark et Component D ata Element Price Baseline m a rket equilibrium price of the affected product Supply Side Supply from affected dom estic facilities Baseline quantity supplied by each affected facility 30 Com p liance costs for each affected facility Price elasticities of supply for dom estic facilities (if available) Supply from unaffected dom estic facilities Baseline quantity supplied by each unaffected facility Price elasticities of supply for dom estic facilities (if available) Supply from the foreign sector Baseline quantity supplied by the foreign sector Price elasticity of supply for the foreign sector (if available) Demand Separate dom estic Baseline quantity dem a nded by each dem a nd com ponent* dem a nd com ponents Own-price elasticity of dem a nd (e.g., m a nufacturing Cross-price elasticities of dem a nd (if available) sector and housing construction) Foreign dem a nd Baseline quantity dem a nded by the foreign sector* Own-price elasticity of dem a nd Cross-price elasticities of dem a nd (if available) *Needed to estim ate the m u ltiplicative constant in the dem a nd equation.
B.5 A ssumptions
Based on EPA’ s understanding of the ply w ood and co m posite wood industry , review of available data, and application of the analy tical approach d escribed in the next section, EPA m a de the following assum p tions.

• T he baseline y ear for the analy s is is 1997. • A ll m a rket segm e nts are perfectly com p etitive. • E ach affected product is sold in a single national m a rket for hom ogenous output at one price.

• A ffected dom estic products, unaffected dom estic products, and foreign products in the sam e m a rket segm e nt are perfect substitutes for each other. • A ll factors that affect dem and, other than price(s), are constant in the short-run.

30 W e assum e that the EPA’s ICR collected producti on quantities from all dom estic facilities, both affected and unaffected.
B-4• I ndustry supply elasticity for foreign suppliers is the sam e as industry supply elasticity for dom estic suppliers. • T he price elasticities for dom estic and foreign dem a nd are the sam e. • T he production costs of foreign suppliers are unaffected by em ission controls.

• T he production costs of unaffected dom estic s uppliers and of substitutes are unaffected by em ission controls.
B.6 A naly t ical Approach
This section describes EPA’ s approach to the EIA for the ply w ood and com posite wood econom ic im pact analy s is. As the previous section described, this analy s is disaggregated ply w ood and com posite wood products into the following three m a rket segm e nts.

• S oftwood ply w ood and veneer (SWPW). • O riented strandboard (OSB). • O ther com posite wood products (OWC): • P articleboard and m e dium dens ity fiberboard (PB/MDF), and • H ardboard (HB). A separate m a rket equilibrium analy s is was pe rform ed for each m a rket segm e nt, incorporating separate equations for dom estic supply , forei gn supply , dom estic dem and, and foreign dem a nd. 31 For each m a rket, these equations were com b ined into a si ngle equation that sets the quantity supplied equal to the quantity dem anded in the post-regulation scenario, determ ining the new m a rket equilibrium price at which that equality holds. Although specific param e ter estim ates m a y differ from one m a rket to another, the m e thodology used to m odel supply and dem a nd and to estim ate the new equilibrium prices and quantities in these m arkets is basically the sam e. These m arkets are therefore discussed together, with m a rket-specific distinctions m a de as appropriate.
B.7 N otation To facilitate the discussion below of supply and dem a nd functions in the baseline and the postregulation scenarios, a brief explanation of the nota tion used will be helpful. In general, Q denotes quantity and P denotes price. Price and quantities in th e baseline are subscripted with a “0,” and price and quantities in the post-regulation scenario are subscripte d with a “1.” Dom estic and foreign supply and dem a nd in a m arket are denoted by the following superscripts:

• D S denotes dom estic supply ; • FS denotes foreign supply (i.e., im ports); • DD denotes dom estic dem and; • F D denotes foreign dem and (e.g., exports); • TS denotes total supply ; and • T D denotes total dem and.

31 Because there are separate com ponents of dom estic dem a nd, there is one dem a nd equation for each com ponent. See Exhibit B-1.
B-5The quantity supplied by the jth dom estic facility in a m a rket is denoted by subscripting the Q DS with a “j.” The quantity dem anded by the kth dem a nd com pone nt in a m a rket is denoted by subscripting the Q DD or the Q FD with a “k.” It is necessary to distinguishbetween the m u ltiple dom estic dem a nd com ponents associated with several of the m arkets analy zed here. The following are som e exam ples of the notation u sed below, based on the above notational rules:

• DS is the quantity supplied by the jth dom estic facility in the baseline; 

### Q j 0

• DS i s the quantity supplied by the jth dom estic facility in the post-regulation scenario. 

### Q j 1

• DD i s the quantity dem anded by the kth dom estic dem a nd com ponent (e.g., dom estic 

### Q k 1 m anufacturing) in the post-regulation scenario; • P 0 is the baseline m arket equilibrium price; and • P 1 is the post-regulation m arket equilibrium price.
B.8 The SupplySide of the Market This analy s is m odeled two broad sources of supply — dom estic supply and foreign supply — that satisfy dem a nd from two broad sources — dom es tic dem a nd and foreign dem a nd — in each m arket. Because facility -specific inform ation on quantities pr oduced and com p liance costs is available, this analy s is m odeled facility -specific supply func tions. Although m a ny dom estic facilities will have com p liance costs, som e will not. In addition, fore ign facilities will have no com p liance costs. For som e products, the foreign com ponent of supply is substantial. For exam ple, in 1995, 17 percent of consum ption of reconstituted wood products in the United States cam e from im ports (foreign supply )

. Because som e dom estic facilities and all foreign f acilities will have no com p liance costs, and because, am ong those dom estic facilities that will have com p lian ce costs, the cost per unit of product produced is likely to vary from one facility to another, the anal y s is will capture differential im pacts across facilities. While som e facilities (those with com p liance costs) are likely to supply reduced quantities of products to their m a rkets, other facilities with zero com p lia nce costs are likely to supply greater quantities.
B.8.1 F unctional Form of Supply Curves
There is little em pirical support for any particular functional form of the supply functions in these m a rkets. Although facility -specific production quantities and com p liance cost estim ates are available, facility -specific estim ates of average production cost are not. It is therefore not possible to estim ate step supply functions in any of these m arkets. Nor are there facility -specific estim ates of price elasticity of supply

. In the absence of any em pirical basis to support one functional form over another, the analy s is assum e d that the average dom estic facility supply curve is the supply function corresponding to a generalized Leontief profit function. Th is supply function has the following form :

DS / 

### Q av g 

### = γ +    β

2 

  * P − 12 (1)

DS is the average m a rket equilibrium quantity supplied, P is the m a rket equilibrium price, and $ where Q av g and ( are param e ters ( $ < 0; ( >0). This is a well recognized and reasonable form for a supply function. It

B-6can be shown that the price elasticity of supply for th is supply function, 

### ε , is a function of the price, the quantity and the param e ter $ , and that the industry supply function has the sam e elasticity of supply at the equilibrium price. Given this, the param e ter $ can be solved for as a function of this elasticity , and the baseline price and quantity

. In particular,

DS / 

### β = − 4 ε * Q av g 

### * P 12 (2) Therefore, given inform ation about the baselin e m a rket equilibrium price and the baseline equilibrium average quantity per facility , and a reasona ble estim ate of the industry elasticity of supply at the baseline price, it is possible to estim ate $

. The assum p tion about the industry average elasticity affects not only the value of $ but all aspects of the econom ic analy s is (as explained below). The m odel has the capability to produce results through sens itivity analy ses around these assum p tions that would allow the Agency to exam ine how the analy tic out com es (including change in equilibrium price and quantities, closures, and social welfare im pacts) change as the input assum p tions about this elasticity change. This is straightforward in a spreadsh eet analy s is. However, no sensitivity analy ses were perform ed for this EIA.
B.8.2 D omestic Supply
The total dom estic quantity supplied in a give n m a rket (e.g., the total dom estic supply of softwood ply w ood used for all final goods) is the sum of the dom estic facility -specific supply quantities. Under the assum p tion that the supply functions of i ndividual dom estic facilities have the sam e functional form as the average dom estic supply function (equa tion (1)) and the sam e value for the param e ter $ (as calculated in equation (2)), facility -specific supply f unctions were derived by solving for the facility

specific value of ( that is consistent with the f acility ’ s baseline quantity supplied:

DS



### −  β  * P − 1 2 

### γ j 

### = Q j 

###   2 

###   / (3)

DS is the quantity supplied by the jth dom estic facility and P is the m a rket equilibrium price. where Q j Using the baseline equilibrium price, P 0 , the jth dom estic facility ’ s quantity supplied in the baseline, Q

j0 DS , and a value for $ , we can derive a value for ( j . 32 The jth dom estic facility ’s supply function in the baseline is therefore

DS 

### = γ j 

### +    β

2 

### 

  * P 0 − 1 2

. ( 4 ) 

### Q j 0 /
The jth facility ’s shutdown price (the price at which it supplies zero units) can be shown to be 

### β 2 shutdow n 

### P

j 0 

### = 4 γ 2 j . ( 5 )

32 Using this approach, the elasticity of supply, which is a function of both price and quantity supplied, will vary from one facility to another. The shutdown price — the price at which the facility will supply zero units — will also vary from one facility to another.
B-7The total quantity supplied by dom estic facilities in the baseline is the sum of the facility -specific quantities:
DS 

### Q 0

DS 

### = 

# ∑ Q j 0 . ( 6 ) j In the post-regulation scenario, the supply function of the jth facility , with per unit com p liance cost c j $ 0, becom e s

DS 

### = γ j 

### +    β

2 

### 

  *( P 1 

### − c j 

### ) − 12 (7) 

### Q j 1 /

where P 1 is the new (post-regulation) m arket equilibrium price. The jth facility ’s shutdown price is now 

### β 2 sh

utdo wn 

### P

j 1 

### = 4 γ 2 j 

### + c j . ( 8 )

The jth facility ’s post-regulation supply decision can therefore be written as 

###  / shutdown DS 

###  γ j 

### +  β  *( P c j 

### ) − 1 2 

### i f P 1 

### > P j 1 

### Q j 1 

### =    2   1 

### − shutdown . ( 9 ) 

###  0 if P 1 

### ≤ P j 1 

### 

The total quantity supplied by all dom estic facilities in the post-regulation period is

DS Q 1

DS = 

## ∑ Q j 1 . ( 10) j Baseline quantities are available for all dom es tic facilities from the EPA’s 1998 Inform ation Collection Request (ICR) issued to ply w ood and wood com posite producers (EPA, 1998). EPA also developed facility -specific com p liance costs. EPA calculated both total dom estic baseline quantity supplied and facility -specific per unit output com p lian ce costs from this inform ation. SWPW, OSB, and PB/MDF baseline prices were based on the industry -re ported free on board (f.o.b.) prices. These are the product prices prior to shipping costs and distributor m ark-ups. 33 Because f.o.b prices were not available for HB, the agency used wholesale price quotes that we re publicly available. Exhibit B-3 presents the prices in 1996 dollars and the extrapolated baseline prices in 1997 dollars.

33 Except for hardboard, which includes delivery costs.
B-8Exhibit B-3. Prices in 1996 and Baseline Prices in 1997 Product P rices in 1996 ($/cubic meter) Baseline Prices in 1997 ($/cubic meter) Softwood Plywood 231 235 Oriented Strandboard 184 185 Other Com posite W ood Products Particleboard/MDF 165 169 Hardboard n/a 1 ,322 Source: SW PW , OSB, and PB/MDF prices: Abt Associat es, 1999. HB prices: Get-a-Quote.net. 4' x 8' sheets, used as underlaym e nt, 1/8" tem p ered . Note: SW PW , OSB, and PB/MDF prices are base d on 1996 prices adjusted by average annual price change from 1989 to 1996. HB prices are in 2000 dollars. As noted above and as shown in Exhibit B-3, the b aseline prices of PB/MDF and hardboard, within the broader category “other com posite wood products,” ar e very different. Each of these two product groups (PB/MDF and HB) was therefore analy zed as a sep arate m a rket. However, because of lack of inform ation specific to each (PB/MDF and HB) on the other inputs to the analy s is -- i.e., elasticities of supply and dem and, and percentage that goes to m anufacturing versus construction -- estim ates for the overall category "other wood com posites" for these input s were applied to each of the specific products. Although there are no available estim ates of the price elasticities of supply of softwood ply w ood, OSB, or other com posite wood products, there are so m e estim ates of elasticities of supply of different softwood lum b ers, which served as a proxy for the elas ticities of supply of related products such as those considered in this analy s is. Lewandrowski et al. (1994) provide several estim ates of supply elasticities. While their estim ates differ by an order of m a gnitude depending on the unde rly i ng assum p tions they m a ke, they note that m o st published lum b er supply elasticities are less than 1.00. Because they m odel inventories of lum b er, there are differences between production and supply : the produc ts m a y either be sold or stored. They note further that, “if inventory adjustm e nts tend to balance out over tim e, pr oduction should about equal supply over a y ear,” and that their lum b er produc tion elasticities (0.358 for Southern Pine, 0.443 for Douglas Fir, and 0.446 for Western Pine) m a y therefore be closer to supply elasticities. This analy s is used the (unweighted) average of these elasticities, 0.42, as the price elasticity of dom estic industry supply for all m a rket segm e nts. As noted above, while the supply elasticities of individual dom estic facilities depend (indirectly ) on this industry supply elasticity , they also depe nd on facility -specific quantities supplied. Dom estic facilities’ supply elasticities therefore vary from one fac ility to another. As noted above, the m odels are designed to that, if desired, the Agency can perform a sensitivity analy s is to investigate the im pact of alternative estim ates of the industry average s upply elasticity on the results of the analy s is.

B-9B.8.3 F oreign Supply Supply from the foreign sector (im ports) can be m odeled sim ilarly , and this supply was added to the dom estic supply

. Unlike dom estic facilities, foreign facilities will not experience any increases in production costs due to the proposed NESHAP. This analy s is therefore com b ined and treated them as one “facility ” with supply function:

/ 

### Q FS 

### = γ FS 

### +    β

2 

### 

  * P − 12

. ( 11)

The industry profile presents inform ation on the baseline quantities im ported (Abt Associates, 1999). Because there is no inform ation on the elasticities of foreign supply of softwood ply w ood, OSB, or other wood com posites, the analy s is assum e d th at these elasticities of supply are the sam e as the corresponding elasticities of supply for the correspondi ng dom estic industries. The analy s is further assum e d that prices in the foreign sector are the sam e as those in the corresponding dom estic m a rkets.
B.8.4 T otal Market Supply The total quantity of a product supplied at the new m a rket equilibrium price, P 1 , is the sum of the quantities supplied by dom estic facilities and th e quantity supplied by the foreign sector: 34 

### Q 1 TS 

### = Q 1 DS 

### + Q 1 FS (12)
Substituting from equations (9) and (10) for the dom estic supply ( 

### Q 1 DS ) and from equation (11) for the foreign supply ( 

### Q 1 FS ), the total quantity s upplied to the m arket post-regulation is:

DS 

### Q 1

TS 

### = Q 1 DS 

### + Q 1 FS 

### = 

# ∑ Q j 1 

### + Q 1 FS (13) j

34 The supply and dem a nd curves typically used by econom ists when showing supply and dem a nd in a m a rket are actually inverse supply and dem a nd functions becau se quantity is on the x-axis and price is on the y-axis. Rather than showing the quantity supplied (dem anded) at a given price, the inverse supply (dem and) function shows the price at which a given quantity is supplied (dem anded). The (quantity, price) point at which the m a rket inverse supply curve and the m a rket inverse dem a nd curve cross is the m a rket equilibrium point. The (inverse) m a rket supply curve is the horizontal sum of the individual suppl y curves. If at price p the jth supplier will supply q j units to the m a rket, then the total quantity supplied at price p is 

## ∑ Q j . Sim ilarly, if at price p the kth dem a nd com ponent j dem a nds qk units, then the total quantity dem a nded at price p is 

# ∑ Q k . The m a rket is in equilibrium when k 

## ∑ Q j = 

## ∑ Q k .

j k

B-10DS 

### + γ FS 

### +    β

2 

### 

  * P 1 − 12 (14)

/ 

### Q 1

TS 

### = 

# ∑ Q j 1 j where, as shown in equation (9),

shutdow n DS 

###    γ j 

### +  β  *( P c j 

### ) − 12 

### i f P 1 

### > P j 1 

### Q

j 1 

### =   2   1 

### − /

shutdown 

###   0 if P 1 

### ≤ P j 1
B.9 The Demand Side of the Market
The total dem and for a product at a given price is the sum of the dem a nds at that price from separate sources. 35 Total dem and is com posed of dom es tic dem and and foreign dem and (exports).
B.9.1 D omestic Demand As stated previously , the two m a jor dom estic dem a nd com ponents in the m a rkets for softwood ply w ood and veneer and for other com posite wood products are the construction industry and the m anufacturing industry ; within the m anufacturing industry , the two m a jor categories of use of these products are furniture and shelving m anufacture and m anufacture of kitchen and bath structures. The one m a jor dom estic dem and com ponent in the m arket for oriented strandboard is the construction industry

. This analy s is exam ined the short-run relations hip between the price of a product and the quantity of that product dem anded by a given dem and com ponent (e.g., the construction industry ) , all else held constant

. That is, although factors other than price are known to affect the quantity of a product dem anded, the question at hand is the following: What is the im pact of a specific regulation on price and quantity in the m a rket for a product? This question requi res that all other factors be held constant in the analy s is. Because the exact functional form of this dem a nd relationship is not known for any of the three m arket segm e nts, EPA applied a reasonable and co mm only used dem and relationship, consistent with basic m i croeconom ic theory , of the following form : 36 

### ln( Qk DD 

### ) = α ε k 

### ln( P ) (15) k 

### + or, equivalently , 

### Qk DD 

### = γ k 

### P ε k 

### , (16)

35 As with supply, the m a rket dem a nd curve is the horizontal sum of the individual dem a nd com ponent dem a nd curves (see the previous footnote).

36 This basic functional form was used, for exam ple, by Buongiorno (1996) in m odeling dem a nds for several forest products, including plyw ood, particleboard, and fiberboard.
B-11where
Q

k DD = the quantity dem anded by th e kth dom estic dem a nd com ponent; P = the m arket equilibrium price. (Note that for each m a rket there is a single m a rket price which is paid by all dem a nd com ponents in that m a rket.); 

### α

k = adem a nd-com ponent-specific constant calib rated to the baseline price and quantity ;
ε

k = the own-price elasticity of dem a nd by the kth dem a nd com ponent, and 

### γ k 

### = e α k

.
The m u ltiplicative constant, ( k , is calibrated to the baseline price and quantity dem a nded by the kth dom estic dem and com ponent (using equation (16)).
B.9.2 Substitution
In som e cases, there m ay be substitution possib ilities between the products being considered in this analy s is — m o st notably , softwood ply w ood and OSB m a y both be used as structural panels in construction. If the necessary inform ation were availa ble — in particular the cross-price elasticities of dem and — it would be possible to m odify the above de m a nd relationship to include the effect of changes in the price of the substitute product. Cross-price elasticities, however, are very difficult to estim ate and estim ates of the cross-price elasticities that would be relevant to this analy s is are not obtainable.
The om ission of short-run substitution possibilities from the m odel, however, is not likely to have any significant im pact on the results. In the construction industry , inputs such as ply w ood and reconstituted wood products are used in com b ination w ith other specific inputs and m a y best be m odeled as part of a composite (or aggregate) input to the final good, a residence for exam ple. To change from ply w ood to OSB in housing construction, for exam pl e, would require a change not only of ply w ood to OSB but also a change of those inputs that m u st be used in com b ination with ply w ood to those inputs that m

u st be used in com b ination with OSB — i.e., a change from one com posite input to another. This would also be true of non-wood substitut es for ply w ood and com posite wood products.
This m odel of production as using com posite input s is described by Cham bers (1988) and was applied to lum b er used in residential construction byAdam s et al. (1992). In such a m odel, the dem and for a product (e.g., lum b er) is a function of the “pri ce” of the com posite input that includes the product and the price of the com posite input that does not in clude the product (but instead includes a substitute). A change in the relative prices of two inputs (e.g., lum b er and a substitute for lum b er, or ply w ood and OSB) which are com ponents of two com posite inputs which m a y be substituted for each other will induce substitution only to the extent that this change induces a change in the relative prices of the two com posite inputs. 37

37 The view of these products as being com ponents of com posite inputs in the construction industry was corroborated in a personal comm unication with Prof. J. Buongi orno, a leading econom ist in the area of forest sector econom ics. Professor Buongiorno noted that it is the cost of the product in place that m a tters in construction — it is not just a m a tter of substituting one m a terial input for anot her, that such substitution requires other substitutions that also have cost im plications. In effect, what is required is a substitution of one com posite input for another. It is therefore the relative “prices” of the com posite inputs that m a tters, not the relative prices of the two m a terial inputs (e.g., plywood and OSB) in these com posite inputs that determ ines the extent of substitution.
B-12Sim ilarly , ply w ood and wood com posite input subs titution in furniture m a nufacturing is likely to be m i nim a l. Structural properties and design characteristics of certain wood products used in m a nufacturing processes are specific to the necessary pr oduct. Furtherm ore, these processes are designed to take advantage of certain w ood products and substitution in the s hort-term would require high capital investm e nts. The Am erican Ply w ood Association’ s (APA) case studies note how changes in the use of wood products in m a nufacturing significantly alters costs. Bassett Furniture states “ply wood provides labor efficiencies because the [m anufacturing] equi pm ent elim inates m a ny m a nual operations” and Rowe furniture claim s “converting to a ply w ood fram e en abled Rowe to stream line the m a nufacturing process” (APA, 1999). This also supports the om ission of substitution effects in this analy s is. Another factor that supports the reasonableness of om itting substitution possibilities from the m odel is the presum p tion that the price changes inducedby the regulation are likely to be sm all. The estim ated annualized costs of the rule, $120 m illion, are sm all relative to the roughly $11 billion value segm e nts from the industries. Given that the price of any product being considered is only a portion of the “price” of the com posite input of which it is a part, the changes in the relative prices of the com posite inputs to the construction industry are likely to be sm all as well.
B.9.3 O wn-Price Demand Elasticities As shown in Exhibit B-1, there are two dom estic dem a nd com ponents for softwood ply w ood and two for other com posite wood products — the cons truction industry and the m a nufacturing industry

. Although own-price elasticities for softwood ply w ood, OSB, and other com posite wood products are not available for these specific dem and com ponents, short-term own-price elasticities of total dem a nd have been estim ated by Buongiorno for ply w ood, particleboard, and fiber board (Buongiorno, 1996). 38 These total dem and elasticities are -0.16, -0.27, and -0.10, respectively Exhibit B-4). Spelter estim ated short-term (one y ear) elasticities of dem a nd for softwood ply w ood and structural particleboard over several-y ear tim e spans (1970-1981 for softwood ply w ood and 1977-1981 for structural particleboard), showing a general downward trend over tim e, reflecting the effect of m a turing m a rkets (Spelter, 1984). The m o st recent y ear for which short-term elasticities of dem a nd are available from Spelter is 1981. Spelter estim ated the price elasticities of dem a nd for softwood ply w ood and structural particleboard in 1981 to be -0.10 and -0.56, respectively

. These estim ated elasticities of dem a nd from Spelter are supportive of those in Buongiorno. The estim ated dem a nd elasticities for ply w ood in the two papers are quite sim ilar (-0. 16 in Buongiorno, versus -0.10 in Spelter). Although Spelter’s estim ated dem a nd elasticity for structural particleboard is som e what higher than Buongiorno’s estim ated dem and elasticity for partic leboard (-0.56 versus -0.27), the Spelter estim ate corresponds to 1981 whereas the Buongiorno estim ate is m o re recent. If the general downward trend in short-term price elasticities of dem and observed by Spelter continued from 1981 onward, then the m o re recent Buongiorno estim ate of -0.27 would be consiste nt with the earlier Spelter estim ate of -0.56. Because the Buongiorno estim ates are m o re recent, and because they are supported by the estim ates from Spelter (1984), this analy s is uses the estim ates from Buongiorno (1996), given in Exhibit B-4. In the absence of an estim ated elasticity of dem a nd specificallyfor OSB, the analy s is assum es that it is the sam e

38 Fiberboard, a type of reconstituted wood product, is not im pacted by the proposed rule.
B-13as for softwood ply w ood used in construction. 39 This assum p tion is reasonable considering the following characteristics.

• S oftwood ply w ood and OSB have approxim a tely e qual shares of the structural panel m a rket. • F actors of dem and for both products are sim ilar. • B oth products have reached sim ilar levels of life-cy cle m a turity

.

Exhibit B-4. of (Total) Demand Used in Analysis Own-Price Elasticities Product O wn-Price Elasticity of (Total) Demand Softwood Plywood* -0.16 Oriented Strandboard** -0.1034 Other Com posite W ood Products*

- 0.27 *Based on elasticities of dem a nd estim ated in Buongiorno (1996) for plywood (-0.16) and particleboard (-0.27). **Assum e d to be the sam e elasticity of dem a nd as for softwood plywood used in construction, see Exhibit B-5. For the purposes of this analy s is, EPA applied the es tim ated elasticity of particleboard to the three products in the other com posite wood pr oducts category for the following reasons.

• R esearch did not produce estim ates of dem a nd elasticities for m e dium density fiberboard or for hardboard. • P articleboard constitutes the largest share of production of the other wood com posites category

.
• T here are roughly twice the num ber particleboardplants as m e dium density fiberboard and hardboard plants com b ined.
The elasticities of dem a nd given in Exhibit B-4 re fer to total dem a nd. Estim ating the elasticities of dem a nd specific to the construction industry a nd the m a nufacturing industry requires either (1) assum i ng that they are both equal to the elasticity of total dem a nd or (2) deriving elasticities of dem and for each of these dom estic dem and com ponents in su ch a way that the weighted average of these elasticities (weighted by the dem and shares in the m arket) equals the elasticity of total dem a nd. As explained below, EPA selected the second approach.
The estim ated elasticities of dem a nd for the e nd products, the production of which requires these products as inputs, differ substantially

. The de m a nd for durable m a nufactured goods and for wood furniture have been shown to be s ubstantially m o re elastic than the dem a nd for residential construction. The own-price elasticities of dem and for durable m a nuf actured goods was estim ated to be about -1.4 and wood furniture was estim ated to be about -3.4, whereas the (short-term ) elasticity of dem a nd for

39 It should be noted that there is undoubtedly substa ntial statistical uncertainty surrounding all of the published elasticity of dem a nd estim ates. Although specific point estim ates are necessary for the analysis, the dem a nd elasticities should not be taken to be m o re precise than they actually are. W h ile the Buongiorno estim ate for plywood (-0.16) was statistically significant, the estim ate for particleboard (-0.27) was not. Particularly for OSB and other wood com posites, only a m o re m odest statem ent (e .g., that these dem a nd elasticities are relatively sm all, probably som e where in the range of 0 to -0.4) is truly supported by the literature. However, given that an actual point estim ate is necessary for the analysis, the point estim ate in Buongiorno (1996) is a reasonable estim ate.
B-14residential building construction is estim ated to be about -0.58 (U.S. EPA, 1995). The dem and for these products for use in the construction industry is theref ore likely to be substantially less elastic than the dem a nd for use in m anufacturing (e.g., of furniture). Therefore, EPA used the second approach — that is, deriving elasticities of dem and for each of these dom estic dem a nd com ponents in such a way that the weighted average of these elasticities (weighted by th e dem a nd shares in the m a rket) equals the elasticity of total dem and. To do this, EPA assum e d a ratio (based on reasonable judgm ent) between the elasticity of dem a nd for a given product for use in construction vers us for use in m a nufacture, and to calculate the dem and-com ponent-specific elasticities, given that ratio, that are consistent with the dom estic dem and com ponent proportions in Exhibit B-1 and the elasticity of total dem a nd in Exhibit B-4. For exam ple, suppose the dom estic dem a nd for softwood ply w ood to be used in m a nufacturing is twice as elastic as the dom estic dem a nd for softwood ply w ood to be used inconstruction. Given the proportions of dom estic dem and for softwood ply w ood by each industry (64% inconstruction versus 36% in m a nufacturing) and the elasticity of total dem and (-0.16), the elastic ity of dem a nd for softwood ply w ood to be used in construction would be calculated as



### − 01 6

.

. ε

c o n s truc tion 

### = (.

. = − 01 1 8

. ( 17) 

### 0 3 6 * 2 + 0 6 4 )
The elasticity of dem a nd for softwood ply w ood to be used in m anufacturing would be twice that, or -0.235. For this purpose of this analy s is, EPA assum e d that the ratio of the elasticity of dem and for wood products for m a nufacturing to the elasticity of dem and for construction is 2.5. EPA arrived at this assum p tion by exam ining the ratio of elasticities of the finished products for which these goods are inputs: residential construction (-0.58) and durable m a nufacturing (-1.40), which is roughly 2.5 (EPA, 1995). Exhibit B-5 presents the base case dem a nd-com ponent-specific elasticities of dem and.

Exhibit B-5. Elasticities of Demand for Specific Demand Components

Product Elasticity of Total De mand Assumed Ratio of Elasticities of Demand: M a nufac tur i ng to

Constr uc tion Implied Elasticities of Demand

Constr uc tion M a nufac tur i ng Softwood Plywood 2.5 -0.16 - 0.1034 -0.260
OSB

- 0.1034 n/a

- 0.1034 n/a Other W ood Com posites -0.27 2 .5 -0.115 -0.287 (PB/MDF & HB) Source: Exhibit B-4, Equation 17, Abt Associates Inc. assum p tions.
The rem a ining param e ters in the dem a nd-com ponent-specific dom estic dem a nd functions (the ( k ’ s from equation (16)) were calibrated to the baselin e prices and quantities, given in Exhibit B-6. To calibrate ( k to the baseline price and quantity , the analy tical m odel solved equation (16) for ( k and calculated the value of ( k that results if the price is the baseline price and the quantity dem a nded is the quantity dem a nded in the baseline, given a value for the elasticity

. Solving equation (16) for ( k yi e l d s :

B-15DD 

### γ k 

### = Q k

. 

### P ε k Using the 1997 baseline price and quantity of softwood ply w ood (SWPW) dem anded for construction (k=1) shown in Exhibit B-6, for exam ple, and the price elasticity of dem a nd for SWPW to be used in construction (shown in Exhib it B-5), the value of γ 1, S W P W is calculated as

DD 11 , 49 8 Q 10 γ 1 , SWPW = P 0 ε 1 = 235 − 0

. 115 = 21 , 542

. 45 1

. With this value of 

### γ 1, S W P W in equation (16), and given the elasticity of dem a nd for SWPW for construction and the baseline price of SWPW, equati on (16) predicts the observed baseline quantity of SWPW.
Under som e circum stances, a reasonable alternative to calibrating ( k to the baseline price and quantity m i ght be to estim ate ( k based on several y ears’ worth of price/quantity data — that is, to find the value of ( k that results in the best fit of the dem a nd function to the price/quantity data over several y ears, given the elasticity of dem and. In this approach, it would be preferable to find the best fit value of " k in equation (15), which is the linear form of equation (16), using linear regression, and then to calculate 

### γ k 

### = e α k

. The regression approach has the advantage that it is based on m o re than a single y ear and is therefore likely to be m o re robust. However, it will produce a dem a nd curve that will not go through the baseline equilibrium price/quantity because it will not fit any particular y ear exactly

. Because the changes in equilibrium prices and quantities in these m arkets is likely to be sm all, reasonable estim ation of the new m arket equilibrium requires that the baselin e m a rket equilibrium that we observe is reflected in the analy s is — that is, that the baseline supply a nd dem a nd curves intersect at the em pirical baseline price/quantity point (i.e., that both curves go through the em pirical baseline price/quantity ). We will therefore use the calibration approach.

B-16Exhibit B-6. 1997 Baseline Prices and Quantities

Product Bas e lin e Price ($ p er cu b i c meter) Base line Quantity Supplie d to: Constr uc tion Industr y (M ft 3 ) M a nufac tur i ng Industr y (M ft 3 ) Softwood Plywood (3/8 in basis) 235 11,244 6,324
OSB (3/8 in basis) 185 9,595 0 Other W ood Com posites Particleboard/MDF (3/4 in basis) 169 1,164 10,481
Hardboard (1/8 in basis) 1,322 177 1,592 Source: Abt Associates, 1999. Exhibit B-3. Quantities split using data from Exhibit B-1.
The total dom estic dem and for a product (e.g., softw ood ply w ood) at a given price is the sum of the
DD

. In the case of softwood ply w ood and other wood com posites, dom estic dem a nd com ponents — 

# ∑ Q k k there are two dom estic dem and com ponents — i.e., k=1, 2: 

### Q DD 

### = Q 1 D

D 

### + Q 2 DD 

### = γ 1 DD 

### P ε1 

### + γ 2 DD 

### P ε 2 

### , (18)
where 

### Q 1

DD = dom estic dem a nd for the product to be used in construction (k=1); 

### Q

2 DD = dom estic dem and for the product to be used in m a nufacturing (k=2); P = the price of the product;
ε

1 = the own-price elasticity of dem a nd fo r the product for use in construction; 

## ε

2 = the own-price elasticity of dem a nd for the product for use in m a nufacturing; and


### γ 1

DD and γ 2 DD = m ultiplicative constants specific to the dom estic dem a nds for the product from construction and m a nufacturing, respectively

. In the case of OSB, there is only one dom estic dem and com ponent — the construction industry

. The

DD DD DD ε OSB , 1 dom estic dem a nd equation for OSB would be 

### Q OS B 

### = Q OS B , 1 

### = γ OS B , 1 

### P OSB
. This is just a special

DD case, however, of equation (18) above in which 

### γ OS B ,2 is zero.

B-17B.9.4 F oreign Demand Foreign dem and for (exports of) each of these products is sm all relative to dom estic dem a nd. For exam ple, on a value basis, only 6 percent of softwood ply w ood and recons tituted wood products are exported. Moreover, inform ation that would allow an y distinction to be m a de between the elasticities of dem a nd for these products in foreign m arkets as opposed to dom estic m a rkets is not available. Therefore, although a foreign dem and (export) com ponent was include d in the dem a nd side of each m a rket m odel, it was necessary to assum e that the elasticities of dem and are the sam e in the foreign m a rket as in the dom estic m a rket. In particular, the foreign dem a nd analy s is was based on the following assum p tions.

• T he price of a product is the sam e in foreign m a rkets for the product as it is in the dom estic m a rket for the product.

• T he price elasticity of foreign dem a nd for the pr oduct to be used in a given industry (construction or m a nufacturing) is the sam e as the price elasticity of dom estic dem a nd for the product to be used in that industry

.
• T he proportions of the product in foreign m a rkets that go to the construction versus m a nufacturing industries are the sam e as in the United States.
Given these assum p tions, the distinction between dom es tic and foreign dem a nd is a form ality

. If the dom estic dem and for the product for use by the kth industry (k=1, 2) is given by 

### Q

k DD 

### = γ k DD 

### P ε k (19)
and the foreign dem and for the product for use by the sam e industry is given by 

### Qk

FD 

### = γ k FD 

### P ε k , ( 20)

then the total dem and for the product for use in th e kth industry (both dom estically and in foreign countries) is 

### Qk TD 

### = γ k DD 

### P ε k 

### + γ k FD 

### P ε k 

### = γ k D 

### P ε k , ( 21)
where 

### γ k D 

### = γ k DD 

### + γ k FD

. As with the supply param e ters, ( k , the dem a nd param e ters are calibrated to the baseline quantity dem anded and the baseline price.
The total dem a nd for the product (for all uses) in the post-regulation scenario , then, is

TD 

### Q 1 TD 

### = 

# ∑ Qk 1 . ( 22) k
B.10 Market Equilibrium In equilibrium , the total quantity supplied equals the total quantity dem a nded. To solve for the new m a rket equilibrium price of the product (e.g., softwood ply w ood), then, the analy s is set the total

B-18quantity of the product supplied at the new m a rket e quilibrium price equal to the total quantity dem anded by all dem and com ponents: Q 1 TS = Q 1 T D , (23)
or, substituting in from e quations (13) and (22),

TD DS + Q 1 FS = 

## ∑ Q k 1 . 

## ∑ Q j 1 j k Substituting in from equations (14) and (21), this can be written:

DS 

### + γ FS 

### +    2   * P 1 − 12 

### = 

# ∑ γ k D 

### P 1 ε k (24) 

# ∑ Q j 1 

### β  / j k

DS where the jth dom estic facility ’s quantity supplie d post-regulation, 

### Q j 1 , depends on whether the new

m a rket equilibrium price, P 1 , is greater than or less than the facility ’ s new shutdown price, as shown above in equation (9):

shutdow n DS 

###    γ j 

### +  β  *( P c j 

### ) − 12 

### i f P 1 

### > P j 1 

### Q

j 1 

### =   2   1 

### − /

shutdown 

###   0 if P 1 

### ≤ P j 1 This is an equation in one unknown — P 1 , the new m arket equilibrium price. The value of P 1 that satisfies the new m a rket equilibrium (e quation (24)) was solved for iteratively

. B.11 FacilityClosures In the short run, a facility will close if its averag e variable cost exceeds th e m arket price. Because facility -specific inform ation on average variable costs in the baseline is not available, however, it is not possible to base facility closure predictions on em piri cal data and estim ated com p liance costs. To the extent that the assum e d facility -specific supply functi ons are reasonable depictions, however, they can be used to allow predictions of facility closures in th e post-regulation scenario. The facility supply function shows the quantity that the facility will supply at any given price. The point at which the supply function intersects the price axis (the y

- axis) is therefore the price at which the facility will supply zero. In a shortrun analy s is, the price at which the facility will clo se is called the shutdown price. For those facilities with positive com p liance costs, the shutdown price in the post-regulation scenario is higher than it was in the baseline, as shown in equation (8), reproduced below: 

### β

2 shutd o wn 

### = 4 γ 2

j 

### + c j . 

### P

j 1

B-19The facility ’s closure decision, originally given in equation (9), is reproduced above as part of equation (24). Com putationally , for any value of P 1 , the jth facility ’s quantity produced can be calculated using equation (7) above:

/ DS 

## = γ j 

## +  β  *( P 1 

## − c j 

## ) − 1 2 

## Q

j 1 

##   2 

##  

DS DS with the added constraint that if the predicte d 

### Q j 1 

### < 0 then set 

### Q j 1 

### = 0

. Calculation of facility closures is thus part of the iterative process of calculati ng the post-regulation m a rket equilibrium price and quantity

. The num ber of facility closures is sim p ly the number of facilities that produce zero in the postregulation scenario.
B.12 Social Cost of the Regulation Social costs vary based on the characteristics of th e m a rkets in which facilities participate. In a perfectly com p etitive m arket, an individual facility ’ s supply curve m easures the m a rginal cost of production at different quantities of production. Because m a rginal costs will increase with the im position of com p liance costs, the supply curves for those fac ilities with com p liance costs will shift up as a result of the regulation. Because the m arket level supply curv e is just the horizontal sum of individual facility supply curves, the m arket supply curve will shift up as well. The (derived) dem a nd for any of these products m easures the total quantity of the product dem a nded (summ e d over all dem a nd com ponents) at a given price, assum i ng all else (e.g., technology and output of products going to final dem a nd) held constant. The dem a nds are unchanged by the regula tion. Figure 2 below graphically represents the im pact of the regulation on the m arket for a particular product, which, for the purpose of illustration, can be softwood ply w ood. Figure B-2: Im pact of Regulation on Social Welfare



### i

P 1 

### a 

### P 0 

### h
g f


### Q P

D S b a s e lin e 

### S post

co mp liance



### b c

d e



### Q 1 

### Q 0

B-20The im position of com p liance costs on softwood ply w ood producers results in changes in both consum er and producer surplus in the softwood ply w ood m a rket: 

###  ̃ Change in Consumer Surplus : Consum er surplus m easures the difference between what consum ers are willing to pay and what they actually pay for a product. Graphically , this is the area under the m a rket dem and curve and above the m a rket price line. In the baseline (before im position of the regulation), this is area hci in Figure 2. When the supply curve shifts up and the price of softwood ply w ood increases, consum ers lose som e surplus. After the im position of the regulation, consum er surplus is reduced to area abi

. The change in consum er surplus is therefore area abi - area hci , or a loss of area abch in Figure 2. Note that because softwood ply w ood does not go to final dem a nd (i.e., it is used to produce other products that are then purchased by consum ers), the “consum ers” of softwood ply w ood are the producers of the final goods. The concept of consum er surplus, howev er, is the sam e, whether the dem a nd is final dem a nd or derived dem and. 

###  ̃ Change in Producer Surplus : Producer surplus m easures the difference between what it costs suppliers to produce Q units of softwood ply w ood and the price they receive for those Q units — their econom ic profit. Graphically , this is the area above the m a rket supply curve and below the m a rket price line. In the baseline, before th e im position of the regulation, producer surplus is represented by the area hcf

. When com p liance costs are im posed, som e producer surplus is gained if the price received increases, and som e producer surplus is lost because the cost of producing softwood ply w ood also increases. After the im position of the regulation producer surplus is represented by area abg

. The change in producer surplus is a m i xture of a loss (area gecf and a gain (area abeh ) to producers. Note that area abeh is actually a transfer from consum ers of softwood ply w ood to producers of softwood ply w ood — that is, area abeh is a loss to consum ers of softwood ply w ood but a gain to producers. The change in social welfare connected with the ith m a rket (e.g., the m a rket for softwood ply w ood) is the sum of the changes in consum er surplus in the ith m a rket ( ) CS i ) and producer surplus in the ith m arket ( ) PS i ). Using the graphic areas in Figure 2, th e total change in social welfare connected with the ith m a rket resulting from the regulation would be:
) CS i + ) PS i = ( abi - hci) + ( abeh - gecf )

= - abch + ( abeh - gecf ).
Decom posing area abch into its two com ponent parts — abeh and bec , ) CS i + ) PS i = - ( abeh + bec ) + ( abeh - gecf )

= - bec - gecf = - gbcf

. The net im pact in each m arket is a social cost — that is, the change in social welfare (producer plus consum er surplus) is negative. The social co st associated with the changes in the softwood ply w ood m a rket can be calculated by calculating area gbcf for that m a rket — that is, given the specific m a rket supply and dem a nd curves. The total social cost of th e regulation is the sum of the social costs associated with each of the affected m arkets — for softwood ply w ood, OSB, and other wood com posites.

B-21B.12.1 C alculation of Change in Social Welfare The change in social welfare is the sum of th e change in producer surplus and the change in consum er surplus. The derivation of the changes in producer and consum er surplus are presented below.
B.12.1.1 Change in Producer Surplus Figure B-3: Facility-Specific Supply Curve



## Inver s e Supply Function Supply Functi on



# A 0 

## j Q 0 

## (P ) = G Q j0 

## (P)

P 0

S 

# A 0 

## Q 0 

## *

P 0 

## Q 0 

## * P 0 S 

## P 0 

## Quanti ty Pri c e

Producer surplus in the baseline
Let A 0 = producer surplus in the baseline. The jth facility ’ s supply curve in the baseline is given by :

/ 

### Q

j 0 

### = ma x { 0 , γ j 

### + ( β / 2 ) P − 1 2 

### }

.
The m a rket supply curve is the sum of the facility -specific supply curves 40 :

/ 

### Q

0 

### = 

# ∑ Q j 0 

### = 

# ∑ max{ 0 , γ j 

### + ( β / 2 ) P − 1 2 

### }

. j j

40 The foreign sector is treated as a “foreign facility”.
B-22PriceQuantity

### β Producer surplus in the baseline = area A 0 =

P 0 P 0 0 

### () / 

# ∫ Q P d P = 

# ∫ ∑ m a x { 0 , γ j 

### + ( β / 2 ) P − 1 2 

### } d P

s P 0 P 0 s j

P 0 / 

### = 

# ∑ ∫ [ γ j 

### + ( β / 2 ) P − 1 2 

### ] d

P

s j P j 0 where 

### P 0 s is the price at which zero is supplied to the m a rket in the baseline (the “m arket shutdown

s price”), and P j 0 is the jth facility ’ s shutdown price in the baseline. Note that the jth facility ’ s supply

s curve is flat (i.e., Q j = 0) up to 

### P j 0 and then Q j > 0: Figure B-4: Constrained Supply Curve



### $ p ! 1/ 2 

# }

S S 

### Q J0 

### = M a x 

# { 0, ( j 

### + (Q J0 

### is f l atup to P J0 S 

### ) 

### 2

P 0 

### P J0 

### P 0 

### Pric e

So
P 0 / 

### A 0 

### = 

# ∑ ∫ [ γ j 

### + ( β / 2 ) P − 1 2 

### ] d

P

s j P j 0

P 0 P 0 / 

### = 

# ∑ γ j 

# ∫ dP + ( / 2 ) 

# ∑ ∫ P − 12 

### d

P

s s j P j 0 j P j 0

/ / 

### A 0 

### = 

# ∑ γ j 

### [ P 0 

### − P j s 0 

### ] + β 

# ∑ [ P 0 12



### − P j s 0 1 2 

### ]

. j j
B-23Quantity

### β Producer surplus in the post-regulation scenario
Let A 1 = producer surplus in the post regulation scenario. The jth facility ’ s supply curve in the post-regulation scenario is given by : / 

### Q

j 1 

### = max{ 0 , γ j 

### + ( β / 2 ) ( P

− c j 

### ) − 1 2 

### }

.
Where c j is the jth facility ’s per unit output com p liance cost. The m a rket supply curve is: / 

### Q 1 

### = 

# ∑ Q j 1 

### = 

# ∑ ma x { 0 , γ j 

### + ( β / 2 ) ( P

− c j 

### ) − 1 2 

### }

. j j Producer surplus in the post-regulation scenario = area A 1 (analogous to A 0 in the baseline):

P 1 P 1 

### A 1 

### = 

# ∫ Q 1 

### () / 

### P d P = 

# ∫ ∑ m a x { 0 , γ j 

### + ( β / 2 ) ( P

− c j 

### ) − 1 2 

### } d P
P 1 s P 1 j

P 1



### − / 

### = 

# ∑ ∫ [ γ j 

### + ( β / 2 ) ( P c j 

### ) − 1 2 

### ] d

P

s j P j 1
where 

### P 1 s is the price at which zero is supplied to the m arket in the post-regulation scenario (the “m arket

s shutdown price”), and 

### P j 1 is the jth facility ’ s s hutdown price in the post-regulation scenario. Now doing a change of variable, let x = P - c j Y P = x + c j and dP = dx. Then

P c j 1 − / 

### A 1 

### = 

# ∑ ∫ [ γ j 

### + ( β / 2 ) x − 1 2 

### ] d

x j P j s 1 − c j

1 − 1 − P c j P c j / 

### = 

# ∑ γ j 

# ∫ dx + ( / 2 ) 

# ∑ ∫ x − 12 

### d

x

s j P j s 1 − c j j P j 1 − c j

P cj

1 − / 

### A 1 

### = 

# ∑ γ j 

### [ P 1 

### − P j s 1 

### ] + ( β / 2 ) 

# ∑ ∫ x − 12 

### d

x

. j j P j s 1 − c j

/ / 

### A 1 

### = 

# ∑ γ j 

### [ P 1 

### − P j s 1 

### ] + β 

# ∑ [ ( P 1 

### − c j 

### ) 12



### − ( P j s 1 

### − c j 

### ) 1 2 

### ] j j

B-24The change in producer surplus, ) PS = A 1 - A 0 . B.12.1.2 Change in Consumer Surplus Figure B-5: Market Level Demand Curve



## Inverse Demand Func ti on Demand Function

P 1 

## Q 0 

## P 0 

## Q 1 

## * * Q TD 

## (P)

Q 1 

## * Q 0 

## * P 0 

## P 1 

## Quantity Price

Dem a nd by the kth dem and com ponent: 

### Q k 

### = γ k 

### P ε k

. The total dem and at price P is 

### Q TD 

### = 

# ∑ γ k 

### P ε k 

### = γ 1 

### P ε 1 

### + γ 2 

### P ε 2

. k Note: Foreign and dom estic dem and com ponents are com b ined in this analy s is, as explained in “Econom ic Analy s is Methodology for the Ply w ood and Wood Com posites Industries.” There are therefore two dem a nd com ponents : construction and m a nufacturing. The change in consum er surplus is ju st the area under the dem a nd curve from P 1 to P 0 :

P 0 

### ∆ CS = 

# ∫ [ γ 1 

### P ε 1 

### + γ 2 

### P ε 2 

### ] d P P 1PriceQuantity

B-25P 0 P 0 ε 1 

### = γ 1 

# ∫ P d P + γ 2 

# ∫ P ε 2 

### d P P 1 P 1


### ( ε 1 

### + 1 ) 

### [ P 0 ε 1 + 1



### − P 1 ε 1 + 1 

### ] + ( ε 2 

### + 1 ) 

### [ P 0 ε 2 + 1



### − P 1 ε 2 + 1 

### ] ∆ CS = γ 1 

### γ 2

B.13 Computational Tools The analy s is calculated the post-regulation equilib ria for the four separate m arket sectors using an Excel spreadsheet for each. Given param e ter values for the relevant supply a nd dem and equations in a given m a rket, and facility -specific per unit com p liance costs, EPA programm e d the following.

• T he relevant m a rket segm e nt dem a nd equati ons (incorporating both dom estic and foreign dem a nd, as discussed above), • T he foreign supply equation, and • F acility -specific dom estic supply equations. EPA used an iterative procedure in which, on eachiteration, a new equilibrium m a rket price (P 1 ) is input to the equations, and the resulting de m a nd and supply are com p ared. The value of P 1 on the subsequent iteration will be adjusted according to whether m arket dem and exceeds m arket supply (in which case, P 1 would be increased) or m a rket supply exceeds m a rket dem a nd (in which case, P 1 would be decreased) until m a rket supply equals m a rket dem a nd — i.e., equilibrium is achieved.
B.14 SensitivityAnaly ses All aspects of the econom ic analy s is depend on the assum p tions m a de about the supply and dem and functions. The closure analy s is and the estim a tion of social cost m a y be particularly sensitive to the values of the param e ters chosen for the analy s is. Because of this, EPA m a y choose to perform a sensitivity analy s is to show how the analy s is outcom es — equilibrium price and quantity , num ber of closures, and social cost of the regulation — va ry as the input param e ter values vary

. This is straightforward to carry out in a spreadsheet analy s is in which param e ter values in designated cells can be easily changed and the com putations rerun.
B.15 EIA Results As described throughout this appendix, the ec onom ic analy s is produced estim ates of how the im position of com p liance costs associated with the regulatory proposal will change the m arket equilibrium price and quantity

. The m e thodology d escribed here provides estim ates of how production will shift across im pacted producers, non-im pacted produ cers, and foreign suppliers. This approach also provides estim ates of net social cost s associated with the proposed rule.
There are som e additional insights into the rule’ s im pacts that can be gained from exam ination of the EIA’s results. EPA exam ined the overall EIA resu lt of the change in m a rket quantity as an indicator of how m u ch less production capacity will be required to m eet overall dem and. Initially , it is of interest,

B-26to the extent possible, to exam ine the facility -level im pacts of the ru le associated with this decline in dem a nd.
EPA assum e d that the facilities with the highest baseline production costs will experience the greatest im pacts associated with the rule. The im pacts will depend on the facility ’ s response to increased costs, and whether the increase in costs places the facility ’ s overall production costs above m a rket prices. Responses will vary widely from facility to facility : they could close, reduce production by closing a process line, or cut costs elsewhere, am ong others. The analy tical approach described in the earlier section on dom estic supply allows EPA to estim ate fac ility closures in the post-regulation scenario in the absence of actual facility -specific inform a tion on average variable production costs. EPA iteratively calculated the post-regulation equilibri um m a rket price. As part of the iterative procedure EPA determ ined, for each facility , it’ s new shutdown price in the post-regulation scenario and therefore whether or not it closes. If the quantity it would supply at the post-regulation m a rket price is # 0, then the facility will close. In other words, the facility will close if the post-regulation m a rket equilibrium price is less than or equal to the facility ’ s post-regulation shutdown price.
B.16 References
Abt Associates Inc. 1999. Profile of the Plywood and Wood Composite Industries. Prepared for Larry Sorrels, Innovative Strategies and Econom ic Gr oup, Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
Adam s, Darius M., R. Boy d , and J Angle. 1992. “Evaluating the Stability of Softwood Lum b er Dem and by End-Use Sector: A Stochastic Param e ter Approach.” Forest Science , Vol. 38, No. 4, pp 825- 841.
Am erican Ply w ood Association. 1999. Upholstered Furniture Case Studies . http://www.apawood.org. Buongiorno, Joseph. 1996. “Forest Sector Modeling: A Sy nthesis of Econom etrics, Mathem atical Programm i ng, and Sy stem Dy nam i cs Methods.” International Journal of Forestry , 12, pp. 329- 343. Buongiorno, Joseph. 1999. Personal comm unication withEllen Post, Abt Associates Inc. Novem b er 23, 1999.
Cham bers, Robert G. 1988. “Applied Pr oduction Analy s is: A dual approach.” Cambridge University

Press

. Get-a-Quote.net. 2000 National Constructi on Estim ator, Panelized Wood Wall Panels. http://www.get-a-quote.net, page 395. Lewandrowski, Jan K., M. K. Wohlgenant, T. J. Gr ennes. 1994. “Finished Product Inventories and Prices Expectations in the Softwood Lum b er Industry

. ” American Journal of Agricultural Economics , 76, pp. 83-93.

B-27Spelter, Henry

. 1984. Price Elasticities for Softwood Plywood and Structural Particleboard in the United States

. Forest Products Laboratory , U.S. Departm e nt of Agriculture Forest Service, Madison, WI.
U.S. Environm ental Protection Agency

. 1995. Appendix B: Complete List of Own-price Demand and Supply Elasticities

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
U.S. Environm ental Protection Agency . 1998. Industry Specific Information Collection Request (ICR) for the Development of Plywood and Particleboar d Maximum Achievable Control Technology (M ACT) Standards

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
U.S. Environm ental Protection Agency

. 1999a. OAQPS Economic Analysis Resource Document

. Air Quality Strategies and Standards Division, Offi ce of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
U.S. Environm ental Protection Agency

. 1999b. Economic Impact Analysis for the Polymers & Resins III NESHAP

. Air Quality Strategies and Standards Division, Office of Air Quality Planning and Standards, U.S. Environm ental Protection Agency , Research Triangle Park, NC.
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. 1999c. 1999 Revised RFA/SBREFA Guidance for EPA Rulemakers

.

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