Enhancements planned for the ISIS-cement based on PCA’s review comments

Meeting with the Portland Cement Association (PCA) November 23, 2009

Portland Cement Association and cons tituents joined EPA over the phone Tyrone Wilson
Stuart Sessions Doug Roark
Ed Sullivan
Tian Liu

EPA
Elineth Torres
Ravi Srivastava

Tom Walton Lisa Conner – over the phone
Keith Barnett
Will Yerlverton

Contractors Samudra Vijay- Sam Analytic Solutions LLC Brooks Depro- RTI

Topics for discussion

I. Market Structure 1. EPA explained that in ISIS the new market structure to use the states as “demand

centers”
2. Demand centers within each state w ill be based on metropolitan area(s) 3. Import terminals will be based on USGS custom districts (36) 4. Other cement terminals – per PCA information on other terminals including
distribution terminals is not available and w ill need to be developed. Developing these data will take time, resource commitment, and considerable expense on the part of PCA. PCA indicated it cannot commit to developing th ese data given the time constraint. II. Transportation - Ravi

1. Transportation matrix will be expanded to reflect the impact of terminals and the frequent use of models other than truck. (TRAGIS Model) - distance a. Barge

a. Rail
b. Transportation cost by truck

2. Cost of transporting cement - Ravi proposed to send to PCA a transpor tation matrix (with supply points including plants and import districts and demand cente rs by states) for review and feedback on
whether there are additional data indu stry might be able to contributeStu- said that the matrix concept is reasonable

- plants on rivers and lakes will be serving primarily terminals – then from terminals to consumers the transportati on method is truck or rail (15-20% of plants)

- Transportation from plant to terminal is usually 15% rail, 15% truck, remainder is barge and from the terminal the product is tran sported by truck

III. AVC – Elineth and Brooks

1. EPA is revising the AVC functions to account for SG&A, cost of shipping within a region and to terminals, prope rty taxes and insurance –

Brooks - Overall comments from PCA on AVC are reasonable. Need feedback from PCA on the missing cost elements - SG&A, co st of shipping within a region and to terminals, property taxes and insurance – do th ese costs vary by year, are these costs fix
or variable?

a. PCA will provide EPA with a similar table as the one provided on the NESHAP comments for year 2005- EPA will use the table to incorporate
these elements to AVC for the NESHAP.
b. Also, Ed Sullivan will work with PCA members to get a sign off for providing somewhat aggregated data from the benchmarking survey. This data will likely be more detailed than that in th e table referred to above, and will show some variation across groups of kilns/plan ts rather than only the industry-wide average. PCA’s benchmarking survey re port is produced annually and dates
back to 1996..

2. Repair and maintenance costs- Use a price index more specific to repair/maintenance
than GDP deflator to escalate cost -

3. Labor costs- Work with PCA to update these costs if needed. Draw earning data from
BLS consistent with PCA PCA’s comments: include benefits and reflect appropriate mix of salaried and hourly employees.

4. Fuel cost and availability- coke, an d TDF, natural gas (availability) –

Samudra- Current data on fuels is SEED S data but we need information on cost, availability and emission intensity for the fuels that are not common:Availability of natural gasTdf ? availability and price and emission intensity Mid-kiln firing? availability and price, emission intensity Other fuels ?? (USGS) availabil ity and price, emission intensity

PCA commented that the ISIS Model is unrealistic in simulating the possibility that kilns would change from a primary fuel to 100% al ternate fuel, and instead the following fuel use pattern may be used:TDF and MKF 20% maximum for wet, long dry- 10-12% preheater, and precalciner

Natural gas- 1-2% co-firing

Pet Coke- 20%

Stu- PCA has the labor energy survey- fuel use info, cost. Ed will be providing thru Ty
Wilson the Annual Year Book that cont ains aggregate information on fuels

EPA will send to PCA a matrix with the information on fuels – to get feedback on cost, availability and intensities

5. Updating escalation factors

IV. Demand projections -

1. Updating consumption data based on the latest projections from PCA (summer 2009 Forecast and 2009 Long-term forecast which reflects the deeper and prolonged slump for cement consumption with recession) –

a. Ed Sullivan- PCA will share with EPA their latest long-term forecast on a yearly basis. We will get the forecast by State

2. historical data – yearly data- for calibration
a. Ed Sullivan- PCA will share with EP A historical data – yearly data by State we might also get county level data – county level data are estimates based on population

V. Supply

1. Updating for the cancel or deferral of most of the industry’s previously planned capacity expansion projections over the next few years.

2. Adding new projections beyond 2010 based on PCA Plant Summary Book of 2009

Ed Sullivan- PCA will provide EPA with the latest information on capacity shutdown, expansion and postponements. Data is a snap -shot. Report to be shared with EPA was done on Oct. and won’t reflect any de cisions made after October 2009.

Also the Long-term consumption outlook to be shared by PCA has information on longterm supply. Long-tem supply from PCA accounts for capacity changes and climate change.

VI. Capacity Replacement

1. Updating cost of installing new equipment, substitution of new/expansion/upgrade production capacity for existing capacity based on data provided by PCA2. Abandoning the “conversions” - EPA should abandon the “conversion” concept altogether, and instead assume only expa nsions/replacement and/or Greenfield.

o PCA- commented on capacity c onstraints in the model:

a. If reasonable values are used for: a) th e $/ton for greenfield facilities as well as replacements; and b) rate of return required for investment in new capacity, then ISIS would not need to focus that much on capacity constraints.

o PCA suggested that instead of having a capac ity constraint for greenfield facilities or replacements, ISIS perhaps could have an aggregate constraint on capital availability for the entire industry. EP A will need some guidance from PCA on what is acceptable- annually or in five year blocks. This to be discussed as an agenda item in the call to address th e transportation matrix. PCA concurred.

o PCA mentioned that the 7%- OMB social di scount rate is not reasonable as the minimum rate of return required for new capital investment. Ravi suggested that perhaps a 12-15% discount rate is more appropriate. PCA agreed. We need to agree to a number that is reasonable. This also will be an agenda item for our next call. PCA agreed.

VII. Imports -
1. Modeling to include imports to meet demand, peak demand and competitiveness

-Ravi- EPA is working with Dallas Burt raw and other economist from RFF to develop elasticities that will reflect freight rates, and other variables that can constraint imports in the future. Data being used on the analysis is USGS data – import district data and c.i.f data, etc.

Elineth will share with all the methodology that Dallas Burtraw from Resources for the Future (RFF) developed for the econome tric analysis on cement imports.

VIII. Calibration

1. Will be done using data set that spans fo r many years for calibr ation and validation instead of one year

2. “The calibration constant” will be elimin ated once the AVC function is updated to include the missing elements (SG&A, cost of shipping within a region and to terminals, property taxes, insurance

3. Will perform sensitivity analysis on key years
Stu mentioned that calibrati on should include up to 2008

Other Topics: Ty Wilson asked about how EPA intends to work around the GAMS license issue when the ISIS model is released to the general public and emphasized that the potential cost associated with securing access to the license is a likely concern for probable users. Ravi mentioned there is a license fee for using the GAMS software, that the cost is a one-time fee from the GAMS Corporation, and that EP A will investigate whet her there is some possibility for reducing the license cost for the public to use ISIS.