30%

25%

20%

15%

10%

Share of Firms (%)

5%

0%

<$5 $5-$10 $10-$50 $50-$100 $100-$500 $500-$1,000 >$1,000
Parent Company Revenue Range ($millions)

Figure 2-4. | Equipment Companies Employment Distribution (N = 60)

Sources: Hoover’s Online. <http://www.hoovers.com>.
WD Partners Worldscape through LexisNexis.

Dun & Bradstreet Small Business Solutions <http://smallbusiness.dnb.com/default.asp?bhed2=1 107465546>.
Graham & Whiteside Major Companies Database through LexisNexis.

2-13


compressors. Demand in these areas is influenced by changes in fuel prices and changes in
overall economic activity

In Table 2-7, we use the latest detailed benchmark input-output data report by the Bureau
of Economic Analysis (U.S. BEA, 2002) to identify industries that use pumps and compressor
equipment. Again, these data include all types of pumps and compressor equipment and are not
restricted to equipment affected by the NSPS. Nonagricultural demanders of pumps and pumping
equipment include railway transportation, nonfarm single-family homes, and semiconductor
machinery manufacturing. Major demanders of compressor equipment include construction of

Table 2-7. Pumps and Compressor Equipment Use by Industry: 1997

Direct
Commodity [0-CodeDetail_I-O Industry Use Requirements
Code Description Code 10-CodeDetail_I-O Description Value Coefficients
333911 Pump and pumping 482000 Rail transportation 508.4 1.34%
equipment manufacturing
230110 New residential 1-unit structures, 208.1 0.12%
nonfarm
333295 Semiconductor machinery 173.7 1.64%
manufacturing
230210 Manufacturing and industrial 92.6 0.34%
buildings
213111 Drilling oil and gas wells 717 0.82%
333912  Airand gascompressor 230110 Newresidential 1-unit structures, 211.9 0.12%
manufacturing nonfarm
333912 Air and gas compressor 115.0 2.22%
manufacturing
230130 New residential additions and 56.1 0.10%
alterations, nonfarm
336300 Motor vehicle parts manufacturing 50.0 0.03%
32619A Plastics plumbing fixtures and all 50.0 0.08%

other plastics products

Note: The data include pumps and compressor equipment that is not affected by the proposed NSPS.
“These values show the amount of the commodity required to produce $1.00 of the industry’s output.

Source: U.S. Bureau of Economic Analysis. 2002. 1997 Benchmark Input-Output Accounts: Detailed Make Table,
Use Table and Direct Requirements Table. Tables 4 and 5.

single-family homes and additions and manufacturing of compressor equipment, motor vehicle
parts, and plastic products.

2-7


3.2 Economic Framework

Given data limitations and uncertainties regarding supply and demand equations in
affected markets, EPA used a stylized model to support conclusions regarding the economic
impacts of the proposed program. This model examines changes in long-run equilibrium in
response to increases in per-unit production costs. The market supply function is assumed to be
horizontal in this model because marginal costs are constant as output changes (EPA, 1999)
Market demand is represented by the standard downward-sloping curve. The market is assumed
here to be perfectly competitive; equilibrium is determined by the intersection of the supply and
demand curves

A change in unit-production costs shifts the market supply curve for engines (see Figure
3-1). As shown in the figure, the cost increase causes the market price to increase by the fu//
amount of the per-unit control cost (i-e., from P to P’). This scenario is typically referred to as
“full-cost pass-through” because the costs are passed on to downstream buyers in the form of
higher prices. A rise in the equilibrium market price will also lead to a reduction in consumption.

$id
> c b S,; With Regulation
\ Price { 1 Juni Cost Increase
ncrease > a
o Sg Without Regulation
D
Q, Q% Output

Figure 3-1. Long Run: Full-Cost Pass-Through

3-2


Number

2-1
2-2

2-3

2-4
2-5

2-6

2-8

2-9

LIST OF TABLES

Motor and Generator Manufacturing: 2002 and Earlier Years ($billion)..

Welding and Soldering Equipment Manufacturing: 2002 and Earlier Years
(Sbillion) ... .

Pumps and Pumping Equipment Manufacturin
(Sbillion) ...

Air and Gas Compressor Manufacturing: 2002 and Earlier Years (billion)...
Farm Machinery and Equipment Manufacturing: 2002 and Earlier Years
($billion) . -

Generator Set and Welding Equipment Use by Industry 1997.

Pumps and Compressor Equipment Use by Industry: 1997 ............

Number of On-Farm Pumps of Irrigation Water by Type of Energy: 1998 and

2003..

Distribution of Engine ‘and Equipment Production by ‘Business. Size: 2002 and

Earlier Years .

2-10 Estimated Historical Unit Sales Data by Market 1998 2002.

2-11 Projected Unit Sales Data by Horsepower Range: Selected Years... veceseteestesesesneeneeee

3-1

5-1

Average Total Cost Per Engine: 2015 (2005$)........cccccecccecseessecsesseesesseesstssresaneeseeere

Summary Statistics for SBREFA Screening AnalySis.........0..ccccccccsseseeetetesteteeeeeees

002 and Earlier Years

12-4

2-8

. 2-10
2-14

2-15

3-1

5-3


Table 2-10. Estimated Historical Unit Sales Data by Market: 1998-2002

2002 2001 2000 1999 1998
Stationary Generator Sets and Welders
25-50 1,484 1,909 1,691 1,765 891
50-100 2,575 2,054 2,045 2,365 1,807
100-175 4,252 6,659 4,901 6,510 3,911
175-300 1,908 995 840 983 886
300-600, 1,011 952 963 1,200 1,034
600-750 67 88 83 70 64
>750 1,107 1,043 1,041 976 791
Total 12,404 13,700 11,564 13,868 9,384
Stationary Pumps and Compressors
25-50 32 35 61 74 75
50-100 ISI ISI 126 129 269
100-175 199 223 710 754 773
175-300 92 107 234 306 349
300-600 192 238 375 515 559
600-750 52 60 85 111 106
>750 505 567 844 1,026 1,102
Total 1,222 1,381 2,436 2,915 3,234
Stationary Irrigation Systems
50-100 0 0 72.9 97.8 120.3
100-175 415.2 469.6 360.8 371.2 495.2
175-300 143.65 88.4 0 0 0
Total 559 558 434 469 616

Note: Total PSR population sales were multiplied by the stationary fraction of total engine sales reported by
Parise (2006).

2.5 Projections

Using 10-year growth data for engines (Parise, 2006), the Agency estimated that
stationary SI engine markets will continue to grow at historical rates (see Table 2-11). The total
affected population is estimated to grow from 15,938 to 18,235 engines between 2006 and 2015

2-14


please refer to the economic impact analysis for the proposed rule. This analysis is available in
the public docket.

Therefore, we conclude that the proposed rule when implemented will not have a
significant adverse effect on the supply, distribution, or use of energy


SECTION 3
ECONOMIC IMPACT ANALYSIS

EPA prepares an EIA in order to provide decision makers with a measure of the social
costs of using resources to comply with a proposed program (EPA, 2000). The analysis generally
includes the development of one or more partial equilibrium market models that estimate price
and consumption changes and the associated measures of social costs (as measured by changes in
consumer and producer surplus). However, data quality and uncertainties prevented a full
specification and numerical partial equilibrium model for this analysis. As a result, EPA used a
qualitative approach to assess economic impacts.

3.1 Regulatory Program Cost Estimates

The real-resource costs associated with the proposed NSPS and NESHAP programs
include the cost of installing and maintaining air pollution control equipment; the activities
related to engine certification for manufacturers; and the cost of initial notification, record
keeping, and testing for certain engine owners and operators (see Table 3-1). EPA estimates total
annualized costs of the NSPS will be $17 million for the year 2015. The total annualized costs
associated with the NESHAP for 250 to 500 hp 4SLB SI engines located at major sources will be
$3 million for the year 2015. Both programs represent an annualized cost of approximately $20
million.

Table 3-1. Average Total Cost Per Engine: 2015 (2005S)

Average Total Cost
NSPS Total Annual Costs Number of Affected Engines (S/Engine)
25-50 $1,747,358 3,584 $488
50-100 $2,020,548 2,529 $799
100-175 $4,271,151 4,986 $857
175-300 $2,342,233 2,552 $918
300-600 $2,348,153 1,942 $1,209
600-750 $45,425 15 $3,028
750> $4,508,746 2,627 $1,716
Total $17,283,614 18,235 $948
NESHAP $3,170,231 416 $7,621

Sources: Parise, T., Alpha-Gamma Technologies, Inc. 2006. Memorandum: “Cost Impacts and Emission Reductions
Associated with Proposed NSPS for Stationary SI ICE and NESHAP for Stationary RICE.” Appendix A.

Parise, T., Alpha~Gamma Technologies, Inc. 2006. Memorandum: “Population and Projection of Stationary
Spark Ignition Engines.” Table 3.

3-1


80%

70%

60%
50%
40%
30%
20%
10%

0%

Share of Firms (%)

<100 100-250 250-500 500-750 750-1000 >1000
Parent Company Employment Range

Figure 2-1. Engine Companies Employment Distribution, 2005 (N = 21)

Sources: Hoover’s Online. <http://www.hoovers.com>.
W&D Partners Worldscape through LexisNexis.

Dun & Bradstreet Small Business Solutions <http://smallbusiness.dnb.com/default.asp?bhed2=1 107465546>.
Graham & Whiteside Major Companies Database through LexisNexis.

90%
80%
70%
60%
50%
40%
30%
20%
10%
0% : : :
<$5 $5-$10 $10-$50 $50-$100 $100-$500 $500-$1000 >$1000
Parent Company Revenue Range ($millions)

Share of Firms (%)

Figure 2-2. Engine Companies Sales Distribution (N = 24)
Sources: Hoover’s Online. <http://www.hoovers.com>.
W&D Partners Worldscape through LexisNexis.

Dun & Bradstreet Small Business Solutions <http://smallbusiness.dnb.com/default.asp?bhed2=1 107465546>.
Graham & Whiteside Major Companies Database through LexisNexis.


2.1.1.2 Pumps and Compressors

The U.S. Economic Census classifies pumps and pumping equipment under Pump and
Pumping Equipment Manufacturing (NAICS 333911). This U.S. industry comprises
establishments primarily engaged in manufacturing general purpose pumps and pumping
equipment (except fluid power pumps and motors), such as reciprocating pumps, turbine pumps,

Table 2-2. Welding and Soldering Equipment Manufacturing: 2002 and Earlier Years

(Sbillion)
Cost as a Share Cost as a Share Cost as a Share

Value of Cost of of Product of Product of Product
Year Shipments Materials Value (%) Labor Value (%) Capital Value (%)
2002 $3.8 $1.9 50% $0.4 11% $0.1 3%
2001 $3.9 $2.1 54% $0.4 10% $0.1 3%
2000 $4.2 $2.3 55% $0.4 10% $0.1 2%
1999 $4.2 $2.3 55% $0.4 % $0.1 2%
1998 $4.3 $2.3 53% $0.4 % $0.1 2%
1997 $4.4 $2.5 57% $0.5 11% $0.1 2%

Source: U.S. Bureau of the Census. 2004d. “Welding and Soldering Equipment Manufacturing: 2002.” 2002
Economic Census Manufacturing Industry Series. EC02-311-333992(RV). Washington, DC: U.S. Bureau
of the Census. Table 1.

centrifugal pumps, rotary pumps, diaphragm pumps, domestic water system pumps, oil well and
oil field pumps, and sump pumps

As shown in Table 2-3, the variable production costs include materials (including energy)
and labor. Of these categories, materials (including fuel and energy) represented about half of the
total product value in 1997 to 2002. Within the materials category, the U.S. Census did not report
gasoline and other carburetor costs. Labor expenditures accounted for approximately 9%, and
other costs, such as capital, transportation, marketing, and markup, represented the remaining
43%,

The U.S. Economic Census classifies compressors under Air and Gas Compressor
Manufacturing (NAICS 333912). This U.S. industry comprises establishments primarily engaged
in manufacturing general purpose air and gas compressors, such as reciprocating compressors,
centrifugal compressors, vacuum pumps (except laboratory), and nonagricultural spraying and
dusting compressors and spray gun units.

2-3


U.S. Environmental Protection Agency (EPA). 2000. EPA Guidelines for Preparing Economic
Analyses, EPA 240-R-00-003, September 2000. A copy of this document can be found at
<http://yosemite.epa. gov/ee/epa.eed.nsf/webpages/guideliens.html#download>

US. Environmental Protection Agency (EPA). 2004. Final Regulatory Impact Analysis: Control
of Emissions from Nonroad Diesel Engines EPA420-R-04-007, May 2004. A copy of this
document can be found at <http://www.epa.gov/nonroad-diesel/2004ft/420104007. pdf>

U.S. Environmental Protection Agency. 2005. Economic Impact Analysis of the Standards of
Performance for Stationary Compression Ignition Internal Combustion Engines. EPA-
452/R-05-006. Research Triangle Park, NC: EPA.

Viscusi, W.K., J.M. Vernon, and J.E. Harrington. 1992. Economics of Regulation and Antitrust.
Lexington, MA: D.C. Heath and Co

W&D Partners Worldscape through LexisNexis. Available from <http://www.lexisnexis.com/>.

R-2


principal executives and biographies. http://www.dnb.com/dbproducts/description/
0,2867,2-223-1012-0-223-142-177-1,00.html
Among the companies that manufacture engines, we identified 5 small companies and 16
large companies with sales data. All of them are included in the Other Engine Equipment
Manufacturing (NAICS 333618) industry.

The results of the screening analysis, presented in Table 5-1, show that one firm has a
CSR greater than 3%. The remaining 20 small firms have estimated CSRs below 1%. The
average (median) CSR for small firms is 0.73% (0.02%), and the average and median CSR for
all large firms with data is less than 0.01% (0.001%).

Table 5-1. Summary Statistics for SBREFA Screening Analysis

Small Large
Number Share (%) Number Share (%)

Companies with Parent Sales Data 5 100% 16 100%

Compliance costs are <1% of sales 4 80% 16 100%

Compliance costs are > 1 to 3% of sales 0 0% 0 o%

Compliance costs are > 3% of sales 1 20% 0 O%
Cost-to-Sales Ratios (%)

Average 0.73% 0.01%

Median 0.02% 0.001%

Maximum 3.55% 0.08%

Minimum 0.00% 0.00%

5.3. Assessment

After considering the economic impacts of this proposed rule on small entities, the
Agency certifies that this proposed rule will not have a significant economic impact on a
substantial number of small entities. This proposed rule is expected to affect 21 ultimate parent
businesses. Five of the parent businesses are small according to the SBA small business size
standard. One of these five firms would have an annualized cost of more than 1% of sales
associated with meeting the requirements; the estimated cost is between 3% and 4% for this
small firm. Also, no other adverse impacts are expected to these affected small businesses.

Although this proposed rule would not have a significant economic impact on a
substantial number of small entities, the Agency nonetheless tried to reduce the impact of this

5-3


1.2

EIA:

= Market Analysis: The average total cost data per engine suggest percentage changes
in engine prices may exceed 10% on average and range from 2% to 20%. Although
these changes are large, economic theory and other EPA economic models of engine
markets suggest demand for engines is inelastic and changes in consumption are
likely to be small.

= Economic Welfare Analysis: EPA believes the national annualized compliance cost
estimates provide a reasonable approximation of the social cost of this regulatory
program. The engineering analysis estimated annualized costs of $20 million in 2015

= Energy Impacts: EPA concludes that the proposed rule when implemented will not
have a significant adverse effect on the supply, distribution, or use of energy.

= Small Business Analysis: EPA performed a screening analysis for impacts on small
businesses by comparing compliance costs to average company revenues. EPA’s
analysis found that the ratio of compliance cost to company revenue falls below 1%
for four of the five small companies included in the screening analysis. One small
firm would have an annualized cost of more than 1% of sales associated with meeting
the requirements; the estimated cost is between 3% and 4% for this small firm. No
other adverse impacts are expected to these affected small businesses.

Organization of this Report

The remainder of this report supports and details the methodology and the results of the

= Section 2 presents a profile of the affected industries.

= Section 3 describes the estimated costs of the regulation and describes the EIA.
methodology and reports market and welfare impacts

= Section 4 describes energy impacts.

= Section 5 presents estimated impacts on small entities.

1-2


SECTION 1
INTRODUCTION

The U.S. Environmental Protection Agency (EPA) is proposing a new source
performance standards (NSPS) that would apply to new stationary spark ignition (SI) internal
combustion engines (ICE). New source performance standards implement section 111(b) of the
Clean Air Act (CAA) and are issued for categories of sources that cause, or contribute
significantly to, air pollution that may reasonably be anticipated to endanger public health or
welfare. The standards apply to new stationary sources of emissions (i.e., sources whose
construction, reconstruction, or modification begins after a standard for those sources is
proposed). The NSPS for stationary SI ICE would be promulgated under 40 CFR part 60, subpart
JIS.

The regulatory action also proposes national emission standards for hazardous air
pollutants (NESHAP) from existing, new, and reconstructed stationary reciprocating internal
combustion engines (RICE) with a site rating of less than or equal to 500 horsepower (hp)
located at major sources and existing, new, and reconstructed stationary RICE located at area
sources. This action, when promulgated in a final rule, would meet EPA’s statutory obligation to
address hazardous air pollutant (HAP) emissions from these sources under sections 112(d) and
112(k) of the CAA. The final NESHAP for stationary RICE would be promulgated under 40
CFR part 63, subpart ZZZZ, which already contains standards applicable to stationary RICE with
a site rating above 500 hp located at major sources.

As part of the regulatory process of preparing this area source standard, EPA is required
to develop an economic impact analysis (EIA) and small entity impacts analysis for the gas
distribution industry. To support EPA’s development of these standards, EPA’s Innovative
Strategies and Economics Group (ISEG) has conducted an EIA to assess the potential costs of
the rule. This report documents the methods and results of this EIA.

11 Executive Summary
The key results of the EIA are as follows:

= Engineering Cost Analysis: EPA estimates total annualized costs of the NSPS will
be $17 million for the year 2015. The total annualized costs associated with the
NESHAP for 250 to 500 hp 4-stroke lean burn (4SLB) SI engines located at major
sources will be $3 million for the year 2015. Both programs represent an annualized
cost of approximately $20 million

1-1


As shown in Figures 2-3 and 2-4, approximately half of the equipment companies (31
total) are large companies, while the remaining 29 equipment companies are small. Annual sales
for equipment companies are concentrated above $1 billion (40%) and below $100 million
(25%).

2.4 — Historical Market Data

Generator sets and welding applications are the only sectors showing growth from 1998
to 2002 (see Table 2-10). The strongest growth occurred in the 175 to 300 hp category. In

contrast, pumps, compressors, and irrigation systems all experienced declines in sales during this
5-year period.

2.4.1 Price Trends

Prices for equipment and engines have increased moderately over the last decade with the
rate of increases comparable to other manufacturing industries (see Figure 2-5). Since 2003,
prices have risen relatively faster than in previous years as costs of key material inputs have
increased. For example, Lincoln Electric cited the rising cost of steel as a key factor influencing
production costs (Lincoln Electric, 2006).

45%
40%
35%
30%
25%
20%
15%
10%

5%

0%

Share of Firms (%)

<100 100-250 250-500 500-750 750—1,000 >1,000
Parent Company Employment Range

Figure 2-3. Equipment Companies Employment Distribution, 2005 (N = 60)

Sources: Hoover’s Online. <http://www.hoovers.com>.
W&D Partners Worldscape through LexisNexis.

Dun & Bradstreet Small Business Solutions <http://smallbusiness.dnb.com/default.asp?bhed2=1 107465546>.
Graham & Whiteside Major Companies Database through LexisNexis.

2-12


As shown in Table 2-1, the variable production costs include materials (including energy)
and labor. Of these categories, materials (including fuel and energy) represent about half of the
total product value. Within the materials category, gasoline and other carburetor engines

Table 2-1. Motor and Generator Manufacturing: 2002 and Earlier Years ($billion)

Cost as a Share Cost as a Share Cost as a Share
Value of Cost of of Product of Product of Product
Year Shipments Materials Value (%) Labor Value (%) Capital Value (%)
2002 $9.1 $4.3 4T% $1.2 13% $0.2 2%
2001 $9.4 $4.5 48% $1.2 13% $0.2 2%
2000 $10.0 $4.9 49% $1.3 13% $0.2 2%
1999 $10.8 $5.4 50% $1.4 13% $0.3 3%
1998 $11.6 $5.7 49% $1.5 13% $0.4 3%
1997 $12.2 $6.0 49%, $1.5 12% $0.3 2%

Source: U.S. Bureau of the Census. 2004b. “Motor and Generator Manufacturing: 2002.” 2002 Economic Census
Manufacturing Industry Series. ECO2-311-335312(RV). Washington, DC: U.S. Bureau of the Census.
Table |.

accounted for approximately 1.6% of product value in 2002. Labor expenditures accounted for
approximately 13%, and other costs, such as capital, transportation, marketing, and markup,
represented the remaining 40%.

The U.S. Economic Census classifies welding equipment under Welding and Soldering
Equipment Manufacturing (NAICS 333992). This U.S. industry comprises establishments
primarily engaged in manufacturing welding and soldering equipment and accessories (except
transformers), such as arc, resistance, gas, plasma, laser, electron beam, and ultrasonic welding
equipment; welding electrodes; coated or cored welding wire; and soldering equipment (except
handheld).

As shown in Table 2-2, the variable production costs include materials (including energy)
and labor. Of these categories, materials (including fuel and energy) represented about 50% to
57% of the total product value in 1997 to 2002. Within the materials category, the Census did not
report gasoline and other carburetor engine costs. Labor expenditures accounted for
approximately 11%, and other costs, such as capital, transportation, marketing, and markup,
represented the remaining 40%.

2-2


3.3. Conclusion

Using average total cost data from the engineering cost memos, the NSPS standard could
result in average price increase for engines of $950 (see Table 3-1). The price increases will
likely vary by engine horsepower and range from $490 per engine to $3,030 per engine. The
NESHAP requires additional controls for a very small subset of the engine population (250 to
500 hp 4SLB SI engines located at major sources). Price increases for these engines could be as
high as $7,620 per engine. Although baseline price data for these engines are not available, EPA
analysis for the nonroad rule (EPA, 2004; Table 10.3-6) provides a proxy for engine prices.
Using these baseline price data and average total cost data suggests percentage changes in engine
prices may exceed 10% on average and range from 2% to 20%

EPA considered potential consumption changes using the price elasticity of demand,
which refers to the percentage change in quantity demanded resulting from a percentage change
in price of the good. Economic theory and other EPA economic models of engine markets
suggest these elasticities are likely to be inelastic and very small (EPA, 2004). As a result, EPA
believes changes in engine consumption will be much smaller than the percentage increases in
price discussed above. For example, if we consider the range of percentage change in prices
above and assume a constant price elasticity of demand of -0.10, engine consumption could
potentially fall between 0.2% to 2%

EPA’s Guidelines for Preparing Economic Analyses (EPA, 2000; p. 125) notes there is
little practical difference between social cost estimates derived from a perfect competition partial
equilibrium model and engineering compliance cost estimates when consumption changes are
small. Given the consumption change analysis above, EPA believes the national annualized
compliance cost estimates provide a reasonable approximation of the social cost of this
regulatory program. The engineering analysis estimated annualized costs of $20 million in 2015


oo.

SS}
(we
SEPA etn

Economic Impact and Small Business
Analysis for the Standards of Performance
for Stationary Spark Ignition Internal

Combustion Engines and NESHAP for
Reciprocating Internal Combustion Engines


primarily engaged in manufacturing agricultural and farm machinery and equipment and other
turf and grounds care equipment, including planting, harvesting, and grass-mowing equipment
(except lawn and garden type)

As shown in Table 2-5, the variable production costs include materials (including energy)
and labor. Of these categories, materials (including fuel and energy) represented 52% to 57% of
the total product value in 1997 to 2002. Within the materials category, gasoline and other

Table 2-5. Farm Machinery and Equipment Manufacturing: 2002 and Earlier Years

(Sbillion)
Cost as a Share Cost as a Share Cost as a Share

Value of Cost of of Product of Product of Product
Year Shipments Materials Value (%) Labor Value (%) Capital Value (%)
2002 $14.7 $7.7 52% $1.3 M% $0.3 2%
2001 $14.1 $7.6 54% $1.3 % $0.3 2%
2000 $13.5 $7.7 57% $1.4 10% $0.3 2%
1999 $118 $6.4 54% $1.3 11% $0.3 3%
1998 $16.5 $8.5 52% $1.5 M% $0.4 2%
1997 $16.0 $8.4 53% $1.6 10% $0.5 3%

Source: U.S. Bureau of the Census. 2004a. “Farm Machinery and Equipment Manufacturing: 2002.” 2002
Economic Census Manufacturing Industry Series. EC02-311-333111(RV). Washington, DC: U.S. Bureau
of the Census. Table 1.

carburetor engines accounted for approximately 0.9% of product value in 2002. Labor
expenditures accounted for approximately 9%, and other costs, such as capital, transportation,
marketing, and markup, represented the remaining 39%.

2.2 The Demand Side

The demand for equipment is derived from consumer demand for the services and
products the equipment provides. We describe uses and industrial consumers of these equipment.

2.2.1 Generators and Welding Equipment

Generator sets provide power for prime, standby, and peaking power industrial,
commercial, and communications facilities. According to the latest detailed benchmark input-
output data reported by the Bureau of Economic Analysis (U.S. BEA, 2002),! NAICS 33415
(AC, Refrigeration, and Forced Air Heating) is the largest industrial user of generators (see

I These data include all types of generators and welding equipment and are not restricted to equipment affected by
the NSPS.

2-5


As shown in Table 2-4, the variable production costs include materials (including energy)
and labor. Of these categories, materials (including fuel and energy) represented 55% to 60% of
the total product value in 1997 to 2002. As with the pumps and pumping equipment category, the
U.S. Census did not report gasoline and other carburetor engine costs separately. Labor
expenditures accounted for approximately 8%, and other costs, such as capital, transportation,
marketing, and markup, represented the remaining 35%.

Table 2-3. Pumps and Pumping Equipment Manufacturing: 2002 and Earlier Years

(Sbillion)
Cost as a Share Cost as a Share Cost as a Share

Value of Cost of of Product of Product of Product
Year Shipments Materials Value (%) Labor Value (%) Capital Value (%)
2002 $7.0 $3.4 49% $0.6 M% $0.2 3%
2001 $7.4 $3.6 49% $0.6 8% $0.2 3%
2000 $7.6 $3.7 49% $0.6 8% $0.2 3%
1999 $7.2 $3.5 49% $0.6 8% $0.2 3%
1998 $7.6 $4.0 53% $0.7 % $0.2 3%
1997 $6.7 $3.3 49% $0.7 10% $0.2 3%

Source: U.S. Bureau of the Census. 2004c. “Pump and Pumping Equipment Manufacturing: 2002.” 2002 Economic
Census Manufacturing Industry Series. ECO2-311-333911(RV). Washington, DC: U.S. Bureau of the
Census. Table 1.

Table 2-4. Air and Gas Compressor Manufacturing: 2002 and Earlier Years (Sbillion)

Cost as a Share Cost as a Share Cost as a Share
Value of Cost of of Product of Product of Product
Year Shipments Materials Value (%) Labor Value (%) Capital Value (%)
2002 $4.8 $2.7 56% $0.4 8% $0.2 4%
2001 $5.6 $3.0 54% $0.4 TMM% $0.2 4%
2000 $6.2 $3.3 53% $0.4 6% $0.2 3%
1999 $5.7 $3.0 53% $0.4 TMM% $0.2 4%
1998 $5.7 $3.1 54% $0.5 % $0.2 4%
1997 $5.6 $3.1 55% $0.5 % $0.2 4%

Source: U.S. Bureau of the Census. 2004¢. “Pump and Pumping Equipment Manufacturing: 2002.” 2002 Economic
Census Manufacturing Industry Series. ECO2-311-333911(RV). Washington, DC: U.S. Bureau of the
Census. Table 1.

2.1.1.3 Irrigation Systems

The U.S. Economic Census classifies irrigation equipment under Farm Machinery and
Equipment Manufacturing (NAICS 333111). This U.S. industry comprises establishments

2-4


REFERENCES

Dun & Bradstreet Small Business Solutions http://smallbusiness.dnb.com/default.asp?
bhed2=1107465546

Graham & Whiteside Major Companies Database through LexisNexis. Available from
<http://www lexisnexis.com/>.

Hoover’s Online. 2005. Available from <http://www.hoovers.com/free>
Lincoln Electric Holdings. 2006. Form 10-K. Filed February 24, 2006.

Parise, T., Alpha-Gamma Technologies, Inc. 2006. Memorandum: “Population and Projection of
Stationary Spark Ignition Engines.”

Power Systems Registry (PSR). 2004. OELinkTM. <http://www.powersys.com/OELink.htm>

U.S. Bureau of Economic Analysis (BEA). 2002. 1997 Benchmark Input-Output Accounts
Detailed Make Table, Use Table and Direct Requirements Table. Tables 4 and 5.

US. Bureau of Economic Analysis (BEA).2006. Series PCU3353 12335312,
PCU333992333992, PCU333911333911, PCU333912333912, PCU333111333111,
PCU3336183336181, PCUOMFG—OMFG.

U.S. Bureau of the Census. 2004a. “Farm Machinery and Equipment Manufacturing: 2002.”
2002 Economic Census Manufacturing Industry Series. EC02-311-333111(RV),
Washington, DC: U.S. Bureau of the Census. Table 1

U.S. Bureau of the Census. 2004b. “Motor and Generator Manufacturing: 2002.” 2002 Economic
Census Manufacturing Industry Series. EC02-311-335312(RV). Washington, DC: U.S
Bureau of the Census. Table 1.

U.S. Bureau of the Census. 2004c. “Pump and Pumping Equipment Manufacturing: 2002.” 2002
Economic Census Manufacturing Industry Series. EC02-311-333911(RV). Washington,
DC: U.S. Bureau of the Census. Table 1

US. Bureau of the Census. 2004d. “Welding and Soldering Equipment Manufacturing: 2002.”
2002 Economic Census Manufacturing Industry Series. EC02-311-333992(RV),
Washington, DC: U.S. Bureau of the Census. Table 1.

US. Department of Agriculture (USDA), National Agricultural Statistics Service (NASS). 2004.
“2003 Farm and Ranch Irrigation Survey.” Washington, DC: USDA-NASS

US. Environmental Protection Agency (EPA). 1999. OAQPS Economic Analysis Resource
Document. Research Triangle Park, NC: EPA. A copy of this document can be found at
http://www.epa.gov/ttn/ecas/econdata/6807-305.pdf.


proposed rule on small entities. When developing the revised standards, the Agency took special
steps to ensure that the burdens imposed on small entities were minimal. The Agency conducted
several meetings with industry trade associations to discuss regulatory options and the
corresponding burden on industry, such as record keeping and reporting.

Following publication of this proposed rule, copies of the Federal Register action and, in
some cases, background documents, will be publicly available to all industries, organizations,
and trade associations that have had input during the regulation development, as well as state and
local agencies. The Agency continues to be interested in the potential impacts of this proposed
rule on small entities and welcomes comments on issues related to such impacts.

5-4


SECTION 2
INDUSTRY PROFILE

2.1 The Supply Side

In this industry profile, we discuss an important supply-side issue associated with
industries that manufacture equipment powered by SI stationary internal combustion engines:
production costs (e.g., labor and materials such as engines). Because the proposed rule will
change the costs of engines, we compare the costs of engine inputs with equipment product
value, other variable production costs such as labor and materials, and capital expenditures. This
cost information along with other information in this industry profile serve to inform the
economic impact and small business impact analyses included in this report.

2.1.1 Equipment Production Costs

The equipment industries provide three broad services: power (generator sets and
welding equipment), pumping and compression, and irrigation. Similar to the industry
characterization approach EPA followed for the proposed Stationary Compression Ignition
Internal Combustion Engines New Source Performance Standard (NSPS) (EPA, 2005), we rely
on industry data reported by the U.S. Census to provide an overview of equipment production
costs. Although industry definitions are broad and limit their ability to provide insight into
absolute expenditure levels, the statistics do provide a reasonable proxy of the relative
importance of inputs in the manufacturing process.

The U.S. Economic Census data provide production cost data by industry North
American Industrial Classification System (NAICS) codes. As discussed below, all of the
industries have similar distributions of production costs across materials, labor, and capital. As
shown in the discussion below, engine costs generally represent 1% to 2% of product value in
these industries

2.1.1.1 Generator Sets and Welding Equipment

The U.S. Economic Census classifies generator sets under Motor and Generator
Manufacturing (NAICS 335312). This industry comprises establishments primarily engaged in
manufacturing electric motors (except internal combustion engine starting motors), power
generators (except battery charging alternators for internal combustion engines), and motor
generator sets (except turbine generator set units). It also includes establishments rewinding
armatures on a factory basis.


138
133

128 Val
123 TA

118 a

113
108
103

98 +} T T T T T T T T T
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

= 100)

(Base Period: Dec 95

Adjusted Producer Price Index

—€— Motor and Generator Welding and Soldering Equipment
—@—Pump and Pumping Equipment + ——Air and Gas Compressor

—-~ Farm Machinery and Equipment —®-— Gasoline Nonautomotive Engines
Total U.S. Manufacturing

Figure 2-5. _ Price Trends for Equipment and Engines
Note: Price data for 2005 are preliminary estimates made by BLS that are subject to future revisions.

Source: U.S. Bureau of Labor Statistics. 2006. Series PCU3353 12335312, PCU333992333992,
PCU333911333911, PCU333912333912, PCU333111333111, PCU3336183336181, PCUOMFG—
OMFG.

Table 2-11. Projected Unit Sales Data by Horsepower Range: Selected Years

HP Range 2006 2010 2015
25-50 2,697 3,091 3,584
50-100 2,628 2,584 2,529
100-175 4,914 4,946 4,986
175-300 2,259 2,389 2,552
300-600 1,430 1,658 1,942
600-750 88 56 15
>750 1,922 2,236 2,627
Total 15,938 16,959 18,235

“The projected number of new SI engines does not include new 2-stroke lean burn (2SLB) engines.

Source: Parise, T., Alpha-Gamma Technologies, Inc. 2006. Memorandum: “Population and Projection of Stationary
Spark Ignition Engines.”

2-15


SECTION 5
SMALL BUSINESS IMPACT ANALYSIS

The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a
regulatory flexibility analysis of any rule subject to notice and comment rulemaking
requirements under the Administrative Procedure Act or any other statute unless the agency
certifies that the rule will not have a significant economic impact on a substantial number of
small entities (SISNOSE). Small entities include small businesses, small organizations, and small

governmental jurisdictions.
5.1 Description of Small Entities Affected

For the purposes of assessing the impacts of this proposed rule on small entities, small
entity is defined as (1) a small business based on the following Small Business Administration
(SBA) size standards, which are based on employee size: NAICS 333911 B Pump and Pumping
Equipment Manufacturing—500 employees or less; NAICS 333912 B Pump and Compressor
Manufacturing—500 employees or less; NAICS 33399P—AII other Miscellaneous General
Purpose, Machinery—500 employees or less; NAICS 335312 B Motor and Generator
Manufacturing—1,000 employees or less; and NAICS 333618—Other Engine Equipment
Manufacturing—1,000 employees or less; (2) a small governmental jurisdiction that is a
government of a city, county, town, school district, or special district with a population of less
than 50,000; and (3) a small organization that is any not-for-profit enterprise that is
independently owned and operated and is not dominant in its field. For more information, refer
to http://www.sba.gov/size/sizetable2002.html. The small entity impacts of this proposed rule are
estimated in terms of comparing the compliance costs to revenues at affected firms.

5.2 Small Business Screening Analysis

In the next step of the analysis, we assessed how the regulatory program may influence
the profitability of ultimate parent companies by comparing pollution control costs to total sales.
To do this, we divided an ultimate parent company’s total annual compliance cost by its reported

revenue:

i
race

_ ii
CSR “ik, (5.1)


Number

2-1

2-2

2-3

2-4

2-5

3-1

LIST OF FIGURES

Engine Companies Employment Distribution, 2005 (N = 21) ......cecccceeceeesteeeeeee
Engine Companies Sales Distribution (N = 24) ...0.....ceccceccecseesseess ess esseeesetesetseetseenees
Equipment Companies Employment Distribution, 2005 (N = 60)... ceccceeneee
Equipment Companies Employment Distribution (N = 60) .......0...0.ccccceceeeseeeeeee

Price Trends for Equipment and Engines ............0.ccccccecseecseessecsecseeseesseessessressneeseeese

Long Run: Full-Cost Pass-Through ........0.0..ccccccccscesesseseseesesesreseseesesnsieeesesseensneeseeeenes

Page
2-11

3-2


2.2.3 Irrigation

Demand for irrigation equipment is driven by farm operation decisions, optimal
replacement considerations, and climate and weather conditions. The National Agriculture
Statistics Service (NASS) 2003 Farm and Ranch Irrigation Survey (USDA-NASS, 2004) shows
that the top five states ranked by total acres irrigated are California, Nebraska, Texas, Arkansas,
and Idaho

The survey reported that approximately 500,000 pumps were used on U.S. farms in 2003
with energy expenses totaling $1.6 billion. Electricity is the dominant form of energy expense for
irrigation pumps, accounting for 60% of energy expenses. Diesel fuel is second (18%), followed
by natural gas (18%) and other forms of energy such as gasoline (4%)

As shown in Table 2-8, the number of on-farm pumps fell from 508,727 to 497,443 (2%)
between 1998 and 2003. However, electric- and diesel-powered pumps use increased during this
period (3% and 4%, respectively), while other fuel sources such as gasoline declined
significantly. Pumps powered by gasoline and gasohol, for example, declined from 8,965 to
6,178, a 31% change during this period

Table 2-8. Number of On-Farm Pumps of Irrigation Water by Type of Energy: 1998 and

2003
Fuel Type 1998 2003 Percentage Change
Electricity 308,579 319,102 3%
Natural gas 58,880 41,771 -29%
LP gas, propane, butane 23,964 17,792 -26%
Diesel fuel 108,339 112,600 4%
Gasoline and gasohol 8,965 6,178 31%
Total 508,727 497,443 -2%

Source: U.S. Department of Agriculture, National Agricultural Statistics Service. 2004. “2003 Farm and Ranch
Irrigation Survey” Washington, DC: USDA-NASS. Table 20.

2.3. Industry Organization

We discuss key issues related to vertical integration within the industry and distinguish
firms in this industry by size using the Small Business Administration’s (SBA’s) firm size
standards.! As discussed below, large equipment and engine operations are generally vertically

IThe latest table of size standards is available at http:/Avww.sba.gov/size/indextableofsize.html.

2-8


We identified 21 engine companies and 72 equipment companies and obtained sales and
employment data for 81 of these companies (87%). Using SBA size standards and ultimate
parent employment data, our analysis indicates that 34 ultimate parent companies are small
businesses (37%). PSR data suggest that small businesses manufacture a small share of total
engines (6% in 2002) (see Table 2-9). However, approximately one-quarter of equipment is
manufactured by small businesses.

As shown in Figures 2-1 and 2-2, 16 engine companies are large (76%) with annual sales
typically exceeding $1 billion. The remaining five engine companies are small (24%) with
annual sales typically falling below $500 million.

Table 2-9. Distribution of Engine and Equipment Production by Business Size: 2002 and
Earlier Years

2002 2001 2000

Engines

Small 875 988 1,630

Large 13,327 14,669 13,292

Total 14,201 15,657 14,455
Equipment

Small 3,583 2,947 1,290

Large 10,618 12,711 13,165

Total 14,201 15,657 14,455

Source: Power Systems Registry (PSR). 2004. OELinkTM. (http://www. powersys.con/OELink.htm>.

Note: PSR production levels have been scaled using stationary fractions of total engine sales reported by Parise
(2006).

2-10


CONTENTS

Section

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1.1 Executive Summary... cece es eeseseesnssnesnesneenssnseesnsresssesieaneeeenee

1.2 Organization of this Report 0.0.0...

2 Industry Profile 0.0.0.0.
2.1 The Supply Side... bees
2.1.1 Equipment Production Costs................0

2.2 The Demand Side. . soeteseeseeee
2.2.1 Generators and Welding Equipment...

2.2.2 Stationary Pumps and Compressor Equipment. steesesietesrtiesessseneseeeetee

2.2.3 Irrigation .

2.3. Industry Organization...

2.3.1 Engines: The Equipment Firm’s “Make” or “Buy” Decision.................
2.3.2 Distribution of Small and Large Firms... ccceeeceeeteeeteteeeteteees

2.4 Historical Market Data soetseseeseesseseanesesseeeee
2.4.1 Price Trends ........c.ccec cect

2.5 Projections .........ccecccecceeceesecseesseesessesssessretsessetsvetsetsessrecsiessissensessseseretanetsetese

3 Economic Impact Analysis ......0...ccccccccecceeessesessesessestssneseeensseesesreseesseseesieseeeseenees
3.1 Regulatory Program Cost Estimates ......0...0..0.:cccccesccecseessecsesseesseeetessessressneeseeese
3.2 Economic Framework .........0..cccccecscecseessecseesseessessserseeesetevetsessrecsrecsiesseseressnataneese

BB Comlusion oo... cece cceecc esses esses eesessceesenseesenseetsessetiesresssiseessseesenteetseteeseeseee

4 Energy Impacts 0.0. ees eseeseseseseseseenseeneeenenenes

5 Small Business Impact Analysis... 0c cecceceseseessessessesnssneseeenssesseseesenseseeseeees
5.1 Description of Small Entities Affected... cccceeceesseeseeseeseesetteeesneeeeeteees

5.2 Small Business Screening Analysis .......0...ccccceccceeteseeeteteeeere

5.3 ASSESSMENE ooo... eee ccc ce cee ees ess eseesseesesseeeecesceeseeteseeseessesiesisereesesiseesenteesenseeteesetes

References... cece eeece ese eseesessestesessseiteiseiseesseteetetiessets

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. 1-2

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2-1

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3-1
3-1
3-2
3-3

5-1
5-1
5-1
5-3

.-R-1


SECTION 4
ENERGY IMPACTS

Executive Order 13211 (66 FR 28355, May 22, 2001) provides that agencies will prepare
and submit to the Administrator of the Office of Information and Regulatory Affairs, Office of
Management and Budget, a Statement of Energy Effects for certain actions identified as
“significant energy actions.” Section 4(b) of Executive Order 13211 defines “significant energy
actions” as

any action by an agency (normally published in the Federal Register) that promulgates or
is expected to lead to the promulgation of a final rule or regulation, including notices of
inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking:
(1) G) that is a significant regulatory action under Executive Order 12866 or any
successor order, and (ii) is likely to have a significant adverse effect on the supply,
distribution, or use of energy; or (2) that is designated by the Administrator of the Office
of Information and Regulatory Affairs as a significant energy action

This proposed rule is a significant energy action as designated by the Administrator of the Office
of Information and Regulatory Affairs. We have, therefore, prepared a Statement of Energy
Effects for this action as follows

The increase in petroleum product output, which includes increases in fuel production, is
estimated at less than 0.00001%, or about 10 barrels per day based on 2006 U.S. fuel production
nationwide. The reduction in coal production is zero because no coal-fired units will be affected
by the requirements of this proposed rule. The reduction in electricity output is estimated at
0.00002%, or about 88,000 kilowatt-hours per year based on 2006 U.S. electricity production
nationwide. Production of natural gas is expected to decrease by 286,000 cubic feet (ft*) per day,
a decrease of 0.00002% from 2006 U.S. production levels. The maximum of all energy price
increases, which include increases in natural gas prices as well as those for petroleum products,
and electricity, is estimated to be 0.0001% nationwide. Energy distribution costs may increase by
roughly no more than the same amount as electricity rates. We expect that there will be no
discernable impact on the import of foreign energy supplies, and no other adverse outcomes are
expected to occur with regard to energy supplies. The increase in the cost of energy production
should be minimal given the very small increases in energy prices and outputs shown above. All
of the estimates presented above account for some pass-through of costs to consumers, as well as
the direct cost impact to producers. For more information on these estimated energy effects,

4-1


EPA-452/P-06-001

May 2006

Economic Impact and Small Business Analysis for the Standards of Performance for Stationary
Spark Ignition Internal Combustion Engines and NESHAP for Reciprocating Internal
Combustion Engines

By:
Brooks Depro
RTI International
Research Triangle Park, North Carolina 27709

Prepared for:
John L. Sorrels, Project Officer
Innovative Strategies and Economics Group (ISEG)

Contract No. EP-D-06-003
Task Order No. 0-2

U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group (ISEG)
(MD-C339-01)

Research Triangle Park, NC 27711


United States Office of Air Quality Planning and Standards Publication No. EPA-452/P-06-001
Environmental Protection Air Quality Strategies and Standards Division
Agency Research Triangle Park, NC May 2006



where

CSR = _ cost-to-sales ratio,

TACC = _ total annualized compliance costs,

1
n
TR,

= index of the number of affected plants owned by company j,
= number of affected plants, and
= total revenue from all operations of ultimate parent company j

This method assumes the affected company cannot shift pollution control costs to consumers (in

the form of higher market prices). Instead, the company experiences a one-for-one reduction in

profits.

To identify sales and employment characteristics of affected parent companies, we used a

company database developed for small business analysis of the Bond Rule (RTI, 2006). Since the

rule does not affect all companies included in the database, the analysis only includes companies

that produced the following types of equipment segments:

pumps and compressors (Pump and Pumping Equipment Manufacturing [NAICS
333911] or Air and Gas Compressor Manufacturing [NAICS 333912]) and

welders and generators (Motor and Generator Manufacturing [NAICS 335312] or
Welding and Soldering Equipment Manufacturing [NAICS 333992]).

The statistics included in the database come from PSR and other publicly available resources

such as the

following:

LexisNexis Academic Universe: A single database for company profiles, executives,
revenue, and competitors; detailed financial information; full-text articles; investment
reports; and industry overviews. Company information can be searched by name,
address, Standard Industrial Classification (SIC), or ticker symbol
www.lexisnexis.com/academic/universe/academic/.

Hoover’s Online: This electronic database is an excellent source of information on
USS. public and private companies. Users can search for companies by name, ticker
symbol, or keyword. It provides corporate ownership, sales, net income, and
employment. Links are also provided to the company’s Web site and those of top
competitors (if available), Securities and Exchange Commission (SEC) filings in
EDGAR Online, investor research reports, and news and commentary

http://www. hoovers.com/.

Dun & Bradstreet’s Million Dollar Directory: The D&B Million Dollar Directory
provides information on over 1,260,000 leading U.S. public and private businesses.
Company information includes industry information with up to 24 individual eight-
digit SIC codes, size criteria (employees and annual sales), type of ownership, and


Table 2-6). Other industries include pumping equipment manufacturing, generators and welders
manufacturing, and machinery repair.

The welding industry is considered a mature industry, and demand for this equipment
fluctuates with industrial activity (Lincoln Electric Holdings, 2006). BEA data suggest NAICS
811300 (Commercial Machinery Repair and Maintenance) is the largest user of welding and
soldering equipment (see Table 2-6). Other major users include fabricated metal manufacturing,
household goods repair, and other industrial machinery manufacturing.

Table 2-6. Generator Set and Welding Equipment Use by Industry: 1997

Direct
Commodity I0-CodeDetail_I-O Industry 10-CodeDetail_I-O Requirements
Code Description Code Description Use Value —_Coefficients*
335312 Motor and generator 333415 AC, refrigeration, and forced air 1,364.2 6.23%
manufacturing heating
811300 Commercial machinery repair 453.4 1.38%
and maintenance
333911 Pump and pumping equipment 451.4 6.97%
manufacturing
335312 Motor and generator 408.7 3.46%
manufacturing
334119 Other computer peripheral 398.7 1.67%
equipment manufacturing
333992 Welding and soldering 811300 Commercial machinery repair 408.3 1.24%
equipment and maintenance
manufacturing 332312 Fabricated structural metal 170.5 1.13%
manufacturing
811400 Household goods repair and 140.9 0.57%
maintenance
333298 All other industrial machinery 107.3 1.34%
manufacturing
230220 Commercial and institutional 61 0.03%
buildings

Note: The data include generators and welding equipment that is not affected by the proposed NSPS.

“These values show the amount of the commodity required to produce $1.00 of the industry’s output.

Source: U.S. Bureau of Economic Analysis. 2002. 1997 Benchmark Input-Output Accounts: Detailed Make Table,
Use Table and Direct Requirements Table. Tables 4 and 5.

2.2.2 Stationary Pumps and Compressor Equipment

The construction industry is an important user of pump and compressor equipment; as a
result, demand for this equipment fluctuates with construction activity. Oil field drilling and well
servicing applications are primary consumers of high horsepower equipment such as drills and

2-6


integrated, and approximately half of the ultimate parent companies identified are small
businesses.

2.3.1 Engines: The Equipment Firm’s “Make” or “Buy” Decision

Vertically integrated firms own a combination of “upstream” and “downstream”
production operations; for example, vertically integrated equipment manufacturers make the
engines used in equipment rather than buy engines from independent engine manufacturers.
Although firms may choose this structure for several reasons, two frequently cited benefits are
reducing transaction costs associated with input purchases and taking advantage of technological
economies that arise through integrated production structures (Viscusi, Vernon, and Harrington,
1992). A review of the Power Systems Research (PSR) data for 2002 shows that vertical
operations are more likely to occur within large public and private firms. In addition, a
significant share of small specialty engine manufacturers produce and sell engines to other
independent equipment companies.

2.3.2 Distribution of Small and Large Firms

EPA identified key firms using PSR data from 2002 (PSR, 2004). Although the
information in PSR’s database was separated by fuel, size range, and application type, it includes
both mobile and stationary engines (Parise, 2006). Using these data to identify company names
has some limitations because the data set contains companies that produce mobile only,
stationary only, or mobile and stationary engines. We acknowledge this limitations and are
reviewing alternative ways of identifying stationary SI companies.

Small entities include small businesses, small organizations, and small governmental
jurisdictions. A small entity is defined as follows:

= asmall business whose parent company has fewer than 1,000 employees (for NAICS
335312 [Motor and Generator Manufacturing]) and NAICS 333618 [Other Engine
Equipment Manufacturing]

= _asmall business whose parent company has fewer than 500 employees (for NAICS
333911 [Pump and Pumping Equipment Manufacturing], NAICS 333912 [Air and
Gas Compressor Manufacturing], NAICS 333111 [Farm Machinery and Equipment
Manufacturing], and NAICS 333992 [Welding and Soldering Equipment
Manufacturing]

= asmall governmental jurisdiction that is a government of a city, county, town, school
district, or special district with a population of fewer than 50,000

= asmall organization that is any not-for-profit enterprise, which is independently
owned and operated and is not dominant in its field