MEMORANDUM 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

Office of Air Quality Planning and Standards 

Research Triangle Park, North Carolina 2771 1 

June 19, 1985 

SUBJECT: Criteria· for Determining RACT in Region IV 

FROM: j'~hn- C a·l d~-~;;-(R; ef , / Economic A.na1ys; s Branch, SASD (MD-12) 

TO: G. T. Helms, Jr., Chief 

Control Programs Operations Branch (MD-15) 

As you requested we have reviewed the document from EPA Region IV presenting a methodology for judging the technological and economic feasibility of emission controls to be designated as RACT for a particular industrial installation. 

My concerns are: 1) the document establishes decision rules for RACT, 2) t he economi c feasibility test combines affordability with cost effectiveness and, 3) the economic feasib.ility tests are not very robust. 

Establishing Decision Rules 

The Agency grappled with decision rules in 1977 in its attempt to ~staJlish criteria for RACT. It decided at that time that there were too many· confounding factors to establish firm decision rules for tech- nological or. economic feasibility which would apply in every case. (nstead, EPA concluded that RACT has to be a case by case determination. This policy is clearly arti culated in the supplement to the general preamble on RACT (44FR 53761, 9/17/79) . We cannot find any basis to SJ~po rt t he dec ision ru les established by the text of the Region IV document. Rather RACT must be a case by case determination which should 

re iy on tne entire recora as discussed in the general preamble cited above. 

Intermingling of Cost Effectiveness and Affordability 

The two criteria of cost effectiveness and affordability are dif- ferent and should be presented separately. 

Cost Effectiveness 

In evalu at1ng economic feasibility for RACT , the agency gives significant weight to economic efficiency and the "fairness test'' of cost-effectiveness. The reason for this is that Agency policy historically has been to seek attainment through the most cost-effective mix of strategies avai lable. The CTG's, although primarily technology based, are applied to ozone SIP 's in a manner to provide a rough first order approximation 
2 

of the most economically efficient plan. To maintain consistency, evaluation 

of the economic feasibiliy of a source's control requirements should be in the context of the CTG requirements rather than an absolute cost-effect- iveness criteria. 

We wou ld envision a source presenting the uniqueness of its operations compared to other sources addressed by the CTG. The demonstration would 

then show that these unique attributes result in the recommended level of 

cont rol being significantly less cost-effective for this source than for other sources in this category . The use of $2 ,000 per ton as a hurdle 

which triggers a decision cannot be supported . Rather, it is more appro- p~iate as a ''rule of thumb" based on empirical evidence of what past ex pe ~ience has indicateo that the higher end of RACT costs has been for typical sources. There are sources and source categories for which costs in excess of $2,000/ton have been determinea to be reasonable. 

Affordability 

We wou ld advise avoiding any decision criteria or tests for "afforda- bi 1 ity". There is no basis in economi c theory to support !"ewardi ng an ineffici ent fi rm to t he detriment of the efficient solely because the inefficient firm cannot "afford" its fair degree of control which is belng implemented by other companies. -However, we recognize that due to 

t he aisrupt ion and dislocatlon a closure may cause a community, the Agency is occasiona lly placed in a position of negotiating a suitable alternati ve 

t c closu re . In lieu of an exemption, the alternat ive which we would recommend is extend ing the compliance schedule to allow the company to 

pl ace itself into a posit i on to either afford the controls or to develop d implement more aff ordable alternatives. However, a company which s~ates that it must close the plant if it is required to comply with the ?.~CT ~e qui ents must su pport the allegation if the Agency is to provide 

re lief to mitigate the potential adverse impacts of plant closure. 

Tnere are certain analyses t hat can be performed to eval uate the 

Company's contention that closure woul d result from compliance. Several xampl ~s are included in the attachment. 

wne re a source cannot demonstrate a problem, the Agency shoula avoid r~~ting any relief basea on affordab ility. Where relief is deemed a~ cpriate , an economica lly feasible alternative will need to be negotiated on a case by case oasis. 

Because of these conce;ns, I recommend you advise Region IV not to p~oceed to distribute the document in its present form. 

Attachment 

cc: A 1 Wehe 

Oi ck Jenkins 
ATTACHMENT 1 

EXAMPLES OF ANALYSES FOR EVALUATING A CONTENTION OF CLOSURE 

Need for Cost Absorption -The company should show with data tne 

extent it expects to be forced to absorb the costs of control. In many 

instances, most of the costs will be passed on in the form of higher ~rices. 

Empirica l data on supply and demand elasticities as well as per unit cost 

impacts, expected costs i ncurred by competitors, and available industry 

p~oduction capacity· need to be presented. , This analysis shows only one 

facet of a problem and must be used with other analy'ses to be meaningful. 

Impact on Closure - In assessing closure of an ongoing operation 

tne company needs to present data regarding its fixed and variable 

costs in producing the product affected. If projected revenues do not 

exceed the sum of expected variable costs and annualized costs of the 

·p:oposed control equipment , then closure could be a consider ation. 

Otherwise. the source is still making a positive contribution to covering 

fix ed charges. Hence, the firm is better off operating with the investment 

in a control device t han not operating at all and closure would not 

norma lly be ind ic ated. 

Capital Formation - A useful indicator of the ability to raise capital 

would be the level of capit al investment necessary for the control equipment 

compared to typical recent historical annual investments made by the 

firm. If the capital investment for the control equipment is lower 

than other recent annual capital investments made by the firm, then an 

argument that "funds are not available" is not credible. Even if the capital 

requirements are large by historic standards this does not necessarily make 

it unreasonable. For instance, funds are sometimes available from industrial 

municipal bond issues floated for the express purpose of providing low 

cost funds for pollution control.