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:



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# 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. Establi shing Decision Rules The Agency grappled w ith decision rules in 1977 in its attempt to

**~staJlish** criteria for RACT. It decided at that time that there were too m any· co nfounding factors to establish firm decision rules for tech- nological or. economic feas i bility 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 prea m

ble on RAC T (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 weigh t 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 approximation2 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 w

hich 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 sourc es. 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 avoi ding 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 h e detriment of the efficient solely because the inefficient firm cannot "afford" its fair degree of control w hich is belng implemented by other companies. -However, we recognize that due to t h e ais rupt ion and dislocatlon a closure may cause a community, the Agency is occ asiona lly placed in a po sit ion of negotiating a suitab le alternat i ve t c closu re . In lieu of an exemption, the altern at ive which w e w ould 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 affordable 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 c lo sure w oul d res ult from compliance. Several

**xampl ~s**  are included in the attachment. w

ne re a source cannot demonstrate a problem, the Agency shoula avoid

**r~~ting** an y relief basea on affordab ili ty. W here relief is deemed

**a~ cpriate** 

**,** an econ omically feasible al ternat ive w ill 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 JenkinsATTACHMENT 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.** Empirical 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: opo sed 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 w

ould 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.