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# OAR Box 1846 Prepped by Ollie Stewart



## Document

Number: 

# 77 ) lll-A-3

Docket Number: 

# A-90-0 7

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# Regulator y Flexibilit

y Analysis o

f th e Proposed Fuels an

d Fue l Additives Registration Progra m

Fina l Repor t

Prepared by: IC FIncorporate d unde r EP A Contrac t

No

. 68-C8-002

4 Wor k Assignment

No

. 2-1 , Subtas k

4

Prepared for: Offic e o f Mobil e Source s U.S

. Environmenta l Protectio n Agency
Septembe r

30 , 199 1P. 3

INTRODUCTION 

### EP A is in th e process of

developing regulation

s unde rSectio n 21 1 o f

th e Gea n Ai

rAc t (CAA ) whic

h would requir

e emission

s an d healt h effect s testing o f

al l moto rvehicle fuel

s an d fue l additive s (F/FA) . Thi

s repor tpresent s th e result

s of a regulator

y flexibility analysi

s o f th e testing requirement

s of th e propose

d fuels an d fue l additive s regulation . I

ti s divide d int o eigh tsections : I) Backgroun

d an d Summar y o f th e Propose

d Regulation ; II) Requirement

s o f th e Regulator

y Flexibilit

y Act ; III) Methodology ; TV) Definition of

"Small " Manufacturer ;

. V ) Characterizatio

n of Smal l Manufacturer

s i n th e Regulated Community ; VI ) Summar

y o f Expected Cost

s of th e Propose

d Regulation ; VII ) Impact

s o n Smal l Fue l an d Fue l Additiv e Manufacturers ; an

d Vm ) Possible Response s t o the Impact

s o f th e Proposed Regulation .

I . BACKGROUN

D AN D SUMMAR

Y O F THE PROPOSE D REGULATION 

### Sectio n 211(b)(2 ) o f

th e 197 0 CA A give

s EP A th e authorit

y to requir

e manufacturer

s to conduc ttest s to determine th e potentia l healt h effect s of theirfuels an

d fue l additive s an d t o requir e othe rinformatio

n t o identif

y th e emissions produce

d b y suc h fuel s an d additives , theireffect

s o n th e publi c healt h an d welfare , an

d theirimpact

s o n th e performanc

e o f emission contro

l systems . Th e CAA Amendment

s o f 197 7 adde d Sectio n 211(e ) whic

h mad e implementation o f

Sectio n 211(b)(2 ) mandator y an d provide d additiona

l direction concernin

g th e implementatio

n of the statute' s testing requirements . Specifically :

• Sectio n 211(e)(1 ) require d implementatio

n o f th e Sectio n 211(b)(2 ) authorit y withi n on e yea rof th e enactmen

to f th e amendments .

• Sectio n 211(e)(2 ) establishe d tim e limit s fo rcomplianc

e b y fue l an d additiv e manufacturers. Fo

rthos e fuels an

d additive s notyetregistere

d whe n th e Sectio n 211(b)(2 ) regulation

s ar e promulgated, the "requisit e information " mus

tb e submitte

d prio rto registration . Fo

rfuels an d additive s alread y registered , th e informatio n mus t b e provide

d "n o late rtha n three years " afte

rth e ne w regulation

s ar e issued .

• Sectio n 211(e)(3 ) allowe d EP A t o exemptormak

e specia l allowance

s fo rsmal l businesses , t

o provid e fo rcos tand/o

rburde n sharing, an

d t o mak e othe rspecific exemptions whe

n additiona

l testin g woul d b e duplicativ

e of adequat e existin g testing . Th e proposed regulation implement s Sections 211(b)(2 ) an

d (e ) b y developing a

n emissions an d healt h effect s testing program

. I n developing thi

s program , EP A ha s take n step s consistentwit

h the Ac tto limi tth e focu s of th e requirement

s s o a s nott o presen ta n unnecessar

y burde n o n th e regulate d industry . Th e propose

d testing progra

m consist s o f three tiers . Th e purpose o f th e tier s is to provid

e a mean s b y whic h additiona

l testing wil

l onl y b e require

d i f th e tes tresult

s o f th e previou

s tier s meri t it . Tier1 include

s characterizatio

n o f emissions , a comprehensiv e searc h an d summar y o f available informatio n sources concerning th e emissions-base d effect s o f fuels an d fue l additive s o n publi c healt h an d welfare , an

d applicatio

n o f dat a modelin g techniques . Tier2 consist s o f short-ter m screeningP. 4

test s whic h addres s certai n healt h endpoints. 1 Th e numbe r o f test s require d i n thi s tie r wil l depen d o n th e exten tt o whic h th e data searc h activitie s i n Tie r 1 provid e documentatio n o f adequat e existin g testin g comparabl e t o th e screenin g test s include d i n Tie r2 . Fuel s and additive s wil l b e subjec tt o Tie r3 requirement s a s determine d o n a case-by-cas e basi s by EPA . t o addres s particula r area s o f concer n whic h aris e i n th e earlie rtiers . EP A expect s thatTie r 3 wil l ofte n includ e anima l inhalatio n exposure s o f

chroni c (tw o t o thre e year ) duratio n t o verif y and/o r quantif

y th e results o f

th e screenin g evaluations . EP A i s allowin g industr y t o determin e ho w cost s are t o b e allocate d amon g manufacturers . However , t o preven tundu e burde n (a s require d in Sectio n 211(e)(3)) , th e propose d regulatio n contain s provision s suc h as cost/burde n sharing , consideratio n o f smal l busines s impacts , an d eliminatio n o f

duplicativ e testing . Thes e provision s are explaine d i n detai l i n th e preambl e t o th e propose d regulation .

n . REQUIREMENT S O F TH E REGULATOR Y FLEXIBILIT Y AC T
Th e Regulator y Flexibilit y Ac t(RFA ) require s EP A t o analyz e th e requirements o f propose d regulation s t o determin e whethe rthe y wil l caus e a significan timpac to n a substantial numbe r o f smal l entities. 2 Becaus e th e RF A doe s no tprovid e concret e definition s o f "smal l entity, " "significant impact " o r"substantia

l number, " EP A ha s establishe d guideline s settin g th e standard s t o b e use d i n evaluatin g impacts o n smal l businesses. 3 Th e guideline s specif y tha tsiz e definition s se tb y th e U.S . Smal l Busines s Administratio n (SBA ) shoul d b e use d as th e initia l determinatio n o f a "smal l entity, " bu ttha tEP A ma

y us e a n alternativ e definitio n if i tbette rcapture s th e poin tatwhic h entitie s ar e adversel y affecte d simpl y becaus e o f thei rsize . Th e guideline s furthe r specif y thata "substantia

l number " ca n b e eithe ra larg e fractio n o f th e affecte d populatio n o f small entitie s o r a larg e numbe r o f smal l entities . Finally , th e guideline s se tfou r criteri a fo r determinin g whethe r impact s wil l b e significant :

• Annua l complianc e cost s increas e tota l cost s o f productio n fo r small businesse s b y mor e tha n fiv e percent ;

• Complianc e cost s as a percentag e o f sale s fo r smal l businesse s are atleas tte n percen t highe rtha n complianc e cost s as a percentag e o f sale s fo r larg e businesses ;

• Capital cost s o f

complianc e represen ta significan tportio n o f capital availabl e t o smal l businesses ; o r

• Th e requirement s o f th e regulatio n are likel y t o resul ti n closure s o f smal l businesses . A s explaine d belo w i n th e sectio n o n methodology , thi s analysi s employ s th e latte rtw o criteria .

1 Pleas e refe rt o th e propose d regulatio n fo r detail s o n healt h endpoints .
2 5 US C 601 . 3 U.S . Environmenta l Protectio n Agency , Memorandu m t o Assistan tAdministrators , "Compliance wit

h th e Regulator y Flexibilit y Act, " EP A Offic e o f

Policy , Planning , an d Evaluation , 1984 .P. 5

m . METHODOLOG Y
Thi s sectio n present s th e dat a source s an d methodolog y use d t o conduc tthi s regulatory flexibility analysis . Th e analytical assumption s an d limitation s ofth e data collecte d are als o discussed . Thi s sectio n is divide d int o fou rparts : collectio n an d adjustmen to f data ; definitio n o f

"small " manufacture rfo rthi s regulation ; estimatio n o f testin g costs ; and estimatio n o f financia l impacts . A . Dat a
Th e primar

y sourc e o f

dat a fo rthi s analysi s i s th e repor tentitled , "Characterizatio n o f th e Moto rFue l an

d Fue l Additive s Industry. " IC F use d dat a i n thi s repor tt o develo p a characterizatio n databas e thatcontain s th e followin g informatio n fo r 29 2 fue l manufacturer s and 21 6 additiv e manufacturers : Manufacture rname ;

Location ; Corporat e status ; Nam e o f paren tcompany ; Numbe rand typ e o f

fue l an d additiv e products ; Indicatio n o f

whethe rth e financial informatio n pertain s t o th e paren tcompan y o r affiliate/division/join tventure/subsidiary , Sales ; Assets ; Ne tIncome ; Numbe ro f

employees ; Four-digi tStandard Industrial Classificatio n (SIC ) code s correspondin g t o th e principa l busines s activities ; an d

• Comments/additiona l information . Thre e adjustments wer e mad e t o th e characterizatio n databas e fo r thi s analysis . First , an y fue l o radditiv e manufacturers thatproduc e onl y leade d fuels , blends, 4 o r relabele d products wer e omitted , sinc e thes e manufacturers ar e no taffecte d b y th e testin g requirement s o f th e propose d rule . Second , asse tand ne tincom e statistic s wer e estimate d b y regressio n fo r a numbe r o f companies . Tw o separat e equation s (on e relatin g ne tincom e t o sale s an d th e othe r relatin g asset s t o sales ) wer e develope d fo rbot h fue l an d additiv e manufacturers . Thes e equation s are presente d in Appendi x A
Third , sinc e th e repor tdi d no tcontai n informatio n o n all affecte d manufacturers and data i n i tare skewe d toward large rmanufacturers , th e underlyin g sale s distribution s o f F/F A manufacturer s wer e estimate d as follows . First , IC F Incorporate d (ICF ) too k a rando m sampl e o f 10 0 fro m th e 47 2 fue l and 34 0 additiv e manufacturer s fo rwhic h th e databas e containe d n o information . Dat a o n sales , numbe ro f

employees , primar

y an d secondar y SI C codes , and miscellaneou s othe r informatio n wer e obtaine d fo r7 8 o f

th e 10 0 sampl e manufacturers . Analysi s indicate d thatth e rando m sampl e containe d a highe rpercentag e o f smal l companie s tha n th e industr y characterizatio n database .

Blend s ar e chemical s thatar e adde d t o fuel s bu tar e no tregistere d separatel y by additiv e manufacturers . Becaus e blend s d o no trepresen ta uniqu e produc t registere d b

y a manufacturer , the y wer e no tconsidere d i n thi s analysis .P. 6

T o approximate th e underlyin g distribution s o f fue l and additiv e manufacturers , IC F use d informatio n obtaine d fro m th e sampl e companie s t o develo p "weights " fo r companie s i n industr y characterizatio n database . Appendi x B contain s table s detailin g thi s process . Thes e compan y weight s wer e use d throughou tth e analysi s t o projec tth e numbe r o f small and larg e companie s an d estimate d impacts . B . Definitio n o f

"Small " Manufacture r
Th e Regulator y Flexibility Ac tspecifie s thatSmall Busines s Administratio n (SBA ) definition s shoul d b e use d as th e initial determinatio n o f a small entity butthatEP A ma y us e a n alternativ e definitio n if

itbette r capture s th e poin ta twhich entitie s are adversel y affecte d simply becaus e o f thei rsize . Adoptio n o f

a n alternativ e definitio n fo r thi s regulatio n wa s considere d becaus e th e regulate d communit

y span s a larg e numbe r o f Standard Industria

l Classificatio n (SIC ) codes . Specifically , fue l and additiv e manufacturer s represente d 2 9 and 6 7 differen tSI C codes , respectively . Six four-digi t SI C code s (2911 , 5153 , 5171 , 5172 , 5191 , and 5541 ) represente d ove r5 0 percen to f F/F A manufacturer s i n th e Industr y Characterizatio n database . However , sinc e complianc e cost s are primarily a functio n o f

th e typ e o f

product , an d no tth e numbe r o f products o rth e siz e o f

a company , IC F wa s unabl e t o develo p a n alternativ e definitio n withou tfirstperformin g a n in-depth analysi s o f th e structur e o f

th e fue l an d additiv e industry . Additionally , th e inten to f th e Regulator y Flexibilit y Ac ti s t o determin e th e disproportionat e impacts o f

regulation s o n smal l companie s relativ e t o thei r larg e competitor s (which , as i n thi s case , ma y b e differen ttha n all companie s withi n th e regulate d community) . Thi s suggest s thatimpact analyse s shoul d conside rth e relativ e siz e o f eac h compan y wit

h respec tt o its ow n industry . Fo rthes e reasons , EP A ha s adopte d SB A definition s o f "small " fo r thi s analysis . Furthermore , whil e thi s analysi s separate s fue l an d additiv e manufacturers , itcombine s all SI C codes . IC F judgemen ti s tha tth e result s are robus twit h respec tt o th e siz e definitio n use d in thi s analysis . C . Estimatio n o f

Testin g Cost s Fo rpurpose s o f

thi s analysis , EP A use d estimate s o f laborator

y testin g costs , th e numbe r o f products an d manufacturer s i n th e regulate d community , an d an y informatio n currentl y availabl e abou tth e toxicit

y o f eac h produc tt o develo p a total expecte d cos tan d a n expecte d cos tpe r manufacture ro f

th e testin g requirements . EP A estimate d complianc e cost s fo r 71 5 fue l manufacturer s an d 51 7 additiv e manufacturers . I n developin g thes e estimates , EP A mad e severa l simplifyin g assumptions . First , testin g requirement s wil l impos e one-tim e cost s thatwil l b e incurre d ove r a thre e yea r period . Second , on e productpe rproductgrou p will b e selecte d fo r testin g an d th e cost s o f testin g tha tproduc twil l b e divide d equall y amon g th e numbe r o f products i n thatgrou p (a s oppose d t o th e numbe r o f manufacturer s havin g products i n thatgroup) . D . Estimatio n o f

Impact s T o asses s th e impacts o f th e propose d testin g requirements and t o discer n whethe r small companie s ar e impacte d disproportionately , IC F analyze d th e effect s o f complianc e cost s o n eac h company' s return o n asset s (ne tincome/assets) . Retur n o n asset s (ROA ) i s a genera l indicato r o f financial healt h an d i s frequentl y use d t o compar e th e financial healt h o f companie s withi n a

n industry . Th e financial industr y ofte n use s RO A a s on e o f th e criteri a fo r determinin g th e borrowin gP. 7

potentia l o f

a company . I n thi s manner , analysi s o f th e chang e i n a company' s RO A ca n indicat e whethe rcomphanc e cost s represen ta significan tportio n o f th e capita l availabl e t o a smal l busines s and , ultimately , whethe rcomplianc e cost s are likel y t o resul ti n closur e o f thatcompany . A s explaine d below , thi s ca n b e don e by utilizin g standard RO A threshold s indicatin g differen tlevel s o f financia l health . I n general , a compan y wit h a RO A les s than 2. 5 percen tis considere d t o b e i n financial distress . A tthi s level , a compan y ma y experienc e difficultie s obtainin g additional loan s o r othe r capital . A RO A les s tha n -4 . percen tindicate s thata compan y i s i n sever e financial distress . Finally , a RO A les s than -3 0 percen tgenerall y indicate s closure . IC F use d slightl y differen tmethod s t o estimat e th e impacts o n companie s fo r whic h actual dat a wa s availabl e an d o n companie s fo rwhic h asset s an d ne tincom e wer e estimated . Fo r companie s wit h actual data , th e analysi s wa s fairl y straightforward . Fo r eac h company , its initial RO A serve d as a baseline . Sinc e complianc e cost s ar e assume d t o b e incurre d ove r thre e years , RO A afte r comphanc e cost s wer e calculate d b y subtractin g one-thir d o f complianc e cost s fro m ne tincome . RO A afte rcost s wer e the n compare d with th e baselin e t o determin e th e overal l magnitud e o f th e chang e in RO A an d whethe rcost s had drive n RO A acros s an y o f th e thre e thresholds . Fo rcompanie s with estimate d asse tand ne tincom e information , th e initial RO A were , b y definition , poin testimates . Actua l RO A fo r thes e companie s ar e expecte d t o fall withi n a give n rang e aroun d thos e poin testimates . T o accoun tfo rthi s uncertaint y i n th e analysis , IC F calculate d th e standar d deviatio n o f RO A fo rcompanie s with actual data an d use d thi s valu e t o estimat e th e rang e i n whic h eac h initial RO A coul d b e expecte d t o var y and th e probabilit

y tha ta company' s RO A wa s alread y belo w a threshold . Thi s sam e proces s wa s applie d t o calculatin g RO A afte r comphanc e costs . Th e baselin e and afte rcos tRO A wer e the n compare d as describe d above . Not e tha tth e estimate s o f

th e uncertaint

y i n impacts fo r thes e companie s wil l no tb e strictl y accurate , a s th e estimate s o f

th e chang e i n RO A wil l b e subjec tt o th e sam e uncertainty . ICF s judgemen ti s thatthi s additiona l uncertaint

y doe s no tmateriall y affec tth e results . Ther e are severa l limitation s t o thi s analysis . First, i tassesse s th e impacto f th e start-u p progra m only . I

tdoe s no taccoun tfo rfuture uniqu e products no r ho w manufacturer s o f ne w products i n currentl y existin g group s wil l pa y fo rpreviou s testing . Second , i tassume s tha ta compan y is willin g t o us e profits an d resource s from th e entir e compan y t o cove rcomplianc e cost s o f thi s regulation . Ho w realisti c thi s assumptio n i s depends , i n part , o n ho w integral fue l an d additiv e products are t o th e cor e busines s o f th e company . Third , som e o f th e financia

l informatio n wa s fo r subsidiarie s whil e othe rwa s fo rparen tcompanies . T o asses s impacts , IC F matche d subsidiar y financial informatio n wit h subsidiar

y compiianc e cost s and paren tfinancial informatio n wit h paren t complianc e costs .

IV . DEFINITIO N O F "SMALL " MANUFACTURE R A s state d i n th e sectio n o n methodology , EP A ha s adopte d SB A definition s o f smal l fo rthi s analysis . Thes e definition s are base d o n SI C code s and are presente d i n Exhibi t1 . Th e mos t frequen tdefinition s o f

small ar e companie s havin g les s than o r equa l t o 10 0 an d 50 0 employees . Usin g thes e definitions , IC F estimate s thatther e are 40 5 (7 8 percent ) smal l additiv e manufacturers , an d 53 8 (7 5 percent ) small fue l manufacturers , currentl y registere d fo r unleade d ga s and diese l products .P. 8 

## Exhibi t1 SB A DEFINITION

S O F SMAL L BY SI C COD E FO RF/F A MANUFACTURER

S

SI C 109 4 122 1 131 1 138 1 138 2 138 9 154 2 171 1 201 1 202 2 202 3 204 6 204 8 206 1 208 5 208 6 209 6 232 9 233 9 243 5 243 6 261 1 265 7 267 1 267 3 267 8 281 3 281 9 282 1 282 2 282 4 283 3 283 4 284 1 284 2 284 3 284 4 285 1 286 5 286 9 287 3 287 4 287 5 287 9 289 1 289 2 289 9 291 1 295 2 299 2 » O F EMPLOYEE S O R

MILLION S O F $ 50 0 50 0 50 0 50 0 $3. 5 $3. 5 $17. 0 $7. 0 50 0 50 0 50 0 75 0 50 0 50 0 75 0 50 0 50 0 50 0 50 0 50 0 50 0 75 0 75 0 50 0 50 0 50 0 100 0 100 0 75 0 100 0 100 0 75 0 75 0 75 0 50 0 50 0 50 0 50 0 75 0 100 0 100 0 50 0 50 0 50 0 50 0 75 0 50 0 150 0 75 0 50 0 SI

C 308 1 308 9 317 2 341 1 342 9 343 2 343 3 346 9 347 9 349 9 351 9 352 3 352 4 353 1 355 6 356 1 356 9 359 2 359 9 369 4 371 1 371 4 371 5 372 4 379 5 379 9 386 1 422 1 422 6 461 2 461 3 495 3 495 9 501 2 501 3 501 4 501 5 507 2 508 2 508 3 508 5 512 2 515 3 515 9 516 9 517 1 517 2 519 1 519 8 521 1 » O F EMPLOYEE S O R

MILLION S O F $ 50 0 50 0 50 0 100 0 50 0 50 0 50 0 50 0 50 0 50 0 100 0 50 0 50 0 75 0 50 0 50 0 50 0 50 0 50 0 75 0 100 0 50 0 50 0 100 0 100 0 50 0 50 0 $12. 5 $12. 5 150 0 150 0 $6. 0 $3. 5 10 0 100 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 10 0 100 10 0 10 0 10 0 10 0 $3. 5 | SI

C 525 1 526 1 539 9 541 1 553 1 554 1 557 1 569 9 591 2 594 1 598 3 598 4 622 1 653 1 738 9 753 8 754 9 769 9 873 4 * O F EMPLOYEE S O R

MILLION S O F S $3. 5 $3. 5 $3. 5 $13. 5 $3. 5 $3. 5 $3. 5 $3. 5 $3. 5 $3. 5 $6. 0 $3. 5 $3. 5 S10. 0 $3. 5 $3. 5 $3. 5 $3. 5 $3. 5P. 9

v . CHARACTERIZATIO N O F SMAL L MANUFACTURER S I N TH E REGULATE D COMMUNIT Y
Th e characteristic s o f

smal l F/F A manufacturer s are significantl y differen ttha n thos e o f larg e F/F A manufacturers . Additionally , th e characteristic s o f fue l manufacturer s diffe r from thos e o f additiv e manufacturers . Exhibi t2 illustrate s thes e difference s b y comparin g weighte d average s o f severa l pertinen tstatistics . First , weighte d averag e sale s and asset s o f larg e fue l manufacturer s are approximatel y 3 0 time s large rtha n th e weighte d averag e sale s and asset s o f smal l fue l manufacturers . Th e weighte d averag e sale s o f larg e additiv e manufacturer s are almos t20 0 time s large rthan th e weighte d averag e sale s o f small additiv e manufacturers . Th e weighte d averag e asset s o f larg e additiv e manufacturers are 37 7 time s greate rtha n th e weighte d averag e asset s o f smal l additiv e manufacturers . Interestingly , small additiv e companie s ten d t o b e smalle rtha n smal l fue l companie s whil e larg e additiv e companie s ten d to b e large rtha n larg e fue l companies . Thes e difference s indicat e that , fo r a give n leve l o f comphanc e cost , smal l manufacturer s are likel y t o b e impacte d mor e tha n larg e manufacturer s an d small additiv e manufacturer s ma y b e impacte d mor e tha n smal l fue l manufacturers . Second , smal l additiv e companie s ten d t o b e stronge r financiall y tha n small fue l companies . Fo ra give n leve l o f

sales , additiv e companie s generall y hav e highe r ne tincomes , assets , and RO A than fue l companies . Furthermore , RO A ar e fairl y constan tfo r small and larg e additiv e companie s whil e RO A increas e wit h siz e fo rfue l companies . Thi s implie s highe r economie s o f scal e fo r fue l companies. Thi s als o indicate s that , fo r a give n leve l o f complianc e cost , fue l companie s ma y b e impacte d mor e tha n additiv e companies . Third , whil e larg e manufacturer s ten d t o hav e mor e products tha n small manufacturers , th e averag e larg e additiv e compan y has significantl y mor e products than th e averag e smal l additiv e compan y and fue l companie s i n general . Thi s indicate s thatadditiv e companie s potentiall y fac e large r comphanc e cost s tha n fue l companies .

5 Al l o f

th e trend s discusse d i n thi s sectio n are als o supporte d by a compariso n o f media n statistic s fo rsmal l an d larg e F/F A manufacturers .P.1 0



## Exhibi t2 Characteristics o f

Smal l an d Larg e Manufacturer

s

Fue l Manufacturer

s Weighte d Average : #o f Employee

s Sale s (000 ) Asset s (000 ) Ne tIncom e (000 ) RO A #o f Product s

Additiv e Manufacturers Weighte d Average : #o f Employee s Sale s (000 ) Asset s (000 ) Ne tIncom e (000 ) RO A #o f Product s Smal l

56 $50,00 0 $17,00 0 $92 9 2.9 % 1. 8

Smal l

9 1 $18,00 0 $10,00 0 $60 3 4.4% * 2. 9 Lare e

2,64 1 $1,474,00 0 $584,00 0 $39,66 9 5.6 % 2. 9

Large

11,17 7 $3,418,00 0 $3,767,00 0 $168,56 8 5.5 % 9. 4

* On e outlie rwa s dropped .P.1 1

VI . SUMMAR Y O F EXPECTE D COST S O F TH E PROPOSE D REGULATION
Th e tota l expecte d cos to f th e testin g requirement s i s $8 3 million . Expecte d cost s pe r manufacture r rang e from jus t$49 7 t o ove r $ 2 million . Exhibi t3 provide s summar y statistic s o f comphanc e costs . Thi s tabl e allow s on e t o compar e small manufacture r comphanc e cost s t o larg e manufacture r comphanc e costs . Fo r bot h fue l and additiv e manufacturers , th e median complianc e cos tt o larg e companie s i s highe r tha n th e media n complianc e cos tt o small companies . Moreover , al l media n comphanc e cos tvalue s are sufficientl y small as t o no tcaus e significantfinancia l impacts . Ther e are som e interestin g difference s betwee n weighte d averag e statistic s for small and larg e companie s as wel l as fo r fue l an d additiv e companies . First, complianc e cost s for additiv e companie s ten d t o b e highe r tha n fo r fue l companies. Thi s partially reflect s th e fac tthatadditiv e companie s typicall y hav e mor e product s tha n fue l companies . Second , an d importantl y fo r thi s analysis , th e averag e cos tpe r produc ti s slightl y highe r fo r smal l additiv e manufacturers than fo r larg e additiv e manufacturers . Give n th e difference s i n th e financial profile s o f small and larg e companies , thi s statisti c indicate s tha tsmal l additiv e manufacturer s ma y experienc e disproportionat e financia l impacts . I tals o indicate s tha tsmal l additiv e manufacturer s ma y produc e mor e unusua l o r "niche " products .

vn . IMPACT S O N SMAL L FUE L AND FUE L ADDITIV E MANUFACTURER S
A s indicate d i n th e discussio n o f methodology , IC F estimate d impact s b y analyzin g th e chang e i n RO A directl y attributabl e t o th e propose d regulation . Companie s i n th e characterizatio n databas e wer e assigne d "weights " t o enabl e IC F t o projec timpacts ove r all companie s currently registere d as producin g unleade d an d diese l products . Exhibi t4 present s th e results o f thi s impac

tanalysis . Effects on Small

Companies are Relatively Greaterthan on Large
Thi s analysi s show s unambiguousl y that , fo r bot h fue l and additiv e companies , th e effect s o n small companie s are greate r tha n o n large . Th e chance s thatotherwis e health y fuel manufacturer s wil l experienc e financial distres s (i.e. , hav e thei r RO A drive n belo w 2.5% ) are 1 5 time s greate r fo r smal l companie s tha n fo r large ; th e comparabl e rati o fo r additiv e manufacturers is 140 time s as great . Thi s patter n als o hold s i f on e compare s th e impacts i n term s o f sever e financia

l distres s ( a los s equa l t o fou r percen to f

assets) . Onl y tw o firms (bot h smal l additiv e manufacturers ) are projecte d t o fail a s a resul to f

th e propose d regulatio n if the y are force d t o absorb thes e costs . Compariso n o f

th e tota l magnitud e o f change s i n RO A show s tha tal l buton e o f

th e companie s predicte d t o suffe r heav y impacts are small . Clearly , an y tendenc y fo r smalle r companie s t o hav e smalle r comphanc e cost s i s no tstron g enoug h t o outweig h th e relativel y greate r vulnerabilit y resultin g fro

m thei r much smalle r level s o f asset s and earnings .

Expecte d comphanc e cost s pe r manufacture r hav e bee n revise d sinc e thes e statistic s wer e calculated . Sinc e th e change s wer e relativel y minor , IC F doe s no texpec tthatthes e summar y statistic s woul d chang e significantly .

## Exhibi t3 Summar y o f Complianc

e Cost s P.1 2

Fuel Manufacturers

Media n Cost/Manufacture r Weighte d Averag e Cost/Manufacture r % wit h Cost s < $10,00 0 % with Cost s > $10,00 0 Weighte d Averag e Cost/Produc t

Additiv e Manufacturers

Media n Cost/Manufacture r Weighte d Averag e Cost/Manufacture r % with Cost s < $10,00 0 % with Cost s > $10,00 0 Weighte d Averag e Cost/Produc t Small $1,08 5 $26,01 2 84.6 % 15.4 % $8,87 4

Smal l $1,05 7 $67,71 5 80.5 % 19.5 % $20,20 4 Larg e $2,17 0 $73,97 1 73.0 % 27.0 % $22,03 3

Urg e $1,99 0 $121,58 9 70.2 % 29.8 % $16,91 5

## Exhibit4 Estimate d Impacts * P.1 3

Typ e o f Manufacture

r
Fue l Manufacturer

s Smal l #i n Databas e Weightedft Weighted% Larg e #in Databas e Weightedtt Weighted%
Additiv e Manufacturer

s Smal l #i n Databas e Weightedtt Weighted% Larg e If i n Databas e Weighte d tt Weighte d % RO

A <2.5 %

1 4 0.76 %

0 0 0.05 %

7 2 3 5.73 %

0 0 0.04 % RO

A <-4 %

0 0 0.04 %

0 0 0.00 %

3 1 8 4.38 %

0 0 0.00 % RO

A <-30 %

0 0 0.00 %

0 0 0.00 %

0 2 0.58 %

0 0 0.00 %

* Interpretation : RO A < 2.5 % indicate s financia l distress . RO A < -4 % indicate s sever e financia l distress . RO A < -30 % indicate s closure . Fue l percentage s ax e base d o n 53 8 smal l an d 17 7 larg e fue l manufacturers . Additiv e percentage s ar e base d o n 40 5 smal l an d 11 2 larg e additiv e manufacturers . Al l manufacturer s thatwer e impacte d a tth e -30 % an d -4 % threshold s wer e als o impacte d a

tth e 2.5 % threshold .P.1 4



### Actual Impacts are Insignificant for Fuel Manufacturers Th e fac t tha t comphanc e cost s hav e relatively greate r effect s o n smal

l companies , whil e no t a n unimportan t

consideratio n fo

r evaluatin g impact s o n small manufacturers , is probably no t o f great concer n unles s th e actual magnitud e of th e impact s i s significant

. Fo r fue l manufacturers , ther e i s n o evidenc e that

thi s i s th e case . Th e projecte dchanc e tha t agiven small fue

l manufacturer

wil l b e driven ove

r th e threshol dseparatin g a n adequat e retur n o n asset s t o th e point o f financial distres s is onl y abou t on e i n 130

. Th e analysi s show s that n o fue l companie s woul db e driven int o closure b y th e propose dregulation

. Compariso n of th e magnitud e o

f change s i n ROA show s that

onl y tw o fue l manufacturer s i

n th e characterizatio n databas e hav e complianc e cost s larg e enoug h t o reduc e thei r RO A b y on e percent

. Impacts may be Significant for Small Additive Manufacturers A different

pictur e emerge s fro

ma n examinatio n of

th e effect s o n additiv e manufacturers

. Projecte dimpact s are , again , extremely minor fo r larg e firms , an dskewe db y effect s o n asingle , unusually smal

l "large " compan

y (on e wit h only 40 0 employee s an dsale s o f $1 7 million)

. Lookin g a

t smal l companies , however , i

t appear s that

ther e coul db e asignifican t number of companie s drive n int o financia

l distres s a s aresul t

of th e propose dregulation

. Th e analysi s project s that almos t si x percen t o f smal l additiv e manufacturer s wil l b e pushe dover

th e threshol dint o financial distress

. Impact s ar e als o see n a

t othe r thresholds

. Thes e findings ar e no t

base do n on e o r

tw o unusual companies

. Compariso n of th e magnitud e of

change s in RO A show s tha t eight smal l additiv e companie s i

n th e characterizatio n databas e ar e projecte dt o experienc e reduction s of at leas t thre e percentag e point s in thei r RO A A decreas e o

f thre e percentag e point s i n ROA i s significan

t becaus e th e weighte daverag e RO A i s 4. 4 percen t

fo r sma U additiv e companies , an d5. 5 percen t fo r larg e additiv e companies

. Thus , i f a n additiv e manufacturer

experience s adecreas e i

n RO A of thre e percent , it

i s likel y t o fal l int o financia

l distres s i f forcedt o absor

b thos e costs

.

VIII

. RESPONSE S T O TH E IMPACT S O F TH E PROPOSE D TESTIN G REQUIREMENT S 

### Companie s projecte dt o experienc e impact s fro mth e comphanc e cost s wil l no t necessarily b e lef t wit h th e reduction s i

n thei r rate s o f retur n indicate db

y thi s analysis

. Instead , they wil l hav e ope n t o the manumber

o f course s of

actio n that

coul dreduc e th e impact s of th e regulations

. Tw o likel y responses , pric e increase s an dreduction s i n th e number

o f products , ar e discussedbelow

. Thes e actions , however , wil

l hav e secondar

y effect s of

thei r own . A

. Pric e Increase s Th e analysi s presente dabov e estimate s impact s o n return s assuming n o change s i n price s o r sales

. In man

y cases , however , regulator y cost s ca n b e passe do n t o consumers , o r bac k t o suppliers

. Th e scop e o

f thi s analysi s preclude dan y attemp t t o mak e detaile dprediction s of

th e pric e change s that woul dresult

. Severa

l general observations , however , ca n b e made

. First , th e complianc e cost s represen t a n increas e in th e fixed cost s o f producin g th e products , rathe r tha n th e variabl e costs

. Th e distinctio n lie s in th e fact

that i f afirmincrease s it s outpu t o f agiven product , it s tota l complianc e cost s d o no t

increase ; i

n fact , th e averag e comphanc e cost s dro p somewha t wit h ever y additional uni t sold , a s th e fixedcomphanc e cost s ar e sprea dover mor e units

. Thi s mean s that competin g additiv e manufacturer s wil

l hav e a n incentiv e t o kee p sale s o f thei r product s hig

h t o help pa

y fo r thei r testin g

1 2P.1 5



### costs

. Thi s pressur e t o sell coul dmak e i t les s likel y tha t pric e increase s wil

l stick , a s attempt s t o rais e price s b y on e firmar e undercu t

b y other s seekin g greate r

marke t share , unles s o r

unti l some competin g producer s withdra w fro mth e market

. In addition , arequiremen t that an y new manufacturer s enterin g th e marke t compensat e th e existing manufacturer s confer s acertai n degre e of protectio n o n th e existing manufacturers

. T o th e exten t that they ha dbee n keepin g thei r

price s lo w as astrateg y t o discourag e competition , th e potentia l fo

r imposing testin g cost s o n ne w competitor s migh

t allo w existin g firms t o rais e price s somewha t withou t fea r that thi s increas e wil

l resul t i n increase dcompetition

. In othe r words , price s migh t b e raise dt o help cove

r complianc e cost s becaus e an y potentia l ne

w competitor s woul dfac e simila r costs

. An

y pric e increase s would , o f course , impos e part

o f th e cost s of

th e regulation s o n consumers , an dcoul db e expecte dt o reduc e sale s t o acertai n exten t Finally , t o th e exten t

that aproduc t

ha s unusua

l characteristics , it s manufacturer ma y hav e considerabl e freedo mi

n settin g it s price , an dmigh t hav e mor e succes s in coverin g it s comphanc e costs

. Thi s i s a

n importan t

consideration , give

n that man y o f th e larges t

comphanc e cost s ar e face d b y firms that

ar e paying asubstantial percentag e of th e tota l testin g cost s of

tha t testin g group . Thi s ma y sugges t that thei r product s hav e fe

w clos e substitutes

. Thus , thei r unusua l qualitie s ma

y b e abl e t o support apric e increas e that

offset s th e impact

o f th e testin g costs-especiall y give n that , a s note d above , an y potentia l new competitor s wil l fac e hig h comphanc e cost s a s well

. B

. Reduction s i n th e Numbe r o f Product s Anothe r respons e ope n t o additiv e producer s facin g substantial testin g cost s i s t o dro p th e produc t o r product s wit

h th e greates t

cost s an dsmalles t

profit potential

. Thi s respons e i s likel y t o hav e some residua

l impact s o n profitability

. Thi s residua l impact , however , i s hkel

y t o b e relatively smal l a s th e firmi s droppin g aproduc t wit h hig h cost s andsmall sales/profi t potential

. Ultimatel y thi s respons e wouldreduc e th e number o f competin g product s an dmake i t easier fo r remainin g firms t o increas e prices

. Reduction s i

n ne w product s ca

n b e expecte dt o occur

a s well ; innovatio n that

create s produc t diversit y wil l b e discourage dt o a

n unknow n exten t

sinc e ever

y new produc t

wil l requir e th e payment of testin g costs

. Furthermore , th e more unusua l th e new produc t

is , th e greate r

it s complianc e cos t is likel y t o be

. Again , thi s increase s th e abilit y of existing manufacturer s t o rais e price s enoug h t o cove r thei r costs , bu t a t som e cos t i n term s of produc t diversity

.

1 3P.1 6

APPENDI X A

EQUATION S FO RESTIMATIN G ASSET S AN D NE T INCOM E

## Appendi x A Equation s t o Estimat e Asset s an dNe t Incom e

EQUATION S T O ESTIMAT E ASSET S AN D NE T INCOM E FO RFUE L COMPANIE S Log(Ne tIncome ) = • + b(Log(Sales) )

Regressio n Output : Constan t St dEr r o f Y Es t RSquare d No

. o f Observation s Degree s o f

Freedo m
X Coefficient(s ) 1.11 4 St dEr r o f Coe f 0.03 3

t = 33.93 2

Log(Assets ) = a+ b(Log ( Sales)) *

Regressio n Output : Constan t St dEr r o f Y Es t RSquare d No

. o f Observation s Degree s o f

Freedo m
X Coefficient(s ) 1.02 2 St dEr r o f Coe f 0.02 1

t = 48.39 7 0.92 4 0.33 0 0.88 8 14 7 14 5

-0.54 2 0.22 0 0.93 7 15 9 15 7 EQUATION S T O ESTIMAT E ASSET S AN D

NE T INCOM E FO RADDITIV E COMPANIE S Log(Ne t Income ) = a+ b(Log(Sales) ) Regressio n Output : Constan t St dEr r o f Y Es t RSquare d No

. o f Observation s Degree s o f

Freedo m
X Coefficienl(s ) 1.14 9 St dEr r o f Coef

. 0.02 4

t = 48.58 3

Log(Assets ) = a+ b(Lo g (Sales) )

Regressio n Output : Constan t St dEr r o f Y Es t RSquare d No

. o f Observation s Degree s o f

Freedo m
X Coefficient(s ) 1.10 8 St dEr r o f Coef

. 0.01 4

t = 77.81 4 1.18 7 0.25 8 0.96 1 9 7 9 5

-047 7 0.16 1 0.98 4 10 3 10 1

* Outlie r was exclude dP.1 8

APPENDI X B

DEVELOPMEN T O F WEIGHT S

## Appendix B- l DEVELOPMEN T O F WEIGHT S FORFUE L MANUFACTURER S

SALE S DISTRIBUTIO N O F FUE L COMPANIE S I N TH E DATABAS E SALE S (SM1LLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 100 SO O 100 0 500 0 1000 0 >1000 0 f O F

COMPANIE S

3 5 6 6 5 2 8 2 8 2 0 1 2 6 2 7 3 4 1 5 1 4 8 5 22 2 % O F COMPANIE S 1.35 % 2.25 % 2.70 % 2.70 % 2.25 % 12.61 % 12.61 % 9.01 % 5.41 % 2.70 % 12.16 % 15.32 % 6.76 % 6.31 % 3.60 % 2.25 % 100.00 % SALE S DISTRIBUTIO N O F COMPANIE S

I N TH E SAMPL E DATABAS E SALE S (SMILLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 10 0 50 0 100 0 500 0 1000 0 tfOF COMPANIE S

1 0 5 5 3 1 8 3 4 4 1 3 3 1 1 0

5 2 % O F COMPANIE S 19.23 % 9.62 % 9.62 % 5.77 % 1.92 % 15.38 % 5.77 % 7.69 % 7.69 % 1.92 % 5.77 % 5.77 % 1.92 % 1.92 % 0.00 % 0.00 % 100.00 % COMBINE D SALE S DISTRIBUTIO N

PROJECTE D 0

O F SAMPL E COMPANIE S

9 5 4 7 4 7 2 8 9 7 6 2 8 3 8 3 8 9 2 8 2 8 9 9 0 0 49 3 PROJECTE D # O F

COMPANIE S 9 8 5 2 5 3 3 4 1 4 10 4 5 6 5 8 5 0 1 5 5 5 6 2 2 4 2 3 8 5 71 5 PROJECTE D

PERCEN T 13.68 % 7.33 % 7.47 % 4.82 % 2.03 % 1 4 52 % 7.89 % 8.10 % 6.98 % 2.17 % 7.75 % 8.73 % 342 % 328 % 1.12 % 0.70 % 100.00 % WEIGHT S FO R DATABAS E COMPANIE S SALE S (SMILLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 10 0 50 0 100 0 500 0 1000 0 >1000 0 WEIGHT S 32.6 0 10.4 8 8.9 0 57 4 2.9 0 3.7 1 2.0 2 2.9 0 4 1 6 2 5 8 2 0 5 1.8 4 1 6 3 1.6 8 1 0 0 1 0 0

## Appendi x B- 2 DEVELOPMEN T O F WEIGHT S FO RADDITIV E MANUFACTURER S

SALE S DISTRIBUTIO N O F ADDITIVE COMPANIE S I N TH E DATABAS E SALE S (SMILLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 10 0 50 0 100 0 500 0 1000 0 >!000 0 #O F

COMPANIE S

3 4 7 3 6 1 6 2 4 1 5 8 7 1 2 2 4 1 2 1 8 4 6 169 %O F COMPANIE S

1.78 % 2.37 % 4.14 % 1.78 % 3.55 % 9.47 % 14.20 % 8.88 % 4.73 % 4.14 % 7.10 % 14.20 % 7.10 % 10.65 % 2.37 % 3.55 % 100.00 % SALE S DISTRIBUTIO N O F COMPANIE S

I N TH E SAMPL E DATABAS E SALE S (SMILLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 10 0 50 0 100 0 500 0 1000 0 >1000 0 j

f O F COMPANIE S

11 4 0 1 1 1 3 0 0 0 2 2 0 0 0 0 2 5 % O F COMPANIE S
44.00 % 16.00 % 0.00 % 4.00 % 4.00 % 4.00 % 12.00 % 0.00 % 0.00 % 0.00 % 8.00 % 8.00 % 0.00 % 0.00 % 0.00 % 0.00 % 100.00 % COMBINE D SALE S DISTRIBUTIO N

PROJECTED § O F SAMPL E COMPANIE S

153 5 6 0 1 4 1 4 1 4 4 2 0 0 0 2 8 2 8 0 0 0 0 34 8 PROJECTE D #O F FUEL COMPANIE S

15 6 6 0 7 1 7 2 0 3 0 6 6 1 5 8 7 4 0 5 2 1 2 1 8 4 6 51 7 PROJECTE D

PERCEN T

30.20 % 11.54 % 1.35 % 327 % 3.85 % 5.79 % 12.72 % 2.90 % 1.55 % 1.35 % 7.71 % 10.03 % 2.32 % 348 % 0.77 % 1.16 % 100.00 % WEIGHT S FO RDATABAS E COMPANIE S SALE S (SMILLIONS )

1 2 3 4 5 1 0 2 0 3 0 4 0 5 0 10 0 50 0 100 0 500 0 1000 0 >1000 0 WEIGHT S

520 4 14.9 2 1.0 0 5.6 4 3.3 2 1 8 7 2.7 4 1.0 0 1 0 0 1.0 0 3.3 2 2.1 6 1 0 0 1 0 0 1 0 0 1 0 0