1 

### January 31, 2012

MEMORANDUM

SUBJECT: Economic Impact Analysis for Risk and Technology Review : Chromium Electroplating and Chromic Acid Anodizing Source Categories

FROM: Robin Langdon and Tom Walton

Economist s
A E G (C439

- 02)

TO: Phil Mulrine Environmental Enginee r
M M G ( D243

- 02 )

This document addresses the economic im pacts of Risk and Technology Review for Chromium Electroplating and Anodizing source categories . T he total capital and total annualized costs for the proposed amendments are estimated to be $ 3

. 7 million and $ 2

. 8 million/year, respectively. The cost estimates are provided in “ Procedures for Determining Control Costs and Cost Effectiveness for Chromium El ectroplating Supplemental Proposal” , which is available in the docket. Also available in the docket is

“ Profile of Chromium Electroplating Processes and Emissions

, Emission Standards Technical Support and Post Promulgation Activities ”, which includes info rmation use d in this analysis regarding number of employees and other industry statistics

.

Small Business Impacts Analysis

The Small Business Administration defines a small entity in the c hromium e lectroplating industry 1 

### as an entity with fewer than 5 00 employees. 2 

### In addition, t he U.S. Census Bureau’s 2009 Statistics of U.S. Businesses indicate there were 2,434 firm s in NAICS
code category 332813 and 31 firms, or 1.27 percent

, had more than 500 employees. 3


### Based on this information, we conclude that m ore than 98 percent of the entities in the chromium electroplating industry are considered small entities. As such, for the small business impacts analysis we included all of the affected entities.

1 The chromium electroplating industry falls within the North American Industry Classification System
code 332813

– electroplating, plating, polishing, anodizing, and coloring.

2 Refer to http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf for more i nformation on SBA
small business size standards.

3 U.S. Census Bureau, Statistics of U.S. Businesses

-- http://www2.census.gov/econ/susb/data/2009/us_6digitnaics_2009.xls

. NAICS code category 332813
also includes firm types not affected by this rulemaking.2 

### Approximately 1,45 4 facilities, or entities, are in the chromium electroplating industry
and the new proposed requirements will affect approximately 1,116 facilities

. 4 

### EPA performed a screening analysis for impacts on all affected small entities by comparing compliance costs to average sales revenues by employment size category

. This is known

as the cost

- to

- revenue or cost

- to

- sales ratio, or the “sales test.” The “sales test” is the impact methodology EPA primarily employs in analyzing small ent ity impacts as opposed to a “profits test,” in which annualized compliance costs are calculated as a share of profits. The sales test is frequently used because revenues or sales data are commonly available for entities impacted by EPA regulations, and pr ofits data normally made available are often not the true profit earned by firms because of accounting and tax considerations. The use of a “sales test” for estimating small business impacts for a rulemaking is consistent with guidance offered by EPA on c ompliance with SBREFA 5 

### and is consistent with guidance published by the U.S. SBA’s Office of Advocacy that suggests that cost as a percentage of total revenues is a metric for evaluating cost increases on small entities in relation to increases on large en tities (U.S. SBA, 2010). 6



### Table 1 below presents the result s of the cost

- to

- sales screening analysis ; t he t able
reflects a cost per plant increase of 15 percent to reflect estimated additional costs for using WAFS that do not contain perfluorooctyl sulfonates (PFOS). 7 

### Table 2 provides the
numbers of Facilities Subject to the Requirements , by Industry Subcategory and Employment Size Category.

4 Approximately 1,45 4 chromium electroplating facilities are located in the U.S. Of these, approximately 338 are located in California and the remaining 1,116 are outsi de of California. This information can be found on page 1 of the “ Procedures for Determining Control Costs and Cost Effectiveness for Chromium Electroplating Supplemental Proposal .”

5 The SBREFA compliance guidance to EPA rulewriters regarding the types o f small business analysis that
should be considered can be found at http://www.epa.gov/sbrefa/documents/Guidance

- RegFlexAct.pdf

. See Table 2 on page 36 for guidance on interpretations of the magnitude of the cost

- to

- sales numbers.

6 U.S. SBA, Office of Advocacy. A Guide for Government Agencies, How to Comply with the Regulatory Flexibility Act, Implementing the President’s Small Business Agenda and Executive Order 13272, June

2010.

7 Although the costs for non

- PFOS WAFS are comparable to the costs of PFOS

- based WAFS, non

- PFOS WAFS are depleted more quickly in the electroplating bath. For plants, that regularly electroplate, the depletion of non

- PFOS WAFS is negated by dr ag

- out. However, for plants that do not electroplate regularly (i.e., do not electroplate daily for several hours per day), the depletion rate can be up to 20 percent. Estimating increased WAFS costs of 15 percent across the board for all electroplating plants that use WAFS provides estimated costs for non

- PFOS WAFS that are biased high. For additional information, refer to page 4 and Table 12 (page 24) of the “ Procedures for Determining Control Costs and Cost Effectiveness for Chromium Electroplating Su pplemental Proposal .”3 

### Table 1. Summary of the Screening Analysis Results Based on Cost

- to

- Sales Ratios, by Industry Subcategory and Employment Size Category

Employment Size Category <20 Employees 20

- 99 Employees >100 Employees

Average Sales by Employment Size Category 8 $708,132 $4,330,616 $10,827,407

Total Number

of Affected

Facilities Annualized Costs, by Compliance Option

Decorative
Chromium Electroplating 480

Test Only 7 $1,306 .18% 0.03% 0.012%

WAFS Only 9 340 $ 429 .06 % 0.01% 0.004 %

WAFS & Test 8 $ 4,163 .59 % 0.10 % 0.038 %

Retrofit APCD 6 &

Test -- -- -- -- --

Chromium Anodizing 146

Test Only 10 $1,262 0.18% 0.03% 0.012%

WAFS Only 56 $ 207 0.03% 0.00% 0.002%

WAFS & Test 11 $2, 638 0.3 7 % 0.06% 0.024 %

Retrofit APCD & Test

-- -- -- -- -- Small Hard
Chromium Electroplating 271

Test Only 26 $1,484 0.21% 0.03% 0.01%

WAFS Only 24 $1, 197 0.17 % 0.03 % 0.01%

WAFS & Test 50 $ 9,467 1.34 % 0.22 % 0.09 %

Retrofit APCD & Test 5 $22,184 3.13% 0.51% 0.20%
Large Hard
Chromium Electroplating 219

Test Only 27 $1,907 0.27% 0.04% 0.02%

WAFS Only 3 $ 8,327 1.18 % 0.1 9 % 0.08 %

WAFS & Test 33 $5 7,420 8.11 % 1.33 % 0.53 %

Retrofit APCD & Test 4 $55,872 7.89% 1.29% 0.52%

8 By NAICS code, the average sales receipts by employment size category are from the U.S. Census Bureau, 2008, “Firm Size Data from the Statistics of U.S. Businesses: U.S. Detail Employment Sizes: 2007” and can
be found < http://www.census.gov/econ/susb/data/download_susb2007.html>

. 9 WAFS is wetting agent fume suppressant and APCD is air pollution control device.4 

## Table 2

. Number of Facilities Subject to the Requirement s , by Industry Subcategory and Employment Size Category 10

Employment Size Category 11 <20 Employees 20

- 99 Employees >100 Employees

Total Number of
Affected
Facilities 12



### Decorative Chromium Electroplating 480 123 245 112



### No Requirements 125 32 64 2 9

Test Only 7 2 4 2

WAFS Only 340 87 174 7 9

WAFS & Test 8 2 4 2

Retrofit APCD & Test

-- -- -- -- 

### Chromium Anodizing 146 13 106 27



### No Requirements 69 6 5 0 1 3

Test Only 10 1 7 2

WAFS Only 56 5 41 1 0

WAFS & Test 11 1 8 2
Retrofit APCD & Test

-- -- -- -- 

### Small Hard Chromium Electroplating 271 91 91 91



### No Requirements 16 6 5 5 5 5 5 5

Test Only 26 9 9 9
WAFS Only 24 8 8 8

WAFS & Test 50 17 17 17

10 Some totals may not add due to rounding.

11 By potential requirement, we allocated the facilities among the employment size categories according to percentages in Table 28, page 106 of the “ Profile of Chromium Electroplating Processes and Emissions, Emission Standards Technical Support and Post Pro mulgation Activities.” For example, for decorative chromium electroplating, we allocated 25.6 percent of facilities to the employment size category of fewer than 20 employees; allocated 51.2 percent of facilities to the employment size category of between 20 and 99 employees; and allocated 23.3 percent of facilities to the employment size category of more than 100 employees.

12 The 1,116 facilities located outside of California were allocated among the industry subcategories in this
table based on the metho dology described in the following document available in the docket: “Simulation of Actual and Allowable Emissions for Chromium Electroplating Facilities Emission Standards Technical Support and Post Promulgation Activities”.5 Retrofit APCD & Test 5 2 2 2 

### Large Hard Chromium Electroplating 219 39 106 74



### No Requirements 152 26 73 52
Test Only 27 5 13 9
WAFS Only 3 1 1 1

WAFS & Test 33 6 16 1 1

Retrofit APCD & Test 4 1 2 1



### S ee Appendix A ( Methodology Used to Determine Number of Plants Subject to the Requirements of the Proposed Amendments for Chromium Electroplating ) to the

“ Procedures for Determining Control Costs and Cost Effectiveness for Chromium Electroplating Supplemental Proposal ” document for a discussion of the methodologies
used to calculate the number of f acilities by p otential r equirement.

From the screening analysis, we estimated that appr oximately 96% of all affected
facilities would have a cost

- to

- sales ratio less than 1% (i.e., only about 4% would have

cost

- to

- sales greater than 1%). W e also estimated that about 1% o f all affected facilities,

or 9 facilities with fewer than 20 employees, may have cost

- to

- sales ratios between 3 to 8 percent. All of these facilities are in the hard chromium category, with two of the facilities in the small hard chromium category and seven in the large hard chromium

c ategory.

Additional Small Business Impacts Analysis

– Large and Small Hard
Chromium

We examined the large and small hard chromium categories in more detail and
determined that the cost

- to

- sales impact estimated in the screening analysis may be
overstated for one or more of the following reasons :

• The American Business Directory includes employment and sales data by firm.

We reviewed the American Business Directory and located some sales data for the employment size category of fewer than 20 employees in the large and small hard chromium categories ; th is data suggests that sales receipts for these entities may be as much as two times the average sales receipts data used in
the screening analysis.

• The small and large hard chromium elec troplating facilities affected by the proposed rule may have higher emissions associated with higher production
than the facility production rates reflected in the average sales receipts data.6 

### Profits Test

If market conditions limit the ability to pass compliance costs to customers, the establishment could bear more of the economic burden through reduced profits. As
such , we calculated a “profits test” to assess the compliance costs relative to firm profits.

To better understand industry profita bility thresholds, we collected average industry

level net income after taxes and total net sales reported by the U.S. Bureau of Census. After dividing net income after taxes by total net sales, the statistics suggest that each $1,000 of sales produced $4 0 to $60 of after tax accounting profits (4 to 6 percent of sales) (see Table 3 ). As a result, sales tests results exceeding 3 percent would eliminate a significant portion of net income if firms cannot pass on compliance costs to
customers in the form of higher market prices. To further understand the issue, we evaluated how existing market demand conditions influence ability to pass compliance

costs to customers.

Table 3 . Quarterly Financial Reports for NAICS 332 Fabricated Metal Products

Year Rati o of Net Income After Taxes
to Total Net Sales

2010 6.2

2009 3.6

2008 6.2

2005 6.0

U.S. Census Bureau. Quarterly Financial Reports http://www.census.gov/econ/qfr/



### .

Market Demand Characteristics

In markets with perfect competition, the economic burden of compliance costs will fall more heavily on the side of the market that is more sensitive to market price changes. The relationship between pass through and elasticities can be expressed as:

Perc entage of cost pass through = Supply Elasticity/(Supply E lasticity

- Demand Elasticity)

On the demand

- side, we found several factors suggest ing that the demand for hard chromium electroplating services is highly inelastic, which means when market prices
cha nge there is little change in the quantity of services that customers demand

. 13 

### All other things equal, these factors suggests the industry may have the ability to pass on compliance costs to customers.

13 Previous economic impact ana lysis suggest s demand elasticity values around

- 0.25, which suggests that a one percent increase in price would result in 0.25 percent reduction in the quantity of services demand (EPA, 1993). Using this value and the earlier example, 80 percent of the co sts could be passed to

customers

-- 80% = 1/[1

- (

- 0.25)]7 

### First, business customers using hard chromium ele ctroplating services have limited alternative technologies available that provide the desirable properties for their products

. 14 

### For example, thermal spraying is one possible replacement for hard chromium electroplating

, but it is more technically challeng ing and has much higher capital costs. Thermal spraying also does not coat the crevasses of the equipment as well

. Therefore, thermal spraying is not a perfect substitute and would not replace most hard chromium facilities. Industry reports suggest adopti ng alternative technologies in some industries has stalled as sectors

, such as the airline industry

, weigh
the cost s and benefits of adopting new technologies. 15



### Second, hard chromium electroplating tends to be used in highly segmented and specialize d end products with limited product substitutes and customers appear uninterested in giving up chrome. 16 

### For example, EPA review of industry survey responses suggests one facility supplies hard chrome plating services for exotic objects
for the aviation ind ustry; plated tubes and hydraulic rods; and large extrusion screws and rolls for paper industries. Another facility works with specialized aerospace, defense, industrial, recreational and electronics markets. Airline companies have used plating operations provided by the facility.

Lastly , anecdotal evidence suggests that customers who wish to have a piece of equipment electroplated generally take it to a local job shop. Large objects that require electroplating are expensive to transport over long distanc es , so job shop proximity is an important economic factor that customers consider.

Conclusions

Employing the sales test screening methodology produce s the following resul ts

--

a pproximately 96% of all affected facilities will experience minimal impact, or a cost

- to

sales ratio of less than 1%. In addition, for approximately 1% of all affected facilities, or

9 facilities with fewer than 20 employees, the potential for cost

- to

- sales impacts may be
between 3 and 8 percent. All of these fac ilities are in the hard chromium category, with two of the facilities in the small hard chromium category and seven in the large hard chromium category. For these categories, b ecause the average sales receipts used for the analysis likely understate sale s for a number of facilities and because these facilities are likely to be able to pass cost increases through to their customers, we don’t anticipate the regulatory proposal to result in firm closures, significant price increases, or substantial profit lo ss. We conclude that this proposal will not have a significant economic impact on a substantial number of small entities.

14 Hard Chrome Plating... Its Past, Present and Future < http://66.192.79.183/articles/web120301.html >

15 Chrome Plating Alternatives: Thermal Spray, Electroless Plating, and Others http://www.thintri.com/chrome

- plating

- report.htm

. 16 Chrome Plating Alternatives: Thermal Spray, Electroless Plating, and Others http://www.thintri.com/chrome

- plating

- report.htm

.